Richards v. Centripetal Networks, Inc.

Background

Albert Richards purchased two convertible promissory notes from Centripetal Networks, Inc. in 2015 and 2016, paying $250,000 for each note. The notes provided for automatic conversion into stock if Centripetal completed a qualifying equity financing led by Option 3 Cyber Investments, LLC. They also gave Richards the option to convert at a discounted price if Centripetal completed another sale and issuance of equity securities. The notes required Centripetal to give Richards written notice at least 30 days before such a transaction and to provide related transaction documents and revisions.

Richards alleged that, between 2016 and 2019, Centripetal issued securities without providing the required notice. The alleged events included stock issued after employees exercised options, convertible notes, stock options, and the conversion of Option 3’s notes into preferred shares. The defendants did not appear to dispute that the events occurred, but argued that they did not qualify as triggering events under the notes and that Richards had notice of them.

After the notes’ maturity date, Richards negotiated a settlement with Centripetal and executed it on October 17, 2019. Centripetal paid the balance due on the notes, and Richards relinquished his conversion rights. The settlement agreement stated that no equity securities had been issued that would trigger Richards’s conversion option. It also stated that common options and warrants were not triggering events. Richards later claimed that he was unaware of that specific addition to the agreement and that defendants had fraudulently induced him to sign it. He alleged claims for breach of contract, concealment, negligent misrepresentation, intentional misrepresentation, and fraudulent inducement.

Motion and Earlier Rulings

Centripetal Networks LLC, Steven Rogers, and Jonathan Rogers moved for summary judgment. Summary judgment is a decision without a trial when the evidence shows that no important fact is genuinely disputed and the moving party is entitled to judgment under the law. The court must view the evidence and reasonable inferences in favor of the party opposing the motion and may not weigh competing evidence or decide witness credibility at this stage.

The court’s earlier orders on motions to dismiss had barred some claims concerning common options and warrants but allowed other claims to proceed. The court had also determined that the settlement agreement did not bar claims concerning stock issued when stock options were exercised. In this order, the court concluded that Richards was not precluded at the summary-judgment stage from arguing that warrants or convertible notes were triggering events, although the settlement agreement could still provide evidence about what the parties understood the notes to cover.

The court did rule that Richards could not base his breach-of-contract claim on the issuance of employee stock options. Richards had previously stated that the issuance of options itself was not a triggering event and had instead distinguished that event from the issuance of stock after options were exercised. The court treated those earlier statements as binding admissions.

Analysis

The parties’ claims depended substantially on the meaning of the notes’ phrase “any sale and issuance of equity securities that do not constitute a Next O3 Round.” Richards could prevail on his fraud-related claims only if defendants had misrepresented, concealed, or failed to disclose a transaction that qualified as a triggering event. His contract claim similarly depended on whether such an event occurred and whether defendants failed to provide written notice.

Defendants argued that Richards actually knew about the alleged triggering events or should have discovered them from financial statements and other information. The court found the evidence unclear. Richards acknowledged receiving financial statements showing that stock options had been exercised, but he did not admit that he had reviewed them and recognized the significance of those exercises. His testimony about when he learned of warrants and convertible notes was also not definitive. The court found factual disputes about what Richards reviewed, when he reviewed it, whether the documents should have alerted him to the alleged triggering events, and whether his conduct was reasonable.

The court noted that Richards’s version of events was not overwhelmingly persuasive and that his position would be tested at trial without the favorable assumptions required at summary judgment. Nevertheless, because the evidence, viewed in Richards’s favor, showed at least one genuine dispute over a material fact, summary judgment was unavailable.

Disposition

The court DENIED the motion for summary judgment filed by Centripetal Networks LLC, Steven Rogers, and Jonathan Rogers. The prior scheduling order remained in effect. The parties were directed to meet and confer and file a short status report addressing whether a settlement conference before the planned March 2025 bench trial would be productive.