appellants' brief

RECORD NO. 09-35605

In The

United States Court of Appeals For The Ninth Circuit

HIMC CORPORATION, a Washington corporation,

Plaintiff – Appellee,

v.

PREM RAMCHANDANI; SHAI BAR LAVI; ANNA

SACHS BAR-LAVI; AVI SIVAN; AVRAHAM OVAIDIA,

Defendants – Appellants.

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF WASHINGTON AT TACOMA

BRIEF OF APPELLANTS

Charles Herrmann Moshe Mortner HERMANN & ASSOCIATES THE MORTNER LAW OFFICE PC 1535 Tacoma Avenue South 130 William Street, 6th Floor Tacoma, Washington 98402 New York, New York 10038 (253) 627-8142 (646) 839-8530 Counsel for Appellants Counsel for Appellants

Case: 09-35605 09/16/2009 Page: 1 of 51 DktEntry: 7063617

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Table of Contents

TABLE OF AUTHORITIES .........................................................................................IV

JURISDICTIONAL STATEMENT................................................................................ 1

A. The Basis For The District Court’s Subject Matter Jurisdiction ............. 1

B. The Basis For The Court Of Appeals’ Jurisdiction ................................. 1

C. The Filing Dates and Finality of the Order Appealed From.................... 1

D. References................................................................................................ 2

STATEMENT OF THE ISSUES PRESENTED FOR REVIEW................................. 3

STATEMENT OF THE CASE ........................................................................................ 4

A. Nature of the Case ....................................................................................... 4

B. The Course of Proceedings .......................................................................... 5

C. The Disposition Below ................................................................................ 5

STATEMENT OF FACTS ............................................................................................... 6

SUMMARY ARGUMENT............................................................................................. 13

ARGUMENT ................................................................................................................... 16

STANDARD OF REVIEW ............................................................................................ 16

STANDARD FOR GRANTING SUMMARY JUDGMENT...................................... 16

I. THE ACTIONS OF HIMC’S BOARD COMPLIED WITH................................. 17

RCW 23B.06.210(2)...................................................................................................... 17


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1. HIMC’s Board Properly Authorized the Issuance of the Shares to the

Individual Defendants. ...................................................................................................... 17

2. The District Court Enlarged the Effect of RCW 23B.06.210 .......................... 19

II. THE DISTICT COURT ERRED IN FINDING THERE WAS NO AGREEMENT

BETWEEN HIMC AND VERIPAY. ........................................................................................ 21

A. It is Undisputed that the MOU is a Contract Between HIMC and Veripay. ... 21

B. The District Court’s Grounds for Holding the MOU Void are Erroneous. ..... 23

The Absence of a Stated Price Per Share in the MOU was Not Fatal to Formation

of a Contract. ..................................................................................................................... 24

The District Court Should have Found that the Share Price of $0.01 is the Only

Reasonable Inference that can be Drawn from the Evidence............................................ 25

The District Court Erred in Holding that the MOU was Void Because HIMC,

Allegedly, Failed to Cash the Individual Defendants’ Checks for the Purchase of the

Shares. ............................................................................................................................... 29

The District Court Erred in Holding that the MOU was Void on the Grounds that

HIMC Issued Restricted Stock Rather than Free Trading Stock. ..................................... 33

III. THIS COURT SHOULD GRANT SUMMARY JUDGMENT FOR

APPELLANTS, BECAUSE HIMC WAIVED ANY RIGHT TO SEEK RESCISSION OF THE

MOU BY RATIFICATION. ..................................................................................................... 35

IV. THIS COURT SHOULD GRANT SUMMARY JUDGMENT FOR

APPELLANTS, BECAUSE HIMC BREACHED ITS DUTY TO APPELLANTS BY

REFUSING TO REMOVE THE RESTRICITIVE LEGEND ON THE STOCKS.................... 38

CONCLUSION................................................................................................................ 41


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STATEMENT OF RELATED CASES......................................................................... 42

CERTIFICATE OF COMPLIANCE............................................................................ 43


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Table of Authorities

Cases

Berg v. Hudesman, 115 Wn.2d 657, 667, 801 P.2d 222 (1990) ............................. 27

Campbell v. Liberty Transfer Co, 2006 WL 3751529 at *15 (E.D.N.Y.) .............. 44

Conrad v. Ace Property & Cas. Ins. Co., 532 F.3d 1000, 1004 (9th Cir. 2008) .... 17

David v. United States, 820 F.2d 1038, 1039-40 (9th Cir.1987) ............................ 17

Diaz v. Nat'l Car Rental Sys., Inc. 143 Wn.2d 57, 66, 17 P.3d 603, rev'd, 143

Wn.2d 57 (2001) .................................................................................................. 27

Eurick v. Pemco Ins. Co., 108 Wash.2d 338, 340, 738 P.2d 251 (1987)................ 22

Hoke v. Stevens-Norton, Inc., 60 Wash.2d 775, 375 P.2d 743 (1962) ................... 39

Hynes v. Hynes, 28 Wash.2d 660, 672, 184 P.2d 68 (1947)................................... 35

Interstate Prod. Credit Ass'n v. MacHugh, 90 Wn.App. 650, 654, 953 P.2d 812,

review denied, 136 Wn.2d 1021, 969 P.2d 1063 (1998) ..................................... 31

McKim v. Newmarket Technology, Inc., 2008 WL 754739 at *8 (W.D.Ky.)......... 44

Meringolo v. Power2ship Inc., 2003 WL 21750009 (S.D.N.Y.)............................ 43

Multicare Med. Ctr. v. Department of Soc. And Health Serv., 114 Wn.2d 572, 587,

790 P.2d 124 (1990)............................................................................................. 37

Murphy v. Panton, 96 Wash. 637, 165 P. 1074 (1917)..................................... 14, 21


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Oregon Mut. Ins. Co. v. Barton, 109 Wash.App. 405, 413, 36 P.3d 1065 (2001),

review denied,146 Wash.2d 1014, 51 P.3d 88 (2002)......................................... 34

Peoples Mortgage Co. v. Vista View Builders, 6 Wn.App. 744, 747-48, 496 P.2d

354 (1972)............................................................................................................ 36

Poweroil Manufacturing Company, Inc., v. Carstensen, 69 Wash.2d 673, 419 P.2d

793 (1966)...................................................................................................... 37, 39

Reynolds Homes, Inc. v. Kondo, 2001 WL 1632544, 2 (Wash.App. Div.

2)(Wash.App. Div. 2, 2001) .......................................................................... 22, 31

S. Cal. Painters & Allied Trade Dist. Council No. 36 v. Best Interiors, 359 F.3d

1127, 1130 (9th Cir.2004).................................................................................... 16

Scott Galvanizing, Inc. v. Northwest EnviroServices, Inc., 120 Wn.2d 573, 582,

844 P.2d 428, rev'd, 120 Wn.2d 1002 (1993)...................................................... 30

Storseth v. Pacific Coast Investment Co., 42 F.3d 1402, 1994 WL 650000 (9th Cir.

