Court Opinion

ID: 9838440
Source: CourtListenerOpinion
Date Created: 2023-09-06 15:00:37.104634+00
Date Added: 2024-06-11T18:05:28.079442
License: Public Domain

22-274(L)
EMA Financial, LLC v. Chancis

                          UNITED STATES COURT OF APPEALS
                               FOR THE SECOND CIRCUIT
                                    August Term, 2022
                    (Argued: March 27, 2023 Decided: September 6, 2023)
                            Docket Nos. 22-274(L), 22-402(CON)

                                   EMA FINANCIAL, LLC,
           Plaintiff-Counter-Defendant-Counter-Claimant-Appellee-Cross-Appellant,
                                                        v.
                             JOEY CHANCIS, RICHARD ROER,
       Defendants-Counter-Claimants-Counter-Defendants-Appellants-Cross-Appellees,

     RAR BEAUTY, LLC, LABB, INC., REFLEX PRODUCTIONS, INC., RICHARD CHANCIS,
                              JOEY NEW YORK, INC.,
                 Defendants-Counter-Claimants-Counter-Defendants. *

Before:            SACK, LOHIER, AND CARNEY, Circuit Judges.

       This action concerns loans issued by the plaintiff, EMA Financial, LLC, to a
group of companies that were controlled by Joey Chancis, Richard Chancis, and
Richard Roer. The loan agreements contained so-called “floating-price
conversion option” provisions, which gave EMA the right to exercise an option
to receive company stock in lieu of cash repayment on the loans.
       When EMA initially sought partial repayment of the loans through the
stock repayment option in 2017, the companies delivered the shares to EMA at
the agreed-upon discount rate. Later that year, EMA sought to exercise the
conversion option again. This time, the companies failed to deliver the stock.
      EMA then brought suit, claiming, inter alia, breach of contract and breach
of guaranty as to the loan agreements, and fraudulent conveyance and
fraudulent inducement. The defendants asserted as an affirmative defense that

*   The Clerk of Court is respectfully directed to amend the official caption as set forth above.
22-274(L)
EMA Financial, LLC v. Chancis

the loan agreements were void because the conversion option provisions
rendered the agreements criminally usurious under New York law. The district
court (Vernon S. Broderick, J.) dismissed this defense and granted several of
EMA’s claims on summary judgment. After a bench trial on the remaining issues
in the case, the district court entered judgment in favor of EMA for some of its
claims and in favor of the defendants for others.
       Joey Chancis and Richard Roer now appeal, arguing in relevant part that
the district court’s dismissal of the usury defense at summary judgment should
be vacated in light of an intervening change in New York law. EMA
cross-appeals, challenging, among other things, several findings in the district
court’s post-trial order.
      We agree with the defendants that the district court erred in deciding that,
as a matter of law, the loan agreements were not usurious under New York law.
We therefore decline to address EMA’s challenges to the district court’s
judgment at this time. Accordingly, we
      VACATE AND REMAND in part for the district court’s further
consideration of this issue.

                                      JEFFREY FLEISCHMANN, Law Office of Jeffrey
                                      Fleischmann, P.C., New York, NY, for EMA
                                      Financial, LLC;

                                      MARJORIE SANTELLI (Mark R. Basile and
                                      Eric Benzenberg, on the brief), The Basile
                                      Law Firm P.C., Jericho, NY, for Joey
                                      Chancis and Richard Roer.
22-274(L)
EMA Financial, LLC v. Chancis

SACK, Circuit Judge:

        This action concerns loans issued by the plaintiff, EMA Financial, LLC

(hereinafter, “EMA”), 1 to a group of companies (hereinafter, the “Corporate

Defendants”) 2 that were controlled by Joey Chancis, Richard Chancis, and

Richard Roer (hereinafter, the “Individual Defendants”). The loan agreements

contained so-called “floating-price conversion option” provisions, which gave

EMA the right to receive company stock at a discounted rate in lieu of cash

repayment on the loans. Following the execution of the loan agreements, the

Individual Defendants commingled company funds with their personal assets

and disregarded corporate formalities.

