STSG, LLC v. Intralytix, Inc. et al

Filing 57

MEMORANDUM AND ORDER: re: 47 MOTION for Leave to File First Amended Complaint filed by STSG, LLC. Upon Consideration of the proposed amendments and the parties' arguments on their futility, plaintiff's motion for leave to amend the comp laint is granted as to Counts III, VI, VII, VIII and IX; granted in part as to Count V; and denied as to Counts II and IV of the proposed amended complaint. Plaintiff is directed to file an amended complaint consistent with this opinion in fourteen (14) days. This Memorandum and Order resolves ECF Docket Entry No. 47. SO ORDERED. (Signed by Judge Naomi Reice Buchwald on 12/10/2019) (ama)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
--------------------------------------X
STSG, LLC,
Plaintiff,
MEMORANDUM AND ORDER
- against 18 Civ. 5569 (NRB)
INTRALYTIX, INC., LYC HOLDINGS INC.,
and JOHN J. WOLOSZYN,
Defendants.
--------------------------------------X
NAOMI REICE BUCHWALD
UNITED STATES DISTRICT JUDGE

The Court previously denied without prejudice the defendants’
motion

to

dismiss

the

complaint,

following

the

defendants’

concession at oral argument—contrary to their prior position—that
plaintiff had some rights to information and inspection under the
agreement governing the loan between the parties.
plaintiff

exercised

defendants.

those

rights

and

received

Subsequently,
documents

from

Based on information plaintiff obtained from those

documents, plaintiff now moves for leave to amend its complaint.
For the following reasons, the plaintiff’s motion is granted in
part and denied in part.

I.
A.

Background 1

STSG’s Loan to Intralytix

This litigation has its genesis in

a series of agreements

(“Agreements”) that plaintiff STSG, LLC (“STSG”) and defendant
Intralytix, Inc. (“Intralytix”) entered in 2003 to memorialize a
loan of $1 million by STSG to Intralytix.
No. 47-2) ¶ 24.

Prop. Am. Compl. (ECF

Those agreements include the Master Agreement,

the Credit Agreement, and Convertible Promissory Note issued by
Intralytix to STSG.

Id.

At the time, STSG was an active venture

capital firm, and Intralytix was a start-up.

Id. at ¶ 4.

Under

the Agreements, the loan was initially due on April 30, 2006.
at ¶ 26.

Id.

As noted earlier, the Agreements provide STSG certain

information

and

inspection

rights.

Id.

at

¶¶ 28-35.

The

Agreements also placed a number of restrictions on Intralytix’s
activities,

including

prohibitions

of

making

distributions

to

equity holders, incurring additional debts, and transacting with
its affiliates.

Id. at ¶¶ 36-38.

Section 7 of the Credit Agreement provides STSG with two
distinct rights to convert its loan into Intralytix Class A Common
Stock. Id. at ¶ 40. One of the two rights, defined as the “Initial

1

The Court’s inquiry in resolving this motion centers on futility,
which in turn resembles an inquiry for a motion to dismiss pursuant to Federal
Rule of Civil Procedure 12(b)(6). Dougherty v. Town of N. Hempstead Bd. of
Zoning Appeals, 282 F. 3d 83, 88 (2d Cir. 2002).
Therefore, the Court, in
resolving this motion, “accept[s] as true all factual allegations in the
[proposed amended] complaint and draw[s] all reasonable inferences in favor of
plaintiff[].” City of Providence v. BATS Glob. Mkts., Inc., 878 F.3d 36, 48
(2d Cir. 2017).

2

Conversion Option,” allows STSG to convert the outstanding loan
balance into Intralytix Series A Common Stock at $36.45 per share.
Id.

Section 7.2 provides that this Option expires on the earlier

of October 30, 2004 or Intralytix engaging in a private equity
financing. Id. The other right, defined as the “Second Conversion
Right,” allows STSG to convert its loan balance into equity in
Intralytix

if

Intralytix

raises

$3

million

or

more

in

gross

proceeds through a single private equity financing transaction.
Id.

The price adopted in that financing determines the strike

price of the Second Conversion Right.
B.

Id.

Transfer of Senior Loan to Meyerflyer

In around April 2003, STSG also entered into an agreement
(“Subordination Agreement”) with Ecolab Finance Inc. (“Ecolab”),
under which STSG consented to subordinate its loan to Intralytix
to Ecolab’s loan to Intralytix (“Senior Loan”).

Id. at ¶¶ 5, 24.

In around December 2008, Ecolab sold the Senior Loan to Meyerflyer,
LLC (“Meyerflyer”) for $225,000.

Id. at ¶ 47.

The Second Amended

and Restated Promissory Note governing the Senior Loan as held by
Meyerflyer indicates that the principal of $225,000 and accrued
interest were due on June 30, 2010.
C.
STSG

Id.

Highflyer Transaction
learned

through

this

litigation

that

Meyerflyer

transferred the Senior Loan to another entity, called Highflyer,
LLC (“Highflyer”).

Id. at ¶ 52.

In their brief in support of the
3

motion to dismiss the original complaint, defendants stated that
the Senior Loan was then currently held by Highflyer, an entity
that

is

owned

including

and

defendant

Intralytix.

