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Dugan v. Schamens

United States District Court, W.D. North Carolina

September 30, 2017




         THIS MATTER comes before the Court on Plaintiffs' Motion for Default Judgment And To Correct Typographical Error of Plaintiff's Name in Caption and memorandum in support (Doc. Nos. 46 and 47). The motion is ripe for adjudication. For the reasons stated below, Plaintiffs' motion is granted.

         I. BACKGROUND

         Plaintiff's Guy M. Dugan, Karen Dugan, and the GDM Family Trust filed this lawsuit on August 11, 2015 alleging twelve cause of action against Defendants: 1) fraudulent inducement; 2) fraud; 3) breach of fiduciary duty; 4) constructive fraud; 5) conversion; 6) securities fraud; 7) embezzlement; 8) unfair and deceptive trade practices; 9) piercing the corporate veil; 10) civil conspiracy; 11) accounting; and 12) unjust enrichment and constructive trust. (Doc. No. 1). In brief, the underlying facts relate to an alleged securities fraud committed by Defendants in which Plaintiffs invested over $800, 000 in Defendant Invictus Asset Management (“IAM”), but instead of investing the money on Plaintiffs' behalf, Defendants allegedly used the money for personal gain and benefit. (Id.).

         Defendants have never had an attorney enter an appearance on their behalf, with the exception of Phillips Wiegand, Jr., who settled the claims against him while his Motion to Dismiss was pending before the Court.[1] (Doc. Nos. 4, 34). Instead, Defendants David and Piliana Schamens have attempted to defend themselves and the corporate defendants pro se. Proceeding pro se, Defendants have not answered or otherwise responded to the complaint, but have filed a total of four motions for extension of time to answer. On November 23, 2015, Plaintiffs filed Waivers of Service executed by David and Piliana Schamens on their own behalf and on behalf of each of the Corporate Defendants, waiving service and stating that responses to the complaint were due January 11, 2016. On that day, Defendants filed their first Motion for Extension of Time to Answer, seeking an extension “on the grounds that defendants need additional time to investigate and prepare and [sic] an adequate Response as well as retain counsel.” (Doc. No. 32). The Court gave Defendants until February 1, 2016 to respond to the complaint. (Doc. No. 33). Defendants failed to comply with that deadline, but on February 10, 2016, filed their second Motion for Extension of Time to Answer again on the basis that “defendants need additional time to investigate and prepare and [sic] an adequate Response as well as retain counsel.” (Doc. No. 36). Additionally, Defendants stated they never received a copy of the January 14, 2016 order granting Defendants' first request for an extension and the Clerk of Court told Defendants that the order was not mailed because the Court did not have an address on file. (Id.). The Court granted Defendants' Second Motion for Extension of Time to Answer and gave Defendants until February 26, 2016 to respond to the complaint. (Doc. No. 37).

         On February 29, 2016, again having missed the deadline to respond to the complaint, Defendants filed their third Motion for Extension of Time to Answer. (Doc. No. 38). Defendants sought until March 2, 2016 to respond to the complaint because their “retained counsel need[ed] time for coordination to pro hac with local counsel and prepare answer.” (Id.). The Court again granted Defendants' requested and ordered that they had until March 2, 2016 to respond to the complaint. (Doc. No. 39).

         After Defendants failed yet again to meet the Court-ordered deadline to respond, Plaintiffs filed a Motion for Entry of Default on March 3, 2016. (Doc. No. 40). On March 4, 2016, Defendants filed their Reply to Motion for Entry of Judgment, though it more resembled a fourth Motion for Extension of Time to Answer seeking until March 7, 2016 to file their response to the complaint because “Counsel [had] been retained but [was] out of state and [had] yet been unable to complete arrangements with local counsel to pro hac vice with the Court in order to legally file with the Court the appropriate answers and motions due to scheduling conflicts, ” but assuring the Court that “[a]n Answer and corresponding motions have been prepared and ready to be filed upon local counsel completing the agreement to pro hac out of statement [sic] counsel. Upon information and belief, these filings will be made on Monday, March 7.” (Doc. No. 41). On March 7, 2017, the Court denied Defendants' then-latest request for an extension, and the Clerk of Court entered default against Defendants. (Doc. Nos. 42, 43, 44). Defendants did not file an answer or other response on March 7.

         The case went silent for four months until, on July 22, 2016, the Court instructed Plaintiffs to file a motion for default judgment within fourteen days. (Doc. No. 45). Accordingly, on August, 5, 2016, Plaintiffs filed their Motion for Default Judgment and supporting memorandum and affidavits. (Doc. Nos. 46-47, 50-53). On September 12, 2016, Defendants filed their fifth request for an extension in this case-a Motion to Extend Time for Response to Plaintiffs' Motion for Default Judgment. (Doc. No. 55). Defendants represented that “[t]his case was settled and the terms of the settlement were abided by (see Exhibit A). Plaintiff's [sic] Counsel did not inform either the Defendant that they had not dismissed this action per the terms of the agreement and instead, have proceeded with a motion for default judgment in both State and Federal Court.” (Id.). Defendants requested a hearing and to have until September 19, 2016 to respond to the Motion for Default Judgment. (Id.). On September 13, 2016, the Court obliged Defendants' request for an extension and granted the motion, giving Defendants until September 19 to respond to the Motion for Default Judgment. (Doc. No. 56). Yet again, Defendants failed to respond within the extra time allotted.

