Opinion
No. 02 CV 6662 (GEL)
December 6, 2002
For Plaintiff, Matthew J. Borger, Klehr, Harrison, Harvey, Branzburg Ellers LLP, Philadelphia, PA (William A. Harvey and Richard M. Beck, Klehr, Harrison, Harvey, Branzburg Ellers LLP, Philadelphia, PA; Andrew Saulitas, Law Offices of Andrew Saulitas, P.C., New York, NY, on the brief).
For Defendant Cellpoint, Inc., Thomas E. Engel, Engel McCarney, New York, NY.
OPINION AND ORDER
Plaintiff Castle Creek Technology Partners, LLC ("plaintiff" or "Castle Creek"), seeks a preliminary injunction requiring defendant CellPoint Inc. ("defendant" or CellPoint"), to deliver to it 1,635,037 shares of CellPoint common stock. The action of a series of agreements between the parties pertaining to CellPoint's $10,000,000 dept to Castle Creek. CellPoint has defaulted on the agreements, triggering Castle Creek's option to convert the debt to shares of CellPoint common stock at a conversion price based on the stock's trading price at the time of the default. For the reasons discussed below. the preliminary injunction is granted as to 1,421,661 shares.
BACKGROUND
CellPoint is an England-based corporation, incorporated under the laws of Nevada, that provides mobile location software to cellular network operators. (Def. Mem. at 2.) In December 2000, CellPoint and Castle Creek entered into a Securities Purchase Agreement, whereby Castle Creek loaned $10,000,000 to CellPoint in exchange for convertible Notes. The Notes provide that CellPoint may repay its debt to Castle Creek in cash, but that Castle Creek may at any time convert all or part of the outstanding balance and interest to shares of CellPoint common stock. (Borger Decl. Ex. A ¶ 3.1.) The number of shares to be delivered is determined by dividing the balance that Castle Creek desires to be converted by the conversion price assigned to the shares by the Notes. ( Id.)
The Notes specify several "Events of Default" that, on occurrence, cause CellPoint to be in breach of its obligations under the Notes. Upon default, Castle Creek has the right to deliver to CellPoint a "Default Notice" and to demand immediate payment of the "Default Amount," an amount somewhat greater than the outstanding balance of the debt. ( Id. ¶ 7.1(a)-(j).) Castle Creek may also demand conversion of shares in lieu of payment. ( Id.)
The Default Amount is calculated using a formula based on the outstanding balance, the conversion price, and the bid price of CellPoint's common stock. (Borger Decl. Ex. A ¶ 7.2.)
Since the parties entered into the Securities Purchase Agreement, CellPoint has been increasingly beleaguered by financial problems. In June 2001, CellPoint defaulted on the Notes by failing to make the required interest payments. (Amended Compl. ¶ 7, Castle Creek Tech. Partners, LLC v. CellPoint Inc., 01 Civ. 9861 (GEL).) The parties therefore signed a Forbearance Agreement in July, in which Castle Creek agreed to forbear in enforcing its remedies for CellPoint's default, in return for security interests in CallPoint's intellectual property and other assets. (Borger Decl. Ex. B ¶¶ 4, 6.) The Forbearance Agreement left the Securities Purchase Agreement unchanged in all other relevant respects. ( Id. ¶ 13.)
In September 2001, the parties entered into a supplemental agreement (the "2001 Amendment") that amends the Securities Purchase Agreement. Most pertinently, the 2001 Amendment adjusts the conversion price, providing that the price shall be fixed at $4.00 per share as long as CellPoint is in compliance with the agreement but that if an Event of Default has occurred, the conversion price shall be the lower of the average closing bid price or the lowest sale price of CellPoint common stock in the period just before and after the default. ( Id. Ex. C ¶ 3.) The 2001 Amendment leaves the Securities Purchase Agreement unchanged in almost all other respects, including the list of Events of Default. ( Id. ¶ 9.)