Id.

managed

by

Woloszyn,

several
the

Chief

Intralytix
Executive

affiliates,
Officer

of

STSG’s further investigation has revealed that

the SEC Form D filed by Highflyer for an exempt offering of
securities was signed by Woloszyn as a manager of Highflyer.

Id.

at ¶ 54.
The Third Amended and Restated Promissory Note governing the
Senior Loan as held by Highflyer indicates that Intralytix owed
$334,407 to Highflyer.

Id. at ¶ 58.

Sulakvelidze, a Director and

Corporate Secretary of Intralytix, signed the Note on behalf of
Highflyer.

Id. at ¶¶ 57-58.

Under this version of the Note, the

Senior Loan was due on the earliest of: (1) Intralytix raising $30
million in a single fundraising round of financing, (2) two-thirds
of Highflyer partners calling the Note, or (3) an occurrence of
Event of Default, as defined therein.

Id. at ¶ 62.

On June 1,

2017, Intralytix and Highflyer executed the Fourth Amended and
Restated Promissory Note, modifying the $30 million threshold to
$40 million.

Id. at ¶ 63.

On June 7, 2017, Intralytix and Highflyer entered into an
agreement (“Letter Agreement”), in which Highflyer expressed its
intent to convert the Senior Loan into Intralytix Class A Common
Stock

contingent

on

satisfaction

of
4

a

number

of

conditions,

including the settlement of STSG’s loan to Intralytix.

Id. at

¶ 65.
D.

Lesaffre Equity Financing

On or about May 31, 2017, LYC Holdings Inc. (“Lesaffre”)
acquired 3,390,093 shares of Intralytix Class A Common Stock at
$17.5 million.
acquired

Id. at ¶ 77.

represents

31.9%

The number of shares Lesaffre

ownership

in

Intralytix.

Id.

In

preparation of this transaction, Intralytix and Lesaffre entered
into a non-disclosure agreement in January 2017 (“Non-Disclosure
Agreement”), and Lesaffre thereafter conducted a due diligence
review of Intralytix.

Id. at ¶ 75.

The SEC Form D filed by Intralytix in connection with this
transaction indicates that $1,881,733 of the proceeds would be
paid to Intralytix officers and directors.
particular,

the

Disclosure

Schedule

of

Id. at ¶ 78.
the

Stock

In

Purchase

Agreement between Intralytix and Lesaffre indicates that, upon
closing of the transaction, certain amounts would be paid to
Woloszyn,

Sulakvelidze

and

another

Intralytix

Director

in

satisfaction of the loans they made to Intralytix in their personal
capacities.

Id. at ¶¶ 79-80.

A portion of the planned payment to

Sulakvelidze was for redemption of 100,000 shares of Intralytix
Class A Common Stock he owned.

Id. at ¶ 79.

Intralytix used some

additional amount of the proceeds to pay a portion of the “accrued
salary” Intralytix owed to Woloszyn.
5

Id. at ¶ 120.

On May 31, 2017, Intralytix, Lesaffre and certain Intralytix
shareholders—including Woloszyn and Sulakvelidze—entered into an
agreement entitled “Investors’ Rights Agreement,” which governs
the rights of Intralytix shareholders.

Id. at ¶ 95.

Section 5.1

of this Agreement provides Lesaffre a right to acquire Intralytix’s
Intellectual Property, as defined therein, at fair market value
upon dissolution or liquidation of Intralytix as long as Lesaffre
is holding a certain amount of Intralytix stock.

Id. at ¶ 96;

Id., Ex. 22, § 5.1.
E.

History of Disputes Between the Parties

STSG learned about the Lesaffre transaction in July 2017 when
Intralytix publicly announced it.

Id. at ¶ 101.

On October 10

and November 10, 2017, STSG sent letters to Intralytix, asserting
that Intralytix had breached certain provisions of the Credit
Agreement and asking Intralytix to produce certain documents in
exercise of its information and inspection rights.

Id. at ¶ 103.

Although Woloszyn initially suggested that Intralytix would honor
STSG’s document demands, Intralytix eventually rejected them on
December 15, 2017.

Id. at ¶¶ 105-06.

STSG commenced this litigation by filing a complaint on June
20, 2018.

See ECF No. 1.

dismiss the complaint.

On August 17, 2018, defendants moved to
See ECF No. 17.

argument on the motion on March 7, 2019.

The Court heard oral
See ECF No. 38.

During

oral argument, defendants retreated from their prior position and
6

conceded that STSG was entitled to financial information for
Intralytix under the Agreements.
on

this

concession,

the

Id. (Oral Arg. Tr.) at 20.

Court

denied

without

Based

prejudice

the

defendants’ motion to dismiss the complaint on March 19, 2019,
reasoning that exercise of plaintiff’s information and inspection
rights

foreseeably

would

alter

plaintiff could properly plead.

the

universe

of

allegations

See ECF No. 37.

Following oral argument, on March 14, 2019, STSG exercised
its information and inspection rights.

Prop. Am. Compl. ¶ 126.

In response to STSG’s demands, Intralytix provided some documents
but refused to provide others, such as detailed capitalization
tables,
Lesaffre

due

diligence

transaction,

requests
and

and

responses

documents

relating

transactions with Meyerflyer and Highflyer.

concerning
to

the

Intralytix’s

Id. at ¶ 126.