1994) .................................................................................................................... 41

Swanson v. Holmquist, 13 Wn.App. 939, 942, 539 P.2d 104 (1975) ..................... 36

Tanner Elec. Co-op. v. Puget Sound Power & Light Co., 128 Wn.2d 656, 674, 911

P .2d 1301 (1996)................................................................................................. 30

U.S. Life Credit Life Ins. Co. v. Williams, 129 Wn.2d 565, 569, 919 P.2d 594, aff'd,

129 Wn.2d 565 (1996) ................................................................................... 22, 27

United States v. 1.377 Acres of Land, 352 F.3d 1259, 1264 (9th Cir. 2003).......... 16


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Whitcomb v. Sager, 144 P. 922 (Wash.1914) ................................................... 39, 41

Zalud v. Boltz, 2000 WL 1346678 (Wash.App. Div. 1) ................................... 25, 26

Statutes

28 U.S.C. §1332 ........................................................................................................ 1

28 USC 1291 ............................................................................................................. 1

RCW 23B.06.210(2) ............................................................................. 17, 18, 19, 20

RCW 62A.3-311...................................................................................................... 34

RCW 62A.8-401, Section 8-401 of the Uniform Commercial Code...................... 42

Securities Act of 1933 (“Securities Act”), 17 C.F.R. § 230.144 ........................... 11

Other Authorities

U.S. Securities and Exchange Commission, “Rule 144: Selling Restricted and

Control Securities,” http://www.sec.gov/investor/pubs/rule144.htm................. 44

Rules

Federal Rule of Appellate Procedure 4(a)(1)(A) ...................................................... 2

Rule 144 of the Securities Act of 1933 (“Securities Act”), 17 C.F.R. § 230.144 .. 42

Treatises

2 Restatement, Contracts §§ 483, 484, pp. 921, 924............................................... 40


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JURISDICTIONAL STATEMENT

A. The Basis For The District Court’s Subject Matter Jurisdiction

Subject matter jurisdiction for the District Court in this action exists based

on 28 U.S.C. §1332, because the amount in controversy exceeds $75,000,

exclusive of interest and costs, and because the controversy is between citizens of

different states.

Plaintiff-Appellee, HIMC Corp. is a Washington corporation, with its

principal place of business being located in Tacoma, Washington.

Defendants-Appellants Prem Ramchandani, Avi Sivan, Anna S. Bar-Lavi

and Shai Bar-Lavi are residents of the State of New York. Defendant-Appellant

Avraham Ovadia is a resident of the Republic of South Africa.

B. The Basis For The Court Of Appeals’ Jurisdiction

This is an appeal from a final decision of the U.S. District Court for the

Western District of Washington, Tacoma. Accordingly, the basis for the Court of

Appeals’ jurisdiction is 28 U.S.C. 1291.

C. The Filing Dates and Finality of the Order Appealed From

The final decision appealed from, titled Order and Final Judgment was

entered in the District Court’s docket on May 20, 2009. (ER-1) On June 19, 2009,


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the Notice of Appeal was timely filed within 30 days of entry of the order,

pursuant to Federal Rule of Appellate Procedure 4(a)(1)(A). (ER-265)

This appeal is from a final order that disposes of all parties’ claims.

D. References

Pursuant to Fed.R.App.Pro. 28(d), the parties are referred to herein in the

manner they were referred to by the District Court in the Order appealed from (E-

1). Accordingly, Plaintiff-Appellee HIMC Corp. is herein referred to as HIMC;

and Defendants-Appellants Prem Ramchandani, Avi Sivan, Avraham Ovadia,

Anna S. Bar-Lavi and Shai Bar-Lavi are referred to as the Individual Defendants.


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STATEMENT OF THE ISSUES PRESENTED FOR REVIEW

1. Did the District Court err in holding that the price for the sale of

securities to the Defendant-Appellants was set by the Board of Directors

of HIMC Corp and because the Defendants did not agree to that price,

under RCW 23B.06.210, the contracts between the parties were

retroactively made void?

2. Did the District Court err in finding that the Memorandum of

Understanding, executed February 9, 2005 (ER-122), was not a contract,

and consequently, directing the Defendants-Appellants to return certain

stock certificates to HIMC Corp.?

3. Did the District Court err in denying the Defendants-Appellants’ motion

for Summary Judgment?

4. The Court of Appeals is respectfully requested to conduct de novo

review, and to issue summary judgment in favor of the Individual

Defendants upon their Second Counterclaim.


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STATEMENT OF THE CASE

A. Nature of the Case

This action concerns a joint venture between HIMC and an entity called

Veripay to generate new business for HIMC. The joint venture was memorialized

in a Memorandum of Understanding, which provided compensation to Veripay

upfront by the issuance of 689,226 shares of HIMC stock to Veripay’s nominees,

the Individual Defendants. The shares were issued as restricted under Rule 144k

registration. At the conclusion of the holding period, HIMC refused to remove the

restrictions, and preemptively commenced this Declaratory Judgment Action

against the holder of the shares, the Individual Defendants.

HIMC asserted in its Complaint that the Individual Defendants failed to pay

an additional $79,261 necessary to complete the purchase of the HIMC stock at a

price of $0.125 per share. The Individual Defendants counter that the amount they

paid represented the agreed stock purchase price of $0.01 per share.

In this action HIMC sought (1) declaratory and injunctive relief as to the

application of Rule 144(d) and (k) to the restricted stock and a permanent

injunction preventing the Individual Defendants from seeking removal of the

restrictions and prohibiting defendant Fidelity Transfer from reissuing HIMC stock

certificates to the Individual Defendants without the restrictions; (2) rescission of


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the Memorandum of Understanding based on breach of contract and common law

and statutory misrepresentation.

In their Second Counterclaim the Individual Defendants alleged breach of

contract against HIMC and sought removal of the restrictions of the stock issued to

them; plus the Individual Defendants sought monetary damages as a result of

HIMC’s refusal to remove the restrictions at the time when the restrictions expired,

when HIMC’s stock was trading at a price substantially above its current levels.

B. The Course of Proceedings

This action was commenced on August 13, 2007, with the filing of the

Complaint. (ER-33) The Individual Defendants answered and filed their

counterclaims on November 1, 2007. (ER-79) The Individual Defendants moved

for summary judgment and HIMC cross-moved. Discovery was conducted. In the

course of proceedings the District Court consistently ruled in favor of HIMC and

against the Individual Defendants in all of ten different motions. On November 25,

2008, the District Court entered an order denying the Individual Defendants

motion for summary judgment and denying in part and granting in part HIMC’s

motion for summary judgment. (The “Summary Judgment Order”) (ER-6)

C. The Disposition Below

The order appealed from, Order and Final Judgment (ER-1), was based on

the Summary Judgment Order (ER-6). In each of these orders the District Court


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rejected the arguments proffered by both sides, and notwithstanding the fact that

the contract between the parties was undisputed, the District Court found no

contract to exist and directed the Individual Defendants to return the HIMC shares

that had been issued to them.

STATEMENT OF FACTS

On or about December 13, 2004, HIMC and Pasa Inc., an entity owned by

the Individual Defendants, entered into a “Binding Letter of Intent.” (ER-99) The

Binding Letter of Intent (“BLOI”) stated the terms for a joint venture, in which a

new entity, later called Veripay, would be created for the purpose of bringing new

customers to HIMC. (ER-95, Affidavit of Shai Bar-Lavi, sworn to October 8,

2008, (“Bar-Lavi Afft.”), ¶2.) Specifically, the parties to the BLOI, intended that

Veripay would provide customers for HIMC Corp.’s credit card transaction

processing services from the direct response marketing industry. See Bar-Lavi

Afft., ¶3.

