Opinion
17-CV-08274 (AT)(SN)
10-11-2018
NTT AMERICAN INC., Plaintiff, v. TENNESSEE DATA SYSTEMS, LLC, et al., Defendants.
REPORT AND RECOMMENDATION SARAH NETBURN, United States Magistrate Judge.
TO THE HONORABLE ANALISA TORRES:
On June 13, 2018, the Honorable Analisa Torres entered a default for plaintiff NTT American Inc. ("NTTA" or the plaintiff) against defendants Tennessee Data Systems, LLC ("Tennessee Data") and Integris Solutions Group, LLC ("Integris) (collectively, the defendants). This case was referred to my docket to conduct an inquest and to report and recommend concerning the plaintiff's damages. On July 16, 2018, the plaintiff submitted Proposed Findings of Fact and Conclusions of Law, to which defendants failed to respond. NTTA seeks damages up to $10,421,311.73 from Tennessee Data and up to $7,818,677.84 from Integris, plus an award of attorney's fees and prejudgment interest.
FACTUAL ALLEGATIONS
The following facts are established by the allegations in the complaint, which are deemed admitted except to the extent they concern the amount of damages or the plaintiff's admissible evidence submitted for this inquest. See, e.g., Finkel v. Romanowicz, 577 F.3d 79, 84 (2d Cir. 2003) (citing Au Bon Pain Corp. v. Artect, Inc., 653 F.2d 61, 65 (2d Cir. 1981)); Cotton v. Slone, 4 F.3d 176, 181 (2d Cir. 1993).
On August 17, 2016, Integris (Tennessee Data's information technology consultant) and Hewlett Packard Enterprise (Tennessee Data's equipment supplier) began negotiations with NTTA to build a "private cloud solution" for Tennessee Data. ECF No. 10, ¶ 24 (the "Amended Complaint"). NTTA then proposed providing services to Tennessee Data that included equipment and services procured through Integris. Am. Compl. ¶¶ 25-26.
On December 13, 2016, Tennessee Data and NTTA entered into the Master Services Agreement, which memorialized this proposal. Am. Compl. ¶ 27. Article 3.2 of that agreement sets forth the procedure for receiving payment. Am. Compl. ¶ 28. NTTA first sends an invoice to Tennessee Data, which has 30 days to pay. Am. Compl. ¶ 28. After any delinquency extending beyond 30 days, Tennessee Data must pay interest on the amount due. Am. Compl. ¶ 28. Article 7.2(1) provides that either party can terminate a service order 30 days after it notifies the other of a material breach in that order. Am. Compl. ¶ 32. After termination of the Agreement (including any services orders), Article 7.3 of the Master Services Agreement extinguishes NTTA's obligations under the terminated agreement and requires Tennessee Data to pay all outstanding amounts due and "Termination Fees." Am. Compl. ¶ 33. Termination Fees, in turn, are defined as "(1) the full amount of the Service Charges that [Tennessee Data] would have been charged for the remainder of the then-current Order Term and all unamortized costs, including but not limited to equipment purchased on behalf of [Tennessee Data], third-party charges, and any other costs and expenses incurred on behalf of [Tennessee Data] in connection with the terminated Services; (2) reimbursement to NTTA for all volume, term, or other discounts and credits provided in anticipation of full performance of [Tennessee Data]'s obligations and any unpaid portion of the installation fee set forth in the applicable Service Order; and (3) any additional charges set forth in the applicable Service Order." Am. Compl. ¶ 34. At the same time, NTTA and Integris entered into a guaranty agreement by which Integris guaranteed Tennessee Data's payments up to $820,000 in the event that Tennessee Data entered into default. Am. Compl. ¶ 47-48.
Also on December 13, 2016, and in conjunction with the Master Services Agreement, Tennessee Data and NTAA entered into an "Infrastructure as a Service Addendum." Am. Compl. ¶ 37. Article 2 of that agreement provides that 72 hours after NTTA installs its equipment it is presumed that Tennessee Data "has accepted NTTA Equipment." Am. Compl. ¶ 38. NTTA, however, retains title to this equipment. Am. Compl. ¶ 38.
