JGB (Cayman) Newton, Ltd. v. Sellas Life Sciences Group Inc. et al
Filing
108
OPINION AND ORDER re: 39 MOTION for Judgment on the Pleadings By Defendant Sellas Life Sciences Group, Inc.. MOTION to Dismiss The Amended Complaint By All Other Defendants. MOTION to Strike Document No. 18 (Paragra phs 9 And 72 Of The Amended Complaint. filed by John Varian, Angelos M. Stergiou, Stephen F. Ghiglieri, Jane Wasman, Sellas Life Sciences Group Inc., Aleskey N. Krylov, Robert L. Van Nostrand, Dr. David A. Scheinberg, MD, PhD, 48 MOTI ON for Judgment on the Pleadings --Motion (A) By Plaintiff JGB (Cayman) Newton, Ltd. For Partial Judgment on the Pleadings, and (B) By all Counterclaim Defendants to Dismiss all Counterclaims. filed by JGB (Cayman) Newton, Ltd., JGB Ca pital L.P., JGB Capital Offshore Ltd., JGB Partners L.P., JGB Collateral, LLC. JGB's July 6, 2018 motion for partial judgment on its own claims is denied. JGB and all counterclaim defendants' motion to dismiss is denied as to Sella s's counterclaims one through four and granted as to Sellas's counterclaims five through seven for mutual mistake, conversion, and unjust enrichment. Sellas's June 18, 2018 motion for judgment on the pleadings seeking dismissal of JGB 's FAC and all other defendants' motion to dismiss the FAC are granted in full. Sellas and all other defendants' motion to strike paragraphs 9 and 72 from the FAC is denied. This resolution of the pending motions leaves four counterc laims brought by Sellas for trial. They are (1) declaratory judgment against JGB that the Hard Price Floor adjusted to $10.50 after the reverse stock split; (2) declaratory judgment against JGB and JGB Collateral requiring the JGB entities to deliver cash collateral owed to Sellas; (3) breach of contract against JGB for return of the excess shares it delivered while using the $0.35 Hard Price Floor; and (4) breach of contract against JGB and JGB Collateral for release of funds hel d in the Collateral Account. In light of this Opinion's resolution of the core contract dispute, the parties shall advise the Court by Thursday, October 25, 2018, whether a trial is necessary on the four outstanding claims. (Signed by Judge Denise L. Cote on 10/23/2018) (rro)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
------------------------------------- X
:
JGB (CAYMAN) NEWTON, LTD.,
:
Plaintiff,
:
:
-v:
:
SELLAS LIFE SCIENCES GROUP INC., DR. :
ANGELOS M. STERGIOU, MD, ScD H.C.,
:
ALEKSEY N. KRYLOV, JANE WASMAN,
:
STEPHEN F. GHIGLIERI, DR. DAVID A
:
SCHEINBERG, MD, PhD, ROBERT L. VAN
:
NOSTRAND, and JOHN VARIAN,
:
Defendants. :
:
------------------------------------- :
:
SELLAS LIFE SCIENCES GROUP, INC.,
:
Counterclaim Plaintiff, :
:
-v:
:
JGB (CAYMAN) NEWTON, LTD., JGB
:
COLLATERAL, LLC, JGB CAPITAL OFFSHORE :
LTD., JGB PARTNERS L.P., and JGB
:
CAPITAL L.P.,
:
Counterclaim Defendants. :
------------------------------------- X
APPEARANCES:
For the Plaintiff:
Douglas K. Yatter
Virginia Tent
Christopher J. Clark
Austin C. Murnane
Latham & Watkins LLP
885 Third Avenue
New York, NY 10022
1
18cv3095(DLC)
OPINION AND
ORDER
For the Defendants:
Jay B. Kasner
Christopher P. Malloy
Jeremy A. Berman
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, NY 10036
DENISE COTE, District Judge:
This litigation arises out of a convertible debenture
agreement between JGB (Cayman) Newton, Ltd. (“JGB”) and Sellas
Life Sciences Group, Inc. (“Sellas”). 1
In 2016, JGB invested $24
million in Sellas’s predecessor in exchange for such a
convertible debenture.
Over the course of the parties’
relationship, the debenture was amended from time-to-time.
One
of the amendments placed a limit on JGB’s right to convert
principal into stock:
specifically, if the share price of
Sellas’s stock fell below $0.35/share as defined by the
agreement, JGB would only be able redeem the number of shares it
would have received had the price been $0.35/share, plus cash
worth the difference between the amount redeemed and the actual
value of the total delivered shares. 2
A convertible debenture is a debt financing instrument in which
the holder of the debenture has the right to convert (“redeem”)
principal of the debt into stock of the borrower.
1
For example, as explained in the parties’ agreement and recited
below, if JGB sought to redeem $100,000 at a time when the Stock
Payment Price was $0.25/share, JGB would receive 285,715 shares
of common stock (100,000 divided by $0.35) plus $28,571.43 in
cash (the difference between the $100,000 sought to be redeemed
2
2
The parties’ primary dispute centers around whether the
agreements between the parties provide that the $0.35/share
figure automatically adjusts for stock splits.
The practical
import of this disagreement is immense: according to JGB’s
calculations, adjusting the $0.35/share figure for stock splits
would result in less than one third the number of shares than
would issue if this figure remained unadjusted.
Both sides
argue that the transaction documents are unambiguous and have
moved to have this matter decided on the pleadings and to
dismiss the other side’s claims.
The motions are granted in
part.
BACKGROUND
The following facts are undisputed and contained in the
Amended Complaint, the Amended Answer and Counterclaims, the
exhibits thereto, and the documents integral to those pleadings. 3
Sellas is a clinical-stage biopharmaceutical company
incorporated in Delaware with a principal place of business in
New York.
Sellas’s predecessor company was Galena Biopharma,
and the value of the 285,715 shares calculated at the actual
$0.25/share price).
In connection with their briefing on the motions, both parties
have submitted numerous additional documents not referenced in
the pleadings or otherwise integral thereto. This Opinion does
not consider these documents.
3
3
Inc. (“Galena”), which merged with Sellas in or around December
2017.
JGB is an investment fund with its principal place of
business in the Cayman Islands.
The Securities Purchase Agreement
On May 10, 2016, JGB and Galena entered into a Securities
Purchase Agreement (“SPA”) whereby JGB paid $24 million to
Galena, in return for a convertible debenture, which was issued
the same day and titled 9% Original Issue Discount Senior
Secured Debenture (the “Original Debenture”).
The SPA functions
as the primary agreement between the parties and contains
numerous provisions applicable to other documents, defined in
the SPA as “Transaction Documents.”
The SPA defines
“Transaction Documents” as follows:
“Transaction Documents” means this Agreement [the
SPA], the Debentures, the Warrants, the Security
Agreement, the Subsidiary Guaranty, the Registration
Rights Agreement, the Securities Account Control
Agreement, Pay-Off Letter and all exhibits and
schedules thereto and hereto and any other documents
or agreements executed in connection with the
transactions contemplated hereunder. 4
(Emphasis supplied.)
The SPA contains general provisions regarding each of the
Transaction Documents.
The SPA’s merger clause provides that
“The Transaction Documents . . . contain the entire
The capitalized terms are each specifically defined in the
definitions section of the SPA.
4
4
understanding of the parties with respect to the subject matter
hereof and thereof and supersede all prior agreements.” 5
Most importantly for this dispute, the SPA contains a
Construction Clause applicable to all Transaction Documents that
refers to stock splits.
It provides:
The parties agree that each of them and/or their
respective counsel have reviewed and had an
opportunity to revised the Transaction Documents and,
therefore, the normal rule of construction to the
effect that any ambiguities are to be resolved against
the drafting party shall not be employed in the
interpretation of the Transaction Documents or any
amendments thereto. In addition, each and every
reference to share prices and shares of Common Stock
in any Transaction Document shall be subject to
adjustment for reverse and forward stock splits, stock
dividends, stock combinations and other similar
transactions of the Common Stock that occur after the
date of this Agreement.
