Opinion
Civil Action No. 95-1047 (JBS).
January 19, 2001
MEMORANDUM OPINION GRANTING PLAINTIFFS' MOTION FOR DEFAULT JUDGMENT AS TO LIABILITY ONLY ON LEGAL MALPRACTICE CLAIM AGAINST BAKER DEFENDANTS
This matter is before the Court upon plaintiffs' motion for entry of a default judgment against defendants Scott R. Baker, Esquire, and The Scott Baker Firm, P.C., pursuant to Rule 55(b), Fed.R.Civ.P., following this Court's Order striking defendants' answer to plaintiffs' Third Amended Complaint for failure to appear and defend. The Court has considered the Affidavits of Elizabeth G. Dixon, Esquire (on behalf of plaintiff Louis F. Larsen) and Richard J. Kwasny, Esquire (on behalf of the other twenty-six plaintiffs), and the letter opposition of Scott Baker on his own behalf. Where, as in this case, default has previously been entered against these defendants, the plaintiffs have the burden under Rule 55(b)(2), Fed.R.Civ.P., to establish that the essential elements of the pleaded claims are present, normally taking the factual allegations in the complaint as true. See Fed.R.Civ.P. 8(d); Comdyne I v. Corbin, 908 F.2d 1142, 1149 (3d Cir. 1990); Fehlhaber v. Indian Trails, Inc., 425 F.2d 715, 717 (3d Cir. 1970); D.B. v. Bloom, 896 F. Supp. 163, 170 n. 3 (D.N.J. 1995). The court in its discretion may require some proof of facts that must be established to determine liability. 10A Wright, Miller Kane, Federal Practice and Procedure § 2688 at 60-61 (citing, inter alia, D.B. v. Bloom, supra, 896 F. Supp. at 170 n. 2). Requiring supplemental proof of essential facts would be especially appropriate in the present case where defendants' default arose not from failure to answer but instead from the striking of the answer (and defendants' denials) due to failure to appear and defend.
Rule 8(d), Fed.R.Civ.P., reads:
(d) Effect of Failure to Deny . Averments in a pleading to which a responsive pleading is required, other than those as to the amount of damage, are admitted when not denied in the responsive pleading. Averments in a pleading to which no responsive pleading is required or permitted shall be taken as denied or avoided.
After the Court determines that judgment by default should be entered as to liability, the court must address the quantum of damages or other recovery to be awarded. If a specific damages sum was sought in the complaint and uncontested, the court has discretion to award that amount without further hearing. 10A Wright, Miller Kane, supra, § 2688 at 63.
Where, as in the present case, the sum is not certain and is not susceptible to easy computation, the court may require submission of supplemental evidence of damages by hearing or otherwise. Id. at 69-70. The court has discretion to convene a damages hearing or to act upon the basis of affidavits setting forth the amount and basis for establishing and calculating damages, by a person with knowledge, and sufficient documentary evidence to satisfy the court. Bartkus, N.J. Federal Civil Procedure, § 17-3:3.2 at 443 n. 53 (1999), citing Dundee Cement Co. v. Howard Pipe Concrete Products, 722 F.2d 1319, 1323 (7th Cir. 1983) (citing Magette v. The Daily Post, 535 F.2d 856 (3d Cir. 1976));Broadcast Music, Inc. v. De Gallo, Inc., 872 F. Supp. 167 (D.N.J. 1995); accord, Transportes Aeros DeAngola v. Jet Traders Inv. Corp., 624 F. Supp. 264 (D.Del. 1985). A damages hearing will be especially appropriate under Rule 55(b)(2) where there are multiple claimants, issues of proximate causation, or other complexities in ascertaining the degree of damages, as contrasted with the mere fact of damage. See generally Pope v. United States, 323 U.S. 1, 12 (1944); Fehlhaber v. Indian Trails, supra, 425 F.2d at 715; Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., 109 F.3d 105 (2d Cir. 1997); Eisler v. Stritzler, 535 F.2d 148 (1st Cir. 1976).
Based upon the pleadings and all relevant submissions, the Court finds as follows:
1. On August 3, 1995, plaintiffs filed a Third Amended Complaint, which named Scott R. Baker, Esquire and The Scott Baker Firm, P.C. (collectively, "the Baker defendants") as defendants and asserted fraud, civil Racketeer Influenced and Corrupt Organizations Act ("RICO"), civil conspiracy, and legal malpractice claims against those defendants.
