Tarpon Bay Partners LLC v. Zerez Holdings Corporation ( 2023 )

21-1916-cv (L)
Tarpon Bay Partners LLC v. Zerez Holdings Corporation
In the
United States Court of Appeals
For the Second Circuit
August Term, 2022
Nos. 21-1916-cv, 21-2010-cv
TARPON BAY PARTNERS LLC,
Plaintiff–Consolidated Defendant–Counterclaim Defendant–Appellant–
Cross-Appellee,
STEPHEN M. HICKS,
SOUTHRIDGE ADVISORS II, LLC, a Delaware limited liability company,
Consolidated Defendants–Counterclaim Defendants–Appellants–
Cross-Appellees,
v.
ZEREZ HOLDINGS CORPORATION, an Oklahoma corporation, FKA
DEFINITIVE REST MATTRESS COMPANY,
Defendant–Consolidated Plaintiff–Counterclaim Plaintiff–Appellee–
Cross-Appellant,
DOES, 1–25,
Consolidated Defendants–Counterclaim Defendants–Appellees. *
Appeal from the United States District Court
for the District of Connecticut
ARGUED: MARCH 3, 2023
DECIDED: AUGUST 11, 2023
* The Clerk of Court is respectfully directed to amend the caption
accordingly.
Before: NARDINI, MERRIAM, Circuit Judges, and KATZMANN, 1 Judge.
Plaintiff-Appellant Tarpon Bay Partners LLC (“Tarpon Bay”)
and Defendant-Appellee Zerez Holdings Corporation (“Zerez”)
attempted to reach an investment deal in which Tarpon Bay would
purchase Zerez’s debt obligations and, in return, receive stock in
Zerez pursuant to section 3(a)(10) of the Securities Act of 1933. As
part of this attempt, Zerez issued a promissory note that allowed
Tarpon Bay to convert $25,000—the signing fee for the attempted
transaction—into Zerez’s common stock at a 50 percent discount in
stock price. After the deal broke down, Tarpon Bay demanded more
than 278 million shares worth nearly $2.23 million on the date of
conversion. Zerez refused to issue the shares.
Tarpon Bay sued Zerez to enforce the note, and Zerez
countersued Tarpon Bay, Southridge Advisors II, and Stephen Hicks
(together, “Counterclaim Defendants”). On Tarpon Bay’s motion for
summary judgment, the United States District Court for the District
of Connecticut (Underhill, J.) held that although genuine issues of
material fact remained as to whether the note lacked consideration,
the note was unconscionable as a matter of law and therefore
unenforceable. On Zerez’s later motion for summary judgment on its
counterclaims, the district court held in relevant part that Zerez was
not entitled to relief under the Connecticut Unfair Trade Practices Act
(“CUTPA”). Tarpon Bay appeals and Zerez cross-appeals from the
final judgment.
We first vacate the district court’s holding that the note was
unconscionable as a matter of law on the record before it at summary
judgment. We next conclude the district court correctly determined
that genuine issues of material fact remained as to whether
1 Judge Gary S. Katzmann, of the United States Court of International
Trade, sitting by designation.
2
consideration supported the note. Finally, we affirm the district
court’s grant of summary judgment for the Counterclaim Defendants
on CUTPA on the alternative ground that CUTPA does not apply to
the case at bar. We VACATE in part, AFFIRM in part, and REMAND
for further proceedings consistent with this opinion.
GEORGE O. RICHARDSON, III, Sullivan &
Worcester LLP, New York, NY, for Plaintiff–
Appellant and Counterclaim Defendants–
Appellants.
JONATHAN M. SHAPIRO, (Evan K.
Buchberger, on the brief), Aeton Law
Partners, Middletown, CT, for Defendant–
Cross-Appellant.
GARY S. KATZMANN, Judge:
Before us are the appeal of Plaintiff-Appellant Tarpon Bay
Partners LLC (“Tarpon Bay”) and cross-appeal of Defendant-
Appellee Zerez Holdings Corporation (“Zerez”) from the Judgment
of the United States District Court for the District of Connecticut.
Tarpon Bay and Zerez are commercial parties who regularly transact
in the capital markets and attempted to reach an arm’s-length
investment deal. After the deal broke down, Tarpon Bay sued to
3
enforce an allegedly valid promissory note issued by Zerez (the
“Signing Fee Note”). Among other defenses and counterclaims,
Zerez raised the defense of unconscionability and counterclaimed
that Tarpon Bay, Southridge Advisors II, LLC (“Southridge”), and
Stephen M. Hicks (“Hicks”) (together, “Counterclaim Defendants”)
had violated the Connecticut Unfair Trade Practices Act (“CUTPA”),
Conn. Gen. Stat. §§ 42-110a to -110q.
In September 2019, the district court denied summary
judgment for Tarpon Bay on its enforcement claims because genuine
issues of material fact remained as to whether the Signing Fee Note
was supported by consideration. It then held in the same opinion that
the Signing Fee Note was unconscionable and therefore
unenforceable. Tarpon Bay challenges these two holdings on appeal.
In July 2021, the district court granted summary judgment for Tarpon
Bay on Zerez’s CUTPA counterclaim, which Zerez challenges on
4
cross-appeal.
We first hold that the record at the summary judgment stage
did not establish that the Signing Fee Note was unconscionable under
Connecticut law. We next hold that the district court correctly denied
summary judgment for Tarpon Bay on its enforcement claims.
Finally, we hold that the district court’s grant of summary judgment
on Zerez’s CUTPA claim was warranted on the alternative grounds
that CUTPA does not apply to the case at bar. Accordingly, we
VACATE in part, AFFIRM in part, and REMAND for further
proceedings consistent with this opinion.
I. Background
A. Factual Background
Unless otherwise stated, the parties do not dispute the
following facts. Zerez and Tarpon Bay are sophisticated commercial
parties who are routine players in the capital markets. Zerez is a
publicly traded holding company, formed in Oklahoma and operated
out of California, that invests in and manages emerging technology
5
businesses. Joint App’x at 867, 915, 1149. Trading at fractions of a
cent, Zerez’s common stock is a penny stock listed on the over-the-
counter (“OTC”) market under the stock symbol “SCNA.” 2 Id. at 867,
870. Tarpon Bay is a Florida limited liability company managed by
Southridge, an investment advisory firm based in Connecticut and
headed by Hicks. Id. at 867–68, 874.
In January 2016, Zerez sought new capital to fund its continued
2 OTC “securities are securities not listed on a national securities
exchange.” Over-the-Counter (OTC) Securities, Investor.gov,
https://www.investor.gov/introduction-investing/investing-basics/glossary/over-
counter-otc-securities (last visited Aug. 10, 2023). And microcap stocks,
commonly referred to as “penny stocks,” refer to shares in “companies with low
or micro market capitalizations. . . . of less than $250 or $300 million.” Microcap
Stock, Investor.gov, https://www.investor.gov/introduction-investing/investing-
basics/glossary/microcap-stock (last visited Aug. 10, 2023).
Due to the very low price, and to the lack of disclosure requirements that
are generally applicable to securities listed on national exchanges, penny stocks on
the OTC market are typically highly volatile in price and generally illiquid. See
Joshua T. White, U.S. SEC, Outcomes of Investing in OTC Stocks 8–9 (Dec. 16, 2016),
https://www.sec.gov/files/White_OutcomesOTCinvesting.pdf. Because it can be
difficult to find a buyer, parties holding penny stock often cannot sell shares
quickly without lowering the price.
As of August 10, 2023, SCNA trades at $0.0007 per share. See SCNA,
OTCMarkets, https://www.otcmarkets.com/stock/SCNA/overview (last visited
Aug. 10, 2023). Zerez changed its name to “Smart Cannabis Corp.” in September
2017. See Joint App’x at 972.
6
operations and growth. Id. at 1150. The company had more than
$500,000 of debt on its books, so it entertained offers from fundraising
brokers to provide or procure new capital in exchange for stock or
other debt. Id. Juan Carlos Murga, Zerez’s then-CEO, was in contact
with individuals from several venture capital and investment funds
but ultimately proceeded with Anish Aswani of Southridge. 3 Id. at
1149–51. The parties dispute how they were initially put in touch. 4
However it happened, Aswani and Murga engaged in discussions
that Tarpon Bay would purchase Zerez’s debt obligations and, in
exchange, receive a commensurate amount of stock in Zerez. Id. at
915–16, 1296. The transaction would reduce Zerez’s carried debt and
make the company more attractive for future lenders or investors. Id.
at 916, 1296. Because Zerez would need to issue equity in exchange
3 Aswani was an employee who negotiated with Zerez on behalf of
Southridge and Tarpon Bay. Id. at 928.
4 Tarpon Bay alleges that they connected “through a third party familiar
with both companies that had recommended to Zerez that Tarpon might be able
to assist Zerez in reducing its carried debt.” Id. at 916. Zerez denies the
involvement of a third party and insists that Aswani placed a “cold call” to Murga.
Id. at 1302.
7
for its outstanding debt, the parties were aware that the transaction
would require a court order approving the fairness of the terms
pursuant to section 3(a)(10) of the Securities Act of 1933. 5 Joint App’x
at 915–16, 1296.
Aswani sent Murga a proposed term sheet outlining the key
aspects of the deal (the “Term Sheet”). Id. at 916, 1296. Under the
Term Sheet, Tarpon Bay would individually engage and execute
agreements with Zerez’s creditors to buy the debt; Tarpon Bay would
seek court approval of the section 3(a)(10) transaction within five days
5 Section 3(a)(10) of the Securities Act exempts issuers from registration for
securities issued in exchange for outstanding securities or other qualifying value.
Specifically, the provision exempts from registration:
[A]ny security which is issued in exchange for one or more bona
fide outstanding securities, claims or property interests, or partly in
such exchange and partly for cash, where the terms and conditions
of such issuance and exchange are approved, after a hearing upon
the fairness of such terms and conditions at which all persons to
whom it is proposed to issue securities in such exchange shall have
the right to appear, by any court, or by any official or agency of the
United States, or by any State or Territorial banking or insurance
commission or other governmental authority expressly authorized
by law to grant such approval . . . .
