Supreme Court, New York County, August 18, 2022

Piekarski Law PLLC, New York City (Mendy M. Piekarski of counsel), and Thompson Hine LLP, New York City (Mohammad Karim Sabbidine of counsel), for plaintiff.

Tarter Krinsky & Drogin LLP, New York City (Justin Y. Chu of counsel), and The Basile Law Firm P.C., Jericho (Mark R. Basile of counsel), for defendants.

Plaintiff GS Capital Partners, LLC (GS Capital or plaintiff) moves pursuant to CPLR 3213 for summary judgment in lieu of complaint against defendants FTE Networks, Inc. (FTE) and SCFTE SPV LLC (SCFTE and together with FTE, defendants) to recover under the terms of a convertible redeemable note (note). Plaintiff's motion is denied, and this matter shall proceed as a plenary action.

The parties entered a series of agreements on March 10, 2020, pursuant to which GS Capital acquired FTE common stock at a discount. First, GS Capital and FTE entered a securities purchase agreement (SPA) (NY St Cts Elec Filing [NYSCEF] Doc No. 6) which required FTE to enter the note and for its affiliate, SCFTE, to enter a guaranty. Second, FTE executed the note (NYSCEF Doc No. 5) pursuant to which it promised, among other things, to pay GS Capital $1,800,000. The note accrued interest at a 6% rate of interest. Third, SCFTE executed a payment guaranty (guaranty) on the note (NYSCEF Doc No. 7). The authenticity of the SPA, note and guaranty are not in dispute (NYSCEF Doc No. 25 at 1, defendants' mem of law).

Following the execution of the note, in August of 2020, FTE informed the Securities and Exchange Commission (SEC) that it could not timely file certain required documents and FTE subsequently became delinquent in its SEC filings (NYSCEF Doc No. 4 ¶¶ 11-15, aff of Isaac Kastner; NYSCEF Doc Nos. 8-10). As a result, GS Capital contends that FTE defaulted under section 8 (m) of the note and on January 25, 2021, GS Capital issued a notice of acceleration to FTE (NYSCEF Doc No. 11). This action was commenced on January 27, 2021, by the filing of a summons with notice of motion for summary judgment in lieu of a complaint (NYSCEF Doc No. 1).

On March 22, 2021, defendants submitted opposition (NYSCEF Doc Nos. 17-25). Defendants [*2]argue that (1) the note is "inextricably linked to, a securities purchase agreement" and therefore not an instrument for the payment of money only; (2){**76 Misc 3d at 1091} the note is criminally usurious; and (3) plaintiff may have acted as an unregistered securities dealer (NYSCEF Doc No. 25 at 1). In support of their contentions, defendants have filed a copy of the complaint in United States Sec. & Exch. Commn. v John M. Fife (US Dist Ct, ND Ill, 1:20-cv-05227) (NYSCEF Doc No. 24) in which the SEC claims "engaging in a regular business of buying convertible notes and then selling the resulting newly-issued shares of microcap companies' stock into the public market" constitutes a violation of section 15 (a) (1) of the Securities Exchange Act of 1934 (15 USC § 78a et seq., as added by Pub L 73-291, 48 US Stat 881).

The parties stipulated to multiple adjournments (NYSCEF Doc Nos. 26-30) and on July 20, 2021, informed the court that their efforts at a compromise had failed (NYSCEF Doc No. 31). GS Capital filed its reply on July 23, 2021 (NYSCEF Doc No. 32). Thereafter, defendants submitted letters to the court (NYSCEF Doc Nos. 37-38) to draw attention to supplemental authority. Specifically, defendants contend that the Court of Appeals decision in Adar Bays, LLC v GeneSYS ID, Inc. (37 NY3d 320 [2021]), as subsequently relied on in PHSC, Inc. v Powerhouse Group Enters., Inc. (74 Misc 3d 1222[A], 2022 NY Slip Op 50204[U] [Sup Ct, NY County 2022]), warrants denial of plaintiff's motion based on defendants' potentially meritorious usury defense. Specifically, the Court of Appeals held that a conversion option to purchase securities at a discount could be treated as interest for purposes of applying a usury defense.

