LG Capital Funding, LLC v. ProText Mobility, Inc.
Filing
36
OPINION AND ORDER......The plaintiff failed to effectuate a proper Notice of Conversion and is therefore not entitled to the lost income of the shares requested in the November 17 Notice, nor to the damages it claims it is due because of defendants a lleged failure to perform on that Notice. There was no Event of Default related to the November 17 Notice. Accordingly, it is hereby ORDERED that the plaintiff shall submit a proposed final judgment, reflecting the above ruling, by March 5, 2018. (Signed by Judge Denise L. Cote on 2/26/2018) (gr)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------- X
:
LG CAPITAL FUNDING, LLC,
:
:
Plaintiff,
:
:
-v:
:
PROTEXT MOBILITY, INC.,
:
:
Defendant.
:
:
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17cv3841(DLC)
OPINION AND ORDER
APPEARANCES
For the plaintiff:
Kevin Kehrli
Garson, Segal, Steinmetz, Fladgate LLP
164 West 25th Street, Suite 11R
New York, NY 10001
For the defendant:
Bryan A. McKenna
590 Avenue of the Americas, 18th Floor
New York, NY 10022
DENISE COTE, District Judge:
Plaintiff LG Capital Funding, LLC (“LG”) commenced this
breach of contract lawsuit on February 22, 2017.
diversity jurisdiction over this action.
There is
This Opinion contains
the Court’s findings of fact and conclusions of law following a
bench trial.
A bench trial was scheduled for February 26, 2018.
The
parties consented on February 23 to submit the case to the Court
based on their pre-trial submissions, which included
declarations of direct testimony from two witnesses: Joseph
Lerman, the Managing Director of LG, and David Lewis, currently
the Senior Strategic Advisor of defendant Protext Mobility, Inc.
(“Protext”).
In brief, LG lent money to Protext and was partially repaid
for those loans by selling in the open market shares of stock
that LG obtained from Protext.
There were eight successful
stock transfers from Protext to LG in 2014.
The instant dispute
concerns a ninth request to convert debt into stock sent by
email by an LG representative to Protext’s Chief Executive
Officer (“CEO”).
Unlike the eight prior requests, which had
been sent to David Lewis, who was then Protext’s Executive
Director, this ninth request was never acted upon.
LG contends
it is now entitled to damages in the amount of $738,758.05,1 plus
attorney’s fees, due to this failure.
Protext contends that the
ninth request was invalid because the course of conduct between
the parties required LG to send any request to David Lewis and
it would be unjust to seek damages premised on a stock price
that is far greater now than LG’s 2014 stock price.
$155,578.05 for the remaining principal and interest under all
three Notes, and $583,000.00 for lost profits on the shares
Protext failed to deliver. These amounts are current as of the
date of the plaintiff’s pretrial memorandum, filed on February
2, 2018.
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2
BACKGROUND
The following constitutes this Court’s findings of fact.
Between April and July of 2014, LG entered into two Securities
Purchase Agreements (“SPAs”) with Protext, and one Debt Purchase
Agreement (“DPA”) with a third party, Lantern Rock Limited
Partnership (“Lantern”).
Each agreement was accompanied by a
Convertible Redeemable Promissory Note (“Note”) issued by
Protext to plaintiff.
On behalf of Protext, the SPAs were
signed by Protext’s then-Chief Executive Officer, Steve Berman.
No Protext representative signed the DPA.
Through these three
transactions, LG paid $100,000 in consideration.2
The Note issued in conjunction with the SPA entered on
April 2, 2014 (“Note 1”) reached maturity on April 2, 2015.
David Lewis, as Protext’s Executive Director, signed Note 1 on
behalf of Protext.3
The Note issued in conjunction with SPA
entered on July 2, 2014 (“Note 2”) reached maturity on July 2,
2015.
The DPA was also entered into on July 2, 2014 by LG, but
with a third party, Lantern, and so no Protext representative
LG paid $30,000 to Protext on April 2, 2014, $50,000 to Protext
on July 2, 2014, and another $20,000 to Lantern on July 2, 2014.
2
Note 1’s signature line lists Mr. Lewis as “Executive
Director” of the company, even though the SPA signed by Steve
Berman on the same day lists Mr. Lewis as the Chief Financial
Officer of Protext, see infra. In his Declaration Testimony,
Mr. Lewis states that “when the events relating to this case
took place . . . I was Executive Director.”
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3
signed the DPA.
The DPA provided for the purchase of $21,500 in
principal under a convertible promissory note in the amount of
$445,124.99 issued by Protext to Lantern on December 29, 2010.
