Hermitage Inn Real Estate Holding Co. v. Extreme Contracting, LLC, 2016-090

• Decision Date: 02 June 2017
• Docket Number: No. 2016-090,2016-090
• Parties: Hermitage Inn Real Estate Holding Co., LLC v. Extreme Contracting, LLC
• Court: Vermont Supreme Court

2017 VT 44

Hermitage Inn Real Estate Holding Co., LLC
v.
Extreme Contracting, LLC

No. 2016-090

Supreme Court of Vermont

October Term, 2016
June 2, 2017

NOTICE: This opinion is subject to motions for reargument under V.R.A.P. 40 as well as formal revision before publication in the Vermont Reports. Readers are requested to notify the Reporter of Decisions by email at: JUD.Reporter@vermont.gov or by mail at: Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801, of any errors in order that corrections may be made before this opinion goes to press.

On Appeal from Superior Court, Chittenden Unit, Civil Division

Helen M. Toor, J.

Darren R. Misenko and William Alexander Fead of Fead Construction Law, PLC, South Burlington, for Plaintiff-Appellee.

Jacob O. Durell and Jasdeep S. Pannu of Stevens Law Office, Stowe, for Defendant-Appellant.

PRESENT: Reiber, C.J., Dooley, Skoglund, Robinson and Eaton, JJ.

¶ 1. DOOLEY, J. Defendant Extreme Contracting, LLC appeals from the trial court's order granting a default judgment to plaintiff Hermitage Inn Real Estate Holding Co., LLC in this contract dispute. The court held defendant responsible for enforcing a mandatory arbitration clause in the parties' contract and ordered defendant to "initiate" arbitration by a certain date. When defendant failed to do so, the court considered this a failure to obey a "scheduling order" under Vermont Rule of Civil Procedure 16.2, and as a sanction, it granted a default judgment to plaintiff under Rule 37(b)(2)(C). Defendant argues, among other things, that a default judgment was inappropriate here. It maintains that the court should have granted its motion to dismiss plaintiff's suit given the mandatory arbitration provision, and that as the defendant, it should not

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have been required to "initiate" arbitration. It also asserts that the court erred in denying its motion to vacate the default judgment. We agree that the court erred. Notwithstanding the many delays and missteps by defendant's attorney, the court issued an erroneous order, and based on that order ultimately granted a sanction—a default judgment—that was unsupported by the facts and the law. We reverse the court's decision and remand for entry of an order requiring plaintiff to initiate arbitration or face dismissal of its suit.

¶ 2. Given the basis of the court's decision and the nature of defendant's claims on appeal, we must recount the procedural history of this case in detail. In December 2013, the parties entered into a contract pursuant to which plaintiff agreed to pay defendant $681,987.81 to perform certain work at the Hermitage Base Lodge Project. The contract contained the following mandatory arbitration clause:

In the event of any dispute arising hereunder, the matter shall be submitted to and settled by binding arbitration in accordance with the Construction Industry Rules of the American Arbitration Association. The parties shall be bound by the decision rendered and such decision may be enforced by any court of competent jurisdiction.

¶ 3. Notwithstanding this provision, plaintiff sued defendant in October 2014, raising breach-of-contract claims and indemnification claims for amounts of liens imposed on the property by defendant's unpaid subcontractors. Plaintiff also moved for an ex parte trustee process under Vermont Rule of Civil Procedure 4.2(b)(3), which the court granted. In mid-January 2015, defendant's principal filed a pro se answer and a counterclaim for $185,000. The principal indicated that defendant could not afford to hire counsel "as a result of financial strain from not being paid," and asked the court for an extension of time or "lessons of the law" to prepare a defense.

¶ 4. Plaintiff apparently did not receive this filing, and on January 20, 2015, it moved for a default judgment based on defendant's failure to answer the complaint. The court denied

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plaintiff's motion in February 2015. It stated, however, that because defendant was an LLC, it must hire counsel or seek permission to have a nonattorney appear. The court directed defendant to do so by March 6, 2015, or it would strike the pro se answer on plaintiff's motion. Defendant's principal asked for additional time to hire counsel, indicating that he did not know Vermont law and did not believe that he could represent the LLC on his own. The court granted defendant's request, extending the deadline to April 13, 2015. When defendant failed to meet this deadline, plaintiff moved to strike defendant's pro se answer and counterclaim, and moved for a default judgment in its favor under Vermont Rule of Civil Procedure 55(a) for failure to plead or otherwise defend.

