Crede CG III, Ltd. v. 22nd Century Group, Inc.

Filing 116

OPINION AND ORDER re: 100 MOTION for Partial Summary Judgment filed by 22nd Century Group, Inc. For the foregoing reasons, 22nd Century's motion for summary judgment as to whether Crede's claim in Counts III-V are capped at a maximum of $10 million is GRANTED; 22nd Century's motion for summary judgment as to its additional claims is DENIED. The parties are ORDERED to submit a joint letter on or before March 1, 2019, setting forth their availability for a bench trial in the second half of 2019 and the contemplated length of the trial. If the parties would like to be referred to the Court's Mediation Program, or to a settlement conference before the Court or Magistrate Judge Henry B. Pitman, they can advise the Court in that same letter. (Signed by Judge Katherine Polk Failla on 2/15/2019) (mro)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
------------------------------------------------------X
:
CREDE CG III, LTD.,
:
:
Plaintiff,
:
:
v.
:
:
22ND CENTURY GROUP, INC.,
:
:
Defendant. :
:
------------------------------------------------------ X

16 Civ. 3103 (KPF)
OPINION AND ORDER

KATHERINE POLK FAILLA, District Judge:
This dispute arises out of an investment arrangement between Plaintiff
Crede CG III, Ltd. (“Crede”) and Defendant 22nd Century Group, Inc. (“22nd
Century”), and the souring of that relationship in 2016. Since Crede filed suit
in March of that year, 22nd Century has twice moved for summary judgment.
First, in March 2017, 22nd Century requested that the Court grant summary
judgment on four claims. That request was largely unsuccessful: The Court
denied the motion as to three of four counts. Now, in its second attempt, 22nd
Century moves the Court for partial summary judgment, this time seeking to
remove or limit certain categories of damages prior to trial. Here, too, 22nd
Century has only limited success. For the reasons that follow, the Court
grants in part, and denies in part, 22nd Century’s motion.

BACKGROUND 1
The Court’s Orders of January 20, 2017, and December 28, 2017,
provide a thorough review of the relevant facts of this case. See Crede CG III,
Ltd. v. 22nd Century Grp., Inc., No. 16 Civ. 3103 (KPF), 2017 WL 280818, at *16 (S.D.N.Y. Jan. 20, 2017) (“Crede I”); Crede CG III, Ltd. v. 22nd Century Grp.,
Inc., No. 16 Civ. 3103 (KPF), 2017 WL 6729368, at *1-7 (S.D.N.Y. Dec. 28,
2017) (“Crede II”). As a result, this Court assumes the parties’ familiarity with
the underlying facts and will only discuss what is necessary to resolve the
instant motion.
Broadly speaking, this dispute arises out of an investment arrangement
in which Crede agreed to provide capital and other services to support the
business interests of 22nd Century. See Crede I, 2017 WL 6729368, at *1. In
return, Crede received, among other consideration, warrants giving it the right
to purchase 22nd Century stock or to exchange the warrants for 22nd Century
stock. See id. Among the terms of one of these warrants was a prohibition on
Crede engaging in certain activities related to the organization of 22nd
Century’s Board of Directors. See id. After Crede’s principal sent a series of

1

This Opinion draws from the parties’ briefing, including 22nd Century’s opening
memorandum of law (“Def. Br.” (Dkt. #100)), Crede’s memorandum in opposition (“Pl.
Opp.” (Dkt. #110)), 22nd Century’s reply (“Pl. Reply” (Dkt. #115)), 22nd Century’s Local
Rule 56.1 Statement (“Def. 56.1” (Dkt. #102)), Crede’s Opposition to 22nd Century’s
Local Rule 56.1 Statement (“Pl. 56.1 Opp.” (Dkt. #111)), and certain exhibits submitted
by the parties. 22nd Century has submitted exhibits as attachments to the Declaration
of John A. Tucker in support of the motion for partial summary judgment, including the
deposition of Terren Peizer (Tucker Decl., Ex. A (Dkt. #103-1 (“Peizer Dep.”))), the
deposition of Jeffrey Schultz (Tucker Decl., Ex. B (Dkt. #103-2 (“Schultz Dep.”))), the
Tranche 1A Warrant (Tucker Decl., Ex. E (Dkt. #103-5 (“Warrant”))), and the transcript
of the hearing held in this Court on July 11, 2018 (Tucker Decl., Ex. O (Dkt. #103-15
(“July 11 Tr.”))).

