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Auctus Fund, LLC v. Sunstock, Inc.

United States District Court, D. Massachusetts

September 23, 2019

AUCTUS FUND, LLC and EMA FINANCIAL, LLC, Plaintiffs,
v.
SUNSTOCK, INC., Defendant.

          MEMORANDUM AND ORDER

          WILLIAM G. YOUNG, DISTRICT JUDGE

         I. INTRODUCTION

         The plaintiffs, Auctus Fund, LLC (“Auctus”) and EMA Financial, LLC (“EMA”), seek damages for the defendant’s, Sunstock, Inc. (“Sunstock”), breaches of four contracts. Pls. Auctus Fund, LLC’s & EMA Financial LLC’s Mot. Entry Final J. Against Def. Sunstock, Inc. (“Mot. Final J.”), ECF No. 50. The Court previously entered summary judgment for Auctus and EMA on those breaches, Electronic Clerk’s Notes (“Summ. J. Order”), ECF No. 38, so the Court now must determine the damages that Sunstock owes Auctus and EMA.

         Although Auctus’s contracts indicate that Nevada law governs them, the Court sets aside that choice because Nevada has nothing to do with these contracts. See Pl. Auctus Fund, LLC’s Emergency Mot. Compel Conversion Debt Public Shares & Inj. & Equitable Relief Specific Performance Against Def. Sunstock, Inc. (“Auctus Mot.”), Ex. B-2, Convertible Promissory Note (“First Auctus Note”) § 4.6, ECF No. 10-4; Auctus Mot., Ex B-4, Convertible Promissory Note (“Second Auctus Note, ” and, collectively with the First Auctus Note, the “Auctus Notes”) § 4.6, ECF No. 10-6. Instead, the Court applies California law to Auctus’s contracts and determines that California’s usury laws limit damages to the principal that Sunstock owes. See Hardwick v. Wilcox, 217 Cal.Rptr.3d 883, 886 (Ct. App. 2017) (quoting Gibbo v. Berger, 19 Cal.Rptr.3d 829, 834 (Ct. App. 2004)). Further, the Court offsets the remaining principal that Sunstock owes in the amount of the interest that Sunstock paid prior to defaulting. See id. (citing Westman v. Dye, 4 P.2d 134, 135-39 (Cal. 1931)).

         In contrast, the Court enforces EMA’s contracts’ choice of New York law. See Pl. EMA Financial, LLC’s Emergency Mot. Compel Conversion Debt Public Shares & Inj. & Equitable Relief Specific Performance Against Def. Sunstock, Inc. (“EMA Mot.”), Ex. C-2, 10% Convertible Note (“First EMA Note”) § 4.6, ECF No. 5-5; EMA Mot., Ex. C-4, 12% Convertible Note (“Second EMA Note” and, collectively with the First EMA Note, the “EMA Notes”) § 4.6, ECF No. 5-5. The Court nonetheless concludes that New York law permits EMA to obtain only the unpaid principal plus interest at the contractual pre-judgment and statutory post-judgment rates. See Truck Rent-A-Ctr., Inc. v. Puritan Farms 2nd, Inc., 361 N.E.2d 1015, 1018 (N.Y. 1977). The Court rejects Auctus and EMA’s request that it order Sunstock to convert the cash value of damages into Sunstock equity stock, see Mot. Final J., Ex. 1, Pls.’ Auctus Fund, LLC’s & EMA Financial, LLC’s Proposed Final J. (“Proposed Final J.”) 2-3, ECF No. 50-1, because it deems monetary damages “at least adequately compensatory, ” see Auctus Fund, LLC v. First Columbia Gold Corp., Civ. A. No. 17-10543-ADB, 2019 WL 1316736, at *3 (D. Mass. Mar. 21, 2019) (Burroughs, J.).

