General Steel Domestic Sales, LLC v. Chumley et al

Filing 366

OPINION AND ORDER overruling 357 APPEAL OF MAGISTRATE JUDGE DECISION to District Court, adopting 335 Report and Recommendations, and denying 357 ; denying 108 Motion for Default Judgment Against Defendant PRQ and Swartholm, by Chief Judge Marcia S. Krieger on 9/9/14.(dkals, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Chief Judge Marcia S. Krieger
Civil Action No. 13-cv-00769-MSK-KMT
GENERAL STEEL DOMESTIC SALES, LLC, a Colorado limited liability company,
doing business as General Steel Corporation,
Plaintiff,
v.
ETHAN DANIEL CHUMLEY, individually;
ATLANTIC BUILDING SYSTEMS, LLC, a Delaware corporation, doing business as
Armstrong Steel Corporation;
GOTTFRID SWARTHOLM, individually; and
PRQ INTERNET KOMMANDITBOLAG (LIMITED PARTNERSHIP), doing business as
PRQ Inet KB,
Defendants.

OPINION AND ORDER ADOPTING RECOMMENDATION AND
DENYING MOTION FOR DEFAULT JUDGMENT

THIS MATTER comes before the Court on the Magistrate Judge’s Recommendation
(#335) to deny the “Motion for Default Judgment Against Defendants PRQ and Swartholm”
(#108) filed by the Plaintiff General Steel Domestic Sales, LLC (“General Steel”). General Steel
filed a timely Objection (#357).
ISSUES PRESENTED
As relevant to the instant motion, General Steel asserts a claim for False Advertising in
violation of the Lanham Act, 15 U.S.C. § 1125(a)(1)(B), against PRQ Internet Kommanditbolag
(Limited Partnership) d/b/a PRQ Inet KB (“PRQ”), Mr. Swartholm, Mr. Chumley, and Atlantic
Building Systems, LLC d/b/a Armstrong Steel Corporation (“Armstrong Steel”).

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PRQ and Mr. Swartholm were personally served with the Summons and Complaint in
this action on April 4, 2013. They failed to respond and the Clerk entered default against both
PRQ and Mr. Swartholm on July 11, 2013.
General Steel moves for an entry of default judgment against PRQ and Mr. Swartholm.
The matter was referred to the Magistrate Judge, who concluded that entry of default judgment is
inappropriate until liability of the nondefaulting parties is determined.
FACTS
General Steel asserts that the Defendants created websites containing “significantly false,
misleading, and defamatory content about General Steel and its employees” for the purpose of
attacking General Steel’s business. The domain name of the first website—
www.generalsteelscam.com— was transferred to General Steel after a World Intellectual
Property Organization (“WIPO”) decision concluding that Mr. Chumley used the website in bad
faith. General Steel alleges that, after the WIPO decision, a new website was created with nearly
identical content using the domain name www.steelbuildingscomplaints.com.
Mr. Swartholm is the managing partner of PRQ, which is a company that provides web
hosting services. PRQ and Mr. Swartholm are the Registrants of
www.steelbuildingscomplaints.com and were previously the Registrants of
www.generalsteelscam.com.
General Steel asserts that “[t]he registration, establishment and maintenance of these
websites were acts taken as a direct result of one or more agreement(s) among all Defendants to
undertake false advertising against General Steel.” In addition, General Steel alleges that “PRQ
and [Mr.] Swartholm are acting as agents of [Mr.] Chumley and Armstrong Steel, and in concert
with [Mr.] Chumley and Armstrong Steel” to host these websites.

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General Steel seeks injunctive relief against all of the Defendants and seeks an award of
damages from Mr. Chumley and Armstrong Steel.
STANDARD OF REVIEW
When a magistrate judge issues a recommendation on a dispositive motion, the parties
may file specific, written objections within fourteen days after being served with a copy of the
recommendation. See 28 U.S.C. § 636(b)(1); Fed. R. Civ. P. 72(b). The district court reviews de
novo determination those portions of the recommendation to which a timely and specific
objection is made. See U.S. v. One Parcel of Real Prop. Known as 2121 E. 30th St., 73 F.3d
1057, 1060 (10th Cir. 1996).
ANALYSIS
General Steel objects to the Magistrate Judge’s Recommendation on the grounds that the
Magistrate Judge erred in relying on Frow v. de la Vega, 82 U.S. 552 (1872), to conclude that the
Motion for Default Judgment is not ripe. Specifically, General Steel argues that the facts of this
case are distinguishable and “this case is not one in which the Plaintiff seeks recovery that could
be joint, or joint and several, as among the defaulting and non-defaulting Defendants.” In other
words, General Steel asserts that the Court can enter default judgment against PRQ and Mr.
Swartholm without resolving the claims against the remaining codefendants because there is no
risk of inconsistent judgments where General Steel does not seek monetary damages from the
defaulting defendants. Accordingly, the Court reviews this portion of the Magistrate Judge’s
Recommendation de novo.
A party is in default if it fails to appear or otherwise defend. Fed.R.Civ. P. 55. However,
a party’s default is not necessarily sufficient to entitle a plaintiff to an entry of default judgment.
See Bixler v. Foster, 596 F.3d 751, 762 (10th Cir. 2010). Instead, “[o]nce default is entered, ‘it

