United States District Court, S.D. California
ORDER: GRANTING MOTION FOR LEAVE TO FILE AN AMENDED COUNTERCLAIM
GRANTING JOINT MOTION TO FILE AN AMENDED ANSWER [DOCKET NOS. 34, 35
ROGER T. BENITEZ, District Judge.
Defendants Bio-Matrix Scientific Group, Inc. and David R. Koos ("Bio-Matrix") have filed a motion for leave to file an amended counterclaim for usury. (Docket No. 34.) Plaintiff Starcity Capital, LLC opposes the motion. The parties have also filed a joint motion for leave for Bio-Matrix to file an amended answer. (Docket No. 35.) For the reasons set forth below, the joint motion for leave to file an amended answer and motion for leave to file an amended counterclaim are GRANTED.
Starcity's Second Amended Complaint ("SAC") alleges that on December 12, 2012, Starcity purchased a $30, 000 portion of a $700, 000 promissory note between the Sherman Family Trust and Bio-Matrix under a Securities Transfer Agreement ("STA"). Under the STA between Bio-Matrix, Starcity, and the Sherman Family Trust, referred to as STA#2 in Bio-Matrix's counterclaim, Bio-Matrix purchased the $30, 000 portion of the note and Bio-Matrix agreed to honor conversion rights granted to Starcity to convert the $30, 000 into Bio-Matrix stock at a discounted price.
On January 2, 2013, Starcity delivered to Bio-Matrix a "Conversion Notice" to convert $17, 000 of the $30, 000 note into 103, 030, 303 common shares of Bio-Matrix common stock. (SAC ¶ 3.) Bio-Matrix's transfer agent sent Starcity a paper stock certificate representing the shares. ( Id. ¶¶ 3, 14.) On January 15, 2013, Scottsdale Capital Advisors, Starcity's brokerage firm, informed Starcity that Bio-Matrix had not timely filed its Form 10-K and that Scottsdale Capital Advisors would not accept the shares into Starcity's account. ( Id. ¶ 17.)
Starcity alleges that Bio-Matrix induced Starcity to cancel the paper stock certificate by falsely promising to cause the shares to be transferred to Starcity's brokerage account via Deposit/Withdrawal at Custodian ("DWAC"). ( Id. ¶ 4.) Starcity alleges that Defendants then refused to initiate the DWAC transfer. ( Id. ¶¶ 4, 5.) According to Starcity, because it did not have the freely tradable shares it was entitled to, it missed the opportunity to sell at an opportune time. ( Id. ¶ 29.) The SAC asserts claims for: (1) breach of fiduciary duty; (2) breach of contract; and (3) declaratory relief.
Bio-Matrix filed an Answer. (Docket No. 24.) The parties have also filed a joint motion to allow Bio-Matrix to file an amended Answer. (Docket No. 24.) However, Starcity opposes Bio-Matrix adding a counterclaim for usury.
Bio-Matrix seeks leave to file a counterclaim for usury based on the same transaction asserted by Starcity, STA#2, and an earlier transaction, STA#1, that is not alleged in the SAC. Bio-Matrix's proposed counterclaim alleges that under STA#1, similar to STA#2, Starcity purchased a portion of the same promissory note between Bio-Matrix and the Sherman Family Trust and received the right to buy Bio-Matrix stock at a 45% discount to the closing bid price for Bio-Matrix's stock during the five trading days immediately preceding the conversion date.
Bio-Matrix alleges Starcity exercised its conversion rights as to STA#1 on November 16, 2012, December 13, 2012, and December 27, 2012 and received Bio-Matrix shares at a significant discount from the shares true value. Bio-Matrix asserts that the difference between the price Starcity received the stock for (the bid price) and the true value of the stock on the conversion date is interest with rates of 112.12%, 215.15%, and 809.09%. As to STA#2, Bio-Matrix alleges Starcity converted $13, 000 of the $30, 000 note on April 15, 2013. Again treating the difference between the true value and the discounted price as interest, Bio-Matrix alleges an 87.33% interest rate.
Leave to amend under Rule 15(a)(2) "should [be] freely give[n]... when justice so requires." Fed.R.Civ.P. 15(a)(2). The Ninth Circuit "has noted on several occasions... that the Supreme Court has instructed the lower federal courts to heed carefully the command of Rule 15(a), ... by freely granting leave to amend when justice so requires." DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir. 1987) (noting "the underlying purpose of Rule 15-to facilitate decision on the merits rather than on the pleadings or technicalities."). "This policy is to be applied with extreme liberality.'" Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1051 (9th Cir. 2003) (quoting Owens v. Kaiser Found. Health Plan, Inc., 244 F.3d 708, 712 (9th Cir. 2001)).
Courts consider "undue delay, bad faith, dilatory motive, repeated failure to cure deficiencies by previous amendments, undue prejudice to the opposing party, and futility of the proposed amendment" in deciding whether justice requires granting leave to amend under Rule 15. Moore v. Kayport Package Express, Inc., 885 F.2d 531, 538 (9th Cir. 1989) (citing Foman v. Davis, 371 U.S. 178, 182 (1962)). "Where the legal basis for a cause of action is tenuous, futility supports the refusal to grant leave to amend." Lockheed Martin Corp. v. Network Solutions, Inc., 194 F.3d 980, 986 (9th Cir. 1999). "Prejudice to the opposing party is the most important factor." Jackson v. Bank of Hawaii, 902 F.2d 1385, 1387 (9th Cir. 1990) (citing Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 330-31 (1971)).
As to futility, the primary issue addressed by the parties, the Court is skeptical of Bio-Matrix's proposed counterclaim for usury. The attempts to treat the purchase of a note in exchange for the right to purchase stock at a discount as a loan and treat the difference between the true value of the stock and its discounted price as interest are questionable. However, Starcity has failed to meet its burden in establishing the futility of the proposed counterclaim. Other than two cases that only identify the undisputed elements for a usury claim, Starcity has cited only one case in support of its argument that the counterclaim is futile. When contrasted with the many cases cited by Bio-Matrix explaining the Court's obligation to broadly construe what constitutes a loan and interest, the Court cannot find Starcity has established the amendment would be futile.
The other factors courts should consider weigh in favor of granting leave to amend. There was no undue delay in seeking amendment. The request to amend was filed within the time provided in the Court's scheduling order. There is no indication of bad faith or dilatory motive. As to the most important factor, prejudice to the opposing party, Starcity has not identified any prejudice it would suffer if leave to amend is granted. Starcity having already stipulated to Bio-Matrix adding an affirmative defense for usury suggests ...