CBAI Amended Complaint

75838625.1 0052273-00001

David L. Mortensen (#8242) Email: [email protected] Jill M. Pohlman (#7602) Email: [email protected] Jose A. Abarca (#12762) Email: [email protected] STOEL RIVES LLP 201 South Main Street, Suite 1100 Salt Lake City, Utah 84111-4904 Telephone: (801) 328-3131 Attorneys for Cord Blood America, Inc.

IN THE UNITED STATES DISTRICT COURT DISTRICT OF UTAH, CENTRAL DIVISION

CORD BLOOD AMERICA, INC., a Florida corporation,

Plaintiff, v.

TONAQUINT, INC., a Utah corporation; ST. GEORGE INVESTMENTS, LLC, a Illinois limited liability company,

Defendants. ___________________________________ TONAQUINT, INC., a Utah corporation; ST. GEORGE INVESTMENTS, LLC, a Illinois limited liability company, Counterclaimants,

v. CORD BLOOD AMERICA, INC., a Florida corporation, Counterclaim Defendant.

FIRST AMENDED COMPLAINT AND JURY DEMAND

Case No. 2:13-cv-00806-RJS

The Honorable Robert J. Shelby

Plaintiff Cord Blood America, Inc. (CBAI), by and through its counsel hereby

complains against Tonaquint, Inc. (Tonaquint) and St. George Investments, LLC (SGI)

(together, Defendants) and for its causes of action alleges as follows:

Case 2:13-cv-00806-RJS Document 48 Filed 05/07/14 Page 1 of 34

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PARTIES, JURISDICTION, AND VENUE

1. Plaintiff CBAI is a publicly-traded corporation organized and existing under the

laws of the State of Florida, with its principal place of business at 1857 Helm Drive, Las Vegas,

Nevada 89119.

2. On information and belief, defendant Tonaquint is a corporation organized and

existing under the laws of the State of Utah, with its principal place of business at 303 East

Wacker Drive, Suite 311, Chicago, Illinois 60601. On information and belief, Tonaquint is a

privately held real estate development company, which makes convertible debt loans (as

described below) to publicly-traded companies.

3. On information and belief, defendant SGI is a limited liability company organized

and existed under the laws of the State of Illinois, with its principal place of business at 303 East

Wacker Drive, Suite 311, Chicago, Illinois 60601. On information and belief, SGI is an Illinois-

based, privately held investment fund, which is in the business of making convertible debt loans

(as described below) to publicly-traded companies.

4. On information and belief, Defendants are related entities in that they share

common owners, principals, officers and/or directors. Specifically and among other things, on

information and belief, John Fife (Fife) is the primary owner and a principal of both SGI and

Tonaquint.

5. The Court has subject-matter jurisdiction over this dispute pursuant to 28 U.S.C.

1332(a) because there is complete diversity of citizenship and the amount in controversy exceeds

the sum of $75,000.00, exclusive of costs and interest.


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6. This Court has personal jurisdiction over Defendants based on their continuous

and systematic contacts with the State of Utah, through their regular transaction of business in

this judicial district. Also, Defendants have had specific contacts with Utah sufficiently related

to this cause of action to warrant the exercise of personal jurisdiction by this Court.

7. Venue is proper in this district pursuant to 28 U.S.C. 1391.

GENERAL ALLEGATIONS

A. CBAIs Business

8. CBAI is engaged in the business of collecting, processing, and preserving

umbilical cord blood and tissue, allowing families to preserve cord blood and tissue at the birth

of a child for potential use in future stem cell therapy. Cord blood stem cells have been used in

the treatment of more than 70 malignant and non-malignant diseases, including sickle cell,

leukemia, non-Hodgkins lymphoma, other forms of cancer, life threatening anemias, and auto-

immune diseases.

9. CBAI has one laboratory processing and storage facility located in Las Vegas,

Nevada and also holds an interest in a company with a laboratory processing and storage facility,

located in Buenos Aires, Argentina. Collectively, the two facilities store and service

approximately 30,000 samples of umbilical cord blood and tissue.

B. Convertible Promissory Notes

10. In the past, CBAI has obtained financing to fund its operations through the

issuance of convertible promissory notes in exchange for loans made to CBAI. Typically, under

these convertible promissory notes, the holders of the promissory notes receive an original issue

discount (OID), meaning the creditor loans less than the face amount of the promissory note,


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and interest on the amount loaned to CBAI and the holders have the option to convert the amount

owed into shares of CBAIs common stock at below market prices in accordance with formulas

set forth in the applicable notes. This form of financing shall be referred to herein as

Convertible Stock Debt.

11. Beginning in 2009 and continuing for a time thereafter, CBAI issued a number of

convertible promissory notes (the JMJ Notes) to JMJ Financial (JMJ).

12. Pursuant to the JMJ Notes, JMJ had the option to convert all or a portion of the

amounts owed under the JMJ Notes into CBAI common stock at conversion prices set forth in

each of the JMJ Notes.

C. CBAI Enters into the SGI Agreement.

13. In order to raise additional funds, in 2011, CBAI also entered into a Note and

Warrant Purchase Agreement (the SGI Agreement) with SGI.

14. Pursuant to the 2011 SGI Agreement, SGI paid CBAI $250,000 and executed and

delivered six secured buyer notes to CBAI. Each of the six secured buyer notes was in the

amount of $125,000, for a total of $750,000.

15. In return, CBAI granted SGI (a) a secured convertible promissory note in the

principal amount of $1,105,500 (the SGI Note) and (b) a warrant to purchase Cord Blood

common stock (the Warrant).

D. CBAIs Convertible Debt and Authorized Shares of Stock.

16. As a result of the JMJ Notes and the SGI Note, in 2012, much of CBAIs debt

was in the form of promissory notes which could, at the request of the holder, be converted into

CBAI common stock at prices below the publicly-traded price.


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17. Consequently, CBAI was concerned about the dilutive effect its Convertible

Stock Debt had on its share price and its many shareholders. Additionally and among other

concerns, CBAI was also concerned about being in default under the existing promissory notes if

the note holders sought to convert debt into common stock and CBAI could not satisfy the

requests because it had already issued the maximum amount of common stock authorized by

CBAIs shareholders (the Authorized Shares).

18. Accordingly, CBAI resolved to take steps to eliminate all or a significant portion

of its Convertible Stock Debt over time. In furtherance of this goal, CBAI took steps to become

cash flow positive, eliminating any need for CBAI to take on any additional Convertible Stock

Debt in its current form, to fund operations. CBAI has remained cash flow positive since the

Second Quarter of 2012.

19. Additionally, in or around 2012, CBAI began exploring possibilities for reducing

its existing Convertible Stock Debt.

E. CBAI Negotiates a Deal with SGI that Would Reduce CBAIs Potential Convertible Debt. 20. In or around 2012, Fife approached CBAI about making an additional investment

in CBAI. Consistent with its goal of reducing and eventually eliminating its Convertible Stock

Debt, CBAI began negotiations with Fife.

21. During those negotiations, CBAI repeatedly explained that the purpose of any

agreement was to enable CBAI to protect its stock price by eliminating all or a significant

portion of CBAIs Convertible Stock Debt, while minimizing the amount of dilution of its

common stock.


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22. Consistent with that purpose, in 2012, Fife offered CBAI a two-step or two-phase

deal for an additional loan to CBAI. Specifically, Fife proposed that the first step or phase

would be for him, through SGI, to purchase the JMJ Notes. And, the second step or phase would

be for Fife to (a) exchange the existing SGI note for a new note with fixed price terms (the

Amended SGI Note); (b) exchange the JMJ Notes purchased from JMJ for new, self-

amortizing notes, with fixed conversion prices (the Second SGI Note); and (c) consecutively

amortize the notes, thereby allowing CBAI to pay off the Amended SGI Note before being

required to make any payments on the Second SGI Note.

23. On or about May 21, 2012, CBAI accepted Fifes offer. CBAI refers to these two

steps or phases as offered by Defendants, through Fife, and as accepted by CBAI as the

Convertible Stock Debt Elimination Agreement.

