Opinion
16-CV-06012 (LDH)(RLM)
2018-07-26
LG CAPITAL FUNDING, LLC, Plaintiff, v. M LINE HOLDINGS, INC., Defendant.
ORDER ADOPTING REPORT AND RECOMMENDATION
Plaintiff, LG Capital Funding, LLC ("LG") filed this suit on October 28, 2016 and served Defendant, M Line Holdings, Inc., on November 7, 2016. (See ECF Nos. 1, 5.) Defendant has since failed to appear in or defend itself in this matter. On March 9, 2017, Plaintiff filed a Motion for Default Judgment. (See ECF No. 8.) On June 1, 2017, United States Magistrate Judge Roanne L. Mann issued a report and recommendation (the "R & R") (ECF No. 11), wherein she recommended that Plaintiff's motion for default judgment be granted, in part, and denied, in part. On June 15, 2017, Plaintiff filed an objection challenging Magistrate Judge Mann's recommendation that the Court not award liquidated damages to Plaintiff. (See Objection, ECF No. 12.) In reaching that conclusion, Magistrate Judge Mann found that the "requested damages are grossly disproportionate to actual damages, and thus constitute an unenforceable penalty." (R & R at 758.)
The Court reviews any portion of Magistrate Judge Mann's R & R that has been objected to under a de novo standard of review. See Fed. R. Civ. P. 72(b)(1),(3); 28 U.S.C. § 636(b)(1)(C). As to the balance of the R & R, "the district court need only satisfy itself that there is no clear error on the face of the record." Estate of Ellington ex rel. Ellington v. Harbrew Imps. Ltd. , 812 F. Supp. 2d 186, 189 (E.D.N.Y. 2011) (quoting Urena v. New York , 160 F. Supp. 2d 606, 609-10 (S.D.N.Y. 2001) ) (internal quotation marks and citations omitted).
For the reasons set forth below, the Court adopts Magistrate Judge Mann's thorough and well-reasoned opinion in full.
BACKGROUND
Between February 6, 2014, and June 10, 2014, Defendant M Line Holdings, Inc. issued three convertible redeemable notes (the "Notes") to Plaintiff, each in the amount of $50,000. (See Complaint, ECF No. 1 ¶¶ 6-8, Exs. A-C.) Two of the Notes had maturity dates of February 6, 2015 and one had a maturity date of June 10, 2015. (See id. ) Under each of the Notes, Defendant was obligated to repay Plaintiff the principal as well as an annual interest rate of eight percent by the maturity date. (See id. at ¶ 10.) The Notes also contained identical stock conversion provisions which permitted Plaintiff to convert all or part of the outstanding principal of the Notes and certain future interest into shares of Defendant's common stock. (See id. ¶¶ 12-14.) If Defendant failed to pay the principal or interest due on any Note, or failed to honor the stock conversion provisions of any Note, Defendant would be in default. (See id. , Exs. A-C, § 8.) In the event of default, an increased interest rate would apply to Defendant's payments: 24% under Note 1; 18% under Note 2; and 16% under Note 3. (See id. ¶ 11.) Additionally, if Defendant failed to honor the stock conversion provision of the Notes, Defendant agreed to pay "$250 per day the shares [were] not issued beginning on the 4th day after the conversion notice was delivered to [Defendant,]" and "increas[ing] to $500 per day beginning on the 10th day." (Id. , Exs. A-C, § 8.)
Note 3 is internally inconsistent with respect to its maturity date, providing for both a May 30 and June 10, 2015 maturity dates. (Compl. ¶ 8, Ex. C.) Plaintiff alleges a maturity date of June 10, 2015. The difference is not material for the purposes of the instant motion and the Court accepts Plaintiff's allegation as true. (Compl. ¶ 22.)
On February 6, 2015, Notes 1 and 2 became due and payable. (See id. ¶¶ 18-19.) Defendant, however, failed to repay either, rendering Defendant in default on Notes 1 and 2. (See id. ¶ 20.) On June 10, 2015, Note 3 became due and payable. Here again, Defendant failed to repay the Note, rendering Defendant in default on Note 3. (See id. ¶ 22.) Finally, on September 4, 2015, nearly seven months after Defendant allegedly defaulted on the Notes, Plaintiff attempted to convert some of the amount due under Note 1 into stock. (See id. ¶ 23.) Defendant failed to deliver the converted stock, rendering them in default with respect to Note 1's stock conversion provision. (See id. ¶ 24.)
DISCUSSION
Plaintiff objects to Magistrate Judge Mann's recommendation that liquidated damages not be awarded. Plaintiff contends that the liquidated damages are not disproportionate to Plaintiff's actual damages, and that damages as a result of Defendant's breach were not easily ascertainable at the time the parties entered into the contract. (See Objection, at *4.) Further, Plaintiff argues that it is Defendant's burden to prove that liquidated damages constitute an unenforceable penalty, and that Defendant has waived its right to do so as a result of its default. (See id. )
I. The Court's Independent Obligation to Ensure the Appropriateness of Damages.
As a threshold matter, the Court rejects Plaintiff's argument that it should not address the appropriateness of liquidated damages where the party against whom those damages are to be assessed is in default. (See Objection, at *9-10.) The Court has an independent obligation to determine whether damages to be awarded are appropriate. This role does not change simply because one party is in default. "Even when a default judgment is warranted based on a party's failure to defend, the allegations in the complaint with respect to the amount of the damages are not deemed true. The district court must instead conduct an inquiry in order to ascertain the amount of damages with reasonable certainty." Credit Lyonnais Sec. (USA), Inc. v. Alcantara , 183 F.3d 151, 155 (2d Cir. 1999) (internal citations omitted). Indeed, "[c]ourts should take great care in entering default judgment, ensuring if at all possible that both parties have their cases judged on the merits." Liberty Mut. Ins. Co. v. Fast Lane Car Serv., Inc. , 681 F. Supp. 2d 340, 346 (E.D.N.Y. 2010) ; see also Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., Div. of Ace Young Inc. , 109 F.3d 105, 111 (2d Cir. 1997) (reversing and remanding where district court simply accepted the non-defaulting parties statement of damages because "[t]his did not satisfy the court's obligation to ensure that the damages were appropriate").
II. Liquidated Damages Clauses Are Upheld Unless They Constitute a Penalty.
To find a liquidated damages clause enforceable, a court must determine: first , that the amount of actual loss is difficult or impossible to estimate precisely; and second , that the liquidated damages sought bear a "reasonable proportion to the probable loss." Leasing Serv. Corp. v. Justice , 673 F.2d 70, 73 (2d Cir. 1982). Magistrate Judge Mann found that the liquidated damages clause at issue here failed to satisfy both of these standards. The Court agrees.
a. Damages Were Neither Difficult Nor Impossible to Estimate Precisely.
Plaintiff's expected damages from a breach of the conversion provisions were readily ascertainable. It is well-established under New York law that "the damage award resulting from a breach of an agreement to purchase securities is the difference between the contract price and the fair market value of the asset at the time of the breach." Union Capital LLC v. Vape Holdings Inc. , No. 16-CV-1343, 2017 WL 1406278, at *6 (S.D.N.Y. Mar. 31, 2017) (quoting Sharma v. Skaarup Ship Mgmt. Corp. , 916 F.2d 820, 825 (2d Cir. 1990) ); see also Boyce v. Soundview Tech. Grp., Inc. , 464 F.3d 376, 385 (2d Cir. 2006) ("[T]he measure of damages is the difference between the option price and the market value of the stock.") Using this well-established principal, Magistrate Judge Mann calculated Plaintiff's damages for the attempted September 4, 2015 conversion as $3,789.46 (or approximately 1.4% of Plaintiff's claimed liquidated damages). (See R & R, 759 n.13.)
