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Inc. v. Etwa Enterprise, Inc.

United States District Court, Fourth Circuit

June 12, 2013

7-ELEVEN, INC.
v.
ETWA ENTERPRISE, INC., et al.

MEMORANDUM OPINION

DEBORAH K. CHASANOW, District Judge.

Presently pending and ready for resolution in this contract dispute is a motion for default judgment filed by Plaintiff 7-Eleven, Inc. (ECF Nos. 27, 28).[1] The relevant issues have been briefed and the court now rules pursuant to Local Rule 105.6, no hearing being deemed necessary. For the reasons that follow, the motion will be granted in part and denied in part.

I. Background

Plaintiff commenced this action on November 14, 2012, by filing a complaint against ETWA Enterprise, Inc. ("ETWA"), and its principal, Elias Tefera. According to the complaint, on or about January 16, 2003, Mr. Tefera entered into franchise and security agreements with 7-Eleven, which granted him the right to operate a 7-Eleven store in Lanham, Maryland, and to use associated trademarks. Several years later, Mr. Tefera assigned the franchise agreement to ETWA and executed a guaranty in which he "personally and unconditionally" guaranteed ETWA's debts, liabilities, and obligations under the franchise agreement, as well as any attorneys' fees and costs incurred by 7-Eleven in enforcing the agreements. (ECF No. 1 ¶ 19).

The franchise agreement required Defendants, inter alia, to maintain a minimum net worth in the store of $15, 000 at all times, which was to be demonstrated by monthly financial statements reporting assets and liabilities. The agreement further provided that if Defendants failed to maintain the required net worth, 7-Eleven had the right, after giving notice and an opportunity to cure, to terminate the franchise. Upon termination, Defendants were required to "[p]eaceably surrender the Store and 7-Eleven Equipment[;]... transfer to [7-Eleven] the Final Inventory[; and]... [t]ransfer [to 7-Eleven] the Receipts, Cash Register Fund[s], prepaid Operating Expenses, money order blanks, bank drafts, lottery tickets and Store supplies[.]" ( Id. at ¶ 28). Defendants further agreed to cease using all 7-Eleven marks in the event of termination.

Starting in early 2011, Defendants consistently failed to maintain the required minimum net worth of $15, 000. Plaintiff sent numerous notices of material breach and provided multiple opportunities to cure. Defendants, however, failed to avail themselves of these opportunities and the franchise grew increasingly deeper in debt. As of October 2012, the store's net worth was "negative $239, 417.15, or $254, 417.15 below the $15, 000 minimum [n]et [w]orth ETWA must maintain under... the [f]ranchise [a]greement." ( Id. at ¶ 32). On or about October 12, 2012, 7-Eleven hand-delivered to Defendants a notice of material breach, identifying a number of required deposits Defendants had failed to make and advising that if the default was not cured within three business days, the franchise agreement would be terminated and Defendants would be required to relinquish possession of the store.

When Defendants failed to cure their numerous breaches, 7-Eleven dispatched personnel to begin conducting an audit of the store's inventory on October 26, 2012. Upon Mr. Tefera's arrival on that date, Plaintiff's representatives explained that they were taking possession of the store and offered him the opportunity to sell ETWA's interest to a third-party. Mr. Tefera declined this offer and refused to permit 7-Eleven to take possession after the audit was complete. Thereafter, 7-Eleven withdrew all financing and payroll support, but Defendants continued to operate the store with very limited resources.

The complaint alleged breach of the franchise and security agreements, breach of guaranty, trademark infringement, and unfair competition under federal and Maryland law. Plaintiff sought preliminary and permanent injunctive relief, unspecified monetary damages, and attorneys' fees and costs.

Concomitantly with the complaint, Plaintiff filed a motion for temporary restraining order and preliminary injunction. Judge Williams conducted an ex parte telephonic hearing on the motion for temporary restraining order on November 15, 2012. Upon finding a strong likelihood that Plaintiff would succeed on the merits, that irreparable injury would result if 7-Eleven were not permitted access to the store, that the balance of equities tipped decidedly in favor of Plaintiff, and that emergency injunctive relief was in the public interest, Judge Williams issued an order temporarily enjoining Defendants from denying 7-Eleven access to the store, from failing to perform all required bookkeeping, and from transferring or disposing of any store assets pending further proceedings.

At the preliminary injunction hearing, held November 21, 2012, Plaintiff presented evidence of Defendants' breaches of the franchise agreement and continuing trademark infringement. Mr. Tefera personally appeared, without counsel, and did not present any material evidence in rebuttal. At the conclusion of the hearing, the court issued a preliminary injunction ordering Defendants to surrender possession of the store at 3:00 p.m. on the same date; enjoining them from using 7-Eleven marks, from unfairly competing with 7-Eleven, or disposing of store assets; and directing Defendants to deliver to 7-Eleven any and all property bearing its trademarks.

On January 8, 2013, noting that Defendants had failed to respond to the complaint, the court directed Plaintiff to file and serve motions for entry of default and default judgment or explain why such action was not appropriate. On February 7, Plaintiff filed motions for entry of default and default judgment. Defendants did not respond, and the clerk entered default on March 5.

II. Standard of Review

Under Federal Rule of Civil Procedure 55(a), "[w]hen a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend, and that failure is shown by affidavit or otherwise, the clerk must enter the party's default." Where a default has been previously entered by the clerk and the complaint does not specify a certain amount of damages, the court may enter a default judgment upon the plaintiff's application and notice to the defaulting party, pursuant to Fed. R.Civ.P. 55(b)(2). A defendant's default does not automatically entitle the plaintiff to entry of a default judgment; rather, that decision is left to the discretion of the court. See Lewis v. Lynn, 236 F.3d 766, 767 (5th Cir. 2001). The Fourth Circuit has a "strong policy" that "cases be decided on their merits, " Dow v. Jones, 232 F.Supp.2d 491, 494 (D.Md. 2002) (citing United States v. Shaffer Equip. Co., 11 F.3d 450, 453 (4th Cir. 1993)), but default judgment may be appropriate where a party is unresponsive, see S.E.C. v. Lawbaugh, 359 F.Supp.2d 418, 421 (D.Md. 2005) (citing Jackson v. Beech, 636 F.2d 831, 836 (D.C.Cir. 1980)).

"Upon [entry of] default, the well-pled allegations in a complaint as to liability are taken as true, but the allegations as to damages are not." Lawbaugh, 359 F.Supp.2d at 422. Federal Rule of Civil Procedure 54(c) limits the type of judgment that may be entered based on a party's default: "A default judgment must not differ in kind from, or exceed in amount, what is demanded in the pleadings." Thus, where a complaint specifies the amount of damages sought, the plaintiff is limited to entry of a default judgment in that amount. "[C]ourts have generally held that a default judgment cannot award additional damages... because the defendant could not reasonably have expected that his damages would exceed that amount." In re Genesys Data Technologies, Inc., 204 F.3d 124, 132 (4th Cir. 2000). Where a complaint does not specify an amount, "the court is required to make an independent determination of the sum to be awarded." Adkins v. Teseo, 180 F.Supp.2d 15, 17 (D.D.C. 2001) (citing S.E.C. v. Management Dynamics, Inc., 515 F.2d 801, 814 (2nd Cir. 1975); Au Bon Pain Corp. v. Artect, Inc., 653 F.2d 61, 65 (2nd Cir. 1981)). While the court may hold a hearing to consider evidence as to damages, it is not required to do so; it may rely instead on "detailed affidavits or documentary evidence to determine the appropriate sum." Adkins, 180 F.Supp.2d at 17 ...


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