Opinion
No. C-01-3676 PJH (JCS)
December 20, 2002
REPORT AND RECOMMENDATION RE PLAINTIFF'S APPLICATION FOR DEFAULT JUDGMENT [Docket No. 30]
I. INTRODUCTION
Plaintiff's Application For Default Judgment By Court ("the Motion") came on for hearing on December 13, 2002. For the reasons stated below, it is recommended that the Court GRANT Plaintiff's Motion for default judgment against Defendant American Fronteer Financial Corporation. Plaintiff should be awarded $381,564.08 in damages and $5,718.00 in attorneys' fees and costs, for which Defendants American Fronteer and Auerbach, Pollack Richardson should be jointly and severally liable.
The Court provides here only a brief overview of the facts. A more detailed recital of the facts is contained in the Court's April 1, 2002 Report and Recommendation (erroneously file stamped March 32, 2002), which is incorporated by reference, in its entirety, in this Report and Recommendation.
Plaintiff Montgomery Building, Inc. ("Montgomery") brought this action for breach of a commercial lease against three Defendants: 1) Auerbach, Pollack Richardson ("Auerbach"); 2) American Fronteer Financial Corp. ("American Fronteer"); and 3) RAF Financial Corp. ("RAF"). Although the only Defendant that was named in the lease was RAP, Montgomery alleged that American Fronteer and Auerbach were also liable. In particular, Montgomery alleged that American Fronteer was liable because it was either the same entity as RAP with a new name or because American Fronteer had acquired RAP. Montgomery alleged that Auerbach was liable under the lease because RAF and/or American Fronteer had transferred all of their assets and liabilities — including their obligations under the lease — to Auerbach.
Montgomery served the complaint on Defendant Auerbach and Auerbach failed to appear. Accordingly, default was entered against Auerbach and Montgomery brought a motion for default judgment against that Defendant only. The Court granted Montgomery's motion, adopting the findings of the April 1, 2002 Report and Recommendation by the undersigned Magistrate Judge and awarding damages and attorneys' fees.
As the Court explained in its April 1, 2002 Order, the complaint was served on John Ferguson, as registered agent for Auerbach, on October 1, 2001. Default was entered as to Auerbach on November 27, 2001. Subsequently, however, Montgomery's counsel received a letter from John Ferguson stating that he was no longer the registered agent for Auerbach. As a result, Montgomery served the complaint again on December 7, 2001, this time on Hugh Regan, the president and CEO of Auerbach. When Auerbach again failed to appear, a new default was entered, on January 16, 2002.
On October 1, 2001, Montgomery served the complaint on American Fronteer, do Gary L. Cook. American Fronteer failed to appear. However, Montgomery did not immediately request entry of default because on October 17, 2001, American Fronteer filed for bankruptcy under Chapter 11. While the bankruptcy proceeding was pending, this Court could take no binding action against American Fronteer. On August 9, 2002, this Court took judicial notice of an order by the bankruptcy court, dated March 26, 2002 dismissing American Fronteer's Chapter 11 bankruptcy proceeding. Montgomery now seeks default judgment against American Fronteer and an award of damages in the same amount as was awarded against Auerbach, that is, $381,564.08. Montgomery's counsel stipulated at oral argument on this Motion that no further fees and costs are requested by Montgomery beyond those that were previously awarded by the Court.
III. ANALYSIS A. Standard For Awarding Default Judgment
Plaintiff has applied for a default judgment in this action on the basis that Defendant American Fronteer has failed to appear after valid service. Under Federal Rule of Civil Procedure 55(b)(2), the court may enter a default judgment where the clerk, under Rule 55(a), has already entered the party's default based upon failure to plead or otherwise defend the action. The district court's decision to enter a default judgment involves some discretion. Lau Ah Yew v. Dulles, 236 F.2d 415 (9th Cir 1956) (affirming district court's denial of default judgment). Further, Rule 55(c) allows the district court to exercise its discretion a second time by setting aside a default judgment in appropriate circumstances. The court is free to consider a wide range of factors in deciding whether to enter a default judgment, including: "(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." Ettel v. McCool, 782 F.2d 1470, 1471-1472 (9th Cir. 1986). see also Wright Miller, Federal Practice and Procedure, Civil § 2685. In deciding whether to enter a default judgment, the Court may also consider whether there would be grounds for setting aside the judgment if the defaulting party were to seek such relief. Id.
Here, Defendant American Fronteer failed to appear after valid service. The Court finds no evidence in the record that American Fronteer's failure to appear in this action was due to excusable neglect. Further, in light of the substantial amount of money at issue in this action, Plaintiffs will be prejudiced if this Court does not enter default judgment against American Fronteer. Therefore, so long as Plaintiffs' claim is well-pleaded, default judgment should entered against American Fronteer.
B. Liability as to "Well-Pleaded" Allegations
Where a default judgment is deemed appropriate, the factual allegations of the complaint, except those relating to damages, are taken as true. Geddes v. United Financial Group, 559 F.2d 557, 560 (9th Cir. 1977) (citing Pope v. United States, 323 U.S. 1, 12 (1944)). So long as the allegations in the complaint are "well-pleaded," liability is established as to those allegations by the default. Trans World Airlines Inc. v. Hughes, 308 F. Supp. (D.C.N.Y. 1969), modified on other grounds, 449 F.2d 51, rev'd on other grounds, 409 U.S. 363 (1973).
