Bermuda Road Properties, LLC v. Ecological Steel Systems, Inc.

Filing 292

ORDER denying 290 Motion for Default Judgment. Signed by Judge Jennifer A. Dorsey on 3/1/2017. (Copies have been distributed pursuant to the NEF - DC)

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UNITED STATES DISTRICT COURT

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DISTRICT OF NEVADA

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Bermuda Road Properties, LLC,

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Plaintiff

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Order Denying Application for Default
Judgment

v.

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2:12-cv-01579-JAD-GWF

EcoLogical Steel Systems, Inc., et al.,

[ECF No. 290]

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Defendant

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Bermuda Road Properties, LLC moves for default judgment on seven claims against

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seven defaulted defendants in this action.1 The Frow doctrine precludes me from entering

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default judgment on four of the claims at this time, one of the claims is really an equitable

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remedy, and Bermuda has not demonstrated that it is entitled to relief on the other two claims. I

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therefore deny Bermuda’s motion without prejudice.

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Background

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Bermuda Road Properties, LLC sues numerous defendants on various claims arising from

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the alleged misappropriation of $2.1 million that Bermuda paid EcoLogical Steel Systems, Inc.

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(ESSI) as a down payment for ESSI’s construction of a steel building for Bermuda.2 I granted

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summary judgment in Bermuda’s favor on its first claim seeking a declaration that the Bermuda-

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ESSI contract is void ab initio.3 Bermuda’s claims against D3DS CSD, LLC have been

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dismissed with prejudice.4 And the Clerk of Court entered default against Hudson Family Trust

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ECF No. 290.

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ECF No. 259.

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ECF No. 80.

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ECF No. 168.

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Dated October 29, 2012; EcoSteel Building Systems, Inc.; Steel Buildings, Inc.; Eco

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Investments, LLC; EcoSteel, LLC; HitplayYoga, LLC; and Northern Steel Investments, LLC.5

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ESSI and the Hudsons filed voluntary bankruptcy petitions for relief under Chapter 7 of

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Title 11 of the United States Code in the Central District of California, Santa Ana Division.6

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ESSI’s bankruptcy case is still pending;7 the Hudsons were granted a discharge under the

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Bankruptcy Code and their bankruptcy case was closed.8 The automatic stay under 11 U.S.C. §

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362 terminated once they were granted a discharge.9 But a bankruptcy discharge “operates as an

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injunction against the commencement or continuation of an action, the employment of process,

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or an act to collect, recover[,] or offset any such debt as a personal liability of the debter, whether

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or not discharge of such debt is waived. . . .”10 The discharge order and resulting injunction is

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not the final say, however, because Bermuda initiated an adversary proceeding challenging the

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dischargeability of the Hudsons’ alleged debt to it; that adversary proceeding is still pending

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before the bankruptcy court.11

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ESSI moved the bankruptcy court for an order confirming that the automatic stay applies

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to Bermuda’s fraudulent-transfer and alter-ego-liability claims in this action or, alternatively,

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extending the automatic stay to the defaulted defendants.12 The bankruptcy court denied ESSI’s

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ECF Nos. 287, 288.

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ECF No. 254.

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In re EcoLogical Steel Systems, Inc., 8:16-bk-11465-TA (C.D. Cal. Apr. 6, 2016) (ESSI BK
Case).

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In re Joseph Roland Hudson, III, 8:16-bk-11462-TA at ECF Nos. 67 (Order of Discharge), 78
(Minute Order Closing Case) (C.D. Cal. Apr. 6, 2016) (Hudson BK Case).

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11 U.S.C. § 362(c)(2)(C).
11 U.S.C. § 524(a)(2).

Bermuda Road Properties, LLC v. Joseph Roland Hudson, III, 8:16-ap-01138-TA (C.D. Cal.
May 18, 2016) (adversary proceeding).
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ESSI BK Case, ECF No. 12.
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motion.13 The Hudsons filed a similar motion in their bankruptcy case,14 which was also

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denied.15 The bankruptcy court ruled that, while the automatic stay prevents Bermuda from

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pursuing any judgment against the Hudsons or ESSI, “including alter ego[,]” that stay does not

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prevent Bermuda from similarly proceeding against the defaulted defendants, and it refused to

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enjoin this proceeding against them under 11 U.S.C. § 105(a) or otherwise.16

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Discussion

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Bermuda moves for default judgment against the seven defaulted defendants on: (Claim

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2) for a declaration that Joseph R. and Diana L. Hudson and the defaulted defendants are alter

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egos of ESSI; (Claim 3) unjust enrichment; (Claim 4) aiding and abetting breach of a duty of

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loyalty; (Claim 5) aiding and abetting breach of a confidential relationship; (Claim 15) alter

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ego/pierce corporate veil against ESSI, the Hudsons, and the defaulted defendants; (Claim 16)

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constructive trust; and (Claim 19) fraudulent/intentional misrepresentation.17

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A.

