United States District Court, D. Massachusetts
MEMORANDUM AND ORDER
WILLIAM G. YOUNG, DISTRICT JUDGE
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.
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)).
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.).
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.
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.
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.
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. 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.
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.
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. 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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).
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.
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.
Choice of Law Clause
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
(a) the chosen state has no substantial relationship to the
parties or the transaction and there is no other reasonable