Plaintiff does not challenge Magistrate Judge Mann's calculations. Instead, Plaintiff argues that it could have made an unknown number of future conversions and that it is entitled to damages for these conversions. (Objection, *8-9.) Indeed, Plaintiff claims that it could have ultimately converted the entire outstanding balance of the Note. (Objection, *9.) In either event, Plaintiff argues that it would have reaped additional value from these conversions and that it is entitled to damages for these conversions. Plaintiff misapprehends the basis for its recovery.
Plaintiff is entitled to recovery based on Defendant's failure to honor the requested September 4, 2015 conversion. Plaintiff is not entitled to recover based on hypothetical stock conversions neither made by Plaintiff nor denied by Defendant. Plaintiff argues that its losses cannot be determined because it is impossible to know the number of times it would have converted its shares, the number of times it would have sold converted stock, and the price at which it would have done so. Therefore, Plaintiff claims that its losses were unascertainable.
Courts in this district have previously rejected this exact argument from this exact Plaintiff. See, e.g. , LG Capital Funding, LLC v. CardioGenics Holdings, Inc. , No. 16-CV-1215, 2018 WL 1521861, at *7 (E.D.N.Y. Feb. 20, 2018) ("LG is not entitled to lost profits from any future price increase of the shares it was to receive (just like it would not be penalized for a future decrease in the share value)."); LG Capital Funding, LLC v. Vape Holdings, Inc. , No. 16-CV-2217, 2016 WL 3129185, at *3-4 (E.D.N.Y. June 2, 2016) (rejecting LG's argument that "the dates upon which LG would have sold the stock it did not receive, and the amounts LG would have realized from any such sales, will be difficult to establish with any degree of certainty"); LG Capital Funding, LLC v. PositiveID Corp. , No. 17-CV-1297, 2017 WL 2556991, at *7 (E.D.N.Y. June 12, 2017) (finding "LG's damages are easily measurable and compensable with monetary damages"). The same outcome is warranted here.
New York law forecloses the Court from considering the variables offered by Plaintiff. Courts rely on the fair market value of the asset at the time of breach in calculating damages, and therefore "reject[ ] the contention that in order to calculate damages it would [be] necessary to speculate when and if a plaintiff would sell its stock." Vape Holdings, Inc. , 2016 WL 3129185, at *4. Because "[t]he damage award resulting from a breach of an agreement to purchase securities is the difference between the contract price and the fair market value of the asset at the time of breach," Plaintiff's losses here were ascertainable. Sharma , 916 F.2d at 825.
b. The Liquidated Damages Are Not Reasonably Related to Expected Losses.
"A liquidated damages clause generally will be upheld by a court, unless the liquidated amount is a penalty because it is plainly or grossly disproportionate to the probable loss anticipated when the contract was executed." United Air Lines, Inc. v. Austin Travel Corp. , 867 F.2d 737, 740 (2d Cir. 1989). The liquidated damages clause at issue, bears no reasonable relation to any actual or expected losses. "[C]ourts have explained that a damages provision that awards a specified sum ‘no matter the timing of the breach’ is likely to be a penalty clause because not all breaches are ‘of the same gravity’ and thus the fixed damage award is not a ‘reasonable effort to estimate damage.’ " Leviton Mfg. Co. v. Pass & Seymour, Inc. , 2017 WL 3084404, at *6 (E.D.N.Y. July 19, 2017) (quoting Energy Plus Consulting, LLC v. Illinois Fuel Co., LLC , 371 F.3d 907, 909-10 (7th Cir. 2004) ); see also Bradford v. New York Times Co. , 501 F.2d 51, 57 (2d Cir. 1974) (noting that "setting a fixed amount for any breach irrespective of its gravity or the probable damage to be contemplated might well classify the clause as an unenforceable penalty").
The clause at issue provides that following a breach, Defendant is required to pay "$250 per day the shares [were] not issued beginning on the 4th day after the conversion notice was delivered to [Defendant,]" and "increas[ing] to $500 per day beginning on the 10th day." (Id. , Ex. A, § 8.) On its face, this clause does not purport to have any relationship to Plaintiff's actual or expected damages. And Plaintiff does not argue that these figures have some proportional relationship to Plaintiff's actual or expected losses. Plaintiff provides no explanation for the basis of the $250 or $500 figures or why the fourth and tenth day are chosen as benchmarks (as compared to, say, the fifteenth or thirtieth day). See LG Capital Funding, LLC v. Coroware, Inc. , 2017 WL 3973921, at *3 (E.D.N.Y. Sept. 8, 2017) (rejecting exact same liquidated damages provision in LG note action because "the amount is not tethered to the plaintiff's actual losses, and serves only to coerce contract performance"). Moreover, the liquidated damages currently total more than twice the combined value of all three Notes at issue, and, as noted above, almost 100 times the amount of damages calculated by Magistrate Judge Mann, with the value continuing to increase by the day. CONCLUSION
This is not the first time that courts in this district have found that this Plaintiff's use of this clause is unenforceable on these grounds. This identical provision has been found unenforceable on several occasions. See, e.g. , CardioGenics Holdings, Inc. , 2018 WL 1521861, at *10 ; Coroware, Inc. , 2017 WL 3973921, at *3 ; LG Capital Funding, LLC v. Sanomedics Intl. Holdings, Inc. , 2015 WL 7429581, at *13, 2015 N.Y. Misc. LEXIS 4294, at *38 (N.Y. Sup. Ct. Nov. 23, 2015) (finding that these same liquidated damages provisions "are so far in excess of the principal loan amounts ... and are so conspicuously and grossly disproportionate to the probable loss, that there can be no question that these liquidated damage clauses were clearly designed to penalize [the defendant]"). The Court agrees with these decisions and finds that the liquidated damages clause bears no "reasonable proportion to the probable loss" and therefore serves only as a penalty.
The Court has reviewed the remaining portions of the R & R for clear error and, finding none, hereby adopts Magistrate Judge Mann's R & R as the opinion of this Court. For the foregoing reasons, the Court orders, consistent with Magistrate Judge Mann's R & R, that Plaintiff's motion be granted in part and denied in part, and that Plaintiff be awarded:
(1) $136,503.01 in unpaid principal and interest;
(2) default interest at a combined daily rate of $69.76 from February 7, 2015 through entry of final judgment;
(3) $2,300 in attorney's fees; and
(4) $493.20 in costs.
SO ORDERED.
REPORT AND RECOMMENDATION
ROANNE L. MANN, CHIEF UNITED STATES MAGISTRATE JUDGE
In this diversity action for breach of contract, plaintiff LG Capital Funding, LLC ("plaintiff") alleges that defendant M Line Holdings, Inc. ("defendant") failed to make payments due and owing under three convertible redeemable notes. Pending before this Court, on referral from the Honorable LaShann DeArcy Hall, is plaintiff's motion for default judgment. For the following reasons, this Court respectfully recommends that plaintiff's motion be granted in part and denied in part, and that plaintiff be awarded (1) $136,503.01 in unpaid principal and interest; (2) default interest at a combined daily rate of $69.76 from February 7, 2015 through entry of final judgment; (3) $2,300 in attorney's fees; and (4) $493.20 in costs.