Tennessee Data and NTTA entered into their first service order on December 13, 2016. Am. Compl. ¶ 39. The term for the December service order was four years running from the date that NTTA notified Tennessee Data that all relevant service components had been deployed. Am. Compl. ¶ 40. Article 4.1 of the December service order provided for a one-time charge of $125,000 and recurring charges of $205,000 per month. Am. Compl. ¶ 41. Article 4.2 of that order provides that Tennessee Data shall pay NTTA a security deposit of $410,000. Am. Compl. ¶ 42. NTTA notified Tennessee Data that all components were deployed on June 30, 2017.
On December 16, 2016, NTTA issued Integris six purchase orders to procure Hewlett-Packard Enterprises equipment and solutions to provide to Tennessee Data. Am. Compl. ¶ 44. Integris executed these purchase orders, sending equipment and solutions to five locations in exchange for a total payment by NTTA of $6,499,000.55. Am. Compl. ¶ 44.
Due to the failure of Integris and Tennessee Data to make their facilities available to NTTA, the delivered solution components remained uninstalled through April 19, 2017. Am. Compl. ¶ 45. At that point, Integris requested on Tennessee Data's behalf that the equipment be transferred from the Tennessee Data sites to NTTA sites. Am. Compl. ¶ 45. As a result, NTTA issued an additional service order seeking a one-time payment of $82,695.96 and recurring charges of $11,927 over four years. Am. Compl. ¶ 45.
To prepare for the fulfillment of its end of the bargain, NTTA paid $28,754.53 to Cytherian, LLC for installation services, $150,365.28 to NTT Communications Managed Services for service management, and $196,733.84 to RagingWire Data Centers. Am. Compl. ¶ 46.
On August 18, 2017, and August 24, 2017, NTTA notified Tennessee Data that it was in default for a missed payment due on August 18, 2017. Am. Compl. ¶ 50. Following those default letters, NTTA sent Tennessee Data an invoice for $1,181,681.10. Am. Compl. ¶ 52. NTTA issued another invoice to Tennessee Data on October 2, 2017, for $1,411,270.10. Am. Compl. ¶ 53. To date, Tennessee Data has failed to make any payments or respond to NTTA's notices of default or invoices. Am. Compl. ¶ 54. On September 25, 2017, NTTA notified Integris that it was in default of the Guaranty Agreement due to Tennessee Data's failure to pay its financial obligations. Am. Compl. ¶ 55. Subsequently, on October 24, 2017, NTTA further notified Integris that due to Tennessee Data's failure to pay, Integris owed the full guaranteed amount—$820,000—stipulated in the Guaranty Agreement. Am. Compl. ¶ 56. Integris has not responded to these letters or paid the amount due under the Guaranty Agreement. Am. Compl. ¶ 57.
On November 3, 2017, NTTA sent Tennessee Data a termination notice, which triggered the provision of the Master Services Agreement requiring payment of the Termination Fees. Am. Compl. ¶ 58. The Termination Fees consisted of the full sum of the Service Charges that Tennessee Data would have been charged for the remainder of the term as well as costs, fees, and other reimbursements. Am. Compl. ¶ 58.
PROCEDURAL HISTORY
NTTA brought this action on October 26, 2017, alleging claims against the defendants for breach of contract, account stated, promissory estoppel, and quantum meruit to recover compensatory damages (including liquidated damages), pre-judgment interest, and attorney's fees and costs. On June 13, 2018, Defendants failed to respond to an order to show cause or otherwise participate in the litigation and apparently ceased communication with local counsel. ECF No. 59.
This case was referred to this Court to report and recommend on the plaintiff's damages. On July 16, 2018, NTTA submitted its proposed Findings of Fact and Conclusions of Law in support of damages, along with affidavits from Paul Gochar and Tomoyuki Sakae (business executives at NTTA) and Erik Berglund (counsel for NTTA) as well as various exhibits. The defendants did not submit a response.
