LaSHANN DeARCY HALL, United States District Judge.
Plaintiff LG Capital Funding, LLC ("LG Capital"), commenced this action on June 28, 2016, and served Defendant FLASR, Inc. ("FLASR"), on July 22, 2016. (See Compl., ECF No. 1; Summons, ECF No. 10.) Defendant has since failed to appear or defend itself in this matter in any meaningful way.
The Court reviews de novo LG Capital's objections to the R&R. See 28 U.S.C. § 636(b)(1)(C); Fed. R. Civ. P. 72(b)(3). As to the remainder of the R&R, the 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) (internal quotation marks and citation omitted). The R&R is thorough and well-reasoned. However, based on new arguments not before Magistrate Judge Orenstein at the time of its issuance, this Court adopts the R&R in part and modifies it as discussed in detail below.
On or about April 1, 2015, FLASR issued a convertible redeemable note (the "Note") to LG Capital in the amount of $78,750. (Compl. ¶ 6.) The Note had a maturity date of April 1, 2016, at which point FLASR was obligated to repay LG Capital the principal plus 8% interest. (Id. Ex. A ("Note") at 1, ECF No. 1-1.) The Note also contained a stock-conversion provision permitting LG Capital to convert all or part of the outstanding principal of the Note into shares of FLASR's common stock. (Compl. ¶ 7.) To ensure the availability of shares for conversion, the Note provided that FLASR would initially "issue irrevocable transfer agent instructions reserving 2,900,000 shares of its Common Stock for conversions." (Id. ¶ 11.) The provision required FLASR to "at all times reserve a minimum of four times the [number] of shares required if the [N]ote would be fully converted," and it permitted that LG Capital "may reasonably request increases from time to time to reserve such amounts." (Id.) If FLASR failed to pay the principal or interest due on the Note, failed to honor the stock-conversion provision of the Note, or failed to replenish the stock reserve within three business days, FLASR would be in default. (Note § 8.) In the event of default, a 24% interest rate would apply to FLASR's payments. (Id.) Additionally, if FLASR failed to honor the stock-conversion provision of the Note,
In October and November 2015, FLASR honored LG Capital's conversion requests by delivering shares in a timely manner. (Compl. ¶¶ 12-15.) However, FLASR failed to honor LG Capital's November 3, 2015 and March 1, 2016 requests to increase the share reserve. (Id. ¶¶ 16-18.) In addition, FLASR failed to honor LG Capital's May 12, 2016 conversion request to convert some of the amount due under the Note. (Id. ¶¶ 21-22.)
LG Capital objects to Magistrate Judge Orenstein's recommendation that the Court not award liquidated damages or lost profits to LG Capital. (Objection 4-5.) In addition, LG Capital maintains that, to the extent the Court agrees with the findings in the R&R, the Court may award expectation damages for FLASR's breach. (Id. at 12-14.) Lastly, LG Capital provides evidence to support its request for attorney's fees. (Id. at 14-16.) Each objection is addressed in turn below.
LG Capital contends that Magistrate Judge Orenstein erred in looking to the express language of the Note, which cast the liquidated-damages provision as a "penalty," to determine that the liquidated-damages provision was an unenforceable penalty. (Objection 6-9.) LG Capital argues that, if the Court applies the usual standard to the provision, the Court will find that the liquidated damages requested meet each prong of the test for enforceability. (Id.; Pl.'s Suppl. Mem. Supp. Its Mot. Default J. ("Suppl. Mem.") at 7-9, ECF No. 45.) The Court disagrees.
To enforce a liquidated-damages clause, a court must determine both that the amount of actual loss is difficult or impossible to estimate precisely and that the liquidated damages bear a "reasonable proportion to the probable loss." Leasing Serv. Corp. v. Justice, 673 F.2d 70, 73 (2d Cir. 1982). Here, LG Capital fails to establish either prong.
LG Capital argues that its losses cannot be determined because it is impossible to know the number of times LG Capital would have converted its shares, the number of times it would have sold converted stock, or the price at which it would have done so. (Objection 8.) This argument is unavailing.