On June 19, 2019, STSG sent a letter to Intralytix, exercising
its conversion rights under the Credit Agreement and requesting
$250,000 of the outstanding balance of its loan be converted into
48,430 shares of Intralytix Class A Common Stock upon the same
terms

and

conditions

provided

to

Lesaffre.

Id.

at

¶ 131.

Intralytix denied the STSG’s conversion request on June 25, 2019.
Id. at ¶ 133.

In its denial letter, Intralytix asserted that

STSG’s Second Conversion Right lapsed on October 30, 2004 when the
Initial Conversion Option lapsed because the Second Conversion
Right could only be exercised “in lieu of the Initial Conversion
7

Option.”

Id. at ¶ 133.

As an alternative ground for denial,

Intralytix also asserted that, even if STSG retained any conversion
rights after October 30, 2004, the Credit Agreement did not allow
conversion of only a portion of the loan.
F.

Id., Ex. 27, at 2.

Proposed Amendments to Complaint

On September 13, 2019, plaintiff filed this motion for leave
to amend its complaint.

See ECF No. 47.

following

(1)

amendments:

to

Plaintiff proposes the

include

additional

factual

allegations and detail; (2) to assert tortious interference claims
against
Highflyer

defendant
and

his

Woloszyn
receipt

based
of

on

his

Intralytix’s

conduct

involving

payments

with

the

proceeds from the Lesaffre transaction; (3) to seek an order
requiring specific performance by Intralytix of STSG’s conversion
demand; (4) to seek a declaratory judgment on the STSG’s conversion
rights; and (5) to assert a claim for the attorneys’ fees and
expenses incurred in connection with this litigation pursuant to
Section 3.4(c) of the Security Agreement.

II.
A.

See ECF No. 47-2.

Discussion

Legal Standard

Federal Rule of Civil Procedure 15(a)(2) provides that the
court “should freely give leave when justice so requires.” Whether
to grant leave, however, is ultimately “within the sound discretion
of the district court.”

McCarthy v. Dun & Bradstreet Corp., 482
8

F.3d 184, 200 (2d Cir. 2007).

“A district court has discretion to

deny leave for good reason, including futility, bad faith, undue
delay, or undue prejudice to the opposing party.”

Id.

In opposing

this motion, defendants do not argue that the proposed amendments
are the product of bad faith or undue delay, nor do defendants
suggest that granting the motion would cause them undue prejudice.
The Court agrees.

Instead, defendants argue, and this opinion

addresses, whether granting plaintiff leave to amend would be
futile.
Because futility of the proposed amendments is evaluated
under Rule 12(b)(6) standard, a motion for leave to amend may be
denied if plaintiff fails to allege “enough facts to state a claim
for relief that is plausible on its face.”
Twombly, 550 U.S. 544, 547 (2007).

Bell Atlantic Corp. v.

However, “a proposed claim may

be found futile only where it is clearly frivolous or legally
insufficient on its face.”
v.

Circle

Line-Statute

of

Circle Line Sightseeing Yachts, Inc.
Liberty

Ferry,

Inc.,

9788(NRB), 2003 WL 253094, at *1 (S.D.N.Y. 2003).

No.

01

Civ.

As the parties

opposing this motion for leave to amend, “[d]efendants bear the
burden of demonstrating futility.”

Am. Fed. of State County and

Mun. Employees Dist. Council 37 Health & Sec. Plan v. BristolMyers Squibb Co., No. 12 Civ. 2238(JPO), 2013 WL 6409323, at *3
(S.D.N.Y. Dec. 9, 2013).

9

B.

Analysis

Defendants argue that the proposed amendments would be futile
on two grounds: (1) the Subordination Agreement precludes the
proposed claims; and (2) only plaintiff’s breach of contract claim
is adequately pled.
1.

The Court addresses each ground in turn.

Subordination Agreement

Defendants

first

futile because,

while

argue
each

that
of

the

proposed

STSG’s

claims

amendments
is

based

are

either

directly or indirectly on the Intralytix’s alleged failure to repay
the STSG’s loan, the Subordination Agreement prohibits Intralytix
from repaying the STSG’s loan as long as any amount of the Senior
Loan remains outstanding.

See Defs.’ Opp’n at 6; 7 n.4.

The Court agrees with defendants that, under Section 3(a) of
the Subordination Agreement, Intralytix is prohibited from making
any payment to STSG as long as any amount of the Senior Loan
remains outstanding. 2

See ECF No. 47-10, § 3(a).

Instead of

disputing this proposition, plaintiff maintains that the Senior
Loan was paid off in 2014 when Highflyer acquired the Senior Loan
from

Meyerflyer.

Pl.’s

Mem.

of

Law

(ECF

No.

56)

at

3.

Specifically, plaintiff posits that Highflyer was a sham entity
operated by Intralytix affiliates and, therefore, its acquisition

2
In evaluating the Intralytix’s interpretation of the Subordination
Agreement, the Court applies Minnesota law pursuant to the choice-of-law clause
therein. See ECF No. 47-10, § 11(a). Therefore, its terms are given their
plain meaning because the parties do not dispute that there is no issue of
ambiguity. Metro. Airports Comm’n v. Noble, 763 N.W.2d 639, 645 (Minn. 2009).

10

of the Senior Loan from Meyerflyer should be regarded as a buyout of the Senior Loan by Intralytix, rendering the Senior Loan
effectively repaid.

Id.