DISCUSSION
I. Legal Standard
Although "a default judgment entered on well-pleaded allegations in a complaint establishes a defendant's liability," it does not reach the issue of damages. Bambu Sales, Inc. v. Ozak Trading, Inc., 58 F.3d 849, 854 (2d Cir. 1995) (quoting Trans World Airlines, Inc. v. Hughes, 449 F.2d 51, 69 (2d Cir. 1971)). In conducting a damages inquest, the court accepts as true all of the factual allegations of the complaint, except those relating to damages. See Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., Div. of Ace Young Inc., 109 F.3d 105, 108 (2d Cir. 1997) (citing Greyhound Exhibitgroup, Inc. v. E.L.U.L. Realty Corp., 973 F.2d 155, 158 (2d Cir. 1992)). The plaintiff, however, must still substantiate its claim for damages with admissible evidence to prove the extent of damages. See Trehan v. Von Tarkanyi, 63 B.R. 1001, 1008 n.12 (S.D.N.Y. 1986) (requiring plaintiff to introduce evidence proving damages suffered before the court can determine whether relief flows from the facts (citing Flaks v. Koegel, 504 F.2d 702, 707 (2d Cir. 1974)).
Where the defaulting defendants have not made any submission on a damages inquest, the court must assess whether the plaintiff has provided a sufficient basis for the court to determine damages. See Transatl. Marine Claims Agency, Inc. v. Ace Shipping Corp., 109 F.3d 105, 111 (2d Cir. 1997) (noting that a court should take the "necessary steps to establish damages with reasonable certainty."). A court has the discretion to decline to award any damages where, on a damages inquest, a plaintiff fails to demonstrate its damages to a reasonable certainty, even though liability has been established through default. See, e.g., Griffiths v. Francillon, No. 10-CIV-3101 (JFB)(GRB), 2012 WL 1341077, at *1 (E.D.N.Y. Jan. 30, 2012) (recommending that no damages be awarded because the motion papers alone were insufficient to support an award of damages), report and recommendation adopted, 2012 WL 1354481, at *1 (E.D.N.Y. Apr. 13, 2012); Dor Yeshurim, Inc. v. A Torah Infertility Medium of Exch., No. 10-CIV-2837 (JFB)(WDW), 2011 WL 7285038, at *5 (E.D.N.Y. Aug. 10, 2011) (finding that the "Complaint and plaintiff's papers in support [were] woefully inadequate to support any monetary relief" and recommending that neither profits nor damages be awarded), report and recommendation adopted, 2012 WL 464000, at *1-3 (E.D.N.Y. Feb. 10, 2012).
II. Tennessee Data
"To make out a viable claim for breach of contract a 'complaint need only allege (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.'" Eternity Glob. Master Fund Ltd. v. Morgan Guar. Tr. Co. of N.Y., 375 F.3d 168, 177 (2d Cir. 2004) (quoting Harsco Corp. v. Segui, 91 F.3d 337, 348 (2d Cir. 1996)). Regarding the contractually stipulated liquidated damages clause, "[t]he law of New York provides that 'a contractually agreed upon sum for liquidated damages will be sustained where (1) actual damages may be difficult to determine and (2) the sum stipulated is not plainly disproportionate to the possible loss.'" U.S. Fid. & Guar. Co. v. Braspetro Oil Servs. Co., 369 F.3d 34, 70 (2d Cir. 2004) (quoting United Merchants & Mfrs. v. Equitable Life Assurance Soc'y, 674 F.2d 134, 142 (2d Cir. 1982)). "[T]he rule has evolved that where the damages flowing from a breach of a contract are easily ascertainable, or the damages fixed are plainly disproportionate to the contemplated injury, the stipulated sum will be treated as a penalty and disallowed." Id. "The reasonableness of the liquidated damages and the certainty of actual damages must be measured as of the time the parties enter the contract, not as of the time of the breach." L & L Wings, Inc. v. Marco-Destin Inc., 756 F. Supp. 2d 359, 363 (S.D.N.Y. 2010). "An acceleration clause is one type of liquidated damages provision, which in its usual form requires a party who defaults on installment payments to pay the balance of the debt in one lump sum." The Edward Andrews Grp., Inc. v. Addressing Servs. Co., No. 04-CIV-6731 (LTS)(AJP), 2005 WL 3215190, at *5 (S.D.N.Y. Nov. 30, 2005).
