District of Columbia, A Municipal Corp. v. Suter

OCR transcription for search; preserved printed pages are authoritative

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IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND

IN RE: WILLIAM SUTER, III

WILLIAM SUTER, III
Appellant

Vv. : Civil Action No. 2005-2118
: EXEMPT FROM ECF

DISTRICT OF COLUMBIA

Appellee

MEMORANDUM OPINION
This case is before the court on appeal from the order of |
visiting United States Bankruptcy Judge Niles L. Jackson granting |

the motion of appellee District of Columbia for summary judgment,
Case No. 04-1944-NVA (hereinafter “Bankr. Proceeding”) (Bankr.
Proceeding, paper 40). Oral argument is deemed unnecessary because
the facts and legal arguments are adequately presented in the
briefs and record, and the decisional process would not be
Significantly aided by oral argument. See Fed. R. Bankr. P. 8012.
For the reasons that follow, the court will affirm the bankruptcy
court’s ruling.
t. Background

A. Proceedings in District of Columbia Superior Court

The following facts are undisputed. On July 8, 2002, the
District of Columbia filed a civil complaint (“DC Action”) in the

Superior Court of the District of Columbia (“Superior Court”)

against The Steven A. Rosen Company, CW Restoration, and William N.

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

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Suter III. The District of Columbia (“Appellee”) alleged that the
defendants had engaged in fraudulent and deceptive business
practices in connection with the insurance adjustment process and
restoration of homes destroyed by fire, in violation of the
District’s Consumer Protection Procedures Act (D.C. Cope §§ 28-3904,
28-3909) and the Consumer Protections Act (D.C. Cope § 28-3811).
When the DC Action was filed, Appellant was the sole officer of The
Steven A. Rosen Company and president of CW Restoration, Inc.
Initially, all three defendants were represented by counsel, Claude
Roxborough and Edward M. Kimmel.

The Superior Court held a hearing July 8, 2002, on Appellee’s
request for a temporary restraining order and a second hearing July
17, 2002, on a request for a preliminary injunction; Appellant
appeared at both hearings and was represented by counsel. on
August 2, 2002, the Superior Court entered a Preliminary Injunction
Order and Memorandum Order in which it found:

(1) William Suter controls The Steven A. Rosen
Company and CW Restoration, Inc., all
defendants named in this action;

(2) William Suter, through his companies,
agents, and employees, took advantage of
homeowners who had just suffered losses from
fire, pressuring them into signing contracts

with his companies when they were least able
to protect themselves;

' Collectively, the defendants in the Superior Court action
will be referred to as “defendants.” Appellant Suter will be
referred to as “Appellant.”

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(3) William Suter, through his companies,
agents and employees, misrepresented to
homeowners the services his companies would
provide and the fees they would charge;
(4) William Suter, through his companies,
agents, and employees, sent forged contract
documents to homeowners’ insurance companies,
forged endorsements on checks, and diverted
for his own benefit insurance proceeds
intended for subcontractors and policyholders;
and
(5) William Suter, through his companies,
agents, and employees, as [sic] result of his
fraudulent diversion of insurance proceeds,
failed to complete renovations and repairs he
had agreed to perform, leaving homeowners
stranded in temporary housing and without
financial resources.

(Bankr. Proceeding, paper 38, ex. 4).

On September 25, 2002, Appellee filed a motion for entry of
default because the defendants failed to answer the complaint. The
defendants did not oppose the motion, and the Superior Court
granted Appellee’s motion on October 18, 2002. Subsequently, the
defendants twice asked the Superior Court to set aside the default;
the court denied both motions for failure to comply with procedural
rules.

On May 16, 2003, during a third attempt to vacate the entry of
default, the defendants withdrew their motion for business reasons
and said they would proceed with an ex parte hearing on the issue
of damages. Appellant concedes that he was at the hearing, however

he states that he did not consent to the withdrawal as to him

individually. ‘Any such representations to the contrary made to

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the Court by Roxborough were in error and without Suter’s consent,
knowledge, and understanding.” (Paper 7, at 7). The parties
agreed to use a Special Master to calculate damages, and they
submitted papers on the issue of damages.* The Special Master
submitted his report on October 1, 2003.

Earlier on September 26, 2003, Appellant filed a motion for
permission to proceed pro se for himself only. The Superior Court
granted his motion on October 3, 2003. The Superior Court then
allowed all parties to file responses to the Special Master’s
report. Appellant claims he filed a motion to set aside the entry
of default as to him individually on October 14, 2003, (Paper 7, at
7), but the record shows that the only paperwork he filed on
October 14, 2003, was an “Exceptions to the Report and
Recommendation of Special Master” (“Exceptions”). (Bankr.
Proceeding, paper 32, ex. 5). In the Exceptions, Appellant
outlined his objections to the Special Master’s accounting and
asked the Superior Court to allow him discovery or an evidentiary

hearing to cross examine or verify Plaintiff's ex parte proof. Id.

? Appellant contends that Roxborough believed that the purpose
of appointing a Special Master and proceeding with ex parte proof
was to allow the parties and the Special Master to work “in a
collective effort to evaluate punch lists from the complaining
affiants and effectuating [sic] the necessary repairs; not the
determination and imposition of money damages.” (Paper 7, at 6-7).