15 U.S.C. § 77c(a)(10).
8
of executing the agreements with Zerez’s creditors; and Zerez would
issue a commensurate amount of stock to Tarpon Bay, subject to
certain limitations not relevant here. Id. at 981–82. The Term Sheet
also specified that Tarpon Bay would receive (1) a $25,000 fee payable
in cash or a promissory note for stock at Tarpon Bay’s election
(“Signing Fee”) and (2) a fee worth $75,000 at minimum upon judicial
approval of the transaction. Id. at 983. But the signature page of the
Term Sheet indicated that the Term Sheet “merely represent[s]
proposed terms for possible liabilities satisfaction. Until definitive
documentation is executed by all parties, there shall not exist any
binding obligation,” other than two provisions relating to
confidentiality and exclusivity. Id. at 984. Murga was personally
involved in the discussions with Aswani, but Zerez alleges that it
played no role in drafting the Term Sheet. Id. at 917, 1297, 1303. Zerez
signed the Term Sheet on January 15, 2016. Id. at 984.
On January 27, 2016, Zerez executed a convertible promissory
9
note to Tarpon Bay for the Signing Fee (“Signing Fee Note”). Id. at
1005, 1012. The Signing Fee Note was issued pursuant to the Signing
Fee provision in the Term Sheet. Id. at 917–18, 1296–98. Crucially, the
Signing Fee Note was payable on demand and allowed Tarpon Bay
“to convert all . . . of the Outstanding Principal Amount . . . into
Common Stock at a conversion price . . . for each share of Common
Stock at a 50% discount from the lowest closing bid price in the 30
trading days prior to the day that [Tarpon Bay] requests conversion.”
Id. at 1005–06. The Signing Fee Note also obligated Zerez “to reserve
at least Five hundred million (500,000,000) shares of its Common
Stock for issuance to Holder in connection with conversion of this
Note.” Id. at 1011. Aswani told Murga that Zerez was issuing the
Signing Fee Note solely for the services that Southridge and Tarpon
Bay would provide as part of the section 3(a)(10) transaction, and that
Murga would need to execute the Signing Fee Note to proceed
because it was a prerequisite to entering into a definitive agreement.
10
Id. at 918, 1304. Zerez alleges that it played no role in drafting the
Signing Fee Note and that it felt that it had no meaningful choice in
negotiating its terms given its financial condition. Id. at 1304. One
day after Zerez executed the Signing Fee Note, Hicks signed the Term
Sheet on January 28, 2016. Id. at 984. Murga alleges that he was
unaware of Hicks’s involvement prior to that point. Because Hicks
had been the subject of unrelated lawsuits filed by federal and state
securities regulators, Murga further alleges that Zerez would not have
agreed to move forward with Tarpon Bay and Southridge had it
known that Hicks was involved. Id. at 1151–52.
Between February and April 2016, Tarpon Bay proceeded to
reach out to Zerez’s creditors and ultimately executed agreements,
termed “Claim Purchase Agreements,” with eight creditors to
purchase a total of $512,874.06 of Zerez’s debt. Id. at 428, 919. Zerez
has not disputed that it was aware of this process; two of Zerez’s
largest creditors, whom Tarpon Bay had engaged with Claim
11
Purchase Agreements, were Murga himself and Claudia Lima
(Zerez’s Secretary and Treasurer). Id. at 428, 919, 1000. On June 13,
2016—more than five days after the last Claim Purchase Agreement
was executed, which was the time period expressly required by the
Term Sheet 6 —Tarpon Bay filed an action against Zerez in Florida
state court seeking a fairness hearing to approve the securities
transaction pursuant to section 3(a)(10) of the Securities Act. See
Tarpon Bay Partners, LLC v. Zerez Holdings, No. 2016-CA-001300 (Fla.
Cir. Ct. filed June 13, 2016); see also Joint App’x at 920–21, 1299.
But the section 3(a)(10) transaction was never approved. Zerez
did not appear at the hearing, and the parties dispute why. 7 Id. at 921,
6 Moreover, the Claim Purchase Agreements required that Tarpon Bay file
the section 3(a)(10) lawsuit within ten business days of execution. See, e.g., id. at
1016. The latest Claim Purchase Agreement was executed on April 26, 2016. Id. at
1063. While the Claim Purchase Agreements were binding on Tarpon Bay, Zerez
was not a party to those agreements, and the agreements made clear that there
were no third-party beneficiaries. See, e.g., id. at 1020.
7 Tarpon Bay asserts that Murga confirmed via email that Zerez had
obtained counsel to accept service of the section 3(a)(10) complaint but that Tarpon
Bay never received the contact information of that attorney. Joint App’x at 921.
Zerez counters that it was never told to retain counsel or pay the attorney’s fee in
12
1299. On September 22, 2016, Murga emailed Aswani stating that
Zerez wished to “stop and cancel the [3(a)(10)] filing” and to “pull
back on the filing.” Id. at 1067. The next day, Tarpon Bay was
informed that three creditors were exercising their undisputed rights
to cancel the Claim Purchase Agreements. 8 Id. at 1178–79. On
October 10, 2016, Zerez sent a letter to Tarpon Bay on official
letterhead informing Tarpon Bay that Zerez “HEREBY rescinds and
cancels any and all consulting and/or services relationships with
Southridge and/or Tarpon Bay . . . , and further HEREBY rescinds and
cancels the $25,000” Signing Fee Note, citing the lack of “sufficient,
adequate, []or material services” rendered to Zerez. Id. at 1069.
Tarpon Bay responded via letter on October 17, 2016, asserting that
Zerez had “no grounds to rescind” the Signing Fee Note and
the Florida proceeding, and that it was never notified once litigation was filed. Id.
at 1305, 1665. Zerez maintains that Murga followed up repeatedly with Tarpon
Bay, and in a call from Murga to Aswani about the transaction’s progress, Aswani
stated that the transaction was imminent. Id. at 1665.
8 The Claim Purchase Agreements allowed either party to terminate the
agreement if the section 3(a)(10) transaction was not approved within ninety days
of the date of execution. See, e.g., id. at 1017.
13
demanding “immediate payment of all principal and interest due
under the Note.” Id. at 1071–72 (emphasis removed). Zerez also
changed control and management by the end of October 2016 after it
had acquired a new principal subsidiary, Next Generation Farming
Inc. Id. at 945.
On November 29, 2016, Tarpon Bay sent Zerez a “Notice of
Conversion” that demanded 278,958,900 shares of Zerez stock worth
nearly $2.23 million on the date of conversion. Id. at 1074–76. Tarpon
Bay relied on the Signing Fee Note provision that allowed payment
in stock, rather than in cash; the cash value at the time, with accrued
interest and fees, was $27,895.89. Id. at 1005–06, 1075. Tarpon Bay
took advantage of very low stock pricing in the thirty days before
November 29, 2016—specifically, the stock price of $0.0002 on
October 17, 2016—and demanded conversion at the 50 percent
discounted price per share of $0.0001 pursuant to the Signing Fee
Note’s conversion formula. Id. at 1075. Hicks candidly stated in later
14
deposition testimony that Tarpon Bay timed the conversion to take
advantage of a price dip: “[W]e wanted to get the lowest possible
conversion price, receive the shares and sell them in the market at the
highest possible price. If we waited too long with the stock moving
up, we would lose the low prices.” Id. at 1228. Tarpon Bay’s request
for 278,958,900 shares was approximately 55.6 percent of the
500,000,000 reserve shares that the Signing Fee Note had required
Zerez to set aside for potential conversion. See id. at 1011. Zerez
refused to issue the shares to Tarpon Bay, and this litigation ensued.
B. Procedural History
In January 2017, Zerez sued Counterclaim Defendants in the
U.S. District Court for the Eastern District of California for a
“judgment enforcing its rescission of the Term Sheet and Note for
failure of consideration” and damages for unjust enrichment and
fraud. See Compl. at 7, Zerez Holdings Corp. v. Tarpon Bay Partners LLC,
No. 2:17CV00029(TLN)(DB) (E.D. Cal. filed Jan. 6, 2017); Joint App’x
at 157–65. Tarpon Bay separately sued Zerez in Connecticut Superior
15
Court in March 2017 seeking specific performance of the conversion
pursuant to the Signing Fee Note and Term Sheet. See Compl. at 11–
12, Tarpon Bay Partners LLC v. Zerez Holdings Corp., No. DBD-CV17-
6021890-S (Conn. Super. Ct. filed Mar. 3, 2017); Joint App’x at 38–39.
Zerez successfully removed the Connecticut action to the U.S. District
Court for the District of Connecticut in April 2017. Joint App’x at 20.
The California case was transferred to the District of Connecticut in
January 2018, see Zerez Holdings Corp. v. Tarpon Bay Partners LLC, No.
2:17CV00029(TLN)(DB), 2018 WL 402238 (E.D. Cal. Jan. 12, 2018), and
the two cases were consolidated into the case from which this appeal
was taken, Joint App’x at 10.
In June 2018, Tarpon Bay filed the Amended Complaint seeking
(1) immediate delivery of the 278,958,900 shares, (2) declaratory
judgment in its favor, and (3) damages in the amount of $25.9 million
(together, the “Affirmative Claims”). Id. at 842–43. Zerez filed the
16
Answer in August 2018 and asserted twelve affirmative defenses 9 and
eleven counterclaims against Counterclaim Defendants. 10 Id. at 865–
66, 882–890. Notable to this appeal, Zerez’s second affirmative
defense alleged that the terms of the Signing Fee Note were
“unconscionable and/or unenforceable.” Id. at 865.
Tarpon Bay moved for summary judgment in January 2019 on
the Affirmative Claims and Zerez’s twelve affirmative defenses, and
Counterclaim Defendants moved for summary judgment on all
eleven of Zerez’s counterclaims. Id. at 911. Zerez did not cross-move
9 Zerez asserted the following affirmative defenses: (1) failure to state a
claim; (2) unconscionability; (3) lack of consideration; (4) unclean hands; (5)
estoppel; (6) failure to satisfy the conditions precedent of the Signing Fee Note; (7)
waiver; (8) laches; (9) rescission of the contract; (10) unjust enrichment; (11)
voidness for misrepresentations made by Plaintiff; and (12) bad faith. Id. at 865–
66.
