Opinion
20-CV-4474 (PGG) (BCM)
08-19-2024
LG CAPITAL FUNDING, LLC, Plaintiff, v. E-WASTE SYSTEMS, INC., Defendant.
TO THE HON. PAUL G. GARDEPHE
REPORT AND RECOMMENDATION
BARBARA MOSES, UNITED STATES MAGISTRATE JUDGE
Plaintiff LG Capital Funding, LLC (LG Capital) seeks damages against defendant E-Waste Systems, Inc. (EWSI) for breach of contract. Plaintiff alleges that EWSI failed to deliver common stock, as required, in response to a notice of conversion submitted to it on November 13, 2014, pursuant to one of two $84,000 convertible notes (each a Note, and together, the Notes) issued by EWSI to plaintiff earlier that year under the terms of the parties' Securities Purchase Agreement (SPA). See Compl. (Dkt. No. 1) ¶¶ 6-47 & Exs. B (SPA), C (Note 1), & D (Note 2). Plaintiff further alleges that EWSI's failure to deliver stock constituted an Event of Default under both Notes, after which the remaining principal balance accrued interest at the default rate of 24% rather than the original rate of 8%. Compl. ¶¶ 22-26, 29-30, 37-38.
On November 19, 2020, the Honorable Paul G. Gardephe, United States District Judge, issued an Order of Default against EWSI (Dkt. No. 22) and referred this action to me to conduct a damages inquest. (Dkt. No. 23.) For the reasons that follow, I respectfully recommend that plaintiff be awarded: (1) $73,799.83 for breach of Note 1, plus default interest at a rate of $35.69 per day from November 19, 2014 to the date on which judgment is entered; (2) $84,920.55 for breach of Note 2, plus default interest at a rate of $55.23 per day from November 19, 2014 to the date on which judgment is entered; and (3) $10,744.80 for plaintiff's attorneys' fees and costs.
I. BACKGROUND
Except where otherwise indicated, the facts in this section are taken from the Complaint and accepted as true for the purposes of determining defendants' liability. See City of N.Y. v. Mickalis Pawn Shop, LLC, 645 F.3d 114, 137 (2d Cir. 2011) (quoting Vt. Teddy Bear Co. v. 1-800 Beargram Co., 373 F.3d 241, 246 (2d Cir. 2004) ("It is an 'ancient common law axiom' that a defendant who defaults thereby admits all 'well-pleaded' factual allegations contained in the complaint.")); 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[.]").
Plaintiff LG Capital is a New York limited liability company with its principal place of business in Brooklyn. Compl. ¶ 1. All of its members are citizens of New York. Id. Defendant EWSI is a Nevada corporation with its principal place of business in Las Vegas. Id. ¶ 2. On or around March 20, 2014, the parties entered into the SPA, which contemplated the issuance by EWSI and the purchase by LG Capital of two convertible 8% notes, in the face amount of $84,000 each, for an aggregate purchase price of $168,000. Compl. ¶ 7 & Ex. B. Both Notes were duly issued on March 20, 2014. Id. ¶¶ 8-9. Note 1 was "funded" (paid for) on March 25, 2014, and Note 2 (the "back end note") was funded six months later, on September 29, 2014. Id. ¶¶ 12-13.
The maturity date of both Notes was March 20, 2015. Compl. ¶ 14. However, pursuant to ¶ 4(a) of each Note, LG Capital (referred to therein as the Holder) had the right, beginning 180 days after issuance, "to convert all or part of the outstanding and unpaid principal into shares of EWSI common stock (the 'Common Stock') at a discount to the market price." Id. ¶¶ 16-17; see also Note 1 ¶ 4(a); Note 2 ¶ 4(a). The discount was substantial: the conversion price was "60% of the lowest closing bid price of the Common Stock . . . for the twenty-two prior trading days," including the day on which the Holder delivered its notice of conversion to EWSI (referred to in the Notes as the Company). Compl. ¶ 18 (emphases omitted); see also Note 1 ¶ 4(a); Note 2 ¶ 4(a).
The Company was required to deliver the shares within three business days of its receipt of the Notice of Conversion. Note 1 ¶ 4(a); Note 2 ¶ 4(a). EWSI's common stock was, at that time, trading over the counter in the "Pink Sheets." Compl. ¶ 2.
Plaintiff successfully exercised its conversion rights under Note 1 three times: on September 24, October 6, and October 14, 2014. Compl. ¶ 19. Defendant honored each of these requests, leaving an outstanding principal balance on Note 1 of $59,500. Id. ¶ 20. No conversions were attempted or executed under Note 2, as to which the outstanding principal balance remained $84,000. Id.
On November 13, 2014, plaintiff submitted a fourth Notice of Conversion under Note 1, seeking to convert another $5,220 in principal and $226.58 in accrued interest into 914,430 shares of EWSI common stock. Compl. ¶ 21 & Ex. J (November 13 Notice). Defendant failed to honor the November 13 Notice, thereby causing an Event of Default under both Notes upon the expiration of the three business days allowed to deliver the shares. Id. ¶¶ 22-26, 37. The Event of Default, in turn, triggered a default interest rate of 24% per annum thereafter. Id. ¶¶ 22, 37-38. Although the maturity date of the Notes has long passed, defendant has not paid any of the outstanding principal or interest under either Note, and plaintiff has not waived its defaults. Id. ¶¶ 39-40.
