Social Life Network, Inc. v. LGH Investments, LLC

[7] 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA [10] 11 SOCIAL LIFE NETWORK, INC., Case No.: 3:21-cv-00767-L-MDD 12 Plaintiff, ORDER DENYING DEFENDANTS’ 13 v. MOTION TO DISMISS 14 LGH INVESTMENTS, LLC AND [ECF No. 42] LUCAS HOPPEL, [15] Defendants. [17] Before the Court is Defendants LGH Investments, LLC (“LGH”) and Lucas [18] Hoppel’s (“Hoppel”) (collectively, “Defendants”) motion to dismiss all of Plaintiff Social [19] Life Network, Inc’s (“Plaintiff”) claims.1 (ECF No. 42.) The Court issued an order [20] dismissing all of Plaintiff’s claims from their first amended complaint. (ECF No. 57.) [21] Plaintiff appealed, and the Ninth Circuit affirmed in part and reversed in part, and [22] overturned this Court’s holding that Plaintiff was categorically exempt from California’s [23] usury laws. See Social Life Network, Inc. v. LGH Invs., LLC, 2023 WL 3641791 (9th Cir. [24] May 25, 2023). The Ninth Circuit remanded to this court to determine the sole question [27] 1 All claims against previous Defendant J.H. Darbie and Co. were dismissed in the Court’s previous [28] 1 of whether Plaintiff had stated a claim that the loan in dispute was usurious. This Court 2 ordered supplemental briefing on this question. (ECF Nos. 69, 72, 73.) The Court has 3 jurisdiction to decide the present matters pursuant to 28 U.S.C. § 1332 . The Court 4 decides the matters on the papers submitted and without oral argument. See Civ. L. R. 5 7.1(d.1). For the reasons stated below, the motion to dismiss is denied. 6 I. BACKGROUND 7 Plaintiff is a technology company that licenses software. (ECF No. 35 at 6.) Its 8 shares are publicly traded on the over-the-counter (OTC) markets. (Id.) In April 2019, 9 Plaintiff needed money to continue its business operations and marketing. (Id. at 9.) 10 Plaintiff hired Defendant J.H. Darbie & Co. (“Darbie”) to connect them with potential 11 lenders. (Id.) 12 Darbie arranged a financing transaction between Plaintiff and Defendant LGH that 13 was executed on April 11, 2019. (Id.) Under the agreement, LGH lent $100,000 to 14 Plaintiff in exchange for: (1) a convertible note for $110,000 plus 7% interest, payable in 15 seven months, with the note allowing LGH to elect to receive payment in stock at a price 16 of $0.15 instead of receiving cash at the time of maturity; (2) 150,000 shares of Plaintiff’s 17 restricted common stock, and; (3) a warrant for 412,500 shares of Plaintiff’s stock at a 18 strike price of $0.20 for an aggregate exercise amount of $82,500. (Id. at 14-15.) The 19 warrant also contained an anti-dilution or “most favored nations” clause, which stated 20 that if Plaintiff issued stock to other parties at a lower price than LGH’s strike price, the 21 strike price for LGH would be lowered to the lowest offered price and the number of 22 shares would increase such that the aggregate exercise amount would remain $82,500. 23 (ECF No. 35-4 at 5-6.) At the time of the transaction, Plaintiff’s stock was trading at 24 $0.145 per share. (ECF No. 35 at 15.) 25 On November 11, 2019, at the date of maturity, Plaintiff paid back the full 26 $117,700 that was due on the convertible note in cash. (Id.) Later, from December 7, 27 2020 to April 7, 2021, LGH began a series of transactions exercising the warrant. (Id. at [28] 1 18.) Due to the anti-dilution provisions of the warrant, LGH exercised the warrant at a 2 strike price of $0.0001, ultimately buying hundreds of millions of shares. 3 Plaintiff then brought a variety of claims under federal and state law, seeking 4 damages and to have the transaction declared void. The sole remaining claim is a usury 5 claim under Cal. Civ. Code § 1916-2 and Cal. Const. art. XV, § 1. 6 II. LEGAL STANDARD 7 A Rule 12(b)(6) motion to dismiss tests the sufficiency of the complaint. Navarro 8 v. Block, 250 F.3d 729, 732 (9th Cir. 2001). A pleading must contain, in part, “a short 9 and plain statement of the claim showing that the pleader is entitled to relief.” Fed. R. 10 Civ. P. 8(a)(2). Accordingly, a plaintiff must plead “enough facts to state a claim to relief 11 that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); see 12 also Fed. R. Civ. P. 12(b)(6). The plausibility standard demands more than “a formulaic 13 recitation of the elements of a cause of action,” or “‘naked assertions’ devoid of ‘further 14 factual enhancement.