Watkins v. Lundell

Citation169 F.3d 540
Decision Date26 February 1999
Docket NumberNo. 97-3684,97-3684
PartiesDaniel WATKINS; Cynthia Watkins, Appellees, v. Terry LUNDELL; Stephanie Lundell, Appellants.
CourtUnited States Courts of Appeals. United States Court of Appeals (8th Circuit)

Lynn Jay Irwinn III, Des Moines, IA, argued (Phil Whatson, on the brief), for Appellant.

Denny M. Dennis, Des Moines, IA, argued (Karl T. Olson, on the brief), for Appellee.

Before BEAM, MAGILL, and MORRIS SHEPPARD ARNOLD, Circuit Judges.

BEAM, Circuit Judge.

Terry and Stephanie Lundell (the Lundells) appeal the district court's partial denial of their motions to set aside default judgment. The district court set aside a portion of the default judgment, under Federal Rule of Civil Procedure 60(b)(6), in order to correct a computation of actual damages and to reduce punitive damages. The Lundells argue that the entire default judgment should be set aside. They contend, inter alia, that the district court erred in awarding punitive damages. We affirm in part and reverse in part.

I. BACKGROUND

Terry Lundell, a resident of Tucson, Arizona, contracted to purchase approximately 5,381 acres of farmland in Iowa on March 26, 1990. He in turn advertised the property for sale in California where Daniel Watkins, a resident of Los Altos, California, contacted Lundell and agreed to purchase the property. As a down payment, Daniel Watkins delivered title and possession of a vintage Ferrari Testarossa, valued at $200,000. Daniel Watkins also paid a $25,000 loan origination fee and $8,000 for an appraisal. Terry Lundell accepted and sold the Ferrari but financial difficulties resulted in his failure to perform on his contract to purchase the Iowa property. The property was eventually forfeited, and without the property, Terry Lundell could not fulfill his contract to sell the land to Daniel Watkins. In 1992, Daniel Watkins and his wife, Cynthia Watkins (the Watkins), filed an action for breach of contract and fraud.

The Watkins' action was brought in the United States District Court for the Northern District of California, where it was referred for early mediation. The mediation resulted in a "Mutual Release and Settlement Agreement" (the settlement) that provided for dismissal of the contract and fraud action contingent on certain terms. The settlement required that Terry Lundell pay $25,000 to the Watkins within ten days, followed by three subsequent payments of $70,000 on November 1 of 1993, 1994, and 1995 with interest accruing on the unpaid balance at five percent. Terry Lundell was also required to obtain a life insurance policy naming the Watkins as beneficiaries. As security for the settlement, Terry Lundell provided a confession of judgment, to be filed in the event of default, and mortgages on two of his other properties. His wife, Stephanie Lundell, signed the settlement as a guarantor. Despite an extension of time, the Lundells never paid any amount, the life insurance policy was never obtained, and the property used as security turned out to be worthless. After the Lundells defaulted on the settlement contract, the Watkins filed the confession of judgment.

On July 9, 1993, the Watkins brought the present action for breach of the settlement agreement and fraud in inducing the settlement. For reasons unknown and irrelevant here, this action was brought in the United States District Court for the Southern District of Iowa. The Lundells were personally served and read and understood the summons and complaint. Just before the expiration of time for filing an answer, Terry Lundell contacted an Iowa attorney concerning representation. The Iowa attorney, being informed that an answer was due, contacted opposing counsel and received an extension of time to answer. However, before accepting the representation, the Iowa attorney requested a retainer and documents relating to the circumstances giving rise to the lawsuit. Terry Lundell agreed that he would provide the retainer and documents but never contacted the Iowa attorney again. An answer was never filed.

Meanwhile, the Watkins attempted to collect on the confessed judgment from the first action in California, and while doing so were contacted by an Arizona attorney representing the Lundells. The Arizona attorney indicated that the Lundells were contemplating bankruptcy and were prepared to offer the Watkins a quitclaim deed to some property, with allegedly $10,000 in equity, a third-position deed of trust to some parcels of land, and an unsecured interest-free promissory note in the amount of $75,000. This offer was to be in settlement of all the Watkins' claims. The Watkins rejected the offer out-of-hand, and the Lundells made no further contact.

