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Henderson v. Hughes

United States District Court, D. Nevada

May 9, 2017

Elma Henderson, Plaintiff
v.
Thomas Robert Hughes, et al., Defendants

          ORDER GRANTING IN PART MOTIONS TO DISMISS, SUSTAINING IN PART OBJECTIONS TO MAGISTRATE JUDGE'S ORDER, AND SETTING ASIDE DEFAULTS [ECF NOS. 99, 101, 103, 107, 129, 134-36, 143]

          Jennifer A. Dorsey United States District Judge.

         A Missouri state court awarded Elma Henderson damages against Thomas Robert Hughes and Northstar Global BT in the principal amounts of $15, 000 and $225, 000, respectively, plus awards of attorney's fees and interest.[1] Henderson domesticated the Missouri judgment in Nevada.[2] In exchange for Henderson's agreement to delay collection, Northstar and Hughes promised to pay Henderson the amount owned under the judgment plus an additional $200, 000.[3]As collateral for their obligations to Henderson, Hughes and Northstar placed shares of stock in Mission Mining Company and accounts receivable due to them from that company in escrow.[4]Problems arose and this action followed.

         Hoping to expand the pool of debtors that she can recover against on the Missouri judgment, Henderson sues Northstar and numerous other trusts and entities that she alleges are alter egos of Hughes.[5] Henderson sues Mission Mining for breach of contract regarding the assigned accounts receivable.[6] She sues Hughes and Northstar for beaching the forbearance agreement.[7] She sues Hughes, Northstar, Mission Mining, and Western Gold Company, LLC for fraudulent transfer of the “Gold Star” mining claims or ownership of the company that holds those claims.[8] She sues Hughes, Northstar, the Colindo Trust, Colten Metals, LLC, Pacific Western Capital, Inc., Lake W Holdings, Inc. for fraudulent transfer of the “El Dorado, ” “Lake W Holdings, ” “Colten Metals, ” and “Adder” mining claims or ownership of the companies that hold those claims.[9] She names Hughes's ex-wife Cheryl as a defendant.[10] And she seeks declaratory relief.[11]

         Four defendants move to dismiss the claims against them under FRCP 12(b)(6).[12] Three different defendants move to dismiss for failure to timely serve them under FRCP 4(m).[13] Four of the defendants also appeal Magistrate Judge Hoffman's order denying their motion to appear specially for the purpose of contesting service by seeking reconsideration of the magistrate judge's order denying their motions to quash service.[14]

         I grant Cheryl Hughes's motion to dismiss under FRCP 12(b)(6) because Henderson has not sufficiently stated a claim for declaratory relief against her. I give Henderson leave to amend if she can sufficiently state a plausible claim for declaratory relief against Cheryl. I deny Northstar's and Odin Statutory Trusts's motions to dismiss under FRCP 12(b)(6) because those defendants have been defaulted by the Clerk of the Court. I disregard Hughes's unauthorized amended motion to dismiss, [15] but I grant his original motion to dismiss under FRCP12(b)(6) in part: I dismiss Henderson's alter-ego claim with leave to amend.

         I deny Colindo Minerals, LLC's and Lake W Holdings, LLC's motions to dismiss under FRCP 4(m) because I find that both entities were timely and properly served with process. But I grant Henderson leave to file a second amended complaint to change “Lake W Holdings, Inc.” to “Lake W Holdings, LLC.” I cannot determine on this record if defaulted defendant Colten Metals, LLC was properly served with process. I therefore convert its motion to dismiss under FRCP 4(m) into a motion to set aside default, grant that request, deny its motion in all other respects, and give Henderson 30 more days to serve Colten.

         I also cannot determine on this record if defaulted defendant Frank Finnerty, in his capacity as trustee for the Colindo Trust and the Bob Creek Trust, was properly served with process. I therefore sustain the trusts' objections to the magistrate judge's order in part: I reverse the portion of the order denying reconsideration on the issue of the sufficiency of service on Finnerty. I overrule the trusts' other objections and affirm Judge Hoffman's order in all other respects. I instruct the Clerk of Court to set aside the default entered against Finnerty, and I grant Henderson a 30-day extension to effectuate service.

