Case 2:15-cv-07254-SJF-GRB Document 24 Filed 02/01/17 Page 1 of 8 PageID #: 226

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF NEW YORK
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KBM WORLD WIDE, INC.

Plaintiff,
REPORT &
RECOMMENDATION
-against- CV 15-7254 (SJF) (GRB)

HANGOVER JOES HOLDING CORP.

AND MATTHEW VEAL,

Defendants.
--------------------------------------------------------------X

GARY R. BROWN, United States Magistrate Judge:

PROCEDURAL HISTORY

This action was commenced via the filing of a complaint on or about December 21, 2015.

DE 1. On January 26, 2016, defendants filed an answer and counterclaim. DE 14. On July 12,

2016, defendants filed the instant motion for summary judgment, which was referred for report

and recommendation to the undersigned by the Honorable Sandra j. Feuerstein on August 24,

2016. DE 21-23; Electronic Order dated August24, 2016. This opinion follows.

FACTS

The allegations of the complaint, see generally Compl., DE 1, provide, in sum and

substance, as follows:

KBM World Wide Inc. (KBM) alleges that it was an investor in Hangover Joes

Holding Corporation (Hangover Joes), and that defendant Matthew Veal was CEO of

Hangover Joes. See id. at 2-3. KBM invested in so-called nano-cap companies, the

securities of which are sold as over the counter stocks, sometimes transferred via so-called

Pink Sheets. See id. at 3. KBM provided capital in return for shares purchased at discount

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prices. KBM claims to have invested $43,000, as relevant herein, in Hangover Joes, and alleges

that defendants made material misrepresentations in connection with this investment, causing

damages to KBM. See id. at 3-4, 12.

The complaint describes the provision of a convertible promissory note in the amount of

$43,000, in connection with a Securities Purchase Agreement, on or about January 2, 2015. See

id. at 14. That agreement required, inter alia, defendants to comply with SEC filing

requirements, and failure to do so would constitute a default of the agreement. See id. at 16,

18. An instance of default would, according to this agreement, result in various penalties to

Hangover Joes, including payment of 150% of the outstanding balance on the note, amounting

to $64,500. See id. at 18-19.

Based upon these facts, the complaint purports to set forth nine causes of action,

including default on the promissory agreement and note, fraud in the inducement, breach of

contract, violation of Rule 10(b)-5(b), and breach of fiduciary duty, and seeks damages,

injunctive and equitable relief. See id. at 13-63.

In its answer, defendants assert twenty affirmative defenses and eight counterclaims

under a variety of theories including, as relevant herein, criminal usury under New York Penal

Law 190.40. See generally Answer, DE 14. That affirmative counterclaim appears to be

predicated on the allegation (abandoned for the purposes of this motion) that the costs of

plaintiffs [sic] loans bore interest in excess of 150%. See id. at 93. Allegations ostensibly

relevant to the counterclaims charge that plaintiff developed a scheme whereby it preys upon

publicly trading companies in desperate need of operating capital and makes usurious loans

convertible into common stock. See id. at 84. Defendants further allege that as a result of

the subject loan agreement, plaintiff is attempting to usurp common trading stock from the

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defendant and then, effectively, dump it into the market and drive the price of defendants stock

into near oblivion while enjoying substantial profit. See id. at 87. The allegations further

state that plaintiff made the subject loans aware that defendants could not repay them, and that

the terms were oppressive, usurious, improper, unlawful and unfair. See id. at 88-91.

For the reasons discussed below, particularly the defendants failure to comply with Rule

56.1, attempting to summarize the undisputed facts largely proves a fruitless endeavor. Notably,

however, there appears to be no dispute that defendants entered four additional, nearly identical

transactions with plaintiff during a two-year period. See Kramer Aff., 15, DE 22-1. In each of

the other transactions, the debt incurred by defendants was satisfied through conversion to stock.

Id. It also appears uncontested that the structure of the subject agreement provides plaintiff with

the right to acquire restricted stock at a substantial discount from the market price at the time of

acquisition, but that the plaintiff must hold said stock for six months, during which time the price

may well fluctuate. DE 22 at 10. Finally, it is beyond dispute that conversion of the debt to

stock does not require the defendants to tender any funds, but rather simply issue a certificate for

restricted shares, such that third party purchasers pay any profit made by plaintiff. Id.

DISCUSSION

Standard of Review

This motion for summary judgment is decided under the oft-repeated and well understood

standard for review of such matters, as discussed in Bartels v. Inc. Vill. of Lloyd Harbor, 97 F.

