RedHawk Holdings Corp., et al v. Schreiber, et al
Filing
162
ORDER AND REASONS granting 151 Motion to Enforce Settlement Agreement. Signed by Judge Ivan L.R. Lemelle on 03/02/2020. (ko)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
REDHAWK HOLDINGS CORP.
AND BEECHWOOD PROPERTIES LLC
CIVIL ACTION
VERSUS
NO. 17-819
DANIEL J. SCHRIEBER AND
SCHREIBER LIVING TRUST DTD 2/08/95
SECTION "B"(2)
ORDER AND REASONS
Defendant filed a motion to enforce
alleging
that
plaintiff
breached
its
settlement agreement,
obligations
under
the
settlement agreement. Rec. Doc. 151. Plaintiff timely filed a
response in opposition. Rec. Doc. 157. For the reasons discussed
below,
IT IS ORDERED that the motion to enforce the settlement
agreement is GRANTED.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
This case is about an unsuccessful business venture between two
experienced businessmen. The unsuccessful business venture, and
some personal issues, led to this litigation. The facts surrounding
the venture are summarized in a previously issued order (Rec. Doc.
122). Many of the facts and procedural history in this case do not
bear on the analysis of the instant motion, those relevant to the
instant motion are summarized here.
Originally, plaintiffs, RedHawk Holdings Corp.(“RedHawk”)and
Beechwood
Properties
LLC
(“Beechwood”,)
1
filed
suit
against
defendants,
Daniel
J.
Schreiber
(“Schreiber”)
and
Schreiber
Living Trust DTD 2/08/95 (“Schreiber Trust”), for securities fraud
under 10B and 20 of the Exchange Act and SEC Rule 10b-5, securities
fraud under sections 18 and 20 of the Exchange Act, fraud under
state law, breach of contract , unjust enrichment, and breach of
fiduciary
duties.
Rec.
Doc.
1.
Schreiber
thereafter
filed
a
counterclaim against plaintiffs alleging unlawful interferences
with his ability to transfer his shares of stock in RedHawk. Rec.
Doc. 49.
In October 2018, this court granted Schreiber’s motion for
summary judgment dismissing all of RedHawk and Beechwood’s claims
against Schreiber. See Rec. Doc. 122. In January 2019, this court
denied RedHawk and Beechwood’s motion for new trial and motion to
dismiss
Schreiber’s
counterclaims
for
lack
of
subject
matter
jurisdiction. Rec. Doc. 143 and 144.
On February 6, 2019 this court entered an order of dismissal
after being advised by counsel for the parties that a compromise
was reached between parties. Rec. Doc. 150. Parties later signed
a settlement agreement and release. Rec. Doc. 151-2. Under the
settlement agreement, Schreiber would receive $250,000 and was
issued two non-interest-bearing promissory notes in the amount of
$200,000 each in exchange for his shares in RedHawk. Id. The first
promissory note is due on or before September 6, 2020 and the
second promissory note is due on or before September 5, 2021. Rec.
2
Doc. 151-2 at 2.
The settlement agreement also contains the
following provision;
“6. Acceleration. Note 1 and Note 2 will also be subject
to these terms:… (c)While any amounts are due to
Schreiber, the Company agrees that if it issues any
shares of any series or class for cash, it shall use 50%
of all monetary proceeds received from the issuance to
reduce the debts owed to Schreiber.” Rec. Doc. 151-2 at
3-4.
On September 16, 2019, RedHawk issued a Securities and Exchange
Commission (“SEC”) Form 8-K and contemporaneous press release
announcing
that
RedHawk
“completed
the
sale
of
$500,000
in
aggregate principal amount of new convertible notes”. Rec. Doc
151-3 at 4. The convertible notes issued mature five years from
the date of issuance and are convertible into shares of the
RedHawk’s common stock. Id. The contemporaneous press release also
announced
that
RedHawk
issued
a
number
of
warrants
to
the
purchasers of the convertible notes exercisable ten years from the
date of issuance for the purchase of an aggregate of $12,500,000
shares of RedHawk’s common stock. Id.
Schreiber filed the instant motion seeking enforcement of the
settlement agreement’s acceleration clause alleging RedHawk was in
breach of the settlement agreement because RedHawk issued shares
for cash and failed to use 50% of the monetary proceeds to reduce
RedHawk’s debt to Schreiber. Rec. Doc. 151. RedHawk and Beechwood
filed a response to Schreiber’s motion to enforce arguing the
issuance of the notes and warrants did not trigger the settlement
3
agreement’s acceleration clause because notes and warrants are not
shares. Rec. Doc. 157. Schreiber sought and was granted leave to
reply
in
which
Schreiber
further
argued
that
RedHawk
was
in
default. Rec. Doc. 161.
LAW AND ANALYSIS
Enforcement of Settlement Agreements
Federal
courts
have
the
power
to enforce agreements
that
settle litigation pending before them. Eastern Energy, Inc. v.
Unico Oil & Gas, Inc., 861 F.2d 1379, 1380 (5th Cir. 1988).