Protext also issued a replacement $21,500.00, 8% Convertible
Redeemable Promissory Note to LG with a maturity date of July 2,
2015 (“Note 3”).
2 and 3.
Steve Berman, the CEO of Protext, signed Notes
Note 3 reached maturity on July 2, 2015.
Notice Provisions
The text of the SPAs -- to which Notes 1 and 2 are directly
related -- gives information regarding whom to contact at the
Company.
Section 5(f) of the April 2, 2014 SPA notes that “all
notices, demands, requests, consent, approvals, and other
communication required or permitted” should be sent to the
Company at its Florida mailing address “Attn: Steve Berman,
CEO.”
The same section of the July 2, 2014 SPA contains the same
language and address, but directs that the communication should
be sent “Attn: David Lewis, CFO.”
The July 2, 2014 DPA, to
which Note 3 is related, does not contain any information
regarding a physical address for Protext, because the DPA is an
agreement between LG and a third party.
Each Note issued in connection with the SPAs and the DPA
contains language regarding the method by which LG can exercise
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its right to convert portions of the principal balance and
interest of the Notes into shares of Protext stock.
Each Note
requires LG to give the “Company,” which is identified in the
Notes as “Pro Text Mobility, Inc.,” written notice of any
conversion request.
The relevant language in each is identical
and reads:
Any Holder of this Note electing to exercise the right of
conversion . . . is required to give the Company written
confirmation that this Note is being converted (“Notice of
Conversion”)[.] The date of receipt (including receipt by
telecopy) of such Notice of Conversion shall be the
Conversion Date.”
None of the Notes specifies to whom written notice should be
sent.
The Notes do not list a specific email or other address.
The Notes contain precise details of when LG can exercise
its right to convert, as well as the method of calculation for
the price for each share of common stock received in exchange
for principal.
Note 1 reads:
The Holder of this Note is entitled, at its option, at any
time after 180 days, and after full cash payment for the
shares convertible hereunder, to convert all or any amount
of the principal face amount of this Note then outstanding
into shares of the Company’s common stock (the “Common
Stock”) without restrictive legend of any nature, at a
price (“Conversion Price”) for each share of Common Stock
equal to 50% of the average of the two lowest closing bid
prices of the Common Stock as reported on the National
Quotations Bureau OTCQB exchange which the Company’s shares
are traded or any exchange upon which the Common Stock may
be traded in the future (“Exchange”) for the ten prior
trading days including the day upon which a Notice of
Conversion is received by the Company(provided such Notice
of Conversion is delivered by fax or other electronic
method of communication to the Company after 4 P.M. Eastern
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Standard or Daylight Savings Time if the Holder wishes to
included [sic] the same day closing price).
(Emphasis added.)
Note 2 contains similar, but slightly different language:
The Holder of this Note is entitled, at its option, at any
time after 180 days, to convert all or any amount of the
principal face amount of this Note then outstanding into
shares of the Company’s common stock (the “Common Stock”)
without restrictive legend of any nature, at a price
(“Conversion Price”) for each share of Common Stock equal
to 45% of the average of the two lowest trading prices of
the Common Stock as reported on the National Quotations
Bureau OTCQB exchange which the Company’s shares are traded
or any exchange upon which the Common Stock may be traded
in the future (“Exchange”) for the ten prior trading days
including the day upon which a Notice of Conversion is
received by the Company (provided such Notice of Conversion
is delivered by fax or other electronic method of
communication to the Company after 4 P.M. Eastern Standard
or Daylight Savings Time if the Holder wishes to include
the same day closing price).
(Emphasis added.)
Note 3 contains nearly identical language to
Note 2, with the exception that the price for each share of
Common Stock is equal to 50% of the average of the two lowest
trading prices of the Common Stock.
Importantly, all three Notes articulate that, in the event
the Note holder wishes to have the day on which Notice is sent
included among the “ten prior trading days” used to calculate
the Conversion Price, then the Notice of Conversion is to be
sent “to the Company” by “fax or other electronic method
communication after 4 p.m.”
In a later section of each Note,
the text reads: “The Holder may, at any time, send in a Notice
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of Conversion to the Company for Interest Shares based on the
formula provided[.]”
Note 3 includes, as an exhibit, a Notice of Conversion
form, which the plaintiff was directed to complete as its
written confirmation of conversion.
Neither the text of the
Note nor the exhibit provides an email address or fax number to
which the Notice should be sent.
All three Notes contain default provisions.
In relevant
part, the Notes define an “Event of Default” such that a default
on one Note constitutes a default on all others.
“Events of
Default” include if Protext defaults “in the payment of
principal or interest on this Note or any other note issued to
the Holder by the Company.”