(Emphasis supplied.)
The SPA also contains Galena’s representation that it will
not provide JGB with material non-public information.
Section
4.8 of the SPA provides that:
Except with respect to the material terms and
conditions of the transactions contemplated by the
Transaction Documents, the Company covenants and
agrees that neither it, nor any other Person acting on
its behalf, has provided prior to the date hereof or
The SPA’s choice of law clause provides that “[a]ll questions
governing the construction, validity, enforcement and
interpretation of the Transaction Documents shall be governed by
and construed and enforced in accordance with the internal laws
of the State of New York, without regard to the principles of
conflicts of law thereof.” The SPA also provides for disputes
over each of the Transaction Documents to be litigated in the
state and federal courts of the City of New York.
5
5
will in the future provide any Purchaser or its agents
or counsel with any information that the Company
believes constitutes material non-public information,
unless prior thereto such Purchaser shall have entered
into a written agreement with the Company regarding
the confidentiality and use of such information. The
Company understands and confirms that each Purchaser
shall be relying on the foregoing covenant in
effecting transactions in securities of the Company.
(Emphasis supplied.)
The August 22, 2016 Debenture
The Original Debenture was amended and restated on August
22, 2016, resulting in two documents:
the “Amendment
Agreement,” in which the parties agreed to amend and restate the
Original Debenture, and the “Amended and Restated 9% Original
Issue Discount Senior Secured Debenture Due November 10, 2018”
(“Debenture”), which replaced the Original Debenture.
The
Amendment Agreement provided that “this Agreement [the Amendment
Agreement] and the [Amended and Restated] Debenture is a
Transaction Document.
In addition, all references in the
Transaction Documents to the Original Debenture shall be deemed
to mean the Original Debenture as amended pursuant to this
Agreement.”
The Amendment Agreement also provided for Galena to
publicly disclose the agreement on the next trading day, and
that once the Amendment Agreement was disclosed, “[JGB] shall
not be in possession of any material, nonpublic information
received from [Galena]”.
6
The Debenture is a complex, carefully worded instrument.
The key provisions for this dispute are as follows.
Beginning
on November 10, 2016, JGB generally had the right to require
Galena to redeem up to $1.5 million per month in principal on
the Debenture.
At Galena’s option, the Debenture could be put
into “Stock On” mode, at which point redemptions of the
principal would be paid in shares of common stock of Galena, as
long as certain conditions (the “Equity Conditions”) were met.
If the Equity Conditions were not met, then redemptions of
principal were required to be paid in cash.
At all relevant
points here, the Debenture was in “Stock On” mode.
When paying JGB in stock, Galena was required to calculate
the price of its stock as 92.5% of the Volume Weighted Adjusted
Price (“VWAP”) 6 for the trading day immediately prior to the
redemption, or 92.5% of the average VWAP for the three lowest
VWAPs in the 20 consecutive trading day period preceding the
redemption notice, whichever was lower.
In other words, the
stock received by JGB under the Debenture would be valued at a
significant discount relative to Galena’s then-trading price.
Galena was required to provide the requisite number of shares
within three trading days after JGB delivered a notice of
redemption.
Failure to deliver the requisite shares within two
VWAP is a means to calculate the average trading price over a
particular day.
6
7
trading days after the due date was an “Event of Default” and
would result in partial liquidated damages of $5 for each $1,000
of principal being redeemed for each trading day beyond the
second trading day that delivery was delayed.
The key Equity Condition of relevance to this case requires
that “the VWAP of the Common Stock is at least $0.20 per share
(appropriately adjusted for any stock split, stock dividend,
stock combination, stock buy-back or other similar transaction).
. . .” (the “Price Floor”).
If the Equity Conditions are not
satisfied at the time of a redemption, JGB has the right to
receive redemptions in cash, or, at its exclusive option, waive
the failure of the condition and continue to accept stock.
The Debenture also contains two provisions aimed at
ensuring that JGB would not be in possession of any material
non-public information.
An Equity Condition is that “[JGB] is
not in possession of any information provided by or on behalf of
[Galena] that constitutes, or may constitute, material nonpublic information.”
The Debenture also provides that:
Each of [JGB] and [Galena] acknowledge [Galena’s]
obligation under [the SPA] to not provide any material
non-public information to [JGB], and [JGB] agrees that
[Galena] shall have no liability to [JGB] for failing
to disclose any material non-public information in
connection with the issuance of any Stock Payment
Shares to [JGB] in accordance with the terms of this
Debenture.
(Emphasis supplied.)
8
In November 2016, Galena underwent a 1-for-20 reverse stock
split. 7
Pursuant to the terms of the Debenture, the Price Floor
was raised to $4.00.
December 2016 Waiver
The parties next amended the Debenture on December 14,
2016, in a “Waiver” agreement (“December 2016 Waiver”).
The
December 2016 Waiver acknowledged that Galena’s stock price had
fallen below $4.00 per share (the new Price Floor), and
indicated that Galena requested that JGB waive the Price Floor.
The December 2016 Waiver waived the Price Floor for December
2016 through March 2017, subject to certain new conditions.
The
December 2016 Waiver included a provision confirming that JGB
had not been provided any material non-public information by
Galena.
The December 2016 Waiver also included the following
definitional provision:
Transaction Documents. The Debenture, the [SPA], . .
. this Agreement, the other Transaction Documents, and
all other agreements, instruments and other documents
executed in connection with or relating thereto
(collectively, the “Debenture Documents”) are legal,
valid, binding, and enforceable against [Galena] . . .
in accordance with their terms.
A reverse stock split is a type of transaction in which each
outstanding share of the company is converted into a fraction of
a share, thus making each individual full share proportionally
more valuable. The reverse stock split here converted each
former share of Galena to 1/20 of a share, thus raising Galena’s
per share price by a factor of 20.
7
9
May 2017 Amendment
The next agreement in the record was entered into on May 1,
2017, in a document titled “Amendment Agreement” (“May 2017
Amendment”). 8
In response to a request from the NASDAQ Stock
Market, the parties agreed that any price floor could not be
lower than $0.35.
The May 2017 Amendment begins by stating
that:
WHEREAS, satisfaction of the Equity Conditions (as
defined in the Debenture) requires among other things
that the VWAP (as defined in the Debenture) for the
Common Stock shall be at least $4.00 per share
pursuant to paragraph (i) of the definition of “Equity
Conditions” set forth in Section 1 of the Debenture
(the “Price Floor”); provided, however, that the Price
Floor may be waived by the Holder at its option;
WHEREAS, the NASDAQ Stock Market (“NASDAQ”) has
requested that the parties enter into agreement to
provide that any waiver of the Price Floor may not
result in the Stock Payment Price being less than
$0.35 per share;
WHEREAS, the Holder is willing to enter into the
agreement requested by NASDAQ [on] the terms and
conditions set forth herein.
(Emphasis supplied.)
The May 2017 Amendment contains a definitional section that
is almost identical to that contained in the December 2016
Waiver that refers to itself as a Transaction Document and that
JGB describes five occasions on which the Debenture was
“amended and restated”: August 22 and December 14, 2016, and May
1, July 10 and August 7, 2017.
8
10
also defines a category of documents as “Debenture Documents.”
It reads:
Transaction Documents. The [Amended] Debenture, the
[SPA], . . . the [December 2016 Waiver], the Waiver
dated April 1, 2017, this Agreement, the other
Transaction Documents and all other agreements,
instruments and other documents executed in connection
with or relating thereto (collectively, the “Debenture
Documents”) are legal, valid, binding and enforceable
against the Company and Guarantors in accordance with
their terms.
(Second emphasis supplied.)
The provision for a $0.35 price floor per share is
contained in the third paragraph.
