Rizk et al v. MYRM Holdings, L.L.C. et al
Filing
95
REPORT AND RECOMMENDATIONS re 80 Motion for Entry of Default, filed by J. Cary Gray, Edward G Rizk, Rizk Interests, Ltd., Sylvia R Rizk, 86 Motion to Compel, Motion for Sanctions, filed by J. Cary Gray, Kenneth A Barfield, Edward G Rizk, Rizk Int erests, Ltd., Sylvia R Rizk, Austin Properties LLC, 89 Motion for Partial Summary Judgment, filed by J. Cary Gray, Kenneth A Barfield, Edward G Rizk, Rizk Interests, Ltd., Sylvia R Rizk, Austin Properties LLC; ORDER DENYING 91 Motion for Extension of Time to File Response/Reply, filed by MRYM Holdings, L.L.C., MYRM Holdings, L.L.C., MRYM Group, Ltd., Randall Hibshman, Christopher L Blackwell, Kanti Bahl, MRYM Holdings, Ltd. Co. Signed by Judge Andrew W. Austin. (jk, )
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
AUSTIN DIVISION
J. CARY GRAY, et al.
VS.
MYRM HOLDINGS, L.L.C., et al.
§
§
§
§
§
NO. A-11-CV-180 LY
REPORT AND RECOMMENDATION
TO:
THE HONORABLE LEE YEAKEL
UNITED STATES DISTRICT JUDGE
Before the Court are the Plaintiffs’ Motion for Entry of Default Judgment (Clerk’s Doc. No.
80); Defendants’ Response in Opposition to the Motion (Clerk’s Doc. No. 83); Plaintiffs’ Motion
to Compel and for Sanctions (Clerk’s Doc. No. 86); Plaintiffs’ Motion for Partial Summary
Judgment (Clerk’s Doc. No. 89); and Defendants’ Motion for Extension of Time to File a Response
to the Plaintiffs’ Motion for Partial Summary Judgment (Clerk’s Doc. No. 91). The District Court
referred the above-motions to the undersigned Magistrate Judge for a report and recommendation
pursuant to 28 U.S.C. §636(b) and Rule 1(c) of Appendix C of the Local Rules of the United States
District Court for the Western District of Texas, Local Rules for the Assignment of Duties to United
States Magistrate Judges.
The Plaintiffs’ three motions seek to establish the Defendants’ liability: either by entering
a default judgment, death penalty sanction, or partial summary judgment. The Defendants have only
responded to the Plaintiffs’ motion for entry of default judgment—they did not respond to the motion
for sanctions and only filed a motion for an extension to respond to the summary judgment motion.
Considering that the Plaintiffs rely, at least in part, on the Defendants’ refusal to participate in the
process, the lack of a response is not surprising. Although the Defendants have answered the
Plaintiffs’ complaint and therefore are not in default, their contumacious conduct during the
litigation warrants a default judgment sanction.
I.
Background
A.
The Defendants’ Refusal to Participate
For as long as the case has been pending, it has progressed very little. The answer was filed
almost a year after the Plaintiffs first filed suit. From the pleadings, it appears that the Defendants
have employed a variety of stalling tactics. Discovery has not taken place. The Plaintiffs noticed
depositions, but the Defendants did not appear. And the Defendants have indicated that they will
not participate in written discovery. The docket sheet contains voluminous filings demonstrating
the Defendants’ conduct and the Plaintiffs’ attempts to require the Defendants to participate in the
case. The undersigned will highlight several of these instances.
The Plaintiffs filed suit on March 8, 2011. The Defendants filed a motion to dismiss, but
after the Court denied their motion, they failed to timely file an answer. The Plaintiffs requested that
the Clerk enter default, which spurred the Defendants into action—they answered and requested that
the Court remove the default judgment. On September 13, 2011, the Court denied the Plaintiffs
motion for entry of default and default judgment, and set aside the Clerk’s entry of default. Unable
to answer in time, the Defendants requested an extension, which the Court granted. In lieu of
answering, the Defendants filed another motion to dismiss. On January 10, 2012, the Court denied
the Defendants’ motion. Again, the Defendants failed to file an answer thereafter, so the Plaintiffs
once again moved for default judgment. Several days later, the Defendants filed an answer.