The Second Circuit, relying on "fundamental proposition[s] of contract law, including that of New York," has squarely held that "[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, not the difference between the contract price and the value of the shares sometime subsequent to the breach." Sharma v. Skaarup Ship Mgmt. Corp., 916 F.2d 820, 825 (2d Cir. 1990). "Courts have therefore rejected the contention that in order to calculate damages it would [be] necessary to speculate when and if a plaintiff would sell its stock." LG Capital Funding, LLC v. Vape Holdings, Inc., No. 16-cv-2217, 2016 WL 3129185, at *4 (E.D.N.Y. June 2, 2016).
Indeed, courts in this district have repeatedly rejected identical arguments from LG Capital itself. 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
Even if LG Capital could have shown that actual damages were difficult to estimate, it fails to establish that the liquidated damages it seeks are reasonably related to its 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). "[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., No. 17-cv-46, 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. N. Y. 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").
Here, the provision at issue provides that following a breach, FLASR is required to pay "$250 per day the shares [were] not issued beginning on the 4th day after the conversion notice was delivered to [FLASR,].... increas[ing] to $500 per day beginning on the 10th day." (Note § 8.) On its face, this provision does not appear to have any relationship to LG Capital's actual or expected damages, and LG Capital does not argue that it does. Rather, LG Capital argues that, because its calculated amount of liquidated damages is less than either amount it calculates for principal and interest or expectation damages, the liquidated damages are "not disproportionate" to LG Capital's alleged harms. (Objection 8.) Yet, LG Capital provides no explanation for the Note's use of $250 or $500 as daily payment amounts or why the fourth and tenth days were selected as benchmarks (rather than, say, the fifteenth and thirtieth days). "Moreover, in assessing if a liquidated damages provision functions as a penalty, courts are to consider whether damages were ascertainable and the liquidated damages amount was unreasonable as of the time of contracting, not the time of the breach." Union Capital LLC v. Vape Holdings Inc., No. 16-cv-1343, 2017 WL 1406278, at *7 (S.D.N.Y. Mar. 31, 2017). In other words, the liquidated-damages clause bears no reasonable proportion to the probable loss and therefore serves only as a penalty. Identical provisions in other LG Capital notes have been found unenforceable on several occasions. See, e.g., CardioGenics, 2018 WL 1521861, at *10; LG Capital Funding, LLC v. Coroware, Inc., 2017 WL 3973921, at *3
LG Capital next objects to Magistrate Judge Orenstein's finding that it is not entitled to lost profits. (Objection at 9-12.) To support an award of lost profits, LG Capital "must make three showings: 1) the damages were caused by the breach; 2) the damages are provable with reasonable certainty; and 3) the damages were within the contemplation of the parties at the time of contract." Atias v. Sedrish, 133 F. App'x 759, 760 (2d Cir. 2005) (summary order) (citing Ashland Mgmt. Inc. v. Janien, 82 N.Y.2d 395, 404, 604 N.Y.S.2d 912, 624 N.E.2d 1007 (1993)). If such contemplation is not express, a court may look to "the nature, purpose and particular circumstances of the contract known by the parties[,] ... as well as `what liability the defendant fairly may be supposed to have assumed consciously, or to have warranted the plaintiff reasonably to suppose that it assumed, when the contract was made.'" Travellers Int'l, A.G. v. Trans World Airlines, Inc., 41 F.3d 1570, 1578 (2d Cir. 1994) (quoting Kenford Co. v. Cty. of Erie, 73 N.Y.2d 312, 319, 540 N.Y.S.2d 1, 537 N.E.2d 176 (1989)). Here, there is no question that LG Capital's damages were caused by the breach. LG Capital argues that it has made the third showing—that the damages were within the contemplation of the parties at the time of contracting—but the Court need not reach that issue, because LG Capital fails to make the second showing.
