Haua v. Prodigy Network, LLC, 20 Civ. 2318 (PGG) (KNF)

• Decision Date: 29 September 2021
• Docket Number: 20 Civ. 2318 (PGG) (KNF)
• Parties: JOSE ANTONIO HAUA and BIBIANA KURI OTERO, Plaintiffs, v. PRODIGY NETWORK, LLC, a Delaware limited liability company, PRODIGY SHOREWOOD INVESTMENT MANAGEMENT, LLC, and 17 JOHN PREFERRED, INC., a Delaware corporation, Defendants.
• Court: U.S. District Court — Southern District of New York

JOSE ANTONIO HAUA and BIBIANA KURI OTERO, Plaintiffs, v. PRODIGY NETWORK, LLC, a Delaware limited liability company, PRODIGY SHOREWOOD INVESTMENT MANAGEMENT, LLC, and 17 JOHN PREFERRED, INC., a Delaware corporation, Defendants.

No. 20 Civ. 2318 (PGG) (KNF)

United States District Court, S.D. New York

September 29, 2021

ORDER

PAUL G. GARDEPHE, U.S.D.J.:

Plaintiffs Jose Antonio Haua and Bibiana Kuri Otero bring this action for breach of contract against Defendants 17 John Preferred Inc., Prodigy Network, LLC, and Prodigy Shorewood Investment Management, LLC (“PSIM”). (Cmplt. (Dkt. No. 1)) Defendant PSIM has moved to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). (Dkt. No. 47) Plaintiffs have moved for an award of attorneys' fees as against Prodigy Network and 17 John Preferred, which have defaulted. (Dkt No. 74) The Court referred Plaintiffs' motion to Magistrate Judge Kevin N. Fox for a Report and Recommendation (“R&R”). (Dkt. No. 71) Judge Fox has issued an R&R recommending that Plaintiffs' motion for an award of attorneys' fees be denied. (Dkt. No. 83)

For the reasons stated below, PSIM's motion to dismiss will be granted, and this Court will adopt the R&R in its entirety.

BACKGROUND

I. FACTS

This is a breach of contract action arising from Plaintiffs' real estate investment. (Cmplt. (Dkt. No. 1)) Plaintiffs are Mexican citizens and residents, and Defendants are a Delaware corporation and two LLCs with no Mexican members. (Id. ¶¶ 2-6)

According to the Complaint, in January 2017, Prodigy Network solicited Plaintiffs for a real estate investment in a co-working and short-term apartment rental project in the Financial District of Manhattan. (Id. ¶ 11) On June 7, 2017, Plaintiffs executed a Subscription Agreement, in which they agreed to purchase 17 John Preferred Class B-1 Common Stock in the amount of $125, 000, and to make a Class A Investor Loan to 17 John Preferred in the amount of $375, 500, for a total investment of $500, 500.^[1] (Id. ¶ 17)

Investments in 17 John Preferred were sold pursuant to the terms of a March 15, 2017 Amended and Restated Confidential Private Offering Memorandum (the “Offering Memorandum”). (Id. ¶ 13) Under the terms of the Offering Memorandum, holders of Class B Common Stock in 17 John Preferred^[2] are not permitted to redeem their stock without written consent of the “Investment Manager, ” which is defined as “Prodigy Shorewood Investment Management LLC (or an affiliate thereof). . . .” (Id. ¶¶ 14-15) (emphasis omitted) On June 13, 2017, Plaintiffs entered into a Side Letter Agreement (“SLA”) with Prodigy Network, pursuant to which Prodigy Network granted Plaintiffs an unconditional right to redeem their investment in full with an annually compounded return of 20%. (Id. ¶ 18) The SLA provides as follows:

Reference is made to [the Offering Memorandum]. . . . Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Private Offering Memorandum. . . . Upon the making of Subscribers['] [i.e., Plaintiffs'] subscription to the Pref Fund [i.e., investments in 17 John Preferred] and a capital contribution for Class B-1 Common Stock and Class A Loan from and after the Contribution Date, Prodigy Network, LLC, in its capacity as the Investment Manager of the Pref Fund agrees to the following:

(i) The Investment Manager agrees that it will arrange for the sale of Subscribers['] Interests in Pref Fund in the event the Subscriber[s] provide[] written notification to the Investment Manager informing the Investment Manager that the Subscriber[s] would like to sell [their] Class B-1 Common Stock, Class A Loan and Common Factor (the ‘Redemption Notification') no earlier than twelve (12)-months after the Subscribers['] contribution and no later than fifteen (15)-months after the Subscribers['] contribution. Upon the Investment Manager's receipt of such notification from the Subscriber[s], the Investment Manager will have 90 days to arrange for and complete the sale of Subscribers['] Class B-1 Common Stock, Class A Loan and Common Factor for an anticipated annually compounded return of 20%.

