RedHawk Holdings Corp., et al v. Schreiber, et al
Filing
211
ORDER AND REASONS: The 151 motion to enforce settlement is GRANTED and Schreiber is awarded $101,490.27, representing contractual interest in the amount of 18% on the outstanding principal debts until they were paid, plus reasonable attorneys' fees and costs incurred with its successful efforts to enforce the settlement agreement or 10% of the amounts due, whichever is greater. Signed by Judge Ivan L.R. Lemelle on 9/23/2021. (pp)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
REDHAWK HOLDINGS CORP., ET AL.
CIVIL ACTION
VERSUS
NO. 17-819
DANIEL J. SCHREIBER, ET AL.
SECTION: “B”(5)
ORDER & REASONS
Defendants
Daniel
J.
Schreiber
and
Daniel
J.
Schreiber,
Trustee of the Schreiber Living Trust—DTD 2/08/95 (“Schreiber”)
filed a motion to enforce settlement after plaintiff RedHawk
Holdings Corp. allegedly failed to comply with its obligations
under
the
settlement
agreement.
Rec.
Doc.
151.
This
court
previously granted the motion, Rec. Doc. 162, and plaintiffs
appealed. Rec. Doc. 163. The Fifth Circuit vacated that order and
remanded to this Court for further proceedings to reconsider
Schreiber’s motion after permitting RedHawk to file its requested
sur-reply. RedHawk Holdings Corp. v. Schreiber, 836 F. App’x 232
(5th Cir. 2020); Rec. Doc. 203-1 at 9. RedHawk subsequently filed
its sur-reply, Rec. Doc. 208, and Schreiber responded. Rec. Doc.
210. Accordingly, for the following reasons,
IT
IS
ORDERED
that
the
motion
to
enforce
settlement
is
GRANTED.
The facts of the underlying action have been well documented
on
the
record.
Plaintiffs
RedHawk
1
Holdings
Corporation
and
Beechwood Properties, LLC filed this lawsuit against Daniel J.
Schreiber, the former CEO and director of RedHawk, for, amongst
other claims, securities fraud. Rec. Docs. 1, 20. Schreiber filed
counterclaims
alleging
an
interference
with
his
ability
to
transfer his shares of RedHawk stock. Rec. Doc. 49. The parties
engaged in settlement discussions before the Magistrate Judge in
January
2019.
Rec.
Docs.
147,
148.
Shortly
thereafter,
the
undersigned was notified in February 2019 that a settlement had
been reached. Rec. Doc. 149. This court subsequently dismissed the
action but retained jurisdiction to enforce the settlement upon a
showing of good cause. Rec. Doc. 150.
Under the settlement agreement, Schreiber would transfer all
of his RedHawk stock back to RedHawk. Rec. Doc. 151-2 at 2. In
exchange, RedHawk agreed to pay $250,000 immediately upon signing
the agreement and issue two non-interest-bearing promissory notes
in the amount of $200,000 each to be paid on or before September
6, 2020 and September 5, 2021 respectively. Id. The agreement
contained an acceleration clause for the two promissory notes that
included several terms including (1) a thirty-day grace period
following any RedHawk default, after which all payments would be
immediately due and payable plus 18% interest and the greater of
reasonable attorneys’ fees or 10% of the amount due and (2) a
provision that if RedHawk issued any shares of any series or class
for cash while any amounts are due, 50% of the monetary proceeds
2
were to be paid to Schreiber to reduce the amount owed. Id. at 34.
A
few
months
after
confecting
the
settlement
agreement,
RedHawk issued on September 16, 2019 a SEC Form 8-8k and a press
release providing that it “completed the sale of $500,000 in
aggregate principal amount of new convertible notes,” and issued
a number of stock warrants that are exercisable in ten years for
the purchase of an aggregate of 12.5 million shares of RedHawk
common stock. Rec. Doc. 151-1 at 3.
The
following
day,
Schreiber
informed
RedHawk
that
this
action triggered the acceleration clause because it failed to pay
Schreiber $250,000 from the proceeds of the sale and RedHawk was
now in default. Rec. Doc. 151-1 at 3. RedHawk responded it was not
in default because the transaction was for sale of convertible
notes and not for the sale of stocks. Id. at 4.