Apparently (and justifiably) frustrated by the Defendants’ continued practice of delaying, on
March 21, 2012, the Plaintiffs filed a motion for sanctions and requested that the Court compel the
Defendants to participate in discovery. This is the third motion for sanctions filed in this case. The
2
Defendants have not responded to this motion. The Plaintiffs also filed a motion for partial summary
judgment on April 2, 2012. The Defendants requested additional time to respond to the motion,
but—nearly three months later—have not yet filed a response. Further, the Defendants only offer
a weak justification for requiring more time—their lawyers need extra time to procure affidavits
from their clients, some of whom are not located in the United States. And the Defendants have to
date still never filed a response. Accordingly, the undersigned HEREBY DENIES the Defendants’
Motion for Extension of Time to File a Response to the Plaintiffs’ Motion for Partial Summary
Judgment (Clerk’s Doc. No. 91).
Further, the Defendants have not limited their inaction to dispositive motions. They have
refused to participate in written discovery. The Plaintiffs noticed depositions of the Defendants, and
the Defendants did not appear. And the Defendants’ counsel left a voicemail for the Plaintiffs’
counsel saying that the Defendants did not plan on responding to written discovery requests or
appearing for depositions.
B.
Facts Underlying the Case1
The Plaintiffs, Rizik Interests, Barfield, and Austin Properties, entered into a joint venture
agreement to purchase collateralized mortgage obligations (CMO). They spent almost $800,000 on
600 million shares of a Morgan Stanley CMO. They then entered a limited bonus partnership
agreement with the MYRM entities to manage the CMO. According to the Plaintiffs, Defendant
1
Under the local rules, parties must file responses within fourteen days or the court may grant
the motion as unopposed. LOCAL RULE CV-7(e). As the Defendants failed to respond to the motion
for sanctions and the motion for partial summary—and failed to meaningfully participate in the
litigation—the Court may enter default judgment as a sanction and take the plaintiff’s well-pleaded
factual allegations as true. U.S. of Am. for Use of M-Co Constr., Inc. v. Shipco Gen., Inc., 814 F.2d
1011, 1014 (5th Cir. 1987). Accordingly, the Court takes the Plaintiffs’ allegations as true in reciting
the facts of the case.
3
Blackwell made several false representations during the negotiation of the partnership agreement:
his past work for the Bank of Madrid and Goldman Sachs, his academic pedigree, and his
relationships with individuals and banking entities.
Relying at least partly on these
misrepresentations, the Plaintiffs believed that Blackwell could guarantee a specific rate of return
on their investment, entered into the partnership agreement with MYRM Holdings, L.L.C,2 and
transferred the CMO to MRYM Holdings, Ltd.
The Plaintiffs have not received any payment for the CMO and cannot locate the CMO after
the Defendants allegedly transferred it to other entities. This is true even after the Court granted the
Plaintiffs’ application for a preliminary injunction and ordered the Defendants to “immediately turn
over and surrender possession and control to Plaintiffs all profits, interests, earnings, monies, or
other economic gain or property acquired by use or disposition of Plaintiffs’ Morgan Stanley CMO.”
Clerk’s Doc. No. 25 at 2. According to emails between the parties, the Defendants were working
on transferring money into their attorneys’ IOLTA account, and their counsel asked for an extension
to allow Homeland Security to clear the funds, but the Plaintiffs still have not been paid. The
Plaintiffs now sue the MYRM and MRYM Entities and Blackwell,3 Hibshman, and Bahl as officers,
directors, principals, or otherwise affiliated with MYRM.
2
MYRM Holdings, L.L.C. is the “First Party” to the Agreement, and Blackwell signed it. But
an Exhibit to the Agreement has the funds transferred into a MRYM Holdings, Ltd. account, and
apparently Blackwell only had authority to act on behalf of Defendant MRYM Group, Ltd.—he
denies having authority to act on MYRM, MRYM Holdings, L.L.C., or MRYM Holdings, Ltd. Co.
3
Additionally, the SEC has filed a Complaint in the Northern District of Texas against
Blackwell alleging that Blackwell perpetuated a Ponzi scheme.
4
II.