These supplemental agreements failed to stave off litigation however, and in November 2001, Castle Creek filed suit against CellPoint in this Court alleging that, among other things, CellPoint had breached the 2001 Amendment by failing to comply with Castle Creek's request to convert $100,000 to shares of common stock. (Amended Compl. ¶¶ 27-29, Castle Creek Tech. Partners, LLC v. CellPoint Inc., 01 Civ. 9861 (GEL).) Castle Creek sought a preliminary injunction requiring that CellPoint convert the shares, but the action settled before this Court considered the injunction.
Meanwhile, CellPoint's financial difficulties continued to worsen. Its stock price, which had closed at a high of $94.50 on February 2, 2000, had fallen to less than $1 by January 2002. By March 2002, CellPoint reported on its Form 10-QSB that it had only $35,503 in cash on hand (Borger Decl. Ex. R at 18), but was spending roughly $700,000 per month ( id. Ex. S at 2). Consequently, CellPoint and Castle Creek entered into a Term Sheet that provided that the parties would negotiate to restructure CellPoint's debt, converting half of the outstanding debt into a new class of preferred stock at a conversion price of $.78, and creating a new note for the other half. (Tornell Decl. Ex. F.)
Before any final agreement under the Term Sheet could be reached, however, CellPoint defaulted on the Notes. In late April 2002, CellPoint's subsidiary, CellPoint Systems AB, was forced into bankruptcy in Sweden. (Pl. Mem. at 3.) On June 26, CellPoint's stock was delisted from the NASDAQ, and stayed delisted for more than ten consecutive trading days. (Borger Decl. Ex. E.) Both events constituted Events of Default under the Notes ( Id. ¶¶ 7.1(b); 7.1(i)), and on July 18, Castle Creek sent CellPoint a Notice of Default based on the NASDAQ delisting. ( Id. Ex. M.)
Castle Creek began submitting notices of conversion in June, using the adjusted conversion price that the 2001 Amendment prescribed in the event of CellPoint's default. (Compl. ¶ 18.) Between June and September, Castle Creek requested that a total of $422,500 of the principal amount, plus interest, be converted to 2,447,924 shares of CellPoint stock. (Frei Decl. ¶ 4 Ex. A.) The requests for conversion made prior to the July 18 Notice of Default used a conversion price of $.384 per share, based on the average closing bid price around the time of the bankruptcy, indicating that Castle Creek considered CellPoint to be in default at this time. (Borger Decl. Ex. C ¶ 3.) After July 18, Castle Creek began using an adjusted conversion price of $.173 per share, based on the average closing bid price around the time of the NASDAQ delisting ( id. Ex. M). CellPoint disputed the conversion price, contending that the correct figure was $.78 per share (Def. Mem. at 11), as provided by the Term Sheet. and converted the $422,500 plus interest at that price, delivering a total of 1.026209 shares. (Frei Decl. Ex. A; Brown Aff. Ex. A.).
The 2001 Amendment provided that the conversion price would be recalculated after each subsequent Event of Default. (Borger Decl. Ex. C ¶ 3.)
This total represents 812,887 shares delivered before Castle Creek's Amended Complaint was filed on September 19, 2002 and 213,376 shares subsequently delivered. (Brown Aff. Ex. A.)
On August 21, 2002, Castle Creek instituted this action alleging that it was entitled to delivery of the remaining shares that it had requested. Castle Creek subsequently moved for a preliminary injunction requiring CellPoint to deliver 1.635.037 shares of common stock, as required by the Notes and the 2001 Amendment. CellPoint contests the motion on contractual grounds, and also argues that Castle Creek is not entitled to injuncitive relief because of the equitable doctrines of unclean hands and laches.
Presumably, the total should now be 1,421,661 shares, following CellPoint's recent delivery of 213,376 shares.