BACKGROUND
A. Factual
Plaintiff is a limited liability company, organized under New York law, with its principal place of business in Brooklyn; all its members are citizens of New York. See Verified Complaint (Oct. 28, 2016) ("Compl.") ¶ 1, Electronic Case Filing Docket Entry ("DE") #1. Defendant is a corporation, organized under Nevada law, with its principal place of business in Anaheim, California. See id. ¶ 2. Defendant's stock is traded publicly on the Over the Counter ("OTC") markets, or "Pink Sheets," under the symbol "MLHC." See id.
Between February 6 and June 10, 2014, defendant issued three convertible redeemable notes (collectively, the "Notes") to plaintiff in the total amount of $150,000—the first and second on February 6th, each in the amount of $50,000 and with a maturity date of February 6, 2015 ("Note 1" and "Note 2"), and the third on June 10th, in the amount of $50,000 and with a maturity date of June 10, 2015 ("Note 3"). See id. ¶¶ 6–8 & Exs. A–C, DE #1-1, #1-2, #1-3. Plaintiff fully funded the Notes, respectively, on February 13, 2014; September 17, 2014; and June 17, 2014. See id. ¶¶ 6–8. Apart from their maturity dates and default interest rates, the Notes at issue here are substantially the same. See id. ¶ 9 & Exs. A–C. All three stipulate that they "shall 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[,]" and that the parties "consent to exclusive jurisdiction and venue in the courts of the State of New York." Compl., Exs. A–C, § 14. Under all three Notes, defendant promised to repay plaintiff the principal balance, as well as interest at an annual rate of eight percent (the "regular rate"), by the relevant maturity date. See id. ¶ 10 (citing Exs. A–C, at 1). Each Note gave plaintiff the right, "at any time after 180 days," and with appropriate notice and payment, to convert all or part of the outstanding principal and proportionate future interest into shares of defendant's common stock. See id. ¶¶ 12–14 (quoting Exs. A–C, § 4).
Note 3 is internally inconsistent concerning its maturity date, providing for both May 30th and June 10th. See Compl., Ex. C, at 1. But plaintiff alleges a maturity date of June 10th, see id. ¶ 22, which the Court accepts for purposes of the instant motion.
The Notes do not specify whether the 180-day period began with the parties' execution of the Notes or after plaintiff fully funded them. See Compl., Exs. A–C, § 4. Nevertheless, as discussed infra pp. 750–51, this apparent ambiguity is immaterial since plaintiff elected to convert shares under Note 1 more than 180 days after either date. See Compl. ¶¶ 6–8, 15 & Ex. D.
The Notes specify a number of default events. See id., Exs. A–C, § 8. Relevant to this action, such events include defendant's failure to pay the principal or interest due on any Note by the specified maturity date, or to deliver common stock to plaintiff pursuant to the terms of the Notes. See id. §§ 8(a), (k). Each Note contains a cross-default provision specifying that defendant's default under any individual Note also constitutes a default for purposes of any other Note. See id. ¶ 20 (citing Exs. A–C, § 8(a) ); see also id., Exs. A–C, § 8(c) (default includes defendant's "fail[ure] to perform or observe, in any respect, any covenant, term, condition, agreement or obligation ... under this Note or any other note").
In the event of default, an increased annual interest rate would apply to defendant's payments under the Notes—specifically, twenty-four percent under Note 1, eighteen percent under Note 2, and sixteen percent under Note 3 (the "default rates"). See id. ¶ 11 (quoting Exs. A–C, § 8). Additionally, for any failures to deliver shares of its common stock to plaintiff after a proper request for conversion, defendant agreed to pay "$250 per day the shares [were] not issued beginning on the 4th day after the conversion notice was delivered to [defendant,]" and "increas[ing] to $500 per day beginning on the 10th day." Id., Exs. A–C, § 8. Defendant further promised "to pay all costs and expenses, including reasonable attorneys' fees ...," that plaintiff might incur "in collecting any amount due under th[e] Note[s]," or "in the investigation, preparation and prosecution of ... [an] action or proceeding [to enforce any provision of the Notes]." See id., Exs. A–C, §§ 7, 8.
On September 17, 2014, plaintiff elected to convert $20,000 of the principal balance on Note 1 (and, consequently, $951.23 of future interest at the regular rate) into more than 38 million shares of MHLC stock at a conversion price of $0.00055 per share. See Compl. ¶ 15 (citing Ex. D, DE #1-4). Defendant "duly made and honored" that conversion, reducing the principal balance due on Note 1 to $30,000. Id. ¶ 16. Though plaintiff subsequently attempted to convert additional shares under Note 1, see id. ¶¶ 23–24, to date plaintiff has not exercised its conversion rights under Notes 2 or 3, see id. ¶ 17.
Plaintiff alleges that several default events thereafter occurred. On February 6, 2015, Notes 1 and 2 reached maturity and became due and payable in the respective amounts of $32,367.12 and $51,567.12 in principal and interest, see id. ¶¶ 18–19, yet defendant failed to repay either, see id. ¶ 20. Plaintiff further contends that, due to the cross-default provision contained in each Note, defendant's non-payment under Notes 1 and 2 was a breach as to all three Notes. See id. ¶ 21. Then, on June 10, 2015, Note 3 became due and payable in the amount of $52,586.30 in principal and interest, but defendant again failed to make payment—an additional breach, in plaintiff's view. See id. ¶ 22. Finally, on September 4, 2015, nearly seven months after defendant allegedly defaulted on all three Notes, plaintiff attempted to convert $1,278 under Note 1 (and, consequently, $159.83 of future interest at the regular rate) into 13,067,090 shares of MLHC stock at a conversion price of $0.00011 per share (the "September 4th conversion"). See id. ¶ 23 (citing Ex. E, DE #1-5). Defendant failed to deliver the shares within three business days—a final breach, plaintiff claims. See id. ¶ 24.
On March 30, 2016, plaintiff notified defendant by letter from counsel that defendant was in default under the terms of the Notes. See id. ¶ 29 & Ex. F, DE #1-6. To date, defendant has failed to make payment under the Notes or to deliver shares of common stock pursuant to the September 4th conversion. See id. ¶¶ 29, 33. Consequently, when the instant motion was filed, plaintiff calculated that defendant owed $189,611.24 under the Notes, consisting of $136,520.55 in principal and interest at the regular rate through February 6, 2015, and $53,090.70 in default interest accrued thereafter, with additional interest accruing daily at the default rates. See Declaration of Joseph Lerman (Mar. 9, 2017) ("Lerman Decl.") ¶ 6, DE # 8-1. Additionally, as a result of defendant's failure to honor the September 4th conversion, plaintiff claims liquidated damages of $271,000 as of the filing of the instant motion, with additional liquidated damages accruing at a daily rate of $500. See id. ¶ 7. Finally, plaintiff requests $2,875 in attorney's fees, as well as $493.20 in costs. See Declaration of Kevin Kehrli (Mar. 9, 2017) ("Kehrli Decl.") ¶¶ 13–16, DE #8-2 (citing id., Exs. A–B, DE #8-3, #8-4).
B. Procedural
Plaintiff initiated this lawsuit on October 28, 2016, see Compl., and purportedly served defendant on November 7, 2016 by personal service on a guard at the gated community in Las Vegas, Nevada where defendant's registered agent, Peter Cimino, resides, see Proof of Service (Nov. 16, 2016) ("11/16/16 Proof of Service") at 2, DE #5 (citing Nev. Rev. Stat. § 14.090(1)(a) ). Defendant thereafter failed to appear or defend this action, leading plaintiff to seek entry of default, see Request for Certificate of Default (Dec. 12, 2016), DE #6, which was granted on January 10, 2017, see Entry of Default (Jan. 10, 2017), DE #7. On March 9, 2017, plaintiff filed the instant motion, see Motion for Default Judgment (Mar. 9, 2017), DE #8, which the Honorable LaShann DeArcy Hall, the District Judge assigned to this matter, referred to this Court for its report and recommendation, see Order (Mar. 10, 2017). Though this Court directed defendant to respond to plaintiff's motion by April 28, 2017, see Electronic Order (Apr. 7, 2017), to date the Court has received no such response.