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, [15] 550 U.S. at 557 ). Accordingly, the complaint “must contain allegations of underlying 16 facts sufficient to give fair notice and to enable the opposing party to defend itself 17 effectively.” Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir. 2011). 18 In reviewing a Rule 12(b)(6) motion to dismiss, “[a]ll allegations of material fact 19 are taken as true and construed in the light most favorable to the nonmoving party.” 20 Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336 , 337–38 (9th Cir. 1996). However, a court 21 need not take legal conclusions as true merely because they are cast in the form of factual 22 allegations. See Roberts v. Corrothers, 812 F.2d 1173, 1177 (9th Cir. 1987). Similarly, 23 “conclusory allegations of law and unwarranted inferences are not sufficient to defeat a 24 motion to dismiss.” Pareto v. FDIC, 139 F.3d 696, 699 (9th Cir. 1998). 25 III. DISCUSSION 26 The usury analysis requires the Court to answer two questions. First, did Plaintiff 27 adequately plead that the loan was usurious. Second, does the statute of limitations 28 extinguish any potential claims. Each of these questions is taken in turn. 1 a. Whether Loan Is Usurious 2 i. Legal Standard – California Law of Usury 3 California’s law regarding excessive interest rates is set forth in the Usury Law, an 4 uncodified ballot initiative first adopted in 1918. See Cal. Civ. Code §§ 1916-1 et seq. 5 The Usury Law provides for forfeiture of usurious interest and provides for the civil 6 recovery of treble interest payments under certain circumstances. Id. §§ 1916-2, 1916-3. 7 The maximum legal interest rate is now set forth in Article XV of the California 8 Constitution, which provides that parties may contract for a rate of interest up to the 9 greater of ten percent per year or five percent per year over the discount rate of the 10 Federal Reserve Bank of San Francisco. Cal. Const. Art. XV, § 1. 11 Usury contains four elements: “(1) The transaction must be a loan or forbearance; 12 (2) the interest to be paid must exceed the statutory maximum; (3) the loan and interest 13 must be absolutely repayable by the borrower; and (4) the lender must have a willful 14 intent to enter into a usurious transaction.” Ghirardo v. Antonioli, 8 Cal. 4th 791 , 798 15 (Cal. 1994). An agreement containing a usurious interest rate renders the interest 16 provisions of a note void. Epstein v. Frank, 177 Cal. Rptr. 831, 837 (Cal. Ct. App. 1981). 17 Voiding of the interest provisions, however, “do[es] not affect the right of the payee to 18 recover the principal amount of the note when due. The inclusion of a usurious interest 19 provision, therefore, results, in effect, in a note payable at maturity without interest.” Id. 20 “The word ‘interest’ as used in the usury law includes any bonus, commission, or 21 any other form of compensation paid to the lender for the use of the money borrowed, but 22 it does not include expense items for investigating, appraising, inspecting and otherwise 23 servicing the loan.” Cambridge Dev. Co. v. U.S. Financial, 90 Cal. Rptr. 333, 335 (Cal. 24 Ct. App. 1970). Interest is measured as ascertainable market value at the time the loan is 25 made. Sandell, Inc. v. Bailey, 28 Cal. Rptr. 413, 421 (Cal. Dist. Ct. App. 1963). 26 ii. Analysis 27 It is undisputed by the parties that the transaction in question was a loan. LGH 28 loaned Plaintiff $100,000 dollars in exchange for (1) a convertible note for $110,000 plus 1 7% interest, payable in seven months, with the note allowing LGH to elect to receive 2 payment in stock at a price of $0.15 instead of receiving cash at the time of maturity; (2) 3 150,000 shares of Plaintiff’s restricted common stock, and; (3) a warrant for 412,500 4 shares of Plaintiff’s stock at a strike price of $0.20 for an aggregate exercise amount of 5 $82,500. (ECF 35 at 14-15.) 