“Although federal courts possess the inherent power to enforce
agreements
entered
into
in
settlement
of
litigation,
the
construction and enforcement of settlement agreements is governed
by the principles of state law applicable to contracts generally.”
Id. (citing Lockette v. Greyhound Lines, Inc., 817 F.2d 1182, 1185
(5th
Cir.
1987)).
Louisiana
law
demands
that
any settlement agreements be made in writing or recited in open
court, in which case the recitation shall be susceptible of being
transcribed from the record of the proceedings. La. Civ. Code art.
3071.
The Court's role in interpreting contracts is to determine
the common intent of the parties. La. Civ. Code art.2045. In
determining
article
common
2047,
words
intent,
and
pursuant
phrases
used
to Louisiana
in
contract
Civil
are
Code
to
be
construed using their plain, ordinary and generally prevailing
4
meaning,
unless
the
words
have
acquired
a
technical
meaning. See Henry v. South Louisiana Sugars Co-op., Inc., 957
So.2d 1275, 1277 (La.2007) (citing Cadwallader v. Allstate Ins.
Co., 848 So.2d 577, 580 (La.2003)). “When the words of a contract
are clear and explicit and lead to no absurd consequences, no
further interpretation may be made in search of the parties'
intent” and the agreement must be enforced as written. Hebert v.
Webre, 982
So.2d
770,
773–74
(La.2008)
citing
La.
Civ.
Code
art.2046.
This
court
retained
jurisdiction,
through
the
order
of
dismissal, for all purposes including enforcing the settlement
agreement entered into by the parties. Rec. Doc. 150. It is
undisputed that the plaintiffs and the defendants entered into a
written compromise which included an acceleration clause that
requires RedHawk to use 50% of any monetary proceeds received from
the sale of shares to decrease its debt to Schreiber. The issue
before this court is whether RedHawk’s issuance of convertible
notes constitutes an issuance of shares thereby triggering the
acceleration clause.
Shares
Shares are the units into which the proprietary interests in
a corporation are divided. La. R. S. § 12:1-140.
A share of stock is simply one of the proportionate
integers or units, the sum of which constitutes the
capital stock of the corporation. In a broader sense, a
5
share of the capital stock may be defined as the interest
or rights which the owner ... has in the management of
the corporation, and in its surplus profits, and, on a
dissolution, in all of its assets remaining after the
payment of its debts.
Rousseau v. 3 Eagles Aviation, Inc., No. CIV.A. 02-0208, 2004 WL
1737920, at *4 (E.D. La.Aug. 3, 2004), aff'd, 130 F. App'x 687
(5th Cir. 2005) quoting Succession of Quintero, 209 La. 279, 24
So. 2d 589, 591 (La. 1945). Per Louisiana Revised Statute, shares
may be classified into classes or series by a corporation’s board
of directors. La. R. S. § 12:1-602.
In interpreting the phrase “any shares of any series or class”
found
in
the
acceleration
clause
agreement, it is clear and explicit
of
the
parties’
settlement
that “any series or class”
refers directly to “shares”. The series or class refers explicitly
to the category of shares as indicated by the Louisiana Revised
Statute. Thus, to trigger the acceleration clause the convertible
notes issued by RedHawk need to be “a series or class of shares”.
Convertible notes and warrants are not a series or class of shares.
A corporation may issue rights, options, or warrants for the
purchase of shares or other securities of the corporation. La. R.
S. § 12:1-624. The board of directors shall determine the terms
upon which the rights, options, or warrants are issued and the
terms, including the consideration, for which the shares or other
securities are to be issued. Id.
6
Schreiber argues that RedHawk’s sale of convertible notes and
stock warrants for $500,000 constitutes an issuance of shares for
cash. Rec. Doc. 151-1 at 6. Schreiber cites to a Middle District
of Louisiana case that uses Black’s Law Dictionary to explain,
“[a]“stock warrant” is a security “instrument granting the holder
a long-term (usu. a five-to ten-year) option to buy shares at a
fixed price. ” Tr. of FleetCor Techs. Licensee Tr. #1 v. Fleet
Fuel, Inc., No. CV 05-235-JJB, 2007 WL 9702206, at *1 (M.D. La.
Sept. 28, 2007) quoting BLACK'S LAW DICTIONARY 1441 (7th ed. 1999).
Schreiber further cites to a Southern District of New York case
which explains convertible notes;
“A “convertible note” is a hybrid security with
characteristics of both stocks and bonds. “Like bonds,
convertible notes pay interest … and have a maturity
date ...” However, “like stock, the price of convertible
notes is more sensitive to the earnings prospects of the
issuer than an ordinary bond because each note can be
converted to equity.” If the price of a company's stock
rises enough, it becomes advantageous to an investor in
convertible notes to convert its notes into stock at the
maturity date.”
Sharette v. Credit Suisse Int'l, 127 F. Supp. 3d 60, 70 (S.D.N.Y.
2015).