LG Capital's own argument belies its assertion that lost-profits damages were provable to a reasonable certainty. Indeed, LG Capital states plainly that "lost profits resulting from FL[A]SR's failure to deliver shares [were] difficult to ascertain at the time of contracting." (Objection 9; see also Decl. Kevin Kehrli Supp. Mot. Default J. ("Kehrli Decl.") ¶ 15, ECF No. 19-2 ("Plaintiff's damages from Defendant's failure to deliver shares are exceedingly difficult to calculate with any certainty, due to variations in trade price, trade volume, and timing of sales of Defendant's common stock.").) Moreover, LG Capital provides no support for the assumption that it would have "more likely" sold its stock "nearer to the median price," as opposed to any other price. (Kehrli Decl. ¶ 17.)
In objecting to the R&R, LG Capital argues, for the first time, that if the Court denies its requests for liquidated damages and lost profits, the Court should award expectation damages for both the May 12, 2016 conversion and future conversions that could not be submitted. (Objection 12-14; Suppl. Mem. 9-17.) This argument was not presented to Magistrate Judge Orenstein, so he was not afforded the opportunity to address it. Based on this Court's de novo review, expectation damages are appropriate in this case for both the May 12, 2016 conversion and future unfulfilled conversions.
"[T]he doctrine of expectation damages ... gives force to the provisions of a contract by placing the aggrieved party in the same economic position it would have been in had both parties fully performed." Bausch & Lomb Inc. v. Bressler,
LG Capital is also entitled to expectation damages for FLASR's anticipatory breach of future conversions. In Vape Holdings, the district court, faced with facts similar to those in this case, articulated a formula for calculating expectation damages for a defendant's refusal to honor future notices of conversion:
2017 WL 1406278, at *6. Applying the Union Capital formula to the instant action, LG Capital is entitled to expectation damages in relation to the balance of the Note in the amount of $151,883.91.
Magistrate Judge Orenstein recommended that the Court award LG Capital unpaid principal in the amount of $69,965 plus accrued interest in the amounts of $3,438.91 (at the regular rate) and $31,990.33 (at the default rate). (R&R 8-9.) LG Capital did not object to these recommended awards. However, because the Court awards LG Capital full expectation damages, LG Capital is not entitled to unpaid principal or accrued interest. As LG Capital itself avers, "[t]he Note ... provided for a conversion right, through which [LG Capital] could obtain [FLASR] common stock ... in lieu of repayment of the principal and interest by [FLASR]." (Objection 1.) Here again, when faced with
Excepting the $400 filing fee, Magistrate Judge Orenstein denied LG Capital's motion for attorney's fees and litigation costs, subject to LG Capital's refiling its request with the proper documentation and substantiation. (R&R 12-14.) On August 14, 2017, LG Capital filed additional documentation to substantiate its request. (Decl. Chris Han Supp. Pl.'s Objs. R. & R. Dated July 27, 2017 ECF No. 43-1 ("Han Decl.").) For the reasons set forth below, LG Capital's request is granted in part and denied in part.
LG Capital maintains that it is entitled to $35,125 in attorney's fees for 140.50 hours of work at rate of $250 per hour. (Han Decl. ¶¶ 26-28.) The Court disagrees.
In reviewing a request for attorney's fees, a district court must first determine the "presumptively reasonable fee" for the services. "The presumptively reasonable fee boils down to `what a reasonable, paying client would be willing to pay,' given that such a party wishes "to spend the minimum necessary to litigate the case effectively." Simmons v. New York City Transit Auth., 575 F.3d 170, 174 (2d Cir. 2009) (quoting Arbor Hill Concerned Citizens Neighborhood Ass'n v. Cty. of Albany & Albany Cty. Bd. of Elections, 493 F.3d 110, 112, 118 (2d Cir. 2007)). The Court should then multiply the presumptively reasonable fee by the "reasonable number of hours expended" to determine the appropriate award. Porzig v. Dresdner, Kleinwort, Benson, N. Am. LLC, 497 F.3d 133, 141 (2d Cir. 2007). In determining the reasonable number of hours expended, "the district court should exclude excessive, redundant or otherwise unnecessary hours, as well as hours dedicated to severable unsuccessful claims." Quaratino v. Tiffany & Co., 166 F.3d 422, 425 (2d Cir. 1999).