         Discussion

         A. Motions to dismiss under FRCP 12(b)(6)

         “A dismissal under Federal Rule of Civil Procedure 12(b)(6) is essentially a ruling on a question of law.”[16] At minimum, a plaintiff should state “enough facts to state a claim to relief that is plausible on its face.”[17] The complaint need not contain detailed factual allegations, but it must contain more than “a formulaic recitation of the elements of a cause of action.”[18] The Rule 8(a) notice pleading standard requires the plaintiff to “give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.”[19] The “plausibility standard” does not impose a “probability requirement”; rather, it requires a complaint to contain “more than a sheer possibility that a defendant has acted unlawfully.”[20] “Where a complaint pleads facts that are merely consistent with a defendant's liability, it stops short of the line between possibility and plausibility of entitlement to relief.”[21]

         In considering a motion to dismiss for failure to state a claim upon which relief may be granted, all material allegations in the complaint are accepted as true and are to be construed in a light most favorable to the non-moving party.[22] “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.”[23] “While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations.”[24]“[O]nly a complaint that states a plausible claim for relief survives a motion to dismiss.”[25] A court should assume the veracity of well-pleaded factual allegations and “then determine whether they plausibly give rise to an entitlement to relief.”[26] “[W]here the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged-but it has not shown-that the pleader is entitled to relief.”[27] Thus, a complaint may be dismissed as a matter of law for “(1) lack of a cognizable legal theory or (2) insufficient facts under a cognizable legal claim.”[28]

         The United States Supreme Court's decision in Ashcroft v. Iqbal provides a two-step framework for considering the sufficiency of factual allegations subject to a motion to dismiss under FRCP 12(b)(6). First, I may choose to begin by identifying which of the complaint's factual allegations are no more than “legal conclusions” or “mere conclusory statements, ” because “the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions.”[29] The inquiry then becomes whether the remaining, nonconclusory allegations make it plausible that an actionable claim exists.[30]

         Cheryl Hughes, Northstar, Odin Statutory Trust, and Thomas Hughes move to dismiss the amended complaint under FRCP 12(b)(6) for failure to state a claim on which relief can be granted.[31] I address each defendant's argument in turn.

         1. Cheryl Hughes

         Cheryl Hughes argues that the claims against her should be dismissed because Henderson does not allege any wrongdoing on Cheryl's part and Henderson has not actually stated any claims against her.[32] Henderson responds that she named Cheryl as a defendant because “it is appropriate to seek declaratory relief against” Cheryl due to her relationship with other defendants.[33] Henderson alleges that Cheryl is the “putative owner” of defendant CBH Consulting, LLC and “putative beneficiary” of the Colindo Trust defendant.[34] Henderson alleges that CBH Consulting and the Colindo Trust are the alter egos of Thomas Hughes.[35]

         Declaratory relief is appropriate when “the judgment will serve a useful purpose in clarifying and settling the legal relations in issue” and “it will terminate and afford relief from the uncertainty, insecurity, and controversy giving rise to the proceeding.”[36] Accepting Henderson's allegations that Cheryl is the owner of CBH Consulting and the beneficiary of the Colindo Trust as true, as I must, there is still not sufficient factual information in the amended complaint to make it plausible that an actionable claim for declaratory relief exists against Cheryl. Henderson does not allege what legal relations between herself and Cheryl are unclear, unsettled, uncertain, insecure, or in controversy. Nor does Henderson allege that she and Cheryl have adverse legal rights or that a definite and concrete controversy going to their respective legal rights has arisen. I therefore grant Cheryl's motion to dismiss. Henderson may amend her claims against Cheryl if she can sufficiently state a plausible claim for declaratory relief-based on true factual allegations that give rise to an actionable legal theory-against her.