The BLOI provided that HIMC would give two forms of compensation:

i. 689,226 shares of HIMC’s common stock, to be issued

“upfront” at the price of $0.01 per share to four individuals

identified by Pasa, Inc.; and


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ii. An additional 675,441 shares of HIMC’s common stock,

provided “Pasa, Inc. through its various companies, contacts

and groups, brings $100,000,000.00 (one hundred million

dollars) gross revenue through New Co. [i.e., Veripay] in a

period of 24 (twenty-four) months from the time of the

establishment of New Co.” (Emphasis Supplied) (ER-99)

Shortly after the execution of the BLOI, the Individual Defendants paid to

HIMC four checks, totaling $6,892.28 (ER-45), for the HIMC common stock

described in the BLOI that was to be issued “upfront,” as is alleged in the

Complaint:

17. On or about December 15 and 16, 2004 Prem Ramchandani, Avi Sivan, Shai Bar Lavi, and Avraham Ovadia each issued a check for $1,723.07 payable to HIMC Corp. for four purchases of 172,307 shares of HIMC stock, at $0.01 per share. A true and correct copy of the front of the checks are attached to the Complaint as Exhibit 1. (ER-36)

On February 9, 2005, HIMC and the joint venture vehicle, Veripay LLC

(“Veripay”) executed two agreements. First was an agreement, titled

“Memorandum of Understanding” (the “MOU”). The MOU created a direct

contractual relationship between HIMC and Veripay, upon terms similar to what

was described in the BLOI. (ER-122) The second agreement was titled “HIMC


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CORPORATION AND VERIPAY, LLC. OPERATING AGREEMENT”

(“Operating Agreement”) (ER-129) With the Operating Agreement the parties

established the rules by which they would govern their joint venture.1

As envisioned in the BLOI, the MOU provided for the upfront issuance of

shares to the Individual Defendants, i.e., the designees of Veripay, and a

subsequent issuance of shares upon achieving certain sales goals. The MOU

states,

The transfer of shares shall be done on the following schedule.

1. The current shareholder or (or its designee) of VERIPAY shall receive 689,226 upon execution of this agreement.”

2. The balance of 675,441 shall be conveyed to the current shareholder of VERIPAY upon VERPAY (sic) generating gross transaction volume of $100,000,000 in a period of 24

1 The Operating Agreement provided an arbitration clause, stating:

All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration by one or more arbitrators appointed in accordance with Nevada arbitration guidelines and said Rules. (ER-132)

On the basis of this arbitration clause, the Individual Defendants moved in

the District Court, pursuant to Section 3 of the Federal Arbitration Act, 9 U.S.C.,

for an Order staying this action until arbitration could be had. The District Court

denied that motion. (ER-25, Docket Item 68)


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months from the date of the first sales contract entered by VERIPAY.

(ER-122)(Emphasis supplied.)

Thus, the MOU required no further payment by the designees of Veripay,

i.e., the Individual Defendants, as consideration for the issuance 689,226 shares.

Two days after executing the MOU and the Operating Agreement, on

February 11, 2005, HIMC caused 689,226 shares of common stock to be issued to

the Individual Defendants (ER-51 and 109), as the Complaint acknowledges:

23. On February 11, 2005 HIMC notified Fidelity Transfer Co., as its transfer agent, to issue four certificates for 172,307 shares each to: 1) Prem Ramchandani; 2) Avi Sivan, 3) Anna Sachs Bar-Lavi; and 4) Avraham Ovadia. A true and correct copy of the directive to Fidelity Transfer is attached hereto and incorporated herein as Exhibit 5. (ER-37)

During the months of March and April 2005, Veripay, working with HIMC,

attempted to bring the hoped for new business to HIMC. As part of these efforts,

the Individual Defendants Avi Sivan and Shai Bar-Lavi, along with HIMC’s

executives, including its president, Aaron McCann attended the Electronic

Retailers Association convention in Florida. These efforts did not result in

revenues to HIMC, and the parties to this action disagree as to who is responsible


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for this failure. (See Affidavit of Shai Bar-Lavi, ER-97)2

Notwithstanding the lack of success in the Veripay joint venture, on May 5,

2005, HIMC entered into a third agreement with Veripay LLC, titled “ADDITION

TO MEMORANDUM OF UNDERSTANDING DATED FEB 9, 2005.”

(Hereinafter, the “Addition to MOU”) (ER-101) The Addition to MOU provided

for additional forms of compensation to Veripay. Moreover, the Addition to MOU

ratified the MOU and the issuance of the shares to the Individual Defendants,

stating, “This agreement adds to and does not in any way reduce the grant of

shares specified in the Feb 9, 2005 MOU.” (Emphasis supplied.) (ER-101)

Nowhere in the Addition to MOU does it say that the grant of shares from

MOU was revoked or that it failed for lack of consideration, or that an additional

$79,261.22 was needed to pay for that stock, as HIMC has claimed in this action.

(ER-40, Complaint, ¶39)

On or about June 16, 2005, HIMC terminated its president, Aaron McCann,

who had been the signatory on behalf of HIMC in all of the above-mentioned

contracts and agreements. (ER-160)

2 HIMC’s former President Aaron McCann acknowledged in his deposition

that Defendant-Appellant Shai Bar Lavi did a lot of traveling for HIMC business

(ER-192); and that McCann and Defendant-Appellant Avi Sivan went on sales

calls together. (ER-193)


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As the Individual Defendants alleged in their Second Counterclaim, the

stock certificates representing the 689,228 shares issued to the Individual

Defendants on or about February 11, 2005 contained a standard legend restricting

the transfer of such shares, other than pursuant to an exemption under Rule 144 of

the Securities Act of 1933 (“Securities Act”), 17 C.F.R. § 230.144, and receipt by

the company of an opinion of counsel to such effect. (Defendants’ Answer and

Counterclaim, ¶76, ER-87)

On or about February 11, 2006, Attorney Paul Greenfield, as counsel for the

Individual Defendants, requested that HIMC Corp. direct its counsel to issue a

legal opinion authorizing the removal of the restrictive legend contained on the

stock certificates issued to the Individual Defendants, so that the Individual

Defendants could properly sell their 689,228 shares, pursuant to Rule 144.

(Defendants’ Answer and Counterclaim, ¶77, ER-87)

HIMC unreasonably refused to allow the transfer of the Individual

Defendants stock under SEC rules and the applicable contract, the MOU.

As a result of HIMC Corp.’s breach, the Individual Defendants sustained

injury and loss. Specifically, the Individual Defendants injury arises from their

inability to sell their 698,226 shares of HIMC Corp. stock in and around the time

of February 2006. Such injury includes the market value of the HIMC stock at the


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time of HIMC Corp.’s breach. (Defendants’ Answer and Counterclaim, ¶85, ER-

88)

In the two years following the issuance of HIMC’s stock to the Individual

Defendants, HIMC’s new management did nothing to vitiate or rescind the

contracts with Veripay or to seek revocation of the stock issued to the Individual

Defendants.

However, in March, May and June 2007, the Individual Defendants renewed

their demands that the restrictions be removed from their stock certificates under

the terms of Rule 144k. (ER-55, 56 and 57)

HIMC responded to these demands in July 2007 by offering to return to the

Individual Defendants the money paid by them for the HIMC share in December

16, 2007, together with interest accrued. (ER-65-76, and ER-39 Complaint, ¶33)

The Individual Defendants demands also precipitated HIMC’s race to the

Court house door and the filing in August 2007 of HIMC’s Declaratory Judgment

action herein in the Western District of Washington (Tacoma).


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SUMMARY ARGUMENT

I. THE DISTRICT COURT ERRED IN HOLDIG

NO CONTRACTS EXISTED BETWEEN THE PARTIES,

PURSUANT TO RCW 23B.06.210

The District Court erred in holding that RCW 23B.06.210 was not complied

with; and the District Court incorrectly found that the Board of Directors “set” the

price for the stock for the Individual Defendants.

First, RCW 23B.06.210, which requires that the Board of Directors

authorize the issuance of stock, was fully complied with in this case. HIMC’s

Board of Directors authorized the issuance of the stock that went to the Individual

Defendants in a duly recorded resolution to issue the stock.

The District Court incorrectly found that the Board of Directors “set” the

price for the stock, when, in fact, there was no resolution of the Board of Directors

of HIMC to that effect.

The facts are that the Individual Defendants had a contract to receive stock

from HIMC. They paid for the stock in accordance with the contract. The Board

of Directors authorized issuance of the stock, and thereupon, the corporation issued

the stock.

