Apollo Capital Corp v. Astra Veda Corporation

Background

Apollo Capital Corp. previously held several of Astra Veda Corporation’s convertible promissory notes. After Astra experienced financial distress, the parties entered into a Restructuring Agreement. Astra acknowledged debt exceeding $400,000, and Apollo agreed to reduce the debt to an aggregate payoff of $360,000. The agreement included a release and an indemnification provision.

Astra later sued Apollo concerning some of the note conversions and alleged violations of the Racketeer Influenced and Corrupt Organizations Act. That earlier case was dismissed because the complaint treated Apollo as the RICO enterprise itself, and the court did not decide whether the Restructuring Agreement was valid. Apollo then sued Astra for indemnification, seeking reimbursement for the costs of defending the earlier case. Apollo claimed those costs exceeded $200,000. The opinion noted that the submitted legal bills appeared to cover all defendants in the earlier case, and that neither party addressed how much of those costs Apollo alone could recover.

The parties filed cross-motions for summary judgment. Discovery had closed, but the court found that the motion papers left material factual disputes.

Indemnification Provision

The court identified a grammatical ambiguity in the indemnification provision. The provision could be read broadly to cover claims related to the notes and other agreements, or more narrowly to cover claims related only to Apollo’s performance of obligations under those documents. Astra argued that the narrower reading clearly favored it, but the court found that Astra had not adequately explained that position.

Because the provision did not unambiguously exclude the earlier lawsuit, the court denied Astra’s request for summary judgment on that ground. The court did not decide whether the provision unambiguously covered the earlier lawsuit because Apollo’s motion failed on other grounds.

Usury Defense

Astra argued that the indemnification provision was unenforceable because the underlying notes were criminally usurious and that the usury tainted the Restructuring Agreement. The court rejected Apollo’s request for summary judgment based on its argument that Astra could not use criminal usury as a defense. The court also concluded that the agreement’s savings, severability, and release provisions did not resolve the issue on summary judgment. It did not decide Apollo’s separate argument that Astra had waived the invalidity position by taking inconsistent positions in the earlier case.

Under the New York law discussed in the opinion, Astra had to show a loan, an obligation to repay principal, interest above the statutory limit, and an intent to violate the usury laws. The court found factual disputes concerning both the interest and intent elements. The notes’ stated interest rate was allegedly lawful by itself, but the notes also included fixed profits and conversion rights. Valuing those conversion rights required a fact-specific inquiry. The court also explained that usurious intent generally presents a factual question when it does not appear clearly from the face of the note.

The court further held that, if the notes were usurious, factual questions remained about whether that taint carried into the Restructuring Agreement or whether the parties had abandoned the original notes and created a new, lawful obligation. The parties disputed whether the Restructuring Agreement merely modified the notes or retired them, and they disputed the significance of provisions concerning conversion rights after default. The court therefore denied summary judgment on these issues.

Other Arguments

The court rejected or declined to rely on Astra’s arguments concerning Apollo’s proof of legal fees, Apollo’s jury demand, and Apollo’s responses to factual statements and briefing arguments. The court declined to resolve the case on those technical grounds.

The court did, however, agree that Apollo’s declaratory-judgment claim duplicated its breach-of-contract claim. Apollo’s requested declaration depended on the same facts needed to establish that Astra breached the indemnification provision. The court therefore granted Astra’s motion for summary judgment as to the declaratory-judgment claim.

Disposition

The court granted Defendant’s motion for summary judgment as to the declaratory-judgment claim. The court otherwise denied the summary-judgment motions. It directed the parties to meet, confer, and submit a joint letter proposing a schedule to complete the case.