Summary
emphasizing that if the court were to find irreparable harm based on the purported difficulty of determining when stock would be sold "then every case involving a contract to convert stock would amount to per se irreparable harm"
Summary of this case from LG Capital Funding, LLC v. PositiveID Corp.Opinion
02 Civ. 1480 (WK)
March 18, 2002
Kenneth A. Zitter, Esq., Law Offices of Kenneth A. Zitter, New York, NY, for Plaintiff.
Howard S. Koh, Esq., Jeffrey A. Kimmel, Esq., Meister, Seelig Fein LLP, New York, NY, for Defendants.
MEMORANDUM ORDER
Plaintiff Laurus Master Fund, Ltd ("plaintiff") moves pursuant to Fed.R.Civ.P. 65 and 28 U.S.C. § 2201 for a preliminary injunction and declarative relief. Specifically, plaintiff seeks an order, pending final determination of this action, directing defendant Valcom, Inc. ("Valcom"), a public Delaware corporation with its principal place of business in Valencia, California, to:
(1) deliver to plaintiff 4.5 million shares of Valcom's common stock, satisfying plaintiff's pending requests to convert the 8% Secured Convertible Valcom Notes (the "Notes") it holds; and
(2) immediately comply with its registration obligation under the subscription agreements, the agreements pursuant to which plaintiff purchased the Notes from Valcom.
On March 15, 2002 we heard oral argument from the parties. For the reasons that follow, we deny plaintiff's motion for a mandatory preliminary injunction.
BACKGROUND
On or about June 7, 2001, plaintiff purchased $750,000 worth of the Notes issued by Valcom. On or about September 7, 2001, plaintiff purchased $250,000 worth of the Notes issued by Valcom. The combined purchase resulted in plaintiff's $1 million investment in the Notes. The purchases were made pursuant to the respective Subscription Agreements of those dates (collectively, the "Subscription Agreements").
We refer to the June 7 and September 7 Subscription Agreements collectively except when their discrepancies are relevant to this Memorandum and Order.
Under the terms of the Notes and the Subscription Agreements, when plaintiff delivers a conversion notice, Valcom is required to: (1) convert the Notes into common stock of Valcom at the conversion price set forth in the Notes (Subscription Agreements ¶ 9.2); and (2) have, within the time set forth in the Subscription Agreements, an effective registration statement filed with the Securities and Exchange Commission (the "SEC") for the common stock into which the Notes are convertible (Id. ¶ 10.1).
The conversion price for the Notes is equal to the lower of: (1) 80% of the average of the three lowest closing prices for the common stock market for the 30 trading days prior to the date of execution of each of the respective Subscription Agreements; or (2) 80% of the average of the three lowest closing prices for the common stock on the market for the 60 trading days prior to, but not including, the date of conversion. (Id. ¶ 2.1(b)) ("Conversion Price").
The Subscription Agreements provide for at least two limitations on plaintiff's conversion rights. Paragraph 9.3 of the June 7 Subscription Agreement, entitled Maximum Conversion, states in pertinent part:
[Plaintiff] shall not be entitled to convert on a Conversion Date that amount of the Note in connection with that number of shares of Common Stock which would be in excess of the sum of (i) the number of shares of Common Stock beneficially owned by [plaintiff] and its affiliates on a Conversion Date, and (ii) the number of shares issuable upon the conversion of the Note with respect to which the determination of this provision is being made on a Conversion Date, which would result in beneficial ownership by [plaintiff] and its affiliates of more than 4.99% of the outstanding shares of Common Stock of the Company on such Conversion Date . . . [Plaintiff] may void the conversion limitation described in this Section 9.3 upon 75 days prior written notice to [Valcom].
(emphasis added). Paragraph 9.4 of the Subscription Agreements states that Valcom may not refuse conversion based on any claim for any reason, unless it first obtains a court imposed injunction, enjoining conversion of all or part of the Notes. In addition, in this circumstance Valcom must also post a surety bond for 130% of the conversion amount, payable to plaintiff if it were to ultimately obtain a judgment in its favor.
This portion of the June 7 Subscription Agreement, which does not appear in the September 7 Subscription Agreement, is here applicable since the January 11, 2002 conversion notices sought to convert shares which were the subject of the June 7 Agreement. (See Affidavit of Vince Vellardita Exh. F).
The Subscription Agreements further provide for registration of the number of shares equal to 300% of the number of shares issuable at the Conversion Price on the closing date or the date the Registration Statement is filed, whichever is greater. (Subscription Agreements ¶ 10.1(iv)). Valcom is considered to not have met its registration obligation when the number of shares registered falls below 125% of the number of shares that plaintiff could convert at the Conversion Price ("Non-Registration Event"). (Id. ¶ 10.4). The Subscription Agreements provides for liquidated damages in the event a Non-Registration Event occurs. (Id.)
Prior to December 31, 2001, on approximately 45 different occasions, plaintiff sent Valcom conversion notices with respect to the Notes. Valcom duly converted the appropriate portion of the Notes into common stock at the Conversion Price.
On January 11, 2002, plaintiff submitted two conversion notices, one to convert $810,000 worth of Notes into 4 million shares of Valcom common stock and one to convert $101,350 of the Notes into 500,000 shares of Valcom common stock. The conversion price at the time was $. 2027 per share. Valcom did not honor this conversion request.
DISCUSSION
A party seeking preliminary injunctive relief ordinarily must show:
(a) that it will suffer irreparable harm in the absence of an injunction and (b) either (i) likelihood of success on the merits or (ii) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly in the movant's favor.
Tom Doherty Assoc., Inc. v. Saban Entertainment, Inc. (2d Cir. 1995) 60 F.3d 27, 33 (emphasis added).
