Power UP Lending Grp. v. Proto Script Pharm. Corp.

POWER UP LENDING GROUP, LTD, Plaintiff, v. PROTO SCRIPT PHARMACEUTICAL CORP., Defendant.

No. CV 17-4083 (DRH) (AKT)

United States District Court, E.D. New York

August 20, 2021

AMENDED REPORT AND RECOMMENDATION

A KATHLEEN TOMLINSON, Magistrate Judge:

I. Preliminary Statement

Plaintiff Power Up Lending Group, LTD. (“Plaintiff” or “Power Up”) commenced this action against Defendant Proto Script Pharmaceutical Corp (“Defendant” or “Proto Script”) alleging, among other things, default on a promissory note. See generally Complaint (“Compl.”) [DE 1].

Proto Script's counsel entered an appearance in this action on August 3, 2017 [DE 5] and subsequently filed an Answer on behalf of Proto Script on September 19, 2017 [DE 14]. Following limited discovery, which included Proto Script's failure to timely serve Rule 26(a) Initial Disclosures [DE 19-20] and failure to respond to discovery requests [DE 21-22], Proto Script's counsel moved to be relieved as counsel of record [DE 24]. On March 6, 2018 Judge Spatt, who was then assigned to this case ^[1] permitted Proto Script's counsel to withdraw and gave Proto Script 30 days to retain new counsel. DE 26. Proto Script failed to retain new counsel on its behalf, as is required under Second Circuit law for a corporate entity. See Grace v. Bank Leumi Trust Co. of N.Y., 443 F.3d 180, 192 (2d Cir. 2006).

On October 1, 2020, the Clerk of the Court entered a Certificate of Default against Proto Script, pursuant to Rule 55(a) of the Federal Rules of Civil Procedure. DE 29. Power Up moved for entry of default judgment against Proto Script on October 2, 2020. See Plaintiff's Notice of Motion for Entry of Default Judgment (“Pl.'s Not. of Mot.”) [DE 30]. Judge Hurley referred the motion to this Court for a Report and Recommendation as to whether the motion should be granted and, if so, the appropriate amount of damages, costs, and/or fees, if any, to be awarded. See October 2, 2020 Electronic Order. For the reasons which follow, the Court respectfully recommends to Judge Hurley that Power Up's motion be GRANTED.

II. Background

A. Factual Background

The following facts are taken solely from the Complaint and are accepted as true for purposes of the instant motion. See Finkel v. Romanowicz, 577 F.3d 79, 84 (2d Cir. 2009).

Power Up is a corporation organized and existing under the laws of the Commonwealth of Virginia^[2] and maintains an office in Nassau County, New York. Compl. ¶ 7; Convertible Promissory Note at 1, attached as Ex. A to the Affidavit of Curt Kramer (“Kramer Aff.”) [DE 30-2]; Securities Purchase Agreement, attached as Ex. B to Kramer Aff. [DE 30-3] at 1. Proto Script is a corporation organized and existing under the laws of the State of Nevada, with an office in the City of Rancho Cucomonga, California. Id. ¶ 8. Power Up invests in publicly traded “nano-cap” companies, otherwise known as “penny stock companies, ” whose securities are traded on the over-the-counter market. Id. ¶ 2. These companies are often capital constrained which hinders their access to banks or investment firms. Id.; Kramer Aff. ¶ 3. It is Power Up's practice to provide capital to such companies in return for shares purchased at a discount to market price. Id. Proto Script is one such penny stock company in which Power Up invested. See id.

On January 31, 2017, Proto Script, as the borrower, executed and delivered to Power Up a Convertible Promissory Note in the amount of $203, 500.00 (the “Note”). Id. ¶ 12. The Note was issued pursuant to a Securities Purchase Agreement (the “Purchase Agreement”) which provides for “certain issuances of, and conversion rights in and to, [Proto Script's] stock.” Id.; Kramer Aff. ¶ 4. The Note and Purchase Agreement (collectively, the “Instruments”) “provid[ ] that the venue for any action for lawsuit between the parties would be in the State of New York, County of Nassau and that the instruments would be governed by and construed in accordance with the laws of the State of Virginia.” Id. ¶ 13; Kramer Aff. ¶ 5. The Note also provides that Proto Script must remain current in its filing obligations under the Exchange Act of 1933. Id. ¶ 14; Kramer Aff. ¶ 6.

Proto Script failed to file its Form 10K Annual Report with the Securities and Exchange Commission (the “SEC”) covering the period ending December 31, 2016, which was due to be filed by March 30, 2017. Id. ¶ 15; Kramer Aff. ¶ 7. Under the terms of the Note, the failure to file the required SEC filings constitutes an event of default and breach. Id. ¶¶ 15-16. In such circumstances, Section 3.9 of the Note provides that Power Up is entitled to recover 150% of the outstanding principal amount of the Note, together with accrued and unpaid interest and default interest. Id. ¶ 16; Kramer Aff. ¶ 9. On April 24, 2017, Power Up sent a letter notifying Proto Script of its default under the Note. Id. ¶ 17; Notice of Default, attached as Ex. D to Kramer Aff. [DE 30-5]. In total, Power Up claims it has been damaged “in the amount not less than $305, 250, together with interest and default interest.” Id. ¶¶ 3, 18.