2. The history of this case was previously summarized by this Court. Andrews v. Holloway, No. 95-1047, slip op. (D.N.J. Nov. 9, 1995). The plaintiffs in this case are twenty-seven individuals who invested in a limited partnership, defendant Continental Rare Coin Fund I, Ltd. ("CRCF I"), in response to a 1988 prospectus issued by defendant Gregory Holloway ("Holloway"). Holloway was the sole shareholder of CRCF I and served as the firm's investment advisor. The purpose of the limited partnership was to invest in rare domestic coins, capitalized by the $1.7 million dollar investment of the partner plaintiffs. The total investment in CRCF I, including those investors who are not plaintiffs, was $4 million in 1988. At the end of 1989, the limited partnership held coins in its inventory worth over $5 million. By 1992, the partnership had no value and had ceased operations. The investor-plaintiffs were not made aware of the status of the venture until 1994. See Andrews v. Holloway, No. 95-1047, slip op. at 2 (D.N.J. Nov. 9, 1995).
3. An Order Striking the Answer and Granting Default against the Baker defendants was entered in this Court on July 29, 1997, due to the Baker defendants' repeated disobedience to court orders and failure to participate, for reasons found therein. Plaintiffs now seek entry of a final default judgment against Baker and his firm in an amount equal to their initial contributions, or $2,009,302.70. Plaintiffs additionally seek treble damages related to their RICO claim, pursuant to 18 U.S.C. § 1964(c).
4. Because only plaintiffs' submissions on the claim of legal malpractice brief the issue, as previously requested by this Court, this Court will evaluate and grant the entry of a default judgment of liability against the Baker defendants only on the legal malpractice claim. Plaintiffs' motion for entry of default judgments on the remaining fraud, civil RICO, and civil conspiracy claims will be denied.
5. Scott R. Baker, Esquire, served as counsel to the partnership and the individual partners from 1988 until July 30, 1991. Baker prepared the limited partnership agreement for CRCF I (Dixon Aff., Ex. H) and advised Holloway on redemption procedures (Dixon Aff., Ex. B, T 11-3 to 11-5).
6. In 1989, the Continental Companies entered into an oral contract with Charles and Michael Byers ("Byers") and their corporations, The C.B. Byers Corp. and Byers Numismatic Corp., which contract required Byers and their corporations to purchase foreign coins on behalf of CRCF I. (Dixon Aff., ¶ 14.) From March, 1989 until August, 1990, Byers purchased foreign coins on behalf of CRCF I. (Id.) No later than April 3, 1990, after receiving a letter from Price Waterhouse regarding CRCF I's ownership of foreign coins, Baker became aware that the Continental Companies were involved in the sale of foreign coins, in violation of the Partnership Agreement he himself drafted. In a draft reply letter to Price Waterhouse, Baker stated that "it is not clear whether [CRCF I]'s acquisition of foreign coins would constitute a factual basis which might give rise to legal liability for potential claims and assessments." (Dixon Aff., Ex. F).
7. In May, 1990, Baker drafted a letter to investors that proposed an Amended and Restated Partnership Agreement which would allow CRCF I to deal in foreign coins. (Dixon Aff., Ex. G.) This letter did not inform investors that Continental Companies had been purchasing foreign coins from Byers since March, 1989. In July, 1990, Baker received a letter from the attorney for Byers threatening litigation related to their oral purchasing contract. (Dixon Aff., Ex. B, T 99-9 to 99-12.) Baker testified that he does not recall what, if anything, he did in response to the letter. (Id., T 99-13 to 100-2.) On November 7, 1990, Byers filed a fraud and breach of contract suit in California against Continental Companies. Baker gave advice and counsel to Holloway and CRCF I on that litigation. (Dixon Aff., Ex. B, T 11-9 to 11-12.) On December 14, 1990, Baker and Byers settled the California suit for $32,500.00. (Dixon Aff., ¶ 22.) In May, 1991, the Continental Companies filed suit against Byers, alleging fraud and breach of contract. (Id. at 23.) The CRCF I investors were not advised of these suits by Baker or Holloway until July, 1991, when a general status letter was sent out. (Dixon Aff., Ex. I.) There were few details about the foreign coin dealings, litigation, or settlement agreement contained in the status letter. (Id.)