¶ 5. Before the court ruled on these requests, Stevens Law Office entered an appearance on defendant's behalf in mid-May 2015 and asked for an extension of time in which to respond to plaintiff's motions. Plaintiff opposed the request. It cited the delays that had already occurred and argued that the time for counsel to enter an appearance had passed. Plaintiff asked the court to strike defendant's pro se answer, dismiss the counterclaim, and grant it a default judgment. In response to these motions, the court gave defendant until July 24 "to present to the Court some basis for believing that [defendant] has a defense on the merits—an answer must be filed by counsel by that deadline. If an answer is filed, the Motion to Strike will be denied." The court then struck defendant's earlier pro se answer.

¶ 6. Through counsel, defendant filed an answer on July 24, 2015. At the same time, it moved to dismiss plaintiff's complaint and to enforce the mandatory arbitration clause in the parties' contract. Defendant also asked to enlarge the time in which to file counterclaims, which the court granted, but defendant never filed any counterclaims.

¶ 7. Plaintiff opposed these requests. It asked the court to reject defendant's answer as insufficient and to grant it a default judgment. Plaintiff asserted that the denials in defendant's answer did not fairly meet the substance of the averments denied, and that defendant had not

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provided any grounds for its denials or in any way contradicted facts asserted in an affidavit that plaintiff had offered in support of the ex parte motion for trustee process. Plaintiff maintained that defendant's answer failed to comply with the court's order, that this should be treated as a failure to obey a scheduling order under Rule. 16.2, and that a default judgment should be issued as a sanction under Rule 37(b)(2)(C). If a default judgment was not granted, plaintiff argued that the case should be stayed pending the completion of arbitration rather than dismissed. It cited § 3 of the Federal Arbitration Act, 9 U.S.C.A. § 3, as support for this assertion. Plaintiff further argued that defendant should be required to initiate arbitration under the American Arbitration Association (AAA) Construction Industry Rules by filing a demand for arbitration with the AAA, paying the administrative filing fee, and filing a copy of the applicable arbitration agreement, because defendant was the party seeking to enforce the mandatory arbitration provision in the contract. Plaintiff asked the court to establish a deadline for defendant to initiate arbitration.

¶ 8. In a September 9, 2015 entry order, the court denied plaintiff's motion for a default judgment. It also denied defendant's motion to dismiss, finding that defendant cited no law to support dismissal as opposed to the stay requested by plaintiff. The court thus stayed the case pending arbitration, contingent upon defendant properly initiating such arbitration by October 1, 2015. The court subsequently granted defendant's request for an additional two weeks in which to initiate arbitration.

¶ 9. On October 21, 2015, plaintiff again requested a default judgment in its favor. It argued that defendant failed to meet the court's deadline and that its failure to do so should be treated as a failure to obey a scheduling order under Rule 16.2. Again, plaintiff asked the court to sanction defendant under Rule 37(b)(2)(C) by granting a default judgment in its favor. Plaintiff maintained that defendant's failure to meet the deadline was part of a long pattern in which defendant had deliberately delayed resolution of the case. It argued that defendant's repeated failure to meet court deadlines demonstrated a deliberate and willful disregard for the court's

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orders and the efficient management of the case. Plaintiff asserted that it had been prejudiced due to the costs associated with the delay in resolving the case.

¶ 10. In a December 8, 2015 entry order, the court directed defendant to provide proof that it had initiated arbitration as ordered, and if no such proof was filed by December 18, the court indicated that it would grant plaintiff's motion for default judgment. On December 29, 2015, given defendant's failure to initiate arbitration, the court granted plaintiff's October 21, 2015 motion for default judgment "for the reasons set forth in the motion." The court directed plaintiff to submit a proposed judgment to which defendant would have five days to object.

¶ 11. In April 2016, plaintiff moved for a final judgment. One month later, defendant filed a motion to vacate, a...