Unpublished Disposition, 851 F.2d 361 (9th Cir. 1983)

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U.S. Court of Appeals for the Ninth Circuit - 851 F.2d 361 (9th Cir. 1983)

Diane SOSHNIK, Plaintiff-Appelleev.Charles BRUENS, Defendant,andThe Great Redwood Land Association, a Limited Partnership,Defendant-Appellant.

No. 87-1643.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Nov. 10, 1987.Decided June 22, 1988.

Before CHAMBERS, SKOPIL and POOLE, Circuit Judges.


MEMORANDUM* 

Great Redwood Land Association ("GRLA"), a limited partnership, appeals the district court's entry of default judgment against it in an action brought by Diane Soshnik to recover damages equal to the amount of her unreturned contributions to GRLA. We reverse and remand.

Soshnik invested in GRLA as a general partner, allegedly after being promised that her status would be changed to that of limited partner. In her complaint she alleged that she had repeatedly but unsuccessfully requested a return of her contributions pursuant to Section 8 of GRLA's Certificate of Limited Partnership, and that GRLA's failure to return the contributions constituted a breach of that agreement. Soshnik did not attach a copy of the certificate to her complaint, but she subsequently submitted a copy to the district court for other purposes. Under Section 8 only limited partners, not general partners, were entitled to a return of their contributions. In her complaint Soshnik conceded that she invested as a general partner and acknowledged that the promise to change her status to limited partner was false. She did not allege that her status was ever, in fact, changed.

The district court entered default against GRLA for failure to appear, denied a subsequent motion to vacate the default and default judgment, and ordered that the amount of Soshnik's damages be determined at a hearing before a magistrate. At the hearing to vacate and again at the hearing on damages, GRLA made the same three arguments which it now makes on appeal. Those arguments are: (1) Soshnik was not entitled to a return of her contribution under Section 8 of the Certificate of Limited Partnership because she did not allege that she was a limited partner; (2) Even if Soshnik rightfully but unsuccessfully demanded the return of her contributions she was entitled only to a dissolution and accounting, as provided by Cal.Corp.Code Sec. 15516(4), and not to damages; and (3) Even if Soshnik were otherwise entitled to recover her contributions she would first have to show that GRLA would have sufficient assets remaining to satisfy its other debts and liabilities, as required by Cal.Corp.Code Sec. 15516(1) (a).

At the hearing on GRLA's motion to vacate, the judge implicitly rejected these arguments. The magistrate later concluded that she lacked authority to consider the arguments because the matter referred to her was limited to determining the amount of damages as measured by Soshnik's unreturned contributions. Since the parties stipulated to the amount of Soshnik's contributions, no evidentiary hearing was held.

Upon entry of default, factual allegations in the complaint, except those relating to damages, are deemed admitted. See Danning v. Lavine, 572 F.2d 1386, 1388 (9th Cir. 1978); 6 J. Moore, W. Taggart & J. Wicker, Moore's Federal Practice p 55.03, at 55-16 (2d ed. 1987); 10 C. Wright, A. Miller & M. Kane, Federal Practice and Procedure Sec. 2688, at 444 (2d ed. 1983 & Supp.1987). Default does not, however, establish liability. "On appeal, the defendant ... is entitled to contest the sufficiency of the complaint and its allegations to support the judgment." Danning v. Lavine, 572 F.2d at 1388, quoting Nishimatsu Construction Co. v. Houston National Bank, 515 F.2d 1200, 1206 (5th Cir. 1975). Nor does the defaulting defendant admit facts relating to damages. The amount of damages must be proven, if contested. 6 J. Moore, W. Taggart & J. Wicker, Moore's Federal Practice p 55.03, at 55-16 (2d ed. 1987); 10 C. Wright, A. Miller & M. Kane, Federal Practice and Procedure Sec. 2688, at 444 (2d ed. 1983 & Supp.1987).

GRLA first contends that Soshnik's complaint was insufficient to support default judgment because Soshnik failed to allege that she was a limited partner, de facto or otherwise. Soshnik responds that because her complaint met the minimal requirements for pleading a breach of contract under Fed. R. Civ. P. 8,1  GRLA cannot rely on the text of the Partnership Certificate to demonstrate the insufficiency of the complaint. We agree with GRLA. Under Fed. R. Civ. P. 8 there is no requirement that the complaint state facts sufficient to constitute a cause of action; a short statement of the claim showing that the pleader is entitled to relief suffices. See 2A J. Moore & J. Lucas, Moore's Federal Practice p 8.13, at 8-60 (2d ed. 1987). Nonetheless, only factual allegations are admitted by default, not liability or legal conclusions. Since Soshnik failed to plead facts showing that she was entitled to a return of her contribution under Section 8 of the Partnership Certificate, GRLA's liability was not established by its default.

