Adar Bays, LLC v. 5Barz International, Inc.

Filing 69

ORDER granting 50 Motion for Summary Judgment; denying 60 Motion to Dismiss. Adar Bays' motion for summary judgment, Dkt. No. 50, is granted, and 5Barz's cross-motion for judgment on the pleadings, Dkt. No. 60, is denied. Adar Bay s' letter motion for leave to move to strike, Dkt. No. 66, is denied. Adar Bays is entitled to $58,514.38 plus interest as described supra § II(c)(i)(E). The Clerk of the Court is respectfully directed to terminate docket numbers 50, 60, and 66. (Signed by Judge Naomi Reice Buchwald on 8/16/2018) (anc)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
----------------------------------X
ADAR BAYS, LLC,
Plaintiff,
MEMORANDUM AND ORDER
- against 16 Civ. 6231 (NRB)
5BARZ INTERNATIONAL, INC.,
Defendant.
----------------------------------X
NAOMI REICE BUCHWALD
UNITED STATES DISTRICT JUDGE
This litigation, between the lender-plaintiff, Adar Bays, LLC
(“Adar

Bays”

or

“plaintiff”)

and

borrower-defendant

5Barz

International, Inc. (“5Barz” or “defendant”), is the latest in a
barrage of cases brought in this District and in the Eastern
District

of

identical,
amounts.

New

York

convertible

involving

alleged

promissory

notes

breaches
of

modest

of

nearly

principal

Adar Bays has brought this action against 5Barz for

having repeatedly breached the provisions of a $52,500 note and
subsequent settlement agreement by failing to honor conversion
requests,

pay

outstanding

current with the SEC.

interest

and

principal,

and

remain

Adar Bays now moves for summary judgment,

seeking entry of judgment, along with $342,123.69 in damages, plus
attorneys’ fees and costs.

5Barz cross moves for judgment on the

pleadings, contending that the note and the settlement agreement
are void ab initio as imposing criminally usurious interest rates.
1

For the reasons we discuss infra, plaintiff’s motion is
granted and defendant’s motion is denied.

However, we decline to

award much of the exorbitant and unwarranted damages that Adar
Bays seeks, and reserve decision on the amount of attorneys’ fees
and costs to which Adar Bays is entitled.
I.

BACKGROUND
5Barz “is in the business of designing, manufacturing and

selling a line of cellular network infrastructure devices for use
in the office, home and mobile marketplaces.”

Plaintiff’s Local

Rule 56.1 Statement of Undisputed Material Facts (“Pl.’s 56.1”)
¶ 4, Nov. 13, 2017, Dkt. No. 53.

Its shares are traded over-the-

counter on the “Pink Sheets” under the symbol “BARZ.”1

Id. ¶ 3.

On June 16, 2015, 5Barz issued to Adar Bays a Convertible
Redeemable Note (the “Note”) in the principal amount of $52,500,
with interest accruing at 8% per annum, and a June 16, 2016
maturity date.

Id. ¶¶ 5, 72; see Declaration of Aryeh Goldstein

(“Goldstein Decl.”) Ex. A, Nov. 9, 2017, Dkt. No. 52.

Adar Bays

funded the Note in the amount of $50,000, representing the Note’s
face value less $2,500 for attorneys’ fees.

Pl.’s 56.1 ¶ 6.

The Pink Sheets, historically printed on pink paper, “is a quotation
service that certain broker-dealers use to post offers to sell and to buy
securities not listed on a national exchange, and is not itself an exchange.”
SEC v. Boock, No. 09 Civ. 8261(DLC), 2011 WL 3792819, at *18 (S.D.N.Y. Aug. 25,
2011) (citing Pension Comm. of Univ. of Montreal Pension Plan v. Banc of Am.
Sec. LLC, 568 F.3d 374, 377 (2d Cir. 2009)), reconsideration denied, 2011 WL
5417106 (S.D.N.Y. Nov. 9, 2011).
1

2

The terms of the Note give Adar Bays the right to convert
portions of the unpaid principal balance and accrued interest into
shares of 5Barz common stock at a discount relative to the market
price.

See

id.

¶¶

8-10;

Note

§

4(a)-(b).

To

ensure

the

availability of shares for such conversions, the Note requires
5Barz to issue irrevocable transfer agent instructions reserving
3,684,000 shares of 5Barz common stock.
§ 12.

Pl.’s 56.1 ¶ 16; Note

The Note also requires 5Barz to, at all times, “reserve a

minimum of four times the amount of shares required if the [N]ote
would be fully converted.”

Pl.’s 56.1 ¶ 17, Note § 12.

Further,

to preserve Adar Bays’ ability to sell the converted shares, the
Note requires 5Barz to remain “current” in its filings with the
Securities and Exchange Commission (the “SEC”).

See Pl.’s 56.1

¶ 50; Note § 8(m).
To exercise its conversion rights under the Note, Adar Bays
is

to

provide

“the

Company,”

i.e.,

5Barz,

with

“written

confirmation that th[e] Note is being converted,” i.e., a “Notice
of Conversion,” “[t]he date of receipt (including receipt by
telecopy) of such Notice of Conversion shall be the Conversion
Date.”

Pl.’s 56.1 ¶ 11; Note § 3.

The conversion price is “equal

to 60% of the lowest trading price of the Common Stock as reported
on

the

National

Quotations

Bureau

OTCQB

exchange

[on]

which

[5Barz’s] shares are traded . . . for the fifteen prior trading
days including” the Conversion Date.
3

Pl.’s 56.1 ¶ 10 (emphasis

omitted); Note § 4(a) (same).
The Note also enumerates several “Events of Default” and the
resulting consequences for 5Barz.

Pl.’s 56.1 ¶ 49; Note § 8.

Among other things, should 5Barz default in the payment of interest
or principal on the Note, fail to deliver converted common stock
to Adar Bays within three business days of the Conversion Date,
not replenish the share reserve within three business days of Adar
Bays’ request, or “not be ‘current’ in its filings” with the SEC,
then interest will begin to accrue “at a default interest rate of
24% per annum.”
Certain
consequences.

Pl.’s 56.1 ¶¶ 50, 52, 56; Note § 8.

of

these

“Events

of

Pl.’s 56.1 ¶ 61.

Default”

trigger

additional

“If th[e] Note is not paid at

maturity, the outstanding principal due under th[e] Note shall
increase by 10%.”

Id. ¶ 60; Note § 8.

In the event 5Barz fails

to honor a Notice of Conversion, a “penalty” of $250 per day the
shares are not delivered to Adar Bays is imposed, beginning the
fourth day after the Conversion Date, and increasing to $500 per
day beginning on the tenth day.

Pl.’s 56.1 ¶ 62; Note § 8.

Alternatively, at Adar Bays’ “election,” it may invoke a “Make
Whole” provision, where, upon providing 5Barz written notice, Adar
Bays is entitled to an amount calculated as follows: “High trade
price at any time on or after the day of exercise x Number of
conversion shares.”

Pl.’s 56.1 ¶ 68; Note § 8.

With the exception of satisfying its obligation, on June 16,
4

2015, the date the Note was issued, to issue instructions to its
transfer agent to irrevocably reserve 3,684,000 shares of common
stock, see Declaration of Mark Geoghegan (“Geoghegan Decl.”) ¶¶ 78 & Ex. A, Jan. 5, 2017, Dkt. No. 59, 5Barz completely failed to
comply with the requirements set forth in the Note.
First, on November 22, 2015, 5Barz “became delinquent in its
filing requirements” with the SEC by failing to timely file its
Form 10-Q.

Pl.’s 56.1 ¶ 18; Goldstein Decl. ¶ 13 & Ex. B., at 63.

Second, on March 30, 2016, Adar Bays submitted a Notice of
Conversion (the “First Notice of Conversion”) to 5Barz to convert
$5,000 of principal and accrued interest into 184,775 shares of
common stock, representing a conversion price of $0.027 per share.
See Pl.’s 56.1 ¶¶ 19, 21.