DISCUSSION
After the Clerk of the District Court enters a Certificate of Default, the District Court may, on application, enter a default judgment if a defendant "has failed to plead or otherwise defend" an action. See Fed R. Civ. P. 55(a)–(b) ; see also S.D.N.Y./E.D.N.Y. Local Civ. R. 55.2(a)–(b). "A defendant's default is an admission of all well-pleaded factual allegations in the complaint except those relating to damages." Lyons P'ship, L.P. v. D & L Amusement & Entm't, Inc., 702 F.Supp.2d 104, 111 (E.D.N.Y. 2010) (citing Greyhound Exhibitgroup, Inc. v. E.L.U.L. Realty Corp., 973 F.2d 155, 158 (2d Cir. 1992) ); see also Fed. R. Civ. P. 8(b)(6). Plaintiff bears the burden of establishing damages, see Greyhound Exhibitgroup, 973 F.2d at 158, which the Court must "ascertain ... with reasonable certainty[,]" Credit Lyonnais Secs. (USA), Inc. v. Alcantara, 183 F.3d 151, 155 (2d Cir. 1999), either by evaluating affidavits or documentary evidence, see Fustok v. ContiCommodity Servs., Inc., 873 F.2d 38, 40 (2d Cir. 1989), or, in its discretion, by holding an evidentiary hearing, see, e.g., Action S.A. v. Marc Rich & Co., Inc., 951 F.2d 504, 508 (2d Cir. 1991).
I. Sufficiency of Service
"A default judgment is ordinarily justified where a defendant fails to respond to a complaint." SEC v. Anticevic, No. 05 CV 6991(KMW), 2009 WL 4250508, at *6 (S.D.N.Y. Nov. 30, 2009) (citing, inter alia , Bermudez v. Reid, 733 F.2d 18, 21 (2d Cir. 1984) ). Accordingly, before entering a default judgment, the Court should confirm that defendant was duly served and notified of this lawsuit. See LG Capital Funding, LLC v. Volt Solar Sys., No. 15 Civ. 1404 (KAM) (VMS), 2016 WL 11447845, at *4, 2016 U.S. Dist. LEXIS 108779, at *10 (E.D.N.Y. Aug. 15, 2016), adopted, 2016 WL 4718014, 2016 U.S. Dist. LEXIS 122438 (E.D.N.Y. Sept. 9, 2016).
Pursuant to Rule 4(h) of the Federal Rules of Civil Procedure ("FRCP"), corporate defendants may be served "pursuant to state law in the state ... where service is made[.]" Jean-Louis v. Warfield, 898 F.Supp.2d 570, 574 (E.D.N.Y. 2012) (citing Fed. R. Civ. P. 4(h)(1)(A) ). Under Nevada law, where, as here, the intended recipient of service "resides at a location to which access is not reasonably available except through a gate[,]" and "there is [a] guard posted at the gate ... [who] denies access to the residence for service of process, service of process is effective upon leaving a copy thereof with the guard." Nev. Rev. Stat. § 14.090(1)(a) ; see also Bank of the West v. Barton, No. 2:14-cv-770-APG-CWH, 2014 WL 3514978, at *2–3 (D. Nev. July 15, 2014) ; 11/16/16 Proof of Service. Accordingly, the Court concludes that defendant was properly served with process, and that default judgment is justified so long as plaintiff has adequately alleged breach of contract.
II. Personal Jurisdiction and Venue
All three Notes stipulate that the parties "consent to exclusive jurisdiction and venue in the courts of the State of New York. " Compl., Exs. A–C, § 14 (emphasis added). Plainly then, the parties have consented to personal jurisdiction by and exclusive venue in the state courts of New York, not this Court—an issue plaintiff conspicuously failed to brief. See, e.g., Nagel v. The Residential Resort, LLC, No. 3:03CV2246 (PCD), 2004 WL 288808, at *2 (D. Conn. Feb. 6, 2004) (concluding that forum selection clause's reference to "the courts of the State of Connecticut" referred only to Connecticut state courts (emphasis added) ); see also, e.g., Volvo Fin. Servs., LLC v. Financiera TFC S.A., Civ. No. 12-cv-5609, 2013 WL 3761035, at *3 (D.N.J. July 16, 2013) (reaching same conclusion with respect to "the courts of the State of New Jersey") (citing N.J. v. Merrill Lynch & Co., 640 F.3d 545, 548–49 (3d Cir. 2011) ). Nevertheless, this Court respectfully recommends that personal jurisdiction obtains here and that venue is proper.
This conclusion is only bolstered by the inclusion, in otherwise substantially similar notes that plaintiff has litigated in this District, of contractual provisions specifically consenting to jurisdiction by and designating as a forum "the state courts of New York or ... the federal courts located in the state and county of Kings County, New York. " Volt Solar Sys., 2016 WL 11447845, at *6, 2016 U.S. Dist. LEXIS 108779, at *16 (emphasis added).
Though district courts need not "raise sua sponte the defense of lack of personal jurisdiction on behalf of parties who have elected not to pursue th[at] defense[ ] for themselves[,]" they may elect to do so nevertheless. City of N.Y. v. Mickalis Pawn Shop, LLC, 645 F.3d 114, 135 (2d Cir. 2011) (internal formatting and citation omitted). Here, in light of the exclusive forum selection clause contained in each of the Notes, this Court deems it appropriate to provide a recommendation concerning personal jurisdiction.
Parties may consent to the personal jurisdiction of a particular court through contractual forum selection clauses, see, e.g., D.H. Blair & Co., Inc. v. Gottdiener, 462 F.3d 95, 103 (2d Cir. 2006), but have "no power by private contract to oust a federal court of jurisdiction otherwise obtaining[,]" New Moon Shipping Co., Ltd. v. MAN B & W Diesel AG, 121 F.3d 24, 28 (2d Cir. 1997). Accordingly, a forum selection clause designating New York state court as the exclusive forum for a contractual dispute cannot divest a federal court of personal jurisdiction over the parties to that same dispute if jurisdiction is otherwise obtained. See Lipson v. Birch, 46 F.Supp.3d 206, 213 (E.D.N.Y. 2014).
In diversity cases brought against non-domiciliaries in New York federal courts, the New York long-arm statute, Section 302(a) of the New York Civil Practice Law and Rules ("CPLR"), governs the personal jurisdiction analysis. See Lipson, 46 F.Supp.3d at 216–20. Of relevance here, Section 302(a)(1) provides 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. N.Y. C.P.L.R. § 302(a)(1). The attendant inquiry is twofold: "(1) whether the defendant transacts any business in New York and, if so, (2) whether th[e] cause of action arises from such a business transaction." Lipson, 46 F.Supp.3d at 217 (quoting Best Van Lines, Inc. v. Walker, 490 F.3d 239, 246 (2d Cir. 2007) (internal formatting omitted) ). Under the first prong, "the Court looks to the totality of the defendant's activities within the forum to determine whether it has engaged in purposeful activity there." Id. (quoting Best Van Lines, 490 F.3d at 246 (internal quotation marks omitted) ). "Under the second ..., the Court inquires whether there is ‘an articulable nexus, or a substantial relationship, between the claim asserted and the actions that occurred in New York.’ " Id. (quoting Best Van Lines, 490 F.3d at 246 ).