Defendants have failed to show the

futility of this effort by plaintiff to disregard the corporate
formality of Highflyer.

Moreover, the question of whether to

disregard the corporate formality would inevitably entail a factintensive

inquiry

litigation.

that

is

not

resolvable

at

this

stage

of

Therefore, the Court rejects the defendants’ claim of

futility based on the Subordination Agreement.
2.

Adequacy of Pleading

Having rejected the defendants’ over-arching defense, we now
turn

to

a

claim-by-claim

analysis

of

plaintiff’s proposed amended complaint.

the

sufficiency

of

the

Defendants argue that

plaintiff fails to adequately plead its claims in Counts II through
IX.

The Court addresses each Count in turn.
a) Count II: Breach of Implied Covenant of Good
Faith and Fair Dealing Claim against Intralytix
Defendants maintain that Count II of the proposed amended

complaint is futile because it is duplicative of the breach of
contract claim asserted in Count I.

The Court agrees.

A good faith and fair dealing claim should be dismissed as
duplicative of a breach of contract claim if “both claims arise
from the same facts and seek the identical damages for each alleged
breach.”

Amcan Holdings, Inc. v. Canadian Imperial Bank of Com.,

11

894 N.Y.S.2d 47, 50 (N.Y. App. Div. 1st Dep’t 2010)(internal
citations omitted).

“[T]o assert a cause of action for the breach

of good faith and fair dealing that is not duplicative of [a]
breach

of

[d]efendants

contract
fulfilled

claim,
their

[plaintiff]
contractual

must

allege

obligations

but

that
that

those obligations were carried out in bad faith in order to deprive
[plaintiff] of the benefit of [its] bargain.”

Joseph v. Gnutti

Carlo S.p.A., No. 15 Civ. 8910(AJN), 2016 WL 4764924, at *7
(S.D.N.Y. Sept. 12, 2016)(internal quotations omitted).
The plaintiff’s breach of good faith and fair dealing claim
is

entirely

predicated

on

the

Intralytix’s

conduct

that

constitutes the basis of plaintiff’s breach of contract claim.
Also, in asserting the breach of good faith and fair dealing claim,
plaintiff alleges that “Intralytix has failed to perform things
necessary to carry out the purpose” of the Agreements, not that it
performed those things in bad faith.

Lastly, plaintiff seeks to

recover the same amount of damages under both claims.

Under the

circumstances, the plaintiff’s breach of good faith and fair
dealing claim is duplicative of its breach of contract claim. 3

3
Plaintiff’s argument that its breach of good faith and fair dealing
claim is in part based on inappropriate exercise of discretion by Intralytix is
without merit given the plaintiff’s failure to cite any contractual provision
granting Intralytix discretion.

12

b) Count III: Unjust Enrichment Claim against
Intralytix
In Count III of the proposed amended complaint, plaintiff
asserts an unjust enrichment claim against Intralytix.

Defendants

argue that this claim is also duplicative of the plaintiff’s breach
of contract claim.

The Court disagrees.

Under New York law, unjust enrichment claims are “available
only in unusual situations when, though the defendant has not
breached a contract nor committed a recognized tort, circumstances
create an equitable obligation running from the defendant to the
plaintiff.”
(N.Y. 2012).

Corsello v. Verizon N.Y., Inc., 944 N.Y.S.2d 732, 740
Although “[p]laintiffs may not ultimately recover

under both the breach of contract and unjust enrichment claims,
courts in this Circuit routinely allow [p]laintiffs to plead such
claims in the alternative.”

Transcience Corp. v. Big Time Toys,

LLC, 50 F. Supp. 3d 441, 452 (S.D.N.Y. 2014)(emphasis in original).
“A court may allow a breach of contract and an unjust enrichment
claim to proceed at the motion to dismiss stage when the validity
or scope of the contract is difficult to determine.”

U.S. Bank

Nat’l Assoc. v. BFPRU I, LLC, 230 F. Supp. 3d 253, 266 (S.D.N.Y.
2017).
Here, the parties disagree at least on the scope of the Senior
Loan holder’s authority to extend the maturity of Senior Loan under
the Subordination Agreement.

See Pl.’s Reply at 7;

13

Prop. Am.

Comp.

¶ 106.

Given

the

uncertainties

surrounding

the

Subordination Agreement and other related issues, plaintiff may
proceed with an unjust enrichment claim against Intralytix at this
stage of litigation.
c) Count IV: Tortious Interference with Contract
Claim against Lesaffre
In Count IV of the proposed amended complaint, plaintiff
alleges that Lesaffre tortiously interfered with the Agreements
between plaintiff and Intralytix in the course of negotiating and
executing the Lesaffre’s acquisition of Intralytix Common Stock
shares.
Under New York law, the elements of a tortious interference
with contract claim are: (1) the existence of a valid contract
between the plaintiff and a third party; (2) defendant’s knowledge
of that contract; (3) defendant’s intentional procurement of the
third-party’s breach of the contract without justification; (4)
actual breach of the contract; and (5) damages resulting therefrom.
Lama Holding Co. v. Smith Barney Inc., 668 N.E.2d 1370, 1375 (N.Y.
1996).