        When EMA initially sought partial repayment of the loans through the

stock repayment option in 2017, the Corporate Defendants delivered the shares

to EMA at the agreed-upon discount rate. But when EMA sought to exercise the

conversion option again later that year, the Corporate Defendants failed to

deliver the stock.

1For ease of reference, we refer in this opinion to Plaintiff-Counter-Defendant-Counter-Claimant-
Appellee-Cross-Appellant EMA as the “plaintiff.”
2The Corporate Defendants are RAR Beauty, LLC (hereinafter, “RAR”), Labb, Inc. (hereinafter, “Labb”),
Reflex Productions, Inc. (hereinafter, “Reflex”), and Joey New York, Inc.

                                                    1
22-274(L)
EMA Financial, LLC v. Chancis

        EMA then brought suit against the Corporate Defendants and the

Individual Defendants, claiming, inter alia, breach of contract and breach of

guaranty as to the loan agreements, fraudulent conveyance, and fraudulent

inducement. The Corporate Defendants and the Individual Defendants asserted

as an affirmative defense that the loan agreements were void because the

conversion option provisions rendered the loan agreements criminally usurious

under New York law. On summary judgment, the district court (Vernon S.

Broderick, J.) dismissed this defense and granted some of EMA’s claims. The

district court then held a bench trial to resolve the remaining issues in the case,

including EMA’s claims for fraudulent conveyance and fraudulent inducement

against the Individual Defendants. 3 The district court ultimately entered

judgment in favor of EMA for some of its claims and in favor of the Individual

Defendants for others.

        Joey Chancis and Richard Roer (hereinafter, the “Defendants/Appellants”)

now appeal, arguing in relevant part that the district court’s dismissal of the

usury defense at summary judgment should be vacated in view of an intervening

3As discussed below, by the time of the bench trial, counsel for defendants had withdrawn
representation, and the district court had granted motions for default judgment against the Corporate
Defendants in light of their inability to proceed pro se. Therefore, only the Individual Defendants
proceeded to the bench trial on a pro se basis.

                                                    2
22-274(L)
EMA Financial, LLC v. Chancis

change in New York law. EMA cross-appeals, challenging, among other things,

several of the findings in the district court’s post-trial order.

        We agree with the Defendants/Appellants that the district court erred in

deciding that, as a matter of law, the loan agreements were not usurious under

New York law. We therefore decline to address EMA’s challenges to the district

court’s judgment at this time. Accordingly, we vacate the district court’s

judgment in part and remand for further proceedings consistent with this

opinion.

                                         BACKGROUND 4

        I.      Joey New York

        In 1993, Joey Chancis (hereinafter, “Chancis”) co-founded Joey New York.

The company created and distributed skincare and cosmetic products. In or

around 2009, Joey New York temporarily ceased operations.

        In 2010, Richard Roer (hereinafter, “Roer”) co-founded RAR, another

company that manufactured and distributed beauty and skincare products. Roer

was president of RAR and co-president of Reflex, a division of RAR.

        In 2014, Joey New York resumed operations and sold shares to the public.

4Unless otherwise noted, the following facts are drawn from the district court’s findings of fact and are
undisputed.

                                                     3
22-274(L)
EMA Financial, LLC v. Chancis

The publicly traded company was named Joey New York, Inc. 5 At that time,

Roer served as president and Chancis served as CEO of Joey New York. In

August 2016, Joey New York acquired a 100% interest in RAR and Labb. Around

the time that Joey New York went public, Chancis’s husband, Richard Chancis,

began working as a consultant for Joey New York. In the following years,

Richard Chancis took on increasing responsibilities for company operations.

          In 2017, Joey New York sought financing to expand its operations.