24. Consistent with CBAIs goal of eliminating all or a significant portion of CBAIs

Convertible Stock Debt in the Convertible Stock Debt Elimination Agreement, CBAI and Fife

agreed that: (a) SGI would exchange the SGI Note for the Amended SGI Note that would be paid

off on a set amortization schedule or alternatively could be converted by SGI, but only at a fixed

conversion price of $.03 per share; (b) the Second SGI Note and the Amended SGI Note would

amortize consecutively, allowing CBAI to repay one of the notes prior to being required to make

any payments on the other note; (c) SGI would not make requests to convert debt under the

Second SGI Note or the Amended SGI Note, other than at a share price of $.03, and would allow

CBAI to repay those notes pursuant to an amortization schedule by making monthly payments of

either cash or stock in CBAIs discretion; and (d) CBAI could prepay the entire amount of the

Second SGI Note and the Amended SGI Note.


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25. Additionally, in the Convertible Stock Debt Elimination Agreement, CBAI and

Fife also agreed that SGI would not make conversion requests on the SGI Note, prior to

replacing it with the Amended SGI Note.

26. Moreover, during negotiations, CBAI and Fife understood and agreed that the

purpose of the Convertible Stock Debt Elimination Agreement was to (a) allow CBAI to

eliminate its burdensome long-term convertible stock debt, in its then-existing form; (b) increase

CBAIs cash flow by consecutively amortizing the Second SGI Note and the Amended SGI

Note; (c) allow CBAI to repay the Second SGI Note and the Amended SGI Note pursuant to a

set amortization schedule by making monthly payments of either cash or stock in CBAIs

absolute discretion; and (d) allow CBAI to prepay the entire amount of the Second SGI Note and

the Amended SGI Note.

27. Many, if not all, of the agreed upon terms of the Convertible Stock Debt

Elimination Agreement were memorialized in emails sent by Fife to CBAI in 2012.

F. The Threat of Litigation By JMJ Causes the Parties to Complete Written Documentation of the Convertible Stock Debt Elimination Agreement in Two Phases. 28. In 2012, CBAI became concerned that JMJ was on the verge of initiating a

lawsuit against CBAI on the JMJ Notes. Accordingly and in order to quickly obtain the funds

necessary to repay JMJ, CBAI and Fife agreed that they would complete the Convertible Stock

Debt Elimination Agreement in the two steps and/or two phases previously identified by Fife at

different times.

29. Specifically, as Fife has proposed and CBAI had accepted, in the first step or

phase, CBAI and SGI agreed they would complete the Second SGI Note, a traditional, form


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convertible stock agreement and related documents, whereby Fife (through SGI) would provide

the funds for CBAI to pay off the JMJ Notes (Phase One).

30. Thereafter, as proposed by Fife and as accepted by CBAI, in the second step or

phase, CBAI and SGI would complete the Amended SGI Note and related documents, which

would replace the existing SGI Note, which the parties had agreed was to be of no further force

and effect and the Second SGI Note would be aligned to amortize after CBAI had repayed the

Amended SGI Note (Phase Two).

31. At this time and in order to induce CBAI to execute the Second SGI Note and to

enter into the Convertible Stock Debt Elimination Agreement, Fife repeatedly represented that

(a) the SGI Note would be replaced by the Amended SGI Note; (b) the Second SGI Note and the

Amended SGI Note would be amortized consecutively and Defendants would not seek to enforce

those notes simultaneously; (c) no payment or conversions would be required or allowed under

the SGI Note, as it was to be replaced by the Amended SGI Note; (d) CBAI would be allowed to

repay the Second SGI Note and the Amended SGI Note pursuant to a set amortization schedule

by making monthly payments of either cash or stock in CBAIs absolute discretion; and (e)

CBAI would be allowed to prepay the entire amount of the Second SGI Note and the Amended

SGI Note at its discretion.

32. Based on these and other representations, CBAI agreed to execute the Convertible

Stock Debt Elimination Agreement in the two steps or phases set forth above.

G. Fife Substitutes Tonaquint for SGI as the Party to the Second SGI Note. 33. At the eleventh hour as the parties were drafting the Second SGI Note and the

other related documents for Phase One of the Convertible Stock Debt Elimination Agreement,


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Fife substituted Tonaquint in for SGI as a party to the Second SGI Note, making Tonaquint a

party to the Convertible Stock Debt Elimination Agreement. There was almost no discussion

amongst the parties about this substitution.

34. Around that same time, Fife requested that the parties change the structure of

Phase One. Instead of Tonaquint buying the JMJ notes and exchanging the note for a new note

with CBAI, Tonaquint asked CBAI to agree to Tonaquint loaning the funds to CBAI and CBAI

paying off the JMJ notes. Because this did not materially change the Convertible Stock Debt

Elimination Agreement, CBAI agreed.

35. Accordingly and pursuant to Phase One of the Convertible Stock Debt

Elimination Agreement, CBAI issued the Second SGI Note to Tonaquint in the amount of

$1,252,000. The Second SGI Note shall hereafter be referred to as the Tonaquint Note.

36. Also, pursuant to Phase One of the Convertible Stock Debt Elimination

Agreement, CBAI received $1,120,000 in cash at closing. As the parties agreed, CBAI used

those funds to pay off the JMJ Notes.

37. As a result of the Convertible Stock Debt Elimination Agreement, the vast

majority of CBAIs debt was held by SGI in the form of the SGI Note and Tonaquint in the form

of the Tonaquint Note (together, the Notes).

38. As set forth above, before and after the Convertible Stock Debt Elimination

Agreement was executed, Defendants represented to CBAI that (a) the Notes would be

consecutively amortized, (b) the Notes would not become due and owing simultaneously; (c)

Defendants would not seek to enforce the Notes simultaneously; (d) SGI would replace the SGI

Note with the Amended SGI Note that would be paid off on a set amortization schedule; or,


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alternatively, could be converted by SGI to CBAI common stock, but only at a fixed conversion

price of $.03 per share; (e) there would be no conversions or payments due under the SGI Note,

as it was to be replaced by the Amended SGI Note; (f) Defendants would not make requests to

convert debt under the Notes to CBAI common stock, other than at a conversion rate of $.03,

allowing CBAI to repay the Notes pursuant to a set amortization schedule by making monthly

payments of either cash or stock in CBAIs discretion; (g) Defendants would allow CBAI to

prepay the amounts owing under the Notes; and (h) the Convertible Stock Debt Elimination

Agreement would be completed in the two phases identified above.

H. SGI and Tonaquint Fail to Perform Phase Two of the Convertible Stock Debt Elimination Agreement. 39. After the parties completed Phase One of the Convertible Stock Debt Elimination

Agreement, CBAI repeatedly contacted Defendants about completing Phase Two of the

Convertible Stock Debt Elimination Agreement as Fife had represented and the parties had

agreed to do. In response, Fife and Defendants represented that their legal department was

working on other projects, but would complete the paper work for Phase Two.

40. Specifically, within a few days after completing the Tonaquint Note and other

documents consistent with Phase One of the Convertible Stock Debt Elimination Agreement,

CBAI spoke with Fife about completing Phase Two of the Convertible Stock Debt Elimination

Agreement. At that time, Fife referred to the time spent creating all of the documents necessary

for Phase One and suggested that the parties take a break before proceeding to Phase Two and

lining up the Notes.


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41. Thereafter, CBAI devoted its time and efforts to increasing CBAIs authorized

stock and, on or about September 25, 2012, CBAI was able to complete the documents necessary

for and obtained shareholder approval of an increase in CBAIs authorized stock.

42. A few days later, on or about October 1, 2012, CBAI contacted Defendants to

discuss completing Phase Two by amending the Notes. Specifically, CBAI and Defendants

discussed pushing back the date for the installment payments under the Tonaquint Note so that

the Notes would consecutively amortize, allowing CBAI to pay the Notes one at a time and in

cash or stock in CBAIs discretion.

43. Thereafter, on or about October 2, 2012, Defendants sent an email stating that

they would, as previously agreed, amend the Notes to extend the beginning of the installment

payments under the Tonaquint Note and allow cash prepayments under the SGI Note.

44. In response, CBAI again accepted this offer and again agreed to amend the Notes

consistent with Phase Two. While CBAI believes this agreement was part of Phase Two of the

Convertible Stock Debt Elimination Agreement, to the extent it was not, it constitutes a new

agreement referred to hereafter as the 2012 Amendment Agreement.

