Opinion
22-CV-9601 (MMG) (OTW)
04-10-2024
JAVON JOHNSON, Plaintiff, v. KENNETH REECE, Defendant.
REPORT AND RECOMMENDATION TO THE HONORABLE MARGARET M. GARNETT
ONA T. WANG, UNITED STATES MAGISTRATE JUDGE
I. INTRODUCTION
Plaintiff Javon Johnson (“Plaintiff”) brings this action against Defendant Kenneth Reece (“Defendant”) for breach of contract (Count I), breach of fiduciary duty (Count II), breach of the implied covenant of good faith and fair dealing (Count III), unjust enrichment (Count IV), and accounting (Count V), arising out of Plaintiff's investment in Defendant's cryptocurrency exchange startup venture. (ECF 1). Defendant did not appear or respond to the Complaint. Accordingly, Judge Broderick granted a default judgment on July 20, 2023, and referred this matter to me for an inquest into damages. (ECF 23).
II. BACKGROUND
A. Factual Background
The following facts, drawn from Plaintiff's Complaint (ECF 1) (hereinafter, “Compl.”), Plaintiff's Proposed Findings of Fact and Conclusions of Law (ECF 26), and Plaintiff's Inquest Memorandum of Damages (ECF 27), are deemed established for the purposes of determining Defendants' liability and the damages to which Plaintiff is entitled. See, e.g., City of New York v. Mickalis Pawn Shop, LLC, 645 F.3d 114, 137 (2d Cir. 2011) (“It is an ‘ancient common law axiom' that a defendant who defaults thereby admits all ‘well-pleaded' factual allegations contained in the complaint.”) (internal citation omitted); Finkel v. Romanowicz, 577 F.3d 79, 84 (2d Cir. 2009) (“In light of [defendant's] default, a court is required to accept all of [plaintiff's] factual allegations as true and draw all reasonable inferences in its favor[.]”) (citing Au Bon Pain Corp. v. Artect, Inc., 653 F.2d 61, 65 (2d Cir. 1981)).
Sometime in “the middle of 2020,” Defendant asked whether Plaintiff was interested in investing in a cryptocurrency exchange startup, known as both BloxXwop LLC (a New York LLC) and Blox Financial OU (a New York company) (collectively, “BloxXwop”). Compl. ¶ 7-8. Plaintiff represents that he and Defendant had previously “engaged in numerous business transactions.” Id. ¶ 6. After Defendant made several representations to Plaintiff about the potential of BloxXwop, including sending him a pitch deck and telling him that it “would do $500 million dollars in volume per day,” Plaintiff invested $150,000 USD in BloxXwop on October 22, 2020, equivalent to a 12.5% equity share. Id. ¶ 9-13. Later, in November 2020, Plaintiff invested 1.90878297 Bitcoin, which was then worth $35,041,for a 15% share in BloxXwop, or $185,000. Id. ¶ 13; ECF 27.
Plaintiff's Inquest Memorandum of Damages includes a PDF receipt of the Bitcoin transaction showing a transaction date of November 24, 2020. (ECF 27-1).
Plaintiff's Complaint sets forth a number of exchanges between Plaintiff and Defendant during which Plaintiff asked questions about the progress of the exchange and expressed concern about when he could expect a return on his initial investment. Compl. ¶ 13-15. Defendant extolled the promise of his exchange and predictions for the rising price of bitcoin, such as “[i]t's going to be a run history as never seen.... Bitcoin will be 50 by this time next year minimum from what I gather.” Id. ¶ 15(a). Starting in October 2020, Plaintiff attended a number of meetings with Defendant and members of an alleged development team that were developing a website for BloxXwop. Id. ¶ 18. One of the attendees at this meeting was Bibiana Aquero, BloxXwop's COO. Id. In April 2021, Plaintiff stopped attending these meetings “because BloxXwop was not doing the business that [Defendant] had represented it would, and was not paying any dividends.” Id. ¶ 21.Plaintiff also alleges that Ms. Aquero told him that Defendant had sexually harassed her. Id. ¶ 22. Based on this fact and the failure to pay dividends, Plaintiff informed Defendant that he wanted Defendant to buy back his BloxXwop shares, i.e., he wanted out of the investment. Id. ¶ 22.
Defendant allegedly represented that 70% of the profits from BloxXwop would be distributed as shareholder dividends. Compl. ¶ 12. Plaintiff's Complaint, id. ¶ 14, and the Agreement, reference a shareholder agreement dated November 9, 2020. (ECF 1-1 at 1). Plaintiff did not provide a copy of this agreement to the Court.
