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JTH Tax, Inc. v. Geraci

United States District Court, E.D. Virginia, Norfolk Division

October 2, 2014

JTH TAX, INC. d/b/a LIBERTY TAX SERVICE, Plaintiff,
v.
ALAN GERACI, and JONLARY CIRCLE ENTERPRISES, LLC, Defendants.

MEMORANDUM OPINION AND ORDER

RAYMOND A. JACKSON, District Judge.

Before the Court is Plaintiff JTH Tax, Inc. d/b/a Liberty Tax Service ("Liberty")'s Motion for Default Judgment against Defendants Alan Geraci ("Geraci") and Jonlary Circle Enterprises, LLC ("JCE"). ECF No. 7. Defendants filed both an untimely Answer to the Complaint and an untimely Opposition to Plaintiffs Motion. The Court held a hearing on this matter on September 16, 2014, at which Defendants failed to appear. This matter is now ripe for judicial determination. For the reasons stated herein, Plaintiffs Motion for Default Judgment is GRANTED. It is ORDERED that judgment be entered on behalf of Plaintiff and against Defendant, in a total amount of $267, 286.83. Plaintiff's request for costs and attorney's fees is DEFERRED. Defendants are also PERMANENTLY ENJOINED AND RESTRAINED from certain acts as outlined at the conclusion of this Order.

I. FACTUAL AND PROCEDURAL HISTORY

On May 20, 2014, Plaintiff filed a Complaint against Defendants, alleging that Defendants breached franchise agreements relating to the operation of Liberty Tax Service tax preparation businesses. ECF No. 1. Liberty states that it entered into three franchise agreements with Geraci, and that pursuant to each agreement, Geraci operated a different Liberty franchise office located in southern California. Id. ¶¶ 7, 12, 17. Defendant JCE is a limited liability company that held the Liberty franchise licenses. ECF No. 10. Defendant Geraci is a managing member of JCE. Id. Defendants secured operating capital and financed the purchase of the Liberty franchises by executing two promissory notes payable to Liberty. ECF No. 1 at ¶¶ 20-22. According to Liberty, JCE was sent a letter of termination on January 3, 2014. Id. ¶¶ 25. In its letter, Liberty informed JCE and Geraci that Defendants were terminated due to breaches of the franchise agreements, including insolvency and failure to pay amounts owed to Liberty. Id. Defendants have ceased making payments on their promissory notes and are now in default. Id. ¶¶ 28.

The Complaint includes three counts of breach of contract: Breach of franchise agreements, breach of promissory notes, and accounts receivable. As relief for the alleged breaches, Liberty seeks: (1) judgment in an amount equal to 19% of Defendants' gross revenues for advertising and royalty fees lost by Liberty during the period Defendants breached the post-termination obligations; (2) an injunction compelling Defendants, their agents, and employees to stop using literature or items bearing the Liberty Marks and to deliver to Liberty all customer lists and associated records; (3) enforcement of a two-year non-compete clause; (4) compensatory damages in the amount of $238, 448.37, the amount currently due on the unpaid promissory notes and accounts receivable; and (5) costs and attorney's fees.

On June 5, 2014, the Summons and Complaint were served on both Defendants in California. ECF No. 4. After three previous unsuccessful attempts at personal service, the process server left Summonses for both Geraci and JCE with Geraci's stepson at Geraci's California home. Id. Copies of each Summons were also mailed to Geraci's home on June 5, 2014. Defendants failed to timely respond to the Summons and Complaint.[1]

On July 9, 2014, Liberty filed a Request for Entry of Default, which asked the Clerk of Court to enter default as to Defendants Geraci and JCE pursuant to Fed.R.Civ.P. 55(a). ECF No. 5. The Clerk entered default as to Geraci and JCE pursuant to Fed.R.Civ.P. 55(a) on July 10, 2014.

On July 18, 2014, Liberty filed the instant Motion for Default Judgment against Geraci individually as guarantor, and against JCE. ECF No. 7. Pursuant to Local Rule 7(k) and Roseboro v. Garrison, 528 F.2d 309 (4th Cir. 1975), the Motion properly advised Defendants of their rights and obligations with respect to a Motion for Default Judgment filed in the United States District Court for the Eastern District of Virginia. Id. Plaintiff filed its Motion electronically and certified that it had served Defendants Geraci and JCE by first-class U.S. Mail at Geraci's home address and the San Marcos, California franchise address. Id. As before, Defendant failed to timely respond.

In its Motion for Default Judgment, Liberty moves for a judgment of $271, 649.36 in damages as well as permanent injunctive relief. It asserts that absent Defendants being enjoined from continuing to use Liberty's Marks and customer lists, Liberty is "at risk of continued loss of goodwill and customers..." ECF No. 8. Liberty's damages figure comes from a combination of the amount currently owed on the promissory notes ($45, 542.33), and the total amount past due for royalty and advertising fees under the franchise agreements ($192, 924, 04), and an estimate of the amount owed under the franchise agreement due to failure to comply with post-term obligations ($33, 200.99)[2]. Further, Liberty contends that enforcement of its non-compete clause is necessary because failure to do so would "threaten[] Liberty's relationship with all franchisees." Id. Liberty supports its Motion with affidavits from two employees, a copy of a promissory note, a spreadsheet of accounts receivable, and a spreadsheet of gross fees from two of Defendants' franchises.