45. Accordingly, on or about October 17, 2012, Defendants told CBAI that they

would have their counsel prepare the documents necessary to amend the Notes, consistent with

Phase Two, to among other things delay the installment payments under the Tonaquint Note and

allow CBAI to pay off the SGI Note in cash or stock before being required to make payments

under the Tonaquint Note.


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46. Thereafter, CBAI repeatedly contacted Defendants to follow up on the

amendments for the Notes. In response, Defendants represented that their lawyers had been

backed up, but would complete the documents.

47. Relying on Defendants repeated representations that the Notes would be

amended consistent with Phase Two and that the time for installment payments under the

Tonaquint Note would be pushed back, CBAI did not make an election or make any payments


48. Around this same time, CBAI began asking Defendants to provide an accounting

of the amounts Defendants claimed to be owed under the Notes. In response, on January 15,

2013, Defendants sent an accounting of the amounts it claimed were owing under the Tonaquint

Note. Consistent with Phase Two and Defendants agreement to amend the Notes, Defendants

accounting showed that there had been no defaults under the Tonaquint Note and that the amount

due and owing was only the principal amount plus interest.

49. Despite these repeated representations, after Phase One was completed,

Defendants have failed to complete Phase Two as agreed. Additionally, contrary to Defendants

repeated representations, (a) SGI has failed to execute the Amended SGI Note; (b) Defendants

have not allowed CBAI to amortize the Notes consecutively, instead demanding that CBAI

perform under the Notes simultaneously; and (c) Defendants have conspired to prevent CBAI

from prepaying both notes.

50. In addition, despite agreeing to not do so, SGI submitted numerous conversion

notices to CBAI in which SGI converted amounts owed under the SGI Note into shares of CBAI

common stock, without replacing the SGI Note, as agreed. In essence, Defendants have sought


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to convert amounts owed under the SGI Note, a note that the parties agreed would be replaced

and would have no further force or effect.

51. Moreover, Defendants knew that one of the primary purposes of CBAIs

willingness to enter the Convertible Stock Debt Elimination Agreement was to reduce dilution of

CBAIs common stock as much as possible, and to avoid having to request any further increases

in CBAIs Authorized Stock to pay the Convertible Stock Debt. Despite this knowledge and its

prior representations, SGI continued to make conversion requests under the prior SGI Note,

which was supposed to be replaced, knowing that doing so would force CBAI to dilute the

common stock base and eventually force CBAI to seek to obtain authorization to issue more

shares.

52. Beyond that, despite making representations to CBAI that CBAI could make

payments on the Notes in stock or cash, Defendants have demanded that CBAI make payments

in CBAI common stock. On information and belief, Defendants have made these requests as

part of a conspiracy to eliminate all of CBAIs Authorized Shares, thereby allowing Defendants

to claim that CBAI is in default under the Notes and Warrant and allowing Defendants to impose

strict penalties and/or foreclose on and sell all of CBAIs assets.

53. Consistent with their strategy, Defendants have threatened to foreclose on the

Notes, and thereby seize and sell all of CBAIs assets.

54. In August 2013, CBAI requested that Defendants provide a payoff amount and an

accounting of the amounts they claimed were owing under the Notes.


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55. In response, Tonaquint sent a letter, which, contrary to Defendants prior

representations, for the first time claimed that CBAI had defaulted under the Tonaquint Note in

October 2012--10 months earlier.

56. SGI has never responded to CBAIs request for a payoff amount and accounting.

FIRST CAUSE OF ACTION (Fraud in the Inducement Against Defendants)

57. CBAI hereby incorporates by reference the allegations set forth in paragraphs 1

through 56 above as though fully set forth herein.

58. As set forth above, in 2012, while CBAI was contemplating whether to enter the

Convertible Stock Debt Elimination Agreement, including the Tonaquint Note, Defendants

represented to CBAI that, among other things, they would complete Phase Two, that the Notes

would be amended so that they were consecutively amortized, that the Notes would not become

due and owing simultaneously, and that Defendants would not seek to enforce the Notes

simultaneously. In fact, Defendants have sought to enforce the Notes simultaneously,

demanding that CBAI make payments on the Notes concurrently.



represented that, consistent with Phase Two, SGI would replace the SGI Note with the Amended

SGI Note, that the Amended SGI Note would be paid off on a set amortization schedule or,


price of $.03 per share. In fact, Defendants have refused to replace the SGI Note with the

Amended SGI Note and have repeatedly and unilaterally sought to convert the amounts owed

under the SGI Note into CBAI common stock at a price lower than the fixed price.


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represented to CBAI that, consistent with Phase Two, they would not make requests to convert

debt under the Notes to CBAI common stock. Rather, Defendants represented that CBAI would

be able to repay the Notes pursuant to a set amortization schedule by making monthly payments

of either cash or stock in CBAIs discretion. In fact, Defendants have made numerous requests

to convert debt under the Notes into CBAI common stock.



represented to CBAI that, consistent with Phase Two, CBAI could prepay all amounts owed

under the Notes. In fact, Defendants have conspired to prevent CBAI from prepaying the

amounts owed under the Notes.



represented that, consistent with Phase Two, the Convertible Stock Debt Elimination Agreement

would be completed in the two phases identified above, including that in Phase One the parties

would complete the Tonaquint Note and in Phase Two the parties would replace the SGI Note

with the Amended SGI Note and consecutively amortize the Notes. In fact, since completing

Phase one, Defendants have failed to complete Phase Two and instead seek to enforce Phase One

in a manner contrary to the parties intent and Defendants representations.

63. SGI and Tonaquint knew or should have known that their representations set forth

above were false.


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64. SGI and Tonaquint knowingly and intentionally misled CBAI through false and

material misrepresentations concerning CBAIs rights and obligations under the Notes to induce

CBAI to enter into the Convertible Stock Debt Elimination Agreement, including the Tonaquint

Note as part of Phase One.

65. CBAI was materially induced to enter into the Tonaquint Note as part of Phase

One of the Convertible Stock Debt Elimination Agreement based on Defendants false

representations set forth above.

66. CBAI did not know that Defendants representations were false at the time they

were made.

67. CBAI reasonably relied on Defendants misrepresentations to their detriment by

entering into the Convertible Stock Debt Elimination Agreement, including the Tonaquint Note

as part of Phase One.

68. As a direct and proximate result of Defendants fraudulent inducement, CBAI has

suffered and continues to suffer actual, incidental, and consequential damages in an amount to be

determined at trial, but not less than $75,000, exclusive of costs and interest.

69. Defendants fraudulent inducement was willful, wanton and malicious, with the

intent to harm and irreparably damage CBAI, thereby subjecting Defendants to an adverse award

of punitive damages to aid in the deterrence of such future conduct.

70. As a result of Defendants fraudulent misrepresentations, CBAI is also entitled to

an order rescinding the Tonaquint Note, the SGI Note, the Warrant and their related documents.

Alternatively, CBAI is entitled to an order reforming the Convertible Stock Debt Elimination

Agreement, including the Notes, to (a) be consistent with Defendants representations and the


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terms agreed upon by the parties in 2012; and (b) allow CBAI time to either increase Authorized

Shares and/or to obtain the funds necessary to pay any amounts owed to Defendants.

71. As a result of Defendants fraudulent misrepresentations, CBAI is also entitled to

an order enjoining Defendants from foreclosing on the Notes and/or seeking to seize and/or sell

CBAIs assets.

SECOND CAUSE OF ACTION (Breach of Agreement (Convertible Stock Debt Elimination

Agreement ) Against Defendants)



73. To the extent the Convertible Stock Debt Elimination Agreement, including the

Tonaquint Note as part of Phase One, was not obtained by Defendants fraudulent inducement as

described above, it is a valid and binding agreement.

74. Pursuant to the Convertible Stock Debt Elimination Agreement, Defendants

warranted and agreed, among other things, that (a) the Notes would be consecutively amortized;

(b) the Notes would not become due and owing simultaneously; (c) Defendants would not seek

to enforce the Notes simultaneously; (d) SGI would replace the SGI Note with the Amended SGI

Note that would be paid off on a set amortization schedule or, alternatively, could be converted

by SGI to CBAI common stock, but only at a fixed conversion price of $.03 per share; (e)

Defendants would not make requests to convert debt under the Notes to CBAI common stock,

other than at a conversion price of $.03, but would allow CBAI to repay the Notes pursuant to a

set amortization schedule by making monthly payments of either cash or stock in CBAIs

discretion; (f) Defendants would allow CBAI to prepay the amounts owing under the Notes; and


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(g) the Convertible Stock Debt Elimination Agreement would be completed in the two phases

identified above.

