United States District Court, D. Wyoming
BRUCE L. EGAN AND RICHARD A. HEISE, SR., Plaintiffs,
DICE PARTNERS, INC. ET AL., Defendants.
OPINION, ORDER, AND JUDGMENT ON PLAINTIFFS' MOTION FOR DEFAULT JUDGMENT
ALAN B. JOHNSON, District Judge.
This matter comes before the Court on Plaintiffs' Motion for Default Judgment. Doc. 34. Having considered the pleadings, the applicable law, the written submissions, materials offered, and Plaintiffs' evidence and arguments presented during the default judgment hearing, the Court FINDS and ORDERS as follows:
This case is about Plaintiffs' ventures into online gambling through a company called Dice Partners, Inc. (Dice). Plaintiffs make the following claims against Dice: (1) Dice defaulted on each Plaintiff's promissory note; (2) Dice breached its contract by diverting funds to third parties to the detriment of shareholders; (3) Dice was unjustly enriched by Plaintiffs' loans to Rome Consulting; (4) Dice and its employees were unjustly enriched "as to the profits of Dice" while shareholders were impoverished; (5) Dice's actions justify the creation of a constructive trust; and (6) Dice's actions justify Plaintiffs bringing a shareholder derivative claim on behalf of Dice.
Plaintiffs request the Court to find that (1) Defendants are jointly and severally liable for the repayment of Plaintiffs' Rome Consulting and Dice promissory notes plus costs of collection including reasonable attorney's fees; (2) Defendants must pay Plaintiffs ten million dollars directly or to be placed in a trust for Gerli & Co. to manage and distribute to shareholders in accordance with Panamanian law; and (3) Plaintiffs are entitled to receive ownership and control of the following domain names: dicelandcasino.com, romecasino.com, and romepartners.com.
On February 6, 2013, Plaintiffs filed their Complaint. [Doc. 1]. After Defendants failed to answer, on May 28, 2013, Plaintiffs filed a Motion for Entry of Default. [Doc. 10]. On June 4, 2013, the Clerk of Court entered default. [Doc. 11]. On August 29, 2013, Plaintiffs filed a Motion for Default Judgment. The Court held an evidentiary hearing on October 25, 2013. After the hearing, the Court entered an Order requesting further documentation from Plaintiffs. [Doc. 22]. Plaintiffs responded with further documentation on March 14, 2014. [Doc. 23]. On September 11, 2014, Plaintiffs filed an Amended Complaint. [Doc. 23]. After Defendants failed to answer again, on October 9, 2014, Plaintiffs filed a Motion for Entry of Default. [Doc. 30]. The Clerk of Court entered default against Defendants on October 23, 2014. [Doc. 31]. Plaintiffs filed a Motion for Default Judgment on October 24, 2014. [Doc. 34]. On October 29, 2014, pursuant to Federal Rule of Civil Procedure 55(2)(B), the Court held a hearing on Plaintiffs' Motion for Default Judgment and took the Plaintiffs' motion under advisement.
This case involves a complicated web of transactions between Plaintiffs and Defendants. It is worth noting that the Court is in a precarious position evaluating a case regarding international online gambling when the Court is uncertain of the legality of the parties' business dealings. The Court's ruling on default judgment does not condone or remark on the legality of Plaintiffs' or others' actions.
Defendant Dice was incorporated in 2006 in the Republic of Panama under the corporation name Xavarian International Investment Solutions. [Amended Complaint, ¶¶ 1, 3 and Attachment 2]. On February 11, 2008, Xavarian amended its Articles of Incorporation and changed the name of the corporation to Dice Partners, Inc. (Dice). [Amended Complaint, Attachment 2]. Jeremy Barnett, a California resident, is the founder and President of Dice. [Amended Complaint, pg. 2]. Dice operates online casinos using the domain names romecasino.com and dicelandcasino.com. [Amended Complaint, ¶ 2]. Dice published online gambling websites in February 2008 using these domain names and began accepting paying customers in April 2008. [Amended Complaint, ¶ 7].
In 2008, Barnett founded two additional companies to support Dice-Rome Partners, Inc. and Rome Consulting, Inc. [Amended Complaint, pg. 2]. Barnett created Rome Partners to manage marketing functions on behalf of Dice's online casinos via the website, romepartners.com. [Amended Complaint, pg. 2]. Despite the abbreviation "Inc." after the company names, Barnett did not incorporate Rome Partners, Inc. or Rome Consulting, Inc. [Amended Complaint, pg. 1, ¶¶ 38, 18-21, Attachment 10]. Plaintiffs contend Rome Consulting but not Rome Partners, "was intended to be incorporated in the British Virgin Islands and would have replaced Dice." [Amended Complaint, pg. 2]. Plaintiffs do not allege anything regarding the intended incorporation of Rome Partners.
