LG Capital Funding, LLC v. Coroware, Inc.

Filing 24

DECISION AND ORDER: The plaintiffs motion for default judgment is granted in part as to the breach of contract claim and the request for attomeys' fees and costs, and denied as to the conversion claim. The plaintiff is entitled to the following damages: (1) expectation damages in the amount of $54,912.33, for the the January 13, 2016 conversion request; (2) the balance of the principal onthe notes, plus regular interest, plus default interest of 24% from the default date to the date of the R&R; and (3) attorneys' fees and costs in the amount of $5,953. Additional default interest of $55.04 should be added for each day from the date of the R&R to the date of the judgment. Ordered by Judge Ann M. Donnelly on 9/8/2017. (Greene, Donna)

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US DISTRICT C0 1 •• :n :- '
IN CLERK'S

UNITED STA TES DISTRICT COURT

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EASTERN DISTRICT OF NEW YORK

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BAOOKLYi~ C ,- . ;:: ·

LG CAPITAL FUNDING, LLC,

Plaintiff,

DECISION AND ORDER

- again st -

I 6 Civ. 2266 (AMD) (PK)

CO ROW ARE, INC.,

Defendant.

ANN M. DONNELLY, District Judge.

The plaintiff, LG Capital Funding, LLC, commenced thi s diversity breach of contract
action on May 5, 201 6, alleging that defendant Coroware, Inc. fa iled to make payments due
under three promissory notes. (Com pl., ECF 1.) The plaintiff then filed a moti on for default
judgment. The Honorable Peggy Kuo issued a report and recommendation; the pl aintiff objects
to portions of Judge Kuo's report. For the reasons set forth below, I adopt Judge Kuo's thorough
and well-reasoned opinion, and make the additional finding that the plaintiff is entitled to
expectation damages in the amount of $54,9 12.33 .
BACKGROUND

The defendant issued three convertible promissory notes for $40,000 (note 1), $32,000
(note 2), and 20,625 (note 3), respectively. (Comp!.

~~

9-11. ) The notes provided that on

specified dates of maturity, the defendants would pay the plaintiff the principal value amount
plus 12% interest.

(Id. ~

13.) Additionally, after 180 days, the plaintiff could "convert all or any

of the amount of the principal face amount of the Note then outstanding into shares of [the
defendant' s] common stock" at a discounted price.

(Comp!.~~

13-15.)

On March 26, 2014, the plaintiff sought to convert $16,000 of the principal of Note 1 and
$160 of the interest into shares of the defendant's stock.
leaving a principal balance of $24,000 on note 1. (Id.

~

(Id. ~

20.) The defendant complied,

21.) On March 11, 20 15, notes 1 and 2

reached their maturity dates, but the defendants did not pay the plaintiff.

(Id.~

22.) Accordingly,

the plaintiff "sought to take advantage of the conversion feature of the Notes," and issued a
notice of conversion stating its request to convert $15,000 of the principal amount and $3,304.11
of the interest on Note 1 into shares of common stock.

(Id. ~

23.) The defendant did not respond.

There is a cross-default provision in the notes to the effect that a default on one note, if
not cured within five days, renders the others payable immedi ately. (Notes § 8.) Section 8(k) of
the notes provides that if the defendant breaches the conversion provision, it incurs a $250
penalty per day starting the fourth day after receiving the notice of conversion, and that the
penalty increases to $500 per day starting the tenth day after receipt of the notice. (Notes§ 8(k).)
After attempting to contact the defendant through counsel, the plaintiff filed this lawsuit
on May 5, 2016, alleging breach of contract and conversion, and seeking damages in the amount
of the outstanding balance on the notes-including the principal, interest, and default interest plus lost profits or, in the alternative, liquidated damages.

(Comp!. ~~

5-6, 39-44.)