10 Zerez alleged the following counterclaims: (1) Breach of implied contract,
against Tarpon Bay; (2) Declaratory relief, against Tarpon Bay; (3) Breach of
fiduciary duty, against Southridge; (4) Usury, against Tarpon Bay; (5) Rescission
for failure of consideration, against Tarpon Bay; (6) Fraudulent inducement,
against Counterclaim Defendants; (7) Mistake, against Counterclaim Defendants;
(8) Aiding and abetting, against Counterclaim Defendants; (9) Civil conspiracy,
against Counterclaim Defendants; (10) Violation of the California Unfair
Competition Law, Cal. Bus. & Prof. Code §§ 17200–17210, against Counterclaim
Defendants; and (11) Violation of CUTPA, Conn. Gen. Stat. §§ 42-110a to -110q,
against Counterclaim Defendants. Joint App’x at 882–90.
17
for summary judgment and argued only that Tarpon Bay’s motion for
summary judgment should be denied; regarding the Affirmative
Claims, Zerez argued that its affirmative defenses precluded
summary judgment in favor of Tarpon Bay. Id. at 1120. On
unconscionability, Zerez submitted that, “[a]t a minimum, issues of
fact remain as to whether the Note was unconscionable including a
determination of whether the circumstances give rise to terms that are
so one-sided as to be unconscionable.” Id. at 1123. The motions for
summary judgment were resolved in two decisions: one in September
2019 on the Affirmative Claims and unconscionability, Tarpon Bay
Partners LLC v. Zerez Holdings Corp. (Tarpon Bay I), No.
3:17CV00579(SRU), 2019 WL 4646061 (D. Conn. Sept. 24, 2019), and
another in July 2021 on all eleven of Zerez’s counterclaims, Tarpon Bay
Partners LLC v. Zerez Holdings Corp. (Tarpon Bay II), 547 F. Supp. 3d
195 (D. Conn. 2021).
In the first summary judgment decision, dated September 24,
18
2019, the district court denied summary judgment for Tarpon Bay on
the Affirmative Claims. First, there remained “a question of material
fact with respect to whether the” Signing Fee Note “was supported
by adequate consideration.” Tarpon Bay I, 2019 WL 4646061, at *7.
Second, the Signing Fee Note was “unconscionable and, therefore,
unenforceable.” Id. at *8. The district court held that the Signing Fee
Note was procedurally unconscionable because “[t]he undisputed
facts of the case show that Tarpon Bay very clearly exploited its
superior bargaining power over Zerez, which was on the verge of
financial collapse, in order to control the terms of the agreement, and
resultant partnership, and deprive Zerez of any meaningful choice in
the agreement.” Id. at *10. It also concluded that the Signing Fee Note
was substantively unconscionable because the “terms . . . are
extremely one-sided in Tarpon Bay’s favor” and it would be entitled
19
to $25 million 11 “for little to nothing in return.” Tarpon Bay I, 2019 WL
4646061, at *10. But despite holding that the Signing Fee Note was
unenforceable, the district court denied Tarpon Bay’s motion for
summary judgment without expressly indicating that the Affirmative
Claims were dismissed as a matter of law or entering partial judgment
for any party. The district court also denied without prejudice
Counterclaim Defendants’ summary judgment motion on Zerez’s
counterclaims because Zerez had indicated that it would likely
abandon those counterclaims if the Signing Fee Note were deemed
unconscionable. Id. at *11.
Shortly after the decision, Tarpon Bay moved to certify the
11The September 2019 decision initially stated that Tarpon Bay would be
“entitled to $25 million for little to nothing in return. . . . It cannot be that Tarpon
Bay receives [a] $25 million windfall with no promise in return or, at most, a
promise to attempt to retire Zerez’s debt.” Tarpon Bay I, 2019 WL 4646061, at *10.
But the July 2021 decision acknowledged that the $25 million sum represents the
damages that Tarpon Bay sought, not the value of the stock requested under the
Signing Fee Note. The latter was valued at $2.23 million at the time of conversion.
While it is unclear how Tarpon Bay calculated the $25 million sum for damages,
we agree with the district court’s July 2021 decision that the appropriate number
to consider is $2.23 million, not $25 million. Tarpon Bay II, 547 F. Supp. 3d at 209
n.6.
20
September 2019 order for interlocutory appeal to this court pursuant
to 28 U.S.C. § 1292(b). 12 Joint App’x at 13. The district court denied
the motion to certify in October 2019, concluding that its ruling did
“not involve a controlling question of law” but rather “the application
of undisputed facts in this case to the well-settled Connecticut law of
unconscionability.” Tarpon Bay Partners LLC v. Zerez Holdings Corp.,
No. 3:17CV00579(SRU), 2019 WL 10984250, at *2 (D. Conn. Oct. 29,
2019). Zerez decided to pursue its counterclaims notwithstanding the
September 2019 decision, and Counterclaim Defendants renewed
their motion for summary judgment on Zerez’s counterclaims. Joint
App’x at 1438. Zerez also moved for partial summary judgment on
12 Section 1292(b) states in relevant part:
When a district judge, in making in a civil action an order not
otherwise appealable under this section, shall be of the opinion that
such order involves a controlling question of law as to which there
is substantial ground for difference of opinion and that an
immediate appeal from the order may materially advance the
ultimate termination of the litigation, he shall so state in writing in
such order.
28 U.S.C. § 1292(b).
21
two of its eleven counterclaims, both of which it pursues on appeal:
Counterclaim Two, seeking declaratory judgment as to Zerez’s
obligations under the Signing Fee Note, and Counterclaim Eleven,
alleging a violation of CUTPA. Id. at 1806–07.
In the second summary judgment decision, dated July 7, 2021,
the district court granted in part and denied in part Counterclaim
Defendants’ and Zerez’s motions for summary judgment. Tarpon Bay
II, 547 F. Supp. 3d at 227. Notably, the court granted summary
judgment for Zerez on Counterclaim Two and concluded that
“[b]ecause the Signing Fee Note is unconscionable and unenforceable,
Zerez has no rights or obligations under the Signing Fee Note.” Id. at
217. The court also granted summary judgment for Counterclaim
Defendants on the CUTPA claim for two reasons: the deceptive
conduct alleged was duplicative of the unconscionability claim, and
Zerez had not established that it suffered an ascertainable loss under
the statute. Id. at 223–24. As to Zerez’s other counterclaims, judgment
22
was either entered for Counterclaim Defendants, or the counterclaims
were dismissed as moot. Id. at 210, 227. The district court entered
judgment on the eleven counterclaims and closed the case, but it did
not enter judgment on the Affirmative Claims. Judgment at 1–2,
Tarpon Bay Partners LLC v. Zerez Holdings Corp., No.
3:17CV00579(SRU) (D. Conn. July 8, 2021).
The relevant dispositions from the district court’s September
2019 and July 2021 opinions are summarized in the following table:
AFFIRMATIVE CLAIMS
Decided in September 2019
Claim Asserted by Disposition of Tarpon Bay’s
No. Defendant
Tarpon Bay Mot. for Summ. J.
Delivery of
1. Zerez Denied
278,958,900 shares
2. Declaratory relief Zerez Denied
3. Award of damages Zerez Denied
COUNTERCLAIMS ON APPEAL
Decided in July 2021
Disposition of Disposition
Counterclaim Countercl. of Zerez’s
No. Defendant
Asserted by Zerez Defs.’ Mot. for Partial Mot.
Summ. J. for Summ. J.
23
Tarpon
2. Declaratory relief Denied Granted
Bay
Violation of Countercl.
11. Granted Denied
CUTPA Defs.
Tarpon Bay timely appealed from the Judgment, and Zerez
timely cross-appealed. Joint App’x at 1970, 2006. The parties
participated in the Second Circuit’s mediation program, but the case
was ultimately reinstated on March 24, 2022.
II. Jurisdiction and Standard Of Review
Before turning to the merits of the dispute, we first address an
issue that affects our jurisdiction. We have jurisdiction over “appeals
from all final decisions of the district courts of the United States.” 28
U.S.C. § 1291. “Finality is determined on the basis of pragmatic, not
needlessly rigid pro forma, analysis. . . . What essentially is required is
some clear and unequivocal manifestation by the trial court of its
belief that the decision made, so far as it is concerned, is the end of the
case.” Fiataruolo v. United States, 8 F.3d 930, 937 (2d Cir. 1993).
Although the parties do not challenge jurisdiction in this case, see
24
Appellants’ Br. at 1; Cross-Appellant’s Br. at 2, “we are obliged to
raise the issue of our jurisdiction nostra sponte when it is
questionable.” Massaro v. Palladino, 19 F.4th 197, 208 (2d Cir. 2021)
(internal quotation marks and citation omitted).
The district court denied summary judgment for Tarpon Bay in
its September 2019 order “with respect to [Tarpon Bay’s] three claims
against Zerez because the purported agreement is unconscionable as
a matter of law,” Tarpon Bay I, 2019 WL 4646061, at *12, but did not
enter judgment on those three claims—the Affirmative Claims—in
favor of any party. See Judgment at 1–2. Denials of summary
judgment are “by their terms interlocutory” and ordinarily not
reviewable absent a final judgment disposing of the claims. Ortiz v.
Jordan, 562 U.S. 180, 188 (2011) (internal quotation marks and citation
omitted). A denial of summary judgment for one party on the claims
it has raised, without an accompanying grant of summary judgment
for the opposing party on the same claims, would ordinarily mean
25
that the status quo is preserved and the claims proceed to trial. But
we have clear indication here that the district court meant otherwise.
The subsequent July 2021 order—which entered summary judgment
only on Zerez’s counterclaims, not Tarpon Bay’s Affirmative
Claims—stated that “[a]s a result of [the court’s] rulings, no claims
remain[ed] live in this action.” 13 Tarpon Bay II, 547 F. Supp. 3d at 211.
We therefore interpret the district court’s September 2019 order
denying summary judgment for Tarpon Bay to also include a grant of
summary judgment for Zerez on the Affirmative Claims. Summary
judgment is appropriate “if the movant shows that there is no genuine
dispute as to any material fact and the movant is entitled to judgment
13 Moreover, in the October 2019 decision denying Tarpon Bay’s motion for
certification to the Second Circuit, the district court suggested that the
unconscionability ruling was dispositive of all three of Plaintiff’s breach of contract
claims. See Tarpon Bay, 2019 WL 10984250, at *2 & n.1 (noting also that the
September 2019 “Ruling is not dispositive of the case as a whole” because “Zerez’s
eleven counterclaims [were] still pending”). But as mentioned earlier, the district
court nonetheless refrained from characterizing its September 2019 decision as a
ruling on “a controlling question of law” but rather viewed it as an “application
of undisputed facts . . . to the well-settled Connecticut law of unconscionability.”