Defendants' only contact with the Court has come via email communication with the Deputy Clerk, an Opposition to the instant Motion filed 62 days after the Motion was filed, and an Answer filed 97 days after service of the Summons and Complaint. In the Opposition, Defendants claim an intention to defend the suit, contact local counsel in Norfolk, Virginia, and have their attorney apply for pro hac vice status in this Court. ECF No. 10. ¶¶ 8. To date, no local counsel has appeared and no pro hac vice application has been received.

On September 3, 2014, the Court set a hearing on the Motion for September 16, 2014, at 10:00 a.m. A Notice of Electronic Filing was mailed to Geraci's home and JCE's place of business. In so doing, the Clerk sent the notice to the same address Defendants listed on their Answer.

The Court held a hearing on Plaintiff's Motion on September 16, 2014. Liberty was represented through counsel. As of 10:00 a.m., Defendants' counsel table was completely empty, having no counsel, party, or representative of either Geraci or JCE. In an effort to provide Defendants with one additional opportunity, the Court waited fifteen minutes to begin the hearing. When Court opened at 10:15 a.m., only Plaintiff was present. During the hearing, the Court heard sworn testimony from Stephen Richard, Liberty's Director of Business Intelligence and Data Warehouse. Mr. Richard calculated for the Court an estimate of the amount owed under the franchise agreement due to failure to comply with post-term obligations. The estimates are based on the 2013 gross revenues at two of Defendants' franchises: CA562 and CA589. Counsel for Liberty argued that pursuant to the franchise agreements, it is entitled to 19% of the 2014 gross revenues from both locations. However, because Defendants have failed to provide Liberty with any revenue reports for 2014, Liberty has estimated using 2013 figures. The Court received the gross revenue report for CA589 as Plaintiffs Exhibit I, and the gross revenue report for CA562 as Plaintiffs Exhibit 2. The Court also marked and received the Court's Exhibit, five email exchanges between the Deputy Clerk and Defendants. The hearing concluded with argument from Plaintiff's counsel, wherein Plaintiff again argued for both damages and injunctive relief.

II. LEGAL STANDARD

The Federal Rules of Civil Procedure require the clerk to enter default against a party from whom affirmative relief is sought when that party has "failed to plead or otherwise defend" its case. Fed.R.Civ.P. 55(a). When a plaintiff's claim is not for a sum certain, as in this case, the plaintiff must apply to the Court for default judgment, and if the party against whom the judgment is sought has appeared previously, that party must be served with written notice at least seven days prior to any hearing. Fed.R.Civ.P. 55(b)(2). Further, Rule 55(b)(2) provides that:

The court may conduct hearings or make referrals-preserving any federal statutory right to a jury trial-when, to enter or effectuate judgment, it needs to:
(A) conduct an accounting;
(B) determine the amount of damages;
(C) establish the truth of any allegation by evidence; or
(D) investigate any other matter.

"Upon default, the well-pled allegations in a complaint as to liability are taken as true, although the allegations as to damages are not." S.E.C. v. Lawbaugh, 359 F.Supp.2d 418, 422 (D. Md. 2005). A plaintiff's complaint is well-pleaded under the Federal Rules of Civil Procedure when it "contains sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).

Default judgments are to be granted sparingly, with consideration to be given to, among other factors, the question of whether a less severe sanction would suffice. See, e.g., Lolatchy v. Arthur Murray, Inc., 816 F.2d 951, 953-54 (4th Cir. 1987); United States v. Moradi, 673 F.2d 725, 727-28 (4th Cir. 1982). The Court is certainly mindful of the Fourth Circuit's strong preference that defaults be avoided and claims disposed of on their merits. Colleton Preparatory Acad., Inc. v. Hoover Universal, Inc., 616 F.3d 413, 417 (4th Cir. 2010) (citing Tazo, Inc. v. Director, Office of Workers Comp. Program, U.S. Dep't of Labor, 895 F.2d 949, 950 (4th Cir. 1990); Consolidated Masonry & Fireproofing, Inc. v. Wagman Constr. Corp., 383 F.2d 249, 251 (4th Cir. 1967)). When a district court enters default judgment, however, the decision is committed to the sound discretion of the court and shall be reviewed only for abuse of discretion. Lolatchy, 816 F.2d at 953-54.

Because a default judgment order may dispose of a matter, the Court must first satisfy itself that it has jurisdiction over the case. See Arbaugh v. Y&H Corp., 546 U.S. 500, 514 (2006) ("First, subject-matter jurisdiction, because it involves a court's power to hear a case, can never be forfeited or waived.' Moreover, courts... have an independent obligation to determine whether subject-matter jurisdiction exists, even in the absence of a challenge from any party." (citations omitted)); In re Kirkland, 600 F.3d 310, 315 (4th Cir. 2010) ("Subject matter jurisdiction cannot be forfeited or waived, and can be raised by a party, or by the court sua sponte, at any time prior to final judgment."). A plaintiff may bring suit in federal court only if the matter involves a federal question arising "under the Constitution, laws or treaties ...


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