After 5Barz failed to deliver the

requested shares, Adar Bays, through counsel, “tendered a default
notice . . . to [5Barz’s] CEO, Daniel Bland, and its Director of
Finance,

Mark

Geoghegan,

stating,

inter

alia,

that

[5Barz’s]

failure to tender the shares pursuant to the First [Notice of]
Conversion on or before April 4, 2016 had resulted in Defendant’s
breach . . .

of the Note and had caused [a] corresponding Event

of Default.”

Id. ¶ 23.

Finally, defendant failed to pay any principal or accrued
interest when the Note matured on June 16, 2016.

Id. ¶ 55.

Plaintiff commenced this litigation soon afterwards.

See Compl.,

Aug. 5, 2016, Dkt. No. 1.
5

While this litigation was pending, the parties temporarily
resolved their differences, entering into a settlement agreement
(the “Settlement Agreement”) on November 1, 2016.
¶ 28; Goldstein Decl. Ex. E.

Pl.’s 56.1

The Settlement Agreement required

5Barz to, inter alia: (1) “immediately upon signing,” deliver
184,775 shares of common stock—the number of shares Adar Bays
sought in its First Notice of Conversion—to Adar Bays; (2) “[u]pon
signing,” issue irrevocable transfer instructions to its transfer
agent reserving at least 4,588,128 shares of common stock; (3)
“within five days of signing,” file any and all documentation to
become current with the SEC; (4) on November 15, 2016, December
15, 2016, and January 15, 2017, tender to Adar Bays either (a) the
sum of $27,911.11, or (b) the equivalent in common stock based on
market value; and (5) remunerate any shortfalls actualized in Adar
Bays’ net proceeds from the sale of any common stock delivered
under the Settlement Agreement, such that Adar Bays would recover
at least a total value of $83,733.33 and 184,775 shares of common
stock.

Pl.’s 56.1 ¶ 29;2 Settlement Agreement at 1-3.

In return,

Adar Bays “agreed to [release] any and all claims against” 5Barz
“under the Note.” Settlement Agreement at 1; see id. § 3. However,

2 Defendant disputes plaintiff’s summary of the Settlement Agreement as
“contain[ing] material omissions” and “mischaracteriz[ing] [its] terms,”
Defendant’s Local Rule 56.1 Statement of Undisputed Material Facts (“Def.’s
56.1”) ¶ 29, Jan. 5, 2018, Dkt. No. 61, yet amazingly uses the exact same
summary in its own declaration, see Geoghegan Decl. ¶ 13.

6

“[i]n the event of any breach or default by [5Barz] of the terms
of th[e Settlement] Agreement . . . , [such] release . . . shall
automatically

be

deemed

ineffective

and

[Adar

Bays]

shall

automatically and without further action be entitled to all its
rights and preferences under th[e Settlement] Agreement, . . . and
the Note.”

Pl.’s 56.1 ¶ 30; Settlement Agreement § 1(g).

After signing the Settlement Agreement on November 1, 2016,
5Barz did not (1) deliver the 184,775 shares until November 9,
2016; (2) issue irrevocable share reserve instructions to the
transfer agent; (3) “file the necessary quarterly report to bring
its filing status with the SEC to current” until December 2, 2016;
or (4) tender any additional cash or common stock.
¶¶

32-33,

37-39,

40-42.

Adar

Bays,

reverting

Pl.’s 56.1

to

the

Note,

submitted a second Notice of Conversion on December 29,3 2016 (the
“Second Notice of Conversion”), requesting that 5Barz convert
$7,000 of the Note’s remaining principal and accrued interest into
257,542 shares of common stock.

Id. ¶¶ 43, 45.

In response,

5Barz’s transfer agent “stated that it would need a corporate
resolution” from 5Barz “in order to process” the conversion, which
5Barz has yet to issue.

Id. ¶¶ 46, 47.

3 Plaintiff’s 56.1 Statement states that the Second Notice of Conversion
was submitted on December 25, 2016, which, in light of the material in the
record to which it cites, appears to be a typographical error.

7

II.

DISCUSSION

Adar Bays moves for summary judgment, under Federal Rule of
Civil Procedure 56, on liability, damages, and attorneys’ fees for
5Barz’s breach of both the Note and the Settlement Agreement.
5Barz cross moves for judgment on the pleadings pursuant to Federal
Rule of Civil Procedure 12(c), arguing that the Note and the
Settlement Agreement are void ab initio as imposing usurious
interest rates.4
We proceed by first considering 5Barz’s cross-motion, which
we deny in toto.

We then grant Adar Bays’ motion for summary

judgment as to 5Barz’s liability for breaching both the Note and
the Settlement Agreement.

However, we conclude that the damages

Adar Bays seeks for those breaches are exorbitant and without basis
in law, and thus we recalculate the damages to which it is
entitled.

Finally, Adar Bays may move for reimbursement of the

attorneys’ fees and costs for which it has proof of payment if the

In a January 29, 2018 letter motion (Dkt. No. 66) plaintiff moved to
strike defendant’s surreply for the latter’s failure to seek leave from this
Court before moving for judgment on the pleadings.
Motions to strike “are
generally disfavored.” Nungesser v. Columbia Univ., No. 1:15-cv-3216-GHW, 2017
WL 1102661, at *1 (S.D.N.Y. Mar. 23, 2017). Here, plaintiff’s motion to strike
is denied as defendant’s surreply is a mere regurgitation of the moving brief;
its consideration could not possibly prejudice plaintiff. See Landesbank BadenWurttemberg v. RBS Holdings USA Inc., 14 F. Supp. 3d 488, 497 (S.D.N.Y. 2014)
(To prevail on a motion to strike, “a party must demonstrate that . . . to
permit the allegations to stand would result in prejudice to the movant.”
(quoting In re Fannie Mae 2008 Sec. Litig., 891 F. Supp. 2d 458, 471 (S.D.N.Y.
2012))); Allocco v. Dow Jones & Co., No. 02 Civ. 1029(LMM), 2002 WL 1484400, at
*1 (S.D.N.Y. July 10, 2002) (“Federal courts have discretion in deciding whether
to grant motions to strike.”).
4

8

parties are unable to resolve the issue inter se.
a. Judgment on the Pleadings
i. Standard of Review
The standard for addressing a Rule 12(c) motion for judgment
on the pleadings is the same as that for a Rule 12(b)(6) motion to
dismiss for failure to state a claim. Cleveland v. Caplaw Enters.,
448 F.3d 518, 521 (2d Cir. 2006).

In ruling on a 12(b)(6) motion,

the Court must accept all factual allegations in the complaint as
true and draw all reasonable inferences in the plaintiff’s favor.
Koch v. Christie’s Int’l PLC, 699 F.3d 141, 145 (2d Cir. 2012).
To

survive

a

motion

to

dismiss,

a

complaint

“must

contain

sufficient factual matter . . . to ‘state a claim to relief that
is plausible on its face.’”

Ashcroft v. Iqbal, 556 U.S. 662, 678

(2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
(2007)).

A claim is facially plausible “when the plaintiff pleads

factual content that allows the court to draw the reasonable
inference that the defendant is liable for the misconduct alleged.”
Id.

If the plaintiff has not “nudged [its] claims across the line

from conceivable to plausible, th[e] complaint must be dismissed.”
Bell Atl., 550 U.S. at 570.
ii. Usury
Defendant seeks judgment pursuant to its fourth affirmative
defense, namely, that the Note and the Settlement Agreement are
void ab initio as imposing usurious interest rates.
9

See Answer at

6, Feb. 27, 2017, Dkt. No. 35.
Under New York law,5 a contract is criminally usurious when
the parties knowingly provided for an interest rate of 25% or
more.6

See N.Y. Penal Law § 190.40.

“Usury is an affirmative

defense and a heavy burden rests upon the party seeking to impeach
a

transaction

for

usury.”

Hillair

Capital

Invs.,

L.P.

v.

