EMA Fin., LLC v. Chancis

80 F.4th 395

EMA FINANCIAL, LLC, Plaintiff-Counter-Defendant-Counter-Claimant-Appellee-Cross-Appellant, v. Joey CHANCIS, Richard Roer, Defendants-Counter-Claimants-Counter-Defendants-Appellants-Cross-Appellees,RAR Beauty, LLC, Labb, Inc., Reflex Productions, Inc., Richard Chancis,Joey New York, Inc., Defendants-Counter-Claimants-Counter-Defendants.^*

Docket No. 22-274(L)

Docket No. 22-402(XAP)

August Term, 2022

United States Court of Appeals, Second Circuit

Argued: March 27, 2023

Decided: September 6, 2023

Jeffrey Fleischmann, Law Office of Jeffrey Fleischmann, P.C., New York, NY, for EMA Financial, LLC;

Marjorie Santelli (Mark R. Basile and Eric Benzenberg, on the brief), The Basile Law Firm P.C., Jericho, NY, for Joey Chancis and Richard Roer.

Before: Sack, Lohier, and Carney, Circuit Judges.

Sack, Circuit Judge:

This action concerns loans issued by the plaintiff, EMA Financial, LLC (hereinafter, "EMA"),¹ to a group of companies (hereinafter, the "Corporate Defendants")² that were controlled by Joey Chancis, Richard Chancis, and Richard Roer (hereinafter, the "Individual Defendants"). The loan agreements contained so-called "floating-price conversion option" provisions, which gave EMA the right to receive company stock at a discounted rate in lieu of cash repayment on the loans. Following the execution of the loan agreements, the Individual Defendants commingled company funds with their personal assets and disregarded corporate formalities.

When EMA initially sought partial repayment of the loans through the stock repayment option in 2017, the Corporate Defendants delivered the shares to EMA at the agreed-upon discount rate. But when EMA sought to exercise the conversion option again later that year, the Corporate Defendants failed to deliver the stock.

EMA then brought suit against the Corporate Defendants and the Individual Defendants, claiming, inter alia, breach of contract and breach of guaranty as to the loan agreements, fraudulent conveyance, and fraudulent inducement. The Corporate Defendants and the Individual Defendants asserted as an affirmative defense that the loan agreements were void because the conversion option provisions rendered the loan agreements criminally usurious under New York law. On summary judgment, the district court (Vernon S. Broderick, J.) dismissed this defense and granted some of EMA's claims. The district court then held a bench trial to resolve the remaining issues in the case, including EMA's claims for fraudulent conveyance and fraudulent inducement against the Individual Defendants.³ The district court ultimately entered judgment in favor of EMA for some of its claims and in favor of the Individual Defendants for others.

Joey Chancis and Richard Roer (hereinafter, the "Defendants/Appellants") now appeal, arguing in relevant part that the district court's dismissal of the usury defense at summary judgment should be vacated in view of an intervening change in New York law. EMA cross-appeals, challenging, among other things, several of the findings in the district court's post-trial order.

We agree with the Defendants/Appellants that the district court erred in deciding that, as a matter of law, the loan agreements were not usurious under New York law. We therefore decline to address EMA's challenges to the district court's judgment at this time. Accordingly, we vacate the district court's judgment in part and remand for further proceedings consistent with this opinion.

BACKGROUND⁴

I. Joey New York

In 1993, Joey Chancis (hereinafter, "Chancis") co-founded Joey New York. The company created and distributed skincare and cosmetic products. In or around 2009, Joey New York temporarily ceased operations.

In 2010, Richard Roer (hereinafter, "Roer") co-founded RAR, another company that manufactured and distributed beauty and skincare products. Roer was president of RAR and co-president of Reflex, a division of RAR.

In 2014, Joey New York resumed operations and sold shares to the public. The publicly traded company was named Joey New York, Inc.⁵ At that time, Roer served as president and Chancis served as CEO of Joey New York. In August 2016, Joey New York acquired a 100% interest in RAR and Labb. Around the time that Joey New York went public, Chancis's husband, Richard Chancis, began working as a consultant for Joey New York. In the following years, Richard Chancis took on increasing responsibilities for company operations.

