Lowry v. Edelman

Background

John Lowry and Morton Appleton, Peter Appleton, Ana Matos Appleton, Jacob Appleton Irrevocable Trust, and William Appleton Irrevocable Trust sued Gabriel Edelman and several corporate entities for breach of contract and fraud. Edelman declared bankruptcy on March 6, 2022, and the case was stayed as to him. The court later entered default judgment establishing liability against six corporate defendants: Vix Capital Partners, LLC; Latinum Holdings LLC; Edelman Blockchain Advisors; Creative Advancement, LLC; CH Global Inc.; and Euro Credit, LLC.

The court referred the case to Magistrate Judge Wang for an inquest, meaning a proceeding to determine damages. Her December 22, 2022 order required the plaintiffs to submit proposed findings and an inquest memorandum supported by documentary evidence or affidavits. The order also stated that the damages proceeding could be decided on written submissions and required any party seeking an evidentiary hearing to request one and explain why it was necessary.

The plaintiffs obtained four deadline extensions. The Appleton Plaintiffs filed submissions on April 20, 2023, and Lowry filed his submissions one day late, on April 21, 2023. Neither submitted the required damages memorandum, supporting evidence, or a request for an evidentiary hearing. The Appleton Plaintiffs said an affidavit would follow, and Lowry included a footnote saying that his affidavit would be filed later.

Magistrate Judge’s Recommendations and Objections

After nearly ten additional months without supplemental evidence, Magistrate Judge Wang issued a Report and Recommendation finding that the plaintiffs had not provided competent evidence supporting their claimed damages. She made provisional damages calculations in case the plaintiffs submitted adequate evidence with their objections but alternatively recommended denying any damages because of their haphazard and incomplete filings.

The district court instructed that the recommendation would be treated as recommending no damages unless the plaintiffs filed timely objections with adequate supporting evidence and explained why new evidence should be accepted at that stage. The plaintiffs filed objections styled as motions for reconsideration and submitted additional evidence. They argued that they had misunderstood the process and expected an evidentiary hearing before the recommendation was issued.

The court referred the matter back to Magistrate Judge Wang for a supplemental recommendation concerning whether the late evidence should be considered. The supplemental recommendation concluded that the plaintiffs had not shown why the court should accept the late evidence. It also found that the original order had clearly required proof of damages and explained how to request a hearing. The plaintiffs then filed objections to the supplemental recommendation.

Ruling

Judge Furman held that the plaintiffs had not offered a compelling justification for failing to submit evidence by the repeatedly extended deadline. The court explained that new evidence ordinarily is not considered in objections to a magistrate judge’s recommendation without a compelling reason for the earlier failure to submit it. The court rejected the plaintiffs’ asserted belief that a damages hearing would occur, noting that the order warned that the inquest could be decided on written submissions and required a party seeking a hearing to request one and explain its need.

The court also agreed that the late submissions were inconsistent and incomplete. Among other problems, the court noted discrepancies in the Appleton Plaintiffs’ claimed investments, a lack of records supporting most of Lowry’s claimed investments, vague and block-billed attorney-fee invoices, and affidavits that did not clearly distinguish between Edelman individually and the corporate entities.

The court overruled the plaintiffs’ objections and adopted Magistrate Judge Wang’s Supplemental Report and Recommendation insofar as it recommended denying the plaintiffs’ motions for reconsideration and continuing to recommend denial of any damages award. The court awarded the plaintiffs no damages from the corporate defendants. It directed the Clerk to enter judgment under Rule 54(b) as to the six defaulting corporate defendants, administratively closed the case, and allowed any party to seek reopening within twenty-one days after the bankruptcy proceeding ended or the automatic stay was lifted or modified as to this action. Claims against Edelman remained stayed.