It reads:
3. Agreement. For purposes of Section 2(a) of the
Debenture and Section 4(a) of the Debenture, [JGB] and
[Galena] hereby agree that [JGB] may, from time to
time, at [JGB’s] option waive the Price Floor (for
such number of Trading Days as [JGB] determines);
provided, however, [JGB] cannot waive the Price Floor
to the extent that the resulting Stock Payment Price
would be less than $0.35 per share as a result of any
such waiver. For the avoidance of doubt, in the event
of any Equity Conditions Failure that is not, or
cannot be as a result of this Agreement, waived by
[JGB], [Galena] shall honor the Holder Redemption
Amounts in cash or, at [Galena’s] election, with the
prior written consent of [JGB], deliver aggregate
consideration in shares of Common Stock and cash in
satisfaction of the applicable Holder Redemption
Amount as follows: (i) the number of shares of Common
Stock equal to the quotient obtained by dividing such
Holder Redemption Amount and $0.35 (each such share
having a deemed value per share at the Stock Payment
Price that would have been in effect but for the
minimum Stock Payment Price condition of $0.35 per
share set forth herein) and (ii) cash equal to the
difference between the Holder Redemption Amount and
the aggregate deemed value of the shares of Common
Stock delivered in clause (i). For example, if the
applicable Holder Redemption Amount is $100,000 and
11
the Stock Payment Price would be $0.25 per share but
for the provisions of this Agreement, then [Galena]
shall issue 285,715 shares of common stock to the
Holder and pay to [JGB] an amount in cash equal to
$28,571.43.
4. Limitation of Agreement. The Agreement set forth
above shall be limited precisely as written and
relates solely to clause (i) of the definition of
“Equity Conditions” set forth in Section 1 of the
Debenture, Section 2(a) of the Debenture and Section
4(a) of the Debenture in the manner and to the extent
described above . . . .
5. No Modification. Except as expressly set forth
herein, nothing contained in this Agreement shall be
deemed or construed to amend, supplement or modify the
Debenture or any other Debenture Documents or
otherwise affect the rights and obligations of any
party thereto, all of which remain in full force and
effect.
(Emphasis supplied.)
The point below which the Price Floor could not be waived
by JGB under the May 2017 Amendment will be referred to as the
Hard Price Floor.
Like the other agreements, the May 2017
Amendment also selected New York law and a New York venue, and
confirmed that JGB had not received any material nonpublic
information.
Collateral Account
The SPA also provided that the Debenture would be secured
by a restricted cash collateral account (“Collateral Account”).
The parties agreed that the Collateral Account would contain a
sum equal to at least the outstanding principal.
Another
agreement, the Securities Account Control Agreement, governed
12
this account.
The December 2016 Waiver amended the Securities
Account Control Agreement to, among other things, provide that
Galena “may not make withdrawals from the Account without the
prior written consent of [JGB].”
The December 2016 Waiver also
provided that JGB “shall, on a monthly basis, provided that no
Event of Default has occurred and is continuing, provide written
instructions . . . to wire transfer within three (3) Business
Days after the end of the month any funds in excess of the
outstanding Principal Amount of the Debenture” to Galena.
On July 10, 2017, JGB and Galena entered into an amendment
of the Debenture in which the Stock Payment Price formula was
modified to generally provide that the Stock Payment Price would
now be 80% of the prior trading day’s VWAP or 80% of the average
of the three lowest VWAPs in the 20 prior trading days.
This
increased the discount on Galena’s shares when JGB redeemed
principal.
Like the other agreements, it chose a New York venue
and law, and confirmed that no material, nonpublic information
had been provided to JGB.
August 2017 Merger
On August 7, 2017, JGB and Galena entered into a “Consent
Agreement” (“August 2017 Consent”) to permit Galena to merge
into Sellas.
JGB gave permission to Galena to enter into the
merger with Sellas, and further agreed to generally limit its
redemptions to 15% of the daily trading volume of the stock.
13
Like the other agreements, it chose New York law, a New York
venue, and, other than knowledge of the forthcoming merger,
represented that JGB was not in possession of any material
nonpublic information.
The merger between Galena and Sellas closed on or about
December 29, 2017.
Immediately before the merger, Galena
effected a 1-for-30 reverse stock split.
As outlined, the
primary dispute between the parties is whether the Hard Price
Floor remained at $0.35, or adjusted to $10.50 to account for
the reverse stock split.
The parties’ pleadings dispute various aspects of what
happened next.
For purposes of each motion, the non-movant’s
factual allegations are taken as true and all inferences are
drawn in favor of the non-movant.
follows.
Sellas’s version is as
On December 29, 2017, JGB issued five Holder
Redemption Notices to redeem $1.05 million in principal.
Those
redemption notices used the $0.35 cent Hard Price Floor.
Sellas
informed JGB that it would deliver the shares on a post-split
basis, to which there was no objection.
After the merger and
reverse-stock split, on January 4, 2018, Sellas delivered the
shares as calculated using the adjusted $10.50 Hard Price Floor.
Throughout January and February, JGB accepted shares issued in
response to Holder Redemption notices calculated using the
$10.50 Hard Price Floor without complaint.
14
In addition, JGB’s
CFO sent an e-mail on February 1, 2018 indicating that JGB
believed that the Hard Price Floor was $10.50.
The parties’ pleadings also dispute what transpired during
negotiations to retire the Debenture that took place in February
and March 2018.
JGB’s version is that on or about February 21,
2018, Sellas offered to buy out JGB’s remaining rights under the
Debenture.
Further offers to buy out JGB’s rights under the
Debenture were made on or about February 22 and March 4.
On March 4, Krylov advised JGB that it had drawn up terms
of an additional offer, and asked JGB to halt its trading of
Sellas’s shares to consider the offer, which defendants believed
contained material nonpublic information.
Sellas contends that
this offer was tied to a Private Investment in Public Equity
(“PIPE”) transaction that it was in the midst of finalizing and
which constituted material non-public information, such that JGB
would have to stay out of the public markets once it was
provided this information.
JGB agreed to receive the
information, and halted trading from March 7 to March 9, 2018 to
consider the offer, which it ultimately rejected.
Once the PIPE
was publicly announced, on March 9, JGB was free to resume
trading.
On March 8, in response to JGB’s March 2, 2018 Holder
Redemption Notice, which calculated the shares due using the
$0.35 Hard Price Floor, Sellas began issuing shares to JGB using
15
the $0.35 Hard Price Floor.
Sellas claims that it believed it
could do so without waiving its rights under Section 4(d) of the
Debenture, which provides that “delivery [of shares] shall not
operate as a waiver by [Sellas] of any such action [Sellas] may
have against [JGB].”
JGB, for its part, contends that at some
point during the timeframe between December 2017 and April 2018,
Sellas agreed that $0.35 was the correct Hard Price Floor,
including specifically in a discussion on March 4, 2018.
On March 22, defendant Angelos Stergiou, Sellas’s CEO, made
another offer to buy out JGB, which JGB also rejected.
Through
March 2018, the two sides could not come to an agreement on
retiring the Debenture.
On April 2, the dispute over the Hard Price Floor came to a
head.
That morning, Sellas took the position in a letter to JGB
that the Hard Price Floor was $10.50, and stated its intention
to refuse to honor any of JGB’s Holder Redemption Requests
calculated using the $0.35 Hard Price Floor.
Later that
morning, JGB issued a Holder Redemption Notice calculated using
the $0.35 Hard Price Floor.
The same day, Sellas issued a press
release announcing positive results in clinical trials for its
cancer drug.
That was the first notice given to JGB of those
positive results.
Sellas’s stock price more than doubled.
JGB claims that, as a result of Sellas’s refusal to deliver
shares on April 2, 2018, it lost an opportunity to make $21.5
16
million selling Sellas shares.
Sellas, for its part, claims
that it delivered shares on April 5, 2018 using the $0.35 Price
Floor within the three-day window provided by the Debenture.
Sellas further claims that on April 9, 2018, JGB denied
Sellas’s request to release $1.35 million from the Collateral
Account, which it claims is the required collateral associated
with redemptions issued in response to Holder Redemption Notices
62-67, which were issued sometime between March and April 2,
2018.
Sellas claims that JGB and its agent JGB Collateral
continue to refuse to release these funds.