2

incendiary emails to 22nd Century members and shareholders, 22nd Century
invoked the prohibition and declared that Crede’s right to exchange the
warrant for stock was null and void. See id. Crede balked at this response,
and unsuccessfully attempted to exchange the warrants on two occasions.
See id. On April 26, 2016, Crede sought to exchange 77,555 shares. (Def. 56.1
¶ 5). Later, on May 17, 2016, Crede sought to exchange 2,000,000 shares. (Id.
at ¶ 7). Prior to the second attempted exchange, Crede filed this lawsuit. (Dkt.
#1).
On March 20, 2017, before undertaking any formal discovery, 22nd
Century moved for summary judgment. (Dkt. #52-54). On December 20,
2017, the Court denied the motion as to all counts, except for one. (Dkt. #61).
On July 9, 2018, 22nd Century filed a pre-motion letter, requesting leave to file
a motion for partial summary judgment on four discreet aspects of Crede’s
remaining claims, relating to damages. (Dkt. #94). The Court held a
conference on July 11, 2018, at which time 22nd Century argued that the
proposed motion would limit the issues for trial and facilitate settlement
discussions. (July 11 Tr. 9:03-11:02). On July 20, 2018, the Court granted
22nd Century’s letter motion and set a briefing schedule. (Dkt. #97). The
motion for partial summary judgment was fully briefed as of October 11, 2018.
(Dkt. #100-03, 108-15).

3

DISCUSSION
A.

Applicable Law
1.

Summary Judgment Under Federal Rule of Civil Procedure 56

Rule 56(a) provides that a “court shall grant summary judgment if the
movant shows that there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a); see
also Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 247-48 (1986). 2 A genuine dispute exists where “the
evidence is such that a reasonable jury could return a verdict for the
nonmoving party.” Fireman’s Fund Ins. Co. v. Great Am. Ins. Co. of N.Y., 822
F.3d 620, 631 n.12 (2d Cir. 2016) (internal quotation marks and citation
omitted). A fact is “material” if it “might affect the outcome of the suit under
the governing law[.]” Anderson, 477 U.S. at 248.
While the moving party “bears the initial burden of demonstrating ‘the
absence of a genuine issue of material fact,’” ICC Chem. Corp. v. Nordic Tankers
Trading a/s, 186 F. Supp. 3d 296, 301 (S.D.N.Y. 2016) (quoting Catrett, 477
U.S. at 323), the party opposing summary judgment “must do more than
simply show that there is some metaphysical doubt as to the material facts,”
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986); see

2

The 2010 Amendments to the Federal Rules of Civil Procedure revised the summary
judgment standard from a genuine “issue” of material fact to a genuine “dispute” of
material fact. See Fed. R. Civ. P. 56, advisory comm. notes (2010 Amendments) (noting
that the amendment to “[s]ubdivision (a) … chang[es] only one word — genuine ‘issue’
becomes genuine ‘dispute.’ ‘Dispute’ better reflects the focus of a summary-judgment
determination.”). This Court uses the post-amendment standard, but continues to be
guided by pre-amendment Supreme Court and Second Circuit precedent that refers to
“genuine issues of material fact.”

4

also Brown v. Henderson, 257 F.3d 246, 252 (2d Cir. 2001). Rather, the
non-moving party “must set forth specific facts showing that there is a genuine
issue for trial.” Parks Real Estate Purchasing Grp. v. St. Paul Fire & Marine Ins.
Co., 472 F.3d 33, 41 (2d Cir. 2006) (quoting Fed. R. Civ. P. 56(e)).
“When ruling on a summary judgment motion, the district court must
construe the facts in the light most favorable to the non-moving party and
must resolve all ambiguities and draw all reasonable inferences against the
movant.” Dallas Aerospace, Inc. v. CIS Air Corp., 352 F.3d 775, 780 (2d Cir.
2003). In considering “what may reasonably be inferred” from evidence in the
record, however, the court should not accord the non-moving party the benefit
of “unreasonable inferences, or inferences at war with undisputed facts.” Berk
v. St. Vincent’s Hosp. & Med. Ctr., 380 F. Supp. 2d 334, 342 (S.D.N.Y. 2005)
(quoting Cty. of Suffolk v. Long Island Lighting Co., 907 F.2d 1295, 1318 (2d
Cir. 1990)). Moreover, “[t]hough [the Court] must accept as true the allegations
of the party defending against the summary judgment motion, … conclusory
statements, conjecture, or speculation by the party resisting the motion will not
defeat summary judgment.” Kulak v. City of N.Y., 88 F.3d 63, 71 (2d Cir. 1996)
(internal citation omitted) (citing Matsushita, 475 U.S. at 587; Wyler v. United
States, 725 F.2d 156, 160 (2d Cir. 1983)); accord Hicks v. Baines, 593 F.3d
159, 166 (2d Cir. 2010).
2.

