EMA Financial, LLC v. nFUSZ, Inc.

Background

EMA Financial, LLC, the lender, and nFUSZ, Inc., the borrower, entered into two substantially similar transactions. In December 2017, nFUSZ issued EMA an 8% convertible note with an original principal amount of $185,000 and 1,200,000 warrant shares exercisable at $0.11 per warrant share. In January 2018, nFUSZ issued a $75,000 convertible note and 500,000 warrant shares exercisable at $0.14 per warrant share. The notes were later repaid in full.

The warrant agreements allowed EMA, under specified circumstances, to exercise warrants without a cash payment through a “cashless exercise.” The agreements stated that the number of shares would be calculated by dividing the difference between the market price and the exercise price, multiplied by the number of warrant shares being exercised, by the exercise price. The parties agreed that the formula’s numerator was correct but disputed its denominator.

On March 28, 2018, EMA sought to exercise 500,000 warrant shares on a cashless basis. NFUSZ’s stock was trading at $1.71, and the exercise price was $0.11. Applying the written formula produced 7,272,727 shares. NFUSZ argued that the denominator should instead be the $1.71 market price, producing 467,836 shares.

Motions and issues

EMA moved for partial summary judgment under Federal Rule of Civil Procedure 56. It sought a declaration that its exercise notice was valid and that its reading of the cashless-exercise formula was correct, as well as dismissal of NFUSZ’s defenses and counterclaims. NFUSZ cross-moved for summary judgment, arguing that the transactions were criminally usurious under New York law and therefore void. In the alternative, NFUSZ sought rescission or reformation of the warrant agreements based on mistake.

The agreements selected Nevada law. NFUSZ argued that New York law should apply because of the transactions’ connections to New York and because New York’s criminal-usury protections reflected a fundamental public policy. The court also considered whether the value of the warrants should be included in calculating the interest rate for usury purposes.

Usury defense

Judge Naomi Reice Buchwald held that the Nevada choice-of-law provisions controlled. Under the court’s analysis, Nevada had a reasonable relationship to the transactions because NFUSZ was incorporated there, and applying Nevada law would not violate a sufficiently fundamental New York public policy. Nevada law permits parties to agree to any written interest rate and does not allow corporations to raise a criminal-usury defense.

The court therefore granted EMA’s motion for partial summary judgment dismissing NFUSZ’s usury defense and denied NFUSZ’s cross-motion for summary judgment on that defense. The court also stated that, even if New York law applied, it would not include the uncertain value of the warrants in the usury calculation. The court did not need to decide whether a criminally usurious transaction would be void from the beginning.

Cashless-exercise formula

The court rejected EMA’s request for a declaration adopting the formula as written. It reasoned that the warrant agreements described cashless exercise as an alternative way to pay the exercise price by cancelling enough warrant shares to cover that price. A formula using the exercise price as the denominator would instead give EMA more than seven million common-stock shares for exercising 500,000 warrant shares, without requiring payment, and could exceed the agreements’ stated maximum of 1,200,000 shares.

The court concluded that NFUSZ’s formula—using the market price as the denominator—was the only reasonable interpretation of the agreements as a whole. That formula reduced the shares delivered to account for the exercise cost and produced 467,836 shares using the agreed market price and exercise price. The court also noted that uncontroverted evidence of industry usage supported NFUSZ’s interpretation, although it found the agreements’ text and structure sufficient without relying on that evidence.

The court accordingly denied EMA’s requested declaratory judgment and reformed the formula to reflect the interpretation advanced by NFUSZ. NFUSZ’s reformation counterclaim was dismissed as moot because the court granted the requested correction directly, and NFUSZ’s alternative requests for relief were dismissed as moot.

Disposition

The court granted EMA’s motion for partial summary judgment dismissing NFUSZ’s usury defense. It denied NFUSZ’s cross-motion for summary judgment on the usury defense. It denied EMA’s motion for a declaratory judgment adopting EMA’s reading of the cashless-exercise formula and reformed the formula to use the market price as the denominator. The parties were instructed to file a joint letter within 21 days proposing future proceedings, and the clerk was directed to terminate the pending motions.