> Page one of Appellant’s Exceptions is missing from the
record. The record includes, however, a cover letter that provides
the title and filing date.

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at 25. Appellant also filed a Motion to Dismiss on November 17,
2003, and the corporate defendants filed a motion on October 31,
2003, to vacate the entry of default.

In an order filed January 12, 2004 (“Restitution Order”)*, the
Superior Court denied Appellant's motion to dismiss, denied the
corporate defendants’ motion to vacate, and entered judgment
against all three defendants. With respect to Appellant’s motion
to dismiss, the Superior Court stated:

The Court is aware that a default judgment
should not be entered against a party if the
Complaint, on its face, does not set forth a
valid legal claim against that party, even
though default may have been entered;...

Despite Suter’s protestations, the Complaint
clearly makes out a claim against him. First,
there are allegations against him
individually. For example, he is personally
alleged to have made untrue representations
and not to have made required disclosures. See
Complaint at 8. Corporate officers are
“personally liable for torts which they
commit, participate in, or inspire, even
though the acts are performed in the name of
the corporation.” Vuitch v. Furr, 482 A. 2d
811, 821 (D.C. 1984). In addition, in looking
to the Complaint only, this is a case in which
sufficient allegations have been made to
pierce the corporate veil and hold Suter
personally liable. First, the Complaint
alleges that “Defendant Suter is the sole

4 For some reason, the Restitution Order is not contained in
either the record on appeal, or in the electronic record in the
bankruptcy court. It was received in evidence by the bankruptcy
court and the undersigned obtained a hard copy from that court.
Both parties refer to the Restitution Order in their briefs and
Appellee quotes from it. In order to complete the record, a copy
is attached to this Opinion.

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Director, President, Vice President, Secretary
and Treasurer of CW. Defendant Suter is also
the Vice President, and sole Officer of Rosen.
He controls and participates in the acts and
practices that are the subject of this
action.” Id. at 3. In addition, Rosen and CW
have the same address, they engage in sham
internal deals that they Eraudulently
represent to consumers are = arm'’s-length
transactions, and CW is unlicenced. The
Court, therefore can conclude that “the
corporation is, in reality, an alter ego or
business conduit of the person in control” and
that “considerations of justice and equity .

justify piercing the corporate veil.”
Lawlor v. District of Columbia, 758 A.2d 964,
975 (D.C. 2000). Since the Complaint thus
does state a cause of action against Suter,
judgment can be entered against him.

(Restitution Order, at 4-5). The Superior Court also accepted the
Special Master’s calculation of damages and ordered restitution in
the amount of $1,916,185.00, which was based on the amount of money
owed “to each of the consumers, depending on the consumer’s
individual situation.” Id. at 6. The Restitution Order further
directed Appellee to file a motion to the extent it sought
permanent injunctive relief and attorneys’ fees, and that if “no
motion is filed, the court will enter a final judgment along the
lines of the Order entered today.” Id. at 9.

On March 2, 2004, the Superior Court entered a final judgment
(“Final Judgment”), which included the restitution award against

all defendants in the amount of $2,162,928.00,° civil penalties in

° The Superior Court adjusted the restitution amount to

include another consumer. (Bankr. Proceeding, paper 1, ex. 2, at
1-2).

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the amount of $52,000 ($1,000 for each harmed consumer), and
attorneys’ fees in the amount of $290,000. (Bankr. Proceeding,
paper 1, ex. 2, at 3). The Superior Court ordered that “Plaintiff
shall dispense the restitution to consumers through a distribution
plan.” Id. at 3-4.

On May 13, 2004, Appellant filed a motion “for an order
staying the enforcement of the judgment entered herein against
Defendant, William Suter, in his individual capacity.” (Bankr.
Proceeding, paper 32, eX. 7, at 1). The Superior Court denied the
motion June 4, 2004.

B. Proceedings in Bankruptcy Court

On January 28, 2004 — after the Restitution Order was filed
but before the Superior Court entered Final Judgment on March 2,
2004 ~— Appellant filed a voluntary petition under Chapter 7 of the
Bankruptcy Code. He was represented by counsel in the bankruptcy
proceeding.

On July 30, 2004, Appellee commenced an adversary action
seeking a determination that the Final Judgment awards are
non-dischargeable pursuant to 11 U.S.C. § 523(a) (7). On March 30,
2005, Appellee filed a motion for summary judgment, for which the
bankruptcy court held a hearing June 3, 2005. On July 8, 2005, the
bankruptcy court granted Appellee’s motion for summary judgment and
held that Appellant’s debt was non-dischargeable. Appellant,

proceeding pro se, filed a timely appeal.

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II. Standard of Review

On appeal from the bankruptcy court, the district court acts
as an appellate court and reviews the bankruptcy court’s findings
of fact for clear error and conclusions of law de novo. See In re
Johnson, 960 F.2d 396, 399 (4 Cir. 1992); Travelers Ins. Co. v.
Bryson Prop., XVIII (In re Bryson Prop., XVIII), 961 F.2d 496, 499
(4° Gir.), cert. denied sub nom., Bryson Prop., XVIII v. Travelers
Ins. Co., 506 U.S. 866 (1992).
III. Issues on Appeal

Appellant raises three issues, contending that: (1) the final
judgment of the Superior Court was void because it violated the
automatic stay provision in 11 U.S.C. § 362(b) (4); (2) the
bankruptcy court’s decision to grant Appellee’s motion for summary
judgment was inappropriate because there are disputes over whether
Appellant consented to the withdrawal of his motion to set aside
default judgment and whether he is liable for the acts of the
corporate defendants; and (3) the bankruptcy court erred when it
found that the final judgment was non-dischargeable pursuant to 11
U.S.C. § 523 (a) (7).