Id. at *2.
26
as a matter of law.” Fed. R. Civ. P. 56(a). “A material fact is one that
would ‘affect the outcome of the suit under the governing law,’ and a
dispute about a genuine issue of material fact occurs ‘if the evidence
is such that a reasonable [factfinder] could return a verdict for the
nonmoving party.’” Aetna Life Ins. Co. v. Big Y Foods, Inc., 52 F.4th 66,
72 (2d Cir. 2022) (alteration in original) (quoting Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 248 (1986)). By ultimately holding that the
Signing Fee Note was “unconscionable as a matter of law,” Tarpon Bay
I, 2019 WL 4646061, at *12, the September 2019 decision necessarily
concluded that any genuine issue of fact regarding consideration was
not material. 14 See Anderson, 477 U.S. at 248 (“Factual disputes that
14 The district court reached two conclusions in the September 2019
opinion: first, that “there is a question of material fact with respect to whether the
Promissory Note was supported by adequate consideration,” and second, that
“the Promissory Note was . . . unconscionable and, therefore, unenforceable.”
Tarpon Bay I, 2019 WL 4646061, at *8 (emphasis added).
But the second holding would have to render the “question of . . . fact with
respect to whether the Promissory Note was supported by adequate
consideration” not material. Id. As discussed below, infra pp. 34–35,
unconscionability is a defense to contract enforcement under Connecticut law. So
even if Tarpon Bay had shown that there was no genuine issue of fact that
27
are irrelevant or unnecessary will not be counted.”). Put simply, the
district court reasoned—without formally stating it—that summary
judgment for Zerez on the Affirmative Claims was proper. Later, in
July 2021, the district court entered judgment on Zerez’s
counterclaims, which were the only live claims that remained in the
case. See Judgment at 1–2. After that point, “there was nothing left
for the district court to decide that would have affected the respective
positions of the parties.” Massaro, 19 F.4th at 208–09. The July 2021
Judgment was therefore “final” under 28 U.S.C. § 1291. And because
the September 2019 summary judgment order merges into the July
2021 final judgment on appeal, we have jurisdiction to review both
decisions. See Gold v. N.Y. Life Ins. Co., 730 F.3d 137, 144 (2d Cir. 2013)
(merging earlier summary judgment decisions into the judgment
consideration supported the Signing Fee Note, the district court’s legal
determination that the contract was unconscionable would have still meant that
the contract is unenforceable. Facts relating to consideration should have,
therefore, been deemed not material for summary judgment purposes. See
Anderson, 477 U.S. at 248 (“Only disputes over facts that might affect the outcome
of the suit under the governing law will properly preclude the entry of summary
judgment.”).
28
upon timely appeal).
Tarpon Bay also asks us to review the district court’s denial of
its motion for summary judgment on the Affirmative Claims. The
denial of a motion for summary judgment is usually not immediately
appealable. See id. at 144 n.4; Spavone v. N.Y. State Dep’t of Corr. Servs.,
719 F.3d 127, 133 (2d Cir. 2013) (applying the collateral order doctrine,
which renders some summary judgment denials immediately
appealable, in a qualified immunity case). But the more precise
jurisdictional question here is not whether the denial is immediately
appealable, but whether the denial becomes reviewable upon appeal
from final judgment. In cases where appeal is taken from final
judgment, we have the discretion to review a denial of summary
judgment that accompanies a grant of summary judgment on cross-
motion. See Barhold v. Rodriguez, 863 F.2d 233, 237 (2d Cir. 1988) (“[A]s
we have jurisdiction to decide [the appellants’] appeal from the
granting of [the appellees’] motion for summary judgment, we
29
exercise our discretion to decide [the appellants’] claim of error in the
denial of their summary judgment motion as well.”); see also Gary
Friedrich Enters., LLC v. Marvel Characters, Inc., 716 F.3d 302, 320 (2d
Cir. 2013) (“Because we have jurisdiction over the grant of summary
judgment, we have the discretion to review the otherwise
unappealable order denying [the appellants’] cross-motion for
summary judgment.” (citing Barhold, 863 F.2d at 237)); see also Am.
Motorists Ins. Co. v. United Furnace Co., 876 F.2d 293, 302 (2d Cir. 1989)
(citing Barhold, 863 F.2d at 237) (similar). 15
Because we interpret the September 2019 order denying
15 Gold does not compel a different result here. In that case, the court
“decline[d] to review the district court’s decision” and explained that “[w]here a
district court has denied summary judgment because resolution of such claim
requires the adjudication of issues of fact that are inseparable from the merits, the
denial of such motion is not immediately appealable notwithstanding the merger
doctrine.” Gold, 730 F.3d at 144 n.4. But the denial of summary judgment in Gold
was not on cross-motion to the grant of summary judgment that the court
reviewed; the motions underlying the grant and denial requested summary
judgment on independent causes of action at different stages in the litigation
before the district court. See id. at 140–41.
By contrast, Barhold’s line of cases establishes that we may review denials
of summary judgment that accompany grants on cross-motion. And each of those
cases reviewed denials of summary judgment for questions of fact or mixed
30
summary judgment for Tarpon Bay on the Affirmative Claims to also
grant summary judgment for Zerez, the district court’s denial and
corresponding sua sponte grant disposed of the Affirmative Claims
on what effectively were cross-motions for summary judgment. Cf.
Coach Leatherware Co. v. AnnTaylor, Inc., 933 F.2d 162, 167 (2d Cir. 1991)
(“[I]t is most desirable that the court cut through mere outworn
procedural niceties and make the same decision as would have been
made had [the nonmoving party] made a cross-motion for summary
judgment.” (quoting Local 33, Int’l Hod Carriers Bldg. & Common
Laborers’ Union of Am. v. Mason Tenders Dist. Council of Greater N.Y.,
291 F.2d 496, 505 (2d Cir. 1961))). Just as the merger doctrine extends
our review from the final disposition in July 2021 to the earlier grant
of summary judgment for Zerez in September 2019, see Gold, 730 F.3d
at 144, it also extends our appellate jurisdiction to the corresponding
denial of summary judgment for Tarpon Bay, see Marvel Characters,
questions of law and fact. See Marvel, 716 F.3d at 320; Am. Motorists, 876 F.2d at
303; Barhold, 863 F.2d at 237.
31
716 F.3d at 320. For reasons of judicial economy, we exercise our
discretion to review the denial here.
We review the district court’s summary dispositions de novo.
See id. For summary judgment to be warranted, the evidence,
construed in the light most favorable to the party against whom it was
entered, must show that there is no genuine issue of material fact, and
the moving party must be entitled to judgment as a matter of law. See
Aetna Life Ins., 52 F.4th at 72; Fed. R. Civ. P. 56(a). The “mere existence
of some alleged factual dispute” is insufficient to reverse a grant of
summary judgment. Anderson, 477 U.S. at 247–48.
III. Discussion
The parties present three questions on appeal. First, Tarpon
Bay challenges the district court’s ruling that the Signing Fee Note
was unconscionable. Second, Tarpon Bay argues that the district
court erred in determining that there remained a genuine issue of
material fact as to whether consideration supported the Signing Fee
Note. And third, Zerez challenges on cross-appeal the district court’s
32
grant of summary judgment for Tarpon Bay on Counterclaim Eleven,
which alleged that Counterclaim Defendants violated CUTPA.
For the reasons discussed below, we first vacate the district
court’s ruling that the Signing Fee Note was unconscionable as a
matter of law, on the record before it at summary judgment. We then
conclude that the district court correctly determined that genuine
issues of material fact remained as to whether consideration
supported the Signing Fee Note. The district court’s dismissal of the
Affirmative Claims is therefore also vacated, and the denial of
summary judgment for Tarpon Bay is affirmed. 16 Finally, we affirm
the district court’s grant of summary judgment on Zerez’s CUTPA
counterclaim on the alternative ground that CUTPA does not apply
16 The district court also dismissed as moot Counterclaims Five
(Rescission), Six (Fraud), Seven (Mistake), Nine (Civil Conspiracy), and parts of
Counterclaim Two (Declaratory Relief) because the relief sought by those
counterclaims was duplicative of its September 2019 holding that the Signing Fee
Note was unenforceable. Tarpon Bay II, 547 F. Supp. 3d at 216–18, 220. Zerez has
not pursued those claims on appeal.
33
to the case at bar.
A. Unconscionability
The Signing Fee Note makes clear that Connecticut law governs
the dispute. Joint App’x at 1008. Under Connecticut law, the doctrine
of unconscionability is a defense to contract enforcement that is
intended “to prevent oppression and unfair surprise.” 17 Cheshire
Mortg. Serv., Inc. v. Montes, 223 Conn. 80, 87–88 (1992) (internal
quotation marks and citation omitted). “The classic definition of an
unconscionable contract is one which no man in his senses, not under
delusion, would make, on the one hand, and which no fair and honest
man would accept, on the other.” Bender v. Bender, 292 Conn. 696,
731–32 (2009) (internal quotation marks and citation omitted). The
question of whether a contract is unconscionable “is a matter of law
to be decided by the court based on all the facts and circumstances of
17In reviewing the district court’s unconscionability ruling, we assume
arguendo that there are genuine issues of material fact regarding whether the
Signing Fee Note was part of a validly formed contract between Tarpon Bay and
Zerez. See infra section III.B.
34
the case.” Cheshire, 223 Conn. at 87 (internal quotation marks and
citation omitted).
Like those of many other jurisdictions, Connecticut courts have
parsed the unconscionability inquiry into procedural and substantive
prongs. See Restatement (Second) of Conts. § 208 (Am. L. Inst. 1981)
(collecting cases by jurisdiction). A successful unconscionability
defense “‘generally requires a showing that the contract was both
procedurally and substantively unconscionable when made—i.e.,
some showing of an absence of meaningful choice on the part of one
of the parties together with contract terms which are unreasonably
favorable to the other party.’” Bender, 292 Conn. at 732 (quoting Hottle
v. BDO Seidman, LLP, 268 Conn. 694, 719 (2004)). 18 Procedural
18 The district court cited Bender but nonetheless stated that “only
substantive unconscionability is required.” Tarpon Bay I, 2019 WL 4646061, at *9.