Legal Standard for Default Judgment
Under Fifth Circuit law, there are three steps to obtaining a default judgment: first, default
by the defendant; second, clerk’s entry of default; and third, entry of a default judgment. New York
Life Ins. Co. v. Brown, 84 F.3d 137, 141 (5th Cir. 1996) (citing FED . R. CIV . P. 55(a)). “A default
occurs when a defendant has failed to plead or otherwise respond to the complaint within the time
required by the Federal Rules. An entry of default is what the clerk enters when the default is
established by affidavit or otherwise. After defendant’s default has been entered, plaintiff may apply
for a judgment based on such default. This is a default judgment.” Id. (emphasis in original)
(citations and footnote removed). If the clerk has not already entered a default, the Court may enter
a default and the default judgment simultaneously when a party shows “by affidavit or otherwise”
that another party was properly served under FED . R. CIV . P. 4(e) and “has failed to plead or
otherwise defend . . . .” FED . R. CIV . P. 55(a); 55(b)(2). The moving party must also show the
nonmovant is not is not an infant or incompetent, see id., and is not in the military, see 50 U.S.C.
app. § 520(1).
The moving party must also show the amount of damages. If the claim is for a sum certain,
that can be figured through arithmetic, a default judgment may be entered without a hearing. James
v. Frame, 6 F.3d 307, 310 (5th Cir.1993). However, if the moving party also seeks attorney’s fees,
it must prove both the amount of the fees and the reasonableness of the fees, subject to court inquiry.
Hunt v. Inter-Globe Energy, Inc., 770 F.2d 145, 148 (10th Cir. 1985).
III.
Entry of Default
In this case, the Court removed the clerk’s previous entry of default and the Plaintiffs have
not obtained another entry of default from the clerk. Thus, the Court first reviews the affidavits and
proof of service to insure that the Defendants are in default. In order to show proper service under
5
FED . R. CIV . P. 4(e), the Plaintiffs must show that the Defendants were properly served either as
required under the Federal Rules or “pursuant to the law of the state in which the district court is
located . . .” Id. at 4(e)(1). In Texas service by registered or certified mail is sufficient. TEX .R. CIV .
P. 106(a)(2). Albeit late, the Defendants filed an answer. And despite their apparent refusal to
participate in discovery, in addition to their answer the Defendants have filed motions to dismiss.
Therefore, they are not in default, and entry of default is therefore not appropriate.
IV.
Death Penalty Sanctions
Although the Defendants are not in default, the court may still enter default judgment as a
sanction. Under Rule 37, a district court may impose sanctions on a party who fails to comply with
a discovery order. Rule 37 “contains two standards—one general and one specific—that limit a
district court’s discretion.” Ins. Corp. of Ireland, Ltd. v. Compagnie des Bauxites de Guinee, 456
U.S. 694, 707 (1982). First, any sanction must be “just.” Id. Second, the sanction “must be
specifically related to the particular ‘claim’ which was at issue in the order to provide discovery.”
Id. The sanction of a default judgment is warranted when the penalized party’s discovery violation
is willful and when a lesser sanction would not substantially achieve the desired deterrent effect.
United States v. $49, 000 Currency, 330 F.3d 371, 376 (5th Cir. 2003) (citing Smith v. Smith, 145
F.3d 335, 344 (5th Cir. 1998); Batson v. Neal Spelce Assocs., Inc., 765 F.2d 511, 514 (5th Cir.
1985); and Jones v. La. State Bar Ass’n, 602 F.2d 94, 96 (5th Cir. 1979) (per curiam)). The court
“may also consider whether the discovery violation prejudiced the opposing party’s preparation for
trial, and whether the client was blameless in the violation.” $49, 000 Currency, 330 F.3d at 376
(citing Batson, 765 F.2d at 514). “The primary purpose of sanctions is to deter frivolous litigation
and abusive tactics.” Topalian v. Ehrman, 84 F.3d 433, No. 94-20567, 1996 WL 248995, at *4 (5th
6
Cir. Apr. 12, 1996). The sanction imposed must be “the least severe sanction adequate to achieve
the desired result.” Scaife v. Associated Air Ctr. Inc., 100 F.3d 406, 412 (5th Cir. 1996).