A, Automatic Stay Pursuant to § 362 (b) (4)

Appellant argues that the Superior Court’s Final Judgment
against him violated the automatic stay provisions of the

Bankruptcy Code, 11 U.S.C. § 362, because he filed a Chapter 7

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petition before the judgment was entered against him. Section
362 (b) (4) provides:

(ob) The filing of a petition under section
301, 302, or 303 of this title, or of an
application under section 5(a)(3) of the
Securities Investor Protection Act of 1970,
does not operate as a stay-

[4] under paragraph (1), (2), (3), or (6) of
subsection (a) of this section, of the
commencement or continuation of an action or
proceeding by a governmental unit or any
organization exercising authority under the
Convention on the Prohibition of the
Development, Production, Stockpiling and Use
of Chemical Weapons and on Their Destruction,
opened for signature on January 13, 1993, to
enforce such governmental unit’s or
organization’s police and regulatory power,
including the enforcement of a judgment other
than a money judgment, obtained in an action
or proceeding by the governmental unit to
enforce such governmental unit’s or
organizations police or regulatory power .

Appellant argues that this section does not apply to him because
under the “plain words” of § 362(b) (4) “only governmental units
exercising authority under the cited Convention fall within its
safe harbor.” (Paper 7, at 10). He seeks support in a Mississippi
bankruptcy court decision, In re Finley, 237 B.R. 890
(Bankr.N.D.Miss. 1999). Appellee responds that it used its police
and regulatory authority to prevent Appellant from engaging in
fraudulent and deceptive business practices and that Appellant’s

legal argument is “widely rejected.” (Paper 8, at 11-12).

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The bankruptcy court correctly held that Appellant’s reading
was too narrow and was inconsistent with the Fourth Circuit’s
standard for determining whether governmental action was excepted:

If the purpose of the law is to promote

“public safety and welfare,” Universal Life
Church, Inc. v. United States (In re Universal
Life Church, Inc.), 128 F.3d 1294, 1297 (9"

Cir. 1997), or to “effectuate public policy,”
NLRB v. Edward Cooper Painting, Inc., 804 F.2d
934, 942 (6 Cir. 1986) (internal quotation
marks omitted), then the exception applies.
On the other hand, if the purpose of the law
relates “to the protection of the government's
pecuniary interest in the debtor’s property,”
Universal Life Church, 128 F.3d at 1297, or to
“adjudicate private rights,” Edward Cooper
Painting, 804 F.2d at 942 (internal quotation
marks omitted), then the exception is
inapplicable. The inquiry is objective: we
examine the purpose of the law that the state
seeks to enforce rather than the state’s
intent in enforcing the law in a particular
case. See United States v. Commonwealth Cos.
(In re Commonwealth Cos.), 913 F.2d 518, 523
n.6 (8° Cir. 1990); United States v. Grooms,
No.Crim. A, 96-00071-C, 1997 WL 578752, at *3
(W.D.Va. Aug. 29, 1997).

Safety-Kleen, Inc. (Pinewood) v. Wyche, 274 F.3d 846, 865 (4 Cir.
2001). Nowhere in Safety-Kleen does the court require the
government agency to be acting pursuant to the Convention.
Moreover, the Fourth Circuit has recognized that Congress intended
to exclude actions involving consumer protection laws, inter alia,
from the automatic stay.

Just what was meant by the language of § 362 is explained in

S.Rep. 989, 957 Cong., 2d Sess. 52, reprinted in 1978 U.S.Code

10

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Cong. & Admin.News 5787, 5838. There, speaking of § 362(b) (4) and
(5), the committee said:

Paragraph (4) excepts commencement or

continuation of actions and proceedings by

governmental units to enforce police or

regulatory powers. Thus, where a governmental

unit is suing a debtor to prevent or stop

violation of fraud, environmental protection,

consumer protection, safety, or similar police

or regulatory laws, or attempting to fix

damages for violation of such a law, the

action or proceeding is not stayed under the

automatic stay.
E.E.O.C v. McLean Trucking Co., 834 F.2d 398, 401 (4™ Cir. 1987)
(emphasis in original omitted). Consequently, the bankruptcy court
did not err in holding that the Superior Court judgment against
Appellant was exempt from the automatic stay.

B. Validity of the Debt

In the bankruptcy court, Appellant sought, in essence, to
question the validity of the debt. Appellant argued that the
Final Judgment was not entitled to collateral estoppel effect in
the bankruptcy proceeding because the Final Judgment was based on
an entry of default. (Bankr. Proceeding, paper 29, at 5). Inthis
court, Appellant argues that the bankruptcy court’s grant of
summary judgment was inappropriate because there is a material
factual dispute “as to whether he consented to the withdrawal of
his motion to set aside the default judgment." (Paper 7, at 12).
He asserts that the Superior Court should have vacated the default

judgment and thereby “right the wrong that was perpetrated” on him.

