Li v. Prodigy Network LLC

Background

Maolin Li and Haiyu Wang sued Prodigy Network LLC, Prodigy Shorewood Master Rep Fund LLC, and Prodigy Shorewood Domestic Feeder Rep Fund LLC. The opinion describes the plaintiffs as citizens of the People’s Republic of China and the defendants as a crowdfunding commercial real estate investment platform and two related Delaware limited liability companies. The lawsuit concerned the plaintiffs’ investment in a project at 114 East 25th Street in New York City. The plaintiffs sought damages for their losses or the return of their investment, along with other relief.

The complaint was filed on February 8, 2021. The defendants were served, but none appeared. At the plaintiffs’ request, the clerk entered a certificate of default on March 11, 2021. The plaintiffs filed a motion for default judgment, which was refiled on April 6, 2021 after the first filing was rejected for filing errors.

Bankruptcy stay

By the time the motion was properly filed, Prodigy Network LLC had filed a Chapter 7 bankruptcy case in the District of Delaware. A bankruptcy filing generally creates an automatic stay, meaning that it stops certain proceedings against the debtor. The court stated that the stay deprived it of authority to adjudicate the default-judgment motion against Prodigy Network LLC, and that filing the motion after the bankruptcy filing violated the stay at least as to that defendant.

The court could not determine whether the automatic stay also covered Prodigy Shorewood Master Rep Fund LLC and Prodigy Shorewood Domestic Feeder Rep Fund LLC. Similar entities with “1234 West Randolph Series” appended to their names appeared among the bankruptcy filings, but the court noted that the investment involved a New York City property while 1234 West Randolph Street is in Chicago. Bankruptcy counsel first stated that all defendants were subject to the stay, then said he did not think the two additional defendants were among the entities that filed for bankruptcy. The court also noted the possibility that a bankruptcy court had extended the stay to related entities that did not file bankruptcy themselves.

Default-judgment requirements

The court explained that a defendant’s failure to appear does not automatically entitle a plaintiff to a default judgment. Under Federal Rule of Civil Procedure 55, a plaintiff must establish both that the court has jurisdiction over the defendant and that the well-pleaded facts establish a legal right to relief. The court said the complaint did not clearly show that the plaintiffs were entitled to the requested return of their investment.

The complaint described a possible “voluntary redemption” right requiring 90 days’ notice, but it did not allege that the plaintiffs gave that notice. It also quoted language specific to the 114 East 25th Street investment stating that an investor could not voluntarily redeem the investment unless an applicable supplement provided otherwise. The complaint did not plead whether the supplement contained such a provision. The court said these allegations were difficult to reconcile and that the complaint’s assertion that the plaintiffs were entitled to recover their capital was a legal conclusion rather than a well-pleaded fact.

The court further stated that the plaintiffs might have a contractual claim for unpaid annual interest, but it questioned whether that amount would satisfy the amount-in-controversy requirement for diversity jurisdiction. It also said the complaint did not clearly show that the defaulting defendants were unjustly enriched.

Order

Judge Colleen McMahon ordered that all proceedings be stayed as to Prodigy Network LLC. The portion of the default-judgment motion concerning that defendant was severed and placed on the court’s suspense docket. The plaintiffs’ lawyer was ordered to provide status updates every 120 days concerning Prodigy Network LLC’s bankruptcy and to notify the court if the motion could later be adjudicated.

The plaintiffs’ lawyer was also ordered to notify the court by June 18, 2021, whether the automatic stay covered the other two named defendants. If the plaintiffs wanted to proceed against those defendants and they were not covered by the stay, the court would schedule an inquest—a hearing to determine whether the plaintiffs were entitled to relief and to establish damages. The order did not enter the requested default judgment.