Accordingly, on February 1, 2017, Joey New York and EMA entered into a

Securities Purchase Agreement (hereinafter, the “First SPA”) pursuant to which

EMA purchased a convertible redeemable promissory note from Joey New York

for $90,000 (the “First Note”). On May 3, 2017, EMA and Joey New York entered

into a second Securities Purchase Agreement (hereinafter, the “Second SPA,” and

together with the First SPA, the “SPAs”), pursuant to which EMA purchased

another convertible redeemable promissory note from Joey New York for

$151,600 (hereinafter, the “Second Note,” and together with the First Note, the

“Notes”). Other than the dollar figures, the relevant terms of the Notes are

materially identical.

5   We refer to Joey New York and Joey New York, Inc. collectively as “Joey New York.”

                                                     4
22-274(L)
EMA Financial, LLC v. Chancis

       EMA had two options to seek repayment of the loans. It could collect cash

repayments, at a default interest rate on the Notes of 24% per year.

Alternatively, the Notes contained, and allowed EMA to collect under, floating-

price conversion option provisions. As explained by the New York Court of

Appeals, a floating-price conversion option is a contract provision that “permits

a lender to convert outstanding balance [of debt] to shares of stock at a fixed

discount.” Adar Bays, LLC v. GeneSYS ID, Inc., 37 N.Y.3d 320, 334 (2021) (Adar

Bays II). In relevant part, the Notes provide:

       [EMA] shall have the right, in its sole and absolute discretion, at any
       time from time to time, to convert all or any part of the outstanding
       amount due under this Note into fully paid and non-assessable shares
       of Common Stock, as such Common Stock exists on the Issue Date, or
       any shares of capital stock or other securities of the Borrower into
       which such Common Stock shall hereafter be changed or reclassified
       at the conversion price (the “Conversion Price”) determined as
       provided herein (a “Conversion”).

       [The Conversion Price is the] lower of: (i) the closing sale price of the
       Common Stock on the Principal Market on the Trading Day
       immediately preceding the Closing Date, and (ii) 65% of the average
       of the lowest two (2) sale prices for the Common Stock on the
       Principal Market during the twenty (20) consecutive Trading Days
       immediately preceding the Conversion Date or the closing bid price.

EMA Fin. LLC v. Joey N.Y. Inc., No. 17-cv-9706 (VSB), 2022 WL 292920, at *3-4

(S.D.N.Y. Feb. 1, 2022) (citations omitted).

                                          5
22-274(L)
EMA Financial, LLC v. Chancis

        To summarize, under this provision, EMA had the right to exercise an

option to exchange debt owed to it under the Notes for company stock. The

conversion option guaranteed EMA a strike price on company stock pegged at

65% of the market price at the time when EMA exercised the option. By way of

example, if EMA opted to convert $100 of debt, EMA would receive an amount

of company stock worth about $154 at the time of conversion, and the loan

principal would be treated as paid down by $100—i.e. 65% of approximately

$154.

        II.    Conduct Following the Execution of the SPAs

        Following the execution of the SPAs, Joey New York faced business

headwinds. It ultimately failed to turn a profit or make any cash payments to

pay down the loans. None of the Individual Defendants ever received a salary

from the company after Joey New York went public, despite having invested

substantial funds in the company. However, the Individual Defendants made

various withdrawals and transfers from the Corporate Defendants’ accounts

following the execution of the SPAs. As explained by the district court:

        The parties have stipulated as to hundreds of withdrawals, transfers,
        and other financial transactions that the Individual Defendants made
        from various corporate accounts since Plaintiff made its first loan to
        Defendants. These transactions roughly fall into five categories.

                                          6
22-274(L)
EMA Financial, LLC v. Chancis

       First, there are instances where the Individual Defendants transferred
       money from the corporate accounts to their personal accounts in an
       effort to reimburse themselves after using the funds in the personal
       accounts for business expenses. To this end, Defendants testified that
       they commonly used their personal accounts to pay for significant
       expenses on behalf of the corporate entities and would reimburse
       those personal accounts, often when the spending limits on those
       personal accounts had been reached.