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Id. at 13. He also claims that he did not have an opportunity to
litigate his personal liability in Superior Court. For instance,
Appellant states that he did not personally guarantee the
performance or obligations of the corporate defendants and asserts
that the “only reason” he was included as a defendant in the DC
Action was that he was an officer and shareholder of both corporate
defendants. (Paper 7, at 12-13). Appellee responds that the
bankruptcy court correctly held that the Restitution Order and
Final Judgment were entitled to preclusive effect because “the
Superior Court did rule on Appellant’s motion to dismiss the
Superior Court action as to him personally.” (Paper 8, at 16).
The federal courts must give full faith and credit to valid

state court judgments pursuant to 28 U.S.C. § 1738.° See In re
Genesys Data Technologies, Inc., 204 F.3d 124, 127 (4™ Cir. 2000);
In re Heckert, 272 F.3d 253, 257 (4 Cir. 2001). The court
explained in In re Heckert that

[W]hen a prior state court judgment is the

debt at issue, we are of [the] opinion that

the bankruptcy court, in an adversary
proceeding to determine whether the debt is

° 28 U.S.C. § 1738 provides in pertinent part:

Such acts, records and judicial proceedings or
copies thereof, . . . shall have the same full
faith and credit in every court within the
United States and its Territories and
Possessions as they have by law on usage in
the court of such State, Territory or
Possessions from which they are taken.

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dischargeable, cannot issue its own judgment
on the debt to replace the state court
judgment previously obtained. All the
bankruptcy court is called upon, or authorized
to do, is to determine whether or not the
state judgment is dischargeable.

272 F.3d at 257. Where the debtor claims that a state court
default judgment should not be binding in a later federal
bankruptcy dischargeability proceedings, courts apply the forum
jurisdiction’s law of collateral estoppel to determine the
judgment’s preclusive effect. See In re Ansari, 113 F.3d 17 (4™
Cir. 1997); In re Genesys Data Technologies, Inc., 204 F.3d at 129;
In re Heckert, 272 F.3d at 257.

District of Columbia courts have held that collateral estoppel

applies where

[A]Jn issue of fact or law is actually
litigated and determined by a valid and final
judgment, and the determination is essential
to the judgment, the determination is
conclusive in a subsequent action between the
parties, whether on the same or a different
claim. Offensive use of collateral estoppel
arises when a plaintiff seeks to estop a
defendant from relitigating the issues which
the defendant previously litigated and lost

against another plaintiff. Parkland Hosiery
Co., Ine. v. Shore, supra note 7, 439 U.S.
[322] at 329, 99 §.Ct. at 650 [1979]. An

issue is actually litigated when it “is
properly raised, by the pleadings or
otherwise, and is submitted for determination,
and is determined . . . An issue may be
submitted and determined on a motion to
dismiss for failure to state a claim, a motion
for judgment on the pleadings, a motion for
summary judgment .. . or their equivalents

. . .” Restatement (Second) of Judgments §
27(d).

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Ali Baba Co. v. WILCO, Inc., 482 A.2da 418, 421-22 (D.C. 1984)
(footnotes omitted). A default judgment may be entitled to
preclusive effect. See Croley v. Winberg, CIV.A. 94-7891 PLF, 1995
WL 270896, at *2 (D.D.C. Apr. 28, 1995) (giving res judicata effect
to a default judgment in an eviction action); Thomas v. Marvins
Credit, 76 A.2d 773, 776 (D.C. 1950) (giving res judicata effect
where defendant did not appear in a lawsuit brought by creditor) ;
Woods v. Cannaday, 158 F.2d 184, 185 (App. D.C. 1946) (giving res
judicata effect where the defendant failed to appear or defend the
action) .

The bankruptcy court’s finding that Appellant had a full
opportunity to participate in the DC Action and to litigate the
issue of his personal liability for the consumer protection laws
was not clearly erroneous. The bankruptcy court observed:

In this case, the Debtor attended, and was
represented by counsel, the hearing on the
temporary restraining order and the hearing on
the District’s request for preliminary
injunction. The Debtor’s attorney filed
post-hearing briefs on his behalf. The Debtor
and/or his companies decided for business
reasons, after several attempts to set aside
the default, to proceed to the damages phase
of the litigation. By that time, the Debtor
had asked the Superior Court to proceed
without the benefit of counsel. He personally
submitted papers in connection with the
damages issue and the Master’s Report. He
filed his own motion to dismiss the DC Action.
In the Restitution Order, the Superior Court
explicitly set out the reasons judgment
against him was appropriate, despite his
failure to answer the Complaint, and “despite
his protestations.” The Judgment merely made

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the injunction permanent and assessed
restitution and costs against him.

(Bankr. Proceeding, paper 38, at 13). The record shows that
Appellant had an opportunity to litigate and to offer arguments
through his counsel and in a pro se capacity. In fact, Appellant
recognizes that he was given the opportunity to represent himself
and to challenge the entry of default in the Superior Court.
(Paper 7, at 12). Moreover, the Superior Court rendered its
judgment based on a consideration of Appellant’s liability and this
determination was essential to the judgment.

In addition, the Rooker-Feldman doctrine creates another
jurisdictional obstacle to the review Appellant seeks of the
Superior Court’s Final Judgment. Under the doctrine, “{llower
federal courts cannot sit in direct review of final state court
decisions.” Suarez Corp. Indus. v. McGraw, 125 F.3d 222, 229 (4™
Cir. 1997). Accordingly, the court must reject Appellant’s
argument that it review the order entered by the Superior Court.
The debt represented by that judgment is valid.

