Schiff v. Yayi International Inc.

Background

The plaintiffs alleged that they loaned money to Yayi International Inc. through individual promissory notes and that Yayi and Euro Pacific Capital Inc. also entered into a Securities Purchase Agreement. The plaintiffs claimed that Yayi defaulted on its payment obligations and asserted claims for breach of contract and breach of the duty of good faith and fair dealing.

Yayi was served with the complaint and amended complaint but did not respond or otherwise appear. The Clerk entered a default, and the court later ordered default on liability and referred the matter to Magistrate Judge Kevin Nathaniel Fox to determine damages. The plaintiffs sought $8,920,000 in unpaid principal, interest, additional amounts for Euro Pacific’s alleged reputational damage and business losses, and attorney fees and costs.

Magistrate Judge’s Recommendation and Plaintiffs’ Objections

Magistrate Judge Fox recommended denying damages and attorney fees because the plaintiffs’ submissions did not establish their losses with sufficient evidence. The materials included one promissory note, although the plaintiffs sought recovery on all of the notes, and a Securities Purchase Agreement that omitted referenced exhibits. The plaintiffs also did not provide evidence showing that the notes had matured or connecting the single note to the investors they claimed to represent. The recommendation also found that the request for attorney fees was not sufficiently supported.

The plaintiffs objected and asked to supplement the inquest record with more than 4,000 pages of material. They argued that the additional documents would cure the evidentiary deficiencies and support their claims for principal, prejudgment interest, and attorney fees. The court noted that the plaintiffs had been directed to submit proof of damages during the damages proceeding and had not provided a compelling explanation for failing to submit the new material to Magistrate Judge Fox earlier.

Court’s Analysis

The court denied the request to supplement the record. It explained that objections to a magistrate judge’s recommendation generally are not an opportunity to present evidence that could have been submitted during the original proceeding. Because the plaintiffs’ arguments concerning principal and attorney fees depended on the excluded new evidence, the court reviewed those portions of the recommendation for clear error rather than conducting a fresh review.

The court found no clear error in Magistrate Judge Fox’s conclusion that the plaintiffs had not proven their damages or entitlement to attorney fees with reasonable certainty. It adopted the finding that the plaintiffs were not entitled to recover the alleged unpaid principal on the notes or attorney fees.

The court separately reviewed the plaintiffs’ argument for prejudgment interest, meaning interest allegedly accruing before judgment. It did not decide whether the plaintiffs were legally entitled to that interest because it had already determined that they could not recover the underlying principal; the interest request was therefore moot.

Disposition

Judge Vernon S. Broderick vacated the November 15, 2018 order and withdrew the April 7, 2017 amended referral to Magistrate Judge Fox. The court denied the plaintiffs’ request to supplement the inquest record and adopted Magistrate Judge Fox’s Report and Recommendation except that the request for prejudgment interest was denied as moot rather than on the merits. The Clerk was directed to close the case.