Strategic Diversity, Inc. v. Alchemix Corporation

I. Background

A. The Initial Investment

In April 2001, Kenneth P. Weiss met Robert Horton. Weiss expressed interest in investing in Horton’s alternative fuels 20618 STRATEGIC DIVERSITY v. ALCHEMIX CORP. start-up company, Alchemix Corporation. At the direction of his accountant, Weiss set up Strategic Diversity, Inc., (“Strategic”) to handle his investments. In Strategic’s first venture, Weiss sought to invest $500,000 in Alchemix and requested certain collateral to secure his investment. Approxi- mately two weeks later, the parties arrived at an agreement.

In a seven-page agreement signed on July 2, 2001, Strate- gic agreed to invest $500,000 in Alchemix. The agreement incorporated the following: (1) a convertible promissory note (“Note”) in the amount of $500,000.00; (2) security interests in Alchemix’s patents and intellectual property rights; and (3) a warrant which included a provision that ensured capitaliza- tion of the company could not exceed 40 million shares (“Warrant”).

The Note was to be paid after five years at an interest rate of ten percent per year compounded monthly. Under the terms of the Note, Weiss had the option of converting the Note to 250,000…