Paragraph 8(k) of each Note states that an Event of Default occurs if the Company does "not deliver to the Holder the Common Stock pursuant to paragraph 4 herein without restrictive legend within 3 business days of its receipt of a Notice of Conversion[.]" Note 1 ¶ 8(k); Note 2 ¶ 8(k). Paragraph 8(h) states that an Event of Default occurs if the Company has "[d]efaulted on or breached any term of any other note or similar debt instrument into which the Company has entered and failed to cure such default within the appropriate grace period[.]" Note 1 ¶ 8(h); Note 2 ¶ 8(h). The Notes do not prescribe any grace period for curing a default under ¶ 8(k).
Paragraph 8 of each Note states that "[u]pon an Event of Default, interest shall be accrue at a default interest rate of 24% per annum or, if such rate is usurious or not permitted by current law, then at the highest rate of interest permitted by law." Note 1 ¶ 8; Note 2 ¶ 8. The 24% default interest rate was not the only adverse consequence prescribed in the Notes for a failure to honor a conversion notice. Paragraph 8 also prescribes a "penalty" of "$250 per day the shares are not issued beginning on the 4th day after the conversion notice was delivered to the Company" and "$500 per day beginning on the 10th day." Note 1 ¶ 8; Note 2 ¶ 8. Further, upon any Event of Default (whether or not related to the Holder's conversion notices), the Holder became entitled, in its "sole discretion," to "consider [the Notes] immediately due and payable, without presentment, demand, protest or (further) notice of any kind (other than notice of acceleration), all of which are hereby expressly waived . . . and the Holder may immediately, and without expiration of any period of grace, enforce any and all of the Holder's rights and remedies provided herein or any other rights or remedies afforded by law." Note 1 ¶ 8; Note 2 ¶ 8. There is no allegation in this case that LG Capital exercised its discretion to accelerate the Notes.
B. Procedural History
Plaintiff filed this action on June 11, 2020, alleging that defendant breached the terms of the Notes and is entitled to recover for breach of contract, Compl. ¶¶ 56-61, or, in the alternative, for unjust enrichment. Id. ¶¶ 62-65. Plaintiff also seeks its attorneys' fees and costs incurred in this action. Id. ¶¶ 66-68.
Paragraph 7 of each Note states that EWSI "agrees to pay all costs and expenses, including reasonable attorneys' fees and expenses, which may be incurred by the Holder in collecting any amount due under this Note." Note 1 ¶ 7; Note 2 ¶ 7. Paragraph 8 adds that if LG Capital files a collection action, it "shall be reimbursed by the Company for its attorneys' fees and other costs and expenses incurred in the investigation, preparation and prosecution of such action or proceeding." Note 1 ¶ 8; Note 2 ¶ 8.
On July 20, 2020, the summons and complaint were delivered to Carolyne Susan Johnson, a corporate officer of EWSI designated by law to accept service on its behalf. (Dkt. No. 8.) Defendant did not answer or otherwise appear. On September 9, 2020, at plaintiff's request, the Clerk of Court issued a Certificate of Default. (Dkt. No. 11.)
On October 23, 2020, plaintiff moved by proposed order to show cause (OSC) for the issuance of a default judgment. (Dkt. Nos. 14-19.) On October 27, 2020, Judge Gardephe issued the OSC (Dkt. No. 20), directing EWSI to show cause on November 19, 2020, why a default judgment should not be issued against it. The OSC and its supporting documents were served on EWSI by mail at its last known address on October 30, 2020. (Dkt. No. 21.) On November 19, 2020, after defendant failed to file any opposition to the motion for a default judgment and failed to appear at the scheduled show-cause hearing, Judge Gardephe issued the Order of Default and referred the case to me for report and recommendation as to damages.
On November 20, 2020, I issued a Scheduling Order for Damages Inquest (Scheduling Order) (Dkt. No. 24) directing plaintiff to submit proposed findings of fact and conclusions of law, together with supporting papers, by January 20, 2021, and to serve them, with the Scheduling Order, on defendant at its last known mailing address. Scheduling Order ¶¶ 1, 7. I further directed EWSI to file any opposition by February 22, 2021. Id. ¶ 8. Plaintiff timely filed its Proposed Findings of Fact and Law (Prop. Findings) (Dkt. No. 28) on January 20, 2021, supported by the declarations of Joseph Lerman (Lerman Decl.) (Dkt. No. 25) and Kevin Kehrli (Kehrli Decl.) (Dkt. No. 26), as well as a memorandum of law (Dkt. No. 27), and served those materials the same day on EWSI at its last known address. (Dkt. No. 29.) Plaintiff seeks damages in the amount of $187,009.99 for breach of Note 1 and $210,779.78 for breach of Note 2, for a total of $397,789.77 in contract damages (as of January 20, 2021), together with $15,650.00 in attorneys' fees and $744.80 in costs. Prop. Findings ¶¶ 22-49. EWSI did not submit any opposition papers.