PROCEDURAL HISTORY
On April 9, 2018, JGB filed a complaint in this court, and
amended that complaint on May 2 (“FAC”).
claims for relief:
The FAC asserts eight
(1) a claim against Sellas seeking an order
that Sellas specifically perform its obligations under the
Debenture; (2) a claim against Sellas for breach of contract;
(3) a claim against Sellas for breach of duty of good faith and
fair dealing; (4) a claim for federal securities fraud against
Sellas, Stergiou, and Krylov, for the conduct between February
2018 and April 2, 2018; (5) a control person claim against the
officers and directors of Sellas; (6) a claim for fraud and
deceit against Sellas, Stergiou, and Krylov; (7) a claim for
17
conversion against Sellas; and (8) a claim for unjust enrichment
against Sellas.
On May 18, 2018, Sellas answered the FAC and brought
counterclaims, and on May 25, amended its answer and
counterclaims.
The counterclaims are brought on behalf of
Sellas only, and involve claims for:
(1) declaratory judgment
against JGB that the Hard Price Floor adjusted to $10.50 after
the reverse stock split; (2) declaratory judgment against JGB
and JGB Collateral requiring the JGB entities to deliver cash
collateral owed to Sellas; (3) breach of contract against JGB
for return of the excess shares it delivered while using the
$0.35 Hard Price Floor; (4) breach of contract against JGB and
JGB Collateral for release of funds held in the Collateral
Account; (5) mutual mistake against JGB; (6) conversion against
JGB and JGB Collateral; and (7) unjust enrichment against JGB
Capital Offshore, JGB Partners, and JGB Collateral.
On June 18, Sellas moved for judgment on the pleadings;
Krylov, Stergiou, and the Sellas officer defendants moved to
dismiss the FAC; and all defendants moved to strike paragraphs 9
and 72 of the FAC.
On July 6, JGB moved for partial judgment on
the pleadings in its favor regarding its first and second causes
of action, and to dismiss the counterclaims pursuant to Rule
12(b)(2) and 12(b)(6), Fed. R. Civ. P.
18
Sellas’s motion became
fully submitted on July 30 and JGB’s motion became fully
submitted on August 10.
On October 1, Sellas and the individual defendants moved
for a temporary restraining order, a preliminary injunction, and
expedited discovery.
On October 4, the parties filed a
stipulation and proposed order, which the Court ordered the same
day, rendering the motion for a temporary restraining order
moot.
The parties subsequently agreed to consolidate the motion
for a preliminary injunction with a trial on the merits, to take
place in November.
DISCUSSION
The standards governing motions to dismiss are wellestablished.
When a party moves to dismiss for failure to state
a claim upon which relief can be granted under Rule 12(b)(6),
Fed. R. Civ. P., a court must “accept all allegations in the
complaint as true and draw all inferences in the non-moving
party’s favor.”
LaFaro v. N.Y. Cardiothoracic Grp., PLLC, 570
F.3d 471, 475 (2d Cir. 2009) (citation omitted).
The complaint
will survive the motion to dismiss as long as it contains
“sufficient factual matter, accepted as true, to state a claim
to relief that is plausible on its face.”
Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009) (citation omitted).
The court will
deem the complaint “to include any written instrument attached
19
to it as an exhibit, materials incorporated in it by reference,
and documents that, although not incorporated by reference, are
integral to the complaint.”
L-7 Designs, Inc. v. Old Navy, LLC,
647 F.3d 419, 422 (2d Cir. 2011) (citation omitted).
Where a party moves to dismiss securities fraud
allegations, “section 21D(b)(2) of the [Private Securities
Litigation Reform Act (PSLRA)], which governs scienter pleading
in securities fraud actions, establishes a more stringent rule
for inferences involving scienter, and requires that a
plaintiff's complaint state with particularity facts giving rise
to a strong inference that the defendant acted with the required
state of mind.”
Teamsters Local 445 Freight Div. Pension Fund
v. Dynex Capital Inc., 531 F.3d 190, 194 (2d Cir. 2008)
(citation omitted).
An inference of scienter is “strong” and a
complaint will survive if “a reasonable person would deem the
inference of scienter cogent and at least as compelling as any
opposing inference one could draw from the facts alleged.”
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 324
(2007).
“Judgment on the pleadings is appropriate where material
facts are undisputed and where a judgment on the merits is
possible merely by considering the contents of the pleadings.”
Sellers v. M.C. Floor Crafters, Inc., 842 F.2d 639, 642 (2d Cir.
1988).
“In deciding a Rule 12(c) motion, we apply the same
20
standard as that applicable to a motion under Rule 12(b)(6),
accepting the allegations contained in the complaint as true and
drawing all reasonable inferences in favor of the nonmoving
party.”
Mantena v. Johnson, 809 F.3d 721, 727–28 (2d Cir. 2015)
(citation omitted).
On a motion for judgment on the pleadings,
the court will consider documents attached to the pleadings, and
documents integral to them.
See L-7 Designs, Inc., 647 F.3d at
422.
I.
The Contract Claims
The core of the dispute between these parties centers on
the interpretation of the Debenture and the May 2017 Amendment,
which created the Hard Price Floor.
With regard to the breach
of contract claims alleged in this dispute, JGB has moved for
partial judgment on the pleadings and to dismiss Sellas’s
amended counterclaims, and Sellas has moved for judgment on the
pleadings to dismiss JGB’s FAC.
Under New York law, 9 “a fundamental objective of contract
interpretation is to give effect to the expressed intention of
the parties.”
2017).
In re MPM Silicones, 874 F.3d 787, 795 (2d Cir.
“The initial inquiry is whether the contractual
Each of the relevant contracts provides for New York law to
govern disputes, and all parties in their briefing agree that
New York law governs.
9
21
language, without reference to sources outside the text of the
contract, is ambiguous.”
Id.
An ambiguity exists where the terms of the contract
‘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.’
Law Debenture Trust Co. of New York v. Maverick Tube Corp., 595
F.3d 458, 466 (2d Cir. 2010) (quoting International Multifoods
Corp. v. Commercial Union Ins. Co., 309 F.3d 76, 83 (2d Cir.
2002)).
By contrast, a contract is unambiguous if its “language
has a definite and precise meaning about which there is no
reasonable basis for a difference of opinion.”
Keiler v.
Harlequin Enters. Ltd., 751 F.3d 64, 69 (2d Cir. 2014).
In
determining whether a term is ambiguous, courts are to consider
“the entire contract to safeguard against adopting an
interpretation that would render any individual provision
superfluous.”
RJE Corp. v. Northville Industries Corp., 329
F.3d 310, 314 (2d Cir. 2003) (citation omitted).
“[T]he
language of a contract is not made ambiguous simply because the
parties urge different interpretations.”
Aetna Cas. & Sur. Co.
v. Aniero Concrete Co., 404 F.3d 566, 598 (2d Cir.
2005)(citation omitted).
“The matter of whether the contract is
ambiguous is a question of law for the court.”
Trust Co. of New York, 595 F.3d at 465.
22
Law Debenture
If an ambiguity exists, then a court may consider extrinsic
evidence to determine its meaning.
See JA Apparel Corp. v.
Abboud, 568 F.3d 390, 397 (2d Cir. 2009).
Where extrinsic
evidence is considered, the meaning of the ambiguous contract is
a question of fact for the factfinder.
Id.
The sources of
evidence that may be considered in interpreting an ambiguous
contract include course of performance evidence.
Because such
evidence involves factual disputes, however, it is generally
inappropriate for resolution on a motion to dismiss or for
judgment on the pleadings.
Both JGB and Sellas contend that the relevant contract
terms are unambiguous and support their positions.
The plain
meaning of the contract terms at issue here requires the Hard
Price Floor to be adjusted for stock splits.
The Hard Price Floor was created by the May 2017 Amendment.