The Washington Business Corporation Act (RCW 23B.06.210) was fully

complied with in this transaction, and under Washington law stock once issued


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carries the presumption that it is paid for. Murphy v. Panton, 96 Wash. 637, 165 P.

1074 (1917).

Relying on its incorrect findings of fact, the District Court further erred in

holding that, by operation of RCW 23B.06.210(2), the Board retroactively voided

the contracts between the parties herein.

Based on the foregoing, Court of Appeals should reverse the District Court

and issue Summary Judgment in favor of the Individual Defendants.

II. THE DISTICT COURT ERRED IN FINDING THERE WAS NO

AGREEMENT BETWEEN HIMC AND VERIPAY

The District Court erred in holding that no contract existed between the

parties, when in fact it is undisputed that the Memorandum of Understanding

(“MOU”) (ER-122) formed the contract between the parties. The court overlooked

its primary goal of determining the intent of the parties, which clearly manifested

an intent that the MOU was a valid contract.

The Court erroneously found that the absence of an express price for the

shares issued pursuant to the MOU was fatal to the agreement. Under the case law,

the Court should have found that silence as to price in the MOU was not fatal to

the formation of a contract.

The court should also have found that based on the extrinsic evidence, the

agreed price $0.01 per share is the only reasonable inference that can be drawn.


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The District Court also erred in finding that “It is undisputed that HIMC has

never cashed” the Individual Defendants purchase money checks for their HIMC

stock. In fact, several admissions against party interest by HIMC make clear that

the checks were cashed. Moreover, even if the checks, which were duly tendered,

were not cashed, such a finding should not have been deemed fatal to the MOU.

Finally, the District Court erroneously found that the Individual Defendants

had objected to the issuance of restricted stock and that this was fatal to the MOU.

In fact, no formal objection was ever made, and the type of security issued should

not have been deemed fatal to the MOU.

Accordingly, the Court of Appeals should reverse the District Court and

issue Summary Judgment in favor of the Individual Defendants.


APPELLANTS, BECAUSE HIMC WAIVED ANY RIGHT TO SEEK

RESCISSION OF THE MOU BY RATIFICATION

HIMC’s conduct clearly ratified the issuance of stock and the MOU, which

constitutes a waiver of any claim of rescission. Accordingly, upon de novo review,

the Court should grant summary judgment for the Individual Defendants.


APPELLANTS, BECAUSE HIMC BREACHED ITS DUTY TO

APPELLANTS BY REFUSING TO REMOVE THE RESTRICITIVE

LEGEND ON THE STOCKS


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If the Court concludes that the shares issued to the Individual Defendants

were duly paid for, then the Court must conclude that HIMC breached its duty to

the Individual Defendants by failing to provide its approval or opinion letter to

facilitate the removal of the Rule 144K restrictive legends on the Individual

Defendants’ HIMC stock certificates. Accordingly, upon de novo review, the

Court should grant summary judgment on the Individual Defendants’ Second

Counterclaim.

ARGUMENT

STANDARD OF REVIEW

The district court's grant of summary judgment on a contract claim is reviewed

de novo, see S. Cal. Painters & Allied Trade Dist. Council No. 36 v. Best Interiors,

359 F.3d 1127, 1130 (9th Cir.2004), as is its interpretation and meaning of

contract provisions, see United States v. 1.377 Acres of Land, 352 F.3d 1259, 1264

(9th Cir. 2003). See also Conrad v. Ace Property & Cas. Ins. Co., 532 F.3d 1000,

1004 (9th Cir. 2008).

STANDARD FOR GRANTING SUMMARY JUDGMENT

The standard for granting a motion for summary judgment is after viewing


17

the evidence in the light most favorable to the non-moving party, "no genuine issue

of material fact exists," and that the moving party is entitled to judgment as a

matter of law. David v. United States, 820 F.2d 1038, 1039-40 (9th Cir.1987).

I. THE ACTIONS OF HIMC’S BOARD COMPLIED WITH

RCW 23B.06.210(2).

The District Court held,

This Court has determined that no mutual and enforceable agreement for issuance of stock at an agreed upon price was entered into by the Plaintiff and the four defendants for the securities issued on or about February 11, 2005. The Defendants did not agree to the price set by the Board of Directors of HIMC Corp. under RCW 23B.06.210 (2) and (3). (ER-2)

1. HIMC’s Board Properly Authorized the Issuance of the Shares to the Individual Defendants.

The District Court incorrectly found that the Board of Directors “set” the

price for the stock and the Individual Defendants did not agree to it. However,

there was no resolution of the Board of Directors of HIMC setting the price of the

stock to be issued.

Moreover, RCW 23B.06.210(2) requires only that “Any issuance of shares

must be authorized by the board of directors.”

The District Court erred, because, in fact, RCW 23B.06.210 was fully

complied with in this case. HIMC’s Board of Directors duly authorized the


http://www.westlaw.com/Find/Default.wl?rs=dfa1.0&vr=2.0&DB=350&FindType=Y&ReferencePositionType=S&SerialNum=1987078966&ReferencePosition=1040

http://www.westlaw.com/Find/Default.wl?rs=dfa1.0&vr=2.0&DB=350&FindType=Y&ReferencePositionType=S&SerialNum=1987078966&ReferencePosition=1040

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issuance of the stock that went to the Individual Defendants. The specific

resolution of HIMC’s Board of Directors states:

Resolved, That the Board of Directors of HIMC Corporation deem it in the best interest of the Corporation, to issue 689,228 share of HIMC restricted stock to the individuals mentioned above (referring to Prem Ramchandani, Shai Bar Lavi, Avraham Ovadia and Avi Sivan).

(ER-124)

This resolution was contained in the minutes of a meeting of the Board of

Directors on February 9, 2005, titled “Special Meeting of the Board of Directors,”

(ER-124).

There was, in fact, no resolution of the Board of Directors of HIMC setting

the price of the stock to be issued. The minutes of the Board’s meeting only report

a discussion of contract terms. However, this portion of the minutes was only a

recording of items that were discussed at the “Special Meeting.” There was no

resolution as to price of the shares. The actual resolution portion of the document

is clear and simple, the Board authorized the issuance of 689,228 share of HIMC

restricted stock to the defendants, and that is all.

Based on the foregoing, it cannot be said that the requirements of RCW

23B.06.210 were not satisfied. Issuance of shares were authorized by the board

of directors. Nor can it be held that the Binding LOI is not a contract because it


19

stated a price that was contrary to a price subsequently discussed at a meeting of

the Board of Directors.

2. The District Court Enlarged the Effect of RCW 23B.06.210

The District Court improperly enlarges the requirements of RCW

23B.06.210(2). The law only states, “Any issuance of shares must be authorized

by the board of directors.” Nowhere does RCW 23B.06.210 require that a

contract for the issuance of stock, duly entered into by a corporation, subsequently

becomes void, if the issuing corporation’s Board of Directors “sets” the price at a

different level.

The BLOI, entered into on December 5, 2005 was a valid contract entered

into by the parties and it stated the price for the sale of securities to the Individual

Defendants. The requirement under RCW 23B.06.210 that the Board authorize

issuance of shares, does not empower the Board of Directors to retroactively void

the contract.

The District Court’s expanded interpretation of RCW 23B.06.210(2), if

adopted as law here would lead to absurd and unjust results. The District Court’s

interpretation of RCW 23B.06.210(2) would require the Court of Appeals to hold

that based on RCW 23B.06.210, a unilateral resolution of a Board of Directors,

behind closed doors and after the fact, could vitiate the contract rights of a third

party. Under the District Court’s reading of RCW 23B.06.210, a corporation could


20

issue stock pursuant to a contract with a service provider, and two years later

demand return of the stock because the Board of Directors, unknown to the service

provider, had resolved to reject certain terms of the service provider’s contract. In

fact, that is what the District Court has done in this case.

