Opinion
Case No. 16-11991 (JTD) (Jointly Administered) Adv. Proc. No. 18-50724 (JTD)
2021-11-29
IN RE: SCRIPSAMERICA, INC., et al, Debtors. Charles A. Stanziale, Jr., Trustee of Scripsamerica, Inc., Plaintiff, v. Ironridge Global IV, Ltd, LNK International, Inc. a/k/a L.N.K. International, Inc. and the Suffolk County Comptroller, Defendant.
Steven Beckelman, Jeffrey T. Testa, McCarter & English, LLP, Newark, NJ, Kate R. Buck, Shannon Dougherty Humiston, McCarter & English, LLP, Wilmington, DE, for Plaintiff.
Steven Beckelman, Jeffrey T. Testa, McCarter & English, LLP, Newark, NJ, Kate R. Buck, Shannon Dougherty Humiston, McCarter & English, LLP, Wilmington, DE, for Plaintiff.
Related Docket Nos. 335 - 337
Related Docket No. 14 & 15
FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER GRANTING MOTION OF THE CHAPTER 7 TRUSTEE FOR APPROVAL OF SETTLEMENT PURSUANT TO RULE 9019 OF THE FEDERAL RULES OF BANKRUPTCY PROCEDURE, INCLUDING RESOLUTION OF PENDING ADVERSARY PROCEEDINGS, OTHER LITIGATION AND CLAIMS, AND FOR RELATED RELIEF
JOHN T. DORSEY, UNITED STATES BANKRUPTCY JUDGE
Upon the motion (this "Settlement Motion ") brought by Charles A. Stanziale, Jr., in his capacity as the duly appointed trustee (the "Trustee ") of the chapter 7 bankruptcy estate (the "Estate ") of Debtor ScripsAmerica, Inc. (the "Debtor ") under and pursuant to Rule 9019 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules "), and § 105(a) of title 11 of the United States Code, 11 U.S.C. §§ 101 - 1532 (the "Bankruptcy Code "), requesting approval of the settlement (the "Settlement ") described in the Motion and in the agreement by and among the Trustee on behalf of the Estate, and Ironridge Global Partners LLC ("Ironridge Partners ") and Ironridge Global IV Ltd. ("Global IV, " and together with Ironridge Partners, collectively, "Ironridge " or the "Non-Trustee Settling Parties "), which is attached hereto as Exhibit 1 (the "Settlement Agreement "); and the Court, having found that notice of the Settlement Motion and the hearing on the Motion provided proper and sufficient notice and opportunity for any party in interest and to all parties affected or to be affected by approval of the Settlement and the Settlement Agreement and the relief contemplated thereby to object thereto; and the Court, having considered the respective records of the captioned bankruptcy case and adversary proceedings and the legal and factual bases set forth in the Settlement Motion and all documents filed with or in support of the Settlement Motion including, without limitation, the Declaration of Theresa Felix in Support of Motion of the Chapter 7 Trustee for Approval of Settlement Including Resolution of Pending Adversary Proceedings, Other Litigation and Claims, and for Related Relief; and the Court, having determined that a sufficient record has been established and just cause exists to grant the relief sought by the Settlement Motion and granted in this Order; and the Court, after due deliberation thereon and good cause appearing therefor, hereby makes and issues the following findings of fact, conclusions of law, and order:
This Order constitutes the Court's findings of fact and conclusions of law under Fed. R. Civ. P. 52, as made applicable herein by Bankruptcy Rules 7052 and 9014. Any finding of fact shall constitute a finding of fact even if it is stated as a conclusion of law, and any conclusion of law shall constitute a conclusion of law even if it is stated as a finding of fact.
I. FINDINGS OF FACT AND CONCLUSIONS OF LAW
A. Background
1. The Settlement resolves the eight separate actions and related appeals pending in state courts in California, New York, and New Jersey, the U.S. District Court for the Central District of California, and in this Court (collectively, the "Litigation Matters "), including: (i) Ironridge Global IV, Ltd. v. ScripsAmerica, Inc., No. BC524230 (Los Angeles County Super. Ct.), ScripsAmerica, Inc. v. Ironridge Global IV, Ltd., et al., 2:14-cv-03962 (C.D. Cal.), Ironridge Global IV, Ltd., et al., v. Scrips America, Inc., et al., Case No. 2:16-CV- 05335 (C.D.Cal.), Ironridge Global IV, Ltd. v. LNK International, Inc. and Scrips America, Inc., Index No. 612769/2015 (N.Y. Sup. Ct.) (the "LNK State Court Action "); Ironridge Global IV, Ltd. v. Olde Monmouth Stock Transfer Co., Inc., Docket No. L-772-15 (N.J. Super. Ct.); ScripsAmerica, Inc. v. Ironridge Global IV, Ltd., LNK International, Inc. a/k/a L.N.K. International, Inc. and Suffolk County Comptroller, Adv. No. 18-51960 (LSS) (Bankr.D.Del.) (the "Debtor LNK Adversary "); ScripsAmerica, Inc. v. Ironridge Global IV, Ltd. et al., Case No. 2:17-cv-00945 (C.D.Cal.); and Charles A. Stanziale, Jr., Chapter 7 Trustee of ScripsAmerica, Inc. v. Ironridge Global IV, Ltd., LNK International, Inc. and Suffolk County Comptroller, Adv. No. 18 - 50724 (LSS) (Bankr. D. Del.) (the "Trustee LNK Adversary ").
2. Each of the Litigation Matters relates to transactions involving the Debtor and Ironridge dating back to 2013. Ironridge lent money to the Debtor and, when Debtor could not repay the loan, Ironridge commenced a lawsuit against the Debtor in California state court and such lawsuit (the "California Collection Action ") was settled by the Debtor and Ironridge by their entry into of a Stipulated Judgement filed with the California state court which provided, inter alia, for repayment of the moneys loaned through the issuance by the Debtor of its stock to Ironridge.
