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Omniwind Energy Systems, Inc. v. Redo

United States District Court, E.D. Pennsylvania

February 24, 2015



STEWART DALZELL, District Judge.


We consider here plaintiffs' motion for entry of default judgment against both defendants, who have failed to appear, plead, or otherwise defend in this case. Plaintiffs are OmniWind Energy Systems, Inc. ("OmniWind"), Loren A. Schultz ("Schultz"), and Andrew D. Clauss ("Clauss"). Defendants are Roderick O. Redo ("Redo") and Redo Industries, Inc. ("Redo Industries").

We have jurisdiction pursuant to 28 U.S.C. §§ 1332(a)(1) and 1367 as this suit is between citizens of different states and the amount in controversy exceeds $75, 000.[1]

While we are satisfied that we have jurisdiction over plaintiffs' claims and the absent defendants, we will deny plaintiffs' motion for entry of default judgment and dismiss their complaint without prejudice.

The entry of default judgment is a matter for the Court's discretion. The absent defendants' possible defenses to five of plaintiffs' seven claims weigh against the entry of default judgment. For reasons of judicial economy and in the interests of justice, these seven claims - all of which share a common nucleus of operative fact - should be adjudicated together. Keeping the claims together also insulates plaintiffs from claim-splitting challenges.[2]


"When a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend, and that failure is shown by affidavit or otherwise, the clerk must enter the party's default." Fed.R.Civ.P. 55(a). Once the clerk enters default, if the claim is not for a sum certain as contemplated by Fed.R.Civ.P. 55(b)(1), then "the party must apply to the court for a default judgment." Fed.R.Civ.P. 55(b)(2); see also, e.g., Eastern Elec. Corp. of N. J. v. Shoemaker Constr. Co., 657 F.Supp.2d 545, 552 (E.D. Pa. 2009).

Whether to grant a default judgment "is left primarily to the discretion of the district court." United States v. $55, 518.05 in U.S. Currency, 728 F.2d 192, 194 (3d Cir. 1984); Hritz v. Woma Corp., 732 F.2d 1178, 1180 (3d Cir. 1984). A party "is not entitled to a default judgment as of right." Eastern Elec. Corp., 657 F.Supp.2d at 551. Courts disfavor default judgment because it precludes deciding the case on its merits. Id. "Matters involving large sums should not be determined by default judgments if it can reasonably be avoided." Tozer v. Charles A. Krass Milling Co., 189 F.2d 242, 245 (3d Cir. 1951). Default judgment is appropriate if a defendant entirely fails to appear or otherwise defend. See, e.g., Fed.R.Civ.P. 55(b)(2); Anchorage Assocs. v. Virgin Islands Bd. of Tax Review, 922 F.2d 168, 177 n. 9 (3d Cir. 1990).

"A consequence of the entry of a default judgment is that the factual allegations of the complaint, except those relating to the amount of damages, will be taken as true." Comdyne I, Inc. v. Corbin, 908 F.2d 1142, 1149 (3d Cir. 1990) (quoting 10 Wright & Miller, Federal Practice and Procedure, § 2688 at 444 (2d ed. 1983)) (internal quotations omitted). Once the clerk enters default, the defaulting defendant is deemed to have admitted to every well-pled allegation in the complaint. Breaking the Chain Found. v. Capitol Educ. Support, Inc., 589 F.Supp.2d 25, 28 (D.D.C. 2008). Before granting default judgment, a court must ascertain whether the unchallenged facts constitute a legitimate cause of action, since a defaulting party does not admit to mere conclusions of law. Chanel, Inc. v. Gordashevsky, 558 F.Supp.2d 532, 536 (D.N.J. 2009); see also Labarbera v. ASTC Labs. Inc., 752 F.Supp.2d 263, 270 (E.D.N.Y. 2010).

Our Court of Appeals requires us to consider three factors before entering a default judgment. They are whether (1) plaintiff will be prejudiced if we deny default, (2) the defendant has a meritorious defense, and (3) the default was the product of defendant's culpable conduct. Chamberlain v. Giampapa, 210 F.3d 154, 164 (3d Cir. 2000) (hereinafter "the Chamberlain factors").

We recite the facts as they appear in the complaint.


OmniWind is a Pennsylvania limited liability company with a principal place of business in Bucks County, Pennsylvania. Compl. at ¶ 1. OmniWind manufactures and distributes wind turbines and provides electricity to customers through private power purchase agreements. Id. at ¶ 6. Schultz, a member and chair of OmniWind's Board of Managers, resides in Dublin, Pennsylvania. Id. at ¶¶ 1, 7. Clauss, a member and former OmniWind employee, resides in Doylestown, Pennsylvania. Id. at ¶¶ 1, 8.