Here, the same four junior associates—all of whom were admitted to practice in New York in 2015—who worked to collect the amount due under the Note also performed similar work in a recent case. (Compare Han Decl. ¶ 27 n.10, ECF No. 43-1 (identifying associates as Chris Han, Esq.; Michael Smaila, Esq.; Kevin Kehrli, Esq.; and Jessica Mass, Esq.), with Decl. Kevin Kehrli Supp. Mot. Default J., Cardiogenics, No. 16-cv-1215 (E.D.N.Y. Dec. 22, 2017), ¶ 37 n.1, ECF No. 55-2 (same)). In that case, Magistrate Judge Bulsara noted that the prevailing "hourly rates for junior associates in the Eastern District range from $100 to $200," so he "[found] that a reduction of their hourly rates from $250 to $150 [was] appropriate." Cardiogenics, 2018 WL 1521861, at *12. Judge Donnelly adopted his recommendation, describing it as "entirely appropriate." 2018 WL 2057141, at *2. This Court agrees with the analysis in CardioGenics and applies it to the instant motion. The reasonable hourly rate for the four associates' work is reduced to $150. Because the Court is satisfied that the 140.5 total hours spent on the tasks listed in the itemized bill were not unreasonable, LG Capital is entitled to recover $21,075 in attorney's fees.
Plaintiff seeks $439.88 in additional litigation costs for FedEx shipments and multiple service attempts. (Han Decl.
The Court has reviewed the remainder of the R&R for clear error and, finding none, hereby adopts Magistrate Judge Orenstein's R&R as the opinion of this Court, except as modified by this order. For the foregoing reasons, LG Capital's motion is GRANTED in part and DENIED in part. The Court awards LG Capital:
SO ORDERED.
James Orenstein, U.S. Magistrate Judge.
Plaintiff LG Capital Funding, LLC ("LG") filed the instant motion for default judgment against the defendant FLASR, Inc. ("FLASR") on November 10, 2016. Docket Entry ("DE") 19. Upon a referral from the Honorable LaShann DeArcy Hall, United States District Judge, I now make this report and, for the reasons set forth below, respectfully recommend that the court grant the motion for default, order FLASR to deliver 1,523,983 shares of FLASR common stock to LG, and award LG damages in the total amount of $105,794.24 (consisting of $69,965.00 of unpaid principal, $3,438.91 of regular interest, $31,990.33 of default interest, and $400.00 in litigation costs).
The following factual recitation is based on the non-conclusory allegations in LG's Complaint and the supporting exhibits attached thereto, which I deem to be admitted as a result FLASR's default. See Fed. R. Civ. P. 8(b)(6); Finkel v. Romanowicz, 577 F.3d 79, 83 n.6 (2d Cir. 2009) (citing Greyhound Exhibitgroup, Inc. v. E.LU.L. Realty Corp., 973 F.2d 155, 158 (2d Cir. 1992)); DE 18 (entry of default). On or about April 1, 2015, FLASR issued to LG a $78,750, 8% Convertible Redeemable Note (the "Note"), the terms of which gave LG the right to convert portions of the unpaid principal balance and accrued interest into shares of FLASR common stock at a discount relative to the market price. See DE 1 (Complaint) ¶¶ 6-10 & Ex. A (Note) § 4(a). To ensure the availability of shares for such conversion, the Note required FLASR to issue irrevocable transfer agent instructions reserving 2,900,000 shares of FLASR common stock for that purpose (the "Share Reserve"). See id. ¶ 11 (citing Note § 12). The Note also required that FLASR must at all times "reserve a minimum of four times the amount of shares required if the [N]ote would be fully converted." Id. (citing same). To preserve LG's ability to convert and sell the shares, the Note further required FLASR to remain current in its filings with the Securities and Exchange Commission ("SEC"). See Note § 8(m). Finally, as a further safeguard of LG's conversion rights, the Note allowed LG to "reasonably request increases from time to time" in the amount of the Share Reserve. Complaint ¶ 11 (citing Note § 12).