         2. Northstar Global BT and Odin Statutory Trust

         Northstar Global BT and Odin Statutory Trust each moves to dismiss under FRCP 12(b)(6) for failure to state a claim.[37] Both of these defendants are in default for failing to respond to Henderson's original complaint.[38] Neither defendant has moved to set aside the Clerk of Court's entry of default against it. I therefore deny Northstar's and Odin's motions to dismiss. Before they may seek this relief, they must move to set aside the defaults.

         3. Thomas Robert Hughes

         Thomas Robert Hughes responded to Henderson's amended complaint with an answer containing a 13-page motion to dismiss under FRCP 12(b)(6) as his first affirmative defense.[39]Hughes later filed, without leave, an “amended answer to complaint and motion to dismiss.”[40]The only difference between Hughes's two filings appears to be the assertion of a statute-of-limitations defense in the later one. I disregard Hughes's later filing because he did not obtain leave of court to file it. I construe Hughes's first filing as a motion to dismiss under FRCP 12(b)(6) and consider it under that standard.

         Hughes spends much of his motion disputing the factual allegations in Henderson's complaint. When considering a motion to dismiss, I must accept all material allegations in the complaint as true and construe them in the light most favorable to the non-moving party.[41]Hughes argues that Henderson cannot state a cognizable claim that the defendant trusts are his alter egos because they are spendthrift trusts governed by Nevada law, and Nevada law authorizes the alter-ego relationship between a natural person and a spendthrift trust.[42] But Henderson does not allege that any of the trusts are spendthrift trusts, and Hughes does not provide any evidence to establish that they are. Without commenting on the merits of Hughes's argument, I note that it invites me to consider matters outside the pleadings; I decline to do so.

         Hughes broadly argues that Henderson's alter-ego claim is not adequately supported by factual allegations. I agree. Henderson alleges that 14 different entities and trusts are Thomas Hughes's alter egos. She correctly pleads the elements of an alter-ego claim under Nevada law. But she does not allege sufficient facts to state a claim for alter-ego liability that is plausible on its face as to one or any of the alleged alter-ego defendants. I therefore grant Hughes's motion to dismiss in part as to Henderson's alter-ego claim. Henderson may amend her alter-ego claim if she can sufficiently state plausible alter-ego liability against one or any of the alleged alter-ego defendants.

         B. Motions to dismiss under FRCP 4(m)

         Rule 4(m) of the Federal Rules of Civil Procedure provides that, “[i]f a defendant is not served within 90 days after the complaint is filed, the court-on motion or in its own after notice to the plaintiff-must dismiss the action without prejudice against that defendant or order that service be made within a specified time.” Colindo Minerals, Lake W Holdings, and Colton Metals each moves to dismiss the amended complaint, arguing that Henderson failed to serve them within FRCP 4(m)'s 90-day window.[43] I address each defendant's argument separately.

         1. Colindo Minerals, LLC

         Colindo Minerals argues that it was not timely served with either Henderson's original complaint or her amended pleading. Henderson named Colindo Minerals, LLC as a defendant in her original complaint filed on August 3, 2016.[44] Three days later, Henderson served Colindo Minerals with summons and a copy of the original complaint through its resident agent, CBH Consulting, LLC.[45] Colindo Minerals answered Henderson's original complaint through its counsel, S. Frank Stapleton.[46] I find that this company was properly and timely served with the summons and a copy of Henderson's original complaint.

         I also find that Colindo was properly and timely served with a copy of Henderson's first amended complaint. Rule 5(b)(3) authorizes a pleading filed after an original complaint to be served using the court's electronic-filing system, if a local rule so authorizes. The local rules of this district authorize service to be effected in that manner on persons who are “filers” in the court's electronic-filing system.[47] Colindo's attorney is a “filer” in the court's electronic-filing system. Thus, when Henderson electronically filed her first amended complaint, [48] Colindo was necessarily served with a copy of that pleading through its attorney via the Court's electronic-filing system.[49] I therefore deny Colindo's motion to dismiss either of Henderson's complaints under FRCP 4(m).