         On November 10, 2016, Plaintiffs filed a Notice of Settlement and Motion to Stay Entry of Default Judgment or Dismissal until February 15, 2017, stating that the parties needed 95 days to consummate the confidential terms of the settlement. (Doc. No. 57). The Court granted Plaintiffs' motion, but after a one-week extension of the stay to consummate the terms of the settlement, Plaintiffs' requested a ruling on the pending Motion for Default Judgment. (Doc. Nos. 58-61).

         On April 27, 2017, the Court scheduled a hearing on Plaintiffs' Motion for Default Judgment, which was held on June 2, 2017. The morning of the hearing, less than an hour before it began, David Schamens, still unrepresented in this matter, filed a Motion for Continuance and a Motion to Enforce Settlement or Alternatively to Vacate the Entry of Default. (Doc. Nos. 65 and 66). Defendants' Motion for Continuance sought to continue the hearing because, among other things, “[d]ue to opposing counsel's interference with pro hac counsel, Defendants are left with no counsel at this time and have been forced to make a motion pro se . . . .” (Doc. No. 65). At the hearing, the Court first heard the parties on Defendants' Motion for Continuance and denied the motion. Next, the Court heard the parties on the Motion for Default Judgment, and at the conclusion of the hearing took the motion under advisement. (Doc. No. 67).


         The entry of default judgment is governed by Rule 55 of the Federal Rules of Civil Procedure which provides in relevant part that “[w]hen a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend, and that failure is shown by affidavit or otherwise, the clerk must enter the party's default.” Fed.R.Civ.P. 55(a).

         Upon the entry of default, the defaulted party is deemed to have admitted all well-pleaded allegations of fact contained in the complaint. Ryan v. Homecomings Fin. Network, 253 F.3d 778, 780 (4th Cir. 2001); Weft, Inc. v. GC Inv. Assocs., 630 F.Supp. 1138, 1141 (E.D. N.C. 1986) (citations omitted); see also Fed.R.Civ.P. 8(b)(6) (“An allegation-other than one relating to the amount of damages-is admitted if a responsive pleading is required and the allegation is not denied.”). Nevertheless, the defendant is not deemed to have admitted conclusions of law and the entry of “default is not treated as an absolute confession by the defendant of his liability and of the plaintiff's right to recover.” Ryan, 253 F.3d at 780 (citations omitted); see also E.E.O.C. v. Carter Behavior Health Servs., Inc., No. 4:09-cv-122-F, 2011 WL 5325485, at *3 (E.D. N.C. Oct. 7, 2011). Rather, in determining whether to enter judgment on the default, the court must determine whether the well-pleaded allegations in the complaint support the relief sought. See Ryan, 253 F.3d at 780 (citing Weft, 630 F.Supp. at 1141); DIRECTV, Inc. v. Pernites, 200 F. App'x 257, 258 (4th Cir. 2006) (“‘[A] defendant is not held to admit facts that are not well-pleaded or to admit conclusions of law'”) (quoting Nishimatsu Constr. Co. v. Houston Nat'l Bank, 515 F.2d 1200, 1206 (5th Cir. 1975)); Arista Records, LLC v. Gaines, 635 F.Supp.2d 414, 416 (E.D. N.C. 2009); 10A Wright, Miller & Kane, Federal Practice and Procedure § 2688 (3d ed. Supp. 2010) (“[L]iability is not deemed established simply because of the default ... and the court, in its discretion, may require some proof of the facts that must be established in order to determine liability.”).

         To that end, the Fourth Circuit has “repeatedly expressed a strong preference that, as a general matter, defaults be avoided and that claims and defenses be disposed of on their merits.” Colleton Preparatory Acad., Inc. v. Hoover Univ., Inc., 616 F.3d 413, 417 (4th Cir. 2010) (citations omitted). Nonetheless, default judgment “may be appropriate when the adversary process has been halted because of an essentially unresponsive party.” SEC v. Lawbaugh, 359 F.Supp.2d 418, 421 (D. Md. 2005). Entry of default judgment is left to the sound discretion of the trial court. Duke Energy Carolinas, LLC v. BlackRock Coal, LLC, No. 3:11-cv-616-RJC-DSC, 2012 WL 1067695 (W.D. N.C. Mar. 29, 2012) (granting default judgment in the plaintiff's favor after finding that service of the complaint and summons on defendant was sufficient yet defendant failed to defend); CF Cloninger Trucking IL Inc. v. SourceOne Group, Inc., No. 3:08-cv-00320-FDW, 2009 WL 35191 (W.D. N.C. Jan. 5, 2009) (granting default judgment when defendant failed to defend complaint). Accord Lawbaugh, 359 F.Supp.2d at 421 (granting default judgment for permanent injunction, disgorgement and a civil monetary penalty where defendant failed to answer complaint alleging securities fraud and misappropriation). Although the clear policy of the Rules is to encourage dispositions of claims on their merits, see Reizakis v. Loy, 490 F.2d 1132, 1135 (4th Cir.1974), trial judges are vested with discretion, which must be liberally exercised, in entering [default] judgments and in providing relief therefrom." United States v. Moradi, 673 F.2d 725, 727 (4th Cir. 1982).

