Opinion
21-CV-5397 (RA) (RWL)
08-26-2022
PAYPOLITAN OU, a corporation organized under the laws of Estonia, Plaintiff, v. ELOISA MARCHESONI, and GIACOMO ARCARO, Defendants.
REPORT AND RECOMMENDATION TO HON. RONNIE ABRAMS: DAMAGES INQUEST
ROBERT W. LEHRBURGER, United States Magistrate Judge.
This is a breach of contract case in which Plaintiff Paypolitan OU (“Paypolitan” or “Plaintiff”) seeks recovery of damages from Defendants Eloisa Marchesoni and Giacomo Arcaro (collectively, “Defendants”) for absconding with Plaintiff's cryptocurrency in breach of the parties' contract. By orders dated May 26, 2022, the Honorable Ronnie Abrams, U.S.D.J., granted default judgment against Defendants and referred this matter to me to conduct an inquest on damages. For the reasons set forth below, I recommend that the Court award Plaintiff $809,258.50 in damages and $532.00 in costs.
The facts are drawn from the Complaint (Dkt. 1) (“Compl.”); the Declaration For Judgment By Default of Brian G. Kelley, filed Nov. 23, 2021 (Dkt. 43) (“Kelley Decl.”); the Declaration Of Nils Tharandt Ortiz filed Nov. 23, 2021 (Dkt. 44) (“First Ortiz Decl.”); the Second Declaration Of Nils Tharandt Ortiz filed June 24, 2022 (Dkt. 55-1) (“Second Ortiz Decl.”); and all exhibits thereto. The Court also cites to Plaintiff's Proposed Findings Of Fact And Conclusions Of Law filed June 24, 2022 (Dkt. 54-1) (“FFCL”).
A. Paypolitan And Its EPAN Cryptocurrency Token
Paypolitan is a corporation organized under the laws of Estonia, with its principal place of business in Germany. (Compl. ¶ 2.) Paypolitan is a financial technology company that primarily provides business-to-business payment-processing services. In connection with its business, Paypolitan created a cryptocurrency token called EPAN. (Compl. ¶ 8.) A cryptocurrency token is a virtual asset with independent value. (Second Ortiz Decl. ¶ 2.)
A cited reference that follows more than one sentence supports all preceding sentences that are not directly followed by a cited reference.
EPAN is “paired” with a major cyptocurrency token in order to provide liquidity. The paired token for EPAN is Ether coin (“ETH”), which is one of the most liquid cryptocurrencies that can be readily exchanged for U.S. dollars or any other currency at any time. (Second Ortiz Decl. ¶ 3.) EPAN is traded on multiple cyrpocurrency exchanges, the primary one for EPAN being UNISWAP. (Id. ¶ 4.)
Paypolitan created and funded a “liquidity pool” on UNISWAP. The liquidity pool contains both EPAN tokens and ETH tokens and facilitates exchanges of EPAN. The amount of ETH in the liquidity pool determines the value of the EPAN token. The more ETH tokens are added to the liquidity pool, the more the value of EPAN increases. Conversely, as ETH is removed from the liquidity pool, the value of EPAN decreases. (Id.; see also Compl. ¶ 21 n.5.) As of early April 2021, the value of Paypolitan's liquidity pool on UNISWAP was approximately $1.8 million. (Second Ortiz Decl. ¶ 5.)
B. The Agreement With Defendants To Promote EPAN And Increase Its Value
Defendant Marchesoni, a New York citizen, is a self-styled “Cryptoenthusiast” who holds herself out as a cyptocurrency influencer. (Compl. ¶¶ 3, 10.) Defendant Arcaro, also a New York citizen, participated in the events at issue as part of Marchesoni's team. (Id. ¶¶ 4, 11.)
On March 22, 2021, Marchesoni offered her services to Paypolitan to promote and increase the value of EPAN. (Compl. ¶¶ 12-13.) Over the ensuing days, Paypolitan and Defendants entered into an oral agreement (the “Agreement”). Specifically, Marchesoni and her team agreed they would promote EPAN to achieve an increase in value of EPAN to an initial value of approximately $2.40 (four times its value of $0.60 as of April 6, 2021), with an expected sustained value of $1.50. (Compl. ¶ 18.) As part of the plan, Paypolitan agreed to supply 700,000 EPAN tokens to Defendants solely for the purpose of Defendants' promoting and increasing the value of EPAN. (Compl. ¶ 19; Second Ortiz Decl. ¶ 7.) Defendants were to hold, but not use or transfer, the EPAN tokens. (Second Ortiz Decl. ¶ 9.)