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remains for the court to consider whether the unchallenged facts constitute a legitimate cause of
action.’”1 See id. (quoting 10A Charles A. Wright, Arthur R. Miller & Mary K. Kane, Federal
Practice and Procedure § 2688, at 63 (3d ed. 1998)). When one of several defendants who is
alleged to be jointly liable defaults, judgment should not be entered against him until the matter
has been adjudicated with regard to all defendants, or all defendants have defaulted. See Hunt v.
Inter-Globe Energy, Inc., 770 F.2d 145, 147 (10th Cir. 1985) (quoting10 C. Wright, A. Miller &
M. Kane, Federal Practice and Procedure § 2690, at 455–56 (1983)). Otherwise, a court might
enter contradictory judgments resulting in an “absurdity” because, for example, “there might be
one decree of the court sustaining the charge of joint fraud committed by the defendants; and
another decree disaffirming the said charge, and declaring it to be entirely unfounded.” See
Frow, 82 U.S. at 554.
General Steel argues that this rule exists only to prevent inconsistent damage awards, not
inconsistent judgments. Accordingly, in its view, the reasoning of Frow does not apply to a
situation, as here, where the plaintiff does not seek an award of damages from the defaulting
defendants. In other words, General Steel argues that an entry of default is appropriate against
PRQ and Mr. Swartholm because General Steel does not seek an award of damages against
them.
Although the Tenth Circuit in Hunt focused on the problem posed by inconsistent
monetary awards, it is clear from the opinion that inconsistent determinations of liability among
codefendants are also disfavored. Specifically, the Tenth Circuit concluded that “just as
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Here, General Steel must assert facts that establish the following elements: (i) that PRQ and
Mr. Swartholm made material false or misleading representations of fact in connection with the
commercial advertising or promotion of its product; (ii) in commerce; (iii) that are either likely
to cause confusion or mistake as to (a) the origin, association or approval of the product with or
by another, or (b) the characteristics of the goods or services; and (iv) injury the plaintiff.
Cottrell, Ltd. v. Biotrol Int'l, Inc., 191 F.3d 1248, 1252 (10th Cir. 1999) (citations omitted).
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consistent verdict determinations are essential among joint tortfeasors, consistent damage awards
on the same claim are essential among joint and several tortfeasors.” See Hunt, 770 F.2d at 148
(emphasis added). This conclusion is consistent with the analysis used in Frow, where multiple
defendants were accused of joint fraud. 82 U.S. at 554. There, the Supreme Court reasoned that
if the court entered judgment against the defaulting defendants, and the case progressed and
resulted in a verdict in favor of the remaining defendants then “a final decree on the merits
against the defaulting defendant alone, pending the continuance of the cause, would be
incongruous and illegal.” Id. In other words, it would be logically inconsistent to have a court
issue one judgment in favor of the plaintiff on his joint fraud claim and another judgment against
the plaintiff on the same joint claim.
Here, a similarly incongruous result is possible. General Steel asserts that “[t]he
registration, establishment and maintenance of these websites were acts taken as a direct result of
one or more agreement(s) among all Defendants to undertake false advertising against General
Steel” (emphasis added). Thus, if the Court entered default judgment against PRQ and Mr.
Swartholm now, but later entered judgment in favor of Armstrong Steel and Mr. Chumley, it
would result in logically inconsistent judgments. Accordingly, entry of default judgment against
PRQ and Mr. Swartholm should not occur until and unless the claims against the remaining
defendants are resolved on the merits.
CONCLUSION
For the foregoing reasons, General Steel’s Objection (#357) to the Magistrate Judge’s
Recommendation (#335) is overruled. The Court ADOPTS the Magistrate Judge’s

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Recommendation and DENIES General Steel’s “Motion for Default Judgment Against
Defendant PRQ and Swartholm” (#108).
Dated this 9th day of September, 2014.
BY THE COURT:

Marcia S. Krieger
Chief United States District Judge

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