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Gotshalk v. Hellwig

United States District Court, D. Nevada

March 30, 2017

Kyle Gotshalk, et al., Plaintiffs
v.
Peter Hellwig, et al., Defendants

          ORDER GRANTING IN PART MOTION FOR DEFAULT JUDGMENT [ECF NO. 108]

          Jennifer A. Dorsey United States District Judge

         Kyle and Leonard Gotshalk, Clinton Hall, LLC, Richard Maher, and Patrick O'Loughlin sued Peter Hellwig and his companies, Anthus Life Corp. and Stakool Inc., alleging that Hellwig and Anthus defrauded plaintiffs out of their shares and control of defendant-company Stakool.[1]Defaults have been entered against all defendants, [2] and plaintiffs renew their motion for default judgment against them.[3] I find that plaintiffs have shown that they are entitled to default judgment on some of their claims and a damage award of $431, 800, but they have not shown their entitlement to injunctive relief or to the additional damages they seek. I therefore grant in part plaintiffs' motion and give them until April 9, 2017, to prove their request for any additional monetary damages and injunctive relief.[4]

         Background

         A. Anthus purchases primary ownership and management rights of Stakool from plaintiffs.

         Stakool was a publicly traded company owned and managed primarily by plaintiffs.[5] In the summer of 2011, plaintiffs sold primary ownership and management rights to Hellwig's alter-ego company, Anthus.[6] Under the purchase agreement, plaintiffs agreed to transfer the overwhelming majority of all issued and outstanding Stakool common stock[7] to Anthus in exchange for $350, 000, and Anthus promised to issue 1.2 million shares[8] of Stakool common stock back to Clinton Hall, Kyle Gotshalk, and a third party[9] within 60 days of closing.[10] To protect the value of the common stock, the parties also agreed to limit the total issued and outstanding shares of Stakool common stock.[11] The agreement required the current directors of Stakool-including then-President and Director K. Gotshalk-to step down, and Hellwig and his associates immediately assumed management positions.[12]

         Kyle Gotshalk and Clinton Hall eventually received the cash owed under the purchase agreement, but not the promised shares, and Maher was never paid the $25, 000 owed to him under the purchase agreement. Kyle and Hellwig later signed first and second amendments to the purchase agreement to revise the payment schedule. Under these amendments, Clinton Hall and Gotshalk were to receive additional shares and Maher was to be paid $5, 000 per month until the full $25, 000 was paid.[13] The second amendment also contained a protection against dilution: “No dilution of Clinton Hall, Kyle Gotshalk's, or Cherish Adam's [shares] shall take place during the pendency of this Agreement.”[14] Stakool ultimately issued only a fraction of the promised shares and never paid Maher.[15]

         B. Plessas and Delphina agree to purchase Stakool common stock from Clinton Hall and Kyle Gotshalk, Maher, and O'Loughlin.

         In the meantime, Nick Plessas and the Delphina Group-both of whom were acting in concert with Hellwig and Anthus-contracted with Clinton Hall and Kyle Gotshalk to buy 1.1 million shares of Stakool common stock for $110, 000.[16] Clinton Hall and Kyle released their shares on the open market, where Delphina said it would acquire the stock.[17] Delphina refused to acquire the shares, and it has never paid Clinton Hall and Kyle for releasing their shares.[18]

         Plessas and Delphina also persuaded plaintiffs Richard Maher and Patrick O'Loughlin to part with 2.5 million and 450, 000 shares, respectively, in the same fashion.[19] Delphina never acquired the released shares or compensated Maher and O'Loughlin for releasing them.[20] Finally, Stakool entered into a separate consulting agreement with Kyle in exchange for 1.3 million shares of Stakool common stock.[21] Gotshalk rendered all services due under the agreement, but Stakool refused to issue the stock or otherwise compensate him.[22]

         C. Stakool fails to issue plaintiffs the promised shares and issues shares to Hellwig and others without shareholder authorization, and plaintiffs call a shareholder meeting.