As compensation to Defendants for their services, Paypolitan agreed that Defendants would be entitled to payment equal to 50 percent of the sustained increase in value of the 700,000 EPAN tokens, but only if they achieved a sustained value of $1.50. Accordingly, if and only if Defendants achieved a sustained value of $1.50 per EPAN token, they would be entitled to $315,000 as payment for their services, which they would be permitted to realize by retaining and/or selling some of the 700,000 EPAN tokens that were used in promotion. (Compl. ¶ 20.)
C. Defendants Unauthorized Liquidation Of EPAN Tokens
Pursuant to the Agreement, on April 6, 2021, Paypolitan transferred 700,000 EPAN tokens to Defendants. (Compl. ¶ 23.) Paypolitan had purchased the 700,000 EPAN on April 2, 2021, using 203 ETH, the equivalent of $435,075.69. (Second Ortiz Decl. ¶ 8.)
The market value of 1 ETH on April 2, 2021 was $2,143.23. 203 ETH x $2,143.23 = $435,075.69. (Second Ortiz Decl. ¶ 8 and Ex. 1.) The Court takes judicial notice of the historical financial data for the value of ETH cryptocurrency submitted by Defendants. See Fed. R. Civ. Ev. 201(b); Acticon AG v. China N.E. Petroleum Holding Ltd., 692 F.3d 34, 37 n.1 (2d Cir. 2012) (taking judicial notice of historical data regarding stock prices).
The Defendants began promoting EPAN tokens, resulting in an increase in value to $1.08 per token as of April 8, 2021. (Compl. ¶ 24.) But at that juncture, and without EPAN tokens having reached a sustained value of $1.50 as required by the Agreement, Defendants starting liquidating EPAN tokens and exchanging them for ETH from the Paypolitan liquidity pool - all for their own benefit, not promotion of EPAN tokens. (Compl. ¶¶ 25-34.) Specifically, on April 9, 2021, Defendants sold 263,605 EPAN tokens, enriching themselves by 112 ETH, and reducing the value of the Paypolitan liquidity pool by $232,076.32. (Compl. ¶ 25; Second Ortiz Decl. ¶ 10.) On May 12, 2021, Defendants sold the remaining 397,789 EPAN tokens, enriching themselves by 33 ETH, and reducing the value of the Paypolitan liquidity pool by $142,106.58. (Compl. ¶ 34; Second Ortiz Decl. ¶ 11.)
The market value of 1 ETH on April 9, 2021 was $2,072.11. 112 ETH x $2,072.11 = $232,076.32. (Second Ortiz Decl. ¶ 10 and Ex. 2.)
The market value of 1 ETH on May 12, 2021 was $4,306.26. 33 ETH x $4,306.26 = $142,106.58. (Second Ortiz Decl. ¶ 11 and Ex. 3.) In addition to the sales of April 9 and May 12, 2021, Defendants apparently liquidated smaller amounts of EPAN tokens at other times between those dates. (See Compl. ¶ 32.) Neither the Complaint nor Plaintiff's inquest submissions specify the amount or value of EPAN sold by Defendants on those additional occasions. During the inquest conference held on August 24, 2022, Plaintiff represented that it is not seeking damages in connection with those much smaller transactions.
As a result of Defendants' unauthorized sales of large amounts of EPAN tokens over a short period of time, the price of EPAN tokens cratered to $0.30, an amount far lower than the price of EPAN tokens before the parties' Agreement pursuant to which Defendants were to promote and increase the value of EPAN tokens. (Compl. ¶ 35.)
JURISDICITON AND PROCEDURAL HISTORY
The Court has subject matter jurisdiction because there is complete diversity of citizenship between the parties and the amount in controversy exceeds $75,000 (exclusive of interest and costs). (Compl. ¶¶ 2-5); see 28 U.S.C. § 1332. The Court has personal jurisdiction over the Defendants as they are New York citizens. (Compl. ¶ 6.)
