Ebi Securities Corp. v. Net Command Tech, Inc. , 85 F. App'x 105 ( 2003 )

F I L E D
United States Court of Appeals
Tenth Circuit
UNITED STATES COURT OF APPEALS
DEC 22 2003
TENTH CIRCUIT
PATRICK FISHER
Clerk
EBI SECURITIES CORPORATION,
INC., a Colorado corporation on behalf of
itself and Net Command Tech, Inc.,
formerly known as Corsaire, Inc., and
Corsaire Snowboard, Inc.,
Plaintiff-Counter-Defendant-
Appellee,
v. No. 01-1524
NET COMMAND TECH, INC., a Florida (D.C. No. 99-K-1361)
corporation, formerly known as Corsaire, (D. Colorado)
Inc., formerly known as Corsaire
Snowboard, Inc.,
Defendant,
and
RENE MICHAEL HAMOUTH,
individually; THE HAMOUTH FAMILY
TRUST; 411396BC, Ltd.,
Defendants-Counter-Claimants-
Appellants.
ORDER AND JUDGMENT*
*
This order and judgment is not binding precedent, except under the doctrines of
law of the case, res judicata, and collateral estoppel. The court generally disfavors the
citation of orders and judgments; nevertheless, an order and judgment may be cited under
the terms and conditions of 10th Cir. R. 36.3.
Before EBEL, BRISCOE and TYMKOVICH, Circuit Judges.
Defendants Rene Michael Hamouth (Hamouth), The Hamouth Family Trust
(Trust), and 411396BC, Ltd., (BC) were sued by plaintiff EBI Securities Corporation,
Inc., (EBI) for allegedly having violated § 16(b) of the Securities Exchange Act of 1934.
After defendants failed to respond to plaintiff’s discovery requests, comply with an
agreed-upon settlement, and appear at a show cause hearing, the district court entered
default judgment against them. Defendants now appeal. We exercise jurisdiction
pursuant to 28 U.S.C. § 1291, and reverse and remand for further proceedings.
I.
EBI is a corporation with its principal offices in Englewood, Colorado. At all
times pertinent, EBI was a broker/dealer licensed with the National Association of
Securities Dealers, Inc. Hamouth, a Canadian citizen, was a director and controlling
stockholder of Corsaire Snowboard, Inc., a Delaware corporation with its principal place
of business in West Vancouver, British Columbia. Hamouth also beneficially owned and
controlled or directed the Trust and BC.
On July 16, 1999, EBI filed this action against defendants, alleging defendants
Hamouth, the Trust, and BC wrongfully realized short-swing profits from trading the
common stock of Corsaire in violation of § 16(b) of the Securities Exchange Act of 1934,
15 U.S.C. § 78p(b). The summons and complaint were served on defendants by Canadian
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authorities pursuant to the Hague Convention on November 9, 1999. On November 29,
1999, defendants requested an extension to December 20, 1999, to file their answer,
which was granted.
On December 10, 1999, Jeffrey J. Scott, defendants’ first attorney, filed a motion
to withdraw. Scott’s motion advised defendants
that “[t]hey [were] personally responsible for complying with all Court
orders and time limitations established by any applicable rules,” that “they
[could not] appear without counsel admitted to practice before [the district
court],” and that “[a]bsent prompt appearance of substitute counsel,
pleadings, motions, and other papers may be stricken, and default judgment
or other sanctions may be imposed against them.”
Aplee. Br. at 4 (quoting motion to withdraw). The district court granted Scott’s motion
on December 13, 1999, and a copy of the order was served on the defendants.
Defendants failed to file an answer or otherwise respond to EBI’s complaint. On
February 2, 2000, EBI filed a motion for entry of default and default judgment. On
February 3, 2000, the district court granted EBI’s motion and, on February 15, 2000,
entered default judgment against defendants “[i]n the amount of $226,914.00 plus interest
in the amount of $54,762.10.” App. at 19.