Plaintiff and Defendant entered into a written Stock Sale and Purchase Agreement (ECF 1-1) (hereinafter the “Agreement”) dated June 23, 2021,with a closing date of February 28, 2022. Id. ¶ 23. Based on the price in the Agreement, Defendant would buy back Plaintiff's shares for the equivalent of Plaintiff's initial $185,000 investment. (ECF 1-1). Plaintiff agreed to extend the closing date to March 30, 2022. Compl. ¶ 23. On March 15, 2022, Plaintiff asked Defendant if everything was still on schedule for a March 30, 2022 closing, and Defendant responded that he was planning on taking BloxXwop public on the NASDAQ exchange and offered Plaintiff a June 6, 2022 target buyout date, to which Plaintiff objected. Id. ¶ 26-27. A week prior to the March 30, 2022 closing date, Plaintiff and Defendant arranged to meet regarding the buyout, but Defendant cancelled the meeting. Id. ¶ 24. On April 1, 2022, Plaintiff texted Defendant that the March 30, 2022 buyout extension had expired and that Defendant was in breach of their Agreement. Id. ¶ 29. To date, Defendant has not repaid Plaintiff his investment as set forth in the Agreement. Id. ¶ 32.
Plaintiff's complaint states that the parties entered into the Agreement “[a]fter numerous negotiations between the parties over the ensuing months, in or around February, 2022.” Compl. ¶ 23. The Court notes that the Agreement is dated June 23, 2021, with a line of small print after the signature block stating “[b]oth parties entered into a Verbal Agreement on 6/20/2021.” (ECF 1-1 at 5; ECF 27-2 at 5). The discrepancy between dates does not change the outcome of this Report and Recommendation.
B. Procedural History
Plaintiff filed his complaint on November 10, 2022. (ECF 1). A summons and copy of the complaint were properly served on Defendant on November 17, 2022. (ECF 6). After Defendant failed to answer the Complaint or appear at the Order to Show Cause hearing scheduled for July 20, 2023 (ECF 22), Judge Broderick entered default judgment on July 20, 2023, and referred this matter to me for an inquest into damages. (ECF 23).
I directed Plaintiff to file his Proposed Findings of Fact and Inquest Memorandum setting forth proof of damages by November 22, 2023. (ECF 24). Plaintiff filed both on November 21, 2023. (ECF Nos. 26-27). On March 4, 2024, this case was reassigned to Judge Garnett. To date, Defendant has failed to respond.
III. DISCUSSION
A. Inquest Standard
Where default has been entered against a defendant, courts are to accept as true all of the well-pleaded facts alleged in the complaint, except those concerning the amount of damages. See Transatl. Marine Claims Agency, Inc. v. Ace Shipping Corp., Div. of Ace Young Inc., 109 F.3d 105, 108 (2d Cir. 1997). Because a defaulting party does not concede mere legal conclusions, the Court must still determine “whether the unchallenged facts constitute a legitimate cause of action.” In re Indus. Diamonds Antitrust Litig., 119 F.Supp.2d 418, 420 (S.D.N.Y. 2000). Where a plaintiff's well-pleaded facts are sufficient to state a claim on which relief can be granted, the only remaining issue is if the plaintiff provided adequate support for his requested relief. See Gucci Am., Inc. v. Tyrrell-Miller, 678 F.Supp.2d 117, 119 (S.D.N.Y. 2008) (citing Credit Lyonnais Sec. (USA), Inc. v. Alcantara, 183 F.3d 151, 155 (2d Cir. 1999)). Plaintiff must supply an evidentiary basis for the specific damages amount sought. See Santana v. Latino Express Rests., Inc., 198 F.Supp.3d 285, 292 (S.D.N.Y. 2016).
An inquest into damages may be conducted without an evidentiary hearing. See Tamarin v. Adam Caterers, Inc., 13 F.3d 51, 53-54 (2d Cir. 1993) (“[A] hearing is not required where a sufficient basis on which to make a calculation exists.”); Maldonado v. La Nueva Rampa, Inc., No. 10-CV-8195 (LLS) (JLC), 2012 WL 1669341, at *2 (S.D.N.Y. May 14, 2012). Here, no hearing was requested or held, as the damages awarded can be ascertained “with reasonable certainty.” Credit Lyonnais Sec. (USA), Inc., 183 F.3d at 155.