8. Plaintiffs allege that Baker improperly benefitted from CRCF I and the sale of King of Siam foreign coin sets. (Kwasny Aff., ¶ 23.) Baker denies receiving any money not owed to him for services. (Baker Reply Letter, Sep. 11, 1997 at 3-4.) On July 30, 1991, Baker advised Holloway that he was resigning as corporate counsel for the Continental Companies. (Dixon Aff., Ex. C., Holloway Letter.) In the lengthy resignation letter, Baker refers to a series of conversations and communications in which he expressed concern about the dealings of the Continental Companies. Baker acknowledges that he was aware Holloway commingled funds and used CRCF I monies for personal investments. (Id. at 1.) Baker further acknowledges that he was aware that the non-disclosure of such commingling to investors violated securities law. (Id. at 2.) Also on July 30, 1991, Baker sent a very brief letter to investors advising only that he was terminating his legal representation of the Continental Companies. (Dixon Aff., Ex. C, Landrum (Investor) Letter.) This investor letter failed to advise investors of the improper and illegal conduct of which he was aware. (Id.)
9. This Court's jurisdiction over this matter was originally vested in 28 U.S.C. § 1331, because plaintiffs' civil action arose under the RICO statute, 18 U.S.C. § 1961, et seq., and supplemental jurisdiction over plaintiffs' legal malpractice claim is vested in this Court pursuant to 28 U.S.C. § 1367(a).
10. State law is applied by federal courts in three situations: (1) when they are so required by Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), (2) when they are so directed by a federal statute, or (3) as a matter of discretion in their exercise of power to so choose. Monmouth County Corr. Inst. Inmates v. Lanzaro, 643 F. Supp. 1217, 1221 (D.N.J. 1986). The Erie doctrine applies in federal question as well as diversity cases. Monmouth County, 643 F. Supp. at 1221. This Court will, therefore, apply state law to determine the legal malpractice claim herein. Having determined that state law will govern, this Court next must determine whether there is a meaningful conflict between the law of legal malpractice in New Jersey and Texas. Upon review of the applicable law as stated by the appellate courts of both states, this Court finds that there is no material difference between New Jersey and Texas law on legal malpractice. See DeAngelis v. Rose, 320 N.J. Super. 263, 274, 727 A.2d 61 (App. Div. 199 9) (requiring proof of a duty, the breach of that duty, and the proximate causation of damages for legal malpractice claim); Longaker v. Evans, 2000 WL 1726691, *10, ___ S.W.3d ___ (Tex.App., 2000) (holding that legal malpractice, like negligence, required showing of duty, breach, causation, and negligence). Because there is no meaningful conflict between New Jersey and Texas law, this court will apply the law of the forum state, New Jersey.
11. Under New Jersey law, the elements required to state a prima facie case for legal malpractice are: "(1) the existence of an attorney-client relationship creating a duty of care upon the attorney; (2) the breach of such duty; and (3) proximate causation." RTC Mortg. Trust 1994 N-1 v. Fidelity Nat. Title, 58 F. Supp.2d 503, 521 (D.N.J. 1999) (quoting DeAngelis, 320 N.J. Super. at 274). Ordinarily, New Jersey law requires an affidavit of merit, signed by someone in the legal profession, stating that a reasonable probability exists that the attorney defendant committed malpractice. See N.J.S.A . 2A:53A-27. No such affidavit is required in this malpractice action because the facts critical to determining the malpractice at issue occurred prior to the effective date, June 29, 1995, of the New Jersey statute. Waterloov Gutter Prot. Sys. Co., Inc. v. Absolute Gutter Prot., L.L.C., 64 F. Supp.2d 398, 425 n. 21 (D.N.J. 1999) (citing Alan J. Cornblatt, P.A. v. Barrow, 153 N.J. 218, 229, 708 A.2d 401, 406 (1998)). Despite this, in her affidavit in support of entry of a final judgment, Elizabeth Dixon, Esquire, attorney for plaintiff Louis F. Larsen, submitted that to "a reasonable degree of professional certainty . . . the breaches set forth [in her affidavit] fall substantially and materially below the reasonable standard of care for an attorney." (Dixon Aff., ¶ 37.) This Court credits the Dixon affidavit on this point.
