Legacy Inv. & Mgmt., LLC v. Susquehanna Bank

LEGACY INVESTMENT AND MANAGEMENT, LLC Plaintiff, v. SUSQUEHANNA BANK et al.,Defendants/Counter-claimants/Third Party-Plaintiffs/Third Party Counterclaim Defendants v. LEGACY INVESTMENT & MANAGEMENT, INC. et al.,Third Party Defendants/Fourth Party Claimants v. KENNEDY COMPOUND, LLC, et al., Fourth Party Defendants

CIVIL NO.: WDQ-12-2877

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND, NORTHERN DIVISION

Dated: February 27, 2014

MEMORANDUM OPINION

Legacy Investment and Management, LLC ("Legacy LLC") sued Susquehanna Bank ("the Bank") and Susquehanna Trust & Investment Company ("STIC"), (together "Susquehanna"), in the Circuit Court for Baltimore County, Maryland for breach of contract and unjust enrichment. ECF No. 2 at 1, 14-15. Legacy LLC also sought aninjunction requiring Susquehanna to unfreeze a bank account containing funds allegedly owned by Legacy LLC's customers--various Homeowners and Condominium Associations ("HOAs"). Id. at 10-15. Susquehanna removed to this Court and interpled, inter alia, several HOAs to determine ownership of the funds. ECF Nos. 1, 16 at 1-2, 35-36. One HOA, Hilltop Condominium Association ("Hilltop"), brought crossclaims against Legacy LLC and others¹ for fraud and breach of fiduciary duty. ECF No. 166 at 18-20. Pending is Hilltop's unopposed motion for default judgment on these crossclaims. ECF No. 245. No hearing is necessary. See Local Rule 105.6 (D. Md. 2011). For the following reasons, the motion will be granted in part and denied in part.

I. Background²

On October 22, 2009, Hilltop³ contracted with Legacy LLC to provide Hilltop with certain management services in exchange fora monthly fee.⁴ See ECF No. 166 at 12-13. These services included management of Hilltop's reserve funds, which "are typically set aside in savings accounts [or] money market checking accounts . . . to cover long term capital expenses." See id. at 13. The contract prohibited Legacy LLC from commingling Hilltop's funds with funds from any other source. See id. at 12.

At some time, Francis told other Legacy LLC employees that he planned to move the reserve funds of several HOA customers from accounts at various banks, and then consolidate those funds. Id. at 13. At least one employee--Howard Hellend--told Francis that it was improper to commingle the funds of multiple HOAs. Id. Francis dismissed Hellend's concerns, and Hellend resigned. Id.

On October 8, 2011, without notice to Hilltop, Francis moved Hilltop's reserve funds to a business checking account he opened at a branch of the Bank in Columbia, Maryland. See id. at 13-15. The account was created in Hilltop's name with Legacy LLC listed as the escrow agent. ECF No. 311-4 at 2. On October 11, 2011, Francis opened a business checking account at the Bank for Legacy Inc. ECF No. 166 at 15. On October 28, 2011,without authorization, Francis transferred $23,420.56 from Hilltop's account to the Legacy Inc. account.⁵ See id. at 16.

In June or July 2012, an accounting firm conducted an audit of several of Legacy LLC's HOA customers. See id. This audit revealed that Francis had mailed fraudulent bank account statements to the HOAs--including Hilltop--to conceal his theft of reserve funds for his personal use. See id. at 17-18. The statements sent to Hilltop "showed incorrect balances in Hilltop's account at the Bank," which Hilltop "reasonably and justifiably relied on" to its detriment.⁶ See id. at 18-19. Francis provided these false statements to Hilltop "for the purpose of defrauding Hilltop" and Legacy Inc. and Legacy LLC "provided substantial assistance and aid to" Francis with "actual knowledge . . . that their conduct . . . further[ed] Defendant Francis's fraudulent acts." Id. at 19-20.

On September 24, 2012, Legacy LLC sued Susquehanna in the Circuit Court for Baltimore County, Maryland, alleging breach of contract and unjust enrichment, after Susquehanna revoked its access to the HOAs' deposit accounts and the STIC investment account. ECF No. 2 at 10-15. On September 26, 2012, Susquehanna removed to this Court on the basis of diversity jurisdiction. ECF No. 1. On October 5, 2012, Susquehanna answered Legacy LLC's complaint and brought a third party interpleader action against, inter alia, Hilltop and other HOAs to determine ownership of the funds in the investment account. ECF No. 16 at 1-2, 35-36.

On March 20, 2013, Hilltop answered Susquehanna's complaint and brought four crossclaims: (1) fraud against Francis (count one); (2) breach of fiduciary duty and constructive fraud against the defendants (count two); (3) aiding and abetting fraud against the defendants (count three); and (4) fraudulent transfers against the defendants (count four). ECF No. 166 at 18-20. Hilltop sought, inter alia, $30,000 in compensatory damages and $100,000 in punitive damages. Id. The defendants did not answer Hilltop's complaint, enter an appearance, or otherwise participate in the case after it was removed.⁷

On June 27, 2013, Hilltop moved for entry of default against Legacy Inc. and Legacy LLC. ECF No. 220. On July 1, 2013, Hilltop moved for entry of default against Francis. ECF No. 224. On July 2, 2013, default was entered against the defendants. ECF Nos. 227, 228. On July 22, 2013, Hilltop moved for a default judgment against the defendants. ECF No. 245. The defendants have not opposed the motion or the entry of default against them.