B. Jurisdiction and Venue
This Court has proper subject-matter jurisdiction over the case under 28 U.S.C. § 1332, as the parties are completely diverse and the amount in controversy exceeds $75,000. Plaintiff is a resident of Connecticut and Defendant is a resident of New York. Compl. ¶ 4-5.
Although Plaintiff obtained a default, Plaintiff must still show proper service before the Court can exercise personal jurisdiction over Defendant. See Martinez v. Alimentos Saludables Corp., No. 16-CV-1997 (DLI) (CLP), 2017 WL 5033650, at *4 (E.D.N.Y. Sept. 22, 2017) (“Personal jurisdiction is a necessary prerequisite to entry of a default judgment.”). Under Federal Rule of Civil Procedure 4(e)(1), service on an individual can be effected by “following state law for serving a summons . . . where the district court is located.” FED. R. CIV. P. 4(e)(1). New York law permits service of an individual defendant by both delivering the summons and complaint to “a person of suitable age and discretion at the actual place of business, dwelling place or usual place of abode of the person to be served” and mailing the summons to the last known residence or place of business. N.Y. C.P.L.R. § 308(2). Here, Plaintiff properly served a summons and complaint on Defendant at Defendant's dwelling (usual place of abode) and service was accepted by the doorman who was of suitable age. (ECF 6).
C. Damages
1. Breach of Contract
Plaintiff has adequately alleged a breach of contract claim. Under New York law, the elements of a breach of contract claim are: (1) the formation of an agreement; (2) performance by one party; (3) breach of the agreement by the other party; and (4) damages. Berman v. Sugo LLC, 580 F.Supp.2d 191, 202 (S.D.N.Y. 2008) (citing First Investors Corp. v. Liberty Mut. Ins. Co., 152 F.3d 162, 168 (2d Cir. 1998)).
Article 10(c) of the Agreement provides that the Agreement is governed by Delaware law, with the exception of its conflict of law provisions. (ECF 1-1). Under New York law, forum selection clauses are presumptively valid. See, e.g., Brooke Grp. Ltd. v. JCH Syndicate 488, 663 N.E.2d 635, 637 (N.Y. 1996) (recognizing “that parties to a contract may freely select a forum which will resolve any disputes over the interpretation or performance of the contract” and that “[s]uch clauses are prima facie valid and enforceable unless shown by the resisting party to be unreasonable”); Sterling Nat'l Bank v. E. Shipping Worldwide, Inc., 826 N.Y.S.2d 235, 237 (N.Y.App.Div. 2006) (same). Plaintiff does not raise any objection to the forum selection clause. Regardless, there is no conflict between New York law and Delaware law on the elements of breach of contact. Wellgistics, LLC v. Welgo, Inc., No. N22C-08-182, 2024 WL 113967, at *4 n.41 (Del. Super. Ct. Jan. 9, 2024) (“[T]here is no actual conflict with New York law [and Delaware law] on the elements of breach of contract.”); White Stag Aircraft Leasing (US), LLC v. Aircraft Purchasing Co. I, LLC, No. 652258/17 (N.Y. Sup. Ct. May 1, 2018). Because “the contract law of New York and Delaware is ‘not in conflict, the court can apply New York law even [though] there is a provision selecting [Delaware's] laws in the contract.'” See O'Grady v. BlueCrest Capital Mgmt. LLP, 111 F.Supp.3d 494, 500 n.2 (S.D.N.Y. 2015) (quoting Two Locks, Inc. v. Kellogg Sales Co., 68 F.Supp.3d 317, 326 (E.D.N.Y. 2014)).
Plaintiff's complaint establishes the formation of an agreement. The initial agreement between Plaintiff and Defendant was for the purchase of a 12.5% equity share in BloxXwop for $150,000 and another approximately $35,000 paid via Bitcoin, for a 15% equity share in BloxXwop. Compl. ¶ 13. It is unclear whether Defendant actually invested Plaintiff's money in BloxXwop on Plaintiff's behalf. Plaintiff alleges that Defendant “was not in fact, pursuing the cryptocurrency exchange business, but merely was (falsely) inducing Plaintiff's confidence in this purported enterprise.” Id. ¶ 16. Plaintiff further establishes that he performed under the agreement by providing Defendant $150,000 and the equivalent of approximately $35,000 via Bitcoin. Id. ¶ 13. Plaintiff provided receipt of the Bitcoin transfer showing that on November 24, 2020, he completed a transaction for approximately 1.9 Bitcoin (equivalent to $35,041). (ECF 27-1).