1. Plaintiffs' loans to and investments in Dice and Rome Consulting
Plaintiffs met Jeremy Barnett through a mutual friend. In February 2008, Barnett presented Plaintiffs with a Subscription Agreement and Investment Representation and a business plan summary to solicit their investments in Dice. [Amended Complaint, ¶ 5]. Following this meeting, through Barnett, Heise purchased 1, 925, 000 shares in Dice for $250, 000 and Egan purchased 777, 000 shares in Dice for $100, 000. [Amended Complaint, ¶¶ 56, 57, Attachments 16, 17; Response to Request for Information, Exhibit 1]. In May 2008, Heise purchased an additional 1, 925, 000 shares for $100, 000. [Amended Complaint, ¶ 57, Attachment 18]. Plaintiffs and Dice executed Subscription and Investment Representations, which state that the laws of the United States and the State of Nevada govern the agreements. [Amended Complaint, Attachments 16, 17, 18 Section 4]. According to the shareholder register, since 2008, Heise and Egan have acquired and transferred the following shares in Dice:
Name Number of shares Date acquired Date of transfer Bruce Egan 770, 000 June 4, 2008 July 15, 2011 Bruce Egan 770 February 15, 2008 July 15, 2011 Richard Heise Sr. 3, 657, 500 December 1, 2008 July 15, 2011 Richard Heise Sr. 1, 925, 000 June 4, 2008 July 15, 2011 Richard Heise Sr. 1925 February 15, 2008 July 15, 2011 Richard Heise Sr. 47 December 24, 2013 N/a Bruce Egan 31 December 24, 2013 N/a
As of February 12, 2014, Plaintiffs and Barnett are the only shareholders in Dice.
a. Facts relevant to the Dice promissory notes
Following their initial purchases of shares, Plaintiffs each loaned Dice $200, 000. Through a resolution, on or around October 30, 2008, the Dice Board of Directors authorized Barnett to issue a promissory note for a maximum loan amount of $200, 000 by each Plaintiff to Dice. [Amended Complaint, Attachment 5]. Accordingly, Barnett issued each Plaintiff a Promissory Note and Detached Warrant Purchase Agreement on October 20, 2008. [Amended Complaint, Attachments 6 and 7].
Under the terms of the promissory notes, Plaintiffs were to lend a maximum $200, 000 to Dice in exchange for the option to purchase 4% of Dice's common stock and a promise that Dice would repay the amount of the actual loan in full with 15% interest per annum within two years from the date of the agreement, October 21, 2008. [Amended Complaint, Attachments 6 and 7, Pg. 6]. The promissory notes outlined a payment schedule: the first payment with interest was due four months after the initial payment, February 20, 2009. [Amended Complaint, Attachments 6 and 7, Pg. 6]. Dice's subsequent payments were due every three months following the first payment and each payment amount included three months interest on the outstanding balance plus amortized principal. [Amended Complaint, Attachments 6 and 7, Pg. 6]. Barnett and, assumedly his wife, Lauren Barnett were listed as the Guarantors of the notes. [Amended Complaint, Attachments 6 and 7, Pg. 8]. Barnett signed the promissory notes on behalf of Dice as its President. [Amended Complaint, Attachments 6 and 7, Pg. 8].
Egan remitted the full $200, 000 on October 20, 2008 and Heise remitted $100, 000 on September 15, 2008 and another $100, 000 on October 23, 2008. [Amended Complaint, Attachments 6 and 7, Pg. 1].
The Plaintiffs' Dice notes contained a default provision that stated,
If any payment of principal and interest is not paid by the Company within five (5) business days after the date on which such payment shall become due and payable under this Note or upon the bankruptcy or receivership of the Company (each, an "Event of Default"), the Holder may, by giving written notice to the Company, declare the unpaid principal amount hereof and all accrued and unpaid interest hereon to be immediately due and payable and upon such declaration, the unpaid principal amount hereof and all accrued unpaid interest hereon shall be and become immediately due and payable. [Complaint, Attachments 6 and 7, Pg. 7].