Plaintiff submitted a letter in response (NYSCEF Doc No. 39) arguing that the court should not consider defendants' letters because they are impermissible surreplies and because applying Adar Bays "would constitute an improper retroactive application of a new principle of law" under Gurnee v Aetna Life & Cas. Co. (55 NY2d 184 [1982]). Defendants submitted a reply letter generally arguing that plaintiff's analysis of Gurnee was incorrect (NYSCEF Doc No. 40). The court has considered the parties' arguments with respect to the applicability of Adar Bays on the merits.

CPLR 3213 permits a party to move for summary judgment in lieu of a complaint "[w]hen an action is based upon an instrument for the payment of money only" and provides that "[i]f the motion is denied, the moving and answering papers shall be deemed the complaint and answer, respectively, unless the{**76 Misc 3d at 1092} court orders otherwise." The inquiry for the court is whether the note is "entitled to the expedited treatment of CPLR 3213" (PDL Biopharma, Inc. v Wohlstadter, 147 AD3d 494, 494 [1st Dept 2017] [denying motion where the court had to consider additional documents and determine whether there was a default and directing discovery]). Relevant here, a potentially meritorious usury defense warrants denial of a motion for summary judgment in lieu of a complaint (Cleo Realty Assoc., L.P. v Papagiannakis, 151 AD3d 418, 419 [1st Dept 2017]).

In Adar Bays, the Court of Appeals held that (1) "a stock conversion option that permits a lender, in its sole discretion, to convert any outstanding balance to shares of stock at a fixed discount should be treated as interest" when applying the usury law, Penal Law § 190.40, and (2) a contract is "void ab initio" if it violates the usury law (Adar Bays, 37 NY3d at 323-324). The PHSC, Inc. decision cites Adar Bays for the proposition that "a criminally usurious loan is void and unenforceable" (PHSC, Inc., 2022 NY Slip Op 50204[U], *2).

Plaintiff's reliance on Gurnee to limit the applicability of Adar Bays is misplaced. In Gurnee, the Court of Appeals held that its decision Kurcsics v Merchants Mut. Ins. Co. (49 NY2d 451, 454 [1980]) concerning the term "first party benefits" as used in the Insurance Law should be [*3]applied retroactively to all cases not barred by the statute of limitations. The Court of Appeals noted that

"a change in decisional law usually will be applied retrospectively to all cases still in the normal litigating process . . . As an exception to this general rule, however, where there has been such a sharp break in the continuity of law that its impact will wreak more havoc in society than society's interest in stability will tolerate a court may direct that the new pronouncement operate prospectively alone" (Gurnee, 55 NY2d at 191-192 [citations and internal quotation marks omitted]).

The Court of Appeals stated "it is important to emphasize that Kurcsics did not establish a new principle of law. It merely construed a statute that had been in effect for a number of years" (id. at 192 [internal quotation marks omitted]).

The Adar Bays decision did not establish a new principle of law, but instead construed a statute that has been in effect for many years. Nor did the Court suggest that its opinion should be given only prospective effect. Accordingly, there is no basis{**76 Misc 3d at 1093} for the court to find that Adar Bays is inapplicable to the present case.

The court finds that defendants have raised factual disputes that could give rise to a potentially meritorious criminal usury defense. Usury is a fact-specific affirmative defense for which defendants should have the benefit of discovery. Accordingly, this proceeding will be converted to a plenary action under CPLR 3213 (Punch Fashion, LLC v Merchant Factors Corp., 180 AD3d 520, 521 [1st Dept 2020], lv dismissed 35 NY3d 1124 [2020]). In view of this determination, the court does not at this stage address the merits of defendants' other arguments in opposition to the present motion.

Accordingly, it is ordered that plaintiff's motion for summary judgment in lieu of a complaint is denied; it is further ordered that this matter proceed as a plenary action and that the moving and answering papers on this motion be deemed the complaint and answer, respectively (CPLR 3213); and it is further ordered that the parties confer in advance pursuant to Commercial Division rule 8 and appear for a telephonic preliminary conference on September 20, 2022, at 10:30 a.m. (the parties should email dial-in information in advance of the call to SFC-Part3@nycourts.gov).^[FN*]