Canons of Contractual Interpretation

A court interpreting a contract must “give effect to the intent of the
parties as revealed by the language of their agreement,” while giving the
5

contract’s “words and phrases … their plain meaning … so as to give full
meaning and effect to all of [the contract’s] provisions.” Chesapeake Energy
Corp. v. Bank of N.Y. Mellon Tr. Co., 773 F.3d 110, 113-14 (2d Cir. 2014)
(quoting Olin Corp. v. Am. Home Assur. Co., 704 F.3d 89, 99 (2d Cir. 2012);
Compagnie Financiere de CIC et de L’Union Europeenne v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 232 F.3d 153, 157 (2d Cir. 2000)). Under New York law,
which governs the parties’ relationship here under the agreements at issue, “[i]t
is well settled that a contract must be read as a whole to give effect and
meaning to every term” and “in a way [that] reconciles all [of] its provisions, if
possible.” Maven Techs., LLC v. Vasile, 46 N.Y.S.3d 720, 722 (4th Dep’t 2017)
(quoting N.Y. State Thruway Auth. v. KTA-Tator Eng’g Servs., P.C., 913 N.Y.S.2s
438, 440 (4th Dep’t 2010)). Indeed, “[i]n construing a contract, a court should
read the contract as a whole and avoid any interpretation that would render a
contractual provision without force and effect.” Luitpold Pharm., Inc. v. Ed.
Geistlich Söhne A.G. Für Chemische Industrie, 784 F.3d 78, 87 (2d Cir. 2015)
(internal citations omitted) (construing New York law).
“[W]hen parties set down their agreement in a clear, complete document,
their writing should … be enforced according to its terms. Evidence outside
the four corners of the document as to what was really intended but unstated
or misstated is generally inadmissible to add to or vary the writing.” W.W.W.
Assocs., Inc. v. Giancontieri, 77 N.Y.2d 157, 162 (1990). “Only when a court
finds ambiguity in the parties’ written agreement may it look to extrinsic
evidence to discern the parties’ intent.” Luitpold Pharm., Inc., 784 F.3d at 87.
6

A contract is ambiguous “if its terms ‘could suggest more than one meaning
when viewed objectively by a reasonably intelligent person who has examined
the context of the entire integrated agreement and who is cognizant of the
customs, practices, usages and terminology as generally understood in the
particular trade or business.’” Chesapeake Energy Corp., 773 F.3d at 114
(quoting Law Debenture Tr. Co. of N.Y. v. Maverick Tube Corp., 595 F.3d 458,
465 (2d Cir. 2010)). Conversely, “[n]o ambiguity exists where the contract
language has a definite and precise meaning, unattended by danger of
misconception in the purport of the [contract] itself, and concerning which
there is no reasonable basis for a difference of opinion.” Id. (quoting Maverick
Tube Corp., 595 F.3d at 467).
A summary judgment motion involving contractual interpretation thus
involves two steps: “First, a court must determine, as a matter of law, whether
the disputed contractual terms are ambiguous.” Great Minds v. John Wiley &
Sons, Inc., 204 F. Supp. 3d 507, 511 (S.D.N.Y. 2016) (citing Maverick Tube
Corp., 595 F.3d at 465). Second, if the court finds no ambiguity, it interprets
the contract according to its “plain meaning.” Id. at 512. But if the court finds
ambiguity, “‘where there is relevant extrinsic evidence of the parties’ actual
intent,’ then the contract’s meaning becomes an issue of fact precluding
summary judgment.” Sayers v. Rochester Tel. Corp. Supplemental Mgmt.
Pension Plan, 7 F.3d 1091, 1094 (2d Cir. 1993) (quoting Seiden Assocs., Inc. v.
ANC Holdings, Inc., 959 F.2d 425, 428 (2d Cir. 1992)). The moving party thus
bears the burden of proving that its proffered construction is the contract’s
7

only fair construction. Vasile, 46 N.Y.S.3d at 722 (quoting Nancy Rose Stormer,
P.C. v. Cty. Of Oneida, 886 N.Y.S.2d 298, 299 (4th Dep’t 2009)).
B.

