Color Technologies, Inc., Appellant, vs. Jeffrey A. Pitt, Third-Party Plaintiff, Respondent, Timothy J. Conlin, et al., Third-Party Defendants, Appellants.

Color Technologies, Inc., Appellant, vs. Jeffrey A. Pitt, Third-Party Plaintiff, Respondent, Timothy J. Conlin, et al., Third-Party Defendants, Appellants. A04-1038, Court of Appeals Unpublished, April 26, 2005.

This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480 A. 08, subd. 3 (2004).

 

 

STATE OF MINNESOTA

IN COURT OF APPEALS

A04-1038      

 

 

Color Technologies, Inc.,

Appellant,

 

vs.

 

Jeffrey A. Pitt, Third-Party Plaintiff,

Respondent,

 

 

Timothy J. Conlin, et al., Third-Party Defendants,

Appellants.

 

 

Filed April 26, 2005

Affirmed in part, reversed in part and remanded.

Toussaint, Chief Judge

 

Ramsey County District Court

File No. C1-01-009879

 

 

Matthew P. Lewis, Mason Edelman Borman & Brand, LLP, 3300 Wells Fargo Center, 90 South Seventh Street, Minneapolis, MN 55402 (for appellants)

 

 

Gregg V. Herrick, Newquist & Ekstrum, Chartered, 6401 University Avenue N.E., Suite 301, Fridley, MN 55432 (for respondent)

 

 

            Considered and decided by Shumaker, Presiding Judge; Toussaint, Chief Judge; and Dietzen, Judge.

U N P U B L I S H E D  O P I N I O N

 

TOUSSAINT, Chief Judge

 

This is an appeal from a default judgment entered against appellants as a discovery sanction.  Because the sanction of a default judgment was not warranted under the facts and circumstances, we affirm in part, reverse in part, and remand.

FACTS

This case involves an automobile refinishing business founded by appellants Timothy Conlin and William Bradley.  On January 2, 1994, appellants signed an agreement to form the company Color Technologies (Color Tech) to engage in metal finishing and automotive bodywork and to share ownership equally.  On January 24, appellants signed an "option agreement" with respondent Jeffrey Pitt by which he agreed to pay $23,000 into the company, accept terms of the January 2 agreement, and personally assume one-third of the company's liabilities. 

Pitt alleges that the parties orally agreed in 1997 that Bradley would purchase Pitt's stock for $62,333 and reimburse him for $11,000 if Pitt would discontinue employment immediately.  Pitt claims that he left his employment, received the $11,000, but has still not received payment for his stock.  Appellants dispute that Bradley agreed to pay Pitt $62,333 for his interest in Color Tech and argue that any amount for Pitt's interest must be discounted by the company's liabilities. 

The parties retained counsel, and Color Tech corporate records were made available for inspection.  On February 12, 1999, Conlin and Bradley sent Pitt a notice of default demanding that Pitt make payment to Color Tech in the amount of $56,214 by March 12, 1999.   Neither party took action on that demand.  Two and one-half years later, however, Color Tech filed an action for replevin and conversion, alleging that Pitt had stolen a vehicle from the corporation.  Although Pitt had never paid the $56,214 demanded, the suit did not seek money owed the corporation.  On or about November 29, 2001, Pitt filed an answer and counterclaim alleging bad faith by the corporation and not until March 18, 2002, filed a third-party complaint against and discovery on appellants.

During discovery Pitt conceded that the vehicle belonged to Color Tech.  The bulk of discovery and the discovery disputes revolved around Pitt's counterclaim.

Under the first scheduling order, July 26 was designated the last day for discovery.  On that day Pitt moved to compel discovery and appellants produced discovery.  At the August 12 hearing on Pitt's motion to compel, appellants' counsel "apologize[d] to the court for not being able to respond to the discovery on a timely basis" and clarified that he had relocated his residence and employment.  The court granted the motion.

Pitt's second motion to compel and for sanctions, including default judgment, was heard on December 2, 2002.  Bradley and Conlin had been deposed, but Pitt had sent out a second set of interrogatories, to which they had not yet responded.  Pitt's counsel identified the areas of discovery he had problems with and conceded that Pitt had title to the vehicle only as a nominee of the corporation, so he would turn the vehicle back to the corporation.

Appellants' counsel stated "this is a small corporation . . . . They don't have a lot of corporate documents.  I believe they've given [Pitt's counsel] everything they have in their files. . . .They didn't appear to have minutes. . . . It didn't appear they [had other corporate documents]."  He also noted that Pitt had had access to and even taken copies of corporate documents.  He concluded that appellants had provided adequate and full discovery with respect to the simple issues involved in the case and "even if the court ordered us to provide additional discovery, I'm not sure what else we could provide."  