       The second category of stipulated transactions involve instances
       where the Individual Defendants transferred money between the
       various corporate accounts.

       Third, there were instances where the Individual Defendants
       withdrew money from the various corporate accounts for what
       appear to be legitimate business purposes.

       Fourth, there were instances where the Individual Defendants
       withdrew money from the various corporate accounts for purposes
       that, at the very least, seem unusual for business expenses and
       perhaps skirted the line between business and personal.

       Fifth, there were instances where the Individual Defendants made
       transfers or withdrawals for which they testified they do not know
       the purpose.      Defendants provided few receipts indicating
       contemporaneous corroboration of the purpose of these transactions.
       The Individual Defendants testified that they submitted receipts to
       Stephanie Cspeke, who was employed by the accounting firm that
       served as the SEC accountant for the corporate entities, but
       Defendants did not submit robust documentation to corroborate this
       process.

EMA Fin., 2022 WL 292920, at *5-6 (internal citations to trial transcripts and

footnote omitted).

                                         7
22-274(L)
EMA Financial, LLC v. Chancis

          III.   EMA’s Conversions

          First in August and September 2017, and then again in 2020 and 2021,

pursuant to the SPAs and Notes, EMA submitted notices of conversion to the

Corporate Defendants. The Corporate Defendants honored these notices of

conversion and delivered to EMA nearly 20,000,000 shares of Joey New York

stock. By exercising the conversion option and then selling those shares on the

open market, EMA generated net proceeds of $301,023.27. As the district court

observed, “[t]his figure is greater than the $241,600 that [EMA] loaned [to the

Corporate Defendants] pursuant to the two Notes.” EMA Fin., 2022 WL 292920,

at *15.

          On October 20 and November 14, 2017, EMA submitted two further

notices of conversion to the Corporate Defendants. In these two instances, the

Corporate Defendants did not deliver any shares to EMA.

                                PROCEDURAL HISTORY

          In December 2017, following the Corporate Defendants’ failure to honor

EMA’s October and November 2017 notices of conversion, EMA filed this action

in the United States District Court for the Southern District of New York against

Chancis and the Corporate Defendants. The district court’s subject-matter

jurisdiction was based on diversity of citizenship. EMA alleged that the

                                           8
22-274(L)
EMA Financial, LLC v. Chancis

defendants’ failure to honor the notices of conversion constituted breach of

contract and breach of guaranty under New York law. 6 EMA also brought a

claim for fraudulent inducement against Chancis.

       Chancis and the Corporate Defendants asserted a counterclaim against

EMA for fraudulent inducement. They also pleaded an affirmative defense

seeking to invalidate the SPAs and Notes as usurious under New York law.

       In an opinion and order dated September 22, 2019, the district court

granted EMA’s motion for summary judgment dismissing Chancis’s and the

Corporate Defendants’ affirmative defense of usury. The district court also

granted summary judgment in favor of EMA regarding Chancis’s and the

Corporate Defendants’ liability for breach of contract, breach of guaranty, and

attorney’s fees. Finally, the district court granted EMA’s motion to dismiss the

defendants’ counterclaim for fraudulent inducement.

       Following the district court’s September 22, 2019 opinion and order, EMA

filed an amended complaint. In it, EMA named Roer and Richard Chancis as

defendants for the first time in the litigation. EMA now brought claims of

fraudulent conveyance and fraudulent inducement against all three Individual

6The Notes and SPAs include New York choice of law provisions. Accordingly, New York law governs
the claims and defenses relating to the Notes and SPAs.

                                                9
22-274(L)
EMA Financial, LLC v. Chancis

Defendants, alleging in relevant part that they had siphoned money from the

Corporate Defendants and put those funds to personal use. EMA sought

compensatory and punitive damages, specific performance, and to pierce the

corporate veil of the Corporate Defendants in order to hold the Individual

Defendants liable for any judgment that EMA obtained against the Corporate

Defendants.