OmniWind holds licenses to patented airfoil technology that enables the efficient generation of energy from wind. Id. at ¶ 13. In the summer of 2012, after years of making itself more attractive to private and institutional investors, OmniWind sought outside investors to fund a major power purchase agreement. Id. at ¶¶ 14-15.

Enter Redo Industries, a Kansas corporation located in Wichita, and its sole shareholder, director, and officer, Redo himself, also of Wichita, Kansas. Id. at ¶¶ 2, 9. Upon plaintiffs' information and belief, Redo uses Redo Industries "for investment purposes and may use it to trade commodities, including oil, natural gas and food commodities." Id. at ¶ 11.

On October 13, 2012, Redo and OmniWind entered into a Binding Summary of Proposed Terms, attached to the complaint as Exhibit A. Id. at ¶ 16. The Binding Summary provided that Redo Industries would invest $15 million in OmniWind and provide it with $10 million in debt financing in exchange for 50% of its equity and certain managerial rights. Id. at ¶¶ 17-18. Redo, on behalf of Redo Industries, executed a Subscription Agreement, a General Terms Sheet with Risks or "Disclosure", and a First Amended and Restated Operating Agreement on October 17, 2012. Id. at ¶ 19. Plaintiffs attach these documents - the Subscription, Disclosure, and Operating Agreement - as Exhibits B, C, and D. Plaintiffs aver that the Binding Summary, Subscription, Disclosure, and Operating Agreement together constitute Redo Industries' "contractual and legal obligation to provide OmniWind with financing for its obligations." Id. at ¶ 20.

On October 15, 2012, Redo contacted Karl Douglass, OmniWind's Chief Executive Officer, to discuss closing details. Id. at ¶ 21. Redo allegedly told Douglass that Redo Industries needed about $55, 000 for an escrow account to use as collateral for money to be paid as "discount points and loan fees for monies [Redo Industries] and/or Redo were borrowing." Id. at ¶ 22. Redo told Douglass that "OmniWind needed to have some collateral at risk in the form of skin in the game' in order for [Redo Industries] and OmniWind to be business partners." Id. Redo said the escrowed funds would be returned to OmniWind at closing and would be credited to the amount Redo Industries would invest in OmniWind, and that closing would occur within a week or two of receipt of the money in escrow. Id. at 23. When Redo requested the funds "OmniWind had no income and no cash reserves." Id. at ¶ 24. However, as the deal with Redo was "in OmniWind's management team's belief, a fair one, and could provide it with the necessary funding in order to execute its business strategy, OmniWind's management made the decision" to send the money. Id. OmniWind wired $55, 000 to defendants' private bank, Sterling Asset Management, Inc., in Las Vegas, Nevada. Id. at ¶ 25.

On October 29, 2012, Douglass spoke with Redo, who assured Douglass that he would be able to close on or before November 26, 2012. Id. at ¶ 26. OmniWind, relying on Redo's statements, assured some of its creditors that it would be able to begin paying its obligations by the end of 2012. Id. at ¶ 27. OmniWind, again relying on Redo's statements, continued to incur other business obligations - insurance, payroll, rent, etc. - so that it could perform on its contracts as soon as the investment money arrived. Id. at ¶ 28.

Weeks went by without a closing. Id. at ¶ 29. Redo assured OmniWind, in a letter attached as Exhibit E, that they would close by December 21, 2012. Id. Redo told Douglass that the closing had to happen before December 21, as the underwriters of Redo Industries' financing were going away for the holidays and would not return until 2013. Id. at ¶ 30. Closing did not occur by December 21st. Id. at ¶ 31.

Redo assured OmniWind that closing was still imminent but that he needed to work out a few items with his banker and they would close in January of 2013. Id. at ¶ 32. Redo explained that he could not close sooner because the underwriter for the loan transaction who would be used to fund his investment in OmniWind was still on vacation. Id. at ¶ 34. Redo also said Redo Industries needed another $75, 000 to close on its financing. Id. at ¶ 33. In reliance on these statements, OmniWind transferred $75, 000 via three electronic transfers: $15, 000 on January 22, 2013; $10, 000 on January 23, 2013; and another $50, 000 on January 23, 2013. Id. at ¶ 35. "All monies were transferred to accounts at Redo's instruction, either on his behalf, or on behalf of" Redo Industries. Id. In order to supply OmniWind with the money, Douglass took out a personal loan from a private lender, and OmniWind borrowed money from a second private lender. Id. at ¶ 36. Redo assured Douglass that they would close by the end of January of 2013. Id. at ¶ 37. That did not happen. Id. at ¶ 38.