Plaintiff commenced this action on June 18, 2021. (Dkt. 1.) The Complaint asserted several causes of action, including breach of contract, breach of bailment, unjust enrichment, fraudulent inducement, and conversion. On July 13, 2021, Plaintiff served the Complaint and summons on Defendants. (Dkt. 18-19; see also Dkt. 28 at 1-2 (finding service proper and accepting filing of proof of service two days late).) On September 10, 2021, the Court ordered Defendants to answer, or seek an extension to do so, by October 1, 2021. (Dkt. 28 at 2.) On October 1, 2021, both Defendants filed letters requesting an extension of time. (Dkt. 30-31.) The Court granted an extension, requiring Defendants to answer the complaint by November 5, 2021. In the event Defendants failed to do so, the Court's order directed Plaintiff to move for default judgment by November 12, 2021. (Dkt. 33.)
Neither Defendant filed any response to the Complaint or formally appeared. Accordingly, on November 6, 2021, Plaintiff applied for certificates of default against the Defendants, which the Clerk of Court issued on November 8, 2021. (Dkt. 34-39.) Plaintiff moved for default judgment that same day. (Dkt. 40.) Due to certain filing deficiencies, Plaintiff refiled its motion on November 23, 2021. (Dkt. 42.)
On May 2, 2022, the Court set a hearing date of May 25, 2022 for Defendants to show cause why default judgment should not be entered against them. (Dkt. 48.) On May 26, 2022, the day after the hearing, the Court granted Plaintiff's motion for default judgment against Defendants on Plaintiff's first cause of action for breach of contract. (Dkt. 50.)
The matter was referred to me for inquest on May 26, 2022. (Dkt. 51.) The following day, the Court issued an order requiring Plaintiff to submit Proposed Findings of Fact and Conclusions of Law by June 24, 2022 and requiring any answering papers from Defendants to be filed by July 7, 2022. (Dkt. 52.) Plaintiff filed its Proposed Findings and Conclusions in timely fashion. (Dkt. 54.) Defendants did not file any response. The Court held a conference on August 24, 2022 for the purpose of obtaining answers to the Court's questions.
LEGAL STANDARDS
When a defendant defaults, all well-plead facts alleged in the complaint, except those relating to the amount of damages, must be accepted as true. City Of New York v. Mickalis Pawn Shop, LLC, 645 F.3d 114, 137 (2d Cir. 2011) (“It is an ancient common law axiom that a defendant who defaults thereby admits all well-pleaded factual allegations contained in the complaint”) (internal quotations marks omitted); Finkel v. Romanowicz, 577 F.3d 79, 84 (2d Cir. 2009) (trial court is “required to accept all of [the plaintiff's] factual allegations as true and draw all reasonable inferences in its favor”). “This principle applies regardless of whether default is entered as a discovery sanction or for failure to defend.” Walpert v. Jaffrey, 127 F.Supp.3d 105, 129 (S.D.N.Y. 2015) (citation omitted). The court may also rely on factual allegations pertaining to liability contained in affidavits and declarations submitted by the plaintiff. See, e.g., Tamarin v. Adam Caterers, Inc., 13 F.3d 51, 54 (2d Cir. 1993); Fustok v. ContiCommodity Services, Inc., 873 F.2d 38, 40 (2d Cir. 1989). Nonetheless, the court “must still satisfy itself that the plaintiff has established a sound legal basis upon which liability may be imposed.” Shld, LLC v. Hall, No. 15-CV-6225, 2017 WL 1428864, at *3 (S.D.N.Y. April 20, 2017) (internal quotation marks omitted); see Finkel, 577 F.3d at 84.
Once liability has been established, a plaintiff must provide admissible evidence establishing the amount of damages with reasonable certainty. Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., Division Of Ace Young Inc., 109 F.3d 105, 111 (2d Cir. 1997) (District Court “could not just accept [Plaintiff's] statement of damages at “face value” without satisfying “the court's obligations to ensure that the damages were appropriate”); see also Lenard v. Design Studio, 889 F.Supp.2d 518, 527 (S.D.N.Y. 2012) (in an inquest following a default, “[a] plaintiff must... substantiate a claim with evidence to prove the extent of damages”).
