Petition for Writ of Certiorari — Lundell v. Watkins

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\f Supreme Court, U.S.

. FILED

No. 99 107 may 191999

Urrivie Ur tHE CLERK

In The

Supreme Court of the United States

TERRY LUNDELL,

Petitioner,

DANIEL WATKINS and CYNTHIA WATKINS,

Respondents.

On Petition For A Writ Of Certiorari To

The United States Court Of Appeals

ms For The Eighth Circuit

PETITION FOR WRIT OF CERTIORARI

TeRRY LUNDELL

8715 E. Eagle Creek Drive

Tucson, Arizona 85730

(520) 296-5486

Petitioner Pro Se

QUESTIONS PRESENTED FOR REVIEW

Did the Court of Appeals err by not setting aside Judge-

ment rendered on Defendant while Defendant was

actively involved in Military Service where no affidavit

was filed by the Plaintiffs setting forth facts that the

defendant was not in military service or in lieu thereof an

affidavit setting forth either that the defendant is in the

military service or that the plaintiff is not able to deter-

mine whether or not defendant is in such service as

specified in the Soldiers’ and Sailors’ Relief Act 50 U.S.C.

§ 520(1).

Was the Defendant prejudiced by reason of his military

service and did the Eighth Circuit Court err by not

requiring the Defendant to file a bond conditioned

approved by the court conditioned to indemnify the

Detendant, who was in military service, against any loss

or damage he may have suffered by reason of any judge-

ment should the judgement be thereafter set aside in

whole or in part as specified in the Sailors’ Relief Act 50

U.S.C. § 520(1).

TABLE OF CONTENTS

Page

OPTICS BE iv sieve ede eaesscieasavetesven) l

FURIE BGs 8a eRe es 1

STATUTORY PROVISIONS INVOLVED............. l

STATEMENTS GF Tite Ge cos vers boxe ckinaneees 3

REASONS FOR GRANTING THE WRIT ........... 6

I. The issues in appellant’s brief were timely

TAGES ANG NOL WHIVGE 6 bs cic dcekesnsencevees 6

Il. Defendants in fairness should have been given

notice of the order for evidentiary hearing .. 9

Ill. The Soldiers’ and Sailors’ Relief Act Applied

to the Defendant and he was prejudiced by his

cg See er ry ee ry eee a ey one 11

IV. The District Court in Iowa should not have

found as true and adopted operative facts of

the complaint in the California action........ 12

V. Plaintiffs could not establish a right to relief

for breach of the settlement in the California

action because they were in breach of it and

not legally excused from performance........ 13

VI. The Plaintiffs’ claims are Res Judicata in the

WOUSENE ACTON «0 oc innccpecensuanecens te edres 15

VII. There is insufficient evidence that the Defen-

dants fraudulently induced the Plaintiffs to

enter into the settlement in the California

GUO. «hn cdo cnes de ctausneeeeeeea 16

VIII. The Plaintiffs as sophisticated investors were

not entitled to reasonably rely on the Defen-

dants’ representations in the underlying trans-

rer rer rr rr rr men pen mp pre 17

ill

TABLE OF CONTENTS - Continued

Page

IX. The judgement in this case is not Res Judicata in

a subsequent proceeding commenced under 11

WR EE vc vvcorcesdsccececsunceesens

X. The Plaintiffs were not entitled to an award of

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INDEX TO APPENDICES

APPENDIX A Decision of United States Court of

ER ee rer App.

APPENDIX B_ Order following Remand....... App.

APPENDIX C_ Decision of United States District

Court Denying Combined

re te Oat oe sha App.

APPENDIX D Decision of United States District

Court Report and Recommenda-

rh hee rt oC App.

TABLE OF AUTHORITIES

Page

Cases

Au Bon Pain Corp. v. Artect, Inc., 653 F.2d 61 (2d

Sei BOOED 0.66 a vse es ciecswcs cece Perea Eh wewiet ss 13

Black v. Lane, 22 F.3d 1395 (7th Cir. 1994) ........... 13

Boyle v. Lorimar Prods., Inc., 13 F.3d 1357 (9th Cir.

BO vtucvanaedssanesdsasenencerceaedthe saw 21, 22

Burgess v. Burgess, 234 N.Y.S.2d 87 (S. Ct. 1962) ..... 12

In re Burnett, Adv. L-88-0245 - W (Bankr. N.D.

Bg rer rr yore spore tp pear aee 19

Cornell Leasing Corp. v. Hemmingway, 553 N.Y.S.2d

Bee TR GR. Fav 6 ie oes ha hoses be hs esndareeeess 11

Markowitz v. Carpenter, 211 P.2d 617 (Cal. Dist. Ct.

Fea, THD 55s hho 0a WE 6 oo 0 8 eek Oe RARER 11

Oliver v. Oliver, 12 So.2d 852, 244 Ala. 234 (1943).... 11

Pulla v. Amoco Oil Co. v. Haslip, 72 F.3d 648 (8th

COE DRE aveune ccsccccissdsscteciercnenee 21, 22, 24

Pacific Mutual Life Ins. Co. v. Haslip, 499 U.S. 1

EARS ss aR ts a AS he 24

Schmizza v. Illinois Farmers Insurance Company, 928

Ee. Fe Ge Ge. Fes hoo oct ccnerseavsuscs 24

Waits v. Frito-Lay, Inc., 978 F.2d 1093 (9th Cir.

1992), cert. denied, 506 U.S. 1080, 113 S. Ct. 1047,

ee Beg Ee ee ee I ik coo ca kcouceh cduccueaiees 20

STATUTES

BS UK. © Tr ic pcvecnseceucussesseaerdees 19

De UA GB Bae) CEFN G ds 66 cio cnvisvececenveeess re

TABLE OF AUTHOF’“tES - Continued

Page

Pe Ses Ue Ee RUNES sheen ctecvi ees osdnaeaviey 2, 3

ey See EE ss cc ts okresu cere bones 20

California Civil Code § 3294(a) (1993)............... 20

re Ge Ra Ge Cs vc ow cb cde cicedventanvas 21

Iowa Code § 668A.1(1)(a) (1993) ..............02 00. 20

Iowa Code § 668A.1(3) (1993)............ cece eee eee 21

RULES

es Ce Oe Ms oa aa bedeaance ceed ence rees y Pe

ee ee ee cr a a wee ey wee aaa ‘Pr

. fv AG | ere emma os 6 7.6.9

PG A, Bo Ue iia crudeiedcavessdeseelssaneeenn 9

a. ee SL IEEE o'o we deck accede kivectesoreee 10

eg EE A”, eer trees Roe 7

PETITION FOR WRIT OF CERTIORARI

TERRY LUNDELL respectfully petitions for a writ of

certiorari to review the judgment of the United States

Court of Appeals for the Eighth Circuit in this case.

OPINIONS BELOW

The opinion of the court of appeals (App. 1) is not

reported.

The opinions of the district court (App. 17, 19 and-45)

are not reported.

JURISDICTION

The jurisdiction of this court is invoked under 28

U.S.C. § 1254(1).

STATUTORY PROVISIONS INVOLVED

50 U.S.C. § 520(1) provides in pertinent part:

In any action or proceeding commenced in any

court, if there shall be a default of any appear-

ance by the defendant, the plaintiff, before

entering judgment shall file in the court an affi-

davit setting forth facts showing that the defen-

dant is not in military service. If unable to file

such affidavit plaintiff shall in lieu thereof file

an affidavit setting forth either that the defen-

dant is in the military service or that plaintiff is

not able to determine whether or not defendant

is in such service. If an affidavit is not filed

showing that the defendant is not in the military

service, no judgment shall be entered without

first securing an order of court directing such

entry, and no such order shall be made if the

defendant is in such service until after the court

shall have appointed an attorney to represent

defendant and protect his interest, and the court

shall on application make such appointment.

Unless it appears that the defendant is not in

such service the court may require, as a condi-

tion before judgment is entered, that the plain-

tiff file a bond approved by the court

conditioned to indemnify the defendant, if in

military service, against any loss or damage that

he may suffer by reason of any judgment should

the judgment be thereafter set aside in whole or

in part. And the court may make such other and

further order or enter such judgment as in its

opinion may be necessary to protect the rights

of the defendant under this Act (sections 501 to

593 of this Appendix).

50 U.S.C. § 520(1) (1993).

50 U.S.C. § 520(4) provides in pertinent part:

If any judgment shall be rendered in any action

or proceeding governed by this section against

any person in military service during the period

of such service or within thirty days thereafter,

and it appears that such person was prejudiced

by reason of his military service in making his

defense thereto, such judgment may, upon

application, made by such person or his legal

representative, not later than ninety days after

the termination of such service, be opened by

the court rendering the same and such defen-

dant or his legal representative let in to defend;

provided it is made to appear that the defendant

has a meritorious or legal defense to the action

or some part thereof.

50 U.S.C. § 520(4) (1993).

STATEMENT OF THE CASE

Plaintiffs/Appellees are residents of San Jose,

California. Defendants/Appellants are residents of Tuc-

son, Arizona. Appellees and Appellants-were parties to a

civil action entitled Daniel Watkins and Cynthia Watkins v.

Terry Lundell and Stephanie Lundell, Civil Action No.

C92-20291, filed in the U.S. District Court, Northern Dis-

trict of California, San Jose Division, on May 19, 1992

(California Action) (App. at 1-13). In the California

Action, Appellees sued Appellants for breach of contract

and fraud in connection with a contract of sale of the A.C.

Benton farm in lowa by Appellants as sellers to Appellees

as purchasers. (App. at 1-13). Appellants filed a counter-

claim for breach of contract against Appellees in the

California Action. (App. at 1-13). The California Action

was dismissed with prejudice following a written settle-

ment (Settlement) executed by both parties December 21,

1992 (App. at 6-13). The Settlement required that settle-

ment funds would be payable to Daniel Watkins, Cynthia _

Watkins, and LaMarca and Landry, P.C. at the LaMarca

and Landry, P.C. law office in West Des Moines. (App. at

9, paragraph 3(f)). LaMarca and Landry, P.C. also caused

themselves to be named beneficiaries under a life insur-

ance policy that Terry Lundell was required to obtain and

maintain in the unpaid amount of the Settlement. (App.

at 11, paragraph 9).

A material provision of the Settlement required that

George LaMarca of LaMarca and Landry, P.C. deliver a

letter to Appellants’ banker advising that the parties had

fully settled all disputes in the California Action, that

neither party admitted liability, and that the parties each

wanted to buy their respective peace and security by final

settlement of the matter. (App. at 11, paragraph 10).

Paragraph 10 of the Settlement was not complied with by

Appellees. Appellants were unable to perform the Settle-

ment.

This action was filed July 9, 1993, in U.S. District

Court Southern District of lowa, Central Division, Civil

Action No. 4-93-CV-10487 (App. at 1-13), on identical

grounds averred in the California Action, including addi-

tional allegations that Appellants fraudulently induced

Appellees to enter into the mediated Settlement of the

California Action. Appellants did not initially appear in

the present action.

On November 18, 1993, Appellees applied for default

judgment against Appellants. (App. at 18-19). On Novem-

ber 23, 1993, the court entered an order finding Appel-

lants in Default. (App. at 20). On November 23, 1993,

Appellees’ Motion for Default Judgment against Appel-

lants was redocketed as a Motion for Judgment. (Clerk’s

Pleading Index Entry #4).

On December 2, 1993, U.S. District Judge Ronald E.

Longstaff referred the case to U.S. Magistrate Mark W.

Bennett for recommendations. (Clerk’s Pleading Index

Entry #5). On December 15, 1993, Magistrate Bennett

entered an Order directing that an evidentiary hearing be

held on Appellees’ Motion for Judgment on January 7,

1994 at 9:00 A.M. (Evidentiary Hearing) (App. at 141).

Said order was stamped “Copy to Counsel” and initialed

by the court. Id. Said order does not indicate that a copy

was served or mailed to Appellants. Id. Appellants were

without counsel at the time the order for the Evidentiary

Hearing was entered.

On January 7, 1994, the Evidentiary Hearing was

held in U.S. District Court pursuant to Magistrate Ben-

nett’s Order. Appellants did not appear in person or

through counsel at the Evidentiary Hearing. The Eviden-

tiary Hearing was reported before a Certified Shorthand

Reporter. (App. at 21-38).

On January 11, 1994, Magistrate Bennett filed a

Report and Recommendation Pursuant to 28 U.S.C.

§ 636(b)(1)(B) concerning the Motion for Judgment before

Judge Longstaff (First Report). (App. at 39-49). On Febru-

ary 16, 1994, Judge Longstaff issued an order incorporat-

ing the First Report and entering Judgment in favor of

Appellees against Appellants in the amount of

$335,000.00 actual damages, interest at 5% per annum,

and $3,500,000.00 punitive damages. (App. at 51-52).

On July 6, 1995, Appellants filed a Motion to Set

Aside Default Judgment, for Bill of Review in Equity and

for Relief under the Soldiers’ and Sailors’ Relief Act.

(Combined Motion) (App. at 54-69). On April 21, 1997,

U.S. Magistrate Ross Walters filed a report and recom-

mendation to Judge Longstaff concerning the Combined

Motion (Second Report). (App. at 181-206). The Second

Report recommended denial of Appellants’ Combined

Motion; reduction of the amount of actual damages in the

' Judgment in favor of Appellees against Appellants to

$235,000.00 plus interest at 5% per annum; judgment

against Appellant, Terry Lundell, for $3,500,000.00 puni-

tive damages; and reduction of the punitive damages

award against Appellant, Stephanie Lundell, to

$117,500.00. (App. at 205). On July 11, 1997, Appellants

filed timely objections to the Second Report. (App. at

207-08). On July 23, 1997, Judge Longstaff issued an order

incorporating the Second Report in his Judgment. (App.

at 209-11). On August 4, 1997, Appellants’ filed a Motion

to Amend Findings of Fact and Judgment and Brief in

support thereof. On August 21, 1997, Appellees resisted

Appellants’ Motion to Amend Findings of Fact and Judg-

ment although Appellants were not served with such

resistance. On August 29, 1997, Judge Longstaff over-

ruled Appellants’ Motion to Amend Findings of Fact and

Judgment. On September 25, 1997, Appellants filed

Notice of Appeal before this Court.

REASONS FOR GRANTING THE PETITION

I. THE ISSUES IN APPELLANTS’ BRIEF WERE

TIMELY RAISED AND NOT WAIVED

A. Lundells’ Motion to Amend Finding of Facts

and Judgment pursuant to Rule 52(b) was

timely filed.

The Watkinses argue that Lundells’ Motion to Amend

Findings of Fact and Judgment was somehow untimely

filed. (Appellees’ Brief, pp. 7, 18, 24, 26, 29). They argue

that these issues are before the court for the first time on

appeal because they were first raised in Lundells’ Motion

to Amend Findings of Fact and Judgment filed August 4,

1996, more than 10 days after the entry of final judgment,

are untimely and should be considered waived. Id. This

argument misses the mark for several reasons.

The decision of the District Court on Lundells’ Com-

bined Motions was entered July 23, 1997. (App. pp.

209-11). Fed. R. Civ. P. 52(b) provides, in pertinent part:

“On a party’s motion filed no later than 10 days after

entry of judgment, the court may amend its findings - or

make additional findings - and may amend the judgment

accordingly.” Fed. R. Civ. P. 52(b) (1997). See also, Fed. R.

