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Peterson v. Olson

May 2, 2006

ROBERT PETERSON, AND SCHOOL WIZZARD, INC., PLAINTIFFS,
v.
VERIL L. OLSON, AND EEL RIVER ACQUISITION CORP., DEFENDANTS.



The opinion of the court was delivered by: Judge Blanche Manning

MEMORANDUM AND ORDER

Robert Peterson has developed technology-which he calls the School Wizzard-that allows schools to affordably give students computer access at their desks. But Peterson has had trouble marketing his patented technology because defendants Eel River Acquisition Corp. and Veril Olson allegedly failed to come through with a $10 million loan. Peterson and his company, School Wizzard, Inc. sued, and the defendants defaulted. The court entered an order of default, and must now determine what damages are due Peterson.

Introduction

The following facts alleged in the plaintiffs' amended complaint are deemed true as a result of the defendants' default. In re Catt, 368 F.3d 789, 793 (7th Cir. 2004). Eel River and Olson (presumably Eel River's owner or principal) agreed to loan School Wizzard, Inc. $10 million so that Peterson could produce a prototype and market his invention. In order to process the loan, the plaintiffs paid Eel River $250,000 in estimated application fees, to be refunded if the loan never occurred. Eel River repeatedly assured Peterson that the loan was on track, but for some reason that is not apparent to the court, over time it returned to Peterson all but $80,000 of the application fee. Additional assurances that the loan would materialize followed, but eventually it fell through. The defendants failed to return the remaining $80,000 of the application fee.

Without the loan, Peterson used his own money to maintain his patent and market the School Wizzard, although he never produced a prototype. Peterson testified that the costs to maintain his patent and market the School Wizzard exceeded $363,000. In addition, he testified that he lost $46,000 in interest and dividends he would have earned on the application fee that Eel River held.

The bulk of Peterson's alleged damages resulted from his lack of a prototype, which Peterson contends left him unable to license his patent or sell his technology. He estimates that his first-year profits alone would have exceeded $70 million. He also testified that the value of his patent has diminished over time as a result of the defendants' failure to loan him money to produce a prototype. He estimates the loss in value of his patent to be $1.8 billion. In the complaint, the plaintiffs also ask that damages be trebled because the defendants' failure to loan them money violated the Racketeer Influenced and Corrupt Organizations Act ("RICO"), see 18 U.S.C. § 1962.

Analysis

Default proceedings consist of two stages-the establishment of the default, followed by the entry of the default judgment. In re Catt, 368 F.3d at 793. The first stage occurs when a defendant fails to appear in response to the summons and complaint served upon him. Id. After the defendant establishes default, the plaintiff must proceed to the second stage by establishing his entitlement to the relief he seeks. Id.; see also 10A Charles Alan Wright, Arthur R. Miller, & Mary Kay Kane, 10A Federal Practice & Procedure, § 2688 at 63 (3d ed. 1998) ("Even after the default, however, it remains for the court to consider whether the unchallenged facts constitute a legitimate cause of action.") Therefore, the plaintiff may not merely rest upon the allegations in the complaint. Instead, he must provide evidence to the court so that it may determine whether the complaint alleged a cause of action, as well as "ascertain the amount of damages with reasonable certainty." Id. (citing Credit Lyonnais Securities (USA) v. Alcantara, 183 F.3d 151, 155 (2d Cir. 1999)). A plaintiff normally establishes the reasonable certainty of its damages either by affidavit or during a damages hearing. See Fed. R. Civ. P. 55(b)(2); Credit Lyonnais, 183 F.3d at 154-55.

According to Peterson's complaint, the defendants' failure to loan him $10 million caused the following damages: (1) $80,000 in loan application fees which the defendants failed to return; (2) $46,000 of lost interest and dividends on the application fees the defendants wrongfully held; (3) $363,000 in out-of-pocket expenses to maintain and market his patent; (4) first-year lost profits of $70 million; and (5) $1.8-billion diminution over time in the value of his patent. However, at Peterson's damages hearing, the only damages he testified that he suffered were the $363,000 in out-of-pocket expenses and the $70-million in lost profits.

Return of $80,000 of Loan Application Fee

The court turns first to the $80,000 in application fees the defendants failed to return. According to the terms of the loan agreement as alleged by Peterson, the defendants were obligated to return the entire $250,000 application fee if the loan fell through (the amended complaint states that the loan agreement is attached, but in fact it is not). The defendants returned most of the application fee, but not the final $80,000. Accepting as true Peterson's allegation that the terms of the loan agreement required the defendants to return the application fee if the loan fell through, the court concludes that Peterson is entitled to the return of his $80,000.

Loss of Interest On Loan Application Fee

Although Peterson is entitled to the return of his $80,000, the remainder of his requests for damages are too speculative. For instance, he offered no testimony to support his alleged loss of interest and dividends in the amount of $46,000. The court is therefore at a loss to know how he ...


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