         If the court finds that liability is established, it must then determine damages. Carter Behavior Health, 2011 WL 5325485, at *4 (citing Ryan, 253 F.3d at 780-81; Gaines, 635 F.Supp.2d at 416-17). The court must make an independent determination regarding damages, and cannot accept as true factual allegations of damages. Id. (citing Lawbaugh, 359 F.Supp.2d at 422). While the court may conduct an evidentiary hearing to determine damages, it is not required to do so, but may rely instead on affidavits or documentary evidence in the record to determine the appropriate sum. See EEOC v. CDG Mgmt., LLC, No. RDB-08-2562, 2010 WL 4904440, at *2 (D. Md. Nov. 24, 2010) (citations omitted); EEOC v. North Am. Land Corp., No. 1:08-cv-501, 2010 WL 2723727, at *2 (W.D. N.C. Jul. 8, 2010).


         In the words of Benjamin Franklin, “You may delay, but time will not, and lost time is never found again.” It has been two years since this case appeared before the Court. Since then, the Court has granted four continuances in order for Defendants to find counsel and respond to Plaintiffs' complaint. Despite the ample time afforded to them, Defendants have continually failed to produce counsel. On June 2, 2017, the day of the hearing on Plaintiff's Motion for Default, Defendant David Schamens filed yet another Motion for Continuance. Yet again, Defendants failed to procure counsel. Defendants' actions are impermissible. First, corporate defendants may not appear before the Court pro se.[2] Second, Defendants' lack of action betrayed the time afforded to them by the Court. Although Defendants may continue to drag their feet, the Court will not. Given Defendant's silence amidst an abuse of time, Plaintiffs' Motion for Default is ripe and the Court now takes it under consideration. Accordingly, the Court finds that Plaintiffs have sufficiently pled facts to support all of the requisite elements for the claims of fraudulent inducement, fraud, breach of fiduciary duty, constructive fraud, conversion, securities fraud, piercing the corporate veil, civil conspiracy, and unjust enrichment and constructive trust. The Court does not find sufficient support for Plaintiffs' claim for unfair and deceptive trade practice. Furthermore, Plaintiffs do not move the Court for default judgment for either their embezzlement or accounting claims and do not discuss them in their Motion for Default Judgment. The Court therefore considers those claims waived.

         a. Fraudulent Inducement

         Plaintiffs' first claim that Defendants fraudulently induced Plaintiffs' investments into the corporate defendants. "The essential elements of fraud in the inducement are: (1) False representation or concealment of a material fact, (2) reasonably calculated to deceive, (3) made with intent to deceive, (4) which does in fact deceive, (5) resulting in damage to the injured party." Whisnant v. Carolina Farm Credit, 693 S.E.2d 149, 157 ( N.C. Ct. App. 2010). Plaintiffs have fulfilled each of these elements within the well-pleaded allegations of their Complaint.

         First, Defendants' representations to Plaintiffs were false representations and concealments of material fact. Defendants: (1) concealed D. Schamens' status as a permanently barred investment counselor deemed “harmful” to investors' interests by the SEC; (2) misrepresented the status of Wiegand who held himself as a corporate general counsel when he was not in fact an attorney; (3) held Piliana Shamens out as the official representative of the corporate Defendants' acts in order to conceal David Shamens and Phillips Wiegand's involvement in corporate operations; (4) misrepresented to Plaintiffs how their investments would be handled in conjunction with option strategies in order to make steady profits; and (5) created fictitious account statements showing Plaintiffs' investments making significant gains. (Doc. No. 1 ¶¶ 53, 111, 116). Rather than honor their statements, Defendants used Plaintiffs' funds for their personal benefit. (Id. at ¶ 113-14).

         Second, the Defendants knew or should have known that the Plaintiffs would rely on those misrepresentations in making the determination to invest over $800, 000 with the Defendants. (Id.) Defendants' misrepresentations were significant in that they completely masked the manner in which Plaintiffs' funds were to be used. Rather than “make steady profits in both up and down markets by using option strategies, ” Defendants diverted Plaintiffs' funds to, among other things, purchase expensive homes. (Id.) As such, Defendants' misrepresentations were reasonably calculated to deceive Plaintiffs into entrusting their life savings to the Defendants and were made with the intent to deceive because the Defendants used the Plaintiffs' savings for the Defendants' own personal use and benefit. These calculated misrepresentations damaged Plaintiffs when they invested ...

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