NAOMI REICE BUCHWALD, UNITED STATES DISTRICT JUDGE.
In this breach of contract action, plaintiff contends that defendants breached an agreement for the sale of certain convertible securities. Plaintiff now moves for summary judgment, seeking rulings that defendants are liable for breach of contract and that the breach caused plaintiff damages arising from the lost opportunity to convert the withheld securities into stock to be resold at a profit. For the following reasons, we conclude that defendants are liable for breach of contract but that damages are inappropriate to resolve at this time. Accordingly, plaintiff's motion for summary judgment is granted in part and denied in part.
This case arises from an agreement for the purchase of convertible debt securities. The parties to the transaction, and to this case, are the issuer of the securities, defendant Sanomedics International Holdings, Inc. ("Sanomedics" or "SIMH");
On September 11, the parties entered into a "Debt Purchase Agreement" memorializing the terms of the sale to Coventry.
The transaction, as described in both the Memorandum of Terms and the subsequent DPA, was to take place in three "closings," with the second to take place within thirty days of the first, and the third to take place within thirty days of the second.
DPA ¶ 3.
The first closing took place on September 11: Coventry paid CLSS, and, that same day, Sanomedics informed its transfer agent, and the transfer agent acknowledged, that Coventry was to be issued a replacement note for $50,000. Coventry 56.1 ¶ 8. Coventry took possession of this note. Defs. 56.1 ¶ 6.
Thirty days from the first closing date of September 11 was October 11. October 11 was a Saturday; October 12 was a Sunday; and Monday, October 13, was the Columbus Day holiday. Coventry 56.1 ¶ 13.
Between October 10 and October 13, the market price of Sanomedics stock increased precipitously.
On October 14, Coventry wired $49,000 to CLSS in an attempt to consummate the second closing. Defs. 56.1 ¶ 9. However, CLSS refused to consummate the second closing. On October 15, at 11:43 AM, Craig Sizer wrote in an email to Jack Bodenstein, co-owner of Coventry, that "in light of several factors we are deciding not to move forward with the sale of the remaining balance of the note referenced in our original agreement." Bodenstein Decl. Ex. 12, at 1-2.
Bodenstein sought recourse from Sanomedics, writing at 12:32 PM to Sanomedics CFO David Langle that "I do not understand why you are not sending back the replacement note.... You signed the Debt [P]urchase Agreement, and now you have to honor it. I am sending you a conversion notice for 1,684,210 shares for $16,000 of the note." Bodenstein Decl. Ex. 11.
In the meantime, Bodenstein had responded to Sizer to insist that the parties' agreement entitled him to the next note. At 1:41 PM, Sizer replied, "[y]ou are outside the 30 day window and the note has already been converted." Bodenstein Decl. Ex. 12, at 1.
Finally, Bodenstein emailed Sanomedics President Keith Houlihan, who responded at 4:20 PM that "CLSS has informed us that they have issue with this matter and are not selling the note. Please address this with their team as it's a CLSS and Coventry concern not Sanomedics." Bodenstein Decl. Ex. 10, at 1.
On October 15, plaintiff, through counsel, sent defendants a demand letter alleging that defendants had breached the DPA. Bodenstein Decl. Ex. 13. Ultimately, CLSS returned Coventry's $49,000 payment for the attempted second closing, and Coventry would never wire to CLSS the final $44,000 contemplated by the DPA with respect to the third closing. Defs. 56.1 ¶¶ 10-11.
On November 3, Coventry filed its complaint in this Court. On February 5, 2015, defendants moved to dismiss the Complaint for failure to state a claim upon which relief can be granted. Defendants contended they were not bound to consummate the second closing because (1) Coventry's October 14 payment was not "within 30 days of the first closing" and therefore untimely under the DPA; and (2) the phrase "subject to market conditions" in the DPA's third paragraph rendered the parts of the DPA pertaining to the second and third closings illusory and unenforceable. By Memorandum and Order dated July 23, 2015, we denied the motion, rejecting both of defendants' arguments.
Coventry now moves for summary judgment. ECF No. 26. Coventry argues defendants breached the DPA and are liable for damages in the amount of at least $525,328, but perhaps as much as $1,278,000, based on Coventry's hypothetical analyses of the proceeds it would have earned had it been delivered the remaining $95,000 of the convertible note, converted
The Court has jurisdiction under 28 U.S.C. § 1332 because the parties are of diverse citizenship and the amount in controversy exceeds $75,000.
A motion for summary judgment is appropriately granted when there is no genuine dispute as to any material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a). The Court's function is not "to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial."
On the question of liability, there is no genuine issue of fact for trial. Plaintiffs have established that defendants breached the DPA as a matter of law. Under New York law, "an action for breach of contract requires proof of (1) a contract; (2) performance of the contract by one party; (3) breach by the other party; and (4) damages."
Defendants raise four arguments in opposition, but none is availing.
First, we reject defendants' contention that the phrase "subject to market conditions" in Paragraph 3 of the DPA entitled them to refuse to consummate the second and third closings at their option. Instead, the DPA unambiguously forecloses such a reading.
The relevant sentence in the DPA reads as follows: "At the second closing, which shall occur within 30 days of the first closing, and subject to market conditions, the Buyer shall purchase from the Seller another $50,000 of the Assigned Portion less $1K in legal fees." DPA ¶ 3. A parallel provision governs the third closing with respect to the remaining $45,000 in principal.
