Cherotti v. Exphand, Inc.

Background

Timothy Cherotti sued Exphand, Inc. and Frank Nemirofsky, alleging that they obtained $1,352,237.31 from him through loans and related payments but never repaid him or provided promised Exphand stock. The amended complaint asserted breach of contract, unjust enrichment, conversion, fraud, and fraudulent conveyance under New York law. Cherotti also sought an equitable lien, a constructive trust, punitive damages, attorney’s fees, and costs.

The defendants repeatedly failed to comply with court orders and discovery obligations. Their first lawyers withdrew after the defendants failed to pay their fees. The defendants then failed to retain counsel on time, respond to the amended complaint by the deadline, comply with discovery requirements, appear for scheduled depositions, and respond to court directives. Although they eventually filed answers, they stopped communicating with the court after filing their second answer. The Clerk entered a certificate of default, and Cherotti moved for default judgment.

Sanctions and Default Judgment

The court found that the defendants’ noncompliance was willful, lasted for a substantial period, continued despite repeated warnings, and could not effectively be addressed through lesser sanctions. Under Rules 16 and 37 of the Federal Rules of Civil Procedure, the court therefore found dispositive sanctions appropriate, including striking the defendants’ second answer and entering default judgment.

The court then applied the default-judgment procedure under Rule 55. It accepted the amended complaint’s well-pleaded factual allegations as true, except those concerning damages, and found that the defendants’ asserted defenses were not meritorious.

Claims and Liability

The court granted the motion with respect to the breach-of-contract claim. It found that Cherotti adequately alleged that he loaned the defendants $1,352,237.31, that the defendants promised to repay the loans and provide Exphand stock as interest, that Cherotti performed his obligations, and that the defendants breached their agreements by failing to repay him. The court held the defendants jointly and severally liable on that claim.

The court denied the motion with respect to the unjust-enrichment and conversion claims because they were duplicative of the breach-of-contract claim. The court also denied the motion with respect to the fraud claim because the alleged promises concerned performance of the contracts and the allegations did not identify the statements with the particularity required by Rule 9(b). The fraudulent-conveyance claim also failed because the allegations were conclusory and did not provide sufficient details about the alleged transfers or the defendants’ intent.

Damages and Other Relief

The court found that Cherotti’s bank statements sufficiently supported his damages request and that no damages hearing was necessary. It awarded $1,352,237.31 in compensatory damages for the unpaid loans.

The court denied Cherotti’s requests for an equitable lien and constructive trust. It found no agreement identifying specific property to secure the loans, and it concluded that the valid contracts and available monetary damages provided an adequate legal remedy. The court also denied punitive damages because the alleged conduct involved a private wrong and Cherotti did not show that it was directed at the public generally.

The court awarded pre-judgment interest at New York’s nine-percent annual rate, calculated from December 31, 2020, the date the action was filed, through entry of judgment. That award totaled $323,427.10. The court also awarded post-judgment interest under 28 U.S.C. § 1961. It denied attorney’s fees and costs because Cherotti did not prevail on the fraudulent-conveyance claim, the statutory basis he relied on for those fees.

Disposition

Judge Sarah L. Cave ordered that the motion be granted in part and denied in part. The motion was denied as to the unjust-enrichment, conversion, fraud, and fraudulent-conveyance claims and as to the requests for an equitable lien, constructive trust, punitive damages, attorney’s fees, and costs. The motion was granted as to the breach-of-contract claim. The defendants’ second answer was stricken, default judgment was entered against them jointly and severally, and the Clerk was directed to enter judgment for $1,675,664.41 and close the case.