Yuanzong Fu v. Rhodes

2013 UT App 120_________________________________________________________
THE UTAH COURT OF APPEALS
YUANZONG FU,
Plaintiff and Appellee,
v.
CLYDE RHODES, JOSEPH NASO, AND RENE NASO EVANS,
Defendants and Appellants.
Opinion
No. 20110081‐CA
Filed May 16, 2013
Third District, Salt Lake Department
The Honorable Paul G. Maughan
No. 080916174
Randy B. Birch, Attorney for Appellants
David J. Hodgson, Attorney for Appellee
JUDGE JAMES Z. DAVIS authored this Opinion, in which JUDGE
STEPHEN L. ROTH concurred. JUDGE CAROLYN B. MCHUGH
concurred in part and dissented in part, with opinion.
DAVIS, Judge:
¶1 Clyde Rhodes, Joseph Naso, and Rene Naso Evans
(collectively, Defendants) appeal from an Order and Judgment,
claiming that the trial court abused its discretion by striking their
Answer and entering judgment against them as a discovery
sanction pursuant to rule 37 of the Utah Rules of Civil Procedure.
See Utah R. Civ. P. 37(e)(2). In the alternative, Defendants contend
that even if the sanction was otherwise appropriate, the trial court
erred by entering judgment because Yuanzong Fu’s Complaint fails
to set forth factual allegations supporting the relief requested. We
affirm but remand for a calculation of fees on appeal.
BACKGROUND
Fu v. Rhodes
¶2 On August 7, 2008, Fu filed his Complaint against
Defendants 1 for breach of contract, fraud, negligent
misrepresentation, foreclosure, and fraudulent transfer. The claims
arise out of four real estate investments Fu made (the Investments)
between February and July of 2007. The Investments were each
evidenced by a promissory note and were to be repaid in monthly
installments and secured by trust deeds against certain real
property. The Complaint alleges that the trust deeds were never
recorded against the property and that Fu had been repaid only a
small fraction of the funds advanced.
¶3 Defendants filed their Answer on September 11, 2008. The
Answer includes an affirmative defense that “[Fu] has failed to
state a cause of action against . . . Defendants upon which relief can
be granted.” On January 12, 2009, the trial court entered a
stipulated discovery plan and order, providing that all fact
discovery would be completed no later than April 23, 2009.
Subsequently, Fu served his first set of interrogatories, requests for
the production of documents, and requests for admissions on
Defendants. Because Defendants failed to respond to any of the
discovery requests, Fu filed a motion to compel.
¶4 On May 12, 2009, the trial court granted Fu’s motion and
warned that “[i]f . . . Defendants . . . fail[ed] to provide all
requested discovery within ten days . . . , Defendants’ Answer
[would] be stricken and [Fu would] be entitled to judgment as
prayed for in the Complaint.” Defendants responded to Fu’s
interrogatories within ten days but failed to respond completely to
the remaining discovery requests. Rather than seek immediate
redress from the trial court, however, Fu apparently reached a
1. The Complaint also included S. Parker Smith as a named
defendant. During litigation, however, Smith filed a Notice of
Bankruptcy Filing and Stay. As a result, default judgment was not
entered against Smith and he is not a party on appeal.
20110081‐CA 2 2013 UT App 120Fu v. Rhodes
compromise with Defendants, which is reflected in a stipulated
amended case management order filed on March 15, 2010. The
order provides that “[f]act discovery, including responses to
written discovery and depositions, [was to] be completed no later
than May 31, 2010.” (Emphasis omitted.) Despite that new order,
the parties’ discovery disputes continued.
¶5 On June 2, 2010, Fu filed a motion for entry of judgment
pursuant to rule 37, alleging that Defendants had “engaged in a
deliberate pattern of promising [documents] and then” failing to
provide them in an attempt to hinder Fu in taking depositions and
prosecuting his case. See generally Utah R. Civ. P. 37(e)(2)(D) (“[T]he
court in which the action is pending may impose appropriate
sanctions for the failure to follow its orders, including . . . dismiss
all or part of the action, strike all or part of the pleadings, or render
judgment by default on all or part of the action.”). Fu also argued
that Defendants failed to provide a full set of bank statements,
books and records, tax returns, and proof of alleged payments on
the Investments. Defendants disputed these assertions and claimed
that they had produced all bank statements, did not understand
what the requests for books and records entailed, and did not have
any documents evidencing payments to Fu or tax returns for the
years requested.
¶6 At an August 14, 2010 hearing on the motion for entry of
judgment, Defendants claimed to have provided all requested
documents within their control, but Fu argued to the contrary. The
trial court asked Fu to submit a discovery violations timeline,
which he filed on September 2, 2010. On September 20, the trial
court granted Fu’s motion for entry of judgment. Although the
court acknowledged that “in most cases, lesser sanctions are
usually sufficient and more appropriate in moving a case along,”
it found the more severe sanction of default judgment to be
appropriate in this case, stating, “[B]ased upon the [D]efendants’
continued failures to comply with timely discovery, their failure to
comply with the Court’s previously entered Order to Compel, and
their failure to comply with the Case Management Orders, . . .
20110081‐CA 3 2013 UT App 120Fu v. Rhodes
[Fu’s] Motion is based on good cause and should be granted.” The
trial court instructed Fu to prepare an order memorializing its
decision.
¶7 Defendants filed an objection to the proposed order and a
motion to alter and amend the order, which the trial court set for
hearing on December 20, 2010. Defendants challenged the
proposed sanction as excessive and again claimed that they had
fully complied with Fu’s discovery requests. After hearing from the
parties, the trial court noted, “The argument today is remarkably
similar to what we heard at our last hearing. And the Court’s
unpersuaded that there’s anything new or different at this point,
and so, . . . I’m going to enter the order as proposed by [Fu] at this
time.” The trial court entered judgment “against [Defendants],
jointly and severally, for breach of contract, common law fraud,
and negligent misrepresentation and on the [Investments]” in the
sum of $235,440, which includes interest, court costs, and attorney
fees, and “for fraudulent transfer and foreclosure” relating to nine
separate properties. Defendants appeal.
ISSUES AND STANDARDS OF REVIEW
¶8 Defendants argue that the rule 37 sanctions the trial court
imposed in this case—striking their Answer and entering default
judgment—were unduly severe and therefore constituted an abuse
of the trial court’s discretion. See generally Utah R. Civ. P. 37(e)(2).
“As a general rule, district courts are granted a great deal of
deference in selecting discovery sanctions, and we overturn a
sanction only in cases evidencing a clear abuse of discretion.”
Kilpatrick v. Bullough Abatement, Inc., 2008 UT 82, ¶ 23, 199 P.3d 957.
¶9 Defendants also contend that even if it was otherwise
appropriate for the trial court to strike their Answer, the trial court
erred when it entered default judgment because the facts alleged
in the Complaint do not support recovery under the stated legal
theories. Defendants concede that this issue was not preserved but
20110081‐CA 4 2013 UT App 120Fu v. Rhodes
assert that supreme court precedent belies the necessity of
preserving this type of claim for appeal. See infra ¶ 14. We generally
do not consider claims raised for the first time on appeal unless
they fall under a recognized exception to the preservation rule. See
Strawberry Elec. Serv. Dist. v. Spanish Fork City, 918 P.2d 870, 880
(Utah 1996).
ANALYSIS
I. Severity of Sanctions
¶10 In reviewing a challenge to rule 37 sanctions, we first
“consider whether the district court was justified in ordering
sanctions” and “then review the type and amount of sanctions for
abuse of discretion.” PC Crane Serv., LLC v. McQueen Masonry, Inc.,
2012 UT App 61, ¶ 32, 273 P.3d 396. Here, Defendants do not argue
that a sanction was unjustified. Instead, they contend that the trial
court abused its discretion by “imposing . . . the most severe
sanction available under Rule 37.” “Even though dismissing an
action is ‘one of the most severe of the potential sanctions that can
be imposed, it is clear from the language of rule 37 that it is within
a trial court’s discretion to impose such a sanction.’” Allen v.
Ciokewicz, 2012 UT App 162, ¶ 32, 280 P.3d 425 (quoting Morton v.
Continental Baking Co., 938 P.2d 271, 274 (Utah 1997)); see also Utah
R. Civ. P. 37(e)(2). Accordingly, Defendants undertake a significant
burden in attempting to show that the trial court abused its
discretion in striking their Answer and entering default judgment.
To meet that burden, Defendants “must show either that the
sanction is based on an erroneous conclusion of law or that the
sanction lacks an evidentiary basis.” SFR, Inc. v. Comtrol, Inc., 2008
UT App 31, ¶ 14, 177 P.3d 629 (citation and internal quotation
marks omitted). Defendants have failed to identify any error of
law, and the record supports the trial court’s decision.