         Without proper authority or notice and in violation of the purchase agreement and Stakool's bylaws, agreements, and governing documents, defendants increased the authorized shares of Stakool common stock to four billion-of which two billion were issued to Hellwig-and to issue additional series and classes of preferred shares, which diluted plaintiffs' ownership, equity, and voting rights.[23] Despite these issuances, Clinton Hall retained and continues to hold 9.9 million shares of Class A Prefferred Stock, which constitute the majority of voting rights in Stakool.[24]

         In March 2013, plaintiffs exercised their rights under Stakool's bylaws as majority preferred shareholders and scheduled and noticed a special meeting of the shareholders to vote on the replacement of the then-existing board members-which consisted of Hellwig and his associates-and to revoke all of the improperly issued common and preferred shares, including those issued to Hellwig.[25] A majority of Stakool's voting-eligible shareholders voted at the meeting to remove and replace the existing board members and to revoke all improperly issued shares.[26] Nevertheless, Hellwig issued an additional 1.1 billion shares of Stakool common stock to Joseph C. Canouse a few days later, and he and the other officers-who had already been removed at the March 12 meeting-purported to appoint Canouse as Stakool's President, Chief Executive Officer, and Director before “resigning” from their posts.[27] Canouse-whom plaintiffs characterize as a “rogue director”-then proceeded to issue a press release, which the newly formed board was forced to publicly disclaim.[28] Two weeks later, plaintiffs filed this lawsuit to regain control of Stakool and recoup their losses. Seven months after this lawsuit was filed, Stakool changed its name to Fresh Promise Foods, Inc.

         Plaintiffs Kyle and Leonard Gotshalk, Clinton Hall, LLC, Richard Maher, and Patrick O'Loughlin sued defendants Peter Hellwig and Nick Plessas and their alter-ego companies, Anthus Life Corp and Delphina Group, along with Stakool. Plaintiffs allege that Anthus, Delphina, and Stakool are vicariously liable for Hellwig and Plessas's acts and omissions and that Hellwig, Anthus, Delphina, and Plessas must all be “treated as one entity” for purposes of this lawsuit.[29] Plaintiffs assert 22 claims for relief and seek declaratory, injunctive, and monetary relief.[30] All claims against Plessas and Delphina were voluntarily dismissed not long after this action commenced, [31] and default was entered against Anthus and Hellwig after they failed to appear in this action.[32] About 33 months later, I entered default against Stakool and dismissed its counterclaims with prejudice for its repeated refusal to comply with this court's orders.[33]

         Plaintiffs now move for default judgment. They seek declaratory and injunctive relief that all actions taken in violation of the purchase agreement and amendments and Stakool's governing documents are void, and they collectively seek $832, 500 in monetary damages and $67, 846.89 in attorney's fees and costs.

         Discussion

         Federal Rule of Civil Procedure 55(b)(2) permits a plaintiff to obtain a default judgment if the clerk previously entered default based on a defendant's failure to defend. After entry of default, the complaint's factual allegations are taken as true, except those relating to damages.[34] “[N]ecessary facts not contained in the pleadings, and claims [that] are legally insufficient, are not established by default.”[35] The court has the power to require a plaintiff to provide additional proof of facts or damages in order to ensure that the requested relief is appropriate.[36] Whether to grant a motion for default judgment lies within my discretion, [37] which is guided by the seven factors outlined by the Ninth Circuit in Eitel v. McCool:

(1) the possibility of prejudice to the plaintiff; (2) the merits of plaintiff's substantive claim; (3) sufficiency of the complaint; (4) the sum of money at stake in the action; (5) the possibility of a dispute concerning material facts; (6) whether the default was due to excusable neglect; and (7) the strong policy underlying the Federal Rules of Civil Procedure favoring decisions on the merits.[38]

         A default judgment is generally disfavored because “[c]ases should be decided upon their merits whenever reasonably possible.”[39]

         A. Analyzing the Eitel factors

         1. Possibility of prejudice to plaintiffs

         The first Eitel factor weighs in favor of granting default judgment against the defendants. Plaintiffs pursued their claims to recover the damages that they sustained as a result of the defendants' acts and omissions. The defendants failed to participate in this case despite plaintiffs' attempts to include them: Hellwig and Anthus never appeared, and Stakool repeatedly violated this court's orders, which resulted in case-dispositive sanctions and the entry of default. Without a judgment against the defendants, plaintiffs have no other recourse to recover for the damages that they have sustained, and defendants may continue to dilute the value of plaintiffs' shares, further damaging them.

