LG Capital Funding, LLC v. Exeled Holdings Inc.

Background

LG Capital Funding, LLC and ExeLED Holdings Inc. entered into a Securities Purchase Agreement and a convertible note in August 2015. The note had a face value of $58,937.26, an 8% annual interest rate, and allowed LG Capital to convert principal and accrued interest into ExeLED common stock. ExeLED was required to deliver the shares within three business days after receiving a conversion notice. LG Capital sent a conversion notice on April 27, 2017, but ExeLED did not deliver the requested shares.

The court had previously granted LG Capital summary judgment in part and denied it in part after ExeLED failed to appear at trial. The court then referred damages to Magistrate Judge Ona T. Wang for an inquest. Judge Wang recommended $396,303.44 for breach-of-contract damages and $135,252.76 for anticipatory-breach damages, for a total of $531,556.20. She also recommended denying LG Capital’s requests for $74,310 in attorneys’ fees and $497.97 in costs. LG Capital objected.

Damages for the Undelivered Shares

Judge Liman conducted a de novo review of the challenged portions of the magistrate judge’s report and recommendation. Applying New York law, he explained that contract damages should place the injured party in the economic position it would have occupied if the contract had been performed. For undelivered stock, the relevant market value is generally the value when the stock should have been delivered.

The court held that the breach occurred on May 2, 2017, the final business day on which ExeLED was required to deliver the shares—not May 3, the following day. The court reasoned that LG Capital was entitled to have the shares on May 2, and using a later date would not put LG Capital in the position it would have occupied if ExeLED had performed.

The court also held that the damages calculation had to include the principal and accrued interest that LG Capital was converting. Subtracting the conversion price from the stock’s market value without restoring that principal and interest would give LG Capital less than the value it would have received if ExeLED had delivered the shares. The court approved the method of calculating damages by taking the difference between the market price and conversion price, multiplying by the number of shares, and then adding the converted principal and accrued interest.

The court further held that the number of shares must be calculated using the correct conversion price under the note. Because the number of shares depends on the principal and interest being converted divided by the conversion price, the share count could not remain tied to the earlier, allegedly incorrect price used in LG Capital’s conversion notice.

Anticipatory Breach

The court ruled that the anticipatory-breach damages also had to be calculated using May 2, 2017. By failing to deliver the shares on that date, ExeLED made clear that it would not perform its remaining obligations. LG Capital therefore could not use a conversion price from an earlier date, because that would give it the benefit of hindsight and allow it to select a more favorable price. The conversion price and number of shares for the remaining balance had to be determined as of the anticipatory-breach date.

Attorneys’ Fees and Costs

Judge Liman did not adopt the recommendation to deny attorneys’ fees and costs altogether. He held that the note provided for attorneys’ fees and that Rule 54 did not bar recovery of costs available under the contract. However, he also ruled that LG Capital was not entitled to its fee request automatically or in full. The court identified concerns about block billing, clerical work, billing by a person not yet admitted to the bar, and work that appeared routine in light of counsel’s similar cases. Any award therefore had to be limited to reasonable fees and costs.

Disposition

The court did not adopt the damages calculations in the report and recommendation and did not enter a damages, attorneys’ fees, or costs award at that time. It directed LG Capital, within two weeks, to submit a proposed judgment using the formulas in the opinion, a letter explaining the calculations, and a renewed request for attorneys’ fees and costs. The opinion contains inconsistent figures in places concerning the number of shares and conversion-price calculations, so the final amount was left for the proposed judgment.