After the February 22, 2021 deadline set forth in the Scheduling Order came and went, the Court noted, upon review of the file, that plaintiff's January 20, 2021 proof of service did not expressly state that plaintiff had served the Scheduling Order that day along with its Proposed Findings and supporting documents. Consequently, by Order dated September 16, 2021 (September 16 Order) (Dkt. No. 30), the Court directed plaintiff to either (1) file a supplemental proof of service (to clarify that it had in fact previously served the Scheduling Order on defendant) or (2) serve defendant anew with the Scheduling Order, along with the September 16 Order itself, which gave EWSI a new deadline of October 8, 2021, to submit any opposition to the Proposed Findings. Explaining that it was unsure whether it had previously served the Scheduling Order, plaintiff served both the Scheduling Order and the September 16 Order on September 17, 2021. (Dkt. No. 31.) Defendant once again did not submit any papers in opposition to plaintiff's inquest materials.
Since neither party has requested a hearing on the issue of damages, and since defendant did not submit any written materials, I have conducted the inquest based solely upon the materials submitted by plaintiff. See Bricklayers & Allied Craftworkers Local 2 v. Moulton Masonry & Constr., LLC, 779 F.3d 182, 189 (2d Cir. 2015) (holding that Fed.R.Civ.P. 55(b)(2), which governs the determination of damages following default, "allows but does not require the district judge to conduct a hearing") (quoting Action S.A. v. Marc Rich & Co., 951 F.2d 504, 508 (2d Cir. 1991)); De Lage Landen Fin. Servs., Inc. v. Universal Wilde, Inc., 2019 WL 4195441, at *3 n.2 (S.D.N.Y. Aug. 15, 2019) (finding that a hearing was not required because plaintiff's sworn declarations were a sufficient basis on which to make a damages calculation), report and recommendation adopted, 2019 WL 4194574 (S.D.N.Y. Sept. 3, 2019).
II. JURISDICTION AND VENUE
A. Subject Matter Jurisdiction
I am satisfied that subject matter jurisdiction is proper pursuant to 28 U.S.C. § 1332(a)(1), which provides that a federal district court has original jurisdiction in cases among "citizens of different states." "A limited liability company such as LG [Capital] takes the citizenship of each of its members for the purpose of diversity jurisdiction." LG Cap. Funding, LLC v. Imerjn, Inc., 2021 WL 4926126, at *1 (S.D.N.Y. Oct. 21, 2021); see also Catskill Litig. Tr. v. Park Place Entm't Corp., 169 Fed.Appx. 658, 659 (2d Cir. 2006) (summary order); Handelsman v. Bedford Vill. Assocs. Ltd. P'ship, 213 F.3d 48, 51-52 (2d Cir. 2000). Since all of LG Capital's members are citizens of New York, Compl. ¶ 1, it too is a citizen of New York for diversity purposes. A corporation such as EWSI is "a citizen of every State . . . by which it has been incorporated and of the State . . . where it has its principal place of business[.]" 28 U.S.C. § 1332(c)(1). Since EWSI is incorporated and headquartered in Nevada, Compl. ¶ 2, it is a citizen of Nevada for diversity purposes, and there is complete diversity between the parties.
Section 1332(a) also requires that the amount in controversy be greater than $75,000. This requirement is easily met by plaintiff's allegations as to its damages. See LG Cap. Funding, LLC v. 5Barz Int'l, Inc., 307 F.Supp.3d 84, 87 (E.D.N.Y. 2018) (5Barz I) (relying on damages sought in complaint to satisfy the amount-in-controversy requirement).
B. Personal Jurisdiction and Venue
I am also satisfied that this Court has personal jurisdiction over defendant. In the SPA, the parties agreed to bring any action "concerning the transactions contemplated by this Agreement" "only in the state courts of New York or in the federal courts located in the state and county of New York," and "irrevocably waive[d] any objection to jurisdiction and venue of any action instituted hereunder[.]" SPA ¶ 5(a). Since the purchase and issuance of the Notes were the "transactions contemplated" by the SPA, see id. at 1 ¶¶ B-C (preamb.), 1(a)-(c), the parties agreed, in that contract, to bring any action concerning the Notes exclusively in the state or federal courts of New York. Similarly, the Notes themselves contain a New York forum selection clause, in which the parties consented to "exclusive jurisdiction and venue in the courts of the State of New York," as well as a New York choice of law clause, in which they agreed that the Notes would be "governed by and construed in accordance with the laws of New York applicable to contracts made and wholly to be performed within the State of New York[.]" Note 1 ¶ 14; Note 2 ¶ 14.
Forum selection clauses are "prima facie valid and should be enforced unless enforcement is shown by the resisting party to be unreasonable under the circumstances." M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 10 (1972) (internal quotation marks omitted). The Second Circuit has prescribed a four-part reasonableness test for the validity of a forum selection clause, under which the court considers: (1) whether the clause was "reasonably communicated to the party resisting enforcement"; (2) whether the clause is "mandatory or permissive"; (3) whether the "the claims and parties involved in the suit are subject to" the clause; and (4) whether the party resisting jurisdiction has "rebutted the presumption" that the clause is valid by "making a sufficiently strong showing that 'enforcement would be unreasonable or unjust, or that the clause was invalid for such reasons as fraud or overreaching.'" Phillips v. Audio Active Ltd., 494 F.3d 378, 383-84 (2d Cir. 2007) (quoting M/S/ Bremen, 407 U.S. at 15). Here, there is no "party resisting enforcement." I have nonetheless considered each factor and have determined that all of them support the exercise of personal jurisdiction over EWSI.
