Thompson v. StreetSmarts, Inc.

• Decision Date: 30 June 2011
• Docket Number: No. CV-10-1885-PHX-LOA,CV-10-1885-PHX-LOA
• Parties: Craig Thompson, an Arizona resident, Plaintiff, v. StreetSmarts, Inc., a Delaware corporation; Dave Batt, an Illinois resident, Defendants.
• Court: U.S. District Court — District of Arizona

Craig Thompson, an Arizona resident, Plaintiff,

v.StreetSmarts, Inc., a Delaware corporation; Dave Batt, an Illinois resident, Defendants.

No. CV-10-1885-PHX-LOA

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

Dated: June 30, 2011

REPORT AND

RECOMMENDATION,

FINDINGS OF FACT, AND

CONCLUSIONS OF LAW

A default damages hearing was conducted in open court on April 21, 2011, after entries of default against Defendants StreetSmarts, Inc. and Dave Batt on Plaintiff Craig Thompson's ("Plaintiff") September 2, 2010 Complaint. Testifying at the hearing was Plaintiff who voluntarily terminated his employment on August 4, 2010 because Defendants failed to pay his salary and other contractual benefits. Pursuant to General Order 11-3,¹ the undersigned Magistrate Judge recommends that default judgment be entered in favor of Plaintiff against Defendants, jointly and severally, in the amount of $195,319.41 for the reasons set forth in this Report and Recommendation.

I. Background

This is a breach of employment contract and tort action brought by Plaintiff, a 43-year-old computer software engineer, developer and resident of Phoenix, Arizona, arising out of his employment with Defendant StreetSmarts, Inc. ("StreetSmarts"), a Delaware corporation, led by its President and Chief Executive Officer Defendant Dave Batt ("Batt"), an Illinois resident. (Transcript ("Tr.") of April 21, 2011 hearing at 13) In his Verified Complaint, Plaintiff alleges the following causes of action against both Defendants: treble damages pursuant to Arizona Revised Statute ("A.R.S.") § 23-353 (Count I) for failure to pay Plaintiff's wages; fraud and fraudulent misrepresentation (Count II); breach of contract (Count III); breach of the covenant of good faith and fair dealing (Count IV); piercing the corporate veil (Count V); negligent misrepresentation (Count VI); and unjust enrichment (Count VII). (Doc. 1) Plaintiff seeks "direct and consequential damages," compensatory and punitive damages, reasonable attorney's fees, costs, and pre-judgment and post-judgment interest. (Id. at 17)

In his December 6, 2010 default damages hearing memorandum, Plaintiff requests the entry of judgment in the sum of $333,125.81, calculated as follows:

1. $164,479.56, representing treble damages of unpaid wages ($54,826.52) pursuant to A.R.S. § 23-355, doc. 23 at 14;

2. $8,333.33, representing the 25,000 shares of stock and 50,000 shares of stock options owed to Plaintiff. Pursuant to a July 1, 2009 email from Defendant Batt to Plaintiff, doc. 23-1, Exh 3 at 10, there are 13,500,000 StreetSmarts' shares issued and outstanding, and the fair market value of StreetSmarts is $1.5 million, thus making each share worth $0.11. According to Plaintiff, 75,000 shares are worth $8,333.33² at the price$0.11 per share, id. at 14-15;

3. $30,922.18 in unpaid employment taxes that Plaintiff believes he is obligated to pay out of any award. According to Plaintiff, employment taxes consist of 15.3% of gross wages for FICA, and 3.5% for FUTA and SUTA. Plaintiff argues that, had StreetSmarts paid Plaintiff as agreed, StreetSmarts would have paid employment taxes of 18.8% on all gross wages. If Plaintiff's gross unpaid wages have been trebled, 18.8% of $164,479.56 is equal to $30,922.18, id. at 15;

4. $14,233.55 in simple interest, at the rate of 10%, on the totals in paragraphs 1-3, above, id.;

5. $1,190.25 in taxable costs, consisting of the District Court's $350.00 filing fee; $93.25, $88.00 and $39.00 in process server fees; and $620.00 in Westlaw computer legal research charges, id.;

6. $2,925.00 in hourly-based attorneys' fees, consisting of: $1,075.00 in fees incurred for outside contract attorneys and $1,850.00 for legal research and writing, id.;

7. $111,041.94 for Plaintiff's contingency attorneys' fees. Id.

Service of the Summons and Complaint on StreetSmarts was made on September 8, 2010 through its statutory agent in Wilmington, Delaware, United States Corporation Agents, Inc., with copies of Plaintiff's Summons and Complaint mailed in accordance with Fed. R. Civ. P. 4(h). (Doc. 7) As discussed later herein, Batt was served with the Summons and Complaint by alternative service on January 13, 2011 due to Batts' significant efforts to evade service of process. (Docs. 26, Exhibits ("Exhs") 1-2; 28; 30, Exhs 1-2) No answer or other responsive pleading has been filed by, or on behalf of, StreetSmarts or Batt, and the time to do so has expired. The Clerk of Court entered StreetSmarts' and Batts' defaults on October 8, 2010 and March 17, 2011, respectively. (Docs. 9, 33) On October 22, 2010 and March 31, 2011, Plaintiff filed separate applications for entry of default judgment against each Defendant and requested an evidentiary hearing pursuant to Rule 55(b)(2), Fed.R.Civ.P. (Docs. 16, 35) Because theComplaint requested non-liquidated monetary damages, the Court held a default damages evidentiary hearing on April 21, 2011. Holtsinger v. Briddle, 2007 WL 1080112, * 1 (E.D.Cal. 2007) ("[w]hen a plaintiff's damages are unliquidated (i.e. capable of ascertainment from definite figures contained in documentary evidence or in detailed affidavits) or punitive, they require 'proving up' through an evidentiary hearing or some other means." ) (citing Dundee Cement Co. v. Howard Pipe & Concrete Prods., 722 F.2d 1319, 1323-24 (7th Cir. 1983)). Pre-hearing and post-hearing proposed findings of fact and conclusions of law were filed on December 6, 2010 and May 6, 2011, respectively.³ (Docs. 25, 43)

