Court Opinion

ID: 2977841
Source: CourtListenerOpinion
Date Created: 2015-09-22 18:14:59.10692+00
Date Added: 2024-06-11T11:44:09.257919
License: Public Domain

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
                         File Name: 09a0323n.06
                           Filed: May 11, 2009

                                        No. 08-5942

                       UNITED STATES COURT OF APPEALS
                            FOR THE SIXTH CIRCUIT

MARK VESLIGAJ,

       Plaintiff-Appellee,

              v.                                               On Appeal from the United
                                                               States District Court for the
MICHAEL PETERSON; DIALYSIS DIMENSIONS,                         Middle District of Tennessee
INC.; PETERSON & ASSOCIATES, INC.,                             at Nashville

       Defendants,

DIALYSIS SYSTEMS, INC.,

       Defendant-Appellant.

                                                         /

Before:       GUY, GILMAN, and COOK, Circuit Judges.

       PER CURIAM.           Defendant Dialysis Systems, Inc. (DSI), appeals from the denial

of its motion to alter or amend the default judgment entered in favor of plaintiff Mark

Vesligaj for a total of $170,873.99, representing unpaid wages, prejudgment interest on the

unpaid wages, and the value of a 1.5% equity interest in DSI. DSI argues that the district

court abused its discretion in finding that the standards for relief from judgment had not been

met and by entering judgment without an evidentiary hearing to determine the amount of

damages. For the reasons set forth below, we affirm in part and reverse in part, vacating only
No. 08-5942                                                                                   2

the $36,000 award representing the value of the 1.5% equity interest in DSI and remanding

for further determination of the damages in that regard.

                                               I.

       On April 25, 2007, plaintiff filed this action in state court asserting claims for breach

of contract, quantum meruit, and fraudulent conveyance against defendants Michael

Peterson, Peterson & Associates, Inc. (PAI), Dialysis Systems, Inc. (DSI), and Dialysis

Dimensions, Inc. (DDI). Plaintiff alleged that Peterson was a majority shareholder, principal

officer, and a member of the board of directors of PAI, DSI, and DDI (which acquired the

assets of DSI). DSI hired plaintiff to work as a mechanical engineer on a 30-hour-week basis

and offered plaintiff a 1.5% equity interest in DSI because DSI was a young company that

could not pay plaintiff more.

       In July 2003, however, Peterson told plaintiff that DSI could not pay him and asked

him to defer his salary until cash flow improved or additional investors were found. That

continued until plaintiff resigned in July 2004, when he began to work instead as a

consultant. DSI made some payments on the unpaid wages until November 2006. An

agreement in principle was reached with employees who had deferred salary and were owed

equity interests in DSI, but the agreement was not consummated. Plaintiff alleged that DSI

transferred its assets to DDI, and, in June 2006, plaintiff was offered a 2.5% interest in DDI

in exchange for an agreement to further forbear the unpaid wages and not seek the equity

interest due him. Plaintiff received a proposed equity agreement and a promissory note from

DDI for $100,665.48 in wages and interest from DDI. Plaintiff did not accept the offer,
No. 08-5942                                                                                   3

however, allegedly because the agreement included further deferral contingencies that he

found unacceptable.

       A petition for removal was filed on behalf of all the defendants, but the answer filed

on May 25, 2007, was filed only on behalf of Peterson, PAI, and DDI. Plaintiff’s motion for

entry of default against DSI was erroneously denied by the clerk, but, after correction, default

was entered against DSI on July 30, 2007. Plaintiff voluntarily dismissed the claims against

all the defendants except DSI in November 2007, and filed his first motion for entry of

default judgment against DSI in December 2007.

       DSI did not respond to this first motion for default judgment, but a response was filed

by the three other defendants along with an affidavit from Peterson. In denying entry of

default judgment on January 29, 2008, the district court stated that it had not considered the

response because the dismissed defendants had no standing to oppose the entry of default

judgment against DSI. Nonetheless, noting that the clerk had not entered judgment because

the judgment sought an undetermined equity interest and non-statutory interest, the district

court found that the plaintiff’s declaration did not provide sufficient evidence as to the

calculation of the damages, and denied the motion without prejudice to refiling the motion

supported by sufficient evidence to permit the court to determine a sum certain. On April 7,

2008, no motion having been filed, the district court issued an order scheduling a status

conference for April 21, 2008.

