Zakeni Limited v. SPYR Inc.
Filing
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MEMORANDUM OPINION. Signed by Judge Sue L. Robinson on 8/24/2016. (nmfn)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
ZAKENI LIMITED,
)
)
Plaintiff,
)
)
)
)
v.
SPYR, INC. f/k/a EAT AT JOE'S, LTD.
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Defendant.
Civ. No. 15-926-SLR
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)
Robert D. Goldberg, Esquire of Biggs & Battaglia, Wilmington, Delaware. Counsel for
Plaintiff. Of Counsel: Evan M. Newman, Esquire and Allen Schwartz, Esquire of
Newman Law, PC.
Steven L. Caponi, Esquire of K&L Gates LLP and Adam V. Orlacchio, Esquire of Blank
Rome, LLP, Wilmington, Delaware. Counsel for Defendant. Of Counsel: Stephen M.
Orlofsky, Esquire, and Erik G. Fikry, Esquire of Blank Rome, LLP.
MEMORANDUM OPINION
Dated: Augusyif. 2016
Wilmington, Delaware
I. INTRODUCTION
On October 13, 2015, Zakeni Limited ("plaintiff') filed a complaint alleging, inter
alia, breach of contract against SPYR, Inc. ("defendant") for failure to pay its obligations
related to two convertible series I debentures. (D.I. 1 at iT 1) Presently before the court
is defendant's motion to dismiss the complaint for failure to state a claim. (D.I. 11) The
court has jurisdiction pursuant to 28 U.S.C. § 1332. 1
II. BACKGROUND
A. Parties
Plaintiff is an investment corporation incorporated in Nassau, Bahamas. (D.I. 1
at
iT 5)
Defendant is a holding company incorporated under the laws of the State of
Nevada with its principal place of business in Denver, Colorado. Defendant's stock is
traded on the OTCQB under the symbol "SPYR." SPYR, Inc. was formerly known as
Eat at Joe's, Ltd. and traded on the OTCQB under the ticker symbol "Joes." Defendant
has wholly-owned subsidiaries in the digital publishing and advertising industry and in
the food service industry. (Id. at iT 6)
8. Debentures
Plaintiff is the holder of two convertible series I debentures. (D.I. 1 at iT 2) The
first debenture provided that defendant would be obligated to pay interest of eight
percent on the principal sum of $900,000.00 from the issue date of on or about July 31,
1998. (Id. at iT 11) The second debenture provided that defendant would be obligated
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Venue is proper as the agreements between the parties require that any action to
enforce the debentures be brought in this District. (D. I. 1 at iT 8)
to pay interest of eight percent on the principal sum of $600,000.00 from the issue date
of on or about September 2, 1998. (Id. at 1125) On the third anniversary of the original
issue date, defendant was obligated to make a mandatory payment of principal and
interest. (Id. at 1112) Defendant did not make these payments in or about 2001. (Id. at
111l 16, 30)
From 1998 through 2011, defendant included the debentures as a balance sheet
line item in its annual reports. (See e.g., 0.1. 14, ex. D at Zakeni53, ex. E; 0.1. 12, ex. A
at SPYR 15, exs. B-K) In 2001, defendant inserted the following language into its
annual report: "The Company needs to obtain additional financing to fund payment of
obligations . . . . Management believes these efforts will generate sufficient cash flows
from future operations to pay the Company's obligations and realize other assets.
There is no assurance any of these transactions will occur." (D.I. 12, ex. A at SPYR24)
The 2002 and 2003 annual reports included similar statements. (Id., ex. Bat SPYR52,
ex. Cat SPYR79) Beginning in 2004, defendant's annual reports recited:
On July 31, and September 2, 1998, the Company sold its 8% convertible
debenture in the aggregate principal amount of $1,500,000 to an
accredited investor pursuant to an exemption from registration under
Section (4)(2) and/or Regulation D.
The material terms of the Company's convertible debentures provide for
the payment of interest at 8% per annum payable quarterly, mandatory
redemption after 3 years from the date of issuance at 130% of the
principal amount. Subject to adjustment, the debentures are convertible
into Common Stock at the lower of a fixed conversion price ($1.82 per
share for $900,000 principal amount of debentures; $1.61 per share for
$600,000 principal amount of debentures) or 75% of the average closing
bid price for the Company's Common Stock for the 5 trading days
preceding the date of the conversion notice. Repayment of indebtedness
is secured by a general lien on the assets of the Company and guarantee
by 5 of the Company's subsidiaries.