         2. Substantive merits and sufficiency of the claims

         The second and third Eitel factors require plaintiffs to demonstrate that they have stated a claim on which they may recover.[40] Plaintiffs conclusorily argue that their amended complaint contains 22 well-pleaded claims for relief against defendants.[41] Because this is plaintiffs' fourth default-judgment effort, I nonetheless analyze some of plaintiffs' claims to determine whether they have stated any on which they may recover.

         a. Breach of contract

         To prevail on a breach-of-contract claim under Nevada law, the plaintiff must show (1) the existence of a valid contract, (2) a breach by the defendant, and (3) damage as a result of the breach.[42] Plaintiffs have shown the existence of a valid contract via the purchase agreement, amended payment agreements, and Gotshalk's consulting agreement. They have also offered evidence to show that Anthus breached its obligations under the agreement by failing to issue Clinton Hall and K. Gotshalk the promised shares and by failing to pay Maher the $25, 000 due to him under the agreement.[43]

         Kyle Gotshalk has also stated a claim for breach of contract against Stakool for breach of the consulting agreement. He alleges that he agreed to render six months of consulting services in exchange for 1.3 million shares of Stakool common stock, [44] that he rendered all services due under the agreement, and that Stakool refused to issue the stock or otherwise compensate him.[45]

         Additionally, I am persuaded that Hellwig and the two companies he now controls-Anthus and Stakool/Fresh Promise-should be treated as alter egos because the facts in the amended complaint sufficiently establish that Hellwig controls both of these companies, they share a unity of interest, and that, because Hellwig has used them to commit fraud against the plaintiffs, adherence to the corporate fiction under these circumstances would sanction fraud or promote manifest injustice.[46] I therefore find that Hellwig, Anthus, and Stakool are jointly and severally liable for Anthus and Stakool's contractual breaches.

         However, I find that plaintiffs' claims for breach of contract based on the stock-transfer agreements with Nick Plessas and the Delphina Group fail as plead against Hellwig, Anthus, and Stakool. Plaintiffs allege that they agreed to part with these additional shares based on representations from Plessas and Delphina, who were voluntarily dismissed from this case, [47] and their in-concert or conspiracy allegations are conclusory.[48] Thus, they do not plausibly show that defendants conspired with Plessas and the Delphina group to defraud plaintiffs out of these additional shares. Plaintiffs' conclusory alter-ego allegations also do not persuade me that defendants should be liable for Plessas and Delphina's conduct.

         b. Common-law fraud and negligent misrepresentation

         The amended complaint sufficiently sets forth plaintiffs' fraud-based claims against defendants under Rule 8 and 9(b). In order to state a claim for fraud under Nevada law, the plaintiff must allege: “(1) a false representation made by the defendant; (2) defendant's knowledge or belief that its representation was false or that defendant has an insufficient basis of information for making the representation; (3) defendant intended to induce plaintiff to act or refrain from action upon the misrepresentation; and (4) damage to the plaintiff as a result of relying on the misrepresentation.”[49] Plaintiffs allege that defendants knowingly made false representations that they would issue the promised shares back to plaintiffs and honor the terms of the purchase agreement and amendments to induce plaintiffs to relinquish ownership and control of Stakool.[50] In reliance on these promises, Gotshalk executed the purchase agreement and Gotshalk, Clinton Hall, and Maher relinquished the promised shares and were damaged because they did not receive the promised payments or shares, and the value of the shares that they did receive was diluted by defendants' conduct.

         c. Deceptive trade practices/consumer fraud

         Victims of a deceptive trade practice may bring a consumer-fraud action.[51] To prevail, plaintiffs must show that an act of consumer fraud by the defendants caused damage to the plaintiffs.[52] Consumer fraud is “a deceptive trade practice as defined in NRS 598.0915 to 598.0925, inclusive.”[53] Plaintiffs do not specify which provision defendants violated. They allege that defendants knowingly “made false representations in the transaction involving the sale of the Stakool shares of stock, ” among other things.[54] In other places in the complaint, plaintiffs allege that defendants falsely represented that they would honor the terms of the purchase agreement and amendments to swindle plaintiffs out of their ownership and control of Stakool, and that they were damaged because they never received the shares or money due under these agreements.[55] Section 598.0915(15) of the Nevada Revised Statutes makes it a deceptive trade practice to knowingly make a false representation in a transaction. Plaintiffs state a claim for deceptive trade practice/consumer fraud.

         3. Amount at stake

         The third Eitel factor “requires that the court assess whether the recovery sought is proportional to the harm caused by defendant's conduct.”[56] Plaintiffs seek to recover a total of $590, 000[57] plus interest, attorney's fees, and costs. These damages are comprised of the value of the unissued shares, the dilution of the value of the shares that were issued, and the uncompensated transfers of stock to Delphina and Plessas. This amount is plainly significant, but I find that it is not unreasonable when balanced against defendants' conduct, which includes fraud and intentional breaches of several agreements. So long as defendants can prove their entitlement to these damages, the amount is reasonable in light of the circumstances of this case.