¶11 The trial court expressly warned Defendants in May 2009
that they were at risk of having judgment entered against them,
20110081‐CA 5 2013 UT App 120Fu v. Rhodes
informing them that if they “fail[ed] to provide all requested
discovery within ten days . . . [their] Answer [would] be stricken
and [Fu would] be entitled to judgment as prayed for in the
Complaint.” Not only did they fail to meet this deadline, but they
failed to provide the requested discovery even by the extended
May 31, 2010 deadline stipulated to in the amended case
management order. By the time the trial court entered judgment
against Defendants on September 20, 2010, nearly sixteen months
had passed since the trial court’s initial deadline and the discovery
requests were still outstanding. The trial court afforded Defendants
two opportunities to be heard before striking their Answer and
entering default. Ultimately, while acknowledging the severity of
the sanctions imposed, the court found that Fu’s motion for entry
of judgment was “based on good cause and should be granted”
due to “[D]efendants’ continued failures to comply with timely
discovery, their failure to comply with the Court’s previously
entered Order to Compel, and their failure to comply with the Case
Management Orders.” Under these circumstances, we are not
convinced that it was an abuse of the trial court’s discretion to
strike the Answer and enter default judgment. See Morton, 938 P.2d
at 275–76 (affirming dismissal as a discovery sanction where the
plaintiff “had plenty of warning that his case was in trouble,
considering he admitted to having received the motion to compel
which specifically requested a court order . . . threatening
dismissal” but “did nothing to show the court that he was
interested in diligently prosecuting his case”); Hales v. Oldroyd,
2000 UT App 75, ¶¶ 26, 28, 999 P.2d 588 (affirming the dismissal of
a complaint as a discovery sanction where the plaintiff “continually
delayed in responding to discovery requests”); Tuck v. Godfrey, 1999
UT App 127, ¶¶ 24–25, 981 P.2d 407 (affirming entry of default
judgment as a discovery sanction where the defendant “had ‘done
virtually nothing’” to advance discovery).
20110081‐CA 6 2013 UT App 120Fu v. Rhodes
II. Sufficiency of the Complaint
¶12 Next, Defendants argue that even if striking their Answer
was appropriate, the facts alleged in the Complaint do not support
recovery under the legal theories pleaded and, therefore, the trial
court erred in entering judgment against Naso and Evans on all
claims, and against Rhodes on the claims based on the July 23, 2007
investment. As discussed, rule 37 provides that “the court in which
the action is pending may impose appropriate sanctions for the
failure to follow its orders, including . . . render judgment by default
on all or part of the action.” See Utah R. Civ. P. 37(e)(2)(D)
(emphasis added); see also Knouff v. United States, 74 F.R.D. 555, 557
(W.D. Pa. 1977) (mem.) (determining that a motion to strike an
answer is, “in effect if not form, an application for entry of
judgment by default”). Nevertheless, as Defendants point out, that
power is tempered by the requirement that the entry of judgment
be supported by the well‐pleaded allegations of the complaint. As
the Utah Supreme Court has explained,
[A d]efendant’s failure to answer and ensuing
default . . . require the court to accept the factual
allegations as true, but the court [should] enter
judgment as requested only if it determined those facts
established an actionable claim. Were the rule
otherwise, a court could be obligated to enter a
money judgment on a complaint as frivolous as a
refusal to share recipes with a neighbor. Thus, the
court must determine whether an actionable claim
exists.
American Towers Owners Ass’n, Inc. v. CCI Mech., Inc., 930 P.2d 1182,
1194 (Utah 1996) (omission and second alteration in original)
(citation and internal quotation marks omitted) (holding that the
trial court properly denied a motion to enter judgment against a
party who failed to answer because the trial court’s previous
summary judgment in favor of other defendants established that
the plaintiff’s claims failed as a matter of law), abrogated on other
20110081‐CA 7 2013 UT App 120Fu v. Rhodes
grounds by Davencourt at Pilgrims Landing Homeowners Ass’n v.
Davencourt at Pilgrims Landing, LC, 2009 UT 65, 221 P.3d 234.
¶13 Accordingly, “[a] trial court asked to render a judgment by
default must first conclude that the uncontroverted allegations of
an applicant’s petition are, on their face, legally sufficient to
establish a valid claim against the defaulting party.” Stevens v.
Collard, 837 P.2d 593, 595 (Utah Ct. App. 1992); see also id. at 598(upholding the trial court’s refusal to modify custody despite the
father’s failure to respond because the mother’s sparse allegations
were legally insufficient to reopen the custody decree). Defendants
contend that the same requirements must be met before judgment
can be entered as a discovery sanction. See, e.g., Microsoft Corp. v.
Computer Care Ctr., Inc., 2008 WL 4179653, at *6 (E.D.N.Y. Sept. 10,
2008) (stating that “regardless of whether default is entered as a
discovery sanction or for failure to defend,” the factual allegations
of the complaint must constitute a legitimate cause of action); Split
Rock Hardwoods, Inc. v. Lumber Liquidators, Inc., 646 N.W.2d 19, 30
(Wis. 2002) (“A successful motion to strike an answer will normally
lead to a default judgment. Therefore, a motion to strike an answer
to facilitate a default judgment should satisfy the same criteria as
the motion for default judgment.”).
¶14 However, Fu argues that we should not evaluate the
sufficiency of the Complaint on appeal because Defendants did not
raise this issue in the trial court. The defense of “failure to state a
claim can[not] be raised for the first time on appeal.” Smith v.
Vuicich, 699 P.2d 763, 765 (Utah 1985) (per curiam) (discussing the
issue in the context of an appeal after a jury trial); see also
Restatement (Second) of Judgments § 78 (1982) (“Relief from a
judgment must be obtained by means of a motion for that purpose
in the court that rendered the judgment unless relief may be
obtained more fully, conveniently, or appropriately by some other
procedure.”). Nevertheless, Defendants insist that when a trial
court strikes a party’s pleading and enters a default judgment, the
party may challenge the sufficiency of the complaint to support the
20110081‐CA 8 2013 UT App 120Fu v. Rhodes
judgment for the first time on appeal. Defendants’ position is not
supported by our jurisprudence.
¶15 In State v. Sixteen Thousand Dollars United States Currency, 914
P.2d 1176 (Utah Ct. App. 1996), we rejected the idea that a
defendant could appeal directly from a default judgment without
first raising grounds for setting aside the default with the trial
court. See id. at 1178. We held that this rule extends even to alleged
legal errors, such as the trial court’s failure to determine the legal
sufficiency of the pleadings, see generally American Towers, 930 P.2d
at 1194 (explaining that a trial court should enter default judgment
“only if it determined [that the factual allegations] established an
actionable claim” (emphasis, citation, and internal quotation marks
omitted)), or its having awarded damages in excess of the amount
prayed for, see generally Katz v. Pierce, 732 P.2d 92, 95 (Utah 1986)
(per curiam) (“A default judgment shall not be different in kind
from, or exceed in amount, that specified in plaintiff’s complaint.”
(citing Utah R. Civ. P. 54(c)(2))). See Sixteen Thousand, 914 P.2d at
1178. In order to preserve a challenge to a default judgment entered
for failure to appear, the defendant must first seek relief in the trial
court by making “a Rule 60(b) motion for relief from judgment, or
a motion for a new trial, or to amend or alter the judgment,
pursuant to Rule 59” of the Utah Rules of Civil Procedure. Id. See
generally Utah R. Civ. P. 59; id. R. 60(b). Only then may the party
“appeal from a denial of a Rule 60(b) motion or from the default
judgment directly, following a denial of a Rule 59 or other post‐
judgment motion.”2 Sixteen Thousand, 914 P.2d at 1178. This rule is
2. We also suggested in Sixteen Thousand that a direct appeal from
a default judgment entered as a rule 37 sanction might be
permissible without an intervening motion to set aside because a
rule 37 defendant, by virtue of having appeared before the trial
court, would be able to preserve an argument regarding the
sufficiency of the pleadings without filing a post‐judgment motion.
See State v. Sixteen Thousand Dollars U.S. Currency, 914 P.2d 1176,
(continued...)
20110081‐CA 9 2013 UT App 120Fu v. Rhodes
consistent with the policy that “[a] trial court should be given an
opportunity to correct errors of law, as well as to excuse a
defaulting party when reasonable, so as to resolve any arising
controversy before appeal.” Id. at 1179.3
¶16 Despite our precedent directly addressing the preservation
rule in the context of a default judgment, Defendants point us to
the supreme court’s statement in Skanchy v. Calcados Ortope SA, 952
P.2d 1071 (Utah 1998), that “[o]n appeal from a default judgment,
a defendant may contest ‘the sufficiency of the complaint and its
allegations to support the judgment.’” Id. at 1076 (quoting
2. (...continued)
1178 (Utah Ct. App. 1996). This is consistent with the primary
holding of Sixteen Thousand—that the preservation rule applies to
appeals from default judgments. Id. at 1178–79.
