ProActive Capital Partners, LP v. Sysorex, Inc.

Background

ProActive entered into a securities purchase agreement with Sysorex on July 7, 2021, to purchase a convertible debenture with a face value of $112,500. The debenture agreement allowed ProActive to convert the debenture into common-stock shares by sending a conversion notice. Sysorex was required to deliver the shares within two business days.

ProActive alleged that it sent a conversion notice on May 4, 2022, seeking to convert $100,000 of principal into 15,312,258 shares. After Sysorex did not respond or deliver the shares, ProActive sent a notice of default and acceleration. ProActive sued for breach of contract, injunctive relief, and declaratory judgment.

Sysorex’s lawyer moved to withdraw. The court granted that motion and directed Sysorex to retain new counsel, warning that a corporation could not proceed without a lawyer and that failure to appear through counsel could result in default judgment. Sysorex did not retain new counsel, and the clerk entered a certificate of default. ProActive then moved for default judgment.

Default judgment and contract damages

A default generally treats well-pleaded allegations about liability as admitted, but it does not automatically establish the amount of damages. The plaintiff must provide an evidentiary basis for the requested damages.

The court found that ProActive’s factual allegations established a breach of contract. ProActive sought $1,094,060.84 based on converting $142,404 at a lower conversion price that applied after an event of default. The court rejected that calculation for two reasons. First, ProActive did not identify a provision allowing it to convert the increased default amount and interest into shares rather than recover that amount in cash. Second, ProActive had not alleged in its complaint that Sysorex had failed to disclose material indebtedness when the agreement was signed; it raised that theory for the first time in its default-judgment papers.

The court instead determined that ProActive was entitled to convert $100,000 of principal at the agreement’s original conversion price. Using the stated volume-weighted average price and the number of shares that resulted from that calculation, the court awarded $683,788 in breach-of-contract damages, rather than the $1,094,060.84 requested.

Attorneys’ fees and costs

The agreements required the non-prevailing party to reimburse the prevailing party for reasonable attorneys’ fees and litigation costs. ProActive requested $271,043.50 in fees and $1,320.94 in costs, based on 412.5 hours of work. The court concluded that ProActive had not sufficiently shown that the requested attorney time and rates were reasonable, particularly because more than 300 hours and more than $200,000 were attributed to discovery without an explanation of why that work was necessary for the straightforward conversion claim.

The court identified approximately 99 hours and $64,006.50 in work connected to the complaint, the answer, and the default-judgment submissions. It awarded that $64,006.50 in attorneys’ fees. The court also found the requested $1,320.94 in costs recoverable. The court directed ProActive to submit additional documentation if it wished to pursue additional attorneys’ fees for the other work. The order states that, without a further submission, judgment would include the fees attributable to the complaint, review of the answer, and preparation of the default-judgment materials.

Disposition

Judge Naomi Reice Buchwald granted ProActive’s motion for default judgment. The plaintiff was awarded $683,788 on Count I, $64,006.50 in attorneys’ fees, and $1,320.94 in costs. The court also directed ProActive, if it chose to do so, to submit further documentation supporting its attorneys’ fee request.