BRITANNIA HOLDINGS LTD. v. GREER, 51047-9-I (Wash.App. 3-31-2003)

No. 51047-9-I.The Court of Appeals of Washington, Division One.
Filed: March 31, 2003. DO NOT CITE. SEE RAP 10.4(h). UNPUBLISHED OPINION

Appeal from Superior Court of King County, Docket No: 02-2-12120-9 Judgment or order under review, Date filed: 08/14/2002.

Counsel for Appellant(s), Patricia S. Novotny, Attorney at Law, 3418 N.E. 65th St. Ste a, Seattle, WA 98115-7397.

Counsel for Respondent(s), Chad Allred, Ellis Li McKinstry PLLC, 601 Union St. Ste 4900, Seattle, WA 98101-3906.

Michael Robert Mc Kinstry, Ellis Li McKinstry PLLC, 601 Union St. Ste 4900, Seattle, WA 98101-3906.

SCHINDLER, J.

Britannia Holdings Ltd. obtained a default judgment against Bernard G. Greer and Alistar Capital Corporation for securities fraud, breach of contract, and default on a promissory note. Greer, but not Alistar, moved to vacate the default judgment on the grounds that he had a meritorious defense to the action and that his failure to timely appear and answer Britannia’s complaint was excusable and inadvertent. The trial court denied the motion to vacate. We affirm.

FACTS
In July 1998, Britannia and Alistar entered into an investment management agreement. Greer, as president and CEO of Alistar, entered into the agreement on behalf of Alistar. Alistar agreed to invest Britannia’s money on a parallel basis with Alistar’s Pilot Fund and to assume a fiduciary duty to carry out its obligations in the best interests of Britannia. Alistar also agreed that it would invest no more than 20% of Alistar’s funds in one company and would invest only in companies that had significant sales, earnings, and cash flow. Between July 1998 and March 2000, Britannia invested $9.1 million with Alistar.

By the spring of 2000, Britannia became concerned about the viability of Alistar and the Pilot Fund. In July 2000, Britannia’s investment consultant, Sterling Crum, met with Greer to discuss Britannia’s investments with Alistar. Greer told Crum that of the $9.1 million Britannia had invested with Alistar, he could only account for $3,033,870.65. According to Greer, some or all of the missing $6.1 million had been placed in Alistar’s general bank account and a considerable portion of the money had been used for Alistar’s general corporate purposes, to support charities, and to purchase investments for other investors or investment programs. Greer proposed a plan whereby some of these investments would be reallocated to Britannia’s account.[1]

Alistar and Britannia entered into a settlement agreement effective November 20, 2000. Alistar agreed to execute and deliver to Britannia a promissory note in the amount of $3,525,002.29. The balance of the promissory note was to be secured by an agreement giving Britannia a security interest in Alistar’s Net Carried Interest. Alistar also agreed to reallocate $5,806,800 of Britannia’s investments to stock in Neuvant Aerospace Corporation. The agreement provided that if Alistar failed to repurchase with cash all of Britannia’s Neuvant shares on or before November 20, 2001 (except if the failure was caused solely by Britannia’s refusal to sell its Neuvant shares at their fair market value), Britannia could opt out of the settlement agreement and pursue all legal remedies against Alistar.[2]

Alistar made payments totaling $348,717.75 on the promissory note. By November 20, 2001, Alistar was unable to raise the funds needed to repurchase Britannia’s Neuvant shares as provided in the settlement agreement.

On April 18, 2002, Britannia filed a lawsuit against Alistar and Greer. It alleged securities fraud against Greer, and securities fraud, default on the promissory note, and breach of contract against Alistar.

The complaint alleged, in part:

Greer and Alistar made untrue statements of material fact, or omitted necessary material facts, about the status of Britannia’s investment and how the investment had been used and treated. Greer and Alistar engaged in a course of business that operated as a fraud or deceit upon Britannia.
These actions resulted in financial harm to Britannia.[3]

Britannia alleged that Alistar violated RCW 21.20.010. It also alleged that Greer was liable under RCW 21.20.010 and 21.20.430(3)[4] and Alistar was liable under RCW 21.20.101 and 21.20.430(1).

Britannia served both Greer and Alistar on May 14, 2002. Greer delivered Britannia’s complaint to his attorney on May 23, 2002. Neither Greer nor Alistar filed or served an answer by June 3. On June 4, the trial court entered an order of default against Greer and Alistar.

On June 5, Greer’s attorney, William Beresford, telephoned Britannia’s attorney, Chad Allred, and asked Allred to voluntarily set aside the order of default and take no action until he returned from vacation on June 26. Allred could not agree because numerous lawsuits were pending against Greer and Alistar and Britannia needed to proceed expeditiously on the judgment.