First, the choice of forum was clearly communicated in the SPA and the Notes. Second, the forum selection clauses are plainly mandatory. The SPA states that any action shall be brought "only" in a New York state or federal court, while the Notes state that EWSI consents to the "exclusive" jurisdiction of the courts of New York. Third, the forum selection clauses unquestionably govern EWSI, which signed both the SPA and the Notes, and this action, which arises from the Notes. Fourth, EWSI, which is in default, "has not presented any evidence, and the Court is not aware of any reason, why the selection clause[s] should be rendered invalid." Interglobo Customs Broker, Inc. v. Sunderland Bros. Co., 2019 WL 5996281, at *3 (S.D.N.Y. Nov. 14, 2019) (finding forum selection clause binding in the context of a damages inquest after default), report and recommendation adopted, 2020 WL 409685 (S.D.N.Y. Jan. 24, 2020).
"Though the Second Circuit has not decided the issue," Beach v. Citigroup Alt. Invs. LLC, 2014 WL 904650, at *8 (S.D.N.Y. Mar. 7, 2014), courts in this Circuit have read clauses phrased like ¶ 14 of the Notes "to indicate that the parties have agreed to the jurisdiction of the New York State courts, not federal courts in New York State." Imerjn, 2021 WL 4926126, at *1. However, "[t]his jurisdictional language does not limit the Court's personal jurisdiction over the defendant. Parties may consent to personal jurisdiction of a particular Court through contractual forum selection clauses, but they may not, by submitting to one court's power, thereby divest another court of power over it." Id. at *2 (collecting cases). "Accordingly, the 'exclusive' language of the Notes does not prevent this Court from exercising personal jurisdiction, if personal jurisdiction otherwise exists." Id. Here, "personal jurisdiction otherwise exists" because EWSI also agreed, in the SPA, to litigate in the state or federal courts of New York, see SPA ¶ 5(a), and because EWSI is subject to specific personal jurisdiction in this Court pursuant to New York's long-arm statute, which provides in relevant part that "a court may exercise personal jurisdiction over any non-domiciliary . . . who in person or through an agent . . . transacts any business within the state" of New York, if the suit arises out of that business. N.Y. C.P.L.R. § 302(a)(1).
EWSI transacted business in New York when it issued the Notes to LG Capital in New York, "communicated with plaintiff at its New York place of business concerning the Notes," agreed to pay principal and interest on the Notes to plaintiff in New York, and, prior to its default, "forwarded converted shares of [EWSI] stock to plaintiff at a New York address," as specified in plaintiff's conversion notices. LG Cap. Funding, LLC v. M Line Holdings, Inc., 422 F.Supp.3d 739, 754 (E.D.N.Y. 2018). "These facts are sufficient to constitute the transaction of business in New York." Imerjn, 2021 WL 4926126, at *2. Further, "the exercise of this jurisdiction is constitutional," id., because the existence of the forum-selection clauses in the SPA and the Notes, even if non-binding, gave defendant "fair warning of the possibility of being subject to the jurisdiction of New York." D.H. Blair & Co., Inc. v. Gottdiener, 462 F.3d 95, 105 (2d Cir. 2006).
III. LIABILITY
As noted above, following a default judgment, the courts must accept all well-pleaded factual allegations in the complaint as true, except those relating to damages. Finkel, 577 F.3d at 84; see also Cotton v. Slone, 4 F.3d 176, 181 (2d Cir. 1993); Greyhound Exhibitgroup, Inc. v. E.L.U.L. Realty Corp., 973 F.2d 155, 158 (2d Cir. 1992). If those well-pleaded allegations establish the defaulting party's liability, the only remaining issue is whether plaintiff has provided adequate support for its requested damages or other relief. 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)). "Conversely, if the well-pleaded factual allegations in the complaint fail to state a claim upon which relief can be granted, no damages can be awarded, even if the post-default inquest submissions supply the missing information." Mondragon v. Keff, 2019 WL 2551536, at *4 (S.D.N.Y. May 31, 2019) (collecting cases), report and recommendation adopted, 2019 WL 2544666 (S.D.N.Y. June 20, 2019).
I am satisfied that plaintiff has stated a breach of contract claim with respect to both Notes. Under New York law, "there are four elements to a breach of contract claim: (1) the existence of an agreement, (2) adequate performance of the contract by the plaintiff, (3) breach of contract by the defendant, and (4) damages." Mindspirit, LLC v. Evalueserve Ltd., 346 F.Supp.3d 552, 57374 (S.D.N.Y. 2018) (Gardephe, J.) (internal quotation marks omitted) (quoting Ellington Credit Fund, Ltd. v. Select Portfolio Servicing, Inc., 837 F.Supp.2d 162, 188-89 (S.D.N.Y. 2011)). Here, plaintiff has attached copies of Note 1 and Note 2, which are signed by EWSI's Chairman and CEO and clearly set out the terms of the parties' economic arrangements. Each of these Notes "is a contract," 5Barz 1, 307 F.Supp.3d at 94, "enforceable under traditional principles of contract law[.]" Amrusi v. Nwaukoni, 155 A.D.3d 814, 816, 65 N.Y.S.3d 62, 65 (2d Dep't 2017), abrogated on other grounds by Ajdler v. Province of Mendoza, 33 N.Y.3d 120, 123 N.E.3d 233 (2019). LG Capital furnished the necessary consideration by funding each Note, see Compl. ¶¶ 12-13, and otherwise performed all of its obligations under the Notes. Id. ¶ 58. Defendant, however, failed to honor the November 13 Notice, as required by ¶ 4(a) of Note 1, id. ¶¶ 24, 43, and thereafter failed to repay the outstanding principal or pay the interest accrued under either Note, including ordinary interest at 8% through the date of default, pursuant to ¶ 4(b) of both Notes, and default interest at 24% thereafter, pursuant to ¶ 8 of both Notes. Id. ¶¶ 38-39, 53, 59. These allegations, taken as true after default, demonstrate that defendant breached both Notes and that plaintiff was damaged thereby.
