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Animal Blood Bank, Inc., A California Corporation, et al v. Anne S. Hale

November 16, 2012

ANIMAL BLOOD BANK, INC., A CALIFORNIA CORPORATION, ET AL., PLAINTIFFS,
v.
ANNE S. HALE, AN INDIVIDUAL, DEFENDANT.



The opinion of the court was delivered by: Kendall J. Newman United States Magistrate Judge

FINDINGS AND RECOMMENDATIONS

Plaintiffs filed a Motion for Default Judgment (the "Motion") on September 20, 2012.*fn1 (Mot. for Default J., Dkt. No. 74.) Defendant Anne S. Hale ("defendant") did not file any written opposition to the Motion.

Plaintiffs seek default judgment upon claims for: (1) breach of a "Merger Agreement," (2) breach of a "Shareholder Agreement," (3) breach of fiduciary duty arising from defendant's role as a director and officer of plaintiff Animal Blood Bank, Inc. ("ABB"), (4) misappropriation of trade secrets belonging to ABB, and (5) fraud. (Mot. for Default J. at 10-14.) Plaintiffs' Motion includes a four-page list of damages figures and citations supporting those figures (id. at 18-21), but the Motion did not specify the claim(s) giving rise to each damages figure. Instead, plaintiffs prefaced the four-page list with the explanation that "[p]laintiffs are able to demonstrate the following damages as a result of [Defendant] Hale's misconduct." (Id. at 18.) The undersigned requested further clarification from plaintiffs specifying which damages amounts arise from which claim(s). (Dkt. No. 77.) Plaintiffs timely filed the requested supplemental briefing. (Supp'l Br., Dkt. No. 78.) Plaintiffs' motion and supporting declarations, exhibits, and supplemental briefing are currently pending before the undersigned. (Dkt. Nos. 74, 78; Declaration of Patricia Kaufman ("Kaufman Decl."), Dkt. No. 74-3; Declaration of Marc Koenigsberg ("Koenigsberg Decl."), Dkt. No. 74-2.)

The court heard plaintiffs' motion for default judgment on its law and motion calendar on November 1, 2012. Attorneys Marc Koenigsberg appeared at the hearing on behalf of plaintiffs. Plaintiffs Michael and Patricia Kaufman also appeared at the hearing and gave sworn testimony under penalty of perjury. No appearance was made by or on behalf of defendant. For the reasons stated below, the undersigned recommends that plaintiffs' motion for default judgment be granted, that judgment be entered in plaintiffs' favor, and that plaintiffs be awarded $244,541.05 in damages, two permanent injunctions, $385,356.53 in attorneys' fees, and $4,084.70 in litigation costs.

I. BACKGROUND

A. Summary Of Plaintiffs' Allegations

In general, this case arises out of the merger of defendant's company, MidWest Animal Blood Services, Inc. ("MABS") with and into ABB. The merger closed on July 16, 2008. (Compl. ¶ 11.) Defendant was the president and chief executive officer of ABB from June of 2008 until her resignation in May of 2010. (Id. ¶ 5.) Over the course of her relationship with ABB, defendant allegedly breached her fiduciary duties to ABB, breached her contracts with ABB and the Kaufmans, defrauded ABB and the Kaufmans, and misappropriated ABB's trade secrets and proprietary information. (Id. ¶¶ 43-74.)

Relevant here, plaintiffs' Prayer For Relief requests damages, injunctive relief, declaratory relief, and "attorneys' fees and costs." (Compl. at 19-20.)

B. Relevant Procedural Background

Plaintiffs filed their complaint on August 4, 2010. (Compl., Dkt. No. 1.) Defendant was served with process and filed an Answer and Counterclaims on October 8, 2010. (Dkt. No. 8.) On August 3, 2011, plaintiffs' counsel filed a Notice of Filing Bankruptcy as to defendant. (Dkt. No. 44.) On October 24, 2011, the district judge stayed this action due to the pendency of defendant's bankruptcy proceeding. (Dkt. No. 52.)

On February 10, 2012, the district judge lifted the bankruptcy stay. (Dkt. No. 55.) However, since the bankruptcy stay was lifted, defendant has not participated in this action, despite multiple court orders directing her to do so.