3. Unlike the dissent, we are not concerned that the holding of
Sixteen Thousand contradicted dicta in Katz v. Pierce, 732 P.2d 92(Utah 1986) (per curiam), suggesting that a party against whom a
default judgment has been entered for failure to appear might have
appealed directly from the judgment rather than the 60(b) motion
to set aside. See id. at 95. First of all, this dicta consists of a single
sentence without further explanation. See id. (“[N]o direct appeal
from the judgment was taken, although appellants might have
done so.”). Furthermore, the Katz court’s rejection of the damages
argument was based on the fact that the argument had not been
raised by the appellants in their rule 60(b) motion, and the court
adamantly condemned the assertion of “new grounds . . . for the
first time on appeal without having afforded the trial court an
opportunity to rule on those grounds or to correct any alleged
deficiency.” Id. The Katz court’s emphasis on the importance of
preservation makes it unlikely that it intended by dicta to imply
that preservation in the context of a direct appeal is unnecessary.
In any event, unlike the explicit holding in Sixteen Thousand, the
dicta in Katz is not controlling authority.
20110081‐CA 10 2013 UT App 120Fu v. Rhodes
Nishimatsu Constr. Co. v. Houston Nat’l Bank, 515 F.2d 1200, 1206
(5th Cir. 1975)). Taken out of context, this statement appears to
suggest an exception to the preservation rule. However, it is clear
from the Skanchy court’s accompanying discussion that it was
considering not whether a claim that a complaint was insufficient
to support a default judgment could be raised for the first time on
appeal, but whether it could be raised at all in light of the fact that
“well‐pled facts alleged in the pleadings of the nondefaulting party
are binding and can support the default judgment.” See id.
¶17 The foundation for this discussion is apparent in Nishimatsu
Construction Co. v. Houston National Bank, 515 F.2d 1200 (5th Cir.
1975), the case on which the Skanchy court relied in asserting that
a defendant could challenge the sufficiency of the complaint on
appeal. See Skanchy, 952 P.2d at 1076. The Nishimatsu court
explained that a defendant is not, by operation of a default
judgment, “held to admit facts that are not well‐pleaded or to
admit conclusions of law,” that is, “a default is not treated as an
absolute confession by the defendant of his liability and of the
plaintiff’s right to recover” and a defendant is therefore “entitled
to contest the sufficiency of the complaint and its allegations to
support the judgment.” Nishimatsu, 515 F.2d at 1206 (emphasis
omitted). The Skanchy court’s discussion makes it apparent that it
was this issue, not the preservation rule, that it had in mind when
it quoted Nishimatsu: “Although factual allegations are deemed
admitted, a plaintiff’s legal allegations are not binding.
Accordingly, a court may grant relief only if a valid legal basis
supported by well‐pled facts is asserted in the complaint.” Skanchy,
952 P.2d at 1076 (citation omitted).4
4. In Nishimatsu, the defendant appealed directly from the default
judgment without first filing a motion to set aside. See Nishimatsu
Constr. Co. v. Houston Nat’l Bank, 515 F.2d 1200, 1204 (5th Cir. 1975).
Thus, the Nishimatsu defendant’s challenge to the sufficiency of the
complaint appears not to have been preserved. However,
(continued...)
20110081‐CA 11 2013 UT App 120Fu v. Rhodes
¶18 Indeed, the Skanchy opinion does not refer to the
preservation rule at all and does not seem to view the challenge to
the sufficiency of the complaint as being raised for the first time on
appeal.5 Id. at 1076–77. We are unwilling to take the Skanchy court’s
isolated statement that a defendant subject to a default judgment
is entitled to contest the sufficiency of the complaint on
appeal—made in the context of a discussion of whether legal
allegations are binding, rather than in the context of a preservation
discussion—as a definitive ruling carving out an exception to the
preservation requirement, especially in light of our undisturbed
precedent in Sixteen Thousand explicitly requiring preservation. See
Sixteen Thousand, 914 P.2d at 1178–79.
¶19 Furthermore, even if a defense of failure to state a claim
could be raised for the first time on appeal in the context of a
4. (...continued)
preservation is neither the crux of the Nishimatsu court’s analysis
nor the basis for the Skanchy court’s reliance on that analysis.
5. It is ultimately unclear whether the Skanchy defendant’s
challenge to the sufficiency of the complaint was actually
preserved. The court observed only that the defendant “moved to
set aside the judgment” and that “[t]he district court denied the
motion as to liability but granted it with respect to damages.” See
Skanchy v. Calcados Ortope SA, 952 P.2d 1071, 1073–74 (Utah 1998).
However, even assuming that the issue was not preserved, the
Skanchy court’s failure to explicitly address preservation, and the
defendant’s apparent failure to contest the appeal on preservation
grounds, suggests to us that the Skanchy court’s ruling was not
intended to carve out an exception to the preservation rule. It
seems more likely that the preservation issue was simply never
adequately brought to the supreme court’s attention and that the
court consequently considered the defendant’s argument as though
it were preserved.
20110081‐CA 12 2013 UT App 120Fu v. Rhodes
default judgment entered for failure to appear, it is not reasonable
for such a rule to extend to an appeal of a default judgment entered
pursuant to rule 37. Where a default judgment is entered as a
discovery sanction—as opposed to being entered as a result of a
defendant’s failure to answer a complaint—“the sanctioned party
[will have] filed responsive pleadings, . . . appeared before the trial
court, and had an opportunity to argue against the sanction before
the trial court.” Id. (distinguishing a default judgment entered as a
discovery sanction pursuant to rule 37 from a default judgment
entered for failure to appear in explaining why a direct appeal from
a rule 37 default judgment might be permissible). Thus, a
defendant who has a default judgment entered against him as a
discovery sanction will have had every opportunity to raise a
defense for failure to state a claim before the trial court.
Accordingly, any rationale that might exist for permitting a
defendant to bypass the trial court and raise such a challenge for
the first time on appeal in the context of a default judgment entered
for failure to appear does not support such a rule with respect to a
default judgment entered as a discovery sanction. Indeed, the
parties in this case had been actively involved in litigation for more
than two years. Before entering default judgment, the trial court
held two separate hearings, yet Defendants never argued to the
trial court that the Complaint failed to state a claim upon which a
default judgment could be based. Because trial courts should
generally be afforded “an opportunity to correct error and to end
controversies before an appeal becomes necessary,”6 id. at 1179, we
decline to take upon ourselves the burden of weighing the
sufficiency of the pleadings on appeal without the benefit of the
trial court’s analysis where Defendants had every opportunity to
raise the issue in the trial court.
6. The importance of this policy to the proper functioning and
respective responsibilities of our courts is underscored by the
extent of the analysis in which the dissent was required to engage
in order to determine, in the first instance, whether Fu’s Complaint
stated a claim. See infra ¶¶ 31–54.
20110081‐CA 13 2013 UT App 120Fu v. Rhodes
III. Attorney Fees on Appeal
¶20 Because we affirm the default judgment against Defendants,
and because the promissory notes for the Investments contain
provisions for payment of attorney fees if an action is brought to
enforce them, Defendants are liable to Fu for attorney fees and
costs reasonably incurred on appeal. See Management Servs. Corp. v.
Development Assocs., 617 P.2d 406, 409 (Utah 1980) (“[A] provision
for payment of attorney’s fees in a contract includes attorney’s fees
incurred by the prevailing party on appeal as well as at trial, if the
action is brought to enforce the contract . . . .”). We remand for the
trial court to determine the amount of those fees and costs incurred
on appeal.
CONCLUSION
¶21 The trial court did not abuse its discretion by striking
Defendants’ Answer and entering default judgment against
Defendants as a discovery sanction. Furthermore, because
Defendants have failed to preserve their claim that the facts alleged
in the Complaint do not support recovery under the stated legal
theories, we do not address that issue on appeal. Accordingly, we
affirm the trial court’s Order and Judgment. We also award Fu
attorney fees and costs reasonably incurred on appeal, to be
calculated by the trial court on remand.
McHUGH, Judge (concurring in part and dissenting in part):
¶22 I concur with part I of the majority’s decision, but I
respectfully dissent from part II regarding whether a party may
challenge the sufficiency of the complaint to support a default
judgment for the first time on appeal. Accordingly, I would
consider whether Fu’s Complaint states a claim upon which relief
20110081‐CA 14 2013 UT App 120Fu v. Rhodes
can be granted against each of the Defendants. Upon review of the
Complaint, I would conclude that it does so as to Rhodes but fails
to state a claim against Naso and Evans. As a result, I would affirm
the default judgment against Rhodes but reverse as to Naso and
Evans.
I. Preservation
¶23 The Utah appellate courts have not addressed the precise
issue before us: whether a party who has appeared and
participated in litigation is required to raise a challenge to the
sufficiency of the complaint in the trial court to preserve that issue
for appeal of a default judgment entered as a result of a discovery
sanction striking the answer. However, our appellate courts have
provided some guidance on this issue in the context of a default
judgment entered as a result of a failure to appear. Although much
of that discussion is dicta, I believe it provides assistance in
highlighting the competing rationales on this issue.
¶24 In the first of these decisions, Katz v. Pierce, 732 P.2d 92 (Utah
1986) (per curiam), the trial court entered default judgment against
defendants who failed to file a timely answer. Id. at 93.