The defendant filed an answer July 9, 2016, (ECF 5), but did not respond to the plaintiffs
discovery demands. (ECF 8.) On November 4, 2016, the defendant' s attorney moved to
withdraw as counsel on the ground that he was not able to contact the defendant. (ECF 9.) Judge
Kuo held a hearing and ordered a representative for the defendant to appear, but none did. (ECF
12.) Accordingly, Judge Kuo granted defense counsel's motion to withdraw and ordered the

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defendant to obtain new counsel or update her as to the status of its efforts by November 22,
2016. (Id.) The defendant did not comply with Judge Kuo ' s order, and the plaintiff moved for
permi ssion to request a certificate of default. (ECF 13 .) Judge Kuo ordered the defendant to
show cause why it failed to comply with her order, but the defendant did not respond. (ECF 14.)
Judge Kuo granted the plaintiff permission to request a certificate of default. (ECF 15.) After
obtaining a certificate of default, the plaintiff moved for defaul t judgment pursuant to Federal
Rule of Civi l Procedure 55(b)(2) on January 17, 2017, seeking damages, attorneys' fees, and
costs. (ECF 19.)
In a Report and Recommendation issued on July 12, 20 17, Judge Kuo recommended that
I grant the motion for default judgment as to the plaintiff's breach of contract claim and the
request for attorneys' fees and costs, but deny the motion as to the plaintiffs conversion claim as
duplicative. (ECF 2 1 at 13.) Additionally, Judge Kuo recommended that I award the plaintiff
$130,654.37 for the breach of contract claim and $5,953 for attorneys' fees and costs, and that
these amounts should accrue a default interest of $55.04 per day from the date of her R&R to the
date of thi s judgment. Judge Kuo directed the plaintiff to serve her recommendations on the
defendant by July 19, 2017. The plaintiff filed its certificate of service a day late, on July 20,
20 17. (ECF 22.) On August 2, 201 7, the plaintiff timely fi led its objection to Judge Kuo' s Report
and Recommendations, arguing that it should be entitled to lost profits, li quidated damages, or
expectation dam ages. (ECF 23 .)

DISCUSSION
I.

Standard of Review
In reviewing a Report and Recommendation, a district court "may accept, reject, or

modify, in whole or in part, the findings or recommendations made by the magistrate judge." 28

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U.S.C. § 636(b)(l )(C). A party's objections must be specific; where a party "makes only
conclusory or general objections, or simply reiterates [the] original arguments, the Court reviews
the (R & R] only for clear error." Pall Cmp. v. Entegris, Inc., 249 F.R.D. 48, 51 (E .D.N.Y.
2008) (quoting Barratt v. Joie, No. 96 Civ. 324, 2002 WL 335014, at *l (S.D.N.Y. Mar. 4,
2002)). The district judge must evaluate proper objections de nova and "may accept, reject, or
modify the recommended disposition." Fed. R. Civ. P. 72(b)(3).
" [E]ven in a de novo review of a pru1y's specific objections, [however,] the court will not
consider 'arguments, case law and/or evidentiary material which could have been, but were not,
presented to the magistrate judge in the first instance."' Brown v. Smith, No. 09 Civ. 4522, 2012
WL 511581 , at * 1 (E.D .N.Y. Feb. 15, 2012) (quoting Kennedy v. Adamo, No. 02 Civ. 1776,
2006 WL 3704784, at *1 (E.D.N.Y. Sept. 1, 2006)) (alterations omitted). Moreover, "the district
court is ' permitted to adopt those sections of a magistrate judge's report to which no specific
objection is made, so long as those sections are not facially erroneous."' Sasmor v. Powell, No.
11Civ.4645, 2015 WL 5458020, at *2 (E.D.N.Y. Sept. 17, 2015) (quoting Batista v. Walker,
No . 94 Civ. 2826, 1995 WL453299, at *l (S.D.N .Y. July 31 , 1995)).
II.

