Assist Financial Services, Inc. v. Freight One Transportation, Inc. et al

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION
ASSIST FINANCIAL SERVICES,
INC., a South Dakota Corporation,
Plaintiff,
4:20-cv-4015
vs. MEMORANDUM AND
ORDER
FREIGHT ONE TRANSPORTATION,
INC., a California Corporation, and
DAVID PALACIOS,
Defendants
Pending before the Court is PlaintifFs Amended Motion for Default
Judgment(Doc 17) wilh several affidavits in support(Doc. 19, 20, 21). As
explained in the Court's Memorandum and Order(Doc. 15)addressing
Defendant's previous Motion for Default Judgment(Doc. 9), Plaintiff Assist
Financial Services, Inc., filed a Complaint against Defendants Freight One
Transportation, Inc. and David E. Palacios raising the following claims: 1) Breach
ofPurchasing Agreement against Freight One; 2)Breach of Purchasing Agreement
against Palacios, d/b/a/ Freight One; 3)Breach of Guaranty against Palacios; 4)
Fraudulent Inducement & Deceit against Defendants.(Doc. 1). When Defendants
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failed to respond,Plaintiffs filed a Motion for Default(Doc. 5)and the Clerk of
Court filed an entry of default(Doc. 8)pursuant to FRCP 55(a). Plaintiffs
subsequently filed a Motion for Default Judgment.(Doc. 9).
FRCP 55(b)(1) provides that the Clerk must enter a default judgment if the
amount is for a sum certain. In other cases, according to FRCP 55(b)(2), the party
must apply to the Court for a default judgment. Stephenson v. El-Batrawi, 524
F.3d 907,917 n.11 (8th Cir. 2008)(quoting KPS & Assocs., Inc. v. Designs By
FMC,Inc., 318 F.3d 1, 19(1st Cir. 2003)). In ruling on Plaintiffs Motion,the
Court first determined that diversity jurisdiction exists, 28 U.S.C. § 1332(a), and
that South Dakota law applies to resolution ofthe claims. (Doc. 15). The Court
denied the Motion, however.(Id.). The Court's rationale was that it was unable to
determine the specific amounts ofthe costs and fees owed to Plaintiff because
some amounts had been redacted on the documents filed with the Court.(Id.).
Furthermore,the Court denied the request for attorneys' fees because, although
authorized by the parties' contract,(Doc. 1-1, § 22), the Court was required to
determine whether the fee requested was "reasonable." In re S. Dakota Microsoft
Antitrust Litig., 707 N.W.2d 85,98(S.D. 2005). That determination and the
amount of damages could not be made without additional information concerning
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damages and the mathematical calculations used to support damages and attomeys'
fees. (Doc. 15).
Almost one year after the court's entry of Judgment, Plaintiff filed an
Amended Motion for Default Judgment which is now before the Court. (Doc. 17).
The Court notes that the copy ofthe parties' contract has had the redactions
removed so that the damages claimed are now reflected as sums certain. (Doc. 21-
1)-
DISCUSSION
1. Default
When the Court has been asked to render a default judgment pursuant to
Rule 55(b)(2), it is given the discretion to hold a hearing or otherwise obtain
evidence to ascertain the appropriate amount of damages. Stephenson,524 F.3d at
915. As was pointed out in Glickv. Western Power Sports,Inc., 944 F.3d 714,718
(8th Cir. 2019), this determination is not simply a mathematical computation by
the court. Rather, the court first must determine whether the plaintiff has stated a
substantive claim. ^nMarshall v. Baggett,616 F.3d 849(8th Cir. 2010)the court
made clear that, although a court may enter a default judgment, it is "incumbent
upon the district court to ensure that the unchallenged facts constitute a legitimate
cause of action prior to entering final judgment." Id. at 852-53(quoting Murray v.
Lene, 595 F.3d 868, 871 (8th Cir. 2010)(cleaned up)). The Marshall court vacated
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the judgment despite the default because "the complaint was insufficient to state a
claim." 616 F.3d at 852-53. The court in did likewise. 944 F.3dat 718. See
also Martinhing International, LLC v. BC Cleaners, LLC,855 F.3d 847, 850 {8th
Cir. 2017). In contrast, the complicated and detailed facts in
warranted a defaultjudgment. 524 F.3d at 912-14. Ste 2\so Everyday Learning
Corp. V. Larson, 242 F.3d 815, 817(8th Cir. 2001)(default affirmed).