Accordingly, after a hearing on a motion to compel on May 3, 2012, having determined that neither defendant nor the Chapter 7 Bankruptcy trustee who "owns" defendant's counterclaims intends to participate in this litigation, the undersigned entered an order to show cause directing defendant to show cause why: (1) her answer should not be stricken; (2) her default should not be entered; and (3) her counterclaims should not be dismissed with prejudice. (See Order & Order to Show Cause ("OSC"), May 8, 2012, at 3-4, Dkt. No. 66.) The undersigned ordered the Chapter 7 bankruptcy trustee, Michael A. Mason, to similarly show cause in regards to dismissal of defendant's counterclaims. (Id. at 3.) Neither defendant nor Mr. Mason filed a response to the OSC. Accordingly, the undersigned recommended that: (1) the Clerk of Court be directed to strike defendant's answer to plaintiffs' complaint and enter defendant's default; and (2) defendant's counterclaims be dismissed with prejudice. (Dkt. No. 68.) The OSC warned that defendant's and Mason's failures to respond to the OSC constituted consent to these recommendations. (Id. at 4.)

On July 2, 2012, the district judge issued an order dismissing defendant's counterclaim in this action, pursuant to the parties' stipulation. (Dkt. No. 70.)

On August 21, 2012, the district judge issued an order partially adopting the undersigned's Findings and Recommendations.*fn2 (Order, Dkt. No. 72.) Therein, the district judge directed the Clerk of the Court to: (a) strike defendant's answer (Dkt. No. 8) to plaintiffs' complaint; and (b) enter defendant's default with respect to plaintiffs affirmative claims. (Order at 2.)

On October 3, 2012, the Clerk of the Court entered defendant's default pursuant to the district judge's order at Docket Number 72. (Clerk's Cert. of Entry of Default, Dkt. No. 76.)

On September 20, 2012, plaintiffs filed the pending motion for default judgment against defendant and served a copy of the motion on defendant by U.S. mail and by overnight courier. (Cert. of Serv., Sept. 20, 2012, Dkt. No. 74-1 at 28.) A review of the court's docket reveals that defendant has not filed a response to the motion for default judgment.

II. LEGAL STANDARDS

Pursuant to Federal Rule of Civil Procedure 55, default may be entered against a party against whom a judgment for affirmative relief is sought who fails to plead or otherwise defend against the action. See Fed. R. Civ. P. 55(a). However, "[a] defendant's default does not automatically entitle the plaintiff to a court-ordered judgment." PepsiCo, Inc. v. Cal. Sec. Cans, 238 F. Supp. 2d 1172, 1174 (C.D. Cal. 2002) (citing Draper v. Coombs, 792 F.2d 915, 924-25 (9th Cir. 1986)). Instead, the decision to grant or deny an application for default judgment pursuant to Federal Rule of Civil Procedure 55(b)(2) lies within the district court's sound discretion. Aldabe v. Aldabe, 616 F.2d 1089, 1092 (9th Cir. 1980). In making this determination, the court considers the following factors:

(1) the possibility of prejudice to the plaintiff, (2) the merits of plaintiff's substantive claim, (3) the sufficiency of the complaint, (4) the sum of money at stake in the action[,] (5) the possibility of a dispute concerning material facts[,] (6) whether the default was due to excusable neglect, and (7) the strong policy underlying the Federal Rules of Civil Procedure favoring decisions on the merits.

Eitel v. McCool, 782 F.2d 1470, 1471-72 (9th Cir. 1986). Default judgments are ordinarily disfavored. Id. at 1472.