In
November
settlement
2019,
seeking
the
Schreiber
accelerated
filed
a
amounts
motion
of
the
to
enforce
notes
for
$400,000 plus 18% interest running from the date of the agreement,
and attorney fees of either the actual sums expended in pursuing
that payment or 10% of the amounts due, whichever is greater.
RedHawk responded to the motion and this Court granted Schreiber
leave to reply. Rec. Docs. 157, 161. RedHawk opposed the motion
for leave and requested an opportunity to submit a sur-reply should
3
the Court grant it but leave to file a sur-reply was denied. See
Rec. Doc. 159.
In March 2020, this Court granted Schreiber’s motion to
enforce the settlement agreement, Rec. Doc. 162, and awarded
Schreiber
$519,495.78,
which
included
the
entire
accelerated
amount due on the notes plus 18% interest and attorneys’ fees.
Rec. Doc. 179. RedHawk appealed the judgment and the Fifth Circuit
vacated and remanded to allow RedHawk to file a sur-reply and
thereafter reconsider the instant motion to enforce settlement.
RedHawk Holdings Corp. v. Schreiber, 836 F. App’x 232, 233, 237
(5th Cir. 2020) (per curiam).
While the appeal was pending, RedHawk paid all principal
amounts due to Schreiber under the settlement agreement and notes
($400,000 for the remaining notes plus the $250,000 RedHawk paid
at
the
time
of
settlement).
Rec.
Doc.
208
at
3.
RedHawk
subsequently filed its sur-reply to the motion, Rec. Doc. 208, and
Schreiber responded. Rec. Doc. 210. The only remaining issue is
whether
RedHawk
breached
the
acceleration
provision
of
the
settlement agreement, thereby entitling Schreiber to interest and
attorneys’ fees or 10% of the amounts due, whichever is greater. 1
I.
PARTIES’ CONTENTIONS
While opposing entitlement issues, RedHawk did not appear to question
Schreiber’s statement that his current attorney fees in seeking
enforcement are greater than 10% of the amount allegedly due.
1
4
Schreiber argued that RedHawk’s sale of convertible notes and
stock warrants for $500,000 constitutes an issuance of “any shares
of any series or class for cash.” Rec. Docs. 151-1 at 6, 210 at 23. RedHawk argued, and this Court generally agreed in its nowvacated order, that convertible notes and stock warrants are not
shares, but instead, they make up a debt of the company. Rec. Docs.
157
at
6-7,
162
at
8.
However,
Schreiber
showed
without
an
objection that RedHawk’s history demonstrates that even though
convertible notes and stock warrants are not shares, RedHawk
consistently converts notes and warrants into shares of its common
stock. Rec. Docs. 161 at 1, 210 at 5-6. Schreiber also posits that
RedHawk’s transaction was not purely a debt offering, but a hybrid
offering, citing Sharette v. Credit Suisse Int’l, 127 F. Supp. 3d
60, 70 (S.D.N.Y. 2015) (“A convertible note is a hybrid security
with characteristics of both stocks and bonds.”). In support,
Schreiber points to RedHawk’s 10-k and 10-Q SEC filings that
include transactions of convertible notes and other cash advances
that Schreiber argues will not be repaid because the company issued
shares of its common stock to its creditors. Rec. Doc. 210 at 36. The following examples of that history are taken from RedHawk’s
public filings with the SEC:
During the fiscal year ended June 20, 2019 . . . We issued
568,529,275 shares of common stock upon the conversion of
approximately $929,844 of convertible notes that were
previously sold to accredited investors.
5
Concurrent with the execution of the Exchange Agreement,
holders of $574,250 aggregate principal amount of the
Company’s
5%
convertible
promissory
notes
(“Notes”),
including accrued interest, have converted their Notes into
114,849,929 shares of Common Stock. The extinguishment of the
notes and related accrued interest for the shares of common
stock resulted in a gain on extinguishment of $375,000 based
on the closing price of the common stock as of the exchange
date.
Rec. Doc. 151-6 at 20, 43.