Civ. P. 59(e), Fed. R. Civ. P. 6(e), however, provides, in

pertinent part: “Whenever a party has the right or is

required to do some act or take some proceedings within

a prescribed period after the service of a notice or other

paper upon the party and the notice or paper is served

upon the party by mail, 3 days shall be added to the

prescribed period. Fed. R. Civ. P. 6(e) (1997). Without

computing the three days, the tenth day after the District

Court’s Order on Lundells’ Combined Motions fell on

Saturday, August 2, 1997. Applying Rule 6(e) alone, Lun-

dells’ Motion was due August 5, 1997. Moreover, Fed. R.

Civ. P. 6(a) provides, in pertinent part:

In computing any period of time prescribed or

allowed by these rules, . . . [t]he last day of the

period so computed shall be so included, unless

it is a Saturday, a Sunday, or a legal holi-

day,...in which event the period runs until the

end of the next day which is not one of the

aforementioned days. When the period of time

prescribed or allowed is less than 11 days, inter-

mediate Saturdays, Sundays, and legal holidays

shall be excluded in the computation.

Fed. R. Civ. P. 6(a) (1997).

According to Rule 6(a), July 26, July 27, August 2,

and August 3 were not to be included in the computation

of time for Lundells to file their Motion to Amend Find-

ings and Judgment under Rule 52(b). According to Rule

6(e), July 24, July 25, and July 26 were not to be included

in the computation of time for Lundells to file their

Motion to Amend Findings and Judgment under Rule

52(b). Applying Rules 6(a) and 6(e) together, Lundells’

Motion to Amend Findings and Judgment was due Fri-

day, August 8, 1997. Lundells’ Motion to Amend Finding

of Facts and Judgment was in fact filed Monday, August

4, 1997, in a timely manner as permitted by the foregoing

rules.

B. Lundells’ Motion to Amend Finding of Facts

and Judgment preserved error on the issues

raised.

The issues raised in Lundells’ Motion to Amend

Finding of Facts and Judgment are not being raised for

the first time for purposes of this appeal. Lundells were

not required to raise all the issues in their Appeal Brief

prior to filing their Motion to Amend Finding of Facts

and Judgment in order to preserve error. Fed. R. Civ. P.

52(b) states:

When findings of fact are made in actions

tried without a jury, the sufficiency of the evi-

dence supporting the findings may be later

questioned whether or not in the district court

the party raising the question objected to the

findings, moved to amend them, or moved for

partial findings.

Fed. R. Civ. P. 52(b) (1997).

The instant case in which a default judgment was

granted and an evidentiary hearing held before the Dis-

trict Court was certainly not one tried by a jury. Accord-

ingly, Lundells are not precluded from raising the issues

raised in the Arguments in his Appeal Brief and the

Court must consider these issues as properly raised in

this Appeal.

II. LUNDELLS IN FAIRNESS SHOULD HAVE BEEN

GIVEN NOTICE OF THE ORDER FOR EVIDENTI-

ARY HEARING ON WATKINSES’ MOTION FOR

JUDGMENT

The Watkinses argue that Lundells were not entitled

to notice of the evidentiary hearing held on January 7,

1994, that a party in default who knowingly and deliber-

ately refuses to defend an action is not entitled to notice

of a subsequent hearing. This argument ignores an impor-

tant irregularity in the proceeding and the purpose of

Fed. R. Civ. Rule 55. On December 15, 1993, Magistrate

Bennett entered an Order for an evidentiary hearing on

Watkinses’ Motion for Judgment on January 7, 1994 at

9:00 A.M. (Clerk’s Pleading Index Entry #7). The order

was stamped “Copy to Counsel” and initialed presuma-

bly by court personnel. Id. The order did not make a

reference to a copy being served or mailed to Lundells.

Id. Although Lundells had not appeared, the Court

entered its order as if they had, through counsel, believ-

ing Lundells would be notified of the hearing through

counsel. As Lundells were believed to have counsel at the

time the Order was entered, however, notice was not

mailed to them and they had no notice of the hearing. It

is unknown whether anyone other than Watkinses’ coun-

sel received a copy of the Order for hearing as indicated

by the Clerk’s stamp. This irregularity should be resolved

in favor of Lundells in order to insure provision of the

minimum level of procedural and substantive due pro-

cess to which Lundells were entitled.

Some state courts have amended local civil pro-

cedural rules to require that before default may be taken,

the non-appearing defendant must be given notice that

he is in default and that default judgment may be entered

if the defendant does not rectify the default within 10

days of such notice. See, e.g., Iowa R. Civ. P. 230 (as

amended, January 2, 1998). This change could only have

been made to avoid offending our notion of fair play and

substantial justice required by the Fifth and Fourteenth

Amendments to the Constitution. Although Fed. R. Civ. P.

55 has not been so amended, the District Courts must not

overlook their duty to establish the evidence in Fed. R.

55(b)(2) (1997) for it is the same notion of fair play and

substantial justice that is served thereby.

Ill. THE SOLDIERS’ AND SAILORS’ RELIEF ACT

APPLIED TO TERRY LUNDELL AND HE WAS

PREJUDICED BY HIS MILITARY SERVICE

The Soldiers’ and Sailors’ Relief Act, 50 U.S.C.

§ 520(1) (1993), was intended solely for the benefit of

those in the armed services of the United States, and is to

be liberally construed to effectuate its purpose. Oliver v.

Oliver, 12 So.2d 852, 244 Ala. 234 (1943). The Watkinses

first improperly contend that the Act does not apply to

military personnel performing reserve duty, citing Mark-

owitz v. Carpenter, 211 P.2d 617, 619 (Cal. Dist. Ct. App.

1949) (naval reservist not entitled to protection of the Act)

and Cornell Leasing Corp. v. Hemmingway, 553 N.Y.S.2d

285, 287 (Civ. Ct. 1990) (dicta suggesting a reservist is not

protected by the Act). Markowitz is factually and legally

inapposite because its holding is limited to there being no

authority that a person in an inactive military status can

claim the benefits of the Act, in a case further supported

by testimony that the defendant was in Los Angeles (the

situs of the trial) at the time of the trial. Markowitz at 619.

(Emphasis added). Cornell is factually and legally inap-

posite because it concerned a show cause action for non-

payment of rent in which the decision denying relief was

rendered on the basis that the defendant did not show

prejudice because of his military service due to the prox-

imity of his assignment to his home in this country. Cornell at

286-87. (Emphasis added). The question of Cornell’s

reserve status was neither reached nor discussed and

there is simply no suggestion in the dicta or otherwise

that active reserve status disqualifies one from protection

under the Act. It is undisputed in this case that Terry

Lundell was on active Air Force Reserve duty pilot status

between August 28, 1993 and February 16, 1994. (App. at

192, 24, 159-60, 161, 169, 179).

The district court improperly concluded the Soldiers’

and Sailors’ Civil Relief Act did not apply to Terry Lun-

dell because he failed to show he was prejudiced as a

result of his military service. (App. at 29-30, 192-96).

Specifically, the district court denied Terry Lundell’s

request for relief under the Act ostensibly because he

allegedly failed to establish that his defense was preju-

diced by his limited military service. (App. at 195-96). But

the Act was arguably intended to prevent judgment by

default against a person in military service who did not

have adequate time or opportunity to appear and defend

or otherwise protect his right. See, Burgess v. Burgess, 234

N.Y.S.2d 87, 89 (Sup. Ct. 1962). Between August 28, 1993

and November 23, 1993, Terry Lundell was engaged in

some type of military activity on 36 days. (App. at 192,

24, 159-60, 161, 169, 179). Between November 23, 1993,

and February 16, 1994, Terry Lundell was engaged in

official duty with the Military on 33 days. Id. Terry Lun-

dell clearly did not have this time or opportunity due to

the chronicity of his active military service.

IV. THE DISTRICT COURT IN IOWA SHOULD NOT

HAVE FOUND AS TRUE AND ADOPTED OPER-

ATIVE FACTS OF THE COMPLAINT IN THE

CALIFORNIA ACTION

The district court exceeded its authority and abused

its discretion by adopting the operative facts alleged in

the California complaint without requiring independent

proof of damages. The Watkinses argue that the operative

facts set forth in the California complaint provide rele-

vant background information about the parties and their

prior course of dealing. While it is well recognized that

when a defendant is in default, a court may accept as true

the well-pleaded allegations in a plaintiff’s complaint,

Black v. Lane, 22 F.3d 1395, 1399 (7th Cir. 1994), it is

equally recognized that in default cases, the court may

seek or require additional proof to establish liability or

damages. Au Bon Pain Corp. v. Artect, Inc., 653 F.2d 61, 65

(2d Cir. 1981). A diligent search for the truth requires that

the court require credible and weighty evidence to estab-

lish the proof of the plaintiff’s factual and legal claims

and discard that which is merely self serving and uncor-

roborated, such as the testimony of Daniel Watkins at the

January 7, 1994 hearing on damages. Moreover, where the

pleading alleges a duty not cognizable under law, such as

one to disclose to the Watkinses that the Lundells had just

purchased the property for $6,000,000.00 despite the fact

that they knew that arranging $5,600,000.00: of initial

financing would be impossible once lenders learned the

property had recently sold for $6,000,000.00, adoption of

such an allegation becomes error and may not stand.

V. WATKINSES COULD NOT ESTABLISH A RIGHT

TO RELIEF FOR BREACH OF THE SETTLEMENT

IN THE CALIFORNIA ACTION BECAUSE THEY

WERE IN BREACH OF IT AND NOT LEGALLY

EXCUSED FROM PERFORMANCE

Although Lundells first raised the defense at the

evidentiary hearing on their Combined Motions (Hearing

Transcript Dec. 16, 1996 at 173-75), the defense was not

waived because the court in consideration of the merits of

Lundells’ Combined Motions proceeded to hear the

defense and give it due consideration in the Report and

Recommendations. Moreover, the letter provision in para-

graph 10 was as material to the settlement agreement as

any other term and thereby a condition precedent to the

Lundells’ performance under the contract. (App. pp.

3-10) The Lundell’s obligations under the settlement

agreement were as conditioned on the Watkinses’ attor-

ney preparing and delivering a letter to Lundell’s lowa

banker as any other material provision of the settlement

agreement. Perhaps the Watkinses confuse the term

‘material’ with the term ‘essential.’ The provision was

negotiated in the mediation of the California action,

included in the settlement agreement for a particular

reason and must be given its plain, intended, unam-

biguous meaning. It was not surplusage. The language of

the settlement agreement speaks for itself. Delivery of the

settlement payments required under the settlement agree-

ment were likewise as conditioned on the letter being

sent to Lundell’s banker as any other material provision

of the settlement agreement. The Watkinses failure to

provide the letter was a material breach from which the

Watkinses have shown no legal excuse.

The Watkinses claim further that Terry Lundell never

provided the Watkinses’ attorney with information neces-

sary to prepare and send the letter to his banker. In this

case, Watkinses’ attorney, George LaMarca, testified that

he did not send a letter to Lundell’s banker because Terry

Lundell never provided him with the name and address

of his Iowa banker (Hearing Transcript Dec. 16, 1996 at

174-75), because LaMarca did not know the exact content

or language to use in the letter, (id. at 174), and because

according to Lundell the letter had to have certain lan-

guage in it to satisfy the banker that Lundell was sup-

posed to provide to LaMarca via a specimen that Lundell

never sent. Id. This testimony fails to corroborate the

Watkinses alleged excuse for the breach because their

attorney was put in the position of having to argue his

Own veracity together with that of the Watkinses on a

material matter relating to an affirmative defense, a

highly discouraged practice which in the present case

should be given no weight.

VI. THE WATKINSES CLAIMS ARE RES JUDICATA

IN THE PRESENT ACTION

The doctrine of res judicata applies to the present case

because the claims and issues in this case are Virtually

identical to the claims and issues raised in the underlying

California case. The California case involved claims of

fraud and breach of contract in connection with the sale

of real estate in Iowa. The present case involves claims of

fraud and breach of contract in connection with a settle-

ment agreement resolving the same claims and issues of

fraud and breach of contract in connection with the sale

of real estate in Iowa. The claims and issues raised in the

two cases are hardly separate or distinct. The parties

were identical. The underlying merits were identical.

Except for the addition of a settlement of the underlying

claims, there was a full and fair opportunity to litigate the

underlying issues. The evidence necessary to establish

the underlying claims was the same. Establishment of the

settlement agreement claims through trial would require

trial of the underlying claims. The differences between

the two cases are thinly veiled at best. Consequently, the

doctrine does apply.

VII. THERE IS INSUFFICIENT EVIDENCE THAT

LUNDELLS FRAUDULENTLY INDUCED WAT-

KINSES TO ENTER INTO THE SETTLEMENT

IN THE CALIFORNIA ACTION

The Watkinses argue that they presented the district

court with more than sufficient evidence to establish each

and every element including witness testimony and

exhibits at the evidentiary hearing on January 7, 1994.

They claim without authority a litany of mere allegations

that the Lundells made numerous fraudulent misrepre-

sentations in their course of dealings with the Watkinses,

that in May 1990 Terry Lundell fraudulently induced

Daniel Watkins to enter into a contract for the sale of

property in lowa even though he never had clear title to

the property, that as a result of Terry Lundell’s misrepre-

sentations Daniel Watkins lost the benefit of his bargain

and his down payment valued at $200,000 together with

$33,000 in loan origination and appraisal fees, that in

1992 Terry Lundell and his wife fraudulently induced

both Daniel and Cynthia Watkins to enter into a settle-

ment agreement to dismiss their California lawsuit, that

the Lundells falsely promised to pay $235,000 and

pledged an insurance policy and mortgages as security,

that the Lundells never intended to honor that settlement

agreement, that the settlement payments were never

paid, that the insurance policy was never procured, that

the mortgages were worthless, that as a result the Wat-

kinses forfeited their claims in California and never

recovered the $235,000 promised under the settlement

agreement. Watkinses claim further that the mortgages on

the Colorado and Utah properties originally represented

as sufficient security for the Lundells’ obligations were in

fact highly encumbered, there being no equity in those

properties. (App. at 3, 30, 46, 184).

In his position, Daniel Watkins, or any plaintiff for

that matter, in order to recover, could Say just about

anything without contradiction when the defendant is not

present and the court is well experienced to take note and

suspicion over the audacity of the allegations during

prove-up. For instance, the court should out of a reason-

able caution for determining the truth, consider requiring

such evidence as documents or independent testimony to

establish claims of sizable net worth, income from farm-

ing operations, size of operation, appraisal of land and

the extent of encumbrances thereon. In common usage in

business transactions, these matters are not ordinarily

given credibility solely by word of mouth. Contrarily, due

diligence is the common modern rule exercised by astute

investors. The evidence of fraudulent inducement must

fail for the reason that it is one-sided and lacks the kind

of corroboration expected to clearly, sufficiently and con-

vincingly prove it.

VIII. WATKINSES AS SOPHISTICATED INVESTORS

WERE NOT ENTITLED TO REASONABLY RELY

ON LUNDELLS’ REPRESENTATIONS IN THE

UNDERLYING TRANSACTION

The Watkinses argue that this claim is misdirected

and not relevant to the present lawsuit because it does

not involve a claim of fraud based on misrepresentations

concerning the sale of the Iowa property raised in the

California lawsuit, that the present lawsuit alleges fraud

based on misrepresentations made to induce a settlement

and dismissal of the California lawsuit. Again, the differ-

ence is thinly guised at best. But the obviously high level

of sophistication of the Watkinses, as investors, goes to

the heart of the element of reasonable reliance on any

statements made to them by Terry Lundell. Simply put,

the bigger the transaction, the more diligence that ought

to in common sense be done by the one seeking the

bargain. Daniel Watkins was seeking a bargain, a 5380-

acre farm he was willing to pay 7.8 million dollars for.