DISCUSSION
"[A] preliminary injunction is an extraordinary and drastic remedy, one that should not be granted unless the movant, by a clear showing, carries the burden of persuasion." Mazurek v. Armstrong, 520 U.S. 968, 972 (1997) (emphasis in original) (quoting from WRIGHT, MILLER KANE, FEDERAL PRACTICE AND PROCEDURE § 2948 (2d ed. 1995)). Since Castle Creek seeks a mandatory injunction that will change the status quo by requiring CellPoint to deliver the disputed shares, Castle Creek's showing must be judged against the higher standard applicable to mandatory injunctions. Jolly v. Coughlin, 76 F.3d 468, 473 (2d Cir. 1996). Thus, the preliminary injunction may be granted only if plaintiff has shown that (1) that the injunction is necessary to prevent irreparable harm, and (2) there is a "clear" or "substantial" likelihood that it will prevail on the merits. Id. (quoting Tom Doherty Assocs., Inc. v. Saban Entertainment, Inc., 60 F.3d 27, 33-34 (2d Cir. 1995). Since Castle Creek has established both irreparable harm and a clear likelihood of success, it is entitled to the preliminary injunction.
I. Irreparable Harm
Castle Creek argues that it will suffer irreparable injury if the injunction is not granted because CellPoint is "at the brink of insolvency," (Pl. Mem. at 6), 50 that "there is a substantial chance that upon final resolution of the action the parties cannot be returned to the positions they previously occupied." Brenntag Int'l Chemicals, Inc. v. Bank of India, 175 F.3d 245, 249 (2d Cir. 1999). While the purely financial injury at stake here is usually not enough to justify injunctive relief, id., a defendant's imminent insolvency can constitute irreparable harm when it is possible that the defendant will not be able to pay damages at the conclusion of the litigation. Netwolves Corp. v. Sullivan, No. 00 Civ. 8943 (AGS), 2001 WL 492463, at *11 (S.D.N.Y. May 9, 2001). In its Complaint, Castle Creek seeks a declaratory judgment as to the applicability of the adjusted conversion price, and an injunction requiring CellPoint to comply with its conversion requests in full. (Amended Compl. ¶¶ 23-33.) If CellPoint is no longer a going concern at the close of litigation, an injunction ordering the delivery of CellPoint shares would be pointless, and Castle Creek would be left without the converted shares and without the option of obtaining a money judgment for the outstanding debt amount, thus suffering irreparable injury. Netwolves Corp., 2001 WL 492463. at *10-*11 (finding irreparable harm where defendant's insolvency would prevent plaintiffs from recovering any value for their stock).
Castle Creek has demonstrated that CellPoint, if not currently insolvent, may become so in the near future. As noted above, CellPoint has had continuous financial problems that have worsened in 2002. In its Annual Report (Form 10-K) for the fiscal year ending June 20, 2002, CellPoint stated that it "has had recurring significant losses," and now has a capital deficiency of approximately $11 million. (Beck Supp. Decl. Ex. T at 52.) CellPoint also continues to spend more money than it receives through its operations. (Borger Decl. Ex. S at 2.) Thus, defendant noted, "[t]here is substantial doubt about [CellPoint's] ability to continue as going concern unless it is able to obtain additional financing." (Beck Supp. Decl. Ex. F at 52.)
This situation has not changed appreciably since the Annual Report was filed in June. CellPoint has been making efforts to strengthen its financial situation, including cutting costs and repurchasing its bankrupt Swedish subsidiary (Tornell Decl. ¶ 8; Def. Mem. at 4), but these measures are no substitute for the funds necessary to pull the company out of its deficit and satisfy its creditors. CellPoint has also produced evidence of new partnership agreements that will generate revenue over the next few years (Tornell Decl. ¶¶ 3-5), but the projected income is nowhere near sufficient to address the capital deficit or even to cover company's expenses. A recently announced agreement with Lucent (CellPoint Press Release, 11/402) will generate only $500,000 to $800,000 annually (Tornell Decl. ¶ 3). and a purchase order with an unnamed buyer has an initial value of $2 million. ( Id. ¶ 4.) These amounts are as noted on the Form 10-K, far from certain, and if these and additional funds are not forthcoming, CellPoint will have to "substantially curtail or cease operations) (Beck Supp. Decl. Ex. T at 52.) In addition, CellPoint's stock is currently trading at $.20, and has remained at roughly that price for seven months. The New York Times, Company Research: CellPoint Inc., available at http://marketwatch.nytimes.com (Dec. 6, 2002). The early November announcement of the Lucent deal had little effect on the share price, supporting the conclusion that investor confidence is so shaky, and CellPoint's financial situation so dire, that these new deals will do little to alleviate the situation in the short term.
