United States District Court, S.D. California
GOLDEN STATE EQUITY INVESTORS, INC. Plaintiff,
ALLIANCE CREATIVE GROUP, INC. Defendant.
ORDER DENYING DEFENDANT'S MOTION TO DISMISS FOR
FAILURE TO STATE A CLAIM [DOC. NO. 6]
Michael M. Anello United States District Judge.
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.
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.
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,
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.
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.
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 . . .”).
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
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.
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
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.