The Plaintiffs Partial Objections
The plaintiff does not contest Judge Kuo ' s determination that the plaintiff is entitled to

damages regarding its breach of contract claim, or that those damages include the outstanding
principal on the promissory notes, as well as regular and default interest. (ECF 23, at 3.) Finding
no clear error in those determinations, I adopt them.
The plaintiff objects, however, to Judge Kuo's determination that it is not entitled to lost
profits or liquidated damages. Accordingly, I review those findings de nova. See, e.g., Grassia v.

Scully, 892 F. 2d 16, 19 (2d Cir. 1989).

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a. Lost Profits
To support an award of lost profits due to a breach of contract, a plaintiff must show that
"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." Alias v. Sedrish, 133 F. App'x 759, 760 (2d Cir. 2005) (citing Ashland Mgmt. Inc. v.

Janien, 82 N.Y.2d 395, 404, 604 N.Y.S.2d 912, 624 N.E.2d 1007 (1993)). The plaintiff claims
that it is entitled to lost profits from the unconverted shares of stock that it could have sold if the
defendant had completed the conversion, and proposes that these profits should be calculated
based on the stock's hi ghest sale price. (Report and Recommendations, ECF 21 , at 8.)
The plaintiff asserts that its entitlement to lost profits may be proved by a reasonable
certainty. From the date the plaintiff submitted its notice of conversion tlu·ough the date the
plaintiff sent the defendant a default letter, the stock price ranged from $.0001 per share to
$.0004 per share, resulting in a conversion rate of between $36,608.22 and $146,432.88. (ECF
23 at 9.) Accordingly, the plaintiff claims, it is reasonably certain that the plaintiff would have
profits from its sale of the converted notes, and the Court should calculate its award for lost
profits as $128,128.77, which represents the highest potential profit, $146,432.88, minus the
converted value of the notes, $18,304.11. (Lerman Deel., ECF

19-1 ~7 . )

Judge Kuo rejected the plaintiff's proposed lost profits calculation, finding that the
plaintiff did not provide any support for its assumption that it would have sold the stock when it
was at its highest price, as opposed to any other time. She found the plaintiff's estimate
especially "speculative" in light of its description of the stock as "extremely volatile." (Report
and Recommendations, ECF 2 1, at 1O;

Comp!.~

49.) Indeed, the plaintiff's complaint states that

the parties included a liquidated damages provision in the contract because "certain

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unpredictable variables in the ... market, such as fluctuati ons in trading price and vo lume, as well
as reactionary trends, the exact profits wruch [the plaintiffJ might stand to receive were
extremely difficult to calculate."

(Comp!.~

44.) The damages provision of the notes provides

that in the event of default, the note becomes " immediately due and payable," accrues interest at
a rate of 24% per year, and that the holder is subject to a daily fine of $250 per day and then
$500 per day. (Notes§ 8.) The plaintiff has not established that the parties contemplated the
proposed award of damages for lost profits, nor has it established that the proposed calculation
estimates its actual loss of profits with any reasonable certainty.
Judge Richard Sullivan of the Southern District of New York recently declined to enforce
a contract provision that called for th e same measure of lost profits- that is, "multiplying the
number of shares by 100% of the highest market price on any date subsequent to the failure to
convert"- finding that this formula was designed to provide the note purchaser "with a
guaranteed higher cash payout than a true make-whole measure, which wou ld focus only on [its]
loss as a result of [the note issuer's] failure to abide by the terms of the bargain." Union Capital

LLC v. Vape Holdings Inc. , No. 16 Civ. 1343 (RJS), 2017 WL 1406278, at *7 (S.D.N.Y. Mar.
31, 2017). Similarly, the plaintiffs request for lost profits here does not reflect actual damages
with any reasonable certainty.
For these reasons, I adopt Judge Kuo 's recommendation and deny the plaintiff s request
for lost profits.
b. Liquidated Danrnges
As an alternative to its claim for lost profits, the plaintiff argues it is entitled to liquidated
damages under Section 8 of the promissory notes, which provides for the daily penalty of $250