Castle Creek has thus provided ample and specific evidence that CellPoint is at the brink of insolvency, and that by the conclusion of the litigation, CellPoint may be in no position to satisfy a money judgment or an injunction. Brenntag, 175 F.3d at 249; cf. Gladstone v. Waldron Co., No. 98 Civ. 2038 (DNE), 1998 WL 150982, at *2 (S.D.N.Y. Mar. 31, 1998) (holding that conclusory allegations of defendant's insolvency are not sufficient to justify granting preliminary injunction). While CellPoint points out that it is not currently insolvent (and may indeed become profitable in the future), the seriousness of the current situation indicates an "actual and imminent threat" of CellPoint's insolvency. Quantum Corporate Funding, Ltd. v. Assist You Home Care Services of Virginia, 144 F. Supp.2d 241, 248 (S.D.N.Y. 2001). Thus, Castle Creek will suffer irreparable harm if the injunction is not granted.
Castle Creek also argues that a finding of irreparable harm may be based on the provision in the Notes that states that CellPoint "acknowledges that a breach by it of its obligations will cause irreparable harm to [Castle Creek]." (Borger Decl. Ex. A ¶ 9.14; Pl. Mem. at 8.) It is not clear whether such a contractual provision, on its own, can establish irreparable harm, but the acknowledgment does provide additional support for the finding of irreparable harm. See, e.g., North Atlantic Instruments v. Haber, 188 F.3d 38, 49 (2d Cir. 1999).
Nonetheless, CellPoint argues that, despite its potential insolvency, Castle Creek's delay in seeking this injunction indicates that it will not be irreparably harmed if preliminary relief is not granted. (Def. Mem. at 13; Tr. 30.) While an extended delay in seeking a preliminary injunction may indicate the absence of irreparable harm, Majorica, S.A. v. R.H. Macy Co., 762 F.2d 7, 8 (2d Cir. 1985), there has been no such delay here. Defendant suggests that plaintiff could have sought this injunction much earlier in the parties' relationship (as early as October 2001, when CellPoint's stock price was much higher), but Castle Creek's cause of action did not actually accrue until June 2002, when CellPoint wrongly refused to convert portions of the debt into shares. Thus, plaintiff could not have sought an injunction any earlier than June, and has not delayed in any mariner that would cast doubt on the potential for irreparable harm caused by CellPoint's insolvency.
This argument assumes that the irreparable harm that maw be suffered by plaintiff is that the converted shares will be worth little on the market (Def. Mem. at 13), but as noted above, the potential irreparable harm is that CellPoint will become insolvent, leaving Castle Creek without remedies.
II. Likelihood of Success on the Merits
Castle Creek has also demonstrated that there is a substantial likelihood that it will prevail on the merits of its claim. CellPoint does not dispute that the Notes give Castle Creek the right to convert the outstanding principal amount, or any part therof, to common stock at any time, whether or not CellPoint is in default. (Borger Decl. Ex. A ¶ 3.1) Upon the occurrence of an Event of Default, Castle Creek is entitled under the 2001 Amendment to demand payment of the Default Amount in money or in stock, converted at the specified adjusted conversion price. ( Id. ¶ 7.1; id. Ex. C ¶ 3.1.) The bankruptcy of CellPoint's Swedish subsidiary, and its delisting from the NASDAQ, both constituted Events of Default under the Notes. Thus, Castle Creek was fully entitled to demand payment of the outstanding debt in June, and to insist on conversion of the stock at the adjusted conversion price.