Schreiber contends that the equity
component of the transactions—consistently issuing shares of its
common
stock
in
exchange
for
cash—that
renders
the
sale
of
convertible notes and warrants for $500,000 not a “pure debt
transaction,” but rather the issuance of “any shares of any series
or class for cash” triggering the acceleration clause in the
parties’ settlement agreement. Rec. Doc. 161 at 3.
Additionally, both parties correctly ask the Court to again
consider the parties’ intent in light of the attendant events and
circumstances when interpreting the language of the settlement
agreement. Schreiber asserts that the acceleration clause used
expansive language to encompass “any shares of any series for cash”
to
protect
Schreiber’s
interest
against
RedHawk
continually
diluting the value of its stock. Rec. Docs. 161 at 5, 210 at 5.
Schreiber shows that by continuing in this practice, RedHawk has
received at least $1 million in proceeds from the issuance of
securities covered under the acceleration clause and failed to
reduce its debt to Schreiber. RedHawk’s SEC filings provide several
transactions in which notes were converted into equity and RedHawk
6
issued stocks during pertinent periods. Rec. Doc. 161 at 8. In its
sur-reply, RedHawk reaffirms that the underlying facts are not in
dispute, but the issue is how to interpret the parties’ agreement
and apply the rules of the acceleration agreement to the undisputed
facts. Rec. Doc. 208 at 4. RedHawk asserts that the outstanding
convertible notes that were eventually converted into shares of
RedHawk stock were issued and outstanding before the Settlement
Agreement, and the debt owed was converted into shares later during
the term of the Settlement Agreement. Id. at 5.
It concludes
receipt of the funds for the convertible notes occurred before the
settlement agreement and before any amounts were due to Schreiber.
II. LAW AND ANALYSIS
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)).
Schreiber
and
RedHawk’s
agreement
specify
application of Louisiana law in the resolution of this dispute.
Under Louisiana law, any settlement agreement must be made in
writing or recited in open court, in which the recitation shall be
7
transcribed on the record of the proceedings. LA. CIV. CODE ANN. art.
3071. The Court's role in interpreting the settlement agreement is
to determine the common intent of the parties. LA. CIV. CODE ANN.
art. 2045. Words and phrases used in settlement agreements are to
be construed using their plain, ordinary, and generally prevailing
meaning, unless the words have acquired a technical meaning. See
Henry v. S. La. 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 ANN. art. 2046).
This court retained jurisdiction for all purposes including
the enforcement of the settlement agreement. Rec. Doc. 150. The
parties do not dispute the existence of a written settlement
agreement or the acceleration provision therein. The underlying
issue before this court is whether the transactions cited in
RedHawk’s SEC filings trigger the acceleration provision and thus
entitle Schreiber to the 18% interest and attorneys’ fees and costs
or 10% of the amounts due, whichever is greater.
A. The Acceleration Clause
The acceleration clause at paragraph 6(c) provides:
8
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 4.
The undisputed record shows that RedHawk issued shares of its
stock while outstanding settlement amounts were owed to Schreiber.
RedHawk’s exhibit to its sur-reply states the conversions were
made from June 26, 2019 through December 9, 2019. Rec. Doc. 2081, p. 8; see also Rec. Doc. 151-6, pp. 37, 41, 43; Rec. Doc. 1611, p. 13. As stated earlier, the parties agreed to an amicable
resolution
on
February
6,
2019,
and
the
written
settlement
agreement was executed on March 22, 2019. Rec. Doc. 151-2. 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 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. 2
If a noteholder prefers not to continue to collect interest or not to have
its loan repaid at the note’s maturity date, then, at its option, the noteholder
2
9
RedHawk contends that all cash for the issuance of convertible
notes were received before the parties confected their settlement
agreement. Rec. Doc. 208 at 8. It further contends most cash
payments were received before the commencement of the underlying
litigation. It admits that notes were later converted into stocks
while amounts were due to Schreiber but denies receiving additional
cash after execution of the settlement agreement. Id.