Analysis
Attempting to remove or limit certain categories of damages prior to trial,

22nd Century brings four claims. All those claims are based on — and, 22nd
Century argues, are clearly resolved by — the plain language of the Warrant.
However, because some of the Warrant’s operative language is ambiguous, and
the uncertainty that is not cured by extrinsic evidence, the Court declines to
grant summary judgment on three of 22nd Century’s four claims.
1.

A Genuine Dispute of Material Fact Remains as to Whether
Crede Is Entitled to Liquidated Damages Following an
Exchange of the Warrant

22nd Century’s first claim involves the Warrant’s provision for liquidated
damages. While Crede asserts that it is entitled to liquidated damages at 1.5%
per day for the failure to deliver the shares it sought in the April 26 and May 17
exchange notices, 22nd Century argues that the plain language of the Warrant
forecloses the possibility of liquidated damages.
Section 1(c) of the Warrant provides for remedies if 22nd Century
wrongfully fails to issue shares to Crede under the Warrant. (Warrant § 1(c)).
The relevant portions of Section 1(c), including the liquidated damages
provision, are as follows: If 22nd Century wrongfully fails to issue shares, the
holder of the Warrant is entitled to liquidated damages “upon the Holder’s
exercise of the Warrant.” (Id. (emphasis added)). Liquidated damages are
calculated at 1.5% of the value of shares per day until the delivery of shares

8

Crede sought in its first and second exchange notices. (Id.). “In addition to the
foregoing,” the section subsequently provides for remedies “upon the Holder’s
exercise or exchange[.]” (Id. (emphasis added)). Those remedies do not include
liquidated damages. (Id.).
The parties advance competing interpretations of the relevant language.
22nd Century argues that Section 1(c) provides different remedies depending
on whether Crede exercised or exchanged the Warrant. (Def. Br. 15-16). In
particular, 22nd Century argues that, “[b]ecause Crede’s liquidated damages
claims arise from Crede’s two attempts to exchange — not exercise — the
Warrant, the first remedy under Section 1(c) for liquidated damages does not
apply.” (Id. at 15). In opposition, Crede argues that the Warrant does not
create a binary relationship between the words “exchange” and “exercise.” (Pl.
Opp. 6-10). Thus, in Crede’s view, Section 1(c) does not restrict liquidated
damages solely to an exercise of the Warrant. (Id.).
The Court finds aspects of the Warrant that support 22nd Century’s
position. Specifically, the Warrant uses the same or similar distinguishing
phrases — such as “exercise or exchange” or “exercisable or exchangeability” —
23 times throughout the document, which suggests that “exercise” does not
also encompass “exchange.” (See Def. Reply 3). See also United States v.
Zukerman, 897 F.3d 423, 431 (2d Cir. 2018) (finding that the presence of a
phrase at one point makes clear that the phrase’s omission elsewhere was
deliberate). In addition, the rule against surplusage requires the Court to avoid
a reading that renders some words altogether redundant — for example, the
9

word “exchange” in the phrase “exercise or exchange.” See Int’l Multifoods
Corp. v. Commercial Union Ins. Co., 309 F.3d 76, 86 (2d Cir. 2002) (collecting
cases).
Crede, conversely, reads “exercise” to include “exchange” as one method
of exercise. (Pl. Opp. 7). Crede asserts, and 22nd Century disputes, that the
term “exercise” is used multiple time in the Warrant to refer to all types of
exercise, including an exchange. (Id. at 7-8; Def. Br. 4-5). 3 In Crede’s view,
because the term “exercise or exchange” is used inconsistently, its usage
rebuts the presumption that a phrase has the same meaning throughout the
document. See Freeman v. HSBC Holdings PLC, No. 14 Civ. 6601 (DLI)(CLP),
2018 WL 3616845, at *54 (E.D.N.Y. July 27, 2018) (“[The] Supreme Court has
recently cautioned that ‘the presumption of consistent usage readily yields to
context[.]’” (quoting King v. Burwell, 135 S. Ct. 2480, 2493 n.3 (2015))). In
addition, Crede argues that the redundant use of “exercise” and “exchange” in
the later portion of Section 1(c) is meant to indicate emphasis. (See Pl. Opp. 7).
Doublets are two ways of saying the same thing that reinforce its meaning. See
Antonin Scalia & Bryan A. Garner, Reading Law 176-77 (2012). Alternatively,
doublets may be the product of sloppy drafting, rather than proof of the
drafter’s intent. See id. at 170 (“[T]his [canon] assumes a perfection of drafting
that, as an empirical matter, is not often achieved.”).