Capitalized terms not defined herein have the meanings given to them in the Settlement Motion.
3. Each of the LNK State Court Action, the Debtor LNK Adversary, and the Trustee LNK Adversary relates to the competing claims of Global IV and the Estate to $160,519.82 on deposit with the Suffolk County, New York, Comptroller (the "LNK Funds ").
4. By the Settlement as set forth in the Settlement Agreement, the parties have agreed, inter alia, to (i) fully and finally settle, dismiss as appropriate and/or discontinue all of the Litigation Matters to the extent they are pending in this Court; (ii) fully and finally settle, dismiss as appropriate and/or discontinue all other of the Litigation Matters to the extent such involve claims by the Non-Trustee Settling Parties and the Debtor or Debtor's Estate against each other (allowing such matters to proceed as to parties other than the Non-Trustee Settling Parties and the Debtor or Debtor's Estate); (iii) the expungement of the claim of Ironridge Global Partners; (iv) mutual general releases by the Non-Trustee Settling Parties and the Trustee on behalf of the Estate; and (v) the distribution of half of the LNK Funds to Global IV and the other half to the Estate.
5. For purposes of determining whether to approve a settlement under Bankruptcy Rule 9019, courts rely on four factors: "(1) the probability of success in litigation; (2) the likely difficulties in collection; (3) the complexity of the litigation and the expense, inconvenience, and delay involved; (4) and the paramount interest of the creditors." In re Martin, 91 F.3d 389, 393 (3d Cir. 1996), In re Nortel Networks, Inc., 522 B.R. 491, 510 (Bankr. D. Del. 2014), In re Managed Storage Int'l, Inc., No. 09-10368 (MWF), 2020 WL 1532390, at *4 (D. Del. Mar. 31, 2020). Each of the factors is considered below.
B. ANALYSIS
(1) Probability of Success on the Merits
6. Debtor has repeatedly asserted two fundamental arguments against Ironridge, which formed the basis for its claims in all of the Litigation Matters: first, that the Stipulated Judgment entered in litigation in the California Collection Action was unfair, fraudulent or inadequately disclosed, because of the provision in the Stipulated Judgment allowing Global IV to receive additional shares as the market price of the Debtor's stock declined due to Global IV selling shares; and second, that Global IV was required to register as a securities dealer, assertedly because it obtained unregistered stock at a discount and resold large volumes of shares into the open market.
a) Ironridge Did Not Engage in Securities Fraud
7. Debtor claimed in the Litigation Matters that Ironridge or its principals made false statements of material fact, or failed to disclose material facts, concerning purported financing agreements involving Ironridge. See 15 U.S. Code § 77q(a), 15 U.S. Code § 78j(b), 17 CFR § 240.10b-5.
8. Debtor's claims in the securities-related litigation it commenced against Global IV in the U.S. District Court for the Central District of California (the "Central District of California "), arose "from an allegedly fraudulent scheme to manipulate Scrips' stock price in order to obtain additional shares of the stock under an agreement between the parties pursuant to which Ironridge would pay off certain of Scrips’ accounts payable in exchange for issuance of stock set by an agreed upon formula." See ScripsAmerica, Inc. v. Ironridge Glob. LLC, 56 F.Supp.3d 1121, 1130-31 (C.D. Cal. 2014) ; ScripsAmerica, Inc. v. Ironridge Glob. LLC, 119 F.Supp.3d 1213, 1234-35 (C.D. Cal. 2015).
9. However, in two published decisions, the Central District of California held that Debtor did not establish and that Ironridge did not commit securities fraud. Id.
10. On November 19, 2013, the Debtor filed with the SEC a Current Report on Form 8-K (the "Scrips 8-K ") describing the material terms of the Stipulated Judgment. The public report also referenced the California Collection Action. Any member of the investing public could have accessed a copy of the Stipulated Judgment online.
11. As determined by the Central District of California, Ironridge's conduct in connection with the Stipulated Judgment could not be deceptive or manipulative, because all of the terms were set forth in the written agreement between the parties and filed with the California state court. See ScripsAmerica, 119 F.Supp.3d at 1243 ("the manner in which the adjustment mechanism was to operate was fully disclosed in the parties’ agreement and stipulation, which included a merger clause that cut off any right to rely on prior oral representations"); Camber Energy, Inc. v. Discover Growth Fund, No. CV H-17-1436, 2017 WL 1969682, at *1 (S.D. Tex. May 11, 2017) (fact that issuer "failed to adequately scrutinize its agreements ... before signing them" precluded securities fraud claim against investor).
12. The Scrips 8-K disclosed the only two terms that mattered: that the "shares issued to Ironridge are freely tradable" and that the "number of shares issued to Ironridge is subject to adjustment based on the trading price of the Registrant's stock." In such a circumstance it is reasonably understood that "the stock price will almost certainly drop, because the supply of shares available for purchase in the market increases." Crown Bridge Partners, LLC v. Sunstock, Inc., No. 18 CIV. 7632 (CM), 2019 WL 2498370, at *1 (S.D.N.Y. June 3, 2019), citing Death Spiral Debt, https://www.investopedia.com/terms/d/deathspiral.asp. See also ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 106 (2d Cir. 2007) (floorless convertible security is not inherently manipulative, even when coupled with selling).
13. If the key terms of an agreement are disclosed, i.e. that additional shares may be owed if the price drops, an investor cannot commit securities fraud by failing to disclose either the number of shares it has sold or the potential impact of selling activity that is not prohibited under the terms of the deal. See ATSI Commc'ns, Inc., 493 F.3d at 106.
