Integrity Dominion Funds, LLC v. Lazy Deuce Capital Co., LLC et al
Filing
161
ORDER denying as moot 127 Motion for Summary Judgment; granting 137 Amended Motion for Default Judgment; dismissing without prejudice Integrity's remaining claims, Johnson's cross-claims and third-party claims, and Lazy Deuce's cross-claims and third-party claims as the Court declines to exercise supplemental jurisdiction over them. (Written Opinion). Signed by Judge Richard H. Kyle on 02/27/14. (KLL)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Integrity Dominion Funds, LLC,
Plaintiff,
Civ. No. 12-254 (RHK/JSM)
MEMORANDUM OPINION
AND ORDER
v.
Lazy Deuce Capital Co., LLC, et al.,
Defendants,
v.
Jeff Hagen, et al.,
Third-Party Defendants.
Lucas J. Thompson, Aaron D. Hall, Mark Santi, Twin Cities Law Firm LLC,
Minneapolis, Minnesota, for Plaintiff.
Robert M. Gardner, Gardner Law Office, Burnsville, Minnesota, for Defendant and
Third-Party Plaintiff Brent Johnson.
INTRODUCTION
In this action, Plaintiff Integrity Dominion Funds, LLC (“Integrity”) alleges that
Lazy Deuce Capital Co., LLC (“Lazy Deuce”), which defaulted on $1.5 million of
Integrity’s loans, and Lazy Deuce’s officers, including Defendant Brent Johnson, were
engaged in a fraudulent investment scheme. Integrity now moves for default judgment
against Lazy Deuce and Johnson moves for summary judgment on Integrity’s claims.
For the reasons that follow, the Court will grant Integrity’s Motion and decline to
exercise supplemental jurisdiction over the remaining claims.
BACKGROUND
Integrity is a small private investment fund operated by three principals, Thomas
Barrett, George Bakalov, and H. Chris Poole. Lazy Deuce is an investment company that
was owned and operated by Defendants Brent Johnson, Kenneth Haglind, Brian Baldwin,
and Frank Delahanty III.
In October 2010, Lazy Deuce approached Integrity about short-term, high-interest
investment opportunities. Lazy Deuce described itself as an entity providing
“nontraditional financing” to parties with “unusual collateral.” Beginning November
2010, Integrity extended Lazy Deuce 30- and 90-day loans with monthly interest rates
between 3.5% and 10%. Lazy Deuce timely repaid the first nine loans in full. But in
May 2011, it defaulted on three of Integrity’s loans, totaling $1.5 million in principal:
(1) a $200,000 90-day loan made on March 28, 2011, at 3.5% monthly interest; (2) a
$700,000 90-day loan made on April 21, 2011, at 4% monthly interest; and (3) a
$600,000 30-day loan made on May 26, 2011, at 4% monthly interest. (Barrett Aff. ¶ 5
& Ex. A.) Lazy Deuce timely paid the first two months of interest on the two 90-day
loans, but defaulted on the final payment of principal and interest for all three.
In 2012, Integrity commenced the instant action against Lazy Deuce, Johnson,
Baldwin, and eight other individuals and related entities, asserting a single federal claim
under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961–68
(“RICO”), and several state-law claims, including breach of contract, fraudulent
misrepresentation, and fraudulent transfer. Integrity has since amended its Complaint
three times. In response to the latest Complaint, several Defendants asserted cross-2-
claims, third-party claims, and moved to dismiss. Before the Court had decided their
Motions, all of the Defendants settled with Integrity (and dismissed their cross-claims),
except Johnson, Baldwin, and Lazy Deuce. Of those three Defendants, only Johnson had
moved to dismiss, and the Court granted his Motion in part, dismissing the federal RICO
claim against him. At that time, the Court decided to exercise supplemental jurisdiction
over the remaining state-law claims against Johnson to prevent Integrity from litigating
the case simultaneously against Lazy Deuce and Baldwin in federal court and against
Johnson in state court. However, Baldwin has since settled with Integrity, which leaves
pending only (1) Integrity’s claims against Johnson and Lazy Deuce, and (2) Johnson’s
and Lazy Deuce’s state-law cross-claims and third-party claims. Integrity now moves for
default judgment or, alternatively, summary judgment against Lazy Deuce, and Johnson
also moves for summary judgment. The Motions have been fully briefed, the Court heard
oral argument on January 29, 2014, and the Motions are now ripe for disposition. 1
ANALYSIS
I.