LG successfully issued conversion notices on October 14, 2015 and November 3, 2015, converting $7,106.00 of unpaid principal and $319.98 of accrued interest into shares of FLASR common stock. See id. ¶¶ 12-15 & Exs. B-C (conversion notices). On the date of the second conversion, LG exercised its right to ask FLASR to increase the Share Reserve to 200,000,000
On May 12, 2016, LG submitted a notice of conversion electing to convert $1,679.00 of principal and $149.78 of accrued interest into 1,523,983 shares of FLASR common stock. See id. ¶ 21 & Ex. E (the "Notice of Conversion"). FLASR never honored the Notice of Conversion and failed to deliver the shares. See id. ¶¶ 23-24. LG then commenced the present action.
LG filed the instant Complaint on June 28, 2016. It simultaneously sought preliminary injunctive relief requiring FLASR, among other things, to deliver to LG 1,523,983 shares of FLASR common stock and to instruct its transfer agent to reserve a minimum of four times the amount of shares of FLASR common stock required for full conversion of the remaining principal balance and accrued interest on the Note. DE 2 (Unsigned Order to Show Cause). The court issued the Order to Show Cause ("OTSC") on July 8, 2016, and scheduled a hearing for August 12, 2016. DE 6. After some delay, LG served FLASR on August 3, 2016. DE 11 (letter regarding service); DE 12 (certificate of service).
FLASR failed to appear as required. See Minute Entry and Order dated Aug. 12, 2016. On August 19, 2016, pursuant to the court's request, LG filed supplemental briefing regarding its request that the court order FLASR to increase its authorized shares and the bases for entering an injunction absent a bond. DE 14. On October 19, 2016, the court held another hearing regarding the OTSC and granted LG's request in its entirety. DE 16 (the "Injunction Order"). The court further directed LG to seek entry of default based on FLASR's failure to answer the Complaint.
Federal Rule of Civil Procedure 55 establishes the process for entry of default judgment. First, "[w]hen a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend, and that failure is shown by affidavit or otherwise, the clerk must enter the party's default." Fed. R. Civ. P. 55(a). "[A]fter a default has been entered against a defendant, and the defendant fails to appear or move to set aside the default under Rule 55(c), the Court may enter a default judgment on a plaintiff's motion." LG Funding, LLC v. Florida Tilt, Inc., 2015 WL 4390453, at (E.D.N.Y. July 15, 2015) (citing Fed. R. Civ. P. 55(b)(2)). When a defendant defaults, the court must accept as true all well-pleaded allegations in the complaint, except those pertaining to the amount of damages. See Fed. R. Civ. P. 8(b)(6); Finkel, 577 F.3d at 83 n.6. The fact that the complaint stands unanswered does not, however, suffice to establish liability on its claims; a default does not establish conclusory allegations, nor does it excuse any defects in the plaintiff's pleading. With respect to liability, a defendant's default does no more than concede the complaint's factual allegations; it remains the plaintiffs burden to establish that those uncontroverted allegations, without more, establish the defendant's liability on each asserted cause of action. See, e.g., Finkel, 577 F.3d at 84; see also Greyhound Exhibitgroup, 973 F.2d at 159 (complaint's assertion of proximate cause necessary for finding of liability must be
Under New York law, a plaintiff is entitled to damages for breach of contract where it can establish the existence of a contract, performance by the party seeking recovery, non-performance by the other party, and damages attributable to the breach. See Eternity Glob. Master Fund, Ltd. v. Morgan Guar. Tr. Co., 375 F.3d 168, 177 (2d Cir. 2004). In order to establish a case for default on a promissory note, a plaintiff must provide proof of a valid note and of the defendant's failure, despite proper demand, to make payment. See Grp. 1 Auto., Inc. v. Country Imported Car Corp., 2012 WL 11955634, at *8 (E.D.N.Y. Aug. 15, 2012) (citing Exp.-Imp. Bank of U.S. v. Agricola Del Mar BCS, 536 F.Supp.2d 345, 349 (S.D.N.Y. 2008)). LG adequately pleads each element: it establishes the existence of the Note; performance by LG; non-performance by FLASR; and damages attributable to FLASR's breach. See Complaint ¶¶ 6-44. I therefore conclude that LG has established liability on its claims.
