State by Humphrey v. Ri-Mel, Inc.

• Decision Date: 15 December 1987
• Docket Number: No. C3-87-436,RI-ME,INC,C3-87-436
• Citation: 417 N.W.2d 102
• Parties: STATE of Minnesota, by its Attorney General, Hubert H. HUMPHREY, III, Respondent, v., et al., Defendants, D. Leonard Rice, et al., Appellants, Kenneth Melby, et al., Defendants.
• Court: Minnesota Court of Appeals

Page 102

417 N.W.2d 102

56 USLW 2452

STATE of Minnesota, by its Attorney General, Hubert H.

HUMPHREY, III, Respondent, v. RI-MEL, INC., et al., Defendants, D. Leonard Rice, et al., Appellants, Kenneth Melby, et al., Defendants.

No. C3-87-436.

Court of Appeals of Minnesota.

Dec. 15, 1987.

Review Denied Feb. 17, 1988.

Syllabus by the Court

1. The Club Contracts Act is not unconstitutional on its face as a violation of equal protection guarantees.

2. Appellants have not shown the attorney general has unconstitutionally applied the Club Contracts Act by intentional or purposeful discrimination in enforcement of the Act.

3. Appellants have not shown that the bond requirement under the Club Contracts Act amounts to a confiscation of business assets in violation of due process.

4. The trial court did not abuse its discretion in refusing to vacate the default judgment.

5. The trial court had legal authority to award attorney fees to the attorney general.

6. The attorney general had authority to bring an action on behalf of club members under his broad common law powers and the doctrine of parens partriae.

7. The trial court did not err in awarding $491,000 in restitution to club members.

Hubert H. Humphrey, III, Atty. Gen., Robert C. Long, Norine Olson-Elm, Sp. Asst. Attys. Gen., St. Paul, for respondent.

Stephen J. Foley, Meagher, Geer, Markham, Anderson, Adamson, Flaskamp & Brennan, Minneapolis, for appellants.

Heard, considered and decided by FORSBERG, P.J., and LANSING and NIERENGARTEN, JJ.

OPINION

FORSBERG, Judge.

The respondent State of Minnesota, through the attorney general, brought an action against appellants D. Leonard Rice, Shirley Rice and several other defendants. The suit alleged violations of the Minnesota Club Contracts Act and other consumer protection statutes. On December 8, 1986, the trial court entered a $581,000 default judgment against appellants D. Leonard Rice and Shirley Rice for their failure to fully comply with three discovery orders and an order to show cause, which directed them to appear personally and show cause why a default judgment and an adjudication of contempt should not be entered. Subsequently, appellants obtained new counsel and moved to vacate the default judgment. On February 26, 1987, the trial court orally denied appellants' motion to vacate the default judgment from the bench. The Rices appeal from the December 8 default judgment and the February 26 order denying their motion to vacate, claiming that:

(1) the Club Contracts Act is unconstitutional on its face and as applied by the attorney general and violates due process;

(2) the trial court erred in refusing to vacate the default judgment;

(3) the trial court erred in awarding the attorney general attorney fees; and

(4) the damage award against appellants is unauthorized by law and not supported by the evidence.

We affirm.

FACTS

Appellants D. Leonard Rice and Shirley Rice, individually and as officers, directors, and controlling shareholders operated ten Spa Petite Health Clubs and four European Health Spa Clubs. The four European Health Spas, with over 6,250 members, were closed on or about December 16, 1985. The 10 Spa Petites, with over 10,000 members, were closed on February 7, 1986. None of the members could recover the value of their prepaid health services.

In December, 1985, the State of Minnesota, through the attorney general, sued appellants and the other defendants, Ri-Mel, Inc., d/b/a Spa Petite and European Health Spa; Fitness Minnesota Health Spas Corporation d/b/a European Health Spa; Bureau of Collection Recovery, Inc.; Kenneth Melby; Robert Rice; and Blake Rice and Fitness and Health, Inc. The complaint alleged Fitness Minnesota Health Spas Corporation and Bureau of Collection Recovery, Inc. are incorporated separately, but in fact function interchangeably with Ri-Mel, Inc. without regard to corporate formalities and operate from the same location as Ri-Mel's Minnesota office. Appellant D. Leonard Rice was the chairman of the board of Ri-Mel, Inc., and appellant Shirley Rice was the president of the company. When the action was commenced, appellant D. Leonard Rice was also the president of Fitness Minnesota Health Spa Corporation and allegedly controlled 50% of the stock of that company through another corporation, Self-Centers, Inc., which was owned by two of his daughters.