14. Regardless, it was the Debtor, not Ironridge that had an obligation to disclose the material terms of the transaction. See S.E.C. v. Chester Holdings, Ltd., 41 F.Supp.2d 505, 526 (D.N.J.1999). A third party, such as Ironridge that entered into a contract described in a public report, is not liable for any material misrepresentations or omissions by the filer of the report. See S.E.C. v. Dauplaise, No. 6:05CV1391 ORL 31KRS, 2006 WL 449175, at *7 (M.D. Fla. Feb. 22, 2006).
15. Continued "high volume" selling of a large number or high percentage of shares through standard brokerage accounts is not unlawful, even if such activity causes the price of the stock to decline substantially resulting in more shares being issued and sold. See Sedona Corp. v. Ladenburg Thalmann & Co., No. 03 CIV 3120 LTS THK, 2009 WL 1492196, at *5 (S.D.N.Y. May 27, 2009) ; ATSI Commc'ns, 493 F.3d at 101 ; ScripsAmerica, 119 F.Supp.3d at 1239-40. An investor cannot be liable for securities fraud unless specific facts or shown that prove scienter, i.e. that it wrongfully intended to fraudulently manipulate the market for its benefit. Id . That is not possible when, as here, there was a contractual formula in place that protected the investor from market fluctuations. Id.
16. Ironridge sold its shares of the Debtor in a manner designed to maximize its total economic return on investment, by selling as many shares as possible, at the highest price possible, in a manner that had the least negative impact reasonably possible, including directing trades to alternative trading systems that allow institutional investors to trade without exposure until after the trade has been executed and reported to avoid disclosing their selling strategies to the market and pushing the price down, and adjusting the number and percentage of shares sold based on daily supply and demand; none of which misleads investors or constitutes market manipulation. ATSI Commc'ns , 493 F.3d at 100-01 ; GFL Advantage Fund, Ltd. v. Colkitt , 272 F.3d 189, 207 (3d Cir.2001).
17. Ironridge did not employ any device, scheme, or artifice to defraud; make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. See 17 C.F.R. § 240.10b-5. Accordingly, Ironridge did not commit securities fraud. See ScripsAmerica, 56 F. Supp. 3d at 1166 ; ScripsAmerica, Inc., 119 F. Supp. 3d at 1266.
a) Ironridge Was Not a Dealer
18. The Securities Exchange Act of 1934 provides that, in general, the term "dealer" means a person "engaged in the business of buying and selling securities" for his own account. See 15 U.S.C. § 78c(a)(5)(A). The "purpose of the ‘engaged in the business’ language is to distinguish dealers from traders." See Louis Dreyfus Corp. (SEC No-Action Letter), Fed. Sec. L. Rep. P 78,526, 1987 WL 108160 *2 (July 23, 1987).
19. A dealer in securities "is an individual or firm who stands ready and willing to buy a security for its own account (at its bid price) or sell from its own account (at its ask price)." Dealer Definition (Investopedia), https://www.investopedia.com/terms/d/dealer.asp. To be "engaged in the business of buying and selling" a person must continuously hold itself out as willing to buy a specific security, e.g. a share of a named public company's stock, at a particular price, and also willing to sell that exact same security at a stated higher price. Id., Div. of Trading & Markets, U.S. SEC, Guide to Broker-Dealer Registration (April 2008), http://www.sec.gov/divisions/marketreg/bdguide.htm. See also United Sav. Assoc. of Texas (SEC No-Action Letter), 1987 WL 107923 at *1 (Apr. 2, 1987).
20. Ironridge did not buy Debtor's stock in the open market. Instead Ironridge acquired it at a discounted price directly from the Debtor. In addition, Ironridge did not continuously hold itself out as willing to sell its stock at a stated price, but instead sold anonymously through a regular brokerage account over a period time. For such reasons, Ironridge was not a dealer. Id .
21. A "dealer" does not include a person who buys or sells securities for its own account, "but not as a part of a regular business." See 15 U.S.C. § 78c(a)(5)(B). The term "regular business" as used in Section 5(B) means "the regular business of providing dealer services to others ..., such as soliciting investor clients, handling investor clients' money and securities, [and] rendering investment advice to investors." See Chapel Investments, Inc. v. Cherubim Interests, Inc., 177 F. Supp. 3d 981, 990 (N.D. Tex. 2016). These services "distinguish the activities of a dealer from those of a private investor or trader." In the Matter of Sodorff, 50 S.E.C. 1249, 1992 WL 224082 at *5 n.27 (Sept. 2, 1992). Ironridge did not solicit investor clients, handle investor clients' money or securities, or render investment advice to individual members of the investing public, and therefore was not a dealer. Id .
22. Under the plain language of Section 5(A), "only a person engaged in the business of dealing may be considered a dealer." Id. Traders and investors like Ironridge who "buy and sell securities" are "not conducting a trade or business" and therefore cannot be dealers under the plain language of the statute. See Topic No. 429 Traders in Securities, https://www.irs.gov/taxtopics/tc429; Louis Loss & Joel Seligman, Fundamentals of Securities Regulation, Ch. 8A(b) The Dealer-Trader Distinction, pp. 814-15 (2004).
23. "Dealers are distinguished from investors and traders because they have customers and derive their income from marketing securities for sale to customers or from being compensated for services provided as an intermediary or market-maker." Id. Dealers "effect securities transactions for customers, for which they typically charge a commission or other transaction-based fee." XY Plan. Network, LLC v. United States Sec. & Exch. Comm'n, 963 F.3d 244, 248 (2d Cir. 2020). Whereas an investor or trader may buy securities from issuers at substantial discounts and resell them into the public market for immediate profit, a dealer buys and sells securities from its customer and to its customer. See C.H. Meyer, Law of Stock Brokers and Stock Exchanges § 43-a, at 33-34 (Supp. 1933). Institutional investors like Ironridge have no individual customers, and therefore cannot be dealers. Id .
