Olcott v. Delaware Flood Co.

• Citation: 327 F.3d 1115
• Decision Date: 24 April 2003
• Docket Number: No. 01-5119.,No. 02-5021.,01-5119.,02-5021.
• Parties: Bernard OLCOTT, Plaintiff-Appellee, v. DELAWARE FLOOD COMPANY, a limited partnership under the laws of Oklahoma; Layton Oil Company, a Kansas corporation; William Douglas Layton, individually and as general partner of Delaware Flood Company 1976 DH; Delaware Flood Company 1977 EH; Delaware Flood Company 1978 FH; Delaware Flood Company 1979 Ltd; Michael Galesi, Defendants-Appellants, and First National Bank of Oklahoma City, Defendant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1115

327 F.3d 1115

Bernard OLCOTT, Plaintiff-Appellee, v. DELAWARE FLOOD COMPANY, a limited partnership under the laws of Oklahoma; Layton Oil Company, a Kansas corporation; William Douglas Layton, individually and as general partner of Delaware Flood Company 1976 DH; Delaware Flood Company 1977 EH; Delaware Flood Company 1978 FH; Delaware Flood Company 1979 Ltd; Michael Galesi, Defendants-Appellants, and First National Bank of Oklahoma City, Defendant.

No. 01-5119.

No. 02-5021.

United States Court of Appeals, Tenth Circuit.

April 24, 2003.

COPYRIGHT MATERIAL OMITTED

R. Thomas Seymour (C. Robert Burton with him on the briefs), Seymour Law Firm, Tulsa, OK, for Defendants-Appellants.

David Feinsilver, The Feinsilver Law Group, P.C., Millburn, NJ, for Plaintiff-Appellee.

Before TACHA, Chief Judge, and BALDOCK and MURPHY, Circuit Judges.

BALDOCK, Circuit Judge.

Defendants appeal the district court's entry of a $1.1 million default judgment. The district court entered default as a discovery sanction after finding Defendants repeatedly, willfully, and in bad faith failed to comply with discovery orders. On appeal, Defendants assert the district court was without jurisdiction to enter a default judgment. Defendants also raise numerous additional challenges to the district court proceedings. We have jurisdiction pursuant to 28 U.S.C. § 1291.¹ We affirm the judgment and damage award, but remand with instructions to recalculate the prejudgment interest award.

I.

Plaintiff Bernard Olcott, an investor in oil drilling and exploration limited partnerships, filed a complaint against Defendants in 1982 alleging federal securities law violations and various state law tort, fraud and breach of contract claims.² The claims arose out of Defendants' solicitation, sale and operation of oil tax shelter limited partnership units between 1976 and 1979. Plaintiff's suit sought damages and rescission of the investment contracts. In February 1986, after unsuccessfully attempting to employ more traditional discovery motions, Plaintiff filed a motion to compel Defendants to render an accounting of all partnership assets and income. On March 4, in exchange for the court's postponement of the jury trial scheduled to begin March 17, Defendants consented to entry of an accounting order requiring them to provide Plaintiff within six months "a full, complete, meaningful, and formal accounting ... setting forth all items of contribution, income, and expense as well as the disposition of all assets and monies. . . ."

Defendants subsequently submitted three accountings. After each submission, Plaintiff challenged the sufficiency of the accounting. The court-appointed accounting expert also found each of the submitted accountings wholly inadequate. The court held an evidentiary hearing after each submission and, after each hearing, concluded the submitted accounting did not comply with the court's accounting orders. After each hearing, the court ordered Defendants to file a supplemental accounting.

After the third submission, and a delay of almost four years, the court concluded Defendants' failure to comply was willful and in bad faith. The court partially based its conclusion on the testimony of two of Defendant Michael Galesi's former attorneys. Each testified Galesi agreed to provide an accounting solely to obtain a continuance and never had any intention of complying with the court's accounting order. Counsel also testified that Galesi still had no intention of complying with the court's order and would rather "take his chances" than provide the accounting. Plaintiff also introduced evidence that none of Defendants had requested bank records or made any other effort to produce an accounting in compliance with the court's order. As a result of the willful discovery violations, the court entered an order of default on February 8, 1990. See Fed.R.Civ.P. 37(b)(2); Fed.R.Civ.P. 55(a). In its order, the court stated:

This court must order a sanction appropriate to the severity of Defendants' abuse of the legal process. Plaintiff is entitled to a judgment against the Defendants, jointly and severally, for his investment of $1.9 million less any portion of those funds which Defendants can establish were utilized for legitimate purposes under the terms and provisions of the limited partnership agreements. There will be a trial at which the burden will be on the Defendants to establish to the satisfaction of the fact finder that any portion of Plaintiff's contribution was utilized for legitimate business purposes under the terms of the agreements among the parties.³

The court also ordered Defendants to comply with its prior accounting order by correcting the deficiencies identified by the court's expert.

