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Roaring Fork Partners, L.L.C. v. Claremont Investment Partners


February 10, 2012


On appeal from Superior Court of New Jersey, Chancery Division, Union County, Docket No. C-173-09.

Per curiam.


Argued December 7, 2011 -

Before Judges Fuentes, Harris and Koblitz.

Plaintiffs Roaring Fork Partners, LLC (Roaring Fork) and Virginia Dawson filed a complaint against eleven defendants, including Claremont Investment Partners, LLC (CIP) and Gerald P. Sullivan. Plaintiffs' cause of action arises from Dawson's employment with CIP. After filing an amended complaint, plaintiffs' attorney was granted leave to withdraw. Dawson alleges she did not receive notice of the attorney's application to withdraw. After plaintiffs failed to attend a prescheduled case management conference, defendant Sullivan sought dismissal of plaintiffs' complaint, which was granted. When plaintiffs failed to answer counterclaims filed by CIP, CIP requested a default judgment. The motion judge granted defendants' motions unopposed, entering judgment on CIP's counterclaims for $18,321.47.

Dawson brought a pro se motion on behalf of herself and Roaring Fork to vacate the dismissals and the default judgment. The motion judge found that Roaring Fork could not bring a motion while unrepresented and that Dawson did not have standing to bring the motion as an individual. Although the motion judge stated briefly that dismissal with prejudice was appropriate because plaintiffs' failures to attend court were not excusable, he found the standing issue dispositive.

On appeal, plaintiffs argue that: (1) the dismissal with prejudice was an inappropriate sanction; (2) the dismissal was entered without a formal motion by defendants; (3) the motion to vacate the default judgment should have been granted because the default judgment was entered simultaneously with an improperly entered default; and (4) the default judgment was entered in an inappropriate amount. We agree that Dawson's motions should have been granted. We therefore reverse and remand to allow Roaring Fork to file a motion through counsel pursuant to Rule 4:50-1.

Dawson was hired as President and CEO of CIP in April 2009. As part of her employment agreement, CIP gave her a twenty percent membership interest in the company. Dawson then formed Roaring Fork, a limited liability company, to hold her shares. Roaring Fork became a member of CIP after the transfer of shares. Dawson alleges that defendants violated CIP's operating agreement, diluting Roaring Fork's shares, thereby causing their value to diminish.

Roaring Fork and Dawson filed a verified complaint and order to show cause. On December 15, 2009, the court granted a preliminary injunction temporarily barring CIP from conducting a members' meeting and requiring defendants to produce certain documents. CIP and Sullivan filed an answer and counterclaims.*fn1

Plaintiffs answered defendants' counterclaims.

In March 2010, plaintiffs filed a motion for leave to file an amended complaint to add new defendants and to remove CIP's attorney. The motion judge granted both applications. In their amended complaint, plaintiffs raised allegations of: (1) tortious interference with economic advantage, (2) breach of fiduciary duty, (3) breach of contract, (4) corporate waste, (5) conversion, (6) breach of oral agreement, (7) fraud, (8) violation of the business judgment rule, (9) breach of duty of loyalty, and (10) a member's derivative action. Sullivan filed an answer and counterclaims to plaintiffs' first amended complaint on September 1, 2010. The trial court dismissed Sullivan's counterclaims in late October 2010.

In a September 30, 2010, case management order, the motion judge scheduled a status conference for January 21, 2011, noting that "[n]o further notice will be given."

In November 2010, CIP filed an answer and asserted counterclaims in response to plaintiffs' amended complaint. CIP raised nine counts: (1) breach of contract, (2) breach of the covenant of good faith and fair dealing, (3) conversion, (4) unjust enrichment, (5) interference with prospective economic advantage, (6) theft of trade secrets and confidential and proprietary information, (7) breach of fiduciary duty, (8) breach of duty of loyalty, and (9) malicious use of process. Dawson alleges that she began experiencing difficulties with her mail delivery around this time.

Also in November, plaintiffs' attorney filed a motion to be relieved as counsel. Dawson asserts that she was not informed of the motion and thus did not receive a copy from counsel. She acknowledges receipt of an email dated October 27, 2010, in which her counsel intimated he was considering withdrawal because of a fee dispute. She further acknowledges receipt of another email dated November 4, 2010, with an attachment labeled "Resp from Roberts re motion to be relieved." According to Dawson, the motion to be relieved was granted on December 3, 2010, which provided for a thirty-day deadline for plaintiffs to obtain substitute counsel.

On January 5, 2011,*fn2 Sullivan requested by letter that the motion judge dismiss plaintiffs' complaint for failing to obtain counsel. On January 21, 2011, the motion judge entered an order dismissing plaintiffs' claims against Sullivan with prejudice for the following reasons: (1) Roaring Fork did not retain substitute counsel, (2) Dawson did not have standing to pursue plaintiffs' claims individually, and (3) plaintiffs failed to appear for a case management conference held on January 21, 2011. Dawson indicates that she received this order on February 4, 2011.