Article 7.4 of the Master Services Agreement between NTTA and Tennessee Data is an acceleration clause stipulating that all payment installations become due upon breach. In total, this sum is $10,262,433.73. The Court finds this provision and sum derived therefrom to be reasonable liquidated damages, not a penalty. NTTA invested an enormous amount into purchasing the material necessary to build this project. It explains that due to the equipment's specialized use, it is unable to mitigate the harm by sale. Gochar Decl. ¶¶ 14-19. Further, NTTA had to devote its own time and resources to the project in addition to the money spent on the related equipment. Because NTTA had to purchase the appropriate equipment upfront, it bore the risk for its investment. All of these concerns existed at the time the parties entered into the contract. The Court finds that this sum equals a reasonable expectation of damages.
Plaintiff claims it is owed an additional $158,878 due to two supplemental service orders. Sakae Decl. ¶¶ 22-25. Neither of these supplemental contracts were mentioned in the Amended Complaint, meaning Defendants could not have anticipated responding to allegations that it was in breach with respect to those two orders. The Court confines its review to well-pled allegations. Greyhound Exhibitgroup, Inc. v. E.L.U.L. Realty Corp., 973 F.2d 155, 158 (2d Cir. 1992) ("[A] party's default is deemed to constitute a concession of all well pleaded allegations of liability.") (emphasis added).
NTTA further seeks damages for claims of account stated, promissory estoppel, and quantum meruit. The damages resulting from any of these claims are duplicative of the damages derived from the claim of breach of contract. Thus, the Court declines to reach those counts and recommends an award of $10,262,433.73 for breach of contract.
III. Integris
"For a plaintiff to establish a prima facie case that it is entitled to recover on a guarantee under New York law, it must show: (1) that it is owed a debt from a third party; (2) that the defendant made a guarantee of payment of the debt; and (3) that the debt has not been paid by either the third party or the defendant." Tennenbaum Capital Partners LLC v. Kennedy, No. 07-CIV-9695 (DCF)(LTS), 2009 WL 2913679, at *4 (S.D.N.Y. Sept. 11, 2009), aff'd sub nom. Tennenbaum Capital Partners L.L.C. v. Kennedy, 372 F. App'x 180 (2d Cir. 2010) (quoting Chemical Bank v. Haseotes, 13 F.3d 569, 573 (2d Cir. 1994)).
Due to the entry of default, Integris is deemed liable for breach of the Guaranty Agreement. Through this agreement, Integris guaranteed up to $820,000 of Tennessee Data's obligations under the Master Services Agreement and related agreements. Because Tennessee Data failed in these obligations, resulting in damages an order of magnitude larger than this stipulated sum, the Court finds that Integrity owes damages for the full $820,000.
NTTA also asserts a claim for promissory estoppel against Integris for $6,998,677.84. "A plaintiff must satisfy four elements to succeed on a promissory-estoppel claim: '(1) a promise, (2) reliance on the promise, (3) injury caused by the reliance, and (4) an injustice if the promise is not enforced.'" Weinreb v. Hosp. For Joint Diseases Orthopaedic Inst., 404 F.3d 167, 172 (2d Cir. 2005) (quoting Schonholz v. Long Island Jewish Med. Ctr., 87 F.3d 72, 79 (2d Cir. 1996)). "Promissory estoppel is a narrow doctrine designed to enforce a contract in the interest of justice where some contract formation problem would otherwise prevent enforcement—for example, the Statute of Frauds or a failure of consideration." BNP Paribas Mortgage Corp. v. Bank of Am., N.A., 949 F. Supp. 2d 486, 516 (S.D.N.Y. 2013). "Accordingly, where a plaintiff also alleges breach of a contract, a promissory estoppel claim is duplicative of a breach of contract claim unless the plaintiff alleges that the defendant had a duty independent from any arising out of the contract." Bd. of Trustees ex rel. Gen. Ret. Sys. of Detroit v. BNY Mellon, N.A., No. 11-CIV-6345 (RJS), 2012 WL 3930112, at *6 (S.D.N.Y. Sept. 10, 2012).