75. In fact, Defendants have (a) demanded that CBAI make payments on the Notes

simultaneously; (b) refused to replace the SGI Note with the Amended SGI Note; (c) repeatedly

and unilaterally sought to convert the amounts owed under the SGI Note into CBAI common

stock at a price lower than the fixed price the parties intended to include in the Amended SGI

Note; (d) made numerous requests to convert debt under the Notes into CBAI common stock,

which Defendants immediately sold; (e) conspired to prevent CBAI from prepaying the amounts

owed under the Notes; and (f) refused to complete Phase Two of the Convertible Stock Debt

Elimination Agreement and instead sought to enforce Phase One in a manner contrary to the

parties intent and Defendants agreement and representations.

76. Defendants actions set forth herein constitute a material breach of the Convertible

Stock Debt Elimination Agreement.

77. CBAI has fully performed, or has been excused from performing, its obligations

under the Convertible Stock Debt Elimination Agreement with Defendants.

78. As a direct and proximate result of Defendants breach, CBAI has suffered, and

will continue to suffer, actual and consequential damages in an amount to be determined at trial,

but not less than $75,000, exclusive of costs and interest.

79. As a result of Defendants breach, CBAI is also entitled to an order rescinding the

Tonaquint Note, the SGI Note, the Warrant and their related documents. Alternatively, CBAI is

entitled to an order reforming the Convertible Stock Debt Elimination Agreement, including the

Notes, to (a) be consistent with Defendants representations and the terms agreed upon by the


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parties in 2012; and (b) allow CBAI time to either increase the Authorized Shares of CBAI

and/or to obtain the funds necessary to pay any amounts owed to Defendants.

80. As a result of Defendants breach, CBAI is also entitled to an order enjoining

Defendants from foreclosing on the Notes and/or seeking to seize and/or sell CBAIs assets.

THIRD CAUSE OF ACTION (Breach of the Implied Covenant of Good Faith

and Fair Dealing Against Defendants)



82. Under Utah law, every contract includes an implied covenant of good faith and

fair dealing.

83. Accordingly, to the extent the Convertible Stock Debt Elimination Agreement,

including the Tonaquint Note as part of Phase One, was not obtained by Defendants fraudulent

inducement as described above, it was subject to an implied covenant that Defendants would

perform their obligations in good faith, in the spirit of fair dealing and in a manner that did not

deprive CBAI of the benefits it bargained for under the agreement.

84. As set forth above, the benefits CBAI bargained for and the purpose of the

Convertible Stock Debt Elimination Agreement was to (a) allow CBAI to eliminate its

burdensome long-term convertible stock debt, in its then-existing current form; (b) increase

CBAIs cash flow by consecutively amortizing the Notes and allowing CBAI to repay one of the

notes prior to being required to make any payments on the other note; (c) allow CBAI to repay

the Notes pursuant to a set amortization schedule by making monthly payments of either cash or


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stock in CBAIs discretion; and (d) allow CBAI to prepay the entire amount of the Second SGI

Note and the Amended SGI Note.

85. Defendants have breached the implied covenant of good faith and fair dealing by

(a) demanding that CBAI make payments on the Notes simultaneously; (b) refusing to replace

the SGI Note with the Amended SGI Note; (c) repeatedly and unilaterally seeking to convert the

amounts owed under the SGI Note into CBAI common stock at a price lower than the fixed price

the parties intended to include in the Amended SGI Note; (d) demanding that CBAI make

payments under the SGI Note, which was supposed to have been replaced by the amended SGI

Note; (e) making numerous requests to convert debt under the Notes into CBAI common stock;

(f) conspiring to prevent CBAI from prepaying the amounts owed under the Notes; and (g)

refusing to complete Phase Two of the Convertible Stock Debt Elimination Agreement and

instead seeking to enforce Phase One in a manner contrary to the parties intent and Defendants

representations.






entitled to an order reforming the Convertible Stock Debt Elimination Agreement, including the

Notes, to (a) be consistent with Defendants representations and the terms agreed upon by the

parties in 2012; and (b) allow CBAI time to either increase the Authorized Shares of CBAI

and/or to obtain the funds necessary to pay any amounts owed to Defendants.


21 75838625.1 0052273-00001



FOURTH CAUSE OF ACTION (Unjust Enrichment Against Defendants)



90. CBAI has conferred benefits on Defendants by entering into the Convertible

Stock Debt Elimination Agreement and by issuing the Notes.

91. Defendants knew and know of the benefit CBAI has conferred upon them.

92. CBAI conferred those benefits based on Defendants representations and

agreement that (a) the Notes would be consecutively amortized; (b) the Notes would not become

due and owing simultaneously; (c) Defendants would not seek to enforce the Notes

simultaneously; (d) SGI would replace the SGI Note with the Amended SGI Note that would be

paid off on a set amortization schedule or, alternatively, could be converted by SGI to CBAI

common stock, but only at a fixed conversion price of $.03 per share; (e) Defendants would not

make requests to convert debt under the Notes to CBAI common stock, other than at a price of

$.03, and would allow CBAI to repay the Notes pursuant to a set amortization schedule by

making monthly payments of either cash or stock in CBAIs discretion; (f) Defendants would

allow CBAI to prepay the amounts owing under the Notes; and (g) the Convertible Stock Debt

Elimination Agreement would be completed in the two phases identified above.

93. Defendants have accepted and retained the benefit CBAI has conferred, even

though Defendants have (a) demanded that CBAI make payments on the Notes simultaneously;

(b) refused to replace the SGI Note with the Amended SGI Note; (c) repeatedly and unilaterally


22 75838625.1 0052273-00001

sought to convert the amounts owed under the SGI Note into CBAI common stock at a price

lower than the fixed price the parties agreed to include in the Amended SGI Note; (d) made

numerous requests to convert debt under the Notes into CBAI common stock; (e) conspired to

prevent CBAI from prepaying the amounts owed under the Notes; and (f) refused to complete

Phase Two of the Convertible Stock Debt Elimination Agreement and instead sought to enforce

Phase One in a manner contrary to the parties intent and Defendants representations.

94. The circumstances are such that it would be inequitable for Defendants to retain

the benefit CBAI conferred on them.

95. CBAI is, therefore, entitled in equity to recover from Defendants an amount equal

to the benefits CBAI has conferred on Defendants, to be determined at trial, but not less than

$75,000 exclusive of interest and costs, plus interest, costs, and reasonable attorneys fees.

96. CBAI is also entitled to an order enjoining Defendants from foreclosing on the

Notes and/or seeking to seize and/or sell CBAIs assets.

FIFTH CAUSE OF ACTION (Breach of Agreement (2012 Amendment Agreement)

Against Defendants)



98. In October 2012, Defendants and CBAI agreed to amend the Notes to extend the

beginning of the Installment Payments under the Tonaquint Note and allow cash prepayments

under the SGI Note. While, as set forth above, CBAI believes this agreement was part of Phase

Two of the Convertible Stock Debt Elimination Agreement, to the extent it was not, it constitutes

a new agreement referred to hereafter as the 2012 Amendment Agreement.


23 75838625.1 0052273-00001

99. The 2012 Amendment Agreement is a binding and enforceable contract.

100. Defendants have breached the 2012 Amendment Agreement by failing and

refusing to amend the Notes as agreed.

101. Defendants have also breached the 2012 Amendment Agreement by, among other

things, claiming that CBAI breached the Tonaquint Note and by refusing to allow CBAI to pay

off the Notes.

102. CBAI has fully performed, or has been excused from performing, its obligations

under the 2012 Amendment Agreement.






entitled to an order reforming the Tonaquint Note, the SGI Note, the Warrant and their related

document to be consistent with the 2012 Amendment Agreement.