Upon a finding of liability, the court must conduct an inquiry sufficient to establish damages to a "reasonable certainty." Credit Lyonnais Sec. (USA) v. Alcantara, 183 F.3d 151, 155 (2d Cir. 1999) (citing Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., 109 F.3d 105, 111 (2d Cir. 1997)). Even when a defendant defaults, damages must be based on admissible evidence. See House v. Kent Worldwide Mach. Works, Inc., 359 Fed.Appx. 206, 207 (2d Cir. 2010); Cesario v. BNI Constr., Inc., 2008 WL 5210209, at *2 (S.D.N.Y. Dec. 15, 2008); Ermenegildo Zenga Corp. v. 56th St. Menswear, Inc., 2008 WL 4449533, at *3 (S.D.N.Y. Oct. 2, 2008); Smith v. Islamic Emirate of Afghanistan, 262 F.Supp.2d 217, 224 (S.D.N.Y. 2003). A court may make this determination based upon evidence presented at a hearing or upon review of detailed affidavits and documentary evidence. See Fed. R. Civ. P. 55(b)(2); Action S.A. v. Marc Rich & Co., 951 F.2d 504, 508 (2d Cir. 1991). "The Court may also issue an injunction on a motion for default judgment provided that the moving party shows that (1) it is entitled to injunctive relief, and (2) it meets the prerequisites for the issuance of an injunction." Main Events/Monitor Prods. v. Batista, 1998 WL 760330, at *1 (E.D.N.Y. Aug. 26, 1998). In order to satisfy the second prong, the party seeking injunctive relief must demonstrate irreparable harm and the absence of an adequate remedy at law. See Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 57, 95 S.Ct. 2069, 45 L.Ed.2d 12 (1975).
"[T]he general rule for measuring damages for breach of contract has long been settled. It is the amount necessary to put the plaintiff in the same economic position he would have been in had the defendant fulfilled his contract." Adams v. Lindblad Travel, Inc., 730 F.2d 89, 92 (2d Cir. 1984); see also Merrill Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d 171, 185 (2d Cir. 2007) ("A party injured by breach of contract is entitled to be placed in the position it would have occupied had the contract been fulfilled according to its terms"); Lucente v. Int'l Bus. Machs. Corp., 310 F.3d 243, 262 (2d Cir. 2002) (putting plaintiff in the same economic position is a fundamental principle of an award for breach of contract). LG has submitted declarations from counsel of record Kevin Kehrli and LG member Joseph Lerman attesting to the amounts owed to LG under the Note. See Kehrli
LG is entitled to delivery of 1,523,983 shares of FLASR's common stock, along with any corporate resolutions necessary to enable LG to sell such common stock without restriction, as LG has demonstrated that entry of the preliminary injunction was necessary to avoid irreparable harm. See Injunction Order.
The original value of the Note was $78,750.00. Note at 1. Under the Note's terms, FLASR was to pay "each interest payment and the outstanding principal due... before or on" April 1, 2016. Id. LG seeks an award of $71,644.00 in unpaid principal, subtracting the converted principal of $7,106.00 from the face value of the Note. See Lerman Decl. II ¶ 24, Figure 1. However, because I am recommending that the court order FLASR to deliver to LG the requested shares pursuant to the May 16, 2017 Notice of Conversion, see supra Section II.C.1, LG is entitled to recover the original value less the converted principal of $7,106.00, see Complaint, Exs. B-C (notices of conversion), as well as the amount of the most recent conversion request of $1,679.00. In order to place LG in the economic position it would have been in had the contract been performed, I respectfully recommend the court award LG unpaid principal in the amount of $69,965.00.