4

“New York law emphasizes the requirement that a tortious

interference with contract claimant establish that the defendant

4

In their motion papers, the parties have not discussed the choice
of law issue with respect to the tortious interference claims asserted in Counts
IV through VI of the proposed amended complaint. Defendants discussed these
claims under New York law, and plaintiff has not raised any objection as to the
defendants’ choice of law. Under the circumstances, the parties are deemed to
have acquiesced in the application of New York law to the evaluation of the
futility of these claims. See Michele Pommier Models, Inc. v. Men Women NY
Model Manag., Inc., 14 F. Supp. 2d 331, 335 n.2 (S.D.N.Y. 1998).

14

purposefully

intended

particular contract.”
2018)(citing

NBT

to

cause

a

contract

party

to

breach

a

Conte v. Emmons, 895 F.3d 168, 172 (2d Cir.

Bancorp

Inc.

N.E.2d 492, 495 (N.Y. 1996)).

v.

Fleet/Norstar

Fin.

Grp.¸664

Also, a plaintiff asserting a

tortious interference with contract claim must allege that “there
would not have been a breach but for the activities of defendants.”
Sharma v. Skaarup Ship Manag. Corp., 916 F.2d 820, 828 (2d Cir.
1990).
In asserting a tortious interference with contract claim
against

Lesaffre,

Intralytix

to

plaintiff

breach

alleges

four

that

provisions

of

Lesaffre
the

induced

Agreements:

(1) Section 4.1(e) of the Credit Agreement; (2) Section 2.5 of the
Credit Agreement and the STSG Convertible Promissory Note; (3) the
STSG’s Second Conversion Right; and (4) the Security Agreement.
The Court concludes that the proposed tortious interference with
contract claim against Lesaffre is futile on all four alleged
bases.
(1)

Credit Agreement Section 4.1(e)

Section 4.1(e) of the Credit Agreement requires Intralytix to
furnish STSG a “notice of the occurrence of any discussions . . .
relating

to

the

issuance

of

[new

securities],”

such

as

the

Intralytix common stock shares sold to Lesaffre. Plaintiff alleges
that Lesaffre intentionally caused Intralytix to breach Section
4.1(e) “by virtue of the Mutual Non-Disclosure Agreement” between
15

Intralytix and Lesaffre.
fundamentally flawed.

Prop. Am. Compl. ¶ 76.

This claim is

Lesaffre would not even have known of

Section 4.1(e) until after it signed the Non-Disclosure Agreement.
Id. at ¶ 75.

Moreover, plaintiff does not suggest that entering

into a non-disclosure agreement was in and of itself suspicious in
the

context

foreclose

of

an

Lesaffre

inference

transaction.
that

Lesaffre

These

circumstances

intended

to

procure

Intralytix’s breach of Credit Agreement Section 4.1(e) in entering
into

the

Non-Disclosure

Agreement

because

a

party

cannot

be

expected to intend to procure a breach of an agreement that it is
not aware of. 5
(2)
Credit Agreement Section 2.5
STSG’s Convertible Promissory Note

and

Plaintiff also assets that Lesaffre caused Intralytix to not
repay the plaintiff’s loan and thereby breach Section 2.5 of the
Credit Agreement and the Convertible Promissory Note Intralytix
issued to STSG.

However, in advancing this claim, plaintiff does

not refer to any specific action by Lesaffre.

Nor does the amended

complaint include any reference to the terms of the Lesaffre
transaction that precluded Intralytix from repaying the STSG’s

5

Plaintiff further argues that Lesaffre tortiously interfered with
Section 4.1(e) of the Credit Agreement by “colluding to keep STSG in the dark
concerning the Lesaffre-Intralytix discussions.”
Pl.’s Reply at 8.
This
argument fails because the proposed amended complaint does not include any
allegation about Lesaffre’s conduct after it became aware of the Credit
Agreement. Plaintiff cannot cure the defect in its pleading with a conclusory
allegation of collusion between Lesaffre and Intralytix.

16

loan.

Thus, plaintiff fails to allege any activity by Lesaffre,

“but for” which there would have been no breach.

Sharma, 916 F.2d

at 828.
Plaintiff argues that its allegation that Lesaffre is a thirdparty beneficiary of the Highflyer Letter Agreement to “induce”
the Lesaffre transaction cures this defect.

While the briefing

for this motion does not make clear why Lesaffre was made a thirdparty beneficiary of that Agreement, Lesaffre was not a party to
the Letter Agreement, see Prop. Am. Compl., Ex. 14, and plaintiff
fails to otherwise allege any involvement by Lesaffre in the
negotiation and execution of the Agreement. The Letter Agreement’s
designation of Lesaffre as a third-party beneficiary alone is
insufficient to sustain a claim of tortious interference with
contract.
(3)
Plaintiff

also

alleges

STSG’s Second Conversion Right
that

Lesaffre

improperly

caused

Intralytix to deny its request to convert $250,000 of its loan
into 48,430 shares of Intralytix Class A Common Stock and thereby
breach its Second Conversion Right.

Prop. Am. Compl. ¶¶ 131-32.

However, nowhere in the proposed amended complaint does plaintiff
allege any involvement of Lesaffre in this denial.

Apparently,

Intralytix denied the STSG’s request based on its interpretation
of the Credit Agreement and without reference to Lesaffre or any
agreement

between

Lesaffre

and

Intralytix.
17

Id.,

Ex.

27.