CellPoint appears to argue. somewhat halfheartedly. that neither of these developments were Events of Default. With respect to the bankruptcy, CellPoint points out in a footnote in its surreply brief that its Swedish subsidiary has been repurchased and is no longer in bankruptcy, and states that "Castle Creek has apparently abandoned its argument that the bankruptcy of CellPoint's Swedish subsidiary constituted a default." (Def. Surreply at 2 n. 2.) Whether the bankruptcy has been cured is not relevant to CellPoint's default under the Notes, however, as Paragraph 7.1 states that a bankruptcy "shall immediately constitute an Event of Default and there shall be no cure period." (Borger Decl. Ex. A ¶ 7.1.) In addition, there is no indication that plaintiff has abandoned its assertion that the bankruptcy was an Event of Default, as it presses this point in its reply brief. (Pl. Reply at 1.)
As to the NASDAQ delisting, CellPoint states that "Castle Creek's argument that NASDAQ de-listing per se constitutes a default under the identical `structure' should go pan passu by the boards" (Def Surreply at 2 n. 2), but it never raised this argument in any other part of its submissions, or at oral argument, and it does not base any of its defenses to this action on its not being in default. Even if CellPoint were seriously pressing this argument, it would be unavailing, as the Notes unambiguously provide that the company's delisting from the NASDAQ is an Event of Default. (Borger Decl. Ex. A ¶ 7.1(b).)
In response to plaintiff's conversion notices, CellPoint issued 1,026,263 shares between June and October, using the $.78 per share conversion price provided in the Term Sheet, rather than the prices requested by Castle Creek, which were calculated according to the 2001 Amendment. (Def. Mem. at 11.) Both parties agree that the Term Sheet is a preliminary agreement, but CellPoint argues that the provisions of the Term Sheet are themselves binding, and that its $.78 conversion price supersedes the 2001 Amendment's adjusted conversion price even for conversions of common stock. (Def. Mem. at 11; Tr. 27-29, 31-32.) Castle Creek disputes this, contending that the Term Sheet's conversion price was not yet in effect because the Term Sheet was simply a preliminary agreement to agree, binding the parties only to good faith in negotiating. (Pl. Reply at 9; Tr. 31.)
The Second Circuit recognizes two types of preliminary agreements: agreements that are "fully binding," where the parties have "agree[d] on all the points that require negotiation," but have not yet memorialized the agreement in final form; and agreements that leave some major terms open for negotiation, in which the parties commit simply to negotiate in good faith to create a final contract. Adustrite Systems, Inc. v. Gab Business Services, Inc., 145 F.3d 543, 548 (2d Cir. 1998) (internal citations omitted). In determining which type of preliminary agreement the parties created, the "key, of course, is the intent of he parties: whether the parties intended to be bound, and if so, to what extent." as evidenced by the language of the contract, and the words and deeds of the parties. Id. at 548-49.