The Agreement, provided to the Court at ECF 1-1, required Defendant to “buy out” Plaintiff's shares in BloxXwop. Plaintiff sufficiently alleged that Defendant breached the Agreement by failing to pay Plaintiff the agreed upon price (i.e., the return of Plaintiff's initial $185,000 investment) by the agreed upon closing date of March 30, 2022. Compl. ¶ 29, 32. Finally, Plaintiff has shown that he suffered damages as a result of Defendant's breach. To date, Plaintiff has not received the return of his $185,000 investment. Id. ¶ 32. Accordingly, Plaintiff has sufficiently alleged a breach of contract claim and monetary damages.
2. Damages
“Under New York law, a successful plaintiff in a breach of contract action is entitled to damages in the ‘amount necessary to put the plaintiff in the same economic position he would have been in had the defendant fulfilled his contract.'” Scholastic, Inc. v. Snap TV, Inc., No. 09-CV-4349 (GBD) (GWG), 2011 WL 1330246, at *3 (S.D.N.Y. Apr. 8, 2011) (quoting Indu Craft, Inc. v. Bank of Baroda, 47 F.3d 490, 495 (2d Cir. 1995)), adopted by 2012 WL 3041786 (S.D.N.Y. Jul. 23, 2012); accord Merrill Lynch & Co., Inc. v. Allegheny Energy, Inc., 500 F.3d 171, 185 (2d Cir. 2007) (“A party injured by breach of contract is entitled to be placed in the position it would have occupied had the contract been fulfilled according to its terms.”).
Plaintiff seeks a total award of $220,591.36 in damages, comprised of $150,000 for his initial investment and $70,591.36 for the portion of his investment paid in Bitcoin, calculated at the price at which Bitcoin was trading at the time Plaintiff submitted his Inquest Memorandum.(ECF 27 at 1).
Plaintiff calculates the return of his Bitcoin investment by multiplying the 1.90878297 BTC he transferred to Defendant by the value of Bitcoin at the time of his Inquest Memorandum submission (1.90878297 x $36,982.39 = $70,591.36). (ECF 27).
Plaintiff may only recover the $185,000 in funds he invested with Defendants, not the alleged increase in the value of the Bitcoin with which he paid for part of that initial investment. Article 2 of the Agreement provides that the “[e]ntirety of $185,000 USD will be paid via Wire Transfer and/or Cryptocurrency Payment.” (ECF 1-1 at 2). Presumably, the wire transfer could be paid through U.S. dollars. Thus, the written contract provides that Plaintiff/Seller would accept either payment via U.S. dollars and/or via cryptocurrency with a value of $185,000 USD. Id. The plain language of the contract shows that Plaintiff only contracted for the return of his $185,000 investment. See Jing v. Sun, No. 21-CV-2350 (GRB) (AYS), 2022 WL 150590, at *20 (E.D.N.Y. Jan. 4, 2022) (“Plaintiffs' request for the judgment day U.S. Dollar value of the promised Bitcoin is inconsistent with their claim that each was making a risk-free investment, in that each was guaranteed the return of principal invested with [Defendant].”); see also SIPC v. BLMIS (In re Bernard L. Madoff Inv. Sec.), No. 08-CV-1789 (SMB), 2016 WL 1695296, at *6 (Bankr. S.D.N.Y. Apr. 25, 2016) (in bankruptcy and SIPA context, explaining and analyzing cases for proposition that investors in fraudulent scheme could not recover more than principal invested and could not rely on fictitious customer statements to support claims of loss).
Although Plaintiff's investment totaled $185,041 according to the Complaint and the receipt of the Bitcoin transaction (ECF 27-1), under the terms of the Agreement, Plaintiff and Defendant agreed to a buyout price of $185,000. (ECF 1-1 at 2). As such, the Court finds that $185,000 is the proper amount of compensatory damages.