SIXTH CAUSE OF ACTION (Promissory Estoppel Against Defendants)



107. As set forth above, both prior to and after execution of the Tonaquint Note, as part

of Phase One of the Convertible Stock Debt Elimination Agreement, Defendants repeatedly


24 75838625.1 0052273-00001

represented that, among other things, (a) they would complete Phase Two of the Convertible

Stock Debt Elimination Agreement; (b) they would amend the Notes so that they would be

consecutively amortized, (c) the Notes would not become due and owing simultaneously; (d)

Defendants would not seek to enforce the Notes simultaneously; (e) SGI would replace the SGI

Note with the Amended SGI Note that would be paid off on a set amortization schedule; or,


price of $.03 per share; (f) there would be no conversions or payments due under the SGI Note,

as it was to be replaced by the Amended SGI Note; (g) Defendants would not make requests to

convert debt under the Notes to CBAI common stock, other than at a conversion rate of $.03,

allowing CBAI to repay the Notes pursuant to a set amortization schedule by making monthly

payments of either cash or stock in CBAIs discretion; (h) Defendants would allow CBAI to

prepay the amounts owing under the Notes; and (i) the Convertible Stock Debt Elimination

Agreement would be completed in the two phases identified above.

108. In October 2012, Defendants further agreed with and represented to CBAI that

they would amend the Notes to among other things delay the installment payments under the

Tonaquint Note and allow CBAI to pay off the SGI Note in cash or stock before being required

to make payments under the Tonaquint Note.

109. CBAI detrimentally relied on Defendants repeated representations, by (a)

agreeing to enter into the Convertible Stock Debt Elimination Agreement; (b) by executing the

Tonaquint Note; and (c) by not making an election or payments under the Tonaquint Note.

110. CBAI acted with prudence and reasonably relied on Defendants representations as

set forth above.


25 75838625.1 0052273-00001

111. Defendants knew or should have known that Defendants were relying on their

representations and knew or should have known that their representations would cause CBAI to

rely on their representations.

112. It would be inequitable to allow Defendants to renege on their agreements and

representations.

113. Accordingly, Defendants should be estopped from denying that they agreed that

(a) they would complete Phase Two of the Convertible Stock Debt Elimination Agreement; (b)

they would amend the Notes so that they would be consecutively amortized; (c) the Notes would

not become due and owing simultaneously; (d) Defendants would not seek to enforce the Notes

simultaneously; (e) SGI would replace the SGI Note with the Amended SGI Note that would be

paid off on a set amortization schedule; or, alternatively, could be converted by SGI to CBAI

common stock, but only at a fixed conversion price of $.03 per share; (f) there would be no

conversions or payments due under the SGI Note, as it was to be replaced by the Amended SGI

Note; (g) Defendants would not make requests to convert debt under the Notes to CBAI common

stock, other than at a conversion rate of $.03, allowing CBAI to repay the Notes pursuant to a set

amortization schedule by making monthly payments of either cash or stock in CBAIs discretion;

(h) Defendants would allow CBAI to prepay the amounts owing under the Notes; and (i) the

Convertible Stock Debt Elimination Agreement would be completed in the two phases identified

above.

114. Defendants should also be estopped from denying that they agreed to amend the

Notes to, among other things, delay the installment payments under the Tonaquint Note and


26 75838625.1 0052273-00001

allow CBAI to pay off the SGI Note in cash or stock before being required to make payments


PRAYER FOR RELIEF

WHEREFORE, CBAI respectfully prays for this Courts judgment against Defendants

as follows:

On the First Claim for Relief for Fraud in the Inducement

1. For entry of an Order rescinding the Tonaquint Note, the SGI Note, the Warrant

and their related documents;

2. For entry of an Order reforming the Convertible Stock Debt Elimination


terms agreed upon by the parties in 2012, including that (i) the Notes would be consecutively

amortized; (ii) the Notes would not become due and owing simultaneously; (iii) Defendants

would not seek to enforce the Notes simultaneously; (iv) SGI would replace the SGI Note with

the Amended SGI Note that would be paid off on a set amortization schedule or, alternatively,

could be converted by SGI to CBAI common stock, but only at a fixed conversion price of $.03

per share; (v) Defendants would not make requests to convert debt under the Notes to CBAI

common stock, other than at a conversion price of $.03, and would allow CBAI to repay the

Notes pursuant to a set amortization schedule by making monthly payments of either cash or

stock in CBAIs discretion; (vi) Defendants would allow CBAI to prepay the amounts owing

under the Notes; and (vii) the Convertible Stock Debt Elimination Agreement would be

completed in the two phases identified above; and (b) allow CBAI time to either increase the


27 75838625.1 0052273-00001

Authorized Shares of CBAI and/or obtain the funds necessary to pay any amounts owed to

Defendants.

3. For an order enjoining Defendants from foreclosing on the Notes and/or seeking

to seize and/or sell CBAIs assets;

4. For an award of punitive damages in an amount to be determined at trial;

5. For an award of all damages incurred by CBAI, in an amount to be determined at

trial, but not less than $75,000 exclusive of interest and costs;

6. For an award of all costs, and reasonable attorneys fees incurred by CBAI;

7. For an award of pre-and post-judgment interest; and

8. For such other and further relief as this Court may deem just and proper.

On the Second Claim for Relief for Breach of Agreement (Convertible Stock Debt Elimination Agreement) 1. For entry of an Order rescinding the Tonaquint Note, the SGI Note, the Warrant










common stock, but would allow CBAI to repay the Notes pursuant to a set amortization schedule


28 75838625.1 0052273-00001

by making monthly payments of either cash or stock in CBAIs discretion; (vi) Defendants

would allow CBAI to prepay the amounts owing under the Notes; and (vii) the Convertible Stock

Debt Elimination Agreement would be completed in the two phases identified above; and (b)

allow CBAI time to either increase the Authorized Shares of CBAI and/or to obtain the funds

necessary to pay any amounts owed to Defendants.








On the Third Claim for Relief for Breach of the Implied Covenant of Good Faith and Fair Dealing 1. For entry of an Order rescinding the Tonaquint Note, the SGI Note, the Warrant








could only be converted by SGI to CBAI common stock, but only at a fixed conversion price of


29 75838625.1 0052273-00001

$.03 per share; (v) Defendants would not make requests to convert debt under the Notes to CBAI






Authorized Shares of CBAI and/or to obtain the funds necessary to pay any amounts owed to

Defendants.








On the Fourth Claim for Relief for Unjust Enrichment








30 75838625.1 0052273-00001










Authorized Shares of CBAI and/or to obtain the funds necessary to pay any amounts owed to

Defendants.



4. For an award in the amount equal to the benefits CBAI has conferred on

Defendants, to be determined at trial, but not less than $75,000 exclusive of interest and costs,

plus interest, costs, and reasonable attorneys fees;




On the Fifth Claim for Relief for Breach of Agreement (2012 Amendment Agreement) 1. For entry of an Order rescinding the Tonaquint Note, the SGI Note, the Warrant



31 75838625.1 0052273-00001

2. For entry of an Order reforming the Tonaquint Note, the SGI Note, the Warrant

and their related document to be consistent with the 2012 Amendment Agreement.








On the Sixth Claim for Relief for Promissory Estoppel

1. For entry of an Order estopping Defendants from denying that they agreed that (a)

they would complete Phase Two of the Convertible Stock Debt Elimination Agreement; (b) they

would amend the Notes so that they would be consecutively amortized, (c) the Notes would not

become due and owing simultaneously; (d) Defendants would not seek to enforce the Notes

simultaneously; (e) SGI would replace the SGI Note with the Amended SGI Note that would be

paid off on a set amortization schedule; or, alternatively, could be converted by SGI to CBAI

common stock, but only at a fixed conversion price of $.03 per share; (f) there would be no

conversions or payments due under the SGI Note, as it was to be replaced by the Amended SGI

Note; (g) Defendants would not make requests to convert debt under the Notes to CBAI common

stock, other than at a conversion rate of $.03, allowing CBAI to repay the Notes pursuant to a set

amortization schedule by making monthly payments of either cash or stock in CBAIs discretion;

(h) Defendants would allow CBAI to prepay the amounts owing under the Notes; and (i) the


32 75838625.1 0052273-00001

Convertible Stock Debt Elimination Agreement would be completed in the two phases identified

above.