The May 2017 Amendment provides that “the Holder cannot waive
the Price Floor to the extent that the resulting Stock Payment
Price would be less than $0.35.” 10
The Construction Clause of
The Debenture provides for Sellas to issue securities to JGB
that convert into publicly traded common stock at a percentage
discount to the market price on the day of conversion. Such
securities are known as a “future priced,” “death spiral,” or
“toxic” securities because of their potential to exert
significant downward pressure on a company’s stock price. When
shares are converted at a discount and then sold into the market
at market price, the volume of common stock in the market
increases, which drives the price per share down. This, in
turn, leads to an ever increasing amount of common stock being
10
23
the SPA directs that “each and every reference to share prices
and shares of Common Stock in any Transaction Document shall be
subject to adjustment for reverse and forward stock splits.”
By
its unambiguous, plain terms, the Construction Clause applies to
“Transaction Documents.”
Transaction Documents are defined to include
[the SPA], the Debentures, the Warrants, the Security
Agreement, the Subsidiary Guaranty, the Registration
Rights Agreement, the Securities Account Control
Agreement, Pay-Off Letter and all exhibits and
schedules thereto and hereto and any other documents
or agreements executed in connection with the
transactions contemplated hereunder.
(Emphasis supplied.)
Because the May 2017 Amendment was a
document executed “in connection with the transactions
contemplated” by the SPA, the May 2017 Amendment is a
Transaction Document.
Read together, they require the reference
to the Hard Price Floor to be adjusted for stock splits.
There is additional support in the parties’ agreements for
construing the May 2017 Amendment as a Transaction Document and
requiring, as a result, the Hard Price Floor to be adjusted for
stock splits.
The May 2017 Amendment amends the Debenture.
The
parties have agreed that amendments to the Debenture are
issued and subsequently sold into the market upon conversions.
Companies who issue future priced securities often negotiate a
conversion price floor in order to control this downward spiral.
See David A. Broadwin, An Introduction to Antidilution
Provisions (Part 2), Prac. Law. 23, 28-29 (2004).
24
Transaction Documents, classified as “Debentures”.
For
instance, the first paragraph of the August 22, 2016 amended
Debenture, defines “Debenture” as “this debenture, as amended,
restated, supplemented or otherwise modified from time to time.”
In addition, a July 10, 2017 Amendment Agreement between the
parties describes the Debenture “as amended and restated on
August 22, 2016, and as subsequently amended on December 14,
2016, and May 1, 2017” (emphasis supplied), indicating again
that the parties considered the May 2017 Amendment to be an
amendment to the Debenture.
Finally, the May 2017 Amendment refers to itself as a
Transaction Document.
It reads,
Transaction Documents. The Debenture, the Securities
Purchase Agreement, the Subsidiary Guaranty, the
Security Agreement, the Waiver dated December 14,
2016, the Waiver dated April 1, 2017, this Agreement,
the other Transaction Documents and all other
agreements, instruments and other documents executed
in connection with or relating thereto (collectively
the ‘Debenture Documents’) are legal, valid, binding
and enforceable . . . .
(Emphasis supplied.)
JGB contends that this same clause’s reference to a
category of documents titled the “Debenture Documents,” which
includes the May 2017 Amendment, the Debenture, the SPA, and
“other Transaction Documents,” shows that “Transaction
Documents” does not include the May 2017 Amendment, because the
“Debenture Documents” category must be broader than the
25
Transaction Documents, or else it would be meaningless.
In the
face of the many indications in the documents that the May 2017
Amendment is a Transaction Document, this argument is
unavailing.
Read in context, the term Debenture Documents
permits the parties to easily reference a broad and growing list
of agreements in other sections of the same document. 11
JGB next argues that because the May 2017 Amendment was not
one of the transactions contemplated at the time of the
execution of the SPA it cannot be a Transaction Document.
But,
the SPA clearly contemplated future amendments, including by
providing procedures for future amendment.
The “transactions
contemplated” in the SPA logically include redemptions by JGB
pursuant to the Debenture, and, while not created
contemporaneously, the May 2017 Amendment is an agreement that
is directly connected to the terms of these redemptions.
JGB next argues that, even if the May 2017 Amendment is a
Transaction Document, the SPA’s Construction Clause -- with its
requirement that references to share prices be adjusted for
stock splits -- does not govern the May 2017 Amendment because
The term Debenture Document is used throughout the May 2017
Amendment to easily refer to the parties’ existing contractual
obligations. For example, in the paragraph directly following
its definition, the May 2017 Amendment states “Obligations. The
respective obligations of the Company and the Guarantors under
the Debenture Documents are not subject to any setoff,
deduction, claim, counterclaim or defenses of any kind or
character whatsoever.”
11
26
the clause does not include the word “amendments” and therefore
only applies to a subset of Transaction Documents.
JGB points
out that while the Construction Clause expressly refers to “the
Transaction Documents or any amendments thereto” when it
provides that ambiguities are not to be resolved against the
drafting party in interpreting these documents (“Drafter’s
Presumption”), the parties did not add the term “amendments”
when they refer to Transaction Documents in the following
sentence, which governs stock splits.
The reference to
amendments when discussing the Drafter’s Presumption does not
create an ambiguity about the need to adjust for stock splits
whenever a Transaction Document refers to share prices.
There
is no tension between the two sentences, and each may be given
its full force and affect without limiting the reach of either
sentence.
The two sentences are the only two sentences in the SPA’s
section addressed to “Construction.”
separate issues of construction.
They address entirely
One addresses the Drafter’s
Presumption; the other addresses all references to share prices
in light of stock splits.
The first sentence uses the phrase
“the Transaction Documents or any amendments thereto;” the
second sentence begins with the phrase “In addition” and uses
the phrase “any Transaction Document”.
As just described, the
SPA’s definition of Transaction Documents is inclusive and
27
encompasses documents not yet executed.
It includes “any other
documents or agreements executed in connection with the
transactions contemplated hereunder.”
Also, as just described,
the parties themselves referred to the May 2017 Amendment as a
Transaction Document and to many other documents amending prior
Transaction Documents as being Transaction Documents themselves.
In sum, JGB’s suggestion that the SPA’s direction -- that
references to share prices “in any Transaction Document shall be
subject to adjustment for reverse and forward stock splits” -should not be read to actually apply to “any Transaction
Document” would be at odds with the plain meaning of the
sentence, as well as the SPA’s definition of Transaction
Documents.
Throughout their documents the parties rely on the
term Transaction Documents to encompass amendments to the
original Transaction Documents, and to suggest that it does not
would undermine the integrity of those documents in countless
ways that have nothing to do with stock splits.
The documents,
read as whole, do not allow JGB’s reading of the Construction
Clause.
Finally, JGB places the most weight on a term of the May
2017 Amendment itself.
In its fourth of eleven numbered
paragraphs, the amendment describes the “Limitation of
Agreement” (“Limitation Clause”).
The Limitation Clause states
that the amendment “shall be limited precisely as written and
28
relates solely” to three clauses of the Debenture.
Those
clauses concern the Price Floor, the accumulation of interest on
principal, and mechanisms of redemption.
The Limitation Clause
articulates the standard legal requirement that unambiguous
contracts be interpreted as written and directs attention to the
provisions in the Debenture that the amendment is intended to
affect.
It does nothing to indicate that the terms of the May
2017 Amendment should not be subject to the Construction Clause
of the SPA.
Moreover, nothing in the May 2017 Amendment
conflicts with the Construction Clause or indicates an intention
by the parties to override the terms of the SPA.
Indeed, its
reference to the Price Floor provisions of the Debenture
underscores the parties’ intention that the Hard Price Floor
created by the May 2017 Amendment directly impact the operations
of the Price Floor, an intention which would of course be
furthered if both price floors are simultaneously and
automatically adjusted together for stock splits.
JGB does not
argue that the Price Floor provisions of the Debenture are not
subject to the stock split adjustments required by the SPA’s
Construction Clause.
Reading these documents together, then,
and giving full force and effect to each of their terms, JGB’s
suggestion that the Limitation Clause brings the May 2017
Amendment outside the SPA and its Construction Clause must be
rejected.