On February 18, 2014, in response to the Court's February 7, 2014 letter order, Hilltop filed a supplement containing additional evidence on the issue of damages. ECF Nos. 307, 311. Hilltop's evidence shows that, on October 12, 2011, $24,420.56 was deposited into Hilltop's account at the Bank. ECF No. 311-2 at 2. On October 28, 2011, all but $1000 of those funds was transferred into a "Legacy Investment and Management" account. See id. On June 7, 2012, $9,000 was deposited into the Hilltop account and $9,400 withdrawn, leaving a balance of $600. See ECF No. 311-5. Legacy LLC then issued a check to Hilltop for $9,400, and Hilltop used the funds to purchase a boiler. See ECF Nos. 311-1 at 2 (affidavit of Bruce Baker, President of Hilltop), 311-5 at 4. On October 5, 2012, after preliminary discovery, Hilltop received a bank statement from Susquehanna showing that only $100 remained in Hilltop's account. See ECFNo. 311-4. On January 6, 2014, Hilltop received the $100 balance from Susquehanna. ECF No. 311-1 at 2.

II. Analysis

A. Standard of Review

Under Federal Rule of Civil Procedure 55(b)(2), a court may enter a default judgment against a properly served defendant who fails to defend or otherwise appear. In reviewing a motion for entry of a default judgment, the plaintiff's well-pled factual allegations are accepted as true as to liability. Ryan, 253 F.3d at 780-81. However, "a defaulting defendant is not held to admit conclusions of law." United States v. $3,500.00 in U.S. Currency, 2008 WL 215807, at *1 (E.D.N.C. Jan.24, 2008) (citing Ryan, 253 F.3d at 780). Rather, the court must determine whether the unchallenged factual allegations "support a claim and the relief sought." Id.; Ryan, 253 F.3d at 780-81.

If liability is established, the court must make an independent determination of damages; it will not accept the damages allegations as true. Int'l Painters & Allied Trades Indus. Pension Fund v. Metro Glass & Mirror, Inc., ELH-11-2389, 2012 WL 893262, at *2 (D. Md. Mar. 14, 2012) report and recommendation adopted, ELH-11-2389, 2012 WL 1150793 (D. Md. Apr. 4, 2012) (citing Credit Lyonnais Secs. (USA), Inc. v. Alcantara, 183 F.3d 151, 154 (2d Cir. 1999)); Hartford Fin. Servs. Grp., Inc. v. Carl J. Meil, Jr., Inc., CIV. WDQ-10-2720,2011 WL 1743177, at *7 (D. Md. May 5, 2011) (citing Fed. R. Civ. P. 8(b)(6)). The Court may award damages without a hearing if there is sufficient evidence for the award in the record. See Int'l Painters, 2012 WL 893262, at *2 (citing Adkins v. Teseo, 180 F. Supp. 2d 15, 17 (D.D.C. 2001) (in determining damages without a hearing, "the court may rely on detailed affidavits or documentary evidence to determine the appropriate sum")).

Entry of a default judgment is left to the court's discretion, and the Fourth Circuit has a "strong policy" that "cases be decided on the merits." Dow v. Jones, 232 F. Supp. 2d 491, 494-95 (D. Md. 2002) (citing United States v. Shaffer Equip. Co., 11 F.3d 450, 453 (4th Cir. 1993)). However, "default judgment is available when the 'adversary process has been halted because of an essentially unresponsive party.'" Disney Enters., Inc. v. Delane, 446 F. Supp. 2d 402, 405 (D. Md. 2006) (quoting SEC v. Lawbaugh, 359 F. Supp. 2d 418, 421 (D. Md. 2005) (internal quotations omitted)).

B. Liability

1. Fraud

In Count One, Hilltop asserts a fraud claim against Francis. ECF No. 166 at 18-19. To prevail on a fraud claim under Maryland law,⁸ Hilltop must show:

(1) the defendant made a false representation to the plaintiff, (2) the falsity of the representation was either known to the defendant or the representation was made with reckless indifference to its truth, (3) the misrepresentation was made for the purpose of defrauding the plaintiff, (4) the plaintiff relied on the misrepresentation and had the right to rely on it, and (5) the plaintiff suffered compensable injury as a result of the misrepresentation.

Hoffman v. Stamper, 867 A.2d 276, 292 (Md. 2005).

Here, Hilltop has shown that Francis knowingly used false account statements--copies of which Hilltop has provided to the Court, showing inaccurate balances in the Hilltop account--to conceal the unauthorized transfer of Hilltop's funds to the Legacy Inc. account. See ECF Nos. 166 at 17-20, 311-3 at 2-6. Hilltop has also shown that it reasonably relied to its detriment on the misrepresentations on the account statements, which were given to Hilltop by its property manager. See ECF No. 166 at 12-13, 19. Finally, Hilltop has shown that it suffered compensable injury from Francis's fraud, because it lost a significant portion of the reserve...