Cc. Discharge Pursuant to § 523 (a) (7)

Having determined that the validity of a debt is not
reviewable, the court must consider whether it is dischargeable
pursuant to § 523(a)(7). This section provides that an individual
is not released from debt “to the extent such debt is for a fine,
penalty, or forfeiture payable to and for the benefit of a

governmental unit, and is not compensation for actual pecuniary

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loss.” The bankruptcy court held that the debt was
non-dischargeable because it met the language in § 523 (a) (7).
(Bankr. Proceeding, paper 40, at 14-15).

Appellant contends, in part, that the “entire ‘final judgment’
was designed to give individual relief to individual private
consumers based on each individual private consumer's itemized
statement and affidavit of damages.” Id. at 11. Appellant relies
on three cases in support: In re Towers, 162 F.3d 952, 955 (7™ Cir.
1998), National Auto Sales, Inc. v. Wilson (In re Wilson), 299 B.R.
380, 382 (Bankr.E.D.Va. 2003), and In re Pulley, 303 B.R. 81
(D.N.J. 2003). Appellee responds that Appellant’s position is
considered the minority rule and that the Fourth Circuit follows
the majority rule that restitution is within the “fine, penalty, or
forfeiture” language of § 523(a)(7). (Paper 8, at 17-18).

The Fourth Circuit has addressed § 523(a) (7) in both criminal
and civil contexts. In Thompson v. Virginia (In re Thompson), 16
F.3d 576, 580 (4° Cir. 1994), the court held that “for purposes of
federal bankruptcy law, costs imposed as the result of criminal
conviction are non-dischargeable in bankruptcy.” It explained that
such costs “can be considered penal for the purposes of §
523 (a) (7)” and the assessment of costs operates “hand-in-hand with
the penal and sentencing goals of the criminal justice system.”
Id. at 580. In civil cases, the Fourth Circuit held in United

States Department of Housing & Urban Development v. Cost Control

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Marketing & Sales Management of Virginia, Inc., 64 F.3d 920,
927-928 (4° Cir. 1995) (“cCCMS”) that civil fines in the amount of
$8.65 million levied against three developers were not
dischargeable.

The Supreme Court has given § 523(a)(7) a
broad reading, and has held that it applies to
all criminal and civil penalties, even those
designed to provide restitution to injured
private citizens. Kelly v. Robinson, 479 U.S.
36, 107 §.Ct. 353, 93 L.Ed.2ad 216 (1986)
(criminal restitution obligation was not
dischargeable); Pennsylvania Dep’t of Public
Welfare v. Davenport, 495 U.S. 552, 562, 110
S.Ct. 2126, 2132-2133, 109 L.Ed.2d 588 (1990)
(stating that § 523(a)(7) applies to both
criminal and civil fines).

We interpret these cases to say that so
long as the government’s interest in enforcing
a debt is penal, it makes no difference that

injured persons may thereby receive
compensation for pecuniary loss. In other
words, the “not compensation for actual

pecuniary loss” phrase in § 523(a)(7) refers
to the government’s pecuniary loss.

CCMS, 64 F.3d at 927 (footnote omitted) (emphasis in original).
The court reached this result even though the disgorgement remedy
was based on the amount of money the purchasers lost “and [HUD] has
often stated in this record that it intends to use some or all of
its recovery to reimburse those purchasers. On the other hand, the
final judgment orders payment to HUD and imposes no obligation on
HUD to disburse the money to anyone.” Id.

In deciding whether a fine, penalty, or forfeiture meets the
language in § 523(a)(7), courts have looked to the underlying
purpose of the statute. See In re Thompson, 16 F.3d at 580;

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Williams, 925 F.2d at 744-45; Attorney Grievance Comm’n of Md. v.
Smith (In re Smith), 317 B.R. 302, 312 (Bankr.D.Md. 2004).

In this case, the purposes of the District of Columbia’s
consumer protection laws are to “(1) assure that a just mechanism
exists to remedy all improper trade practices and deter the
continuing use of such practices; (2) promote, through effective
enforcement, fair business practices throughout the community; and
(3) educate consumers to demand high standards and seek proper
redress of grievances.” D.C. Cope § 28-3901. One section creates
a consumer protection agency with powers that include investigating
deceptive, unfair or unlawful trade practices; issuing cease and
desist orders for trade practices that violate District law; and
promulgating rules that interpret, define and state general
policies relating to unfair, deceptive and unlawful trade
practices. D.C. Cope § 28-3903. If the District of Columbia
believes a law has been broken

and if it is in the public interest, the
Corporation Counsel, in the name of the
District of Columbia, may petition the
Superior Court of the District of Columbia to
issue a temporary or permanent injunction
against the use of the method, act, or
practice . . . The Corporation Counsel may
recover restitution for property lost or
damages suffered by consumers as a consequence
of the unlawful act or practice.
D.C. Cope § 28-3909. Although the consumer protection laws allow

Appellee to pursue remedies on behalf of private individuals, the

overall goal is to provide oversight and enforcement of consumer

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protection laws; restitution supports this goal by acting as a
deterrent. Thus, although the restitution benefits private
individuals, Appellee’s interest in enforcing this debt is penal in
nature and “it makes no difference that injured persons may thereby
receive compensation for pecuniary loss.” CCMS, 64 F.3d at 928.

