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Pure Barnyard, Inc. v. Organic Laboratories

September 26, 2012

PURE BARNYARD, INC.
v.
ORGANIC LABORATORIES, INC. AND RESULTS CAPITAL, INC.



The opinion of the court was delivered by: Joseph N. Laplante United States District Judge

Opinion No. 2012 DNH 171

MEMORANDUM ORDER

This case arises out of a failed deal to merge two companies in the fertilizer market, plaintiff Pure Barnyard, Inc. and defendant Organic Laboratories, Inc. ("Organic Labs"), into a third entity, Organic Labs Holdings, Inc. ("Organic Holdings"). Pure Barnyard alleges that, during discussions over the proposed deal, Organic Labs--acting through its alleged agents, including defendant Results Capital, Inc.--misrepresented the quantity of fertilizer material to be provided under an agreement between Organic Labs and a supplier. Pure Barnyard further alleges that, in reliance on these misrepresentations, it committed to selling that material (instead of its own products) to its customers, causing it to lose sales and, ultimately, to go out of business, when the material turned out to be unavailable.

This court has subject-matter jurisdiction under 28 U.S.C. § 1332(a)(1) (diversity), because Pure Barnyard is a New Hampshire corporation with its principal place of business here and the defendants, Results Capital and Organic Labs, are Florida corporations with their principal places of business there. After the court denied Organic Labs' motion for summary judgment, Pure Barnyard, Inc. v. Organic Labs., Inc., 2011 DNH 035, it reached a settlement of Pure Barnyard's claims against it.

On February 25, 2011, this court defaulted defendant Results Capital for failing to comply with orders directing that counsel appear on its behalf. More than seven months later--and more than one month after the plaintiff, Pure Barnyard, Inc., had moved for a default judgment against Results, see Fed. R. Civ. P. 55(b)(2)--Results Capital moved, through counsel, to strike the entry of default, see Fed. R. Civ. P. 55(b)(2).

After an evidentiary hearing, the court denies Results Capital's motion to strike the default and grants Pure Barnyard's motion for a default judgment. As explained fully below, Results Capital has failed to show good cause to set aside the default under Rule 55(c). In fact, Results Capital was defaulted after it failed to make any serious effort to comply with a series of court orders that it obtain counsel--a failure that persisted for nearly eight months after the court expressed a willingness to lift the default if Results Capital could obtain counsel (which it had said it soon expected to be able to do).

But the court will enter judgment by default against Results Capital only in the sum of $79,009.01, rather than the more than $3 million that Pure Barnyard seeks. That sum represents the entire value of Pure Barnyard as a going concern, but it has not shown that its business failed due to Results Capital's misrepresentations about the available quantity of feather material or any other subject. Instead, as Pure Barnyard more or less acknowledges, its business failed because Organic Labs backed out of the proposed merger--and Pure Barnyard has never claimed that Results Capital's misrepresentations caused that to happen. Pure Barnyard can, however, recover the profits it would have realized had it sold its own product to one of its customers, instead of committing to sell that customer the chicken feather product in reliance on Results Capital's misrepresentations as to its availability.

I. Results Capital's motion to strike the default

A. Background

Results Capital accepted service of process in this action on December 10, 2008, then filed a motion to dismiss for lack of personal jurisdiction. See Fed. R. Civ. P. 12(b)(1). After the court denied that motion from the bench following oral argument, Order of Sept. 11, 2009, Results Capital filed an answer to the complaint. These filings were made by Results Capital's counsel of record at the time, who were also then counsel of record for its co-defendant, Organic Labs (and who represented the defendants at oral argument on the motion to dismiss).

On October 20, 2009, however, these attorneys withdrew from their representation of both defendants in this matter, citing a "breakdown of the attorney-client relationship." While neither Results Capital nor Organic Labs took issue with this statement at the time, Results Capital now explains that the withdrawal arose simply because the defendants "chose to engage separate New Hampshire counsel." Following the withdrawal, the court ordered that new counsel appear on behalf of both defendants--which, as corporations, could not appear in this action pro se, see L.R. 83.6(d)--by November 10, 2009. Order of Oct. 21, 2009.