The state's action sought a declaratory judgment, injunctive relief, civil penalties, reasonable attorney fees, and restitution for all consumers harmed by the defendants' practices. The complaint alleged the business practices of appellants and the other defendants violated provisions of Minn.Stat. Sec. 325F.69 (1984) (consumer fraud); Minn.Stat. Sec. 325D.44 (1984) (deceptive trade practices); Minn.Stat. Sec. 332.37 (1984) (collection agency practices); and Minn.Stat. Sec. 325G.23-.27 (1984) (Club Contracts Act). Additionally, the state alleged the European Health Spa's and Spa Petite's $25,000 surety bonds were deficient under the Club Contracts Act, which required health clubs to maintain a bond at least as great as the total amount of prepayments received for all contracts of membership entered into after May 31, 1974. Minn.Stat. Sec. 325G.27, subd. 2 (1984).

One day after defendant Fitness Minnesota Spa Corporation, d/b/a European Health Spa closed the four European Health Spa clubs on December 16, 1985, the trial court issued an order temporarily restraining defendants from removing any On January 7, 1986, appellants and Ri-Mel, Inc. entered into a court-approved settlement agreement with the attorney general, which in part provided that Ri-Mel, Inc. would post a $75,000 bond by February 1; and as a condition of doing business agreed not to take any prepayments over $25 after February 1, 1986. The court-approved settlement was not followed and on February 7, 1986, the remaining Spa Petite clubs were closed.

assets from Minnesota or transferring any ownership interest in Spa Petite and European Health Spa clubs. By order dated December 31, 1985, the court issued a temporary injunction enjoining and restraining defendant, Fitness Minnesota Health Spa Corporation, d/b/a European Health Spa and its employees and agents, from doing any business in Minnesota until the defendants obtained a surety bond in favor of the State of Minnesota in an amount not less than $300,000. The December 31 order further directed that the European Health Spa post a $300,000 surety bond within 15 days or the attorney general may seek and have an order appointing a receiver to wind up the corporation's affairs.

By order dated February 11, 1986, the court denied the defendants' oral motion to dismiss the proceedings on constitutional grounds and issued a temporary injunction against appellants personally, precluding them from removing any corporate assets from Minnesota, and appointed a receiver, Jerry A. Bremer, a CPA, to examine Ri-Mel, Inc.'s books and records in appellants' possession. The order directed the receiver to issue a preliminary report to the court on February 19, 1986.

On February 19, 1986, the receiver reported that appellants produced some, but not all of the requested documents. On February 20, the court issued its first discovery order, directing appellants and Ri-Mel, Inc. to produce by February 24 all records and documents requested by the receiver. Appellants failed to comply with the February 20 order. On February 25, the court issued a second discovery order fining appellants $100 as a contempt sanction and directing them to comply with the February 20 order within 48 hours or the court would issue a bench warrant for their arrest. Appellants produced some records on February 27, 1986, but did not include records for Ri-Mel, Inc. or any of the Fitness and Health, Inc. records which they had been ordered to produce.

At a March 3, 1986 hearing, the court ordered appellants to appear for previously noticed depositions on March 19 at 9:00 a.m. and to produce requested documents. Appellants failed to appear. On March 24, the court issued another discovery order directing appellants to appear at the attorney general's office on March 26 at 9:00 a.m. for depositions and to produce the corporate records and documents. The order stated that if appellants failed to appear and produce the documents as ordered, the court would consider severe sanctions, including a default judgment. Appellants appeared without counsel at the court-ordered deposition on March 26, but refused to answer questions, except their name and date of birth, claiming fifth amendment privileges, and failed to produce documents.

On May 9, 1986, the court issued an order requiring appellants to appear personally before it on May 29 at 9:00 a.m. in order to show why they should not be held in contempt of court and why a default judgment should not be entered against them under Minn.R.Civ.P. 37.02(2)(c) for failure to comply with the court's prior discovery orders. Appellants did not personally appear. The court gave appellants until the following morning, May 30, to personally appear. They again failed to appear. At the May 30 hearing, the court orally adjudicated appellants in contempt and in default. A written order for default judgment was issued June 27, 1986.

Subsequently the court held four additional hearings, on July 3, August 12, August 20, and September 22, 1986, to determine the appropriate restitution damage award in the default judgment. Appellant D. Leonard Rice was present and testified at the hearings on August 12 and 20. Following the August 20 hearing, appellants entered into a stipulated settlement with After appellants' failed to comply with the court-approved settlement agreement reached on August 20, the court issued an order for default judgment against appellants on November 12 for $581,000, which included $300,000 in restitution for Spa Petite members; $191,000 in restitution for European Health Spa members;...