Courts have found sufficient business contacts to support personal jurisdiction under CPLR § 302(a)(1) in situations where non-domiciliaries have entered into contracts with New York-based companies. For example, where a group of investors, residents of either New Jersey or Florida, entered into a brokerage account contract with a New York broker and executed "numerous" stock trades, on various New York exchanges, through the broker's New York office, these contacts, in the Second Circuit's view, "provided fair warning of the possibility of [the defendants'] being subject to the jurisdiction of New York." D.H. Blair, 462 F.3d at 105. The court went on to conclude that, since the brokerage accounts at issue were located and managed in New York, there was also a sufficient nexus between the parties' business transactions and the claims at issue to satisfy the requirements of CPLR § 302(a)(1). See id. And a district court found sufficient contacts for purposes of CPLR § 302(a)(1) where, among other things, a defendant, while physically located in Louisiana, signed a contract with a New York-based firm and forwarded it to the firm's New York headquarters (where it was countersigned and thus fully executed); communicated with that firm via the latter's New York headquarters; and attempted to renegotiate contract terms with the firm's New York-based management. See Rescuecom Corp. v. Chumley, 522 F.Supp.2d 429, 441 (N.D.N.Y. 2007).
Here, the contracts at issue constitute business transacted in New York sufficient for this Court to exercise personal jurisdiction over defendant. Though defendant is organized under the laws of Nevada, with its principal place of business in California, see Compl. ¶ 2, it issued the Notes to plaintiff, a limited liability company organized under the laws of New York, which is also the location of plaintiff's principal place of business and where all its members reside, see id. ¶ 1. Defendant communicated with plaintiff at its New York place of business concerning the Notes, and forwarded converted shares of MLHC stock to plaintiff at a New York address. See id. ¶¶ 15–16 & Ex. D. Defendant agreed that the laws of New York would govern the Notes and consented to jurisdiction by its state courts, see Compl., Exs. A–C, § 14, "provid[ing] fair warning of the possibility of [defendant's] being subject to the jurisdiction of New York[,]" D.H. Blair, 462 F.3d at 105. Long-arm jurisdiction is accordingly appropriate here.
B. Venue
"[T]here is a strong federal policy in favor of enforcing forum selection clauses." Lipson, 46 F.Supp.3d at 213 (citing Roby v. Corp. of Lloyd's, 996 F.2d 1353, 1361 (2d Cir. 1993) ). Nevertheless, forum selection clauses are waivable in certain circumstances. See, e.g., BAX Global, Inc. v. Ocean World Lines, Inc., No. 07 Civ. 10457(NRB), 2009 WL 3001816, at *4 (S.D.N.Y. Sept. 18, 2009). In the instant case, whether waiver of a forum selection clause is viewed as a question of venue, see BAX Global, 2009 WL 3001816, at *4, or contract, see Am. Int'l Grp. Europe S.A. (Italy) v. Franco Vago Int'l, Inc., 756 F.Supp.2d 369, 380 (S.D.N.Y. 2010), defendant has waived enforcement of the forum selection clause.
First, numerous courts have concluded that a defaulting party waives the defense of improper venue. Second, as a matter of contract, a party "waive[s] a contractual right when it voluntarily and intentionally abandons the enforcement of that right." Am. Int'l Grp., 756 F.Supp.2d at 380 (citing Beth Israel Med. Ctr. v. Horizon Blue Cross & Blue Shield of N.J., Inc., 448 F.3d 573, 585 (2d Cir. 2006) ). "Waiver may be established by affirmative conduct or by failure to act so as to evince an intent not to claim a purported advantage." Id. (quoting Gen. Motors Acceptance Corp. v. Clifton-Fine Cent. Sch. Dist., 85 N.Y.2d 232, 236, 623 N.Y.S.2d 821, 647 N.E.2d 1329 (1995) ). In this vein, "when a party ... willfully default[s], district courts are not required ‘to raise sua sponte affirmative defenses, which may, of course, be waived or forfeited[.]’ " b.I.G.f.a.c.e. Entm't, Inc. v. Young Money Entm't, LLC, No. 15 CV 5878-LTS, 2016 WL 5092598, at *2 (S.D.N.Y. Sept. 19, 2016) (quoting Mickalis Pawn, 645 F.3d at 134–35 ). Thus, for example, a court may enter a default judgment against a non-appearing party that could otherwise assert an affirmative defense based on contractual limitations on the plaintiff's right to sue. See, e.g., id. at *2 & n.2 (defendant's failure to appear waived contractual time limitations on plaintiff's ability to sue for royalty payments); see also, e.g., Fustok v. Conticommodity Services, Inc., 122 F.R.D. 151, 155 (S.D.N.Y. 1988) (third-party defendant indemnitor, by failing to appear, waived contractual right to object to settlement terms between original parties to lawsuit).
See, e.g., MCA Ventures, LLC v. MJ Envtl. Inc., No. 15-9087-CM, 2015 WL 5937621, at *2 n.1 (D. Kan. Oct. 13, 2015) ; Hrothgar Invs., Ltd. v. Houser, Case No. 15-cv-1116-JCS, 2015 WL 5853634, at *3 n.2 (N.D. Cal. Aug. 18, 2015), adopted, 2015 WL 5747932 (N.D. Cal. Sept. 30, 2015) ; Novatel, Ltd., Inc. v. Infinitbox Internacional S.A. de C.V., Civil Action No. SA-12-CV-186-XR, 2012 WL 12931526, at *2 (W.D. Tex. Oct. 23, 2012) ; Williams v. Lakin, No. 06-CV-515-GFK-PJC, 2008 WL 1990473, at *2 (N.D. Okla. May 2, 2008).
Here, defendant was properly served with the summons and complaint and the relevant default judgment motion papers, see supra pp. 751–52; Certificate of Service (Mar. 9, 2017), DE #9; Electronic Order (Apr. 7, 2017), but has failed to appear or otherwise assert its rights under the forum selection clause. The Court need not sua sponte assert that potential defense on defendant's behalf, and will not do so. See b.I.G.f.a.c.e. Entm't, 2016 WL 5092598, at *2. The right to change the forum for a dispute is decidedly less dispositive in potential effect than the right to invoke a contractual limitations period. Cf. id. Accordingly the Court sees no reason why defendant's rights under the forum selection clause are not waivable to the same extent as the relevant defendant's rights in b.I.G.f.a.c.e. Entertainment, and will therefore proceed to the merits of plaintiff's motion. See id.
III. Liability
"To prevail on a breach of contract claim under New York law, a plaintiff must prove (1) [the existence of] a contract; (2) performance of the contract by one party; (3) breach by the other party; and (4) damages." Terwilliger v. Terwilliger, 206 F.3d 240, 245–46 (2d Cir. 2000) (internal quotation marks and citation omitted). The Court must interpret a written contract "so as to give effect to the intention of the parties as expressed in the unequivocal language they have employed." Id. at 245 (citation omitted). The Court "may neither rewrite, under the guise of interpretation, a term of the contract when the term is clear and unambiguous, nor redraft a contract to accord with its instinct for the dispensation of equity[.]" Id. (citations omitted).