In short, Protext’s default on one
Note for failing to convert shares after receipt of a Notice of
Conversion would constitute an “Event of Default,” such that
Protext would be in default on all other Notes.
The Eight Conversions
On eight separate occasions after the second SPA and the
DPA were executed, from July 21 to October 29, LG successfully
exercised its right to convert portions of the principal balance
and interest of Note 3 into Protext Common Stock.4
It did not
The eight successful conversions were initiated on: July 21,
August 1, August 29, September 4, September 5, September 12,
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7
convert any portions of the balances of Notes 1 or 2.
On each
of those occasions, LG emailed David Lewis, then the Executive
Director of Protext, with an email attachment containing a
completed version of the form Notice of Conversion included as
an exhibit to Note 3.
The emails were sent to Mr. Lewis’ email
address, dl.rockisland@gmail.com.
In the case of the eighth conversion, commenced on October
29, 2014 (the “Eighth Conversion”), the conversion process took
longer.
In that case, an LG representative followed up directly
with Mr. Lewis, at dl.rockisland@gmail.com.
Nochum Greenberg,
an employee at LG, sent emails to Mr. Lewis on October 31 and
November 3 inquiring about the delay of the conversion.
When
those emails went unresponded to, Mr. Greenberg sent another
email on November 5.
That email was addressed to David Lewis,
but also copied the email address sberman@3dmc.tv.
This is the
first record of LG sending any communication to Mr. Berman or
using the email address.
Mr. Greenberg sent another email on
November 24 explaining that the conversion was still not
completed due to an instruction error.
That email was addressed
to David Lewis, but also included the email address
sberman@3dmc.tv in the To: field.
Later that same day, on
October 24, and October 29. A September 30 conversion was
canceled. The conversion at issue here is an attempted November
17 conversion.
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November 24, Mr. Lewis updated the instruction, and forwarded
his communication with the relevant broker to Mr. Greenberg.
Mr. Lewis did not include the email address sberman@3dmc.tv in
his email to Mr. Greenberg.
At no point in this process did LG
receive a reply from sberman@3dmc.tv.
The Eighth Conversion was
finally completed on November 24, 2014.
While the Eighth Conversion took the longest to complete,
there were other instances of back-and-forth between plaintiff
and defendant when Notice of Conversions were not immediately
processed.
For example, there was a slight delay in processing
a Notice of Conversion submitted to Mr. Lewis by plaintiff on
July 21, 2014.
In that case, the plaintiff followed up with Mr.
Lewis on July 24.
The issue was resolved on July 25.
All
emails from plaintiff were directed to David Lewis, at
dl.rockisland@gmail.com.
Similarly, plaintiff attempted to
initiate a conversion on August 1, 2014 and sent a follow up
communication to Mr. Lewis, at dl.rockisland@gmail.com, on
August 5.
A similar pattern took hold for four other conversions:
those commenced on August 29, September 4, September 5, and
September 12.
All initial communications regarding any Notice
of Conversion were initiated by Tomer Tal, at
tomer@newadventureattorneys.com, and follow up communication by
Nochum Greenberg, at nochum@lgcapitalfunding.com.
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All initial
and follow up emails were sent to Mr. Lewis, at
dl.rockisland@gmail.com.
ultimately cancelled.
A Notice sent on September 30 was
Communication regarding that canceled
transaction took place between Mr. Lewis and Mr. Greenberg; the
initial Notice was sent by Mr. Tal.
A Notice sent on October 24
appeared to have been effectuated smoothly, with no record of
follow-up submitted.
No email communications other than those
sent by Mr. Greenberg on November 5 and 24, with respect to the
Eighth Conversion, included the email address sberman@3dmc.tv.
Attempt at a Ninth Conversion
On November 17, 2014, before the Eighth Conversion was
completed, LG attempted to exercise its right to convert
portions of the principal balance and interest of Note 3 into
Protext Common Stock for a ninth time.
LG submitted its Notice
of Conversion (“November 17 Notice”) via email to
sberman@3dmc.tv.
Mr. Lewis’ email address, used on all prior
correspondence regarding Notices of Conversion, was not included
in that communication, even though the salutation was addressed
to “David.”
On November 17, Steve Berman was LG’s Chief
Executive Officer.
As noted above, LG used this sberman@3dmc.tv
on two other occasions, both of which occurred in connection
with the Eighth Conversion.
Those emails were dated November 5
10
and November 24, and both of them included David Lewis’ email
address as well.
The plaintiff did not send any follow-up emails to anyone
at Protext after November 17 to check on the status of the
November 17 Notice.