That same day, Beresford filed a notice of appearance on behalf of Greer and Alistar. On June 6, Allred sent a letter to Beresford, informing him that he received the notice of appearance, but that Britannia planned to proceed with execution of the judgment against Greer and Alistar.[5]

On June 7, a judgment was entered against Alistar, Greer, and the marital community composed of Bernard Greer and Judith Greer in the principal amount of $9.1 million, plus prejudgment interest of $2,370,634,06 and attorney fees of $29,587.03, offset by $422,321.73 the defendants paid. The total amount of the judgment was $11,077,899.36. The court entered findings of fact and conclusions of law. The court found that Greer failed to invest Britannia’s funds on a parallel basis with the Pilot Fund and diverted money from Britannia’s investment and used it for its own purposes, such as paying Alistar’s operating expenses and gifts to charity; that, contrary to the agreement, Greer invested over 64% of Britannia’s investment in one company and invested some of Britannia’s investment in Oridigm, a company that had little potential for growth in sales, earnings, or cash flow, and in other companies that likewise had no significant earnings; and that, in connection with the foregoing, Greer made several untrue statements of material fact or omissions of material fact.

The court concluded that Greer’s actions toward Britannia were in connection with the offer, sale, or purchase of securities, were fraudulent, and were in violation of RCW 21.20.010. The court found that Alistar was liable for securities fraud under RCW 21.20.010 and 21.20.430(1); that Greer was liable under RCW 21.20.010, 21.20.430(1), and 21.20.430(3); and that the parties are jointly and severally liable. The court also concluded that Britannia relied on Greer’s misrepresentations and fraudulent actions and was damaged as a result. Finally, the court concluded that Alistar breached its investment management agreement with Britannia.

On June 10, Allred informed Beresford’s law partner that Britannia had entered a default judgment and faxed him a copy of the judgment. The partner said the firm planned to immediately file a motion to vacate the default judgment, but he would be out of town until June 27, and Beresford would return June 26.

A motion to vacate the default judgment was filed July 23. It sought to vacate the default judgment entered against Greer and the marital community composed of Greer and his wife. The motion did not seek to vacate the default judgment against Alistar. The grounds upon which Greer sought to vacate the judgment were that he had a strong defense to the allegations as to liability and damages, his failure to respond to the summons was based on inadvertence or excusable neglect, and no substantial hardship would result to Britannia if the judgment were vacated.

The trial court heard argument on the motion to vacate and entered an order denying the motion. The court concluded that Greer did not have a meritorious defense to the claims alleged in Britannia’s complaint and did not establish that his failure to appear and answer met the requirements of CR 60(b).

DISCUSSION
Greer moved to vacate the default judgment pursuant to two of the reasons set forth in CR 60(b): (1) “[m]istakes, inadvertence, surprise, excusable neglect or irregularity in obtaining a judgment or order”[6]
and (2) “[a]ny other reason justifying relief from the operation of the judgment.”[7] A motion to vacate must state the grounds upon which relief is sought and must be supported by an affidavit setting forth the facts or errors upon which the motion is based, and where, as here, the moving party is the defendant, the affidavit must also set forth specific facts constituting a defense to the action.[8]

Standard of Review
A court may set aside a judgment of default in accordance with CR 60(b).[9] A motion to vacate a default judgment is a matter within the trial court’s discretion, and an appellate court will not disturb the trial court’s decision unless the trial court abuses its discretion.[10]

The law with respect to default judgments and motions to vacate default judgments is well-settled:

It is well established that default judgments are disfavored because the law favors a determination of controversies on their merits. An appellate court is less likely to find an abuse of discretion where the trial court has set aside a default judgment, than where it has refused to do so. At the same time, however, courts have recognized the necessity of having a responsive and responsible system which mandates compliance with judicial summons. The court’s principal inquiry in balancing these competing policies is whether or not justice is being done.[11]
Proceedings to vacate default judgments are equitable in character, and relief should be granted or denied in accordance with equitable principles. A trial court deciding such motions should exercise its discretion liberally and equitably, so that substantial rights are preserved and justice between the parties is “fairly and judiciously done.”[12]

In deciding to vacate a default judgment, a court must consider four factors:

(1) [whether there is] substantial evidence to support, at least prima facie, a defense to the claim asserted by the opposing party; (2) whether the moving party’s failure to timely appear in the action and answer the opponent’s claim was occasioned by mistake, inadvertence, surprise or excusable neglect; (3) [whether] the moving party acted with due diligence after notice of entry of the default judgment; and (4) [whether] no substantial hardship will result to the opposing party.[13]

These four factors are not, however, given equal weight:

“The first two [factors] are the major elements to be demonstrated by the moving party, and they, coupled with the [latter two] secondary factors, vary in dispositive significance as the circumstances of the particular case dictate. Thus, where the moving party is able to demonstrate a strong or virtually conclusive defense to the opponent’s claim, scant time will be spent inquiring into the reasons which occasioned entry of the default, provided the moving party is timely with his application and the failure to properly appear in the action in the first instance was not willful. On the other hand, where the moving party is unable to show a strong or conclusive defense, but is able to properly demonstrate a defense that would, prima facie at least, carry a decisive issue to the finder of the facts in a trial on the merits, the reasons for his failure to timely appear in the action before the default will be scrutinized with greater care, as will the seasonability of his application and the element of potential hardship on the opposing party.”[14]

Existence of Facts to Support a Defense
When considering whether a party under CR 60 presents facts constituting a defense, the trial court must view the evidence and reasonable inferences therefrom in the light most favorable to the moving party.[15]

The trial court, in its findings of fact and conclusions of law, found that Alistar was liable for securities fraud under RCW 21.20.010 and 21.20.430(1); that Greer was liable under RCW 21.20.010, 21.20.430(1), and 21.20.430(3); and that the parties are jointly and severally liable to Britannia for the full amount of the judgment. Only Greer filed a motion to vacate the default judgment, even though the default judgment was entered against both Greer and Alistar. At the time, Alistar was defunct.

Greer argues that, under collateral estoppel principles, he is not liable for the judgment against Alistar because Britannia’s claims against Alistar were never actually litigated. However, he cites only cases setting forth the general principles of collateral estoppel, and does not cite any case applying these principles to an analogous factual situation. Britannia argues that res judicata, not collateral estoppel, is the operative principle, so the issue is not whether the claims were actually litigated, but rather whether Greer had an opportunity to litigate them.[16]

We conclude that neither collateral estoppel nor res judicata apply here. Both doctrines apply in situations involving a prior proceeding and a later proceeding. In this case, there is only one proceeding — Britannia’s lawsuit against Greer and Alistar.

Judgment was entered against Alistar and Greer. No action has been taken on behalf of Alistar to vacate the judgment against it, and despite Alistar’s defunct status that judgment remains a valid judgment. Pursuant to RCW 21.20.430(3), as CEO and director of Alistar, Greer is jointly and severally liable with Alistar for Alistar’s violation of RCW 21.20.010.

There is nothing in the statute, or case law, to suggest that the fact that Alistar is defunct renders the judgment against it invalid. Greer did not offer a meritorious defense to Alistar’s claims.[17] That judgment remains a valid judgment, and by virtue of RCW 21.20.430(3), Greer is liable.

With respect to Greer’s personal liability, Britannia argues he committed securities fraud by: failing to invest Britannia’s capital in a manner paralleling the Pilot Fund’s investments, diverting Britannia’s funds, failing to diversify Britannia’s investments, and investing in companies with significant sales, earnings, and cash flow problems. Greer argues that he presented substantial evidence to support at least a prima facie defense to these claims.

With respect to the allegation that Greer failed to invest Britannia’s fund on a parallel basis with the Pilot Fund, Greer contends that Sterling Crum directed him not to invest Britannia’s funds in a company called Oridigm, even though the Pilot Fund had invested in Oridigm. However, it is not disputed that, even apart from the investment in Oridigm, Alistar was not investing Britannia’s funds on a parallel basis with the Pilot Fund’s investments.

Greer also asserts in his declaration that all deviations from parallel investing were at Crum’s direction. This assertion is not supported by any specific facts.[18] “To establish a prima facie defense, affidavits supporting motions to vacate default judgments must set out the facts constituting a defense and cannot merely state allegations and conclusions.”[19] This unsupported assertion does not constitute substantial evidence to support a prima facie defense.

With respect to the allegation that Alistar and Greer diverted Britannia’s funds and used them for its own purposes, Greer cites to the fact that in July 2000, over $7.5 million of Britannia’s funds were invested in three companies and that the settlement agreement shows Britannia owned almost $6 million in stock. But, there is no dispute that funds had been diverted. This is the reason the settlement agreement was entered into. Had no diversion occurred, the settlement agreement, the promissory note, and the reallocation of funds would not have been necessary.

With respect to the allegation that Greer and Alistar improperly invested more than 20% of Britannia’s funds in one company, Greer alleges that Britannia consented to increasing the investment of Britannia’s funds in Neuvant Aerospace to over 20%. But, Greer fails to explain the investment of over 20% of Britannia’s funds in another company, the Closeout Company. There is no dispute in the record that Britannia did not consent to this investment.

