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AZ Dnr, LLC v. Luxury Travel Brokers, Inc.

United States District Court, D. Kansas

October 24, 2014

AZ DNR, LLC, d/b/a ERC, LLC, Plaintiff,
v.
LUXURY TRAVEL BROKERS, INC., d/b/a FLYER MILES; LUXURY TRAVEL BROKERS, INC., d/b/a FLYER SMILES; and TIMOTHY W. GIBSON, Defendants.

MEMORANDUM AND ORDER

JOHN W. LUNGSTRUM, District Judge.

This matter comes before the Court on defendants' objections (Doc. # 56) to the Magistrate Judge's Report and Recommendation of September 3, 2014 ("the Report"). In the Report (Doc. # 52), the Magistrate Judge recommended that the Court do the following: (1) deny defendants' motion for an extension of time to respond to plaintiff's motion to strike (Doc. # 49); (2) grant in part plaintiff's motion to strike defendants' answer and amended answer (Doc. # 44); (3) deny defendants' motion to modify the scheduling order to allow the filing of a second amended answer and counterclaims (Doc. #39); and (4) enter a default judgment against defendants. For the reasons set forth below, the Court overrules defendants' objections to the Report; denies defendants' motion for an extension and motion to modify the scheduling order; grants in part plaintiff's motion to strike the answers, to the extent recommended by the Magistrate Judge; and orders that default judgment be entered against defendants on plaintiff's claims.

I. Background

Although the procedural history of this case has been set forth in prior orders, a review of that history is apropos here.

Plaintiff filed this action on November 22, 2013. By its amended complaint, plaintiff seeks damages and injunctive relief, based on claims of tortious interference with contractual and prospective relations, breach of contract, unjust enrichment, and a violation of the federal Computer Fraud and Abuse Act, 18 U.S.C. ยง 1030. Defendants responded to the complaint by filing a motion to dismiss, but the Court denied that motion by Memorandum and Order of February 19, 2014. In that opinion, the Court noted that defendants had failed to cite to a single case in their motion and brief, while failing to substitute citations for the word "CITE" in the brief; and that defendants had failed to file a reply brief.

Defendants failed to file an answer within the required period after the Court's order, and plaintiff requested that default judgment be entered. By Memorandum and Order of April 7, 2014, the Court concluded that although entry of default was warranted because of the missed deadline, good cause would exist to set aside that default, given the stage of the case, the relatively short delay, and the preference for disposition of cases on their merits. Accordingly, the Court granted defendants' motion for leave to file an answer out of time, although it conditioned that relief on defendants' payment of costs and attorney fees incurred by plaintiff in seeking the default. The Court noted in its order, however, that defendants' explanation for their failure to meet the deadline was vague, was not particularly compelling, was not supported by affidavit, and did not address why a motion for extension had not been filed earlier; that defendants had not filed a reply brief to address arguments raised by plaintiff; and that defendants' behavior appeared to continue a pattern begun with their filing of a motion to dismiss that was utterly without merit (which also involved the lack of citation to authority, the use of "CITE" in the brief, and the lack of a reply brief). The Court thus admonished defendants and their counsel "that such a lack of diligence in the future litigation of this case will likely be treated harshly by this Court."

On June 5, 2014, plaintiff filed a motion for monetary sanctions against defendants. Plaintiff argued that defendants violated Fed.R.Civ.P. 11 by stating in their answer that they are without sufficient knowledge to admit or deny plaintiff's allegations of facts that are in fact within defendants' knowledge. Defendants did not file a response to that motion by the deadline of June 19, but defendants' counsel informally informed the Magistrate Judge that a June 18 car accident impaired his ability to file a timely response. On June 23, 2014, the Magistrate Judge extended defendants' response deadline to June 26, 2014, but "[g]iven the noted pattern of inaction by defendants and their counsel in this case, " the Magistrate Judge ordered that no further extensions would be granted absent truly extraordinary circumstances. Despite that extension and admonition, defendants failed to file any response to the motion for sanctions. By Order of June 30, 2014, the Magistrate Judge denied the motion for sanctions under Rule 11, on the basis that plaintiff had failed to satisfy all requirements for relief under that rule. Nevertheless, the Magistrate Judge found that defendants' counsel likely violated Rule 11(b) in filing the answer, based on responses in the answer that clearly were not reasonable or based on reasonably inquiry. The Magistrate Judge concluded as follows:

Where does that leave us? In correspondence with plaintiff's counsel, defense counsel conceded that plaintiff's allegations of deficiencies in the answer have "some merit, " and stated that "[a] revision is in the works." But that promise of a revised answer was made more than two months ago-and before the May 15, 2014 deadline for motions to amend the pleadings had passed. To date, defendants have not filed a revised answer. It appears that defendants' patten of inaction, highlighted in Judge Lungstrum's April 7, 2014 order, has continued, despite Judge Lungstrum's express warning that it would "likely be treated harshly by the Court" in the future. Accordingly, the court, on its own motion, orders defendants to file a revised answer by July 7, 2014, or to show cause by that same date why the current answer does not violate Rule 11(b) (which, as should be clear from the discussion above, would be an uphill battle). Defendants are warned that should they fail to satisfy at least one of these directives, the court will likely sanction defendants by striking the answer and entering default against defendants.

(Footnotes omitted.)

Despite the Magistrate Judge's references to defendants' pattern of inaction and the Court's prior warnings, and despite a stern threat of a default sanction, the deadline of July 7, 2014, came and went without a response from defendants. On July 8, defendants did file (without leave) an amended answer, but that answer contained only minor changes from the original answer and did not address the deficiencies cited by the Magistrate Judge. On July 8, defendants also filed a motion to modify the scheduling order to allow them to file counterclaims. Although defendants did not provide a supporting affidavit, they stated the following facts: defendants retained attorney Kenneth Worth and instructed him to prepare an answer and counterclaim to be filed by local counsel Phillip Gibson; Mr. Worth informed defendants that he had followed those instructions and filed a counterclaim; defendants parted ways with Mr. Worth and retained attorney Samuel Lockhart (a California attorney) to represent them, with Mr. Gibson still acting as local counsel; Mr. Lockhart reviewed the "litigation file" and informed defendants that counterclaims had not been filed with the answer; and defendants were "shocked" and "upset" because they had been informed by Mr. Worth that a counterclaim had been filed and because the amendment deadline had passed. Defendants further argued that "[w]ithout assistance of counsel, Defendants do not have access to Pacer in order to confirm that filings that their counsel represents to them as being filed were in fact filed." Defendants implored the Court not to punish them for the "missteps" of Mr. Worth, their former counsel, and they stated that Mr. Lockhart would file a petition for admission pro hac vice contemporaneously with the filing of that motion.

On July 16, 2014, defendants filed a second motion to modify the scheduling order to allow for the filing of a second amended answer and counterclaims (Doc. # 39). That motion is virtually identical to the prior motion to modify, with the addition that defendants also seek to amend its recently-amended answer "to include information during recent investigation by counsel [ sic ]." Defendants also attached their proposed second amended answer and counterclaims, in which defendants appear to have addressed the pleading deficiencies cited by the Magistrate Judge. That motion remains pending and was addressed by the Magistrate Judge in his Report.[1] Plaintiff filed a response to that motion on July 18, 2014, but defendants did not file any reply brief in support of the motion.

On July 22, 2014, plaintiff filed the instant motion to strike defendants' original answer and amended answer (Doc. # 44), on the basis that defendants had not met the Court's July 7 deadline either by filing a conforming amended answer or by showing cause why they did not violate Rule 11. Defendants did not file any response to that motion, which the Magistrate Judge addressed in his Report.