Integrity’s Motion for Default Judgment
Integrity moves for entry of default and default judgment against Lazy Deuce for
its failure to defend itself in this action. Under Federal Rule of Civil Procedure 55(a),
“[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.” Although Rule 55 contemplates the Clerk entering
default first, the Court has discretion to direct the entry of default and default judgment
1
Lazy Deuce did not respond to Integrity’s Motion, nor did it appear at oral arguments.
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under Rule 55(b) simultaneously. See Ackra Direct Mktg. Corp. v. Fingerhut Corp., 86
F.3d 852, 855 (8th Cir. 1996); e.g., Operating Eng’rs Local No. 49 Health & Welfare
Fund v. A.B. Envt’l Corp., Civ. No. 06-4470, 2007 WL 1888451, at *1 (D. Minn. June
29, 2007) (Schiltz, J.).
Lazy Deuce was initially represented in this action by counsel Brian McMahon
and timely answered Integrity’s First and Second Amended Complaints in May and
August of 2012, respectively. But in November 2012, Kenneth Haglind resigned as
CEO, leaving McMahon unsure who—if anyone—had authority to act on Lazy Deuce’s
behalf, as all of its other principals also had resigned. McMahon indicated to the Court in
an April 2013 hearing that he had “no one to take direction from” since Haglind’s
resignation and he had not filed an Answer to Integrity’s Third Amended Complaint on
behalf of Lazy Deuce because he had been told “not to take any more action on behalf of
the corporation.” (Doc. No. 93 at 32.) At that same hearing, Johnson’s counsel, Robert
Gardner, described Lazy Deuce as “essentially defunct.” (Id. at 19.) After McMahon’s
other clients (Frank Delahanty III and Semita Partners LLC) settled with Integrity in July
2013, Gardner substituted as counsel for Lazy Deuce.
On September 20, 2013, more than six months after Lazy Deuce had failed to
answer or move to dismiss the Third Amended Complaint (due February 7, 2013) or
respond to discovery requests (due March 27, 2013), Integrity applied for entry of default
against it. In response, Gardner filed an Answer (as well as cross- and third-party claims)
on behalf of Lazy Deuce and the clerk denied the application. Gardner then served
Integrity with unexecuted discovery responses on behalf of Lazy Deuce and Integrity
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moved to compel executed Answers to its Interrogatories. Gardner opposed the Motion,
claiming his other client, Johnson, was authorized to act for Lazy Deuce and would
execute the Answers. However, this claim of authority was belied by a “Satisfaction and
Release” Johnson signed in June 2011 severing his ties with Lazy Deuce (and by
McMahon’s and Gardner’s statements in the April 2013 hearing). Accordingly,
Magistrate Judge Mayeron determined there was no agent or officer who could sign the
Interrogatories for Lazy Deuce and denied the Motion to Compel as moot. (Doc. No.
130.) Unsurprisingly, nothing has been filed on Lazy Deuce’s behalf since and it has not
opposed the instant Motion or entered an appearance at oral argument.
As Lazy Deuce has failed to defend itself in this action since at least October 2013
(and arguably since November 2012, when Haglind resigned), the Court concludes that
the entry of default against it is appropriate. See Fed. R. Civ. P. 55(a) (authorizing entry
of default for failure to defend); Ackra, 86 F.3d at 856 (affirming district court’s entry of
default and default judgment against a corporation for failure to defend when it did not
respond to discovery orders or attend conferences scheduled by the court after its counsel
had withdrawn and the court had advised it to obtain new counsel).
Integrity seeks default judgment in the amount of $3,368,133.33: $1,500,000 in
principal plus $1,868,133.33 in interest. Integrity has proved Lazy Deuce defaulted when
the principal and final interest payments came due on each of its final three loans. The
promissory note for each loan provides that “[a]ny unpaid principal will continue to
accrue interest . . . until paid in full” at the monthly rate of 3.5% for the first loan and 4%
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for the last two loans. (See, e.g., Barrett Aff. Doc. No. 139, Ex. B.) The table below
summarizes the principal and interest owed as of January 29, 2014:
Loan
#
Principal Monthly Default Days 30-day
Total
Total Due
Amount Interest
Date since periods Interest Due
Rate
2011- $200,000
3.5%
5/29/11 960
32
$224,000
$424,000
021
2011- $700,000
4%
6/22/11 937
31.2 $874,533.33 $1,574,533.33
024
2011- $600,000
4%
5/27/11 962
32.1
$769,600
$1,369,600
033
(See id. ¶¶ 5–10; Exs. A, B.)
