Ema Financial, LLC v. Vystar Corp.

Background

Ema Financial, LLC sued Vystar Corp. for breach of contract concerning a Note and Securities Purchase Agreement executed on January 29, 2018. The agreements were governed by Delaware law. The Note had a stated value of $80,000, and Ema Financial was to pay Vystar $75,500, subject to a $4,500 discount. Ema Financial later deducted an additional $3,200 under the agreement and wired Vystar $72,300 on March 8, 2018.

The Note allowed Ema Financial, after 180 days, to convert amounts owed into Vystar stock. It also required Vystar to maintain a reserve of shares for that purpose. Ema Financial made nine successful conversion requests. After Vystar failed to maintain enough reserve shares on September 18, 2018, Ema Financial treated the failure as an event of default and applied the Note’s 24% default-interest rate. Ema Financial later made two more conversion requests that Vystar did not honor. Vystar eventually wired Ema Financial $4,658, which Ema Financial rejected as payment of the Note but kept in an attorney’s escrow account.

Vystar asserted counterclaims for breach of contract, unjust enrichment, and a declaration that the agreements were unconscionable and unenforceable. Vystar also asserted affirmative defenses. Both parties moved for summary judgment, a procedure allowing judgment without a trial when there is no genuine dispute over a material fact and the moving party is entitled to judgment under the law.

Court’s analysis

The court held that the Note’s unambiguous language required interest to run from its January 29, 2018 issue date. Ema Financial therefore did not breach the agreement by calculating interest from that date. The court also held that the agreement expressly allowed Ema Financial to deduct the $3,200 as a non-accountable payment for fees and expenses. Ema Financial did not need to prove the specific expenses before making the deduction.

The court rejected Vystar’s argument that Ema Financial accepted a settlement by retaining the $4,658 payment. Ema Financial expressly rejected the payment and stated that it was holding the money in escrow until Vystar delivered the shares demanded in the conversion notice. The court nevertheless concluded that the payment fully satisfied the amount due under the Note as of January 31, 2019.

The court rejected Vystar’s unconscionability counterclaim. Under Delaware law, unconscionability concerns whether contract formation or terms are unfair enough to justify refusing enforcement. The court found that both sides had representatives involved in negotiations, that Vystar had been able to review and negotiate changes, and that Vystar had not shown that any particular term was excessively one-sided or burdensome.

The court also held that Vystar’s failure to maintain the required share reserve triggered an event of default. Under the Note, that event made the entire balance immediately due and payable, allowing Ema Financial to charge 24% default interest on the unpaid balance. Vystar’s honoring of earlier conversion requests did not prevent the balance from remaining due during that period.

The court found that Ema Financial breached the Note by making its first eight conversion requests for principal without also converting accrued interest. The Note’s conversion formula required both principal and accrued interest on the principal being converted. But the court held that this breach was not material, meaning it was not serious enough to defeat the central purpose of the contract or excuse Vystar’s performance. The court also found that Vystar suffered no damages from the breach because the amount owed under the loan was unchanged, and Ema Financial’s approach may have reduced the interest Vystar owed by reducing principal more quickly.

The court rejected Vystar’s remaining affirmative defenses as barriers to Ema Financial’s claim. It also denied Vystar’s requests for relief beyond dismissal of the complaint, including punitive damages, because the court found no evidence that Ema Financial acted with the required wanton or willful disregard of Vystar’s rights. The court noted that Ema Financial had incorrectly interpreted the Note as barring Vystar’s payment, but found that this error and the later unhonored conversion notices did not meet that standard.

Disposition

Judge Gabriel W. Gorenstein denied Ema Financial’s summary judgment motion and granted Vystar’s summary judgment motion dismissing the complaint. The court concluded that Vystar’s $4,658 payment exceeded the balance due and left no amount owed under the Note. The Clerk was directed to enter judgment dismissing the case. Vystar’s additional requests for relief beyond dismissal were denied. Any request by Vystar for attorney’s fees under the Note was subject to a later application under Federal Rule of Civil Procedure 54(d).