The primary purpose of the registration requirement is the protection of the broker or dealer's clients. Roth v. SEC, 22 F.3d 1108, 1109 (D.C. Cir. 1994). See also S.E.C. v. Big Apple Consulting USA, Inc., 783 F.3d 786, 809 (11th Cir. 2015) (consulting and public relations service providers who depended on acquiring client stock and selling that client stock to fund operations and earn a profit were appropriately found to have acted as dealers); David A. Lipton, A Primer on Broker-Dealer Registration, 36 Cath. U. L. Rev. 899, 907 (1987) ; 23 Jerry W. Markham & Thomas Lee Hazen, Broker-Dealer Operations Sec. & Comm. Law § 3:1 (2016).
24. The plain language of Section 5(B) makes clear that a person whose entire business consists of buying and selling securities cannot be a dealer, because such activities must be engaged in as "as part of" a regular business to fall within the definition. See 15 U.S.C. § 78c(a)(5)(B) ; In the Matter of Sodorff, 1992 WL 224082 at *5. If it were possible for an entity whose only activities are buying and selling securities to be a dealer, the statute would have said "all or part of’ rather than "part of." Cf., e.g., 11 U.S. Code § 1322(b)(8) ("all or part of’ claim), 18 U.S.C. § 1955(a) ("all or part of’ gambling business), 42 U.S.C. § 6506a(j)(1) ("all or part of’ oil or gas pool). See also Davenport Mgmt., Inc. (SEC No-Action Letter), Fed. Sec. L. Rep. P 76,643, 1993 WL 120436 (Apr. 13, 1993), citing Louis Loss, Securities Regulation 2983 (1990). Ironridge's only activities were buying securities from issuers at a discount, and then reselling them into the market for a profit, so under the plain language of Section 5(B) it is not a dealer.
25. Both investors and dealers seek to profit by buying stock for less than they sell it. However, investors and traders buy in the open market or directly from issuers, often at a significant discount, and then resell in the open market for a profit, whereas dealers buy from and sell to their customers. See C.H. Meyer, Law of Stock Brokers and Stock Exchanges § 43-a, at 33-34 (Supp. 1933) ; Ackerberg v. Johnson, 892 F.2d 1328, 1335 (8th Cir. 1989) (person who bought shares from corporate insiders and resold in public markets for his own account "clearly’ not a dealer). Investors and dealers may both purchase large blocks of stock at a discount, and the fact that Ironridge sold hundreds of millions of common shares and a large percentage of volume is irrelevant in determining whether it is a dealer or a trader. See Ackerberg, 892 F.2d at 1335 (distribution is not defined "in quantitative terms’).
26. A "person who buys and sells securities for his own account’ as Ironridge did is generally not considered to be "’engaged in the business’ of buying and selling securities and consequently, is not deemed to be a ‘dealer’ under the Act." See Nat'l Council of Sav. Insts., SEC No-Action Letter, 1986 WL 67129 *2 (July 27, 1986). An entity like Ironridge that regularly purchases and sells securities for its own account, "would not, in the absence of any other securities activities, be deemed a ‘dealer’ for registration purposes under the Act." See Burton Securities, SEC No-Action Letter, 1977 WL 10680, *2 (Dec. 5, 1977).
27. Although it was owned and controlled by U.S. residents, Ironridge is a British Virgin Islands company. See NewLead Holdings Ltd. v. Ironridge Glob. IV Ltd., No. 14CV3945, 2014 WL 2619588, at *3 (S.D.N.Y. June 11, 2014). Ironridge therefore "is exempt from registration as a foreign broker-dealer" since it only sold shares through "brokerage accounts at registered broker-dealers." Oceana Capitol Group Limited v. Red Giant Entertainment, Inc., 150 F.Supp.3d 1219, 1226 (D. Nev. 2015), citing 17 C.F.R. § 240.15a-6(a)(4)(i). The "resale of shares through registered-broker dealers cannot be considered in determining whether" it is required to register as a dealer. Chapel Investments, 177 F.Supp.3d at 991. Since Ironridge only sold common shares through standard brokerage accounts, it is exempt from registration as a foreign broker-dealer.
28. Lastly, market selling of "freely tradeable shares acquired in a court approved Section 3(a)(10) exchange does not make the person receiving the shares a dealer." Oceana Capitol Group, 150 F.Supp.3d at 1225.
2) Likely Difficulties in Collection.
29. The parties agree that the second Martin factor is inapplicable here. The money being divided is already on deposit with the state court clerk, so there are no difficulties in collection.
3) Complexity of the Litigation Involved, and the Expense, Inconvenience and Delay Necessarily Attending it.
30. With respect to the third Martin factor, substantial expense, inconvenience and delay will be avoided by approving the settlement. The Settlement Agreement resolves all of the substantial pending litigation between Ironridge and the Debtor in multiple venues and stages.
31. The disputes represented by the Litigation Matters have been, and would continue to be of a complex nature, the results may be uncertain, and the related time and expense that likely will be needed for resolution of such matters favors approval of the Settlement.
32. The diversion of additional valuable time and resources to pursue and defend the various actions -- which, as set forth above, have low and uncertain probabilities of success for the Debtor -- will unnecessarily deplete the Debtor's Estate without any reasonable prospect for a greater return to the Estate.
33. The Settlement avoids further protracted and expensive costs of litigation, and the incurrence of additional costs that would unnecessarily extend the duration of this chapter 7 case.
4) Paramount Interest of the Creditors.
34. The fourth Martin factor recognizes that every constituency affected by a proposed settlement agreement may not be a signatory to the agreement or involved in the negotiations, and so requires that the court conduct an independent review of the fairness of the proposed settlement agreement. In re Capmark Fin. Grp. Inc., 438 B.R. 471, 519-20 (Bankr. D. Del. 2010). While the Court must give the views of objecting parties-in-interest some deference, these views are not dispositive and "cannot be permitted to predominate over the best interests of the estate as a whole." In re Key3Media Grp., Inc., 336 B.R. 87, 97 (Bankr.D.Del.2005) ; Capmark, 438 B.R. at 519 ("views of a committee or other creditors" are not "dispositive on the reasonableness of a settlement"); In re Sea Containers, Ltd., No. 06-11156(KJC), 2008 WL 4296562, at *11 (Bankr.D.Del. Sept.19, 2008) (approving settlement over objection where creditors failed to convince court "the settlement so affects their position as to be unfair.").