I therefore need not consider whether plaintiff has also stated a claim for unjust enrichment, which it pleads "[i]n the alternative," Compl. ¶ 62, and which it could pursue only if there were no enforceable written contract governing the same transaction. See Curtis Props. Corp. v. Greif Cos., 236 A.D.2d 237, 239, 653 N.Y.S.2d 569, 571 (1st Dep't 1997) (an "enforceable written contract governing a particular subject matter precludes recovery in quasi contract for events arising out of the same subject matter"); Amrusi, 155 A.D.3d at 815-16, 65 N.Y.S.3d at 65 (dismissing unjust enrichment claim as duplicative of claim for breach of promissory note because it "was based on the same facts and sought the same damages as the first cause of action alleging breach of contract").
IV. DAMAGES
A. Breach of Note 1
"Under New York law, damages for breach of contract should put the plaintiff in the same economic position he would have occupied had the breaching party performed the contract." LG Cap. Funding, LLC v. CardioGenics Holdings, Inc., 787 Fed.Appx. 2, 3 (2d Cir. 2019) (summary order) (quoting Oscar Gruss & Son, Inc. v. Hollander, 337 F.3d 186, 196 (2d Cir. 2003)); accord Merrill Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d 171, 185 (2d Cir. 2007). Where, as here, the breach consists (in part) of the defendant's failure to deliver stock in response to a conversion notice, the measure of damages for that failure is the market value of the stock that should have been delivered, calculated "at the time of the breach[.]" CardioGenics, 787 Fed.Appx. at 3 (quoting Cole v. Macklowe, 64 A.D.3d 480, 480, 882 N.Y.S.2d 417, 419 (2009)); see also LG Cap. Funding, LLC v. 5Barz Int'l, Inc., 2018 WL 4259979, at *4 (E.D.N.Y. Sept. 6, 2018) (5Barz II) ("[T]he measure of damages is the fair market value of those shares on the date of defendant's breach[.]"). To measure the market value of the relevant stock "on the date of the breach," the federal courts look to "the mean between the highest and lowest quoted selling prices, as provided by the public exchange upon which the stock traded." CardioGenics, 787 Fed.Appx. at 3 (quoting Boyce v. Soundview Tech. Grp., Inc., 464 F.3d 376, 381, 385 (2d Cir. 2006)).
1. Damages for Failed Conversion
Given these principles - and given that plaintiff had already paid for its EWSI shares by funding Note 1 - its damages arising from the failed conversion may be calculated "in one of two ways," LG Cap. Funding, LLC v. ExeLED Holdings Inc., 2021 WL 4949173, at *6 (S.D.N.Y. Oct. 25, 2021): in one step, by "'multiplying the number of shares owed . . . by the mean market value of that stock on the day of the breach,” CardioGenics, 787 Fed.Appx. at 4; see also 5Barz II, 2018 WL 4259979, at *4 (performing the one-step calculation); Imerjn, 2021 WL 4926126, at *3-4 (same), or in two steps, by "multiplying the number of shares owed by the difference between the market price and the conversion price . . . and then adding back the converted principal and any accrued interest." ExeLED Holdings, 2021 WL 4949173, at *6; see also Adar Bays, LLC v. GeneSYS ID, Inc. 341 F.Supp.3d 339, 350 (S.D.N.Y. 2018) (performing the two-step calculation).
Here, as in ExeLED Holdings, "[p]laintiff requested the latter method," 2021 WL 4949173, at *6. In its Proposed Findings, LG Capital explains that the mean market price of EWSI common stock on November 18, 2014 was $0.01825, and that the "contract price," that is, the discounted amount per share it was entitled to pay under Note 1, was $0.006 per share. Prop. Findings ¶¶ 22, 26; see also Lerman Decl. ¶ 28 & Ex. D (attaching price data). Thus, the difference between the market price and the conversion price on the date of the breach was $0.01225, which - multiplied by the 914,430 shares of EWSI common stock to which it was entitled pursuant to the November 13 Notice - yields the sum of $11,201.77, to which the Court adds the $5,220 of principal and $266.58 of accrued interest that plaintiff attempted to convert, for total damages, "in relation to the November 13, 2014 notice of conversion," of $16,688.35. Prop. Findings ¶ 29.
Plaintiff represents this figure as $11,201.76, Prop. Findings ¶ 28, but the exact figure is actually $11,201.7675, which rounds up to $11,201.77.