2. For entry of an Order estopping Defendants from denying that they agreed to

amend the Notes to, among other things, delay the installment payments under the Tonaquint

Note and allow CBAI to pay off the SGI Note in cash or stock before being required to make

payments under the Tonaquint Note.



4. For entry of an Order reforming the Tonaquint Note, the SGI Note, the Warrant

and their related document to be consistent with the Convertible Stock Debt Elimination

Agreement and/or the 2012 Amendment Agreement.








For All Claims for Relief

1. For an order granting CBAI such other and further relief as the equities of the

case may require and this Court deems just and proper, together with the reasonable attorneys

fees, costs, and disbursements incurred by CBAI in this action.


33 75838625.1 0052273-00001

DEMAND FOR JURY TRIAL

Pursuant to Rule 38 of the Federal Rules of Civil Procedure and the Seventh Amendment

to the United States Constitution, CBAI demands a trial by jury on all issues properly triable by

jury.

DATED: May 7, 2014.

STOEL RIVES LLP

/s/ David L. Mortensen David L. Mortensen Jill M. Pohlman Jose A. Abarca Attorneys for Cord Blood America, Inc.

Plaintiffs Address: Cord Blood America, Inc. 1857 Helm Drive Las Vegas, Nevada 89119


34 75838625.1 0052273-00001

CERTIFICATE SERVICE I hereby certify that on the 7th day of May, 2014, I caused a true and correct copy of the

foregoing FIRST AMENDED COMPLAINT AND JURY DEMAND to be served via

CM/ECF on the following:

Nate D. Ashcraft Jonathan K. Hansen HANSEN BLACK ANDERSON ASHCRAFT 2940 West Maple Loop Drive, Suite 103 Lehi, Utah 84043