Dice waived "presentment, demand, notice of demand, protest, notice of protest, and notice of dishonor and any other notice required to be given by law in connection with the delivery, acceptance, performance, default or enforcement of this Note." [Amended Complaint, Attachments 6 and 7, Pg. 7]. In the event of a default that results in a legal dispute, Dice agreed to "pay all costs of collection, including reasonable attorneys' fees." [Amended Complaint, Attachments 6 and 7, Pg. 7].
Dice's first two payments to Egan were full payments of $29, 486.64, although the second payment was six days late. The third and fourth payments were late and were only partial ($14, 000 and $16, 722). After the second, untimely, and partial payment, instead of accelerating the payments per the optional default provision, Egan negotiated a delayed payment schedule with Barnett. [Response to Request for Additional Information, Attachment 11]. The delayed payment schedule extended the term of the note until January 31, 2011, Dice was to make four payments of $26, 486.84 on a quarterly basis. [Response to Request for Additional Information, Attachment 11]. Dice did not follow the amended payment plan, but instead made three more partial-payments of $14, 743.42, $16, 986.64, $9, 828.88 to Egan. [Response to Request for Additional Information, Attachments 11]. In total, Dice paid $195, 792.30 on the note, which Plaintiff Egan breaks down into $144, 242.60 in principal and $56, 464.05 in interest. [Amended Complaint, Attachment 14]. According to the Plaintiffs' calculations, Dice owes Plaintiff Egan, $55, 757.40 in past due principal and $21, 759.29 in past due interest through February 2, 2013 when Plaintiffs filed the Complaint.
Barnett, on behalf of Dice, made three payments out of the eight scheduled payments on Heise's promissory note. Dice's first two payments were full payments of $29, 486.64, but the third payment was a partial payment of $14, 000. [Amended Complaint, Attachment 15]. Dice paid a total of $72, 973.28 to Heise, which Plaintiff Heise breaks down into $55, 702.42 in principal payments and $17, 270.86 in interest payments. [Amended Complaint, Attachment 15]. According to Plaintiff Heise's calculations, Dice owes him $144, 297.58 in past due principal and $73, 818.75 in past due interest.
b. Facts relevant to Rome promissory notes
In July 2009, in addition to and separate from their Dice loans, Plaintiffs each loaned $100, 000 to Rome Consulting, Inc. [Amended Complaint, ¶¶ 19, 21]. On July 22, 2009, Barnett executed and issued promissory notes to both Egan and Heise. [Amended Complaint, ¶¶ 19, 21, Attachments 11 and 12]. Per the notes, within six months of the date of the agreement, Rome Consulting was to repay, in monthly installments, $100, 000 with two percent interest per month to both Egan and Heise. [Amended Complaint, Attachments 11 and 12, Pg. 1]. The Rome promissory notes contain the same default language as the Dice promissory notes. [Amended Complaint, Attachments 11 and 12, Pg. 1]. Rome Consulting has not repaid any amount of principal or interest to Egan or Heise.
The Rome promissory notes state, "... Rome Consulting, Inc., a British Virgin Islands International Business Corporation organized under the laws of the British Virgin Islands..." This statement is inaccurate; as discussed above, Barnett never incorporated Rome Consulting. [Response to Request for Information, pg. 9 "Rome Consulting and Rome Partners were never formalized. They do not legally exist, so technically no one has the authority to accept service or enter into agreements on their behalf.... Rome Consulting, Inc. was never formalized. Mr. Barnett could not have been granted authority through that entity."]. Plaintiffs assert that Barnett represented that he had authority on behalf of Rome Consulting to execute and issue the promissory notes. [Amended Complaint, ¶ 38]. Rome Consulting, however, does not exist and Barnett never incorporated Rome Consulting.
c. Facts relevant to Plaintiffs' claims for gambling proceeds and domain names
Plaintiffs claim that Joshua Cartu was the Dice CEO and effectively had control of the entire Dice business. According to Cartu's hiring documents, however, Rome Partners, not Dice, was his employer. Cartu started on March 1, 2008. [Amended Complaint, Attachment 19]. His base salary was $165, 000 annually with a 20% raise yearly. [Amended Complaint, Attachment 19]. He was eligible for a cash bonus equal to 5% of the profits based on the financial performance of the company. [Amended Complaint, Attachment 19]. Plaintiffs claim that Cartu used his control over the company to steal passwords to romecasino.com, diceelandcasino.com, romepartners.com in 2009, change the passcodes, take control of the websites, and direct the profits from the domain sites to his own bank accounts in the form of bonuses and other compensation in excess of the amounts in which he was contractually entitled.