(App. p. 22). This was a huge transaction; of the type

unsophisticated investors cannot or should not contem-

plate. More sophisticated yet because it involved the

nuances, risks and pitfalls inherent in purchasing income

producing farm property, and especially to Daniel Wat-

kins purchasing from a foreign state nearly 2000 miles

away, using a $200,000 Ferrari as a down payment. The

question arises again: just what could Daniel Watkins

reasonably rely on in this kind of a ‘big deal’? Certainly

he could not reasonably rely on the words of a stranger.

The Watkinses note in their Brief that sometime prior

to the closing, Terry Lundell failed to perform under the

Benton contract and forfeited his right to the property,

(App. at 24-25, 42, 182), that as a result, Terry Lundell

was unable to transfer the Iowa property to Watkins,

(App. at 27, 42, 182), that despite repeated demands,

Lundell refused to return Watkins’ down payment. (App.

at 42). This argument ignores that Watkinses were also

unable to close on the farm purchase because they could

not get financing to support their bid and consequently,

reliance on Terry Lundell’s representations, whatever

they really were, would not have gone to his detriment as

he would fail to close for reasons independent of Terry or

Stephanie Lundell.

IX. THE JUDGMENT IN THIS CASE IS NOT RES

JUDICATA IN A SUBSEQUENT PROCEEDING

COMMENCED UNDER 11 U.S.C. § 523(a)

Where a Bankruptcy Court in Iowa previously ruled

that a state court fraud judgment would be res judicata in

the bankruptcy court, the District Court reversed the

granting of the creditor’s motion for summary judgment

because the state court judgment was procured by default

and there existed a fact issue that debtor was given an

Opportunity to defend against the default. In re Burnett,

Adv. L-88-0245W (Bankr. N.D. Iowa 8/16/90) (state court

found fraud awarding creditor $149,000 actual damages

and $100,000 punitive damages). This distinction is

important in this case, which also involves a default

judgment for fraud where punitive damages were

awarded. 11 U.S.C. § 523(a) determination made in the

Report and Recommendations would therefore not be res

judicata in the bankruptcy court. The Watkinses cite no

authority in this circuit to the contrary.

X. WATKINSES WERE NOT ENTITLED TO AN

AWARD OF PUNITIVE DAMAGES

A. Application of Iowa Law or California Law.

The law on punitive damages is not substantially

similar in Iowa and California. See generally, Cal. Civ.

Code § 3294 (1997); Iowa Code Ch. 668A (1997). Under

California law, a plaintiff is entitled to punitive damages

when “it is proven by clear and convincing evidence that

the defendant has been guilty of oppression, fraud, or

malice.” Cal. Civ. Code § 3294(a) (emphasis added); see

also, Waits v. Frito-Lay, Inc., 978 F.2d 1093, 1105 (9th Cir.

1992), cert. denied, 506 U.S. 1080, 113 S. Ct. 1047, 122 L.

Ed.2d 355 (1993). While the instant record clearly and

obviously falls short of establishing ‘malice’ or ‘oppres-

sion’ as defined in § 3294, it likewise fails to establish

‘fraud’ under the California definition because no clear

and convincing evidence that misrepresentations made

by Lundells, if any, were intentional, were adduced in the

January 7, 1994 hearing. (App. at 22-30).

Under Iowa law, a plaintiff is entitled to punitive

damages when it is proven “by a preponderance of clear,

convincing, and satisfactory evidence, the conduct of the

defendant from which the claim arose constituted willful

and wanton disregard for the rights or safety of another.”

Iowa Code § 668A.1(1)(a) (1997). The fact that both states

test the reasonableness of the award in a similar fashion

as noted by the Watkinses, however, does not homoge-

nize the underlying substantive elements of proof of enti-

tlement to punitive damages in the first instance. Given

these substantive distinctions, erroneously applying Cali-

fornia’s civil code statute could hardly be deemed harm-

less.

B. Evidence Concerning the Net Worth of the Lun-

dells.

The district court erred in receiving and giving

weight to the evidence concerning the Lundells’ alleged

net worth of approximately $11,000,000 at the evidentiary

hearing January 7, 1994. (App. at 30-34). A prima facie

showing of fraud was not established solely through the

testimony of Daniel Watkins, and certainly not by virtue

of the Lundells’ default. Under lowa Code Chapter 668A,

evidence concerning the Lundells’ net worth was relevant

to determine an appropriate award of punitive damages

only if the Watkinses could first make a prima facie

showing of a right to relief. lowa Code § 668A.1(3) (1997);

see, Pulla v. Amoco Oil Co., 72 F.3d 648, 659 (8th Cir. 1995);

Boyle v. Lorimar Prods., Inc., 13 F.3d 1357, 1359-60 (9th Cir.

1994). Watkins claim that the Lundells should be

estopped from arguing that Daniel Watkins’ testimony

concerning the Lundells’ net worth was self-serving and

lacking in credibility. During discovery, the Watkinses

repeatedly requested the Lundells to produce their tax

records, financial statements, credit applications, and

other documentary evidence to confirm their net worth.

Although Terry Lundell ultimately refused to produce

these records and was sanctioned, (Order entered January

2, 1996; Ruling on Plaintiffs’ Motion for Additional Sanc-

tions entered May 20, 1996), such failure makes Daniel

Watkins testimony about Terry Lundell’s net worth no

more or less likely than without the testimony. The dis-

trict court should have required more than Daniel Wat-

kins’ purely self-serving testimony to establish Terry

Lundells’ net worth and in the absence thereof, the dis-

trict court should not have awarded punitive damages.

Only according to Daniel Watkins has Terry Lundell

represented that he is worth $11,000,000 (App. at 30-31).

Only according to Daniel Watkins was Terry Lundell’s

contract harvesting business was generating $120,000 to

$150,000 in income at the time he was attempting to sell

the Iowa property to Watkins. Only according to Daniel

Watkins was Terry Lundell receiving income from his

5,000 wheat acres in Colorado, his farm in Oklahoma, his

four-county project in New Mexico, and his operations in

Merical County, California (App. at 30-31). The fact that

neither the Watkinses nor the district court had the

opportunity to examine the Lundells’ tax records, finan-

cial statements, credit applications, or other documentary

evidence to confirm the Lundells’ net worth does not

confirm the Lundells’ net worth in any particular

amount.

C. Due Process.

The Watkins claim that the punitive damage award of

$3,500,000 against Terry Lundell was not unreasonable

when viewed in light of the nature of the egregious

conduct, the damages they caused, and their overall net

worth. See Pulla v. Amoco Oil Co., 72 F.3d at 659; Boyle v.

Lorimar Prods. Inc., 13 F.3d at 1359-60. To buttress this

argument, the Watkins urge the same litany of unproved,

mere allegations asserted in their fraudulent inducement

cho ala eA Racher DORSsane ten a

claim. (Watkins’ Brief, pp. 24-26). The conservative eye

might more appropriately opine, upon viewing the lack

of quality, independent evidence presented in the January

7, 1994 hearing, that the Lundells’ conduct was at worst,

non-performing or negligent, that the damages caused

are ill-proven, overstated and unmitigated, and that the

Lundells’ net worth was a guess at best, by a person with

a direct financial interest in getting a piece of whatever it

might be. The cases previously cited, however, make it

clear that excessive punitive damage awards deny sub-

stantive due process and will be remitted when so shown;

that the majority of punitive damage cases upheld show

conduct far more reprehensible than that of the Lundells,

most applying a more careful and focused methodology

of determining net worth and in the end applying a

smaller multiplier of the actual damage award to punish

the conduct of the defendant.

Daniel Watkins stands to hold a seven-figure judg-

ment from his testimony about Terry Lundell’s alleged

net worth. (App. at 25, 29-34). The incredulity of his claim

is in his testimony. Daniel Watkins testified “His wife is a

medical doctor. She makes a lot of money. He is a contract

harvester as well as a very huge operator. He probably

grosses 200-300 thousand dollars a year just himself. He’s

got 11 million net worth, and he’s ignoring me. He’s

mocking the whole system here. He’s mocking the settle-

ment agreement. He’s mocking us today.” (App. at 34).

(Emphasis Added). There is no real, believable proof of

the Lundells net worth in these statements and what

reasonable person would believe them without more.

Daniel Watkins’ testimony was uncorroborated brag-

gadocio given for his benefit alone. It should have been

given no weight.

Numerous cases establish limits on punitive damages

awards. See, Pacific Mutual Life Ins. Co. v. Haslip, 499 U.S.

1, 9-15, 23-24 (1991) (insurance fraud case involving pre-

miums purloined by agent — $840,000 punitive damages

award more than four times actual damages “may be

close to the line”); Schmizza v. Illinois Farmers Insurance

Company, 928 F. Supp. 760 (N.D. Ind. 1996) (punitive

award of $600,000.00 found excessive where actual dam-

ages were $45,000.00 and farmer’s conduct did not rank

high on reprehensibility scale). In Haslip, although multi-

ple acts of malfeasance against insureds and an insurance

company were found, a punitive damage award of more

than four times actual damages was thought “close to the

line.” Accordingly, a punitive damage award nearly 15

times purported actuals in a breach of a settlement

regarding a single land contract is patently excessive. The

requisite underlying reprehensibility of conduct of Lun-

dells or harm to Watkinses was not shown and the nature

and quality of the evidence of net worth of the Lundells

embarrassingly inadequate.

In the Second Report, the court had problems with

the amount of punitive damages awarded. It stated: “As

to the final guidepost, it is difficult to compare the puni-

tive damages award here with sanctions for comparable

misconduct. No supportive analogue comes to mind for a

bad faith failure by an individual to pay money due by

contract.” (App. at 201). The 3.5 million-dollar punitive

damage award was not due to extreme reprehensible

conduct against Watkins with equal harm to them. It was

a sanction for not producing income tax records in the

Combined Motion proceeding.

In the Second Report, the court stated: “There is no

indication in the record that [Stephanie Lundell] was

personally involved in the Benton transaction or the

mediation which resulted in settlement of the California

Action against her husband.” (App. at 184). There can be

no basis for an award of punitive damages against her for

merely being a guarantor under the settlement.

CONCLUSION

The petition for a writ of certiorari should be

granted.

Respectfully submitted,

Terry LUNDELL

Date: May 17, 1999

APPENDIX A

ile th are lS a

App. 1

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

No. 97-3684

Daniel Watkins; .

Cynthia Watkins, :

a * Appeal from the United

PP : * States District Court for the

v. * Southern District of Iowa.

Terry Lundell; :

Stephanie Lundell, Z

Appellants.

Submitted: November 20, 1998

Filed: February 26, 1999

Before BEAM, MAGILL, and MORRIS SHEPPARD

ARNOLD, Circuit Judges.

BEAM, Circuit Judge.

Terry and Stephanie Lundell (the Lundells) appeal

the district court’s partial denial of their motions to set

aside default judgment. The district court set aside a

portion of the default judgment, under Federal Rule of

Civil Procedure 60(b)(6), in order to correct a computa-

tion of actual damages and to reduce punitive damages.

The Lundells argue that the entire default judgment

should be set aside. They contend, inter alia, that the

App. 2

district court erred in awarding punitive damages. We

affirm in part and reverse in part.

I. BACKGROUND

Terry Lundell, a resident of Tucson, Arizona, contrac-

ted to purchase approximately 5,381 acres of farmland in

Iowa on March 26, 1990. He in turn advertised the prop-

erty for sale in California where Daniel Watkins, a resi-

dent of Los Altos, California, contacted Lundell and

agreed to purchase the property. As a down payment,

Daniel Watkins delivered title and possession of a vintage

Ferrari Testarossa, valued at $200,000. Daniel Watkins

also paid a $25,000 loan origination fee and $8,000 for an

appraisal. Terry Lundell accepted and sold the Ferrari but

financial difficulties resulted in his failure to perform on

his contract to purchase the Iowa property. The property

was eventually forfeited, and without the property, Terry

Lundell could not fulfill his contract to sell the land to

Daniel Watkins. In 1992, Daniel Watkins and his wife,

Cynthia Watkins (the Watkins), filed an action for breach

of contract and fraud.

The Watkins’ action was brought in the United States

District Court for the Northern District of California,

where it was referred for early mediation. The mediation

resulted in a “Mutual Release and Settlement Agreement”

(the settlement) that provided for dismissal of the con-

tract and fraud action contingent on certain terms. The

settlement required that Terry Lundell pay $25,000 to the

Watkins within ten days, followed by three subsequent

payments of $70,000 on November 1 of 1993, 1994, and

1995 with interest accruing on the unpaid balance a* five

Dinca Sl

CEE

App. 3

percent. Terry Lundell was also required to obtain a life

insurance policy naming the Watkins as beneficiaries. As

security for the settlement, Terry Lundell provided a

confession of judgment, to be filed in the event of default,

and mortgages on two of his other properties. His wife,

Stephanie Lundell, signed the settlement as a guarantor.

Despite an extension of time, the Lundells never paid any

amount, the life insurance policy was never obtained, and

the property used as security turned out to be worthless.

After the Lundells defaulted on the settlement contract,

the Watkins filed the confession of judgment.

On July 9, 1993, the Watkins brought the present

action for breach of the settlement agreement and fraud

in inducing the settlement. For reasons unknown and

irrelevant here, this action was brought in the United

States District Court for the Southern District of Iowa.

The Lundells were personally served and read and

understood the summons and complaint. Just before the

expiration of time for filing an answer, Terry Lundell

contacted an Iowa attorney concerning representation.

The Iowa attorney, being informed that an answer was

due, contacted opposing counsel and received an exten-

sion of time to answer. However, before accepting the

representation, the Iowa attorney requested a retainer

and documents relating to the circumstances giving rise

to the lawsuit. Terry Lundell agreed that he would pro-

vide the retainer and documents but never contacted the

Iowa attorney again. An answer was never filed.

Meanwhile, the Watkins attempted to collect on the

confessed judgment from the first action in California,

App. 4

and while doing so were contacted by an Arizona attor-

ney representing the Lundells. The Arizona attorney indi-

cated that the Lundells were contemplating bankruptcy

and were prepared to offer the Watkins a quitclaim deed

to some property, with allegedly $10,000 in equity, a

third-position deed of trust to some parcels of land, and

an unsecured interest-free promissory note in the amount

of $75,000. This offer was to be in settlement of all the

Watkins’ claims. The Watkins rejected the offer out-of-

hand, and the Lundells made no further contact.

No answer having been filed, the Watkins moved for

entry of default in the present action. Default was entered

against the Lundells, and the action was referred to a

magistrate judge for a determination of damages. The

magistrate judge held a hearing, at which the Lundells

were not present, and found that the Lundells had fraud-

ulently induced the Watkins to settle and had deliberately

decided not to defend the present action. Evidence pro-

vided by the Watkins estimated Terry Lundell’s net worth

to be approximately $11,000,000. The magistrate judge

prepared a report and recommendation calling for actual

damages of $335,000 and punitive damages of $3,500,000

against the Lundells.

The district judge reviewed the record and adopted

the magistrate judge’s report and recommendation and

entered default judgment on February 16, 1994. In June

1995, the Watkins filed the default judgment in Pima

County, Arizona, whereupon the Lundells promptly filed

the motions which are the subject of this appeal. On July

6, 1995, the Lundells moved to set aside the default

judgment urder Federal Rule of Civil Procedure 55(c),

60(b)(4), (5), and (6), by the ancillary remedy of a Bill of

ith en te gomnien bad

App. 5

Review, and under the Soldiers’ and Sailors’ Civil Relief

Act of 1940. See 50 U.S.C. §§ 501-591. The motions were

referred to a magistrate judge for a report and recommen-

dation.