3

For example, Section 1(d) of the Warrant states, “Notwithstanding anything to the
contrary contained herein, exercise of this Warrant on a cashless basis may also be
made … pursuant to the exchange provisions of Section 5 of this Warrant.” (Warrant
§1(d) (emphasis added)). Crede argues this provision is evidence that an exchange
constitutes one method of exercise. (Pl. Opp. 7).

10

The Court finds that, because the operative language is subject to two
objectively reasonable interpretations, Section 1(c) is ambiguous. See Law
Debenture Tr. Co. of N.Y., 595 F.3d at 467. Given this ambiguity, the Court
proceeds to consider 22nd Century’s extrinsic evidence suggesting that the
parties intended the word “exercise” to encompass “exchange.” In support of
its argument, 22nd Century produces the depositions of Crede representative,
Terren Peizer, and Crede’s attorney, Jeffrey Schultz. (Def. Br. 15). Both men,
22nd Century claims, testified that, in Section 1(c), the first remedy for
liquidated damages applied upon Crede’s exercise of the Warrant, while the
second remedy applied after either Crede’s exercise or exchange of the Warrant.
(Id.).
As part of its opposition, Crede submitted declarations from Mr. Peizer
and Mr. Schultz, ostensibly to give the declarants “a chance to offer their
affirmative testimony on the topic.” (Pl. Opp. 9; Dkt. #108-09). In response,
22nd Century argued that these “recently filed declarations intended to retract
or change their testimony should not prevent the entry of summary judgment.”
(Def. Reply 7 (citing Perma Research and Development Co. v. Singer Co., 410
F.2d 572, 578 (2d Cir. 1969) (“If a party who has been examined at length on
deposition could raise an issue of fact simply by submitting an affidavit
contradicting his own prior testimony, this would greatly diminish the utility of
summary judgment for screening out sham issues of fact.”))).
The Court has reviewed the declarations, and has found them to be
complementary rather than contradictory to the deposition testimony, such

11

that the Court can consider them on a motion for summary judgment. Cf.
Mack v. United States, 814 F.2d 120, 124 (2d Cir. 1987) (“It is well settled in
this circuit that a party’s affidavit which contradicts his own prior deposition
testimony should be disregarded on a motion for summary judgment.”). Both
declarations make clear that a genuine dispute of material fact remains as to
whether Crede is entitled to liquidated damages following the exchange of the
Warrant. Both Mr. Peizer and Mr. Schultz clarify that, as they have
consistently interpreted the Warrant, an “exercise” of the Warrant also
encompasses an “exchange.” (See Schultz Decl. ¶¶ 3-4; Peizer Decl. ¶¶ 11-12).
They further explain that during their testimony, they were simply confirming
the text of the Warrant. (Id.). They were not testifying as to their interpretation
of the words on the page, nor did 22nd Century ask questions that went to the
ultimate issue of liquidated damages. (Id.).
Even if the Court were to consider only the depositions, the testimony of
Mr. Peizer and Mr. Schultz is far less damning than 22nd Century suggests,
and it certainly does not indicate that Defendant’s “construction of the”
Warrant “is the only construction [that] can be fairly placed thereon.” Vasile,
46 N.Y.S.3d at 1378 (internal quotations and citations omitted). Both men did
testify that the first remedy applies if there is an exercise of the Warrant, and
that the second remedy applies following an exercise or exchange of the
Warrant. (Peizer Dep. 61:20-63:04; Schultz Dep. 33:17-35:03). However,
neither man addressed whether the term “exercise” encompasses every method
of exercise, including an exchange. In point of fact, when pressed on the

12

matter, Mr. Peizer testified that the operative language “needs clarification,” not
that it conclusively foreclosed liquidated damages following an exchange.
(Peizer Dep. at 63:01-02).
Viewed in Crede’s favor, the plain language of the Warrant is ambiguous.
Because a genuine dispute of material fact exists as to whether the liquidated
damages provision applies only after an “exercise” of the Warrant, summary
judgment is precluded on this claim. 4
2.

