Cd International Enterprises, Inc v. Rockwell Capital Partners, Inc

Citations: 251 F. Supp. 3d 39; 2017 U.S. Dist. LEXIS 61405Docket: Civil Action No. 2016-0394

Court: District Court, District of Columbia; April 24, 2017; Federal District Court

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CD International Enterprises, Inc. (CDII) filed a lawsuit against Rockwell Capital Partners, Inc. and others after Rockwell exercised its right to convert CDII's debt into shares and subsequently sold those shares, leading to a significant decline in CDII's stock price. The court found that Rockwell's actions were in accordance with their negotiated agreements and thus ruled that no valid cause of action existed against Rockwell. Consequently, the court dismissed CDII's complaint.

The background details CDII's operations as a Florida-based mineral trading and consulting firm, its financial dealings with private lender Kong Tung, and the subsequent assignment of that debt to Rockwell. After CDII defaulted on repayment, an amended note was created allowing Rockwell to convert the debt into stock at any time. Rockwell exercised this conversion right multiple times, resulting in a drastic drop in CDII's stock value. CDII’s claims included allegations of lack of consideration, fraud, and violations of the Convertible Note terms, among others, but these claims were rejected by the court.

Defendants have filed a motion to dismiss the Complaint under Federal Rule of Civil Procedure 12(b)(6), having waived defenses related to personal jurisdiction and venue. A motion under Rule 12(b)(6) assesses the legal sufficiency of a complaint, requiring it to present enough factual matter to establish a plausible claim for relief. The complaint must allow the court to reasonably infer the defendant's liability based on the factual allegations, which must be taken as true and construed favorably towards the plaintiff. However, mere conclusory statements are inadequate to survive dismissal. When fraud is alleged, the complaint must detail specific circumstances of the fraud, adhering to Rule 9(b), which necessitates clarity about the "who, what, when, where, and how" of the fraud.

In evaluating CDII's claim that the Convertible Note is void due to lack of consideration, the court notes that it does not assess the adequacy of consideration as long as it is legally sufficient. Consideration may involve an exchange of promises or a detriment to the promisee that is bargained for. The Convertible Note involved legally sufficient consideration as Rockwell reduced the interest rate from 24% to 8%, eliminated the maturity date, and reduced the pledged asset scope. CDII's assertion that these actions do not constitute valid consideration is dismissed, as the court emphasizes that significant disparities in exchanged values do not negate consideration. CDII's claims regarding the invalidity of the maturity date elimination and the reduction in pledged assets are deemed irrelevant, as these were still bargained-for benefits. Ultimately, the court concludes that the agreement is supported by legally sufficient consideration, regardless of CDII's dissatisfaction with the deal.

CDII contends that the Convertible Note is void due to fraudulent inducement by Rockwell, claiming it relied on Rockwell’s representation that it would not liquidate CDII shares without offering reimbursement first. This representation was allegedly made during negotiations in September 2015. However, the final agreement did not include any such restriction on Rockwell’s conversion rights and specified that no other terms or oral promises could be enforced. Under Nevada law, to prove fraud in the inducement, a plaintiff must show justifiable reliance on an intentionally false representation. Courts have held that reliance on statements made during negotiations, which do not appear in the final contract, is not justifiable. CDII does not allege that Rockwell fraudulently altered the agreement terms but only claims reliance on pre-contract representations, which is deemed unjustifiable, particularly given CDII's presumed sophistication as an international business. Consequently, the court will dismiss CDII's fraudulent inducement claim.

Additionally, CDII argues that the Convertible Note is void as it violates public policy due to its nature as a "floorless" or “toxic” convertible security, which can lead to significant stock price reductions and adverse effects on the company and its shareholders. It is recognized that a contractual term may be unenforceable if its enforcement is outweighed by public policy concerns.

Rockwell's Convertible Note potentially allowed it to profit at the expense of CDII’s shareholders, which may have been Rockwell's intention. However, the Second Circuit indicated that purchasing floorless convertible securities is not inherently manipulative, as they help distressed companies access capital. The court found no public policy reasons to enforce the Convertible Note against Rockwell.

CDII's breach of contract claim alleges that Rockwell failed to notify it directly before exercising conversion rights, as required by the Convertible Note. Under Nevada law, a breach of contract claim necessitates proof of a valid contract, breach, and resulting damages. Rockwell conceded it did not notify CDII directly but argued that it informed CDII’s stock transfer agent, Colonial, as per CDII's prior instructions. Despite the apparent breach, the court noted that CDII did not demonstrate any damages resulting from the lack of direct notice and did not seek to amend its complaint. Consequently, the court concluded that CDII conceded this argument by failing to address it in its filings and dismissed the breach of contract claim.

In Count Four, CDII sought damages for wrongful conversion of shares, but the complaint did not clarify whether this referred to wrongful stock conversions or a separate tort of conversion. Under Nevada law, conversion requires a wrongful act over another's property, which must be tortious. The court determined that Rockwell's actions were consistent with their agreements, leading to the dismissal of Count Four as well. Ultimately, the court granted the defendants' motions to dismiss and dismissed the entire suit.