After the court has determined that the plaintiff has a legitimate cause of
action, it proceeds to calculate the amount ofthe judgment. As the court explained
in Everyday Learning,"When a defaultjudgment is entered on a claim for an
indefinite or uncertain amount of damages,facts alleged in the complaint are taken
as true, except facts relating to the amount ofdamages, which must be proved in a
supplemental hearing or proceeding." Id. at 818. See aiso American Red Cross v.
Community Blood Center ofthe Ozarks, 257 F.3d 859, 863-64(8th Cir. 2001).
The court has discretion whether or not to hold a hearing. As was noted in
Stephenson, the court was not required to do so despite the request ofthe defendant
because a hearing was "unnecessary," given that "each category of damages was
supported by extensive documentary evidence." 524 F.3d at 916.
2. PlaintifTs claims
As noted above. Plaintiff claims damages from breach ofcontract, breach of
guaranty, and fraudulent inducement and deceit. The required elements to form a
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valid contract in South Dakota are(1) parties capable ofcontracting;(2)their
consent;(3)a lawful purpose; and (4)sufficient consideration. SetUffv. Akins,616
N.W.2d 878(S.D. 2000)(citing S.D.C.L. § 53-1-2). To prove a breach of contract
plaintiff must show by a preponderance ofthe evidence that 1) an enforceable
promise existed; 2)the defendant breached the contract; and 3)damages resulted
from defendant's breach ofthe contract. First Bank & Trust v. Greene Enterprise,
LLC,2014 WL 5503208 (D.S.D. 2014)(citing McKie v. Huntley,620 N.W.2d 559,
603 (S.D. 2000)).
Plaintiff has supplied the affidavit of Merrell Holbrook, Jr., Chief Operating
Officer and Chief Financial Officer for Assist Financial, in support of its claims.
(Doc. 21). CFO Holbrook asserts personal knowledge ofthe circumstances ofthe
facts in his affidavit (id., ^2,PgID 153) and ofthe business records in support of
Plaintiffs claims.(Id.,f 3 PgID 153). According to the Holbrook Affidavit, the
parties entered into a Factoring and Security Agreement on October 30, 2018(Doc.
21-1) with an addendum Guaranty signed by Defendant David E. Palacios on die
same day (Doc. 21-2). Affiant asserts Defendant sold 53 accounts to Plaintiff at a
face value of$121, 975(Doc. 21, Tf 7,PgID 155), and the affidavit includes
supporting information concerning invoices(Doc. 21-3 and 21-4). Affiant asserts
personal knowledge of Defendants' defaults, including supplying inaccurate
statements of indebtedness, failure to repurchase defaulted accounts, interference
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with Plaintiffs right to receive payments of accounts, failure to assist with
collection after acknowledging certain invoices were spurious. (Doc. 21, THl 9-11,
PgID 156-57). Affiant designates October 9, 2019 as the date of breach of
contract. Affiant asserts Plaintiff endeavored to collect on defaulted accounts and
had some success. (Id., Tf 17 and Doc. 21-5). Affiant cited to the supporting
sections ofthe contract for the fees claimed and to S.D.C.L. § 21-1-13.1 as support
for the claim forprejudgment interest.(Id., KT115-16,PgID 158-59).
Plaintiffs Complaint asserts that pursuant to the parties' Agreement,
Plaintiff purchased Defendants' accounts and paid Defendants the agreed upon-
sum.(Doc. 1,t 16,PgID 4). Plaintiff further alleges that Defendants interfered
with Plaintiffs efforts to collect accounts; submitted documents with materially
false and misleading information; supplied inaccurate information about goods and
services encompassed by the agreement; and refused to return misappropriated
advances. (Doc. 1,^23,PgID 5). Plaintiff supports the claims with a chart listing
spurious accounts.(Id.,^ 27,PgID 7-9). Defendants were served with the
Complaint on February 4, 2020.(Doc.3 and 4).
The Court has examined the Complaint and supporting affidavit and
documents. The Court finds Plaintiff has a legitimate cause of action based on
Defendants' breach ofthe contract and breach ofthe Guaranty, and proceeds to the
question of appropriate damages.
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3. Damages
Plaintiff has claimed damages based on the value of the outstanding
invoices, a closing fee, a default fee, collection charges and an early termination
fee.(Doc. 21-1). Each is discussed below.