Integrated Freight Corp., 963 F. Supp. 2d 336, 339 (S.D.N.Y. 2013)
(citing Gandy Mach., Inc. v. Pogue, 106 A.D.2d 684, 685, 483
N.Y.S.2d 744 (3d Dep’t 1984)).

“When a note is not usurious on

its face, a court will not presume usury; rather, the party
asserting the defense must prove all the elements.

An essential

element of the affirmative defense of usury is the lender’s

5 While defendant’s affirmative defense states that “Plaintiff’s claims
are barred and/or violates [sic] usury laws in Florida and New York,” Answer at
6, we apply New York usury law pursuant to the Note and the Settlement
Agreement’s choice of law provisions, the validity of which defendant does not
challenge. See Note § 14 (“This Note shall be governed by and construed in
accordance with the laws of New York applicable to contracts made and wholly to
be performed within the State of New York.”); Settlement Agreement § 6 (“This
Agreement shall be enforced, governed and interpreted in accordance with New
York law, as described in the Note.”); see also RMP Capital Corp. v. Bam
Brokerage, Inc., 21 F. Supp. 3d 173, 186-87 (E.D.N.Y. 2014) (applying usury law
of the state specified in the challenged agreement’s choice of law provision).
6 New York law prohibits both civil and criminal usury.
Sabella v. Scantek
Med., Inc., No. 08 Civ. 543(CM)(HBP), 2009 WL 3233703, at *16 (S.D.N.Y. Sept.
21, 2009). Corporations like 5Barz, however, may only assert a criminal usury
defense. N.Y. Gen. Oblig. Law § 5-521; Carlone v. Lion & The Bull Films, Inc.,
861 F. Supp. 2d 312, 321 (S.D.N.Y. 2012). Indeed, statutes prohibiting usurious
loans were enacted “to protect desperately poor people from the consequences of
their own desperation,” Seidel v. 18 E. 17th Street Owners, Inc., 79 N.Y.2d
735, 740, 598 N.E.2d 7 (1992), whereas “corporations [are] generally the
antithesis of ‘desperately poor people’ [and] are ordinarily barred from
asserting a usury defense,” Funding Grp., Inc. v. Water Chef, Inc., 19 Misc. 3d
483, 488, 852 N.Y.S.2d 736 (Sup. Ct. Feb. 19, 2008).

10

usurious intent,” which “is implied by a note usurious on its face”
but “remains a question of fact and will not be presumed where a
note states a legal rate of interest.”

Concord Fin. Corp. v. Wing

Fook, Inc., No. 96 CIV. 5293 (DLC), 1997 WL 375679, at *5 (S.D.N.Y.
July 7, 1997) (citations omitted).
It

is

“an

open

question

under

New

York

law

whether

a

criminally usurious loan is void ab initio or whether a successful
defense based on criminal usury results merely in the cancellation
of the interest obligation or in a revised obligation to pay a
non-usurious rate.”

Carlone, 861 F. Supp. 2d at 321 (citing

Venture Mortg. Fund, L.P. v. Schmutz, 282 F.3d 185, 189 (2d Cir.
2002)).

We need not weigh in on this “open question” as 5Barz has

not established that the Note and the Settlement Agreement’s
interest rates exceed 25% in the first instance.
On its face, the Note bears an interest rate of 8%, far less
than the 25% ceiling.

Nevertheless, defendant argues that the

effective interest rate is much higher, taking into account (1)
the conversion discount, (2) the share reservation requirement,
and (3) the heightened interest rate and attendant obligations
incurred upon a contractual Event of Default.
5.

See Def.’s Opp’n 4-

Similarly, defendant argues that the Settlement Agreement is

void as incorporating several of these obligations.

See id.

consider the merits vel non of these arguments seriatim.

11

We

A. Conversion Discount
5Barz argues that Adar Bays has disguised 40% interest on the
Note in its conversion feature, which entitles Adar Bays to a
conversion price of 60% of the lowest trading price of 5Barz common
stock on the fifteen days including and preceding the Conversion
Date.

Note § 4(a); see Def.’s Opp’n at 12-13 (“[P]laintiff has

reserved to itself a 40% discount as to the market price of
defendant’s public stock (40% in additional value of property) at,
and, at all times from the inception of the loans until all amounts
under the loans are repaid by way of a cash payment, or the
conversion of debt into stock.” (emphasis omitted)).

We reject

the argument that the Note’s conversion feature could be considered
an interest obligation subject to a criminal usury defense.
First,

plaintiff

merely

possessed

an

option

to

convert

principal and interest into equity, and could instead have elected
to obtain repayment in cash, which would clearly not have been
usurious.

See Union Capital LLC v. Vape Holdings Inc., No. 16

Civ. 1343 (RJS), 2017 WL 1406278, at *5 (S.D.N.Y. Mar. 31, 2017).
Second, “even if [Adar Bays] chose to convert the loan
principal [and interest] into shares, any potential profit [Adar
Bays] might realize would still be dependent on the market price
at the time of conversion and so, therefore, would be too uncertain
to incorporate into an interest rate calculation” at the time the
Note was executed.

Id.; see Adar Bays, LLC v. Aim Exploration,
12

Inc., 285 F. Supp. 3d 698, 702 (S.D.N.Y. 2018) (“[T]here is no
guarantee that

[the lender] could realize a fixed profit by

reselling the stock since it is possible that the price of the
stock would decrease immediately following submission of a notice
of

conversion.”),

certification

denied,

310

F.

Supp.

3d

454

(S.D.N.Y. 2018); KBM World Wide, Inc. v. Hangover Joe’s Holding
Corp., No. 15-CV-7254(SJF)(GRB), 2017 WL 685606, at *4 (E.D.N.Y.
Feb. 1, 2017) (“[G]iven that the shares could fluctuate in value,
and the value realized would be paid by a buyer and not the
defendants, it is difficult to imagine that the share price
discounts contained in the agreement could reasonably be construed
as

interest,

and

how

one

would

calculate

the

rate

of

such

interest.”), report and recommendation adopted, 2017 WL 680418
(E.D.N.Y. Feb. 21, 2017).
Third, although the initial transaction, the Note, took the
form of a loan, upon conversion to equity through exercise of the
conversion right, “the loan[] [would] likely have the character of
an equity investment,” at which point it would no longer be subject
to a usury defense. Beaufort Capital Partners LLC v. Oxysure Sys.,
Inc., No. 16-CV-5176 (JPO), 2017 WL 913791, at *3 (S.D.N.Y. Mar.
7, 2017); accord LG Capital Funding, LLC v. 5Barz Int’l, Inc., 307
F. Supp. 3d 84, 98-99 (E.D.N.Y. 2018); see Seidel, 79 N.Y.2d at
744, 598 N.E.2d 7 (“If the transaction is not a loan, ‘there can
be no usury, however unconscionable the contract may be.’” (quoting
13

Orvis v. Curtiss, 157 N.Y. 657, 661, 52 N.E. 690 (1899))).
B. Share Reserve
Next, defendant argues that the provision calling for 5Barz
to reserve 3,684,000 shares for future conversions is usurious as
its operation “effectively sequestered and reserved that stock to
make it available on account for Plaintiff, to effectuate future
repayment conversions of the loans using equity.”

Def.’s Surreply

at 8.
“[T]he reservation of shares was not an independent payment
to Adar Bays, but merely a mechanism by which to effectuate the
share conversion as envisioned by the Note . . . . Since the share
conversion feature does not render the agreement usurious, neither
does the reservation of shares provision.” Adar Bays, 285 F. Supp.
3d at 704.
C. Default Interest Rate and Penalties
Defendant next challenges the imposition of a 24% interest
rate, as well as certain added “penalties,” as consequences for an
Event of Default.
Like the issue of whether criminally usurious loans are void
ab initio, it is similarly an “open question” whether New York’s
criminal usury law applies to default obligations whatsoever.
Compare Prowley v. Hemar Ins. Corp. of Am., No. 1:05 CV. 981(KTD),
2010 WL 1848222, at *4 (S.D.N.Y. May 7, 2010), In re Vargas Realty
Enters., Inc., 440 B.R. 224, 234 (S.D.N.Y. 2010), and Bristol Inv.
14

Fund. Inc. v. Carnegie Int’l Corp., 310 F. Supp. 2d 556, 562
(S.D.N.Y. 2003), with Union Capital, 2017 WL 1406278, at *8, and
Madden v. Midland Funding, LLC, 237 F. Supp. 3d 130, 146 (S.D.N.Y.
2017).