6 The convertible note obligated Plaintiff to pay back Defendant $110,000 dollars 7 (the $100,000 loaned amount plus a $10,000 dollar charge that was an “original issue 8 discount”) plus seven percent interest over the seven month period. (Id. at 15) The 9 interest amount was not annualized. (Id.) Plaintiff’s total obligation on the note was 10 therefore $117,700, which they timely paid. (Id.) 11 Regardless of what a charge is labelled, under the usury law, interest “includes any 12 bonus, commission, or any other form of compensation paid to the lender for the use of 13 the money borrowed.” Cambridge Dev. Co., 90 Cal. Rptr. at 335 . Therefore, in addition 14 to the stated 7% interest rate, the $10,000 dollar “original issue discount” is considered 15 interest. For the convertible note alone, therefore, the annualized interest rate equals 16 29.54%.2 17 Defendant argues that because the note was convertible, and because of the extra 18 risk they faced, they were allowed to charge a higher rate than the 10% that is set forth in 19 the California Constitution.3 (ECF No. 69 at 6) This argument fails on a number of 20 grounds. 21 First, LGH themselves held the option to convert the note and receive common 22 stock instead of cash at a set strike price. (ECF No. 35 at 15) Since LGH could, but were 23 not obligated, to convert the note to receive stock instead of cash, they were at no greater 24 risk making the loan than if the repayment only called for payment in cash. If anything, [26] 2 A 7% interest rate over 7 months is equal to 12.16% annualized. And the $10,000 dollar extra charge is 27 an additional 17.38% annualized, equaling a total of 29.54%. (See ECF No. 72 at 5.) 3 The Federal Reserve “discount window” was below 5% between October 31, 2007 and May 4, 2023, [28] 1 the option for LGH to be able to convert the note into stock at a fixed strike price only 2 increased the value of consideration they received. If the stock rose above the strike price 3 set forth in the contract, they could elect to receive stock that had an even greater value 4 than the $117,700 they received. 5 Second, loaning money to small, thinly traded companies is presumably risky. As a 6 general principle a lender is “not prohibited from charging an extra and reasonable 7 amount for ... risk” incurred beyond the risk of default. See Klett v. Sec. Acceptance Co., [8] 242 P.2d 873, 884 (Cal. 1952). However, Defendants have provided no legal authority to 9 support their premise that lending money to a publicly traded business is so risky to 10 entitle it to an interest rate of at least 29.54% (this rate only includes the value of the 11 note). 12 The parties dispute the ascertainable market value of the warrant and the restricted 13 stock shares at the time the loan was made (or if they had any ascertainable value at all). 14 See Sandell, Inc, 28 Cal. Rptr. at 421 . The Court need not resolve this issue at this point 15 as the convertible note alone is sufficient to support a claim for usury. Any ascertainable 16 market value for these other two pieces of consideration LGH received will only serve to 17 increase the usurious rate of the loan. 18 b. Statute of Limitations 19 Two statutes of limitations are relevant here. A one-year statute of limitations 20 applies to affirmative actions for treble damages. See Cal. Civ. Code § 1916-3 ; see also 21 Handi Inv. Co. v. Mobil Oil Co., 653 F.2d 391 , 393 (9th Cir. 1981). The “statute of 22 limitations for affirmative actions to collect usurious interest payments is two years from 23 the date of the usurious interest payment.” Naoom v. Secured Assets Income Funds, 2006 24 WL 8455409 , at *9 (S.D. Cal. Oct. 16, 2006) (citing Stock v. Meek, 35 Cal. 2d 809 , 816 25 (1950)). 26 It is uncontested that Plaintiff paid $117,700 dollars to satisfy the note on 27 November 11, 2019, or within the two-year period from the filing of this action on April 28 19, 2021. This amount included usurious interest, as discussed above. Therefore, 1 || Plaintiff has stated a claim to collect at least some of the usurious interest payments.* See 2 || Stock, 35 Cal. 2d at 817 (when interest is paid before and after the statute of limitations 3 || period, Plaintiff can collect on the interest within the statute of limitations). 4 IV. CONCLUSION 5 For the reasons stated above, the Defendants’ motion to dismiss is DENIED. 6 ISSO ORDERED. 7 ||Dated: November 29, 2023 [8] 9 Hi . James Lorenz United States District Judge [10] 1] [25] 26 ||* The restricted stock shares and the warrant were conveyed on April 11, 2019, outside of the statute of limitations for collecting usurious interest payments. (See ECF No. 69 at 9.) Plaintiff and Defendants 27 disagree on if the warrant is principal or interest, and if it is interest, if the operative date is the date it 28 |} was conveyed or the dates that Defendants exercised the warrant. As the loan was usurious based on the note alone, the Court does not reach these issues at this time. TF