Subsequently, the court denied the defendants’ rule 60(b) motion
to set aside the default judgment. Id.; see also Utah R. Civ. P. 60(b)
(“On motion and upon such terms as are just, the court may in the
furtherance of justice relieve a party or his legal representative
from a final judgment, order, or proceeding . . . .”). The defaulted
party appealed the trial court’s denial of the rule 60(b) motion,
seeking “reversal of the judgment because the damages awarded
[were] in excess of the amount prayed for in the complaint” but did
not separately appeal the default judgment. Id. at 95. The Utah
Supreme Court first noted that it had “consistently reversed default
judgments when the amount of damages awarded exceeds the
amount of the prayer of the complaint or is unsupported by
evidence in the record.” Id. Nevertheless, it refused to do so in Katz
because the “[a]ppeal was taken only from the denial of the 60(b)
20110081‐CA 15 2013 UT App 120Fu v. Rhodes
motion, which was premised only upon the claim that the parties
were [involved in settlement] negotiati[ons].” Id. The supreme
court held that the defendants could not “assert new grounds for
[their] motion [for relief from judgment] for the first time on appeal
without having afforded the trial court an opportunity to rule on
those grounds or to correct any alleged deficiency.” Id. at 95–96.
The court further observed that “[e]ven though the court
erroneously gave no hearing on damages, that issue is relevant
only in the context of a direct appeal from the judgment itself and
not in an appeal from the motion to set aside when not raised
below as grounds for the motion.” Id. at 95. Because “no direct
appeal from the judgment was taken, although appellants might
have done so,” the supreme court refused to consider the challenge
to the amount of damages. Id. The dicta in Katz suggests that, at
least with respect to a default entered for failure to appear, a party
may challenge the amount of damages for the first time on appeal
of the default judgment itself.
¶25 Ten years later, in State v. Sixteen Thousand Dollars United
States Currency, 914 P.2d 1176 (Utah Ct. App. 1996), this court
considered a related issue. There, the Grand County attorney filed
a complaint seeking forfeiture of $16,000 seized during a traffic
stop. Id. at 1177. The driver of the vehicle failed to answer, and the
trial court entered a default judgment in favor of the State. Id. The
driver then filed a motion for relief from judgment under rule
60(b), but before the trial court had an opportunity to rule, he filed
a notice of appeal. Id.; see also Utah R. Civ. P. 60(b). The trial court
later denied the 60(b) motion, but the driver did not appeal from
that order. See Sixteen Thousand, 914 P.2d at 1177. Instead, he
pursued only his direct appeal of the default judgment, arguing
“that the trial court erred as a matter of law in finding the $16,000
subject to forfeiture, erred in making inadequate findings of fact,
and exceeded the scope of permitted discretion in refusing to grant
a continuance.” Id. at 1177–78. This court dismissed the appeal,
holding that the driver “could only appeal from the denial of his
Rule 60(b) motion, and not from the default judgment directly.” Id.
20110081‐CA 16 2013 UT App 120Fu v. Rhodes
at 1178. We reasoned that when default is entered for the failure to
defend, the party must “first present alleged errors regarding a
default judgment to the trial court, and then follow the appropriate
course for appeal.” Id. at 1179. The Sixteen Thousand court did not
discuss the suggestion in Katz that an unpreserved challenge to the
amount of damages can be raised for the first time in a direct
appeal from the default judgment. See Katz, 732 P.2d at 95. As the
majority correctly notes, we instead distinguished a default
judgment entered for failure to defend from a default judgment
entered as a discovery sanction, stating that the “sanctioned party
[would have] filed responsive pleadings, . . . appeared before the
trial court, and had an opportunity to argue against the sanction
before the trial court,” while the party who fails to appear would
not have. Sixteen Thousand, 914 P.2d at 1178. Thus, we suggested
that a direct appeal from a default judgment entered as a sanction
would be appropriate, but that when default judgment is entered
for failure to appear, the proper course is to file a motion under
rule 60(b) for relief from judgment, or under rule 59 to alter or
amend judgment.7 Id. We indicated that this approach “is a natural
corollary of the general rule that we will not consider issues raised
for the first time on appeal.” Id. at 1178–79 (noting “the
requirement that an appellant first present alleged errors regarding
a default judgment to the trial court”). Of importance to the
preservation issue here, we further explained that when a default
judgment is entered in error as a matter of law, including where the
complaint is not legally sufficient to state a valid claim, the “party
asserting the error must first present the issue to the trial court
through the appropriate post‐judgment motion prior to seeking
appellate review.” Id. at 1178 (citing Katz, 732 P.2d at 95, for the
proposition that “a trial court may err as a matter of law in entering
a default judgment”). This dicta advocates different rules for
7. Rule 59 allows a trial court to “open the judgment if one has been
entered, take additional testimony, amend findings of fact and
conclusions of law or make new findings and conclusions, and
direct the entry of a new judgment.” See Utah R. Civ. P. 59(a).
20110081‐CA 17 2013 UT App 120Fu v. Rhodes
default judgments entered as a result of the failure to appear and
default judgments entered as a discovery sanction, and seems
inconsistent with the dicta in Katz suggesting that an invalid
damages award in a default judgment entered for failure to appear
can be challenged by a direct appeal of the judgment. See Katz, 732
P.2d at 95.
¶26 More recently, in Skanchy v. Calcados Ortope SA, 952 P.2d
1071 (Utah 1998), the Utah Supreme Court again considered a
challenge to a default judgment. There, the distributors of shoes
sued the Brazilian manufacturer in Utah for breach of contract,
promissory estoppel, and fraud. Id. at 1073. However, the
“complaint alleged only facts related to the written contract
between the parties and to [the manufacturer’s] breach of the
exclusive territory provision in that contract.” Id. at 1076. After the
manufacturer failed to answer, the trial court entered its default
and subsequently entered default judgment. Id. at 1074. The
manufacturer eventually moved to set aside the judgment under
rule 60(b) of the Utah Rules of Civil Procedure. Id. The trial court
denied the motion with respect to liability but granted it as to
damages. Id. The distributors then elected to pursue damages only
under their promissory estoppel claim. Id. After a bench trial
limited to the amount of damages due under that theory, the trial
court entered default judgment against the manufacturer for the
amount of damages proved at trial. Id. The manufacturer appealed
from the default judgment, claiming that the service of the
complaint was defective and that the trial court erred in awarding
damages for promissory estoppel because that theory was not
supported by the allegations of the complaint. Id. In considering the
second issue, the supreme court explained that “the entry of a
default does not automatically entitle a plaintiff to a default
judgment for the damages claimed in the complaint.” Id. at 1076.
While “all that must be shown for the entry of a default is that the
defendant has failed to answer the complaint in a timely fashion,”
the court instructed that “a default judgment is valid only if the
well‐pled facts show that the plaintiff is entitled to judgment as a
20110081‐CA 18 2013 UT App 120Fu v. Rhodes
matter of law.” Id. Accordingly, the Utah Supreme Court instructed
that “[o]n appeal from a default judgment, a defendant may contest
‘the sufficiency of the complaint and its allegations to support the
judgment.’” Id. (quoting Nishimatsu Constr. Co. v. Houston Nat’l
Bank, 515 F.2d 1200, 1206 (5th Cir. 1975)). Because the complaint
alleged only the promises made in the written contract, the Skanchy
court held that it was “error for the trial court to have awarded a
judgment for damages based on a promissory estoppel theory that
was not properly pled in the complaint, notwithstanding [the
manufacturer’s] default.” Id. at 1078. Thus, the Utah Supreme
Court reversed the judgment for damages and “remanded to the
trial court for further consideration, including whether plaintiffs’
election to pursue reliance damages is binding and whether [the
plaintiffs] may amend their complaint without voiding the default,
if those issues are raised.” Id.
¶27 The Skanchy decision is unclear as to whether the
manufacturer challenged the sufficiency of the complaint in the
trial court. However, the copy of the trial court’s order denying the
rule 60(b) motion attached to the manufacturer’s appellate brief
suggests that it did not.8 Nevertheless, the supreme court
considered whether the complaint stated a claim for promissory
estoppel. Thus, while the court did not expressly address the issue,
I believe its decision supports the proposition that a party
appealing from a default judgment entered as a result of the failure
to appear can challenge the sufficiency of the complaint to support
the judgment for the first time on appeal.
¶28 In my view, the Skanchy court’s reliance on the Fifth Circuit
Court of Appeals’ decision in Nishimatsu Construction Co. v. Houston
National Bank, 515 F.2d 1200 (5th Cir. 1975), is also instructive on
8. That order states that the manufacturer did not allege any
ground for relief other than mistake, inadvertence, surprise, or
excusable neglect. Brief for Appellant at add., Skanchy v. Calcados
Ortope SA, 952 P.2d 1071 (Utah 1998) (No. 2195050).