The one-step method, which is both conceptually and computationally more straightforward, yields the same figure: 914,430 (number of shares to be issued) x $0.01825 (mean market value per share as of November 18, 2014) = $16,688.35.
2. Damages for Failure to Repay Balance
"Had Defendant honored the November 13, 2014 notice of conversion, the remaining principal balance on the Note would have been $54,280.00." Prop. Findings ¶ 31. Since EWSI never repaid that balance, plaintiff is also entitled to recover it, together with applicable interest, as damages. See Adar Bays, LLC v. 5Barz Int'l, Inc., 2018 WL 3962831 at *14 (S.D.N.Y. Aug. 16, 2018) ("The proper damages award for non-payment of principal is (1) the amount of outstanding principal, plus (2) interest for the period during which the outstanding principal remained unpaid."); Imerjn, 2021 WL 4926126, at *4-5 (awarding, as damages after a failed conversion, the unpaid note balance plus applicable interest, including enhanced default interest).
Here, the "outstanding principal" was $54,280. Regular interest accrued on that balance at 8% from March 25, 2014 (the date on which Note 1 was funded) through November 18, 2014 (the date of default), amounting to $2,831.48 ($54,280 x 0.08 x [238/365]). As of November 18, 2014, therefore, LG Capital was entitled to $57,111.48 in principal and regular interest. Since November 19, 2014 - the first day after the date of default - additional interest has accrued at the default rate of 24% per annum, see Note 1 ¶ 8, or $35.69 per day ([$54,280 x 0.24] / 365). Default interest will continue accruing at that rate until the judgment is entered in this action. See Adar Bays v. 5Barz, 2018 WL 3962831 at *12 (determining, under substantially similar note terms, that plaintiff was entitled to the unpaid principal plus "8% interest per annum beginning on the Note's execution, on June 16, 2015, until the first Event of Default was triggered, at which point the default interest rate of 24% per annum began to apply").
Not content with recovering the balance of Note 1 plus 24% interest, plaintiff instead seeks additional "expectation damages" based on the hypothetical conversion of that balance:
Plaintiff's damages for the remaining balance are calculated "by taking the date of breach and determining the conversion price [Plaintiff] was entitled to on that date, the number of shares [Plaintiff] was authorized to convert, and the market price of those shares on the date of the breach.["] Thus, applying the conversion price of $0.006 per share, would have [sic] entitled Plaintiff to 9,046,666 shares of EWSI stock ($54,280.00 / $0.006).... Applying the expectation damages price of $0.01225 per share entitles Plaintiff to $110,821.65 of expectation damages related to the balance of the note ($0.01225 x 9,046,666). Again, Plaintiff is entitled to recovery of the $59,500.00 [sic] in remaining principal, as the expectation damages calculation above subtracts the amount LG paid per share of stock ($.006). Therefore, Plaintiff's damages for expectation damages [sic] for Defendant's breach of the remaining balance of the [sic] Note 1 is $170,321.65.Prop. Findings ¶¶ 32-35 (internal citations omitted).
Calculation errors aside, I conclude that plaintiff is not entitled - on the facts of this case -to any expectation damages with respect to the $54,280 that LG Capital never attempted to convert. Plaintiff relies on GeneSYS ID, in which the court awarded expectation damages "for conversion of the remainder of the Note," but in that case the defendant effectively "refused to honor any future notices of conversation" by "terminating its transfer agent." 341 F.Supp.3d at 350. See also ExeLED, 2021 WL 4949173, at *3-5 (awarding expectation damages with respect to the remaining principal balance of the note on plaintiffs claim for "anticipatory breach of contract"); Union Capital LLC v. Vape Holdings Inc., 2017 WL 1406278, at *6 (S.D.N.Y. Mar. 31, 2017) (noting that it was a "close[] question" and declining to rule out expectation damages for a hypothetical conversion of the remaining principal balance of the note where defendant "refus[ed] to honor any future notices of conversion"). Here, there is no allegation that EWSI refused, explicitly or implicitly, to honor future conversion notices against Note 1 should they be submitted. Moreover, plaintiff did not plead any claim for anticipatory breach and cannot seek damages on that theory after default. See Fed. R Civ. P. 54(c) (default judgment "must not differ in kind from, or exceed in amount, what is demanded in the pleadings"); Joint Stock Co. "Channel One Russia Worldwide" v. InfomirLLC, 2018 WL 4760345, at *1 (S.D.N.Y. Sept. 28, 2018) ("[A] plaintiff cannot recover damages against a defaulted defendant for claims never alleged in its pleading[.]"). For these reasons, "Plaintiff is not entitled to recover based on hypothetical stock conversions neither made by Plaintiff nor denied by Defendant." LG Capital Funding, LLC v. M Line Holdings, Inc., 422 F.Supp.3d 739, 747 (E.D.N.Y. 2018).
To the extent other cases in our Circuit have awarded expectation damages for a hypothetical conversion of the remaining balance of the note in the absence of any claim for anticipatory breach or any allegations of refusal or repudiation, see, e.g., LG Cap. Funding, LLC v. AIM Expl., Inc., 2021 WL 4482654, at *5 (S.D.N.Y. Apr. 20, 2021), report and recommendation adopted, 2021 WL 4482148 (S.D.N.Y. Sept. 30, 2021), I respectfully disagree.