On the date default judgment was entered, defendants’ second attorney, Mark
Appleton, entered his appearance and filed on defendants’ behalf a motion for
reconsideration of the district court’s entry of default judgment. The motion alleged that
defendants “were unable to retain Colorado counsel” after withdrawal of their first
counsel. Id. at 23. The motion further alleged that defendants would “be able to show
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good cause for the failure to file an Answer to the Complaint and that they ha[d]
meritorious defenses to the claims set forth in the Complaint.” Id. at 24. The district
court granted defendants’ motion on March 16, 2000. The district court concluded that
Federal Rule of Civil Procedure 55(b)(2), which generally requires that a party against
whom a default judgment is sought be served with written notice “‘at least 3 days prior to
the hearing on such application,’” had been violated because the court had granted EBI’s
motion on February 3, 2000, the same day defendants were served with a copy of the
motion. Id. at 28.
During discovery, EBI served a set of combined interrogatories and requests for
production of documents on defendants. Although defendants’ responses were originally
due on September 19, 2000, EBI agreed to two extensions. Defendants ultimately failed
to respond and EBI filed motions to compel and for sanctions on January 19, 2001. At
the conclusion of the hearing on EBI’s motions on March 28, 2001, the district court
granted EBI’s motion to compel. In support of its ruling, the district court concluded
“[t]here ha[d] been no adequate showing of good cause to justify [defendants’] failure” to
timely respond or object to the discovery requests and that, accordingly, “all objections to
the discovery requests ha[d] been waived.” Id. at 214. The court awarded EBI costs and
fees associated with its motion, and directed defendants to “answer the interrogatories and
produce all documents responsive to the production requests on or before April 10,
2001.” Id. at 215.
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Defendants failed to comply with the district court’s order compelling them to
respond to EBI’s discovery requests. On April 17, 2001, EBI filed a motion for an order
to show cause. Before responding to EBI’s motion, defendants’ second attorney, Mark
Appleton, moved to withdraw on April 25, 2001, and notified defendants “of their duties
and obligations and the consequences of failure to abide by them.” Aplee. Br. at 6. The
following day, Appleton filed on behalf of defendants a response to EBI’s motion for
order to show cause. On April 27, 2001, the district court granted Appleton’s motion to
withdraw. On May 3, 2001, the district court set a hearing on EBI’s show cause motion
for May 22, 2001. On May 21, 2001, the parties entered into a settlement agreement and
the May 22 hearing was vacated.
Defendants subsequently failed to tender payment to EBI under the terms of the
settlement agreement, and EBI requested revival of the case on the district court’s docket.
On August 27, 2001, the district court granted EBI’s request to revive the case and
rescheduled the hearing on EBI’s motion to show cause for September 24, 2001.
Defendants failed to appear at the show cause hearing. The district court declared the
defendants in default and set a hearing for October 9, 2001, “to enter an amount of
judgment and . . . take evidence on that.” App. at 243. To ensure that defendants received
notice of the hearing, the district court directed EBI to serve defendants “by certified
mail, return receipt requested, and also by ordinary mail in case there is no return receipt
provided.” Id.
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On October 11, 2001, the district court conducted the scheduled hearing, but
defendants did not appear. The court entered judgment in EBI’s favor against defendants
in the amount of $359,724.05 on October 12, 2001. Defendants filed a timely notice of
appeal on November 9, 2001. Since then, defendants’ third set of attorneys have filed a
motion to withdraw and we have granted that motion.
II.
Federal Rule of Civil Procedure 37(b)(2) authorizes a district court to sanction a
party who “fails to obey an order to provide or permit discovery.” Included among the
available sanctions is the entry of “judgment by default against the disobedient party.”
Fed. R. Civ. P. 37(b)(2)(C). We review for abuse of discretion a district court’s decision
to impose the sanction of default judgment under Rule 37(b)(2). See Ruplinger v. Rains,
946 F.2d 731, 732 (10th Cir. 1991); M.E.N. Co. v. Control Fluidics, Inc., 834 F.2d 869,
872-73 (10th Cir. 1987); see also Dennis Garberg & Assoc., Inc. v. Pack-Tech Int’l Corp.,
115 F.3d 767, 771 (10th Cir. 1997) (applying similar standard of review to default
judgment entered pursuant to Rule 55).1
1
The district court did not cite any specific rule when it entered default judgment
against defendants. Although Rule 55(a) allows for entry of default, there is a split of
authority regarding the scope of that rule. Compare Charles Alan Wright, Arthur R.
Miller & Mary Kay Kane, 10A Federal Practice and Procedure § 2682, at 16-18 (3d ed.
