GW Holdings Group, LLC v. US Highland, Inc.

Background

GW Holdings Group, LLC purchased two convertible redeemable promissory notes from Cruzani, Inc. The notes allowed GW Holdings to convert outstanding principal into Cruzani common stock and required Cruzani to maintain stock reserves for those conversions. The agreements also identified certain failures—including failure to remain current in Securities and Exchange Commission filings, failure to deliver stock after a conversion notice, and failure to replenish the stock reserve—as events of default.

Cruzani was not current in its public filings from November 16, 2016, through February 15, 2018. In March and May 2018, GW Holdings submitted conversion notices. Cruzani honored two earlier conversions but later instructed its transfer agent not to honor future notices, asserting that the prior conversions were improper under the Securities Act of 1933. GW Holdings then submitted additional conversion notices that Cruzani refused to honor.

GW Holdings sued for specific performance, breach of contract, and a permanent injunction. In an earlier ruling, the court dismissed the original complaint for insufficiently alleging the amount required for diversity jurisdiction. The Second Circuit later ruled that GW Holdings had met its initial burden of pleading damages, after which GW Holdings filed an amended complaint.

Motion to Dismiss

Cruzani moved to dismiss the amended complaint under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint adequately states a legally recognized claim. Cruzani argued that GW Holdings had not formally asked Cruzani to increase the stock reserve after an earlier conversion depleted it, and therefore had not plausibly alleged that refusing later conversion notices was a breach.

The court denied the motion to dismiss. Accepting the amended complaint’s factual allegations and reasonable inferences in GW Holdings’ favor, the court held that the complaint plausibly alleged that Cruzani violated the requirement that the stock reserve be maintained at four times the amount needed for full conversion. The court also held that the allegations plausibly asserted a breach of GW Holdings’ right to convert outstanding principal into Cruzani stock.

Partial Summary Judgment

GW Holdings moved for partial summary judgment before discovery. Summary judgment is a ruling entered when no genuine dispute over an important fact exists and the moving party is entitled to win under the law. GW Holdings appeared to seek judgment on its breach-of-contract and costs-and-fees claims, asserting that Cruzani breached the agreements by failing to remain current in its filings, refusing the conversion notices, and failing to establish and maintain the required stock reserve.

The court denied the motion without prejudice to renewal after discovery. First, the court concluded that Cruzani’s earlier failure to remain current in its filings did not establish the damages element of GW Holdings’ contract claim because the alleged damages arose from Cruzani’s refusal to process the May 2018 conversion notices, after Cruzani had cured the filing problem. The court also noted that GW Holdings had not accelerated the First Note after the filing default as the agreement required before enforcing remedies.

Second, the court found genuine disputes concerning Cruzani’s obligation to honor the conversion notices. The First Note used the phrase “upon the issuance date of the stock,” which the court found ambiguous. The parties had not conducted discovery concerning their intent, and GW Holdings had not addressed in its summary-judgment motion Cruzani’s argument that the Securities Act of 1933 prevented Cruzani from making the requested stock issuances.

Third, the court found a factual dispute about whether Cruzani breached its duty to replenish the stock reserve. The agreements and transfer-agent letters contained different language about how the reserve could be increased. GW Holdings presented an email sent to the transfer agent, but Cruzani asserted that it never received the email. The court also noted that the email requested the number of shares needed for conversion rather than the four-times reserve described in the agreements, and that GW Holdings had not shown compliance with the agreement’s notice-of-acceleration requirement.

The court declined at that time to consider materials GW Holdings submitted for the first time with its reply, while allowing that those materials could be included in a later post-discovery summary-judgment motion if GW Holdings chose to file one.

Defense Counsel’s Withdrawal

Defense counsel asked to withdraw because Cruzani had not paid outstanding legal fees and expenses and adversity had arisen between counsel and Cruzani. After the motions were fully submitted, the court granted the request. Matthew Tracy and Winget, Spadafora & Schwartzberg, LLP were terminated as counsel for Cruzani.

Disposition

Judge John F. Keenan denied Cruzani’s motion to dismiss; denied GW Holdings’ motion for partial summary judgment without prejudice to renewal after discovery; and granted defense counsel’s request to withdraw. Cruzani was ordered to appoint new counsel within 30 days, after which the parties were to proceed with discovery under the supervision of Magistrate Judge Stewart D. Aaron.