However, it is settled that, to the extent the criminal

usury prohibition applies to default obligations, it operates only
as a 25% cap on chargeable interest and does not render a Note
void ab initio.

Union Capital, 2017 WL 1406278, at *8 (“A

conclusion that the default interest rate is criminally usurious
would not render the Contracts void ab initio. . . .

However, it

would cap both the default interest rate the Court could impose
and the resulting damages.” (citing Kraus v. Mendelsohn, 97 A.D.3d
641, 641, 948 N.Y.S.2d 119 (2d Dep’t 2012))).
On

its

obviously

face,

does

not

the

applicable

alone

exceed

24%

default

the

25%

interest

statutory

rate

limit.

Defendant, however, suggests that the true default interest rate
is much greater, as the “Note provides for additional remedies and
default calculations, depending on the particular alleged event of
default.”

Def.’s Opp’n at 16.

Defendant is referring to the

Note’s “penalty” provisions in the event of a failure to (1) honor
the Note’s conversion feature ($250 per day penalty beginning the
fourth day after delivery of the Notice of Conversion, increasing
to $500 per day beginning on the tenth day), and (2) pay the
principal at maturity (10% increase in outstanding principal due).
We conclude infra that all three of these liquidated damages
15

provisions are unenforceable penalties.

Because “[a] conclusion

that the default interest rate is criminally usurious would not
render the [Note] void ab initio,” we need only be concerned with
the interest awarded, and thus subject to a cap.
Capital, 2017 WL 1406278, at *8.

See Union

As we ultimately do not award

Adar Bays either the daily penalties or 10% increase in outstanding
principal, the sole obligation incurred upon default, the 24%
interest per annum, falls below the 25% limit, and does not warrant
imposition of a usury cap.
D. Settlement Agreement
Finally, defendant contends that the Settlement Agreement is
void as derivative of the usurious Note.
“Settlement agreements are generally favored and are ‘not
lightly case aside.’”

Dandong Old N.-E. Agric. & Animal Husbandry

Co. v. Pasternak Baum & Co., No. 17 Civ. 4571 (KPF), 2018 WL
1399207, at *6 (S.D.N.Y. Mar. 19, 2018) (quoting Hallock v. State,
64 N.Y.2d 224, 230, 474 N.E.2d 1178 (1984)). However, as defendant
explains, “a settlement agreement purporting to compromise and
release a borrower’s usury claim is void and unenforceable if the
original

usurious

obligation

subsequent agreement.”

transcends

into

the

parties’

Def.’s Opp’n at 22; see also Aquila v.

Rubio, No. 33561-12, 2016 WL 1761968, at *7 (N.Y. Sup. Ct. May 2,
2016) (citing 44B Am. Jur. 2D Interest & Usury § 211).
We

agree

that

the

initial
16

obligations

under

the

Note

“transcend[] into the parties’ subsequent [settlement] agreement.”
Not only does the Settlement Agreement call for 5Barz to honor
Adar Bays’ First Notice of Conversion and to reserve additional
shares, but the Note is to remain in effect should 5Barz breach
the Settlement Agreement in any way.

See Settlement Agreement

§ 1(g). However, as we conclude that the Note itself is not
usurious, the inclusion of these provisions does not taint the
Settlement Agreement.
In sum, defendant has come nowhere close to satisfying its
“heavy

burden”

of

establishing

that

either

the

Settlement Agreement is criminally usurious.

Note

or

the

Accordingly, its

motion for judgment on the pleadings is denied.

We thus proceed

to plaintiff’s motion for summary judgment.
b. Summary Judgment
i. Standard of Review
Summary judgment is appropriate when the moving party “shows
that there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.”
P. 56(a).

Fed. R. Civ.

“A fact is material when it might affect the outcome of

the suit under governing law.” McCarthy v. Dun & Bradstreet Corp.,
482 F.3d 184, 202 (2d Cir. 2007) (internal quotation marks omitted)
(quoting Jeffreys v. City of New York, 426 F.3d 549, 553 (2d Cir.
2005)).

A factual dispute is genuine if a reasonable factfinder

could decide in the nonmoving party’s favor.
17

Id.

At summary judgment, a court must resolve all ambiguities and
draw all justifiable inferences in the nonmoving party’s favor.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986).

The

moving party must “make a prima facie showing that it is entitled
to summary judgment.”
(1986).

Celotex Corp. v. Catrett, 477 U.S. 317, 331

If it does so, then there is no issue for trial unless

the party opposing summary judgment presents “sufficient evidence
favoring the nonmoving party for a jury to return a verdict for
that party.”

Anderson, 477 U.S. at 249.

ii. Breach of Note and Settlement Agreement
Both the Note and the Settlement Agreement are enforceable
under traditional principles of contract law.

See In re World

Trade Ctr. Disaster Site Litig., 754 F.3d 114, 121 (2d Cir. 2014);
LG Capital Funding, LLC v. CardioGenics Holdings, Inc., No. 16CV-1215-AMD-SJB, 2018 WL 1521861, at *5 (E.D.N.Y. Feb. 20, 2018).
To recover for breach of contract under New York law, a plaintiff
must prove, by a preponderance of the evidence: “[1] the formation
of

a

contract

between

the

parties;

[2]

performance

by

the

plaintiff; [3] failure of defendant to perform; and [4] damages.”
Orchard Hill Master Fund Ltd. v. SBA Commc’ns Corp., 830 F.3d 152,
156 (2d Cir. 2016) (internal quotation marks omitted); accord JP
Morgan Chase v. J.H. Elec. of N.Y., Inc., 69 A.D.3d 802, 803, 893
N.Y.S.2d 237 (2d Dep’t 2010).

Adar Bays has established, on an

unequivocal record, a prima facie case for breach of both the Note
18

and the Settlement Agreement.
It is undisputed—with the exception of defendant’s usury
defense

rejected

supra—that

the

parties

formed

two

valid

contracts, the Note and the Settlement Agreement.
Adar Bays performed under the Note by tendering $50,000—
$52,500 less $2,500 for attorneys’ fees and costs–to 5Barz.
Pl.’s 56.1 ¶ 6.

See

Plaintiff was excused from performing under the

Settlement Agreement, which would have entailed releasing any and
all claims against defendant under the Note, because of defendant’s
repeated breaches thereof, infra.

