EMA Fin., LLC v. Vystar Corp.

EMA FINANCIAL, LLC, Plaintiff, v. VYSTAR CORP., INC., Defendants.

1:19-cv-01545-ALC-GWG

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

March 29, 2021

OPINION AND ORDER

ANDREW L. CARTER, JR., District Judge:

The Court now considers a motion by Plaintiff EMA Financial, LLC that the Court enter summary judgment in its favor and dismiss all claims and counterclaims by Defendant Vystar Corp, Inc. For the reasons that follow, the Court DENIES EMA's motion, except that it DISMISSES one of Vystar's defenses and the corresponding counterclaim.

Background

This matter arises from a series of Agreements between the parties that includes a Securities Purchase Agreement (the "SPA") and a Convertible Note ("Note") valued at $80,000. EMA seeks to recover damages for several breaches of the Note and SPA, the details of which have been set forth in prior opinions of this Court and the Honorable Gabriel W. Gorenstein, to whom this case is referred for general pretrial purposes. See EMA Fin., LLC v. Vystar Corp., No. 1:19-cv-01545 (ALC), 2020 U.S. Dist. LEXIS 44762 (S.D.N.Y. Mar. 13, 2020), EMA Fin., LLC v. Vystar Corp., 336 F.R.D. 75 (S.D.N.Y. 2020). The Court therefore assumes the reader's familiarity with the underlying Agreements.

By its Amended Answer, Affirmative Defenses and Counterclaims ("ACC", ECF No. 60), Vystar asserts that EMA's claim is barred because, inter alia, EMA acted as an unregistered broker-dealer in violation of Section 15(a)(1) of the 1934 Securities Exchange Act, 15 U.S.C. § 78o(a)(1); the Agreements are unconscionable; and EMA breached the Agreements by calculating the balance of the Note incorrectly. Vystar counterclaims: that EMA manipulated its stock in violation of Section 10(b) and Rule 10b-5 of the Exchange Act (Count I); that EMA violated Section 15(a)(1) of the Exchange Act by acting as an unregistered broker-dealer (Count II); that the Agreements are unconscionable, unenforceable, and that the legal fee provision must be mutual (Count III); seeking to recover in unjust enrichment if the contract is found to be void or unenforceable (Count IV); for breach of contract by EMA (Count V); and for attorneys' fees (Count VI).

On June 4, 2020, EMA filed a motion pursuant to Rule 56 of the Federal Rules of Civil Procedure asking the Court to grant summary judgment on its breach of contract claim and to dismiss Vystar's counterclaims and affirmative defenses pursuant to Rules 9 and 12. ECF No. 75. Vystar opposed the motion for summary judgment and dismissal on July 8, 2020. ECF No. 91. EMA filed a reply in support of the motion for summary judgment and dismissal on July 28, 2020. ECF No. 103.

Standard of Review

Summary judgment is appropriate where the record establishes that "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). "A genuine issue of material fact exists if 'the evidence is such that a reasonable jury could return a verdict for the nonmoving party.'" Nick's Garage, Inc. v. Progressive Cas. Ins. Co., 875 F.3d 107, 113 (2d Cir. 2017) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986)). All facts must be viewed in the light most favorable to the nonmoving party, and the nonmoving party must be given the benefit of all reasonableinferences. See Sulewski v. Federal Express Corp., 933 F.2d 180, 182 (2d Cir. 1991). "Where . . . a party moves for summary judgment on the ground that the nonmoving party bears the burden of proof and will be unable to prove an essential element of his case, Rule 56 allows summary judgment only 'after adequate time for discovery.'" Salahuddin v. Coughlin, 993 F.2d 306, 308 (2d Cir. 1993) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986)).

Discussion

In light of the limited discovery that has occurred in this case to date, as a first step, the Court considers the viability of Vystar's defenses and counterclaims. To the degree they are properly pleaded, it would be premature to grant summary judgment. Although the Court deems it appropriate to dismiss the claim and counterclaim based on EMA being an alleged unregistered broker-dealer, the Court concludes that Vystar is entitled to discovery as to the others. Accordingly, the Court GRANTS EMA's motion in part and DENIES it in part.

A. Broker-Dealer Affirmative Defense and Counterclaim

The Court begins with Vystar's argument that the Agreements are voidable because EMA acted as an unregistered broker-dealer in violation of Section 15 of the Securities Exchange Act of 1934, thereby running afoul of Section 29(b) of the Exchange Act. For the reasons that follow, the Court DISMISSES both the defense and counterclaim based on this argument. See ACC ¶ 71 (Affirmative Defense); ¶¶ 204-209 (Counterclaim).¹

Section 15 provides: "It shall be unlawful for any broker or dealer . . . to make use of the mails or any means or instrumentality of interstate commerce to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security . . . unless such broker or dealer is registered. . . ." 15 U.S.C. § 78o(a)(1).

