Opinion
No. CIV. S-04-2749 DFL DAD.
November 15, 2005
FINDINGS AND RECOMMENDATIONS
This matter came before the court on August 26, 2005, for hearing on plaintiff General Holding, Inc.'s motion for default judgment against defendant Bancroft Ventures Limited. David Priebe and Joseph Wilson appeared on behalf of plaintiff General Holding, Inc. There was no appearance on behalf of defendant Bancroft Ventures Limited. Having considered all written materials submitted with respect to the motion, and after hearing oral argument, for the reasons set forth below the court will recommend that plaintiff's motion be granted.
Don Hancock, the president, chief executive officer and owner of plaintiff General Holding, Inc. was present at the hearing.
PROCEDURAL BACKGROUND
Plaintiff General Holding, Inc. ("General Holding") initiated this action by filing its complaint on December 30, 2004. Plaintiff filed an amended complaint on March 4, 2005. The named defendants in the amended complaint are Bancroft Ventures Limited ("Bancroft"); Derivium Capital (USA), Inc. ("Derivium USA"); Derivium Capital, LLC ("Derivium"); and Charles Cathcart.
While defendant Bancroft initially appeared in this action through counsel, by order filed June 9, 2005, the assigned district judge granted Bancroft's counsel's motion to withdraw. That order required Bancroft to appear through new counsel by July 8, 2005, or face default proceedings. Bancroft did not appear through new counsel. Therefore, pursuant to plaintiff's request, on July 12, 2005, the Clerk of the Court entered default against Bancroft. On July 19, 2005, plaintiff filed the instant motion along with a declaration by counsel addressing damages. Despite being served with all papers filed in connection with the motion for default judgment, defendant Bancroft has not responded to it. Defendants Derivium USA, Derivium and Cathcart have also failed to respond to the motion.
As requested, plaintiff filed proof of service of the motion on defendant Bancroft following the hearing. (See Doc. no. 41.)
Defendants Derivium USA, Derivium and Mr. Cathcart were served with the motion through their counsel, Juan Alberto Torres.
LEGAL STANDARDS
Federal Rule of Civil Procedure 55(b)(2) governs applications to the court for entry of default judgment. Upon entry of default, the complaint's factual allegations regarding liability are taken as true, while allegations regarding the amount of damages must be proven. Dundee Cement Co. v. Howard Pipe Concrete Products, 722 F.2d 1319, 1323 (7th Cir. 1983) (citingGeddes v. United Fin. Group, 559 F.2d 557 (9th Cir. 1977));see also TeleVideo Sys., Inc. v. Heidenthal, 826 F.2d 915, 917 (9th Cir. 1987). It is improper for the court to consider liability issues without first providing notice to plaintiff that the merits will be addressed. Black v. Lane, 22 F.3d 1395, 1398 (7th Cir. 1994). Where damages are liquidated (i.e., capable of ascertainment from definite figures contained in the documentary evidence or in detailed affidavits), judgment by default may be entered without a damages hearing. See Dundee, 722 F.2d at 1323. Unliquidated and punitive damages, however, require "proving up" at an evidentiary hearing or through other means.Dundee, 722 F.2d at 1323-24; see also James v. Frame, 6 F.3d 307, 310 (5th Cir. 1993).Granting or denying default judgment is within the court's sound discretion, see Draper v. Coombs, 792 F.2d 915, 924-25 (9th Cir. 1986) (citations omitted), and the court is free to consider a variety of factors in exercising that discretion, see Eitel v. McCool, 782 F.2d 1470, 1471-72 (9th Cir. 1986). The court may consider such factors as:
(1) the possibility of prejudice to the plaintiff, (2) the merits of plaintiff's substantive claim, (3) the sufficiency of the complaint, (4) the sum of money at stake in the action, (5) the possibility of a dispute concerning material facts, (6) whether the default was due to excusable neglect, and (7) the strong policy underlying the Federal Rules of Civil Procedure favoring decisions on the merits.Eitel, 782 F.2d at 1471-72 (citing 6 Moore's Federal Practice, ¶ 55-05[2], at 55-24 to 55-26).
ANALYSIS
This action arises from a stock loan transaction involving numerous individuals and entities located in several countries. The relevant events span a number of years and involve allegedly fraudulent activity. In sum, the detailed allegations of the well-drafted complaint indicate as follows:
Plaintiff General Holding is a California real estate development corporation. In 1999, defendant Derivium Capital, LLC made a loan to plaintiff under a structure Derivium called the 90% Stock Loan program. Under that program plaintiff pledged and transferred to Derivium 272,000 shares of stock in a New York Stock Exchange-traded company called MDC Holdings ("MDC"), then worth approximately $4.6 million, as collateral for a loan of approximately $4.1 million. Derivium promised to return the stock collateral once plaintiff paid the loan balance. Derivium also represented that it would engage in hedging strategies developed by its principal, defendant Charles Cathcart, that would allow it to fulfill its promise to return the stock even if it appreciated in value by the end of the loan term.