          After the summary judgment opinion and order issued, but before the

bench trial began, the defendants’ counsel sought to withdraw from

representation. The district court permitted counsel to withdraw. Defendants

did not retain new counsel. On May 24, 2021, the district court granted EMA’s

motion for default judgment as to liability against the Corporate Defendants

because corporations cannot proceed pro se. The Individual Defendants

proceeded pro se to the bench trial and all subsequent proceedings before the

district court. 7

          The district court then presided over a six-day bench trial in June and

August 2021 to resolve the then-outstanding issues in the case, including in

7   The Defendants/Appellants are represented by counsel on this appeal.

                                                    10
22-274(L)
EMA Financial, LLC v. Chancis

relevant part EMA’s claims for fraudulent conveyance and fraudulent

inducement against the Individual Defendants, and remedies.

        On February 1, 2022, pursuant to Federal Rule of Civil Procedure 52, the

district court issued findings of fact and conclusions of law. The district court

ordered that (1) “judgment be granted in favor of [EMA] as to breach of contract,

breach of guaranty, and constructive fraudulent conveyance,” EMA Fin., 2022

WL 292920, at *1; (2) “judgment [be] denied as to fraudulent inducement and

actual fraudulent conveyance, and [EMA] is not permitted to pierce the corporate

veil,” id.; (3) “[EMA] is entitled to an award of $151,418.50 in compensatory

damages for its contractual claims, plus prejudgment interest accruing at 24% per

year from July 26, 2017,” id.; and (4) “[EMA] is not entitled to punitive damages

or specific performance,” id. 8

        Two of the Individual Defendants, Roer and Chancis, now appeal, arguing

in relevant part that the district court erred by dismissing their affirmative

defense of criminal usury.

8The Individual Defendants also raised a defense seeking to void the Notes under the Securities
Exchange Act of 1934, 15 U.S.C. § 78a et seq. The district court rejected this argument in its post-trial
order. EMA Fin., 2022 WL 292920, at *18.

                                                      11
22-274(L)
EMA Financial, LLC v. Chancis

       EMA cross-appeals, asserting, inter alia, that the district court erred by (1)

denying it damages for its claims for constructive fraudulent conveyance; (2)

dismissing its claims for actual fraudulent conveyance; and (3) denying its

request to pierce the corporate veil of the Corporate Defendants. As discussed

below, we decline to address the issues raised in EMA’s cross-appeal in view of

our resolution of the Defendants/Appellants’ appeal.

                                    DISCUSSION

       I.      Standard of Review

       The Defendants/Appellants challenge the district court’s grant of summary

judgment dismissing their affirmative defense of criminal usury under New

York law. “We review the district court’s grant of summary judgment de novo,

and we will affirm only if the evidence, when viewed in the light most favorable

to the party against whom it was entered, demonstrates that there is no genuine

issue as to any material fact and that judgment was warranted as a matter of

law.” Saleem v. Corp. Transp. Grp., Ltd., 854 F.3d 131, 138 (2d Cir. 2017).

       II.     The Affirmative Defense of Usury

       Under New York law, a loan contract is criminally usurious, and therefore

void, if the contract provides for an annual interest rate of 25% or more. N.Y.

Penal Law § 190.40; N.Y. Gen. Oblig. Law § 5-511. Before Roer was joined as a

                                          12
22-274(L)
EMA Financial, LLC v. Chancis

defendant in this action, Chancis and the Corporate Defendants pleaded an

affirmative defense of criminal usury in their answer and sought to void the

Notes on that basis. They argued that the floating-price conversion options in

the Notes were structured in such a way that EMA could collect interest on the

loans at a rate that exceeded 25% per year. But in its September 22, 2019

summary judgment opinion and order, the district court dismissed the usury

defense, explaining that “[b]ecause [EMA] could have elected to obtain

repayment of the principal in cash at an interest rate that Defendants do not

assert would exceed twenty-five percent, the [Notes and SPAs] were not

usurious on their face, and Defendants’ argument that they are unenforceable

fails.” EMA Fin. LLC v. Joey N.Y., Inc., No. 17-cv-9706 (VSB), 2019 WL 4600863, at

*5 (S.D.N.Y. Sept. 22, 2019) (footnote omitted).