20110081‐CA 19 2013 UT App 120Fu v. Rhodes
this point. In Nishimatsu, the corporate and individual defendants
named by a bank in a third‐party complaint failed to answer and
default was entered against them. Id. at 1204. Before the bank’s
motion for entry of default judgment could be heard, however, the
defendants filed an answer. Id. Thereafter, the defendants failed to
appear for depositions, did not respond to written discovery, and
refused to communicate with counsel. Id. After several
continuances of the trial date, the trial court granted the bank’s
renewed motion for the entry of default judgment based on the
defendant’s discovery abuses. Id. In response, an individual
defendant filed a notice of appeal from the default judgment
without first seeking relief under rule 60(b). Id. One of the grounds
asserted on appeal was that the allegations in the complaint did not
support the judgment. Id. at 1205–06. The Fifth Circuit held that
despite the individual having “wilfully disregarded the rules of the
judicial process and ignored the trial setting of the court below, and
. . . suffer[ed] a judgment by default as a result of his deliberate and
contumacious conduct,” he could “attempt to defend the case on
the merits for the first time in the Court of Appeals.” Id. at 1202–03
(internal quotation marks omitted). Based on this language, I read
Nishimatsu as supporting the right to challenge the sufficiency of a
complaint for the first time on appeal from a default judgment.
Accord Eagle Fund, Ltd. v. Sarkans, 823 N.E.2d 783, 786 n.8 (Mass.
App. Ct. 2005) (relying on Nishimatsu in reviewing the sufficiency
of a complaint to support a default judgment entered pursuant to
a discovery sanction for the first time on appeal); see also Cabral v.
Diversified Servs., Inc., 560 So. 2d 246, 247 (Fla. Dist. Ct. App. 1990)
(per curiam) (citing Nishimatsu as support for the statement that
despite the usual rule that only issues raised in the trial court may
be reviewed on appeal, a defendant may challenge the sufficiency
of the complaint for the first time on appeal from a default
judgment). Interestingly, the Utah Supreme Court in Skanchy also
adopted the Nishimatsu court’s remedy of vacating the affected
portion of the judgment with instructions that the trial court permit
the plaintiff bank to amend its complaint on remand. Compare
Skanchy, 952 P.2d at 1078, with Nishimatsu, 515 F.2d at 1208.
20110081‐CA 20 2013 UT App 120Fu v. Rhodes
¶29 This position is also consistent with that of the majority of
jurisdictions that have considered the issue. See, e.g., Danning v.
Lavine, 572 F.2d 1386, 1388–89 (9th Cir. 1978) (reviewing appellant’s
claim, raised for the first time on appeal, that the complaint is
insufficient to support the default judgment entered for failure to
appear); Kubick v. Federal Deposit Ins. Corp. (In re Kubick), 171 B.R.
658, 660 (B.A.P. 9th Cir. 1994) (“Although entry of a default
judgment [for failure to appear] is usually attacked collaterally
under Rule 60(b), on direct appeal a defendant can contest the legal
sufficiency of allegations contained in the complaint.” (footnote
omitted)); Thorp Loan & Thrift Co. v. Morse, 451 N.W.2d 361, 362–63
(Minn. Ct. App. 1990) (holding that “a defendant in default [for
failure to appear] may argue for the first time on appeal that the
plaintiff’s complaint did not state a cause of action or that the relief
granted was not justified by the complaint”); Caruso v. Krieger, 698
S.W.2d 760, 762 (Tex. App. 1985) (evaluating the sufficiency of the
pleadings for the first time on appeal because “[a] default judgment
[entered for failure to appear] not supported by the pleadings is
fundamentally erroneous”). While this approach is not universal,9
I believe it is the better approach. Even where a defendant’s
9. See Eagle Hosp. Physicians, LLC v. SRG Consulting, Inc., 561 F.3d
1298, 1308 (11th Cir. 2009) (addressing a defendant’s challenge to
the sufficiency of a complaint after its pleadings had been struck on
an issue raised before the district court, but otherwise holding that
their “additional arguments that the complaint was insufficient . . .
were not raised before the district court” and that because “these
alleged problems with the complaint were not raised below,” the
court would not review them on appeal); United States v. One 1979
Rolls‐Royce Corniche Convertible, 770 F.2d 713, 715, 717 (7th Cir.
1985) (affirming a district court’s entry of default judgment for
failure to appear, holding that “[appellant’s] challenges [to] the
sufficiency of the complaint and the adequacy of the notice and
service of process . . . cannot be urged on appeal because none of
them [were] presented to the district court in the first instance”).
20110081‐CA 21 2013 UT App 120Fu v. Rhodes
discovery sanctions have resulted in the entry of default, I would
hold that the trial court may not enter default judgment without
first assessing if the complaint states a claim. See Davis v.
Goldsworthy, 2010 UT App 78, ¶ 10, 233 P.3d 496 (mem.) (“Thus, ‘to
enter a default judgment . . . , a judge must review the complaint
. . . [to] determine whether the allegations state a valid claim for
relief.’” (alteration and omissions in original) (quoting Skanchy, 952
P.2d at 1076)); see also Pennington v. Allstate Ins. Co., 973 P.2d 932,
940 (Utah 1998) (same); American Towers Owners Ass’n v. CCI Mech.,
Inc., 930 P.2d 1182, 1194 (Utah 1996) (same), abrogated on other
grounds by Davencourt at Pilgrims Landing Homeowners Assʹn v.
Davencourt at Pilgrims Landing, LC, 2009 UT 65, 221 P.3d 234; 10
James Wm. Moore, et al., Moore’s Federal Practice § 55.60[1] (3d ed.
2013) (“[O]ne effect of a default is that the factual allegations of the
claim . . . are deemed to be admitted by the defaulting party.
Therefore, on appeal from a default judgment, the defaulting party
may not contest those facts. The appeal is limited to the legal
sufficiency of the admitted facts.”); Charles Alan Wright, et al.,
Federal Practice & Procedure § 2688 (3d ed. 1998) (“Even after
default, however, it remains for the court to consider whether the
unchallenged facts constitute a legitimate cause of action, since a
party in default does not admit mere conclusions of law.”).10
10. See also Tyco Fire & Sec., LLC v. Alcocer, 218 F. App’x 860, 864
(11th Cir. 2007) (“[B]efore entering a default judgment . . . , the
district court must ensure that the well‐pleaded allegations in the
complaint, which are taken as true due to the default, actually state
a substantive cause of action and that there is a substantive,
sufficient basis in the pleadings for the particular relief sought. At
that point, the defendant, even though in default, is still entitled to
contest the sufficiency of the complaint and its allegations to
support the judgment being sought.”); Statewide Envtl. Serv., Inc. v.
Fifth Third Bank, 352 S.W.3d 927, 930, 932 n.7 (Ky. Ct. App. 2011)
(holding that a default judgment entered as a result of striking
appellants’ answer “itself may be appealed directly without
(continued...)
20110081‐CA 22 2013 UT App 120Fu v. Rhodes
¶30 Furthermore, I would permit a challenge to the sufficiency
of the complaint to support the default judgment to be raised for
the first time on appeal, irrespective of whether default was
entered for failure to appear or as a discovery sanction. See, e.g.,
Microsoft Corp. v. Computer Care Ctr., Inc., 2008 WL 4179653, at *6
(E.D.N.Y. Sept 10, 2008) (stating that, “regardless of whether
default is entered as a discovery sanction or for failure to defend,”
the factual allegations of the complaint must constitute a legitimate
cause of action). Accordingly, I respectfully dissent from the
portion of the majority opinion concluding that we should not
evaluate the sufficiency of the Complaint on appeal because
Defendants did not raise this issue in the trial court. I would
therefore consider whether Fu’s Complaint states a claim upon
which relief can be granted against each of the Defendants. I
undertake the analysis now to illustrate my rationale for joining the
majority in affirming the judgment against Rhodes, but dissenting
with respect to the judgment against Naso and Evans.
II. Sufficiency of the Complaint
¶31 I begin my analysis by evaluating whether the
uncontroverted facts in the Complaint are sufficient on their face
to establish a valid claim for breach of contract, fraud, negligent
misrepresentation, foreclosure, and fraudulent transfer. See
generally Skanchy v. Calcados Ortope SA, 952 P.2d 1071, 1076 (Utah
1998) (“[A] default judgment is valid only if the well‐pled facts
show that the plaintiff is entitled to judgment as a matter of law.”).
In reviewing the trial court’s entry of default judgment, I accept the
10. (...continued)
preservation of the error”); Hunter v. Spaulding, 388 S.E.2d 630, 634
(N.C. Ct. App. 1990) (holding that an appellant’s “exception to the
judgment, entered in open court, permitted him to challenge on
appeal whether a default judgment could be based upon the
[appellees’] complaint,” and rejecting the appellees’ “contention
that this issue [had] not been preserved for appeal”).
20110081‐CA 23 2013 UT App 120Fu v. Rhodes
factual allegations in the Complaint as true and interpret those
facts and all inferences drawn from them in the light most
favorable to the nonmoving party. Cf. Oakwood Vill. LLC v.
Albertsons, Inc., 2004 UT 101, ¶ 9, 104 P.3d 1226 (employing the
same standard in reviewing a trial court’s decision granting a rule
12(b)(6) motion to dismiss a complaint for failing to state a claim).