35. Courts may also consider additional factors, such as: the competency and experience of counsel who support the settlement; the nature and breadth of releases to be obtained by the parties to the settlement; and the extent to which settlement is the product of arm's length bargaining. See In re Spielfogel, 211 B.R. 133, 144 (Bankr. E.D.N.Y. 1997) ; In re Dow Corning Corp., 198 B.R. 214, 223 (Bankr. E.D. Mich. 1996).
36. Here, the Trustee has satisfied the final element of the Martin test by demonstrating the tangible and intangible benefits provided by the Settlement, which both avoids incurring additional costs and brings funds into the Estate. Given the likely difficulties proving the merits of any claim against Ironridge as discussed above, the Estate is better off with the certainty of receiving some payment now.
II. CONCLUSION
37. Based on the foregoing findings of fact and conclusions of law, and given the circumstances of the above-captioned bankruptcy case, adversary proceedings and other litigation matters discussed herein, the Court finds that the Settlement as set forth in the Settlement Agreement and described in the Settlement Motion is fair, reasonable, in the best interests of the Estate, and satisfies the Rule 9019 standards as set forth in the Third Circuit's Martin decision; and, accordingly, the Court will grant the Settlement Motion and approve the Settlement and the Settlement Agreement.
38. Based upon the foregoing findings and conclusions of law, and having determined that the relief sought by the Chapter 7 Trustee by the Settlement Motion is just and proper and in the best interests of the Estate and all creditors of, parties in interest with respect to, and interest holders of, the Debtor, the Court hereby concludes and orders as follows:
(a) The Settlement Motion is GRANTED;
(b) The Settlement is APPROVED; and
(c) The terms of the Settlement Agreement are APPROVED and the Chapter 7 Trustee is hereby authorized to perform all his obligations thereunder and otherwise in accordance with the Settlement and the Settlement Agreement.
Exhibit 1
Settlement Agreement
SETTLEMENT AGREEMENT
This agreement (this "Settlement Agreement") is made and entered into as of this 4th day of October, 2021, by and among (i) Charles A. Stanziale, Jr., in his capacity as the duly appointed trustee (the "Chapter 7 Trustee") under chapter 7 of title 11 of the United States Code (the "Bankruptcy Code") of the estate (the "Estate") of Debtor ScripsAmerica, Inc. ("Debtor" or "ScripsAmerica"), (ii) Ironridge Global Partners LLC ("Ironridge"), and (iii) Ironridge Global IV Ltd. ("Global IV") (collective references to Ironridge and Global IV shall be to the "Non-Trustee Settling Parties").
The Debtors in these cases, along with the last four digits of the federal tax identification number for each of the Debtors, are: ScripsAmerica, Inc. (8594) and Main Avenue Pharmacy, Inc. (6335).
RECITALS
WHEREAS , on September 9, 2016 (the "Petition Date"), ScripsAmerica filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code (the "Chapter 11 Case") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"), captioned as Case No. 16-11991 (LSS).
WHEREAS , on January 30, 2017, the United States Trustee moved to convert the Chapter 11 Case to a case under Chapter 7 of the Bankruptcy Code [D.I. 192] (the "Motion to Convert"); and, by its order of February 7, 2017 [D.I. 217], the Bankruptcy Court granted the Motion to Convert.
WHEREAS , on February 9, 2017, the Chapter 7 Trustee was appointed.
WHEREAS , as of the commencement of the Chapter 11 Case, the Non-Trustee Settling Parties and ScripsAmerica were parties to certain litigation matters pending in various courts as follows:
• Ironridge Global IV, Ltd. v. ScripsAmerica, Inc., No. BC524230 (Los Angeles County Super. Ct.) (the "California Collection Action");
• ScripsAmerica, Inc. v. Ironridge Globally, Ltd., et al., 2:14-cv-03962 (C.D. Cal.) (the "Frivolous Securities Action");
• Ironridge Global IV, Ltd., et al., v. Scrips America, Inc., et al., Case No. 2.16-CV-05335 (C.D.Cal.) (the "Malicious Prosecution Action");
•
Ironridge Global IV, Ltd. v. LNK International, Inc. and Scrips America, Inc., Index No. 612769/2015 (N.Y. Sup. Ct.) (the "LNK State Court Action"); and
• Ironridge Global IV, Ltd. v. Okie Monmouth Stock Transfer Co., Inc., Docket No. L-772-15 (N.J. Super. Ct.) (the "Olde Monmouth Litigation").
WHEREAS , after commencement of the Chapter 11 Case, the Debtor commenced the following actions:
• ScripsAmerica, Inc. v. Ironridge Globals IV, Ltd., LNK International, Inc. a/k/a L.N.K. International. Inc. and Suffolk County Comptroller , Adv. No. 18-51960 (LSS) (Bankr.D.Del.) (the "Debtor LNK Adversary"); and
• ScripsAmerica, Inc. v. Ironridge Global IV, Ltd. et al., Case No. 2:17-cv-00945 (CD.Cal.).
WHEREAS , on September 6, 2018, the Chapter 7 Trustee commenced the adversary Proceeding captioned Charles A. Stanziale, Jr., Chapter 7 Trustee of ScripsAmerica, Inc. v. Ironridge Global IV, Ltd., LNK International, Inc. and Suffolk County Comptroller, Adv. No. 18 - 50724 (LSS) (Bankr. D. Del.) (the "Trustee LNK Adversary").