As the 1999 loan approached its November, 2001, ending date, plaintiff requested a new loan collateralized by the MDC stock, which had appreciated. Derivium assured plaintiff that the new loan had been approved and that funding would be forthcoming. However, that funding did not occur as promised. Derivium finally disclosed to plaintiff in March, 2002, that the true lenders under the 90% Stock Loan program were previously undisclosed foreign firms: defendant Bancroft, an Isle of Man company, and an Irish/Channel Islands company called DDA, which is not a party to this action. Plaintiff then demanded to pay off the loan balance and obtain the return of its stock.
Bancroft responded to plaintiff's demand by indicating that it had erred as to the term of the hedge it had taken on the loan; needed time to unwind the hedge; and would return the MDC stock to plaintiff in November, 2002. Approximately three years later, Bancroft has yet to return the stock which remains as collateral for a loan, the term of which expired in November of 2001. Indeed, the amended complaint alleges that all Derivium did in fact was sell the stock at the inception of the transaction; use 90% of the proceeds to fund the loan; and put the other 10% in the bank accounts of Bancroft and DDA. Derivium acknowledges the obligation to return the stock but blames Bancroft for the difficulties experienced in this regard.
The amended complaint speaks mostly of Derivium (i.e., Derivium Capital, LLC) as opposed to Derivium USA (i.e., Derivium Capital (USA), Inc.). However, according to the amended complaint Derivium USA was formed in 2002 as part of a scheme to continue the sham stock loan business of Bancroft and Derivium. The amended complaint alleges that each of the defendants was the agent of the other defendant and that each defendant acted with the full knowledge of each other defendant such that all defendants are subject to joint and several liability.
Through this lawsuit plaintiff seeks to recover the loan collateral which is now worth over $40 million as well as any decline in the value of that collateral caused by defendants' continuing conversion thereof. Plaintiff also seeks consequential damages. The amended complaint alleges the following nine claims for relief: (1) violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO") (against Bancroft, Derivium USA and Cathcart); (2) tortious interference with contract (against Bancroft); (3) conversion (against Bancroft and Cathcart); (4) breach of contract and third-party contract (against Bancroft); (5) aiding and abetting breach of fiduciary duty (against Bancroft, Cathcart and Derivium USA); (6) fraud (against Cathcart); (7) fraud (against Bancroft and Cathcart); (8) money had and received (against Bancroft, Cathcart and Derivium USA); and (9) fraudulent conveyance (against Bancroft, Cathcart, Derivium and Derivium USA).
The amended complaint prays for still other types of injunctive relief and damages, such as treble damages on the RICO claim and punitive damages, but such relief is not sought in the instant motion.
Thus, the only claim not brought against defendant Bancroft is the sixth claim for relief for fraud, which is brought against defendant Cathcart only.
Weighing the factors outlined in Eitel v. McCool, 782 F.2d at 1471-72, the undersigned has determined that default judgment against defendant Bancroft is appropriate. Defendant has made no showing that its failure to defend was due to excusable neglect. The complaint is sufficient, and while the amount of money at stake is substantial, that amount is merely a result of the nature of the business transaction in which the parties engaged. There also is no apparent possibility of a dispute concerning the material facts underlying the action and there is no reason to doubt the merits of plaintiff's substantive claims. The relevant factors weigh in plaintiff's favor. Accordingly, while recognizing the public policy favoring decisions on the merits, the court will recommend that default judgment be granted.
Upon determining that entry of default judgment is warranted, the court must next determine the terms of the judgment. According to the amended complaint, in June of 2004, defendant Cathcart informed plaintiff for the first time that the loan made through Derivium never had been properly hedged. The next month, plaintiff filed an arbitration demand against Derivium. On June 13, 2005, the arbitrator found for plaintiff on its claims for breach of contract, fraud and conversion. The arbitrator awarded plaintiff $46,558,705.08 in actual damages. This actual damages award was calculated by combining the value of the MDC stock collateral owed to General Holding (the published market value of 517,705 shares of MDC stock as of the date of the arbitration hearing ($40,588,072.00) less the loan balance at that time ($4,618,937.43)) and consequential damages of $10,589,570.51, which figure was determined by the arbitrator based largely on the testimony of Don Hancock.
Through the instant motion, plaintiff seeks the return of the 517,705 shares of MDC stock; monetary damages of $12,845,755.68; and post-judgment interest. This is consistent with the prayer for relief in the amended complaint. It also is supported by the detailed allegations of the amended complaint; plaintiff's memorandum of points and authorities; the arbitration award; portions of the record of the March 8-10, 2005, arbitration between plaintiff and Derivium Capital; and the declaration of Mr. Hancock. In this regard, as explained in plaintiff's Post-hearing Submission Regarding the Motion for Default Judgment, the monetary damages of $12,845,755.68 is made up of $6,688,748.60 for the decline in the value of the collateral caused by defendants' continuing conversion, plus $10,589,570.71 in consequential damages as testified to by Mr. Hancock at the arbitration hearing, less the loan balance of $4,432,563.63. Therefore, the undersigned will recommend that the assigned district judge grant plaintiff's motion for default judgment.