As a general rule, once default is entered, well-pleaded factual allegations in the operative complaint are taken as true, except for those allegations relating to damages. TeleVideo Sys., Inc. v. Heidenthal, 826 F.2d 915, 917-18 (9th Cir. 1987) (per curiam) (citing Geddes v. United Fin. Group, 559 F.2d 557, 560 (9th Cir. 1977) (per curiam)); accord Fair Housing of Marin v. Combs, 285 F.3d 899, 906 (9th Cir. 2002). In addition, although well-pleaded allegations in the complaint are admitted by a defendant's failure to respond, "necessary facts not contained in the pleadings, and claims which are legally insufficient, are notestablished by default." Cripps v. Life Ins. Co. of N. Am., 980 F.2d 1261, 1267 (9th Cir. 1992) (citing Danning v. Lavine, 572 F.2d 1386, 1388 (9th Cir. 1978)); accord DIRECTV, Inc. v. Hoa Huynh, 503 F.3d 847, 854 (9th Cir. 2007) (for default judgment purposes, a defendant is not held to admit facts that are not well-pled or conclusions of law); Abney v. Alameida, 334 F. Supp. 2d 1221, 1235 (S.D. Cal. 2004) ("[A] default judgment may not be entered on a legally insufficient claim.").

A party's default conclusively establishes that party's liability, but it does not establish the amount of damages. Geddes, 559 F.2d at 560. Upon moving for default judgment, the plaintiff is required to provide evidence of its damages, and the damages sought must not be different in kind or amount from those set forth in the complaint. Amini Innovation Corp. v. KTY Intern. Mktg., 768 F. Supp. 2d 1049, 1054 (C.D. Cal. 2011) (citing Philip Morris USA, Inc. v. Castworld Prods., Inc., 219 F.R.D. 494, 498 (C.D. Cal. 2003). When "proving-up" damages, admissible evidence (including witness testimony) supporting damage calculations, is usually required. Id. "The court may conduct hearings or make referrals . . . when, to enter or effectuate judgment, it needs to . . . determine the amount of damages." Fed. R. Civ. P. 55(b)(2)(B). Entry of a default judgment for money is appropriate without a hearing if "the amount claimed is a liquidated sum or capable of mathematical calculation." Davis v. Fendler, 650 F.2d 1154, 1161 (9th Cir. 1981) (no hearing necessary when documents show that the judgment amount is based upon a definite figure); Microsoft Corp. v. Nop, 549 F. Supp. 2d 1233, 1235-36 (E.D. Cal. 2008) ("Where damages are liquidated (i.e., capable of ascertainment from definite figures contained in the documentary evidence or in detailed affidavits), judgment by default may be entered without a damages hearing.") (citing Dundee Cement Co. v. Howard Pipe & Concrete Prods., 722 F.2d 1319, 1323 (7th Cir. 1983)). Unliquidated and punitive damages, however, require "proving up" at an evidentiary hearing or through other means. Nop, 549 F. Supp. 2d 1233, 1235-36.

III. DISCUSSION

A. Appropriateness of the Entry of Default Judgment Under the Eitel Factors

1. Factor One: Possibility of Prejudice to Plaintiffs

The first Eitel factor considers whether the plaintiffs would suffer prejudice if default judgment is not entered, and such potential prejudice to the plaintiffs militates in favor of granting a default judgment. See PepsiCo, Inc., 238 F. Supp. 2d at 1177. Here, plaintiffs will face continuing prejudice if the court does not grant a default judgment. Absent the entry of a default judgment, plaintiffs would be without another recourse for recovery. Accordingly, the first Eitel factor favors the entry of a default judgment.

2. Factors Two and Three: The Merits of Plaintiffs' Substantive Claims and the Sufficiency of the Complaint

The undersigned considers the merits of plaintiffs' substantive claims and the sufficiency of the complaint together below because of the relatedness of the two inquiries. The undersigned must consider whether the allegations in the complaint are sufficient to state a claim that supports the relief sought. See Danning, 572 F.2d at 1388; PepsiCo, Inc., 238 F. Supp. 2d at 1175. California substantive law applies in this diversity action. Intri--Plex Technol., Inc. v. Crest Group, Inc., 499 F.3d 1048, 1052 (9th Cir. 2007) (citing Homedics, Inc. v. Valley Forge Ins. Co., 315 F.3d 1135, 1138 (9th Cir. 2003)).

a. Alleged Breaches Of Contract

The undersigned finds that the allegations in plaintiffs' complaint sufficiently support the grant of relief on plaintiffs' breach of contract claims in the context of an application for entry of default judgment.

