Text of the response:
Dear Judge Buchwald:
We are counsel for plaintiff EMA Financial, LLC and we write in response to the letter dated May 23, 2018 from defendant's counsel requesting apre-motion conference. There is no need for a conference as nothing presented in defendant's letter provides a basis for a motion to dismiss. We address below each of the three points raised in defendants letter.
Plaintiff advanced funds to defendant in two heavily negotiated transactions, one in December 2017 and a second in January 2018. Plaintiff received warrants in connection with each transaction. The December 5, 2017 Warrant had an initial exercise price of $0.11 for 1,200,000 shares. Defendants shares closed at $0.0955 on the date of its issuance. The January 11, 2018 Warrant has an initial exercise price of $0.14 for 500,000 shares. Defendant's shares closed at $0.10 on the date of issuance. Plaintiff has filed suit to enforce the plain terms of the Warrants, which cal] for an adjustment to the exercise price and the number of shares to be issued.
Service of Process
First, defendants suggest that the Summons and Complaint were not properly served because they were sent by Federal Express. The Warrants were issued pursuant to Securities Purchase Agreements, each of which contain substantially similar terms. In each Securities Purchase Agreement, Section 10(a) provides:
"Each party hereto irrevocably waives personal service of process and consents to process being served in any suit, action or proceeding in connection with this agreement or any other transaction document contemplated hereby, by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof "
Plaintiff thus served the Surmnons and Complaint by "overnight delivery" through Federal Express; the Federal Express tracking system provided evidence of that delivery. I have annexed a copy of the tracking report from Federal Express. The foregoing satisfied the terms of the Securities Purchase Agreement. Plaintiff has therefore effected valid service of the Summons and Complaint.
To avoid any issues, Plaintiff has re-served the Summons and Complaint on defendant's
registered agent in Nevada.
Defendant next indicates that it intends to move to dismiss on the grounds that the
issuance of the Warrants rendered the loans usurious under N.Y. Penal L. § 190.42. Defendant's
affirmative defense of usury provides no basis for a motion under FRCP 12(b)(6). The theory
also fails under New York law, should the Court choose to apply New York law instead of the
law selected by the parties, that of Nevada.
Each Warrant was "out of the money" when issued, meaning their exercise price
exceeded the market price for nFUSZ Common Stock. To advance his azgument, counsel for
defendant misstates the exercise price of each Warrant. The December 5, 2017 Warrant has an
exercise price of $0.11 per share, when the market closed that day at $0.0955; the January 11,
2018 Warrant has an exercise price of $0.14, when the market that day closed at $0.10.
Under New York law, usury results from a loan of money at an annualized rate of interest
that exceeds lawful limits. E.g., Schermerhorn v. Talman, 14 N.Y. 93, 115 (N.Y. 1856). New
York law provides for criminal and civil usury at varying rates and subject to numerous
exceptions not relevant here. N.Y. Gen. Oblig. Law § 5-501 (imposing a civil ustuy cap of 16%);
N.Y. Penal L. § 190.42 (imposing a criminal usury cap of 25%).
Defendant concedes that the loans were lawful on their face, but azgues that the Warrants
are elements of value comparable to cash fees paid to the lender, so that the actual loan amount
should be reduced. New York Courts, including the Court of Appeals, have repeatedly held that
"[usury laws apply only to loans or forbearances, not investments" Seidel v. 18 E. 17th St.
Owners, Inc., 79 N.Y.2d 735, 744 (N.Y. 1992) (citations and internal quotations omitted.
Consistent with these principles, "there can be no usury unless the principal sum advanced is
repayable absolutely." Transmedia Rests., Inc. v 33 East 61st Rest. Corp., 710 N.Y.S.2d 756,
760 (N.Y. Sup. Ct. 2000). A "loan is not usurious merely because there is a possibility that the
lender will receive more than the legal rate of interest." See, e.g., Lehman v. Roseanne Investors
Corp., 106 A.D.2d 617, 618, 483 N.Y.S.2d 106, 108 (2d Dep't 1984) (emphasis added); see also
72 N.Y. Jur. 2d Interest and Usury § 63 ("a loan in consideration of a share in profits, income, or
earnings, in lieu of, or in addition to, interest, is not usurious, in the absence of certainty that the
arrangement would produce a return in excess of the legal rate of interest...") (emphasis added).
For example, paying a part of profits in lieu of interest, with no guazantee of profits, is by
definition not usury. See Clift v. Barrow, 108 N.Y. 187, 192-194 (N.Y. 1888); Lefbovici v.
Rawicki, 57 Misc.2d 141, 144-145 (N.Y. Civ. Ct. 1968); Mueller v. Brennan, 68 N.Y.S.2d 517,
518 (N.Y. Sup. Ct. 1947).
Notes convertible into common stock and out-of-the money warrants are a common
feature of the financial world, with underwriters offering many billions of dollars in these
securities each year. No court has ruled that these instruments are usurious merely because the
value of the underlying common stock obtained through the Warrants might provide a return in
excess of 25%per annum. It might also yield no value. The uncertain, contingent nature of the
Warrants mandates their exclusion from any usury analysis.
The two cases cited by defendant demonstrate that its theory has no merit. In Hillair
Capitallnvs., L.P. v Integrated Freight, 963 F.Supp. 2d 336, 338 (S.D.N.Y. 2013), the Court
reviewed a transaction in which the lender received a cash payment from the borrower for fees as
well as 953,030 shares of the borrower's Common Stock. The District Court permitted a motion
to amend the Answer to add an affirmative defense of usury to address whether these in-kind and
cash payments rendered the effective interest rate on the loan usurious. Unlike the out-of-themoney
Warrants here, the Common Stock in Hillair Capital had a fixed and certain value on the
date of delivery. In Alpha Capital Anstalt v. bioMETRX, NYSIip Op. 30045 (U) (Sup. Ct. Suffolk
Co. 2010), the Court reviewed a transaction in which the lender received from the borrower two
tranches of Warrants, one denominated Series A and the other Series B. The exercise price of the
Series B Warrant was $0.10 while the stock was then trading at $1.35. The Series A Warrants,
like those received by plaintiff in this case, were out of the money. The Court ruled, "While the
stated interest rate of only 8%per annum clearly falls below the proscribed rate of 25%per
annum, defendants have raised issues of fact regarding the effective interest rate when the
Series B Warrant and the other fees and charges are included in the calculation of the rate."
Significantly, defendants did not argue that the out-of-the money Series A warrants were
elements of value and the Court made no such ruling.
Nevada Law
Last, defendant argues that Nevada law should not apply, notwithstanding the parties'
agreement to choose the law of that forum. Defendant fails to mention the State of its
incorporation—Nevada. For this reason, the State of Nevada has ample nexus to the transaction
and is appropriate. There is no reason why a Nevada borrower should be entitled to invoke New
York's usury laws. In any event, the choice of law question provides no basis for a motion under
FRCP 12(b)(6).
Conclusion
Based on the foregoing, we respectfully submit there is no need for apre-motion
conference. Defendant should be directed to answer the Complaint.
Sincerely,
.~~r~
Thomas J. Fleming
Enclosure
cc: Mark R. Basile, Esq.