                                         A.

       Following the summary judgment order, as this case was proceeding to

trial, a panel of this Court was presented with materially identical questions of

law to those raised by Chancis and the Corporate Defendants on summary

judgment:

       1. Whether a stock conversion option that permits a lender, in its sole
       discretion, to convert any outstanding balance to shares of stock at a

                                         13
22-274(L)
EMA Financial, LLC v. Chancis

       fixed discount should be treated as interest for the purpose of
       determining whether the transaction violates N.Y. Penal Law
       § 190.40, the criminal usury law.

       2. If the interest charged on a loan is determined to be criminally
       usurious under N.Y. Penal Law § 190.40, whether the contract is
       void ab initio pursuant to N.Y. Gen. Oblig. Law § 5-511Α

Adar Bays, LLC v. GeneSYS ID, Inc., 962 F.3d 86, 94 (2d Cir. 2020) (Adar Bays I).

       In Adar Bays I, we explained that the New York Court of Appeals had, at

that time, not yet addressed either of those questions and that “the existing case

law [was] unclear.” Id. at 92. Because we further concluded that the other

necessary conditions for certification were satisfied, we certified those two

questions to the Court of Appeals. Id. at 93-94.

       The Court of Appeals accepted the certified questions, Adar Bays, LLC v.

GeneSYS ID, Inc., 35 N.Y.3d 996 (2020), and answered both in the affirmative in

an opinion dated October 14, 2021, Adar Bays II, 37 N.Y.3d at 323-24. The Court

of Appeals held that “[b]ecause floating-price conversion options have intrinsic

value that is bargained for in these loans, they should be treated as a component

of interest.” Adar Bays II, 37 N.Y.3d at 337; see also id. at 334 (“New York law

requires that the value of the conversion option . . . should be included in

determining the loan’s interest rate for purposes of the usury statutes, to the

extent such value, when measured at the time of contracting, can be reasonably

                                         14
22-274(L)
EMA Financial, LLC v. Chancis

determined.”). And if a loan’s interest rate, taking into account the floating-price

conversion option, exceeds the statutory cap of 25%, then the loan is “subject to

the same consequence as any other usurious loans: complete invalidity of the

loan instrument.” Id. at 333. Ultimately, the value of a floating-price conversion

option “is a question of fact, and the burden to prove that value is on the

borrower.” Id. at 334.

        Following Adar Bays II, we directed the district court to resolve in the first

instance whether the value of the floating-price conversion option at issue in

Adar Bays caused the interest rate on the loan to exceed 25%. Adar Bays, LLC v.

GeneSYS ID, Inc., 28 F.4th 379, 382 (2d Cir. 2022) (Adar Bays III). We also

“instruct[ed] that, should the district court determine on remand that the Note

was usurious, it should find the Note void and unenforceable.” Id.9

                                                    B.

        The Defendants/Appellants argue that the floating-price conversion

options in the Notes are substantially the same as the options that were at issue

in Adar Bays. The Defendants/Appellants contend that they are therefore entitled

to a similar remedy to the one that we granted to the borrower in Adar Bays III—

9The Adar Bays parties settled the case following Adar Bays III before the district court had the
opportunity to determine whether the loan at issue in that case was usurious under Adar Bays II.

                                                    15
22-274(L)
EMA Financial, LLC v. Chancis

vacatur of the aspects of the district court’s judgment imposing liability on them

for breaching the SPAs and Notes and remand to the district court to determine

in the first instance whether the Notes are usurious and therefore void.

         EMA does not, and we think could not, dispute that the floating-price

conversion options in this case are substantially the same as the options in Adar

Bays. EMA also does not dispute that the district court’s treatment of the usury

defense at summary judgment is irreconcilable with the Court of Appeals’s

decision in Adar Bays II. Instead, EMA argues that the Defendants/Appellants

have waived the usury affirmative defense and are thus precluded from raising it

on appeal. As explained below, we conclude that EMA’s arguments are without

merit.