"To succeed on a claim for breach of contract under California law, a plaintiff must plead and prove: (1) the existence of a contract; (2) plaintiff's performance or excuse for non-performance; (3) defendant's breach; and (4) damage to plaintiff resulting therefrom." Craigslist, Inc. v. Naturemarket, Inc., 694 F. Supp. 2d 1039, 1059 (N.D. Cal. 2010) (citing McKell v. Washington Mut., Inc., 142 Cal. App. 4th 1457, 1489 (2006)).

Here, plaintiffs allege breaches of two separate contracts: the Merger Agreement and the Shareholder Agreement. As described below, plaintiffs have sufficiently pled the elements of a contract claim with respect to each agreement.

The relevant alleged events are as follows. The Kaufmans and defendant formed ABB in December 2002. (Compl. ¶ 1.) Defendant also had her own separate business, MABS. (Id. ¶¶ 10-14.) The Kaufmans and defendant wanted to merge MABS into ABB. (Id.) Accordingly, the Kaufmans and defendant signed a "Merger Agreement" on June 3, 2008. (Id.) The parties also entered into a "Shareholder Agreement" on June 3, 2008. (Id. ¶ 18.) The Certificate of Merger was filed on June 4, 2008. (Supp'l Br., Dkt. No. 78 at 1.) Plaintiffs allege that the merger of MABS into ABB "closed" on or about July 16, 2008.*fn3 (Compl. ¶ 11.)

i. The Merger Agreement

In the Merger Agreement signed on June 3, 2008, defendant and MABS warranted that they had accurately disclosed MABS' financial picture to ABB. (Id. ¶ 15; Exh. A to Compl.) Specifically, the Merger Agreement provided that the "financial information and related unaudited income statements, statements of shareholders' equity, and statements of cash flows of MABS, dated February 28, 2008, as provided to ABB, are accurate and complete in all material respects and fairly present the financial position of MABS as of the dates thereof . . ." (Id.) The Merger Agreement also provided for attorneys' fees for any party prevailing in an action "as a result of breach of the Merger Agreement, or to establish, maintain, or enforce any right or remedy under the Merger Agreement." (Id. ¶ 17; Exh. A to Compl. at ¶ 11.12.) The Merger Agreement provides for recovery of costs in addition to attorneys' fees. (Id.) The Merger Agreement is governed by California law. (Exh. A to Compl. at ¶ 11.2.)

Plaintiffs have pleaded factual allegations to support all four elements of a contract claim under California law with respect to the Merger Agreement. See Craigslist, Inc., 694 F. Supp. 2d at 1059. Plaintiffs have alleged the existence of the Merger Agreement and have alleged their performance of that agreement. (Compl. ¶¶ 11, 44.) Plaintiffs allege defendant's breaches of the Merger Agreement; namely, that defendant failed to accurately disclose all of MABS' liabilities prior to the merger in violation of that agreement and took on loans in MABS' name after the Merger Agreement was signed.*fn4 (Id. ¶¶ 15-16, 43-45.) Plaintiffs have also alleged resulting damages; namely, that ABB has had to take on MABS' undisclosed liabilities, which has "depressed the value of ABB." (Id. ¶ 48.) Plaintiffs alleged that their resulting damages exceed $500,000. (Id. ¶ 38.) Accordingly, plaintiffs have sufficiently alleged defendant's breach of the Merger Agreement for default judgment purposes.

ii. The Shareholder Agreement

In the Shareholder Agreement, the Kaufmans and defendant bound themselves to first obtain the unanimous approval of the other shareholders (namely, each other) prior to spending more then $5,000 of ABB's funds in a single transaction or series of transactions with a single vendor. (Id. ¶ 21; Exh. B to Compl. at 3-4.) They also bound themselves to first obtain the unanimous approval of the other shareholders (each other) prior to entering into contracts or transactions between themselves and ABB. (Id.) Plaintiffs allege that the Shareholder Agreement is governed by California law. (Id. ¶ 22; Exh B. to Compl. at 6.)