The Washington legislature wisely chose not to create such a regime, by not

confusing the Board’s specific power to authorize the issuance of stock with the

corporation’s more general power to enter into contract.

It is possible that HIMC’s CEO, Aaron McCann entered into the BLOI and

MOU on behalf of HIMC, while the corporation’s board was misinformed as to

these contracts. Perhaps this is why Mr. McCann left the employ of HIMC in June

2005, shortly after the events in this case. However, malfeasance by Mr. McCann

in connection to his Board of Directors is an internal corporate issue, which does

not impact on the Individual Defendants’ contract rights two years after-the-fact.

The Washington Business Corporation Act (RCW 23B.06.210) was fully

complied with in this transaction, and under Washington law stock once issued

carries the presumption that it is paid for. Murphy v. Panton, 96 Wash. 637, 165 P.

1074 (1917).

The facts are that the defendants had a contract to receive stock. They paid

for the stock in accordance with the contract. The Board of Directors authorized

issuance of the stock, and the corporation issued the stock. Based on the


21

foregoing, District Court should be revered and the Court of Appeals should issue

Summary Judgment in favor of the Individual Defendants.

II. THE DISTICT COURT ERRED IN FINDING THERE WAS NO

AGREEMENT BETWEEN HIMC AND VERIPAY.

A. It is Undisputed that the MOU is a Contract Between HIMC and

Veripay.

The District Court granted summary judgment in favor of the HIMC by

holding that there was no agreement between HIMC and Veripay. The District

Court’s finding is spectacularly wrong.

When interpreting a contract, the court's primary goal is to determine the

intent of the parties. U.S. Life Credit Life Ins. Co. v. Williams, 129 Wn.2d 565,

569, 919 P.2d 594, aff'd, 129 Wn.2d 565 (1996); Eurick v. Pemco Ins. Co., 108

Wash.2d 338, 340, 738 P.2d 251 (1987). Here, it is undisputed that the MOU

formed an agreement between HIMC and Veripay. Accordingly, any inquiry by

the Court into the question of contract formation is cut-off. Where, as here, the

parties agree that a specific written agreement formed a contract between them,

there can be no clearer objective manifestation of the parties’ intent to have formed

a contract. In Reynolds Homes, Inc. v. Kondo, 2001 WL 1632544, 2 (Wash.App.

Div. 2) (Wash.App. Div. 2, 2001), the court found that it was “undisputed” that a

certain written agreement was a contract. Accordingly, the court directed its

inquiry to interpreting the contract. The court observed that “Determining a


22

contract term's meaning is usually a factual question resolved by examining the

objective manifestations of the parties' intent.”

In addition to the fact that the parties do not dispute that the MOU was a

contract, the evidence shows that the parties conduct manifests their intent that the

MOU was a contract. Upon the execution of the MOU the following conduct of

the parties objectively manifests the mutual intent of the parties that the MOU be a

contract:

1. On February 9, 2005, Veripay and HIMC entered into the Operating

Agreement to govern their relationship created as a result of the MOU;

2. On February 11, 2005, HIMC issued 689,226 shares to the Individual

Defendants, consistent with the provision in the MOU that 689,226

would be issued upon execution of the MOU;

3. During the months of March and April 2005, the Individual Defendants,

working with HIMC, attempted to bring new business to HIMC, which

included attending with HIMC’s executives the Electronic Retailers

Association convention in Florida. (ER-96)

4. On May 5, 2005, HIMC entered into a third agreement with Veripay, the

Addition to MOU (ER-101), which provided for additional forms of

compensation to Veripay and, stated, “This agreement adds to and does


23

not in any way reduce the grant of shares specified in the Feb 9, 2005

MOU.” (ER-101)

Based on the foregoing, it was error for the District Court to substitute its

opinion for the undisputed, express, mutual intent of the parties to have formed a

contract by executing an agreement, to wit, the MOU.

B. The District Court’s Grounds for Holding the MOU Void are

Erroneous.

The District Court summarized its basis for finding no contract between

HIMC and Veripay as follows:

Aaron McCann for HIMC and Shai Bar-Lavi, first for Pasa and then for Veripay, tried to set forth a plan for a joint venture that would be remunerative for HIMC, Veripay, and Veripay’s four designees, the Individual Defendants. The documents that they executed did not result in formation of contracts because there was never acceptance of their terms by both sides. The documents themselves are forward looking and the fact that terms changed as the parties went along, indicates the inchoate nature of the parties’ idea despite the effort to inculcate a sense of gravity in the documents by labeling them “binding.” HIMC and Pasa and Veripay may each have been earnest in working toward a joint venture, but they did not execute a document that contained the important terms of an agreement, that was accepted by each party, at any point after it might have been said that the preliminary groundwork was laid for the joint venture to proceed. There was no agreement between HIMC and

Pasa or Veripay upon important terms — price for the stock or the nature of the stock to be issued to the four Veripay designees. There was merely a tender of checks


24

reflecting a price per share, which HIMC never accepted; and there was an issuance of HIMC restricted stock, which is not what the Individual Defendants contend they bargained for. These parties never got beyond the “offer” stage of contract formation. (Emphasis supplied)(ER-15-16).

The Individual Defendants will show below that the District Court was

wrong as to each of the three issues that the District Court found dispositive in

reaching its decision, (i) the contract term of share price, (ii) the tender and

acceptance of checks, and (iii) the issuance of restricted stock.

1. The Absence of a Stated Price Per Share in the MOU was Not

Fatal to Formation of a Contract.

As noted above the District Court ruled that the MOU did not form a

contract between the parties because the court found there was no agreement as to

the contract of term of price per share to be paid by the Individual Defendants for

HIMC’s stock.

Zalud v. Boltz, 2000 WL 1346678 (Wash.App. Div. 1) is directly on point

with this case. The case involved a dispute between the parties to a venture known

as KARBZ, Inc. “In a special verdict, a jury found Boltz breached a promise to

transfer 50 percent of the shares of stock in KARBZ, Inc. to Zalud, and that total

fair cash market value of KARBZ, Inc. as of the date of the breach was $900,000.

The jury awarded Zalud $450,000 in damages.” Id., at 2. On the appeal, “Boltz

argues the trial court erred in denying his motion for judgment as a matter of law


25

because he and Zalud failed to reach agreement on all essential terms, specifically

on the price of the KARBZ stock purportedly to be transferred, and therefore, no

legally enforceable contract existed.” Id., at 2. The Washington Appellate

Division held, “Here, the trial record is replete with evidence that Boltz and Zalud

agreed Boltz would transfer 50 percent of the outstanding KARBZ shares to Zalud.

That Boltz and Zalud had not agreed on a share price is not fatal to the formation

of a contract.” Id., at 3.

Similarly, in the instant case, the MOU makes clear that HIMC would

transfer 689,226 shares of HIMC stock to the Individual Defendants upon

execution of the MOU. The fact that the MOU was silent as to the share price is

not fatal to the formation of a contract between HIMC and Veripay.

2. The District Court Should have Found that the Share Price of $0.01 is the Only Reasonable Inference that can be Drawn from the Evidence.

Rather than find that the MOU was not a contract, the District Court should

have sought to determine the intent of the parties as to the sale price of the HIMC

stock issued to the Individual Defendants.