A Genuine Dispute of Material Fact Remains as to Whether
the “Blocker” Provision Bars Crede’s Claims Based on the
May 17, 2016 Exchange Notice

Next, 22nd Century argues that Crede’s claims based on the second
exchange notice are barred by the Warrant’s so-called “blocker” provision,
Section 1(f). (Def. Br. 18-19). To review, following Crede’s alleged breach of the
Activity Restrictions, 22nd Century declared Crede’s exchange rights null and
void. (Def. 56.1 ¶ 32). In response, Crede unsuccessfully attempted to
exchange the warrants. (Id. at ¶¶ 33, 36). On April 26, 2016, Crede delivered
its first exchange notice seeking 77,555 shares, and on May 17, 2016, Crede
deliver its second exchange notice seeking 2 million shares. (Id.). 22nd

4

When granting Defendant’s request for leave to file a motion for partial summary
judgment, the Court limited the motion to those “four discrete issues” raised in
Defendant’s July 9, 2018 letter, and discussed at the July 11, 2018 conference. (Dkt.
#97). In its memorandum of law in support of the motion for summary judgment,
Defendant raises a fifth issue, contending that the liquidated damages provision is an
unenforceable provision under New York law. (Def. Br. 16-18). This issue was merely
referenced in passing in a footnote of Defendant’s July 9, 2018 letter (Dkt. #94 n.1
(“22nd Century also is entitled to summary judgement because the liquidated damages
provision amounts to an unenforceable penalty under New York law.”)), and not
discussed in Plaintiff’s reply letter (Dkt. #96), or at the conference addressing the
issuing (see July 11 Tr.), As a result, the Court will not address the argument here.

13

Century claims that the second attempted exchange was voided by the blocker
provision. (Def. Br. 18-19).
The Court begins with the Warrant’s text. Section 1(f) outlines
“Limitations on Exercises and Exchanges.” (Warrant § 1(f)). The blocker
provision sets a limit for Crede’s stock ownership:
[T]his Warrant shall not be exercisable or exchangeable
by the Holder hereof to the extent (but only to the extent)
that the Holder or any of its affiliates would beneficially
own in excess of 9.9% (the “Maximum Percentage”) of
the Common Stock after giving effect to such exercise
or exchange.
(Id.). To ensure compliance, the section also provides a mechanism by which
the holder of the Warrant may confirm its share ownership:
For any reason at any time, upon the written or oral
request of the Holder, the Company shall within one (1)
Business Day confirm orally and in writing to the Holder
the number of shares of Common Stock then
outstanding, including by virtue of any prior conversion
or exercise or exchange of convertible or exercisable or
exchangeable securities into Common Stock, including,
without limitation, pursuant to this Warrant. Upon
request by the Company, Holder shall certify to the
Company upon exercise of this Warrant how may share
of Common Stock are beneficially owned by Holder for
determining compliance with this Section 1(f).
(Id.).
The parties do not dispute, and the Court finds as a matter of law, that
the exchange of the second warrant in accordance with its terms would have
resulted in Crede owning more than 9.9% of 22nd Century shares. Crede’s
second exchange notice attempted to exchange 700,828 warrants for 2,000,000
shares of stock. (Def. 56.1 ¶ 36). That exchange would have resulted in Crede

14

owning 7,884,330 shares, out of the total 78,015,273 outstanding shares. (Id.
at ¶¶ 19, 24). 5 As a result, Crede would have owned 10.1% of the total issued
and outstanding shares.
22nd Century argues that the entire exchange notice is invalid because
the attempted exchange would result in Crede exceeding the 9.9% limit. (Def.
Br. 18). Conversely, the crux of Crede’s textual analysis is the clause “to the
extent (but only to the extent).” (Pl. Opp. 13 (citing Warrant § 1(f)) (emphasis
added)). Crede insists that “the effect of the ‘blocker’ [is] not to nullify an
otherwise valid Exchange Notice, but rather to limit the amount of shares
issued pursuant to that Notice.” (Id.). Therefore, in Crede’s view, pursuant to
the second exchange notice, Crede should have been issued shares until it
reached the 9.9% threshold, at which point the blocker provision would have
prohibited further issuance. (Id.).
Furthermore, Crede argues, the blocker provision cannot render the
entire exchange void because the holder of the Warrant does not have access to
share counts. (Pl. Opp. 15). In Crede’s words, “22nd Century’s theory is that a
minor overage would result in a multi-million dollar loss and frustrate Crede’s
rights to receive shares within the blocker amount, for no purpose whatsoever.”
(Id.). 22nd Century counters that Crede was on public notice of the total