Consequently, with respect to Note 1, plaintiff should be awarded $16,688.35 in expectation damages stemming from defendant's failure to honor the November 13 Notice; $54,280 in remaining principal; $2,831.48 in regular interest on that principal (at 8%) through the date of default; and $35.69 per day in additional default interest (at 24%) thereafter, from November 19, 2014 through the date on which judgment is entered.
Plaintiff does not request any additional award based on the penalty of $250 to $500 "per day the shares are not issued," as prescribed by ¶ 8 of Note 1, likely because "the daily payment provision is an unenforceable penalty." Vape Holdings, 2017 WL 1406278, at *7; see also 5Barz I, 307 F.Supp.3d at 102 (disallowing "liquidated damages" under substantially identical provision, because the daily penalties were "wildly disproportionate to actual losses").
B. Breach of Note 2
The calculation of damages under Note 2 is more straightforward. EWSI's failure to honor the November 13 Notice under Note 1 constituted an Event of Default under Note 2 as well, see Note 2 ¶¶ 8(c), 8(h), triggering the default interest rate of 24% beginning on November 19, 2014. Note 2 ¶ 8. Since plaintiff submitted no notices of conversion under Note 2, its outstanding principal balance remained $84,000. As to this balance, plaintiff does not seek expectation damages based on a hypothetical conversion. Rather, it asks for repayment of the principal, "accrued interest at a rate of 8% from the funding date of September 29, 2014 to the default date of November 18, 2014, and accrued interest at a rate of 24% from November 19, 2014 to the date of entry of judgment." Prop. Findings ¶ 37.
Here, the amount of regular interest that accrued through the date of default was $920.55 ($84,000.00 x 0.08 x [50/365]). Prop. Findings ¶ 39 & Fig. 1. As of November 18, 2014, therefore, plaintiff was entitled to $84,920.55 in principal and regular interest. Since November 19, 2014 -the first day after the date of default - additional interest has accrued at the default rate of 24% per annum or $55.23 per day ([$84,000 x 0.24] / 365). Default interest will continue accruing at that rate until the judgment is entered in this action. Consequently, with respect to Note 2, plaintiff should be awarded $84,000 in principal; $920.55 in regular interest on that principal (at 8%) through the date of default; and $55.23 per day in additional default interest (at 24%) thereafter, from November 19, 2014 through the date on which judgment is entered.
Plaintiff improperly attempts to compound the interest due under Note 2 by calculating the default interest rate as 24% of $84,920.55, see Prop. Findings ¶ 39 & Fig. 1, which would result in a higher daily interest charge. But the Notes say nothing about compounding. Consequently, "plaintiff is entitled to simple interest only," LG Cap. Funding, LLC v. Wowio, Inc., 2018 WL 3202077, at *10 n.11 (E.D.N.Y. Apr. 24, 2018), report and recommendation adopted, 2018 WL 2224991 (E.D.N.Y. May 15, 2018), meaning that the correct calculation for the default interest is 24% of $84,000. See Wowio, 2018 WL 3202077, at *10 (recommending, in a similar case, that LG Capital be awarded the unpaid balance on the notes at issue, which was $103,500 in the aggregate, plus interest at 8% through the date of default, plus default interest thereafter, at the rate of 24%, "on the principal balance of $103,500"). To the extent other cases in our Circuit have accepted LG Capital's computation of default interest as 24% of the outstanding principal plus accrued regular interest as of the date of default, see, e.g., Imerjn, 2021 WL 4926126, at *5, I respectfully disagree.
C. Attorneys' Fees and Costs
Plaintiff also seeks $15,650 in attorneys' fees for legal work performed by associates Kevin Kehrli and Jacob Pargament of Garson, Segal, Steinmetz, Fladgate LLP (GSSF), and $744.80 costs incurred by that firm. Prop. Findings ¶¶ 42-48; Kehrli Decl. ¶¶ 13-15 & Exs. A-B. "Under New York law, a contract that provides for an award of reasonable attorneys' fees to the prevailing party in an action on the contract is enforceable 'if the contractual language is sufficiently clear.'" Cnty. of Oswego Indus. Dev. Agency v. Fulton Cogeneration Assocs., L.P., 636 F.Supp.2d 159, 179 (N.D.N.Y. 2009) (quoting NetJets Aviation, Inc. v. LHC Communications, LLC, 537 F.3d 168, 175 (2d Cir. 2008)). The Notes clearly state that the "Company agrees to pay all costs and expenses, including reasonable attorneys' fees and expenses, which may be incurred by [plaintiff] in collecting any amount due under this Note." Note 1 ¶ 7; Note 2 ¶ 7. This Court's task, therefore, is to determine the quantum of plaintiff's "reasonable" fees and expenses.