Section 29(b), provides:

Every contract made in violation of any provisions of this title [15 USCS §§ 78a et seq.] or of any rule or regulation thereunder, and every contract. . . heretofore or hereafter made, the performance of which involves the violation of, or the continuance of any relationship or practice in violation of, any provision of this title [15 USCS §§ 78a et seq.] or any rule or regulation thereunder, shall be void (1) as regards the rights of any person who, in violation of any such provision, rule, or regulation, shall have made or engaged in the performance of any such contract . . .

15 U.S.C. § 78cc(b).

"To establish a violation of Section 29(b), the plaintiffs must show that (1) the contract involved a prohibited transaction, (2) he is in contractual privity with the defendant, and (3) he is in the class of persons the Act was designed to protect." Pompano-Windy City Partners, Ltd. v. Bear Stearns & Co., 794 F. Supp. 1265, 1288 (S.D.N.Y. 1992) (citing Regional Properties, Inc. v. Financial and Real Estate Consulting Co., 678 F.2d 552, 559 (5th Cir. 1982)) (internal quotes omitted). However, "under [Section] 29(b) of the Exchange Act, only unlawful contracts may be rescinded, not unlawful transactions made pursuant to lawful contracts." Id. (citing Zerman v. Jacobs, 510 F. Supp. 132, 135 (S.D.N.Y.) (Weinfeld, J.), aff'd, 672 F.2d 901 (1981)); see also Slomiak v. Bear Stearns & Co., 597 F. Supp. 676, 682 (S.D.N.Y. 1984); Drasner v. Thomson McKinnon Securities, Inc., 433 F. Supp. 485, 488-89 (S.D.N.Y. 1977).

EMA argues that Vystar's argument fails as a matter of law because the Agreements do not require EMA to act as a broker-dealer and are therefore not voidable under Section 29(b).Vystar urges the Court to permit more discovery on EMA's conduct to support this claim. However, further discovery would be futile for the reasons explained in LG Capital Funding, LLC v. ExeLED Holdings, Inc., 2018 U.S. Dist. LEXIS 202540, at *16 (S.D.N.Y. Sep. 28, 2018). There, the court granted summary judgment on a claim like Vystar's that a SPA was voidable because the defendant was an unregistered broker-dealer. The LG Court concluded that "LG may have acted improperly when it sold off the shares that it received in response to conversions of the second note, for example, but because nothing in the Note or the SPA 'explicitly require[d it] to act as a broker,' the Court can only conclude that the Contracts were still capable of performance even if LG failed to register as a dealer. Put another way, the Note and the SPA are not voidable 'unlawful contracts', and ExeLED cannot use the threat of a hypothetical SEC action to vitiate contracts that were lawful at the time they were executed." Id. Notably, the LG Court did not resolve any factual issues regarding whether LG did or did not act as a broker-dealer.

The logic from LG applies with equal force in this case. Vystar contends that EMA acted as an unregistered broker-dealer in violation of the Exchange Act. However, Vystar has not indicated any way in which the Agreements, which are incorporated by reference into the Complaint and upon which it could rely on a motion to dismiss, require EMA to do so. See Frati v. Saltzstein, 2011 U.S. Dist. LEXIS 25567, at *17-18 (S.D.N.Y. Mar. 14, 2011) ("Lastly, Plaintiffs claim that § 29(b) gives them the right to rescind the Subscription Agreements because RAM, Saltzstein, and Fein failed to register as broker-dealers under § 15(a)(1) of the '34 Act. (Pl. Mem. 20 n.45.) There is, however, no reason to believe that the contracts themselves could not be legally performed — a fact which is fatal to Plaintiffs' claim."); GFL Advantage Fund, Ltd. v. Colkitt, 272 F.3d 189, 202 (3d Cir. 2001) ("In the end, GFL's alleged unlawful activity (i.e., its short sales) is too attenuated from the parties' valid, lawful contracts (i.e., the National Medical and EquiMednotes) or GFL's performance thereunder. Therefore, we conclude that the notes were neither made nor performed in violation of any federal securities laws as is required for rescission under Section 29(b)). Though Vystar urges the Court that EMA's allegedly illegal conduct is "inextricably intertwined" with the Agreement, it has pleaded no facts showing as much. Accordingly, the Court dismisses this defense.

The Court also dismisses Vystar's counterclaim that EMA acted as an unregistered broker-dealer in violation of Rule 15(a)(1) because that provision provides no private right of action. See Goodman v. Shearson Lehman Bros., Inc., 698 F. Supp. 1078, 1083 (S.D.N.Y. 1988).

B. Section 10(b) and Rule 10b-5 of the 1934 Exchange Act

The Court next considers Vystar's misrepresentation and market manipulation counterclaim. ACC ¶ 184-203. EMA contends that this counterclaim should be...