The Notes make clear that the parties intended New York law to govern their interpretation, and New York courts to enforce them. Compare Compl., Exs. A–C, § 14, with AOL Inc. v. Dig. Delivery Networks, Inc., 15 Civ. 6620(GBD)(KNF), 2016 WL 2909117, at *4, 2016 U.S. Dist. LEXIS 58940, at *10 (S.D.N.Y. Apr. 29, 2016) ("As a general rule, choice of law provisions are valid and enforceable in New York." (internal formatting and citation omitted) ), adopted, 2016 WL 2889063, 2016 U.S. Dist. LEXIS 65180 (S.D.N.Y. May 17, 2016) ; see also Bank of N.Y. v. Yugoimport, 745 F.3d 599, 609 (2d Cir. 2014) ("New York choice-of-law rules ... require the court to honor the parties' choice of law provision insofar as matters of substance are concerned[.]" (internal formatting omitted) ).
Plaintiff has adequately alleged breach of contract. The allegations in the Complaint establish the existence of three contracts between the parties, that is, the Notes—signed written agreements under which plaintiff promised to make payments to defendant in exchange for repayment with interest and/or the option to acquire discounted shares of defendant's stock. See Compl. ¶¶ 6–10, 12 & Exs. A–C. Plaintiff performed by paying defendant $150,000, see id. ¶¶ 6–8, but defendant failed to repay the principal and interest due under Notes 1 and 2 by their maturity date of February 6, 2015, see id. ¶¶ 18–20. Under the terms of the Notes, this constituted a default as to all three. See id. ¶ 21 & Exs. A–C, §§ 8(a), (c). Accordingly, the Court respectfully recommends that defendant be held liable for breaching its repayment obligations under each of the Notes as of February 7, 2015 (or the "default date"). Additionally, defendant failed to deliver shares of its stock per the September 4th conversion, despite there being an outstanding principal on Note 1 at that time, thereby triggering Note 1's liquidated damages provisions. See id. ¶¶ 22-24 & Ex. E.
Though plaintiff alleges that an additional default subsequently when defendant failed to repay Note 3, see Compl. ¶¶ 22–24, the Notes unequivocally provide that such a default under any single Note constitutes a default for purposes of all three, see id., Exs. A–C, §§ 8(a), (c), and this Court must measure damages from the date of the initial breach, see Lucente v. Int'l Bus. Machs. Corp., 310 F.3d 243, 262 (2d Cir. 2002) ; see also N.Y. C.P.L.R. § 5001.
IV. Damages
Though defendant, by defaulting, admits all well-pleaded allegations pertaining to liability, the Court has discretion to determine whether plaintiff has substantiated its damages request. See Bricklayers & Allied Craftworkers Local 2, Albany, N.Y. Pension Fund v. Moulton Masonry & Constr., LLC, 779 F.3d 182, 189 (2d Cir. 2015). Under New York law, damages for breach of contract "attempt[ ] to secure to the injured party the benefit of his bargain, subject to the limitations that the injury ... was foreseeable, and that the amount of damages claimed be measurable with a reasonable degree of certainty and, of course, adequately proven." Terwilliger, 206 F.3d at 248 (quoting Freund v. Wash. Sq. Press, Inc., 34 N.Y.2d 379, 382, 357 N.Y.S.2d 857, 314 N.E.2d 419 (1974) ). "[F]undamental" to this analysis is "that the injured party should not recover more from the breach than he would have gained had the contract been fully performed." Id.
New York law also entitles prevailing plaintiffs to prejudgment interest on any sum awarded for breach of contract, "computed from the earliest ascertainable date the cause of action existed[.]" See, e.g., Bank of Am., N.A. v. Brooklyn Carpet Exch., Inc., No. 15 cv 5981 (LGS) (DF), 2016 WL 8674686, at *5 (S.D.N.Y. May 13, 2016) (quoting N.Y. C.P.L.R. § 5001(a) ), adopted, 2016 WL 3566237 (S.D.N.Y. June 27, 2016). Where the parties stipulate to an interest rate, "prejudgment interest is calculated at the contract rate, until the amount owed under the contract merges into a judgment." Id. (citing, inter alia , NML Capital v. Republic of Argentina, 621 F.3d 230, 240 (2d Cir. 2010) ).
A. Compensatory Damages
Because plaintiff's compensatory damages calculations are well supported by the record evidence, the Court respectfully recommends that plaintiff be awarded $136,503.01 in unpaid principal and regular interest pursuant to the Notes, as well as default interest at a combined daily rate of $69.76 from February 7, 2015 through the date of final judgment.
1. Note 1
Plaintiff seeks compensatory damages under Note 1 consisting of $30,000 in principal; $2,367.12 in regular interest; and default interest at an effective daily rate of $21.28. See Lerman Decl. ¶ 6. Apart from a minor adjustment to the award of regular interest, the Court agrees with these calculations, and respectfully recommends that plaintiff be awarded $32,360.55 in principal and interest, plus default interest at the requested daily rate from the default date through entry of final judgment. Specifically, plaintiff has adequately established that defendant owes $30,000 in principal under Note 1 following plaintiff's decision to convert a portion of the original principal balance into MLHC common stock. See Compl. ¶¶ 15–16, 18, 20 & Ex. A, at 1, Ex. D. Plaintiff is also entitled to interest, at the regular rate, from February 13, 2014, the date plaintiff fully funded Note 1, through February 6, 2015, the relevant maturity date—or $2,360.55. Cf. Lerman Decl. ¶ 6; see also N.Y. C.P.L.R. § 5001(a)(1). Finally, plaintiff is entitled to interest at the annual default rate of twenty-four percent, or $21.28 per day, beginning on the default date. See Compl. ¶ 11 & Ex. A, § 8.
The Notes provide that interest shall accrue from the date of execution, see Compl., Exs. A–C, at 1, but plaintiff has sought interest only from the date that each Note was fully funded, see Lerman Decl. ¶ 6.
This figure was reached as follows: 8% [regular interest rate] × $30,000 [principal] = $2,400 [annual interest] / 365 days [in a year] = $6.58 [interest per day] × 359 [days between February 13, 2014 and February 6, 2015] = $2,360.55 [interest due and owing]. Subsequent calculations of regular interest use the same formula. Plaintiff's calculations assumed 360 days between the funding date and the default date, see Lerman Decl. ¶ 6; however, the Court calculated 359 days up through and including February 6, 2015, and used that figure instead.
This figure was reached as follows: 24% [default interest rate] × $32,360.55 [amount due and owing] = $7,766.53 [annual default interest] / 365 [days per year] = $21.28 [daily default interest]. Subsequent calculations of default interest use the same formula.
2. Note 2
Plaintiff seeks compensatory damages under Note 2 consisting of $50,000 in principal; $1,567.12 in regular interest; and default interest at an effective daily rate of $25.43. See Lerman Decl. ¶ 6. The Court agrees with these calculations, and respectfully recommends that plaintiff be awarded the requested amounts.
Specifically, plaintiff has adequately established that defendant owes $50,000 in principal under Note 2. See Compl. ¶¶ 19–21 & Ex. B, at 1. Additionally, plaintiff is entitled to interest, at the regular rate, from September 17, 2014, the date plaintiff fully funded Note 2, through February 6, 2015, the applicable maturity date—or $1,567.12. Cf. Lerman Decl. ¶ 6. Finally, plaintiff is entitled to interest at the default rate of eighteen percent, or $25.43 per day, beginning on the default date. See Compl. ¶ 11 & Ex. B, § 8.
3. Note 3
Plaintiff seeks compensatory damages under Note 3 consisting of $50,000 in principal; $2,586.30 in regular interest; and default interest at an effective daily rate of $23.05. See Lerman Decl. ¶ 6. Apart from a minor adjustment to the award of regular interest, the Court agrees with these calculations, and respectfully recommends that plaintiff be awarded $52,575.34 in principal and interest, plus default interest at the requested daily rate from the default date through the date of judgment.