WHEREAS , each of the LNK State Court Action, the Debtor LNK Adversary and the Trustee LNK Adversary relates to the competing claims of Global IV and the Estate to $160,519.82 on deposit with the Suffolk County Comptroller (the "LNK Funds").
WHEREAS , the Non-Trustee Settling Parties have asserted claims against the Debtor and they further submit some or all of the damages they have suffered may be covered by various general liability insurance policies issued to ScripsAmerica.
AGREEMENT
NOW, THEREFORE , in consideration of the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:
1. The LNK Funds . Within two business days of order approving this Settlement Agreement (the "Settlement Approval Order") becoming a Final Order, Global IV and the Chapter 7 Trustee shall file a stipulation with the New York Supreme Court for Suffolk County (i) providing for distribution of the LNK Funds by the Suffolk County Comptroller (x) to Global IV in the amount of $80,259.91, (y) to the Chapter 7 Trustee on behalf of the Estate in the amount of $80,259.91, and (z) with any interest having accrued on the LNK Funds being divided in half and distributed in equal amounts to each of Global IV and to the Chapter 7 Trustee on behalf of the Estate, and (ii) subject to receipt of good funds from the Suffolk County Comptroller as provided for above by each of Global IV and the Chapter 7 trustee that have cleared all banking procedures necessary to ensure irrevocable and final receipt of such funds, providing for dismissal of the LNK State Court Action with prejudice.
"Final Order " as used herein shall mean an order, the operation or effect of which has not been reversed, stayed modified, or amended, that is in full force and effect, and as to which order (a) the time to appeal, seek certiorari, or request reargument or further review or rehearing has expired and no appeal, petition for certiorari, or request for reargument or further review or rehearing has been timely filed, or (b) any appeal that has been or may be taken or any petition for certiorari or request for reargument or further review or rehearing that has been or may he filed has been resolved by the highest court to which the order or judgment was appealed, from which certiorari was sought, or to which the request was made, and no further appeal or petition for certiorari or request for reargument or further review or rehearing has been or can be taken or granted; provided, however, that the Chapter 7 Trustee and the Non-Trustee Settling Parties jointly reserve the right to waive any appeal period for an order to become a Final Order.
2. Dismissal of Other Pending Litigation . In addition to the obligation to dismiss the LNK State Court Action as provided for in Paragraph 1 above, within two business days of the Bankruptcy Court's order approving this Settlement Agreement becoming a Final Order, the Chapter 7 Trustee shall file notices dismissing the following actions with prejudice:
ScripsAmerica, Inc. v. lronridge Global IV, Ltd., LNK International, Inc. a/k/a L.N.K. International, Inc. and Suffolk County Comptroller , Adv. No. 18 -51960 (LSS) (Bankr, D. Del.);
ScripsAmerica, Inc. v. Ironridge Global IV, Ltd., et al., Case No, 2:14-cv-03962 (C.D.Cal.);
ScripsAmerica, Inc. v. Ironridge Global IV, Ltd. et al., Case No. 2:17-cv-00945 (C.D.Cal.); and
Charles A. Stanziale, Jr., Chapter 7 Trustee of ScripsAmerica, Inc. v. Ironridge Global IV, Ltd., LNK International, Inc. and Suffolk County Comptroller , Adv. No. 18-50724 (LSS) (Bankr. D. Del.).s
3. Discontinuance of Other Pending Litigation Against the Estate . In addition to the obligation to dismiss the LNK State Court Action as provided for in Paragraph 1 above, the Non-Trustee Settling Parties hereby agree to discontinue litigation of any claims against the Estate in Ironridge Global IV, Ltd. et al., v. Scrips America, Inc., et al., Case No. 2:16-CV-05335 (C.D.Cal.) (the "Continuing Action"), provided, however, that the Non-Trustee Settling Parties shall retain all rights in respect of discovery in the Continuing Action and shall be entitled, subject to any applicable objections thereto in the context of such Continuing Action, to seek discovery from the Estate in pursuance of its claims and causes of action against any of the non-Estate defendants in the Continuing Actions, and provided further, that the Chapter 7 Trustee on behalf of the Debtor hereby waives the attorney-client privilege between the Debtor and its counsel with respect to communications prior to February 7, 2017. The Parties further agree that they shall agree to dismiss Ironridge Global IV Ltd. V. Olde Monmouth Stock Transfer Co., Inc., et al., Docket No. L-772-15 (N.J. Super. Ct.) without prejudice and without costs to either party. Any and all charges incurred in preparing the responses to the Non-Trustee Settling Parties’ discovery from the Estate shall be paid for in advance by the Non-Settling Parties to the vendor who performed such services on behalf of the Trustee.
4. Retention of Causes of Action Against Non-Estate Defendants . The Non- Trustee Settling Parties fully retain and preserve all their claims and causes of action against any person or entity oilier than the Estate including, without limitation, any such claims or causes of action against any defendant in the Continuing Actions.
5. Relief From Stay. In the Settlement Motion (as defined herein) the Chapter 7 Trustee shall request termination of the automatic stay of § 362(a) of the Bankruptcy Code with respect to the pending actions identified in Paragraph 3, above, such that if relief from the stay is granted the Non-Trustee Settling Parties thereafter shall be authorized to take any and all actions necessary or available to fully prosecute such actions to judgment and through any and all appeals therefrom. The Chapter 7 Trustee shall support all efforts by any Non-Trustee Settling Party to achieve relief from the automatic stay of § 362(a) of the Bankruptcy Code or any similar stay of proceedings which has been applied in any such pending action,
6. Settlement Motion/Form of Final Order. The Chapter 7 Trustee shall seek approval of this Settlement Agreement and of each of the terms of this Settlement Agreement by appropriate motion (a "Settlement Motion") filed with the Bankruptcy Court in the Bankruptcy Case and shall take all steps reasonable, necessary and proper to prosecute such Settlement Motion to a Final Order. The Non-Trustee Settling Parties shall take all actions reasonable, necessary and proper to prosecute such Settlement Motion to a Final Order. The proposed Final Order approving this Settlement Agreement and granting the relief sought by the Settlement Motion shall be in the form attached hereto as Exhibit A. and shall include findings that the Non-Trustee Settling Parties did not engage in securities fraud and were not securities dealers. Such Final Order shall be, in form and substance, acceptable in all respects to each of the Chapter 7 Trustee and the Non-Trustee Settling Parties; and, each of them shall have the right to terminate this Settlement Agreement in the event the form and substance of the Final Order is not acceptable, in each of their sole discretion.
