Karsch v. Blink Health LTD

Background

Michael Karsch sued Blink Health Ltd., Geoffrey Chaiken, and Matthew Chaiken after Blink repaid a $1 million convertible promissory note that Karsch purchased in July 2014. The note provided for conversion into Series A preferred shares if specified events occurred, including Blink’s issuance and sale of at least $1 million of Series A preferred shares. It also allowed Blink to prepay the note without a penalty, pro rata among the notes.

Karsch and Blink also signed a side letter giving Karsch an option to exchange shares issued or issuable upon conversion of the note for shares with superior voting rights if Blink created or reclassified shares for Geoffrey Chaiken in the manner described by the side letter. Blink repaid Karsch’s note with interest on May 26, 2015, wiring him $1,052,602.74. Blink did not issue Series A preferred shares until after that repayment.

Karsch’s complaint asserted securities fraud, common-law fraud, fraudulent inducement and misrepresentation, breach of contract, breach of the duty of good faith and fair dealing, unjust enrichment, breach of fiduciary duty, fraudulent concealment, negligent misrepresentation, and a claim for an accounting. In an earlier order, the court dismissed several noncontractual claims as duplicative of the contract claims. The remaining claims included contract and fraud-based claims.

Summary-judgment standard

Summary judgment is a procedure for deciding a claim without a trial when the evidence shows no genuine dispute about an important fact and the moving party is entitled to judgment under the law. The court may grant summary judgment when the opposing party lacks enough evidence for a reasonable jury to rule in that party’s favor.

Contract claims

Karsch ultimately argued that Blink breached the agreements by failing to convert his debt into equity. He abandoned three other alleged contract breaches and focused on the claimed failure to convert the note.

Applying New York law, the court explained that a breach-of-contract claim requires an agreement, the plaintiff’s performance, a breach, and damages. The court found no genuine factual dispute about whether a conversion-triggering event occurred before Blink repaid the note. The fundraising threshold referenced in another document did not establish that Blink had issued Series A preferred shares, which was the event specified in the note’s automatic-conversion provision.

The court also rejected Karsch’s arguments under the side letter. The alleged issuance of Geoffrey Chaiken’s common shares in March 2014 occurred before the side letter was signed and did not involve creation of a new class of shares as described in that letter. Karsch also supplied no evidence or date supporting his claim that Geoffrey Chaiken’s membership shares were later reclassified into common shares before the repayment. The record instead showed that Geoffrey Chaiken held common shares with standard voting rights before June 2016, when Blink amended its bylaws to give certain founder-held common shares greater voting power.

The court concluded that no conversion event occurred before Blink prepaid the note. Karsch’s debt therefore remained debt when Blink repaid it, and Blink did not breach either agreement by failing to convert the note into equity. The court granted defendants’ motion for summary judgment on Karsch’s breach-of-contract claims. Because the court found no contract breach, it considered the question of Geoffrey and Matthew Chaiken’s personal liability moot.

Fraud claims

The remaining fraud claims were securities fraud under Section 10(b) of the Securities Exchange Act and Rule 10b-5, common-law fraud, fraudulent inducement and misrepresentation, and fraudulent concealment. The court did not decide whether these claims were improperly duplicative of the contract claims. Instead, it held that the evidence could not establish the required injury or loss.

Karsch alleged that he lost the equity ownership he had bargained for. The court found that he had not bargained for guaranteed equity: conversion depended on specified events, and those events did not occur before Blink exercised its right to prepay the note. The court also found Karsch’s claimed injury speculative because it depended on what might have happened had he signed a different agreement, bought common shares directly, or had the note converted.

The court held that Karsch had not provided evidence from which a reasonable jury could find, by the required clear-and-convincing standard, that he suffered a direct, immediate, and legally sufficient injury caused by defendants’ alleged misrepresentations. The court therefore granted defendants’ motion for summary judgment on the fraud claims. It also granted summary judgment on Karsch’s Section 20(a) claim because that claim required a primary securities-law violation, and the court had granted summary judgment on the securities-fraud claim.

Disposition

Judge Victor Marrero ordered that defendants’ motion for summary judgment on Karsch’s claims is GRANTED. The clerk was directed to terminate pending motions and close the case.