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LG Capital Funding, LLC v. M Line Holdings, Inc.

United States District Court, E.D. New York

July 26, 2018

LG CAPITAL FUNDING, LLC, Plaintiff,
v.
M LINE HOLDINGS, INC., Defendant.

          ORDER ADOPTING REPORT AND RECOMMENDATION

          LASHANN DEARCY HALL, UNITED STATES DISTRICT JUDGE

         Plaintiff, LG Capital Funding, LLC (“LG”) filed this suit on October 28, 2016 and served Defendant, M Line Holdings, Inc., on November 7, 2016. (See ECF Nos. 1, 5.) Defendant has since failed to appear in or defend itself in this matter. On March 9, 2017, Plaintiff filed a Motion for Default Judgment. (See ECF No. 8.) On June 1, 2017, United States Magistrate Judge Roanne L. Mann issued a report and recommendation (the “R&R”) (ECF No. 11), wherein she recommended that Plaintiff's motion for default judgment be granted, in part, and denied, in part. On June 15, 2017, Plaintiff filed an objection challenging Magistrate Judge Mann's recommendation that the Court not award liquidated damages to Plaintiff. (See Objection, ECF No. 12.) In reaching that conclusion, Magistrate Judge Mann found that the “requested damages are grossly disproportionate to actual damages, and thus constitute an unenforceable penalty.” (R&R at *18.)

         The Court reviews any portion of Magistrate Judge Mann's R&R that has been objected to under a de novo standard of review. See Fed. R. Civ. P. 72(b)(1), (3); 28 U.S.C. § 636(b)(1)(C). As to the balance of the R&R, “the district 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) (quoting Urena v. New York, 160 F.Supp.2d 606, 609-10 (S.D.N.Y. 2001)) (internal quotation marks and citations omitted).

         For the reasons set forth below, the Court adopts Magistrate Judge Mann's thorough and well-reasoned opinion in full.

         BACKGROUND

         Between February 6, 2014, and June 10, 2014, Defendant M Line Holdings, Inc. issued three convertible redeemable notes (the “Notes”) to Plaintiff, each in the amount of $50, 000. (See Complaint, ECF No. 1 ¶¶ 6-8, Exs. A-C.) Two of the Notes had maturity dates of February 6, 2015 and one had a maturity date of June 10, 2015.[1] (See id.) Under each of the Notes, Defendant was obligated to repay Plaintiff the principal as well as an annual interest rate of eight percent by the maturity date. (See Id. at ¶ 10.) The Notes also contained identical stock conversion provisions which permitted Plaintiff to convert all or part of the outstanding principal of the Notes and certain future interest into shares of Defendant's common stock. (See Id. ¶¶ 12-14.) If Defendant failed to pay the principal or interest due on any Note, or failed to honor the stock conversion provisions of any Note, Defendant would be in default. (See id., Exs. A-C, § 8.) In the event of default, an increased interest rate would apply to Defendant's payments: 24% under Note 1; 18% under Note 2; and 16% under Note 3. (See Id. ¶ 11.) Additionally, if Defendant failed to honor the stock conversion provision of the Notes, Defendant agreed to pay “$250 per day the shares [were] not issued beginning on the 4th day after the conversion notice was delivered to [Defendant, ]” and “increas[ing] to $500 per day beginning on the 10th day.” (Id., Exs. A-C, § 8.)

         On February 6, 2015, Notes 1 and 2 became due and payable. (See Id. ¶¶ 18-19.) Defendant, however, failed to repay either, rendering Defendant in default on Notes 1 and 2. (See Id. ¶ 20.) On June 10, 2015, Note 3 became due and payable. Here again, Defendant failed to repay the Note, rendering Defendant in default on Note 3. (See Id. ¶ 22.) Finally, on September 4, 2015, nearly seven months after Defendant allegedly defaulted on the Notes, Plaintiff attempted to convert some of the amount due under Note 1 into stock. (See Id. ¶ 23.) Defendant failed to deliver the converted stock, rendering them in default with respect to Note 1's stock conversion provision. (See Id. ¶ 24.)

         DISCUSSION

         Plaintiff objects to Magistrate Judge Mann's recommendation that liquidated damages not be awarded. Plaintiff contends that the liquidated damages are not disproportionate to Plaintiff's actual damages, and that damages as a result of Defendant's breach were not easily ascertainable at the time the parties entered into the contract. (See Objection, at *4.) Further, Plaintiff argues that it is Defendant's burden to prove that liquidated damages constitute an unenforceable penalty, and that Defendant has waived its right to do so as a result of its default. (See id.)

         I. The Court's Independent Obligation to Ensure the Appropriateness of Damages.

         As a threshold matter, the Court rejects Plaintiff's argument that it should not address the appropriateness of liquidated damages where the party against whom those damages are to be assessed is in default. (See Objection, at *9-10.) The Court has an independent obligation to determine whether damages to be awarded are appropriate. This role does not change simply because one party is in default. “Even when a default judgment is warranted based on a party's failure to defend, the allegations in the complaint with respect to the amount of the damages are not deemed true. The district court must instead conduct an inquiry in order to ascertain the amount of damages with reasonable certainty.” Credit Lyonnais Sec. (USA), Inc. v. Alcantara, 183 F.3d 151, 155 (2d Cir. 1999) (internal citations omitted). Indeed, “[c]ourts should take great care in entering default judgment, ensuring if at all possible that both parties have their cases judged on the merits.” Liberty Mut. Ins. Co. v. Fast Lane Car Serv., Inc., 681 F.Supp.2d 340, 346 (E.D.N.Y. 2010); see also Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., Div. of Ace Young Inc., 109 F.3d 105, 111 (2d Cir. 1997) (reversing and remanding where district court simply accepted the non-defaulting parties statement of damages because “[t]his did not satisfy the court's obligation to ensure that the damages were appropriate”).

         II. Liquidated Damages Clauses Are Upheld Unless They Constitute a Penalty.

         To find a liquidated damages clause enforceable, a court must determine: first, that the amount of actual loss is difficult or impossible to estimate precisely; and second, that the liquidated damages sought bear a “reasonable proportion to the probable loss.” Leasing Serv. Corp. v. Justice, 673 F.2d 70, 73 (2d Cir. 1982). Magistrate Judge Mann found that the liquidated damages clause at issue here failed to satisfy both of these standards. The Court agrees.

         a. Damages Were Neither Difficult Nor Impossible to ...


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