The $6,688,748.60 is the difference between the value of the MDC stock at its highest point in value between the dates of May 13, 2002 (the date plaintiff demanded to pay off the loan balance and obtain return of the MDC stock) and September 2, 2005 (the date of plaintiff's post-hearing submission). Plaintiff has established that the value of the MDC stock at its highest point in between those dates was $45,646,049.85 and that the value of the MDC collateral on September 2, 2005 was $38,957,301.25. Thus, plaintiff seeks to recover $6,688,748.60 as the decline in the value of the collateral caused by defendants' continuing conversion thereof.
Finally, plaintiff requests certification under Federal Rule of Civil Procedure 54(b). Rule 54(b) requires as follows:
When more than one claim for relief is presented in an action . . . the court may direct the entry of a final judgment as to one or more but fewer than all of the claims or parties only upon an express determination that there is no just reason for delay and upon an express direction for the entry of judgment.
Fed.R.Civ.P. 54(b); see Baker v. Limber, 647 F.2d 912, 916 (9th Cir. 1981) (applying Rule 54(b) to default judgment). With respect to judgments under Rule 54(b), the Ninth Circuit has stated as follows:
Judgments under Rule 54(b) must be reserved for the unusual case in which the costs and risks of multiplying the number of proceedings and of overcrowding the appellate docket are out balanced by pressing needs of the litigants for an early and separate judgment as to some claims or parties. The trial court should not direct entry of judgment under Rule 54(b) unless it has made specific findings setting forth the reasons for its order. Those findings should include a determination whether, upon any review of the judgment entered under the rule, the appellate court will be required to address legal or factual issues that are similar to those contained in the claims still pending before the trial court. A similarity of legal or factual issues will weigh heavily against entry of judgment under the rule, and in such cases a Rule 54(b) order will be proper only where necessary to avoid a harsh and unjust result, documented by further and specific findings.Morrison-Knudsen Co., Inc. v. Archer, 655 F.2d 962, 965 (9th Cir. 1981).
Here, the court finds that it is unlikely that Bancroft will appeal any entry of default judgment since it did not even file any opposition to the pending motion. If Bancroft were to proceed to appeal, the court recognizes that plaintiff's claims against defendants arise from the same factual events and that such a factual similarity weighs heavily against Rule 54(b) certification. Nonetheless, the papers filed in support of plaintiff's motion indicate that Bancroft is a fleeting entity. Bancroft has abandoned other lawsuits in the United States and ceased doing business here only to withdraw to the Isle of Man and then to other foreign jurisdictions. Any further delay would prejudice plaintiff's attempt to begin enforcing a judgment against Bancroft, which would amount to a "harsh and unjust result." Morrison-Knudsen Co., Inc., 655 F.2d at 965.
Further, the nature of liability sought by plaintiff favors the entering of judgment as requested. The second and fourth claims brought against Bancroft in the amended complaint are for tortious interference with contract and breach of contract and third-party contract, respectively, and brought against Bancroft solely. See Angelo Iafrate Const., LLC v. Potashnick Const., Inc., 370 F.3d 715, 722 (8th Cir. 2004) ("Parties are not similarly situated and a default judgment does not establish inconsistent judgments, however, if the liability of the defaulting party is based on independent wrongful acts or a legal theory distinct from the one under which the answering party prevailed."). The other claims, while brought against Bancroft along with other defendants, involve joint and several liability. See In re Uranium Antitrust Litigation, 617 F.2d 1248, 1256-58 (7th Cir. 1980) (affirming default judgment in antitrust case on grounds that, because liability in antitrust cases was joint and several, nonliability of some defendants would not preclude liability of other defendants). Therefore, under the circumstances, the undersigned further will recommend that the district judge expressly determine that there is no just reason for delay and direct the entry of judgment against defendant Bancroft.
CONCLUSION
Accordingly, for the reasons stated above, the court HEREBY RECOMMENDS that:
1. Plaintiff's motion for default judgment be granted;
2. The district court expressly determine pursuant to Rule 54(b) that there is no just reason for delay and direct the entry of default judgment against defendant Bancroft on plaintiff's claims brought against it; and
3. Defendant Bancroft be directed to (1) return to plaintiff 517,705 shares of MDC Holdings stock, plus any additional shares that may be issued as dividends subsequent to the date of any judgment entered herein; (2) pay monetary damages of $12,845,755.68; and (3) pay post-judgment interest.
These findings and recommendations are submitted to the United States District Judge assigned to the case pursuant to the provisions of 28 U.S.C. § 636(b)(1). Within ten (10) days after being served with these findings and recommendations, any party may file written objections with the court and serve a copy on all parties. Such a document should be captioned "Objections to Findings and Recommendations." The parties are advised that failure to file objections within the specified time may waive the right to appeal the District Court's order. Martinez v. Ylst, 951 F.2d 1153 (9th Cir. 1991).