See BAII Banking Corp. v. UPG,

Inc., 985 F.2d 685, 698 (2d Cir. 1993); Exportaciones Del Futuro
S.A. de C.V. v. Iconix Brand Grp. Inc., 636 F. Supp. 2d 223, 22930 (S.D.N.Y. 2009) (“[F]ailure to perform is not necessarily fatal
where a defendant’s conduct was an impediment to performance and
where

Plaintiff

was

otherwise

ready,

willing,

and

able

to

perform.”).
5Barz repeatedly failed to perform its obligations under, and
thus

repeatedly

Agreement.

breached,

Specifically,

both
5Barz

the

Note

failed

and

to:

the

(1)

Settlement

within

three

business days of Adar Bays’ submission of the First Notice of
Conversion on March 30, 2016 and Second Notice of Conversion on
December 29, 2016, convert and deliver 184,775 and 257,542 shares
of common stock, respectively, Pl.’s 56.1 ¶¶ 19, 21, 22, 45-47;
(2) pay the principal and accrued interest due upon maturity, on
19

June 16, 2016, id. ¶ 55; (3) remain current with the SEC under the
Note, on November 22, 2015, or become current with the SEC under
the Settlement Agreement, on November 6, 2016, id. ¶¶ 18, 33; (4)
“immediately”

tender

the

common

stock

due

upon

signing

the

Settlement Agreement on November 1, 2016, id. ¶ 32; (5) tender the
common stock or cash equivalent due under the Settlement Agreement
on November 15, 2016, December 15, 2016, or January 15, 2017, id.
¶¶ 40-42; and (6) issue irrevocable transfer agent instructions
under the Settlement Agreement, id. ¶¶ 37-39.
Finally, as discussed in more detail infra, Adar Bays suffered
damages from 5Barz’s breach of both the Note and the Settlement
Agreement.
Aside from its meritless defense of usury, 5Barz’s memoranda
of law do not offer a single argument, legal or factual, disputing
liability under the Note or the Settlement Agreement.
5Barz

unpersuasively—and

frequently

Instead,

improperly—seeks

to

manufacture disputes of material fact in its Local Rule 56.1
counterstatement.
First, Adar Bays disputes that it became delinquent in its
SEC

filings

on

November

22,

2015,

because,

citing

to

Mark

Geoghegan’s declaration, “the Company filed a NT-10Q on November
16, 2015 as required by the SEC.”

Def.’s 56.1 ¶ 18.

Geoghegan’s

declaration, however, makes no mention of such filing.
v.

Rockefeller

&

Co.,

258

F.3d
20

62,

74

(2d

See Holtz

Cir.

2001)

(“[W]here . . . the record does not support the assertions in a
Local Rule 56.1 statement, those assertions should be disregarded
and the record reviewed independently.”); Congregation Rabbinical
Coll. of Tartikov, Inc. v. Village of Pomona, 138 F. Supp. 3d 352,
393-94 (S.D.N.Y. 2015) (same).

Moreover, the record supports

plaintiff’s contention: 5Barz’s own Fiscal Year 2015 10-K states,
in pertinent part, “On November 22, 2015, the Company became
delinquent on its filing requirements with the Securities and
Exchange Commission.”

Goldstein Decl. ¶ 13 (quoting Goldstein

Decl. Ex. B, at 63).
Second, 5Barz disputes that Adar Bays submitted Notices of
Conversion “to the extent that Mark Geoghegan who was the central
contact for the Company with Adar Bays did not receive any such
notice.”

Def.’s 56.1 ¶ 19 (citing Geoghegan Decl. ¶ 28 (“I

personally had not received the notices of conversion and I was
the contact person with Plaintiff.”)); see id. ¶¶ 20-21. The Note,
however, does not require Geoghegan to personally receive the
Notices of Conversion, rather, Adar Bays was “required to give the
Company written confirmation that th[e] Note is being converted.”
Note § 3 (emphasis added).

Aryeh Goldstein, Adar Bays’ CEO,

testified that Adar Bays submitted, and 5Barz received, Notices of
Conversion on March 30, 2016 and December 29, 2016, attaching
copies of each to his declaration.
45, 47 & Exs. C & H.

See Goldstein Decl. ¶¶ 17, 34,

5Barz has not submitted evidence to the
21

contrary.
Third, 5Barz disputes that Adar Bays tendered a default notice
to 5Barz on May 10, 2016, “to the extent that as a result of data
retention issues on defendant’s archived data base between April
13, 2016 through September

15, 2016, defendant is unable to

confirm.” Def.’s 56.1 ¶ 23. However, “[a] nonmovant cannot ‘raise
a material issue of fact by denying statements which the moving
party

contends

information.”’”

are

undisputed

for

lack

of

“knowledge

and

AFL Fresh & Frozen Fruits & Vegetables, Inc. v.

Del-Mar Food Servs. Inc., No. 06 Civ. 2142(GEL), 2007 WL 4302514,
at *4 (S.D.N.Y. Dec. 7, 2007) (quoting Stepheny v. Brooklyn Hebrew
Sch. for Special Children, 356 F. Supp. 2d 248, 255 n.4 (E.D.N.Y.
2005)).
Fourth, 5Barz challenges Adar Bays’ contention that 5Barz, by
delivering 184,775 shares of common stock on November 9, 2016,
“failed to deliver [the] shares . . . upon execution of the
Settlement Agreement,” on November 1, 2016, “as it was required
pursuant to its terms.”

Pl.’s 56.1 ¶ 32.

This is disputed,

according to 5Barz, “to the extent that the shares in question are
dated November 4, 2016.”
borderline

frivolous.

Def.’s 56.1 ¶ 32.
As

an

initial

This argument is

matter,

5Barz’s

56.1

counterstatement does not cite any evidence in the record for this
proposition. See Abrams v. Bloomberg, L.P., No. 09 Civ. 6537(DAB),
2012 WL 4783014, at *1 n.1 (S.D.N.Y. Mar. 27, 2012) (disregarding
22

plaintiff’s responses to defendant’s Rule 56.1 statement where
plaintiff failed to refer to evidence in the record); Costello v.
N.Y. State Nurses Ass’n, 783 F. Supp. 2d 656, 661 n.5 (S.D.N.Y.
2011) (same).

As 5Barz is no doubt well aware, the relevant date

is not when the shares were dated but when they were delivered.
See Settlement Agreement at 1 (“184,775 common shares . . . to be
delivered on the following schedule . . . [i]mmediately upon
signing.” (emphasis added)).

Regardless, the shares would still

not have been delivered “immediately upon signing,” on November 1,
2016, even if they had been delivered three days later on November
4, 2016.
Fifth, in response to Adar Bays’ contention that 5Barz,
contrary

to

its

obligation

under

the

Settlement

Agreement,

provided irrevocable instructions to its transfer agent pertaining
to the share reserve, 5Barz explains that it “increased authorized
shares to ensure that it could comply with all of its share
issuance obligations and at the same time permit the Directors of
the Company to protect the assets of the Company by not providing
an open book to debt holders giving them access to the Company’s
treasury shares.”

Def.’s 56.1 ¶ 37; see id. ¶ 39.

This is

unpersuasive. Not only has defendant again failed to cite evidence
in the record to support this assertion, but these “facts” do not
controvert

defendant’s

failure

to

issue

irrevocable

instructions, rather, they merely provide an explanation.
23

transfer
See AFL

Fresh, 2007 WL 4302514, at *5 (“A movant’s statement of material
facts will be deemed to be admitted for the purposes of the motion
unless specifically controverted.”).
explanations

are

characterized

as

And to the extent these
legal

arguments,

they

are

improperly raised in a Rule 56.1 counterstatement. See Costello,
783 F. Supp. 2d at 661 n.5 (disregarding plaintiff’s responses to
defendant’s Rule 56.1 Statement where plaintiff responded with
legal arguments).
Accordingly, Adar Bays has satisfied its prima facie case for
breach of both the Note and the Settlement Agreement.7

We thus

proceed to consider the remedies to which Adar Bays is entitled.
c. Remedies
Having established defendant’s liability for breach of the
Note and the Settlement Agreement, plaintiff seeks an astounding
$342,123.69 in damages, consisting of (1) $4,000 in expectation
damages, (2) $77,873.69 in unpaid principal and interest, and (3)
$260,250 in liquidated damages.

Pl.’s Supp. at 11.

Adar Bays’

professed entitlement to this award is, in large part, without
basis in law.

As we explain below, Adar Bays is actually entitled

In its opening brief, plaintiff moves to strike defendant’s affirmative
defenses. See Pl.’s Supp. at 21-25. Yet by granting plaintiff’s motion for
summary judgment we have mooted this motion. See E. Savings Bank, FSB v. Ferro,
No. 13-CV-5882 (SJF)(GRB), 2015 WL 778345, at *4 n.8 (E.D.N.Y. Feb. 24, 2015)
(citing C.A. Venezolana de Navegacion v. Joseph Vinal Container Corp., No. 86
Civ. 8339 (RWS), 1987 WL 7377, at *1 n.1 (S.D.N.Y. Feb. 20, 1987)); Dayton
Superior Corp. v. Spa Steel Prods., Inc., No. 1:08-CV-1312 (FJS/RFT), 2010 WL
3825619, at *5 (N.D.N.Y. Sept. 24, 2010).
7

24

to only $58,514.38 in expectation damages, as well as interest
thereon, and $0 in liquidated damages.
i. Expectation Damages
Under New York law, “[a] party injured by breach of contract
is entitled to be placed in the position it would have occupied
had the contract been fulfilled according to its terms.”