Under the plain language of Rule 37(b)(2), “[i]f a party . . . fails to obey an order to provide
or permit discovery,” the district court has authority to “strik[e] out pleadings . . . or render[ ] a
judgment by default.” FED . R. CIV . P. 37(b)(2)(C). The Fifth Circuit has explained that “dismissal
is authorized only when the failure to comply with the court’s order results from willfulness or bad
faith . . . [and] where the deterrent value of Rule 37 cannot be substantially achieved by the use of
less drastic sanctions.” Bluitt v. Arco Chem. Co., 777 F.2d 188, 190 (5th Cir. 1985). Further, the
Court can impose death penalty sanctions under its inherent powers. “When a party’s deplorable
conduct is not effectively sanctionable pursuant to an existing rule or statute, it is appropriate for a
district court to rely on its inherent power to impose sanctions.” Carroll v. The Jacques Admiralty
Law Firm, P.C., 110 F.3d 290, 292 (5th Cir. 1997). In order to impose sanctions against a party
under its inherent power, a court must make a specific finding that the party acted in bad faith. Toon
v. Wackenhut Corr. Corp., 250 F.3d 950, 952 (5th Cir. 2001) (citing Goldin v. Bartholow, 166 F.3d
710, 722 (5th Cir. 1999)).
Here, the dilatory and obstructive conduct of the Defendants has been well-documented and
the extreme sanction of default judgment is warranted by their actions. See Bonaventure v. Butler,
593 F.2d 625, 626 (5th Cir. 1979) (“Deliberate, repeated refusals to comply with discovery orders
have been held to justify the use of this ultimate sanction.”); Emerick, 539 F.2d at 1381 (“[W]hen
a defendant demonstrates flagrant bad faith and callous disregard of its responsibilities, the district
courtss choice of the extreme sanction is not an abuse of discretion.”). It is apparent that further
orders requiring the Defendants to file pleadings or respond to discovery would be ineffective. The
Defendants have demonstrated their unwillingness to participate in this litigation. The least severe
7
sanction appropriate, in light of the willful actions of the Defendants, is the entry of a default
judgment.
V.
Recommendation
The Defendants’ conduct demonstrates bad faith and a refusal to meaningfully participate in
the litigation. The Plaintiffs have moved for sanctions three times in this case after the Defendants
refused to follow deadlines. And the Defendants have still not responded to the Plaintiffs’ latest
motion for sanctions or their motion for partial summary judgment. The Defendants appear to
participate only under the threat of sanctions. The Defendants have indicated that they will not
respond to written discovery or appear for depositions as required by the rules of procedure. From
this pattern of behavior, the undersigned finds that lesser sanctions will not ensure compliance and
the Court must resort to the severe sanction of a default judgment. Accordingly, the undersigned
HEREBY RECOMMENDS that the District Court GRANT the Plaintiffs’ Motion to Compel and
for Sanctions (Clerk’s Doc. No. 86).4
If the District Court adopts the undersigned’s report and recommendation, then the Court
RECOMMENDS that parties be directed to file briefs addressing the amount of damages owed to
the Plaintiffs. The Defendants are strongly encouraged to collaborate with the Plaintiffs on this
issue, as it appears that the amount of damages is an issue easily subject to stipulation. Further, the
Court RECOMMENDS that the Defendants be warned that if they continue to neglect their duty to
participate, further sanctions may be appropriate.
4
If the District Court adopts the undersigned’s recommendation, then the undersigned also
RECOMMENDS that the District Court DENY the Plaintiffs’ Motion for Entry of Default Judgment
(Clerk’s Doc. No. 80) and MOOT the Plaintiffs’ Motion for Partial Summary Judgment (Clerk’s
Doc. No. 89).
8
VI.
Warnings
The parties may file objections to this Report and Recommendation. A party filing
objections must specifically identify those findings or recommendations to which objections are
being made. The District Court need not consider frivolous, conclusive, or general objections.
Battles v. United States Parole Comm’n, 834 F.2d 419, 421 (5th Cir. 1987).
A party’s failure to file written objections to the proposed findings and recommendations
contained in this Report within fourteen days after the party is served with a copy of the Report shall
bar that party from de novo review by the district court of the proposed findings and
recommendations in the Report and, except upon grounds of plain error, shall bar the party from
appellate review of unobjected-to proposed factual findings and legal conclusions accepted by the
district court. See 28 U.S.C. § 636(b)(1)(C); Thomas v. Arn, 474 U.S. 140, 150–153 (1985);
Douglass v. United Servs. Auto. Ass’n, 79 F.3d 1415, 1428–29 (5th Cir. 1996) (en banc).
To the extent that a party has not been served by the Clerk with this Report &
Recommendation electronically pursuant to the CM/ECF procedures of this District, the Clerk is
directed to mail such party a copy of this Report and Recommendation by certified mail, return
receipt requested.
SIGNED this 28th day of June, 2012.
_____________________________________
ANDREW W. AUSTIN
UNITED STATES MAGISTRATE JUDGE
9
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?