Plaintiff's calculations again assume an extra day between the funding date of June 17, 2014 and the default date; the correct number of days within that date range, up to and including February 6, 2015, is 235.
Specifically, plaintiff has adequately established that defendant owes $50,000 in principal under Note 3. See Compl. ¶¶ 15–16, 18, 20–21 & Ex. C, at 1. Additionally, plaintiff is entitled to interest, at the regular rate, from June 17, 2014, the date plaintiff fully funded Note 3, up to but not including the default date, when default interest began to accrue—or $2,575.34. Cf. Lerman Decl. ¶ 6. Finally, plaintiff is entitled to interest at the default rate of sixteen percent, or $23.05 per day, beginning on the default date. See Compl. ¶ 11 & Ex. C, § 8. B. Liquidated Damages
For defendant's failure to deliver shares of its stock pursuant to the September 4th conversion, plaintiff seeks liquidated damages in the amount of $271,000 as of the filing of the instant motion—or nearly twice the aggregate value of the Notes—with additional liquidated damages accruing at a daily rate of $500. See Lerman Decl. ¶ 7. Because the requested damages are grossly disproportionate to actual damages, and thus constitute an unenforceable penalty, the Court respectfully recommends that plaintiff not be awarded any liquidated damages.
"A liquidated damages provision is ‘an estimate, made by the parties at the time they enter into [an] agreement, of the extent of the injury that would be sustained as a result of a breach[.]’ " Bristol Inv. Fund, Inc. v. Carnegie Int'l Corp., 310 F.Supp.2d 556, 566 (S.D.N.Y. 2003) (quoting Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., 41 N.Y.2d 420, 424, 393 N.Y.S.2d 365, 361 N.E.2d 1015 (1977) ). It is "well established" that parties may stipulate to liquidated damages that are neither "unconscionable nor contrary to public policy." Id. (quoting Truck Rent-A-Center, 41 N.Y.2d at 424, 393 N.Y.S.2d 365, 361 N.E.2d 1015 (formatting omitted) ). But when the purpose of a damages clause "is not to compensate the injured party for the breach, but rather to impose a penalty on the breaching party by requiring payment ... grossly disproportionate to the amount of actual damages[,]" the clause is deemed to be contrary to public policy. Id. (internal quotation marks and citations omitted). Accordingly, a liquidated damages provision will be sustained only where "(1) the agreed sum is a reasonable estimate of potential damages [and] ... (2) actual damages [we]re difficult to determine, or [we]re not readily ascertainable, ... [when] the parties entered into the agreement at issue[.]" Id. (citation omitted).
Though "[t]he New York Court of Appeals has ... cautioned courts against interfering with liquidated damages provisions[,]" 4 Third Ave. Leasehold, LLC v. Permanent Mission of the U.A.E. to the U.N., 133 F.App'x 768, 770 (2d Cir. 2005) (citing JMD Holding Corp. v. Cong. Fin. Corp., 4 N.Y.3d 373, 381, 795 N.Y.S.2d 502, 828 N.E.2d 604 (2005) ), courts have continued to reject liquidated damages provisions virtually identical to the one at issue here, see, e.g., Union Capital LLC v. Vape Holdings Inc., No. 16 Civ. 1343 (RJS), 2017 WL 1406278, at *7 (S.D.N.Y. Mar. 31, 2017) (declining to award daily liquidated damages of $250 or $500 for failure to deliver shares of stock pursuant to debt instrument as an "[o]bvious[ ]" and "prototypical forbidden penalty"), including a substantially similar provision invoked by the same plaintiff in another lawsuit, see LG Capital Funding, LLC v. Sanomedics Int'l Holdings, Inc., No. 508410/2014, 2015 WL 7429581, at *12, 2015 N.Y. Misc. LEXIS 4294, at *33-38 (N.Y. Sup. Ct. Nov. 23, 2015) (daily liquidated damages of $2,000, $500, and $250 held to be unenforceable).
Additionally, in an unreported decision from an unrelated lawsuit brought by plaintiff, another judge in this District has questioned the enforceability of a similar liquidated damages provision. See R. & R. at 752–53 & n.4, LG Capital Funding, LLC v. One World Holdings, Inc., No. 15-CV-698 (SJ) (JO), 2015 WL 13748548 (E.D.N.Y. Aug. 6, 2015), DE #28 (addressing liquidated damages provision providing for penalty of $2,000 per day for failure to convert shares).
Here, as in Vape Holdings and Sanomedics International Holdings, the daily liquidated damages provision is clearly an impermissible penalty. First, at nearly twice the combined face value of the Notes (and still accruing), the amount requested is grossly disproportionate to actual damages. Cf. Vape Holdings, 2017 WL 1406278, at *7 (refusing to award liquidated damages of $362,280.93 on a note with a face value of $75,000); Bristol Inv. Fund, 310 F.Supp.2d at 568 (rejecting request for liquidated damages consisting of more than fifty percent of the principal balance due and owing); Sanomedics Int'l Holdings, 2015 WL 7429581, at *13, 2015 N.Y. Misc. LEXIS 4294, at *35–38 (refusing to award liquidated damages of $682,000 and $91,000 on notes with respective face values of $36,000 and $42,000).
In fact, the measure of damages was readily ascertainable at the time the parties entered into the Notes at issue here. Plaintiff offers "no explanation for how the daily payment is even conceivably linked to the damages [plaintiff] suffered as a result of [defendant's] failure to deliver its converted shares." Vape Holdings, 2017 WL 1406278, at *7. Nor could plaintiff; under New York law, "[t]he damage award resulting from a breach of an agreement to purchase securities is the difference between the contract price and the fair market value of the asset at the time of the breach[.]" Id. (quoting Sharma v. Skaarup Ship Mgmt. Corp., 916 F.2d 820, 825 (2d Cir. 1990) ). Pursuant to the conversion provisions of Note 1, plaintiff was entitled to purchase shares of MLHC stock at a contract price "equal to 55% of the lowest closing bid price ... for the seven prior trading days including the day upon which a Notice of Conversion [was] received by [defendant]." Compl., Ex. A, ¶ 4(a) (internal formatting omitted); see also id., Ex. E (setting contract price for September 4th conversion as $0.00011 per share). Moreover, defendant's stock is traded on the OTC markets, or Pink Sheets, and information concerning its fair market value at the time of defendant's breach is publicly available. See id. ¶ 2. Applying the New York rule for calculating expectation damages to these figures, by the Court's estimate, yields a sum representing a tiny fraction of the $271,000 (and counting) that plaintiff now seeks.
According to the September 4th conversion notice, the contract price for MLHC stock was $0.00011. See id., Ex. E. The fair market value of MLHC stock at the time of defendant's breach after the attempted conversion—September 9, 2015, or three business days after the notice of conversion was issued, see id., Ex. A, ¶ 4(a)—was approximately $0.0004, see M Line Holdings Inc. Advanced Pricing Chart, The Wall Street Journal, http://quotes.wsj.com/MLHC/advanced-chart (last accessed May 31, 2017). Consequently, had plaintiff sought appropriate expectation damages, plaintiff's recovery would have amounted to approximately $3,789.46, calculated as follows: $0.0004 [fair market value as of date of breach] — $0.00011 [contract price] = $0.00029 [expectation damages per share] × 13,067,090 [number of shares subject to September 4th conversion] = $3,789.46 [total expectation damages]. That amount would then have to be reduced by the $1,278 purchase price relating to the September 4th conversion, along with the interest flowing therefrom, inasmuch as plaintiff (and the Court) have included those sums as part of plaintiff's damages from defendant's failure to repay Note 1. See generally supra notes 9 and 10.