GRLA next argues that Cal.Corp.Code Sec. 15516(4) provides an exclusive remedy for a limited partner who has rightfully but unsuccessfully demanded a return of her contributions. That remedy is a dissolution and accounting. Soshnik contends that a judicially created exception to Cal.Corp.Code Sec. 15516(4) allows a limited partner to seek damages, rather than a dissolution and accounting, when the partnership has already been effectively dissolved. She further contends that GRLA was effectively dissolved when it sold the triplex which had been the partnership's principal asset. Even assuming the continued validity of the exception, its applicability was not established. Whether GRLA was effectively dissolved is a factual issue which was neither alleged, and therefore admitted by default, nor decided at the hearing on damages. Nor did GRLA concede this issue, as Soshnik contends. To the contrary, at the hearing on damages the magistrate was informed that there were at least two other limited partners remaining and that the partnership continued to hold a promissory note from the buyer of the triplex. In the context of discussing satisfaction of possible claims against the partnership, the magistrate and the parties agreed that the partnership was an ongoing concern.

GRLA also contends that under Cal.Corp.Code Sec. 15516(1) (a) Soshnik was not entitled to recover her contributions unless she demonstrated that GRLA would have sufficient assets remaining to satisfy its other debts and liabilities. Again, Soshnik neither alleged nor proved this fact. On appeal, she incorrectly asserts that the magistrate addressed the issue by stating that GRLA was "financially able" to return the contribution on October 23, 1983, the date on which it sold the triplex. The magistrate made this statement in the course of explaining the time period for which prejudgment interest would be awarded. The statement is best understood to mean only that immediately after the sale GRLA had sufficient cash on hand to refund Soshnik's contribution, not that the requirements of Cal.Corp.Code Sec. 15516(1) (a) had been met. At the hearing on damages the magistrate specifically noted that Sec. 15516(1) (a) assumed dissolution and that it was impossible to determine the debts and liabilities referred to in that section as long as the partnership was a going concern. She took no evidence on the existence or amount of GRLA's liabilities.

We have some difficulty characterizing the factual issues raised by GRLA. The facts, which were neither alleged nor proven, are not accurately characterized as essential to state a claim for breach of contract. If that were the case, there would be no question that Soshnik's complaint was insufficient to support the default judgment. Nor do these facts relate only to the amount of Soshnik's damages. If that were true, we could simply remand for a redetermination of damages. The facts at issue here are more in the nature of prerequisites for the particular remedy Soshnik seeks. As such, they relate to damages but are intertwined with liability issues to the point of being inseparable. Since default judgments are generally disfavored and doubts are to be resolved in favor of the defaulting party, Meadows v. Dominican Republic, 817 F.2d 517, 521 (9th Cir.), cert. denied 108 S. Ct. 486 (1987); 10 C. Wright, A. Miller & M. Kane, Federal Practice and Procedure Sec. 2681, at 402-03 (2d ed. 1983 & Supp.1987), we cannot in good conscience affirm the entry of default judgment against GRLA.

We share the district court's view that GRLA had ample opportunity to appear in the action and present these arguments as defenses. Its failure to do so was inexcusable, particularly in light of the district court's repeated admonitions. Nonetheless, GRLA is entitled to challenge the sufficiency of the complaint to support default judgment, and it has done so convincingly. Although Soshnik's complaint was sufficient to plead a general breach of contract under Fed. R. Civ. P. 8, it did not allege facts sufficient to support either her right to a return of contributions under Section 8 of the Partnership Certificate or her right to damages rather than a dissolution and accounting. The necessary facts were neither admitted by default nor proven in the course of establishing damages.

Entry of the default judgment is REVERSED and the case is remanded without prejudice to Soshnik's right to amend the complaint or GRLA's right to answer.

 *

This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir.R. 36-3

 1

It is well established that the plaintiff in a contract action satisfies the requirements of Fed. R. Civ. P. 8 by alleging the existence of a contract, her own performance of conditions precedent, the defendant's breach and damages. 2A J. Moore & J. Lucas, Moore's Federal Practice p 8.17 (2d ed. 1987); 5 C. Wright & A. Miller, Federal Practice & Procedure Sec. 1235 (1969 & Supp.1987). The plaintiff may plead the existence of an express written contract by pleading its legal effect, as Soshnik did. Id