LG Capital Funding, LLC v. Exeled Holdings Inc.

Background

LG Capital Funding, LLC and ExeLED Holdings, Inc., formerly known as Energie Holdings, Inc., entered into a Securities Purchase Agreement and a Convertible Redeemable Note on August 19, 2015. LG paid ExeLED $58,937.26, less stated fees, and received the Note. The Note had an 8% annual interest rate, a face value of $58,937.26, and an August 16, 2016 maturity date.

The Note allowed LG to convert some or all of the outstanding principal and interest into ExeLED common stock. The conversion price was 65% of the lowest closing bid price for ExeLED stock during the 15 prior trading days, including the day ExeLED received the conversion notice. On April 27, 2017, LG notified ExeLED that it was converting $41,000.26 in principal and $10,028.78 in accrued interest into 10,195,612 shares. ExeLED did not provide the shares.

LG sued for breach of contract and anticipatory breach, which means an alleged advance statement that a party will not perform a future contractual obligation. In 2018, the court granted LG summary judgment on liability for two claims, denied summary judgment on anticipatory breach and damages, and rejected ExeLED’s defense that the Note was criminally usurious. The court reasoned that the potential value of the stock-conversion option was too uncertain to include in the interest calculation.

After ExeLED failed to appear for trial, the court entered a default judgment on liability and later entered a final judgment on November 22, 2021, awarding $512,412.19 for breach of contract, $151,461.01 for anticipatory breach, $80,412.50 in attorneys’ fees, and $497.97 in costs.

Motion and arguments

ExeLED moved under Federal Rule of Civil Procedure 60(b)(1) to vacate the final judgment. That rule permits relief from a final judgment for reasons including a judge’s legal mistake. ExeLED argued that the earlier rejection of its usury defense could not stand after the New York Court of Appeals decided Adar Bays, LLC v. GeneSYS ID, Inc.

LG did not dispute that the earlier analysis was inconsistent with Adar Bays, but argued that ExeLED’s motion was untimely because it was filed more than four years after the summary-judgment decision. LG also argued that the earlier decision was consistent with federal decisions existing at the time and that considering the conversion option would not necessarily make the interest rate usurious.

Court’s analysis

Judge Liman held that the motion was timely. Rule 60(b)(1) applies to a final judgment, and the earlier partial summary-judgment decision was not final because claims concerning anticipatory breach and damages remained unresolved. ExeLED filed its motion within a reasonable time and within one year of the November 22, 2021 final judgment.

The court concluded that the earlier decision rested on a legal error. In Adar Bays, the New York Court of Appeals held that the value of a floating-price conversion option must be included in determining the interest rate, to the extent that value can be established through reasonable methods. It also held that a corporate loan exceeding the 25% criminal-usury limit is void and unenforceable, making both principal and interest uncollectible.

The court found that the Note in this case had similar terms to the note in Adar Bays: both allowed conversion into the borrower’s stock at a 35% discount from a recent low trading price. Because the borrower in Adar Bays had raised a factual question about the option’s value, the court held that ExeLED had likewise raised a factual question. The earlier ruling improperly treated the option as too uncertain to consider and therefore prevented an inquiry into whether the transaction was criminally usurious.

The court rejected LG’s argument that Rule 60 relief was unavailable merely because the earlier decision matched other federal decisions at the time. The rule covers all legal mistakes by a judge, not only obvious mistakes. The court also rejected the argument that applying Adar Bays would be impermissibly retroactive, explaining that courts generally apply the law existing when they decide cases that remain in the ordinary litigation process.

Disposition

The court held that ExeLED must have the opportunity to prove the value of the conversion option and whether, after considering that value, the interest rate was criminally usurious and the Note unenforceable. The court granted Defendant ExeLED Holdings, Inc.’s motion to vacate the final judgment. The clerk was directed to close the motion docket entry.