The magistrate judge recommended that a portion of

the default judgment be set aside and partial relief be

granted under Federal Rule of Civil Procedure 60(b)(6).

The report and recommendation concluded that actual

damages should be reduced to $235,000 because of an

error in calculation, and that punitive damages against

Stephanie Lundell be reduced to $117,500 because of

injustice. The magistrate judge did not recommend relief

from the punitive damages awarded against Terry Lun-

dell because Lundell’s actions evidenced a pattern of

fraud and deceit. Furthermore, Lundell withheld infor-

mation necessary to make a more accurate determination

of punitive damages. The district court adopted the

report and recommendations in full, thus granting in part

and denying in part the Lundells’ motions to set aside

default judgment.!

Il. DISCUSSION

We review a determination to set aside default judg-

ment under Federal Rule of Civil Procedure 60(b) for

abuse of discretion. See Nucor Corp. v. Nebraska Pub. Power

Dist., 999 F.2d 372, 374 (8th Cir. 1993). Although the

' The district court also denied the Lundells’ subsequent

motion to amend the findings of fact and judgment. This motion

is nothing more than a second attempt to obtain relief and is

subsumed in the Rule 60(b)(6) analysis.

App. 6

Lundells moved for relief from the default judgment

under several theories, only Rule 60(b)(6) is applicable.?

A Rule 60(b)(6) motion, made within a “reasonable time,”

can provide relief from a judgment, including a default

judgment, for “any other reason justifying relief from the

operation of the judgment,” Fed. R. Civ. P. 60(b)(6), thus

allowing a district court to inject equity and revive an

otherwise lifeless claim. Cf, Klapprott v. United States, 335

U.S. 601, 614-15 (1949) (finding that Rule 60(b)(6) enables

a court to “accomplish justice”); Hoover v. Valley West D

M, 823 F.2d 227, 230 (8th Cir. 1987) (weighing the “equi-

ties involved” on a Rule 60(b) motion).

A. Reasonable Time

Before considering the merits of a Rule 60(b)(6)

motion, we must consider whether the motion was made

within a reasonable time. What constitutes a reasonable

time is dependent on the particular facts of the case in

question and is reviewed for abuse of discretion. See

Federal Land Bank v. Cupples Bros., 889 F.2d 764, 767 (8th

Cir. 1989).

2 Parts (4) and (5) of Rule 60(b) are of no help to the

Lundells as they provide relief when a judgment is void,

satisfied, released, discharged or an underlying judgment upon

which the instant judgment is based was reversed, vacated or

should no longer have prospective application. See Fed. R. Civ.

P. 60(b)(4) & (5). No such allegations are made and the district

court properly disposed of those claims, leaving only Rule

60(b)(6). The district court also correctly dismissed claims for

relief under Federal Rule of Civil Procedure 55(c), Bill of

Review, and the Soldiers’ and Sailors’ Civil Relief Act.

App. 7

We have considerable trepidation about whether the

Lundells’ Rule 60(b)(6) motion was made within a reason-

able time since they allowed the default judgment to

stand, without objection, for approximately seventeen

months. Nevertheless, the district court did not address

the issue and neither of the parties have raised it. In fact,

when counsel for the Lundells was questioned at oral

argument about how a district court could review this

case under Rule 60(b)(6), he responded that “I found no

objection to that procedure, and I thought that the court

had exercised equitable powers and what I thought was

appropriate judgment in the effort to seek overall fairness

and justice.”* From the total dearth of treatment on the

issue of reasonable time, we conclude that it is not prop-

erly before us on appeal.

B. Exceptional Circumstances

The Watkins are content with the partial relief

granted the Lundells by the district court. They do not

argue that the partial relief was inappropriate, but seek

only to uphold the district court’s ruling. The Lundells,

however, contend that the entire default judgment should

be set aside pursuant to Rule 60(b)(6). The Lundells raise

eleven separate arguments ranging from lack of proper

3 Both parties seem to almost entirely overlook the

procedural context in which this case arises. Very little

discussion of the standards under Rule 60(b) were addressed in

the briefs or mentioned at oral argument - even though both

parties were extensively questioned on the issue. Yet, the

district court clearly based its decision on Rule 60(b)(6), and we

review that decision.

App. 8

venue to error in awarding punitive damages. The only

argument of merit relates to punitive damages, which we

review under the Rule 60(b)(6) framework.

“Relief under Rule 60(b) is an extraordinary remedy,”

Nucor, 999 F.2d at 374, since exceptional circumstances

must exist to justify intrusion into the sanctity of a final

judgment. See Rosebud Sioux Tribe v. A & P Steel, Inc., 733

F.2d 509, 515 (8th Cir. 1984). To justify intrusion into the

final judgment, the Lundells contend that either (1)

lowa’s requirements for punitive damages are not met, or

(2) the punitive damages awarded in this case are exces-

sive and unconstitutional.

Under Iowa law, punitive damages are appropriate

where the conduct constitutes “willful and wanton disre-

gard for the rights or safety of another.” lowa Code Ann.

§ 668A(1)(a). This case arises from a breach of contract.

While an ordinary breach of contract does not give rise to

punitive damages in Iowa, if the breach is accompanied

by or results in independently tortious actions or fraudu-

lent activity then punitive damages are permissible. See

Pogge v. Fullerton Lumber Co., 277 N.W.2d 916, 919-20

(lowa 1979). The district court found that the Lundells’

actions constituted “willful and wanton disregard for the

rights of Daniel and Cynthia Watkins.” Watkins v. Lundell,

No. 4-93-CV-10487, slip op. at 9-10 (S.D. Iowa Jan. 11,

1994) (report and recommendation adopted in full by

district court). That finding satisfies the requirements for

punitive damages under lowa law.

The Lundells want to revisit the factual findings

under Rule 60(b)(6). The district court refused to review

App. 9

the findings of willful and wanton disregard for the Wat-

kins’ rights. We agree with this approach and find no

abuse of discretion. The Lundells have shown no excep-

tional circumstances on this issue. If we were to revisit

factual findings without some showing of exceptional

circumstances, then Rule 60(b)(6) would be nothing more

than an end-run around the entire judicial process. There-

fore, we turn to the Lundells’ argument of excessive and

unconstitutional punitive damages.

We first consider the abstract question whether an

award of excessive and unconstitutional punitive dam-

ages in and of itself presents exceptional circumstances.

The Supreme Court has expressed a profound concern for

“unlimited judicial discretion” in fixing punitive dam-

ages. Pacific Mut. Life Ins. Co. v. Haslip, 499 U.S. 1, 18

(1991). To avoid unlimited judicial discretion, the

Supreme Court has scrutinized the procedures for

reviewing punitive damages as well as the substantive

considerations. See, e.g., BMW of North America, Inc. v.

Gore, 517 U.S. 559 (1996) (engaging in extensive and

meticulous review of the state procedure and relevant

substantive guideposts for reviewing a jury award of

punitive damages); TXO Prod. Corp. v. Alliance Resources

Corp., 509 U.S. 443 (1993) (same); Haslip, 499 U.S. at 18-23

(same). Procedural and substantive strictures are neces-

sary to ensure that punitive damage awards, which are

proxy for punishment and deterrence, comply with con-

stitutional requirements. See Haslip, 499 U.S. at 19; see also

Midwest Home Distrib., Inc. v. Domco Indus., 585 N.W.2d

735, 743 (lowa 1998) (stating purposes of punitive dam-

ages).

App. 10

In the Lundells’ case, relevant substantive factors,

such as the degree of reprehensibility, the ratio of actual

to punitive damages and the wealth of the defendant

were analyzed. However, the procedural context raises

concerns. The $3,617,500 in punitive damages was

awarded on default and reviewed only by the judge who

entered the judgment. We think that this measure of

review does not comport with the Supreme Court's pro-

nouncements. Cf. Honda Motor Co. v. Oberg, 512 U.S. 415,

432 (1994) (holding that denial of judicial review of puni-

tive damages violates the Due Process Clause). In light of

these concerns, and because of the equitable nature of the

inquiry, we agree with the district court, that exceptional

circumstances exist justifying operation of Rule 60(b)(6).

We next consider whether the punitive damages

assessed against Terry and Stephanie Lundell, in the

amount of $3,500,000 and $117,500 respectively, are exces-

sive and unconstitutional. The constitutionality of puni-

tive damages is reviewed under the due process clause to

determine if they are “grossly excessive.” BMW, 517 U.S.

at 568. The Supreme Court in BMW considered three

guideposts to determine if punitive damages are grossly

excessive: (1) the degree of reprehensibility of the parties’

actions; (2) the ratio between the actual harm inflicted

and the punitive damages; and (3) the difference between

the punitive damages and the civil penalties authorized

or imposed in comparable cases. See id. at 575. We review

the punitive damage awards against Terry and Stephanie

Lundell separately and consider first the award against

Terry Lundell — $3,500,000.

The degree of reprehensibility is “[p]erhaps the most

important indicium of the reasonableness of a punitive

ee See =e

eS ee "

App. il

damages award.” Id. The degree of reprehensibility is

also indicative of the constitutionally permissible size of

the punitive damage award. The higher the degree of

reprehensibility, the larger the punitive damages award it

can support. Therefore, the punitive damages should be

roughly proportionate to the enormity or gravity of the

offense. See id. at 575-76.

The reprehensible conduct in question involves a

breach of contract and fraud claim. The Watkins agreed to

settle their breach of contract and fraud claim based on

representations made by Terry Lundell. The first pay-

ment, only a small portion of the total required under the

settlement, was due ten days after the settlement was

finalized. Despite an extension and despite years of sub-

sequent efforts, the Lundells have never paid any of the

settlement. It is a fair inference, based on previous con-

duct, conduct during the settlement, and subsequent con-

duct, that Terry Lundell induced the settlement

agreement knowing he would never pay any amount.

Terry Lundell also gave worthless property as security

and false assurances. He has repeatedly attempted to

avoid and to delay his obligations in detriment to the

rights of the Watkins.

The district court found that Terry Lundell engaged

in a “pattern, practice or scheme characterized by fraud

and deceit.” Watkins v. Lundell, No. 4-93-CV-10487, slip

op. at 23-24 (S.D. Iowa April 21, 1997) (report and recom-

mendation adopted by district court). This is certainly

more reprehensible than mere negligence. See BMW, 517

U.S. at 576. We agree with the district court that Terry

Lundell’s conduct is reprehensible, thereby supporting a

App. 12

punitive damages award, but question whether his con-

duct constitutes “the high degree of culpability that war-

rants a substantial punitive damages award.” Id. at 580

(emphasis added).

The second guidepost is the ratio of punitive dam-

ages to the harm inflicted. There must be a “reasonable

relationship” between the two. Id. Punitive damages of

$3,500,000 versus actual damages of $235,000 represents a

ratio of 14.89-to-1. While there is no mathematical for-

mula marking the constitutional line for grossly excessive

punitive damages, see id. at 582, the ratio here is very

high. Cf. Dean v. Olibas, 129 F.3d 1001, 1007 (8th Cir. 1997)

(finding a 14-to-1 ratio very high).

In Haslip, 499 U.S. at 23, the Supreme Court found

that a 4-to-1 ratio was “close to the line” of constitutional

impropriety in a case involving fraud by an insurance

agent. In the present case, we have fraud in the induce-

ment of a settlement agreement where both sides were

sophisticated and represented by counsel. The actions in

Haslip are not so dissimilar from Terry Lundell’s, yet the

actions in Haslip hardly supported a ratio of 4-to-1. On

review of this record, we are not convinced that the

conduct of Terry Lundell is reprehensible enough to jus-

tify greater than a 4-to-1 ratio.

The third BMW guidepost instructs courts to compare

the punitive damages to comparable civil or criminal

sanctions imposed for the conduct. See BMW, 517 U.S. at

583-84. The most comparable civil sanction for Terry Lun-

dell’s actions would be for fraudulent practices, which

carries a maximum fine of $10,000. See lowa Code Ann.

§ 714.8 (defining fraudulent practices); Iowa Code Ann.

;

App. 13

§ 714.9 (making a fraudulent practice, involving over ten

thousand dollars a class “C” felony); Iowa Code Ann.

§ 902.9 (setting the maximum fine and imprisonment for

a class “C” felon). For Terry Lundell, the maximum fine

for his conduct compared to the $3,500,000 in punitive

damages represents a ratio of 350-to-1. Under this guide-

post, the “monetary comparisons are [also] wide.” Haslip,

499 US. at 23.

The district court, following Pulla v. Amoco Oil Co., 72

F.3d 648, 659 (8th Cir. 1995) (Justice Byron R. White,

Retired Associate Justice of the United States Supreme

Court, sitting by designation), also considered Terry Lun-

dell’s wealth. Although BMW analyzed three relevant

guideposts, they are not the exclusive factors. Cf. Haslip,

499 U.S. at 22 (concluding that certain factors considered

by the state, including “financial position,” were suffi-

cient). We also find the wealth of the defendant an appro-

priate consideration here. Terry Lundell’s net worth was

found to be $11,000,000. This finding is now vigorously

disputed by Terry Lundell, but he refuses to provide any

contrary evidence. We must accept it as true. Even so, we

find that an award of $3,500,000 in punitive damages

compared to a net worth of $11,000,000 is excessive.

In view of these considerations, we conclude that the

punitive damages award against Terry Lundell is exagge-

rated. Furthermore, in Pulla we stated that although the

presence of these guideposts or factors may justify a large

punitive award, their absence may also “counsel against a

large award.” Pulla, 72 F.3d at 659 (speaking of analogous

factors). In keeping with Pulla, we find Terry Lundell’s

conduct justifies punitive damages, but are not per-

suaded that the award should exceed a 4-to-1 ratio

App. 14

($940,000) in this case. Thus, we find that the district

court abused its discretion by failing to exercise its power

under Rule 60(b)(6) to set aside the default judgment and

reduce the punitive damages award against Terry Lun-

dell.

Punitive damages, in the amount of $117,500, were

also awarded against Stephanie Lundell. The Watkins

argue that as Terry’s wife, she was fully aware of all that

occurred and should therefore be responsible for punitive

damages. The Lundells contend that Stephanie Lundell

acted only as a guarantor. The record supports the Lun-

dells’ contention. Stephanie Lundell’s conduct lacks the

requisite reprehensibility. Simple failure to pay as a guar-

antor does not suggest the type of conduct, such as fraud,

deceit or trickery, associated with punitive damages. The

fact that the punitive damages award is half the compen-

satory damages does not save this from the requirements

of due process.

The magistrate judge had a “serious concern” about

the constitutionality of the punitive damages award

against Stephanie Lundell, and reduced the original

amount. Watkins, slip op. at 19 (April 21, 1997). We agree

with the underlying concerns articulated by the magis-

trate judge and find that the district court abused its

discretion by failing to eliminate the punitive damages

award against Stephanie Lundell.

III. CONCLUSION

For the foregoing reasons we affirm in part and

reverse in part the district court’s denial of relief from

ee ee a ee ee eS?

RE Tsetew Sue e

App. 15

default judgment under Rule 60(b)(6) and remand to the

district for proceedings consistent with this opinion.

MORRIS SHEPPARD ARNOLD, dissenting.

I respectfully dissent from the judgment of the court.

In the first place, I would hold that relief from this

judgment is simply not available under Rule 60(b)(6)

because the requisite exceptional circumstances are not

present. The Lundells allege nothing but an error of law,

and if every error of law is sufficient to undermine a

judgment, the entire doctrine of res judicata is undone.