(Cmplt., Ex. B (Dkt. No. 1) at 18)

On October 3, 2018, Plaintiffs and Prodigy Network agreed to amend the SLA to grant Plaintiffs an additional fifteen months - through September 13, 2019 - “to submit [their] Redemption Notice to the Investment Manager to the extent the Subscriber[s] would like to exercise [their] rights granted under the Side Letter.” (Id., Ex. D at 27)

On June 26, 2019, PSIM suspended bi-annual preferred return payments to investors in 17 John Preferred. (Id. ¶ 22) On June 27, 2019, Plaintiffs submitted a written demand to redeem their full equity investment and loan. (Id. ¶ 23)

On September 9, 2019, Plaintiffs and PSIM agreed to a second amendment of the SLA pursuant to which PSIM was granted an additional 120 days - through February 12, 2020 -to arrange for and complete the sale of Plaintiffs' investment. (Id. ¶¶ 24-25) The second amendment to the SLA provides as follows:

[T]he Subscriber[s] ha[ve] requested a modification to the Side Letter dated June 13, 2017 (the “Side Letter”), as amended on October 3, 2018. Upon execution of this Second Amendment to the Side Letter, Prodigy Shorewood Investment Management, LLC, in its capacity as the Investment Manager of the Pref Fund, agrees to the following:

(i) The Investment Manager shall be given an additional 120 days to arrange for and complete the sale of Subscribers['] Class B-1 Stock, Class A loan and Common Factor. Such 120 days are in addition to the 90 days from the date of receipt of notification from the Subscriber[s], which is the period defined in the Side Letter to arrange for an[d] complete the sale.

(Id., Ex. E at 30)^[3] Defendants have refused to honor Plaintiffs' redemption demand. (Id. ¶ 25)

II. PROCEDURAL HISTORY

The Complaint was filed on March 16, 2020. (Cmplt. (Dkt. No. 1))

On May 13, 2020, PSIM filed a pre-motion letter seeking permission to file a motion to dismiss under Fed.R.Civ.P. 12(b)(6). (Dkt. No. 22) PSIM also sought a stay of discovery pending resolution of its anticipated motion. (Id.)

On May 19, 2020, this Court set a briefing schedule for PSIM's motion to dismiss and stayed discovery pending resolution of the motion. (Dkt. No. 32)

On June 1, 2020, Plaintiffs moved for a default judgment against Defendants Prodigy Network and 17 John Preferred. (Dkt. No. 34) On August 13, 2020, this Court conducted a hearing to consider Plaintiffs' motion. Defendants Prodigy Network and 17 John Preferred did not appear at the hearing. Following the hearing, this Court entered a default judgment against Prodigy Network and 17 John Preferred in the amount of $808, 596.96. (Dkt. No. 55) Plaintiffs served Prodigy Network and 17 John Preferred with restraining notices and information subpoenas on August 25, 2020, which they received on August 31, 2020. (Dkt. Nos. 60, 60-1-60-4)

In an October 14, 2020 letter, Plaintiffs asserted that Prodigy Network and 17 John Preferred had not responded to the information subpoenas or otherwise communicated with Plaintiffs, and sought an order directing those Defendants to fully comply with the information subpoenas by a date certain pursuant to Fed.R.Civ.P. 37. (Id.)

On October 15, 2020, this Court issued an Order directing Prodigy Network and 17 John Preferred to respond to Plaintiffs' restraining notices and information subpoenas by October 25, 2020. (Dkt. No. 61) The Order provides that a failure to comply will constitute grounds for holding Prodigy Network and 17 John Preferred in contempt of court. (Id.)

On November 4, 2020, Plaintiffs moved for an order holding Prodigy Network and 17 John Preferred in contempt of this Court's October 15, 2020 Order, and further ordering (1) civil or criminal penalties against Prodigy Network and 17 John Preferred; and (2) that Plaintiffs be awarded reasonable attorney's fees and costs in connection with their enforcement of the October 15, 2020 Order. (Dkt. No. 64)

On December 3, 2020, this Court conducted a hearing concerning Plaintiffs' motion for an order of contempt as to Prodigy Network and 17 John Preferred. Neither Prodigy Network nor 17 John Preferred appeared at that hearing. Following the hearing, this Court issued an order holding Prodigy Network and 17 John Preferred in civil contempt for failing to comply with the October 15, 2020 Order, and referred Plaintiffs' application for an award of attorneys' fees and costs to Magistrate Judge Fox for an R&R. (Dkt. Nos. 70-71)

On September 2, 2021, Judge Fox issued an R&R recommending that Plaintiffs' motion for an award of attorneys' fees and costs be denied. (Dkt. No. 83) In his R&R, Judge Fox notifies the parties that they have fourteen days from service of the R&R to file any objections, pursuant to 28 U.S.C. § 636(b)(1) and Fed.R.Civ.P. 72(b). (Id. at 3) The R&R further states that a “[f]ailure to file objections within fourteen (14) days will result in a waiver of objections and will preclude appellate review.” (Id.) (emphasis omitted) Neither side has filed objections to the R&R.

DISCUSSION I.LEGAL STANDARDS

A. Rule 12(b)(6) Standard

“To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “In considering a motion to dismiss[, ] the court is to accept as true all facts alleged in the complaint, ” Kassner v. 2nd Ave. Delicatessen Inc., 496 F.3d 229, 237 (2d Cir. 2007) (citation omitted), and must “draw all reasonable inferences in favor of the plaintiff.” Id. (citing Fernandez v. Chertoff, 471 F.3d 45, 51...