The court also finds that the civil fines and the attorneys’
fees in the Final Judgment are not dischargeable. The civil fines
against Appellant clearly meet the standard in § 523(a) (7) because
they are “payable to and for the benefit of a governmental unit”
and they are not “compensation for actual pecuniary loss.”
Similarly, there is no evidence in the record that the attorneys’
fees are designed to compensate Appellee for a pecuniary loss. The
attorneys’ fees award was based on an accounting of the number of
hours spent on the case and what the Superior Court considered to
be a reasonable rate for that work, rather than compensation for
specific costs. (Bankr. Proceeding, paper 1, ex. 2).

Accordingly, the bankruptcy court did not err in holding that
the Final Judgment was not dischargeable.
IV. Conclusion

For the reasons stated above, the court will AFFIRM the ruling

of the bankruptcy court. A separate Order will follow.

Mhhbr Gt h Chee lrrg
DEBORAH K. CHASANOW
United States District Judge

19

. Case 04-01944 Doc53 Filed 11/07/05 Page 20 of 29

SUPERIOR COURT OF THE DISTRICT OF COLUMBIA

CIVIL DIVISION
THE DISTRICT OF COLUMBIA,
Plaintiff, : Civil Action No.; 02-5498
Judge Boasberg
v. : Calendar 10
THE STEVEN ROSEN CO., et al, ;
Defendants. . :

ORDER (1) DENYING MOTION TO DISMISS OF DEFENDANT WILLIAM
SUTER; (2) DENYING DEFENDANTS’ MOTION TO SET ASIDE ORDER
NOTING WITHDRAWAL OF DEFENDANTS’ MOTION TO VACATE
-DEFAULT AND REINSTATE THE SAME MOTION TO VACATE DEFAULT;
AND (3) ENTERING FINAL ORDER REGARDING RESTITUTION

The Court has reviewed the Motion To Dismiss Of Defendant William Suter,
Plaintiff's Opposition, Defendants’ Motion To Set Aside Order Noting Withdrawal Of
Defendants’ Motion To Vacate Default And Reinstate The Same Motion To Vacate
Default, the Report and Recommendation of Special Master, Defendant Suter’s
Exceptions to the Report, the District’s Response to the Report, Defendants’ CW and

_Rosen’s Response to the Report, Suter’s Further Exceptions to the Report, and the
District’s Replies to Suter’s Exceptions and Further Exceptions.
I. Background
In order to place this Order in context, some procedural background is necessary.
The District filed its Complaint in this matter on July 8, 2002, against Steven A. Rosen
Co., CW Restoration, and William Suter individually. The Complaint asserted, inter alia,
unfair trade practices in violation of the Consumer Protection Procedures Act (“CPPA”)
and sought restitution, civil penalties, and injunctive relief. After a preliminary

injunction hearing, Judge Graae issued a lengthy Order, which found that there was good

» Case 04-01944 Doc53 Filed 11/07/05 Page 21 of 29

cause to believe Defendants had violated certain laws and regulations and that the District
had a likelihood of success on the merits. He thus granted the District a preliminary
injunction on August 22, 2002. He further found that Rosen is “a public adjuster
company that offers to assist consumers whose properties have been damaged by fire.”
Order at 2. CW “is a home improvement contractor operating within the District of
Columbia without a license,” Id. Suter is the sole owner of both. Id.

As Defendants had never answered the Complaint, the District then moved for
entry of default on Sept. 25, 2002. Defendants did not oppose the motion, nor did they
appear at the Initial Scheduling Conference on Oct. 18, 2002, whereupon this Court,
having taken over the calendar in September 2002, entered default in favor of the District.
_ Defendants moved to set aside the default, which the Court denied without prejudice on
Nov. 12, 2002, because Defendants had failed to follow Rule 55. A renewed motion to
set aside the default was similarly denied without prejudice on Feb. 21, 2003, for
Defendants’ failure, once again, to follow Rule 55 and provide good cause and a defense.
The Court, however, permitted Defendants another opportunity to set aside the default.

On May 16, 2003, in open court, however, Defendants informed the Court that
they did not wish to renew their motion to set aside the default, but, for “business
reasons,” wished to proceed with an ex. parte proof hearing. Defendants’ attorney even
left the courtroom to consult again with his clients before so representing to the Court,
which representations the Court memorialized in an Order of the same date.

Ex parte proof hearings, as the name implies, do not typically countenance
testimony by the Defendants, who are limited to cross-examining the Plaintiffs

witnesses. As the District in this instance desired to proceed via affidavit, given the

Case 04-01944 Doc53 Filed 11/07/05 Page 22 of 29

number of consumers involved, the Court permitted Defendants, in lieu of cross-
examination, to submit their own materials regarding damages, a process to which all
parties agreed. Given the volume of documents and the requirement that an accounting
be made of the damage suffered by each consumer, the Court proposed the appointment
of a Special Master to recommend a formula for the computation of damages and a
damages award. All parties agreed to the use of a Special Master, and the Court issued
an Order on July 11, 2003, appointing John C. Hayes, Jr., to whom no party objected, as
Special Master. The Court also permitted the parties to make submissions to him
regarding damages. Both sides did so, and the Special Master had both pleadings and a
number of binders full of materials to consider.