These provisions do not authorize defendants to refuse to sell the remaining $95,000 of the note. First, there is no indication, either in this sentence or anywhere in the DPA, that the DPA was intended to be an option contract. Instead, the DPA uses mandatory language throughout.
Second, even if defendants were correct that the "subject to market conditions" language made the second and third closings optional, it gave that option to Coventry, not to CLSS. The language "and subject to market conditions" modifies the subsequent clause, describing an obligation of the
Third, even if CLSS were correct that the "subject to market conditions" clause provided both CLSS and Coventry the ability to refuse to close the transaction, that refusal must be based on "market conditions." This phrase goes undefined in
Second, defendants inexplicably re-raise the argument we considered and rejected in connection with their motion to dismiss: that Coventry's October 14 wire was untimely because it did not occur "within 30 days of the first closing," a period that ended October 11.
As we explained, "a New York statute governing the recurrent problem of contractual deadlines that fall on weekends and holidays totally undermines defendants' position that Coventry's payment was untimely." July 23 M&O at 6. Specifically, Section 25 of the General Construction Law provides in relevant part:
N.Y. Gen'l Const. Law § 25(1). "Therefore, a default rule of contractual interpretation in New York is that if a period of time for the payment of money or performance of a condition ends on a weekend day or public holiday, that period of time is extended until the next business day." July 23 M&O at 7 (citing
Here, the first closing took place on September 11. The second closing was to take place within thirty days, but the thirtieth day was a Saturday, the thirty-first day was a Sunday, and the thirty-second day was a public holiday.
We reject defendants' rejoinder that Section 25 does not apply because the Paragraph 3 of the DPA expressly indicates an intent to avoid the rule of Section 25. Opp'n 15. The use of the generic term "shall occur within 30 days" does no such thing, and the DPA never mentions October 11 as an important date or that time is of the essence. To read such intent into the DPA's generic language is inconsistent with the plain meaning of Section 25.
Third, defendants argue they are not liable with respect to the third closing because plaintiff made no attempt to consummate it. Opp'n 17. However, the undisputed evidence shows that CLSS repudiated the contract.
"Anticipatory repudiation occurs when, before the time for performance has arisen, a party to a contract declares his intention not to fulfill a contractual duty."
Here, by writing to Coventry that "we are deciding not to move forward with the sale of the remaining balance of the note," CLSS clearly expressed that it did not intend to complete third closing. Sanomedics communicated a similar message, writing, "we were informed by CLSS Holdings that they are not selling the note."
Plaintiff took immediate action by sending a demand letter that day and filing a complaint soon after, clearly electing to treat the defendants' repudiation as breach. In this context, tendering the funds for the third closing was not necessary.
Finally, defendants argue that Sanomedics "cannot be held liable because it did not agree expressly or implicitly to assume any responsibility or risks." Opp'n 12. However, Sanomedics executed the DPA, in which it specifically agreed to treat Coventry as "having all the rights of" CLSS with respect to the notes sold. DPA § 4.5(ii). Sanomedics breached this obligation by refusing to issue Coventry a replacement note once Coventry had paid CLSS for the second closing, and by refusing to honor Coventry's October 15 conversion request. Defendants offer no response
In its papers, plaintiff presents a number of proposals for calculating the damages it suffered as a result of defendants' breach. Such an analysis depends on disputed issues of fact and therefore is inappropriate to resolve at this stage. However, we offer the following observations to guide the parties' future submissions.
The calculation of damages in a breach of contract case governed by New York law is guided by two fundamental principles. First, "damages for breach of contract should put the plaintiff in the same economic position he would have occupied had the breaching party performed the contract."
Two relevant conclusions follow. First, that Coventry would have had to convert the notes and sell the conversion shares in order to profit does not, as defendants suggest, render the alleged damages "loss of profits on collateral business arrangements." Opp'n 18. Instead, Coventry may claim general damages based on the market value of the non-delivered securities on the date of breach. Such claims are regularly allowed in cases involving similarly "in-the-money" financial instruments.
Second, the measure of damages must correctly value the withheld convertible notes as of the date of breach. Such a valuation must account for the attendant restrictions on conversion and liquidation associated with the notes. Therefore it cannot be presumed, as plaintiff proposes, that all $95,000 in principal was convertible to about ten million shares that were all salable on one day, given that conversion could not result in beneficial ownership of more than 4.99% of outstanding stock. Further, a proper analysis would require consideration of the impact of the sale of a substantial number of shares on the market price of SIMH stock.
At oral argument, we suggested that a possible measure of damages might be the profit actually earned by CLSS, assuming that CLSS converted the disputed notes and sold the conversion shares. After CLSS's counsel disclaimed knowledge of whether his client had converted any portion of the remaining $95,000 of the Sanomedics note, we ordered discovery of the events following CLSS's refusal to consummate the second closing. Presumably this discovery should be the predicate for plaintiff's damage calculations.
For the foregoing reasons, plaintiff's motion for summary judgment is granted in part and denied in part. The parties are directed to submit a joint letter on or before July 11, 2016, summarizing the status of the case and the progress of their discovery on the issue of damages.