To date, LG has not delivered the shares
requested in the November 17 Notice.
LG’s Demand
It is undisputed that, to date, Protext has not repaid the
principal and accrued interest under Notes 1 and 2.
The amounts
due with respect to Notes 1 and 2 are not in controversy.
It is
also undisputed that, to date, Protext has not repaid the
remaining principal and accrued interest under Note 3, but the
amount due is in controversy due to the dispute over the
November 17 Notice.
Within months of the Eighth Conversion in 2014, Protext
essentially ceased operations for lack of funding.
In 2016,
after Protext’s operations had been revived through a merger, LG
contacted David Lewis and sought shares pursuant to the
unfulfilled November 17 Notice, calculated on the basis of the
highest price Protext had reached in the intervening two years,
plus the penalties and interest due under the Notes.
lawsuit ensued.
DISCUSSION
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This
It is undisputed that New York law governs this dispute.5
Under New York law, to prevail on a claim for breach of
contract, the plaintiff must show: “(i) the formation of a
contract between the parties; (ii) performance by the plaintiff;
(iii) failure of defendant to perform; and (iv) damages.”
Johnson v. Nextel Commc'ns, Inc., 660 F.3d 131, 142 (2d Cir.
2011).
After a contract has been formed, parties to it are able
to alter or waive portions of an agreement by their “course of
performance.”
C.T. Chemicals (U.S.A.), Inc. v. Vinmar Impex,
Inc., 81 N.Y.2d 174, 179 (1993).
“[F]or a course of performance
to demonstrate mutual assent to a modification, it must be
unequivocally referable to the modification.”
Dallas Aerospace,
Inc. v. CIS Air Corp., 352 F.3d 775, 783 (2d Cir. 2003)
(applying New York law).
“Contractual rights may be waived if
they are knowingly, voluntarily and intentionally abandoned,”
and “[s]uch abandonment may be established by affirmative
conduct or by failure to act so as to evince an intent not to
claim a purported advantage.”
Fundamental Portfolio Advisors,
Inc. v. Tocqueville Asset Mgt., L.P., 7 N.Y.3d 96, 104 (2006)
(citation omitted).
Under New York law, ambiguity exists “where a contract term
could suggest more than one meaning when viewed objectively by a
The SPAs, DPA, and Notes all have choice of law provisions that
indicate New York as the applicable law.
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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.”
Eternity
Global Master Fund Ltd. v. Morgan Guar. Trust Co. of N.Y., 375
F.3d 168, 178 (2d Cir. 2004) (citation omitted).
“Ambiguity in
a contract is the inadequacy of the wording to classify or
characterize something that has potential significance.”
Id.
It is well settled that where there is ambiguity in a contract,
a court may consider the parties’ course of conduct to ascertain
the parties’ intent.
See, e.g., Waverly Corp. v. City of New
York, 48 A.D.3d 261, 265 (N.Y. App. Div. 2008) (“The best
evidence of the intent of parties to a contract is their conduct
after the contract is formed.”); Citibank, N.A. v. 666 Fifth
Ave. Ltd. Partnership. Ltd. Partnership, 2 A.D.3d 331, 332 (N.Y.
App. Div. 2003) (“In view of the ambiguity of the [contract]
provisions particularly, the trial court appropriately relied on
the parties' course of conduct to determine their intent.”).
Separate agreements and contracts are usually read and
interpreted separately, unless they are “inextricably
intertwined.”
Fundamental Long Term Care Holdings, LLC v.
Cammeby’s Funding LLC, 20 N.Y.3d 438, 445 (2013).
Contracts are
inextricably intertwined when the breach of one would “undo the
obligations imposed by the other.”
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Id.
But “the issue of the
dependency of separate contracts boils down to the intent of the
parties.”
Novick v. AXA Network, LLC, 642 F.3d 304, 312 (2d
Cir. 2011) (citation omitted).
Under New York law,
[w]hether the parties intended to treat both agreements as
mutually dependent contracts, the breach of one undoing the
obligations under the other, is a question of fact. In
determining whether contracts are separable or entire, the
primary standard is the intent manifested, viewed in the
surrounding circumstances.
Id. (citation and emphasis omitted).
Under basic principles of agency law, “notice to the agent
is notice to the principal, unless the person giving notice has
reason to know that the agent has no duty to or will not
transmit the message to the principal.”
Rai v. W.B. Imico
Lexington Fee, LLC, 802 F.3d 353, 360 (2d Cir. 2015) (citation
omitted).
“The general rule is that knowledge acquired by an
agent acting within the scope of his agency is imputed to his
principal and the latter is bound by such knowledge although the
information is never actually communicated to it.”
