Federal Court, Citing Adar Bays, Reverses Its Own Judgment Previously Granted to a Note Lender

On November 7, 2022, the U.S. District Court for the Southern District of New York, citing the New York Court of Appeals’ decision in Adar Bays, granted our client’s Rule 60 motion to vacate a final judgment it had previously granted in favor of LG Capital Funding, LLC, a convertible note lender, and against our client, ExeLED Holdings, Inc., an issuer. The now-vacated judgment in LG Capital Funding, LLC, v. ExeLED Holdings, Inc., f/k/a Energie Holdings, Inc., Case No. 1:17-cv-04006 (“ExeLED”), was in the amount of $512,412.19, plus $151,461.02 in damages for ExeLED’s purported anticipatory breach of the note, and $80,412.50 to cover LG Capital’s attorneys’ fees—totaling more than $744,000.00. Since the convertible note had a face value of only $58,937.26, the damages previously awarded by the Court were nearly 10 times the value of the note.

In its order, the Court agreed with ExeLED that—in light of the New York Court of Appeals’ decision in Adar Bays, LLC v. GeneSYS ID, Inc., 37 N.Y. 3d 320 (N.Y. 2021)—the Court had committed an error of law in granting the final judgment in LG Capital’s favor that rejected ExeLED’s valid criminal usury defense under New York law. The Court applied Federal Rule of Civil Procedure 60, requiring the Court to correct its own, earlier error, and reopen the case, thereby allowing ExeLED to proceed with its challenge to the legality of LG Capital’s loan. The same reasoning can be applied to many other cases where the adjudicating court erroneously failed to adhere to the reasoning articulated in Adar Bays, even where a judgment was entered before the Court of Appeals issued its decision in that case.

Adar Bays has confirmed what ExeLED and other microcaps wrung-out by abusive lenders have consistently argued: that a floating-price conversion option—an option with a strike price guaranteed to be “in the money” by a certain fixed discount—has obvious and substantial value, and that—when given as consideration for a loan—the value of that option must be included when calculating the total interest charges.

Consistent with the directive of Adar Bays, the lending practices of firms like LG Capital must now be carefully scrutinized by the courts when looking at interest charges for possible violations of New York’s criminal usury laws. Indeed, with the prior erroneous judgment in ExeLED now set aside, the record in the case has been reopened; if the evidence shows that LG charged interest at a rate of 25% A.P.R. or above—its note will be declared null and void in.

The ExeLED decision is precedent for other public company issuers to challenge the enforcement of similar judgments, in which their valid usury defenses were mistakenly rejected by federal and state courts in New York—including judgments issued prior to Adar Bays. ExeLED may provide a basis to challenge other judgments obtained by LG Capital Funding, LLC, as well as judgments granted in error to other convertible note lenders, such as EMA Financial, LLC; GS Capital Partners, LLC; Power Up Lending Group, Ltd.; FirstFire Global Opportunities Fund, LLC; RedStart Holdings Corp. / Geneva Roth Remark Holdings Inc. / Geneva Roth, LLC / Vis Vires Group LLC; Adar Bays, LLC; Crown Bridge Partners, L.P.; Blue Citi, LLC; Coastal Investment Partners, LLC.

Eric J. Benzenberg, Esq. is a securities litigation attorney at The Basile Law Firm P.C. Eric can be reached at Eric@thebasilelawfirm.com. To learn more about what we can do for you, please call us today at 516.455.1500 ext. 112 for a free initial consultation. With offices in New York, Texas, and Florida, The Basile Law Firm P.C. looks to serve public companies and shareholders nationwide.