Therefore, the proposed tortious interference with contract claim
against Lesaffre based on Intralytix’s alleged breach of STSG’s
conversion right is futile. 6
(4)

Security Agreement

Lastly, plaintiff alleges that Lesaffre improperly caused
Intralytix to breach the Security Agreement “[b]y securing the
right to purchase Intralytix’s Intellectual Property in [the case
of a] Dissolution Event under the Investors’ Rights Agreement.”
Prop. Am. Compl. ¶ 96. According to plaintiff, granting this right
to Lesaffre constituted a breach of the Security Agreement because
“Intralytix irrevocably pledged, assigned to, and granted STSG a
security interest in all of Intralytix’s Intellectual Property and
any proceeds thereof” under the Agreement.

Id.

Regardless of

whether there was any breach by Intralytix in granting Lesaffre an
option on its intellectual properties, 7 the proposed tortious

6

The proposed amended complaint also includes a number of allegations
suggesting that the stock purchase agreement between Lesaffre and Intralytix,
the Investors Right Agreement and the Voting Agreement awarded Lesaffre a number
of rights, which STSG would not be awarded upon the conversion of its loan into
Intralytix common stock.
These allegations cannot constitute a basis of
tortious interference with contract claim because, as long as the conversion by
STSG has not taken place, there can be no breach yet of the Credit Agreement
Section 7.1, which provides that the STSG’s conversion pursuant to the Second
Conversion Right “shall be upon the terms and subject to the conditions
applicable to the Private Equity Sale.”
Plaintiff’s claim that Lesaffre improperly caused Intralytix to breach
the STSG’s Second Conversion Right “by requiring STSG to become a ‘party’ to
the Investors’ Rights Agreement as a condition precedent to exercising its
Conversion Rights,” Prop. Am. Compl. ¶ 96, fails for the same reason. Moreover,
requiring STSG to be bound by the Investors’ Rights Agreement may not constitute
a breach of the Credit Agreement Section 7.1 if Intralytix imposed the same
requirement on Lesaffre.
7
The Court notes, without holding, that granting a contingent right
to purchase intellectual properties is unlikely to amount to a grant of property
interest, which is required for a breach of the Security Agreement.
Under

18

interference with contract claim based on the alleged breach of
Security Agreement is futile because plaintiff fails to adequately
plead the damages element.
In Kronos, Inc. v. AVX Corp., a patent holder gave Corning a
nonexclusive license to produce capacitors under its patents.
N.Y.2d 90, 92 (N.Y. 1993).

81

Under the license, Corning was given

the “most favored licensee” status, meaning that, if more favorable
terms

were

subsequently

negotiated

between

the

licensor

and

another licensee, the licensor was required to offer Corning the
same terms.

Id.

In 1984, the assignee of the patent—which also

assumed the Corning license—entered a license agreement with the
defendant under terms more favorable to the licensee than the
Corning’s license.

Id. at 93.

Corning learned about this license

in 1987 and asked the assignee to renegotiate its license.

Id.

The assignee maintained that it had no obligation to renegotiate
the Corning license.

Id.

In arguing that the Corning’s tortious

interference with contract claim against the defendant had accrued
in 1984, the defendant proffered two theories of damages caused by
the

alleged

breach:

(1)

the

nominal

damages

presumed

for

a

contractual breach; and (2) the reduction in value of the Corning

Delaware law—which governs the Investors’ Rights Agreement pursuant to the
choice-of-law clause contained therein—an option holder’s rights are entirely
contractual without any interest in the underlying subject until the option is
exercised. See Reis v. Hazelett Strip-Casting Corp., 28 A.3d 442, 478 (Del.
Ch. 2011)(analyzing the nature of an option holder’s interest in the context of
securities options).

19

license

resulting

from

the

existence

of

a

license

with

more

favorable terms. Id. at 95. The New York Court of Appeals rejected
the first theory on the ground that Corning could not base its
claim of tortious breach by the defendant on the nominal damages
presumed for the alleged contractual breach by the assignee because
those two breaches were separate and distinct.

Id. at 96.

The

court also rejected the second theory, opining that the decline in
value of Corning license did not necessarily occur at the moment
the

assignee

and

the

defendant

merely

entered

the

license

agreement: until the assignee expressly declined to renegotiate
the terms in 1987, either they could have chosen not to follow
through on the license agreement or the assignee could have decided
to honor Corning’s “most favored licenses” status.

Id. at 97.

Here, plaintiff fails to allege any actual injury it has
suffered because of the option granted to Lesaffre.
option

awarded

to

Lesaffre

becomes

exercisable

In fact, the
only

after

a

“Dissolution Event,” as defined in the Investors’ Right Agreement,
takes place.
occurred yet.

Plaintiff does not allege that any such Event has
Having failed to adequately plead the damages

element, the proposed tortious interference with contract claim
against Lesaffre based on the alleged breach of Security Agreement
by Intralytix is futile.

20

d) Counts V and VI: Tortious Interference with
Contract Claim against Woloszyn
In Counts V and VI, plaintiff asserts tortious interference
with contract claims against Woloszyn, who has been an officer of
Intralytix throughout the relevant period.

