FSR, Inc. v. Korsair Holdings, A.G.
- Edgardo Ramos
- 1:18-cv-11393
- U.S. District Court · Southern District of New York
- 9
In FSR v. Korsair, Judge Ramos granted default only for Korsair’s nonappearance and denied FSR’s remaining requests and the declaratory-judgment motion.
FSR received a finding that Korsair was in default, but not the additional orders it requested concerning the United Health stock certificate. JEC and FSR did not obtain a declaration allowing the certificate to be freely traded. United Health and Douglas K. Beplate remained subject to JEC’s third-party action, and Korsair remained in default.
What happened
In FSR, Inc. v. Korsair Holdings, A.G., FSR claimed that Korsair had failed to repay loans and had committed securities fraud. FSR sought to undo agreements involving a restricted certificate for 3,050,000 United Health shares. JEC, the certificate’s current holder, intervened and brought claims against United Health and Douglas K. Beplate.
FSR asked for a default judgment against Korsair, including orders dividing and reissuing the shares. FSR and JEC also asked the court to declare that the certificate could be freely traded and direct United Health’s transfer agent to remove its restrictive legend.
The court granted FSR’s default-judgment motion only as to Korsair’s default and denied FSR’s other requested relief. It also denied the joint declaratory-judgment motion. Judge Edgardo Ramos concluded that the record did not clearly show an independent claim supporting the requested declaration and that the Securities and Exchange Commission should have an opportunity to address the securities-law issues.
The detailed version
- FSR, Inc. v. Korsair Holdings, A.G. · No. 1:18-cv-11393
- Edgardo Ramos
- Mar. 30, 2020
Background
FSR sued Korsair for securities fraud and repayment of loans. FSR alleged that it had loaned Korsair $50,000 under a promissory note and later entered securities purchase agreements with Korsair. Under one agreement, FSR transferred to Korsair a certificate representing 3,050,000 shares of United Health Products, Inc. FSR alleged that Korsair did not provide the promised 1,000,000 shares of Korsair common stock and made other false statements. FSR sought, among other relief, rescission of the agreement involving the United Health certificate.
The certificate was restricted and could not be freely sold in open-market transactions. JEC Consulting Associates, LLC, which held the certificate, intervened and filed a third-party complaint against United Health, the certificate’s issuer, and Douglas K. Beplate. JEC asserted claims for a declaration under 28 U.S.C. § 2201, federal securities fraud, and intentional infliction of economic injury under New York law. JEC alleged that United Health had refused to provide an opinion letter that would allow the restrictive legend to be removed.
Motion for Default Judgment
Korsair never appeared in the action. Based on a sworn affidavit of service and Korsair’s failure to appear, the court found that Korsair was in default.
FSR requested more than a finding of default. It also asked the court to require JEC to deliver the certificate to United Health’s transfer agent and to require the transfer agent to issue separate certificates representing 550,000 shares to FSR and 2,500,000 shares to be held pending further instructions or a court order.
The court granted FSR’s motion for default judgment only with respect to Korsair’s default. It denied FSR’s other requested relief.
Joint Motion for Declaratory Judgment
FSR and JEC asked the court to declare that the restrictive legend could be removed under Rule 144 of the Securities Act of 1933 and to direct United Health’s transfer agent to issue two unrestricted certificates. United Health argued that there was no complaint seeking declaratory relief. The court rejected that argument because JEC’s third-party complaint did assert a claim for a declaration. The court therefore construed the joint motion as a motion for partial summary judgment, meaning a request to resolve part of a case without a trial.
The court explained that removal of a restrictive legend is generally within the issuer’s discretion and that a transfer agent can remove the legend only with the issuer’s consent, usually through an opinion letter from the issuer’s counsel. JEC argued that the certificate qualified for exemptions from securities-registration requirements under Section 4(a)(1) or Rule 144. JEC also argued that the certificate had been held for more than the one-year period relevant to Rule 144.
The court held that a request for declaratory or injunctive relief is not itself an independent legal claim. It also discussed JEC’s other asserted claims. Under Second Circuit precedent, an alleged wrongful refusal to remove a restrictive legend, without more, does not create a securities-fraud claim under Rule 10b-5. The court further noted that New York law may support a claim based on unreasonable withholding of an opinion letter, but JEC had not alleged that it submitted, or requested from the Securities and Exchange Commission, a “no-action” letter concerning the certificate.
The court stated that it was not clear that JEC had pleaded an independent claim that could support the requested declaration. It also relied on the primary-jurisdiction doctrine, under which a court may allow a specialized agency to address issues within that agency’s expertise before the court adjudicates the dispute. The court concluded that the Securities and Exchange Commission should have an opportunity to address JEC’s authority concerning the certificate under Rule 144.
Disposition
The court granted FSR’s motion for default judgment only as to Korsair’s default in the action and denied FSR’s other requests. The court denied FSR and JEC’s joint motion for declaratory judgment. The court directed the parties to appear for a telephonic conference on April 24 at 10:00 a.m. Judge Edgardo Ramos signed the order.
Read the full 9-page opinion on CourtListener, the free public archive maintained by the Free Law Project.