Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_10-cv-01269/USCOURTS-azd-2_10-cv-01269-0/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 9:9 Motion to Confirm Arbitration Loan

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WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

UV2, LLC, a Michigan limited liability

company, as successor interest to UV2, 

Plaintiff/Judgment Creditor, 

vs.

EMC TELECOM CORPORATION, an

Arizona corporation, now known as

EMCT ACQUISITIONS, INC., 

Defendant/Judgment Debtor. _________________________________

DIGITAL VENTURES, LLC,

Garnishee.

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No. CV 10-01269-PHX-ROS

REPORT AND RECOMMENDATION

TO THE HONORABLE ROSLYN O. SILVER, UNITED STATES DISTRICT JUDGE:

This matter arises on Plaintiff/Judgment-Creditor UV2, LLC’s (“Plaintiff”)

Application for Judgment Against Garnishee Digital Ventures, LLC (“Garnishee”), filed on

March 8, 2012 (Doc. 29.) Plaintiff seeks entry of Judgment against the Garnishee for

nonexempt monies in the amount of $502,173.00 purportedly belonging to

Defendant/Judgment-Debtor EMC Telecom Corporation (“Defendant”). On May 17, 2012,

United States Chief District Judge Roslyn O. Silver referred this case to the undersigned for

post-judgment garnishment proceedings. (Doc. 33.)

Case 2:10-cv-01269-ROS Document 46 Filed 11/20/12 Page 1 of 9
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1

For purpose of clarity, “the Court” will refer to the Presiding Judge, and “this Court”

will refer to the Magistrate Judge.

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A review of the record demonstrates that on August 20, 2010, the Court1

 entered

judgment for Plaintiff and against Defendant in the amount of $502,173.00 as principal, with

interest accruing at the rate of 6% per annum from August 24, 2009, plus Arbitrator fees in

the amount of $4,005.00 and costs in the amount of $404.80. (Doc. 12.)

On March 8, 2012, Plaintiff filed an Application for Writ of Garnishment against the

Garnishee alleging that Plaintiff “has good reason to believe, and therefore alleges, that the

Garnishee [] is holding nonexempt monies on behalf of the Judgment-Debtor and/or has in

its possession nonexempt personal property belonging to the Judgment/Debtor.” (Doc. 29.)

On March 9, 2012, a Writ of Garnishment was issued to the Garnishee requesting that the

Garnishee file an Answer to the Writ. (Doc. 30.) On September 4, 2012, Garnishee filed its

Answer avowing that it “does not have money or property belonging to judgment debtor.”

(Doc. 39.) Plaintiff filed an Objection and Request for Hearing Regarding Garnishee’s

Answer. (Doc. 40.) This Court held a hearing on October 11, 2012, and ordered that

Plaintiff file a memorandum in support of its objection, and set a briefing schedule for the

parties. (Doc. 42.) Thereafter, Plaintiff filed its Memorandum on October 19, 2012 (Doc.

43). Garnishee filed a Response, (Doc. 44), and on November 7, 2012, Plaintiff filed a Reply

(Doc. 45). Neither party requested oral argument, and this Court finds that the parties have

fully briefed the issues and oral argument will not aid in the Court’s decision. See Partridge

v. Reich, 141 F.3d 920, 926 (9th Cir. 1998); Lake at Las Vegas Investors Group, Inc. v.

Pacific Malibu Development Corp., 933 F.2d 724, 729 (9th Cir. 1991). 

BACKGROUND

On May 21, 2009, Garnishee entered into a website hosting agreement (“the

Contract”) with Defendant. (Doc. 43, Exh. 1.) Under the Contract, Defendant agreed to

provide webhosting for Garnishee’s website. (Doc. 44, at 2.) The Term of the Contract

ended on October 31, 2011. (Doc. 43, Exh. 1 at 2, ¶5.2.) By July 1, 2009, Garnishee had a

balance due to Defendant of over $25,000.00 under the Contract. (Doc. 43, Exh. 2.) On

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December 22, 2009, Defendant notified Garnishee of its intent to terminate the Contract.

(Id., Exh. 3.) At that time, Garnishee owed Defendant over $60,000.00. (Id., Exh. 2.) The

Contract Early Termination Provision provided as follows:

Provided no new Agreement exists at end of Term, the expiring Agreement

will renew for successive thirty-six (36) month terms, unless written notice of

non-renewal is provided by either Party, upon at least one hundred and twenty

(120) days (before the effective date of termination), and by paying, in

advance, a termination fee equal to twenty-four (24) months (or, if less, the

number of months remaining in Term) times the monthly average total fees for

the six most recent months (or, if less than six, all the months in the Term)

ending before the date of notice.

(Doc. 43, Exh. 1, at 2 ¶5.3.)