When determining the applicable law as it would be applied by the state courts in
diversity cases, federal courts must consult the forum state’s constitution, statutes,
and highest court. See Erie R. Co. v. Tompkins, 304 U.S. 64, 78 (1938); Chufen Chen v.
Dunkin’ Brands, Inc., 954 F.3d 492, 497 (2d Cir. 2020); Travelers Ins. Co. v. 633 Third
Assocs., 14 F.3d 114, 119 (2d Cir. 1994). We conclude that the district court’s
35
holding ultimately does not follow the Connecticut Supreme Court’s most recent
authority on unconscionability.
Noting that the quotation in Bender derived from Hottle v. BDO Seidman, a
Connecticut Supreme Court case interpreting New York law, see 268 Conn. at 719–
20 (citing Gillman v. Chase Manhattan Bank, N.A., 73 N.Y.2d 1, 10 (1988)), the district
court relied instead on an earlier case applying Connecticut law. See Smith v.
Mitsubishi Motors Credit of Am., Inc., 247 Conn. 342, 353 (1998) (“Even in the absence
of procedural unconscionability, [the defendant] might avoid liability . . . if he
could establish that the clause was substantively unconscionable.”); Tarpon Bay I,
2019 WL 4646061, at *9. But notwithstanding its New York origins, the Bender rule
is controlling here. Bender interpreted Connecticut contract law, see 292 Conn. at730–31 (collecting Connecticut cases on unilateral mistake), and applied the Hottle
quotation as part of Connecticut contract law, see id. at 732–34 & n.26 (following its
recitation of the Hottle quotation with an evaluation of both procedural and
substantive unconscionability). What was once a statement of New York law is
now adopted into Connecticut law. The Bender Court’s general requirement that
both unconscionability prongs be established is, therefore, “state law as
announced by the highest court of the State,” and we are compelled to apply it.
Comm’r v. Bosch’s Est., 387 U.S. 456, 465 (1967).
Smith may still supply an exception to the general rule in Bender. The
Bender court only “generally require[d]” both unconscionability prongs and, in its
statement of the rule on unconscionability, approvingly quoted another portion of
Smith; the court did not appear to view the two cases in tension. See 292 Conn. at731–32 (emphasis added). The Connecticut Supreme Court has never overruled
or otherwise cast doubt on its unconscionability analysis in Smith. Moreover, the
Hottle case—from which Bender derived its standard—held that under New York
law, a contract may be rendered “unenforceable solely on the ground of
substantive unconscionability.” Hottle, 268 Conn. at 720–21 (citing Gillman, 73
N.Y.2d at 12).
But acknowledging that Smith may provide an exception to Bender’s
general rule is not to say that only substantive unconscionability is required.
Equating the two elides a question of degree. Proving oppressive terms under
two-pronged unconscionability is already a difficult task, but prevailing on
substantive unconscionability alone would require an even more onerous showing
of oppression. Cf. Hottle, 268 Conn. at 721 (“[P]rocedural and substantive
unconscionability operate on a ‘sliding scale’; the more questionable the
36
unconscionability relates to the “process by which the allegedly
offensive terms found their way into the agreement.” Cheshire, 223
Conn. at 87 n.14 (internal quotation marks and citation omitted). It
applies when there was “an absence of meaningful choice” by one of
the parties. Bender, 292 Conn. at 732 (internal quotation marks
omitted). Substantive unconscionability, by contrast, relates to “the
content of the contract,” Cheshire, 223 Conn. at 87 n.14 (internal
quotation marks and citation omitted), and applies when contract
terms are “unreasonably favorable” to one party, Bender, 292 Conn. at
meaningfulness of choice, the less imbalance in a contract’s terms should be
tolerated and vice versa.” (quoting State v. Wolowitz, 468 N.Y.S.2d 131, 145 (App.
Div. 1983))). To date, no Connecticut appellate court has determined how extreme
the facts may be to justify application of the Smith exception. And recent cases
have all cited the Bender, not Smith, rule on unconscionability. See Hirsch v.
Woermer, 184 Conn. App. 583, 589 (2018); Emeritus Senior Living v. Lepore, 183 Conn.
App. 23, 29 (2018); Bank of Am., N.A., v. Aubut, 167 Conn. App. 347, 379–380 (2016);
R.F. Daddario & Sons, Inc. v. Shelansky, 123 Conn. App. 725, 741 (2010). But see
Velasco v. Comm’r of Corr., 214 Conn. App. 831, 841–42 (questioning but ultimately
declining to clarify the status of Smith after Bender), cert. denied, 345 Conn. 960(2022); Shoreline Commc’ns, Inc. v. Norwich Taxi, LLC, 70 Conn. App. 60, 70–71 (2002)
(stating that the court “know[s] of no case, and the defendant has cited none, in
which a party may invoke unconscionability without a showing of some kind of
relevant misconduct by the party seeking enforcement of a contract,” but then
evaluating whether substantive unconscionability existed). The Smith exception
ultimately falls far short of swallowing the Bender rule.
37
732 (internal quotation marks omitted). In short, the doctrine of
procedural unconscionability is “intended to prevent unfair
surprise,” and the doctrine of substantive unconscionability is
“intended to prevent oppression.” Smith, 247 Conn. at 349.
Prevailing on unconscionability is generally difficult, and for
good reason. It asks the court to step in and undo the allocation of
risk in a contract. While courts have the power “to police explicitly
against the contracts or clauses which they find to be
unconscionable,” the principle underpinning unconscionability “is
one of the prevention of oppression and unfair surprise . . . and not of
disturbance of allocation of risks because of superior bargaining
power.” U.C.C. § 2-302 cmt. 1 (Am. L. Inst. & Unif. L. Comm’n 1977)
(citation omitted). 19
Unconscionability has its origins in Roman law doctrines of
Connecticut has adopted verbatim section 2-302 of the Uniform
19
Commercial Code (“UCC”), which reads in relevant part:
38
“just price” and in English courts of equity; it serves as a flexible last
resort when other contract law doctrines are unable to redress the
injustice at issue. See Robert E. Scott & Jody S. Kraus, Contract Law
and Theory 501, 507–08 (2013); U.C.C. § 2-302 cmt. 1. Procedural
unconscionability fills in the gaps left by other doctrines intended to
regulate the bargaining process, such as incapacity, fraud, and duress.
Substantive unconscionability is similar to, but more pliable than, the
invalidation of contract on public policy grounds. But an overly
expansive unconscionability doctrine would undermine the
countervailing principles that “courts do not unmake bargains
If the court as a matter of law finds the contract or any clause of the
contract to have been unconscionable at the time it was made the
court may refuse to enforce the contract, or it may enforce the
remainder of the contract without the unconscionable clause, or it
may so limit the application of any unconscionable clause as to
avoid any unconscionable result.
Conn. Gen. Stat. § 42a-2-302(1). Although article 2 of the UCC applies only to
“transactions in goods” and does not strictly apply here, id. § 42a-2-102,
Connecticut courts have looked to the UCC as “a useful guide in examining a claim
of unconscionability.” Texaco, Inc. v. Golart, 206 Conn. 454, 461–62 (1988); see also,
e.g., Cheshire, 223 Conn. at 88–89; Hamm v. Taylor, 180 Conn. 491, 495 (1980).
39
unwisely made,” and that parties have the autonomy to bargain and
allocate risks as they please. Osborne v. Locke Steel Chain Co., 153 Conn.
527, 533 (1966); see also Kent Literary Club of Wesleyan Univ. v. Wesleyan
Univ., 338 Conn. 189, 241 (2021) (“It is axiomatic that courts do not
rewrite contracts for the parties.” (internal quotation marks and
citation omitted)). In short, “‘unconscionability’ cannot be equated
with ‘harshness’ as an abstract matter.” Arthur Allen Leff,
Unconscionability and the Code—the Emperor’s New Clause, 115 U. Pa. L.
Rev. 485, 540 (1967).
Moreover, an unconscionability claim is typically reserved for
vulnerable consumers seeking to prevent enforcement of exploitative
terms by relatively more sophisticated businesses. See Emlee Equip.
Leasing Corp. v. Waterbury Transmission, Inc., 31 Conn. App. 455, 465
(1993) (“Although [certain] provisions might be unconscionable in an
ordinary consumer lease, a different conclusion may follow where, as
here, the contract is a commercial finance lease executed by two
40
corporate entities.”); Iamartino v. Avallone, 2 Conn. App. 119, 126
(1984) (“The loan was a commercial, not a consumer, transaction.”);
cf. Cheshire, 223 Conn. at 124–25 (Berdon, J., dissenting in part and
concurring in part) (stating that the majority reviewed the case
“through the lens of commercially savvy parties” instead of “between
a professional mortgage lender and unsophisticated credit consumers
who had a total monthly income below the poverty level”). Indeed,
“[c]ourts do not generally find contracts unconscionable where the
parties are businesspersons.” Stamford Hosp. v. Schwartz, 190 Conn.
App. 63, 76 (2019) (quoting Emlee, 31 Conn. App. at 464); see also 1
James J. White, Robert S. Summers & Robert A. Hillman, Uniform
Commercial Code § 5:3 (6th ed. 2020) (“The modal successful
unconscionability claimant is a consumer of small means who has
purchased a television or the like for a price that well exceeds the price
available at stores where the middle class shop.”). Where commercial
parties engage in arm’s-length negotiations and are sufficiently
41
sophisticated to understand the agreements they execute, raising the
unconscionability defense asks the court to reconstruct economic
outcomes. We decline to do so in this case.
First, the Signing Fee Note is not procedurally unconscionable.
