Court Maintains Toptal Not in Breach of NPA Or Note by Refusing to Convert the Note to Equityby@legalpdf
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Court Maintains Toptal Not in Breach of NPA Or Note by Refusing to Convert the Note to Equity

by Legal PDFMarch 1st, 2024
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Explore the intricacies of contractual interpretation and breach claims as exemplified by Toptal's actions regarding the conversion of notes to equity. Gain insights into legal precedents, California law, and the resolution of contractual ambiguities. TLDR: Toptal's refusal to convert Mr. Grosz's note to equity does not constitute breach of contract, as determined by the court's interpretation of contractual provisions, including Section 2.2(b) and Section 2.2(c) of the NPA. The court highlights the absence of perpetual options and the unambiguous language of the contract, resolving any ambiguities against Mr. Grosz as the drafter.
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TOPTAL, LLC v. DENIS GROSZ Court Filing, retrieved on February 26, 2024, is part of HackerNoon’s Legal PDF Series. You can jump to any part in this filing here. This part is 4 of 7.

A. Toptal Did Not Breach the NPA Or Note by Refusing to Convert the Note to Equity In 2015

The Court also finds that Mr. Grosz's theory that Toptal breached by failing to perform in

response to Mr. Grosz's election to convert his Note to equity in 2015 cannot withstand summary judgment.

First, the Court finds that Section 2.2(b) of the NPA does not grant Mr. Grosz a perpetual option to elect to convert his Note to equity. See Shaver v. Clacton, 26 Cal. App. 4th 568, 578 (1994) (Crosby, J., concurring) (“options in perpetuity [are] about as common as polar bear sightings in Death Valley”). Section 2.2(b) states: “At any time on or after the fifteenth (15th) day prior to the Maturity Date, if the Next Equity Financing has not occurred by that time, the Note, at Lender's election by written notice to the Company, will be converted ....” The plain meaning of this language creates a start date for the election period commencing “At any time on or after the fifteenth (15t') day prior to the Maturity Date” and ending on the Maturity Date. Construing that provision to give Mr. Grosz a 15-day window ending on the Maturity Date during which he must decide whether to elect to convert is consistent with other contractual provisions, California law, and the meaning of the term “Maturity Date.” See Cal. Civ. Code § 1641 (“The whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other.”).

The Court recognizes that unless a contract “unequivocally demonstrate[s] the parties’ intent” to grant a perpetual option, a contract should not be read to bind the parties forever. See Ginsberg v. Gamson, 205 Cal. App. 4th 873, 893 (2012). There is no such “unequivocal” language here. Cf. Armstrong World Indus., Inc. v. Aetna Cas. & Sur. Co., 45 Cal. App. 4th 1, 79 (1996) (finding that the word “hereafter” “cannot reasonably be read as referring to any time in the indefinite future”); McManigal v. Hiatt, 240 Iowa 541, 546 (1949) (phrases like “hereafter” “indicate[] direction in time rather than duration” and are “not [] synonym[s] for ‘forever”’). 28

The Court finds that Mr. Grosz has presented no record evidence showing that the parties intended for this provision of the contract to grant him a conversion remedy that extended beyond the Maturity Date. See Applied Equip. Corp. v. Litton Saudia Arabia Ltd., 7 Cal. 4th 503, 517 (1994) (“it is appropriate to enforce only such obligations as each party voluntarily assumed”); Nissho of Cal., Inc. v. Bond Safeguard Ins. Co., 220 Cal. App. 4th 974, 983 (2013) (in interpreting contracts, courts “seek to discover the intent of the parties, primarily by examining the words the parties have chosen”). The Court is unaware of any logical reason why Mr. Grosz's option to elect conversion would open 15 days prior to the Maturity Date if it did not close on the Maturity Date.

It is undisputed that Mr. Grosz did not make an election to convert his Note prior to the Maturity Date. Therefore, Toptal's refusal to perform in response to Mr. Grosz's November 24, 2015, or 2020 election (made after both parties filed lawsuits against each other) was not a breach.

Second, while the Coun need not reach this issue given that Mr. Grosz made his election well outside of the time to do so, the Court finds that the NPA does not grant Mr. Grosz the ability to force Toptal to change its corporate form in response to his election. Mr. Grosz only points to Section 2.2(c), a one-sentence provision that states: “For clarification, the Company agrees to complete a Company Conversion prior to any conversion of the Note pursuant to this Section 2.2.” Nothing in the plain language of Section 2.2(c) provides Mr. Grosz with the power to decide when and if Toptal will change its corporate form and complete a Company Conversion. Section 2.2(c) itself does not refer to Section 2.2(b) but instead contains a reference to all of Section 2.2, a reference that encompasses the separate “conversion trigger” of a Next Equity Financing contained in Section 2.2(a)—thereby indicating that Section 2.2(b) does not operate as, and was not inserted to be, an enabling provision of Section 2.2(b) but rather a clarifying, sequencing provision. Moreover, the Court finds that it would be unreasonable to interpret the agreement in a way that would allow a lender of matured debt the perpetual right to force a company to undertake a complete corporate restructuring. See Cal. Civ. Code § 1639 (“When a contract is reduced to writing, the intention of the parties is to be ascertained from the writing alone, if possible..... ”); Cal. Civ. Code § 1643 (“A contract must receive such an interpretation as will make it ...reasonable”). Contracts must be read so as not to produced “absurd results.” Am. Multi-cinema, Inc. v. Manteca Lifestyle Ctr., LLC, 2023 WL 3775333, at *14 (E.D. Cal. June 2, 2023). The Court finds that Mr. Grosz's interpretation that he, as a single lender with a convertible promissory note, could force Toptal to undergo a complete corporate restructuring at his whim and continuing perpetually into the future would produce an absurd result. See Shrem v. Sw. Airlines Co., 2017 WL 1478624, at *2 (N.D. Cal. Apr. 25, 2017), aff'd, 747 F. Appx. 629 (9th Cir. 2019) (dismissing case where plaintiffs “interpretation would contradict the plain language of the contract” and “subject [d]efendant to potentially limitless, unspecified obligations”).

Section 2.2(c) does not say anything about granting Mr. Grosz the power to force Toptal to change its corporate form in order to effectuate any election he makes. The Court agrees with Toptal that if the parties intended to endow Mr. Grosz with such power, the contract would have clearly so stated. It does not. The parties agree that Mr. Grosz inserted Sections 2.2(b) and 2.2(c) into the NPA. Therefore, any ambiguities arising out of these sections must be resolved against him. Mayhew v. Benninghoff, 53 Cal. App. 4th 1365, 1370 (1997). The Court finds that these provisions are unambiguous; however, to the extent there is any ambiguity, the Court construes that ambiguity against Mr. Grosz as the drafter. Section 2.2(e), also state that conversion “may be made contingent upon the closing of the Next Equity Financing,” introducing more ambiguities around Mr. Grosz's interpretation that Section 2.2(c) requires conversion upon his election under Section 2.2(b) and if Toptal had not undergone a Next Equity Financing. The Court declines to interpret the NPA and Note in such a way as to create unnecessary ambiguities.

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This court case retrieved on October 11, 2023, from is part of the public domain. The court-created documents are works of the federal government, and under copyright law, are automatically placed in the public domain and may be shared without legal restriction.