On September 26, 2003, Defendant Suter moved the Court to permit him to
proceed pro se for himself only; Defendants’ counsel, meanwhile, would continue to
_ represent the entity Defendants. The Court granted the Motion in open court on Oct. 3,
2003. The Court then permitted all parties to file objections or responses to the report of
the Special Master, which had been submitted on Oct. 1, 2003. The parties have done so.
. In addition, Suter filed a Motion to Dismiss on Nov. 17, 2003, and CW and Rosen filed a
motion on Oct. 31, 2003, that asks the Court to vacate the default. |

The Court will deal first with the two pending motions and then with the report of
the Special Master. |
II. Analysis

A. Suter’s Motion to Dismiss

In his Motion to Dismiss, Suter argues that “nothing in this case alleges any

conduct by Defendant, William Suter, as an individual.” Mot. at 1. Instead, he contends,

Case 04-01944 Doc53 Filed 11/07/05 Page 23 of 29

all of his actions were on behalf of the entity Defendants. In sum, he argues that
“Plaintiff has offered nothing more than the fact that William Suter is an officer and sole
shareholder of both corporate defendants as the basis for attempting to hold him liable in
this matter.” Id, at 2. The District correctly responds that this 12(b)(6) Motion is
untimely, default having already been entered. The Court, nonetheless, is aware that a
default judgment should not be entered against a party if the Complaint, on its face, does
not set forth a valid legal claim against that party, even though default may have been

entered. Elmore v. Stevens, 824 A.2d 44, 46 (D.C. 2003) (“A party is entitled to

judgment based on a defaulted complaint only to the extent that the complaint alleges a
‘claim for relief’ as specified in Super. Ct. Civ. R. 8.”) (citations omitted).

Despite Suter’s protestations, the Complaint clearly makes out a claim against
him. First, there are allegations against him individually. For example, he is personally
alleged to have made untrue representations and not to have made required disclosures.

‘See Complaint at 8. Corporate officers are “personally liable for torts which they
commit, participate in, or inspire, even though the acts are performed in the name of the
corporation.” Vuitch v. Furr, 482 A.2d 811, 821 (D.C. 1984). In addition, in looking to
the Complaint only, this is a case in which sufficient allegations have been made to pierce
the corporate veil and hold Suter personally liable. First, the Complaint alleges that
“Defendant Suter is the sole Director, President, Vice President, Secretary and Treasurer
of Defendant CW. Defendant Suter is also the Vice President, and sole Officer of Rosen.
He controls and participates in the acts and practices that are the subject of this action.”
Id. at 3. In addition, Rosen and CW have the same address, they engage in sham internal

deals that they fraudulently represent to consumers are arm’s-length transactions, and

Case 04-01944 Doc53 Filed 11/07/05 Page 24 of 29

CW is unlicensed. The Court, therefore, can conclude that “the corporation is, in reality,

an alter ego or business conduit of the person in control” and that “considerations of

| justice and equity . . . justify piercing the corporate veil.” Lawlor v. District of Columbia,
758 A.2d 964, 975 (D.C. 2000) (internal quotations and citations omitted).

Since the Complaint thus does state a cause of action against Suter, judgment can
be entered against him.

B. Rosen and CW’s Motion to Set Aside Default

Despite clearly making a business decision to accept entry of default in May
2003, Rosen and CW, having now seen the Report of the Special Master (“Report”)
issued in October 2003, wish to change their minds, They are too late and without
adequate reason,

In support of their Motion, Defendants make two arguments. First, they set forth
Suter’s arguments — namely, that the Complaint does not set forth a claim. See Elmore,
supra. More specifically, Defendants contend that the Complaint is “not sufficient to
arrive at a judgment base[d] on affidavits of people not identified in the complaint or

related to any specific cause of action,” and that its allegations “are really no more than
opinions without any factual statements or substance.” Mot. at 2. The Complaint
certainly does set forth allegations sufficient to constitute causes of action for violation of
the CPPA; indeed, at a contested preliminary injunction hearing, Judge Graae even found
Plaintiff had a substantial likelihood of success on the merits. Allegations are all that is
needed in the Complaint, and there is no requirement that particular consumers be named

therein.

Case 04-01944 Doc53 Filed 11/07/05 Page 25 of 29

Second, Defendants proceed to rebut facts relating to particular consumers,
licensure, and insurance. Id. at 2-3, The whole point of a default, however, is that
Defendants may not now challenge the truth of the Complaint’s allegations. Despite
_ these arguments, moreover, Defendants have still not satisfied Rule 55, requiring good
cause and a “verified answer setting up a defense sufficient if proved to bar the claim in
whole or in part.” Defendants’ Motion is thus denied.