Both Zerez and Tarpon Bay are sophisticated commercial parties:
Zerez is publicly traded, and both parties routinely invest in other
companies. Murga, Zerez’s then-CEO, was personally involved in the
discussions with Aswani and had the opportunity to review the terms
before signing. While Zerez alleges that Murga played no role in
drafting the Signing Fee Note, there is no indication that Murga ever
asked to edit any of the Signing Fee Note’s provisions. See Joint App’x
at 917, 1297, 1303; see also Smith, 247 Conn. at 351–52 (“We have never
held that principles of unconscionability supersede, in toto, the duty
of a contracting party to read the terms of an agreement or else be
deemed to have notice of the terms.”). Moreover, Zerez had counsel
on retainer at the time of the Signing Fee Note’s execution. In an
42
invoice for services rendered from October 2015 to February 2016—
which overlapped with the execution of the Term Sheet and Signing
Fee Note in January 2016—attorney Mark H. Cheung billed $30,000
to Zerez for legal work on “promissory notes” and “review of
contractual matters.” Joint App’x at 1259. The record at this stage
does not reveal whether Cheung reviewed or otherwise had a role in
negotiating the Term Sheet and Signing Fee Note in January 2016.20
But even if Cheung did not review the contracts for Zerez, Zerez
cannot now claim hardship where it was able to solicit legal advice on
the Signing Fee Note if it felt coerced or did not understand the terms’
implications. See Cheshire, 223 Conn. at 90–91 (finding that an
attorney’s explanation to the defendants of a loan’s terms supported
the trial court’s finding that the loan was not procedurally
20 Cheung must have been aware of the section 3(a)(10) transaction by April
2016 because his law office was also a creditor of Zerez whom Tarpon Bay had
engaged with a Claim Purchase Agreement; moreover, Cheung was the person
who, in September 2016, emailed Aswani that he, along with two other creditors,
were cancelling their Claim Purchase Agreements once the deal had broken down.
See id. at 1178, 1245–46, 1248.
43
unconscionable). Zerez’s failure to consult with readily available
counsel, in these circumstances, precludes a finding of procedural
unconscionability.
Zerez also argues that the Signing Fee Note was procedurally
unconscionable because its business desperately needed to retire its
debt, and the company was “susceptible to coercion” because “it was
presented with only one choice to address its debt.” Cross-
Appellant’s Br. at 29. Zerez maintains that because Aswani told
Murga that “signing of the Note was a prerequisite to entering in[to]
a definitive agreement,” Murga understood that he “had no
meaningful choice in negotiating its terms given Zerez’s financial
condition.” Id. at 30 (citations to record omitted). But Zerez could
have walked away or engaged other parties if it did not like Aswani’s
terms. Zerez received cold calls from multiple entities yet nonetheless
chose to proceed with Tarpon Bay. Joint App’x at 871. Murga himself
suggested that Zerez had options. He stated in a sworn declaration
44
that “Zerez would not have agreed to move forward with Southridge
or Tarpon” if it knew that Hicks, facing unrelated allegations of
securities fraud, was involved in the transaction. Id. at 1151–52. And
after the transaction with Tarpon Bay had failed, Zerez was able to
merge in a newly acquired subsidiary, which involved the issuance of
two billion new shares and a change in company management. See
id. at 967. Zerez may not have had many options, but it had more
than one. See Marcus Dairy, Inc. v. Rollin Dairy Corp., No.
3:05CV00589(PCD), 2008 WL 4425954, at *11 (D. Conn. Sept. 24, 2008)
(finding no unconscionability where defendant received pricing
information from several other suppliers before choosing plaintiff).
Nor does Zerez argue that its financial distress—the $500,000 of debt
on its books and resulting need for new capital—was somehow
caused by Tarpon Bay’s actions. See Krishnamurti v. Tortorici, No. FST-
CV19-6042031-S, 2021 WL 2403325, at *7 (Conn. Super. Ct. May 21,
2021) (“Any financial pressure that the defendant was under was not
45
caused in any way by the plaintiff.”). Even when construed in favor
of Zerez, the circumstances surrounding execution of the Signing Fee
Note do not rise to the level of unfair surprise, lack of knowledge of
terms, lack of legal representation, and absence of meaningful choice
that characterizes procedural unconscionability.
Nor are the terms of the Signing Fee Note substantively
unconscionable. Zerez argues that the Signing Fee Note is oppressive,
even if redemption were limited to $25,000 in cash, because it was
redeemed “for nothing” in return. Cross-Appellant’s Br. at 24. That
argument fails as a matter of law. “The general rule is that, in the
absence of fraud or other unconscionable circumstances, a contract
will not be rendered unenforceable at the behest of one of the
contracting parties merely because of an inadequacy of
consideration.” Rockstone Cap., LLC v. Caldwell, 206 Conn. App. 801,
815 (2021) (quoting, ultimately, Osborne, 153 Conn. at 533) (reversing
trial court’s holding that agreement was substantively
46
unconscionable because defendant received “no direct
consideration”), cert. denied, 339 Conn. 914 (2021) . To hold otherwise
misappropriates the unconscionability doctrine, meant for vulnerable
contracting parties, for what is substantively a challenge to the
adequacy of consideration.
Zerez further contends that the Signing Fee Note is “even
more” unconscionable “under the Note’s conversion provision” that
resulted in the claim of 278,958,900 shares, worth $2.23 million. Cross-
Appellant’s Br. at 24. In other words, Zerez challenges the method of
payment of the Signing Fee—the conversion provision—rather than
the fact that Zerez had to render payment at all ($25,000 or 278,958,900
shares). This argument, too, fails.
The Signing Fee Note allowed for two payment methods: (1)
payment of a fixed $25,000 fee, in addition to accrued interest and
other fees, or (2) payment of the same value in stock using a
predetermined cash-to-stock conversion ratio, which was a “50%
47
discount from the lowest closing bid price in the 30 trading days
prior” to the conversion notice. Joint App’x at 1006. Zerez, short on
cash, might have benefitted from paying out a Signing Fee in stock.
But penny stocks “are considered to be particularly high risk and not
suitable to all investors,” SEC v. Bronson, 14 F. Supp. 3d 402, 404 n.1
(S.D.N.Y. 2014); see also supra note 2, so in choosing an alternative
payment method, Zerez agreed to a risky bet. Specifically, Zerez
wagered that its stock price would remain low enough that Tarpon
Bay would prefer stock to cash, yet stable enough that Zerez could
issue the shares quickly before prices appreciated. By contrast,
Tarpon Bay wagered that the stock price would also remain low
enough to prefer stock to cash, but sufficiently volatile that Tarpon
Bay could opportunistically convert shares after a drastic price dip.
The parties could have agreed to a straightforward payment of cash
but instead executed—assuming consideration arguendo—the
Signing Fee Note, which introduced market risk in determining the
48
payment method. And a bet on the public markets between
commercial parties, without more, does not constitute a “contract
term[] which [is] unreasonably favorable” to the profiting party.
Bender, 292 Conn. at 732 (quoting Hottle, 268 Conn. at 719).
Zerez’s reliance on the conversion amount of $2.23 million to
establish substantive unconscionability as a matter of law is also
misplaced. The district court calculated the $2.23 million sum by
multiplying the 278,958,900 shares that Tarpon Bay requested by
$0.008, Zerez’s stock price on November 28, 2016, one day before the
Notice of Conversion. See Tarpon Bay II, 547 F. Supp. 3d at 208; supra
note 11. But unconscionability is evaluated at the time of the
contract’s formation, not at any time thereafter when the oppression
allegedly took place. See Cheshire, 223 Conn. at 89. At the time of the
contract’s formation, the Signing Fee Note obligated Zerez “to reserve
at least Five hundred million (500,000,000) shares of its Common
Stock for issuance to [Tarpon Bay] in connection with conversion of
49
this Note.” Joint App’x at 1011. The quantity of 278,958,900 shares—
constituting 55.6 percent of the total amount of reserved shares—
could not have been oppressive at the time of execution because Zerez
agreed to a provision that expressly contemplated a conversion of up
to 500,000,000 shares. And on at least ten occasions from December
2014 to January 2016, Zerez had issued common stock pursuant to
convertible promissory notes and compensation packages at
conversion prices ranging from $0.0001—the same as Tarpon Bay’s
requested conversion price—to $0.003. 21 See Appellants’ Br. at 22–23;
Joint App’x at 959. Where the allegedly problematic conversion was
contemplated by another provision in the Signing Fee Note and
executed at a price consistent with prior share issuances, we cannot
conclude that the Signing Fee Note payment method was oppressive
21 The record is silent as to how these conversion prices were determined,
and it is likewise unclear whether Zerez has in the past agreed to a conversion
formula comparable to the formula in this case.
50
to Zerez.
This case does not involve vulnerable consumers seeking relief
from unfairly surprising and oppressive terms. Instead, we are asked
to undo an investment deal that unevenly distributed risk among
sophisticated parties. For a commercial party like Zerez,
unconscionability demands much more. Yes, the Signing Fee Note
may have been executed under confusing circumstances, and yes, it
may have featured terms benefitting one side more than the other.
But that does not compel us to conclude on the record as currently
developed that the Signing Fee Note—if it was a valid contract—was
either unfairly surprising or oppressive. We vacate the district court’s
September 2019 order dismissing Tarpon Bay’s claims on the basis
that the Signing Fee Note is unenforceable. For the same reasons, we
also vacate the district court’s grant of summary judgment on
51
Counterclaim Two. 22
B. Consideration
In the same September 2019 order, the district court denied
Tarpon Bay’s motion for summary judgment on the Affirmative
Claims because “there is a question of material fact with respect to
whether the [Signing Fee Note] was supported by adequate
consideration.” Tarpon Bay I, 2019 WL 4646061, at *7. We affirm that
ruling. The factual issues regarding consideration may reasonably be
resolved in favor of either party, and consideration is material to
whether Tarpon Bay may prevail on its Affirmative Claims. The
Affirmative Claims are accordingly remanded for trial.
“Under the law of contract, a promise is generally not
22 Counterclaim Two sought a declaration of Zerez’s “rights and duties, if
any, under the [Signing Fee] Note and any implied in fact contract and [a]
declaration as to Tarpon’s obligations to provide any performance.” Joint App’x
at 883. In July 2021, the district court granted summary judgment on Counterclaim
Two because it had held in September 2019 that the Signing Fee Note was
unconscionable and unenforceable. Tarpon Bay II, 547 F. Supp. 3d at 217. Because
we here vacate the underlying unconscionability holding, we also vacate the grant
of summary judgment on Counterclaim Two.
52
enforceable unless it is supported by consideration.” Stewart v.
Cendant Mobility Servs. Corp., 267 Conn. 96, 104 (2003) (internal
quotation marks and citation omitted). Consideration “consists of a
benefit to the party promising, or a loss or detriment to the party to
whom the promise is made.” Viera v. Cohen, 283 Conn. 412, 440–41
(2007) (internal quotation marks and citation omitted). A return
promise for performance is sufficient consideration, so long as the
party making the return promise does not have a preexisting duty to
honor that return promise. See, e.g., Bilbao v. Goodwin, 217 A.3d 977,
988 (Conn. 2019); Christophersen v. Blount, 216 Conn. 509, 511 n.3
(1990); see also Conn. Gen. Stat. § 42a-3-303(a) (“An instrument is
issued or transferred for value if . . . [t]he instrument is issued or
transferred for a promise of performance, to the extent the promise
has been performed . . . .”). It is longstanding precedent in
Connecticut that “[i]n the case of . . . promissory notes, the expression
for value received[] raises a presumption of . . . legal consideration.”
