Ema Financial, LLC v. Flitways Technology, Inc.

Background

EMA Financial, LLC brought the action against Flitways Technology, Inc., Island Capital Management LLC, and Miro Zecevic. The complaint alleged that Flitways issued EMA two convertible notes, each for $110,000, and gave Island, its transfer agent, instructions to reserve shares for conversions. EMA alleged that, after it requested a conversion of part of one note, Island and Flitways did not process the conversion. The complaint further alleged that Zecevic directed Flitways not to process the conversion and that Flitways and Zecevic suggested EMA had not funded the notes.

After deposing Zecevic, EMA alleged that Flitways was inadequately capitalized, did not observe corporate formalities, was controlled by Zecevic, used people and funds connected to his other businesses, and shared office information with another business. During a December 2020 settlement conference, Judge Lehrburger stated on the record that EMA and Zecevic had reached a partial settlement in principle. The stated terms included conversion of the notes' outstanding principal and interest at a discounted rate, use of a non-Island transfer agent, and a provision that Zecevic would not interfere with or cause Flitways to object to issuing the converted shares. Before the terms were reduced to a final written agreement, Zecevic filed for Flitways to enter Chapter 11 bankruptcy.

Motion to Amend and Legal Standard

EMA moved under Federal Rule of Civil Procedure 15 for leave to amend its complaint to add three claims: (1) piercing the corporate veil against Zecevic and Flitways, (2) breach of the settlement agreement, and (3) alternatively, specific performance of the settlement agreement. Rule 15 generally directs courts to freely allow amendments when justice requires. The court considered delay, prejudice, further delay, and whether the proposed claims would be futile. A proposed claim is futile if it could not survive a motion to dismiss for failure to state a claim. For this motion, the court treated the complaint's factual allegations as true.

Court's Analysis

Zecevic argued that EMA had not adequately alleged that he used control over Flitways to commit a fraud or other wrong that injured EMA. The court rejected that argument at the amendment stage. It stated that the court or a jury, rather than outside attorneys whose opinions were obtained by Flitways, would determine whether Zecevic committed fraud. The court found that EMA had sufficiently alleged Zecevic's complete control of Flitways leading to a wrong against a third party, and it allowed EMA to add the veil-piercing claim.

Zecevic also argued that the settlement claim was futile because the agreement described on the record had not been finalized. The court cited authority stating that a settlement may remain binding even if a party changes position before the terms are written. It concluded that, as alleged, the agreement was sufficiently clear and that EMA had pleaded enough facts for a reasonable factfinder to determine whether Zecevic breached a binding settlement agreement. The court stated that placing Flitways into Chapter 11 bankruptcy seemingly fell within the agreement's provision concerning noninterference with the conversion. The court allowed EMA to add both claims concerning breach of and specific performance of the settlement agreement.

Disposition

The motion to amend was GRANTED. EMA was ordered to file its amended complaint on the public docket within seven days, and the parties were ordered to submit a joint letter proposing a schedule for the next phase of the proceedings within fourteen days. The opinion addressed whether the proposed claims could be added; it did not decide the ultimate merits of those claims.