The Frow doctrine prevents me from entering default judgment against the
defaulted defendants on Claims 3–5 and 19 at this time.

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The Frow doctrine instructs that, “where a complaint alleges that defendants are jointly

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liable and one of them defaults, judgment should not be entered against the defaulting defendant

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until the matter has been adjudicated with regard to all defendants.”18 Bermuda alleges that ESSI

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and the Hudsons are jointly and severally liable with the defaulted defendants on (Claim 3)

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ESSI BK Case, ECF No. 32.

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Hudson BK Case, ECF No. 12.

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Hudson BK Case, ECF No. 52.

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Id. at 5–6 (“As a practical mater, a determination of alter ego status either of this debtor [the
Hudsons] and/or [ESSI] is an action to impose liability against the debtor(s) and is already
stayed, and supplemental orders such as envisioned in this motion are unnecessary.”).

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ECF No. 290.

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In re First T.D. & Inv., Inc., 253 F.3d 520, 532 (9th Cir. 2001) (citing Frow v. De La Vega, 82
U.S. 552 (1872)).
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unjust enrichment, (Claim 4) aiding and abetting the breach of a duty of loyalty, (Claim 5) aiding

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and abetting the breach of a confidential relationship, and (Claim 19) fraudulent/intentional

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misrepresentation.19 Until ESSI’s and the Hudsons’ liabilities on Claims 3–5 and 19 have been

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adjudicated, or their liability is discharged under the Bankruptcy Code, default judgment should

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not be entered against the defaulted defendants on those claims. I therefore deny Bermuda’s

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motion as to Claims 3–5 and 19 without prejudice to its refiling after these issues have been

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resolved.

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B.

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Bermuda fails to satisfy two key Eitel factors for its remaining claims.
Federal Rule of Civil Procedure 55(b)(2) permits a plaintiff to obtain default judgment if

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the clerk previously entered default based on a defendant’s failure to defend. After entry of

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default, the complaint’s factual allegations are taken as true, except those relating to damages.20

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“[N]ecessary facts not contained in the pleadings, and claims [that] are legally insufficient, are

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not established by default.”21 The court has the power to require a plaintiff to provide additional

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proof of facts or damages in order to ensure that the requested relief is appropriate.22
Whether to grant a motion for default judgment lies within my discretion,23 which is

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guided by the seven factors outlined by the Ninth Circuit in Eitel v. McCool:

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(1) the possibility of prejudice to the plaintiff; (2) the merits of
plaintiff’s substantive claim; (3) 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

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ECF No. 259 at ¶¶ 95, 103, 112, 231.

TeleVideo Sys., Inc. v. Heidenthal, 826 F.2d 915, 917–18 (9th Cir. 1987) (per curiam); 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.”).
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Cripps v. Life Ins. Co., 980 F.2d 1261, 1267 (9th Cir. 1992).

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See FED. R. CIV. P. 55(b)(2).

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Eitel v. McCool, 782 F.2d 1470, 1471 (9th Cir. 1986).

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Federal Rules of Civil Procedure favoring decisions on the
merits.24

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A default judgment is generally disfavored because “[c]ases should be decided upon their merits
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whenever reasonably possible.”25

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1.

Constructive trust is a remedy, not a claim.