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(D.I. 12, ex. D at SPYR110) The same statement was included in defendant's annual
statements through December 31, 2011, published in 2012. (Id. at exs. E-K)
In 2013, defendant's annual statement for the fiscal year ending December 31,
2012 included the following statement:
As of December 31, 2012, the Company recognized an extraordinary gain
of $2,043,702 due to the write-off of the Company's convertible
debentures ... Since approximately 2004, the Company has tried
repeatedly to contact the lender and its principals regarding the remaining
balance owed by the Company on the convertible debenture. The
Company continued to accrue interest on the debenture through
December 31, 2005, when it was determined less than probable that any
further payments would be made. No claims have been filed against the
Company regarding these debentures. The Company's attorney has
determined the six year statute of limitations under New York state law
has expired, and that no further payments are due from the Company.
Based on this information, the Company has written off the balance of the
convertible debenture on the balance sheet of $2,043,702, and recorded
an extraordinary gain of the same amount.
(D.I. 12, ex.Lat SPYR416) Plaintiff demanded payment under the debentures by
letters dated July 10, 2015 and August 27, 2015, as well as information regarding
conversion into shares, with no response by defendant. (D.I. 1 at~ 37)
Ill. STANDARD OF REVIEW
A motion filed under Federal Rule of Civil Procedure 12(b)(6) tests the sufficiency
of a complaint's factual allegations. Bell At/. Corp. v. Twombly, 550 U.S. 544, 555
(2007); Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir. 1993). A complaint must contain
"a short and plain statement of the claim showing that the pleader is entitled to relief, in
order to give the defendant fair notice of what the ... claim is and the grounds upon
which it rests." Twombly, 550 U.S. at 545 (internal quotation marks omitted)
(interpreting Fed. R. Civ. P. 8(a)). Consistent with the Supreme Court's rulings in
Twombly and Ashcroft v. Iqbal, 556 U.S. 662 (2009), the Third Circuit requires a three-
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part analysis when reviewing a Rule 12(b)(6) motion. Connelly v. Lane Const. Corp.,
809 F.3d 780, 787 (3d. Cir. 2016). In the first step, the court "must tak[e] note of the
elements a plaintiff must plead to state a claim." Next, the court "should identify
allegations that, because they are no more than conclusions, are not entitled to the
assumption of truth." Lastly, "[w]hen there are well-pleaded factual allegations, a court
should assume their veracity and then determine whether they plausibly give rise to an
entitlement for relief." Id. (citations omitted).
Under Twombly and Iqbal, the complaint must sufficiently show that the pleader
has a plausible claim. McDermott v. Clondalkin Grp., Inc., 2016 WL 2893844, at *3 (3d
Cir. May 18, 2016). Although "an exposition of[the] legal argument" is unnecessary,
Skinner v. Switzer, 562 U.S. 521 (2011), a complaint should provide reasonable notice
under the circumstances. Id. at 530. A filed pleading must be "to the best of the
person's knowledge, information, and belief, formed after an inquiry reasonable under
the circumstances," such that "the factual contents have evidentiary support, or if so
identified, will likely have evidentiary support after a reasonable opportunity for further
investigation or discovery." Anderson v. Bd. of Sch. Directors of Millcreek Twp. Sch.
Dist., 574 F. App'x 169, 174 (3d Cir. 2014) (quoting Fed. R. Civ. P. 11(b)). So long as
plaintiffs do not use "boilerplate and conclusory allegations" and "accompany their legal
theory with factual allegations that make their theoretically viable claim plausible," the
Third Circuit has held "pleading upon information and belief [to be] permissible [w]here it
can be shown that the requisite factual information is peculiarly within the defendant's
knowledge or control." McDermott, 2016 WL 2893844, at *4 (quotation marks, citation,
and emphasis omitted).
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As part of the analysis, a court must accept all well-pleaded factual allegations in
the complaint as true, and view them in the light most favorable to the plaintiff. See
Erickson v. Pardus, 551 U.S. 89, 94 (2007); Christopher v. Harbury, 536 U.S. 403, 406
(2002); Phillips v. Cnty. of Allegheny, 515 F.3d 224, 231 (3d Cir. 2008). In this regard, a
court may consider the pleadings, public record, orders, exhibits attached to the
complaint, and documents incorporated into the complaint by reference. Tellabs, Inc. v.
Makar Issues & Rights, Ltd., 551 U.S. 308, 322 (2007); Oshiver v. Levin, Fishbein,
Sedran & Berman, 38 F.3d 1380, 1384-85 n.2 (3d Cir. 1994). The court's analysis is a
context-specific task requiring the court "to draw on its judicial experience and common
sense." Iqbal, 556 U.S. at 663-64.