On February 1, 2011, defendant CIP sent a letter to the court requesting dismissal of plaintiffs' complaint and entry of default and default judgment on its counterclaim. CIP did not file a formal motion.

On February 16, 2011, Dawson filed a motion to vacate the order dismissing plaintiffs' claims against Sullivan. She denied receiving timely notice or having prior actual knowledge of: (1) her attorney's motion to withdraw, (2) the court's order granting of the motion, (3) the court's thirty-day deadline to obtain new counsel, (4) the January 21, 2011 case management conference, or (5) the application to dismiss plaintiff's claims.

Also on February 16, 2011, the motion judge entered an order dismissing plaintiffs' claims against defendant CIP with prejudice and granting defendants default judgment on their counterclaims in the amount of $18,321.47.

On February 28, 2011, Dawson, acting pro se on behalf of herself and Roaring Fork, filed a motion to vacate the February 16, 2011 dismissal and default judgment that had been granted in favor of CIP. She again cited mail delivery issues to argue that she received no notice of the court's various orders. Plaintiffs further argued that the entry of default judgment was procedurally defective, as the default and default judgment were entered simultaneously.

On March 4, 2011, the motion judge denied plaintiffs' motion to vacate his January 21, 2011 dismissal with prejudice of plaintiffs' claims against Sullivan. The motion judge found Dawson, as the party who brought the application, had "no standing in this matter since she [was] not an owner of the membership interest in the defendant LLC." Although ultimately ruling on the standing issue alone, the motion judge also discussed Dawson's purported reason for failing to follow the court's order.

[T]he plaintiff, Ms. Dawson, indicates that she had not been in communication with her attorney for some four months, that she did not respond to his e-mail indicating he intended to withdraw as her counsel, and that she [] had vacated her regular residence and was not arranging to receive her mail for a period of time, Ms. Dawson has absented herself from this litigation and communication with her own attorney and then after his withdrawal, the defendants, simply by ignoring correspondence. The contention that she was unaware of what was going on in the case seems to have been self-created.

On March 21, 2011, the motion judge denied plaintiffs' motion to vacate the February 16, 2011 dismissal with prejudice and the entry of default judgment. In his decision, the motion judge found that Dawson "has no standing to seek to vacate orders with respect to plaintiff, Roaring Fork." In support, the motion judge stated:

The motion in this matter was filed by Virginia Dawson acting in a self-represented capacity. The pleadings in this matter indicate that Ms. Dawson has no interest in Claremont Investment Partners, LLC, personally. Her role in the matter is as member of plaintiff, Roaring Fork Partners, LLC.

The decision of whether to vacate a final judgment or order "is left to the sound discretion of the trial court and will not be overturned on appeal absent a mistaken exercise of that discretion." Nowosleska v. Steele, 400 N.J. Super. 297, 302 (App. Div. 2008) (citing Mancini v. EDS, 132 N.J. 330, 334 (1993)).

As noted by the motion judge, the New Jersey Court Rules require that limited liability companies be represented by counsel. R. 1:21-1(c), R. 1:21-1B; see ATFH Real Prop., LLC v. Winberry Realty P'ship, 417 N.J. Super. 518, 527 n.8 (App. Div. 2010), certif. denied, 208 N.J. 337 (2011). We therefore find no abuse of discretion in denying Dawson the right to represent Roaring Fork.

Although New Jersey takes a "generous view of standing," In re Protest of Award of N.J. St. Contract A71188, 422 N.J. Super. 275, 289 (App. Div. 2011), to pursue a vindication of legal rights, a party must have a "'sufficient stake and real adverseness with respect to the subject matter of the litigation, and a substantial likelihood that some harm will fall upon it in the event of an unfavorable decision.'" Van Horn v. Van Horn, 415 N.J. Super. 398, 412 (App. Div. 2010) (quoting In re N.J. Bd. of Pub. Utils., 200 N.J. Super. 544, 556 (App. Div. 1985)). Notably, a litigant has no standing "to assert the rights of a third party." Jersey Shore Med. Ctr.-Fitkin Hosp. v. Estate of Baum, 84 N.J. 137, 144 (1980).

With respect to shareholder actions, standing in a derivative action requires the litigant to own the stock at the time of the complained of action. Pogostin v. Leighton, 216 N.J. Super. 363, 371 (App. Div. 1987); see also Pressler & Verniero, Current N.J. Court Rules, comment 4 on R. 4:32-3 (2012).

Dawson legally transferred her shares in CIP to Roaring Fork. Although Dawson owns Roaring Fork, she no longer maintains an individual interest in the CIP stock. Thus, she is without standing to prosecute actions on behalf of Roaring Fork, which must be represented by counsel. See R. 1:21-1(c).

