DBW Investments, LLC v. Vnue, Inc.

Background

Golock Capital, LLC and DBW Investments, LLC purchased seven convertible promissory notes from VNUE, Inc. Golock purchased five notes between September 1, 2017, and November 15, 2019. DBW purchased two notes on December 20, 2017, and January 18, 2018. The notes allowed the lenders to convert principal and interest into VNUE stock. Six notes used fixed conversion prices, while the seventh used a floating-price conversion option.

Golock exercised a conversion right under one note and received VNUE stock in exchange for more than $24,000 in principal and interest. The opinion states that VNUE later refused to issue stock when Golock sought another conversion, failed to make required interest payments other than two payments, and refused to issue stock-purchase warrants that the plaintiffs requested under amendments to the notes. Golock and DBW sued VNUE for breach of its obligations under the notes.

VNUE filed seven counterclaims against the plaintiffs and other Counterclaim Defendants. The counterclaims originally included three securities-law claims, two claims under the Racketeer Influenced and Corrupt Organizations Act (RICO), and state-law claims for unjust enrichment and a constructive trust. VNUE withdrew its three securities-law claims while opposing the motion to dismiss.

RICO Counterclaims

VNUE alleged that the Counterclaim Defendants conducted the affairs of a RICO enterprise and conspired to violate RICO by attempting to collect debt that was unenforceable under New York usury laws. The court held that these claims were conclusory and did not plead enough facts to make the alleged violations plausible.

The court also held that, to the extent VNUE relied on the New York Court of Appeals’ decision in Adar Bays concerning the treatment of floating-price conversion options in usury calculations, the counterclaims did not allege that the plaintiffs continued convertible-note lending after that decision. The court therefore found that the claims did not adequately allege that the enterprise operated unlawfully when the notes were executed. In addition, the counterclaims did not adequately plead the structural features required for a RICO enterprise, including a purpose, relationships among the participants, and sufficient longevity.

State-Law Counterclaims

The unjust-enrichment counterclaim alleged that the plaintiffs received valuable benefits from VNUE, including stock and profits from selling that stock, as a result of wrongful conduct. The court held that the claim did not plausibly allege that the plaintiffs were enriched unjustly. VNUE later explained that the claim concerned stock Golock received for approximately $24,000 in debt, which VNUE asserted was worth $65,000. The court stated that this amount was far less than the loan amount of more than $341,000 and held that the unjust-enrichment claim failed.

The constructive-trust counterclaim also failed. Under New York law, a constructive trust generally requires a confidential or fiduciary relationship, a promise, a transfer of an asset in reliance on that promise, and unjust enrichment resulting from a breach. VNUE conceded that it had not pleaded a fiduciary or confidential relationship. The court also found that the counterclaim did not plausibly allege that equity otherwise required a constructive trust.

Disposition

Judge Denise Cote granted the plaintiffs’ September 22 motion to dismiss the counterclaims. The court also dismissed the claims against the remaining Counterclaim Defendants, finding no basis to distinguish those claims and noting that VNUE had not argued that the counterclaims were adequately pleaded against them. The opinion does not state that the dismissal was with or without prejudice.