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for each day that the shares are not issued, escalating to $500 per day on the tenth day. (Notes §
8.)
"Under New York law, courts wi ll uphold and enforce liquidated damages provisions
where ( 1) actual damages are difficult to determine and (2) the amount of damages awarded
pursuant to the clause is not clearly disproportionate to the potential loss." Union Capital LLC,
20 17 WL 1406278, at *7 (citing U.S. Fidelity & Guar. Co. v. Braspetro Oil Servs. Co., 369 F.3d
34, 70-7 1 (2d Cir. 2004)). "[I]f the clause in question does not satisfy one or both of these factors
then it is considered an impermissible penalty and will not be enforced by the courts." Id. (citing
U.S. Fidelity & Guar. Co. 369 F.3d at 70-71). To determine whether "a liquidated damages

provision functions as a penalty, courts are to consider whether damages were ascertainable and
the liquidated damages amount was umeasonable as of the time of contracting, not the time of
the breach." Id. (citing Rattigan, 739 F. Supp. at 169). Courts also consider the sophistication of
the parties. Id.
Judge Kuo recommended that I find the liquidated damages provision unenforceable. She
reasoned that "the per-day penalty, which increases after I 0 days, bears no relation to the amount
being converted or any probable loss." (Report and Recommendations, ECF 2 1 at 11.)
Accordingly, she concluded the damages were penalties intended to '"secure performance by the
compulsion' of a disproportionate amount, which ' in the event of default, would reap a windfall
well above the actual harm sustained." (Id. (citing Truck Rent-A-Ctr. , Inc. v. Puritan Farms 2nd,

Inc., 41 N.Y.2d420, 36 1 N.E.2d 1015 (1977)).
I agree with Judge Kuo's determination that the plaintiff is not entitled to liquidated
damages. The daily penalty functions as just that-a penalty; the amount is not tethered to the
plaintiffs actual losses, and serves only to coerce contract performance. See, e.g., Union Capital

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LLC, 2017 WL 1406278, at *7 (declining to enforce an identica l daily penalty provision, finding
that it "serve[d] on ly to encourage [the defendant] to abide by the terms of the contract, and it
thus functions as the prototypical forbidden penalty-an invalid ' added spur to performance. "')
(citing Priebe & Sons v. United States, 332 U.S. 407, 413 (1947)).
c. Expectation Damages
The plaintiff argues that if I reject its request for lost profits or liquidated damages, I
should award expectation damages. 1 Under New York law, "[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." Merrill Lynch & Co. Inc. v. Allegheny Energy, Inc., 500 F.3d
171 , 185 (2d Cir. 2007) (citation omitted). The plaintiff asserts that any damages award must
account for its lost opportunity to convert the notes to stock, and sell the stock on the market.
To support its argument, the plaintiff relies on Judge Sullivan' s decision in Union Capital

LLC v. Vape Holdings Inc.; Judge Sullivan articulated a method of calculating expectation
damages in case involving simil ar circumstances. 20 17 WL 1406278, at *6. Union and Vape
entered an agreement like the one at issue here, and Vape allegedly breached the terms of that
agreement by failing to convert a note when Union issued a notice of conversion. Union sought
to enforce a liquidated damages provision that imposed a per-day penalty and a contract
provision stating that the loss for Vape 's failure to convert shares would be the number of shares
requested multiplied by "the high trade price" of the shares. Id. at *7. Union also sought specific
performance and injunctive relief on the ground that damages would not be ascertainable. As
noted above, Judge Sullivan rejected Union' s arguments that it was entitled to liquidated

1
T he plaintiff did not explicitly request expectation damages in its motion for default judgment, thus Judge Kuo did
not have the occasion to address that question. Neve1theless, since the plaintiffs complaint requests " other and
further relief' as the court " may deem just, proper, and in the interest of justi ce," (Comp!. at 17), the question was
adequately presented below.

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damages or specific performance. Instead, he found that Union 's expectation damages could be
calculated "by subtracting the contract price- the price at which [the plaintiffJ is entitled to
convert shares under the Note-from the market price of the shares on the date of the breach."