Alternatively, RedHawk contends that convertible notes and
warrants are not shares and the issuance of both notes and warrants
is instead a debt of the company. Rec. Doc. 157. RedHawk insists
that unless, and until, the convertible notes are converted to
shares, RedHawk owes the amounts due under the notes. Id. at 16.
7
In
light
of
the
party’s
arguments
and
the
meanings
and
purposes of notes and warrants, an issuance of convertible notes
and warrants is not an issuance of shares. To own shares is to
have ownership in a company; the owner of shares is a shareholder.
A holder of a convertible note or warrant is not a shareholder but
has the opportunity at a later, agreed upon date, to become a
shareholder. Shares are not issued on convertible notes or warrants
until the maturity date. When the maturity date on a convertible
note arrives, RedHawk must either pay the note along with accrued
interest or convert the note into equity at which time RedHawk
would then issue shares. A sale of a convertible note is not a
sale of shares.
Likewise, shares are not sold when a corporation issues a
warrant. A warrant allows a holder to buy shares at a later date
for a specific price. In Helvering v. Southwest Consol. Corp., the
Supreme Court of the United States explained that a warrant holder
is not a shareholder. Helvering v. Sw. Consol. Corp., 315 U.S.
194, 201 (1942). The court stated that a warrant holder, unlike a
shareholder, “does not have, and may never acquire, any legal or
equitable
Milwaukee,
rights
L
S
in
&
shares
W
R
Co,
of
stock.”
161
F.
Id.
472,
quoting
480
Lisman
(C.C.E.D.
v.
Wis.
1908), aff'd, 170 F. 1020 (7th Cir. 1909). A holder of warrants is
not
a
shareholder,
and
he
cannot
8
assert
the
rights
of
a
shareholder; his rights are wholly contractual. Id. at 201. An
issuance of a warrant is not a sale of shares.
Consequently, convertible notes and warrants are not a series
or
class
of
shares.
No
shares
are
issued
at
the
sale
of
a
convertible note nor are shares issued at the issuing of a warrant.
Thus, RedHawk’s sale of convertible notes and stock warrants for
$500,000 was not an issuance of shares which would trigger the
settlement agreement’s acceleration clause.
RedHawk’s is in default of the settlement agreement
As discussed above, the sale the convertible notes and warrants
for $500,000 referenced in RedHawk’s SEC Form 8-K in September
2019 did not constitute an issuance of shares. Although it would
appear more reasonable for Redhawk to reduce its debt to Schreiber
when it first receives the funds from a sale of a convertible note,
the sale does not trigger the acceleration clause as the sale of
the note is not a sale of shares. However, at the moment RedHawk
converts a convertible note into shares, rather than pay the amount
due
on
the
note,
the
acceleration
clause
in
the
settlement
agreement is triggered requiring RedHawk to use 50% of all monetary
proceeds received from the issuance to reduce the debts owed to
Schreiber. Similarly, at the moment RedHawk allows a warrant holder
to exercise a warrant and issues shares, the settlement agreement’s
acceleration clause is also triggered. Once the note is converted
or the warrant is exercised a sale of shares has occurred. RedHawk
9
does not have the luxury of using convertible notes or warrants to
evade the acceleration clause. Thus, when the shares are issued,
RedHawk must use 50% of all monetary proceeds received from the
initial sale of the note to reduce its debt to Schreiber.
Schreiber asserts and provides RedHawk’s most recent 10-K and
10-Q filings which identify multiple instances in which RedHawk
has converted notes into equity by issuing shares rather than
paying the amounts due on notes. Schreiber emphasizes that he has
not received any payments towards the remaining notes owed by
RedHawk. Redhawk fails to address this issue. Upon review of the
8-K and 10-Q filings attached to the motion to enforce settlement,
RedHawk has converted at least $709,048 of convertible notes into
at least 171,313,575 shares. 1 In accordance with the settlement
agreement’s acceleration clause, RedHawk is obligated to use 50%
of those proceeds to reduce its debt to Schreiber. The use of 50%
of the proceeds would have successfully eliminated RedHawk’s debt
to Schreiber. RedHawk is in default of the settlement agreement.
Because RedHawk has issued shares for cash, by converting notes
into equity, while amounts are due to Schreiber, RedHawk owes 50%
1
$41,250 of convertible notes, outstanding as of June 30, 2019, were converted
into 41,250,000 shares of common stock. Rec. Doc. 151-6 at 37. $76,068 of
convertibles notes were converted into 15,213,646 shares of common stock
subsequent to June 30, 2019. Rec. Doc. 151-6 at 41. $574,250 aggregate principal
amount of RedHawk’s convertible promissory notes were converted into 114,849,929
shares of common stock. Rec. Doc. 151-6 at 43. $17,480 of convertible notes
were converted into shares of common stock subsequent to September 30, 2019.
Rec. Doc. 161-1 at 13.
10
of all monetary proceeds received from the sales to reduce the
debts owed to Schreiber. RedHawk is in default of the settlement
agreement.
New Orleans, Louisiana this 2nd day of March, 2020
___________________________________
SENIOR UNITED STATES DISTRICT JUDGE
11
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