         II. BACKGROUND

         A. Procedural History

         Auctus and EMA filed a complaint in this Court on December 13, 2018. Compl. Demand Jury Trial (“Compl.”), ECF No. 1. The complaint alleges that Sunstock breached four contracts, two with Auctus and two with EMA. Id. ¶¶ 39-51, 58-65. Additionally, it asserts that Sunstock violated federal securities laws and other duties that it owed Auctus and EMA under state law. Id. ¶¶ 52-57, 66-91. Auctus and EMA moved for a preliminary injunction and writ of garnishment on December 18, 2018. EMA Mot.; Mem. Law Supp. Pl. EMA’s Emergency Mot. Compel Conversion Debt Public Shares & Inj. & Equitable Relief Specific Performance, ECF No. 6; Pl. EMA’s Emergency Mot., Alternative, Attach Assets Def. Sunstock, Inc., ECF No. 7; Mem. Law Supp. Pl. EMA’s Emergency Mot., Alternative, Attach Assets Def. Sunstock, Inc., ECF No. 8; Auctus Mot.; Mem. Law Supp. Pl. Auctus’ Emergency Mot. Compel Conversion Debt Public Shares & Inj. & Equitable Relief Specific Performance, ECF No. 11; Pl. Auctus’ Emergency Mot., Alternative, Attach Assets Def. Sunstock, Inc., ECF No. 13; Mem. Law Supp. Pl. Auctus’ Emergency Mot., Alternative, Attach Assets Def. Sunstock, Inc., ECF No. 14. These motions also requested the Court to compel Sunstock’s transfer agent, a third party not before the Court, to convert damages into shares of Sunstock equity stock. Auctus Mot. 2; EMA Mot. 2.

         At a December 20, 2018 hearing, the Court ordered the outstanding motions combined with trial on the merits pursuant to Federal Rule of Civil Procedure 65(a). Electronic Clerk’s Notes, ECF No. 15. The Court further notified Auctus and EMA that it had concerns about whether it could enforce two of the contracts’ choice of Nevada law because the contracts might be usurious.

         On January 17, 2019, Sunstock having not yet answered the complaint, Auctus and EMA requested the Clerk to notice a default, ECF No. 17. Sunstock appeared two weeks later and answered the complaint. Answer, ECF No. 20; Def.’s Mot. Extend Time File Answer, ECF No. 21. After two more weeks passed, Sunstock filed oppositions to Auctus and EMA’s motions. Def.’s Mot. Opp’n Both Pls.’ Mots. Compel Conversion Debt Public Shares & Inj. & Equitable Relief Specific Performance Against Def. Sunstock, ECF No. 25; Def.’s Mem. Law Supp. Def.’s Opp’ns Both Pls.’ Mots. Compel Conversion Debt Public Shares & Inj. & Equitable Relief Specific Performance Against Def. Sunstock & Opp’n Both Pls.’ Original & Renewed Mots. Attach Assets Def. (“Opp’n”), ECF No. 27. Sunstock did not deny that it had defaulted on its debts to Auctus and EMA. See generally Opp’n. Sunstock objected, however, to Auctus and Sunstock’s damages calculation and request for the Court to convert damages into Sunstock equity stock. Id.

         The Court held a hearing on February 28, 2019, where it allowed Sunstock’s late answer and notified the parties that it would treat Auctus and EMA’s previously filed motions as summary judgment motions on the complaint’s contract claims. Electronic Clerk’s Notes, ECF No. 33. Shortly after that hearing, Sunstock’s counsel withdrew. Mot. Withdraw Counsel Def., ECF No. 35; Electronic Clerk’s Notes, ECF No. 36. To date, replacement counsel has not appeared on Sunstock’s behalf in this case. At a hearing on March 7, 2019, the Court entered judgment on the merits of the complaint’s contract claims against Sunstock.[1] Summ. J. Order. Because Auctus and EMA had filed a brief on damages only on the morning of the hearing, see Pls.’ Mot. File Suppl. Mem. Late & Exceed Page Limitations (“Pls.’ Mot. File Late”), ECF No. 37; Pls.’ Mot. File Late, Ex. 1, Pl. Auctus Fund, LLC’s & EMA Financial, LLC’s Suppl. Mem. Supp. Converted Mots. Summ. J. Contract & Implied Covenant Claims (Counts III & IV) Alone (“Damages Br.”), ECF Nos. 37-1, the Court postponed a hearing on damages until March 20, 2019. Summ. J. Order.

         On that day, Auctus and EMA filed a motion for leave to file a further brief on the law governing damages. Pls. Auctus Fund, LLC & EMA Financial, LLC’s Mot. Leave File Further Suppl. Memorandum, ECF No. 39. At the hearing, the Court took the issue of damages under advisement and later issued an order on March 21, 2019, which allowed Auctus and EMA to file their brief. Electronic Clerk’s Notes, ECF No. 42; Electronic Order, ECF No. 40; see also Pl. Auctus Fund, LLC’s & EMA Financial, LLC’s Request Leave File Instant Further Suppl. Mem. Supp. Their Converted Mots. Summ. J. Contract & Implied Covenant Claims (Counts III & IV) Alone, ECF No. 41.