7. Releases.
(a) Release of the Chapter 7 Trustee and the Estate . Subject to the entry of the Settlement Approval Order by the Bankruptcy Court, and subject to the terms of this Settlement Agreement including the Chapter 7 Trustee's obligations hereunder, the Non-Trustee Settling Parties, and their successors and assigns, hereby release, acquit, waive and forever discharge the Chapter 7 Trustee, both individually and in his capacity as the Chapter 7 Trustee, his retained professionals, and the Estate, from and against any and all claims, contracts, disputes, agreements, covenants, demands, obligations, controversies, suits, cross-claims, torts, costs, losses, attorneys’ fees, damages, liabilities, expenses and causes of action, whether in law or in equity, whether known or unknown, whether anticipated or unanticipated, whether suspected or claimed, whether fixed or contingent, whether yet accrued or not, and whether damages have resulted from such or not, of any kind, nature or description, that the Non-Trustee Settling Parties have or may hereafter assert against the Chapter 7 Trustee and the Estate, other than for a breach of this Settlement Agreement; provided, however, as set forth in Paragraph 3 of this Settlement Agreement, that the Non-Trustee Settling Parties shall retain all rights in respect of discovery in the Continuing Action and shall be entitled, subject to any applicable objections thereto in the context of such litigation, to seek discovery from the Estate in pursuance of its claims and causes of action against any or the non-Estate defendants in the Continuing Action.
(b) Release of the Non-Trustee Settling Parties. Subject to the entry of the Settlement Approval Order by the Bankruptcy Court, and subject to the terms of this Settlement Agreement including the Chapter 7 Trustee's obligations hereunder, Chapter 7 Trustee and the Estate hereby release, acquit, waive and forever discharge, collectively and individually, the Non-Trustee Settling Parties and their predecessors, successors, assigns, affiliates, shareholders, directors, officers, directors, accountants, attorneys, employees, agents, representatives and servants from and against any and all claims, contracts, disputes, agreements, covenants, demands, obligations, controversies, suits, cross-claims, torts, costs, losses, attorneys’ fees, damages, liabilities, expenses and causes of action, whether in law or in equity, whether known or unknown, whether anticipated or unanticipated, whether suspected or claimed, whether fixed or contingent, whether yet accrued or not. and whether damages have resulted from such or not, of any kind, nature or description, that the Chapter 7 Trustee and/or the Estate has or may hereafter assert against the Non-Trustee Settling Parties arising from or related to any of the litigation matters set forth in this Settlement Agreement or arising from or related to the Estate, other than for a breach of this Settlement Agreement.
8. Waiver of Claims. Upon the Settlement Approval Order becoming a Final Order, Claim No. 2-1 filed by Ironridge Global Partners, LLC shall be deemed expunged without further court order and the Non-Trustee Settling Parties agree that shall not file any other proof of claim against the Estate or in the administratively consolidated bankruptcy proceeding of Main Avenue Pharmacy, Inc.
9. Time . Time is of the essence of this Settlement Agreement.
10. No Admission of Liability. Each Party enters into this Settlement Agreement without admitting any liability or conceding any allegations not already expressly admitted. This Settlement Agreement and its provisions shall not be offered or received in evidence in any action or proceeding as an admission or concession of liability or wrongdoing of any nature on the part of any Party except that it may be offered and received in evidence only as evidence of its terms and/or to enforce its terms.
11. Acknowledgments. Notwithstanding any other provision herein, this Settlement Agreement is not and shall not be deemed to be an offer with respect to any securities. Any such offer will be made only in compliance with all applicable securities laws and provisions of the Bankruptcy Code.
12. Cooperation and Support. The Parties shall cooperate with each other in good faith and shall coordinate their activities (to the extent possible and subject to the terms of this Settlement Agreement) in respect of (i) the filing of a motion with the Bankruptcy Court requesting approval of this Settlement Agreement, (ii) obtaining Bankruptcy Court approval of this Settlement Agreement, (iii) the entry of the Settlement Approval Order, and (iv) the implementation of the terms of this Settlement Agreement. In such regard, the Parties shall seek relief from the Bankruptcy Court consistent with the securities exemption requirements of 15 U.S.C. § 77c(a)(10).
13. Binding Effect/No Third Party Beneficiaries. The terms and conditions contained herein shall be binding upon and shall inure to the benefit of each of the Parties, and their respective successors, assigns, agents, and attorneys. Except for the persons or entities explicitly included in Section 6 and in such case only to the extent of the releases provided for in Section 6, no person or entity other than the Parties hereto shall be authorized to rely upon the contents of this Settlement Agreement or be deemed a beneficiary thereof. Nothing in this Settlement Agreement is intended to benefit or create any right or cause of action in or on behalf of any person other than the Parties hereto (and their affiliated persons and entities who are intended to be beneficiaries of the releases and settlements set forth herein).
14. Non-Severabilitv. (a) This Settlement Agreement is to be construed as a whole, and all provisions of it arc to be read and construed together. Wherever possible, each provision of this Settlement Agreement shall be interpreted in such a manner as to be effective and valid under applicable law.