An ordinary preliminary injunction is prohibitory in nature and seeks to maintain the status quo pending a trial on the merits. Abul Wali v. Coughlin (2d Cir. 1985) 754 F.2d 1015, 1025. In contrast, a mandatory injunction seeks to alter the status quo by compelling a party to perform a positive act. Id. A mandatory injunction should issue "only upon a clear showing that the moving party is entitled to the relief requested, or where extreme or very serious damage will result from a denial of preliminary relief." Id. To obtain a mandatory injunction the movant must demonstrate a heightened likelihood of success on the merits. Tom Doherty Assoc., Inc., 60 F.3d at 34.
I. Irreparable Harm
Plaintiff claims that it will suffer irreparable harm if it is not granted preliminary relief because there may be no other adequate remedy. It argues that monetary damages would be difficult to calculate since the Valcom common stock fluctuates and Valcom may be judgment proof at the time such a judgment would be collectible.
The facts indicate that plaintiff would not be irreparably harmed. First, the market price for publicly traded stocks such as the Valcom common stock at issue here is generally considered to be ascertainable. See Dopp v. Franklin National Bank (2d Cir. 1972) 461 F.2d 873, 881. Plaintiff has not given us any plausible reason why this should not be the case here other than that the stock price fluctuates. The Subscription Agreements provide a formula for determining the proper Conversion Price. There is no reason why we could not make this determination for the applicable period should a judgment for plaintiff be ultimately warranted.
Plaintiff also asserts that it is impossible to tell when and at what price it would sell the stock it receives through conversion and thus difficult to calculate damages. While this is a persuasive argument, it does not itself overcome plaintiff's burden to show irreparable harm. If we were to find irreparable harm based on this argument alone then every case involving a contract to convert stock would amount to per se irreparable harm.
Secondly, Valcom's financial statements show that it has sufficient resources to satisfy any potential judgment in plaintiff's favor. The complaint alleges at least $3.8 million in damages. As of December 31, 2001 Valcom's balance sheet showed net assets of greater than $6 million. (Order To Show Cause Exh. J). This factor weighs against finding irreparable harm. See Tula Business, Inc. v. Medical Industries of American (S.D.N.Y. Feb 18, 1997) 1997 WL 68565 at *1 (denying plaintiffs' motion for a mandatory preliminary injunction directing defendants to deliver to plaintiff shares of stock pursuant to a contract where there was sufficient resources to satisfy any potential judgment for plaintiff).
II. Likelihood of Success on the Merits
In addition, plaintiff has not met its burden of demonstrating a clear showing of likelihood of success on the merits. Plaintiff is not entitled to convert an amount that will make it a beneficial owner of more than 4.99% of Valcom's outstanding common stock on any given Conversion Date, unless it submits written notice 75 days prior indicating that it wishes to void this limitation. (June 7 Subscription Agreement ¶ 9.3). On January 11, 2002, when plaintiff submitted the conversion notices at issue, it sought to convert into a total of 4,500,000 shares of common stock. At that time Valcom had approximately 9,757,649 shares outstanding. (Affidavit of Vince Vellardita ¶ 17). This conversion would have made plaintiff the beneficial owner of well more than 4.99% of Valcom's outstanding common stock. Plaintiff did not comply with the requisite 75 day notice required by the Subscription Agreements. (Id.)
Plaintiff submits that the conversion notices themselves serve as the notice required by the Subscription Agreements and therefore on March 27, 2002 the 75 day period will have passed and the notes will be due. However, it is not clear that the conversion notices themselves could fulfill the notice requirement. Defendants claim not to have taken them as such notice, which is a plausible understanding of the Subscription Agreements. The fact that the Subscription Agreements are susceptible to more than one meaning is enough to find that plaintiff has not met the "clear" or "substantial" showing required to issue a mandatory injunction. See Tula Business, Inc., 1997 WL 68565 at *2.
Furthermore, ordering Valcom to register additional shares does not seem to be appropriate at this juncture. The Subscription Agreements themselves provide for liquidated damages in the occurrence of a Non-Registration Event, like plaintiff is claiming here. (Subscription Agreements ¶ 10.4). The fact that the parties themselves contracted for liquidated damages in the case of a Non-Registration Event, suggests that they found such damages to be sufficient, and that we should not grant a mandatory injunction on this issue at this stage.
Plaintiff cites our decision in Celeste Trust Reg. v. Greystone Digital Technology, Inc. (S.D.N.Y. Jan. 12, 2001) 01 Civ. 91, slip op. (Knapp, J. Designated Part I Judge).
While that case was similar, sought similar relief and plaintiff there was in fact represented by the same attorney as plaintiff in this case, none of the same factors weighing against granting such extraordinary relief as a mandatory preliminary injunction were present. Defendant's only defense in that case was one in equity, that complying with conversion would have been detrimental to the company. We do not base our decision here on such an argument. While plaintiff here seeks conversion based its perspective contract, as did the plaintiff in Celeste Trust Reg., the contract here is different and thus warrants a different outcome.
Furthermore, at least one of the facts distinguishing Celeste Trust Reg is worth noting. There, defendant had sent plaintiff a letter stating that it would no longer honor its conversion requests. For that reason there was no way to predict what the value of the stock would be when plaintiff sought conversion. Here, plaintiff served Valcom with an actual conversion notice, so we could calculate the value on that date.
CONCLUSION
For the aforementioned reasons, we deny plaintiff's request for preliminary injunctive relief. However, we note that this decision makes no suggestion as to the ultimate determination of this case. The parties may contact chambers to set up an expedited discovery schedule in an effort for plaintiff to move for summary judgment if it so desires.
SO ORDERED.