Plaintiff argues in its Memorandum that Defendant was entitled to an early termination

fee of $907,183.27, under the Early Termination provision of the Contract. (Doc. 43, at 3.)

Garnishee disputes that this provision applies. The provision is notably ambiguous, because

it conflates contemplation of simple, end of Term (October 31, 2011), notice of non-renewal,

with termination of Contract before Contract Term expiration. Otherwise, the consequence

for not providing the 120-day, prior to Contract expiration, notice would never equal 24

months, and would always be less than six months, and the number of most recent months

fees to average would never be less than six. The “qualifiers,” logically, can only contemplate

a notice of termination before the Contract end of Term, which is the issue here. The

determination of whether or not this provision applies to the calculation of the debt at issue

however, is mooted by Plaintiff’s willingness, as indicated in its Reply Memorandum, to

abandon calculation of debt based upon the Termination provision, and instead calculate the

debt based upon the minimum charges under the Contract, which it calculates as follows:

• 1 x Hardware Fee at $10,000/mo [per ¶3.2 of Contract] =$10,000

• 1 x Managed Service Fee at $400/mo. [per ¶3.3] =$400

• 1 x Backup Fees at $1,000/mo. [per ¶3.5] =$1,000

• 1 x Flash Media Server Fee at $400/mo. [per ¶3.5.1] =$400

• 4,000 x Digital Storage Vault Fee at .25 [per ¶3.5.3] =$1,000

• 20,000 x GB of Bandwidth at .80 [per ¶¶3.1, 3.1.1] = $16,000

Total = $28,800/monthly minimum x 22 months = $633,600

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(Doc. 45, at 4-5.)

Other than the Termination provision, Garnishee does not dispute the other terms of

the Contract, or that it was in default in December, 2009. Garnishee claims, however, that

Defendant fraudulently invoiced Garnishee for bandwidth usage. In support of its claim,

Garnishee references various correspondence between Garnishee and Defendant. All of the

communication referenced occurred on December 11, 18, 19 and 22, 2009. 

The first communication in the record, dated December 11, 2009, is a memo from Eric

Zeiner (hereinafter “Zeiner”) of Defendant EMC, to S.D. DeLong (hereinafter “DeLong”) of

Garnishee Digital Ventures. (Doc. 44, Exh. 1.) The memo gives notice of the “closure and

sale of Amateur Straight Guys,” and the liquidation of all other assets owned by the company

and the permanent closure of Garnishee. (Id.) Zeiner gives notice that Garnishee “is broke,”

and that the decline of Amateur Straight Guys “was multi-faceted in its genesis as we had

many business and personal issues that contributed.” (Id.) Zeiner continues:

As I know you are aware, our company is broke. Despite the loyalties of the

customers who have hung in there our revenues have sunk far below our

expenditures and Justin and I are both of the opinion that its time to throw in the

towel on this venture. In order to achieve our goal of a seamless transition of

ownership for remaining [Amateur Straight Guys] customers we are in

negotiations with our merchant and card processing vendors and now you to

continue to provide service and to potentially consider establishing a vendor

relationship with the new ownership should they choose to continue with your

company.

...

As you are aware and as we have discussed many times our billing issues with

EMC were a major contributor to the financial downfall of [Garnishee]. ... This

being the case we are still baffled how invoicing occurs with EMC and exactly

what we are paying for. I have requested several times for us to sit down and

go over the invoice in detail so I understand exactly what we have been billed

for, rates etc. This has yet to occur.

...

Finally in regards to bandwidth I have previously advised you that the overage

in bandwidth which was mysterious in its origins is still a mystery to us as the

implementation of our relationship with Edgecast for streaming services

offloaded our highest bandwidth demands off of [Defendant].

(Doc. 44, Exh. 1.)

The next communication in the record is an email dated December 18, 2009, from

DeLong to Zeiner cancelling a meeting. (Doc. 43, at 28.) Zeiner responds that “[i]f we don’t

talk today your account will be terminated according to accounting. It is imperative we talk

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today at least via phone. Accounting will not wait another week and will not deal with this

over the Xmas holidays. They were already upset they had to wait another week for today’s

meeting and by you rescheduling at the last minute, will not bode well with the current

situation.” (Id.) DeLong responds: “Chuck will be able to meet via phone today and I will

set up a call in number. I will attend via phone as well. I want to work with you too which

is why I am trying to bring us all to the table for months now. To intimate that I have not

been working with you is false. I don’t understand why you would suggest that I haven’t

been.” (Id., at 27.) Zeiner responds shortly thereafter:

I’ve been available for all those months to do the table meeting so hopefully

you are not saying it never happened due to anything on our end. The purpose

of the table meeting is to go over all contract and billing info. You need to see

everything with your own eyes and be explained everything so that it is clear

cut and there are no questions as to how things were attained. A phone

conversation doesn’t work as we have already tried in the past with you and

many of your staff.