(b) Notwithstanding anything in this Settlement Agreement to the contrary, and in light of the integrated nature of the settlements and compromises embodied in this Settlement Agreement, in the event that: (i) a court of competent jurisdiction enters a final order ruling that any of the provisions of this Settlement Agreement are void, invalid, illegal, or unenforceable in any material respect, or (ii) any of the provisions of this Settlement Agreement are reversed, vacated, overturned, voided, or unwound in any material respect, then in each case, the entirety of this Settlement Agreement (other than this Section 13) shall be void ab initio and of no force and effect and, during any subsequent proceeding, the Parties shall not assert claim preclusion, issue preclusion, estoppel or any similar defense in respect of rights and claims of the Parties that were the subject of this Settlement Agreement prior to this Settlement Agreement being of no force or effect.
15. Entire Agreement/Construction of this Settlement Agreement. This Settlement Agreement constitutes and embodies the entire understanding and agreement between the Parties hereto with respect to the subject matter hereof and supersedes any and all prior agreements, promises, negotiations, representations, understandings or inducements, whether express or implied, oral or written regarding the terms hereof. Each of the Parties hereto acknowledges that it is executing this Settlement Agreement without reliance on any representations, warranties, or commitments other than those representations, warranties, and commitments expressly set forth in this Settlement Agreement.
16. Modification or Amendment. This Settlement Agreement may be modified or amended only by written agreement executed by all of the Parties.
17. Interpretation. This Settlement Agreement is the product of negotiations among the Parties, and its enforcement or interpretation is intended to be done in a neutral manner and in accordance with section 102 of the Bankruptcy Code ; and any presumption with regard to interpretation for or against any Party by reason of that Party (or its counsel ) having drafted or caused to be drafted this Settlement Agreement or any portion of this Settlement Agreement shall not be effective in regard to the interpretation of this Settlement Agreement.
18. Settlement Discussions. This Settlement Agreement and the transactions contemplated herein are part of a settlement among the Parties. Nothing herein shall be deemed an admission of any kind. To the extent provided by Federal Rule of Evidence 408, any applicable mediation privileges, and any applicable state rules of evidence, this Settlement Agreement and all negotiations relating thereto shall not be admissible into evidence in any proceeding other than a proceeding to enforce the terms of this Settlement Agreement.
19. Specific Performance. It is understood and agreed by the Parties that money damages would be an insufficient remedy for any breach of this Settlement Agreement by any Party, that such breach would represent irreparable harm, and that each non-breaching Party shall be entitled to specific performance and injunctive relief (without the posting of any bond and without proof of actual damages), but no other form of equitable relief, as the sole remedy for any such breach, including an order of the Bankruptcy Court or other court of competent jurisdiction requiring any Party to comply promptly with any of its obligations hereunder.
20. Governing Law/Jurisdiction.
(a) This Settlement Agreement shall be governed by the laws of the State of Delaware, without reference to principles of conflicts of law.
(b) Each Party hereto agrees that it shall bring any action or proceeding in respect of any claim arising out of or related to this Settlement Agreement in the Bankruptcy Court.
(c) Solely in connection with claims arising under this Settlement Agreement, each of the Parties: (i) irrevocably submits to the exclusive jurisdiction and the constitutional authority of the Bankruptcy Court; (ii) waives any objection to laying venue in any such action or proceeding in the Bankruptcy Court; and (iii) waives any objection that the Bankruptcy Court is an inconvenient forum, does not have jurisdiction over any Party hereto, or lacks the constitutional authority to enter final orders in connection with such action or proceeding; provided, however, that this Settlement Agreement and the releases set forth herein may be submitted in any court, arbitration, and/or other legal proceeding to enforce the terms of such releases.
(d) Each Party hereby waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in any legal proceeding arising out of, or relating to, this Settlement Agreement or the transactions contemplated hereby (whether based on contract, tort, or any other theory). Each Party (i) certifies that no representative, agent, or attorney of any other Party has represented, expressly or otherwise, that such other Party would not, in the event of litigation, seek to enforce the foregoing waiver and (ii) acknowledges that it and the other Parties have been induced to enter into this Settlement Agreement by, among other things, the mutual waivers and certifications in this Section 19.
21. Notices. Any notice, demand, request, or other communication required or permitted under this Settlement Agreement or otherwise reasonable or required by the then prevailing circumstances shall be in writing and shall be given to such party at its address set forth below or at such other address as such party may hereafter specify for the purpose of notice thereto. Each such notice, demand, request or other communication shall be effective upon the later of delivery by electronic mail to the electronic mail addresses identified below and (a) if given by mail, three (3) calendar days following the date upon which such notice is deposited in the United States Mail with first class postage prepaid, addressed as aforesaid, provided that such mailing is by registered or certified mail, return receipt requested, or (b) if given by overnight delivery, one (1) calendar day following the date upon which such notice is deposited with a nationally recognized overnight delivery service such as FedEx, UPS or Airborne with all fees and charges prepaid, addressed as set forth below. The addresses set forth below may be changed as to any party by such party delivering notice to the other Parties no less than thirty (30) days prior to such change of address.
| Chapter 7 Trustee: | Charles A, Stanziale, Jr.347 Mt. Pleasant AvenueSuite 200West Orange, New Jersey 07052 |
| With a copy to: | Jeffrey Testa, Esq.McCarter & English, LLPFour Gateway Center100 Mulberry StreetNewark, NJ 07102 |
| Non-Trustee Settling Parties: | John D. Dummy, Esq.Saul, Ewing, Arnstein & Lehr LLP1201 North Market StreetSuite 2300Wilmington, Delaware 19801 |
22. Counterparts . This Settlement Agreement may be executed in any number of counterparts and by different Parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of this Settlement Agreement by telecopier or electronic transmission shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Settlement Agreement by telecopier or electronic transmission also shall deliver an original executed counterpart of this Settlement Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Settlement Agreement.
IN WITNESS WHEREOF, the undersigned parties, intending to be legally bound hereby, hereunto set their hands as of the date first referenced above.