Hampton Affiliates, 66 N.Y.2d 782, 784 (1985).
Center v.
A Chief
Executive Officer of a company is generally presumed to be an
agent of a company.
As the Honorable Learned Hand observed,
“whatever powers are usual in the business may be assumed to
have been granted” to the president or other chief executive of
a company.
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Schwartz v. United Merchants & Mfrs., 72 F.2d 256, 258 (2d Cir.
1934)(holding that, in contrast, express authority must be
granted for “unusual” or extraordinary contracts).
It is not disputed that the parties entered into several
contracts with each other.
It is also undisputed that the SPAs,
DPA, and Notes should be read and interpreted together.
Each
agreement contains a cross-default provision: a default on one
Note functions as a default on others.
There is also no dispute that the plaintiff performed: the
plaintiff paid due consideration for the SPAs and the DPA.
It
is also undisputed that the defendant has not repaid the
plaintiff the principal and accrued interest under the Notes;
the defendant has failed to perform in that regard.
The crux of this suit surrounds the alleged failure of the
defendant to perform on Note 3, specifically whether the
defendant failed to deliver shares pursuant to the November 17
Notice.
If defendant did fail to deliver those shares, the
damages to which plaintiff is entitled are exponentially higher
than if plaintiff were simply entitled to the principal and
accrued interest otherwise owing under the Notes without the
shares.
The SPAs gave the only directions regarding the person
within the “Company” to whom notice should be sent.
The second
SPA changed that person from Steve Berman to David Lewis.
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The
July 2, 2014 SPA gave a physical address and mailing
instructions to where “all notices” should be sent.
The
accompanying Note, Note 2, gave instructions for electronic or
fax delivery of notices to the “Company.”
Read together, the
instructions direct LG to send electronic delivery of notices to
David Lewis.
The second SPA and Note 2, both dated July 2, 2014,
preceded each of the eight stock conversions.
LG followed the
direction given in the July 2, 2014 SPA and sent each of its
eight notices to convert stock to David Lewis.
When there was a
delay, or when LG wished to cancel a conversion request, it sent
emails to Mr. Lewis.
This course of conduct was entirely
consistent with the instructions in the July 2, 2014 SPA and
Note 2, and demonstrates that there was no confusion or
ambiguity regarding the proper course for making effective
notice to the Company.
Moreover, the record is devoid of evidence that could have
led LG to believe that the sole email to which the November 14
Notice was sent -- sberman@3dmc.tv -- was an effective method of
complying with the contractual notice requirements.
no emails from Mr. Berman from that email address.
There were
Two emails
from plaintiff which included sberman@3dmc.tv, concerning the
October 29 Notice, were also sent to David Lewis at his own
email address and, significantly, were responded to by Mr.
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Lewis, using the same email address he used throughout the
parties’ correspondence: dl.rockisland@gmail.com.
Based on the
record, plaintiff had no reasonable basis to believe that Mr.
Berman was receiving emails regarding stock conversions at
sberman@3dmc.tv, or that including that address in email
communication regarding conversion of Note 3 would garner a
response from Mr. Berman.
The address sberman@3dmc.tv does not
appear anywhere in the parties’ agreements.
Communications from
the defendant to the plaintiff never included the address
sberman@3dmc.tv.
Nothing in the record suggests that a Notice
of Conversion sent to sberman@3dmc.tv alone would be effective.
Plaintiff argues that it was in “substantial compliance”
with the notice provision of Note 3.
It argues that the
parties’ course of conduct did not establish a binding practice
between the parties and that plaintiff only had to provide
written confirmation of conversion to the “Company.”
Further,
plaintiff argues, because Steve Berman signed relevant
transaction documents -- he signed all agreements between the
parties except for Note 1 -- on behalf of Protext, it was
reasonable for LG to assume that it could send a Notice of
Conversion directly to him: as an agent of the Company, he was a
proper recipient of the Notice.
These arguments are not
sufficient to overcome the notice instructions in the July 2,
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2014 SPA and the parties’ course of conduct, which complied with
those instructions.
CONCLUSION
The plaintiff failed to effectuate a proper Notice of
Conversion and is therefore not entitled to the lost income of
the shares requested in the November 17 Notice, nor to the
damages it claims it is due because of defendant’s alleged
failure to perform on that Notice.
There was no Event of
Default related to the November 17 Notice.
Accordingly, it is
hereby
ORDERED that the plaintiff shall submit a proposed final
judgment, reflecting the above ruling, by March 5, 2018.
Dated:
New York, New York
February 28, 2018
______________________________
DENISE COTE
United States District Judge
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