LG seeks accrued interest under the Note at a regular rate of 8 percent beginning April 1, 2015 and at a default rate of 24 percent beginning November 6, 2015, when FLASR failed to replenish the Share Reserve, through the date of judgment. See Lerman Decl. II ¶¶ 6, 26. The terms of the Note support the request: it provides for regular interest on the unpaid principal at an annual rate of 8 percent and interest at an accelerated annual rate of 24 percent upon an event of default. See Note at ¶ 4(b), ¶ 8(l), (n) (defining one of many "Events of Default" as a failure to replenish the Share Reserve within three business days of a request by LG, and stating that upon such default, interest shall accrue at an accelerated rate of 24 percent per annum). LG has adequately proven that an event of default occurred and therefore that it is entitled to default interest from November 6, 2015 through the date of judgment. See Lerman Decl. II ¶¶ 16-17; Complaint ¶¶ 16-19.
LG seeks liquidated damages in the amount of $101,000.00 resulting from FLASR's failure to honor the May 12, 2016 Notice of Conversion. See Lerman Decl. II ¶¶ 27-28. Under the terms of the Note, FLASR was to pay, upon failure to convert the common stock, a penalty of $250 per day the shares were not issued beginning on the fourth day after the Notice of Conversion was delivered, and $500 per day beginning on the tenth day after the Notice was delivered. See Note § 8(n), (k). LG delivered the Notice of Conversion on May 12, 2016, and FLASR has yet to deliver the shares. However, for the reasons set forth below, LG is not entitled to recover liquidated damages resulting from FLASR's default on the Note.
Under New York law, which governs the Note, see Note § 14, parties have the right to negotiate liquidated damages provisions, so long as they are "neither unconscionable nor contrary to public policy." 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). "A damages clause is contrary to public policy when its purpose is not to compensate the injured party for the breach, but rather to impose a penalty on the breaching party by requiring payment of a sum of money grossly disproportionate to the amount of actual damages." Bristol Inc. Fund, Inc. v. Carnegie Int'l Corp., 310 F.Supp.2d 556, 566 (S.D.N.Y. 2003) (internal quotations omitted). Whether the provision constitutes liquidated damages or a penalty is a question of law that requires consideration of the nature of the contract and the attendant circumstances. See J. R. Stevenson
Though courts should construe any ambiguity in favor of a penalty, the express language of the Note itself refers to a "penalty[.]" See 139 Fifth Ave. Corp., 1996 WL 154108, at *4; Note § 8(n) ("[I]n the event of a breach of [the conversion provision] the penalty shall be $250 per day the shares are not issued beginning on the 4th day ... This penalty shall increase to $500 per day beginning on the 10th day") (emphasis added). Even if the court were to determine that the penalty provision actually provided for liquidated damages, LG would" still not be able to recover, as LG is already receiving injunctive relief in the form of the desired shares of common stock and monetary damages, including interest at the accelerated rate triggered by FLASR's default. See U.S. Fid. & Guar. Co., 369 F.3d at 71; Bristol Inv. Fund, 310 F. Supp. 2d at 568; Note § 8(n). Accordingly, I respectfully recommend that the court decline to award LG liquidated damages.
LG seeks lost profit damages in the amount of $230,301.45, equivalent to the profit it stood to gain had it been able to convert all of the remaining shares of FLASR common stock, which LG asserts it would have done had FLASR remained in compliance with the Note's terms, and sell them at a median market price. See Lerman Decl. II ¶ 31. However, for the reasons set forth below, LG is not entitled to recover lost profits resulting from FLASR's default on the Note.