The supposed error of constitutional law on which

the court bases its relief, moreover, is not in fact an error

of law: The judge who entered the default judgment

performed, as the court itself admits, an analysis that

comported with due process before it awarded damages.

There is no constitutional right to have this process

repeated if the judgment is not appealed. The court's

reliance on Honda Motor Co. v. Oberg, 512 U.S. 415 (1994)

is misplaced, for that case simply held that the complete

absence of judicial review of punitive damage awards

was unconstitutional.

Finally, even if Rule 60(b)(6) was appropriately

invoked here, and even if I thought it proper to under-

take a review of the punitive damage award, I would not

find the award to be grossly excessive under BMW of

North America, Inc. v. Gore, 517 U.S. 559 (1996). Cf. Dean v.

Olibas, 129 F.3d 1001 (8th Cir. 1997).

i would therefore reverse the judgment of the district

court and remand the case for entry of judgment in the

amount of the original default judgment.

App. 16

A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS, EIGHTH

CIRCUIT.

APPENDIX B

;

App. 17

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF IOWA

CENTRAL DIVISION

DANIEL WATKINS; CYNTHIA

)

WATKINS, ) Civil No.

Plaintiffs ) 4-93-cv-10487

)

se ) ORDER

TERRY LUNDELL; STEPHANIE ) FOLLOWING

LUNDELL, ) | REMAND

)

Defendants. )

(Filed Apr. 29, 1999)

On March 26, 1999, mandate issued from the United

States Court of Appeals for the Eighth Circuit with

respect to its judgment remanding this case to the district

court for proceedings consistent with the opinion of the

Eighth Circuit. That opinion affirmed in part and

reversed in part this court’s ruling on what was treated as

a motion by defendants for relief from judgment or order

under Fed. R. Civ. P. 60(b)(6). The Eighth Circuit held that

punitive damages against defendant Terry Lundell

should be reduced to an amount not exceeding $940,000

and that the punitive damages award against Stephanie

Lundell should be eliminated. By Order entered April 1,

1999, the parties were given an opportunity to be heard

further with regard to the judgment to be entered in

compliance with the mandate. Neither side has requested

further hearing within the time provided.

In compliance with the mandate of the Eighth Cir-

cuit, the default judgment for punitive damages against

App. 18

both defendants is VACATED and the Clerk shall enter

the following substituted judgment for punitive damages:

IT IS HEREBY ORDERED, ADJUDGED AND

DECREED that judgment is entered in favor of

plaintiffs and against defendant Terry Lundell

for punitive damages in the amount of $940,000.

No judgment for punitive damages is entered

against defendant Stephanie Lundell.

In all other respects the amended judgment against

defendants of July 23, 1997 remains as previously

entered.

IT IS SO ORDERED.

Dated this 29th day of April, 1999.

/s/ Ronald E. Longstaff

RONALD E. LONGSTAFF

UNITED STATES DISTRICT

JUDGE

‘4

APPENDIX C

Pe ee ee

(ila KS Seki AR Se ll Ae eee

App. 19

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF IOWA

CENTRAL DIVISION

DANIEL WATKINS and

CYNTHIA WATKINS,

Plaintiffs,

TERRY LUNDELL and

STEPHANIE LUNDELL,

)

Defendants.

)

Civil No. 4-93-cv-10487

REPORT AND RECOM-

MENDATION CONCERN-

ING DEFENDANTS’

COMBINED MOTIONS TO

SET ASIDE DEFAULT

PURSUANT TO FED. R.

CIV. P. 55(c), 60(b)(4), (5),

and (6); FOR BILL OF

REVIEW IN EQUITY; AND

TO VOID DEFAULT JUDG-

MENT PURSUANT TO

THE SOLDIERS’ AND

SAILORS’ CIVIL RELIEF

ACT OF 1940

(Filed Apr. 21, 1997)

The above resisted motions are before the Court.

They were filed by defendants on July 6, 1995. The

motions were referred to the undersigned United States

Magistrate Judge by Judge Longstaff on July 24, 1995 for

report and recommendation in accordance with 28 U.S.C.

§ 636(b)(1)(B). The motions came on for evidentiary hear-

ing on December 16, 1996. Plaintiffs appeared by their

counsel, Mr. Denny M. Dennis. Defendant Terry Lundell

appeared pro se. His wife, Stephanie Lundell, did not

appear. Post-hearing proposed findings and argument

have been received and the matter is now fully submit-

ted.

App. 20

FACTUAL AND PROCEDURAL BACKGROUND

This action was originally filed on July 9, 1993. It

alleged breach of the terms of an agreement to settle a

lawsuit in the United States District Court for the North-

ern District of California and fraud in connection with

representations made to plaintiffs concerning the agree-

ment. Actual and punitive damages were claimed.

It is appropriate to briefly review the dealings

between the parties preceding the initiation of this action

and the subsequent procedural history. More detail can

be found in Judge Bennett’s January 11, 1994 Report and

Recommendation. On March 26, 1990, Terry Lundell

entered into a real estate contract with A. C. and Neva

Benton to purchase about 5,380 acres of farm ground in

Franklin and Butler Counties, lowa. The contract price

was $6,000,000, $400,000 of which was to be down. Terry

Lundell in turn advertised the property for sale on the

west coast and plaintiff Daniel Watkins, a resident of Los

Altos, California, responded. Negotiations ensued and on

May 13, 1990, Watkins and Terry Lundell executed a real

estate contract for the property. The contract price was

$7,800,000, $5,600,000 of which was to be financed. The

closing was to be December 1, 1990. Watkins paid a

$200,000 down payment by giving Terry Lundell title to a

vintage 1985 Ferrari automobile then valued at approxi-

mately that amount. Lundell experienced financial diffi-

culties and Watkins also had problems lining up

financing which he blamed in part on Lundell. Lundell

had discussions with both the Bentons and Watkins about

restructuring the deals, but both ultimately fell through.

Lundell did not perform under the Benton contract and it

was eventually forfeited. As a result, Lundell was also

App. 21

unable to meet his obligations under the contract with

Watkins. In the interim, Watkins had paid a $25,000 loan

origination fee and $8,000 for an appraisal in attempting

to arrange for financing.

In 1992, Watkins and his wife sued Terry Lundell in

the Northern District of California. The action was for

breach of contract and fraud. Stephanie Lundell was not a

party. Apparently, Terry Lundell counterclaimed. The

case was referred for “early neutral evaluation” and a

mediation was held which resulted in settlement. A

“Mutual Release and Settlement Agreement” was exe-

cuted by the parties and the California action was dis-

missed. By the terms of the agreement, Terry Lundell

agreed to pay plaintiffs $235,000! in four installments.

Exhibit 10, at tab 7 p. 3. Twenty-five thousand dollars was

due within ten days, the second installment of $70,000

was due on November 1, 1993, the third installment of

$70,000 was due on November 1, 1994, and the final

installment of $70,000 was due on November 1, 1995. The

balance accrued interest at five percent. Payment of these

amounts was secured by a confession of judgment exe-

cuted by Terry Lundell in the amount of $350,0002 and his

' The January 11, 1994 Report and Recommendation put

the total figure at $335,000, but in fact the total is $235,000.

* When Terry Lundell defaulted on the settlement

agreement, the confession of judgment was filed in the

Northern District of California and has since been transcripted

to state courts in Utah, Iowa, Arizona, and Colorado. Exhibit 10,

at tabs 8, 10-13. The confession of judgment was expressly as

“security [for Terry Lundell’s] monetary obligation” and the

right to file the judgment was “in addition to any other rights or

remedies [Daniel Watkins] would have as a result of any default

App. 22

execution of a mortgage on two properties, 6,000 acres of

land in Pueblo, Colorado and a one acre parcel near Park

City, Utah. Terry Lundell was also to purchase a life

insurance policy as further security. Stephanie Lundell

had no obligations under the settlement agreement

except as guarantor of her husband's performance. Plain-

tiffs had demanded this condition. There is no indication

in the record that she was personally involved in the

Benton property contracts or the mediation which

resulted in the settlement of the California federal action

against her husband.

Despite an extension, Terry Lundell did not pay the

first installment, or any subsequent installments. Nor has

Stephanie Lundell paid any amount as guarantor. In

addition, as the court has found previously:

Terry Lundell has failed to secure the required

life insurance policy. The properties pledged

. . . aS security have proven to be worthless and

without sufficient equity to satisfy any part of

the settlement amounts contained in the Mutual

Release and Settlement Agreement.

January 11, 1994 Report and Recommendation at 8.

or breach” of the settlement agreement. Exhibit 10, at tab 7 pp.

4-5. The default has waived any defense defendant might have

had based on a judgment on the same matter in another court.

See 18 C. Wright, A. Miller & E. Cooper, Federal Practice and

Procedure, § 4442, at 373 (“[vJalid default judgments establish

claim and defense preclusion in the same way as litigated

judgments. ...”). As the California judgment is security for the

obligation sued on in this court, any recovery under either

judgment would be a credit with respect to the other.

ae SRR chs SRA TOR A TAO OS 9 BBN NS Sa

App. 23

As noted, on July 9, 1993, plaintiffs filed the present

lawsuit. On August 28, the Lundells were personally

served with Summons and Complaint. They did not file

an appearance or move or plead. Both Terry and Step-

hanie Lundell read the Summons and Complaint and

understood them and the consequences if they failed to

respond. Specifically, they knew a default would be

entered against them if they did not respond. Stephanie

relied on her husband to handle the matter. See Stephanie

Lundell Depo. at 18.

On September 16, 1993, Terry Lundell called West

Des Moines attorney John Conger concerning potential

representation in this action. Lundell had been referred to

Conger by another Des Moines area attorney. Lundell

told Conger about the lawsuit and solicited his interest in

representing him. Conger understood from Lundell that

an answer to the complaint was due in a day or two and

told him that before he could discuss representation he

would need to talk to opposing counsel, Mr. George

LaMarca, to get additional time. Conger then called

LaMarca and explained he had been contacted by Mr.

Lundell. Conger asked LaMarca for a couple of additional

weeks in order to obtain information and determine

whether he would represent Lundell. LaMarca agreed to

allow two weeks and Conger confirmed this in writing

with LaMarca. Exhibit 10, at tab 15. Conger then called

Lundell and the two had a second conversation, also on

September 16. Conger told Lundell that LaMarca had

assured him he could have a couple of weeks to look into

the matter. Conger asked Lundell for three things, a

retainer in the amount of $5,000, the federal Complaint,

and documents relating to the circumstances giving rise

App. 24

to the lawsuit. Lundell responded he would send the

retainer and written materials within a few days. Mr.

Lundell, however, did not send any of these items or

subsequently contact Mr. Conger concerning the case.

On September 23, 1993, plaintiffs retained Des

Moines attorney Jerrold Wanek to attempt to collect on

the confession of judgment which had been filed in the

Northern District of California. Exhibit 10, at tab 16. Terry

Lundell hired Tucson, Arizona attorney Michael Stofko to

negotiate with plaintiffs. Tr., at 106-08. The Lundells lived

in Tucson. Mr. Lundell told Stofko about this lawsuit. Tr.,

at 49. On October 27, 1993, Stofko wrote a letter to plain-

tiffs in care of Wanek in which he indicated he was

representing the Lundells and they were considering fil-

ing bankruptcy. On behalf of the Lundells, Stofko pro-

posed they would quit claim a Utah property with a small

amount of equity and execute an unsecured promissory

note in the amount of $75,000 in settlement of plaintiffs’

claims under the settlement agreement. The proposal was

rejected by correspondence dated November 3 and Mr.

Lundell was informed of the rejection within a few days.

Tr., at 109; Exhibit 10, at tab 18. Mr. Lundell did nothing

further, and presumed a judgment would be entered. Tr.,

at 110.

On November 15, 1993, Mr. LaMarca’s co-counsel,

Mr. Robert K. DuPuy called Mr. Conger and asked if he

was representing Mr. Lundell. Conger responded he was

not, and told DuPuy he was not aware whether Lundell

had secured other representation. Plaintiffs moved for

entry of default on November 18, 1993, and default was

entered by the Clerk on November 23. The matter was

App. 25

referred to then-Magistrate Judge Bennett, who, follow-

ing hearing, issued a January 11, 1994 Report and Recom-

mendation that judgment be entered against defendants

in the amount of $335,000 plus interest at five percent per

annum in actual damages, and $3,500,000 in punitive

damages. The punitive damages award was based on a

finding that the Lundells fraudulently induced plaintiffs

to enter into the settlement agreement. The report and

recommendation was adopted by Judge Longstaff on Feb-

ruary 16, 1994 and judgment was entered that date.

The Court finds Terry Lundell, acting for himself and

his wife, subsequent to conferring with Mr. Conger, made

a deliberate decision not to defend this action with

knowledge that a default judgment would eventually be

entered. This is evident from Mr. Lundell’s abandonment

of his efforts to retain Mr. Conger, the attempt instead to

renegotiate through Mr. Stofko, and Mr. Lundell’s testi-

mony at hearing.* Plaintiffs did not thereafter inquire as

* Mr. Lundell testified as follows at the evidentiary hearing:

Q. You knew that you had to file an answer, or some

sort of paper or document in court to respond to that

lawsuit, or that a judgment would be rendered

against you for the relief demanded in the complaint.

You knew that, didn’t you?

A. Iknew that they would seek to - for a compliance

with the settlement agreement in California, yes.

Q. My question is this: When you were served with

the summons and complaint on August 28, ‘93, you

read those documents and you understood them,

correct?

A. Yes.

App. 26

to the status of proceedings and took no action until they

learned in June of 1995 that the default judgment had

been filed of record in Pima County, Arizona. Combined

Motions at 2. The Lundells then promptly retained Par-

kersburg, lowa attorney David Mansheim, who filed the

present Combined Motions on their behalf. Citing irrec-

oncilable differences between client and attorney, and

with the approval of the Lundells, Mr. Mansheim moved

for leave to withdraw on February 1, 1996. This was

granted and, after allowing the Lundells time to hire

substitute counsel and a period for discovery, the motions

were heard on December 16, 1996.

Further findings dealing with Mr. Lundell’s motion

under the Soldiers’ and Sailors’ Civil Relief Act are set

out in the discussion which follows.

Q. And you knew if you didn’t file an answer, or

hire counsel, or have somebody do this for you, file an

answer or some sort of response to this lawsuit, that a

judgment would be rendered against you for the

relief that was being sought in the complaint. You

knew that, didn’t you?

A. I knew they were seeking to perfect this, yes, but

the extent that it went and the award, absolutely

inconceivable.

Q. But you knew if you didn’t file an answer or do

something to defend against this lawsuit, that in fact

that’s what they were going to do?

A. We went through this, and I contacted Mr. Stofko,

and we tried to negotiate with them, yes.

Tr., at 103; See also Tr., at 106-110.

App. 27

DISCUSSION

Defendants seek relief from the judgment under Fed.

R. Civ. P. 55(c), 60(b)(4), (5) and (6), by the ancillary

remedy of a Bill of Review, and under the Soldiers’ and

Sailors’ Civil Relief Act of 1940, as amended, 50 U.S.C.

App. §§ 501-591. Only Rule 60(b)(6) — the catch-all clause

- provides any basis for relief. Discussion of this will be

reserved for last.

Rules 55(c),60(b)(4) and (5).

Rule 55(c) allows the Court to set aside an “entry of

default” for good cause shown. Once judgment is entered

on the default, Rule 60(b) governs. See Canal Ins. Co. v.

Ashmore, 61 F.3d. 15, 17 (8th Cir. 1995); United States ex rel.

