Cyber Apps World, Inc. v. EMA Financial, LLC

Background

Cyber Apps sold EMA a convertible note with a $60,000 principal value, a $3,000 original issue discount, and a 12% interest rate. The note allowed EMA to convert debt into Cyber Apps shares at a price based partly on the stock’s recent trading prices. The parties’ agreement also included a most-favored-nation provision, Section 4(m), which could give EMA more favorable terms if Cyber Apps later issued securities to another investor. The agreements selected Nevada law.

After Cyber Apps said it intended to prepay the note, EMA invoked Section 4(m), claiming that the note had been amended to increase the amount due and the prepayment premium. EMA later converted debt into Cyber Apps shares and sold the shares. Cyber Apps alleged that EMA sold shares and short-sold the stock as part of a scheme to lower Cyber Apps’ share price, obtain more shares through conversions, and profit from the transactions.

Cyber Apps sued for rescission under Sections 15(a) and 29(b) of the Securities Exchange Act, breach of contract, market manipulation under Section 10(b) and Rule 10b-5, and unjust enrichment. EMA moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint alleges enough facts to state a legally plausible claim.

Claims the Court Rejected

The court granted the motion as to the Section 15(a) rescission claim because Section 15(a) requires certain broker-dealers to register but does not create a private right to sue. It also granted the motion as to the Section 29(b) rescission claim because that provision permits rescission of unlawful contracts, and the agreement did not require EMA to register as a broker-dealer.

The court granted the motion as to unjust enrichment. Cyber Apps relied on New York’s restriction on excessive interest, but the agreements selected Nevada law. The court held that Nevada had a reasonable relationship to the dispute because Cyber Apps was incorporated there and had its principal place of business there. It also held that New York’s usury policy did not prevent applying the Nevada choice-of-law provision to this corporate borrower.

The court granted the motion as to Cyber Apps’ claim that EMA breached Section 2(a) by selling converted shares. Although Section 2(a) stated that EMA acquired the securities without a view toward resale, the agreement expressly allowed EMA to sell the shares at any time. The court therefore held that EMA could not have breached the contract by doing what the contract permitted.

The court also granted the motion as to the implied-duty claim based on an alleged wrongful scheme to drive down Cyber Apps’ stock price. The court held that an implied obligation could not conflict with the agreement’s express authorization to sell converted shares and stated that the financing arrangement was not inherently improper based on the allegations presented.

Claims Allowed to Continue

The court denied the motion as to Cyber Apps’ market-manipulation claim. Cyber Apps alleged that EMA short-sold Cyber Apps stock, used shares obtained through conversions to cover its short position, and sold stock to depress its price and obtain more shares through later conversions. The court held that these allegations, though barely sufficient, plausibly alleged manipulative conduct and the additional conduct needed to support a market-manipulation theory under Section 10(b) and Rule 10b-5. The court did not decide whether Cyber Apps could prove the claim.

The court also denied the motion as to Cyber Apps’ Section 4(m) contract claim. Cyber Apps alleged that EMA knowingly relied on an incorrect interpretation of the most-favored-nation provision to interfere with Cyber Apps’ effort to prepay the debt. The court held that the amended complaint adequately alleged, although barely, that EMA did not actually have the reasonable belief required by Section 4(m). Factual disputes could not be resolved on a motion to dismiss.

Disposition

The court granted EMA’s motion to dismiss as to the rescission claim, unjust-enrichment claim, and breach-of-contract claims based on the alleged wrongful scheme and Section 2(a). It denied the motion as to the market-manipulation claim and the breach-of-contract claim based on Section 4(m). The opinion also states that the motion regarding Cyber Apps’ withdrawn constructive-trust claim was denied as moot. The court directed the clerk to terminate the motion and rescheduled the initial pretrial conference.