Pitt's motion for a default judgment was taken under advisement, but the December 2 written order required that appellants provide full and complete discovery.  The district court further stated that if appellants fail to provide that discovery by December 13, 2002, they will be precluded from litigating four specific items.  The order noted that the amount of the default judgment taken under advisement was "$62,333 less payment made of $13,627 for a total amount of $48,705 together with interest of ten percent from December 2, 2002." The court also took the motion for attorney fees under advisement.  On January 28, 2003, the court issued an amended scheduling order requiring all discovery to be completed by February 21.

Pitt's third motion to compel and a motion for summary judgment was heard on April 14, 2003.  Appellants' attorney reviewed the incomplete discovery responses from Pitt's attorney and stated the only way to determine who has failed to produce discovery would be for the court to go through the requests item by item.  The district court decided to do that and continued the hearing to May 15 and, later, to July 25, 2003.

On May 15, Pitt was allowed to go item by item through the alleged failures to respond and then appellants were given the same opportunity.  Because appellants had just received a packet of discovery from Pitt, however, the district court continued the matter to allow appellants time to review it.  The district court reconvened on July 25 to go through the alleged inadequacies of Pitt's responses.  When argument returned to appellants' allegedly inadequate responses, however, the court indicated that it would deem appellants' failure to produce certain documents as a discovery violation.

On December 22, 2003, the district court issued an order denying appellants' motions for partial summary judgment and for a separate trial on the replevin action and  granting Pitt's motion for a default judgment with interest from November 1, 1997.  The court also ordered appellants to turn over to Pitt paint guns in their possession and Pitt was to sign the vehicle over to Color Tech.  Pitt was awarded attorney fees for discovery sanctions and costs incurred in bringing the motion for default judgment.  Appellants were also ordered to pay the court administrator $500 for the time spent on the discovery motions. 

Appellants obtained new counsel and, in February 2004, moved for an order vacating the default judgment.  Bradley supplied two affidavits in support of the motion, and appellants' new counsel described the efforts made to remedy all deficiencies.  The district court denied the motion on March 9.  The court also awarded Pitt attorney fees and costs for appearing at the hearing.  

            After another hearing in April, the district court issued findings of fact, conclusions of law, and an order for default judgment on May 21.  The court granted the same relief as in the December 22, 2003 order.  The court also specified the amount of additional attorney fees ($15,915) and deposition costs ($565.96) for a total of $16,480.96.  The court described the paint guns to be delivered to Pitt and gave Pitt permission to sell the car and apply the proceeds to the $96,857.08 judgment if it was not paid within 30 days.

The district court supported its order with procedural findings and findings of fact.  The court found that appellants "have had a long history of willful delay, and flagrant, bad faith discovery violations."   The court also made findings on the merits of the claims, concluding that Bradley falsely represented in an oral agreement that he would purchase Pitt's share of the equity to induce Pitt to leave the employ of the company. 

Appellants filed a notice of appeal from the May 26, 2004 entry of default judgment.[1]

D E C I S I O N

 

District courts have the authority to order a default judgment against a party who fails to comply with discovery or to plead or defend a claim within the time allowed by law.  Minn. R. Civ. P. 37.02 (b)(3), 55.01.  We review the choice of a discovery sanction for abuse of discretion, keeping in mind that a sanction must be "no more severe . . . than is necessary to prevent prejudice to the movant."  Chicago Greatwestern Office Condo. Ass'n v. Brooks, 427 N.W.2d 728, 731 (Minn. App. 1988) (quotation omitted).  But because default judgments infringe on a party's right to trial by jury and run counter to the policy of deciding cases on the merits, our review of discovery sanctions involving a default judgment requires greater scrutiny than our review of lesser sanctions.  See id. at 730-31.  This appeal focuses solely on the propriety of the default judgment as a discovery sanction; appellant does not dispute the court orders for attorney fees or court costs .

The sanctions of default and dismissal are traditionally reserved for a party who willfully, without justification or excuse, and with the intent to delay trial fails to comply with discovery orders or refuses to cooperate with the court and counsel to resolve the case promptly and expeditiously.  See Breza v. Schmitz, 311 Minn. 236, 237, 248 N.W.2d 921, 922 (1976).  Determining whether a severe sanction is warranted, courts consider the extent of the noncompliance, the reasons for delay, the motivation for it, and whether the party being sanctioned had a pattern of misconduct.  Firoved v. Gen. Motors Corp., 277 Minn. 278, 283-84, 152 N.W.2d 364, 368-69 (1967); Williams v. Grand Lodge of Freemasonry AF & AM, 355 N.W.2d 477, 480 (Minn. App. 1984) (considering history of refusing to appear at depositions), review denied (Minn. Dec. 20, 1984).  The paramount consideration, however, is the resulting prejudice to the parties.  Firoved, 277 Minn. at 283, 152 N.W.2d at 368.

Our review of the record does not show that appellants intentionally obstructed the litigation.  Initially, appellants' attorney produced discovery, albeit on the last day within the designated schedule, and apologized for the delay.  At the second hearing, when Pitt insisted that appellants had more documents to produce, appellants' attorney indicated that he thought every document available had been disclosed.  Appellants' attorney also, on his own initiative, suggested that the discovery impasse could only be resolved with the assistance of the court. The record reflects appellants' efforts to comply with all requests.

