K2M Design, Inc. v. Schmidt Consulting Group, Inc.

Background

K2M Design, Inc. brought claims for breach of contract and unjust enrichment against Peter K. Schmidt, Gene Lim, Filmwest Global Partnership, LLC, and Schmidt Consulting Group, Inc. The claims arose from an unpaid promissory note. K2M also asserted a fraud claim against Lim. K2M voluntarily dismissed Schmidt Consulting Group, Inc. from the action.

Schmidt was properly served but did not appear or answer. The court entered a certificate of default against him. K2M moved for default judgment against Schmidt, and the court referred that motion to Magistrate Judge Gary Stein for a report and recommendation. Stein recommended entering default judgment on the contract claim, denying default judgment on the unjust-enrichment claim, awarding $1,260,000 in damages plus interest, and awarding attorneys’ fees and costs. No party objected.

Review of the Recommendation

Because there were no objections, Judge Vyskocil reviewed the report and recommendation for clear error, meaning an obvious mistake. The court found no clear error and adopted the recommendation in its entirety.

The court explained that obtaining a default judgment involves two steps: entering a default after a defendant fails to defend, and then entering a judgment that determines the relief owed. Even after a default, the court must decide whether the allegations establish legal liability and must review the requested damages.

The court also agreed that it had personal jurisdiction over Schmidt. Schmidt was described as a German citizen residing in Germany, and the promissory note contained a clause selecting New York state and federal courts. The court found no obstacle to enforcing that clause, and Schmidt had not objected because he defaulted.

Liability

The court held Schmidt liable for breach of contract under New York law. It found that the note was a valid contract with clear promises, that K2M performed by timely wiring Schmidt $1 million, that the note was not paid as required, and that K2M suffered damages. The court also noted that Schmidt could be liable as both the note’s obligor and guarantor.

The court denied default judgment on the unjust-enrichment claim and dismissed that claim because it relied on the same facts as the breach-of-contract claim and therefore duplicated the contract claim.

Damages, Interest, Fees, and Costs

The court awarded $1,260,000 in contract damages, consisting of $1,000,000 in principal, $200,000 in accrued interest, and a $60,000 late charge. None of those amounts had been paid. The court also approved pre- and post-judgment interest. It stated that pre-judgment interest was awarded at New York’s statutory rate of nine percent per year and that post-judgment interest would run from entry of judgment until payment under federal law.

K2M requested $230,580.50 in attorneys’ fees. The magistrate judge approved reasonable billing rates but reduced the request for block billing, work related to the fraud claim against Lim, and preparation of the fee application. The court approved the resulting award of $192,522.44 in attorneys’ fees. It also approved $3,593.28 in costs.

Disposition

K2M’s motion for default judgment against Schmidt was granted as to the breach-of-contract claim and denied as to the unjust-enrichment claim. The unjust-enrichment claim was dismissed. The court entered default judgment against Schmidt for $1,260,000 in damages, pre- and post-judgment interest, $192,522.44 in attorneys’ fees, and $3,593.28 in costs.