I need to know when we can have this sit down, visual explanation with you

and it cannot be delayed much further.

I would much rather get this Meet up set for sure next week to determine what

your proposed offer is regarding the contract termination and settlement, your

proposed DV sale, what your needs are in the meantime, and what our problems

are in relation to supporting your setup with little to no payment.

Yes your $500 is something, but it doesn’t come close to we are losing

supporting your setup daily, with no hope of recovering the loss.

(Id.)

The parties discuss a meeting on Tuesday. The next email in the thread on December

18, 2009, is sent from Zeiner to DeLong, and discusses a proposed settlement:

I am being told that accounting will only hold the current setup of $500 daily

deposits if we finalize a settlement on the contract by end of next week. ...

They are asking that regardless of the past due amounts ($62K), which we can

hash out in the meet-up ... what is to happen with the future contracted amounts

($1.2m), and equipment costs ($200k) we are stuck paying. ...

I have been given preliminary authorization to make an informal offer of 50%

settlement to release DV and owners from the remaining contract term

obligations, to be paid out of asset sale. That amount would be 50%

($448,683.42) of the remaining contract balance, ($898,366.84) as stipulated

by the contract.

(Doc. 43, at 30-31.)

Zeiner also references sending attachments in a separate email “for discussion at our

meeting, i.e. billing docs, contract stuff, breakdowns of equipment, etc. for reference when

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2

Furthermore, the Contract provide that “[i]f Customer disputes any charges, it must

log the dispute by completing and submitting a dispute request via [Defendant]’s website,

or via email, or by contacting [Defendant]’s staff via telephone,” and must be submitted

“within 5 calendar days of the date of the invoice associated with the disputed charges, or the

invoice shall be deemed correct and all rights to dispute such charges are waived.” (Doc. 43,

Exh. 1, at 7 ¶16.) There is no evidence in the record that Garnishee followed these

procedures.

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we chat so you have full disclosure.” (Id., at 32.) The last email in the thread on December

18, 2009, is an email from Zeiner to DeLong with numerous attachments, described variously

as invoices, equipment comparison, and one described as “DV_Bandwidth_9mos.xls = a 9-

month export direct from cacti bandwidth system that you have access to for verifying

bandwidth.” (Id., at 25.)

On December 19, 2009, De Long responds to Zeiner’s email:

As I’m sure you are very aware we are broke. Yes the sale of the site will be

used to pay you what we feel/ and hopefully mutually agree to in terms of

projected contract terms however we are not in a position to give you

everything we have Eric. It won’t happen. Now, will we be fair? Absolutely.

Will we be exceptionally inquisitive and investigative re: such charges and

claims? You can count on it. Rattling the legal sabre is not necessary Eric we

are fully aware of our obligations and simply seek to understand them better

and if they are legitimate (big if) then we will comply with whatever we can.

(Doc. 43, at 30.)

On December 22, 2009, Garnishee’s corporate counsel wrote a letter to Zeiner

proposing a settlement, that would include a payment by Garnishee to Defendant of

$100,000.00. (Doc. 44, Exh. B.) The last email correspondence provided is one sent on

February 18, 2010, from De Long to Garnishee’s corporate counsel, in which he

acknowledges that “there are major creditors out there who will come after us if we don’t pay

them (EMC, MCS etc.) however as far as reaching to our assets is concerned once our major

asset (ASG) is sold and since no claim on our assets has been made thus far I am certain that

any assets we sold would be beyond the reach of the courts.” (Id., at 35.)

The above communication between Garnishee and Defendant establish clearly that

Garnishee was in default on the Contract, that Garnishee disputed some of the charges2

, and

that both parties attempted to settle the matter, with no success. Garnishee paid a total of

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3

 Rule 69(a), Fed.R.Civ.P., provides in pertinent part:

A money judgment is enforced by a writ of execution, unless the court directs

otherwise. The procedure on execution – in proceedings supplementary to and

in aid of judgment or execution – must accord with the procedure of the

state where the court is located, ... .

(emphasis added).

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$262,990.00 to Defendant for the eight month period from May 2009 to December 2009.

(Doc. 44, at 7.) Garnishee argues that the communication establishes that Defendant’s

invoicing for bandwidth use was fraudulent, and therefore Garnishee should be immune from

garnishment. 

ANALYSIS

Generally, a federal writ of garnishment is governed by the law of the state in which

the district court sits. See Fed.R.Civ.P. 69(a)3

; Hilao v. Estate of Marcos, 95 F.3d 848, 851

(9th Cir. 1996). Under Arizona law, “garnishment reaches only debts existing at the time of

the service of the writ.” Reeb v. Interchange Resources, Inc. of Phoenix, 478 P.2d 82, 84

(Ariz. 1970). “[I]t is well settled in Arizona that the rights of a garnishor-creditor to assets

in the hands of a garnishee are no greater than rights of the defendant-debtor to those assets.”