1998) (concluding Rule 55(a) applies only where party has failed to respond in some way
to one of the pleadings listed in Federal Rule of Civil Procedure 7(a)), with Hoxworth v.
Blinder, Robinson & Co., 980 F.2d 912, 918-19 (3d Cir. 1992) (affirming entry of default
judgment under Rule 55(a) for defendants’ failure to obtain substitute counsel, file a
pretrial memorandum, and respond to discovery requests). We find it unnecessary to
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Although the standard of review is generally deferential, we have emphasized that
“a default judgment is a harsh sanction.” FDIC v. Dailey, 973 F.2d 1525, 1530 (10th Cir.
1992); see M.E.N. Co., 834 F.2d at 872. Thus, “due process requires that ‘failure’ [to
comply with a discovery request/order] is a sufficient ground only when it is the result of
willfulness, bad faith, or some fault of [the offending party] rather than inability to
comply.” M.E.N. Co., 834 F.2d at 872 (internal quotations omitted). We have “defined a
willful failure as ‘any intentional failure as distinguished from involuntary
noncompliance. No wrongful intent need be shown.’” Id. at 872-73 (quoting In re
Standard Metals Corp., 817 F.2d 625, 628 (10th Cir. 1987)).
It is also necessary for a district court to ensure that default judgment is a “just”
sanction for the offending party’s misconduct. See Ehrenhaus v. Reynolds, 965 F.2d 916,
920-21 (10th Cir. 1992) (discussing dismissal of claims as a sanction under Rule
37(b)(2)). Thus, in addition to considering the culpability of the offending party, the
district court also typically should consider a number of other factors on the record,
including (1) the degree of actual prejudice to the non-offending party; (2) the amount of
interference with the judicial process caused by the offending party; (3) whether the court
warned the offending party in advance that default judgment would be a likely sanction
for noncompliance; and (4) the efficacy of lesser sanctions. See id. at 921. “These
decide whether the district court could have relied on Rule 55(a) because the misconduct
at issue, i.e., failing to respond to plaintiff’s discovery requests and failing to appear at the
show cause hearing, clearly fell within the scope of Rule 37(b)(2).
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factors do not constitute a rigid test; rather, they represent criteria for the district court to
consider” in selecting a sanction. Id. “Only when the aggravating factors outweigh the
judicial system’s strong predisposition to resolve cases on their merits is [default
judgment] an appropriate sanction.” Id. (internal quotations omitted).
III.
Defendants contend that the default judgment entered against them by the district
court must be vacated because the district court “failed to make adequate findings
regarding (a) whether the discovery difficulties were due to fault or inadvertence, and (b)
why lesser sanctions would have been ineffective.” Aplt. Br. at 11-12.2
Although the record on appeal strongly suggests that defendants were generally
uncooperative and personally responsible for the failure to respond to the court’s
discovery order, the district court made no findings to this effect. At most, the court
stated that it “agree[d]” with EBI’s counsel that Hamouth did not “think a lot of our
[judicial] system here in the U.S.” and “d[id] not want to engage in this system, play by
the rules.” App. at 241. Further, there was no explanation by the district court as to why
a sanction less than default judgment would have been inappropriate. Instead, the district
court simply stated that it was “not going to be kicked around.” Id. at 243.
2
Defendants have not challenged the district court’s consideration of the other
factors outlined above (e.g., the degree of actual prejudice to the plaintiff), and thus we
consider those factors to have been conceded in favor of plaintiff. It would, nevertheless,
be helpful on remand if the district court would recite on the record its findings regarding
each of the relevant factors.
8
It is therefore impossible “to conclude on this record that no abuse of discretion
has occurred.” Rains, 946 F.2d at 734 (finding similar deficiencies on the part of district
court in imposing default judgment). Thus, we conclude it is necessary to “reverse the
judgment and remand th[e] case to the district court for entry of findings regarding
[defendants’] willfulness, bad faith or other fault in failing to” comply with the district
court’s discovery order (and to appear at the show cause hearing), “and for findings
regarding the possible appropriateness of lesser sanctions.”3 Id.The judgment of the district court is REVERSED and the case REMANDED to
the district court for further proceedings consistent with this order.
Entered for the Court
Mary Beck Briscoe
Circuit Judge
3
In light of this conclusion, we find it unnecessary to address the remaining issues
asserted by defendants on appeal.
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