¶32 As an initial matter, I note that Defendants do not challenge
the sufficiency of the claims asserted against Rhodes in connection
with the February 7, 2006 investment, the May 10, 2007 investment,
and the May 25, 2007 investment (the First Three Investments).
With respect to each of these First Three Investments, Rhodes
executed the promissory note and trust deed in both his individual
and representative capacity. I would therefore affirm the trial
court’s determination that Rhodes is liable to Fu on the First Three
Investments. I separately consider, however, whether Fu has
adequately pleaded a claim against Naso or Evans based on the
First Three Investments and whether he has sufficiently pleaded a
claim against each of the Defendants on the July 23, 2007
investment (the Fourth Investment).
A. Breach of Contract
1. The First Three Investments
¶33 As discussed, Defendants do not contest that the Complaint
states a claim for breach of contract against Rhodes with respect to
the First Three Investments. Fu contends that the Complaint also
states a claim against Naso and Evans for joint and several liability
with Rhodes under a theory of partnership, joint venture, or
partnership by estoppel. Defendants disagree, claiming that even
if accepted as true, the allegations of the Complaint do not establish
that Naso or Evans engaged in a partnership, joint venture, or
partnership by estoppel with Rhodes. In support of their position,
Naso and Evans point to email exhibits attached to the Complaint
that include the reference “PGI Management, Inc.” in the signature
20110081‐CA 24 2013 UT App 120Fu v. Rhodes
line of the senders, and a promissary note and warranty deed
attached to the Complaint which refer to “L2O Homes, LLC.”11
They ask this court to defer to the characterization of the entities in
these exhibits rather than to the allegations in the Complaint, and
further argue that these characterizations are inconsistent with a
claim that L2O Homes and PGI Management are partnerships. See,
e.g., Davis v. Cole, 999 F. Supp. 809, 812–13 (E.D. Va. 1998)
(dismissing securities fraud claims where minutes of a corporate
board meeting that plaintiff attended, which were attached to the
complaint, contradicted plaintiff’s allegation in the complaint that
he was unaware that a corporate transaction involved terms
different from those of the parties’ prior oral agreement). In
response, Fu contends that the exhibits simply establish
Defendants’ false representations about PGI Management and L2O
Homes, and that such references do not constitute proof of the
entities’ actual form.
¶34 “The rules are clear that documents attached to a complaint
are incorporated into the pleadings . . . and are fair game for this
court to consider in addition to the complaint’s averments.”
Oakwood Vill., 2004 UT 101, ¶ 10. Accordingly, in determining
11. Additionally, Defendants claim that Fu’s references throughout
the Complaint to L2O Homes as “L2O Homes, LLC” are judicial
admissions that L2O Homes is not, in fact, a partnership.
Accordingly, they ask us to take judicial notice that L2O Homes is
not a partnership. Fu disputes this determination, arguing that his
use of this title is “simply a reference to that enterprise by the name
used by [Defendants].” I would decline to take judicial notice
because L2O Homes’s form is reasonably disputed, see Utah R.
Evid. 201(b) (“The Court may judicially notice a fact that is not
subject to reasonable dispute . . . .”), and Defendants have failed to
provide any information establishing that L2O Homes is, in fact, a
limited liability company, see id. R. 201(c)(2) (providing that a court
“must take judicial notice if a party requests it and the court is
supplied with the necessary information”).
20110081‐CA 25 2013 UT App 120Fu v. Rhodes
whether Fu has adequately pleaded claims against Naso or Evans
on theories of joint venture, partnership, or partnership by
estoppel, I examine the Complaint and the attached exhibits
together. See Utah R. Civ. P. 10(c) (“An exhibit to a paper is a part
thereof for all purposes.”).
¶35 The Complaint alleges that Defendants were doing business
as PGI Management and that Defendants “worked in concert to
make the [Fourth Investment] look great, safe secure, profitable
and legitimate.” Paragraphs 39 and 40 of the Complaint each state
that Rhodes, Naso, Evans, and Smith “held themselves out to be
partners or part of a joint venture.” In support, paragraph 39
references an attached email (the May 18, 2007 email) sent to Fu,
Rhodes, Naso, and employees of Escrow Specialists, an escrow
company hired by PGI Management, in which Smith thanked
employees of the escrow company, stating, “We really do
appreciate all that you continue to do for myself, [Rhodes], [Naso],
and the whole PGI Team!!!” Paragraph 40 references a spreadsheet
attached to the Complaint which is titled “Frank Fu—Buy‐
Out—Joey Naso and Rene Evans,” and lists the properties allegedly
owned by L2O Homes and the amounts that Fu and Rhodes would
each contribute to L2O Homes. According to Fu, the combination
of these references is enough to support his claim that Naso and
Evans were partners, joint venturers, or partners by estoppel with
Rhodes and are jointly and severally liable with him on the First
Three Investments.
¶36 The Utah Legislature has defined a partnership as “an
association of two or more persons to carry on as co‐owners [of] a
business for profit.” See Utah Code Ann. § 48‐1‐3 (LexisNexis Supp.
2012).12 “The sharing of gross returns does not of itself establish a
12. Sections 48‐1‐3, 48‐1‐3.1, 48‐1‐4, and 48‐1‐13 of the Utah Code
have been repealed and replaced with the Utah Uniform
Partnership Act, effective July 1, 2013. See Utah Code Ann. §§ 48‐1‐
(continued...)
20110081‐CA 26 2013 UT App 120Fu v. Rhodes
partnership, whether or not the persons sharing them have a joint
or common right or interest in any property from which the returns
are derived.” Id. § 48‐1‐4(3) (LexisNexis 2010). However, “[t]he
receipt by a person of a share of the profits of a business is prima
facie evidence that he is a partner in the business.” Id. § 48‐1‐4(4).
¶37 Similarly, a joint venture is defined as “an association of two
or more persons to carry on as co‐owners of a single business
enterprise.” Id. § 48‐1‐3.1(1). While some distinctions exist between
a joint venture and a partnership, “the relations among joint
adventurers are mainly governed by partnership law.” Nupetco
Assocs. v. Jenkins, 669 P.2d 877, 882 n.3 (Utah 1983). Because “a joint
venture is in the nature of a partnership; . . . to establish such an
arrangement, there must be an agreement, express or implied, for
the sharing of profits.” Vern Shutte & Sons v. Broadbent, 473 P.2d
885, 886 (Utah 1970). Accordingly, the Utah Supreme Court has
identified the essential elements of a joint venture as including,
[1] a community of interest in the performance of the
common purpose, [2] a joint proprietary interest in
the subject matter, [3] a mutual right to control, [4] a
right to share in the profits, and [5] unless there is an
agreement to the contrary, a duty to share in any
losses which may be sustained.
Ellsworth Paulsen Constr. Co. v. 51‐SPR‐LLC, 2008 UT 28, ¶ 15, 183
P.3d 248 (alterations in original) (citation and internal quotation
marks omitted).
12. (...continued)
3 to 4, ‐13 (LexisNexis 2010 and Supp. 2012), repealed by
Unincorporated Business Entity Uniform Acts, ch. 353, § 310, 2011
Utah Laws 2162, 2165, 2180–203, as amended by Unincorporated
Business Entities Act Amendments, ch. 244, § 6, 2012 Utah Laws
1036. Because the repealed version of the code has remained
effective at the relevant times of this case, I cite that version.
20110081‐CA 27 2013 UT App 120Fu v. Rhodes
¶38 Here, I believe that the Complaint fails to allege facts that
could support a determination that Naso or Evans were engaged
in a partnership or joint venture with Rhodes. Nowhere in the
Complaint does Fu allege that Defendants were sharing profits
from either PGI Management or L2O Homes. Likewise, Fu does not
allege that they assumed a duty to share in the losses of either
entity. At most, the Complaint contains a bald assertion that Naso
and Evans held themselves out as partners or joint venturers.
However, “a plaintiff’s legal allegations are not binding” in
determining whether a complaint states a claim upon which a
default judgment can be based. See Skanchy v. Calcados Ortope SA,
952 P.2d 1071, 1076 (Utah 1998); see also Landers‐Scelfo v. Corporate
Office Sys., Inc., 827 N.E.2d 1051, 1058 (Ill. App. Ct. 2005) (“A bald
assertion that a partnership or joint venture exists is not sufficient
to plead the existence of such a relationship.”). The actual
documents identified by Fu do not contain statements by Naso or
Evans holding themselves out as Rhodes’s partner. Accordingly, I
would conclude that the Complaint does not support a judgment
based on partnership or joint venture against Defendants.
¶39 In the alternative, Fu contends that he has alleged sufficient
facts to support a theory of liability based on partnership by
estoppel. The Utah Legislature has defined a partnership by
estoppel as follows:
When a person by words spoken or written or by
conduct represents himself, or consents to another’s
representing him, to anyone as a partner, in an
existing partnership or with one or more persons not
actual partners, he is liable to any such person to
whom such representation has been made who has
on the faith of such representation given credit to the
actual or apparent partnership, and, if he has made
such representation or consented to its being made in
a public manner, he is liable to such person, whether
the representation has or has not been made or
20110081‐CA 28 2013 UT App 120Fu v. Rhodes
communicated to such person so giving credit by, or
with the knowledge of, the apparent partner making
the representation or consenting to its being made.