Finally, with respect to the allegation that Greer and Alistar invested in companies that did not have significant sales, earnings, and cash flow, Greer asserts that all the companies he invested in, aside from Oridigm, were strong at the time of the initial investments, but that due to the economic downturn, they weakened. However, Greer does not dispute that he invested funds, albeit not Britannia’s funds, in Oridigm, which was an unprofitable company. Because Alistar was supposed to invest Britannia’s money on a parallel basis with the Pilot Fund, this investment was contrary to their agreement.

The trial court did not abuse its discretion by determining that Greer did not present substantial evidence to show a prima facie defense to Britannia’s allegations.

Failure to Timely Appear and Answer
In determining whether to vacate a default judgment, the court must consider whether the party’s failure to timely appear and answer was due to mistake, inadvertence, surprise, or excusable neglect.[20] In his declaration, Beresford states that he believed he received a copy of Britannia’s complaint from Greer during a meeting with Greer on May 23, along with one or two other complaints against Greer and Alistar that Greer received during the previous week. He states that “[d]ue to the press of other matters, including a mediation the following week,” he was unable to attend to Britannia’s complaint until another week had passed and did not contact Britannia’s attorney until June 5.[21] Beresford learned from Britannia’s attorney on June 5 that service of process had been effected on May 14.

Greer argues that his attorney’s failure to timely appear and answer was due to inadvertence and that he is entitled to relief under CR 60(b)(1). According to Greer, “inadvertence” implies carelessness or inattentiveness, and a showing of carelessness or inattentiveness alone is sufficient to warrant relief under CR 60(b)(1). He fails to cite any authority in support of this argument. Below, Greer argued that his failure to timely appear and answer was due to excusable neglect.[22]

Each case of excusable neglect is decided by its own facts.[23]
Generally, the inadvertence or neglect of a party’s attorney does not constitute excusable neglect.[24] Although Washington courts have not addressed this issue, an Ohio court has concluded that an attorney’s failure to meet a court-imposed deadline due to preoccupation with other cases did not rise to the level of excusable neglect.[25] Whether Beresford’s action or inaction is characterized as inadvertence or neglect, it is not grounds to afford relief under CR 60(b).

Diligence in Moving to Vacate
A party moving to vacate a default judgment must show that he or she acted with diligence after notice of entry of the default judgment.[26]
“Due diligence after discovery of a default judgment contemplates the prompt filing of a motion to vacate. Due diligence in a given case depends upon the circumstances which gave rise to the default.”[27]

Greer filed the motion to vacate the June 7 default judgment on July 23. This is a period of about six and a half weeks. The motion to vacate was filed about a month after Beresford’s return on June 26. Greer argues that due to the complexity of the financial transactions between the parties, his attorney needed time to understand these complex facts before filing the motion. No authority is provided in support of this argument.

The trial court did not include anything in its order denying Greer’s motion to vacate about whether Greer acted with or without due diligence.

The record contains only Greer’s unsubstantiated statements that the complexities of the case necessitated the delay in filing the motion to vacate. Without evidence to substantiate this argument, we cannot determine that Greer acted with due diligence. On this record, the trial court did not abuse its discretion in denying the motion to vacate.

Undue Hardship
Greer argues that Britannia would not suffer unreasonable hardship if the default judgment is set aside, compared to the hardship Greer will suffer if the default judgment is not set aside.[28] Britannia argues that it will be unreasonably harmed because it has already proceeded toward execution of the judgment and vacation of the judgment would put Britannia behind other creditors who have also filed lawsuits against Greer. The trial court did not address this issue in its written order denying Greer’s motion to vacate. Neither party cites any authority in support of their position.

Greer’s argument about substantial hardship focuses on the hardship to Britannia if the default judgment is vacated compared with the hardship to Greer if it is not. We find no support for the proposition that a proper analysis of this issue must include a weighing or comparison of the relative hardships.[29] The record does not support reversal on this ground.

Attorney Fees
Relying on RAP 18.1, Britannia requests an award of attorney fees and expenses incurred before the appeal and on appeal. Britannia requested an award of attorney fees below, but the trial court crossed out that portion of the order and did not award any fees. Because Britannia did not file a cross-appeal or assign error to the trial court’s denial of its request for fees, we do not address Britannia’s request for attorney fees and expenses incurred before the appeal.[30]

A party is entitled to an award of attorney fees on appeal if a contract, statute, or recognized ground of equity permits recovery of attorney fees at trial and the party is the substantially prevailing party on appeal.[31] The settlement agreement[32] and the securities fraud statute[33] allow the recovery of attorney fees at trial. Britannia is entitled to an award of attorney fees on appeal.

We affirm the trial court and grant Britannia’s request for attorney fees on appeal, subject to its compliance with RAP 18.1.

BECKER and COX, JJ., concur.