5

Plaintiff argues that Defendant “has not offered proof as to the total amount of
outstanding shares as of the date of [Plaintiff’s] May 17, 2016 exchange notice. (Pl.
56.1 Opp. ¶ 24). In point of fact, the declaration of Thomas L. James, 22nd Century’s
Vice President, General Counsel, and Secretary, states that on May 17, 2016, 22nd
Century had 76,015,273 shares outstanding, the same amount of outstanding shares
stated on the cover page of 22nd Century’s publicly filed SEC Form 10-Q as of May 9,
2016. (Dkt. #103-3 (“James Decl.”) ¶¶ 1, 5-6).

15

number of issued and outstanding shares because, seven days prior to the
second exchange notice, that number was included in 22nd Century’s public
disclosures to the SEC. (Def. Br. 19).
In addition, both parties highlight relevant provisions that allow for a
confirmation of shares. Crede cites to a mechanism for 22nd Century to
confirm Crede’s share ownership. (Pl. Opp. 15). 22nd Century points to
language that allows Crede to request a written confirmation from 22nd
Century of the total number of Common Stock then outstanding. (Def.
Reply 11-12). Both parties argue that the other is attempting to shift its
obligations to its adversary in support of its textual interpretation. Further,
22nd Century argues that it cannot unilaterally alter an exchange notice to
provide for fewer shares, in order to remain below the blocker threshold. (Id. at
12-13).
Both parties’ interpretations of the “blocker” provision are reasonable.
Turning then to the extrinsic evidence, the Court finds that the evidence offered
by the parties does not shed light on how to interpret this ambiguous provision
of the Warrant. For its part, 22nd Century has once again submitted the
deposition testimony of Crede representatives Mr. Peizer and Mr. Schultz. (Def.
Br. 18-19). That testimony, according to 22nd Century, establishes “that an
attempted exchange that would result in Crede exceeding the 9.9% blocker in
Section 1(f) of the Tranche 1A Warrant would be ineffective.” (Id.). But again
the depositions are not as conclusive as 22nd Century claims. In point of fact,
when Mr. Peizer was asked what he would expect 22nd Century to do “[i]f

16

Crede inadvertently exercised or exchanged for shares above the 9.9 percent
blocker,” he responded, “The process would be we would submit the notice,
they would honor the notice up to the 9.9.” (Peizer Dep. 232:24-233:08). Mr.
Schultz also testified that if Crede “owned nine point nine nine percent, they
would … only be able to exercise or exchange up to nine point nine nine.”
(Schultz Dep. 41: 25-42:03). 6
In sum, neither the Warrant nor the parties’ extrinsic evidence
establishes whether the “blocker” provision nullifies Crede’s second exchange
notice in its entirety. This issue remains a dispute of material fact. And in
turn, the Court cannot enter summary judgment for 22nd Century on Crede’s
claim for the shares sought by its second exchange notice.
3.

Because Crede Was Not Required to Submit a Futile Exchange
Notice, 22nd Century Is Not Entitled to Summary Judgment
on Crede’s Claim for the Balance of the Warrant

Next, 22nd Century moves for summary judgment on Crede’s claim for
“the balance” of the Warrant. (Def. Br. 20-21). The balance represents the
remaining, unexercised portion of the Tranche 1A Warrant, after a reduction
for the exercising of 30,000 Warrants on April 26, 2016, and 700,828 Warrants
on May 17, 2016. (Tucker Decl., Ex. D).
Here, the operative text of the Warrant is unambiguous. Under
Section 5, to make an exchange, Crede is required to deliver an exchange

6

Mr. Schultz’s testimony is echoed in his declaration, where he confirms that he “did not
testify, and do[es] not understand, that if an Exchange Notice results in any shares
being issued in excess of the 9.9% limitation that the entire Exchange Notice is invalid.”
(Schultz Decl. ¶ 6). Instead, Mr. Schultz understood the provision to obligate 22nd
Century “to deliver shares up to the 9.9% threshold, but no more.” (Id. at ¶ 5).