         While reviewing Auctus and EMA’s submissions, on May 6, 2019, the Court ordered Auctus to clarify the basis for this Court’s jurisdiction over Auctus’s claims. Order Show Cause, ECF No. 43. Auctus responded on May 28, 2019, ECF No. 45, and the Court affirmed that it had jurisdiction on May 30, 2019, ECF No. 48.[2] Auctus and EMA filed a motion for entry of final judgment on June 27, 2019, in which they requested unpaid principal amounts on the loans with contractual and statutory interest and attorneys’ fees. Mot. Final J. Auctus further asked the Court to award punitive damages under the Massachusetts Consumer Protection Act, Massachusetts General Laws chapter 93A (“Chapter 93A”), even though the Court had not granted judgment on the merits or entered a default on that count. Compare Summ. J. Order., with Mot. Final J. Ex. at 1.

         B. Facts

         The Court draws the facts from the uncontested exhibits and uncontroverted averments in affidavits submitted in Auctus and EMA’s summary judgment motions. Auctus is a Boston-based limited liability company, organized under Delaware law. Auctus Mot., Ex. B-1, Securities Purchase Agreement (“First Auctus SPA”) 1, ECF No. 10-3; id., Ex. B-3, Securities Purchase Agreement (“Second Auctus SPA”) 1, ECF No. 10-5; Compl. ¶ 4. EMA maintains its headquarters in New York City, although it was formed in Delaware. EMA Mot., Ex. C-1, Securities Purchase Agreement (“First EMA SPA”) 1, ECF No. 5-4; id., Ex. C-3, Securities Purchase Agreement (“Second EMA SPA”) 1, ECF No. 5-6; Compl. ¶ 5. Sunstock incorporated in Delaware and maintains its principal place of business in Sacramento, California. See First Auctus SPA 1; Second Auctus SPA 1; First EMA SPA 1; Second EMA SPA 1; Compl. ¶ 6.

         The complaint alleges that Sunstock led Auctus and EMA to believe that Sunstock had a strategy to invest in California convenience stores and commercial and residential real estate. Compl. ¶¶ 10-15. Auctus and EMA further relate that Sunstock announced that it intended to “plans to divest up to half of its cash proceeds in SILVER BULLION.” Id. ¶¶ 10, 16-18.

         Auctus and EMA say that they decided to invest in Sunstock based on these representations, which they contend were false. Id. ¶¶ 10-38. Auctus agreed to pay Sunstock $112, 250 on May 24, 2017. First Auctus SPA 1, First Auctus Note 1. About six months later, on October 11, 2017, Auctus gave Sunstock an additional $85, 000. Second Auctus SPA 1; Second Auctus Note 1. Each Auctus Note mandates that Sunstock pay 12% interest on the principal amount that it received. First Auctus Note 1; Second Auctus Note 1.

         On June 5, 2017, EMA and Sunstock executed agreements providing Sunstock with $115, 000. First EMA SPA 1; First EMA Note 1. On October 11, 2017, EMA and Sunstock concluded a second deal, in which Sunstock received an additional $85, 000. First EMA SPA 1; Second EMA Note 1. The First EMA Note requires Sunstock to pay 10% interest, while the Second EMA Note sets interest at 12%. Id.

         All of these notes include a provision entitled “Article III: Events of Default.” Each note’s section III.1 indicates that Sunstock’s failure to make principal or interest payments on time constitutes an “Event of Default.” Article III in the Auctus and EMA Notes provide that should Sunstock default, Sunstock would owe 150% of (1) the principal yet to be paid; (2) all unpaid interest; and (3) interest on the unpaid amounts (together, the “Default Sum”). The same article in the Auctus and EMA Notes provide Auctus and EMA with the right to convert that sum into equity stock in Sunstock. Article III of the Notes also mandates various other flat fees for breach of certain of the notes’ terms.

         The prefaces to the Auctus and Second EMA Notes indicate that the interest rate on payments due on default (the “Default Rate”) is “the lesser of (i) twenty four percent (24%) or (ii) the maximum allowed by law.” The First EMA Note’s preface states that its Default Rate is 24%; it omits references to any legal cap on interest. Section 4.6 of the Auctus Notes specifies that Nevada law governs the contract, while the same section of EMA Notes selects New York law. See First EMA Note 20; First Auctus Note 20; Second Auctus Note 20; Second EMA Note 20.

         On June 22, 2019, EMA notified Sunstock that it believed that Sunstock defaulted on March 6, 2018. EMA Mot., Ex. 1, ECF No. 5-2. EMA reports that Sunstock owed it $57, 720 in principal and $8, 388.03 in original interest on the First EMA Note and $85, 000 in principal and $4, 080 in original interest on the Second EMA Note. Id. EMA additionally requested default interest and penalties. Id.