To assess whether the plaintiff has established a sufficient basis for damages, a court has the discretion, but is not required, to hold a hearing. See Fed.R.Civ.P. 55(b)(2); Fustok 873 F.2d at 40. An inquest into damages may be conducted on the papers, without an evidentiary hearing where there is a sufficient basis on which to make a calculation. See Bricklayers & Allied Craftworkers Local 2, Albany, New York Pension Fund v. Moulton Masonry & Construction, LLC, 779 F.3d 182, 189 (2d Cir. 2015); Tamarin 13 F.3d at 53-54; Maldonado v. La Nueva Rampa, Inc., No. 10-CV-8195, 2012 WL 1669341, at *2 (S.D.N.Y. May 14, 2012). As supplemented by Plaintiffs' answers to the Court's questions at the August 24, 2022 conference, there is sufficient basis to do so here; no party has requested an evidentiary hearing; and the Court has determined that none is needed.
LIABILITY
Judge Abrams granted Plaintiff's default judgment motion with respect to Plaintiff's breach of contract claim. Accepting the well-plead allegations of the Complaint as true, supplemented by the declarations of record, the Court finds that Plaintiff has established Defendants' liability for breach of contract.
To prevail on a breach of contract claim under New York law, a plaintiff must establish four elements: (1) the existence of a contract; (2) the plaintiff's performance of that contract; (3) the defendant's breach of that contract; and (4) that the plaintiff suffered damages as a result of the breach. Terwilliger v. Terwilliger, 206 F.3d 240, 246 (2d Cir. 2000) (applying New York law). All four elements are readily met here. Plaintiff and Defendant entered into the Agreement. (Compl. ¶¶ 18-23; Second Ortiz Decl. ¶ 7.) Plaintiff performed by transferring 700,000 EPAN tokens to Defendants. (Compl. ¶ 23; Second Ortiz Decl. ¶ 8.) Even though Defendants did not achieve a sustained value of $1.50 per EPAN token, Defendants liquidated the 700,000 tokens with which they were provided, discontinued contact with Plaintiff, and never returned any tokens or monetary equivalent thus breaching the Agreement. (Compl. ¶¶ 25-34, 36; Second Ortiz Decl. ¶¶ 10-11.) As a result, Plaintiff incurred monetary damage. (Compl. ¶¶ 35, 37, 44; Second Ortiz Decl. ¶¶ 10-13.) Plaintiff's well-plead allegations and supporting declarations thus establish Defendants liability for breach of contract.
Plaintiff's proposed Conclusions of Law invoke New York law. In the absence of any opposition or indicia of conflict with laws of other relevant jurisdictions, the Court applies New York law. See Fieger v. Pitney Bowes Credit Corp., 251 F.3d 386, 393 (2d Cir. 2001) (“A federal trial court sitting in diversity jurisdiction must apply the law of the forum state to determine the choice-of-law. In New York, the forum state in this case, the first question to resolve in determining whether to undertake a choice of law analysis is whether there is an actual conflict of laws. It is only when it can be said that there is no actual conflict that New York will dispense with a choice of law analysis.”) (internal quotation marks and citations omitted).
DAMAGES
As Defendants' liability has been established, the Court turns to evaluating damages and other relief. Plaintiff seeks: (1) breach of contract damages totaling $809,258.59; and $532 in costs. Plaintiff has provided sufficient evidence to support each of those items.