In a breach of contract action, a "plaintiff is entitled to recover lost profits only if [it] can establish both the existence and amount of such damages with reasonable certainty." Schonfeld v. Hilliard, 218 F.3d 164, 172 (2d Cir. 2000). A plaintiff must also "prove that lost profit damages were within the contemplation of the parties when the contract was made." Id. While that contemplation may be recited expressly, "otherwise: ... the nature, purpose and particular circumstances of the contract known by the parties should be considered ... as well as what liability the defendant fairly may be supposed to have assumed consciously, or to have warranted the plaintiff reasonably to suppose that it assumed[.]'" Travellers Int'l, A.G. v. Trans World Airlines, Inc., 41 F.3d 1570, 1578 (2d Cir. 1994) (quoting Kenford Co. v. County of Erie, 73 N.Y.2d 312, 540 N.Y.S.2d 1, 4, 537 N.E.2d 176 (1989)).
The Note itself does not expressly contemplate damages for lost profits. However, the Note does provide for liquidated damages, discussed above, in the event of a breach of the conversion provision, as well as an increased interest rate upon default. See Note § 8. As LG itself admits,
LG also seeks reimbursement of $24,554 in attorneys' fees. See Lerman Decl. II ¶¶ 32-33.
Courts in this circuit assess fee applications using the "lodestar method," under which a reasonable hourly rate is multiplied by a reasonable number of hours expended. See Luciano v. Olsten Corp., 109 F.3d 111, 115 (2d Cir. 1997); King v. JCS Enters., Inc., 325 F.Supp.2d 162, 166 (E.D.N.Y. 2004) (citing cases).
Kehrli states in his declaration that counsel for LG "has spent 63.3 hours on this matter and associates bill at an hourly rate of $225[,]" which includes preparation for and attendance at two hearings, as well as supplemental briefing on a motion for preliminary relief. Kehrli Decl. ¶ 19. However, LG has not provided any contemporaneous billing records to substantiate this statement, nor any information concerning counsel's credentials or experience. Accordingly, I respectfully recommend that LG's request for attorneys' fees be denied without prejudice, subject to refiling with proper documentation and substantiation. See Scott, 626 F.3d at 133-34; Patten Energy, 2016 WL 8117954, at *3.
Pursuant to the terms of the Note, LG also seeks reimbursement for $839.88 in litigation costs. See Lerman Decl. II ¶ 32; Note § 7. While Kehrli states in his declaration that this request includes the filing fee and the cost of multiple service attempts, Kehrli Decl. ¶ 20, LG has failed to provide appropriate itemized documentation, without which the request for costs must be denied. See Onewest Bank v. Louis, 2016 WL 3552143, at *10 (S.D.N.Y. June 22, 2016) (report and recommendation), adopted, 2016 WL 4059214 (S.D.N.Y. July 28, 2016). The court may, however, take notice of and allow recovery of its own filing fees. See Philip Morris USA, Inc. v. Jackson, 826 F.Supp.2d 448, 453 (E.D.N.Y. 2011). Accordingly, I respectfully recommend that LG's request for litigation costs beyond the $400 filing fee be denied without prejudice, subject to refiling with proper documentation and substantiation. See Patten Energy, 2016 WL 8117954, at *3.
For the reasons set forth above, I respectfully recommend that the court grant a default judgment against FLASR; order FLASR to deliver 1,523,983 shares of its common stock to LG; and order FLASR to pay LG damages in the amount of $105,794.24 (consisting of $69,965.00 in unpaid principal, $3,438.91 in regular interest, $31,990.33 in default interest, and $400.00 in litigation costs).
I direct the plaintiff to serve a copy of this Report and Recommendation on the defendant by certified mail and to file proof of service no later than July 31, 2017. Any objections to this Report and Recommendation must be filed no later than August 14, 2017. Failure to file objections within this period designating the particular issues to be reviewed waives the right to appeal the district court's order. See 28 U.S.C. § 636(b)(1); Fed. R. Civ. P. 72(b)(2); Wagner & Wagner, LLP v. Atkinson, Haskins, Nellie, Brittingham, Gladd & Carwile, P.C., 596 F.3d 84, 92 (2d Cir. 2010).
SO ORDERED.