/s/ Stacy Kamaya


PARTIES, JURISDICTION, AND VENUE1. Plaintiff CBAI is a publicly-traded corporation organized and existing under the laws of the State of Florida, with its principal place of business at 1857 Helm Drive, Las Vegas, Nevada 89119. 2. On information and belief, defendant Tonaquint is a corporation organized and existing under the laws of the State of Utah, with its principal place of business at 303 East Wacker Drive, Suite 311, Chicago, Illinois 60601. On information and belief, Tonaquint is a privately held real estate development company, which makes convertible debt loans (as described below) to publicly-traded companies.3. On information and belief, defendant SGI is a limited liability company organized and existed under the laws of the State of Illinois, with its principal place of business at 303 East Wacker Drive, Suite 311, Chicago, Illinois 60601. On information and belief, SGI is an Illinois-based, privately held investment fund, which is in the business of making convertible debt loans (as described below) to publicly-traded companies. 4. On information and belief, Defendants are related entities in that they share common owners, principals, officers and/or directors. Specifically and among other things, on information and belief, John Fife (Fife) is the primary owner and a principal of both SGI and Tonaquint.5. The Court has subject-matter jurisdiction over this dispute pursuant to 28 U.S.C. 1332(a) because there is complete diversity of citizenship and the amount in controversy exceeds the sum of $75,000.00, exclusive of costs and interest. 6. This Court has personal jurisdiction over Defendants based on their continuous and systematic contacts with the State of Utah, through their regular transaction of business in this judicial district. Also, Defendants have had specific contacts with Utah sufficiently related to this cause of action to warrant the exercise of personal jurisdiction by this Court.7. Venue is proper in this district pursuant to 28 U.S.C. 1391.8. CBAI is engaged in the business of collecting, processing, and preserving umbilical cord blood and tissue, allowing families to preserve cord blood and tissue at the birth of a child for potential use in future stem cell therapy. Cord blood stem cells have been used in the treatment of more than 70 malignant and non-malignant diseases, including sickle cell, leukemia, non-Hodgkins lymphoma, other forms of cancer, life threatening anemias, and auto-immune diseases. 9. CBAI has one laboratory processing and storage facility located in Las Vegas, Nevada and also holds an interest in a company with a laboratory processing and storage facility, located in Buenos Aires, Argentina. Collectively, the two facilities store and service approximately 30,000 samples of umbilical cord blood and tissue. B. Convertible Promissory Notes 10. In the past, CBAI has obtained financing to fund its operations through the issuance of convertible promissory notes in exchange for loans made to CBAI. Typically, under these convertible promissory notes, the holders of the promissory notes receive an original issue discount (OID), meaning the creditor loans less than the face amount of the promissory note, and interest on the amount loaned to CBAI and the holders have the option to convert the amount owed into shares of CBAIs common stock at below market prices in accordance with formulas set forth in the applicable notes. This form of financing shall be referred to herein as Convertible Stock Debt.11. Beginning in 2009 and continuing for a time thereafter, CBAI issued a number of convertible promissory notes (the JMJ Notes) to JMJ Financial (JMJ).12. Pursuant to the JMJ Notes, JMJ had the option to convert all or a portion of the amounts owed under the JMJ Notes into CBAI common stock at conversion prices set forth in each of the JMJ Notes. C. CBAI Enters into the SGI Agreement.13. In order to raise additional funds, in 2011, CBAI also entered into a Note and Warrant Purchase Agreement (the SGI Agreement) with SGI.14. Pursuant to the 2011 SGI Agreement, SGI paid CBAI $250,000 and executed and delivered six secured buyer notes to CBAI. Each of the six secured buyer notes was in the amount of $125,000, for a total of $750,000.15. In return, CBAI granted SGI (a) a secured convertible promissory note in the principal amount of $1,105,500 (the SGI Note) and (b) a warrant to purchase Cord Blood common stock (the Warrant). D. CBAIs Convertible Debt and Authorized Shares of Stock.16. As a result of the JMJ Notes and the SGI Note, in 2012, much of CBAIs debt was in the form of promissory notes which could, at the request of the holder, be converted into CBAI common stock at prices below the publicly-traded price.17. Consequently, CBAI was concerned about the dilutive effect its Convertible Stock Debt had on its share price and its many shareholders. Additionally and among other concerns, CBAI was also concerned about being in default under the existing promissory notes if the note holders sought to convert debt into common stock and CBAI could not satisfy the requests because it had already issued the maximum amount of common stock authorized by CBAIs shareholders (the Authorized Shares). 18. Accordingly, CBAI resolved to take steps to eliminate all or a significant portion of its Convertible Stock Debt over time. In furtherance of this goal, CBAI took steps to become cash flow positive, eliminating any need for CBAI to take on any additional Convertible Stock Debt in its current form, to fund operations. CBAI has remained cash flow positive since the Second Quarter of 2012.19. Additionally, in or around 2012, CBAI began exploring possibilities for reducing its existing Convertible Stock Debt.E. CBAI Negotiates a Deal with SGI that Would Reduce CBAIs Potential Convertible Debt.20. In or around 2012, Fife approached CBAI about making an additional investment in CBAI. Consistent with its goal of reducing and eventually eliminating its Convertible Stock Debt, CBAI began negotiations with Fife. 21. During those negotiations, CBAI repeatedly explained that the purpose of any agreement was to enable CBAI to protect its stock price by eliminating all or a significant portion of CBAIs Convertible Stock Debt, while minimizing the amount of dilution of its common stock. 22. Consistent with that purpose, in 2012, Fife offered CBAI a two-step or two-phase deal for an additional loan to CBAI. Specifically, Fife proposed that the first step or phase would be for him, through SGI, to purchase the JMJ Notes. And, the second step or phase would be for Fife to (a) exchange the existing SGI note for a new note with fixed price terms (the Amended SGI Note); (b) exchange the JMJ Notes purchased from JMJ for new, self-amortizing notes, with fixed conversion prices (the Second SGI Note); and (c) consecutively amortize the notes, thereby allowing CBAI to pay off the Amended SGI Note before being required to make any payments on the Second SGI Note. 23. On or about May 21, 2012, CBAI accepted Fifes offer. CBAI refers to these two steps or phases as offered by Defendants, through Fife, and as accepted by CBAI as the Convertible Stock Debt Elimination Agreement.24. Consistent with CBAIs goal of eliminating all or a significant portion of CBAIs Convertible Stock Debt in the Convertible Stock Debt Elimination Agreement, CBAI and Fife agreed that: (a) SGI would exchange the SGI Note for the Amended SGI Note that would be paid off on a set amortization schedule or alternatively could be converted by SGI, but only at a fixed conversion price of $.03 per share; (b) the Second SGI Note and the Amended SGI Note would amortize consecutively, allowing CBAI to repay one of the notes prior to being required to make any payments on the other note; (c) SGI would not make requests to convert debt under the Second SGI Note or the Amended SGI Note, other than at a share price of $.03, and would allow CBAI to repay those notes pursuant to an amortization schedule by making monthly payments of either cash or stock in CBAIs discretion; and (d) CBAI could prepay the entire amount of the Second SGI Note and the Amended SGI Note. 25. Additionally, in the Convertible Stock Debt Elimination Agreement, CBAI and Fife also agreed that SGI would not make conversion requests on the SGI Note, prior to replacing it with the Amended SGI Note. 26. Moreover, during negotiations, CBAI and Fife understood and agreed that the purpose of the Convertible Stock Debt Elimination Agreement was to (a) allow CBAI to eliminate its burdensome long-term convertible stock debt, in its then-existing form; (b) increase CBAIs cash flow by consecutively amortizing the Second SGI Note and the Amended SGI Note; (c) allow CBAI to repay the Second SGI Note and the Amended SGI Note pursuant to a set amortization schedule by making monthly payments of either cash or stock in CBAIs absolute discretion; and (d) allow CBAI to prepay the entire amount of the Second SGI Note and the Amended SGI Note.27. Many, if not all, of the agreed upon terms of the Convertible Stock Debt Elimination Agreement were memorialized in emails sent by Fife to CBAI in 2012. F. The Threat of Litigation By JMJ Causes the Parties to Complete Written Documentation of the Convertible Stock Debt Elimination Agreement in Two Phases. 28. In 2012, CBAI became concerned that JMJ was on the verge of initiating a lawsuit against CBAI on the JMJ Notes. Accordingly and in order to quickly obtain the funds necessary to repay JMJ, CBAI and Fife agreed that they would complete the Convertible Stock Debt Elimination Agreement in the two steps and/or two phases previously identified by Fife at different times.29. Specifically, as Fife has proposed and CBAI had accepted, in the first step or phase, CBAI and SGI agreed they would complete the Second SGI Note, a traditional, form convertible stock agreement and related documents, whereby Fife (through SGI) would provide the funds for CBAI to pay off the JMJ Notes (Phase One).30. Thereafter, as proposed by Fife and as accepted by CBAI, in the second step or phase, CBAI and SGI would complete the Amended SGI Note and related documents, which would replace the existing SGI Note, which the parties had agreed was to be of no further force and effect and the Second SGI Note would be aligned to amortize after CBAI had repayed the Amended SGI Note (Phase Two). 31. At this time and in order to induce CBAI to execute the Second SGI Note and to enter into the Convertible Stock Debt Elimination Agreement, Fife repeatedly represented that (a) the SGI Note would be replaced by the Amended SGI Note; (b) the Second SGI Note and the Amended SGI Note would be amortized consecutively and Defendants would not seek to enforce those notes simultaneously; (c) no payment or conversions would be required or allowed under the SGI Note, as it was to be replaced by the Amended SGI Note; (d) CBAI would be allowed to repay the Second SGI Note and the Amended SGI Note pursuant to a set amortization schedule by making monthly payments of either cash or stock in CBAIs absolute discretion; and (e) CBAI would be allowed to prepay the entire amount of the Second SGI Note and the Amended SGI Note at its discretion. 32. Based on these and other representations, CBAI agreed to execute the Convertible Stock Debt Elimination Agreement in the two steps or phases set forth above. G. Fife Substitutes Tonaquint for SGI as the Party to the Second SGI Note. 33. At the eleventh hour as the parties were drafting the Second SGI Note and the other related documents for Phase One of the Convertible Stock Debt Elimination Agreement, Fife substituted Tonaquint in for SGI as a party to the Second SGI Note, making Tonaquint a party to the Convertible Stock Debt Elimination Agreement. There was almost no discussion amongst the parties about this substitution. 34. Around that same time, Fife requested that the parties change the structure of Phase One. Instead of Tonaquint buying the JMJ notes and exchanging the note for a new note with CBAI, Tonaquint asked CBAI to agree to Tonaquint loaning the funds to CBAI and CBAI paying off the JMJ notes. Because this did not materially change the Convertible Stock Debt Elimination Agreement, CBAI agreed. 35. Accordingly and pursuant to Phase One of the Convertible Stock Debt Elimination Agreement, CBAI issued the Second SGI Note to Tonaquint in the amount of $1,252,000. The Second SGI Note shall hereafter be referred to as the Tonaquint Note. 36. Also, pursuant to Phase One of the Convertible Stock Debt Elimination Agreement, CBAI received $1,120,000 in cash at closing. As the parties agreed, CBAI used those funds to pay off the JMJ Notes. 