29
Accordingly, because the May 2017 Amendment refers to a
share price of $0.35 and the Construction Clause requires share
prices to be adjusted for stock splits, the only plausible
reading of the contract is that an adjustment for stock splits
must be made to the Hard Price Floor.
If the language of the
contract at issue in this dispute were ambiguous, an examination
of extrinsic evidence would be warranted.
Both parties argue
that the course of dealings between the parties referenced in
their pleadings and a NASDAQ rule and guidance support their
interpretations of the contract.
Because the terms in the
parties’ agreements that are relevant to this dispute are
unambiguous, it is unnecessary to address the course of conduct
allegations in the pleadings. 12
Sellas also brings a contract claim related to JGB and JGB
Collateral’s obligation under the contract to release cash from
the Collateral Account over which they exercise control.
JGB and JGB Collateral seek dismissal of this claim on the
grounds that Sellas’s refusal to deliver shares to JGB in
accordance with the parties’ agreements constituted an “Event of
Default” that destroyed any contractual obligation on the part
Sellas also claims, as an alternative to its breach of contract
claims, that mutual mistake occurred and asks the court to
reform the May 2017 Amendment. Because Sellas’s interpretation
of the contract prevails, it is unnecessary to address this
claim.
12
30
of JGB to consent to release of the cash collateral.
Because
Sellas’s interpretation of the contract prevails, its April 2,
2018 letter stating that it would no longer accept the
unadjusted share price and its subsequent refusals to issue
redemptions using an unadjusted Hard Price Floor did not
constitute Events of Default.
Accordingly, JGB and JGB
Collateral’s motion to dismiss Sellas’s collateral account
breach of contract claim is denied.
II.
Fraud Claims
The defendants seek to dismiss JGB’s claim for fraudulent
omission under § 10(b) and for New York common law fraud for
failure to state a claim.
This motion will be granted.
To state a claim under § 10(b) of the Securities Exchange
Act, “a plaintiff must allege ‘(1) a material misrepresentation
or omission by the defendant; (2) scienter; (3) a connection
between the misrepresentation or omission and the purchase or
sale of a security; (4) reliance upon the misrepresentation or
omission; (5) economic loss; and (6) loss causation.’”
Charles
Schwab Corp. v. Bank of Am. Corp., 883 F.3d 68, 92 (2d Cir.
2018) (citing Halliburton Co. v. Erica P. John Fund, Inc., 573
U.S. 258, 134 S. Ct. 2398, 2407 (2014)).
“[A]n omission is
actionable under the securities laws only when the corporation
is subject to a duty to disclose the omitted facts.”
Stratte-
McClure v. Morgan Stanley, 776 F.3d 94, 101 (2d Cir. 2015)
31
(citation omitted).
“Such a duty may arise when there is a
corporate insider trading on confidential information, a statute
or regulation requiring disclosure, or a corporate statement
that would otherwise be inaccurate, incomplete, or misleading.”
Id. (citation omitted).
To meet the scienter requirement under
the PSLRA, a plaintiff must “state with particularity facts
giving rise to a strong inference that the defendant acted with
the required state of mind.”
15 U.S.C. § 78u–4(b)(2)(A).
A
plaintiff cannot meet this requirement by merely “set[ting] out
facts from which, if true, a reasonable person could infer that
the defendant acted with the required intent.”
In re Advanced
Battery Techs., Inc., 781 F.3d 638, 644 (2d Cir. 2015) (citation
omitted).
Rather, “[t]he inference of scienter must be cogent
and at least as compelling as any opposing inference one could
draw from the facts alleged.”
Id. (citation omitted).
“The
requisite scienter can be established by alleging facts to show
either (1) that defendants had the motive and opportunity to
commit fraud, or (2) strong circumstantial evidence of conscious
misbehavior or recklessness.”
ECA, Local 134 IBEW Joint Pension
Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 198 (2d
Cir. 2009) (citation omitted).
In order to have standing to bring a private cause of
action under § 10(b), the plaintiff must be an actual purchaser
or seller of a security.
“[P]otential purchasers of shares . .
32
. who allege that they decided not to purchase because of an
unduly gloomy representation or the omission of favorable
material” lack standing under § 10(b).
Blue Chip Stamps v.
Manor Drug Stores, 421 U.S. 723, 737 (1975).
But, “plaintiffs
who have contractual rights or duties to purchase or sell
securities could also maintain an action under § 10(b).”
Lawrence v. Cohn, 325 F.3d 141, 148 (2d Cir. 2003).
See also
Mallis v. FDIC, 568 F.2d 824, 829 (2d Cir. 1977) (finding that
pledgee of stock in loan contract had standing as a “purchaser”
under § 10(b)).
“Although the burden on a securities plaintiff
to plead loss causation is not a heavy one, the complaint still
must give some indication of a plausible causal link between the
loss and the alleged fraud.”
Charles Schwab Corp., 883 F.3d at
93 (citation omitted).
To state a claim for New York common law fraud, a plaintiff
must allege “(1) a material misrepresentation or omission of a
fact, (2) knowledge of that fact's falsity, (3) an intent to
induce reliance, (4) justifiable reliance by the plaintiff, and
(5) damages.”
Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo
Sec., LLC, 797 F.3d 160, 170 (2d Cir. 2015).
The defendants argue that JGB’s claims under § 10(b) should
be dismissed because they have failed to adequately plead an
actionable omission, they do not have the purchaser or seller
standing required by the statute, they have failed to adequately
33
plead scienter, and they have not adequately alleged loss
causation.
For many of the same reasons, the defendants also
seek to dismiss JGB’s common law fraud claims.
The defendants
additionally argue that the common law fraud claims are barred
by New York’s out-of-pocket loss rule.
JGB’s allegations of fraud under both the Securities
Exchange Act and New York common law must be dismissed because
the FAC fails to plausibly allege that the allegedly fraudulent
acts of Sellas caused JGB any losses.
In its fourth and sixth
claims for relief, JGB alleges that the defendants fraudulently
omitted information regarding the upcoming announcement of its
clinical trial results in its statements to JGB surrounding
offers to buy JGB out of the Debenture.
JGB contends that this
prevented JGB from trading Sellas stock from March 7 to March 9,
2018, and buying Sellas stock during that period at a
comparatively low price.
Accordingly, they did not realize
benefits from this unpurchased stock when the stock price
increased on April 2, 2018, once the clinical trial results were
announced.
JGB does not explain in its FAC, however, how this
two-day market restriction almost a month prior to the spike in
stock value caused any particular loss.
Moreover, even if the two-day market restriction had caused
losses for JGB, JGB cannot show that, had Sellas disclosed nonpublic information to it about its upcoming clinical trials
34
announcement, it could have entered the market and traded Sellas
stock.
Had Sellas informed JGB in early March about the
upcoming clinical trial announcement to occur in early April,
which was non-public information, trading restrictions would
have applied to JGB.
Thus, JGB has not adequately alleged a
connection between the allegedly fraudulent omission of
information about the clinical trial results and subsequent
unrealized gains.
In its briefing, JGB puts forward a different theory of
causation.
JGB argues that loss causation exists because the
allegedly deceptive communications prevented JGB from trading or
redeeming Sellas stock for several days, which in turn allowed
Sellas to “maintain an artificially inflated stock price for
itself and . . . fewer shares for JGB in its next redemptions.”
JGB argues that this furthered the defendants’ broader goal of
avoiding dilution of Sellas stock before and after its April 2
clinical trial announcement.
In other words, JGB argues that,
acting in bad faith, Sellas used a disclosure of non-public
information to JGB related to Sellas’s attempt to buy out the
Debenture to stall JGB’s stock redemptions.
But even if JGB’s
FAC could be read to encompass this allegation, which it cannot,
JGB still offers no explanation as to how two days of market
restrictions in March could have caused JGB’s alleged losses.
JGB delivered 67 total redemption notices to the defendants
35
between August 2016, when the Original Debenture was first
entered into, and April 2, 2018, the date of its 67th notice of
redemption.