Plaintiff's request for the return of his Bitcoin investment calculated at the value on the day of his Inquest Memorandum submission is illogical. The price of Bitcoin is highly volatile. See Winter v. Stronghold Digit. Mining, Inc., No. 22-CV-3088 (RA), 2023 WL 5152177, at *1 (S.D.N.Y. Aug. 10, 2023). Awarding Plaintiff the value of his initial investment “protects both Plaintiff[] and the defaulting Defendant against the ‘highly volatile' fluctuating value of Bitcoin.” Jing v. Sun, 2022 WL 1505950, at *20. Conceivably, the value of Bitcoin on the day of Plaintiff's Inquest Memorandum submission could have been lower than the value on the day of his initial Bitcoin investment. Had that been the case, the Court doubts whether Plaintiff would have sought the value of Bitcoin on the day of his Inquest Memorandum submission. Plaintiff cannot “engage in post hoc cherry-picking” of the value of the portion of his investment paid via Bitcoin. Shi v. Le, 21 CV 1361 (ARR) (CLP), 2022 WL 1085400, at *9 (E.D.N.Y. Mar. 2, 2022) (quoting Meta-Tech Consultants, LLC v. Niu, 2021 WL 5043981, at *3 (D. Nev. Oct. 29, 2021)). Further, Plaintiff “did not provide any information to support [his] claim that the value of the [Bitcoin] had risen,” see id. at *8, other than merely alleging that “[a]t the submission date of this Inquest below, the price of Bitcoin is $36,982.30.” (ECF 27 at 1). Accordingly, I recommend that Plaintiff be awarded $185,000 in compensatory damages.
3. Interest
Plaintiff seeks pre-judgment and post-judgment interest and costs. In a diversity case, pre-judgment interest is governed by state law. Schipani v. McLeod, 541 F.3d 158, 165 (2d Cir. 2008). Under N.Y. C.P.L.R. §§ 5001, 5004, Plaintiff is entitled to pre-judgment interest of nine percent per annum from “the earliest ascertainable date the cause of action existed.” See EMA Financial v. TPT Global Tech, Inc., No. 10-CV-8781, 2023 WL 7043227, at *8 (S.D.N.Y. Oct. 26, 2023).
Here, Plaintiff proposes that pre-judgment interest should be awarded from June 23, 2021, the date the Agreement was executed. (ECF Nos. 27; 1-1 at 5). However, the earliest ascertainable date the cause of action existed is April 1, 2022, the date of the breach (one day after the buyout execution date expired). Plaintiff acknowledges that Defendant was in breach as of April 1, 2022, and reminded Defendant of this fact via text. Compl. ¶ 29. Accordingly, Plaintiff should be awarded pre-judgment interest of nine percent per annum from April 1, 2022 through July 20, 2023, the date default judgment was entered, for a total of $21,667.80 ($185,000 damages x 0.09 x [475 days/365 days per year]).
Plaintiff is also entitled to an award of post-judgment interest. 28 U.S.C. § 1961 provides that “[i]nterest shall be allowed on any money judgment in a civil case recovered in a district court.” “Such interest shall be calculated from the date of the entry of the judgment, at a rate equal to the weekly average 1-year constant maturity Treasury yield, as published by the Board of Governors of the Federal Reserve System, for the calendar week preceding the date of judgment.” Id. The Second Circuit has held that an award of post-judgment interest is mandatory. See Schipani v. McLeod, 541 F.3d 158, 165 (2d Cir. 2008). Accordingly, I recommend that Plaintiff be awarded post-judgment interest from the date default judgment was entered until the date judgment is paid.
4. Costs
Although Plaintiff requests costs for this action (ECF 27), he fails to specify any incurred. Accordingly, I recommend awarding no costs.
IV. CONCLUSION
For the foregoing reasons, I respectfully recommend that Defendant liable to Plaintiff as follows:
1. $185,000 in compensatory damages;
2. $21,667.80 in pre-judgment interest; and
3. Post-judgment interest in accordance with state and federal law from July 20, 2023, until the date the judgment is paid.
V. OBJECTIONS
In accordance with 28 U.S.C. §636(b)(1) and FED. R. CIV. P. 72(b), the parties shall have fourteen (14) days (including weekends and holidays) from receipt of this Report to file written objections. See also FED. R. CIV. P. 6. A party may respond to any objections within fourteen (14) days after being served. Such objections, and any responses to objections, shall be addressed to the Honorable Margaret M. Garnett, United States District Judge. Any requests for an extension of time for filing objections must be directed to Judge Garnett.
FAILURE TO FILE OBJECTIONS WITHIN FOURTEEN (14) DAYS WILL RESULT IN A WAIVER OF OBJECTIONS AND WILL PRECLUDE APPELLATE REVIEW. See Thomas v. Arn, 474 U.S. 140, 155 (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, 58 (2d Cir. 1988); McCarthy v. Manson, 714 F.2d 234, 237-38 (2d Cir. 1983).