Time Equipment Rental & Sales, Inc. v. Harre, 983 F.2d 128,

130 (8th Cir. 1993); Widmer-Baum v. Chandler-Halford, 162

F.R.D. 545, 549 (N.D. Iowa 1995); Fed. R. Civ. P. 55(c) (“if a

judgment by default has been entered [the court] may

likewise set it aside in accordance with Rule 60(b)”).

Under Rule 60(b), the Court may grant relief from a

judgment for six enumerated reasons. Defendants raise

the last three:

.. . (4) the judgment is void; (5) the judgment

has been satisfied, released, or discharged, or a

prior judgment upon which it is based has been

reversed or otherwise vacated, or it is no longer

equitable that the judgment should have pro-

spective application; or (6) any other reason jus-

tifying relief from the operation of the

judgment.

App. 28

Fed. R. Civ. P. 60(b). There is no basis on this record to

conclude the judgment is void under clause (4).4 The

Court has subject matter (diversity) and personal jurisdic-

tion. See Printed Media Services, Inc. v. Solna Web, Inc., 11

F.3d 838, 842-45 (8th Cir. 1993) (judgment is void if the

court lacks personal jurisdiction), 11 C. Wright, A. Miller

& M. Kane, Federal Practice and Procedure § 2862, at 326-29

(hereinafter “11 Wright and Miller”) (judgment “is void

only if court lacks jurisdiction of the subject matter, or of

the parties, or if it acted in a manner inconsistent with

due process of law”). The judgment was not entered in a

manner inconsistent with due process. See Orner v. Shal-

ala, 30 F.3d 1307, 1310 (10th Cir. 1994). In this latter

regard, plaintiffs complain venue was improper in this

district and of a lack of notice to them and Mr. Mansheim,

who had represented the Lundells in a related case in this

court,® of the entry of default and proceedings following.

+ A judgment entered in violation of the Soldiers’ and

Sailors’ Civil Relief Act is voidable, not void. See infra at 13-14.

5 In this district, plaintiffs also sued the realtor, Knudsen,

hired by Lundell to broker the Benton property. See January 11,

1994 Report and Recommendation at 4-5. The court file, of

which the Court has taken notice in light of the reference to it in

the Combined Motions (Motions at 3 and attached Exhibit 1),

indicates Knudsen filed a third-party action against Terry

Lundell. Attorney Mansheim appeared and answered the Third-

Party Complaint on behalf of Lundell and counter-claimed

against Knudsen. See Daniel Watkins and Cynthia Watkins,

Plaintiffs, v. Donald Knudsen, et al., Defendants v. Terry Lundell,

Third-Party Defendant, Civil No. 4-92-cv-10294 (S.D. Ia.) The

action was filed on May 6, 1992 and dismissed by stipulation on

October 27, 1993. This indicates Terry Lundell probably was

dealing with Mr. Mansheim concerning the Knudsen litigation

prior to the November 23, 1993 entry of default in this case,

App. 29

Combined Motions at 3. Absent “timely and sufficient

objection” improper venue does not impair the court's

jurisdiction. 28 U.S.C. § 1406(b). The settlement agree-

ment involved a dispute over the sale of lowa farm

property and payments under it were to be delivered to

plaintiffs’ attorneys at their West Des Moines, Iowa

address. Plaintiffs therefore had some basis to file in this

state and district under the theory that “a substantial part

of the events or omissions giving rise to the claim

occurred” here. 28 U.S.C. § 1391(a)(2). Defendants were

entitled to pre-judgment notice only if they had

appeared, which they did not. Fed. R. Civ. P. 55(b)(2); see

Fed. R. Civ. P. 5(a).

Rule 60(b)(5) is also unavailing for defendants. The

judgment has not been satisfied, released or discharged.

The “prospective application” clause does not apply

where the judgment is solely for money damages. Money

damages are a “present remedy for a past wrong” and as

such, are not prospective. McDonald v. Oliver, 642 F.2d

169, 171 (Sth Cir. 1981); see Twelve John Does v. District of

Columbia, 641 F.2d 1133, 1138-39 (D.C., Cir. 1988); In Re

Fine Paper Antitrust Litigation, 840 F.2d 188, 193-94 (3d Cir.

1988); 11 Wright & Miller, supra § 2863, at 337-38.

Bill of Review.

The equitable remedy of a Bill of Review is no longer

recognized under the federal rules as a means to obtain

relief from a civil judgment. See United States v. Fonesca-

further indication that the Lundells had every opportunity to

arrange for counsel to appear in their defense.

App. 30

Martinez, 36 F.3d 62, 64 (9th Cir. 1994). Rule 60(b)

expressly states:

Writs of coram nobis, coram vobis, audita quer-

ela, and bills of review and bills in the nature of

a bill of review, are abolished, and the pro-

cedure for obtaining any relief from a judgment

shall be by motion as prescribed in these rules

or by an independent action.

The Advisory Committee Notes to Rule 60(b) indicate the

Committee attempted to include in the rule all of the

remedies and types of relief from judgments formerly

available under the ancient forms of common law prac-

tice. Relief is now available only under the rule or by

independent action. 11 Wright & Miller, supra § 2867 at

395. Soldiers’ and Sailors’ Civil Relief Act.

Terry Lundell asks the Court to void the judgment

against him under the Soldiers’ and Sailors’ Civil Relief

Act of 1940. He is currently a Lieutenant Colonel in the

U. S. Air Force Reserve. Exhibit I. During the relevant

time period, Lundell, then a Major, was an operations

officer with his unit, an air refueling squadron. He is also

a pilot and instructor. His operational duties involved

more work than is customary for a reservist. Between

service of the Summons and Complaint on August 28 and

the entry of default on November 23, Lundell was

engaged in some type of military activity on thirty-six

days. See Exhibits 3, 12. Between November 23 and the

entry of judgment on February 16, 1994, he was involved

with the military on thirty-three days. The duty codes on

the relevant military records in evidence indicate that

sometimes when performing military activities Lundell

was on active duty, and at other times not. For most of

App. 31

the entries his duty status is unclear. See Exhibit 3. Giving

Mr. Lundell the benefit of the doubt, the most the record

indicates is that periodically during the relevant time

period he was on active duty with his unit the longest

period of which was ten days.®

The Act provides:

(1) In any action or proceeding commenced in

any court, if there shall be a default of any

appearance by the defendant, the plaintiff,

before entering judgment shall file in the court

an affidavit setting forth facts showing that the

defendant is not in military service.

50 U.S.C. App. § 520(1). If the defendant is in military

service, no default judgment is to be entered except upon

court order following appointment of an attorney to rep-

resent the defendant, and the court may require a bond to

indemnify the defendant from loss should the judgment

later be set aside. Id. The term “military service” is

defined as “Federal service on active duty with any

branch” of the Armed Forces. 50 U.S.C. App. § 511(1).

Construing the statute liberally, the Court will treat Terry

Lundell’s reserve duty as “in military service.” See In Re

Marriage of Brazas, 278 Ill. App. 3d 1, 662 N.E.2d 559,

560-61 (Ill. App. 1996); Cornell Leasing Corp. v. Hemming-

way, 147 Misc. 2d 83, 553 N.Y.S.2d 285, 286 (Civ. Ct. N. Y.

1990).

® A June 29, 1995 letter from Lundell’s operations officer

indicates he was “on duty” between November 23, 1993 and

February 16, 1994. Exhibit 7. The letter does not specify the type

of duty or the days on which service occurred.

App. 32

The affidavit of Mr. DuPuy in support of the motion

tor entry of default judgment averred only that defen-

dants were “not infants or incompetent persons, nor are

they under any other legal disability within the meaning

of Fed. R. Civ. P. 55(b)(1) or (2).”7 The affidavit did not

allege, or set forth facts, showing that defendants were

not in military service, and accordingly was insufficient.

A violation of the statute renders a judgment voidable,

not void.’ See Davidson v. General Finance Corp., 295 F.

Supp. 878, 881 (Dist. Ga. 1968); Ostrowski v. Pethick, 404

Pa. Super. 392, 590 A.2d 1290, 1294 (1991); Krumme v.

Krumme, 6 Kan.App.2d 939, 636 P.2d 814, 817 (1981).

Whether to set aside the judgment is governed by para-

graph (4) of section 520:

(4) If any judgment shall be rendered in

any action or proceeding governed by this sec-

tion against any person in military service dur-

ing the period of such service or within thirty

days thereafter, and it appears that such person

’ Terry Lundell claims this affidavit amounted to a fraud on

the oourt. See Hadges v. Yonkers Racing Corp., 48 F.3d 1320, 1325

(2d C1995). Mr. DuPuy testified he researched the issue and

cometwded that the Soldiers’ and Sailors’ Civil Relief Act applied

te b.fl-time or active members of the military and that Lundell

was not under a disability by reason of the Act. That Lundell

was a “part-time” Air Force pilot and had invoked the Act in the

litigation with the Bentons was referenced in counsel's

questions at the default hearing. Exhibit 11, at 10. This, coupled

with the ambiguities concerning Terry Lundell’s duty status, is

against any finding of fraud.

* The Act does not afford any protection from the default to

Stephanie Lundell as the spouse of a service member. See Ray v.

Porter, 464 F.2d 452, 454 (6th Cir. 1972); Crouch v. General Elec.

Co., 699 F. Supp. 585, 595 n. 10 (S.D. Miss. 1988).

App. 33

was prejudiced by reason of his military service

in making his defense thereto, such judgment

may, upon application, made by such person or

his legal representative, not later than ninety

days after the termination of such service, be

opened by the court rendering the same and

such defendant or his legal representative let in

to defend; provided it is made to appear that the

defendant has a meritorious or legal defense to

the action or some part thereof. .. .

50 U.S.C. App. § 520(4). Preliminarily, the present

motions were filed well over a year after any relevant

period of active duty. During this entire time Terry Lun-

dell knew he was in default and that a judgment could be

entered against him. Yet he took no action to protect his

rights under the Act. His application for relief comes too

late. See Morris Plan Bank of Georgia v. Hadsall, 202 Ga. 52,

41 S.E.2d 881, 882 (1947).

Apart from timeliness, to set aside the default judg-

ment the language of the statute indicates Lundell must

establish (1) he was a person on “active duty” in the

military; (2) it appears he has a meritorious defense to the

action; and (3) that he was prejudiced in making a

defense by reason of his military service. See Ostrowski,

590 A.2d at 1292; Krumme, 636 P.2d at 817. Assuming as

before that the first of these elements is satisfied, and that

Lundell has a defense to those parts of the action for

fraud and punitive damages, he has not shown that his

military service prejudiced him in making a defense. To

the contrary, from his testimony it is clear it did not.

Though he worked frequently at his military job, most of

the time he was not on duty during the relevant period.

He was not deployed for an extended period far from his

App. 34

home. He contacted an lowa attorney to represent him

(indeed, while on duty, see Exhibit 12) but did not follow

through with the information requested. He retained an

Arizona attorney to attempt to negotiate with plaintiffs.

He had appeared, defended and was prosecuting a coun-

terclaim in the separate, related action in this court. See

note 5, supra. He was carrying on his extensive farming

business. He admitted that his military status did not

prevent him from attending to his business or defending

this action. Tr, at 112. As the Court has found, Mr.

Lundell made a conscious decision not to defend this

action. See id.

The purpose of the Soldiers’ and Sailors’ Civil

Relief Act was to protect persons in military

service from having default judgments entered

without their knowledge, not to prevent a judg-

ment by default from being entered against such

person, where that person was fully informed of

the pendency of the action and had the time and

opportunity to appear and defend himself or

otherwise protect his rights.

Wilson v. Butler, 584 So.2d 414, 417 (Miss. 1991).

In the absence of prejudice, Mr. Lundell has not

shown cause to void the default judgment under the

Soldiers’ and Sailors’ Civil Relief Act. He had knowledge

of the action and full opportunity to appear and defend.

Rule 60(b)(6).

Finally, there remains the catch-all provision of Rule

60(b)(6): “any other reason justifying relief from the oper-

ation of the judgment.” “Clause (6) provides ‘a grand

reservoir of equitable power to do justice in a particular

App. 35

case when relief is not warranted by the preceding

clauses.’ ” Transaero, Inc. v. La Fuerza Area Boliviana, 24

F.3d 457, 461 (2d Cir. 1994) (quoting 7 Moore’s Federal

Practice | 60.27(2], at 295 (2d Ed. 1993)); see Widmer-Baum,

162 F.R.D. at 549. Nonetheless, relief under Rule 60(b)(6),

like the other clauses of the rule, requires a showing of

exceptional circumstances. Transaero, 24 F.3d at 461: see

United States v. One Parcel of Property, 51 F.3d 117, 120 (8th

Cir. 1995); United States v. Young, 806 F.2d 805, 606 (8th

Cir. 1986), cert. denied, 484 U.S. 836 (1987). This is neces-

sary “to preserve the delicate balance between the sanc-

tity of final judgments and the incessant command of a

court's conscience that justice be done in light of all the

facts.” Rosebud Sioux Tribe v. A & P Steel, Inc., 733 F2d 509,

515 (8th Cir.), cert. denied, 469 US. 1072 (1984) (quoting

Good Luck Nursing Home, Inc. v. Harris, 636 F.2d 572, 577

(D.C. Cir. 1980)).

With respect to both defendants, there is no reason to

disturb the default judgment for amounts due under the

settlement agreement, except as to the miscalculation of

the amount.” They have not paid what they contractually

owe. Rule 60(b)(6) is broad enough to allow correction of

the amount of actual damages, and indeed, the mis-

calculation is the type of error which may be corrected by

the Court on its own motion under Rule 60(a). Nor are

exceptional circumstances shown to revisit the Court’s

findings that the Lundells engaged in fraudulent conduct

and willfully and wantonly disregarded the rights of

* No actual damages were found other than the amount

due under the settlement agreement. January 11, 1994 Report

and Recommendation at 8-9.

App. 36

plaintiffs so as to warrant punitive damages. January 11,

1994 Report and Recommendation at 9-10. The Lundells

made a deliberate decision not to defend and cannot

complain of the consequences of which they had notice.

The ultimate question on defendants’ motions is

whether the punitive damages award of which they most

complain should be reduced. They claim the award is

excessive. Excessive damages which impose “extreme

hardship or injustice” may warrant relief under clause

(6). 11 Wright & Miller, supra § 2864, at 365. To a degree

the analysis intersects with that recently articulated by

the U. S. Supreme Court when punitive damages are

challenged on substantive due process grounds. See BMW

of North America, Inc. v. Gore, __ U.S. __, __, 116 S. Ct.

1589, 1598-99 (1996). Before Gore, but after the default

judgment in this case, the Eighth Circuit for the first time

vacated a punitive damages award on due process

grounds and in doing so outlined the factors to consider

in determining reasonableness. Pulla v. Amoco Oil Co., 72

F.3d 648, 658 (8th Cir. 1995). For its part, the Iowa

Supreme Court has recently signaled that lowa courts

have a duty to examine punitive damage awards to

ensure they are within emerging constitutional bound-

aries. Wilson v. IBP. Inc., 558 N.W.2d 132, 144-148 (Iowa

1996). It is appropriate to take a second look at the

punitive damages awards in this case in light of these

post-judgment developments in relevant case law.'° Cf.

'0 Defendants have not expressly claimed the punitive

damages awards against them violate their substantive due

process rights. They have claimed, however, the awards are

unreasonable and excessive and, as they are now proceeding

App. 37

Adams v. Merrill Lynch Pearce Fenner & Smith, Inc., 888 F.2d

696, 702 (10th Cir. 1989) (“a change in relevant case law

by the United States Supreme Court warrants relief under

Fed. R. Civ. P. 60(b)(6)”)."!