To aid in ascertaining the parties' intent in a contract, the Washington courts

have adopted the ‘context rule’ in Berg v. Hudesman, 115 Wn.2d 657, 667, 801

P.2d 222 (1990); see also Diaz v. Nat'l Car Rental Sys., Inc. 143 Wn.2d 57, 66, 17


26

P.3d 603, rev'd, 143 Wn.2d 57 (2001). Under that rule, extrinsic evidence is

admissible to assist the court in ascertaining the parties' intent and in interpreting

the contract. U.S. Life Credit Life Ins. Co. v. Williams, supra, 129 Wn.2d 565, 569,

919 P.2d 594, aff'd, 129 Wn.2d 565 (1996). Such evidence is admissible regardless

of whether the contract language is deemed ambiguous. U.S. Life Credit Life Ins.

Co., 129 Wn.2d at 569.

Here, the Individual Defendants contend that the agreed price for HIMC’s

stock was $0.01 per share, and, indeed, based on the extrinsic evidence, this is the

only reasonable inference that can be drawn. The undisputed facts are, as found by

the District Court, are as follows:

1. On or about December 13, 2004, HIMC and an entity owned by the

Individual Defendants, Pasa Inc., entered into a “Binding Letter of

Intent,” which set forth the terms of a joint venture between HIMC and a

new entity, to be called Veripay. Under the Binding Letter of Intent

(“BLOI”), Veripay would provide customers from the direct response

marketing industry for HIMC Corp.’s credit card transaction processing

services. The Binding Letter of Intent provided that HIMC would pay

689,226 shares of HIMC’s common stock, to be issued “upfront” at the

price of $0.01 per share to four individuals identified by Pasa, i.e., the

Individual Defendants.


27

2. On December 15 and 16, 2004, the Individual Defendants issued four

checks, in the amount of $1,723.07 each, to HIMC Corporation. These

checks total $6,892.28 and reflect the $0.01 share price in the Binding

Letter of Intent.

3. On February 9, 2005, the HIMC and Veripay executed their formal

agreement, as contemplated by the BLOI, titled “Memorandum of

Understanding,” (MOU) which created a direct contractual relationship

between HIMC and Veripay. The MOU provided, “The transfer of

shares shall be done on the following schedule. 1. The current

shareholder or (or its designee) of VERIPAY shall receive 689,226 upon

execution of this agreement.” (Emphasis supplied.)

4. On February 11, 2005, two days after executing the MOU, HIMC issued

the 689,226 shares of common stock to the Individual Defendants, which

is now the subject of the instant dispute.

Two questions must be asked regarding the MOU. First: Why didn’t the

parties include in that agreement a price per share for the 689,226 to be issued to

the Individual Defendants? Second: Why did the MOU say the designees “shall

receive 689,226 upon execution of this agreement,” rather than say the shares

shall be issued upon receipt of payment by HIMC?

There can be only one answer to both questions. First, the price of the


28

shares wasn’t stated in the MOU, because it had already been paid by the

Individual Defendants, in the form of the $6,892.28 in checks delivered to HIMC

on December 15 and 16, 2004. Second, the MOU provided for issuance of shares

to the Individual Defendants upon execution of the agreement, again, because the

purchase price for the shares had already been paid in the form of the $6,892.28 in

checks paid delivered to HIMC on December 15 and 16, 2004.

HIMC argued that the price for the HIMC stock issued to the Individual

Defendants was supposed to have been $0.125 per share – not $0.01 per share.

However, the District Court found that the evidence did not support a finding of

mutual intent as to the price of $0.125 per share. (See the Court’s discussion, ER-

12-14.) The Court found,

Moreover, there is nothing to indicate that Veripay or the Individual Defendants accepted this new price term. There is only the request from ‘Shai’ as to the “amount we each need to send. There is nothing to reflect that this is acceptance of the new price term by Shai Bar-Lavi, nor is there anything that purports to give Shai the power to bind the other Individual Defendants to the new price term. (ER-14, lines 6-9.)

Thus, the only reasonable inference that can be drawn from the evidence is

that under the MOU, the agreed price for HIMC’s stock was $0.01 per share.

In Washington, interpreting a contract provision is deemed a question of law

where it depends on the use of extrinsic evidence and only one reasonable

inference can be drawn from the extrinsic evidence. Tanner Elec. Co-op. v. Puget


29

Sound Power & Light Co., 128 Wn.2d 656, 674, 911 P .2d 1301 (1996). Thus,

when a court uses extrinsic evidence to interpret a contract, summary judgment is

appropriate if only one reasonable meaning can be drawn from the extrinsic

evidence. Scott Galvanizing, Inc. v. Northwest EnviroServices, Inc., 120 Wn.2d

573, 582, 844 P.2d 428, rev'd, 120 Wn.2d 1002 (1993). This is because that

meaning necessarily reflects the parties' intent. Interstate Prod. Credit Ass'n v.

MacHugh, 90 Wn.App. 650, 654, 953 P.2d 812, review denied, 136 Wn.2d 1021,

969 P.2d 1063 (1998). See Reynolds Homes, Inc. v. Kondo, supra, 2001 WL

1632544, 2.

Accordingly, it is respectfully requested that upon its de novo review of this

action, that the Court of Appeals will reverse the District Court’s decision and

grant summary judgment in favor of the Individual Defendants.

3. The District Court Erred in Holding that the MOU was Void Because HIMC, Allegedly, Failed to Cash the Individual Defendants’ Checks for the Purchase of the Shares.

In the Order appealed from the District Court also found that the MOU was

not a contract because regarding the Individual Defendants’ tender of four checks

(totaling $6,892.28), which reflected the $0.01 share price, the District Court

found, “It is undisputed that HIMC has never cashed these checks.” (ER-10, lines

18-19) The District Court held, “There was merely a tender of checks reflecting a


30

price per share, which HIMC never accepted.” (ER-15, lines 24-25) Thus, the

District Court’s held that the MOU was not a contract because HIMC never cashed

the Individual Defendants’ checks for the purchase of the shares.

On this point the District Court was wrong on both the facts and the law.

First it is not undisputed that HIMC has never cashed the checks. HIMC only

began to argue this point when it became clear from discovery in this case that the

Individual Defendants had not retained copies of their cancelled checks, and could

not recall if the checks had, in fact been cashed. However, previously HIMC

clearly admitted to cashing the checks, as follows:

In the Complaint HIMC alleges,

24. At no time since February 11, 2005 has any of the Defendants, singularly or collectively, paid HIMC any portion of the additional $79,261.22 needed to complete the purchase of the 687,228 shares of stock at $0.1 25 per share issued to them on or about February 11, 2005. (ER-37)

Thus, the Complaint does not allege that the $6,892.28 amount was not paid,

only the additional amount HIMC claims was due.

Furthermore the Complaint alleges,

33. On July 5, 2007 HIMC Corp. issued four checks in the amount of $1,982.60 each to Defendants Prem Ramchandani, Avi Sivan, Anna Sachs Bar Lavi, and Avraham Ovaidia as the return of the money paid by

them on December 16, 2004 together with interest accrued since December 16, 2005. True and Correct


31

copies of the July 5, 2007 letters are attached hereto as Exhibits 12, 13, 14, and 15. (Emphasis supplied) (ER-39)

Indeed, Exhibits 12, 13, 14, and 15 to the Complaint, referred to above

evidence HIMC’s attempts to “refund” the money paid for the HIMC stock in

dispute herein. (ER-65-76).

The letter from HIMC’s counsel to Appellant Avi Sivan’s counsel, clearly

acknowledges HIMC’s original acceptance of the Appellant’s tender of payment.

That letter states,

In light of the non-performance by Mr. Sivan and other members of the Veripay group coupled with their failure to fully pay for the stock, HIMC Corp. has decided to reimburse your client and the others for the amounts paid and to demand return of the stock certificates. Accordingly please find enclosed a check for $1,982.62 made payable to Avi Sivan. This amount includes a return of principal ($1,723.07) plus interest accrued through July 5, 2007 ($259.55). (Emphasis supplied.) (ER-68)

Finally, it should be noted, that at no place in the record is there evidence

that HIMC ever stated to the Individual Defendants, until the current dispute arose

two years after the fact, that HIMC was rejecting the Individual Defendants’ tender

of the $0.01 per share purchase price for their shares of HIMC stock.

