Cottam v. Global Emerging Capital Group, LLC

Background

John Cottam sued 6D Global Technologies, Inc., 6D Acquisitions, Inc., and Tejune Kang. He alleged that the defendants breached a Subscription Agreement and violated Section 10(b) of the Securities Exchange Act and Rule 10b-5. The parties filed cross-motions for summary judgment, and the defendants also sought default judgment on counterclaims alleging mutual mistake and unilateral mistake.

The Subscription Agreement allowed investors to buy units of 6D Acquisitions common stock. Each unit contained 50,000 shares and cost $15,000. The agreement stated that, after the related share exchange, the shares would automatically convert into 6D Global Technologies shares on a one-for-one basis. Cottam invested $870,000, which under that provision entitled him to 58 units, or 2,900,000 shares. He instead received 420,290 restricted shares after two reverse stock splits reduced the number of outstanding shares by a factor of 6.9. Cottam later sold his shares for $940,000, a $70,000 profit.

Breach of Contract

Applying New York law, the court held that the Subscription Agreement was unambiguous. Its operative provisions twice stated a one-for-one conversion ratio. The court rejected the defendants’ argument that a capitalization table and other share-count figures required reducing Cottam’s shares in proportion to the reverse splits. Those figures did not override the clear conversion provisions, and the court would not rewrite the agreement based on economic concerns or later events.

The court granted Cottam summary judgment on liability for breach of contract against 6D Global Technologies, Inc. and 6D Acquisitions, Inc. The court did not decide the amount of damages. It denied both sides’ motions for summary judgment on damages because the record did not establish the stock’s value at the time of breach, including the effects of trading restrictions, dilution, and liquidity. The court also denied the defendants’ summary-judgment motion on waiver because a reasonable jury could find that Cottam did not voluntarily and intentionally give up his right to additional damages.

Mistake Counterclaims and Default Judgment

The defendants sought to reform the agreement based on mutual mistake and unilateral mistake. The court denied default judgment because the defendants had not obtained a required certificate of default and because default judgments are disfavored when a party has actively litigated the case.

The court also dismissed both counterclaims on the merits. For unilateral mistake, the defendants did not identify evidence that Cottam fraudulently induced them to enter the agreement. For mutual mistake, the defendants did not show that Cottam shared their alleged intent to adjust the conversion ratio after the reverse splits. The defendants’ concern that the one-for-one ratio made the transaction economically unfavorable was not enough to justify rewriting the contract.

Claims Against Tejune Kang

The court granted summary judgment on all claims against Tejune Kang and dismissed him as a party. Cottam did not adequately oppose the defendants’ motion in his initial opposition. Independently, the court held that Kang signed the agreement as the chief executive officer of 6D Acquisitions and that Cottam identified no evidence that Kang intended to become personally liable. Cottam also offered no evidence supporting corporate veil piercing, which can impose a corporation’s obligations on an individual owner or controller in limited circumstances.

Securities-Fraud Claim

The court granted the defendants summary judgment on Cottam’s claim under Section 10(b) and Rule 10b-5. Cottam identified no evidence of a fraudulent misrepresentation or omission, or of the required wrongful state of mind. The court concluded that Cottam’s alleged losses arose from the defendants’ alleged failure to perform the Subscription Agreement, which was a contract dispute rather than a federal securities-fraud claim. The securities-fraud claim was dismissed.

Disposition

Judge Lorna G. Schofield stated that the parties’ cross-motions for summary judgment were each granted in part and denied in part. Cottam obtained summary judgment on contract liability against the remaining corporate defendants, but no party obtained summary judgment on damages or waiver. The defendants obtained summary judgment on the securities-fraud claim and all claims against Tejune Kang. The defendants’ counterclaims were dismissed, their motion for default judgment was denied, and their request for oral argument was denied as moot.