17

notice to 22nd Century prior to September 29, 2016, the expiration date of the
Warrant. (Warrant § 5(a), (d); Def. 56.1 ¶¶ 28-29). The notice must include
certain information, including the exchange date and the exchange price.
(Warrant, Ex. B). That information is necessary for 22nd Century to calculate
the total number of shares to be provided in response to the exchange notice,
known as the “exchange number.” (Id.).
22nd Century’s argument on this point is simple: Because Crede did not
submit an exchange notice for these shares, its claim for the balance of the
Warrant is meritless. (Def. Br. 20-21). “[T]he submission of an [e]xchange
[n]otice was necessary to pursue a claim[,] … without which the Exchange
Number of the shares of stock issuable cannot be determined.” (Def. Reply 1314).
However, while simple, the argument is incorrect. 22nd Century’s
argument ignores — and at points misrepresents — the context of the case,
and the prior conduct of the parties. To review, between March and May,
2016, 22nd Century twice notified Crede that Crede’s exchange rights under
the Warrant were null and void due to Crede’s breach of the Activity
Restrictions. (Def. 56.1 ¶¶ 32, 35). In addition, during that time, Crede
delivered two exchange notices to 22nd Century. (Id. at ¶¶ 33, 36). After
receiving the first exchange notice, 22nd Century reiterated in writing that
Crede’s exchange rights were null and void. (Id. at ¶ 35). 22nd Century did
not honor either of Crede’s exchange notices.

18

22nd Century now argues that Crede was obligated to submit additional
exchange notices, even though 22nd Century had repudiated the exchange
right and declined to honor prior notices. (Def. Reply 13-14). The Court
disagrees. Crede’s prior submission of exchange notices, and 22nd Century’s
responses, prove that sending a third exchange notice to 22nd Century would
have been futile. Compliance with a contractual provision “is not required
where it would amount to a useless gesture.” Wolff & Munier, Inc. v. WhitingTurner Contracting Co., 946 F.2d 1003, 1009 (2d Cir. 1991); see also United
States v. Casamento, 887 F.2d 1141, 1169 (2d Cir. 1989) (“The law does not
require the doing of a futile act.”).
Because this Court cannot obligate Crede to pursue a futile act, 22nd
Century is not entitled to summary judgment on Crede’s claim for the balance
of the warrant.
4.

Crede’s Claims Are Capped at $10 Million

Finally, 22nd Century argues, from the plain language of the Warrant,
that Crede’s claims are capped at $10 million. (Def. Br. 21). Section 15 of the
Warrant states that Crede’s “remedies, including any right of damages, shall be
subject to Section 9(k) of the Securities Purchase Agreement” between 22nd
Century and Crede. (Def. 56.1 ¶ 38). Section 9(k)(iii) of the Securities
Purchase Agreement provides that 22nd Century’s maximum liability under the
provision “shall not exceed 100% of the aggregate Purchase Price actually paid”
by Crede under the Securities Purchase Agreement. (Id. at ¶ 39). It is
undisputed that the “aggregate Purchase Price” was $10 million. (Id. at ¶ 40).

19

Crede concedes that the Warrant limits its monetary damages to $10
million but maintains, without any citation to authority, that the cap does not
include either interest or specific performance. (Pl. Opp. 18). However, this
argument ignores the plain language of the Warrant. Section 15
unambiguously states that Crede’s “remedies, including any right of damages,
shall be subject to” the $10 million cap. (Def. 56.1 ¶ 38 (citing Warrant § 15)
(emphasis added)). Accordingly, the plain language of the Warrant
unambiguously evidences the parties’ intent for the cap to be applied broadly.
No reasonable jury could find that the interest and specific performance
remedies sought by Crede are not subject to the cap. For that reason, the
Court grants summary judgment in favor of 22nd Century on this limited issue
of the damages cap.
CONCLUSION
For the foregoing reasons, 22nd Century’s motion for summary judgment
as to whether Crede’s claim in Counts III-V are capped at a maximum of $10
million is GRANTED; 22nd Century’s motion for summary judgment as to its
additional claims is DENIED.
The parties are ORDERED to submit a joint letter on or before March 1,
2019, setting forth their availability for a bench trial in the second half of 2019
and the contemplated length of the trial. If the parties would like to be referred
to the Court’s Mediation Program, or to a settlement conference before the

20

Court or Magistrate Judge Henry B. Pitman, they can advise the Court in that
same letter.
SO ORDERED.
Dated:

February 15, 2019
New York, New York

__________________________________
KATHERINE POLK FAILLA
United States District Judge

21