NTTA claims that the relevant promise is the Guaranty Agreement, which NTTA relied upon in purchasing the equipment from Integris. But as explained above, this Agreement was a valid contract that placed certain duties on NTTA and Integris. NTTA points to no separate promise apart from this contract as a basis for its promissory estoppel claim. Because its claim for promissory estoppel is duplicative of its claim for breach of contract, it is not a separate grounds for a claim. Indeed, it hardly be said that NTTA reasonably relied on a guaranteed payment of $820,000 to purchase nearly ten times that amount in equipment.
Accordingly, the Court recommends entering judgment of $820,000 against Integris for breach of contract. Because this sum arose out of a guaranty, it is coextensive with the Tennessee Data's underlying obligation to compensate NTTA, such that NTTA cannot recover this sum from both Integris and Tennessee Data.
IV. Prejudgment Interest
"In this diversity case, issues bearing on prejudgment interest are governed by New York law." Baker v. Dorfman, 239 F.3d 415, 425 (2d Cir. 2000). For actions at law, New York law awards a nine percent statutory rate of interest. Action S.A. v. Marc Rich & Co., 951 F.2d 504, 508 (2d Cir. 1991). "Where such damages were incurred at various times, interest shall be computed upon each item for the date it was incurred or upon all of the damages from a single reasonable intermediate date." Marfia v. T.C. Ziraat Bankasi, 147 F.3d 83, 90-91 (2d Cir. 1998) (quoting N.Y. CPLR § 5001(b)). The Court computes interest starting from breach. For Tennessee Data, breach occurred was November 3, 2017. For Integris, the date of breach was November 8, 2017. As of October 10, 2018, $933,557.01 in prejudgment interest has accrued: $865,418.38 with respect to the claim against Tennessee Data and $68,138.63 with respect to the claim against Integris.
V. Attorney's Fees
"[P]arties may agree by contract to permit recovery of attorneys' fees, and a federal court will enforce contractual rights to attorneys' fees if the contract is valid under applicable state law." McGuire v. Russell Miller, Inc., 1 F.3d 1306, 1313 (2d Cir. 1993). Any attorney seeking fees "should keep accurate and current records of work done and time spent." New York State Ass'n for Retarded Children, Inc. v. Carey, 711 F.2d 1136, 1147 (2d Cir. 1983). "These records should specify, for each attorney, the date, the hours expended, and the nature of the work done." Id. at 1148. The Master Services Agreement is a valid contract under New York law and Article 3.2 of that contract includes a fee-shifting provision when one party was required to respond to a breach. Am. Compl. Ex. D. Counsel for NTTA has provided a detailed list of each fee incurred broken down into six-minute increments. This thorough accounting is sufficient to support an award of the attorney's fees in their entirety.
CONCLUSION
I recommend entering judgment jointly and severally against Tennessee Data and Integris in the amount of $820,000, plus prejudgment interest of $68,138.63. I further recommend entering judgment against Tennessee Data for an additional $9,442,433.73, plus prejudgment interest of $865,418.38. Finally, I recommend an award of $99,930.99 in attorney's fees and expenses against Tennessee Data.
* * *
NOTICE OF PROCEDURE FOR FILING OBJECTIONS
TO THIS REPORT AND RECOMMENDATION
The parties shall have fourteen days from the service of this Report and Recommendation to file written objections pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure. See also Fed. R. Civ. P. 6(a), (d) (adding three additional days when service is made under Fed. R. Civ. P. 5(b)(2)(C), (D), or (F)). A party may respond to another party's objections within fourteen days after being served with a copy. Fed. R. Civ. P. 72(b)(2). Such objections shall be filed with the Clerk of the Court, with courtesy copies delivered to the chambers of the Honorable Analisa Torres at the Daniel Patrick Moynihan United States Courthouse, 500 Pearl Street, New York, New York 10007, and to any opposing parties. See 28 U.S.C. § 636(b)(1); Fed. R. Civ. P. 6(a), 6(d), 72(b). Any requests for an extension of time for filing objections must be addressed to Judge Torres. The failure to file these timely objections will result in a waiver of those objections for purposes of appeal. See 28 U.S.C. § 636(b)(1); Fed. R. Civ. P. 6(a), 6(d), 72(b); Thomas v. Arn, 474 U.S. 140 (1985).
/s/_________
SARAH NETBURN
United States Magistrate Judge DATED: October 11, 2018
New York, New York