A review of the record raises a serious concern about

whether the award in Stephanie Lundell’s case comports

with substantive due process. Three principal “guide-

posts” help determine whether Stephanie Lundell had

adequate notice of the penalty which might be imposed if

she executed the settlement agreement in bad faith. These

are: (1) “the degree of reprehensibility” of her conduct;

(2) “the disparity between the harm or potential harm

suffered by [plaintiffs] and [her] punitive damages

award;” and, (3) “the difference between [the punitive

damages] and the civil penalties authorized or imposed

in comparable cases.” Gore, ____ U.S. at __, 116 S. Ct. at

1598-99. The Eighth Circuit has articulated a similar four

factor test:

Whether a punitive damages award is reason-

able for purposes of due process, turns on: (1)

the harm inflicted on the plaintiff; (2) the repre-

hensibility of the defendant’s conduct; (3) the

likely potential harm to others arising from the

pro se, some liberality should be allowed in considering the

scope of their claims.

'! That substantive due process provided some limitation

on the punishment of a tort feasor by punitive damages was

understood at the time of the default in this case. See TXO

Production Corp. v. Alliance Resources Corp., 509 U.S. 443, 454

(1993); Pacific Mutual Life Ins. Co. v. Haslip, 499 U.S. 1, 9-15, 23-24

(1991). What has occurred since has not so much changed the

law as it has provided the analytical framework for addressing

the issue. See Gore, ___ U.S. at __, 116 S. Ct. at 1598-99.

App. 38 -

complained of conduct; and (4) the wealth of the

defendant.

| Pulla, 72 F.3d at 659. The third and fourth of these factors

were not relied on by the Gore court. Gore, however, does

not indicate its guideposts are exclusive of other relevant

factors. The third Pulla factor is closely related to the

second Gore factor.

Moreover, the various opinions in Gore's predecessor,

TXO Production Corp. v. Alliance Resources Corp., 509 U.S.

443 (1993) support the Eighth Circuit's formulation. See

id., at 459-464, 468-69.

The decree of reprehensibility of Mrs. Lundell’s con-

duct is objectively less than that of her husband. Step-

hanie Lundell was not a party to the transactions and

events involving the real estate contracts at issue in the

California litigation or in the litigation itself. Plaintiffs

demanded she guarantee the amounts her husband prom-

ised to pay, and she agreed to do so. Her only representa-

tion in this regard is that contained in the settlement

agreement. The primary obligations under the agreement

were her husband's. Unlike the pattern of fraud and

deceit plaintiffs attribute to Mr. Lundell, Stephanie’s was

“an individual instance of malfeasance.” Gore, ___ US. at

__, 116 S. Ct. at 1599-1600; see TXO, 509 U.S. at 462

(plurality).

The second “guidepost,” the ratio between the actual

s harm inflicted and the punitive damages awarded,

requires consideration of the nature of the harm actually

inflicted and the degree, as well as the harm likely to

result from the defendants’ conduct. See Gore, __ U.S. at

__, 116 S. Ct. at 1601-02. Mrs. Lundell’s conduct .is not

App. 39

only less reprehensible, but as a guarantor, one step

removed in degree from the harm caused by her hus-

band’s failure to perform the primary obligation. The

damages are a liquidated, economic loss arising preemi-

nently from breach of contract to pay money. There is no

risk of harm to others from Mrs. Lundell’s conduct. Pulla.

72 F.3d at 619. In these circumstances, the nearly fifteen to

one award is problematic. See Haslip, 499 U.S. at 7 n.2, 23

(insurance fraud case involving premiums purloined by

agent ~ $840,000 punitive damages award more than four

times actual damages “may be close to the line.”).

As to the final guidepost, it is difficult to compare the

punitive damages award here with sanctions for compa-

rable misconduct. No supportive analog comes to mind

for a bad faith failure by an individual to pay money due

by contract.

The final factor considered by the Eighth Circuit is

the wealth of the defendant. Pulla, 72 F.3d at 648: see

Wilson, 558 N.W.2d at 148. At the default hearing, Daniel

Watkins testified that Terry Lundell was a “huge opera-

tor” involved in a number of agricultural projects. Wat-

kins testified Lundell told him he was worth $11,000,000.

Exhibit 11, at 15. The court relied on this in fixing the

amount of punitive damages. January 11, 1994 Report and

Recommendation at 10. It is not clear, however, that the

evidence of Terry Lundell’s wealth should be attributed

to Stephanie Lundell for punitive damages purposes.

Terry Lundell and Stephanie Lundell were married in

November 1989. Stephanie Lundell Depo. at 7. Stephanie

Lundell graduated from medical school in 1984 and at the

time this action was filed was employed as a staff physi-

cian at Hughes Missile Systems. Id. at 11. The Lundells

App. 40

file separate tax returns. Id. at 26. It can be inferred from

Stephanie's deposition, Terry Lundell’s answers to inter-

rogatories, and Mr. Lundell’s course of dealing with

plaintiffs that she is not much involved in Terry’s farming

business. See Exhibit 8 Ans. to Ints. 4, 5, 17 & 18; Exhibit 9

Supp. Ans. to Ints. 4, 18 & 22. Except for the guarantee in

this case, she testified she is not obligated on Terry’s

business debts. Id. at 34.'°

The doubtful constitutional validity of the large puni-

tive damages award against Stephanie Lundell when

post-judgment case law is considered, together with the

severity of the penalty imposed afford sufficiently excep-

tional circumstances to invoke Rule 60(b) to avoid injus-

tice in her case. The award should he reconsidered in

light of the evidence produced at both the default judg-

ment hearing and more recent motions hearing. The court

has previously applied lowa law to the punitive damages

inquiry in this case. January 11, 1994 Report and Recom-

mendation at 10. In lowa, there are three primary factors

to consider. These are set out in lowa Civil Jury Instruc-

tion 210.1:

1. The nature of defendant’s conduct.

2. The amount of punitive damages which will

punish and discourage like conduct by the

defendant in view of her financial condition.

3. The plaintiff's actual damages.

'2 The Court notes, however, a number of default

judgments have been entered against the Lundells jointly for

apparently farm related debts. Exhibit 9 Supp. Ans. to Int. 9.

App. 41

See Wilson, 553 N.W.2d at 147-48; McGough v. Gabus, 526

N.W.2d. 328, 334 (lowa 1994); Ezzone v, Riccardi, 525

N.W.2d 388, 399 (lowa 1994), cert. denied, 115 S. Ct. 1958

(1995). When these three factors are considered to the

extent shown in the present record, the undersigned

recommends that the punitive damages award against

Stephanie Lundell be reduced to one-half of the actual

damages: $117,500.

Though substantive due process concerns are appli-

cable as well to the punitive damages award against Terry

Lundell, he has not shown cause for relief. There are two

| related reasons for this conclusion. First, his conduct is

more reprehensible. Second, Lundell has withheld critical

information for the Court to consider in assessing

whether he has suffered an injustice.

Terry Lundell was the one involved in allegedly

defrauding Mr. Watkins in connection with the abortive

purchase of the lowa farm ground. It was Terry Lundell

who negotiated the settlement of the California litigation

and who had the primary obligation to make payments

under the settlement agreement. The Court has previ-

ously found Terry Lundell failed to perform most of his

material obligations under the contract and had no intent

to do so. It is fair to infer from the previous report and

recommendation that the court believed this was part of a

pattern of malfeasance in his dealings with plaintiffs.

January 11, 1994 Report and Recommendation at 4-10.

: “[Plerhaps the most important indicium of the rea-

sonableness of a punitive damages award is the degree of

reprehensibility of the defendant’s conduct.” Gore, __

U.S. at__, 116 S. Ct. at 1599. The reprehensibility index

increases the more the loss appears to have been part of a

App. 42

pattern, practice or scheme characterized by fraud and

deceit. See id. at 1599-1600; TXO, 509 U.S. at 462 (plu-

rality); Haslip, 499 U.S. at 23; Wilson, 558 N.W.2d at

147-48.

There was also the evidence at the default judgment

hearing that Terry Lundell had a large farming operation

scattered over several states and a net worth of about

$11,000,000. Mr. Lundell vigorously disputes that he was

ever worth anything approaching this amount, or that he

made the statement Mr. Watkins attributed to him. In the

course of discovery preparatory to the motions hearing,

Lundell was asked to produce financial statements pre-

pared in the past five years as well as applications for

credit submitted within the same time period. These were

not forthcoming, though the discovery responses indi-

cated they would be supplemented to provide the infor-

mation. In his testimony Lundell admitted the existence

of the documents and that they would indicate his finan-

cial condition. Tr., at 89, 147-48, 156. Yet, he failed and

refused to produce the documents, even after being

ordered to do so by the Court. Id. This puts Mr. Lundell

in the position of insisting the punitive damages award is

unreasonable while at the same time refusing to produce

the information which would enable the Court to deter-

mine what is reasonable. Rule 60(b)(6) invokes the

Court's equitable power to grant relief from a judgment

when the rule’s specific grounds for relief do not apply.

Exceptional circumstances are required and the burden is

on defendants. “He who seeks equity must do equity”

and come into court “with clean hands.” Myers v. Smith,

208 N.W.2d 919, 921 (lowa 1973). The court is not in a

App. 43

position to afford relief on the grounds the punitive dam-

ages are unjust or “grossly excessive” when defendant

has hidden a key piece of the puzzle.

In view of the foregoing, IT Is RECOMMENDED that

defendants’ Combined Motions to Set Aside Default

Judgment, for Bill of Review, and to Void Default Judg-

ment Pursuant to the Soldiers’ and Sailors’ Civil Relief

Act be denied except for the motion to set aside default

judgment under Fed. R. Civ. P. 60(b)(6), which should be

granted in part and denied in part. Relief from the judg-

ment should be granted by amending it to reduce the

actual damages found against both defendants to

$235,000 plus interest at the rate of five percent per

annum and to reduce the amount of punitive damages

against Stephanie Lundell to $117,500. In all other

respects, the judgment previously entered should remain

in full force.

IT IS ORDERED that the parties have to and includ-

ing May 23, 1997 to file written objections, pursuant to 28

U.S. C. § 636(b)(1), unless an extension of time for good

cause is obtained. Thompson v. Nix, 897 F.2d 356 (8th Cir.

1990). Such extensions will be freely granted. Any objec-

tions filed must identify the specific portions of the

'* At the conclusion of the evidentiary hearing, plaintiffs’

counsel moved to strike the testimony of Mr. Lundell to the

extent it was inconsistent with the evidence of his net worth

received at the default hearing. Counsel argued this should be

the sanction for not providing financial information as ordered

by the Court. Tr., at 251-55. Such a sanction is allowed by Fed. R.

Civ. P. 37(b)(2)(A), (B), but under the Circumstances I believe it

is best to accept all of the proffered evidence. The motion to

strike is denied.

App. 44

Report and Recommendation to which the objections are

made, and set forth the basis for such objections. See Fed.

R. Civ. P. 72; Nix, 897 F.2d at 357. Failure to timely file

objections may constitute a waiver of a party’s right to

appeal questions of fact. Thomas v. Arn, 474 U.S. 140, 155

(1985); Nix, 897 F.2d at 357.

IT IS SO ORDERED.

Dated this 21st day of April, 1997.

/s/ Ross A. Walters

ROSS A. WALTERS

UNITED STATES MAGISTRATE

JUDGE

ome

-”)

APPENDIX D

App. 45

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF IOWA

CENTRAL DIVISION

DANIEL WATKINS and

CYNTHIA WATKINS, : NO. 4-93-CV-10487

Plaintiffs, “ REPORT &

at ' RECOMMENDATION

’ PURSUANT TO 28

TERRY LUNDELL and " U.S.C. § 636(b)(1)(B)

STEPHANIE LUNDELL,

- (Filed Jun 11 94)

Defendants. .

I. INTRODUCTION AND BACKGROUND.

On July 1, 1993, Daniel and Cynthia Watkins

filed a Complaint and Jury Demand in the United States

District Court for the Southern District of Iowa alleging

breach of contract and fraud arising out of a written

contract entitled “Mutual Release and Settlement Agree-

ment.” The Mutual Release and Settlement Agreement set

forth the terms of a settlement between Daniel and

Cynthia Watkins and Terry and Stephanie Lundell arising

out of a Complaint and Jury Demand filed by the Watkins

against Terry Lundell on May 19, 1992 in the United

States District Court for the Northern District of Califor-

nia. In that underlying litigation, the Watkins allege that

Terry Lundell breached a contract and engaged in a vari-

ety of tortious conduct arising out of the Watkins’

attempted purchase from Lundell of approximately 5,381

acres of farmland in Franklin and Butler Counties, Iowa.

App. 46

On November 18, 1993, the Watkins filed a Motion

for Entry of Default Judgment in this court. On Novem-

ber 23, 1993, pursuant to Federal Rule of Civil Procedure

55(a) , United States District Court Clerk, James R. Rosen-

baum, entered a default against Terry and Stephanie Lun-

dell. On December 2, 1993, pursuant to 28 U.S.C.

§ 636(b)(1)(B), United States District Court Judge Ronald

E. Longstaff referred this matter to me for an evidentiary

hearing, if necessary, and for the submission of a report

and recommendation regarding the amount of judgment

and attorney fees to be entered against Defendants. On

December 15, 1993, I entered an order setting an evidenti-

ary hearing for Friday, January 7, 1994 to determine the

damages, if any, to which the Watkins were entitled. This

matter was then heard on January 7, 1994. Robert K.

DuPuy of LaMarca & Landry, P.C., West Des Moines,

Iowa, appeared on behalf of the Plaintiffs. Plaintiff Daniel

Watkins also personally appeared and testified at the

evidentiary hearing.

At the evidentiary hearing in this matter, the Watkins

also introduced and the court received into evidence the

following exhibits:

Exhibit No. Description

1 Iowa State Bar Association

Real Estate Contract (Short

Form) dated 05/13/90 in

which Terry F. Lundell agreed

to sell to Daniel R. Watkins

5,381 acres of farmland in

Franklin and Butler Counties,

Iowa

App. 47

2 Complaint and Jury Demand

styled Daniel Watkins and.

Cynthia Watkins, Plaintiffs v.

Terry Lundell, Defendant, No.

C 92 20291-SW in the United

States District Court for the

Northern District of Califor-

nia

3 The Mutual Release and Set-

tlement Agreement dated

12/21/92 resolving the North-

ern District of California liti-

gation between the parties

4 Confession of Judgment in the

Northern District of Califor-

nia litigation in the amount of

$350,000.00 with Terry Lun-

dell confessing judgment in

favor of Daniel and Cynthia

Watkins

5 Complaint and Jury Demand

in this litigation

7 Affidavit of Daniel Watkins

signed in January, 1994.

II. FACTUAL FINDINGS.

The Watkins and Terry Lundell resolved the North-

ern District of California federal litigation by entering

into the Mutual Release and Settlement Agreement on

December 21, 1992. While Stephanie Lundell, Terry Lun-

dell’s spouse, was not a party to the Northern District of

California litigation, she did sign the Mutual Release and

Settlement Agreement. As part of that agreement, Terry

App. 48

and Stephanie Lundell agreed to pay Daniel and Cynthia

Watkins a total of $335,000.00 as set forth below:

(a) $25,000.00 within ten (10) days of the

execution of the Mutual Release and

Settlement Agreement but in no event

later than November 24, 1992;

(b) $70,000.00 on November 1, 1993 and

delinquent if not received by Novem-

ber 5, 1993;

delinquent if not received by Novem-

ber 5, 1994; and

(d) a final payment of $70,000.00 on

November 5, 1995.