         2. Lake W Holdings, Inc./Lake W Holdings, LLC

         Lake W Holdings, LLC argues that it was not timely served with process for either of Henderson's complaints because she named[50] and served[51] the wrong entity: Lake W Holdings, Inc. instead of Lake W Holdings, LLC.[52] Henderson responds that service was nonetheless timely and proper because the company and the corporation are one in the same.[53] I agree.

         The parties agree that the Lake W Holdings, Inc. that Henderson sued and served converted its form into a limited-liability entity several years ago. The records for this entity that are available for public inspection on the Colorado Secretary of State's website are consistent with the parties' agreement.[54] Colorado law provides that when an entity converts from one form to another, “the conversion shall not be deemed to constitute a dissolution of the converting entity and shall constitute a continuation of the existence of the converting entity in the form of the resulting entity.”[55] “The resulting entity is the same entity as the converting entity.”[56]Because the Lake W Holdings, Inc. that Henderson sued and served is “the same entity” as Lake W Holdings, LLC, I find that Henderson's naming gaffe does not render service ineffective. I therefore deny Lake W's motion to dismiss. However, to ensure a clear record in this case, I grant Henderson leave to amend her complaint to change the name of this entity from “Lake W Holdings, Inc.” to “Lake W Holdings, LLC.” Lake W Holdings, LLC will then have 14 days after service of the second amended complaint to answer or otherwise respond to that pleading.[57]

         3. Colten Metals, LLC

         Colten Metals, LLC argues that Henderson's claims against it should be dismissed under FRCP 4(m) because it was not timely or properly served with process.[58] The problem, Colten argues, is that Henderson served summons and a copy of the original complaint on CBH Consulting, LLC, which she claimed was Colten's resident agent, but it is not. Henderson urges me to disregard Colten's motion because that entity is in default.[59]

         Henderson named Colten Metals as a defendant in her original complaint[60] and served that entity through what she claimed was its resident agent, CBH Consulting, LLC.[61] Colten did not answer or challenge service. Instead, Mr. Stapleton states that he advised Henderson's attorney in writing in February 2017 that Colten's correct resident agent had not been served.[62]Henderson then moved for[63] and obtained a clerk's entry of default against Colten in April 2017.[64] Henderson does not address Colten's argument that CBH Consulting, LLC was not authorized to accept service on Colten's behalf.[65] Colten's argument that CBH Consulting, LLC is not its resident agent is supported by the records that are available for public inspection on the Wyoming Secretary of State's website for this entity.[66]

         The problem with Colten's motion, however, is that it is in default.[67] Rule 55(c) authorizes district courts to “set aside an entry of default for good cause . . . .” I find that good cause exists here because I cannot conclude on this record that Colten was properly served with process. I therefore construe Colten's motion to dismiss under FRCP 4(m) as a request to set aside default under FRCP 55, grant that request, and instruct the Clerk of Court to set aside the default that was entered against Colten. I give Henderson 30 days to properly serve Colten. Within 30 days of filing her second amended complaint, Henderson must serve, obtain a waiver or acceptance of service, or move the court for leave to serve Colten by alternate means. I deny Colten's motion in all other respects.