Based on the these allegations, Power Up asserts the following causes of action against Proto Script: (1) “Promissory Notes Defaults, ” (2) “Breach of Contract - Lost Profits;” (3) “Breach of Contract - Litigation Expenses;” (4) “Violations of Section 10(b) of the Exchange Act and Rule 10(b)-5b;” and (5) “Injunctive and Equitable Relief.” Id. ¶¶ 11-44.

B. Procedural History

On July 11, 2017, Power Up commenced this action against Proto Script. See generally Compl. Proto Script's counsel entered an appearance on August 3, 2017 [DE 5] and subsequently filed an Answer on behalf of Proto Script on September 19, 2017. DE 14. An Initial Conference was held on September 22, 2017, at which ctime ounsel for both parties appeared. DE 16. At that time, a discovery schedule was adopted, a deadline for the parties' exchange of Rule 26(a) Initial Disclosures was set and a Discovery Status Conference was scheduled for February 2, 2018. DE 16. After the deadline to exchange Rule 26(a) Initial Disclosures had passed, Power Up's counsel advised the Court on October 19, 2017 that Proto Script had failed to produce its disclosures within the time allotted by the Court. DE 19. As a result, Proto Script produced its Rule 26(a) Initial Disclosures later that day. DE 20. On January 9, 2018, Power Up's counsel advised the Court that Proto Script failed to produce responses to Power Up's discovery demands and sought judicial intervention to compel the responses. DE 21. In response, Proto Script's counsel stated that he was having issues communicating with Proto Script's representative and, consequently, intended to file a motion seeking to relieve is law firm, Phillipson & Uretsky, LLP as counsel of record for Proto Script. DE 22. In light of the anticipated filing of such a motion, the Court adjourned without date the scheduled Discovery Status Conference pending resolution of the motion. See February 1, 2021 Electronic Order.

As a result of Proto Script's failure to adequately communicate with its counsel, among other things, its counsel filed a motion on January 31, 2018, pursuant to Local Civil Rule 1.4, to withdraw the law firm of Phillipson & Uretsky, LLP, by Jonathan Uretsky, Esq., as counsel of record. DE 24-1 ¶¶ 14-15. On March 6, 2018, Judge Spatt granted the motion and gave Proto Script 30 days to retain new counsel. DE 26. Proto Script failed to retain new counsel to appear on its behalf and failed to participate further in this action.

After there had been no activity on the docket for some time, Judge Hurley ordered Power Up to show cause why the case should not be dismissed for failure to prosecute the action. See September 16, 2020 Electronic Order. In response, Power Up stated that it had previously made attempts to settle the action to no avail, and that it was otherwise hamstrung from moving the case forward as a result of Proto Script's failure to retain new counsel in accordance with the Court's March 6, 2018 Order. See DE 27. Consequently, Power Up requested leave to file a motion for entry of default judgment under Rule 55(b). Judge Hurley granted that application on September 30, 2020. See September 30, 2020 Electronic Order.

Thereafter, Power Up requested that a Certificate of Default be entered by the Clerk of the Court. The Certificate was entered on October 1, 2020, pursuant to Rule 55(a).^[3] See DE 28-29. Power Up moved for entry of default judgment against Proto Script on October 2, 2020. See Pl.'s Not. of Mot. [DE 30]. Its counsel submitted an Affidavit of Service demonstrating that Proto Script was served with notice of the instant motion. DE 30-7. Power Up's motion seeks an award of $305, 250 in damages. Id. In support of the motion, Power Up also filed a Memorandum of Law [DE 30-6] and the Affidavit of Curt Kramer, CEO of Power Up [DE 31-1], along with exhibits attached to that affidavit.

Judge Hurley referred the motion to this Court for a Report and Recommendation as to whether the motion should be granted and, if so, the appropriate amount of damages, costs, and/or fees, if any, to be awarded. See October 2, 2020 Electronic Order. Following the referral, the Court requested that Power Up confirm that it was not seeking attorneys' fees and costs in connection with its motion since that issue was not clear. See March 2, 2021 Electronic Order. Power Up confirmed that it is not seeking attorneys' and costs on March 2, 2021. DE 31. On June 24, 2021, Power Up further clarified that it is only seeking entry of default judgment on its “Promissory Notes Defaults” claim and not the remaining claims pleaded in the Complaint. See DE 32.

III. Standard of Review

Pursuant to Federal Rules of Civil Procedure 16(f) and 37(b) “[a...