LG Capital Funding, LLC v. Flasr, Inc.

• Decision Date: 26 December 2018
• Docket Number: 16-CV-03565 (LDH) (JO)
• Citation: 422 F.Supp.3d 611
• Parties: LG CAPITAL FUNDING, LLC, Plaintiff, v. FLASR, INC., Defendant.
• Court: U.S. District Court — Eastern District of New York

422 F.Supp.3d 611

LG CAPITAL FUNDING, LLC, Plaintiff,

v.FLASR, INC., Defendant.

16-CV-03565 (LDH) (JO)

United States District Court, E.D. New York.

Signed December 26, 2018

Filed December 27, 2018

ORDER ADOPTING REPORT AND RECOMMENDATION

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.¹ On November 10, 2016, Plaintiff filed a motion for default judgment. (Mot. Default J., ECF No. 19.) On July 27, 2017, Magistrate Judge James Orenstein issued a report and recommendation (the "R&R") recommending that LG Capital's motion be granted in part and denied in part. (ECF No. 40.) On August 14, 2017, LG Capital filed an objection challenging Magistrate Judge Orenstein's recommendation that the Court not award Plaintiff liquidated damages, lost profits, or attorney's fees. (Pl.'s Objs. July 27, 2017 R. & R. Hon. Magistrate Judge James Orenstein, ECF No. 43 ("Objection").)

STANDARD OF REVIEW

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.

BACKGROUND²

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, FLASR agreed to pay "$250 per day the shares [were] not issued beginning on the 4^th day after the conversion notice was delivered to [FLASR,] .... increas[ing] to $500 per day beginning on the 10^th day." (Id. )

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.)

DISCUSSION

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.

I. Liquidated Damages

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.

A. Damages Were Neither Difficult nor Impossible to Estimate Precisely.

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 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)."), R. & R. adopted , 2018 WL 2057141 (Mar. 8, 2018) ; Vape Holdings , 2016 WL 3129185, at *3–4 (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, w[ould] be difficult to establish with any degree of certainty") (internal quotations omitted); LG Capital Funding, LLC v. PositiveID Corp. , No. 17-cv-1297, 2017 WL 2556991, at *7 (E.D.N.Y. June 12, 2017) (finding that "LG's damages [we]re easily measurable and compensable with monetary damages"). Here, too, LG Capital's expectation damages are readily ascertainable.

B. The Liquidated Damages Are Not Reasonably Related to Expected Losses.

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 4^th day after the conversion notice was delivered to [FLASR,] .... increas[ing] to $500 per day beginning on the 10^th 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 (...