12. It is undisputed that the Baker defendants represented both the Continental Companies and the CRCF I investors. (Dixon Aff., Ex. C., Letter from Baker to Holloway.) This attorney-client relationship created a duty of care upon Baker and his firm. Thus, each plaintiff herein was a client of Baker and his firm, through their investor status in CRCF I.
13. Plaintiffs allege that the Baker defendants breached that duty in a number of ways, such as by allowing foreign coins to be purchased in violation of the CRCF I's Partnership Agreement, by failing to disclose such a violation to the investors, by failing to advise outside auditors and investors of the Byers litigation or the subsequent settlement, by drafting a misleading and incomplete status letter to investors, by failing to advise investors about Holloway's commingling of funds, and by failing to advise investors of the reasons behind his resignation. (Dixon Aff., ¶ 36.)
14. This Court finds that Baker breached his duty to CRCF I and the investor plaintiffs when he failed to advise them of the lawsuit filed by Byers against the Continental Companies in November, 1990, failed to advise them of the subsequent settlement in December, 1990, failed to timely advise them of Continental Company's suit against Byers in May, 1991, and when he failed to advise investors that the General Partner, Holloway, was commingling funds and taking inappropriate actions with their investment monies including investments in foreign coins. Although Baker, in his opposition to entry of default judgment, attempts to absolve himself of all liability because he himself did not commingle funds, this Court still finds that Baker's failure to forthrightly advise investors of the active litigations in which the Continental Companies were involved, which litigations directly related to the unauthorized acquisition and sale of rare foreign coins for CRCF I and therefore the investment monies, and his failure to advise investors of Holloway's improper handling of investment monies constitutes a breach of his duty as counsel to the partnership and the investors. Baker further asserts that the loss incurred by plaintiffs would have been the same even if he had communicated all of the information to the investors. Such an argument, which is more appropriately addressed during the damages hearing, does not excuse Mr. Baker's failure to honor the duty owed to his then clients.
15. Plaintiffs assert that the malpractice of the Baker defendants directly and proximately caused damage to them. Plaintiffs argue that Baker's actions gave them a false sense of security in their investments, precluded them from actively participating in litigation that directly impacted their investments, and prevented them from withdrawing their investments after Holloway allegedly commingled funds and committed other misdeeds. This Court now finds that Baker's malpractice had some causal relationship with plaintiffs' losses. Upon submission by plaintiffs of additional proofs, stating how each plaintiff would have adjusted their investment had Baker informed them of the litigations and foreign coin dealings, and addressing the degree to which each plaintiff's loss of investment related to the improprieties within Baker's knowledge rather than to independent factors such as the general market decline in domestic rare coins, and specific damage calculations related to each plaintiff, this Court will be able to make a more detailed finding related to this claim.
16. Although plaintiffs offer some damage calculation, this Court wishes to have a more detailed damage analysis from the plaintiffs, specifically taking into account other factors that may have contributed to the failure of the investment, such as the overall decline in the coin market. Also, plaintiffs' evidence must specifically detail how the malpractice of Baker defendants proximately caused their damages.
17. This Court has considered whether plaintiffs' proofs of damages should be by affidavit or by hearing. Having determined that the present affidavit of plaintiffs' counsel is insufficient to enable the Court to confidently assess the damages caused by Baker's legal malpractice, and recognizing the preference of Rule 55(b), Fed.R.Civ.P., for an evidentiary hearing on the quantum of default judgment damages in complicated matters, as discussed above, this Court will require a damages hearing. Plaintiffs must submit sufficient evidence of the degree of each plaintiff's loss proximately caused by the Baker defendants' legal malpractice.
18. The Court will convene a pre-hearing conference with plaintiffs' attorneys, in which the Baker defendants are invited to participate, to set the date and other parameters of the damages hearing. The conference will be convened before the undersigned on Monday, February 5, 2001 at 2:00 p.m. in Courtroom 4A.
19. The accompanying Order is entered granting default judgment of liability for legal malpractice in favor of plaintiffs and against defendants Scott R. Baker, Esquire and the Scott Baker Firm, P.C., and denying default judgment upon plaintiffs' remaining claims of liability arising from fraud, civil RICO, and civil conspiracy. The court will convene a pre-hearing conference on Monday, February 5, 2001 at 2:00 p.m., and will then set the date for the default judgment damages hearing, as stated above.