IV. ANALYSIS
Under New York law, an action upon a contractual obligation or liability, express
or implied, must be commenced within six years. 2 See N.Y. C.P.L.R. § 213(2). The
limitations period begins to run when the cause of action accrues. See N.Y. C.P.L.R. §
203(a). "A cause of action for breach of contract ordinarily accrues and the limitations
period begins to run upon breach." Guilbert v. Gardner, 480 F.3d 140, 149 (2d Cir.
2007). At bar, the breach of contract occurred when SPYR, Inc. failed to make a
mandatory payment of principal and interest in 2001 . (D. I. 1 at iT 12) The mandatory
redemption dates for the series I debentures were July 31, 2001 and September 2,
2001, respectively, at which time plaintiff's causes of action accrued and the limitations
period began as a result of non-payment. (D.I. 1 at ilil 16, 30, 43) Without an
2
Both parties agree that New York law should be applied in this case based on the
debentures. (D.I. 9 at 3)
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extension, the six-year statute of limitations period for breach of contract for nonpayment would ordinarily have expired in 2007.
"[The] limitations period for an accrued debt may be reset by the debtor pursuant
to New York General Obligations Law§ 17-101, which provides that a signed, written
acknowledgement of the debt will recommence the limitations period." Moore v.
Candlewood Holdings, Inc., 714 F. Supp. 2d 406, 409 (E.D.N.Y. 2010). New York
General Obligations Law§ 17-101 states:
An acknowledgement or promise contained in a writing signed by the party
to be charged thereby is the only competent evidence of a new or
continuing contract whereby to take an action out of the operation of the
provisions of limitations of time for commencing actions under the civil
practice law and rules other than an action for the recovery of real
property. This section does not alter the effect of a payment of principal or
interest.
"A writing, in order to constitute an acknowledgement of a debt, must recognize an
existing debt and contain nothing inconsistent with an intention on the part of the debtor
to pay it." Estate of Vengroski v. Garden Inn, 114 A.D.2d 927, 928 (N.Y. App. Div.
1985) (citation omitted). All of the circumstances of an individual case must be
considered. "The mere fact that the debt was carried on defendant's books and tax
returns would not, in and of itself, constitute the required acknowledgement." Instead,
whether the acknowledgement imports an intention to pay is the critical determination.
Id. at 928 (citations omitted). "[U]nder New York law-the continued carrying of an item
on corporate or financial records operates to revive the statute of limitations, under a
theory that the records reflect the continued validity of an old debt." Candelarie v. Sci.
Innovations, Inc., 2009 WL 2424727 (E.D.N.Y. Aug. 28, 2009); see also Clarkson Co. v.
Shaheen, 533 F. Supp. 905, 932 (S.D.N.Y.1982) (citation omitted) (A debtor's
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acknowledgment of its obligation to creditor in its annual report and fact that it carried
debt on its books for at least two years amounted to "clear recognition of the continuing
validity of the obligation.").
At bar, defendant listed the debentures as a line item in its annual reports
beginning in 1998 and made general statements regarding its debts starting in 2001.
From 2005 to 2012, defendant specifically called out the debentures in its publically
disseminated annual reports. After defendant published its 2012 annual report in 2013,
wherein it stated that it was writing off the debentures, plaintiff demanded payment by
letters dated July 10, 2015 and August 27, 2015. Receiving no response, plaintiff
brought the instant action on October 13, 2015. Defendant argues that, as a matter of
public policy, listing the debentures in the annual reports as required by law, without
more, should not suffice as an acknowledgment of debt with an intention to pay as
needed to toll the statute of limitations. This argument is weakened by defendant's
statement in its 2013 annual report that "[s]ince approximately 2004, the Company has
tried repeatedly to contact the lender and its principals regarding the remaining balance
owed by the Company on the convertible debenture." The court cannot discern on the
record at bar what communications defendant is referencing. Taking the evidence in
the light most favorable to plaintiff, the court concludes that defendant sufficiently
acknowledged the debt within the applicable statutory period (prior to 2007) and, by
doing so, demonstrated an ongoing intent to pay. Under the circumstances at bar, this
acknowledgement suffices to toll the statute of limitations. 3
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In light of this conclusion, the court does not reach plaintiff's equitable estoppel
argument.
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V. CONCLUSION
For the foregoing reasons, defendant's motion to dismiss (D.I. 11) is denied. An
appropriate order shall issue.
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