Utah Code Ann. § 48‐1‐13 (LexisNexis 2010). The Complaint fails
to allege facts that could support a partnership by estoppel against
Evans or Naso. Although Fu points us to the May 18, 2007 email
thanking the title company on behalf of the “PGI team,” nothing in
that email states that Evans or Naso are partners, in an existing
partnership, or that they consented to such a representation.
Likewise, the spreadsheet contains no indication that Naso or
Evans were members of a partnership, that they were sharing
profits, or that they had consented to Rhodes representing them as
his partners. Thus, even interpreting the allegations and all
reasonable inferences in a light most favorable to Fu, the Complaint
fails to set forth factual allegations that could support a claim that
Naso and Evans are jointly and severally liable with Rhodes on a
theory of partnership by estoppel.
¶40 Because the allegations of the Complaint do not state a claim
against Naso or Evans with respect to the First Three Investments,
I believe that default judgment was improperly entered against
them on those claims. See Skanchy, 952 P.2d at 1076 (“[A] default
judgment is valid only if the well‐pled facts show that the plaintiff
is entitled to judgment as a matter of law.”). Accordingly, I would
vacate the portion of the default judgment against Naso and Evans
related to the First Three Investments.
2. The Fourth Investment
¶41 With respect to the Fourth Investment, Defendants argue
that the Complaint fails to state a cause of action against Rhodes for
breach of contract. They correctly note that, unlike the documents
associated with the First Three Investments, Rhodes executed the
trust deed and promissory note related to the Fourth Investment
only in his representative capacity as the managing member of L2O
20110081‐CA 29 2013 UT App 120Fu v. Rhodes
Homes. As a result, Defendants contend that Rhodes is not
individually liable for breach of contract, and that Naso and Evans
can therefore have no joint and several liability with him.
¶42 Fu did not name L2O Homes as a defendant. Furthermore,
there is nothing in the Complaint that alleges facts that could
support “pierc[ing] the corporate veil” and holding Rhodes
personally liable under an alter ego theory. See generally Norman v.
Murray First Thrift & Loan Co., 596 P.2d 1028, 1030 (Utah 1979)
(setting forth the requirements to prove alter ego). Thus, I believe
the Complaint fails to state a claim against Rhodes personally for
breach of contract with respect to the Fourth Investment.
Accordingly, I would hold that the Complaint also fails to state a
breach of contract claim under a theory of joint and several liability
against Naso or Evans on the Fourth Investment.
B. Fraud and Negligent Misrepresentation
¶43 Defendants further contend that the Complaint does not
state a claim for fraud or negligent misrepresentation in connection
with any of the Investments. Specifically, Defendants argue that the
Complaint fails to plead these claims with particularity. To allege
a claim for fraud, a party’s complaint
[m]ust allege (1) that a representation was made
(2) concerning a presently existing material fact
(3) which was false and (4) which the representor
either (a) knew to be false or (b) made recklessly,
knowing that there was insufficient knowledge upon
which to base such a representation, (5) for the
purpose of inducing the party to act upon it and
(6) that the other party, acting reasonably and in
ignorance of its falsity, (7) did in fact rely upon it
(8) and was thereby induced to act (9) to that party’s
injury and damage.
20110081‐CA 30 2013 UT App 120Fu v. Rhodes
Educators Mut. Ins. Ass’n v. Allied Prop. & Cas. Ins. Co., 890 P.2d
1029, 1032 (Utah 1995). Negligent misrepresentation is a form of
fraud13 that “occurs when a person supplies false information for
the guidance of others in their business transactions, if the person
supplying the information failed to exercise reasonable care or
competence in obtaining it.” See Rawson v. Conover, 2001 UT 24,
¶ 31, 20 P.3d 876.
¶44 Rule 9(b) of the Utah Rules of Civil Procedure requires a
plaintiff to plead the relevant facts supporting a fraud claim with
sufficient particularity to show what facts are claimed to constitute
fraud. See Utah R. Civ. P. 9(b) (“In all averments of fraud . . . , the
circumstances constituting fraud . . . shall be stated with
particularity.”). Negligent misrepresentation claims are also
governed by the particularity requirement of rule 9(b). See Williams
v. State Farm Ins. Co., 656 P.2d 966, 972 (Utah 1982) (holding that the
rule 9(b) particularity requirement “reach[es] all circumstances
where the pleader alleges the kind of misrepresentations,
omissions, or other deceptions covered by the term ‘fraud’ in its
13. “Although the two claims are similar, negligent
misrepresentation ‘carries a lesser mental state, requiring only that
the [party] act carelessly or negligently.’” Moore v. Smith, 2007 UT
App 101, ¶ 36 n.12, 158 P.3d 562 (emphasis omitted) (quoting
Robinson v. Tripco Inv., Inc., 2000 UT App 200, ¶ 13, 21 P.3d 219).
Fraud, “on the other hand, requires the [party] to have acted
‘knowingly or recklessly.’” Id. (quoting Robinson, 2000 UT App
200, ¶ 13 n.3).
Because the facts required to prove both negligent
misrepresentation and [fraud] are similar, and the
only difference between the two claims is a lesser
mental state for negligent misrepresentation,
[I would] conclude that [a party] can be liable for
only one or the other regarding each defect at issue
in this case.
See id.
20110081‐CA 31 2013 UT App 120Fu v. Rhodes
broadest dimension”). “[O]ne requirement for pleading fraud with
particularity is to identify the offender.” Coroles v. Sabey, 2003 UT
App 339, ¶ 28, 79 P.3d 974. Additionally, “[f]or the purpose of
testing the sufficiency of a pleading, averments of time and place
are material and shall be considered like all other averments of
material matter.” See Utah R. Civ. P. 9(f); see also Coroles, 2003 UT
App 339, ¶ 28 n.15 (stating that time and location are “relevant
surrounding facts” regarding a misrepresentation (citation and
internal quotation marks omitted)). Thus, a plaintiff’s “mere
recitation . . . of the elements of fraud in a complaint does not
satisfy the particularity requirement.” Armed Forces Ins. Exch. v.
Harrison, 2003 UT 14, ¶ 16, 70 P.3d 35.
¶45 Balanced against these requirements is the general
relaxation of pleading requirements under our notice pleading
standards. The Utah Supreme Court has explained that the
fundamental
purpose of our liberalized pleading rules is to afford
parties the privilege of presenting whatever
legitimate contentions they have pertaining to their
dispute, subject only to the requirement that their
adversary have fair notice of the nature and basis or
grounds of the claim and a general indication of the
type of litigation involved. The functions of issue‐
formulation and fact‐revelation are appropriately left
to the deposition‐discovery process.
Williams, 656 P.2d at 971 (citations and internal quotation marks
omitted).
¶46 Defendants argue that the misrepresentations Fu alleges are
all attributable to persons other than Naso or Evans and that the
Complaint does not specify when the statements were made or
where the parties were at the time and, thus, are not sufficiently
particular. Next, Defendants argue that the Complaint does not
20110081‐CA 32 2013 UT App 120Fu v. Rhodes
allege any damages proximately caused by Rhodes’s
misrepresentations.
¶47 I agree with Defendants that Fu’s Complaint does not
adequately plead claims for fraud or negligent misrepresentation
against Naso and Evans. While the Complaint states that Rhodes,
Naso, Evans, and Smith “represented that [Fu’s] investments
would be, among other things, secured by real property, safe,
secure and that he would be investing property and in L2O
Homes,” it does not identify any specific representations made by
either Naso or Evans. Instead, the Complaint makes numerous
assertions in the passive voice without identifying who made the
particular statements, including that “Fu was told that [Naso] and
[Evans] wanted out of L2O Homes, LLC because [Evans’s] health
was not good enough to continue with the investment”; that “Fu
was promised” that the investment “was to be secured by all the
assets of L2O Homes, LLC”; and that “the assets of L2O Homes
were represented to be” several pieces of property. Cf. Coroles, 2003
UT App 339, ¶ 28 (“For the most part, [p]laintiffs use the passive
voice in this section, failing to identify exactly who made the
alleged misrepresentations. . . . Without any indication of who
made this statement to them, however, we can hardly conclude
that [p]laintiffs have pleaded this allegation with particularity.”
(footnote omitted)). Thus, Fu’s Complaint fails to satisfy “one
requirement for pleading fraud with particularity” because it does
not identify Naso or Evans as an “offender” who made a specific
fraudulent or negligent misrepresentation. See id. Therefore, I agree
with Defendants that the Complaint fails to state a claim against
Naso or Evans for fraud or negligent misrepresentation.