Redo memorialized receiving a portion of the $130, 000 OmniWind sent him by signing a Note, attached by plaintiffs as Exhibit F. Id. at ¶ 39. Plaintiffs allege that the Note does not fully memorialize all the money OmniWind loaned Redo and Redo Industries, as Redo immediately requested more money after receiving the $100, 000 and signing the Note. Id. at ¶ 40. Douglass sent Redo a second Note - with the same terms as the first Note - to memorialize the additional loan. Id. at ¶¶ 41-42. Redo acknowledged receiving the second Note, but neither executed nor returned it. Id. Douglass asked Redo to provide him with a letter for OmniWind's creditors indicating that closing would occur on a date certain on or before January 25, 2013. Id. at ¶ 43. Redo sent such a letter on January 10, 2013, attached by plaintiffs as Exhibit G. Id.

"During the entire spring of 2013, Redo continued to represent that he was close to completing the deal that would free up the necessary funds so that he could honor his and [Redo Industries'] commitments." Id. at ¶ 44. On April 29, 2013, Redo allegedly presented a document that he characterized as proof of funds. Id. at ¶ 45. The document purported to be a bank guaranty of five billion euros from "ABN-AMRO bank to an unknown beneficiary of Southeast Holdings Corporation." Id. (document attached as Exhibit H).

After brief research, OmniWind's management team determined that the document was fraudulent and the subject of a worldwide financial scam. Id. at ¶ 46. Douglass confronted Redo with this information, and Redo confessed "that he had been let down by his personal advisors and that his transaction agreement, whereby he was to obtain monies to invest into OmniWind, had been terminated. Redo also confessed that all of the money OmniWind had transferred... had been lost" when the underlying investment transaction collapsed. Id. at ¶¶ 47-48.

In that same conversation, Redo told Douglass "that he had the ability to start over, and that he would be able to have money to OmniWind in the summer of 2013." Id. at ¶ 49. On May 15, 2013, Redo "presented a document he characterized as proof of a deal that was going to make funds available" to fulfill his and/or Redo Industries' commitments. Id. at ¶ 50. Plaintiffs attach that document as Exhibit I. OmniWind, "faced with financial issues due to its obligations to creditors, and understanding that Redo's investment was going to take additional time, " began to seek other investors in the spring of 2013 while still maintaining communications with Redo. Id. at ¶ 51.

OmniWind's finances had deteriorated significantly since the fall of 2012, when Redo initially agreed to invest in OmniWind through Redo Industries. Id. at ¶ 52. On July 9, 2013, Redo approached Douglass to inform him that he would be able to transfer money to OmniWind that month. Id. at ¶ 54. "OmniWind had few options, and Redo informed Douglass that he had his deal done', but only needed an additional $25, 000.00 to go to closing." Id. at ¶ 54. "After much discussion among Schultz, Clauss and Douglass, Schultz and Clauss agreed to lend [Redo Industries] and Redo $17, 000 and $8, 000, respectively, for a period of one week." Id. at ¶ 55. Those loans were memorialized in Notes, attached to the complaint as Exhibits J and K.

Redo did not close on his deals - either to obtain funding or with OmniWind in July of 2013. Id. at ¶¶ 56-57. In late summer of 2013, Redo once again began to assure Douglass that he would close on his financing and complete his investment commitments to OmniWind. Id. at ¶ 58.

In early September of 2013 Douglass informed Redo that one of OmniWind's creditors, Precision Assembly, Inc., had obtained a judgment against OmniWind and was serving interrogatories in aid of execution against them. Id. at ¶ 59. "Redo informed Douglass that it wasn't going to matter, because there would be plenty of money to pay creditors, and we' would use a different vendor to obtain the same goods and services in the future." Id.

Redo continued to represent that he could be the lead investor. Id. at ¶ 60. During December of 2013 and into 2014, OmniWind pursued additional capital from multiple investment sources, many of which declined to invest due to OmniWind's deteriorated and uncertain financial condition. Id. at ¶ 61.

"As 2013 began to draw to a close, OmniWind's management believed it was captive to Redo and [Redo Industries], as [they] owed OmniWind and its members and managers significant monies. OmniWind's financial condition made it unattractive for further investment and it had no other serious suitors." Id. at ¶ 62. Even as OmniWind engaged in preliminary discussions with new potential investors and pursued potential joint ventures, OmniWind's management "continued to engage in conversations with Redo, who continued to reassure OmniWind that he would be able to obtain funds to live up to his obligations" memorialized in the Binding Summary. Id. at ¶ 63.

In December of 2013, Redo "described multiple pathways for his ability to finance OmniWind, and possibly provide interim cash." Id. at ¶ 64.

First, Redo would leverage money he had on hand to purchase a large shipment of crude oil which he would use as collateral to obtain a loan from investors in Hong Kong. Id. at ¶ 65. Second, Redo would use the proceeds from the sale of his interest in compressed natural gas traveling in a tanker ship, which would land in Manila in the Philippine Islands in late December. Id. at ¶ 67. Third, Redo was forming a new company with Chinese investors looking for green energy opportunities. Id. at ¶ 68.