53
Alcantara v. Pimentel, No. UWY-CV13-6020129-S, 2017 WL 4621386, at
*2 (Conn. Super. Ct. Aug. 21, 2017) (quoting Raymond v. Sellick, 10
Conn. 480, 484 (1835)). But a formal recitation of consideration, such
as “for value received,” “is simply prima facie evidence, shifting the
burden of proof to the party disputing the consideration.” TIE
Commc’ns, Inc. v. Kopp, 218 Conn. 281, 292 (1991) (citing Raymond, 10
Conn. at 483).
The Signing Fee Note reads in relevant part:
FOR VALUE RECEIVED, the Company promises to pay
Tarpon Bay Partners, LLC . . . the principal sum of
Twenty Five Thousand Dollars and No Cents
($25,000.00) . . . or such lesser principal amount
following the conversion or conversions of this Note in
accordance with Paragraph 2 . . . payable on
demand . . . .
Joint App’x at 1005. Because this language “raises a presumption
of . . . legal consideration,” Alcantara, 2017 WL 4621386, at *2 (quoting
Raymond, 10 Conn. at 484), the burden shifts to Zerez to establish a
genuine issue of material fact which, if taken as true, would rebut the
presumption. See Taft Realty Corp. v. Yorkhaven Enters., Inc., 146 Conn.
54338, 342–43 (1959); cf. Fieldpoint Priv. Sec. v. Fed. Ins. Co., No. FST-
CV21-6049713-S, 2021 WL 5919792, at *5 (Conn. Super. Ct. Nov. 29,
2021) (“In connection with a hypothetical summary judgment motion,
the court presumably would have before it a factual record, such that
if the defendant were to present evidence affirmatively establishing
(on a prima facie basis) that no consideration had been paid to the
plaintiff by the Bermuda claimants, the burden would shift to the
plaintiff to establish a material issue of fact as to payment of fees (or
establish the non-materiality of the issue of payment).”). Tarpon Bay
contends on appeal that Zerez failed to rebut the “for value received”
presumption, and accordingly argues that summary judgment on the
Affirmative Claims should enter in its favor. See Appellants’ Br. at
39–40, 45; Appellants’ Reply at 14–17.
We disagree. Zerez raises genuine issues of material fact that
may, if resolved in its favor at trial, rebut the presumption of
consideration. We discern from the parties’ summary judgment
55
arguments that there are three possible ways a contract could have
been formed:
1. The Term Sheet is an unenforceable agreement to agree.
But the Signing Fee Note was executed by Zerez in
exchange for a return promise by Tarpon Bay—made at
some point after the Term Sheet was signed but before
the Signing Fee Note was executed—to begin the section
3(a)(10) transaction pursuant to the Term Sheet’s
contemplated deal structure.
2. The Term Sheet is an unenforceable agreement to agree.
But the Signing Fee Note was an offer by Zerez to induce
Tarpon Bay to proceed with the section 3(a)(10)
transaction. Tarpon Bay accepted that offer by
commencing performance when it contacted creditors,
executed Claim Purchase Agreements, and filed suit in
Florida state court.
3. The Term Sheet itself is a binding agreement. It includes
a return promise by Tarpon Bay to begin the debt-for-
equity transaction pursuant to the Term Sheet’s
contemplated deal structure. The Signing Fee Note is
effectively an addendum that specifies the Signing Fee
provision of the Term Sheet in greater detail.
We analyze the three possibilities in turn and conclude that Zerez
meets its burden of production on rebutting each.
The first option is precluded because Zerez submitted
56
deposition evidence that raised a genuine issue of material fact as to
whether Tarpon Bay ever made a valid return promise to begin the
section 3(a)(10) transaction. Hicks stated in his deposition testimony:
Q. Did Tarpon Bay have any obligation to purchase the
liabilities of Zerez at the time the note was executed?
A. That certainly was the plan, and that’s what
happened.
Q. Do you have an understanding of whether that
obligation existed at the time the promissory note was
executed?
A. I believe—I’m not a lawyer, but I believe that it was a
valid note regardless of whether or not Tarpon Bay
ultimately performed work.
Joint App’x at 1203. If Tarpon Bay was entitled to the Signing Fee
Note “regardless of whether or not Tarpon Bay ultimately performed
work,” then there was no return promise to perform made by Tarpon
Bay. Id. The Signing Fee Note would then be an unenforceable
executory promise. To be clear, there is record evidence suggesting
that Tarpon Bay made a return promise. Aswani stated to Murga
during the Signing Fee Note negotiations that Murga would need to
57
sign the Signing Fee Note in order to proceed because it was a
prerequisite to entering into a definitive agreement. Id. at 1152.
Tarpon Bay also signed the Term Sheet one day after Zerez executed
the Signing Fee Note, which could reflect the existence of a return
promise. And Tarpon Bay’s subsequent performance—when it
contacted creditors, executed eight Creditor Purchase Agreements,
and initiated a lawsuit in Florida state court—may also be evidence
of a return promise. But because the factual issue of whether there
was a return promise may reasonably be resolved in favor of either
party, summary judgment under option one is unwarranted.
The second option is precluded because the record does not
clearly establish that the Signing Fee Note (separate and apart from
the Term Sheet) was an offer that Tarpon Bay accepted by beginning
performance. In its July 2021 decision, the district court evaluated
Zerez’s counterclaim for “breach of implied contract” and reasoned:
Some implied contract likely existed between the parties.
Without executing the definitive documentation that the
58
Term Sheet called for, Tarpon Bay entered into Claim
Purchase Agreements to acquire over $500,000 of Zerez’s
outstanding debt and filed the Florida Case. It is difficult
to believe that Tarpon Bay would have undertaken those
actions if it thought that Zerez had made no return
promises.
Tarpon Bay II, 547 F. Supp. 3d at 212. Under this theory of implied
contract, the Term Sheet was a nonbinding agreement to agree, and
the Signing Fee Note was an offer by Zerez. Tarpon Bay then
accepted Zerez’s offer by return promise: not by verbally
communicating a return promise, but by performance—namely
contacting creditors, executing Claim Purchase Agreements, and
filing the Florida lawsuit. See Restatement (Second) of Conts. § 50
cmt. b (“[T]he beginning of performance or a tender of part
performance operates as a promise to render complete
performance.”). Zerez was aware of Tarpon Bay’s actions—two of its
corporate officers were creditors whom Tarpon Bay had engaged—
yet never objected or attempted to revoke the Signing Fee Note.
Under this implied contract theory, Zerez’s promise to pay the
59
Signing Fee was exchanged for Tarpon Bay’s return promise to
initiate the section 3(a)(10) proceeding.
But genuine issues of material fact remain as to whether there
was valid offer and acceptance under this theory. An offer is a
“manifestation of willingness to enter into a bargain, so made as to
justify another person in understanding that his assent to that bargain
is invited and will conclude it.” U.S. Bank Nat’l Ass’n v. Eichten, 184
Conn. App. 727, 773 (2018) (quoting Restatement (Second) of Conts. §
24); see also Restatement (Second) of Conts. § 2 cmt. b (“A promisor
manifests an intention if he believes or has reason to believe that the
promisee will infer that intention from his words or conduct.”
(emphasis added)). A factfinder may well conclude that, independent
of Zerez’s subjective intent, Tarpon Bay was justified in
understanding the Signing Fee Note to be an invitation to initiate the
transaction. Its execution, after all, shortly followed Aswani’s
statement to Murga that the Signing Fee Note was meant to
60
compensate Tarpon Bay for transaction services and was a
prerequisite to entering into a definitive agreement, and Murga did
not say anything to the contrary. See Joint App’x at 1152. But as
mentioned above, Hicks stated in deposition testimony that he
believed Tarpon Bay was entitled to the Signing Fee Note “regardless
of whether or not Tarpon Bay ultimately performed work.” Id. at
1203. That evidence supports the contrary conclusion that Tarpon
Bay did not understand the Signing Fee Note as an offer that, once
accepted, would compel performance. There is ultimately little
evidence of “[t]he parties’ intentions manifested by their acts and
words,” which “are essential to the court’s determination of whether
a contract was entered into and what its terms were.” Auto Glass Exp.,
Inc. v. Hanover Ins. Co., 293 Conn. 218, 225 (2009) (internal quotation
marks and citation omitted). Because the questions of offer and
acceptance are at the heart of this case and will benefit from a full
61
record at trial, the second option is foreclosed at summary judgment.
Finally, the third option is precluded because the record does
not clearly establish that the Term Sheet was a binding agreement.
Indeed, the Term Sheet contains a caveat:
The terms set forth above do not constitute a contractual
commitment of the Company or the Purchaser, but
merely represent proposed terms for possible liabilities
satisfaction. Until definitive documentation is executed by
all parties, there shall not exist any binding
obligation . . . .
Id. at 984 (emphasis added). The parties dispute the meaning and
importance of “definitive documentation.” Zerez argues that because
there was no “definitive documentation,” the Term Sheet does not
represent a “binding obligation.” See Cross-Appellant’s Br. at 34.
Hicks testified that this paragraph was “leftover from a
different . . . strategy” and unintentionally integrated into this
transaction. Joint App’x at 1206. Yet he also testified that the
“definitive agreement is the complaint” filed in state court, and that
“the claims purchase agreements are really the first thing as far as
62
documentation is concerned.” Id. at 1204. Because the meaning and
satisfaction of the “definitive documentation” requirement raise
genuine issues of material fact as to whether the Term Sheet was
binding, option three does not support summary judgment for
Tarpon Bay. 23
The record in this case presents several genuine issues of
material fact as to whether there was consideration supporting the
Signing Fee Note. Because these factual issues “may reasonably be
resolved in favor of either party,” Anderson, 477 U.S. at 250, the district
court correctly held that Zerez established a genuine dispute of
material fact as to whether the Signing Fee Note was supported by
consideration. We affirm the district court’s denial of summary
judgment and remand the issue of contract formation for further
23 Tarpon Bay does not appear to argue that the Signing Fee Note was itself
the “definitive documentation” that would render the Term Sheet binding. Hick’s
deposition testimony, as well as Aswani’s statement to Murga that the Signing Fee
Note was a prerequisite to entering into a definitive agreement, both suggest that
“definitive documentation” referred to a document after the Signing Fee Note. Id.
at 1152.