Id.; see also, e.g., Sharma v. Skaarup Ship Mgmt. Corp. , 916 F.2d 820, 825 (2d Cir. 1990) ("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 breach, not the
difference between the contract price and the value of the shares sometime subsequent to the
breach. ") (citing Aroneck v. Atkin, 90 A.D.2d 966, 967, 456 N .Y.S.2d 558, 559 (App.Div. 4th
Dep't 1982)).
I agree that the expectation damages calculation that Judge Sullivan used is a reasonable
measure of the plaintiff' s damages with respect to the shares that the plaintiff sought to convert
on January 13, 20 16. (Compl.

~

23.) Accordingly, the pl aintiff is entitled to the difference

between the fa ir market price of the stock on the date of breach ($.0002) and the contract price
($.00005) multiplied by the number of shares the plaintiff sought to convert (366,082,200), for a
total of$54,9 12.33. (Kehrli

Deel. ~

16; Objections, ECF 23 at 13.)

The plaintiff also claims that it is entitled to the san1e measure of expectation damages as
applied to the remainder of the unconverted shares, which the plaintiff might have sought to
convert if the defendant responded to the January 13, 2016 first notice of conversion. Judge
Sullivan considered this to be a "closer question" but concluded that he could "take the date of
the breach and determine the conversion price Union was entitled to on that date, the number of
shares Union was authorized to convert, and the market price of those shares on the date of the
breach. " Union Capital LLC, 20 17 WL 1406278, at *6.

9

Unlike this case, however, Union alleged as a breach "Vape's refusal to honor any future
notices of conversion." Id. The plai ntiff here has made no such allegation. Instead, the plaintiffs
claim regarding lost profits is limited to the "stock that it should have received pursuant to its
January 13, 20 16 conversion request." (Lerman

Deel. ~

7; Compl.

~

47.) Moreover, Judge

Sullivan made no determination as to whether Union established that it was entitled to damages
regarding future notices of conversion; he merely held that those damages would be
ascertainable. Here, the plaintiff might have sought to convert the notes, or it might have sought
to redeem the notes on their maturity dates. Indeed, the plainti ff could have requested to convert
the remainder of the amount on all three notes, but did not do so.
Accordingly, I find that the plainti ff has established that it is entitled to expectation
damages regarding its January 13, 20 16 conversion request, but not any other hypothetical
conversion requests. Other than that, I agree with Judge Kuo's determination that the plaintiff is
entitled to the remaining principal value of the notes plus 12% interest, plus a default interest of
24%.2

CONCLUSION
The plaintiffs motion fo r default judgment is granted in part as to the breach of contract
claim and the request for attorneys' fees and costs, and denied as to the conversion claim. The
p laintiff is entitled to the fo llowing damages: (1 ) expectation damages in the amount of
$54,9 12.33, fo r the the January 13, 201 6 convers ion request; (2) the balance of the principal on
the notes, plus regular interest, plus default interest of 24% from the default date to the date of the

2 T he pla inti ffasse1
ted in its motio n for defaul t j udgment that the balance owed on Note I at the time of the
complaint was $38,863, but that amount incl udes the $ 15,000 in princ ipa l and $3 ,304 in in terest that woul d have
been converted if the defendant honored the Notice of Conversion on January 13, 20 16. Si nce I a m award ing
expectat ion damages for the amount that the p la inti ff sought to convert on January 13, 20 16, the plaintiff s damage
calculation for Note I must be amended to accoun t fo r a reduction o f $ 15,000 in pri ncipa l and $3,304 in interest as
of that date.

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R&R; and (3) attorneys' fees and costs in the amount of $5,953. Additional default interest of

$55.04 should be added for each day from the date of the R&R to the date of the judgment.
SO ORDERED.

s/Ann M. Donnelly
Ann M. Donnelly
United States District Judge
Dated: Brooklyn, New York

September <2^, 2017

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