The language used in the Term Sheet indicates that it is the second type of preliminary agreement, one which binds the parties to good faith negotiation, but not to its exact terms. Entered into in March 2002, the agreement delineates the proposed terms of a restructuring of CellPoint's debt, including the conversion of half of the debt into shares of CellPoint preferred stock at $.78 per share. (Tornell Decl. Ex. F ¶ 2.) Castle Creek clearly indicated its intention not to be bound by the provisions of the Term Sheet, stipulating that its "willingness to complete this transaction is expressly subject to final documentation agreed by both parties," the finalization of CellPoint's debt negotiations, and the completion of the financing necessary to stave off bankruptcy. ( Id. ¶¶ 8-9.) For its part. CellPoint could not have considered the Term Sheet binding, as the class of stock required to restructure the debt in accordance with the Term Sheet did not yet exist, necessitating that CellPoint hold a shareholder vote before it could even begin to comply with the agreement. Accordingly. the provision describing the new debt structure stated that "the parties agree to either try to find an alternative solution that achieves a similar result, or that this part of the agreement is delayed until a shareholders meeting." ( Id. ¶ 3.) CellPoint also promised to take the necessary steps to effectuate the deal, including obtaining shareholder authorization for the new class of stock and filing a registration statement ( id. ¶¶ 3, 8). Around the time that the CellPoint signed the Term Sheet, however, it expressed a somewhat pessimistic view of the potential for finalizing the new agreement in its quarterly report to its shareholders, stating that "[t]here is no assurance that [CellPoint] will be able to obtain stockholder approval" to authorize the new class of stock. (Borger Decl. Ex. R at 9.) Thus, the language of the Term Sheet, and the parties' statements with regard to their obligations under it, indicate that neither party intended the agreement to be a binding final contract.
Because the Term Sheet was not a fully binding preliminary agreement, its proposed $.78 conversion price was not yet in effect, and CellPoint had no right to use it instead of the adjusted conversion price specified by the 2001 Amendment. Therefore, CellPoint breached the Notes and the 2001 Amendment by refusing to use the adjusted conversion price, and Castle Creek is entitled to the delivery of 1,421,661 additional shares of CellPoint common stock.
CellPoint does not contest Castle Creek's calculation of the adjusted conversion prices in accordance with the 2001 Amendment, and therefore does not dispute the number of shares to which Castle Creek is entitled when the adjusted conversion prices are used to calculate the conversion.
III. CellPoint's Additional Defenses
CellPoint raises three additional defenses to its obligation to deliver the stock, all without merit.
A. The Notes' Conversion Cap
CellPoint argues that the Notes themselves limit the number of shares that could be converted by Castle Creek, and that as this limit has already been exceeded, Castle Creek has no right to insist on further conversions. (Def. Mem. at 7.) In order to comply with the National Association of Securities Dealers ("NASD") Rules that applied to CellPoint when it was listed on the NASDAQ (Tr. 5-6), the Notes provide that no more than 2,109,717 shares (20% of the total outstanding shares) may be converted by Castle Creek. unless "stockholder approval in accordance with Paragraph 4(k) of the Securities Purchase Agreement has been obtained." (Borger Decl. Ex. A ¶ 3.3(a).) The Securities Purchase Agreement in turn indicates that CellPoint's "stockholders shall be asked to vote upon and approve the removal of the conversion cap, at the occurrence of certain trigger events. (Beck Supp. Decl. Ex. U ¶ 4(k).) No shareholder vote on the cap ever occurred, however, and CellPoint arctics that since it has already converted a total of 2,419,493 shares at Castle Creek's request (Brown Aff. ¶ 8), it has no obligation to honor any further conversion requests.
NASD Rule 4350 (numbered 4460 at the time of contracting provides that, for all companies listed on the NASDAQ, shareholder approval must be obtained prior to the company's entering into a transaction, other than a public offering, that involves the sale or issuance of common stock equal to 20% or more of the outstanding common stock or voting power. NASD Rule 4350(i)(1)(D)(ii).
CellPoint may not rely on the cap to avoid honoring Castle Creek's further conversion requests. The fact that the cap is still in place is entirely due to CellPoint's breach of the Securities Purchase Agreement. That Agreement obligated CellPoint to hold a shareholder vote on the cap, at which it would use its best efforts to obtain the votes necessary to lift the cap (Beck Supp. Decl. Ex. U ¶ 4(k)(iii)), at the beginning of May 2002, after its Swedish subsidiary went into bankruptcy. The Securities Purchase Agreement required that the meeting be held within ninety days of that event. (Beck Supp. Decl. Ex. U ¶ 4(k)(ii).) Since CellPoint had not held the meeting by early August (Tr. 33), it has been in breach of the Securities Purchase Agreement since then.