                                          C.

         EMA argues that the Defendants/Appellants waived or forfeited any

usury defense before the district court. We disagree.

         Chancis and the Corporate Defendants expressly pleaded an affirmative

defense of usury in their answer to EMA’s original complaint. After the district

court’s summary judgment order, EMA filed an amended complaint, adding

Roer as a defendant. All the defendants, including Roer, then filed a joint answer

                                          16
22-274(L)
EMA Financial, LLC v. Chancis

to the amended complaint that incorporated by reference all the affirmative

defenses that the defendants had raised in their prior answer. See Saks v. Franklin

Covey Co., 316 F.3d 337, 350 (2d Cir. 2003) (“Rule 8(c) of the Federal Rules of Civil

Procedure requires that a responsive pleading must set forth certain enumerated

affirmative defenses as well as ‘any other matter constituting an avoidance or

affirmative defense.’”)

       The district court then held a bench trial that ended in August 2021. The

Court of Appeals decided Adar Bays II on October 14, 2021—after the bench trial

concluded but before the district court had issued its findings of fact and

conclusions of law. On October 18, 2021—four days after the Court of Appeals

decided Adar Bays II—Chancis (at that point proceeding pro se) wrote a letter to

the district court informing it of Adar Bays II and arguing that the court should

revisit the aspect of its summary judgment opinion and order that dismissed the

usury defense. EMA filed a response to that letter. Notwithstanding these

letters, the district court did not address Adar Bays II or the issue of usury in its

findings of fact and conclusions of law.

       Based on these facts, it is clear that EMA has been on notice of the

Defendants/Appellants’ usury defense since the pleading stage, and has had

                                           17
22-274(L)
EMA Financial, LLC v. Chancis

multiple full and fair opportunities to respond to it—first on summary judgment,

then after Chancis’s letter regarding Adar Bays II, and now on appeal.

Accordingly, we disagree with EMA that the Defendants/Appellants waived or

forfeited the affirmative defense, even if they pleaded usury in arguably

conclusory terms in their operative answer by incorporating it by reference from

a prior answer. See Curry v. City of Syracuse, 316 F.3d 324, 330-31 (2d Cir. 2003)

(explaining that a district court may decline to deem an affirmative defense

waived even if a defendant omitted the defense from its answer so long as the

defendant raised the defense before the district court and the plaintiff had notice

and an opportunity to respond); Jones v. Bryant Park Market Events, LLC, 658 F.

App’x 621, 624 (2d Cir. 2016) (summary order) (“We have held that, when a

defendant omits an affirmative defense from his answer, a district court may

nevertheless decline to deem the defense waived if the plaintiff had notice and

an opportunity to respond. There is no reason that this rule should not also

apply when a defendant includes an affirmative defense in his answer, but states

it in conclusory terms.” (internal citation omitted)).

                                         D.

                                          18
22-274(L)
EMA Financial, LLC v. Chancis

       As noted above, before trial, the lawyer who represented the defendants

withdrew from representation. Because a corporation cannot proceed pro se, the

district court granted default judgments against the Corporate Defendants. EMA

now argues that (1) because the Corporate Defendants defaulted after losing on

the issue of usury at summary judgment, the Corporate Defendants waived the

defense; (2) the Corporate Defendants are in privity with the

Defendants/Appellants; and (3) as a result, the Defendants/Appellants are

collaterally estopped by the default judgments against the Corporate Defendants

from raising the usury defense on appeal. We disagree.