RedHawk’s
acceleration
seeks
terms
to
primarily
limit
because
application
the
issuance
of
of
the
shares
occurred in connection with cash payments it received before the
settlement
However,
agreement
the
for
previously
aforementioned
issued
transactions
convertible
considered
notes.
in
its
totality triggered the acceleration clause because once RedHawk’s
notes are converted or warrants are exercised, a confirmed sale of
shares has occurred and, rather than paying the amount due on the
note, RedHawk must use 50% of monetary proceeds received from the
issuance to reduce debts owed to Schreiber. Using convertible notes
may “convert” its debt “into shares of the Company’s common stock . . . at a
price of $0.015 per share.” Rec. Doc. 151-5 at 4. When a noteholder exercises
that option, RedHawk must issue enough shares of RedHawk stock to satisfy
RedHawk’s remaining obligation under the note. The press release accompanying
the Form 8-K filing defines those unissued shares, to be issued if and when a
noteholder exercises its conversion right, as “Note Shares”. The noteholders
also were issued “a number of warrants exercisable ten years from the date of
issuance for the purchase of . . . shares of the Company’s common stock”
(defining those unissued shares of RedHawk as “Warrant Shares”). Id. A stock
warrant is a security that grants the holder an option to purchase shares of
stock at a fixed price. The warrants granted the noteholders an option to
purchase 12.5 million shares of RedHawk ten years from now for “an exercise
price of $0.01 per Warrant Share.” Rec. Doc. 151-5 at 4.
10
or warrants to blatantly evade the acceleration clause cannot be
condoned when RedHawk’s SEC filings identify multiple instances
where it converted notes into shares without making any payments
to reduce its debt to Schreiber.3
These shares were issued while
the settlement amounts were due to Schreiber. Rec. Doc. 208-1
at 8; Rec. Docs. 151-2 and 151-6 at 37, 41, 43; Rec. Doc. 161-1
at 13.
RedHawk’s denial of receiving “no payment whatsoever for the
issuance of shares” is unconvincing. Again, its own public filings
document that shares were issued upon the conversion of notes that
represented hundreds of thousands of cash dollars received by
RedHawk. Its position in the latter regards is further complexing
and refuted by its Chief Financial Officer’s affirmation that cash
was received on March 15, 2019‒less than 30 days after parties
agreed to an amicable resolution on February 6, 2019 and a few
days before execution of the settlement agreement on March 22,
2019. Rec. Doc. 208-1 at 8. Interestingly, RedHawk appears to also
ignore transactions where holders of $142,000 of advances sought
to convert their advances into 55,916,667 shares, which were to be
Further examples of RedHawk’s practices follow: $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.
3
11
completed during the quarter ending December 31, 2019. Rec. Doc.
161 at 8.
RedHawk’s interpretations of the acceleration clause would
undermine the language and intent of the parties’ agreement. All
parties are experienced businessmen and represented by learned
counsel. Given RedHawk’s history of raising capital by issuance
and conversion of convertible notes and warrants, Schreiber agreed
to return 52 million shares to RedHawk in exchange for the promise
of an immediate partial cash payment and two future payments
secured by notes. The parties’ agreement required RedHawk to reduce
that debt when it issued any series or class of shares, thereby
ensuring
that
Schreiber
was
protected
from
RedHawk
being
completely diluted and its shares devalued in the event RedHawk
failed to pay the entirety of the promised future amounts. The
shares issued while amounts were due to Schreiber had cash value
to RedHawk based on pertinent notes or warrants and constituted,
using RedHawks’ characterization of the shares issuance, as being
done “in connection with cash advances” previously received by
RedHawk. Rec. Doc. 208 at 8. It is undisputed that RedHawk received
cash in contemplation of issuing shares upon conversion of notes
and warrants. The plain and expansive language of the agreement’s
acceleration clause did not condition when cash would be received
for the converted equity (shares of stock) so long as the issuance
of that equity occurred “while any amounts are due to Schreiber.”
12
Rec.
Doc.
151-2
at
4.
Relatedly,
the
broad
language
of
the
acceleration clause placed no restrictions on the type, series or
class of shares issued. Clearly, shares issued because of later
conversions of notes/warrants into shares were not exempted from
coverage. RedHawk correctly states, and we reiterate our finding,
that convertible notes and warrants are not shares under Louisiana
law. Rec. Doc. 157 at 6-9; Rec. Doc. 162 at 6-9.
