Opinion
00 Civ. 8695 (WHP)(KNF)
February 11, 2004
REPORT AND RECOMMENDATION
I. INTRODUCTION
Plaintiff International Telecom, Inc. ("ITI"), brought this action for breach of contract, conversion, breach of fiduciary duty, and fraud against, inter alia, Generadora Electrica Del Oriente, S.A ("GEDO") and Antonio Jorge Alvarez ("Alvarez") (collectively "defendants"). Upon defendants' failure to defend against the action, your Honor ordered that a default be entered against the defendants. Your Honor then referred the matter to the undersigned to conduct an inquest and to report and recommend the amount of damages, if any, to be awarded to the plaintiff against the defendants.
The Court directed the plaintiff to file and serve proposed findings of fact and conclusions of law and an inquest memorandum setting forth its proof of damages, costs of this action, and its attorney's fees. The defendants were directed to file and serve opposing memoranda, affidavits and exhibits, as well as any alternative findings of fact and conclusions of law they deemed appropriate, and to state whether a hearing was requested for the purpose of examining witnesses.
Alvarez requested that the Court hold an inquest hearing, which it did; however, the defendants failed to appear at the hearing.
In support of its request for damages, the plaintiff submitted a letter to the undersigned prior to the hearing. Attached to this letter were,inter alia: a declaration by the plaintiff's counsel Alfred Ferrer III ("Ferrer Declaration"); a letter report regarding damages, authored by John D. Ghee, a damages expert hired by plaintiff ("Ghee Report"); and materials relied upon by Mr. Ghee in producing his report. Additionally, the plaintiff introduced three exhibits into evidence at the hearing: 1) a supplemental computation of prejudgment interest allegedly owed to plaintiff; 2) an additional copy of the Ghee Report (without attachments), on which appears a handwritten notation that, according to the plaintiff, is an acknowledgment of service by the defendants' former counsel; and 3) Mr. Ghee's resume.
Plaintiff's submissions aver that it is entitled to $13,630,592 in damages, as well as prejudgment interest.
In opposition to the plaintiff's application for damages, Alvarez submitted a declaration to the undersigned. No submissions were received from GEDO in connection with the plaintiff's damages request.
For the reasons set forth below, I recommend that the plaintiff's request for an award of damages be denied.
II. BACKGROUND AND FACTS
Based on submissions by the plaintiff, the complaint filed in the instant action — the factual allegations of which, perforce of the defendants' default, must be accepted as true, except as they relate to damages, see Au Bon Pain Corp. v. Artect Inc., 653 F.2d 61, 65 (2d Cir. 1981) — and the Court's review of the entire court file maintained in this action, the following findings of fact are made:
ITI is a Florida corporation whose principal place of business is located in that state. ITI operates telecommunications facilities within the United States and provides both domestic and international long distance telecommunications services.
Alvarez is a citizen of the state of South Carolina, and is the chief executive officer of GEDO.
GEDO is a corporation organized under the laws of the Republic of Guatemala, whose principal place of business is located in that country. GEDO operates telecommunications facilities in Guatemala. GEDO is a mere instrumentality and alter ego of Alvarez.
In 1998, ITI sought to become a provider of international telecommunications services between the United States and Guatemala. On or about March 2, 1998, ITI entered into an agreement with GEDO ("Service Agreement"), under which GEDO was to provide ITI access to 100 telephone lines in Guatemala, for the purpose of terminating telephone traffic between that country and the United States. The Service Agreement, which is contained in sub-Exhibit B of Exhibit A to the Ferrer Declaration, provides that GEDO would terminate telephone traffic for ITI at a rate of no more than $0.03 per minute, and, for this service, would receive a commission from ITI of $0.015 per minute. The Service Agreement was to remain in force for five years, although the plaintiff alleges that this period was subsequently enlarged to ten years by an amendment to the Service Agreement.
In order to terminate telephone traffic for ITI, GEDO needed to secure telecommunication services from Telgua, the dominant national telephone carrier in Guatemala. GEDO did so, and performance under the Service Agreement commenced in or around September 1998. Approximately eight months later, in May 1999, Telgua ceased providing service to GEDO. This caused an interruption in GEDO's service to ITI that lasted until Telgua restored service to GEDO in July 1999. In September 1999, Telgua once again ceased providing service to GEDO. Telgua informed GEDO and ITI that they would need to pay Telgua at an increased rate in order for service to be restored, but that the additional payment would later be refunded. ITI alleges that it paid an additional $210,000 in response to this demand from Telgua. Nevertheless, Telgua neither restored service nor refunded the additional payments.
ITI and GEDO entered into a second agreement, under which ITI was to finance legal actions by GEDO against Telgua ("Litigation Agreement"). In exchange, GEDO agreed to use any award or settlement payment to repay ITI for overpayments it made to Telgua and for other expenses ITI had incurred in keeping GEDO in business during the periods when service was interrupted. It was agreed that, after ITI had been reimbursed fully for those expenditures, any remaining funds would be used to compensate GEDO for lost commissions and to compensate ITI for lost profits.