The Court finds that the single claim in Montgomery's complaint, a claim under Cal. Civ. Code § 1951.2, is well-pleaded. Montgomery alleges in its complaint that it is entitled to the remedies set forth in Cal. Civ. Code § 1951.2 because American Fronteer breached the lease for the premises at 601 Montgomery Street. Complaint at 2. Montgomery further alleges that American Fronteer is liable for breach of contract even though RAE was the original lessee because RAF either changed its name or was acquired by American Fronteer. Thus, Montgomery must establish that: 1) RAF and Montgomery are the same entity; and 2) American Fronteer is liable for breach of contract under the terms of the Lease. Montgomery has satisfied both requirements.
Section 1951.2 provides as follows:
(a) Except as otherwise provided in Section 1951.4, if a lessee of real property breaches the lease and abandons the property before the end of the term or if his right to possession is terminated by the lessor because of a breach of the lease, the lease terminates. Upon such termination, the lessor may recover from the lessee:
(1) The worth at the time of award of the unpaid rent which had been earned at the time of termination; (2) The worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the lessee proves could have been reasonably avoided; (3) Subject to subdivision (c), the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the lessee proves could be reasonably avoided; and (4) Any other amount necessary to compensate the lessor for all the detriment proximately caused by the lessee's failure to perform his obligations under the lease or which in the ordinary course of things would be likely to result therefrom. (b) The "worth at the time of award" of the amounts referred to in paragraphs (1) and (2) of subdivision (a) is computed by allowing interest at such lawful rate as may be specified in the lease or, if no such rate is specified in the lease, at the legal rate. The worth at the time of award of the amount referred to in paragraph (3) of subdivision (a) is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus 1 percent. (c) The lessor may recover damages under paragraph (3) of subdivision (a) only if: (1) The lease provides that the damages he may recover include the worth at the time of award of the amount by which the unpaid rent for the balance' of the term after the time of award, or for any shorter period of time specified in the lease, exceeds the amount of such rental loss for the same period that the lessee proves could be reasonably avoided; or (2) The lessor relet the property prior to the time of award and proves that in reletting the property he acted reasonably and in a good-faith effort to mitigate the damages, but the recovery of damages under this paragraph is subject to any limitations specified in the lease. (d) Efforts by the lessor to mitigate the damages caused by the lessee's breach of the lease do not waive the lessor's right to recover damages under this section. (e) Nothing in this section affects the right of the lessor under a lease of real property to indemnification for liability arising prior to the termination of the lease for personal injuries or property damage where the lease provides for such indemnification.
First, the Complaint alleges that the original lessee changed its name to American Fronteer or was acquired by American Fronteer. Second, the evidence indicates that RAF and American Fronteer are, in fact, the same entity. Montgomery presented evidence that RAP changed its name to American Fronteer, effective July 13, 1998. See Second Further Shepardson Decl. at 1, ¶ 2 and National Securities Clearing Corporation Change in List of Participants, Ex. 1 to Second Further Shepardson Decl. The record also reflects that Gary L. Cook, who signed the Lease on behalf of RAF, later accepted service of the complaint on behalf of American Fronteer, see Exh. A to Proof of Service of Summons and Complaint, and is listed as an officer of American Fronteer in its bankruptcy pleading, see Exh. 3 to Second Further Decl. of Scott Shepardson. Therefore, to the extent that RAF would have been liable for breach of contract, American Pronteer is also liable.
The allegations are also sufficient to establish that American Fronteer breached its contract with Montgomery. In particular, the complaint alleges that Auerbach, to whom American Fronteer assigned the Lease, failed to make required payments under the Lease. Complaint at ¶ 8. Pursuant to the Lease, Montgomery was entitled to seek the remedies contained in Cal. Civ. Code § 1951.2 in the event of default. Lease, § 19(a), Exh. D to Declaration of Scott S. Shepardson in Support of Entry of Default Judgment Against American Fronteer Financial Corporation by the Court ("Shepardson Decl. re American Fronteer"). Further, American Fronteer's obligations under the Lease were not terminated when the Lease was assigned to Auerbach. See id. at § 14(a). Therefore, American Fronteer is liable for Auerbach's failure to make required payments under the Lease following assignment of the Lease to Auerbach.
IV. CONCLUSION
For the reasons stated above, it is recommended that Plaintiff's Motion be GRANTED and that default judgment be entered against American Fronteer in the amount of $381,564.08 in damages and pre-judgment interest and $5,718.00 in attorneys' fees and costs, for which American Fronteer and Auerbach shall be jointly and severally liable.
The Court should make clear in its Order that the award of damages against American Fronteer is not several, as Montgomery requests in its Motion, as this would afford Montgomery a double recovery (having already received an award against Auerbach covering the full amount to which it entitled in the Court's August 12, 2002 Order). Rather, the Order should award the same amount against American Fronteer as was awarded against Auerbach, for which the two defendants should be jointly and severally liable. The court should also make clear that the Order granting default judgment against American Fronteer does not impose any additional liability against Auerbach but rather, simply makes Auerbach jointly and severally liable rather than solely liable for the amount awarded against it in damages in the August 12, 2002 Judgment.