Plaintiffs have pleaded factual allegations to support all four elements of a contract claim under California law with respect to the Shareholder Agreement. See Craigslist, Inc., 694 F. Supp. 2d at 1059. Plaintiffs have alleged the existence of the Shareholder Agreement and their own performance of it. (Compl. ¶ 18-23, 44.) Plaintiffs allege defendant's breaches of the Shareholder Agreement by alleging that defendant failed to obtain unanimous shareholder approval before expending more than $5,000 of ABB's funds in a single transaction or series of transactions, and by transacting more than $500 between herself (or her other companies) and ABB without shareholder approval, among other improprieties. (Compl. ¶¶ 21, 25-27, 47; Exh. B to Compl. at 3-4.) Plaintiffs have also alleged resulting damages; namely, that ABB has had to take on MABS' undisclosed liabilities, which has "depressed the value of ABB." (Id. ¶ 48.) Plaintiffs alleged that their resulting damages exceed $500,000. (Id. ¶ 38.) Accordingly, plaintiffs have sufficiently alleged defendant's breach of the Shareholder Agreement for default judgment purposes.

iii. Conclusion As To Contract Claims

The undersigned concludes that the breach of contract allegations in plaintiffs' complaint, taken as true for the purpose of evaluating the application for default judgment, justify entry of default judgment insofar as the merits and sufficiency of those allegations are concerned. Specifically, the undersigned concludes that plaintiffs have sufficiently alleged that defendant breached the Merger Agreement and the Shareholder Agreement. Accordingly, the second and third Eitel factors favor the entry of default judgment as to the contract claims.

b. Alleged Breaches Of Fiduciary Duty

The undersigned finds that the allegations in plaintiffs' complaint sufficiently support the grant of relief on plaintiffs' fiduciary duty claim in the context of an application for entry of default judgment.

To allege a claim for breach of fiduciary duty under California law, a plaintiff must allege: "(1) existence of a fiduciary relationship; (2) breach of the fiduciary duty; and (3) damage proximately caused by that breach." Lane v. Vitek Real Estate Industries Group, 713 F. Supp. 2d 1092, 1104 (E.D. Cal. 2010) (citing Roberts v. Lomanto, 112 Cal. App. 4th 1553, 1562 (2003)). A director of a corporation has a fiduciary relationship with the corporation and owes the corporation a fiduciary duty. Credit Bureau Connection, Inc. v. Pardini, 726 F. Supp. 2d 1107, 1120 (E.D. Cal. 2010).

Here, plaintiffs have pleaded factual allegations to support claims for defendant's breaches of fiduciary duties to ABB. Plaintiffs have alleged that defendant's role as a director and officer of ABB gave rise to her fiduciary duty to ABB. (Compl. ¶ 50.) Plaintiffs have also alleged that defendant failed to accurately inform ABB about MABS' liabilities in advance of the merger, that defendant continued with a "lyophilized platelet project" without ABB shareholder approval, that defendant caused ABB to pay more than $5,000 to her other company, Trianco LLC, without unanimous ABB shareholder approval, and that defendant improperly caused ABB to take on significant liabilities, among other improprieties. (Id. ¶ 51.) Plaintiffs have also alleged damages resulting from these breaches of duty; namely, that defendant's breaches of fiduciary duty to ABB has "depressed the value of ABB," among other damages. (Id. ¶ 48.) Plaintiffs also alleged that their resulting damages exceed $500,000. (Id. ¶ 38.)

The undersigned concludes that the breach of fiduciary duty allegations in plaintiffs' complaint, taken as true for the purpose of evaluating the application for default judgment, justify entry of default judgment insofar as the merits and sufficiency of those allegations are concerned. Specifically, the undersigned concludes that plaintiffs have sufficiently alleged that defendant breached fiduciary duties to ABB. Accordingly, the second and third Eitel factors favor the entry of default judgment as to plaintiffs' fiduciary duty claims.

c. Alleged Misappropriation Of Trade Secrets

The undersigned finds that the allegations in plaintiffs' complaint sufficiently support the grant of relief on plaintiffs' trade secret misappropriation claim in the context of an application for entry of default judgment.

To allege a claim for misappropriation of trade secrets under California law, a plaintiff must allege: (1) they owned trade secrets; (2) that the defendant acquired, disclosed, or used those trade secrets through improper means; and (3) the defendant's actions damaged the plaintiff. Cytodyn, ...


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