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Bermuda argues that it has sufficiently alleged its sixteenth claim for relief seeking the
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imposition of a constructive trust over the portions of the down payment that the defaulted
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defendants obtained or what they purchased with that money. A constructive trust is not a stand8

alone claim, it is an equitable remedy that redresses unjust enrichment, fraud, or misconduct.26

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Default judgment cannot be entered solely because the plaintiff qualifies for a particular remedy
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given to enforce a right or obligation.27 The plaintiff must first demonstrate that it has
sufficiently stated a cause of action on which it may recover.28

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Bermuda alleges unjust enrichment and fraud claims, but those claims cannot be resolved
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by default judgment until ESSI’s and the Hudsons’ liabilities have been adjudicated or their
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alleged debts to Bermuda on those claims have been discharged under the Bankruptcy Code. I
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therefore deny Bermuda’s motion on Claim 16 without prejudice. Bermuda may seek this
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remedy when it can pursue the claims that give rise to it.
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Eitel, 782 F.2d at 1471–72.

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Id. at 1472.

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Waldman v. Maini, 195 P.3d 850, 854–58 (Nev. 2008).

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See Davis v. Passman, 442 U.S. 228, 239 (1979) (“the question of whether a litigant has a
‘cause of action’ is analytically distinct and prior to the question of what relief, if any, a litigant
may be entitled to receive”).
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Id.
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2.

Bermuda’s factual allegations and evidence are not sufficient to establish the
defaulted defendants’ alter-ego liability by default.

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What remains are Bermuda’s second and fifteenth claims for relief alleging alter-ego
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liability against the defaulted defendants.29 “Nevada has long recognized that although

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corporations are generally to be treated as separate legal entities, the equitable remedy of
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‘piercing the corporate veil’ may be available to a plaintiff in circumstances where it appears that
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the corporation is acting as the alter ego of a controlling individual.”30 In order to establish alter-

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ego liability, the plaintiff must demonstrate that (1) the corporation is “influenced and governed
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by the person asserted to be the alter ego”; (2) there is a “unity of interest and ownership that one
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is inseparable from the other”; and (3) “adherence to the corporate fiction of a separate entity
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would, under the circumstances, sanction [a] fraud or promote injustice.”31 Factors that may

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indicate an alter-ego relationship include: “(1) commingling of funds; (2) undercapitalization; (3)
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unauthorized diversion of funds; (4) treatment of corporate assets as the individual’s own; and
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(5) failure to observe corporate formalities.”32

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I skip to the second and third Eitel factors, which require Bermuda to demonstrate that it
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has sufficiently stated a claim on which it may recover.33 It is difficult to get a clear picture of

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Bermuda’s theory of alter-ego liability. Bermuda alleges that the defaulted defendants are the
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alter egos of the Hudsons and ESSI.34 It also alleges that the Hudsons are the alter egos of

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ECF No. 259 at ¶¶ 82–88, 172–184.

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LFC Mktg. Grp., Inc. v. Loomis, 8 P.3d 841, 845 (Nev. 2000) (citing McCleary Cattle Co. v.
Sewell, 317 P.2d 957 (Nev. 1957)).

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Id. at 846–47 (quoting Polaris Indust. Corp. v. Kaplan, 747 P.2d 884, 886 (Nev. 1987)).

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Id. at 847 (citing Polaris Indust. Corp., 747 P.2d at 887).

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See Danning v. Lavine, 572 F.2d 1386, 1388 (9th Cir. 1978).

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ECF No. 259 at ¶ 69.

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ESSI,35 and appears to allege that the Hudsons are the alter egos of the defaulted defendants.36 In

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any event, Bermuda’s allegations alone are not sufficient to establish alter-ego liability against

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the defaulted defendants. Bermuda alleges the elements of alter-ego liability, but those

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allegations are conclusions and labels that are not supported by any factual allegations.37

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Bermuda also alleges the factors that may indicate the existence of an alter-ego relationship but

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those allegations, too, are conclusory and without factual support.38

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These defects are not cured by the evidence that Bermuda attached to its motion for

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default judgment. Bermuda identifies eight exhibits (15 and 31–37) as supporting its alter-ego

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claims against the defaulted defendants.39 Exhibit 15 is a cancelled check from ESSI to

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Hitplayyoga, LLC in the amount of $50,000 dated July 10, 2012.40 Exhibit 31 is two pages from

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the Hudson Family Trust Dated October 29, 2012, showing that the Hudsons are the trustors,

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Id. at ¶ 88.

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Id. at ¶¶ 72, 174.

