Lewis v. Lewis Elec.

• Decision Date: 27 December 2021
• Docket Number: 19-cv-527-DKW-KJM
• Court: U.S. District Court — District of Hawaii
• Parties: LEE LEWIS, Plaintiff, v. LEWIS ELECTRIC, LLC; CCI, INC.; ADAM IBARRA; MARY IBARRA; and VINCE COLARELLI, Defendants.

LEE LEWIS, Plaintiff, v. LEWIS ELECTRIC, LLC; CCI, INC.; ADAM IBARRA; MARY IBARRA; and VINCE COLARELLI, Defendants.

No. 19-cv-527-DKW-KJM

United States District Court, D. Hawaii

December 27, 2021

ORDER (1) GRANTING PLAINTIFF'S MOTION FOR DEFAULT JUDGMENT AGAINST CCI, INC. AND LEWIS ELECTRIC, LLC AND (2) DENYING PLAINTIFF'S MOTION FOR DEFAULT JUDGMENT AGAINST ADAM AND MARY IBARRA

Derick K. Watson United States. District Judge

Plaintiff Lee Lewis seeks default judgment against the two company Defendants-CCI, Inc. (“CCI”) and Lewis Electric LLC (“Lewis Electric”)-for failing to pay money owed to him under two contracts. Lewis also seeks default judgment against two of the companies' owners-Adam (aka Adan) Ibarra (“Adam”) and Mary Ibarra (“Mary”) (collectively, “the Ibarras”)-under an alter ego theory.^[1] The Court GRANTS Lewis' motion for default judgment against CCI and Lewis Electric but not the Ibarras. As explained below, Lewis' evidence supporting his alter ego theory is not sufficient under Hawai'i law to hold the Ibarras personally liable for the companies' debts.

LEGAL STANDARD

A court may enter default judgment for a plaintiff if the defendant has defaulted and the claim is for a “sum certain.” Fed.R.Civ.P. 55. The decision to grant default judgment lies within the court's discretion. Eitel v. McCool, 782 F.2d 1470, 1471 (9th Cir. 1986). In making that decision, courts weigh seven factors:

(1) the possibility of prejudice to the plaintiff; (2) the merits of plaintiff's substantive claim; (3) the sufficiency of the complaint; (4) the sum of money at stake in the action; (5) the possibility of a dispute concerning material facts; (6) whether the default was due to excusable neglect; and (7) the strong policy underlying the Federal Rules of Civil Procedure favoring decisions on the merits.

Id. at 1471-72. Further, “the factual allegations of the complaint, except those relating to the amount of damages, will be taken as true.” TeleVideo Sys., Inc. v. Heidenthal, 826 F.2d 915 917-18 (9th Cir. 1987); Fair Hous. Of Marin v Combs, 285 F.3d 899, 906 (9th Cir. 2002) (plaintiff must provide proof of damages).

RELEVANT BACKGROUND

I. The Sale Contracts

Effective February 16, 2015, Lewis sold his company, Lewis Electric, to CCI, which was 80% owned by the Ibarras.^[2] Dkt. No. 163-1 at 5.

The sale was seller-financed: pursuant to a Membership Interest Purchase Agreement (the “MIPA”), Dkt. No. 1-1, Lewis agreed to transfer his 100% membership interest in Lewis Electric to CCI in exchange for a Promissory Note (the “Note”), Dkt. No. 1-2, in which CCI promised to pay Lewis $185, 000.00 plus five percent annual interest, by December 31, 2018. Dkt. No. 1-1 ¶ 7; Dkt. No. 1-2 at 1, 17, 21. Adam signed the MIPA and Note on behalf of CCI. Dkt. Nos. 1-1 at 50; 1-2 at 20.

Pursuant to Exhibit 2.4(a)(ii) of the MIPA, Lewis and Lewis Electric, under its new ownership, also entered into an Employment Agreement (“EA”). Dkt. No. 1-3. In the EA, Lewis agreed to continue working for Lewis Electric at a salary of $175, 000.00 with annual three percent increases, ^[3] repayment of preauthorized business expenses, and the potential for performance bonuses based on Lewis Electric's future growth and profit. Dkt. No. 1-3 at 3, 14. Adam signed the EA on behalf of Lewis Electric. Id. at 13.^[4]

II. Lewis Electric's Insolvency

Prior to the sale, Lewis claims that Lewis Electric was a profitable business with an appraised value of $3.7 million, having done roughly $85 million in work over a recent seven-year span. Dkt. No. 1 ¶ 19; Dkt. No. 163-4, Declaration of Wallace Beaty (“Beaty Decl.”) ¶ 3. After the sale, Lewis avers that the new owners rendered Lewis Electric insolvent in bad faith-by unjustifiably transferring large sums out of Lewis Electric's accounts to support other companies they owned-resulting in their inability to fulfill their obligations under the sale contracts. Dkt. No. 1 ¶¶ 7-9. Specifically, Lewis alleges:

- In November 2015, Lewis Electric's Chief Operating Officer, Wallace Beaty, learned that Lewis Electric's payroll checks were being denied for insufficient funds. Beaty Decl. ¶ 4.

- Upon investigating what had led to the lack of funds, Beaty discovered that over $786, 516.00 had been transferred out of Lewis Electric's accounts for unexplained reasons, including large sums to a company called B&B Solvent (“B&B”). Id. ¶¶ 4-5.