However, now that Roaring Fork has obtained counsel, our decision affords Roaring Fork the opportunity to pursue relief pursuant to Rule 4:50-1. Subsection (f) of the Rule permits a judgment or order to be set aside in "exceptional situations" to prevent "grave injustice." Nowosleska, supra, 400 N.J. Super. at 303-04 (citations omitted). "In determining whether relief is warranted under this section of the rule, courts focus on equitable considerations." Id. at 303 (citing Hous. Auth. of Morristown v. Little, 135 N.J. 274, 294 (1994)). In the context of an application to vacate a default judgment, subsection (f) "is applied . . . liberally." Id. at 304. Moreover, "any doubt should be resolved in favor of the application to set aside the judgment to the end of securing a trial upon the merits." Ibid. (quoting Davis v. DND/Fidoreo, Inc., 317 N.J. Super. 92, 100-01 (App. Div. 1998), certif. denied, 158 N.J. 686 (1999) (internal quotations omitted).

In their amended complaint, plaintiffs raised ten counts. They did not allege, however, that CIP's actions injured Dawson personally or in her employment with CIP. Rather, plaintiffs allege that these acts diminished the value of stock owned by Roaring Fork. Thus, we agree with the motion judge that Dawson had no standing to move to vacate the dismissal of the complaint.

CIP's counterclaim raised nine counts. Each is at least partially directed against Dawson individually. The breach of contract counterclaim is based on Dawson's failure to repay a $5000 loan from CIP, commencement of the action against CIP, and failure to return trade secrets.

The breach of the covenant of good faith and fair dealing counterclaim is premised on the implicit duty of good faith and fair dealing in all contracts. Dawson personally entered into the contracts in question.

CIP's conversion counterclaim is based on six specific events. First, CIP claims that it provided Dawson with a release agreement and in consideration gave Dawson a check for $10,416.67. CIP alleges that Dawson endorsed the check, but did not sign the release and has not repaid the amount. Second, CIP asserts Dawson has not repaid a separate $5000 loan. Third, CIP claims that when Dawson worked for CIP, she obtained the business cards of potential investors on behalf of CIP and has refused to return these "leads" to CIP. Fourth, CIP claims that it provided Dawson with a laptop for use during her employment, which Dawson has not returned. Fifth, CIP alleges that Dawson has not returned trade secrets, access to which Dawson had only in her capacity as an employee of CIP. Last, CIP alleges that Dawson improperly used CIP's business credit card to pay the expenses in forming Roaring Fork. All of these allegations concern Dawson individually.

CIP's unjust enrichment, tortious interference with prospective economic advantage, and theft of trade secrets counterclaims all stem from the same allegations and all concern Dawson individually.

CIP's allegations of breach of fiduciary duty were made against both Dawson and Roaring Fork. Specifically, however, the counterclaim asserts Dawson breached her fiduciary duty and duty of loyalty in her capacity as President and CEO of CIP.

Although Dawson is without standing to move to vacate a default judgment entered against Roaring Fork, at least a portion of every counterclaim is directed against Dawson as an individual. If the default judgment is enforced, it would have a financial effect on Dawson individually. Thus, contrary to the motion judge's finding, Dawson had standing to move to vacate the default judgment entered against her. The motion judge therefore abused his discretion in denying Dawson's motion to vacate the order entering default judgment against her. See Van Horn, supra, 415 N.J. Super. at 412.

Plaintiffs further argue that the motion judge erred in simultaneously entering a default and default judgment. Because this is an issue of procedure rather than substance, this court can review the entry of a default judgment without a motion to vacate first being filed with the motion judge. See Gladstone v. Berk, 233 N.J. Super. 228 (App. Div. 1989).

First, Rule 4:43-2 unambiguously states: "After a default has been entered in accordance with R. 4:43-1, . . . but not simultaneously therewith, a final judgment may be entered in the action . . . ." (emphasis added). The motion judge's simultaneous entry of both a default and default judgment was therefore in contravention to Rule 4:43-2.

Moreover, the judge granted default judgment in response to a letter from CIP rather than a formal motion requesting relief. Rule 4:43-2(b) expressly requires "the party entitled to a judgment of default" to "apply to the court therefor by notice of motion." R. 4:43-2(b); see also Ducey v. Ducey, ___ N.J. Super. ___ (App. Div. 2012) (slip op. at 5 n.2) (citing Rules 1:6-2 and 5:5-4 in noting that "the use of correspondence must not be a substitute for motions when presenting a party's request for specific relief").

Thus, because the motion judge failed to abide by the procedures as set forth in the Court Rules, we set aside the order entering a default judgment against both plaintiffs. See Gladstone, supra, 233 N.J. Super. at 241.

Reversed and remanded. We do not retain jurisdiction.

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