Paragraph 4(k) of the Securities Purchase Agreement specifies that the shareholder vote on the cap was to be held at the annual meeting in December 2001, or when CellPoint's stock price had remained below $7.00 for ten consecutive trading days. (Beck Supp.Decl.Ex.U ¶ 4(k)(ii).) Before the December meeting, however, the parties entered into the 2001 Amendment, which stipulated that CellPoint was not obligated to comply with Paragraph 4(k) of the Securities Purchase Agreement, so long as it remained in compliance with its obligations under the 2001 Amendment. (Borger Decl. Ex. C ¶ 6.) The Amendment went on to provide that the institution of any bankruptcy proceeding against any of CellPoint's subsidiaries would constitute "material default of its obligations under this Agreement." ( Id.) Thus, CellPoint defaulted under the 2001 Amendment on April 29, 2002, when its subsidiary went into bankruptcy, and it once more became obligated under Paragraph 4(k) of the Securities Purchase Agreement. At that time, CellPoint common stock was trading at $.45, and remained at roughly that price for ten consecutive trading days. The New York Times, Company Research: CellPoint, available at http://marketwatch.nytimes.com. This constituted a trigger event under Paragraph 4(k)(ii), obligating CellPoint to hold a special shareholder meeting, at which a vote on the cap would be conducted. within ninety days. (Beck Supp. Decl. Ex. U ¶ 4(k)(ii).)
CellPoint now relies on this breach in its attempt to avoid its conversion obligations under the Note. When a party to a contract has breached the agreement, however, either by acting in bad faith or by violating an express covenant within the agreement, it may not later rely on that breach to its advantage. Kirke La Shelle Co. v. The Paul Armstrong Co., 188 N.E. 163, 167-68 (N.Y. 1933) (holding that party that had breached one provision within a contract could not rely on that breach to avoid its obligations under a different provision); cf. Indovision Enterprizes, Inc. v. Cardinal Export Corp., 354 N.Y.S.2d 113, 115 (1st Dep't 1974) (stating that a "provision that allows either party by his own breach to excuse his own performance is a commercial absurdity"). Thus, CellPoint may not assert that the conversion cap in the Notes excuses its obligation to honor Castle Creek's conversion requests.
Granting the injunction will not cause CellPoint to violate NASD Rule 4350, because it is no longer listed on the NASDAQ (Pl. Reply at 7), and the rule no longer applies.
Allowing CellPoint's breach to enable it to avoid the rest of the agreement would contravene the clear intent of the parties at the time of contracting. The agreement as a whole indicates that the parties contemplated that Castle Creek would have the option to convert the entire outstanding debt amount into stock. a process that. at any conversion price, would entail converting far more stock than the cap would allow. The Notes state that Castle Creek "may . . . convert . . . all or any part of the outstanding principal amount of this Note, plus all accrued interest thereon" (Borger Supp. Decl. Ex. A ¶ 3.1). and that. in event of default, Castle Creek could continue to submit conversion notices to satisfy the entire outstanding debt ( id. ¶ 7.1). This language, as well as the Securities Purchase Agreement s requirement that CellPoint use its best efforts to obtain the shareholder approval necessary to lift the cap. indicates that the intent of the parties was that the cap would be reached and passed as Castle Creek submitted additional conversion requests. Clearly, then, the cap was included in the Notes solely to satisfy NASD Rule 4350 (see Tr. 7), rather than to limit the amount of debt that was convertible. This interpretation is supported by the structure of the transaction as a whole, in which the debt is secured by the potential for Castle Creek to become a controlling shareholder should CellPoint become unable to pay the debt in cash. Otherwise, the Notes would hold little benefit for Castle Creek, as creditor, because its ability to recoup its investment in the already troubled company would be limited by the conversion cap and by CellPoint's diminishing cash resources. Thus, preventing CellPoint from using the conversion cap to nullify the its obligations under the Notes and the 2001 Amendment will give effect to the intent of the parties us to the transaction as a whole. Bourne v. Walt Disney Co., 68 F.3d 621. 629 (2d Cir. 1995).
