EMA Financial, LLC v. TPT Global Tech, Inc.

Background

TPT Global Tech, Inc. entered into a Securities Purchase Agreement and convertible note with EMA Financial, LLC on or about June 11, 2019. EMA agreed to loan TPT $250,000 with a $15,000 origination discount and funded $235,000. The note carried 12% annual interest and 24% default interest. It gave EMA the right to convert amounts due into TPT common stock and required TPT to issue shares after receiving conversion notices and to reserve enough shares for conversion.

The note defined several events of default, including failure to pay principal or interest, failure to reserve or deliver adequate shares, and breach of the agreements. It also included a default remedy requiring payment of the greater of a formula based on twice the outstanding debt or the value of shares issuable under the note. TPT’s stock price declined, and EMA made at least seven conversions between February and March 2020. TPT admitted that it did not register shares for EMA, did not deliver shares, and did not pay the note.

Motions and legal standards

EMA moved for summary judgment under Rule 56 on its breach-of-contract claim and its claim for costs, expenses, and attorneys’ fees. Summary judgment is appropriate when there is no genuine dispute over a fact that could affect the result and the moving party is entitled to judgment under the law. EMA also moved under Rules 12(b)(6) and 9(b) to dismiss TPT’s counterclaims and affirmative defenses. A Rule 12(b)(6) motion tests whether the pleaded facts state a legally plausible claim, accepting well-pleaded factual allegations as true for that motion.

Breach of contract and defenses

Applying Delaware law, the court held that EMA established TPT’s liability for breach of contract. TPT did not dispute entering into the agreements or identify full performance. Instead, TPT argued that the agreements were void or unenforceable because EMA allegedly acted as an unregistered broker-dealer, that the agreements were unconscionable, and that the debt had been satisfied.

The court rejected TPT’s argument based on Section 29(b) of the Securities Exchange Act. It declined to decide whether EMA was a broker-dealer because that question would not affect the result. Section 29(b) permits rescission when performance of the contract itself is unlawful, and the court found no suggestion that these agreements could not be legally performed. The court therefore held that the agreements remained valid and enforceable.

The court also rejected TPT’s unconscionability defense. Although the agreements had been drafted by EMA and TPT had little room to negotiate, TPT did not provide sufficient support for its argument that the amount of damages or the default provisions alone made the agreements unconscionable. The court found the default liquidated-damages provision invalid, however, and severed that provision while enforcing the remainder of the agreements. TPT’s two-sentence argument that the debt had been satisfied was treated as waived because it did not sufficiently explain how that argument excused TPT’s breaches.

Attorneys’ fees, damages, and interest

The agreements provided that the prevailing party in an action between the parties could recover reasonable attorneys’ fees and costs. Because the court found TPT liable for breach of contract, it granted EMA summary judgment on the recoverability of attorneys’ fees and costs, with the amount to be determined later.

The court granted summary judgment on liability but denied it as to damages because the amount of damages was unclear and required factfinding at trial. The court separately ruled that prejudgment interest would be calculated at the contractual 24% default rate. It concluded that Delaware’s usury statute did not impose a maximum interest rate here because the loan exceeded $100,000 and there was no evidence that repayment was secured by a mortgage against a borrower’s principal residence.

Counterclaims and affirmative defenses

The court granted EMA’s motion to dismiss all four counterclaims. The first counterclaim sought a declaration that EMA violated Section 15(a)(1) of the Exchange Act and that the agreements were void or rescinded. The court held that Section 15(a)(1) provides no private right of action and that the Declaratory Judgment Act does not create an independent cause of action. It also relied on its conclusion that the agreements were not subject to rescission under the Exchange Act.

The second counterclaim sought declarations that the agreements were unconscionable and unenforceable and that the fee provisions were mutual. The court dismissed it because resolving EMA’s breach-of-contract claim would resolve the related issues and because TPT had not adequately pleaded a claim. The court noted that the agreements actually allowed the prevailing party—either party—to recover reasonable attorneys’ fees and costs.

The third counterclaim for unjust enrichment was dismissed because unjust enrichment is available under Delaware law only when the parties do not have an express, enforceable contract. The fourth counterclaim for attorneys’ fees was dismissed because TPT was not the prevailing party after the court found it liable to EMA, even though the agreements contained a mutual fee provision.

As to the affirmative defenses, the court stated that TPT waived several defenses by failing to raise them in opposition to summary judgment, including defenses based on usury, unclean hands, waiver, estoppel, and satisfaction and accord. The court dismissed defenses concerning EMA’s alleged unregistered broker-dealer status, the liquidated-damages provision, repayment, and unconscionability. It declined to rule on the defense that the relief EMA sought was exorbitant because the court had not yet determined the amount of damages.

Disposition

Judge Vernon S. Broderick granted EMA’s motion for summary judgment as to liability, but not as to damages. He granted summary judgment as to the recoverability of attorneys’ fees and costs, with the amount to be determined later. He granted EMA’s motion to dismiss TPT’s counterclaims and affirmative defenses as to all counterclaims and defenses except the defense that EMA’s requested relief was exorbitant, which he declined to decide. The order therefore combined a merits ruling on EMA’s contract claim with threshold rulings dismissing TPT’s counterclaims and defenses.