63
proceedings.
C. CUTPA
Zerez also argues that the district court erred in granting
summary judgment on Counterclaim Eleven, which alleged that
Counterclaim Defendants violated CUTPA. See Conn. Gen. Stat. §§
42-110a to -110q. A party seeking to “prevail on a CUTPA
claim . . . must prove that (1) the defendant engaged in unfair or
deceptive acts or practices in the conduct of any trade or commerce;
and (2) each class member claiming entitlement to relief under
CUTPA has suffered an ascertainable loss of money or property as a
result of the defendant’s acts or practices.” Artie’s Auto Body, Inc. v.
Hartford Fire Ins. Co., 287 Conn. 208, 217 (2008) (internal quotation
marks and citations omitted); see also Conn. Gen. Stat. § 42-110b(a), -
110g(a). 24 The district court concluded that “Zerez simply assert[ed]
24Under the CUTPA provisions relevant here, “[n]o person shall engage in
unfair methods of competition and unfair or deceptive acts or practices in the
conduct of any trade or commerce.” Conn. Gen. Stat. § 42-110b(a). “Any person
who suffers any ascertainable loss of money or property, real or personal, as a
64
a breach of contract claim in the guise of a CUTPA claim” and did not
demonstrate an “ascertainable loss” cognizable under the statute.
Tarpon Bay II, 547 F. Supp. 3d at 223. Because Zerez failed to establish
a CUTPA claim, the district court determined that it “need not decide
whether . . . CUTPA applies to the Signing Fee Note.” Id. Summary
judgment entered for Counterclaim Defendants on that count
accordingly. Judgment at 2.
We affirm the district court’s grant of summary judgment on
the alternative grounds that CUTPA does not apply to the case at
bar. 25 “CUTPA does not apply to deceptive practices in the purchase
result of the use or employment of a method, act or practice prohibited by section
42-110b, may bring an action . . . to recover actual damages.” Conn. Gen. Stat. § 42-
110g(a).
25 While the parties raised the issue of CUTPA’s applicability before the
district court, see Joint App’x at 1867–68, they did not do so in their briefing before
this court. An argument not raised on appeal is generally deemed abandoned. See
United States v. Joyner, 313 F.3d 40, 44 (2d Cir. 2002). But rules concerning waiver
are “prudential, not jurisdictional,” and we have exercised our discretion to review
waived or abandoned arguments “where . . . the argument presents a question of
law and there is no need for additional fact-finding.” Sniado v. Bank Aus. AG, 378
F.3d 210, 213 (2d Cir. 2004); see also United States v. Babwah, 972 F.2d 30, 35 (2d Cir.
1992) (noting that a court of appeals has discretion to consider argument not raised
on appeal “if manifest injustice otherwise would result”).
65
and sale of securities.” Russell v. Dean Witter Reynolds, Inc., 200 Conn.
172, 180 (1986). Despite the broad sweep of CUTPA’s text
encompassing “deceptive acts . . . in the conduct of any trade or
commerce,” Conn. Gen. Stat. § 42-110b(a) (emphasis added), “Federal
Trade Commission (FTC) rulings and cases under the Federal Trade
Commission Act . . . serve as a lodestar for interpret[ing]” CUTPA,
Russell, 200 Conn. at 179. Because “[t]he FTC has never undertaken
to adjudicate deceptive conduct in . . . transactions fall[ing] under the
comprehensive regulatory umbrella of the Securities and Exchange
Commission,” transactions governed by the federal securities laws
likewise fall outside CUTPA’s ambit. Id. at 180. That said, the
securities carveout is not so broad that the mere involvement of stock
in an allegedly deceptive act is sufficient to preclude CUTPA’s
application. See, e.g., Halo Tech Holdings, Inc. v. Cooper, No.
3:07CV00489(AHN), 2008 WL 877156, at *19 (D. Conn. Mar. 26, 2008)
(“[U]se of a stock sale simply as the means for effecting the transfer of
66
a corporation should not remove it from the purview of CUTPA,
when CUTPA would clearly apply if a sale of assets occurred
instead.” (internal quotation marks omitted) (quoting TIE/Commc’ns,
Inc. v. Kopp, No. 64983, 1993 WL 515680, at *8 (Conn. Super. Ct. Nov.
29, 1993)).
CUTPA does not apply to the alleged deception in this case.
Zerez alleges that “Counterclaim Defendants’ . . . acts violate the
Connecticut Unfair Trade Practices Act . . . , in that their conduct was
unfair, immoral, oppressive, unethical, unscrupulous and/or
deceptive and has caused substantial injury to Zerez.” Joint App’x at
890. But any deceptive conduct would have been in furtherance of
the parties’ transaction, which intended a sale of debt for equity
pursuant to section 3(a)(10) of the Securities Act. Because the
antifraud provisions of the federal securities laws would regulate
allegedly deceptive conduct in section 3(a)(10) transactions, the
dispute at bar falls outside of CUTPA’s scope. See Russell, 200 Conn.
67at 179–80.
Upon supervision and approval by a judicial or administrative
body, section 3(a)(10) of the Securities Act of 1933 may exempt an
issuer from registering securities issued in exchange for outstanding
securities or other qualifying value. See 15 U.S.C. § 77c(a)(10). The
provision specifically exempts from registration:
[A]ny security which is issued in exchange for one or
more bona fide outstanding securities, claims or
property interests, or partly in such exchange and partly
for cash, where the terms and conditions of such issuance
and exchange are approved, after a hearing upon the
fairness of such terms and conditions at which all
persons to whom it is proposed to issue securities in such
exchange shall have the right to appear, by any court, or
by any official or agency of the United States, or by any
State or Territorial banking or insurance commission or
other governmental authority expressly authorized by
law to grant such approval . . . .
Id. Section 3(a)(10) transactions arise most frequently in three
contexts: litigation settlement involving an exchange of shares,
bankruptcy proceedings not subject to Chapter 11 of the Bankruptcy
Code, or, as here, the reorganization or capital restructuring of solvent
68
businesses. See 7 J. William Hicks, Exempted Transactions Under the
Securities Act of 1933 § 3:1 (2023).
Despite their exemption from registration, see 15 U.S.C.
§ 77c(a), section 3(a)(10) transactions are still subject to the antifraud
provisions of the Securities Act, see id. § 77q(c). Section 17(a) makes it
illegal for “any person in the offer or sale of any securities . . . to
employ any device, scheme, or artifice to defraud,” or “to engage in
any transaction, practice, or course of business which operates or
would operate as a fraud or deceit upon the purchaser.” 15 U.S.C.
§ 77q(a)(1), (3). Although there is a paucity of case law on point, it
appears undisputed that allegedly fraudulent or deceptive conduct in
the course of executing section 3(a)(10) transactions may indeed
violate section 17(a) upon meeting all the requisite elements. See, e.g.,
In re Am. Trailer Rentals Co., 325 F.2d 47, 52 & n.11 (10th Cir. 1963),
rev’d on different grounds sub nom. SEC v. Am. Trailer Rentals Co., 379
U.S. 594 (1965); SEC v. Johnson, No. 2:20CV08985(FWS), 2023 WL
692628680, at *6–8 (C.D. Cal. Mar. 2, 2023); SEC v. Currency Trading Int’l,
No. 02CV05143(PA), 2004 WL 2753128, at *6, 10 (C.D. Cal. Feb. 2,
2004); SEC v. Granco Prods., 236 F. Supp. 968, 970 (S.D.N.Y. 1964); see
also Staff Legal Bulletin No. 3A (CF), U.S. SEC (June 18, 2008),
https://www.sec.gov/corpfin/staff-legal-bulletin-3a (stating the SEC’s
view that “the anti-fraud requirements of the federal securities laws
would govern disclosure” to parties to whom securities would be
issued after a section 3(a)(10) transaction).
Any attempt to separate the Signing Fee Note from the
underlying scheme to effectuate a section 3(a)(10) transaction is
ultimately unconvincing. While one may confine the allegedly
deceptive conduct to the Signing Fee Note rather than the transaction
writ large, all parties agreed that the Signing Fee Note was executed
pursuant to the Signing Fee provision in the Term Sheet. See Joint
App’x at 1445 (“[I]n satisfaction of its obligation to pay Tarpon the
Signing Fee, Zerez executed . . . the Signing Fee Note.”); id. at 1298
70
(“Admitted and Zerez respectfully refers the Court to the referenced
document for its complete terms.”). The Term Sheet, in turn, makes
clear that the parties contemplated a debt-for-equity transaction
under section 3(a)(10) that would be exempt from registration. See id.
at 981. Moreover, even if the motives behind the Signing Fee Note
were limited to the Term Sheet’s stated purpose of covering Tarpon
Bay’s “legal fees due upon the execution of the term sheet,” id. at 983,
the Signing Fee Note’s option to convert the Signing Fee into Zerez
stock renders it part of the larger securities transaction. See 15 U.S.C.
§ 77b(a)(3) (“Any security given or delivered with, or as a bonus on
account of, any purchase of securities or any other thing, shall be
conclusively presumed to constitute a part of the subject of such
purchase and to have been offered and sold for value.”).
CUTPA may not exceed its broad yet well-defined limits where
the transactions “for the purchase and sale of securities” are such that
the federal securities laws would apply. Russell, 200 Conn. at 180.
71
Because section 17(a) of the Securities Act would apply to allegedly
deceptive behavior in a section 3(a)(10) transaction, CUTPA does not
apply to Counterclaim Defendants’ alleged actions. The district
court’s grant of summary judgment for Counterclaim Defendants on
Counterclaim Eleven is accordingly affirmed.
IV. Conclusion
For the foregoing reasons, we VACATE the district court’s
holding that the Signing Fee Note was unconscionable and therefore
unenforceable as a matter of law, AFFIRM the district court’s denial
of summary judgment because genuine issues of material fact remain
as to whether consideration supported the Signing Fee Note, and
AFFIRM the Judgment as to the CUTPA counterclaim. Without
intimating a view on Zerez’s counterclaims not raised on appeal, we
accordingly REMAND to the district court for further proceedings
consistent with this opinion.
72