       The next day, April 8, 2008, plaintiff filed his revised motion for default judgment

supported by plaintiff’s third declaration setting forth a breakdown of the unpaid wages, his
No. 08-5942                                                                                              4

valuation of an 1.5% equity interest in DSI, and calculation of prejudgment interest on each.

DSI obtained counsel and filed a formal appearance on April 17, 2008, but not until after the

district court had already entered default judgment against it on April 15, 2008. On April 18,

2008, DSI filed a motion to alter or amend the default judgment under Fed. R. Civ. P. 59(e),

complaining specifically that the judgment was entered before the expiration of the ten-day

period for responding under Local Rule 7.01 and contesting not only the value of the equity

interest but also whether plaintiff was entitled to an equity interest at all. DSI submitted a

revised affidavit from Peterson, in which Peterson admitted being DSI’s president, CEO, and

majority shareholder; stated that DSI’s assets were foreclosed by its creditors, including

himself, and then sold to DDI; and denied that the equity interest in DSI had any value.

Plaintiff filed a response in opposition to DSI’s motion.

        In an order entered on July 3, 2008, the district court denied DSI’s motion to alter or

amend the default judgment on the grounds that DSI had not established that it was entitled

to relief under Fed. R. Civ. P. 55(c) and 60(b)(1). DSI’s appeal followed.1

                                                    II.

A.      Default Judgment

        “An appeal from a default judgment is actually an appeal of the denial of a Rule 60(b)

motion, through which a party seeks relief from the default judgment.” Frontier Ins. Co. v.

Blaty, 454 F.3d 590, 595 (6th Cir. 2006). This court reviews a district court’s denial of such

        1
         This court has jurisdiction of this appeal since DSI’s motion to alter or amend judgment was filed
timely under Fed. R. Civ. P. 59(e). See Clarendon Ltd. v. Foster, No. 92-5626, 1993 WL 339703, at *5 (6th
Cir. Sept. 2, 1993) (unpublished).
No. 08-5942                                                                                          5

a motion for abuse of discretion. Burrell v. Henderson, 434 F.3d 826, 831 (6th Cir. 2006).

       Under Fed. R. Civ. P. 55(c), a court “may set aside an entry of default for good cause,

and it may set aside a default judgment under Rule 60(b).” 2 Three factors are considered in

determining whether there is “good cause” to set aside a default: “(1) [w]hether culpable

conduct of the defendant led to the default, (2) [w]hether the defendant has a meritorious

defense, and (3) [w]hether the plaintiff will be prejudiced.” Waifersong, Ltd. v. Classic

Music Vending, 976 F.2d 290, 292 (6th Cir. 1992) (citing United Coin Meter Co. v. Seaboard

Coastline RR, 705 F.2d 839, 845 (6th Cir. 1983)). When the default has ripened into a

default judgment, the court must consider these factors, as well as determine whether the

stricter requirements of Fed. R. Civ. P. 60(b) are met. Burrell, 434 F.3d at 832.

       Here, the district court treated DSI’s motion as seeking relief under Rule 60(b)(1).

Where that is the case, the culpability element of the three-factor test “is framed in terms of

       2
           Rule 60(b) provides that:

       On motion and just terms, the court may relieve a party . . . from a final judgment, order,
       or proceeding for the following reasons:

       (1)        mistake, inadvertence, surprise, or excusable neglect;

       (2)        newly discovered evidence that, with reasonable diligence, could not have
                  been discovered in time to move for a new trial under Rule 59(b);

       (3)        fraud (whether previously called intrinsic or extrinsic), misrepresentation,
                  or other misconduct by an opposing party;

       (4)        the judgment is void;

       (5)        the judgment has been satisfied, released or discharged; it is based on an
                  earlier judgment that has been reversed or vacated; or applying it
                  prospectively is no longer equitable; or

       (6)        any other reason that justifies relief.
No. 08-5942                                                                                                6

‘mistake, inadvertence, surprise, or excusable neglect.’” Waifersong, 976 F.2d at 292

(quoting Rule 60(b)(1)). Only if the party seeking to vacate a default judgment makes this

showing may the court consider the other United Coin Meter factors. Id. The district court

did not abuse its discretion in finding that DSI’s culpable conduct led to the default.