Appellants readily admit "counsel caused unnecessary delays, failed to adequately communicate that documents no longer existed, and failed to adequately cooperate with counsel in moving through discovery expeditiously."  But given the fact that appellants and their attorney attended all the hearings and depositions and produced available documents, is inconsistent with an intentional or pervasive failure to comply or refusal to cooperate.  Significantly, additional discovery by both sides was produced after the district court walked the parties through the discovery requests.  Therefore, we conclude the sanction of default judgment was an abuse of discretion and too severe under these circumstances.

Appellants also argue that the district court erred in denying their motion to vacate the default judgment.  This court's review of the order denying the motion to vacate the default judgment is discretionary.  Minn. R. Cir. App. P. 103.04.  As an order involving the merits, review is appropriate here.  See Petrich v. Dyke, 419 N.W.2d 833, 835 (Minn. App. 1988) (determining on appeal from entry of default judgment as discovery sanction to reverse decision denying motion to vacate).  Reopening of default judgments is to be liberally undertaken so that disputes can be resolved on their merits.  Id. To justify vacating a default judgment entered for noncompliance with discovery, the moving party must show:  (1) a reasonable defense on the merits; (2) a reasonable excuse for his failure or neglect to act; (3) that he has acted with due diligence after notice of entry of default judgment; and (4) that no substantial prejudice will result to the opposing party.  Id.  This court has required that the relative weakness of one factor should be balanced against a strong showing on the other three.  Valley View, Inc. v. Schutte, 399 N.W.2d 182, 184 (Minn. App. 1987), review denied (Minn. Mar. 18, 1987).

Reasonable Excuse.  In its March 7 order, the district court stated that it was "meritorious" that appellants' counsel had responded to the "stale" discovery, but stated it was "too late."  The court clearly did not consider any excuse proffered by appellants' counsel as reasonable.  The prolonged discovery dispute would have been resolved earlier had appellants better articulated why no additional documents existed; it was inadequate to simply state that they had no documents.  Although appellants' showing on this factor is relatively weak, a strong showing on the other three factors justifies vacating the default judgment.

Reasonable Defense.  The district court did not discuss this issue in its order denying the motion to vacate the default judgment.  Appellants have "at least a colorable defense."  Guillaume & Assocs. v. Don-John, Co., 371 N.W.2d 15, 18 (Minn. App. 1985), or a "debatably meritorious claim," Charson v. Temple Israel, 419 N.W.2d 488, 492 (Minn. 1988).  The parties dispute whether they had an agreement governing Pitt's departure from Color Tech.  Appellants raise the reasonable defense that Pitt was required to pay a share of the corporate liabilities, and Pitt "strenuously" disputes that fact.  The option agreement expressly refers to the parties' responsibility for corporate liabilities, which makes appellants' defense that Pitt should pay something for those liabilities reasonable. 

Due Diligence.  Appellants correctly state that the due diligence factor looks at due diligence "after notice of the entry of judgment," Gillaume, 371 N.W.2d at 18, and the district court agreed that appellants had made a strong showing of due diligence in bringing the motion to vacate.

Prejudice.  It is well established in the caselaw that prejudice beyond delay and increased costs associated with the proceedings must be shown to warrant a default judgment.  Galatovich v. Watson, 412 N.W.2d 758, 761 (Minn. App. 1987) (reversing court order denying motion to vacate due to strong showing on three factors).  "Particular" prejudice must be shown.  Housing & Redevelopment Auth. v. Kotlar, 352 N.W.2d 497, 499 (Minn. App. 1984).  In the December 22, 2003 order, the district court indicated that Pitt was entitled to "some closure."  Similarly, in the March 2004 order denying the motion to vacate, the court stated that the "harm Pitt suffered was the costly process of reviewing offered discovery, only to determine it wasn't responsive and then have to renew the motion to compel."  Neither the court nor respondent identified other prejudice. There is no showing of prejudice beyond the delay and costs inherent in litigation and the record contains facts indicating that Pitt, too, contributed to some of that delay.  

Because we conclude a default judgment was too severe a sanction for the conduct during discovery, we reverse the default judgment, but affirm the uncontested lesser sanctions of attorney fee awards and court costs.  Because appellants made a strong showing that they have a reasonable defense on the merits, that they acted with due diligence after notice of judgment, and that no substantial prejudice will result, we reverse the district court's order denying the motion to vacate the judgment.

Affirmed in part, reversed in part, and remanded.

[1] Pitt argues that this appeal is untimely because appellants should have appealed from the December 2, 2002 order granting discovery sanctions.  Discovery orders are not appealable as of right, In re Rice Lake Auto, Inc., 430 N.W.2d 881, 882 (Minn. App. 1988), so this argument lacks merit.