However, cash
received upon issuance of those notes or warrants is conditioned
upon and forms an advancement of cash to RedHawk for the later
issuance of shares of stock when requested by holders of those
instruments. RedHawk cannot fault Schreiber for its agreement to
what arguably was a bad or questionable business deal for RedHawk
relative to the broad language and scope of the acceleration
clause.
Under the foregoing circumstances and because RedHawk has
issued shares for cash, by converting notes into equity while
amounts are due to Schreiber, RedHawk owes 50% of all monetary
proceeds received from the sales to reduce the debts owed to
Schreiber. RedHawk is in default of the settlement agreement.
B. Attorneys’ Fees and Costs
Paragraph
23
of
the
Settlement
Agreement
entitles
the
prevailing party in a dispute in connection with the agreement to
an award of reasonable attorneys’ fees and costs. It provides in
pertinent part that:
13
in the event of litigation . . . concerning the
interpretation or enforcement of this Agreement,
or because of an alleged dispute, default . . .
or breach in connection with any of the
provisions of this Agreement, the successful or
prevailing party shall be entitled to recover
reasonable attorneys’ fees, expenses and costs
actually incurred in connection therewith, in
addition to any other relief to which it may be
entitled.
Rec. Doc. 151-2 at 7.
Paragraph 6(d) of the Settlement Agreement specifies relief
available to Schreiber for untimely payment or default by RedHawk.
It states, in pertinent part, he is entitled “to actual reasonable
attorneys’ fees or 10% of the amounts due, whichever is greater,
for any sums expended after expiration of the 30-day grace period
in pursuing any payment not made timely.” Rec. Doc. 151-2 at 4.
Had Schreiber’s motion for enforcement of settlement been
denied, RedHawk would have basis to seek payment of its attorneys’
fees under the aforementioned paragraph 23 of the agreement.
Alternatively, it argues that Schreiber’s fees should be limited
to an award of the sums expended in preparing his reply to
RedHawk’s opposition to the motion to enforce settlement, and no
more. In support, it points to this Court’s rejection of the latter
motion’s reliance on the issuance of convertible notes as a per se
issuance of “shares” triggering the acceleration provision. It
contends the remaining “claim for payment at issue here did not
arise until it was raised, for the first time, in Schreiber’s
14
[r]eply to [RedHawk’s] opposition.” See Rec. Docs. 157, 161.
RedHawk declined to make payment to Schreiber under this theory
after
the
filing
of
Schreiber’s
reply.
RedHawk
states
the
declination was done in the course of lodging its appeal‒before
any
substantial
sums
were
paid
by
it.
That
new
“theory”
is
presumably based on Schreiber’s reply argument that (a) “RedHawk
issued
shares
Settlement
in
four
Agreement,
other
and
transactions
one
which
since
signing
Schreiber
alleges
the
is
currently, “in process.” Rec. Doc. 159 at 4; (b) Schreiber’s reply
advanced
a
contradictory
anti-dilution
purpose;
and
(c)
Schreiber’s reliance upon a post-settlement form 10-Q filing by
RedHawk on November 19, 2019. Rec. Doc. 159 at 4-8.
Schreiber disputes the limitation that RedHawk places upon
his recovery of attorneys’ fees and costs. In addition to restating
the
basis
for
entitlement
to
same,
he
contends
that
RedHawk
improperly prolonged their dispute when it could have limited the
amount of fees owed to him by timely paying the amounts awarded in
this Court’s July 2020 judgment.
Under the settlement agreement’s attorney fee clauses and for
reasons
cited
above
in
successful
pursuit
of
enforcement,
Schreiber is entitled to interest and reasonable attorneys’ fees
and costs or 10% of the amounts due, whichever is greater. The
latter
topic
will
be
subject
to
quantifying
fees
and
costs,
including limitations, if any, for that award in later proceedings.
15
III. CONCLUSION
The motion to enforce settlement (Rec. Doc. 151) is GRANTED
and Schreiber is awarded $101,490.27, representing contractual
interest in the amount of 18% on the outstanding principal debts
until they were paid, plus reasonable attorneys’ fees and costs
incurred with its successful efforts to enforce the settlement
agreement or 10% of the amounts due, whichever is greater.
New Orleans, Louisiana this 23rd day of September 2021
___________________________________
SENIOR UNITED STATES DISTRICT JUDGE
16
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