        DSI, aware of this action since it joined in the removal, has offered no explanation for

its having delayed almost a year in its defense of the action. Nor could it claim ignorance of

the proceedings since Peterson, its majority shareholder, was also a defendant. DSI did

nothing to defend itself before or after default was entered in July 2007, or when plaintiff

moved for default judgment in December 2007. To the extent DSI might argue that it

thought the opposition filed by the dismissed defendants would be considered in its defense,

the district court explicitly advised DSI otherwise in the order denying the first motion for

default on January 29, 2008. Moreover, the denial of that first motion for default judgment

was explicitly without prejudice to refiling with evidence to support a determination as to

damages. Nonetheless, DSI did not take further action, formally or informally, until April

2008, when it secured counsel in the wake of plaintiff’s revised motion for default judgment.3

        DSI complains that default judgment was entered before expiration of the ten-day

period for responding to a motion under the local rules, but does not claim that the district

court was precluded from deciding the motion after only seven days. DSI also asserts that

        3
          DSI correctly points out that the district court was wrong when it said DSI had made no appearance,
because DSI had joined in the removal. Rule 55(b)(2) states that if a party against whom default judgment
is sought has appeared personally he “must be served with written notice of the application at least 3 days
before the hearing.” DSI emphasizes that this circuit, like most, has found that informal appearances may
suffice. See, e.g., Lutomski v. Panther Valley Coin Exch., 653 F.2d 270, 271 (6th Cir. 1981). The record
reflects, however, that DSI was served with plaintiff’s application for default judgment.
No. 08-5942                                                                                                 7

it was entitled to wait for the district court to schedule an evidentiary hearing under Fed. R.

Civ. P. 55(b)(2) before filing a formal appearance or opposition to default judgment. First,

Rule 55(b)(2) provides that the district court “may conduct hearings or make referrals . . .

when, to enter or effectuate judgment, it needs to: (A) conduct an accounting; (B) determine

the amount of damages; (C) establish the truth of any allegation by evidence; or (D)

investigate any other matter.” (Emphasis added.) This provision, by its terms, allows but

does not require the district court to conduct an evidentiary hearing.                      See Fustok v.

ContiCommodity Servs., Inc., 873 F.2d 38, 40 (2d Cir. 1989) (“[I]t was not necessary for the

District Court to hold a hearing, as long as it ensured that there was a basis for the damages

specified in a default judgment.”).

        Even if DSI had been waiting for a notice of hearing, which it has not actually

claimed, that would not provide sufficient grounds to vacate the default judgment for

mistake, inadvertence, surprise, or excusable neglect. Compare Burrell, 434 F.3d 832-34

(finding the culpability element was met where the defendant diligently, but improperly, tried

to respond and the defendant did not have notice of the default proceedings). Indeed, the

record amply supports the conclusion that DSI deliberately elected to sit out of the case for

almost a year. The district court did not abuse its discretion in finding that DSI had not

demonstrated grounds to vacate the default judgment under Fed. R. Civ. P. 60(b)(1).4

        4
         Although DSI faults the district court for not considering its motion under Rule 60(b)(6), subsection
(6) applies “only in exceptional or extraordinary circumstances which are not addressed by the first five
numbered clauses of the Rule.” Olle v. Henry & Wright Corp., 910 F.2d 357, 365 (6th Cir. 1990) (internal
quotation marks and citation omitted). DSI has not articulated any grounds warranting relief under Rule
60(b)(6).
No. 08-5942                                                                                  8