         4. Possibility of dispute

         Under the next Eitel factor, I consider the possibility that material facts are disputed. Plaintiffs have adequately alleged breach-of-contract and fraud claims against defendants. When Hellwig and Anthus failed to appear and Stakool incurred case-dispositive sanctions, all of the well-pled material facts alleged in plaintiffs' amended complaint were deemed admitted. Plaintiffs have also provided the purchase agreement and amendments and several other documents to support their claims. Because the facts in plaintiffs' amended complaint are presumed true and supported by the record evidence, and defendants have failed to oppose the motion, no factual disputes exist that would preclude the entry of default judgment against defendants.

         5. Possibility of excusable neglect

         The seventh Eitel factor requires me to consider whether defendants' default may have resulted from excusable neglect. Despite being served with a demand letter and process, Hellwig and Anthus never appeared in this lawsuit. Stakool eventually appeared in this action, [58] and it successfully opposed plaintiffs' first motion for default judgment and moved to set aside the Clerk's first entry of default.[59] The magistrate judge then held a settlement conference and the parties represented that a settlement had been reached. But after the court granted several continuances to allow the parties a chance to finalize the agreement, Stakool's attorney notified the court that he had lost contact with his client, and he successfully moved to withdraw.[60]

         When the magistrate judge granted counsel's motion to withdraw, she ordered Stakool to retain new counsel by March 25, 2016.[61] After that deadline expired and counsel had not appeared on Stakool's behalf, the magistrate judge ordered Stakool to show cause why default judgment should not be entered against it for its failure to comply.[62] The magistrate judge expressly warned Stakool that its failure to comply would result in case-dispositive sanctions.[63]After Stakool failed to show cause or otherwise respond to the magistrate judge's order, she issued a report recommending that I dismiss all of Stakool's counterclaims with prejudice and enter default against it.[64] Stakool filed no objections, and I adopted the magistrate judge's recommendation, dismissed Stakool's counterclaims with prejudice, and directed the Clerk to enter default against it.[65] Stakool has never again appeared in this action, and the court's mail to the corporation has been returned as undeliverable.[66] There is no evidence that defendants' defaults are the product of excusable neglect.

         6. Policy for deciding cases on the merits

         Hellwig and Anthus's failure to appear in this action and Stakool's repeated violations of this court's orders also renders a decision on the merits in this case “impractical, if not impossible.”[67] Entry of default judgment is therefore appropriate.

         B. Character and amount of plaintiffs' recovery

         1. Monetary damages

         Plaintiffs do not specify which damages they seek to recover for which claims. As to plaintiffs' breach-of-contracts claims, “[i]t is well established that in contracts cases, compensatory damages ‘are awarded to make the aggrieved party whole and . . . should place the plaintiff in the position he would have been in had the contract not been breached.'”[68]

         As to plaintiffs' fraud-based claims, “[a] party to a contract may seek rescission of that contract based on fraud in the inducement.”[69] “‘Rescission is an equitable remedy [that] totally abrogates a contract and . . . seeks to place the parties in the position they occupied prior to executing the contract.'”[70] Although plaintiffs assert a claim for fraud in the inducement, [71] they do not seek to rescind the purchase agreement. Out-of-pocket losses are a measure of damages often used in fraud cases.[72] In the context of misrepresentation, the out-of-pocket measure “is comprised of ‘the difference between what [the defrauded party] gave and what he actually received . . . .'”[73] The benefit-of-the bargain is another method for measuring damages in fraudulent-misrepresentation cases. Under that measure, plaintiffs are awarded “the value of what [it] would have if the representations were true, less what [it] had actually received.”[74]

         Under the circumstances of this case, and because plaintiffs do not seek rescission of the purchase agreement, their fraud and contractual damages turn out to be the same. The appropriate measure of damages is the shares or share value due to plaintiffs under the purchase agreements and amendments, less whatever value they actually received.

         a. Clinton Hall

         Clinton Hall seeks to recover $465, 000: $105, 000 for the dilution of the common stock ultimately issued under the agreement to Clinton Hall, $250, 000 for the loss of value, use, and marketability of the preferred shares, and $110, 000 for the uncompensated transfer of shares to Delphina. It is undisputed that Clinton Hall was to receive $228, 600 in common shares at a floor value of $.10 per share, but the company received only $31, 800, resulting in a $196, 800 shortfall. In his affidavit, Clinton Hall President Leonard Gotshalk states that, because of stock dilution, the $31, 800 in common stock that Stakool did issue to Clinton Hall is now worth only $42, resulting in an even greater ...


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