While the FAC does not list the dates of each
redemption notice, given that 67 were noticed in over one-and-ahalf years, it is implausible, and most importantly not alleged,
that JGB was noticing redemptions in March 2018 at such a rate
that two days of exclusion would have altered its otherwise
normal course of business.
Elsewhere in the FAC, JGB alleges that Sellas’s delay of
five trading days (between its alleged April 2, 2018 refusal to
deliver shares requested in JGB’s Redemption Notice 67 unless
JGB acquiesced to Sellas’s proposed calculation and its April 9
delivery of those shares at JGB’s requested price, albeit with a
purported reservation of rights) deprived JGB of the opportunity
to trade Sellas stock at the record-high prices that followed
its April 2 clinical trial announcement.
This allegation is not
repeated under JGB’s two fraud causes of action.
Even assuming
that the FAC could be construed as alleging that this series of
events constitutes a violation of § 10(b) and common-law fraud,
again, JGB has failed to adequately allege loss causation.
Although the five-day delay could plausibly have caused JGB to
incur an unrealized gain, JGB does not articulate a connection
between any misrepresentation or omission and this delay.
36
Rather, JGB attributes the delay to the defendants’ repudiation
and breach of the Debenture.
III.
Control Person Claims
JGB also claims that the Sellas Officer and Director
defendants violated § 20(a) of the Securities Exchange Act, 15
U.S.C. §78t(a).
This section provides for derivative liability
against individuals or entities that control individuals who
violate the Securities Exchange Act.
See In re Vivendi, S.A.
Sec. Litig., 838 F.3d 223, 238 n.6 (2d Cir. 2016).
To state a
claim for relief under this section, a plaintiff must plead (1)
a primary violation and (2) direct or indirect control of the
primary violator by the defendant.
JGB’s control person claims
rely on the same allegations it stated in its fourth cause of
action for securities fraud to establish the required primary
violation.
Because JGB has failed to adequately state a
securities fraud claim, JGB’s fifth cause of action must also be
dismissed.
IV.
Implied Covenant of Good Faith and Fair Dealing
In the FAC JGB alleges that the defendants breached their
duty of good faith and fair dealing by depriving JGB of its
bargained-for benefits under the Debenture.
JGB alleges that
Sellas deprived it of these rights through its refusal to honor
JGB’s redemptions per the terms of the Debenture.
37
“New York law implies [the] covenant [of good faith and
fair dealing] in all contracts.”
Sec. Plans, Inc. v. CUNA Mut.
Ins. Soc., 769 F.3d 807, 817 (2d Cir. 2014).
“The implied
covenant of good faith and fair dealing between parties to a
contract embraces a pledge that neither party shall do anything
which will have the effect of destroying or injuring the right
of the other party to receive the fruits of the contract.”
Moran v. Erk, 11 N.Y.3d 452, 456 (2008) (citation omitted).
For
the implied covenant of good faith and fair dealing to apply,
a party's action must directly violate an obligation
that may be presumed to have been intended by the
parties. However, the implied covenant does not
extend so far as to undermine a party's general right
to act on its own interests in a way that may
incidentally lessen the other party's anticipated
fruits from the contract.
Thyroff v. Nationwide Mut. Ins. Co., 460 F.3d 400, 407-08 (2d
Cir.), certified question accepted, 7 N.Y.3d 837 (2006), and
certified question answered, 8 N.Y.3d 283 (2007) (citation
omitted). ”[W]hen a complaint alleges both a breach of contract
and a breach of the implied covenant of good faith and fair
dealing based on the same facts, the latter claim should be
dismissed as redundant.”
Cruz v. FXDirectDealer, LLC, 720 F.3d
115, 125 (2d Cir. 2013).
JGB’s allegations in its FAC that Sellas breached the duty
of good faith and fair dealing by refusing to honor JGB’s
redemption rights arise from the same facts at issue in its
38
breach of contract claims and, as such, must be dismissed as
redundant.
In briefing, JGB narrows its duty of good faith and
fair dealing claim to exclude these duplicative allegations. 13
But its remaining, narrowed claim also fails.
The FAC asserts that the defendants’ attempt to buy JGB out
of its Debenture rights on fraudulent grounds -- to wit, their
failure to disclose the clinical trial results -- constitutes a
breach of the duty of good faith and fair dealing.
While this
claim is distinct from JGB’s breach of contract claim, it
asserts little more than that the plaintiffs acted in their own
interest in a way that incidentally may have diminished the
value of JGB’s contractual rights.
The parties’ agreements
continually state that JGB will not be in possession of material
non-public information, and it was not a violation of either the
Debenture or the duty of good faith and fair dealing to withhold
such information from JGB.
Moreover, the FAC alleges only that
the defendants sought to induce JGB to give up its rights but
does not allege any actual loss based on this behavior.
In its briefing, JGB argues that its claim for breach of the
covenant of good faith and fair dealing is also based on the
defendants’ allegedly fraudulent scheme to manipulate its share
price in February and March 2018 in order to maintain an
artificially high stock price and reduce the number of shares
JGB could redeem. Such a scheme is not clearly alleged in the
FAC and is certainly not mentioned under this claim for relief.
13
39
V.
Unjust Enrichment
JGB alleges unjust enrichment against Sellas for benefiting
from retaining shares and their equivalent value in violation of
its duties under the Debenture.
Sellas also brings a
counterclaim for unjust enrichment against JGB Capital Offshore,
JGB Partners, and JGB Capital for receiving and selling shares
of Sellas beyond that to which they were entitled.
The motions
to dismiss the unjust enrichment claims are granted.
To state an unjust enrichment claim under New York law, the
plaintiff must allege that “(1) the other party was enriched,
(2) at that party's expense, and (3) that it is against equity
and good conscience to permit the other party to retain what is
sought to be recovered.”
Georgia Malone & Co. v. Rieder, 19
N.Y.3d 511, 516 (2012) (citation omitted).
For the defendant to
be enriched at the plaintiff’s expense, “[i]t is not enough that
the defendant received a benefit from the activities of the
plaintiff; if services were performed at the behest of someone
other than the defendant, the plaintiff must look to that person
for recovery.”
Kagan v. K-Tel Entm't, Inc., 568 N.Y.S.2d 756,
757 (1st Dep’t 1991).
Unjust enrichment claims apply “only in
unusual situations” such as “those in which the defendant,
though guilty of no wrongdoing, has received money to which he
or she is not entitled.”
N.Y.3d 777, 790 (2012).
Corsello v. Verizon New York, Inc., 18
Recovery under a theory of unjust
40
enrichment ordinarily is unavailable where a valid contract
governs the same subject matter.
U.S. E. Telecomms., Inc. v.
U.S. W. Commc'ns Servs., Inc., 38 F.3d 1289, 1296 (2d Cir.
1994).
“The theory of unjust enrichment lies as a quasi-
contract claim.
It is an obligation the law creates in the
absence of any agreement.”
Beth Israel Med. Ctr. v. Horizon
Blue Cross & Blue Shield of New Jersey, Inc., 448 F.3d 573, 586
(2d Cir. 2006) (citation omitted).
JGB’s claim for unjust enrichment is rooted in the contract
dispute between the parties.
In its FAC, JGB alleges that since
April 2, 2018, Sellas has “failed to deliver shares to which JGB
was entitled under the Debenture Agreements” and that it
“benefitted by retaining the shares and equivalent value in
violation of its duty to deliver shares under the Debenture
Agreements.”
Any windfall that JGB claims Sellas derived from
its refusal or delay in delivering shares for the April 2, 2018
redemption would be remedied through its breach of contract
claim and therefore cannot form the basis of an unjust
enrichment claim.
In briefing, JGB characterizes its unjust enrichment claim
as based on defendants’ “scheme to cheat JGB out of its
redemption rights,” thus “propping up SLS’s stock price to SLS’s
benefit.”
This formulation does not successfully distinguish
the unjust enrichment claim from the breach of contract claim.
