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Burton v. Day 1 Solutions, Inc.

United States District Court, D. Maryland

April 27, 2016

MICHAEL BURTON, Plaintiff
v.
DAY 1 SOLUTIONS, INC., Defendant

REPORT AND RECOMMENDATION

Charles B. Day, United States Magistrate Judge

This Report and Recommendation addresses Plaintiff’s Motion for Entry of Default Judgment (“Plaintiff’s Motion”)(ECF No. 8). Pursuant to 28 U.S.C. § 636, and Local Rule 301, the Honorable George Jarrod Hazel referred this matter to me for the making of a Report and Recommendation concerning default judgment and/or damages. For the reasons stated herein, I recommend the Court allow a supplementation of the record and enter judgment in favor of Plaintiff in the amount of $4, 201, 176.80, plus interest until paid.

I. Factual and Procedural Background

Plaintiff is the “Trustee of the QB Trust also known as the QB S.O.M. Trust.” Declaration of Michael Burton, at 1, ECF No. 8-1.[1] On November 16, 2015, Plaintiff filed his Complaint asserting an entitlement to monetary damages as a result of monies due on Convertible Promissory Notes (the “Notes”) (Counts 1 and II), as well as a breach of a Convertible Note Purchase Agreement (the “Purchase Agreement”)(Count III). See Complaint, ECF No. 1. Service upon Defendant occurred on November 24, 2015. ECF No. 5. On January 7, 2016, the Clerk of the Court made an entry of default as a result of Defendant’s failure to file an Answer. ECF No. 7.

Plaintiff contends that the Promissory Notes and Purchase Agreement attached to the Complaint were signed by Defendant. Burton Decl. at 1. The Purchase Agreement is dated June 18, 2015 (Compl. Ex. 1). The Notes are dated June 18, 2015 (the “June Note”)(Compl. Ex. 2) and July 28, 2015 (the “July Note”)(Compl. Ex. 3). The Purchase Agreement and the July Note reflect a signature of O. Luis Benavides, on behalf of Defendant Day 1 Solutions, Inc. Significantly, Plaintiff has not filed a signature page for the June Note.

By its terms, the Purchase Agreement, “and all actions arising out of or in connection with” it shall be governed by the laws of the State of Maryland. Purchase Agreement at 6. Additionally, each party “irrevocably consents to the exclusive jurisdiction of, and venue in, the federal courts of Maryland.” Id.

The Purchase Agreement indicates that the “proceeds of the sale and issuance of the Notes shall be used to fund the Company’s working capital and general corporate requirements.” Each Note documents Defendant’s promise to pay two million dollars ($2, 000, 000) to “NuViewIRA FBO QB S.O.M. Trust, Beneficiary, of the Robert W. Burton (Deceased) Roth-IRA, Act#1421666.” The Purchase Agreement also includes a “Permitted Transfer Agreement, ” (the “PTA”) dated June 11, 2015, as Exhibit A. The PTA allows any “Burton Entity” to freely transfer the Notes to other “Burton Entities, ” with notice to, but without approval of Defendant. Both the QB Trust and the Robert W. Burton (Deceased)Roth-IRA are identified by the PTA as Burton Entities. On September 8, 2015, the Notes were transferred to Plaintiff with notice to Defendant.

Plaintiff relies on the averments in the Complaint alleging that Defendant defaulted on the terms of the Notes. Compl. at 3. Plaintiff notes that Defendant represented it was not in violation or default and that none of the statements or information furnished in the Purchase Agreement “contains or will contain any untrue statement of material fact or omits or will omit the stated material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.” Compl. at 3; Purchase Agreement at ¶2(l).[2] The Complaint alleges that Defendant knew it was in default “as to its agreement with Corporate Office Properties Trust (“COPT”).” Compl. at 4.

The Purchase Agreement states that in the event that the “initial Closing is effected, [Defendant] shall reimburse the reasonable, documented, Investor legal fees . . . not to exceed $40, 000.” Purchase Agreement ¶ 7(b). The Complaint indicates Defendant has failed to make payment. Compl. at 5. It also states that the amount due and owing for said legal fees is $35, 320.50 plus interest at the rate of 6% from September 9, 2015. Compl. at 6. Plaintiff has submitted an invoice and time details from counsel in support of these sums. Burton Decl., Ex.

1.

The Complaint implies a host of other breaches without support. By way of example, the Purchase Agreement provides that the monies used to purchase the Notes would “be used to fund the company’s working capital and general corporate requirements, ” and that “no funds may be used to pay dividends, distributions, or to issue loans to employees, officers, directors, or stockholders of the company . . .”. Purchase Agreement at ¶1(c). The Complaint is silent as to how this promise was violated. The Complaint states Defendant made false statements “including the exaggeration of Defendant’s revenues and the failure to truthfully account for and report expenses, assets, and liabilities incurred.” Compl. at 4. It contends that Defendant made false representations “that the Defendant’s officers would not receive personal loans without written approval.” Id. Additionally, the Complaint states that false representations were made that the proceeds of the Notes “would be used to fund [Defendant’s] working capital and general corporate requirements and that no proceeds would be used to make distributions to employees, officers, directors and/or stockholders.” Id. The Complaint merely makes mention of the contractual promises, without stating that said promises were in fact broken or setting forth any of the descriptive acts in support.[3]

The Notes define “Events of Default.” Of particular interest is that a default occurs if Defendant remains “in breach of a material provision . . . of the Note or the [Purchase Agreement] after notice and a reasonable opportunity . . . to cure.” Notes ¶ 15(b). The Notes provide that in the event of default, the holder of each Note may declare all outstanding payable obligations immediately due with appropriate notice, with interest to accrue at the rate of 8% per annum. Notes ¶16. Furthermore, if action is commenced to collect on the Notes, Defendant promises to pay all costs and expenses incurred, including reasonable attorney’s fees. Notes ¶18. The Default Notice was sent on November 2, 2015, and Defendant has failed to cure the identified breaches within the ten day period to do so. Compl. at 5.

Plaintiff has also submitted the Declaration of Ronald S. Canter, Esquire, in support of his request for the payment of reasonable attorney’s fees to prosecute this action. Declaration of Ronald S. Canter, Esq., ECF No. 8-2. Mr. Canter’s declaration speaks to his experience at the bar, the experiences of his associate attorney Bradley T. Canter, their rates and services provided, indicating that said rates are “within the hourly rates set out as ...


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