Webster v. USLife Title Co., 598 P.2d 108, 110 (Ariz. Ct. App. 1979) (citing Mid-State

Electric Supply Co. v. Arizona Title Insurance & Trust Co., 464 P.2d 604, 606-07 (Ariz.

1970)).

In order to determine the liability of the garnishee, a court must look to the facts as they

were found to exist at the time the writ was served. As of the time of service, there must be

a clear, ascertainable debt existing to the defendant, a debt not contingent upon other events.

Able Distributing Co., Inc. v. James Lampe, General Contractor, 160 Ariz. 399, 402 (App.

1989) (internal cites and citation omitted). “Merely because a debt is disputed does not mean

that it is ‘contingent.’” Id. “Where further performance of a contract is necessary before

money payment is due, it is generally held that the obligation to pay the money is not subject

to garnishment until the condition has been filled.” Id., at 403. A debt is contingent for

purposes of garnishment if it is one that may never become due and payable. Id., at 405. On

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the other hand, the denial of liability or assertion of a counterclaim for faulty performance

does not render the obligations so uncertain or contingent as to make it not subject to

garnishment. Id. 

The record before this Court is clear that a Contract between Garnishee and Defendant

was entered into that contained certain essential terms to conclude that it was a binding

contract: it contained a clear beginning and termination date, it contained clear minimum

obligations, and clear compensation terms. The parties commenced performance and there is

no claim that the Contract itself was invalid. Garnishee argues, however, that Defendant

fraudulently billed Garnishee for bandwidth usage in excess of what was actually used by

Garnishee. Garnishee submits evidence, in the form of various correspondence, between

Garnishee and Defendant that, in this Court’s view, only amounts to proof that Garnishee had

notified Defendant of its belief that fraud had occurred in the billing, but not evidence of fraud

sufficient to void an otherwise valid contract. Likewise, evidence that the parties discussed

a possible settlement of the dispute does not render the Contract invalid.

Even if Garnishee was able to establish that Defendant had billed Garnishee for

bandwidth that had not been used, Plaintiff has agreed to seek garnishment of only the

minimum charges on the remaining unfulfilled term of the Contract, $633,600.00, as set forth

on page 3 above. Plaintiff’s judgment against Defendant is less than that amount (currently

$602,753.55). During the evidentiary hearing set before this Court on October 11, 2012,

Plaintiff and Garnishee indicated that, should this Court find it useful in resolving the issue

before this Court, Garnishee’s Principle DeLong, could be deposed and his testimony

provided to this Court. This Court finds, upon consideration of all of the above, DeLong’s

statements would not be useful in the resolution of this matter. This Court will therefore

recommend that Plaintiff’s Objection to Garnishee’s Answer be granted, and that the Writ of

Garnishment, (Doc. 30), is valid. This Court will further recommend that Plaintiff be given

seven (7) days from the date of the Court’s Order adopting this Court’s Report and

Recommendation to file a proposed judgment, consistent with the terms of the Court’s Order.

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In accordance with the foregoing,

IT IS HEREBY RECOMMENDED that Plaintiff’s Objection to Garnishee’s

Answer, supported by Plaintiff’s Memorandum, (Docs. 40, 43), is GRANTED, and that

Plaintiff shall have seven (7) days from the Court’s Order adopting this Report and

Recommendation to file a proposed judgment against Garnishee, consistent with the terms of

the Court’s Order.

This recommendation is not an order that is immediately appealable to the Ninth

Circuit Court of Appeals. Any notice of appeal pursuant to Rule 4(a)(1), Federal Rules of

Appellate Procedure, should not be filed until entry of the District Court’s judgment. The

parties shall have fourteen (14) days from the date of service of a copy of this

recommendation within which to file specific written objections with the Court. See 28

U.S.C. § 636(b)(1); Fed.R.Civ.P. 6(a), 6(b) and 72. Thereafter, the parties have fourteen (14)

days within which to file a response to the objections. Failure to timely file objections to the

Magistrate Judge’s Report and Recommendation may result in the acceptance of the Report

and Recommendation by the district court without further review. See United States v.

Reyna-Tapia, 328 F.3d 1114, 1121 (9th Cir. 2003). Failure to timely file objections to any

factual determinations of the Magistrate Judge will be considered a waiver of a party’s right

to appellate review of the findings of fact in an order of judgment entered pursuant to the

Magistrate Judge’s recommendation. See Fed.R.Civ.P. 72.

DATED this 19th day of November, 2012.

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