41
The most generous interpretation of JGB’s unjust enrichment
claim is as an allegation that Sellas’s various actions between
February and April 2018 caused JGB to receive fewer redemptions
under the Debenture than it otherwise would have and that this,
in turn, benefited Sellas at JGB’s expense.
The only facts
alleged in the FAC that go to the allegation that Sellas limited
JGB’s redemptions is the two-day market restriction that JGB
agreed to as part of one of Sellas’s offers to buy JGB out of
the Debenture and the allegation that Sellas’s April 2, 2018
notice that it would no longer issue shares based on the
unadjusted Hard Price Floor prevented JGB from “hav[ing] the
opportunity to send SLS redemption notices” for additional
shares.
The market restriction cannot support a claim for
unjust enrichment because, as discussed above, JGB fails to
adequately connect this two-day restriction to any slow-down in
JGB’s redemption rates.
Moreover, JGB’s FAC concedes that
throughout the buyout discussions between the parties “JGB
continued to deliver redemption notices to SLS as and when
appropriate under the Debenture Agreements, which SLS continued
to fulfill.”
The allegation that Sellas’s repudiation of the
Hard Price Floor calculation prevented JGB from redeeming its
shares is not plausible.
JGB’s eighth claim for unjust
enrichment must therefore be dismissed.
42
While Sellas’s counterclaim for unjust enrichment also
involves the same subject matter, it argues that it is not
precluded by the contract dispute because the parties against
whom the unjust enrichment counterclaim is alleged are not
parties to any contract with Sellas.
unavailing.
This argument is
The crux of the Sellas unjust enrichment
counterclaim is that the counterclaim defendants were unjustly
enriched because they received more shares of Sellas stock than
JGB was entitled to under the Debenture.
Resolution of the
contract dispute at issue in this case between Sellas and JGB
will necessarily resolve the issue of whether the JGB affiliated
counterclaim defendants unfairly benefitted.
For this reason
Sellas’s seventh counterclaim must also be dismissed for failure
to state a claim. 14
JGB also alleges that the Court does not have personal
jurisdiction over the JGB affiliated counterclaim defendants.
“Where, as here, a district court ... relies on the pleadings
and affidavits, and chooses not to conduct a full-blown
evidentiary hearing, plaintiffs need only make a prima
facie showing of personal jurisdiction.” Southern New England
Telephone Co. v. Global NAPs Inc., 624 F.3d 123, 138 (2d Cir.
2010) (citation omitted). “This showing may be made through the
plaintiff's own affidavits and supporting materials, containing
an averment of facts that, if credited, would suffice to
establish jurisdiction over the defendant.” Id. (citation
omitted). For the purposes of a motion to dismiss, Sellas has
adequately alleged that this Court has personal jurisdiction
over these JGB affiliated counterclaim defendants. Regardless,
the claim must be dismissed under Rule 12(b)(6).
14
43
VI.
Conversion
Both JGB and Sellas make conversion claims.
JGB alleges
that Sellas unlawfully retained shares of Sellas stock to which
JGB was entitled and refused JGB’s demands for delivery of that
stock.
Sellas alleges that JGB and JGB Collateral have retained
approximately $1.55 million in cash that belongs to Sellas by
refusing to permit this cash to be released from the Collateral
Account.
To state a claim of conversion, a plaintiff must allege
that “a defendant exercise[d] unauthorized dominion over
personal property in interference with a plaintiff's legal title
or superior right of possession.”
LoPresti v. Terwilliger, 126
F.3d 34, 41 (2d Cir. 1997) (citation omitted).
“[A] claim to
recover damages for conversion cannot be predicated on a mere
breach of contract.”
Wolf v. Nat'l Council of Young Israel, 694
N.Y.S.2d 424, 425 (2d Dep't 1999).
While intangible property is
often not considered “personal property” for purposes of a
conversion claim, under New York law, shares of stock “merge
with the stock certificates, so that conversion of the
certificate may be treated as conversion of the shares that the
certificate represents.”
Thyroff, 460 F.3d at 405.
JGB’s conversion claim must be dismissed because it is
entirely predicated on the allegation that Sellas breached the
parties’ contract by failing to issue JGB shares as required
44
under their agreement.
For the same reason, Sellas’s conversion
claim must also be dismissed.
Sellas’s conversion claim is
based on JGB and JGB Collateral’s contractual obligation to
release cash from the Collateral Account as Sellas fulfills
JGB’s redemption requests.
The allegations underlying this
claim are thus identical to Sellas’s Collateral Account contract
claim.
VII. Motion to Strike Paragraphs 9 and 72 of the FAC
Sellas also moves to strike two paragraphs from JGB’s FAC.
Both paragraphs refer to an administrative consent order between
the Securities and Exchange Commission (“SEC”) and Sellas’s
predecessor, Galena, and Galena’s former CEO.
Under Fed. R.
Civ. P. 12(f), courts “may strike from a pleading an
insufficient defense or any redundant, immaterial, impertinent,
or scandalous matter.”
Fed. R. Civ. P. 12.
to strike are disfavored.
Rule 12(f) motions
“The function of a 12(f) motion to
strike has been seen as avoiding the expenditure of time and
money that must arise from litigating spurious issues by
dispensing with those issues prior to trial.”
VNB Realty, Inc.
v. Bank of Am. Corp., No. 11cv6805 (DLC), 2013 WL 5179197, at *2
(S.D.N.Y. Sept. 16, 2013) (citation omitted).
Motions to strike
under Rule 12(f) “should be denied unless the challenged
allegations have no possible relation or logical connection to
the subject matter of the controversy and may cause some form of
45
significant prejudice to one or more of the parties to the
action.”
Id. at *3 (citation omitted).
The paragraphs at issue in the FAC are used by JGB to
bolster its claim that Sellas has committed fraud under the
Securities Exchange Act.
JGB claims that Sellas’s allegedly
fraudulent acts also violate the terms of the consent order
between Galena and the SEC, which required Galena to cease
violating securities laws.
Because JGB’s fraud claims have
already been dismissed, striking these paragraphs, which only
support those claims, will not serve the underlying purpose of
Rule 12(f).
Regardless, Sellas cannot meet the high burden of
showing that these paragraphs have no logical connection to the
dispute.
The paragraphs discuss past fraudulent securities
practices of Sellas’s predecessor company, a topic that is
plausibly related to the controversy at hand.
Sellas also makes
no claim that these paragraphs cause it prejudice.
The cease-
and-desist order referenced in the paragraphs is available on
the SEC’s website.
Because Sellas has not shown that the
paragraphs cause it any prejudice and because striking them will
not serve any efficiency purpose, Sellas’s motion to strike
paragraphs 9 and 72 from the FAC is denied.
46
Conclusion
JGB’s July 6, 2018 motion for partial judgment on its own
claims is denied.
JGB and all counterclaim defendants’ motion
to dismiss is denied as to Sellas’s counterclaims one through
four and granted as to Sellas’s counterclaims five through seven
for mutual mistake, conversion, and unjust enrichment.
Sellas’s June 18, 2018 motion for judgment on the pleadings
seeking dismissal of JGB’s FAC and all other defendants’ motion
to dismiss the FAC are granted in full.
Sellas and all other
defendants’ motion to strike paragraphs 9 and 72 from the FAC is
denied.
This resolution of the pending motions leaves four
counterclaims brought by Sellas for trial.
They are (1)
declaratory judgment against JGB that the Hard Price Floor
adjusted to $10.50 after the reverse stock split; (2)
declaratory judgment against JGB and JGB Collateral requiring
the JGB entities to deliver cash collateral owed to Sellas; (3)
breach of contract against JGB for return of the excess shares
it delivered while using the $0.35 Hard Price Floor; and (4)
breach of contract against JGB and JGB Collateral for release of
funds held in the Collateral Account.
In light of this
Opinion’s resolution of the core contract dispute, the parties
47
shall advise the Court by Thursday, October 25, 2018, whether a
trial is necessary on the four outstanding claims.
Dated:
New York, New York
October 23, 2018
___________________________
DENISE COTE
United States District Judge
48
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?