Discover Growth Fund, LLC v. OWC Pharmaceutical Research Corp.

Background

Discover Growth Fund brought a breach-of-contract claim against OWC Pharmaceutical Research Corp. under a Securities Purchase Agreement and a Registration Rights Agreement. Discover alleged that it bought 500 shares of OWC’s Series A Convertible Preferred Stock for $5 million. It converted and sold 119 shares but continued to hold 381 shares.

Discover alleged that OWC failed to file its 2019 annual report or a filing that would have postponed the filing deadline. OWC instead terminated registration of its shares under Section 12(g) of the Securities Exchange Act, which allegedly prevented Discover from converting and selling the remaining 381 shares. The court had previously issued a preliminary injunction requiring OWC to remain current with its public-filing obligations. The opinion states that OWC did not comply, its counsel withdrew on November 18, 2022, and no replacement counsel appeared.

Default judgment and liability

A default judgment is a judgment entered when a party fails to plead or otherwise defend. Under Federal Rule of Civil Procedure 55, the court found that Discover satisfied the procedural requirements for seeking default judgment. The court also found subject-matter and personal jurisdiction, relying in part on the parties’ alleged citizenship, the amount in controversy, OWC’s business activities in New York, and the agreements’ forum-selection provision.

Because OWC stopped defending the action, the court treated the well-pleaded allegations concerning liability as admitted. It concluded that Discover established the elements of breach of contract: an agreement, Discover’s performance, OWC’s breach, and damages. The court therefore found OWC liable for breach of contract.

Damages

The court did not treat the requested damages as automatically admitted. Discover requested $11,931,912.04 under a contractual formula based on the remaining preferred shares, accrued dividends, and additional amounts. The court concluded that applying the full formula would create a windfall and would be so disproportionate to the loss that it would be an unenforceable penalty.

Instead, the court awarded 125% of the $5,462,391.78 liquidation preference, totaling $6,827,989.72. The award consisted of 120% of the stated value of the outstanding preferred shares, $4,572,000; accrued but unpaid dividends of $890,391.78; and an additional 25% of the liquidation preference, $1,395,597.94. The court stated that no damages hearing was required.

Disposition

The court granted Discover’s motion for default judgment. It ordered the Clerk to enter judgment in Discover’s favor against OWC for $6,827,989.72, plus interest, and to terminate all open motions. The opinion does not specify the amount or rate of the interest.