January turned into February. There was no closing. Redo said he did not have the money he owed OmniWind. Id. at ¶ 69. On January 29, 2014, Redo said the tanker carrying the compressed gas was diverted from Manila to Hamburg, Germany because of a late December typhoon. The Chinese bankers' loans were taking a long time because his Hong Kong contact had not completed the necessary steps to finish the loan, but he would be able to close with OmniWind in a few weeks. Id. at ¶ 70. "To date, Redo has not informed OmniWind of the proceeds of the purported natural gas tanker, and the other pathways to closing continued to be dead ends." Id. at ¶ 71.

During the January 29, 2014 conversation, Douglass searched Redo Industries' corporate history and learned that it had lost its corporate existence. Id. at ¶ 72. Douglass confronted Redo who said he would reinstate the corporation and that Redo Industries and OmniWind still had a deal. Id. at ¶ 73. Redo did reinstate Redo Industries' corporate existence with the Kansas Department of State. Id. at ¶ 74.

Redo and Douglass executed a Reaffirmation of Standing Agreements on March 10, 2014, attached by plaintiffs as Exhibit L. Id. at ¶ 75. The Reaffirmation reinstated the obligations in the Binding Summary, Subscription, and Disclosure and emphasized "that there was a binding agreement between [Redo Industries] and OmniWind." Id.

OmniWind, its management, and some of its members, "including Schultz, [Clauss] and Douglass, were under increasing pressure to repay personal and business creditors related to OmniWind. Therefore, Douglass requested that Redo provide him with a letter, which was to be provided to creditors, indicating a date certain when closing would occur." Id. at ¶ 76.

On March 8, 2014, Redo sent a third letter indicating they would close no later than April 18, 2014. Id. at ¶ 77 (attached as Exhibit M). In reliance on that letter, OmniWind provided Redo and Redo Industries with documents to facilitate a closing, including a revised Operating Agreement, proposed employment contracts, and financing documents. Id. at ¶ 78. As the closing date approached, Redo once again began to signal that they might not close. Id. at ¶ 79. On April 17, 2014, Redo organized a conference call with investment bankers, in which Douglass participated. Id. at ¶ 80. Redo told the investment bankers that he would pledge OmniWind's assets - including its technology, patents, joint ventures, and contracts as collateral for a corporate bond. Id. Redo Industries would control the proceeds from the bond, and would use the excess proceeds to fund its oil, gas, and commodity speculation, and any of OmniWind's future needs. Id. at ¶¶ 80-81. "OmniWind believed this proposal to be far outside the scope of the transactions contemplated by" the Binding Summary and other documents. Id. at ¶ 82.

Douglass confronted Redo about his efforts since executing the reassurance letter, and Redo could not state any affirmative steps he had taken other than speaking with investment bankers about a nascent bond offering. Id. at ¶ 83. In May and June of 2014, Redo continued to request OmniWind's cooperation in issuing a bond to obtain funds that Redo could invest in OmniWind. On June 26, 2014, through counsel, OmniWind, Schultz, and Clauss demanded full repayment of the loans made to Redo, with accrued interest. Id. at ¶ 85. Redo has not paid them.

Plaintiffs assert seven causes of action against defendants Redo and Redo Industries.


We first consider whether we have personal jurisdiction over defendants because a default judgment entered without personal jurisdiction is void.[3] Since we determine that we do have personal jurisdiction over both defendants as to all of plaintiffs' claims, we then consider whether to exercise our discretion to enter default judgment.

A. Whether We Have Personal Jurisdiction Over Defendants

A default judgment entered without personal jurisdiction is void, and so we must first consider whether we have personal jurisdiction over the defendants. D'Onofrio v. Il Mattino, 430 F.Supp.2d 431, 437 (E.D. Pa. 2006). Although plaintiffs retain the burden of proving personal jurisdiction in a motion for default judgment, they may satisfy their burden with a prima facie showing. Id. at 438.

A district court sitting in diversity exercises personal jurisdiction according to the law of the state where it sits. Fed.R.Civ.P. 4(k)(1)(A); O'Connor v. Sandy Lane Hotel Co., Ltd., 496 F.3d 312, 316 (3d Cir. 2007). Pennsylvania's long-arm statute permits the exercise of personal jurisdiction to the fullest extent allowed under the United States Constitution. 42 Pa. Cons. Stat. § 5322(b); Pennzoil Prod. Co. v. Colelli & Assocs., Inc., 149 F.3d 197, 200 (3d Cir. 1998) (personal jurisdiction over non-resident defendants authorized to the constitutional limits of the Fourteenth Amendment's Due Process Clause). We therefore inquire whether exercising personal jurisdiction over a defendant is constitutional. Id. Due Process requires a non-resident defendant to have certain minimum contacts with the forum state such that bringing the defendant into court does ...

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