Plaintiff claims that

Woloszyn tortiously interfered with the Agreements between STSG
and Intralytix by operating Intralytix in certain manners.
Under New York law, “a corporate officer who is charged with
inducing the breach of a contract between the corporation and a
third party is immune from liability if it appears that he is
acting in good faith as an officer and did not commit independent
torts or predatory acts against another.” Nahabedian v. Intercloud
Sys., Inc., No. 15 Civ. 669(RA), 2016 WL 155084, at *6 (S.D.N.Y.
Jan. 12, 2016).

“An exception applies, however, where the acts of

the defendant corporate officers which resulted in the tortious
interference with contract either were beyond the scope of their
employment or, if not, were motivated by their personal gain, as
distinguished from gain for the corporation.”

Id. (internal

quotations omitted).
In Count V, plaintiff claims that Woloszyn improperly induced
Intralytix to engage in the following conduct and thereby breach
the Agreements: (1) failing to repay the STSG’s loan; (2) failing
to notify STSG of Intralytix’s discussions about the Lesaffre
transaction; (3) incurring an additional debt from Woloszyn in his

21

personal

capacity;

and

inspection rights.

(4)

denying

STSG’s

information

and

Defendants argue that plaintiff fails to

adequately plead that Woloszyn was either acting beyond the scope
of his employment or inducing Intralytix to commit the alleged
breaches for personal gain.

In Count VI, plaintiff asserts a

tortious interference with contract claim against Woloszyn based
on

his

receipt

transaction.

of

$1,275,989

upon

closing

of

the

Lesaffre

The Court addresses each alleged basis in turn.
(1)

Failure to Repay the STSG’s Loan

Plaintiff alleges that Woloszyn improperly caused Intralytix
to breach the STSG’s Convertible Promissory Note by intentionally
keeping

some

Highflyer.

balance

of

the

Senior

Loan

outstanding

through

The plaintiff’s claim on this basis in part involves

Woloszyn’s conduct as an individual controlling Highflyer beyond
the scope of his duties as an Intralytix officer.

Therefore,

plaintiff adequately pleads the applicability of an exception to
the general rule of shielding a corporate officer, and its claim
of tortious interference with contract against Woloszyn on this
basis is not futile.
(2)
Incurring
Woloszyn

Additional

Debt

from

Section 5.4 of the Credit Agreement prohibits Intralytix from
incurring any additional debt other than the STSG’s loan and the
Senior Loan.

Prop. Am. Compl., Ex. 2, § 5.4.

22

In addition,

Section

5.6

of

the

same

Agreement

prohibits

Intralytix

from

transacting with its affiliates unless approved by the Intralytix
Board.

Id., § 5.6.

caused

Intralytix

Plaintiff alleges that Woloszyn improperly
to

breach

these

provisions

by

inducing

Intralytix to incur an additional debt from him.
Because Woloszyn necessarily performed the alleged conduct as
an Intralytix officer, plaintiff must allege that Woloszyn was
motivated for personal gain in inducing Intralytix to incur a debt
from him.

Plaintiff alleges that “Woloszyn . . . [was] provided

Warrants for Intralytix Class A Common Stock on favorable terms in
connection with the loans.”

Prop. Am. Compl. ¶ 81.

The notes

memorializing Woloszyn’s loan to Intralytix award the noteholders
warrants for Intralytix Class A Common Stock with strike prices
ranging from $1 to $3 per share, depending on the date of the
noteholder’s loan.

Id., Ex. 19 at 3.

Although it is not obvious

on the face of the notes how favorable those terms are, an
inference can be drawn in favor of the plaintiff’s position from
the allegation that Lesaffre acquired Intralytix shares at $ 5.162
per share on May 31, 2017.

Id. at ¶ 77.

Having failed to explain

why the alleged warrants awarded to Woloszyn in connection with
his loan to Intralytix may not be considered to be personal benefit
requisite for pleading the exception’s applicability, defendants
fail to show the futility of this claim.

23

(3)
Failure to Notify STSG of the
Lesaffre Transaction and Denial of STSG’s
Information and Inspection Rights
Plaintiff also claims that Woloszyn intentionally procured
Intralytix’s breaches of Credit Agreement Sections 4.1 and 4.5 by
not providing STSG any notice regarding the discussions about the
Lesaffre

transaction

information.

and

denying

the

STSG’s

demands

for

These purported breaches arise solely from the

alleged action or inaction by Intralytix.

Accordingly, these

claims are necessarily asserted against Woloszyn as an officer of
Intralytix.

The proposed amended complaint, however, is devoid of

any allegation that Woloszyn was acting beyond his position as an
officer of Intralytix or that he stood to gain any personal benefit
from these alleged breaches by Intralytix.

Therefore, this claim

is futile under the general rule of shielding a corporate officer.
(4)
Receipt of Payment upon Closing of
Lesaffre Transaction
In Count VI of the proposed amended complaint, plaintiff
alleges that Woloszyn tortiously interfered with the priority
provision of the Credit Agreement by causing Intralytix to pay
$1,275,989

in

satisfaction

repaying the STSG’s loan.

of

his

loan

to

Intralytix

before

According to plaintiff, “Woloszyn was

driven by a desire to preserve the value of his own personal
assets” in inducing Intralytix to do so.

Prop. Am. Compl. ¶ 197.

An officer’s decision to prioritize a loan repayment to himself

24

over the known rights of a more senior creditor is sufficient to
plead the applicability of an exception as to the officer.