Merrill

Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d 171, 185 (2d Cir.
2007) (citing Boyce v. Soundview Tech. Grp., Inc., 464 F.3d 376,
384 (2d Cir. 2006)).

Had 5Barz performed under the contract, it

would have (1) (timely) conferred the shares requested under the
First

and

Second

Notices

of

Conversion,

and

(2)

paid

the

outstanding principal and interest due at maturity.
A. First Notice of Conversion
Plaintiff delivered its First Notice of Conversion to 5Barz
on March 30, 2016, and was entitled under the Note to receive
184,775 shares of common stock within three business days, or by
April 4, 2016.8

Pl.’s 56.1 ¶¶ 19, 21.

5Barz, however, did not

deliver the shares until November 9, 2016, after the parties had
entered into the Settlement Agreement.

Id. ¶ 32.

In the interim,

the market value of 5Barz common stock had fallen, from $0.059 at
the close on April 4 to $0.054 at the close on November 9.

See

8 Adar Bays arrived at the 184,775 figure by dividing $5,000 by 60% of
the lowest trading price of 5Barz stock on the fifteen business days preceding
March 30, 2016 (60% of $0.0451). See Goldstein Decl. Exs. C, F.

25

Goldstein Decl. Ex. F.

Adar Bays is entitled to the loss of market

value in the shares during that period, calculated by multiplying
the number of shares by the change in value, 184,775 shares x
($0.059 - $0.054), or $923.88.
B. Second Notice of Conversion
Unlike the First Notice of Conversion, in response to which
shares were belatedly delivered, the converted shares were never
delivered as requested in the Second Notice of Conversion.
The Second Circuit has explained that “the damage award
resulting from the breach of an agreement to purchase securities
is the difference between the contract price and the fair market
value of the asset at the time of the breach.”

Sharma v. Skaarup

Ship Mgmt. Corp., 916 F.2d 820, 825 (2d Cir. 1990) (citing Aroneck
v. Atkin, 90 A.D.2d 966, 967, 456 N.Y.S.2d 558 (4th Dep’t 1982)).
This formula ensures that the non-breaching purchaser receives the
benefit of his bargain, i.e., the difference between the price at
which he contracted to purchase the security and the price at which
the security was trading at the time the seller breached by failing
to deliver the shares.

In the context of a convertible note, the

non-breaching plaintiff to whom the shares were not delivered is
entitled to damages calculated by “subtracting the contract price–
the price at which [the plaintiff] is entitled to convert shares
under the Note—from the market price of the shares on the date of
the breach.”

LG Capital Funding, LLC v. Coroware, Inc., No. 16
26

Civ. 2266 (AMD)(PK), 2017 WL 3973921, at *4 (E.D.N.Y. Sept. 8,
2017) (alterations incorporated) (quoting
1406278, at *7).

Union Capital, 2017 WL

Put somewhat differently, Adar Bays is afforded

the benefit of its bargain through the difference between the price
at which it agreed to purchase, i.e., convert principal into,
shares of 5Barz common stock, 60% of the lowest trading price of
the shares in the fifteen business days preceding and including
the Conversion Date, see Pl.’s 56.1 ¶ 10, Note § 4(a), and the
price at which the shares were trading at the time 5Barz was
obligated yet failed to deliver the shares, three business days
after the Conversion Date.
Adar

Bays

submitted

its

Second

Notice

of

Conversion

on

December 29, 2016, seeking to convert $7,000 of the remaining
principal amount and interest into 257,542 shares of common stock.
Pl.’s 56.1 ¶¶ 43, 45.

Plaintiff is entitled to the difference

between 60% of the lowest trading price in the fifteen business
days prior to and including December 29, 2016 (60% of $0.0453, or
$0.02782, see Goldstein Decl. Ex. H), and the trading price at the
close of January 4, 2017 ($0.067), three business days after
December 29, 2016.

See id. Ex. F.

In other words, plaintiff is

due 257,542 shares x ($0.067-$0.02782), or $10,090.50.
C. Failure to Remain Current with the SEC
Plaintiff argues that it is separately entitled to damages
for defendant’s failure to become current with the SEC by November
27

6, 2016, as the Settlement Agreement requires.

According to

plaintiff, the 184,775 shares of common stock from the First Notice
of Conversion were delivered pursuant to the Settlement Agreement
on November 9, 2016, but 5Barz did not become current until
December 2, 2016.

“The value of the 184,775 shares of Common Stock

decreased by over $4,000 during the period of November 1, 2016 to
December [2], 2016.”

Pl.’s Supp. at 18.

awarded

this

damages

for

devaluation,

Plaintiff should be
it

argues,

because

“[d]efendant’s failure to bring its filing status with the SEC
current resulted in [plaintiff’s] inability to sell the shares it
received” during that period.

Pl.’s 56.1 ¶ 35.

It has “long been established in New York that a breaching
party is liable for all direct and proximate damages from the
breach.”

Tractebel Energy Mktg., Inc. v. AEP Power Mtkg., Inc.,

487 F.3d 89, 110 (2d Cir. 2007) (citing Wakeman v. Wheeler & Wilson
Mfg. Co., 101 N.Y. 205, 4 N.E. 264, 266 (1886)).

The damages,

however, must be “reasonably certain and such only as actually
follow . . . from the breach of the contract.” Id. Here, plaintiff
has made no showing that its inability to sell shares followed
from defendant’s failure to remain current with the SEC.
It is true that the SEC is permitted, pursuant to Section
12(k)

of

the

Securities

Act

of

1934,

to

suspend

trading

in

securities of delinquent filers. 15 U.S.C. § 78l(k); Bravo Enters.
Ltd., Exchange Act Release No. 75775, 2015 WL 5047983, at *5 (Aug.
28

27, 2015) (“[W]e have suspended trading in securities of delinquent
issuers who have failed to comply with the periodic reporting
requirements of the federal securities laws because we were of the
opinion that there was a lack of current, adequate, and accurate
information

about

the

company.”

(internal

quotation

marks

omitted)); see, e.g., Vantone Int’l Grp., Inc., Exchange Act
Release No. 75304, 2015 WL 3929978, at *1 (June 26, 2015); First
Am. Sci. Corp., Exchange Act Release No. 74778, 2015 WL 1814345,
at *1 (Apr. 22, 2015).

Yet there is no evidence in the record,

aside from conclusory assertions, that such a suspension was
imposed, or, even had it been, that the suspension was the result
of 5Barz’s failure to remain current with the SEC.9

See Goldstein

Decl. ¶ 29 (“Because Defendant was not current . . . [Adar Bays]
was unable to sell the shares.”); Geoghegan Decl. ¶ 23 (“During
the period between the date when Defendant agreed to become current
in its filing status with the SEC, November 6, 2016, and the date
in which it did become current, December [2], 2016, the shares
could not be sold pursuant to SEC law during that time period.”).
Accordingly, plaintiff is not entitled to damages for 5Barz’s

9 We do not mean to suggest that an issuer’s failure to remain current
with the SEC could only impact share prices in the event of a trading suspension.
We could, for instance, envision a scenario in which an expert testifies that
the prospect of a trading suspension, brought about by the issuer’s failure to
remain current with the SEC, depresses share prices by a certain percentage on
average. Plaintiff has simply not made such a showing here.