II. Jurisdiction

A. Magistrate judge jurisdiction

On September 13, 2010, Plaintiff consented in writing to magistrate-judge jurisdiction pursuant to 28 U.S.C. § 636(c)(1). (Doc. 6) Arguably, when a plaintiff consents in writing to a United States magistrate judge, that magistrate judge has jurisdiction to conduct a default damages hearing and enter final judgment against a properly-served defendant even though that defendant has neither appeared in the action nor consented to proceed before a magistrate judge. Technically speaking, the defaulted defendant is not a party because he has failed to appear in the action. United States v. Real Property, 135 F.3d 1312 (9th Cir. 1998); United States v. 8136 S. Dobson Street, 125 F.3d 1076 (7th Cir. 1997); EEOC v. West Louisiana Health Svcs., Inc., 959 F.2d 1277, 1279-80 (5th Cir. 1992); Giove v. Stanko, 882 F.2d 1316, 1318 (8th Cir. 1989). Because the Ninth Circuit has not expressly addressed this issue, and, at least, one circuitcourt has found to the contrary,⁴ in an abundance of caution, the undersigned will proceed by Report and Recommendation.

B. Subject matter jurisdiction

Federal courts have subject matter jurisdiction over controversies between citizens of different states. U.S. Const. Art. III, § 2; Caterpillar Inc. v. Lewis, 519 U.S. 61, 67-68 (1996) ("The Constitution provides, in Article III, § 2, that "[t]he judicial Power [of the United States] shall extend . . . to Controversies . . . between Citizens of different States."). Pursuant to 28 U.S.C. § 1332(a)(1), a district court has original jurisdiction over all civil actions where the amount in controversy exceeds the sum of $75,000, and the action is between citizens of different states. 28 U.S.C. § 1332(a)(1). "Diversity jurisdiction requires complete diversity between the parties - each defendant must be a citizen of a different state from each plaintiff." In re Digimarc Corp. Derivative Litig., 549 F .3d 1223, 1234 (9th Cir. 2008). Thus, in order to properly invoke diversity jurisdiction, Plaintiff must affirmatively allege facts demonstrating that the citizenship of the parties is completely diverse. However, "the diversity jurisdiction statute, 28 U.S.C. § 1332, speaks of citizenship, not of residency. To be a citizen of a state, a natural person must first be a citizen of the United States." Kanter v. Warner-Lambert Co., 265 F.3d 853, 857 (9th Cir. 2001) (citing Newman-Green, Inc. v. Alfonzo-Larrain, 490 U.S. 826, 828 (1989)). "The natural person's state citizenship is then determined by [the party's] state of domicile, not [the party's] state of residence. A person's domicile is [the party's] permanent home, where [the party] resides with the intention to remain or to which [the party] intends to return." Id. (citing Lew v. Moss, 797 F.2d 747, 749 (9th Cir. 1986)). The party seeking to invoke federal jurisdiction under 28 U.S.C. § 1332 bears the burden of demonstrating that grounds for diversity exist, diversity is complete, and his claim is supported with "competent proof by a preponderance of the evidence. Sanchez v. Monumental Life Ins. Co., 102 F.3d 398, 403-04 (9th Cir. 1996); Indus.Tectonics, Inc. v. Aero Alloy, 912 F.2d 1090, 1092 (9th Cir. 1990).

The Complaint alleges that the District Court for the District of Arizona "has [subject matter] jurisdiction over the claims set forth in this Complaint, venue is proper, and the amount in controversy exceeds $75,000." (Doc. 1 at 3) It further alleges, and the uncontradicted testimony of Plaintiff confirms, that Plaintiff "is a resident of the County of Maricopa, State of Arizona[;]" Defendant StreetSmarts "was and is a corporation organized and existing under the laws of the State of Delaware[;]" and Defendant Batt "was and is a resident of Cook County, State of Illinois." (Id. at 1-2; Tr. 14-15, 66)

Congress and the Supreme Court have provided the meaning of diversity as contemplated by the Constitution when corporations are parties to a lawsuit. Specifically, "the federal diversity jurisdiction statute provides that 'a corporation shall be a citizen of any state by which it has been incorporated and of the state where it has its principal place of business." Hertz Corp. v. Friend, _____ U.S. _____, 130 S.Ct. 1181, 1185 (2010) (quoting 28 U.S.C. § 1332(c)(1) (abrogating Tosco Corp. v. Communities for a Better Environment, 236 F.3d 495, 500-502 (9th Cir. 2001) (per curiam)). The Supreme Court stated:

We conclude that "principal place

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