Plaintiff claims damages of$98,773.00 for outstanding invoices.(Doc. 18,
PgID 137). Plaintiff alleges in its Complaint(Doc. 1)that it entered into a factoring
agreement(Doc. 21-1) with the individual and corporate Defendants, in which it
purchased Defendants' accounts. Subsequently Plaintiff discovered Defendants
had misled it about certain accounts. (Doc. 21). The affidavit of Plaintiffs Chief
Financial Officer and Chief Operating Officer describes the worthless value of
several accounts, discovered only after Plaintiff endeavored to determine why they
had not been paid. (Doc. 21, TfTf 10-11). Plaintiff has attached lengthy documents
listing the unpaid accounts, their value, date of payment, and days past due.(Doc.
21-3, 21-4, 21-5). Plaintiff continued its efforts to collect unpaid accounts and
reduced that amount.(Doc. 21,^17). It is noteworthy that Plaintiff mitigated
damages by endeavoring to collect unpaid accounts. It is also important to take
note ofthe adjustments to Plaintiffs calculations as they developed over time,
because the amount ultimately identified as damages based on outstanding invoices
has been reduced. The court finds that the amount requested at the time ofthis
decision is $98,773.00,(Doc. 18,PgID 137) and grants that amount to Plaintiff.
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The court finds the amount has been established by substantial proof, including the
Affidavit of Merrell Holbrook, Jr.(Doc. 21)and its attachments.
Plaintiff requests an account closing fee of $500. This is identified in the
Factoring and Security Agreement between the parties(Doc. 21-1,§ 12) as a fee
that will be incurred at the voluntary or involuntary termination ofthe Agreement.
The claimed fee is supported by substantial evidence, including the Agreement and
Holbrook affidavit(Doc. 21,PgID 159) and that amount is awarded to Plaintiff.
Plaintiff claims a default fee of$2439.50. Plaintiffs entitlement to the fee
has been supported by substantial proofincluding the Agreement(Doc. 21-1, § 9)
and the Holbrook affidavit(Doc. 21,PgID 159).
The Parties' Agreement(Doc. 21-1,§ 10.3) authorizes a collection charge of
$100 per account, which as applied to the eleven accounts documented(Doc. 21,
PgID 159), amounts to $1100.00, and is awarded to Plaintiff.
The Parties' Agreement(Doc. 21-1,§ 12)authorizes an early termination fee
which affiant Holbrook explained(Doc. 21, 16.d. note 1, PgID 159). The fee
amounts to $4588.64 and is awarded to Plaintiff.
The Parties' Agreement(Doc. 21-1, § 10.12) allows for the collection of
prejudgment interest to the highest extent allowed by law. S.D.C.L. § 21-1-13.1
permits interest of 10%. Calculated from October 19, 2019, identified as the date
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of default, to June 30, 2021,the amount of prejudgment interest on the accounts
receivable is $17,900.19.
The total requested and awarded by the Court for the value ofthe
outstanding invoices, closing fee, default fee, collection fee, early termination fee,
is $107,401.14. The amount of prejudgment interest awarded by the Court is
$17,900.19.
4. Attorneys' fees
Plaintiff has requested attorneys' fees based on the Factoring and Security
Agreement(Doc. 21-1, § 22) which, in the event of default, requires Defendants to
reimburse Plaintiff"for the actual amount of all costs and expenses, including
attomeys' fees."(Id., §22). The Agreement lists the activities of counsel that call
for reimbursement of attorneys' fees, including "collection of fiill payment
pursuant to this contract" (id., § 22.2),"actual costs"(id., § 22.3), and the "actual
amount of all costs and expenses, including attorney fees which Purchaser may
incur in enforcing this agreement."(Id., § 22.4).