         C. Appeal from Magistrate Judge's order denying leave to specially appear

         Northstar Global BT, Odin Statutory Trust, Colindo Trust, and Bob Creek Trust each moved to quash service.[68] Finding that these trusts had been properly served with process, Magistrate Judge Hoffman denied their motions.[69] The trusts then moved to appear specially for the purpose of challenging the sufficiency of service of process by moving the magistrate judge to reconsider his order denying the trusts' motions to quash service.[70] Magistrate Judge Hoffman denied that motion on the bases that the trusts had already unsuccessfully challenged service and had not provided any new evidence to suggest that reconsideration was warranted.[71] The trusts now appeal from that order denying their motion to appear specially.[72]

         “A district court judge may reconsider any pretrial matter referred to a magistrate in a civil . . . case under LR IB 1-3, when it has been shown [that] the magistrate judge's order is clearly erroneous or contrary to law.”[73] “Any party wishing to object to the magistrate judge's order on a pretrial matter must file and serve specific written objections. . . . [within] 14 days after service of the order.”[74] “The district judge may affirm, reverse, or modify, in whole or in part, the magistrate judge's order.”[75]

         The motion for leave to specially appear is a convoluted document in which the trusts appeared to seek various forms of relief. I begin with their request for leave to specially appear for the purpose of challenging service of process (i.e., jurisdiction). The magistrate judge's decision to decline this request was neither clearly erroneous nor contrary to law for two reasons. First, special appearances are not a thing anymore. “The technical distinctions between general and special appearances” for the purpose of challenging jurisdiction in federal court were “abolished” over half a century ago.[76] Second, Magistrate Judge Hoffman had already found that the trusts had been properly served with process when he denied their motions to quash service. The proper procedure for the trusts to challenge that decision was to move the magistrate judge to reconsider, [77] and Magistrate Judge Hoffman properly interpreted the trusts' motion as doing just that. It appears that the trusts simultaneously moved for reconsideration and for leave to specially appear for the purpose of filing a motion for reconsideration.

         “A party seeking reconsideration” of an interlocutory order “must state with particularity the points of law or fact that the court has overlooked or misunderstood.”[78] Finding that the trusts had not provided any “new evidence to suggest a reconsideration” is warranted, the magistrate judge denied their motion.[79] Respectfully, I disagree. The trusts argued that the magistrate judge had overlooked the proof that Henderson filed regarding service on Frank Finnerty in his capacity as trustee for the Colindo Trust and the Bob Creek Trust.[80] In denying the trusts' motions to quash service, the magistrate judge stated-correctly-that “[d]efendants do not argue that Hughes and Finnerty were not personally served . . . .”[81] The proof that Henderson filed, however, does not reflect that Finnerty was personally served with process. For Finnerty as trustee of the Colindo Trust, Henderson's proof shows that summons and a copy of the original complaint was served on “Bob Hughes” in his capacity as “officer, managing agent, or general agent” of “Colindo, Ltd., ” the alleged “managing agent of the Colindo Trust.”[82] For Finnerty as trustee of the Bob Creek Trust, Henderson's proof shows that summons and a copy of the original complaint was served on “Bob Hughes” in his capacity as “officer, managing agent, or general agent” of “BCT Holdings, LLC, ” the alleged “managing agent of the Bob Creek Trust.”[83] Henderson filed proof that she also mailed the summonses and copies of the original complaint to Finnerty as trustee of the Colindo Trust and Bob Creek Trust, [84] but that is neither personal nor proper service under these circumstances.

         I cannot determine on this record that Colindo, Ltd. had authority to accept service on behalf of the Colindo Trust. Nor can I determine on this record that BCT Holdings, LLC had authority to accept service on behalf of the Bob Creek Trust. And there is nothing in the record showing that the trustee for these trusts-Finnerty-was personally served with process. I therefore sustain the trusts' objections in part: I reverse the portion of the magistrate judge's order denying reconsideration on the issue of the sufficiency of service on Finnerty in his capacities as trustee of the Colindo Trust and the Bob Creek Trust. I overrule the trusts' other objections and affirm the magistrate judge's order in all other respects.

         In light of these service issues, I direct the Clerk of Court to set aside the default that was entered against Finnerty in his capacity as trustee of the Colindo Trust and the Bob Creek Trust.[85] I give Henderson 30 days to properly serve Finnerty in his capacity as trustee of the Colindo Trust and the Bob Creek Trust. Within 30 days of filing her second amended complaint, Henderson ...


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