Ramsey County District Court File No. 62-CV-12-7845
Daniel M. Gallatin, Miller & Stevens, P.A., Wyoming, Minnesota (for respondent).
Elizabeth A. Larsen, Keith S. Moheban, Leonard, Street & Deinard, P.A., Minneapolis, Minnesota (for appellant).
Considered and decided by Larkin, Presiding Judge; Halbrooks, Judge; and Worke, Judge.
Appellant bank seeks to overturn a default judgment, claiming that respondent-merchants' complaint failed to state a claim for breach of contract against appellant, the district court abused its discretion by awarding attorney fees, the motion for default judgment was procedurally deficient, and service of the summons was ineffective. We affirm the district court's decision to enter default judgment but reverse its award of attorney fees to respondents.
Respondents Your Magazine Publisher, Inc., Magazines of Florida, Inc., and Big Sky Publishers, Inc., are three publishing companies (the companies) that sell magazine subscriptions over the telephone. The companies entered into a contract with Cynergy Data to facilitate credit-card purchases of the companies' magazines. Appellant BMO Harris Bank (the bank) was the sponsor bank that provided a merchant account to offer a temporary repository for the companies' customer proceeds. Under the contract, Cynergy retained a percentage of customer proceeds to cover credit-card purchases that were fraudulent or rejected by customers. By amendment, the contract also permitted the companies to make a written demand to Cynergy for return of these reserve proceeds 270 days after termination of the contract.
The companies discovered that they began to have customer charge-backs after an employee entered false transactions using customer credit-card numbers; the employee was discharged. Upon discovery of this occurrence, Cynergy terminated the contract with the companies but the bank continued to retain approximately $140, 000 in the companies' reserve funds held in its merchant account. The companies sued the bank for return of the reserve funds, alleging breach of contract and asking for costs and attorney fees.
The bank did not answer the complaint, and the companies moved for default judgment. Following a hearing, the district court entered default judgment in favor of the companies on the ground that the bank breached its contract with the companies by refusing to release the companies' reserve funds. The district court also awarded the companies $5, 000 in attorney fees, in addition to costs and disbursements, and directed the bank to remit the companies' funds within ten days.
The bank moved to vacate the default judgment, arguing that the companies had failed to show a factual basis for a breach-of-contract claim and that the default judgment was void because of ineffective service of process on the bank. Before the hearing on the motion to vacate, Danette Smith, an initial-stock-offering compliance manager for Cynergy Data, submitted an affidavit, which states that "Cynergy is a payment service provider" and that the bank "has been the sponsor bank for Cynergy since at least 2009." Smith's affidavit states that the companies entered into merchant application agreements "with Cynergy and [the bank]" and that "[the bank] control[led] physical possession of the reserve funds" because Cynergy was not permitted to do so. Smith's affidavit also states that the companies sought return of the reserve funds and that Cynergy had refunded a total amount of $121, 384.21 as of November 2012.
The motion to vacate was heard on January 28, 2013, and at the end of the hearing the district court denied the motion, ruling from the bench that the bank did not meet the standard for vacating the default judgment because the bank did not demonstrate excusable neglect or a reasonable defense on the merits. On the next day, the district court issued a written order denying the motion to vacate.
The companies moved to supplement the appellate record with the January 28, 2013 hearing transcript on the motion to vacate. This court issued an order questioning whether the appeal was filed prematurely. By order dated May 14, 2013, this court accepted the appeal and stated that "[a]lthough appellant elected to appeal only the default judgment . . . this court's scope of review includes the motion hearing . . . and the district court's written order . . . denying [the bank's] motion to vacate the default judgment." This court reasoned that "[b]ecause there was a district court disposition of the motion to vacate before the appeal was filed, " the appeal was not premature. Noting that "[o]n appeal from a judgment" this court can "review any order involving the merits or affecting the judgment" under Minn. R. Civ. App. P. 103.04 and that on an appeal from a judgment this court has discretion "to review a subsequent order denying a motion to vacate, even if the order is not independently appealable, " this ...