Supp. 3d 198, 211 (E.D.N.Y. 2015), aff'd sub nom. Bartels v. Schwarz, 643 F. App'x 54 (2d Cir.

2016), which discussion is incorporated by reference herein.

Rule 56.1 Statements

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While defendants seek summary judgment on a novel theory concerning criminal usury,

defendants have failed to comply with the procedural rules required to obtain such relief. As the

Second Circuit has observed:

Local Rule 56.1 was adopted to aid the courts in deciding summary judgment
motions by quickly identifying disputed material facts. The Rule requires that any
motion for summary judgment be accompanied by a list of the material facts as
to which the moving party contends there is no genuine issue to be tried. Local
Civil Rule 56.1(a). The requirement is strict; failure to submit a Rule 56.1
statement with a motion for summary judgment may result in the motion's denial.
Id.

T.Y. v. New York City Dep't of Educ., 584 F.3d 412, 417418 (2d Cir. 2009) (holding Rule 56.1

inapplicable to IDEA cases because a summary judgment approach to IDEA cases . . . is

different than a typical case). Recently, the Circuit reiterated this admonition:

Local Rule 56.1 requires a party moving for summary judgment to submit a short
and concise statement, in numbered paragraphs, of the material facts as to which
the moving party contends there is no genuine issue to be tried and requires that
each numbered paragraph be supported by citation to evidence in the record.
Local Rule 56.1(a), (d). It further puts litigants on notice that [f]ailure to submit
such a statement may constitute grounds for denial of the motion. Local Rule
56.1(a).

Suares v. Cityscape Tours, Inc., 603 F. App'x 16, 17 (2d Cir. 2015) (affirming district courts

denial of summary judgment motion based upon movants filing of a 56.1 statement without

adequate citation); see Giannullo v. City of New York, 322 F.3d 139, 140 (2d Cir.2003) (holding

that unsupported assertions [in a Local Rule 56.1 statement] must . . . be disregarded); Holtz v.

Rockefeller & Co., 258 F.3d 62, 73 (2d Cir.2001) (A district court . . . is not required to

consider what the parties fail to point out in their Local Rule 56.1 statements. . . .); see also

Antwi v. Health & Human Sys. (Centers) F.E.G.S., No. 13 CIV. 835 (ER) (FM), 2014 WL

4548619, at *4 (S.D.N.Y. Sept. 15, 2014)(The failure to file a Rule 56.1 Statement is, on its

own, grounds for denial of a motion for summary judgment); Purisima v. Tiffany Entm't, No. 09

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Civ. 3502(NGG) (LB), 2014 WL 3828291, at *1 (E.D.N.Y. June 20, 2014), report and

recommendation adopted by, No. 09 Civ. 3502(NGG) (LB), 2014 WL 3828376 (E.D.N.Y. Aug.

4, 2014) (As courts in this district have observed repeatedly, the failure to file a Rule 56. 1

Statement is grounds for dismissal of a motion for summary judgment.); MSF Holding Ltd. v.

Fiduciary Trust Co. Int'l, 435 F. Supp. 2d 285, 30405 (S.D.N.Y. 2006) (denying summary

judgment motion where movant failed to submit required 56.1 statement). At the same time, of

course, district courts have broad discretion to determine whether to overlook a party's failure to

comply with local court rules. Holtz, 258 F.3d at 73.

While, under different circumstances, the undersigned might be reluctant to recommend

denying summary judgment solely based upon this procedural failing, it is, in this case, more

than a technical violation. Because plaintiffs have failed to provide an adequate factual record,

this remains a matter in which a review of the record imposes a significant burden upon the

Court. Antwi, 2014 WL 4548619, at *5 (rejecting a pro se summary judgment motion for

failure to comply with the rule). Defendants present virtually no factual support for their motion,

and the tangled web of contentions and counter-contentions render the record impervious to

reasoned review. To buttress this conclusion, one need look no further than defendants own

characterizations of the factual record, which include the following:

Plaintiffs opposition sets forth arguments A-G which are based on inaccurate
assertions of the facts plaintiffs arguments are based on an inaccurate
premise Plaintiff only makes self-serving, conclusory statements that
defendants have not met their burden. See DE 23 at 4.

Plaintiffs Argument C, while correct that pre-payment provisions can not[sic]

form the basis for a usury finding, is moot. Defendant is not asserting usury based
upon prepayment penalties. To the contrary, defendants are basing their usury
defense on the discounted price of the stock conversion, notwithstanding that the
prepayments penalties are, in effect, usurious and that the prepayment penalties
are actually considered to be interest by the IRS. See id. at 5.