On August 7, 2014, plaintiff moved that all deadlines in the case be stayed until resolution of the pending motions, and the Magistrate Judge ordered that any response by defendants be filed by August 11, 2014. On August 12, the Magistrate Judge noted that, "[c]ontinuing their pattern of inactivity, " defendants had failed to respond, and he granted the motion for a stay. That same day, defendants moved for reconsideration of that order, based on Mr. Gibson's representations (without supporting affidavit) that he had been busy in trial and had mis-calendared the response deadline. Mr. Gibson also indicated that he had been in contact with his clients, who "are ready to go forward without further issues, even if that means replacement of the undersigned [Mr. Gibson] as local counsel." Mr. Gibson also argued that striking defendants' pleadings would be an extraordinarily harsh remedy. On August 12, 2014, defendants also filed the instant motion for an extension of time to respond to plaintiff's motion to strike (Doc. # 49). Defendants merely incorporated their arguments from their motion for reconsideration, apparently under the mistaken impression that the Court had already ruled on plaintiff's motion to strike. Defendants did not explain why it had not filed a timely response to that motion. On August 13, 2014, the Magistrate Judge denied the motion for reconsideration, but he noted for the benefit of counsel that the Court had not yet ruled on plaintiff's motion to strike. On August 18, 2014, plaintiff filed a response to defendants' motion for an extension, but, once again, defendants failed to file a reply brief. Defendants' motion for an extension remains pending and was addressed by the Magistrate Judge in his Report.

On September 3, 2014, the Magistrate Judge issued his Report and Recommendation. The Magistrate Judge first recommended denial of defendants' motion for an extension to respond to plaintiff's motion to strike. He noted that defendants had not specifically explained why they could not meet the August 5 deadline for a response, and that their general reference to the press of other business was insufficient to establish the good cause and excusable neglect required under Rule 6(b)(1)(B). The Magistrate Judge also recommended that the Court grant plaintiff's motion to strike defendant's original answer and their amended answer that was late and did not cure the Rule 11 problem, in accordance with the June 30 order.

The Magistrate Judge next recommended that the Court deny defendants' motion to modify the scheduling order to allow for the filing of their second amended answer, on the basis that defendants had failed to show the necessary good cause under Rule 16(b)(4) or a lack of undue delay under Rule 15(a). The Magistrate Judge noted that defendants had not provided any explanation for their failure to cure the Rule 11 problem before the July 7 deadline. He also rejected defendants' argument that they should not suffer from Mr. Worth's failure with respect to ensuring the filing of the counterclaims before the amendment deadline. First, the Magistrate Judge noted that defendants had failed to provide an affidavit or other evidentiary support for their allegations about Mr. Worth's missteps. Second, he noted that defendants had failed to address the fact that Mr. Gibson would have known that no counterclaims had been filed. Third, the Magistrate Judge noted that, in light of a party's responsibility to supervise its attorneys in some regard, defendants should have accessed the Court file on the publicly-available PACER system or at least demanded copies of filings from their counsel. Fourth, he noted that defendants had not stated when they actually learned of the omitted counterclaims, making it impossible to judge defendants' diligence in seeking the amendment.

Based on the denial of leave to file the second amended answer, the Magistrate Judge recommended the entry of a default judgment against defendants, based on defendants' pattern of behavior and the Court's prior warnings. He noted that such a sanction as a result of the conduct of counsel, although harsh, was permitted under Supreme Court and Tenth Circuit precedent. Finally, the Magistrate Judge recommended that, in the event that the Court entered a default judgment, plaintiff's request for fees and costs be denied, with each side bearing its own costs.

On September 15, 2014, new local counsel entered his appearance for defendants, and on the following day, that counsel moved for the admission pro hac vice of Mr. Lockhart, which motion was granted. On September 17, 2014, defendants filed the instant objections to the Magistrate Judge's Report and Recommendation.[2]

II. Analysis

A. Defendants' Motion for Extenstion ...


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