         On July 9, 2018, two days before the First Auctus Note matured, Auctus sent Sunstock two letters asserting that Sunstock had defaulted. Auctus Mot., Ex. B-5 at 1, ECF No. 10-7; id. Ex. B-6 at 1, ECF No. 10-8. According to the letters, Sunstock had paid $31, 931.07 on the principal and did not have unpaid accrued interest on the First Auctus Note but owed the entirety of the principal plus $6, 958.36 on the Second Auctus Note. See id. The letters also demanded default interest and penalties from breaches of other provisions of the Auctus Notes. Id.

         III. ANALYSIS

         The Court must answer three questions to assess the damages that Sunstock owes Auctus and EMA on the contract claims. First, the Court must determine the law that governs each contract. Second, the Court must calculate the damages that Sunstock owes on each Note, with an eye to the governing law. Third, the Court must decide whether to convert the dollar amount owed to Auctus and EMA, if any, into shares.

         A. Legal Framework

         The Court rules that California law applies to the Auctus Notes and New York law applies to the EMA Notes. Since the Court sits in Massachusetts, it applies Massachusetts’s choice of law approach to determine the law governing Auctus and EMA’s damages. See Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 494, 496 (1941); Davidson v. Cao, 211 F.Supp.2d 264, 273 (D. Mass. 2002) (Woodlock, J.) (“A federal court adjudicating state law claims that are pendent to a federal claim must apply the choice of law rules of the forum state.” (quoting Rogers v. Grimaldi, 875 F.2d 994, 1002 (2d Cir. 1989))). Although the Court could “choose[] to forgo independent choice of law analysis and accept the parties’ agreement” that Nevada law applies, the Court instead chooses to analyze choice of law independently because doing so furthers justice. See Shay v. Walters, 702 F.3d 76, 80 (1st Cir. 2012) (quoting Borden v. Paul Revere Life Ins. Co., 935 F.2d 370, 375 (1st Cir. 1991)) (accepting parties’ implicit assumption that Massachusetts law applies while acknowledging that courts may permissibly disregard such acquiescence).

         Before deciding which law to apply, Massachusetts courts “consider whether the choice between the laws of the involved jurisdictions will affect the legal result.” Lou v. Otis Elevator Co., 77 Mass.App.Ct. 571, 584 (2010) (citing Cohen v. McDonnell Douglas Corp., 389 Mass. 327, 332 n.7 (1983)). Here, the Court observes a true conflict exists between Nevada and Delaware, which do not allow corporations to raise usury defenses, and California, Massachusetts, and New York, which allow corporations to void usurious loans under certain circumstances. Compare Del. Code tit. 6, § 2306; Nev. Rev. Stat. § 99.050, with Cal. Const. art. XV, Mass. Gen. Laws ch. 271, § 49, N.Y. Penal Law § 190.40; N.Y. Gen. Oblig. Law § 5-521. Moreover, California, Massachusetts, and New York cap interest at different rates and offer different exceptions to their regulatory regimes. See Cal. Const. art. XV; Mass. Gen. Laws ch. 271, § 49; N.Y. Penal Law § 190.40; N.Y. Gen. Oblig. Law § 5-521.

         Applying Massachusetts choice of law principles, the Court declines to enforce the Auctus Notes’ choice of Nevada law, as Nevada has no apparent relationship to Auctus, Sunstock, or the subject matter of the Auctus Notes. Instead, the Court applies California law because it has the most significant relationship to the Auctus Notes. The Court, however, enforces the EMA Notes’ choice of New York law because EMA maintains its principal place of business in New York, and the relevant New York contract law doctrines do not contravene California’s fundamental public policies.

         1. Choice of Law Clause

         The Court rules that the Auctus Notes’ choice of law clause is void. The EMA Notes’ choice of law clause, however, is valid. Where contracting parties “have expressed a specific intent as to the governing law, Massachusetts courts will uphold the parties’ choice as long as the result is not contrary to public policy.” Oxford Glob. Res., LLC v. Hernandez, 480 Mass. 462, 468 (2018) (quoting Hodas v. Morin, 442 Mass. 544, 549–50 (2004)). Massachusetts courts decide whether to enforce a choice of law agreement using “the two-tiered analysis set forth in the Restatement (Second) of Conflict of Laws § 187(2) (1971) [the ‘Restatement’].” See Hodas, 442 Mass. at 550. The Restatement presumes that the parties’ choice of law applies unless:

(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis ...

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