Ema Financial, LLC v. Flitways Technology, Inc.

Background

Ema Financial, LLC sued Flitways Technology, Inc., Island Capital Management LLC, and Miro Zecevic, alleging contract and securities-law violations. Ema and Island Capital later settled, and the action was dismissed as to Island Capital only.

During a December 2020 settlement conference before Magistrate Judge Robert W. Lehrburger, the parties stated that they had reached a settlement in principle. The recorded terms included converting an outstanding principal amount of essentially $300,000 at a discount rate, using a transfer agent other than Island Capital, requiring Zecevic not to object or cause Flitways to object to issuing the converted shares, and providing a complete release among the parties. The lawyers also acknowledged that they still needed to work out specific language, particularly concerning Zecevic’s noninterference with the conversion.

Ema’s counsel sent a draft settlement agreement on December 29, 2020. The defendants did not provide comments or sign it. The defendants later informed Ema that Flitways had filed for Chapter 11 bankruptcy in a Florida federal court; that bankruptcy case was dismissed on July 15, 2021.

Settlement-enforcement motion

Ema asked the court to enforce the recorded settlement. The court applied four factors used to determine whether parties intended to be bound by an oral agreement before signing a final written document: whether either side reserved the right not to be bound, whether the parties partly performed, whether all material terms were agreed upon, and whether the agreement was the type usually put in writing.

The court concluded that Ema had not proved by a preponderance of the evidence that both sides intended to be bound without a fully executed written agreement. The first factor weighed against enforcement because defense counsel said that the terms sounded acceptable “globally” but that the parties needed to review the agreement and address its details. The draft also contained a merger clause stating that the written agreement would be the parties’ complete understanding and would supersede earlier oral or written agreements. The court viewed those circumstances as evidence that the defendants reserved the right not to be bound until the written agreement was finalized.

The partial-performance factor weighed slightly in favor of enforcement because the parties agreed that Ema would prepare a written document and Ema sent a draft. The factor concerning whether agreements of this type are usually written was neutral. The court found the proposed agreement somewhat complex, involving several million shares, detailed instructions to the transfer agent, noninterference obligations, and a release, but not so complex that this factor weighed against enforcement.

The material-terms factor weighed against enforcement. The court found that the parties still had to define the precise limits of Zecevic’s obligation not to object to or interfere with the conversion. Because important terms remained open for negotiation, the court held that no binding oral settlement agreement had been established. The court therefore denied Ema’s motion to enforce the settlement. Because the recorded settlement was not enforceable, the court also denied as moot Ema’s requests for specific performance, an inquest, and attorney’s fees.

Cross-motion for summary judgment

Zecevic separately sought summary judgment, which is a decision without a trial when there is no genuine dispute over an important fact and the moving party is entitled to judgment under the law. He argued that New York’s business judgment rule protected him from all claims. That rule generally presumes that corporate directors act honestly and in the corporation’s best interests, but it does not protect decisions resulting from fraud, self-dealing, bad faith, or a failure to use reasonable diligence in considering important information.

The court denied the defendants’ cross-motion for summary judgment. It noted that Zecevic did not challenge Ema’s evidence that it had funded the two convertible notes by wire transfer. If Ema had in fact transferred the funds as required by the original agreements, the court stated, Zecevic’s decision to deny Ema’s conversion requests would at least not be protected by the business judgment rule because there was evidence that he failed to take reasonable steps to determine whether the transfer occurred.

Disposition

The court denied Ema’s motion for summary judgment and denied the defendants’ cross-motion for summary judgment. The parties were directed to confer and submit letters within fourteen days addressing proposed trial dates, estimated trial length, and possible settlement discussions. The Clerk was directed to close the motions at Docket Numbers 75 and 80.