Ema Financial, LLC v. Vystar Corp.

Background

Ema Financial, LLC moved under Rule 56 for summary judgment on its breach-of-contract claim and sought dismissal of Vystar Corp., Inc.’s defenses and counterclaims. The dispute concerns agreements between the parties, including a Securities Purchase Agreement and an $80,000 convertible note. Vystar asserted defenses and counterclaims involving alleged unregistered broker-dealer activity, securities fraud, unconscionability, unjust enrichment, breach of contract, and attorney’s fees.

Because discovery was limited, the court first examined whether Vystar’s defenses and counterclaims were legally viable. The court concluded that some claims could not proceed, but that Vystar was entitled to discovery on others before the court considered summary judgment.

Broker-Dealer Defense and Counterclaim

The court dismissed Vystar’s affirmative defense and counterclaim alleging that Ema violated Section 15(a)(1) of the Securities Exchange Act by acting as an unregistered broker-dealer. The court reasoned that the agreements did not require Ema to act as a broker-dealer, and Vystar had not pleaded facts showing that Ema’s alleged conduct was sufficiently connected to unlawful contracts under Section 29(b) of the Exchange Act. The court also dismissed the broker-dealer counterclaim because Section 15(a)(1) does not provide a private right to sue.

Securities-Fraud Counterclaim

Vystar’s Section 10(b) and Rule 10b-5 counterclaim included misrepresentation and market-manipulation theories. The court dismissed the misrepresentation portion because Vystar’s allegations concerned pre-contract statements that sounded in contract or fraudulent inducement rather than securities fraud. The court also found that Vystar had not specifically pleaded other alleged misrepresentations.

The court declined to dismiss the market-manipulation portion. Vystar alleged that Ema timed conversions and sales, acquired and sold large volumes of Vystar stock, and depressed the stock price to obtain more shares under the agreements. The court found these allegations sufficient at this stage to plead manipulative conduct, intent to deceive, economic loss, and a connection between the alleged scheme and Vystar’s losses.

Unconscionability and Discovery

Vystar alleged that the agreements were procedurally unconscionable because they were largely presented on a take-it-or-leave-it basis when Vystar needed financing. Vystar also alleged substantive problems involving penalty provisions and a non-mutual attorney-fee provision. Applying Delaware law, the court held that these allegations were adequately pleaded and that deciding whether the terms were commercially reasonable would be premature before further discovery. The court therefore declined to dismiss Vystar’s unconscionability defense and counterclaim and did not reach the parties’ contract claims.

Disposition

The court granted Ema’s motion in part and denied it in part. It denied summary judgment to Ema except that it dismissed Vystar’s broker-dealer defense and counterclaim. It dismissed the misrepresentation portion of Vystar’s securities-fraud counterclaim, denied Ema’s motion to dismiss the market-manipulation portion, declined to dismiss the unconscionability defense and counterclaim, and ordered the parties to resume discovery. Judge Andrew L. Carter, Jr. directed the clerk to close the motions.