In 2017, Joey New York sought financing to expand its operations. Accordingly, on February 1, 2017, Joey New York and EMA entered into a Securities Purchase Agreement (hereinafter, the "First SPA") pursuant to which EMA purchased a convertible redeemable promissory note from Joey New York for $90,000 (the "First Note"). On May 3, 2017, EMA and Joey New York entered into a second Securities Purchase Agreement (hereinafter, the "Second SPA," and together with the First SPA, the "SPAs"), pursuant to which EMA purchased another convertible redeemable promissory note from Joey New York for $151,600 (hereinafter, the "Second Note," and together with the First Note, the "Notes"). Other than the dollar figures, the relevant terms of the Notes are materially identical.

EMA had two options to seek repayment of the loans. It could collect cash repayments, at a default interest rate on the Notes of 24% per year. Alternatively, the Notes contained, and allowed EMA to collect under, floating-price conversion option provisions. As explained by the New York Court of Appeals, a floating-price conversion option is a contract provision that "permits a lender to convert outstanding balance [of debt] to shares of stock at a fixed discount." Adar Bays, LLC v. GeneSYS ID, Inc., 37 N.Y.3d 320, 334, 157 N.Y.S.3d 800, 179 N.E.3d 612 (2021) (Adar Bays II). In relevant part, the Notes provide:

[EMA] shall have the right, in its sole and absolute discretion, at any time from time to time, to convert all or any part of the outstanding amount due under this Note into fully paid and non-assessable shares of Common Stock, as such Common Stock exists on the Issue Date, or any shares of capital stock or other securities of the Borrower into which such Common Stock shall hereafter be changed or reclassified at the conversion price (the "Conversion Price") determined as provided herein (a "Conversion").

[The Conversion Price is the] lower of: (i) the closing sale price of the Common Stock on the Principal Market on the Trading Day immediately preceding the Closing Date, and (ii) 65% of the average of the lowest two (2) sale prices for the Common Stock on the Principal Market during the twenty (20) consecutive Trading Days immediately preceding the Conversion Date or the closing bid price.

EMA Fin. LLC v. Joey N.Y. Inc., No. 17-cv-9706 (VSB), 2022 WL 292920, at *3-4 (S.D.N.Y. Feb. 1, 2022) (citations omitted).

To summarize, under this provision, EMA had the right to exercise an option to exchange debt owed to it under the Notes for company stock. The conversion option guaranteed EMA a strike price on company stock pegged at 65% of the market price at the time when EMA exercised the option. By way of example, if EMA opted to convert $100 of debt, EMA would receive an amount of company stock worth about $154 at the time of conversion, and the loan principal would be treated as paid down by $100—i.e. 65% of approximately $154.

II. Conduct Following the Execution of the SPAs

Following the execution of the SPAs, Joey New York faced business headwinds. It ultimately failed to turn a profit or make any cash payments to pay down the loans. None of the Individual Defendants ever received a salary from the company after Joey New York went public, despite having invested substantial funds in the company. However, the Individual Defendants made various withdrawals and transfers from the Corporate Defendants' accounts following the execution of the SPAs. As explained by the district court:

The parties have stipulated as to hundreds of withdrawals, transfers, and other financial transactions that the Individual Defendants made from various corporate accounts since Plaintiff made its first loan to Defendants. These transactions roughly fall into five categories.

First, there are instances where the Individual Defendants transferred money from the corporate accounts to their personal accounts in an effort to reimburse themselves after using the funds in the personal accounts for business expenses. To this end, Defendants testified that they commonly used their personal accounts to pay for significant expenses on behalf of the corporate entities and would reimburse those personal accounts, often when the spending limits on those personal accounts had been reached.

The second category of stipulated transactions involve instances where the Individual Defendants transferred money between the various corporate accounts.

Third, there were instances where the Individual Defendants withdrew money from the various corporate accounts for what appear to be legitimate business purposes.

Fourth, there were instances where the Individual Defendants withdrew money from the various corporate accounts for purposes that, at the very least, seem unusual for business expenses and perhaps skirted the line between business and personal.

Fifth, there were instances where the Individual Defendants made transfers or withdrawals for which they testified they do not know the purpose. Defendants provided few receipts indicating contemporaneous corroboration of the purpose of these transactions. The Individual Defendants testified that they submitted receipts to Stephanie Cspeke, who was employed by the accounting firm that served as the SEC accountant for the corporate entities, but Defendants did not submit robust documentation to corroborate this process.

EMA Fin., 2022 WL 292920, at *5-6 (internal citations to trial transcripts and footnote omitted).

III. EMA's Conversions

First in August and September 2017, and then again in 2020 and 2021, pursuant...