405 F.Supp.3d 218
D. Mass.2019Background
- Plaintiffs Auctus Fund, LLC (MA) and EMA Financial, LLC (NY) loaned Sunstock, Inc. (DE corp., principal place CA) four separate amounts in 2017 under convertible promissory notes (two notes each). Principal amounts: Auctus $112,250 and $85,000; EMA $115,000 and $85,000.
- Notes set interest at 10%–12% and provided a Default Rate (up to 24%) plus a contractual damages formula: 150% of unpaid principal, unpaid interest, and interest on unpaid amounts; also permit conversion of damages into Sunstock equity. Auctus notes specified Nevada law; EMA notes specified New York law.
- Court entered summary judgment for Auctus and EMA on contract breach claims and reserved damages. Plaintiffs seek unpaid principal, contractual default interest/penalties, attorneys’ fees, and an injunction directing conversion of money damages into Sunstock stock.
- Applying Massachusetts choice-of-law rules, the court rejected the Auctus notes’ Nevada clause (Nevada had no substantial relationship) and applied California law to those notes; it enforced EMA’s New York choice-of-law clause.
- Under California law the court held the Auctus notes usurious and limited Auctus to recovering unpaid principal offset by interest Sunstock already paid; under New York law the court allowed EMA to recover unpaid principal plus contract (pre-judgment) interest at the Default Rate but rejected the notes’ multiplicative/flat penalty as an unenforceable liquidated-damages penalty.
- The court denied plaintiffs’ requested injunction to convert monetary damages into shares as unnecessary and administratively problematic; it instructed plaintiffs to submit affidavits with figures for principal, setoffs, pre- and post-judgment interest, and attorneys’ fees.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Choice of law for Auctus notes (Nevada clause) | Enforce the Nevada choice of law clause | Nevada has no relation to parties/transaction; clause is invalid under Restatement §187 | Nevada clause invalid; California law governs Auctus notes |
| Choice of law for EMA notes (New York clause) | Enforce New York choice of law | Clause should not override California interests | New York clause valid and enforced |
| Recoverability of Auctus default interest/penalties (usury) | Entitled to contractual 12% interest, Default Rate, 150% damages, attorneys’ fees, and conversion option | Contract terms govern; damages formula enforceable | Under California usury rules Auctus limited to unpaid principal, offset by interest already paid; usurious interest and penalty provisions unenforceable; attorneys’ fees recoverable under contract/Cal. law |
| Recoverability of EMA default multiplier/flat fees (liquidated damages) | Entitled to Default Rate, 150% multiplier, flat fees, attorneys’ fees | Contract terms control; damages formula enforceable | Under New York law the 150% multiplier and flat fees are an unenforceable penalty; EMA may recover unpaid principal, pre-judgment interest at contractual Default Rate, post-judgment statutory interest, and contractual attorneys’ fees |
| Conversion of money damages into stock (specific performance/injunction) | Plaintiffs seek injunction to force transfer agent to convert damages into Sunstock equity | Conversion request binds third parties not before court and is administratively fraught | Denied: money damages adequate; injunction conversion refused |
Key Cases Cited
- Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487 (choice-of-law in federal court follows forum state law)
- Hardwick v. Wilcox, 217 Cal. Rptr. 3d 883 (California usury law limits recovery to principal; usurious provisions void)
- Truck Rent-A-Ctr., Inc. v. Puritan Farms 2nd, Inc., 361 N.E.2d 1015 (New York invalidates contractual provisions that are penalties grossly disproportionate to actual damages)
- Ghirardo v. Antonioli, 883 P.2d 960 (defining elements of usury under California law)
- Westman v. Dye, 4 P.2d 134 (permitting offset of principal by interest already paid in usury context)