Although Lazy Deuce has not opposed the Motion for Default Judgment, Johnson
has. Johnson challenges the amount of the judgment, contending it should be offset by
Integrity’s settlements with his co-Defendants. 2 As the party invoking this affirmative
defense, Johnson has the burden of persuasion and he has utterly failed to meet it. In his
two-sentence argument in opposition to the Motion, Johnson does not provide the Court
with any authority for diminishing the requested judgment. “[I]t is not the Court’s
function to conduct research . . . or make a party’s argument for [him].” Cohen v.
Mortgage Elec. Registration Sys., Inc., Civ. No. 08-1394, 2009 WL 4578308, at *4 (D.
Minn. Dec. 1, 2009) (Montgomery, J.) (quotation omitted). Accordingly, default
judgment will be entered in the full amount of Integrity’s contractual damages plus
2
Integrity questions whether Johnson has standing to oppose its Motion for Default, as the
Motion is against Lazy Deuce only. But Integrity has a breach-of-contract claim pending against
Johnson in which it seeks to pierce the corporate veil and hold Johnson liable for Lazy Deuce’s
breach. As the amount of the judgment entered against Lazy Deuce could potentially be
recovered from Johnson himself, he has a sufficient stake in the outcome of the Motion for the
Court to consider his opposition.
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reasonable costs and attorneys’ fees. 3 (See, e.g., Barrett Aff. (Doc. No. 139), Ex. B
(“Borrower promises to pay all costs of collection of this Note, including, but not limited
to, attorneys’ fees paid or incurred by the Lender on account of such collection.”).)
II.
Subject-Matter Jurisdiction
As the parties in this matter are not completely diverse, the Court’s subject-matter
jurisdiction in this action is premised on the existence of a federal claim—namely,
Integrity’s RICO claim. (See Compl. ¶ 2.) Jurisdiction over the state-law claims, crossclaims, and third-party claims exists solely by virtue of the supplemental-jurisdiction
statute, 28 U.S.C. § 1367, which provides the court discretion to exercise jurisdiction
over state-law claims forming part of the same “case or controversy” as federal claims.
Upon entering default judgment against Lazy Deuce, only state-law claims will remain in
this action. But where all federal claims have been dismissed prior to trial, the factors to
be considered in deciding whether to exercise supplemental jurisdiction—judicial
economy, convenience, fairness, comity, and predominance of state issues—typically
militate against doing so. See 28 U.S.C. § 1367(c) (A court “may decline to exercise
supplemental jurisdiction over a claim . . . if . . . [it] has dismissed all claims over which
it has original jurisdiction.”); Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 350 n.7
(1988) (“In the usual case in which all federal-law claims are eliminated before trial, the
balance of factors . . . will point toward declining to exercise jurisdiction over the
remaining state-law claims.”); e.g., Johnson v. City of Shorewood, Minn., 360 F.3d 810,
3
Alternatively, as Integrity has proved Lazy Deuce breached its contracts with Integrity by
defaulting on the promissory notes, Integrity is entitled to this same relief under Rule 56.
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819 (8th Cir. 2004). This case is no exception. While federal claims remained pending
against Lazy Deuce and Baldwin, the Court exercised jurisdiction to avoid the waste and
inconvenience of parallel lawsuits in state and federal court. (See Doc. No. 99, at 9.)
Now that Baldwin has been dismissed and Lazy Deuce will be also, this reasoning no
longer applies. Accordingly, the Court will dismiss the claims against Johnson (and his
claims against others) without prejudice. 4
CONCLUSION
Based on the foregoing, and all the files, records, and proceedings herein, IT IS
ORDERED:
(1) Integrity’s Amended Motion for Default Judgment (Doc. No. 137) is
GRANTED and Integrity shall recover of Defendant Lazy Deuce Capital Co., LLC the
sum of $3,368,133.33 plus reasonable costs and attorneys’ fees;
(2) Integrity’s remaining claims (see Doc. No. 53), Johnson’s cross-claims and
third-party claims (see Doc. No. 107), and Lazy Deuce’s cross-claims and third-party
claims (see Doc. No. 111) are DISMISSED WITHOUT PREJUDICE as the Court
declines to exercise supplemental jurisdiction over them; and
4
See 28 U.S.C. § 1367(d) (“The period of limitations for [such claims] . . . shall be tolled while
the claim is pending and for a period of 30 days after it is dismissed unless State law provides for
a longer tolling period.”).
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(3) Johnson’s Motion for Summary Judgment (Doc. No. 127) is DENIED AS
MOOT.
LET JUDGMENT BE ENTERED ACCORDINGLY.
Dated: February 27, 2014
s/Richard H. Kyle
RICHARD H. KYLE
United States District Judge
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