According to the Opposition Letter to entry of a default judgment submitted by Baker, his law firm P.C. was dissolved as of September, 1997. (Baker Opp., Sep. 11, 1997 at 5.)
All plaintiffs except Mr. Louis F. Larsen ("Larsen") are represented by Richard J. Kwasny, Esquire. Larsen is represented by Elizabeth G. Dixon, Esquire. All plaintiffs join in this motion for entry of a default judgment against Baker and his firm for fraud, civil RICO, civil conspiracy, and legal malpractice.
Also defendants in this action are Continental Investment Group ("CIG") and Continental Rare Coin Funds, Inc. (collectively, "the Continental Companies").
In his letter to Holloway dated July 30, 1991, Baker acknowledged: "Ethically and technically, I assumed legal representation of the investors in each of the funds at the final closing on each fund. Consequently, they are entitled to notification of the termination of the attorney-client relationship." (Dixon Aff., Ex. C at 3.)
The damages hearing will embrace the issue of compensatory damages proximately caused by the Baker defendants' legal malpractice. Punitive damages will not be addressed because none are sought in the applicable claim for legal malpractice stated in Count XX of the Third Amended Complaint. Moreover, the prospect of any substantial award of punitive damages against the Baker defendants appears to be minimal, absent proof of some aggravating circumstance such as self-dealing, active misconduct (as contrasted with negligent omissions) or some other "evil- minded act" or an act accompanied by a wanton and willful disregard of the rights of another. Nappe v. Anschelewitz, Barr, Ansell Bonello , 97 N.J. 37, 49 (1984). From the proofs submitted, Baker's neglect and carelessness do not appear to rise to the aggravated level required for punitive damages.
Since Mr. Baker appeared in opposition to these default judgment motions on behalf of himself and his former firm, notice of this conference will be given in the accompanying Order to Mr. Baker and will be deemed sufficient notice to both Mr. Baker and the Scott Baker Firm, P.C.
If the Baker defendants have obtained counsel through their malpractice insurance carrier, that counsel may appear and participate with respect to the conference and damages hearing only.
ORDER
This matter came before the Court upon plaintiffs' motion for default judgment pursuant to Rule 55(b), Fed.R.Civ.P.; andThe Court having considered the pleadings and submissions in support and the opposition submitted on behalf of the Baker defendants; and
For good cause shown under Rule 55(b), Fed.R.Civ.P., for reasons stated in the Memorandum Opinion of today's date;
IT IS this Day of January, 2001 hereby
ORDERED that plaintiffs' motion for default judgment pursuant to Rule 55(b), Fed.R.Civ.P., be and hereby is GRANTED IN PART and DENIED IN PART as follows:
IT IS ORDERED and ADJUDGED that partial default judgment upon plaintiffs' claim for legal malpractice liability be entered in favor of plaintiffs JOHN R. ANDREWS, RHEBA ANGLE, JOHN G. FORSHNER, PAUL FREEMAN, JEFFREY B. GLADSTONE, DR. DANIEL GROSS, FRANK D. HOUSER, JAMES E. ISBELL, JR., ESTATE OF PATRICK J. KENNEDY, HUGH B. LANDRUM, JR., DR. JOSEPH A. HELFRICH, MS. NORMA JEAN LANGDON, DONALD E. LEE, NILES R. LEEPER, ALAN G. MAYER, FRANCES MCGOWAN, PHILIP PEARLSTEIN, D.O., MARTIN RAWDIN, O.D., ROBERT O. SAFFORD, STEPHEN E. WOODS, ROBERT A. FOSTER, LOUIS F. LARSEN, DONALD A. MCELVANEY, JUDITH LANING, ROBERT MORLEY, M.D., JACK WILSON, D.D.S., and ARLIS PRIEST, and against defendants SCOTT R. BAKER, ESQ. and THE SCOTT BAKER FIRM, P.C., and
IT IS FURTHER ORDERED that the issues relating to the amount of this default judgment (compensatory damages) shall be determined at a default judgment hearing, to be convened at a date to be set at the pre-hearing conference before the undersigned on Monday, February 5, 2001 at 2:00 p.m.; and
IT IS FURTHER ORDERED that default judgment is DENIED as to plaintiffs' remaining claims against the Baker defendants for fraud, civil RICO and civil conspiracy.
____________________ JEROME B. SIMANDLE U.S. District Judge