Haua v. Prodigy Network, LLC

Background

Jose Antonio Haua and Bibiana Kuri Otero sued Prodigy Network, LLC, Prodigy Shorewood Investment Management, LLC (PSIM), and 17 John Preferred, Inc. for breach of contract. The dispute arose from the plaintiffs’ investment in a Manhattan real-estate project. The complaint alleged that the plaintiffs agreed to purchase $125,000 in 17 John Preferred Class B-1 Common Stock and make a $375,500 Class A Investor Loan, for a total investment of $500,500.

The plaintiffs signed a June 13, 2017 Side Letter Agreement with Prodigy Network. They alleged that the agreement gave them an unconditional right to redeem their investment, with an annually compounded 20% return, during a specified period. The parties later extended the redemption period. In September 2019, PSIM signed a second amendment giving the Investment Manager an additional 120 days to arrange and complete the sale of the plaintiffs’ investment. The plaintiffs alleged that defendants refused to honor their redemption demand.

Prodigy Network and 17 John Preferred defaulted. The court entered a default judgment against them for $808,596.96 and later held them in civil contempt for failing to comply with an order concerning restraining notices and information subpoenas. The plaintiffs then sought $13,065.90 in attorneys’ fees and costs related to their contempt motion.

PSIM’s Motion to Dismiss

PSIM moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not adequately state a legal claim. PSIM argued that it was not a party to the Side Letter Agreement, that the agreement lacked consideration, that the plaintiffs lacked the required written consent to redeem their stock, that the loan’s maturity date had not been changed by the authorized party, and that the agreements did not make PSIM responsible for investor repayments.

The court concluded that the plaintiffs adequately alleged that PSIM ratified the Side Letter. Although PSIM did not sign the original Side Letter, it signed the second amendment in its capacity as the Investment Manager and agreed to additional time to arrange and complete the sale of the plaintiffs’ investment. The court found that this conduct adequately alleged that PSIM affirmatively acknowledged and adopted the Side Letter’s obligations.

The court nevertheless held that the complaint did not adequately establish that the Side Letter could be enforced against PSIM as a modification of the earlier investment agreements. Under New York law, a written contract modification generally must be signed by the party against whom enforcement is sought, unless an applicable rule provides otherwise. The plaintiffs did not explain whether PSIM’s later ratification satisfied that requirement, and they did not allege or argue that Prodigy Network acted as PSIM’s agent when it signed the Side Letter.

The court also rejected the plaintiffs’ argument that their investment supplied consideration for the Side Letter. Consideration is something of value exchanged to support a contract. The court treated the investment as past consideration because the plaintiffs had already agreed to invest before signing the Side Letter. The complaint therefore did not adequately allege either that the Side Letter could be enforced against PSIM as a contract modification or that it was supported by independent consideration.

The court granted PSIM’s motion to dismiss. It also granted the plaintiffs leave to amend because they had not previously amended the complaint and the deficiencies might be cured. The court directed that any motion for leave to file an amended complaint be submitted by October 12, 2021, with the proposed amended complaint attached.

Attorneys’ Fees and Costs

The plaintiffs’ fee motion was referred to Magistrate Judge Kevin N. Fox, who recommended denying it. Neither side objected to the recommendation. Judge Gardephe reviewed the recommendation for clear error and found none.

The recommendation concluded that the fee motion did not comply with Local Civil Rule 7.1(a). In particular, it did not identify the applicable rules or statutes and did not include a memorandum of law explaining the supporting legal authorities and arguments. Because those filing deficiencies prevented the court from evaluating the legal basis for the requested fees, the court adopted the Report and Recommendation in its entirety.

The court denied the plaintiffs’ motion for attorneys’ fees and costs without prejudice. The order therefore separately granted PSIM’s dismissal motion with leave to amend and denied without prejudice the fee motion against Prodigy Network and 17 John Preferred.