See

Power Up Lending Grp., Ltd. v. Murphy, No. 16 Civ. 1454(ADS), 2017
WL 4410799, at *8 (E.D.N.Y. Oct. 3, 2017)(concluding that the
allegation of corporate officers causing the corporation to breach
a credit agreement by making the funds available for payments to
themselves in compensation and other financial benefits rather
than repaying the lender was sufficient to plead the applicability
of an exception).

Therefore, defendants have failed to establish

the futility of the claim asserted in Count VI of the proposed
amended complaint.
e) Counts VII and VIII: Specific Performance and
Declaratory Judgment Claims regarding STSG’s
Conversion Rights
Defendants argue that the plaintiff’s claims regarding its
conversion rights are precluded by the plain language of the Credit
Agreement.

According to defendants, the Second Conversion Right

lapsed when the Initial Conversion Option lapsed because Section
7.1 of the Credit Agreement “makes clear . . . that STSG’s Second
Conversion Right exists only as an alternative to the Initial
Conversion

Option

in

the

event

that

a

‘private

equity

sale’

occurred during the pendency of the Initial Conversion Option.”
Defs.’ Opp’n (ECF No. 54) at 21 (emphasis added).
rejects this interpretation of the Credit Agreement.

25

The Court

Under

New

York

law,

which

governs

the

Credit

Agreement

pursuant to the governing law clause in the Master Agreement,
“[t]he interpretation of a contract is a question of law for the
court unless the contract is ambiguous.”

Broker Genius, Inc. v.

Volpone, 313 F. Supp. 3d 484, 500 (S.D.N.Y. 2018).

“A contract is

ambiguous when on its face it is reasonably susceptible of more
than one interpretation.”

US Oncology, Inc. v. Wilmington Trust

FSB, 958 N.Y.S.2d 47, 49 (N.Y. App. Div. 1st Dep’t 2013)(internal
quotations omitted).
As defendants correctly point out, Section 7.1 of the Credit
Agreement provides that the Initial Conversion Option lapses once
Intralytix engages in a private sale of its equity yielding gross
proceeds of not less than $3 million, and STSG can then exercise
only the Second Conversion Right.

The language of Section 7.1,

however, does not say that the Second Conversion Right also lapses
when the Initial Conversion Option lapses.
To the contrary, Section 7.2 of the Credit Agreement provides
that “STSG’s Conversion Right shall terminate as of the date on
which all obligations of Intralytix under the Convertible Note
have been satisfied.”

The same Section further provides that,

“Notwithstanding the foregoing, STSG’s Initial Conversion Option
(as such term is defined in the Master Agreement) shall terminate
on the earlier of . . . .”

Credit Agreement § 7.2.

While the

Master Agreement does not define the term “Initial Conversion
26

Option,” the Credit Agreement defines it in Section 7.1.

In fact,

the Master Agreement’s failure to define the term is immaterial in
any event because Section 11.14(b) of the Master Agreement provides
that the Credit Agreement’s definition of the term would have
controlled even if it were in conflict with the Master Agreement’s
definition of it.

The term “Initial Conversion Option” as defined

in the Credit Agreement does not cover the Second Conversion Right.
It then naturally follows that the clause in Section 7.2 of the
Credit Agreement addressing the termination of Initial Conversion
Option

has

no

implication

on

the

Second

Conversion

Right.

Therefore, the Second Conversion Right terminates only “as of the
date on which all obligations of Intralytix under the Convertible
Note have been satisfied.”

Credit Agreement § 7.2.

As there is no dispute that there is a balance outstanding
under the Convertible Note, the Second Conversion Right remains
effective, and the plaintiff’s claims in Counts VII and VIII are
not foreclosed by the Credit Agreement.

Accordingly, the Court

grants the plaintiff’s motion as to Counts VII and VIII of the
proposed amended complaint.
f) Count IX:
Intralytix

Legal

Fees

and

Expenses

against

Lastly, plaintiff claims that it is entitled to recover legal
fees and expenses incurred in connection with this litigation

27

pursuant to Section 3.4 (c) of the Security Agreement, which
provides:
Intralytix will pay when due or reimburse STSG on demand
for all costs of collection of any of the Obligations and
all other reasonable out-of-pocket expenses (including, in
each case, all reasonable attorneys’ fees) incurred by STSG
in connection with the creation, perfection, satisfaction,
protection, defense or enforcement of the Security Interest
or the creation, continuation, protection, defense or
enforcement of this Security Agreement or any or all of the
Obligations, including expenses incurred in any litigation
or bankruptcy or insolvency proceedings.
Section

1.5

of

the

Security

Agreement

in

turn

defines

“Obligations,” which appears in Section 3.4(c), as any kind of
“debt, liability and obligation . . . Intralytix may now or at any
time after the date of this Security Agreement owe to STSG, under
the Credit Agreement, the Loan or the Convertible Note.”

All of

the plaintiff’s claims in this litigation can be viewed as stemming
from Intralytix’s alleged non-repayment of STSG loan and denial to
honor

the

STSG’s

exercise

of

Second

Conversion

Right.

Put

differently, it is plausible that the subjects of this litigation
are the Intralytix’s obligations under the Credit Agreement and
the Convertible Note, which qualify as “Obligations” for purposes
of the Security Agreement Section 3.4(c).
sufficient at this stage of litigation.

That possibility is
Therefore, the Court

concludes that the proposed claim for legal fees and expenses is
not futile.

28