- Beaty asked Adam and Colarelli about the funds transfers and “[t]hey explained that various entities, including Lewis Electric, B&B Solvent, and CCI, were all part of the same big corporate structure so the transfers were not a problem. They said that money was being taken out of Lewis Electric for now, but that eventually it might be put back in.” Id. ¶ 7.

- CCI, Lewis Electric, and B&B shared owners, directors, and corporate officers (the Ibarras and Colarelli), a corporate address (111 South Tejon Street, Suite 112, Colorado Springs, Colorado 80903), and attorneys and agents (Stinar Zendejas Gaither, LLC). Dkt. No. 98-15.

- Other than sharing leadership, Lewis Electric and B&B had no business relationship. Thus, “there was no legitimate business purpose for Lewis Electric to be making payments to B&B Solvent, especially in such large quantities.” Beaty Decl. ¶ 5.

- Beaty was terminated in February 2016. Id. ¶ 10.

- From July 2016 until July 2017, Eugene Chong worked as Lewis Electric's Accounting Manager. Dkt. No. 163-5, Declaration of Eugene Chong (“Chong Decl.”) ¶ 2.

- When Chong began working at Lewis Electric, he found the accounting papers in disarray. The company's general ledger had not been updated in over a year, which he thought highly irregular. Id. ¶ 3. While attempting to get the books in order, Chong discovered the large transfers from Lewis Electric to other companies, including over $500, 000.00 to B&B. Id. ¶¶ 4-5. These transfers were made with no explanation or documentation. Id. ¶ 5.

- As a result of the funds transfers, Lewis Electric issued checks to employees that were returned for insufficient funds, key employees left the company, vendors could not be paid, and contracts were canceled. Dkt. No. 1 ¶¶ 20-21; Beaty Decl. ¶ 9 (providing an example of one such canceled contract for over $12M worth of work).

- After Lewis learned that Lewis Electric was not meeting its financial obligations because of the funds transfers, Adam told him the transfers were being made “so that debts owed by B&B Solvent for heavy equipment leases could be paid, ” and that Adam and Colarelli “owed the money and had to pay it even if it would bankrupt Lewis Electric.” Dkt. No. 98-3, Declaration of Lee Lewis (“Lewis Decl.”) ¶¶ 3-5; see also Dkt. No. 163-10 at 3 (a 2017 settlement agreement between B&B, Adam, Colarelli, and a third party, promising Lewis Electric would pay a portion of the B&B's equipment lease debt).

- Lewis Electric is now insolvent. Dkt. No. 1 ¶ 19.

III. Lewis' Claims and Prayer for Damages

First, Lewis claims CCI breached its contract by only paying $94, 124.95 ($83, 391.26 principal and $10, 733.69 interest) on the $185, 000.00 Note with all payments ceasing after June 20, 2016. Dkt. No. 163-1 at 7-8. Thus, he requests compensatory damages from CCI in the amount of $101, 608.74 in principal plus five percent interest, or $128, 945.67.^[5] Id. at 8.

Second, Lewis claims Lewis Electric breached its contract by failing to pay his salary and reimbursable business expenses under the EA from June 20, 2016 until July 21, 2017, even though he continued working there during that time. Id. He claims Lewis Electric owes him seven months of salary at the increased second-year contract rate of $180, 250.00 from July 2016 through January 2017, or $105, 145.83, and five months of salary at the increased third-year contract rate of $185, 657.50 from February 2017 through June 2017, or $77, 357.29, for a total of $182, 503.12 in unpaid salary. Id. He also claims Lewis Electric owes him an additional $50, 000.00 for unreimbursed business expenses. Id. Accordingly, he requests compensatory damages from Lewis Electric in the amount of $232, 503.12.

Lewis also asserts these breach of contract claims against the Ibarras because they “treated corporate assets as [their] own and abused the corporate form, ” and thus should be held personally liable under an alter ego theory. Id. at 10.

Finally, Lewis requests additional compensatory damages of $86, 757.69 in prejudgment interest and consequential damages of $90, 362.20 in attorneys' fees. Id. at 12. To support his prayer for prejudgment interest, Lewis says the interest has been accruing (at an unstated rate) since December 12, 2017, the day he first demanded the delinquent amounts from Defendants. Id. To support his prayer for attorneys' fees, he cites to Haw. Rev. Stat. § 607-14 and explains that the requested amount is 25% of the non-interest damages. Id. He provides no other legal or factual justification for these two figures. See id.

Summary of Damages Requested

Note

$128.945.67

EA (salary)

$182, 503.12

EA (business expenses)

$ 50, 000.00

Prejudgment interest

$ 86, 757.69

Attorneys' fees

$ 90, 362.20

Total

$538, 568.68

IV. Procedural History

On October 3, 2019, Lewis filed a Complaint asserting, inter alia, the two breach of contract claims against CCI Lewis Electric, and the Ibarras. Dkt. No. 1 ¶¶ 9, 26-37, 44-49. On October 15, 2019, the company Defendants, CCI and Lewis Electric, were served through their shared registered agent, John M. Stinar, Esq. Dkt. Nos. 16-17. Neither company responded to the Complaint, and on November 7, 2019, the Court entered default against them. Dkt. No. 163-1 at 12; Dkt. No. 19.^[6] Service of process was then attempted on the Ibarras numerous times without success, Dkt. No....