Plaintiffs further contend that contrary to the Articles of Incorporation, they have not received a single dividend or distribution from Dice because of Cartu's alleged actions. [Amended Complaint, ¶¶ 50-54, 58-62]. The only support Plaintiffs provide in support of Cartu stealing company assets is their statement that Cartu was living a lifestyle that exceeded his annual salary. [Amended Complaint, ¶¶ 59]. Plaintiffs brought a separate federal suit against Cartu alleging that Cartu violated RICO and several other federal and state laws by defrauding Plaintiffs out of their substantial investment in Dice, which Judge Freudenthal dismissed for lack of personal jurisdiction over Cartu. [2:13-cv-00008, Doc. 30]. Dice has not pursued any action against Cartu. [Amended Complaint, ¶ 27].
Plaintiffs believe Dice generated more than ten million dollars in profit since April 2008. [Amended Complaint, ¶ 23]. Plaintiffs base this amount on the last monthly net gaming revenue, $829, 076 multiplied by 12 months. [Amended Complaint, ¶ 23]. Plaintiffs allege, "It is a standard in the gaming community that profit generally runs 30% of net gaming so $10 million is a conservative estimate based on 5 years of gaming." [Amended Complaint, ¶ 23]. Plaintiffs do not provide any support for the "standard" in the gaming community, nor do they provide any documentation evidencing Cartu's last monthly net gaming revenue report of $829, 076. Plaintiff Egan outlines the calculation as follows:
Before any misappropriation occurred, as an investor in the process of considering loaning money to DICE, I personally requested the company CEO to present his best estimate of receivables (i.e. net gaming proceeds). On September 12, 2008 the CEO presented data from the payment processor that actual net gaming revenue for July 2008 was $487, 805.00. That is the last real-world data point available. Since the company first opened for business in April 2008 when revenue was zero, this was obviously a tremendous growth period, so it would not be realistic to extrapolate that early rate of growth. There are growth trend estimates from 2009 to 2013 available for online gambling from public sources. One source often cited, h2 Gambling Capital, anticipated a 13% annual online gambling growth rate.... Applying a 13% annual growth rate for 5 years (July 2008-July 2013) to a base of $487, 805 (July 2008) yields a monthly loss estimate of $898, 749.00 by July 2013 ($487, 805 × 1.13 × 1.13 × 1.13 × 1.13 × 1.13 = $898, 749.00) implying an annual loss in year 2013 of $10, 784, 988. It is very conservative in that it excludes the accumulation of losses from years 2008-2012.
Plaintiffs assert that ten million dollars is a conservative estimate for five years of gaming, 2008-2013. [Amended Complaint, ¶ 23]. Based on the shareholder register, however, Plaintiffs were shareholders for 11 months in 2008, 2009, 2010, and for seven months in 2011 (January through July). Plaintiffs were not shareholders for the remainder of 2011, or 2012, but again became shareholders for eight days in 2013 and two months in 2014 before they filed suit. Accordingly, at the time of the complaint, Plaintiffs were shareholders for roughly three years, two months, and eight days.
Plaintiffs and Barnett agree that the Court has diversity jurisdiction under 28 U.S. Code § 1332, but their agreement does not relieve the Court of its independent duty to determine whether jurisdiction is proper. Williams v. Life Sav. and Loan, 802 F.2d 1200, 1203 (10th Cir. 1986) ("[W]hen entry of a default judgment is sought against a party who has failed to plead or otherwise defend, the district court has an affirmative duty to look into its jurisdiction both over the subject matter and the parties"). Plaintiffs, as the party seeking default judgment, "need only make a prima facie showing... [of jurisdiction] if the motion is decided only on the basis of the parties' affidavits and other written materials." Dennis Garberg & Assoc., Inc. v. Pack-Tech Intern. Corp., 115 F.3d 767, 773 (10th Cir. 1997).
a. Subject matter jurisdiction
Under 28 U.S. Code § 1332, "[T]he district courts shall have original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75, 000, exclusive of interest and costs, and is between... citizens of a State and citizens or subjects of a foreign state." Both Plaintiffs are citizens of Wyoming. Their alleged damages, even based solely on the promissory notes, exceed $75, 000.
Thus, the question becomes whether all Defendants are foreign citizens. A corporation or an unincorporated association is "deemed to be a citizen of any State by which it has been incorporated and of the State where it has its principal place of business." 28 U.S.C. § 1332(c)(1) and (d)(10). When determining a corporation's principal place of business, the Court reviews the "total activity of the company" or the "totality of the circumstances, " considering "the character of the corporation, its purposes, the kind of business ...