B. Unclean Hands
CellPoint next argues that the grant of equitable relief is precluded by Castle Creek's unclean hands in refusing to continue negotiations to restructure CellPoint's debt. (Def. Mem. at 11.) To successfully assert the equitable defense of unclean hands, CellPoint must establish that plaintiff acted in bad faith, and that CellPoint was injured by its conduct. Obabueki v. Int'l Business Machines Corp., 145 F. Supp.2d 371, 401 (S.D.N.Y. 2001).
Defendant's argument is based on the Term Sheet, which, as discussed above, obligated both parties to negotiate in good faith to reach an agreement restructuring CellPoint's debt. (Tornell Decl. Ex. F ¶ 1.) CellPoint contends that Castle Creek refused to continue negotiations in July 2002, when CellPoint prepared a draft Restructure Agreement for Castle Creek's review. (Def. Mem. at 12.) Even crediting CellPoint's allegations (although it has produced no evidence to support its claims), Castle Creek's refusal to continue to negotiate a next agreement does not constitute bad faith.
The obligation to negotiate in good faith prevents a party from "arbitrarily abandoning [a] transaction or insisting on conditions that . . . do not conform to what was spelled out in the preliminary agreement," ensuring that "the transaction will falter only over a genuine disagreement." P.A. Bergner Co. v. Martinez, 823 F. Supp. 151, 156 (S.D.N.Y. 1993) (internal citations omitted). Here, Castle Creek's abandonment of negotiations, after CellPoint had repeatedly, and wrongly, refused to honor its conversion requests, was hardly arbitrary or unprovoked. Since the Term Sheet did not alter Castle Creek's right to request the conversion of additional shares of common stock before a final restructuring agreement was reached, CellPoint breached the existing agreements even as it was attempting to negotiate a new agreement in which Castle Creek would give CellPoint yet more time to repay the remaining debt. This was clearly a "genuine disagreement" that went to the heart of the ongoing negotiations, id., since Castle Creek could have concluded in good faith that a further agreement would be insufficient to ensure CellPoint's repayment of the debt. Faced with CellPoint's breach — not to mention its history of inability or unwillingness to repay its debt to Castle Creek. and Castle Creek's repeated forbearance and modification of the debt agreements — Castle Creek could justifiably have concluded that litigation, rather than yet more agreements, was the only effective way to recoup its investment. Thus, CellPoint has failed to establish that Castle Creek acted in bad faith, and cannot rely on the defense of unclean hands.
C. Laches
Finally, CellPoint argues that the preliminary injunction is precluded by the equitable doctrine of laches (Def. Mem. at 12-13), because Castle Creek has unreasonably delayed in asserting its rights, thereby prejudicing CellPoint. Times Mirror Magazines, Inc. v. Field Stream Licenses Co., 294 F.3d 383, 395 (2d Cir. 2002). Essentially, CellPoint contends that Castle Creek could have sought injunctive relief immediately in June 2002, as soon as the conversion dispute arose. (Def. Mem. at 13.) Given that Castle Creek's conversion requests were submitted over a period of months (June through September). and that CellPoint did convert some, but not all, of the shares that plaintiff requested. it was reasonable for plaintiff to wait until the extent of the dispute was apparent before filing suit in late August. In addition, defendant offers no evidence to suggest that it has been prejudiced by the fact that plaintiff filed suit in August rather than June. ( Id. at 12-13.) Thus, the defense of laches is without merit.
CONCLUSION
Plaintiff has demonstrated the potential for irreparable harm and a substantial likelihood of success on the merits of its claim. Defendant is accordingly ordered to deliver to Castle Creek 1,421,661 shares of its common stock.