Thus, not only is it not undisputed that HIMC never accepted the tender of

the Individual Defendants’ payments for their HIMC stock, but in fact, the

Complaint contains party admissions against interest that HIMC accepted the

tender and cashed the checks.


32

Furthermore, as a matter of law, even if the checks were not cashed by

HIMC, it would not impact on the efficacy of the MOU as a contract. The District

Court cannot hold, as it did, that because HIMC allegedly did not cash the

Individual Defendants’ checks the MOU is void as a contract. The District Court

offered no law to support this holding, and indeed no such law exists.

In fact, the law in Washington is to the contrary. In U.S. Bank National

Association v. Whitney, 119 Wash.App. 339, 81 P.3d 135 (2003) the Court of

Appeals held that in Washington the Uniform Commercial Code provides for

accord and satisfaction of negotiable instruments in accordance with common law

principles. RCW 62A.3-311. Accordingly the Court held, “When the debtor

tenders a check in full payment of a debt, acceptance by the creditor creates a

settlement contract binding on both parties.” (Emphasis added.) U.S. Bank

National Association,, at 142, citing Oregon Mut. Ins. Co. v. Barton, 109

Wash.App. 405, 413, 36 P.3d 1065 (2001), review denied,146 Wash.2d 1014, 51

P.3d 88 (2002); and Hynes v. Hynes, 28 Wash.2d 660, 672, 184 P.2d 68 (1947).

Thus, HIMC’s alleged failure to cash the Individual Defendants’ checks is

not a basis for the District Court holding that the MOU is not a valid contract.


33

4. The District Court Erred in Holding that the MOU was Void on the Grounds that HIMC Issued Restricted Stock Rather than Free Trading Stock.

The District Court found that “although the Individual Defendants have

restricted shares of HIMC stock, they object contending that they should have

shares that may be freely traded in the market.” (ER-14) Accordingly, the District

Court held,

There was merely a tender of checks reflecting a price per share, which HIMC never accepted; and there was an

issuance of HIMC restricted stock, which is not what the Individual Defendants contend they bargained for. These parties never got beyond the “offer” stage of contract formation. (Emphasis supplied) (ER-15-16)

In fact, the Individual Defendants did not contend that they bargained for

free trading stock, rather than restricted stock. Such an objection was never made

by the Individual Defendants in any document, letter or pleading in this case. The

only time the issue of free trading share versus restricted shares came up, was in

the deposition of Appellant Avi Sivan, who stated that HIMC had promised free

trading stock, but issued restricted stock, and that as a result he made some phone

calls to complain. Appellant Sivan, also testified that he continued to perform his

services for HIMC, pursuant to the MOU, notwithstanding the issuance of

restricted stock. (ER- 220-221)

Appellant Sivan’s displeasure with being issued restricted stock is not a

basis for the District Court to find that the MOU was void as a contract,


34

particularly since, none of the Individual Defendants considered it an issue that

voided the contract.

Mutual assent is founded upon “an objective manifestation of mutual intent

on the essential terms of the promise.” Swanson v. Holmquist, 13 Wn.App. 939,

942, 539 P.2d 104 (1975) (quoting Peoples Mortgage Co. v. Vista View Builders, 6

Wn.App. 744, 747-48, 496 P.2d 354 (1972)). The unexpressed subjective intent of

the parties is irrelevant. Multicare Med. Ctr. v. Department of Soc. And Health

Serv., 114 Wn.2d 572, 587, 790 P.2d 124 (1990).

Here, the MOU constitutes “an objective manifestation of mutual intent on

the essential terms of the promise.” The fact that Appellant Sivan, in his testimony

and in some vaguely described telephone calls expressed dissatisfaction with being

issued restricted shares, rather than free trading shares of HIMC stock, is nothing

more than the unexpressed subjective intent of one of the parties and is irrelevant.

The fact is that Sivan also testified that he continued his performance under the

MOU, notwithstanding his displeasure. The Court erred in finding that the type of

shares issued constitutes grounds to hold that the MOU was not a contract.

Based on all of the foregoing, the Court of Appeals should reverse the

District Court’s Summary Judgment Order.


35


APPELLANTS, BECAUSE HIMC WAIVED ANY RIGHT TO SEEK

RESCISSION OF THE MOU BY RATIFICATION.

Under Washington law a ratification of a voidable contract waives the right

to rescind the contract. In Poweroil Manufacturing Company, Inc., v. Carstensen,

69 Wash.2d 673, 419 P.2d 793 (1966), a corporation repaid of loans from its

directors with shipments of oil. Subsequently, the controlling stockholder took

over management of the corporation and sought to rescind the transaction. The

court held that the right to rescind the transaction was waived by the Corporation’s

conduct, which the Court found constituted ratification. The Supreme Court of

Washington held,

If the corporation affirmed and acted in furtherance of the contract, it ratified it and, thus, became bound by it. The right to rescind a voidable contract may be lost where there has been a waiver or ratification. Ratification means that one affirms that which he had a right to repudiate. Therefore, once ratification has been clearly established, we need not look further. And this is the rule even though the ratification be implied from the circumstances rather than expressly declared.

Here, HIMC, through its conduct ratified the MOU of February 9, 2005,

thereby waiving any right to seek rescission in either the second or third causes of

action in HIMC’s Complaint. Ratification of the MOU occurred on May 5, 2005,

when HIMC entered into an agreement, titled “ADDITION TO MEMORANDUM

OF UNDERSTANDING DATED FEB 9, 2005.” (The “Addition to MOU”)

The Addition to MOU provided for additional forms of compensation to


36

Veripay. Moreover, with regard to HIMC’s prior issuance of stock to the

Individual Defendants, the Addition to MOU stated, “This agreement adds to and

does not in any way reduce the grant of shares specified in the Feb 9, 2005

MOU.” (Emphasis supplied.)

Nowhere in the Addition to MOU does it say that the grant of shares from

the February 9, 2005 MOU was revoked or that an “additional $79,261.22 was

needed to make the per share sale price equal to $0.1 25,” as the Complaint alleges

(quoting the Complaint, ¶39.)

Thus, the Addition to MOU affirmed the MOU and thereby ratified the

earlier agreement along with the issuance of stock pursuant to thereto.

Furthermore, HIMC ratified the MOU and the issuance of stock to the

Individual Defendants through its failure to take action. In finding ratification, the

Court in Poweroil, supra, noted that “failure to take steps to vitiate or rescind the

transaction after assuming management, control and direction of the company as

president, majority stockholder, and member of the board of directors, amounted to

an affirmance of and participation in the transaction constituting a ratification

thereof by the corporation.” (See also Hoke v. Stevens-Norton, Inc., 60 Wash.2d

775, 375 P.2d 743 (1962), (an unreasonable delay in manifesting intent to rescind,

give rise to a permissible inference of intent to waive the right of rescission.) citing

2 Restatement, Contracts §§ 483, 484, pp. 921, 924.)


http://www.westlaw.com/Find/Default.wl?rs=dfa1.0&vr=2.0&DB=0101592&FindType=Y&SerialNum=0289906647


37

Here, HIMC’s president Aaron McCann was terminated from his

employment with HIMC in June 2005. However, HIMC’s new management did

nothing to rescind the contracts with Veripay and seek revocation of the stock

issued to the Individual Defendants until the commencement of this suit in July

2007, more than two years later! This two-year delay in itself constitutes

ratification. Furthermore, HIMC’s delay in seeking to vitiate must be viewed in

conjunction with the HIMC’s repeated affirmative conduct, as follows:

(i) Agreeing to the $0.01 per share price stated in the December 13, 2004

Binding Letter of Intent;

(ii) Accepting tender of the Individual Defendants’ payment of the $0.01

per share price without objection on December 6, 2004;

(iii) Agreeing to issue the 689,226 share without conditions for the price in

the February 9, 2005 MOU;

(iv) Issuing the stock on February 15, 2005, without requiring further

payment; and

(v) Affirming the February 9, 2005 MOU and the prior issuance of stock,

in the May 5, 2005 Addition to the MOU.