After Results Capital asked for (and received) an extension of this deadline, new counsel filed a notice of appearance on its behalf on November 23, 2009, and this attorney participated in the preliminary pretrial conference the next day. As a result of discussions at the conference, the court ordered Pure Barnyard to file an amended complaint by December 11, 2009, with answers due by January 10, 2010. Order of Nov. 24, 2009. The amended complaint was timely filed. On January 7, however, counsel of record for Results Capital filed a motion to withdraw, stating only that he had "determined it was necessary," together with a motion for a one-month extension of Result's Capital's time to answer. The court granted both of these motions (granting the extension over Pure Barnyard's objection), ordering that new counsel appear for Results Capital by February 15, 2010, on pain of default. Orders of Jan. 26, 2010. In the meantime, new counsel had appeared for the other defendant, Organic Labs, and filed a motion to dismiss certain counts of the amended complaint for failure to state a claim, see Fed. R. Civ. P. 12(b)(6), together with an answer to the other counts.

New counsel filed a notice of appearance for Results Capital, together with an answer to the amended complaint and a joinder in Organic Labs' motion to dismiss it, on February 16, 2010--a week after the extended deadline for responding to the amended complaint. At the close of a hearing on the defendants' motions to dismiss the amended complaint, the court granted them as to one count, but denied them as to the others, and ordered the parties to file a new proposed scheduling order. Order of Aug. 10, 2010. The plan was filed, but with the explanation that, while counsel for all parties had participated in formulating it, counsel for Results Capital had yet to obtain his client's assent to it. Just over one month later, counsel for Results Capital filed a motion to withdraw, stating that "representation has been rendered unreasonably difficult by the client" and "the client has not been able to substantially fulfill its obligations to counsel." Results Capital did not take issue with these statements at the time, but now says "counsel withdrew due solely to the fact that Results Capital did not have sufficient funds to pay for this litigation."

The court granted the motion to withdraw, and, for the third time, ordered that new counsel appear on behalf of Results Capital on pain of default--this time, by November 15, 2010. Order of Oct. 18, 2010. When that date arrived, Results Capital (acting without counsel) filed a letter with the court, stating only that it "would like to request more time in securing a law firm to represent [it]." The court treated this as a motion for an extension of time and, receiving no objection, ordered the deadline continued until December 10, 2010, while cautioning that "[a]nother extension is not anticipated." Order of Nov. 24, 2011. Nevertheless, on December 9, Results Capital, through another letter, requested another extension, claiming to lack "the funds to secure a firm" because the "lawsuit has been very damaging." In the meantime, as contemplated by the revised scheduling order, Pure Barnyard and Organic Labs had completed discovery, and Organic Labs had filed a motion for summary judgment on all claims against it.

On January 6, 2011, the court denied Results Capital's most recent request for an extension of time to secure counsel. The court explained that, while it was "sensitive to [Results Capital's] plight, the motion/letter fails to provide any basis to infer or conclude that counsel will make an appearance on [its] behalf within a reasonable period of time that would justify additional extensions." Order of Jan. 6, 2011. Subsequently, Pure Barnyard and Organic Labs completed their briefing on the summary judgment motion (and related motions to strike), the court scheduled oral argument on those motions and denied Organic Labs' motion to continue the trial, scheduled (at that point) for April 5, 2011.

In response to this ruling, Organic Labs requested a telephone conference with the court, proposing a series of available times for all counsel of record--as well as David Webb, the principal of Results Capital, who had given his assent to the request for the conference. During the conference, on February 22, 2011, Webb stated that, as a result of some new business, he expected Results Capital's financial condition to improve so that it could afford to retain counsel in this matter. The court explained that, while Results Capital would nevertheless be defaulted, it could seek to have the default removed if it were in fact able to secure counsel. A written order to that effect followed, defaulting Results Capital. Order of Feb. 25, 2011.

On that same day, the court heard oral argument on Organic Labs' motion for summary judgment, and advised the parties from the bench that the motion would very likely be denied and that trial would commence as scheduled. Following the written order denying the summary judgment motion, Pure Barnyard and Organic Labs jointly moved for a continuance of trial so that they could attempt to settle the case. The court granted the motion, and, on May 13, 2011, was advised that Pure Barnyard and Organic Labs had reached a settlement. They filed a stipulation of dismissal on August 12, 2011.

In the meantime, the court had heard nothing from Results Capital, despite its statement in the telephone conference in February that it anticipated being able to retain counsel. So the court ordered Pure Barnyard to file a motion for a default judgment against Results Capital (which Pure Barnyard did, on August 31, 2011) and scheduled a damages hearing for September 19, 2011. Order of Aug. 13, 2011. On that day, new counsel filed (together with a motion to postpone the hearing) a notice of appearance on behalf of Results Capital. This was nearly eight months after the entry of default against Results Capital, and nearly more than nine months after this ...


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