The South Dakota Supreme Court has stated that,"Attorney fees are allowed
when there is a contractual agreement that the prevailing party is entitled to
attorney fees...." Aqreva v. Eide Bailly, LLC,950 N.W.2d 774,792(S.D. 2020)
(quoting Fuller v. Croston, 725 N.W.2d 600,612(S.D. 2006)(quoting Credit
Collection Services, Inc. v. Pesicka, 721 N.W.2d 474,476(S.D. 2006))(cleaned
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up)). Contract provisions are not dispositive, however, for the attorneys' fees
awarded must be "reasonable." In re South Dakota Microsoft Antitrust Litigation,
707 N.W.2d 85,98(S.D. 2005).
The South Dakota Supreme Court has directed that assessment of
reasonableness begins with the calculation of"the hourly fee multiplied by the
attorney's hours." Id. at 99(citing Dicffy v. Circuit Court, Seventh Judicial Circuit,
676 N.W.2d 126,134(S.D 2004)). This calculation is followed by consideration
ofthe following factors:
(1)the time and labor required, the novelty and difficulty ofthe questions
involved, and the skill requisite to perform the legal service properly;
(2)the likelihood, if apparent to the client, that the acceptance ofthe
particular employment will preclude other employment by the lawyer;
(3)the fee customarily charged in the locality for similar legal services;
(4)the amount involved and the results obtained;
(5)the time limitations imposed by the client or by the circumstances;
(6)the nature and length of the professional relationship with the client;
(7)the experience, reputation, and ability ofthe lawyer or lawyers
performing the services; and
(8) whether the fee is fixed or contingent.
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SD Microsoft at 98- 99(quoting City ofSiovx Falls vKelley, 513 N.W.2d 97, 111
(S.D. 1994)).
The South Dakota Supreme Court also has recognized that the "fee should
not be determined by any single factor, but rather all ofthe factors should be taken
into consideration in determining a reasonable fee." Crisman v. Determan
Chiropractic, Inc., 687N.W.2d 507, 514(S.D. 2004){citmg Duffy,676 N.W.2d at
134). Furthermore,"a fee applicant is not limited to paying out-of-state counsel
the reasonable local rates." SD Microsoft at 103 (citing Emery v. Hunt, 236
F.Supp.2d 1033, 1039(D.S.D. 2002)(cleaned up)). The Microsoft court added
that if hiring out-of-state counsel was "reasonable," counsel's hourly rate is
determined by the attorney's "degree of skill, experience, and reputation." Id.
{c{}xoim.g Anderson v. Wilson, 357 F.Supp.2d 991,997(E.D. Ky. 2005)(cleaned
up)).
In the case at bar, plaintiffs have requested attorneys' fees and costs for
attorneys employed at Ullman & Ullman, P. A., Boca Raton,FL,and Redstone
Law Firm, Sioux Falls, SD. Attorneys Michael Ullman and Jared Ullman
specialize in factoring work and, according to the affidavit of Jared Ullman,their
contract with Plaintiff provides for fees of$600/hour for Michael Ullman and
$400/hour for Jared Ullman.(Doc. 20). The affidavit asserts these fees are
customary in the particularized field in which Ullman & Ullman engage.(Id.)
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Michael Ullman billed for 2.8 hours of work and documented the hours worked.
Jared Ullman billed for 35.10 hours and documented his hours and work (Id.) Co-
coimsel Sommers's Memorandum requests $14,600(Doc. 18,PgID 141)for
Ullman & Ullm^. Based on the specialized work in which these attorneys engage,
the contract provisions authorizing the fees, and the number of hours devoted by
each attorney to the case as documented in the affidavit of Jared Ullman (Doc. 20),
and Co-counsel Sommers's filing(Doc. 18), the Court finds the attorneys' fees
requested for Ullman & Ullman are reasonable and awards them in full.
Ullman & Ullman have documented costs in the amount of$1943.04(Doc.
20). The Court fmds that based on the work performed on this case by Ullman &
Ullman,the costs are reasonable and are awarded in full.
Redstone Law Firm attorneys Meghann M.Joyce, Lisa Prostrollo and
Christopher D. Sommers have requested attomeys' fees and costs. The fees
requested are based on typical hourly rates for attomeys with counsels' experience
and on hours devoted to the case of 30.35.(Doc. 18). Attomey Sommers has
documented the work performed on the case.(Id.,^ 6). The total requested is
$7048.18. The Court finds the attomey fee request is reasonable and awards it in
full. Redstone Law Firm has claimed $610 as costs. The costs are documented in
the affidavit of Attomey Sommers(Doc. 18). The Court finds the costs requested
are reasonable and awards them in full.
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5. Guaranty
Plaintiff has filed suit against Freight One Transportation, Inc., and David E.