B.     Determination as to Damages

       Without contesting the award of damages of $99,906.99 in unpaid wages or $34,967

in prejudgment interest on those unpaid wages, DSI argues that the district court erred in

awarding $36,000 for plaintiff’s 1.5% equity interest in DSI without conducting an

evidentiary hearing. It is true, as DSI argues, that: “‘Where damages are unliquidated a

default admits only [the defaulting party’s] liability and the amount of damages must be

proved.’” Antoine v. Atlas Turner, Inc., 66 F.3d 105, 110 (6th Cir. 1995) (quoting Fehlhaber

v. Fehlhaber, 681 F.2d 1015, 1026 (5th Cir. 1982) (en banc)). As the Second Circuit

explained: “Even when a default judgment is warranted based on a party’s failure to defend,

the allegations in the complaint with respect to the amount of the damages are not deemed

true. The district court must instead conduct an inquiry in order to ascertain the amount of

damages with reasonable certainty.” Credit Lyonnais Sec. (USA), Inc. v. Alcantara, 183 F.3d
151, 155 (2d Cir. 1999) (citations omitted). It is more than evident from the record, however,

that the district court did not treat the default as an admission with respect to damages. This

is demonstrated by the district court’s denial of the plaintiff’s first motion for default

judgment on the grounds that there was not sufficient evidence in the record to make a

determination as to damages.

       A district court’s determination that a hearing is not necessary to determine the

amount of damages under Rule 55(b)(2) is reviewed for abuse of discretion. Ortiz-Gonzalez

v. Fonovisa, 277 F.3d 59, 63 (1st Cir. 2002) (citing Pope v. United States, 323 U.S. 1, 12

(1944) (“It is a familiar practice and an exercise of judicial power for a court upon default,
No. 08-5942                                                                                  9

by taking evidence when necessary or by computation from facts of record, to fix the amount

which the plaintiff is lawfully entitled to recover and to give judgment accordingly.”)). Here,

the district court’s reliance on plaintiff’s third sworn declaration to provide the necessary

evidentiary basis for calculating the unpaid wages and the amount of prejudgment interest

on the unpaid wages was not an abuse of discretion. We cannot conclude the same, however,

with respect to the determination regarding the value of the 1.5% equity interest in DSI.

       The only evidence in the record was plaintiff’s declaration, in which he attested as

follows:

       In support of my revised motion for a sum certain, I submit my good faith
       valuation of the 1.5% interest in DSI to be $36,000. This valuation is based
       on my intimate knowledge of DSI and its products, services, and projects and
       the market it served. More specifically, while the company’s assets have been
       transferred to Dialysis Dimensions, Inc. (“DDI”), there is still substantial value
       in DSI. My valuation relies on DSI’s net operating losses (“NOLs”) of
       $2,400,000, which NOLs I believe have value (to DDI) for tax planning
       purposes. My understanding of these NOLs is that they can be assigned to and
       assumed by DDI and utilized to offset DDI gain. My understanding of the deal
       between DSI and DDI will allow such assignment and assumption, and I
       understand that it is the intention of DSI to assign the NOLs to DDI. DSI still
       validly exists for this purpose. It is my belief that DDI intends to, upon
       securing a new investor for DDI, pull forward the NOLs from DSI and place
       them into DDI to boost profitability. I am aware of many phone calls in the
       months prior to the asset reassignment from DSI to DDI in which Michael
       Peterson discussed with company’s counsel the strategies and legal
       maneuverings necessary to accomplish this utilization of the NOLs for the
       financial benefit of DDI.

This evidence, apparently based on personal knowledge, indicates that DSI’s net operating

losses have “value,” but also that such “value” depends on the ability to use the NOLs to

offset the future gains of DDI. Peterson’s affidavit filed in support of DSI’s motion to alter

or amend judgment conceded that the NOLs have value to the extent of any profit earned by
No. 08-5942                                                                               10

DDI, but asserted that the NOLs had no value because DDI had never earned a profit. On

this record, we find plaintiff’s declaration provided insufficient evidence to determine with

reasonable certainty that the value of the 1.5% equity interest in DSI was equal to $36,000.

For this reason, it was an abuse of discretion not to make further inquiry before determining

the value of plaintiff’s 1.5% equity interest in DSI.

       Accordingly, the judgment is AFFIRMED in part and REVERSED in part, the

judgment is VACATED only with respect to the award of $36,000, and the matter is

REMANDED for further proceedings to determine the value of the 1.5% equity interest in

DSI.