37. As a result of the Convertible Stock Debt Elimination Agreement, the vast majority of CBAIs debt was held by SGI in the form of the SGI Note and Tonaquint in the form of the Tonaquint Note (together, the Notes).38. As set forth above, before and after the Convertible Stock Debt Elimination Agreement was executed, Defendants represented to CBAI that (a) the Notes would be consecutively amortized, (b) the Notes would not become due and owing simultaneously; (c) Defendants would not seek to enforce the Notes simultaneously; (d) SGI would replace the SGI Note with the Amended SGI Note that would be paid off on a set amortization schedule; or, alternatively, could be converted by SGI to CBAI common stock, but only at a fixed conversion price of $.03 per share; (e) there would be no conversions or payments due under the SGI Note, as it was to be replaced by the Amended SGI Note; (f) Defendants would not make requests to convert debt under the Notes to CBAI common stock, other than at a conversion rate of $.03, allowing CBAI to repay the Notes pursuant to a set amortization schedule by making monthly payments of either cash or stock in CBAIs discretion; (g) Defendants would allow CBAI to prepay the amounts owing under the Notes; and (h) the Convertible Stock Debt Elimination Agreement would be completed in the two phases identified above. H. SGI and Tonaquint Fail to Perform Phase Two of the Convertible Stock Debt Elimination Agreement. 39. After the parties completed Phase One of the Convertible Stock Debt Elimination Agreement, CBAI repeatedly contacted Defendants about completing Phase Two of the Convertible Stock Debt Elimination Agreement as Fife had represented and the parties had agreed to do. In response, Fife and Defendants represented that their legal department was working on other projects, but would complete the paper work for Phase Two.40. Specifically, within a few days after completing the Tonaquint Note and other documents consistent with Phase One of the Convertible Stock Debt Elimination Agreement, CBAI spoke with Fife about completing Phase Two of the Convertible Stock Debt Elimination Agreement. At that time, Fife referred to the time spent creating all of the documents necessary for Phase One and suggested that the parties take a break before proceeding to Phase Two and lining up the Notes. 41. Thereafter, CBAI devoted its time and efforts to increasing CBAIs authorized stock and, on or about September 25, 2012, CBAI was able to complete the documents necessary for and obtained shareholder approval of an increase in CBAIs authorized stock. 42. A few days later, on or about October 1, 2012, CBAI contacted Defendants to discuss completing Phase Two by amending the Notes. Specifically, CBAI and Defendants discussed pushing back the date for the installment payments under the Tonaquint Note so that the Notes would consecutively amortize, allowing CBAI to pay the Notes one at a time and in cash or stock in CBAIs discretion. 43. Thereafter, on or about October 2, 2012, Defendants sent an email stating that they would, as previously agreed, amend the Notes to extend the beginning of the installment payments under the Tonaquint Note and allow cash prepayments under the SGI Note. 44. In response, CBAI again accepted this offer and again agreed to amend the Notes consistent with Phase Two. While CBAI believes this agreement was part of Phase Two of the Convertible Stock Debt Elimination Agreement, to the extent it was not, it constitutes a new agreement referred to hereafter as the 2012 Amendment Agreement. 45. Accordingly, on or about October 17, 2012, Defendants told CBAI that they would have their counsel prepare the documents necessary to amend the Notes, consistent with Phase Two, to among other things delay the installment payments under the Tonaquint Note and allow CBAI to pay off the SGI Note in cash or stock before being required to make payments under the Tonaquint Note.46. Thereafter, CBAI repeatedly contacted Defendants to follow up on the amendments for the Notes. In response, Defendants represented that their lawyers had been backed up, but would complete the documents.47. Relying on Defendants repeated representations that the Notes would be amended consistent with Phase Two and that the time for installment payments under the Tonaquint Note would be pushed back, CBAI did not make an election or make any payments under the Tonaquint Note.48. Around this same time, CBAI began asking Defendants to provide an accounting of the amounts Defendants claimed to be owed under the Notes. In response, on January 15, 2013, Defendants sent an accounting of the amounts it claimed were owing under the Tonaquint Note. Consistent with Phase Two and Defendants agreement to amend the Notes, Defendants accounting showed that there had been no defaults under the Tonaquint Note and that the amount due and owing was only the principal amount plus interest. 49. Despite these repeated representations, after Phase One was completed, Defendants have failed to complete Phase Two as agreed. Additionally, contrary to Defendants repeated representations, (a) SGI has failed to execute the Amended SGI Note; (b) Defendants have not allowed CBAI to amortize the Notes consecutively, instead demanding that CBAI perform under the Notes simultaneously; and (c) Defendants have conspired to prevent CBAI from prepaying both notes.50. In addition, despite agreeing to not do so, SGI submitted numerous conversion notices to CBAI in which SGI converted amounts owed under the SGI Note into shares of CBAI common stock, without replacing the SGI Note, as agreed. In essence, Defendants have sought to convert amounts owed under the SGI Note, a note that the parties agreed would be replaced and would have no further force or effect. 51. Moreover, Defendants knew that one of the primary purposes of CBAIs willingness to enter the Convertible Stock Debt Elimination Agreement was to reduce dilution of CBAIs common stock as much as possible, and to avoid having to request any further increases in CBAIs Authorized Stock to pay the Convertible Stock Debt. Despite this knowledge and its prior representations, SGI continued to make conversion requests under the prior SGI Note, which was supposed to be replaced, knowing that doing so would force CBAI to dilute the common stock base and eventually force CBAI to seek to obtain authorization to issue more shares. 52. Beyond that, despite making representations to CBAI that CBAI could make payments on the Notes in stock or cash, Defendants have demanded that CBAI make payments in CBAI common stock. On information and belief, Defendants have made these requests as part of a conspiracy to eliminate all of CBAIs Authorized Shares, thereby allowing Defendants to claim that CBAI is in default under the Notes and Warrant and allowing Defendants to impose strict penalties and/or foreclose on and sell all of CBAIs assets. 53. Consistent with their strategy, Defendants have threatened to foreclose on the Notes, and thereby seize and sell all of CBAIs assets.54. In August 2013, CBAI requested that Defendants provide a payoff amount and an accounting of the amounts they claimed were owing under the Notes.55. In response, Tonaquint sent a letter, which, contrary to Defendants prior representations, for the first time claimed that CBAI had defaulted under the Tonaquint Note in October 2012--10 months earlier.56. SGI has never responded to CBAIs request for a payoff amount and accounting. FIRST CAUSE OF ACTION(Fraud in the Inducement Against Defendants)57. CBAI hereby incorporates by reference the allegations set forth in paragraphs 1 through 56 above as though fully set forth herein. 58. As set forth above, in 2012, while CBAI was contemplating whether to enter the Convertible Stock Debt Elimination Agreement, including the Tonaquint Note, Defendants represented to CBAI that, among other things, they would complete Phase Two, that the Notes would be amended so that they were consecutively amortized, that the Notes would not become due and owing simultaneously, and that Defendants would not seek to enforce the Notes simultaneously. In fact, Defendants have sought to enforce the Notes simultaneously, demanding that CBAI make payments on the Notes concurrently.59. As set forth above, in 2012, while CBAI was contemplating whether to enter the Convertible Stock Debt Elimination Agreement, including the Tonaquint Note, Defendants represented that, consistent with Phase Two, SGI would replace the SGI Note with the Amended SGI Note, that the Amended SGI Note would be paid off on a set amortization schedule or, alternatively, could be converted by SGI to CBAI common stock, but only at a fixed conversion price of $.03 per share. In fact, Defendants have refused to replace the SGI Note with the Amended SGI Note and have repeatedly and unilaterally sought to convert the amounts owed under the SGI Note into CBAI common stock at a price lower than the fixed price. 60. As set forth above, in 2012, while CBAI was contemplating whether to enter the Convertible Stock Debt Elimination Agreement, including the Tonaquint Note, Defendants represented to CBAI that, consistent with Phase Two, they would not make requests to convert debt under the Notes to CBAI common stock. Rather, Defendants represented that CBAI would be able to repay the Notes pursuant to a set amortization schedule by making monthly payments of either cash or stock in CBAIs discretion. In fact, Defendants have made numerous requests to convert debt under the Notes into CBAI common stock.61. As set forth above, in 2012, while CBAI was contemplating whether to enter the Convertible Stock Debt Elimination Agreement, including the Tonaquint Note, Defendants represented to CBAI that, consistent with Phase Two, CBAI could prepay all amounts owed under the Notes. In fact, Defendants have conspired to prevent CBAI from prepaying the amounts owed under the Notes.62. As set forth above, in 2012, while CBAI was contemplating whether to enter the Convertible Stock Debt Elimination Agreement, including the Tonaquint Note, Defendants represented that, consistent with Phase Two, the Convertible Stock Debt Elimination Agreement would be completed in the two phases identified above, including that in Phase One the parties would complete the Tonaquint Note and in Phase Two the parties would replace the SGI Note with the Amended SGI Note and consecutively amortize the Notes. In fact, since completing Phase one, Defendants have failed to complete Phase Two and instead seek to enforce Phase One in a manner contrary to the parties intent and Defendants representations.63. SGI and Tonaquint knew or should have known that their representations set forth above were false.64. SGI and Tonaquint knowingly and intentionally misled CBAI through false and material misrepresentations concerning CBAIs rights and obligations under the Notes to induce CBAI to enter into the Convertible Stock Debt Elimination Agreement, including the Tonaquint Note as part of Phase One.65. CBAI was materially induced to enter into the Tonaquint Note as part of Phase One of the Convertible Stock Debt Elimination Agreement based on Defendants false representations set forth above.66. CBAI did not know that Defendants representations were false at the time they were made.67. CBAI reasonably relied on Defendants misrepresentations to their detriment by entering into the Convertible Stock Debt Elimination Agreement, including the Tonaquint Note as part of Phase One.68. As a direct and proximate result of Defendants fraudulent inducement, CBAI has suffered and continues to suffer actual, incidental, and consequential damages in an amount to be determined at trial, but not less than $75,000, exclusive of costs and interest. 69. Defendants fraudulent inducement was willful, wanton and malicious, with the intent to harm and irreparably damage CBAI, thereby subjecting Defendants to an adverse award of punitive damages to aid in the deterrence of such future conduct.70. As a result of Defendants fraudulent misrepresentations, CBAI is also entitled to an order rescinding the Tonaquint Note, the SGI Note, the Warrant and their related documents. Alternatively, CBAI is entitled to an order reforming the Convertible Stock Debt Elimination Agreement, including the Notes, to (a) be consistent with Defendants representations and the terms agreed upon by the parties in 2012; and (b) allow CBAI time to either increase Authorized Shares and/or to obtain the funds necessary to pay any amounts owed to Defendants. 71. As a result of Defendants fraudulent misrepresentations, CBAI is also entitled to an order enjoining Defendants from foreclosing on the Notes and/or seeking to seize and/or sell CBAIs assets.SECOND CAUSE OF ACTION(Breach of Agreement (Convertible Stock Debt EliminationAgreement ) Against Defendants)72. CBAI hereby incorporates by reference the allegations set forth in paragraphs 1 through 71 above as though fully set forth herein.73. To the extent the Convertible Stock Debt Elimination Agreement, including the Tonaquint Note as part of Phase One, was not obtained by Defendants fraudulent inducement as described above, it is a valid and binding agreement. 74. Pursuant to the Convertible Stock Debt Elimination Agreement, Defendants warranted and agreed, among other things, that (a) t

CBAI Amended Complaint

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Transcript of CBAI Amended Complaint