A. Breach of Contract Damages
The Court begins its analysis with the “fundamental principle that damages for breach of contract should put the plaintiff in the same economic position he would have been in had the defendant fulfilled the contract.” Lucente v. International Business Machines Corp., 310 F.3d 243, 262 (2d Cir. 2002) (citing Indu Craft, Inc. v. Bank Of Baroda, 47 F.3d 490, 495 (2d Cir.1995)). As the Second Circuit has explained, “a plaintiff may seek two distinct categories of damages” in a breach of contract case, (1) “general or market damages, and (2) special or consequential damages.” Schonfeld v. Hilliard, 218 F.3d 164, 175 (2d Cir.2000) (internal quotation marks omitted). “A plaintiff is seeking general damages when he tries to recover the value of the very performance promised [,]” whereas consequential damages “compensate a plaintiff for additional losses (other than the value of the promised performance) that are incurred as a result of the defendant's breach.” Id. at 175-76 (internal citations and quotations omitted). Once the fact of damages is established, a plaintiff is entitled to the general damages that are the natural and probable consequence of the breach. Kenford Co., Inc. v. County of Erie, 73 N.Y.2d 312, 319, 540 N.Y.S.2d 1, (N.Y.1989). To collect consequential damages, however, a plaintiff must demonstrate that the parties contemplated those special damages as the probable result of the breach at the time of or prior to contracting. Id. Further,“[i]t is settled Second Circuit law that in a breach of contract case, damages are calculated at the time of the breach.” Boyce v. Soundview Tech. Group, Inc., 464 F.3d 376, 384 (2d Cir.2006).
Here, Plaintiff's damages are readily calculated. Plaintiff seeks to recover damages based on three losses resulting from Defendants' breach of the Agreement: (1) $435,075.69 expended by Plaintiff on April 2, 2021 to purchase the 700,000 EPAN tokens that Defendants liquidated for their own benefit without having achieved the agreed upon benchmark for Defendants to be paid for their services; (2) $232,076.32, the amount by which Defendants reduced the value of the Paypolitan liquidity pool when they breached the Agreement on April 9, 2021; and (3) $142,106.58, the amount by which Defendants reduced the value of the Paypolitan liquidity pool, when they breached the Agreement on May 12, 2021. (See Second Ortiz Decl. ¶¶ 9-11.)
As set forth in the facts above, those dollar amounts are the actual amounts lost by Plaintiff from Defendants' breach of the parties' Agreement. The total sum of the three loss amounts is $809,258.59.
B. Costs
A prevailing party is entitled to recover costs. See Fed.R.Civ.P. 54(d)(1) (“Unless a federal statute, these rules, or a court order provides otherwise, costs - other than attorney's fees - should be allowed to the prevailing party”). Plaintiff is the prevailing party by default. Plaintiff seeks $532 in costs for the court filing fee ($402) and service of process ($130). (FFCL ¶ 13.) Costs associated with docket fees and other miscellaneous fees, including process servers, expressly may be recovered pursuant to Local Civil Rule 54.1(10), and are routinely awarded. See e.g., Malletier v. Artex Creative International Corp., 687 F.Supp.2d 347, 364-65 (S.D.N.Y. 2010) (costs such as filing fees and other ancillary costs are “typically awarded when a defendant defaults”); Tips Exports, Inc. v. Music Mahal, Inc., No. 01-CV-5412, 2007 WL 952036, *11 (E.D.N.Y. Mar. 27, 2007) (reimbursing plaintiff for process servers and postage); Shannon v. Fireman's Fund Insurance Co., 156 F.Supp.2d 279, 305 (S.D.N.Y. 2001) (reimbursing plaintiff for filing fees and shipping costs). The Court has reviewed Plaintiff's submissions and finds sufficient proof of the costs paid and that they are recoverable. Accordingly, Plaintiff should be awarded $532 in costs.
CONCLUSION
For the foregoing reasons, I recommend awarding Plaintiff: $809,258.59 in damages and $532 in costs.
SERVICE
Within three days after entry, Plaintiff shall serve this Report and Recommendation on Defendants through means previously approved by the Court. Within seven days after entry, Plaintiff shall file proof of service.
OBJECTIONS AND RIGHT TO APPEAL
Pursuant to 28 U.S.C. § 636(b)(1) and Rules 72, 6(a), and 6(d) of the Federal Rules Of Civil Procedure, the parties shall have fourteen (14) days to file written objections to this Report And Recommendation. Such objections shall be filed with the Clerk of the Court, with extra copies delivered to the Chambers of the Honorable Ronnie Abrams, United States Courthouse, 40 Foley Square, New York, New York 10007, and to the Chambers of the undersigned, United States Courthouse, 500 Pearl Street, New York, New York 10007. Failure to file timely objections will result in a waiver of objections and will preclude appellate review.