Following the court's entry of default, Defendants filed a summary judgment motion asserting the statute of limitations barred Plaintiff's federal securities act claims. The district court ultimately dismissed Plaintiff's federal claims on statute of limitations grounds.⁴ The court also dismissed Plaintiff's state law claims, concluding that it did not have jurisdiction after dismissing the federal claims. In the same order, without referring to its prior entry of default, the court sanctioned Defendants for their failure to comply with discovery orders by ordering Defendants to pay $402,527.98 in attorneys' fees and accounting expenses. Plaintiff appealed the dismissal of his federal and state claims and sought enforcement of the order entering default. Defendants cross-appealed the imposition of the monetary sanction.

On appeal, this Court affirmed dismissal of Plaintiff's federal securities act claims with respect to the 1976, 1977 and 1978 partnership interests, but reversed and remanded for reconsideration the district court's dismissal of the 1979 securities act claims and all pendant state law claims. Olcott II, 76 F.3d 1538 (remanding Plaintiff's securities act claims for further factual findings and remanding Plaintiff's pendant state claims with instructions to conduct the appropriate death knell analysis). Olcott II also affirmed the district court's imposition of the monetary sanction, but declined to rule upon the merits of the default order after concluding the court's entry of default was not a final determination. Id. at 1558-59. In Olcott II, we assumed the district court intended to "abandon" its entry of default when it entered an order dismissing all claims without entering judgment on the default pursuant to Fed.R.Civ.P. 55(b). Id. Olcott II expressly instructed the district court that it could revisit the issue on remand: "If the court ultimately revives Mr. Olcott's cause of action based on his 1979 investment, the court could take the opportunity to revisit the appropriateness of a default judgment at that time." Id. at 1559.

On remand, the district court again dismissed as time barred the federal securities claims based on Plaintiff's 1979 investment, but elected to retain pendant jurisdiction over Plaintiff's state law tort, fraud and breach of contract claims. The court also indicated its intent to apply the default entered prior to the appeal. At a January 1998 conference, the court specifically ruled that Plaintiff's remaining claims would "merge"⁵ into the default, stating: "I further find and order that [Plaintiff's remaining claims] merged into the 1.9 million dollar judgment entered by this Court."

In a February 4, 1998 order, the district court dismissed many of Plaintiff's state law claims. The court also ruled Plaintiff's remaining fraud and breach of contract claims would not be tried during the setoff hearing:

The primary issue raised by the motions for summary judgment is whether Plaintiff is entitled to pursue his state law claims and receive the benefit of the $1.9 million default judgment he has previously been awarded. Plaintiff has stated both at the preliminary trial conference and at status conferences, that he wishes to accept the $1.9 million default judgment, but that he wishes also to be able to put on evidence for his fraud case as well. Plaintiff concedes that damages are the same, but argues that proving the fraud case is necessary because he may incur problems proving his case if the default judgment is ultimately reversed. This is not sufficient reason to allow Plaintiff to put on evidence to prove a fraud claim when Plaintiff has already received a judgment in his favor entitling him to the same damages. In the interest of efficiency and judicial economy, the trial of this matter is limited to the issues encompassed by the default judgment previously entered.⁶

The court conducted a set-off hearing to establish and quantify Defendants' entitlement to credits against the default. Defendants had the burden of establishing their entitlement to credits by producing an accounting that complied with the court's prior accounting orders. The court limited its consideration of Defendants' evidence to accounting materials directly tracing Defendants' use of Plaintiff's funds. The court did not permit Plaintiff to put on evidence related to his fraud or contract claims.

On June 6, 2001, after a three-day hearing, the court entered judgment in favor of Plaintiff in the amount of $1,077,014.70 plus interest. The court specifically found Defendants failed to cure the deficiencies in the accounting. With the exception of certain Plaintiff-stipulated credits, the court ruled Defendants failed to establish entitlement to any credits against the default. The court subsequently entered an order quantifying the prejudgment interest award and awarding attorneys' fees and costs.

II.

In this appeal, Defendants first assert the district court was without jurisdiction to conduct a set-off hearing or to enter the final judgment order because the court had previously dismissed all substantive claims. Whether the district court had jurisdiction is a legal question we review de novo. Kunkel v....