       When a district court sits in diversity, the governing preclusion law is that

of the state in which the court is located—in this case, New York. Phoenix Light

SF Ltd. v. Bank of N.Y. Mellon, 66 F.4th 365, 371 (2d Cir. 2023). In New York, even

if the other necessary conditions of collateral estoppel are met, the doctrine is

inapplicable where there has been an “intervening change in law [that]

materially alter[s] the parties’ rights.” In re Estate of Baby Girl Launders, 630

N.Y.S.2d 309, 311 (1st Dep’t 1995); see also Snyder v. Newcomb Oil Co., 603 N.Y.S.2d

1010, 1015 (4th Dep’t 1993) (explaining that New York preclusion doctrines “are

                                           19
22-274(L)
EMA Financial, LLC v. Chancis

flexible, not absolute, and give way in extraordinary circumstances such as a

change in the law”).

       It is undisputed on appeal that Adar Bays II changed New York law

governing the Defendants/Appellants’ usury defense. It is also clear that Adar

Bays II materially altered the Defendants/Appellants’ rights by providing them

with a newly viable avenue by which they could seek to void the Notes and

avoid liability for breaching them. Therefore, even assuming the other necessary

conditions for collateral estoppel are met, the Defendants/Appellants are not

precluded from raising a usury defense notwithstanding the Corporate

Defendants’ default.

                                   *     *      *

       In sum, the Defendants/Appellants did not waive or forfeit and are not

precluded from advancing an affirmative defense of usury. Accordingly,

pursuant to Adar Bays II and Adar Bays III, we vacate the district court’s judgment

imposing breach of contract and breach of guaranty liability on the

Defendants/Appellants and remand the matter to the district court to determine

whether the floating-price conversion options render the Notes usurious. Should

the district court determine that the value of the floating-price conversion

options, when measured at the time of contracting, causes the interest rates on

                                         20
22-274(L)
EMA Financial, LLC v. Chancis

the Notes to exceed 25%, we respectfully instruct the district court to find the

Notes void and unenforceable pursuant to Adar Bays III. See 28 F.4th at 382.

       III.    Remaining Issues

       The Defendants/Appellants and EMA raise several other arguments

challenging the district court’s judgment. The Defendants/Appellants contend

that the Notes are void for the additional reason that they are securities and were

performed in violation of the Exchange Act because of EMA’s failure to register

as a broker-dealer. In its cross-appeal, EMA argues that the district court erred

by (1) miscalculating breach of contract damages; (2) not awarding it attorney’s

fees under the SPAs and Notes; (3) dismissing its claims for actual fraudulent

conveyance against the Defendants/Appellants; (4) denying it any relief for its

claims for constructive fraudulent conveyance against the

Defendants/Appellants; and (5) denying EMA’s request to pierce the corporate

veil in order to hold the Defendants/Appellants personally liable for any

judgment against the Corporate Defendants.

       We need not, and therefore decline to, address any of these arguments at

this time in light of our vacatur of the district court’s judgment imposing breach

of contract and breach of guaranty liability on the Defendants/Appellants. In the

event that the district court concludes on remand that the Notes are not usurious

                                         21
22-274(L)
EMA Financial, LLC v. Chancis

under New York law, the parties may present these arguments again in any

subsequent appeal.

                                            CONCLUSION

        We have considered the parties’ remaining arguments on appeal and

conclude that they are without merit. For the reasons explained above, we

vacate the district court’s judgment in part and remand for further proceedings

consistent with this opinion. Any further appeal will be referred to this panel,

and the party taking appeal shall advise the Clerk of Court of this direction. See

United States v. Jacobson, 15 F.3d 19, 21-22 (2d Cir. 1994). 10

10See also Gulliver v. Dalsheim, 739 F.2d 104, 106 (2d Cir. 1984) (noting past panel retained jurisdiction “in
the event that the findings of fact or conclusions of law on the remand d[id] not enable or require the
court of appeals to dispose of the case summarily”); Corporación Mexicana De Mantenimiento Integral v.
Pemex-Exploración Y Producción, 832 F.3d 92, 115 (2d Cir. 2016) (“In typical Jacobson remands, we remand
partial jurisdiction to the district court to supplement the record on a discrete factual or legal issue while
retaining jurisdiction over the original appeal.” (Winter, J., concurring)).

                                                      22