Neither Terry nor Stephanie Lundell have paid one penny

to Daniel and Cynthia Watkins pursuant to the December

21, 1992 Mutual Release and Settlement Agreement.

On August 28, 1993, Defendants Terry Lundell and

Stephanie Lundell were personally served at 6602 North

Pontatoc, Tucson, Arizona, 85718 with a copy of the Com-

plaint and Jury Demand filed in this action on July 9,

1993. Neither Terry nor Stephanie Lundell entered an

appearance, filed an answer, or in any other way

responded to the Complaint filed by the Watkins. On

November 18, 1993, the Watkins filed a Motion for Entry

of Default Judgment in this court. On November 23, 1993,

United States District Court Clerk, James R. Rosenbaum,

pursuant to Federal Rule of Civil Procedure 55 (a),

entered a default against Terry and Stephanie Lundell.

App. 49

Based upon Plaintiffs’ exhibits and the testimony of

Daniel Watkins at the January 7, 1994 evidentiary hear-

ing, the court finds that the factual allegations contained

in the Complaint in the Northern District of California

litigation concerning Terry Lundell’s breach of agreement

arising out of the real estate transaction involving 538

acres of land in Franklin and Butler Counties, Iowa are

true. This court adopts the operative facts set forth in

11 5-33 of Plaintiffs’ Complaint and Jury Demand in the

Northern District of California. These facts are as follows:

5. On March 26, 1990, Defendant Terry Lun-

dell purchased from A.C. and Neva Benton

approximately 5,381 acres of farmland in

Franklin and Butler Counties, Iowa, (“the

farm property”) on an installment sales

contract (also herein referred to as “first

contract”) for a contract price of

$6,000,000.00.

6. On March 26, 1990, Defendant Terry Lun-

dell hired Donald Knudsen, Individually,

and d/b/a Don Knudsen Realty, Inc. to

manage the farm property for him in the

coming agricultural season.

7. On information and belief, Defendant Lun-

dell also retained Donald Knudsen d/b/a

Don Knudsen Realty, Inc. to list the farm

\ property and to seek buyers for the prop-

erty.

8. Pursuant to this agency agreement Donald

Knudsen d/b/a Don Knudsen Realty listed

the farm property for sale and advertised it

in newspapers in various areas of the

United States, on behalf of Lundell.

10.

11.

12.

13.

14.

App. 50

Responding to one of these ads placed in

the San Francisco Chronicle, Plaintiff Daniel

Watkins contacted Defendant Lundell

regarding the farm property on April 29,

1990.

On May 12, 1990, Knudsen showed Plaintiff

Daniel Watkins the sites of the farm prop-

erty in Iowa, and he also verbally gave

Plaintiff information on a variety of items,

including but not limited to, soil types, soil

productivity, crop yield history, bound-

aries, drainage, tiling, fences, and income.

At the time of Plaintiff's visit to the farm

property, Defendant Lundell and Knudsen

were aware that Defendant Lundell would

have difficulty meeting his obligations to

Bentons under the first contract, but did

not disclose these facts to Plaintiffs.

On May 13, 1990, Plaintiff Daniel Watkins

and Defendant Terry Lundell entered into a

real estate contract prepared by Knudsen.

for the purchase of the subject farm prop-

erty (herein also referred to as the “second

contract”), for the contract price of

$7,800,000.00 and requiring initial financing

of $5,600,000.00 by a closing date of Decem-

ber 1, 1990.

In the second contract transaction, Donald

Knudsen, d/b/a Don Knudsen Realty, Inc.

acted as agent for both seller, Defendant

Lundell, and buyers, Plaintiffs Watkins.

Neither Defendant Lundell nor Knudsen

disclosed to Plaintiffs that Lundell had just

purchased the property for $6,000,000.00,

~ re ee

=a —_.,

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15.

16.

App. 51

despite the fact that they knew that arrang-

ing $5,600,000.00 of initial financing on

such a contract would be impossible once

lenders learned that the property had

recently sold for $6,000,000.00.

Relevant and material to the Plaintiffs’

entry into the second contract, Defendant

Lundell made certain representations to

Plaintiff Daniel Watkins regarding the

financing of the transaction including, but

not limited to:

(a) Bentons would forgive $500,000.00 of

principal and interest on their contract

with Lundell; and

(b) Part of the purchase price of the farm

real estate was to be paid or set off by

net farm income from the crops cur-

rently planted on the property.

Donald Knudsen, individually and in rep-

resentative capacity as Don Knudsen

Realty, Inc. made certain representations to

Plaintiff Daniel Watkins, relevant and

material to Watkins, entry into the second

contract, including but not limited to:

(a) That Lundell had marketable title to

the farm property;

(b) That the transfer of the farm property

from Lundell to Watkins was legally

and economically feasible; and

Watkins at a price which made eco-

nomically feasible the financing

required by the second contract.

17.

18.

19.

20.

21.

22.

23.

App. 52

Plaintiffs relied on the truth of those repre-

sentations.

Donald Knudsen and Defendant Terry Lun-

dell were aware of the representations

made by each other to Plaintiff Daniel Wat-

kins and each gave Plaintiff assurances that

the representations of the other were true.

Defendant Terry Lundell discussed with

Plaintiffs various financing options and

offered to assist in arranging a financing

package by co-signing on the required loan,

for example, to assure full and proper

transfer of the farm real estate from Ben-

tons to Lundell to Plaintiffs.

As a down payment on the second contract

Plaintiff Daniel Watkins transferred to

Defendant Terry Lundell, on May 14, 1990,

title and possession of a 1985 Ferrari Tes-

tarossa valued at at least $200,000.00, the

agreed upon down payment, which Defen-

dant sold and invested the proceeds in

another of his business enterprises.

The second contract provided that if the

seller breached the contract, all payments

made by the buyer were to be returned.

At the time of, and subsequent to the sign-

ing of the second contract, Defendant Terry

Lundell advised Plaintiff Daniel Watkins

not to publicly record the contract.

Following the second contract, Donald

Knudsen d/b/a Don Knudsen Realty, Inc.

continued to lit [sic] the farm property

already sold on contract to Plaintiffs, as

still for sale, and made on-going efforts to

24.

25.

26.

27.

28.

29.

App. 53

find new buyers for the property, acting as

the agent for Defendant Terry Lundell.

During the same time period, Donald

Knudsen was actively involved in assisting

Defendant Terry Lundell in raising funds

necessary to meet his obligations under the

Benton contract.

Plaintiffs were not informed by either

Knudsen or Defendant Lundell of Lundell’s

financial difficulties, or of Knudsen’s

attempts to help Lundell honor his contract

with Bentons.

In mid July, 1990, Defendant Lundell

rejected Plaintiffs’ attempts to negotiate a

restructuring of the deal in order to make it

economically feasible, including an offer by

Plaintiffs to enter into a partnership with

Lundell to work the farm together and

share profits with the goal of refinancing

the farm in a few years.

Approximately October 15, 1990, Defen-

dant Lundell called Plaintiffs’ home and

told them “We have a deal,” and to finalize

on their financing; that he had persuaded

Bentons to take a $1,000,000.00 second

mortgage to complete the deal.

In reliance on the representations of Defen-

dant, Plaintiffs paid a loan origination fee

of $25,000.00, and an appraisal fee of

$8,000.00 to begin the final arrangements

for the purchase of the farm property on

the second contract.

On or about January 15, 1991, Defendant

Lundell assured Plaintiffs that the deal

eee | ; ae

App. 54

would be consummated, and that appropri-

ate financing arrangements with the Ben-

tons had been structured.

30. On January 18, 1991, Benton instituted

mediation proceedings and prepared forfei-

ture papers against Lundell on the March

26, 1990, contract between them.

31. On March 13, 1991, Benton sued Lundell

for default on the real estate installment

purchase contract, resulting in Defendant

Lundell’s loss of the farm property and his

inability to transfer it to Plaintiffs under

the second contract.

32. Despite repeated demands, Defendant Lun-

dell has refused to return to Plaintiffs the

down payment they made pursuant to the

second contract for the purchase of the

farm property.

33. Summary of Contracts.

1. Date: March 26, 1990

Seller: Benton |

Buyer: Lundell

Price: — $6,000,000.00

Terms: $400,000.00 down; balance,

contract for deed.

2. Date: May 13 1990

Seller: Lundell

Buyer: Watkins

Price: $7,800,000.00

App. 55

Terms: $200,000.00 down; balance, con-

tract for deed ($5,600,000.00

first mortgage)

Plaintiffs’ Complaint and Jury Demand in the United

States District Court for the Northern District of Califor-

nia, No. C92-20291 at 2-8 (May 19, 1992).

The Mutual Release and Settlement Agreement in the

Northern District of California litigation, which is the

subject matter of this litigation, required Defendants

Terry and Stephanie Lundell to pay the Watkins

$335,000.00 plus interest at five percent (5%) per annum.

This total amount was to be secured by properties alleged

to have sufficient equities to secure the amount of these

payments. Additionally, Terry Lundell was obligated to

take out a life insurance policy to cover the cost of these

payments. Neither Terry nor Stephanie Lundell have

made any payment pursuant to the Mutual Release and

Settlement Agreement. Terry Lundell has failed to secure

the required life insurance policy. The properties pledged

by the Lundells as security have proven to be worthless

and without sufficient equity to satisfy any part of the

settlement amounts contained in the Mutual Release and

Settlement Agreement.

III. DEFAULT JUDGMENT DAMAGES.

The court further finds that Daniel and Stephanie

Watkins are entitled to Three Hundred Thirty-Fifty Thou-

sand Dollars ($335,000.00) in actual damages plus interest

at five percent (5%) per annum for Terry and Stephanie

Lundell’s breach of the Mutual Release and Settlement

App. 56

Agreement and independent fraudulent and tortious con-

duct. The court specifically finds that the other compen-

satory damages sought by the Watkins, including all of

their attorney fees for this litigation as well as the litiga-

tion in the Northern District of California are not recover-

able because they are not proper elements of

compensatory damages under the Mutual Release and

Settlement Agreement.!

Terry and Stephanie Lundell entered into the Mutual

Release and Settlement Agreement with no intention of

fulfilling their portion of the agreement. Based upori the

evidence in the record, the court concludes that the Lun-

dells entered into and breached the Mutual Release and

Settlement Agreement based upon fraudulent activity

1 Under Iowa law “[aJttorney fees are generally not

recoverable as damages in the absence of a statute or a provision

in a written contract.” Suss v. Schammel, 375 N.W.2d 252, 256

(Iowa 1985). While the lowa Supreme Court has recognized an

exception to the rule where defendants’ conduct was

“oppressive and tinctured with legal malice,” Kuiken v. Garrett,

51 N.W. 2d 149, 158 (lowa 1952) , the court does not believe it is

appropriate to award attorney fees here in addition to the large

punitive damages awarded. Even if an award of attorney fees

would be appropriate under the recognized exception by the

Iowa Supreme Court, the Watkins have failed to provide

sufficiently detailed evidence regarding attorney fees arising

out of the breach of the Mutual Release and Settlement

Agreement. Rather, Daniel Watkins testified at the evidentiary

hearing that he has incurred $50,000.00 in attorney fees. The

court understood this testimony to include attorney fees for the

action in the United States District Court for the Northern

District of California. In the absence of a specific itemization for

fees claimed in this litigation, fees are not recoverable. Houghton

v. Sipco, Inc., 828 F. Supp. 531, 643 (S.D. Iowa 1993).

App. 57

which, therefore, constitutes independent, tortious

actions and fraudulent activity independent of Terry and

Stephanie Lundell’s breach of the Mutual Release and

Settlement Agreement.

The court further finds, by a preponderance of clear,

convincing and satisfactory evidence that the fraudulent

conduct of Defendants Terry Lundell and Stephanie Lun-

dell constituted a willful and wanton disregard for the

rights of Daniel and Cynthia Watkins and that conduct of

Terry and Stephanie Lundell was directed specifically at

Daniel and Cynthia Watkins within the meaning of Iowa

Code § 668A.1(1)(a) & (b).

Daniel and Cynthia Watkins are entitled to an award

of punitive damages due to the independent and fraudu-

lent activity of Defendants Terry and Stephanie Lundell.

See Pogge v. Fullerton Lumber Co., 277 N.W.2d 916 (Iowa

1979). In considering the amount of punitive damages,

this court has considered all of the evidence relating to

the nature of Terry and Stephanie Lundell’s conduct, the

amount of punitive damage that will punish and discour-

age like conduct by the Defendants in view of their

financial condition; and Plaintiffs’ actual damages. See

Uniform Jury Instruction 210.1; Nassen v. National States

Ins. Co. , 494 N.W. 2d 231, 238 (Iowa 1992) ; Larson v. Great

West Casualty Co., 482 N.W. 2d 170, 174 (lowa App. 1992) ;

Suss v. Schammel, 375 N.W. 2d 252 (lowa 1985) ; Rowen v.

Le Mars Mutual Ins. Co. of Iowa, 282 N.W.2d 639, 661-62

(lowa 1979) ; TXO Production Corp. v. Alliance Resources

Corp., 113 S. Ct. 2711 (1993); Pacific Mut. Life Ins. Co. v.

Haslip, 499 U.S. 1 (1991); Robertson Oil Co., Inc. v. Phillips

Petroleum Co., No. 91-3717, slip op. at 4-14 (8th Cir. Dec.

28, 1993).

App. 58

The court finds based on the testimony of Daniel

Watkins, that Terry Lundell represented to Daniel Wat-

kins that Terry Lundell’s net worth was approximately

$11,000,000.00.

The court finds that Daniel and Cynthia Watkins are

entitled to an award of Three Million Five Hundred

Thousand Dollars ($3,500,000.00) in punitive damages.

Finally, the court finds that the conduct of Terry and

Stephanie Lundell constitutes false pretenses, false repre-

sentations, actual fraud and the use of a statement in

writing that was materially false regarding the Lundells’

financial condition upon which representation the Wat-

kins reasonably relied in entering into the settlement

agreement, and that the Lundells made or published the

false statements with intent to deceive the Watkins within

the meaning of 11 U.S.C. 523(a)(2)(A) and (B)(i)-(iv).

IV. CONCLUSION.

The court finds that Daniel and Cynthia Watkins are

entitled to Three Hundred Thirty-Five Thousand Dollars

($335,000.00) plus interest at the rate of five percent (5%)

per annum in actual damages for Terry and Stephanie

Lundell’s breach of the Mutual Release and Settlement

Agreement. Additionally, the court finds that Daniel and

Cynthia Watkins are entitled to an award of Three Million

Five Hundred Thousand Dollars ($3,500,000.00) in puni-

tive damages. The court respectfully recommends that

judgment be entered in accordance with these findings.

IT IS ORDERED that the parties shall have ten (10)

days after service of a copy of the report and recommen-

dation to file written objections, pursuant to 28 U.S.C.

App. 59

§ 636(b)(1), unless an extension of time for good cause is

obtained. See Fed. R. Civ. P. 72 ; Thompson v. Nix, 897 F.2d

356, 357 (8th Cir. 1990). Such extensions will be freely

granted. Objections must specify the parts of the record,

including exhibits and transcript lines, which form the

basis for such objections. Failure to timely file objections

may constitute a waiver of a party’s right to appeal

questions of fact. See Thomas v. Arn, 474 U.S. 140 (1985);

Nix, 897 F. 2d at 357.

IT IS SO ORDERED.

DATED this 11th day of January, 1994.

/s/ Mark W. Bennett

MARK W. BENNETT

UNITED STATES

MAGISTRATE JUDGE

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