These fact support a determination that HIMC ratified the stock issuance to

the Individual Defendants and the MOU. In Storseth v. Pacific Coast Investment

Co., 42 F.3d 1402, 1994 WL 650000 (9th Cir. 1994) the Court of Appeals quoted


38

from Whitcomb v. Sager, 144 P. 922 (Wash.1914), wherein the Washington

Supreme Court stated:

When a party, with knowledge of facts entitling him to rescission of a contract or conveyance, afterward, without fraud or duress, ratifies the same, he has no claim to the relief of cancellation. An express ratification is not required ... any acts of recognition of the contract as subsisting or any conduct inconsistent with an intention of avoiding it have the effect of an election to affirm.

Id. at 925 (citation omitted).

Based on the foregoing the Individual Defendants are entitled to summary

judgment against HIMC on HIMC’s claims for rescission.


APPELLANTS, BECAUSE HIMC BREACHED ITS DUTY TO

APPELLANTS BY REFUSING TO REMOVE THE RESTRICITIVE

LEGEND ON THE STOCKS.

The stock certificate representing the shares HIMC shares transferred to the

Individual Defendants contained a standard legend restricting the transfer of such

shares, other than pursuant to an exemption under Rule 144 of the Securities Act of

1933 (“Securities Act”), 17 C.F.R. § 230.144.

The Individual Defendants’ Second Counterclaim contends that HIMC

breached its duty to the Individual Defendants by failing to provide its approval or

opinion letter to facilitate the removal of the restrictive legends on the Individual

Defendants’ HIMC stock certificates.




39

The Individual Defendants have pled in their Second Counterclaim that their

requested sale of the restricted shares issued to them after the one-year holding

period complied with the requirement of SEC Rule 144, and that HIMC was in

derogation of its clear legal duty, under RCW 62A.8-401, Section 8-401 of the

Uniform Commercial Code by refusing to supply an opinion letter to its transfer

agent to allow the Individual Defendants to sell those shares.

Thus, the Individual Defendants contend that if the Court concludes that the

shares were duly paid for, then the Court must conclude HIMC was in breach of its

duty to provide the necessary opinion letter. See Meringolo v. Power2ship Inc.,

2003 WL 21750009 (S.D.N.Y.) at *5.

As regards the Individual Defendants’ assertion of the necessity of the

HIMC’s opinion letter, federal courts have in prior cases taken notice of a

comment by the SEC on Rule 144, which states:

Even if you have met the conditions of Rule 144, you can't sell your restricted securities to the public until you've gotten the legend removed from the certificate.

Only a transfer agent can remove a restrictive legend. But the transfer agent won't remove the legend unless you've obtained the consent of the issuer—usually in the form of an opinion letter from the issuer's counsel—that the restricted legend can be removed. Unless this happens, the transfer agent doesn't have the authority to remove the legend and execute the trade in the marketplace.

To begin the process, an investor should contact the company that issued the securities, or the transfer agent


40

of the company's securities, to ask about the procedures for removing a legend. Since removing the legend can be a complicated process, if you're considering buying or selling a restricted security, it would be wise for you to consult an attorney who specializes in securities law.

What If a Dispute Arises Over Whether I Can Remove the Legend?

If a dispute arises about whether a restricted legend can be removed, the SEC will not intervene. The removal of a legend is a matter solely in the discretion of the issuer of the securities. State law, not federal law, covers disputes about the removal of legends. Thus, the SEC will not take action in any decision or dispute about removing a restrictive legend.

U.S. Securities and Exchange Commission, “Rule 144: Selling Restricted

and Control Securities,” http://www.sec.gov/investor/pubs/rule144.htm (last

visited November, 7 2008); see Campbell v. Liberty Transfer Co, 2006 WL

3751529 at *15 (E.D.N.Y.); and McKim v. Newmarket Technology, Inc., 2008 WL

754739 at *8 (W.D.Ky.).

Based on the foregoing, the Court of Appeals should grant summary

judgment in favor of the Individual Defendants on their Second Counterclaim and

should remand for an inquest as to damages by determining the price of HIMC’s

common stock at the time that the Individual Defendants (Defendants-Appellants)

requested HIMC Corp. to facilitate the removal of the restrictions on the HIMC

Corp. stock issued to them.


41

CONCLUSION

Based on all of the foregoing, Defendants-Appellants, Prem Ramchandani,

Avi Sivan, Avraham Ovadia, Anna S. Bar-Lavi and Shai Bar-Lavi respectfully

request that the Court of Appeals (i) reverse the District Court’s Summary

Judgment Order and (ii) grant summary judgment in favor of the Defendants-

Appellants on the Complaint and on the Defendants-Appellants’ Second

Counterclaim, and (iii) remand for an inquest only to determine the price of

HIMC’s common stock at the time that the Defendants-Appellants requested

HIMC Corp. to facilitate the removal of the restrictions on the HIMC Corp. stock

issued to them, solely for the purpose of determining the damages of the

Defendants-Appellants on their Second Counterclaim, and such other and further

relief as the Court may deem just and appropriate.

Dated: September 15, 2009 New York, NY

Respectfully submitted, The Mortner Law Office, P.C.

__________s/__________________ By: Moshe Mortner, Esq.

Attorney for Defendants- Appellants (Prem, Ramchandani Avi Sivan, Avraham Ovadia, Anna S. Bar-Lavi and Shai Bar-Lavi) 130 William Street, 6th Floor

New York, NY 10038 Tel. 646-839-8530


42

STATEMENT OF RELATED CASES

There are no known related cases pending in this court.

Dated: September 15, 2009 New York, New York

________________s/_____________ Moshe Mortner


43

CERTIFICATE OF COMPLIANCE

WITH TYPE-VOLUME LIMITATION, TYPEFACE

REQUIREMENTS AND TYPE STYLE REQUIREMENTS

1. I certify that this brief complies with the type-volume limitation of

Fed.R.App.P.32(a)(7)(B) because:

This brief contains 8,336 words, excluding the parts of the brief exempted by Fed.R.App.32(a)(7)(B)(iii).

2. This brief complies with the typeface requirements of

Fed.R.App.P.32(a)(5) and the type style requirements of Fed.R.App.P32(a)(6) because:

This brief has been prepared in proportionally space typeface using Microsoft Office Word 2007, in Times New Roman, font size 14.

Dated: September 15, 2009 New York, New York

__________________s/____________ Moshe Mortner


CERTIFICATE OF FILING AND SERVICE I hereby certify that on this 16th day of September, 2009, I caused this Brief

of Appellants to be filed electronically with the Clerk of the Court using the

CM/ECF System, which will send notice of such filing to the following registered

CM/ECF users:

David Adler LAW OFFICE OF DAVID ADLER 520 Pike Street, Unit 1440 Seattle, Washington 98101 (206) 343-5991

Counsel for Appellee I further certify that on this 16th day of September, 2009, I caused the

required copies of the Record Excerpts to be filed with the Clerk of the Court and a

copy of the Record Excerpts to be served, upon counsel for the Appellee, at the

above listed address, both via UPS Next Day Air.

__________________s/____________ Moshe Mortner


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