It is unclear from the record whether the Litigation Agreement was written or oral. No copy of that agreement was received by the Court.
GEDO commenced litigation against Telgua. The litigation, as noted above, was financed by ITI. In May 2000, Telgua attempted to engage GEDO in settlement negotiations. According to the Amended Complaint, Alvarez directed Telgua to negotiate directly with ITI, as ITI was the real party in interest. In July 2000, Telgua offered to pay ITI $925,000 in order to terminate the litigation, and ITI rejected this offer. ITI contends, based on information and belief, that in October 2000, without ITI's knowledge, Telgua entered into settlement negotiations with GEDO and Alvarez. ITI also contends that GEDO agreed to enter into a new service agreement with Telgua and agreed further to seek dismissal of the claims it brought against Telgua on ITI's behalf. In exchange, Telgua agreed to pay GEDO and Alvarez $850,000. According to the Amended Complaint, on November 6, 2000, Alvarez wrote to ITI to notify it that he did not intend to apportion the settlement funds as called for in the Litigation Agreement. Instead, ITI contends that Alvarez kept the settlement funds for himself.
ITI has not advised the Court of the source of its information or the grounds for its belief.
According to ITI, the payments GEDO agreed to make to Telgua in the new service agreement made it economically impossible for GEDO to comply with its Service Agreement with ITI. In the November 6, 2000 letter noted above, Alvarez indicated that GEDO would no longer terminate telephone traffic for ITI, as called for in the Service Agreement. Since that time, GEDO has not terminated any telephone traffic for ITI.
ITI filed this action on November 14, 2000. Its submissions aver that it is entitled to: 1) $12,702,520 for lost profits stemming from the interruption of service between July 1999 and October 2000, and stemming from the lack of service during the seven — and — a — half — year period between GEDO's repudiation of the Service Agreement in November 2000, and the end of the (enlarged) term of the Service Agreement in March 2008; 2) $717,923 in damages for breach of the Litigation Agreement, conversion, fraud and breach of fiduciary duty or the imposition of a constructive trust for that amount, embracing the proceeds from the defendants' settlement with Telgua; 3) $210,149 in damages for breach of contract and conversion stemming from the defendants' failure to return equipment to the plaintiff; and 4) prejudgment interest on each of these amounts, accruing on November 6, 2000, at a rate of 9% per annum.
III. CONCLUSIONS OF LAW
As noted above, upon the entry of a party's default in an action, the party is deemed to have admitted all factual allegations in the complaint, except as they relate to damages. See Au Bon Pain Corp., 653 F.2d at 65. However, a court has discretion to determine whether the facts alleged in a complaint state a legally sufficient cause of action.See, e.g., In re Crazy Eddie Sec. Litig., 948 F. Supp. 1154, 1160 (E.D.N.Y. 1996). Additionally, the amount of damages must be established by the plaintiff in a post — default inquest, "unless the amount is liquidated or susceptible of mathematical computation." Flaks v. Koegel, 504 F.2d 702, 707 (2d Cir. 1974). In conducting an inquest, a court need not hold a hearing "as long as it [has] ensured that there was a basis for the damages specified in the default judgment." Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., 109 F.3d 105, 111 (2d Cir. 1997). The court may rely on affidavits or documentary evidence in evaluating the fairness of the sum requested. See Tamarin v. Adam Caterers. Inc., 13 F.3d 51, 54 (2d Cir. 1993).
Lost Profits
Under New York law, a party may recover lost profits stemming from a breach of contract "if (1) its alleged lost profits were caused by the breach; (2) the 'damages were fairly within the contemplation of the parties' when contracting; and (3) the damages can be proven with a reasonable certainty." Merlite Industries, Inc. v. Valassis Inserts, Inc., 12 F.3d 373, 376 (2d Cir. 1993) (quoting Kenford Co. v. County of Erie. 67 N.Y.2d 257, 261, 502 N.Y.S.2d 131, 132).
The record before the Court does not contain any evidence indicating that, at the time the Service Agreement was formed, the parties intended GEDO to be liable to ITI for lost profits caused by an interruption in the provision of telecommunications services. The express language of the Service Agreement makes the opposite conclusion clear:
Neither party shall be liable to the other for any loss or damage sustained by reasons of any failure in, or breakdown of, the telecommunications facilities or for any interruption of service covered by this Agreement, no matter what the cause of such breakdown or interruption, or however long it shall last.
Service Agreement, ¶ 10.
Accordingly, ITI may not recover from the defendants lost profits stemming from the interruptions in telecommunications service that occurred during the period May 1999 through October 2000.
