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Natural Shrimp, Inc. v. Vista Capital Investments, LLC

United States District Court, S.D. California

November 1, 2019

NATURAL SHRIMP, INC., Plaintiff,
v.
VISTA CAPITAL INVESTMENTS, LLC; and DAVID CLARK, Defendants.

          ORDER

          Hon. William Q. Hayes United States District Judge.

         The matter before the Court is the Motion to Dismiss Pursuant to Fed.R.Civ.P. 12(b)(6) filed by Defendants Vista Capital Investments, LLC, and David Clark. (ECF No. 9).

         I. BACKGROUND

         A. Procedural Background

         On July 3, 2019, Plaintiff Natural Shrimp, Inc. (“Natural Shrimp”), initiated this action by filing a Complaint against Defendants Vista Capital Investments, LLC (“Vista”), and David Clark. (ECF No. 1). On September 6, 2019, Defendants filed a Motion to Dismiss. (ECF No. 9). Defendants move to dismiss Natural Shrimp's Complaint on the grounds that Natural Shrimp fails to state a claim upon which relief can be granted pursuant to Federal Rule of Civil Procedure 12(b)(6). In the alternative, Defendants move the Court to consolidate this case with the breach of contract action filed by Vista against Natural Shrimp, currently pending before this Court, [1] and to designate Vista as the plaintiff in the consolidated action.

         On September 30, 2019, Natural Shrimp filed a Response in opposition to Defendants' Motion to Dismiss. (ECF No. 13). On October 7, 2019, Defendants filed a Reply. (ECF No. 14).

         B. Allegations in the Complaint

         On or about January 23, 2017, Vista and Natural Shrimp entered into a Securities Purchase Agreement. The Securities Purchase Agreement provides that Natural Shrimp shall sell, and Vista shall purchase, 1) a promissory Note; and 2) a Warrant to purchase shares of Natural Shrimp's common stock. The Note is in the principal amount of $250, 000. The Warrant allows Vista “to purchase 350, 000 shares of [Natural Shrimp's] Common Stock.” The Securities Purchase Agreement provides that “[t]he Warrants shall vest such that [Vista] shall receive 1.4 warrants for every dollar funded to [Natural Shrimp] under the Note.” The Securities Purchase Agreement provides that Vista “shall pay the purchase price of $50, 000.” “Upon the closing of [the Securities Purchase Agreement] and initial funding of $50, 000 . . . [Vista] shall receive a Warrant to purchase 70, 000 shares of common stock.” (ECF No. 1, Exhibit A at 28).

         Clark is the “principal and sole representative” of Vista, a sole proprietorship. (Id. ¶¶ 1, 12). On “multiple occasions in the days prior to execution” of the Securities Purchase Agreement, Note, and Warrant, Clark made oral representations to Natural Shrimp's CEO, Bill Williams, and CFO, William Delgado. (Id. ¶¶ 22-23). Clark represented that 1) the Warrant was not an “exploding warrant;” 2) there was a floor on the price of any future share purchase by Vista; 3) there was a cap on the number of shares available for purchase by Vista; 4) Vista would purchase 350, 000 Warrants from Natural Shrimp for $250, 000; and 5) the $250, 000 would be delivered in $50, 000 increments over five months-after the initial $50, 000 payment, every thirty days, beginning thirty days after execution of the Securities Purchase Agreement, Note, and Warrant. (Id. ¶¶ 22, 36). Clark represented that the 70, 000 shares of Common Stock that Vista could purchase after the initial $50, 000 payment would remain at an exercise price of $0.60 per share, for a total aggregate exercise price of $42, 000. Clark “presented” the Warrant to Williams and Delgado as “a standard form document unworthy of close review.” (Id. ¶ 29). Clark made these representations “to induce Natural Shrimp to enter” the agreements. (Id. ¶ 22).

         These representations were false. After making the initial $50, 000 payment under the Securities Purchase Agreement, Vista “failed and refused to provide the additional funds that it promised.” (Id. ¶ 60). Natural Shrimp relied on Clark's representations and would not have executed the Securities Purchase Agreement, Note, or Warrant if it knew that Clark “lied about Vista's delivery of additional financing” and only intended to deliver one-fifth of the financing promised. (Id. ¶¶ 65-66).

         In addition, the Warrant contained “price-adjustment and cashless exercise provisions” designed to benefit the drafting party, Vista, and mislead Natural Shrimp. (Id. ¶¶ 32, 39). The price-adjustment provision made it so “the number of shares Vista was able to acquire was on a sliding scale . . . . If the Exercise Price decreased, the number of shares issuable pursuant to the Warrant increased.” (Id. ¶ 43). The cashless exercise provision “permitted Vista to purchase shares without ever having to pay for them in cash” by providing Vista with “the option to forego a portion of the shares to which it was entitled in order to utilize those shares to pay for other shares at a reduced price.” (Id. ¶¶ 47-48). The price-adjustment and cashless exercise provisions, drafted by Defendants, are inconsistent with Clark's representations regarding the exploding warrant, price floor, and purchase cap.

         On February 22, 2019, Vista sent Natural Shrimp a Notice of Exercise of Warrant seeking to acquire 16, 052, 090 shares of Natural Shrimp's common stock at a price of $0.0026 per share. Instead of paying Natural Shrimp $42, 000 to acquire the shares, Vista sought to utilize the cashless exercise provision to acquire the shares without expending additional funds. The shares had an aggregate market value of $7.135, 154. Natural Shrimp would never have agreed to the inclusion of the exploding warrant, but Clark concealed the existence of the exploding warrant to induce Natural Shrimp to enter into the Securities Purchase Agreement, Note, or Warrant.

         Natural Shrimp brings claims against Vista for 1) rescission; 2) fraudulent inducement; 3) breach of the covenant of good faith and fair dealing; 4) unjust enrichment; and 5) promissory estoppel. Natural Shrimp brings a claim against Clark for fraudulent inducement. Natural Shrimp seeks 1) rescission of the Securities Purchase Agreement, Note, and Warrant; 2) general, special, exemplary, and punitive damages on all claims except the rescission claim; 3) injunctive relief; 4) interest, attorneys' fees, and costs; and 5) “such other and further relief as the Court may deem proper.” (Id. at 24-25).

         II. ...


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