Cc. Report of Special Master

In his Report, the Special Master explained that he had reviewed the materials
submitted by the parties on the damages issue. Report at 1. He also correctly noted that
he was not assessing liability, which had been determined by the default, but rather
damages only. Id. at 1-2. The Special Master then derived the following formula for the
calculation of damages:

[the total of] the fee paid to the defendants by the consumer

for construction work; the value of the work not completed,

as computed by applying the percentage of work not done

to the total insurance payments for construction; the

percentage of work unsatisfactorily done, as computed by

applying that percentage of the work to the total amount

actually expended on the work; and the amount [of] out-of-

pocket expenses incurred by the consumer to complete the

work, deducting any remaining insurance or mortgage

proceeds.
Id. at 3. The Special Master then used this formula and determined the amount of money
owing to each of the consumers, depending on the consumer’s individual situation. The
_ total amount of restitution that he awarded was $2,263,209,
The Court concurs with the formula determined by the Special Master. Under the

formula, restitution is based on the fee paid to Rosen (usually 10-15%) plus the value of

the work not done or poorly done plus the consumer’s out-of-pocket expenses minus any

Case 04-01944 Doc53 Filed 11/07/05 Page 26 of 29

remaining insurance or mortgage monies. This formula requires Defendants to disgorge
their ill-gotten gains, and the consumers are made whole by obtaining money to have
their houses fully repaired and any expenses reimbursed. In addition, no windfall accrués
to any consumer. |

Both sides have asserted different challenges to the Special Master’s Report. The
District first claims that four different consumers should have received sums: Copeland
($68,455), Cook ($15,000), Bynam ($7296), and R. Jackson ($1991). The Court agrees
that the omission of Copeland appears to have been an oversight since that consumer
would otherwise qualify for the amount claimed under the Special Master’s formula.
Awards were not made for the others apparently because either no agreement was made
with Rosen or because none of the work was unfinished or unsatisfactorily completed.
The Court agrees with the Special Master that these three sums should not be aggregated.
Adding the $68,455 only now yields a balance of $2,331,664.

The District next argues that monies should not be awarded: on behalf of

contractors. The District is correct that contractors were not the consumers in whose

name the action was brought; indeed, they could not have been consumers under the

CPPA. The amounts of $123,045 (Keystone) and $45,691 (Woodmore Cleaners) will be
deducted, yielding a new balance of $2,162,928.

Although not raised by the parties, the Court, in its independent review of the
sums awarded, cannot find supporting documentation for the award to consumer
Wishard. Indeed, neither of the District’s spreadsheets includes any mention of this
consumer, nor is an affidavit included in the accompanying binder. If there are other

documents that were submitted to the Special Master, of which the Court is not aware,

Case 04-01944 Doc53 Filed 11/07/05 Page 27 of 29

the District may move to amend the judgment. At this time, however, the amount of
$246,743 will be deducted, leaving a balance of $1,916,185.
Defendant Suter lists many exceptions to the Report, which fall into several
categories. First, he objects to the formula, which the Court has already approved.
Second, he claims that Rosen eared its fee and should be able to retain it. As the default
has already determined that Rosen and CW violated the CPPA, they are not entitled to
keep their fee. Third, Suter argues that figures in the affidavits are not correct, but the
Court cannot find that the Special Master in any way erred in his appraisals of the
affidavits. Fourth, he argues that he cannot respond to the allegations of certain
~ consumers because he does not have their affidavits. Yet these are consumers who dealt
with Suter and his companies. Suter has not been prevented from submitting his own
documentation or evidence in regard to these consumers. He has simply chosen not to.
The objections registered by Rosen and CW have mainly to do with liability. For
instance, they argue that the consumers knew of the relationship between the two entities
and that the relationship between the insurance companies and Rosen was above board.
The default in this case, of course, prevents the Court from addressing these issues of
liability. Indeed, Rosen and CW ultimately argue that the default should be set aside.
See Response at 4. As the Court bas explained in Section B, supra, this is something the
Court is disinclined to do.
The District also asks that the Court issue a restitution figure as an aggregate sum,
rather than decree an award to specific consumers. As other consumers may come
forward and as the Plaintiff in this matter is the District, not the consumers, the Court

believes this to be the appropriate course. As set forth above, that amount is $1,916,185.

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The Court should also note that Defendants have still not paid the Special Master
their half of his fees, as they had previously agreed to do. As the Court vacated its earlier
Order permitting payment to come from an insurer, Defendants owe the Special Master
$3,328.50, which represents 50% of his fees. The District has already paid him its 50%.
This Order requires Defendants to pay their share.

Finally, issues of other relief, including attorney fees and permanent injunctive
relief, are not presently before the Court. To the extent Plaintiff is seeking additional
relief beyond the restitution herein ordered, Plaintiff may file a motion so requesting on
or before Feb. 6, 2004. If no motion is filed, the Court will enter a final judgment along
the lines of the Order entered today.

The Court, accordingly, ORDERS that:

1. Suter’s Motion to Dismiss is DENIED;

2. Defendants’ Motion to Set Aside is DENIED;

3. Judgment is entered in favor of the Special Master against all Defendants

in the sum of $3,328.50; and

4, Restitution is entered in favor of Plaintiff against all Defendants in the

sum of $1,916,185.

IT IS SO ORDERED.

7 AG]
7, 2004 E
“ Sia |

MAILED Jay 4,0 2004

’ Case 04-01944 Doc53 Filed 11/07/05

Copies mailed to:

William Suter
6311 Haviland Dr.
Bethesda, MD 20817

Wendy Weinberg, Esquire
Asst. Corporation Counsel
441-4" St, NW

450N

Washington, DC 20001

Edward Kimmel, Esquire
709 Irving St., NW
Washington, DC 20010

John Hayes, Jr., Esquire
4019" St, NW

Suite 900

Washington, DC 20004

-10

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