29

failure

to

become

current

with

the

SEC

as

provided

in

the

Settlement Agreement.
D. Principal
Adar Bays is also entitled to the outstanding principal
balance on the Note, $52,500 less $5,000, the value of principal
converted,

albeit

belatedly,

through

the

First

Notice

of

Conversion, or $47,500. See LG Capital Funding, LLC v. Worthington
Energy, Inc., No. 16-CV-6288 (NGG)(ST), 2018 WL 1370266, at *5
(E.D.N.Y. Feb. 20, 2018), report and recommendation adopted, 2018
WL 1368025 (E.D.N.Y. Mar. 16, 2018).
E. Interest
Plaintiff is also contractually entitled to interest due on
the Note.

Specifically, plaintiff is entitled to the 8% interest

per annum beginning on the Note’s execution, on June 16, 2015,
until the first Event of Default was triggered, at which point the
default interest rate of 24% per annum began to apply.
Under New York law, “[i]nterest shall be recovered upon a sum
awarded because of a breach of performance of a contract” and shall
begin to run “from the earliest ascertainable date the cause of
action existed.”

N.Y. C.P.L.R. § 5001(a)-(b); see id. § 5002; see

also U.S. Naval Inst. v. Charter Commc’ns, Inc., 936 F.2d 692, 698
(2d Cir. 1991) (“[A] plaintiff who prevails on a claim for breach
of contract is entitled to prejudgment interest as a matter of
right.”).

In practical terms, “[a]n award of interest is ‘often
30

appropriate from the time at which a party was deprived of the use
of money.’”
408,

416

Calgon Carbon Corp. v. WDF, Inc., 700 F. Supp. 2d

(S.D.N.Y.

2010)

(quoting

Lawyers’

Fund

for

Client

Protection v. Bank Leumi Tr. Co., 94 N.Y.2d 398, 407, 727 N.E.2d
563 (2000)).
New York’s statutory prejudgment interest rate is 9% per
annum.

See N.Y. C.P.L.R. § 5004.

But if the applicable contract

“provides a rate at which interest is to be calculated, then the
contractual rate, rather than the statutory rate . . . governs.”
Bank of Am., N.A. v. Brooklyn Carpet Exchange, Inc., No. 15cv5981
(LGS)(DF), 2016 WL 8674686, at *5 (S.D.N.Y. May 13, 2016) (quoting
Nuera

Commc’ns,

Inc.

v.

Telron

Commc’ns

USA,

Inc.,

No.

00

Civ.9167(RMB)(FM), 2002 WL 31778796, at *3 (S.D.N.Y. Nov. 15,
2002)),

report

and

recommendation

(S.D.N.Y. June 27, 2016).

adopted,

2016

WL

3566237

In such cases, “prejudgment interest is

calculated at the contract rate, until the amount owed under the
contract merges into a judgment.”

Id. (citing NML Capital v.

Republic of Argentina, 621 F.3d 230, 240 (2d Cir. 2010)). However,
“[i]n order to prevail at a rate higher than the statutory 9% per
annum, the contract itself must clearly specify the rate charged.”
Microban Prods. Co. v. API Indus., Inc., No. 14 Civ. 41(KPF), 2014
WL 1856471, at *19 (S.D.N.Y. May 8, 2014) (quoting Gates Rubber
Co. v. Vehicle Parts Warehouse Corp., 952 F. Supp. 132, 133
(E.D.N.Y. 1996)).
31

Adar Bays argues that it is entitled to 24% default interest
commencing November 22, 2015, when 5Barz was no longer current
with its SEC filings. See Pl.’s 56.1 ¶ 59. We disagree. Plaintiff
has not demonstrated that it suffered any damages from 5Barz’s
failure to remain current with the SEC as of November 2015.
Indeed, the purpose of the provision requiring 5Barz to remain
current with the SEC was to ensure a market for 5Barz common stock.
Yet in the absence of any record evidence that Adar Bays even held
any common stock at that time (it first sought to convert the Note
into common stock four months later, in late March 2016), or that
trading was ever halted, supra, there is no predicate for a cause
of action against 5Barz based on its failure to remain current in
SEC filings.

Put somewhat differently, Adar Bays had yet to be

“deprived of the use of money” by November 2015.
However, Adar Bays is entitled to the “clearly specified” 24%
interest per annum rate accruing after April 4, 2016, when 5Barz
failed to honor the First Notice of Conversion.

See Note § 8(k).

Thus, plaintiff is entitled to the following interest award: 8%
interest per annum on $52,500 accruing after June 16, 2015, the
date the Note was executed, to April 4, 2016; 24% interest per
annum on $52,500 accruing after April 4, 2016, the deadline for
5Barz to convert $5,000 in outstanding principal and interest into
184,775 shares of common stock, until

November 9, 2016; 24%

interest per annum on $47,500, accruing after November 9, 2016,
32

when 5Barz satisfied the First Notice of Conversion, until the
date on which judgment is entered.
ii. Liquidated Damages
In addition to its expectation damages, plaintiff also seeks
liquidated damages, to wit, (1) the daily “penalties” due for
defendant’s failure to timely honor the Notices of Conversion, or
in the alternative, the amount calculated pursuant to the Note’s
“Make Whole”

provision, and (2) a 10%

increase in principal

outstanding as unpaid upon the Note’s maturity.
Under New York law, courts will uphold and enforce liquidated
damages provisions where “(1) actual damages may be difficult to
determine

and

(2)

the

sum

stipulated

disproportionate to the possible loss.”

is

not

plainly

U.S. Fidelity & Guar. Co.

v. Braspetro Oil Servs. Co., 369 F.3d 34, 70 (2d Cir. 2004)
(emphasis added) (quoting In re United Merchants & Mfrs., Inc.,
674 F.2d 134, 142 (2d Cir. 1982).

While “[t]he New York Court of

Appeals has cautioned that courts should be reluctant to interfere
with liquidated damages provisions,” N. Shipping Funds I, L.L.C.
v. Icon Capital Corp., 998 F. Supp. 2d 301, 334 (S.D.N.Y. 2014),
if the clause in question does not satisfy one or both of these
factors then it is considered an impermissible penalty and will
not be enforced by courts, see U.S. Fidelity Guar., 369 F.3d at
70-71.

“In other words, ‘if such a clause is intended to operate

as a means to compel performance, it will be deemed to be a penalty
33

and will not be enforced.’”

Union Capital, 2017 WL 1406278, at *7

(quoting Rattigan v. Commodore Int’l Ltd., 739 F. Supp. 167, 169
(S.D.N.Y. 1990)).
All of the liquidated damages plaintiff seeks are penalties
and thus will not be awarded.
A. Daily Fine for Failure to Honor Notices of
Conversion
Plaintiff first seeks liquidated damages under Section 8 of
the Note, which provides for the daily fee of $250 for each day
after the third day that shares are not issued following a Notice
of Conversion, escalating to $500 per day beginning on the tenth
day.

See Note § 8.

This provision is clearly an impermissible

penalty.
First, actual damages for the failure to honor a notice of
conversion are not difficult to calculate.

As we demonstrated

supra, expectation damages can be calculated “by subtracting the
contract price—the price at which [the plaintiff] is entitled to
convert shares under the Note—from the market price of the shares
on the date of the breach.”

LG Capital Funding, 2017 WL 3973921,

at *4 (alterations omitted); see LG Capital Funding, 2018 WL
1521861, at *8 (“It is plain that in the Note there is no
uncertainly about the method of calculating actual damages from a
failure to provide converted shares, regardless of when the failure
occurs.

[Plaintiff]

is

entitled

34

to,

within

3

days

of

the

Conversion Date, shares at 58% of the lowest closing bid price of
[defendant’s] common stock in the 12 trading days prior to the
Conversion Date . . . .

And damages would be equal to the

difference between that price and [defendant’s] stock price on the
date of the breach.”).
Second, plaintiff has offered no explanation for how the daily
fees of $250 and $500 are proportionate

to possible damages

incurred from 5Barz’s failure to confer shares of common stock,
trading at less than ten cents per share, to Adar Bays.