¶48 In contrast, if the allegations in the Complaint are
interpreted with all reasonable inferences in a light most favorable
to Fu, the Complaint is particular enough to demonstrate a cause
of action for fraud or for negligent misrepresentation against
Rhodes. The Complaint asserts that “Rhodes promised a 16%
return on investment with monthly payments of interest to be paid
20110081‐CA 33 2013 UT App 120Fu v. Rhodes
to . . . Fu and the investment was to be secured by several pieces of
property.” Additionally, an email attached to the Complaint
establishes that Rhodes sent Fu a list of properties that were falsely
represented to be the assets of L2O Homes on July 18, 2007, and
states, “No turning back. I will need the $110,000 before Monday
Evening. Please.” The Complaint further alleges that based upon
those specifically identified representations, Fu “invested $105,000
on July 23, 2007.” It also asserts that Rhodes “intended through
such misrepresentations and omissions to induce . . . Fu to lend
money based thereon,” that Rhodes’s representations were false,
and that Rhodes “knowingly made the false statements.” The
Complaint then alleges that Rhodes stopped making payments to
Fu after receiving the Fourth Investment, that “Fu has received
approximately $18,500[] in payments on the $142,676[] invested,”
and that Rhodes never secured the properties in which Fu thought
he had invested. Additionally, the Complaint alleges that Rhodes
“transferred property” of L2O Homes that was supposed to be
security for the Fourth Investment after Fu had advanced the
proceeds.
¶49 When combined with the identification of specific
representations allegedly made by Rhodes, I would hold that these
allegations are sufficient to satisfy rule 9(b)’s particularity
requirement, including the “relevant surrounding fact[]” of time.
See Coroles v. Sabey, 2003 UT App 339, ¶ 28 n.15, 79 P.3d 974(citation and internal quotation marks omitted). The Complaint
references Rhodes’s email solicitation to Fu on July 18, 2007, which
included a list of the investment properties, thereby providing a
reasonable inference that Rhodes’s representation that the
investment would be secured by these properties was made a mere
five days before Fu made the Fourth Investment on July 23, 2007.
Moreover, the promissory note for the Fourth Investment itself
states, “This note shall be secured by all of the assets of L2O
Homes, LLC.” Thus, it is reasonable to infer from the Complaint
that Rhodes made, or reiterated, these representations to Fu on the
same day that he made the Fourth Investment.
20110081‐CA 34 2013 UT App 120Fu v. Rhodes
¶50 Because the uncontroverted allegations of the Complaint are
sufficient to establish a valid claim for fraud or negligent
misrepresentation against Rhodes, I would conclude that the trial
court did not err in entering default judgment against Rhodes,
including in connection with the Fourth Investment. See Skanchy v.
Calcados Ortope SA, 952 P.2d 1071, 1076 (Utah 1998).
C. Foreclosure and Fraudulent Transfer
¶51 Finally, Defendants contend that the Complaint fails to state
a claim for foreclosure and fraudulent transfer. Because I would
determine that the default judgment against Rhodes with respect
to each of the Investments is supported by other theories alleged in
the Complaint, I would not address this issue as it relates to him.
See Cook Assocs., Inc. v. Warnick, 664 P.2d 1161, 1168 (Utah 1983)
(holding that it was permissible for a party to plead two alternative
causes of action, but concluding that “the court could not properly
enter judgment on both theories, since that would represent a
double recovery”). Moreover, I would hold that the Complaint fails
to state a claim against Naso or Evans for foreclosure or fraudulent
transfer with respect to the Investments.
¶52 Utah’s Uniform Fraudulent Transfer Act defines fraudulent
transfer, in relevant part, as
[a] transfer made or obligation incurred by a debtor
. . . (a) with actual intent to hinder, delay, or defraud
any creditor of the debtor; or (b) without receiving a
reasonably equivalent value in exchange for the
transfer or obligation; [where] the debtor: (i) was
engaged or was about to engage in a business or a
transaction for which the remaining assets of the
debtor were unreasonably small in relation to the
business or transaction; or (ii) intended to incur, or
believed or reasonably should have believed that he
20110081‐CA 35 2013 UT App 120Fu v. Rhodes
would incur, debts beyond his ability to pay as they
became due.
Utah Code Ann. § 25‐6‐5(1) (LexisNexis 2007). Thus, the plain
language of the Uniform Fraudulent Transfer Act limits its
application to transfers or obligations by a “debtor.” See id.; see also
In re Richards, 2006 WL 4846392, at *4 (Bankr. D. Utah June 18, 2006)
(finding that the Uniform Fraudulent Transfer Act was inapplicable
because none of the transfers were made by a “debtor”).
¶53 Because I would conclude that the Complaint does not state
a claim for breach of contract, see supra ¶¶ 40, 42, fraud, or
negligent misrepresentation against Naso or Evans, see supra ¶ 47,
I would conclude that Fu does not have a right to a money
judgment against Naso or Evans on any debt, and he therefore
cannot recover against them in fraudulent transfer. See Utah Code
Ann. § 25‐6‐5. Likewise, “in a foreclosure proceeding, the
mortgagee’s right to a money judgment is not a separate matter but
a prerequisite to the equitable relief demanded.” State Bank of Lehi
v. Woolsey, 565 P.2d 413, 416 (Utah 1977); see also id. at 415 (“The
main purpose of a mortgage is to insure the payment of the debt
for which it stands as security; and foreclosure is allowed when
necessary to carry out that objective.” (citation and internal
quotation marks omitted)). As a result, I would conclude that the
Complaint does not state a claim for foreclosure or fraudulent
transfer against Naso or Evans.
¶54 However, rather than simply vacating the judgment against
Naso and Evans, I would follow the lead of the Utah Supreme
Court in Skanchy and remand with instructions to allow Fu an
opportunity to amend the Complaint. See Skanchy, 952 P.2d at 1078.
If we were simply to vacate the Order and Judgment in its entirety
or to modify it to exclude Naso and Evans from joint and several
liability, as suggested by those parties, we would place Fu in a
worse position than if Defendants had not been sanctioned. If
Defendants had challenged the sufficiency of the Complaint in the
20110081‐CA 36 2013 UT App 120Fu v. Rhodes
trial court, Fu likely would have been afforded an opportunity to
amend the Complaint to cure any deficiencies. See Utah R. Civ. P.
15(a) (stating that “leave [to amend] shall be freely given when
justice so requires”). Thus, I agree with Fu that it would not be
“equitable to allow parties to fail to comply with the rules of
procedure and hinder the prosecuting of claims against them and
then be able to evade the sanction.” Such a decision would be
contrary to the purpose of rule 37. See id. R. 37(c) (“The court may
make orders regarding disclosure or discovery or to protect a party
or person from discovery being conducted in bad faith or from
annoyance, embarrassment, oppression, or undue burden or
expense, or to achieve proportionality . . . .”); see also Transamerica
Title Ins. Co. v. United Res., Inc., 471 P.2d 165, 167 (Utah 1970) (“The
purpose of the discovery . . . procedures provided for in our rules
is to furnish a method for searching out and facilitating the
resolution of issues which are not in dispute, and of settling the
rights of the parties without the time, trouble and expense of a trial.
It is indispensable to the carrying out of that purpose that parties
furnish essential information when it is requested in conformity
with the rules of procedure.” (footnote omitted)).
¶55 Accordingly, I would remand to the trial court with
instructions to grant Fu leave to amend his Complaint in an
attempt to assert proper claims against Naso and Evans, in which
event Defendants may respond. See Skanchy v. Calcados Ortope SA,
952 P.2d 1071, 1078 (Utah 1998) (holding that the complaint did not
state a claim for promissory estoppel, and remanding “to the trial
court for further consideration, including whether plaintiffs’
election to pursue reliance damages is binding and whether [the
plaintiffs] may amend their complaint without voiding the default,
if those issues are raised”); see also Alan Neuman Prods., Inc. v.
Albright, 862 F.2d 1388, 1392–93 (9th Cir. 1988) (holding that the
trial court erred in entering a default judgment because the
complaint failed to state a claim but remanding with instructions
to allow appellee “to amend its complaint, in which event
[appellant] may respond”); Hauspie v. Stonington Partners, Inc., 945
20110081‐CA 37 2013 UT App 120Fu v. Rhodes
A.2d 584, 587–88 (Del. 2008) (reversing a default judgment entered
as a discovery sanction in part because fraud allegations in the
complaint were not sufficiently pleaded and remanding to the trial
court “with instructions to grant appellees leave to amend their
complaint”).
¶56 In sum, I respectfully dissent from the portion of the
majority opinion holding that we should not evaluate the
sufficiency of the Complaint on appeal because Defendants did not
raise this issue in the trial court. I would consider whether Fu’s
Complaint states a claim upon which relief can be granted against
each of the Defendants. As a matter of law, I believe that the
Complaint adequately supports a default judgment against Rhodes
on each of the Investments. I would therefore affirm the trial
court’s entry of default judgment against Rhodes. However, I
believe that the Complaint fails to set forth factual allegations that
could support any claim against Naso or Evans for breach of
contract, fraud, negligent misrepresentation, foreclosure, or
fraudulent transfer. Therefore, I would determine that the trial
court erred in entering judgment against Naso and Evans, but
remand to the trial court to allow Fu the opportunity to amend his
Complaint.
20110081‐CA 38 2013 UT App 120