No answer having been filed, the Watkins moved for entry of default in the present action. Default was entered against the Lundells, and the action was referred to a magistrate judge for a determination of damages. The magistrate judge held a hearing, at which the Lundells were not present, and found that the Lundells had fraudulently induced the Watkins to settle and had deliberately decided not to defend the present action. Evidence provided by the Watkins estimated Terry Lundell's net worth to be approximately $11,000,000. The magistrate judge prepared a report and recommendation calling for actual damages of $335,000 and punitive damages of $3,500,000 against the Lundells.

The district judge reviewed the record and adopted the magistrate judge's report and recommendation and entered default judgment on February 16, 1994. In June 1995, the Watkins filed the default judgment in Pima County, Arizona, whereupon the Lundells promptly filed the motions which are the subject of this appeal. On July 6, 1995, the Lundells moved to set aside the default judgment under Federal Rule of Civil Procedure 55(c), 60(b)(4), (5), and (6), by the ancillary remedy of a Bill of Review, and under the Soldiers' and Sailors' Civil Relief Act of 1940. See 50 U.S.C. §§ 501-591. The motions were referred to a magistrate judge for a report and recommendation.

The magistrate judge recommended that a portion of the default judgment be set aside and partial relief be granted under Federal Rule of Civil Procedure 60(b)(6). The report and recommendation concluded that actual damages should be reduced to $235,000 because of an error in calculation, and that punitive damages against Stephanie Lundell be reduced to $117,500 because of injustice. The magistrate judge did not recommend relief from the punitive damages awarded against Terry Lundell because Lundell's actions evidenced a pattern of fraud and deceit. Furthermore, Lundell withheld information necessary to make a more accurate determination of punitive damages. The district court adopted the report and recommendations in full, thus granting in part and denying in part the Lundells' motions to set aside default judgment. 1

II. DISCUSSION

We review a determination to set aside default judgment under Federal Rule of Civil Procedure 60(b) for abuse of discretion. See Nucor Corp. v. Nebraska Pub. Power Dist., 999 F.2d 372, 374 (8th Cir.1993). Although the Lundells moved for relief from the default judgment under several theories, only Rule 60(b)(6) is applicable. 2 A Rule 60(b)(6) motion, made within a "reasonable time," can provide relief from a judgment, including a default judgment, for "any other reason justifying relief from the operation of the judgment," Fed.R.Civ.P. 60(b)(6), thus allowing a district court to inject equity and revive an otherwise lifeless claim. Cf, Klapprott v. United States, 335 U.S. 601, 614-15, 69 S.Ct. 384, 93 L.Ed. 1099 (1949) (finding that Rule 60(b)(6) enables a court to "accomplish justice"); Hoover v. Valley West DM, 823 F.2d 227, 230 (8th Cir.1987) (weighing the "equities involved" on a Rule 60(b) motion).

A. Reasonable Time

Before considering the merits of a Rule 60(b)(6) motion, we must consider whether the motion was made within a reasonable time. What constitutes a reasonable time is dependent on the particular facts of the case in question and is reviewed for abuse of discretion. See Federal Land Bank v. Cupples Bros., 889 F.2d 764, 767 (8th Cir.1989).

We have considerable trepidation about whether the Lundells' Rule 60(b)(6) motion was made within a reasonable time since they allowed the default judgment to stand, without objection, for approximately seventeen months. Nevertheless, the district court did not address the issue and neither of the parties have raised it. In fact, when counsel for the Lundells was questioned at oral argument about how a district court could review this case under Rule 60(b)(6), he responded that "I found no objection to that procedure, and I thought that the court had exercised equitable powers and what I thought was appropriate judgment in the effort to seek overall fairness and justice." 3 From the total dearth of treatment on the issue of reasonable time, we conclude that it is not properly before us on appeal.

B. Exceptional Circumstances

The Watkins are content with the partial relief granted the Lundells by the district court. They do not argue that the partial relief was inappropriate, but seek only to uphold the district court's ruling. The Lundells, however, contend that the entire default judgment should be set aside pursuant to Rule 60(b)(6). The Lundells raise eleven separate arguments ranging from lack of proper venue to error in awarding punitive damages. The only argument of merit relates to punitive damages, which we review under the Rule 60(b)(6) framework.

"Relief under Rule 60(b) is an extraordinary remedy," Nucor, 999 F.2d at 374, since exceptional circumstances must exist to justify intrusion into the sanctity of a final judgment. See Rosebud Sioux Tribe v. A & P Steel, Inc., 733 F.2d 509, 515 (8th Cir.1984). To justify intrusion into the final judgment, the Lundells contend that either (1) Iowa's requirements for punitive damages are not met, or (2) the punitive...

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