When calculating reasonable attorneys' fees, federal courts in the Second Circuit begin with "the lodestar," which is "the product of a reasonable hourly rate and the reasonable number of hours required by the case[.]" Millea v. Metro-North R.R. Co., 658 F.3d 154, 166 (2d Cir. 2011). Here, plaintiff seeks reimbursement for 62.6 hours of work by Kehrli and Pargament at a blended rate of $250 per hour. Kehrli Decl. ¶ 13 & Ex. A. In MLine Holdings, which involved the same plaintiff and the same law firm, the court concluded that $250 per hour was an unreasonably high rate for "junior associates," and lowered it to $200 per hour. 422 F.Supp.3d at 760-61 (citing LG Funding, LLC v. Fla. Tilt, Inc., 2015 WL 5038195, at *3-4 (E.D.N.Y. Aug. 26, 2015)). However, rates have crept upwards since 2015, when M Line Holdings was decided, and Kehrli (a 2014 law school graduate) is now a senior associate at GSSF, where he appears to have served as the lead attorney on this matter. Kehrli Decl. ¶ 14 n.1 & Ex. A. The requested rate of $250 per hour is therefore reasonable. See also Imerjn, 2021 WL 4926126, at *5 (approving $250 per hour for Kerhli and other GSSF associates as "very reasonable in this District for the mid-level and junior associates who litigated this case").
In assessing a request for attorneys' fees, the federal courts must also determine whether the hours charged were "reasonably expended on the litigation," and discount the fee award if they were not. Hensley v. Eckerhart, 461 U.S. 424, 433 (1983). Here, the attorneys' work can be divided broadly into five categories: (1) drafting and filing the complaint; (2) service of process; (3) obtaining the Certificate of Default and moving for the entry of a default judgment; (4) preparing for and appearing at the show-cause hearing with respect to default; and (5) preparing the Proposed Findings and other tasks related to the damages inquest. Kehrli Decl. Ex. A. Although each of these tasks required time, the overall hours billed are surprisingly high in relation to similar cases in which the same firm, on behalf of the same client, obtained a default judgment and damage award for breach of similar convertible notes. See, e.g., LG Cap. Funding, LLC v. Blue Sphere Corp., 2020 WL 7231922, at *2 (S.D.N.Y. Dec. 8, 2020) (awarding $7,550 in fees based on 30.2 hours of work by GSSF); AIM Expl., 2021 WL 4482654, at *7 (awarding $15,250 in fees based on 61 hours of work by GSSF in a case that was initially contested, requiring counsel to defend a motion to dismiss before ultimately seeking a default judgment).
This case was uncontested from start to finish. It was also a relatively uncomplicated specimen of the type of case that GSSF frequently litigates on behalf of LG Capital in the New York federal courts. It is thus unclear why - for example - drafting the complaint consumed more than 18 hours of attorney time, and preparing plaintiff's default papers (not including the showcause hearing or the damages inquest) took approximately 23 hours. See Kehrli Decl. Ex. A, at 12; AIM Expl., 2021 WL 4482654, at *7 (reducing the time spent "during the defaulting phase" from 27 hours, which was "unreasonable," to 15 hours). Thus, while GSSF's blended hourly rate is reasonable, the number of hours for which plaintiff seeks fees is somewhat excessive, and should, in my judgment, be cut by approximately one-third, to 40 hours in total, for fees of $10,000. See New York State Ass'n for Retarded Child., Inc. v. Carey, 711 F.2d 1136, 1146 (2d Cir. 1983) (endorsing "percentage cuts as a practical means of trimming fat from a fee application"). The $744.80 in costs incurred by GSSF are reasonable and should be awarded in full.
V. CONCLUSION
For the reasons set forth above, I respectfully recommend that plaintiff LG Capital be awarded the following damages: (1) for defendant EWSI's breach of Note 1, the sum of $73,799.83 (comprising $16,688.35 in expectation damages stemming from defendant's failure to honor the November 13 Notice, $54,280 in remaining principal, and $2,831.48 in regular interest on that principal through November 18, 2014), plus default interest at a rate of $35.69 per day from November 19, 2014 to the date on which judgment is entered; (2) for defendant's breach of Note 2, the sum of $84,920.55 (comprising the $84,000 principal on the note and $920.55 in regular interest on that principal through November 18, 2014), plus default interest at a rate of $55.23 per day from November 19, 2014 to the date on which judgment is entered; and (3) attorneys' fees and costs in the amount of $10,744.80.
Plaintiff is directed to promptly serve a copy of this Report and Recommendation on defendant, and to file proof of such service.
NOTICE OF PROCEDURE FOR FILING OF OBJECTIONS TO THIS REPORT AND RECOMMENDATION
The parties shall have fourteen days from this date to file written objections to this Report and Recommendation pursuant to 28 U.S.C. § 636(b)(1) and Fed.R.Civ.P. 72(b). See also Fed.R.Civ.P. 6(a) and (d). Any such objections shall be filed with the Clerk of the Court, with courtesy copies delivered to the Hon. Paul G. Gardephe at 40 Foley Square, New York, New York 10007, and to the chambers of the undersigned magistrate judge. Any request for an extension of time to file objections must be directed to Judge Gardephe. Failure to file timely objections will result in a waiver of such objections and will preclude appellate review. See Thomas v. Arn, 474 U.S. 140 (1985); Frydman v. Experian Info. Sols., Inc., 743 Fed.Appx. 486, 487 (2d Cir. 2018) (summary order); Wagner & Wagner, LLP v. Atkinson, Haskins, Nellis, Brittingham, Gladd & Carwile, P.C., 596 F.3d 84, 92 (2d Cir. 2010).