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Argument D (that the defendant is not required to pay interest) in any event is
supported only by Plaintiffs mischaracterization of the Note and the applicable
law. This is a complete spin on the facts at issue. The Plaintiff states that the
purpose of the agreements was for defendant to sell unrestricted stock to the
plaintiff, an investor. However, and contra, the crux of the complaint is that of
breach of contract. Plaintiff cites cases in this argument in an effort to bolster its
illusory position and, thus, spin the facts as the kind, supportive investor, and not
the predator it is and for which it has become known. See id. at 5-6.

See Defs. Mem. of Law in Reply at 2-6, DE 23 at 4-9 (emphasis added). These

descriptors (which resemble closing argument rather than summary judgment briefing)

reflect a fundamental misapprehension of the requisites for the relief sought and

demonstrate that, on this record, summary disposition is unwarranted given the absence

of identified undisputed fact.

The Criminal Usury Argument

Even assuming, arguendo, that the Court were inclined to overlook the procedural default

and the apparent disputation of facts, defendants sole argument in support of this motion proves

unpersuasive. While defendants seek summary judgment based upon its usury defense, the New

York Court of Appeals has set a high bar for such defenses, ruling that:

Usury penalties imposed for the violation of the statute are to be strictly construed
and should not be held to include any violation which is not clearly within the
plain intention of the statute. This view is in accord with the long line of
authority establishing that usury must be proved by clear evidence as to all its
elements and will not be presumed, and recognizes that forfeiture imposed by
usury statutes is penal in nature. []. Clear and convincing evidence, of an act
unequivocally exacting a rate of interest in excess of that allowed by law, places a
transaction within the plain intent of the usury statute.

Freitas v. Geddes Savs. & Loan Ass'n, 63 N.Y.2d 254, 261 (1984) (construing civil usury statute)

(citations omitted). In another case, the Court held:

the usury defense must be established by clear evidence as to all the elements
essential thereto. The court will not assume that the parties entered into an
unlawful agreement. On the contrary, when the terms of the agreement are in

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issue, and the evidence is conflicting, the lender is entitled to a presumption that
he did not make a loan at a usurious rate.

Giventer v. Arnow, 37 N.Y.2d 305, 309 (1975). Defendants have not met this significant burden,

particularly in the context of summary judgment.

Defendants predicate their claim that the note at issue facially violates 190.40 of the

New York Penal Code (which prohibits loan agreements charging interest in excess of 25% per

annum) based upon the 45% discount attendant to the stock conversion provisions of the

agreement. See Defs. Mem. of Law at 3-4, DE 21-1. However, on the record before the Court,

this is far from a foregone conclusion. First, a payment may not be considered usurious where,

as here, said payment is based upon a contingency within the control of the debtorin this case,

default in the payment of an agreed-upon obligationand the debtor could have avoided the

imposition of such charges simply by paying promptly. Salamone v. Russo, 129 A.D.3d 879,

881 (2d Dept 2015). Moreover, given that the shares could fluctuate in value, and the value

realized would be paid by a buyer and not the defendants, it is difficult to imagine that the share

price discounts contained in the agreement could reasonably be construed as interest, and how

one would calculate the rate of such interest. Certainly, such determinations cannot be made

upon the scant record before the Court.

For these reasons, defendants argument simply fails which, together with the failure to

provide the Court with an adequate factual record, dooms defeats defendants summary

judgment motion.

CONCLUSION

For the foregoing reasons, it is respectfully recommended that defendants motion for

summary judgment be DENIED in all respects.

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OBJECTIONS

A copy of this Report and Recommendation is being electronically served on counsel.

Any written objections to the Report and Recommendation must be filed with the Clerk of the

Court within fourteen (14) days of service of this report. 28 U.S.C. 636(b)(1) (2006 & Supp. V

2011); Fed. R. Civ. P. 6(a), 72(b). Any requests for an extension of time for filing objections

must be directed to the district judge assigned to this action prior to the expiration of the fourteen

(14) day period for filing objections. Failure to file objections within fourteen (14) days will

preclude further review of this report and recommendation either by the District Court or

Court of Appeals. Thomas v. Arn, 474 U.S. 140, 145 (1985) ([A] party shall file objections

with the district court or else waive right to appeal.); Caidor v. Onondaga Cnty., 517 F.3d 601,

604 (2d Cir. 2008) ([F]ailure to object timely to a magistrates report operates as a waiver of

any further judicial review of the magistrates decision.).

Dated: Central Islip, New York

February 1, 2017

/s/ Gary R. Brown

GARY R. BROWN
United States Magistrate Judge