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See id. at ¶¶ 83 (alleging that ESSI is “solely influenced, dominated, controlled, and governed
by its owners [the Hudsons] as well as the [defaulted defendants]”), 84, 176 (alleging that ESSI,
the defaulted defendants that the Hudsons “are inseparable from each other through unity of
interest and ownership”), 73, 87, 178 (alleging that “[a]llowing the Hudsons to hide behind the
corporate fiction of . . . [the defaulted defendants] would sanction fraud and promote manifest
injustice”).
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See id. at ¶¶ 69–70, 72, 86, 175, 179, 180(b), (d), (e), (f) (alleging that ESSI, the Hudsons, and
the defaulted defendants “shift[ed] funds between themselves . . . without valuable
consideration” and “commingled” funds between themselves and that the Hudsons used
Bermuda’s down payment “to support the operations of the [defaulted defendants]”), 71, 85, 177,
180(a) (alleging that ESSI “is a mere instrumentality of [the Hudsons] and the [defaulted
defendants], observing no corporate formalities to maintain its separate existence” and that the
defaulted defendants “are mere shells, instrumentalities, and/or conduits for the business of the
Hudsons”), 180(c) (alleging that the defaulted defendants and the Hudsons treated ESSI’s assets
like they were their own).

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Id. at n.50.

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ECF No. 290-2 at 21–22.
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grantors, and trustees of that trust.41 Exhibit 32 is a printout of the business entity details for

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EcoSteel Building Systems, Inc. from Utah.gov.42 Exhibit 33 is the same as Exhibit 32 but for

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Steel Buildings, Inc. and includes a list of registered principals showing Diana Hudson as the

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secretary, treasurer, director, and registered agent and Joss Hudson as the president.43 Exhibit 34

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is a list of registered principals for Eco Investments, LLC from Utah.gov showing Joseph Hudson

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as a member.44 Exhibit 35 is a list of registered principles for EcoSteel, LLC from Utah.gov

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showing Joseph Hudson is a member of that company and its registered agent.45 Exhibit 36 is a

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“Statement of Authorized Person” by the organizer of Hitplayyoga, LLC showing that Diana

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Hudson was the initial managing member of that company in April 2012.46 And Exhibit 37 is a

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printout from sussexcounty.de.gov providing what appears to be general information about

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property owned in Sussex County, DE, by Northern Steel Contractors, LLC and a Warranty Deed

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that Joseph Hudson signed as “manager” of Northern Steel Investments, LLC.47 These bits of

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evidence are presented in a vacuum and without any explanation or argument from Bermuda,

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except to say that they are “additional evidence proving the alter ego status of Defendants.”48

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Neither together nor individually do these exhibits prove alter-ego liability of the defaulted

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defendants.

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Sufficiently seting forth a claim for alter-ego liability against the defaulted defendants and
proving the merits of that claim to my satisfaction are two key Eitel factors that weigh heavily

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ECF No. 290-4 at 1–3.

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Id. at 4–5 (handwritten notations call attention to parts of this exhibit without explanation).

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Id. at 6–8 (handwritten notations call attention to parts of this exhibit without explanation).

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Id. at 9–10 (handwritten notations call attention to parts of this exhibit without explanation).

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Id. at 11–12 (handwritten notations call attention to parts of this exhibit without explanation).

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Id. at 13–14.

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Id. at 15–17.

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ECF 290 at 15:20–21.

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against entering default judgment on Bermuda’s claim for alter-ego liability against the defaulted

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defendants. I do not address the remaining Eitel factors because I would decline to exercise my

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discretion to enter default judgment even if those other factors favored default judgment. I

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therefore deny Bermuda’s motion on Claims 2 and 15 for alter-ego liability without prejudice.

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Bermuda may renew its motion as to these claims, but I caution that it will need to amend its

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complaint to allege facts supporting the elements of these claims or provide additional

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evidentiary support and analysis of the evidence. I also caution that default judgment solely on

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the issue of alter-ego liability will not entitle Bermuda to a monetary award against the defaulted

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defendants—an actual claim must be proven.

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Conclusion
Accordingly, IT IS HEREBY ORDERED that Bermuda’s motion for entry of default

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judgment against the Hudson Family Trust Dated October 29, 2012; EcoSteel Building Systems,

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Inc.; Steel Buildings, Inc.; Eco Investments, LLC; EcoSteel, LLC; HitplayYoga, LLC; and

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Northern Steel Investments, LLC [ECF No. 290] is DENIED.

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DATED: March 1, 2017.

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_______________________________
Jennifer A. Dorsey
United States District Judge

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