Palacios as an individual, based on Defendant Palacios's Guaranty filed with the
Factoring and Security Agreement(Doc. 21-2). S.D.C.L. § 56-1-1 defines a
guaranty as "a promise to answer for the debt, default, or miscarriage of another
person." A guarantor's liability "will not be enlarged beyond the plain and certain
import of the guaranty contract" and "any ambiguous or uncertain terms in a
guaranty will be interpreted most strictly against the party who prepared it." First
Dakota National Bank V. Graham,864 N.W.2d 292, 296(S.D. 2015)(quoting
Rabbins & Steams Lumber Co. v. Thatcher, 453 N.W.2d 613,615(S.D. 1990)). If
valid, a guaranty may be enforced to the extent ofa quantifiable benefit the
guarantor received. Northwestern Services Corp. v. Si-Tanka Huron Univ., 731
N.W.2d 625,632(S.D. 2007).
In Marshall, where plaintiffs sought a default judgment,the Eighth Circuit
addressed the issue of individual liability of a defendant sued in conjunction with
the corporation of which she was the president. 616 F.3d at 851. The Court set
forth the rule that an individual may not be accountable for corporate debts based
on an agreement which is signed only in an official capacity as president, not in an
individual capacity. Id. at 853. Lacking any other theory upon which to hold the
individual liable, the complaint against her should have been dismissed. Id. at 855.
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See also Martinizing, 855 F.3d at 852 (default judgment reversed against
individual defendants who had not participated in trademark infringement or
violations of Minnesota Deceptive Trade Practices Act).
In contrast, individual liability has been imposed if the facts so warrant, and
as relev^t to the case at bar, where a corporate officer has signed a guaranty. In
First Bank & Trustv. Greene Enterprise, LLC,2014 WL 5503208(D.S.D. 2014),
plaintiff sought a default judgment against defendant for conversion, breach of the
parties' Factoring and Security Agreement, and breach ofthe guaranty by the
individual defendant. Id. * 1. The court concluded the complaint alleged a
legitimate cause of action, defendants had breached the contract and guaranty, and
damages were recoverable from the company and defendant individually.Id. The
amount ofdamages was supported by detailed calculations in affidavits firom the
bank vice-president and bank's attorney, and the court awarded a defaultjudgment
and the full amount of damages claimed. Id.
In the case at bar, Defendant David E. Palacios signed a Guaranty (Doc. 21-
2)pursuant to which,"for valuable consideration"(id., PgID 176) he accepted the
obligation of guaranteeing payment of all legitimate payments owed by his
company,Freight One Transportation, Inc., to Assist Financial as follows: he
"shall promptly and fully perform, pay and discharge all of its present and future
liabilities, obligations and indebtedness to the Company... This Guaranty is an
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absolute guaranty of pajonent and not of collectibility." Id. Furthermore,
Defendant Palacios agreed that "the records ofthe Company shall be received as
conclusive evidence ofthe amount ofthe indebtedness at any time owing." Id. The
Guaranty was executed at the time the parties signed the Factoring and Security
Agreement.(Id.). Defendants' debts to Assist Financial have not been paid.
Given the terms ofthe Guaranty requiring payment by Defendant Palacios of
the obligations ofFreight One Transportation, Inc. based on the records supplied
by Assist Financial, and the circumstances under which the Guaranty was signed,
the Court finds that Defendant Palacios is liable for the debts owed by Freight One
Transportation, Inc. to Assist Financial in both an individual and representative
capacity.
CONCLUSION
Plaintiff has demonstrated that it is entitled to default judgment against
Defendants based on legitimate claims of breach ofcontract and breach of
guaranty. Plaintiff has supplied documentation ofits Factoring and Security
Agreement and Guaranty with Defendants. The Agreement lists damages payable
on default. Plaintiffhas supported its claims for damages, costs and attomeys' fees
with detailed information including affidavits and business records. Plaintiff is
entitled to the damages, costs and fees requested. (Doc. 18, PgID 139 and 142).
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Accordingly, it is ordered that Plaintiffis awarded the following:
1. Compensatory damages for outstanding invoices of$98,773.00;
2. Closing fee of$500;
3. Default fee of$2349.50;
4. Collection fee of$1100;
5. Early termination fee of$4588.64;
6. Prejudgment interest of$17,900.19;
7. Attorneys'fees of$21,648.18;
8. Costs of$2553.04.
Dated this 9th day of February, 2022.
BY THE COURT:
rence L. Piersol
ATTEST: United States District Judge
MATTHEW W.THELEN,CLERK
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