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Golden State Equity Investors, Inc. v. Alliance Creative Group, Inc.

United States District Court, S.D. California

April 7, 2017



          Hon. Michael M. Anello United States District Judge.

         Plaintiff Golden State Equity Investors, Inc. filed the First Amended Complaint (“FAC”) on September 1, 2016, against Defendant Alliance Creative Group, Inc. alleging a breach of contract. See Doc. No. 5, p. 7. Defendant now moves to dismiss the FAC for failure to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6). See Doc. No. 6, p. 1. The Court took the matter under submission on the briefs and without oral argument pursuant to Civil Local Rule 7.1.d.1. See Doc. No. 11. For the reasons set forth below, the Court DENIES Defendant's motion to dismiss.

         I. Background

         Because this matter is before the court on a motion to dismiss, the Court must accept as true the allegations set forth in the FAC, but in doing so, does not make any findings of fact. See Hosp. Bldg. Co. v. Trs. Of Rex Hosp., 425 U.S. 738, 740 (1976). Plaintiff alleges the following.

         i. Overview

         Plaintiff is an investment company focused on private money lending. See FAC ¶ 1. Defendant is a digital engagement company “engaged in the business of creative packaging.” See FAC ¶ 2. Plaintiff and Defendant “have been in a contractual relationship for the past twelve (12) years.” See Doc. No. 6-1, p. 2.

         Specifically, on April 27, 2004, the parties entered into two agreements whereby Plaintiff invested $300, 000.00 into Defendant's company in exchange for interest repayments and rights to purchase 3, 000, 000 shares of Common Stock. See FAC ¶ 7. The first agreement (“Original Note”) stated that, starting on June 15, 2004, Defendant would pay 7 ¾ per annum interest rate on Plaintiff's $300, 000.00 investment until the principal amount was paid in full. See FAC, Exh. C. The Original Note's maturity date was initially April 27, 2006. See FAC, Exh. C. The second agreement (“Warrant to Purchase Common Stock” or “Warrant”) allowed Plaintiff the right to purchase 3, 000, 000 shares of Defendant's Common Stock. See FAC, Exh. B. The Warrant's expiration date was initially April 27, 2006. See FAC, Exh. B.

         Seven years later, on April 25, 2011, the parties entered into an “Addendum” with new terms. See FAC, Exh. D. The Addendum “extended the maturity date of the Original Note and the expiration date of the Warrant to April 25, 2012.” See FAC ¶ 10; see also Doc. No. 6-1, p. 2. The Addendum further acknowledged that $143, 847.00 of the principal balance remained outstanding under the Original Note. See FAC, Exh. D.

         On March 18, 2013, the parties then entered into an “Exchange Agreement” whereby the Original Note (and its 7 ¾ per annum rate) was exchanged for a “New Note” in which Defendant agreed to pay Plaintiff the remaining outstanding balance of $143, 312.00 at a lower 3 ¾ per annum interest rate. See FAC, Exh. E. The Exchange Agreement provided for Defendant to issue Common Stock to Plaintiff pursuant to the New Note's terms. See Id. at §2.21 (stating “[Defendant] shall honor all conversions of the New Note and shall deliver Underlying Shares in accordance with the terms, conditions and time periods set forth therein”); see also id. at §2.04 (stating “[a]ny Underlying Shares, when issued in accordance with the terms of the New Note will be duly and validly issued . . .”).

         The New Note's terms, signed by the parties on March 31, 2013, extended the maturity date of the principal outstanding balance to March, 6, 2018. See FAC, Exh. A. Furthermore, Section 3.1 in the New Note states “at the option of the Holder [Plaintiff], this Debenture may be converted, either in whole or in part, up to the full Principal Amount . . . into [Defendant's] Common Shares . . . .” See FAC, Exh. A. The New Note also contains various provisions outlining the terms of conversions or transfers of Common Stock to the Plaintiff. See FAC, Exh. A, art. 3 (titled “Conversion of Debenture”).

         On March 21, 2014, after the Exchange Agreement and New Note were signed, Plaintiff elected to purchase 100, 000 shares of Defendant's Common Stock by sending Defendant a document titled “Warrant Notice of Exercise.” See FAC, Exh. F. This document's subject line stated “Warrant Notice, ” and the request included a PDF attachment titled “ACGX Warrant Exercise 032114.” See Id. Moreover, the document stated Plaintiff made the request “pursuant to the terms of the Warrant to Purchase Common Stock (Conversion Warrants) issued by [Defendant] to [Plaintiff].” See Id. (emphasis added). According to this request, Plaintiff paid “$50, 000 as cash and $50, 000 as a debit against the existing warrant credit balance” for Defendant's Common Stock. See Id. Defendant accepted the payments and “issued the shares requested by Plaintiff” based on “the existing warrant credit balance.” See id.; see also Doc. No. 10, p. 4.

         On April 20, 2016, Plaintiff sent Defendant another Conversion Notice exercising Plaintiff's “option to convert $2, 500 Principal Amount of the [New Note] into shares of [Defendant's] Common Stock.” See FAC, Exh. G. Plaintiff contends it made this Conversion Notice pursuant to Section 3.1 of the New Note. See FAC ¶ 18. When Defendant failed to deliver the shares, Plaintiff sent a demand letter to Defendant pursuant to section 3.2(b) of the New Note seeking “cash at 120% of the principal amount . . . plus the outstanding Warrant Credit balance.” See FAC ¶ 20. Defendant did not make these payments.

         As a result, Plaintiff filed this action for breach of contract. Plaintiff alleges two theories of liability. First, Plaintiff contends that, despite that the Exchange Agreement did not expressly extend the Warrant's expiration date, the parties' subsequent conduct impliedly extended the Warrant's expiration date. Thus, Defendant breached that implied agreement when it failed to deliver the shares requested on April 20, 2016. Second, Plaintiff contends Defendant breached the New Note when it refused to deliver the shares or provide cash pursuant to Plaintiff's demand letter. See FAC ¶¶ 25-28. Defendant contends the Court should dismiss Plaintiff's action for four reasons: (1) Plaintiff fails to attach a valid Warrant agreement as an exhibit; (2) Plaintiff fails to allege a breach under the New Note; (3) the New Note is invalid; and (4) the Statute of Frauds precludes liability. See Doc. No. 6-1, pp. 2, 3, 6, 8.

         II. ...

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