Bereft of a logical connection to the breach at issue, the liquidated damages provision in Note 1 was clearly meant "only to encourage [defendant] to abide by the terms of the contract, and ... thus function[ ] as the prototypical forbidden penalty—an invalid added spur to performance." Id. (internal quotation marks and citation omitted). Indeed, plaintiff demanded the September 4th conversion nearly seven months after defendant had already defaulted on all three Notes, see Compl. ¶ 23, and at a time when defendant's shares were essentially valueless, as they remain to date, see id., Ex. E. That plaintiff tried to turn this miniscule "investment" into $271,000 in damages—more than 212 times the initial purchase price of the securities, and seventy-one times the appropriate expectation damages (by the Court's estimate)—elucidates the disconnect between the liquidated damages provision and reality.
Additionally, having failed to deduct the $1,278 purchase price under the September 4th conversion from the principal balance due under Note 1, and from the corresponding interest calculations, plaintiff effectively seeks a double recovery on that sum.
V. Attorney's Fees and Costs
"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 Commc'ns, LLC, 537 F.3d 168, 175 (2d Cir. 2008) ); see also Mt. Vernon City Sch. Dist. v. Nova Cas. Co., 19 N.Y.3d 28, 39, 945 N.Y.S.2d 202, 968 N.E.2d 439 (2012) ("[T]he court should not infer a party's intention to waive the benefit of the [general] rule [that parties pay their own legal fees] unless the intention to do so is unmistakably clear from the language of the promise." (citations omitted) ). "In awarding attorneys' fees pursuant to a contract, a court must order the losing party to pay the amount actually incurred by the prevailing party, ‘so long as those amounts are not unreasonable.’ " Fulton Cogeneration, 636 F.Supp.2d at 179 (quoting F.H. Krear & Co. v. Nineteen Named Trustees, 810 F.2d 1250, 1263 (2d Cir. 1987) ). "Attorneys' fees must be ‘documented by contemporaneously created time records that specify, for each attorney, the date, the hours expended, and the nature of the work done.’ " Id. (quoting Kirsch v. Fleet St., Ltd., 148 F.3d 149, 172 (2d Cir. 1998) ).
To determine the fees due to plaintiff under the clear contractual fee-shifting provision, the Court must ascertain the "presumptively reasonable fee" for the legal services rendered by plaintiff's counsel in this matter, that is, "what a reasonable client would be willing to pay[.]" Masino v. Columbus Constr. Corp., No. 08-CV-1592 (RRM) (CLP), 2009 WL 2566956, at *6 (E.D.N.Y. Aug. 19, 2009) (quoting Arbor Hill Concerned Citizens Neighborhood Ass'n v. Cnty. of Albany, 522 F.3d 182, 183–84 (2d Cir. 2008) ). To calculate the presumptively reasonable fee, the Court must first determine a reasonable hourly rate for the legal services performed, using factors such as the labor and skill required, the difficulty of the legal questions, the attorney's customary rate, the amount at stake, and awards in similar cases. See id. (quoting Arbor Hill, 522 F.3d at 187 n.3 ). Under the so-called "forum rule," the Court should also consider generally the hourly rates charged in the District in which it sits. See Simmons v. N.Y.C. Transit Auth., 575 F.3d 170, 174–76 (2d Cir. 2009). Once the Court determines the reasonable hourly rate, it then multiplies that rate by the reasonable number of hours expended to arrive at the presumptively reasonable fee. See Masino, 2009 WL 2566956, at *7–8.
A. Plaintiff's Attorney's Fees
1. Hourly Rates
Plaintiff seeks $2,875 in attorney's fees for work performed by attorneys Kevin Kehrli, Jessica Mass, and Michael Smaila. See Kehrli Decl. ¶¶ 13, 15 & Ex. A. All three are 2014 law school graduates, for whose services plaintiff claims an hourly rate of $250. See Kehrli Decl. ¶¶ 13–14 & n.1; see also Michael Smaila Attorney Profile, Garson, Ségal, Steinmetz, Fladgate LLP, http://www.gs2law.com/michael-smaila/ (last visited May 31, 2017). Courts in this District typically award hourly rates of $100 to $200 for junior associates in cases of this nature. See, e.g., Sun v. AAA Venture Capital, Inc., CV 2015-04325 (FB)(MDG), 2016 WL 5793198, at *12 (E.D.N.Y. Sept. 12, 2016) (collecting cases), adopted as modified on other grounds, 2016 WL 5868579 (E.D.N.Y. Oct. 6, 2016) ; LG Funding, LLC v. Fla. Tilt, Inc., No. 15-CV-631 (PKC)(VMS), 2015 WL 5038195, at *3–4 (Aug. 26, 2015) (awarding $200 hourly rate in action for breach of contract that proceeded to default judgment for work performed by junior associate admitted to practice in New York for two years at time of fee application). Accordingly, the Court respectfully recommends that plaintiff be awarded attorney's fees at an hourly rate of $200, rather than the requested hourly rate of $250.
In his declaration accompanying the instant motion, Kehrli mistakenly asserts that only he and Mass performed work on this matter, while the exhibit attached to his declaration reflects worked performed by Smaila as well. Compare Kehrli Decl. ¶ 14 & n.1 with id., Ex. A.
2. Hours Billed
Plaintiff has submitted a summary of the legal work performed by its counsel, billed in six-minute increments. See Kehrli Decl., Ex. A. Plaintiff's counsel recorded 11.5 hours of worked performed by Kehrli, Mass, and Smaila. See id. The Court has reviewed that submission and concludes that the time spent on each listed task was not unreasonable. Compare id. with Brooklyn Carpet Exch., 2016 WL 8674686, at *9-10, 2016 U.S. Dist. LEXIS 64413, at *32 (collecting cases concerning reasonable number of hours expended in actions for breach of contract in which defendant defaulted and finding acceptable range of 13.3 hours to 20.6 hours). Accordingly, based on the hourly rate of $200 recommended above, and the reasonable number of hours billed on this matter, the Court respectfully recommends that plaintiff be awarded $2,300 in attorney's fees. The aggregate fee recommended by the Court comports with that found reasonable in similar cases in this District. See, e.g., Fla. Tilt, 2015 WL 5038195, at *4–5.
B. Plaintiff's Reasonable Costs
In addition to attorney's fees, plaintiff seeks $493.20 in costs ($400 for the filing fee and $93.20 for service of process). See Kehrli Decl. ¶ 16 & Ex. B. The Court finds these costs reasonable, and respectfully recommends that the requested amount be included in plaintiffs' award. See Trs. of Local 813 Ins. Trust Fund v. Bradley Funeral Serv., Inc., No. 11-CV-2885 (ARR) (RLM), 2012 WL 3871759, at *7 (E.D.N.Y. Aug. 10, 2012).
CONCLUSION
For the foregoing reasons, the undersigned magistrate judge respectfully recommends that plaintiff's motion be granted in part and denied in part, and that plaintiff be awarded (1) $136,503.01 in unpaid principal and interest; (2) default interest at a combined daily rate of $69.76 from February 7, 2015 through entry of final judgment; (3) $2,300 in attorney's fees; and (4) $493.20 in costs.
Any objections to this Report and Recommendation must be filed with the Honorable LaShann DeArcy Hall on or before June 15, 2017 . Failure to file objections in a timely manner may waive a right to appeal the District Court order. See 28 U.S.C. § 636(b)(1) ; Fed. R. Civ. P. 6(a), 6(d), 72.