To the

contrary, “[i]n this case, the liquidated damages provision is per
se disproportionate because it bears no relationship to actual
losses.”

LG Capital Funding, 2018 WL 1521861, at *10; see LG

Capital Funding, 307 F. Supp. 3d at 102 (“Plaintiff offers no
explanation as to how a daily fee of $250, escalating to $500 after
the tenth day on which defendant has failed to convert shares could
bear a proportional relation to plaintiff’s probable loss arising
from defendant’s failure to deliver conversion shares. These daily
fees have resulted in ‘liquidated damages,’ or, as characterized
in the Note, penalties that are widely disproportionate to the
actual losses.”).
Indeed, Adar Bays’ May 2016 default notice strongly implies
that the purpose of the daily fee obligation was not to estimate
possible damages, but instead to compel performance: “[A]s a result
of the Company’s failure to deliver our Client shares of its common
35

stock pursuant to Adar Bays’ March 30, 2016 notice of conversion,
default payments of $250 per day, escalating to $500 per day, are
now accruing until the shares are delivered.”

Goldstein Decl. Ex.

D, at 2 (emphasis added); see LG Capital Funding, LLC v. Coroware,
Inc., No. 16-CV-2266 (AMD)(PK), 2017 WL 9250379, at *6 (E.D.N.Y.
July 12, 2017), report and recommendation adopted, 2017 WL 3973921
(E.D.N.Y. Sept. 8, 2017).
Finally, even the Note itself refers to the daily fees as
penalties.

See Note § 8 (“In the event of a breach of Section

8(k) the penalty shall be $250 per day the shares are not issued
beginning on the 4th day after the conversion notice was delivered
to the Company.

This penalty shall increase to $500 per day

beginning on the 10th day.” (emphasis added)); LG Capital Funding,
LLC v. FLSAR, Inc., No. 16-CV-3565 (LDH)(JO), 2017 WL 5068116, at
*5 (E.D.N.Y. July 27, 2017) (“Though courts should construe any
ambiguity in favor of a penalty, the express language of the Note
itself refers to a ‘penalty.’” (alteration omitted)).
B. “Make Whole” Provision
In the alternative, plaintiff seeks to invoke the Note’s “Make
Whole” provision, which operates at Adar Bays’ election, as a means
for calculating damages in the event 5Barz fails to honor a Notice
of Conversion.

Specifically, Adar Bays is entitled to an amount

calculated by multiplying the high trade price at any time on or
after the day of Adar Bays’ exercise of its option by the number
36

of conversion shares requested.

See Note § 8.

Adar Bay may not

avail itself thereof.
As an initial matter, and as Adar Bays concedes, it “elected
not to enforce the Make-Whole Provision in this instance.”

Pl.’s

Supp. at 16.
Regardless,

the

provision

is

an

impermissible

and

unenforceable penalty. As discussed supra, the damages for 5Barz’s
failure to honor a Notice of Conversion are not difficult to
determine.

Moreover, the damages awarded pursuant to the Make

Whole provision are totally disproportionate to plaintiff’s actual
damages.

While the latter rectifies plaintiff’s loss of its

contractual

40%

discount

rate,

the

former

“is

tallied

by

multiplying the number of shares by 100% of the highest market
price on any date subsequent to the failure to convert.

The

liquidated damages formula of the Note is thus designed to provide
[Adar Bays] with a guaranteed higher cash payout than a true makewhole measure, which would focus only on [Adar Bays’] loss as a
result of [5Barz’s] failure to abide by the terms of the bargain.”
Union Capital, 2017 WL 1406278, at *7.

It is clear that “the so-

called ‘Make Whole’ provision of the Note is nothing of the sort
and is instead an unenforceable penalty,” which will not be
awarded.

Id.
C. Fine for Untimely Principal Repayment

Plaintiff separately invokes the Note’s provision pursuant to
37

which “[i]f this Note is not paid at maturity, the outstanding
principal due under this Note shall increase by 10%.”

Note § 8.

The proper damages award for non-payment of principal is (1)
the amount of outstanding principal, plus (2) interest for the
period during which the outstanding principal remained unpaid.
Not only are these damages readily calculable, but the liquidated
damages amount—$4,750 or 10% of $47,500 ($52,000 less $5,000 in
converted principal)—bears no reasonable relationship to these
actual damages, especially given the 24% default interest rate
which we have sustained.

Accordingly, the 10% of outstanding

principal award, clearly a penalty to ensure performance, will not
be imposed.
d. Attorneys Fees’ and Costs
Finally, Adar Bays seeks reasonable attorneys’ fees and costs
incurred as the prevailing party in this action, as provided for
in Sections 7 and 8 of the Note, and Section 10 of the Settlement
Agreement.

See, e.g., Note § 8 (“If [Adar Bays] shall commence an

action or proceeding to enforce any provisions of this Note,
including, without limitation, engaging an attorney, then if [Adar
Bays] prevails in such action, [it] shall be reimbursed by [5Barz]
for its attorneys’ fees and other costs and expenses incurred in
the investigation, preparation and prosecution of such action or
proceeding.”).

Courts

in

this

Circuit

have

enforced

nearly

identical fee-shifting provisions, as do we. See, e.g., LG Capital
38

Funding, 307 F. Supp. 3d at 99; LG Capital Funding, 2017 WL
9250379, at *6; see also NetJets Aviation, Inc. v. LHC Commc’ns,
LLC, 537 F.3d 168, 175 (2d Cir. 2008) (“Under New York law, a
contract that provides for an award of reasonable attorneys’ fees
to the prevailing party in an action to enforce a contract is
enforceable if the contractual language is sufficiently clear.”).
However, because Adar Bays has not attached proof that it has paid
its attorneys the sum for which reimbursement is sought, see F.H.
Krear & Co. v. Nineteen Named Trs., 810 F.2d 1250, 1269 (2d Cir.
1987), and because 5Barz has not otherwise addressed this issue,
see Salus Capital Partners, LLC v. Moser, 289 F. Supp. 3d 468, 483
(S.D.N.Y. 2018), we will proceed as follows.
If the parties are unable to resolve the issue of attorneys’
fees inter se within ten days of this Memorandum and Order, Adar
Bays may move for fees ten days thereafter.

5Barz’s opposition

shall be served within ten days after service of the motion, and
any reply shall be served within five days after service of the
opposition.

Adar Bays’ submission of the attorneys’ fees must be

supported by contemporaneous records, and be organized in a manner
that facilitates evaluation (e.g., all hours spent on a specific
task shall be aggregated).

Any challenge advanced by 5Barz shall

be focused on a particular task and shall include a position on
the extent to which the amount of fees sought for the task is
excessive.

See Diamond D. Enters. USA, Inc. v. Steinsvaag, 979
39

F.2d 14,

19

(2d Cir.

produce

perverse

attorneys),

1992)

("Because a fee-shifting clause can

incentives

for

a

litigant

(and

his

. courts must scrutinize fee requests to ascertain

whether they are reasonable." (citing Peter Fabrics, Inc. v. S.S.
"Hermes", 765 F.2d306, 317 (2dCir. 1985))).
III. CONCLUSION

Adar

Bays'

motion

for

summary

judgment,

Dkt.

No.

50,

1

s

granted, and 5Barz's cross-motion for judgment on the pleadings,
Dkt.

No.

60,

lS

denied.

Adar Bays'

letter motion for leave to

move to strike, Dkt. No. 66, is denied.

Adar Bays is entitled to

$58,514.38 plus interest as described supra§ II(c)(i)(E).

The

Clerk of the Court is respectfully directed to terminate docket
numbers 50, 60, and 66.

Dated:

~~~

New York, New York
August L1, 2018

UNITED STATES DISTRICT JUDGE

40

Counsel for plaintiff:

Michael M. Steinmetz
Kevin Kehrli
Michael Smalia
Garson, Segal, Steinmentz, Fladgate LLP

Counsel for defendant:

Mark R. Basile
Catherine P. McGovern
The Basile Law Firm P.C.

41