The Service Agreement does not expressly provide for recovery by ITI of anticipated lost profits stemming from the defendants' non — performance of the contract during the period November 2000 through March 2008. "In the absence of any provision for such an eventuality, the commonsense rule to apply is to consider what the parties would have concluded had they considered the subject."Kenford, 67 N.Y.2d at 262, 502 N.Y.S.2d at 133. The Amended Complaint does not allege any facts that support the conclusion that the parties intended to be liable to one another for future lost profits following a breach of the Service Agreement. Accordingly, there is no basis upon which to conclude that the parties intended, at the time of contracting, that the defendants be liable to ITI for such damages. The plaintiff's claim for breach of the Service Agreement is therefore a legally insufficient basis upon which to recover anticipated lost profits for the period following the defendants' breach.
Proceeds from Telgua Settlement
ITI contends that, pursuant to the Litigation Agreement, GEDO should have paid ITI $717,923 to reimburse ITI for: (a) costs it had incurred to support GEDO's operations during the performance of the Service Agreement; (b) costs it incurred after GEDO repudiated the Service Agreement; (c) unrefunded overpayments ITI made to Telgua; and (d) unearned commission advances it paid to Alvarez. Under any of the theories advanced by the plaintiff for recovery of the settlement funds, however, recovery cannot be greater than the amount of money actually received by GEDO and taken by Alvarez. Thus, in order to recover the $717,923 that it seeks on this claim, the plaintiff must establish two facts: 1) that ITI incurred $717,923 in expenditures that were reimbursable under the Litigation Agreement ("reimbursable expenditures"); and 2) that GEDO received an award or settlement totaling at least this amount.
To substantiate its reimbursable expenditures, ITI has submitted the Ghee Report, with numerous supporting documents attached thereto. However, the record does not contain any competent evidence demonstrating how much, if anything, GEDO and Alvarez were paid by Telgua in order to settle the litigation brought on behalf of ITL The Amended Complaint's allegations regarding the settlement agreement between GEDO and Telgua and any resulting payment of settlement funds are made on "information and belief." The source of the information and the grounds for ITI's belief have not been disclosed to the Court. While facts alleged in a complaint are deemed admitted upon a party's default for the purposes of establishing liability, facts related to damages must be proven, unless damages are liquidated or susceptible of mathematical computation. See Flaks, 504 F.2d at 707. Absent competent evidence in the record, the Court has no basis upon which to rely in making an award to the plaintiff on this claim. Accordingly, the plaintiff cannot recover damages from the defendants stemming from the settlement they reached with Telgua.
Unreturned Equipment
The Ferrer Declaration states that on ITI's claims stemming from the defendants' failure to return equipment to it — Counts III and IV of the Amended Complaint — the plaintiff is entitled to judgment "in the amount of no less than $210,149 for [the defendants'] breach of contract and conversion in refusing to return to Plaintiff equipment worth that amount despite Plaintiff's demand." Ferrer Declaration, ¶ 25(c). The Ferrer Declaration states further that:
The precise damage amounts, as confirmed by the Ghee report, are therefore as follows:
. . .
c. On Counts III and IV, the principal amount of $210,149.
Ferrer Declaration, ¶ 32.
The Ghee Report does not address damages for the equipment that was not returned to the plaintiff as alleged in Counts III and IV of the Amended Complaint. See Ghee Report, p. 1; Ferrer Declaration, ¶ 27. While the Ferrer Declaration does state that these damages "are substantiated by invoices produced in discovery," that material is not part of the record before the Court. For example, the record does not contain an inventory itemizing the equipment in question, invoices or other documents substantiating the value of the equipment, or any other information — aside from the statements in the Ferrer Declaration — upon which the Court might evaluate the plaintiff's application for damages arising out of the defendants' failure to return equipment to the plaintiff.
The Court finds that the Ferrer Declaration, without more, does not provide sufficient information upon which the Court can rely in determining the amount of damages, if any, that the plaintiff should be awarded for the defendants' failure to return equipment to it.
IV. RECOMMENDATION
For the reasons discussed above, I recommend that the plaintiff's application for damages be denied.
V. FILING OF OBJECTIONS TO THIS REPORT AND RECOMMENDATION
Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties shall have ten (10) days from service of this Report to file written objections. See also Fed.R.Civ.P. 6. Such objections, and any responses to objections, shall be filed with the Clerk of Court, with courtesy copies delivered to the chambers of the Honorable William H. Pauley III, 500 Pearl Street, Room 2210, New York, New York, 10007, and to the chambers of the undersigned, 40 Centre Street, Room 540, New York, New York, 10007. Any requests for an extension of time for filing objections must be directed to Judge Pauley. FAILURE TO FILE OBJECTIONS WITHIN TEN (10) DAYS WELL RESULT IN A WAIVER OF OBJECTIONS AND WILL PRECLUDE APPELLATE REVIEW. See Thomas v. Arn 474 U.S. 140 (1985); IUE AFL — CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1054 (2d Cir. 1993); Frank v. Johnson, 968 F.2d 298, 300 (2d Cir. 1992); Wesolek v. Canadair Ltd., 838 F.2d 55, 57-59 (2d Cir. 1988);McCarthy v. Manson, 714 F.2d 234, 237-38 (2d Cir. 1983).