Case 2:14-cv-02046-JAR-KGG Document 19 Filed 11/09/15 Page 1 of 26 IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF KANSAS DORAN LAW OFFICE, ) ) Plaintiff, ) v. ) Case No. 14-2046-JAR-GLR ) STONEHOUSE RENTALS, INC., ) ) Defendant. ) ___________________________________ ) MEMORANDUM AND ORDER Plaintiff Doran Law Office filed this action seeking to recover legal fees and expenses owed by Defendant Stonehouse Rentals, Inc. Defendant did not answer the Complaint within the time allowed by law and stated on the Summons, and default was entered by the Clerk of the District Court. Upon application of Plaintiff, the Court then entered default judgment in the amount of $133,024.30. Defendant filed a Motion to Set Aside Entry of Default and Default Judgment (Doc. 12). An evidentiary hearing was held September 10, 2015. After considering the arguments, evidence, and testimony presented by the parties, the Court is prepared to rule. For the following reasons, the Court denies Defendant’s motion. I. Factual and Procedural Background Plaintiff Doran Law Office filed its complaint against Stonehouse Rentals, Inc. (“Stonehouse”) on January 31, 2014.1 In the Complaint, Plaintiff states that Defendant is a Kansas corporation registered with the Kansas Secretary of State, with its registered agent listed as Salah Ibrahim and its registered office on record as 22858 Fall Leaf Road, Linwood, Kansas. Plaintiff hired a special process server, Aristocrat Investigations, who attempted to 1Doc. 1. Case 2:14-cv-02046-JAR-KGG Document 19 Filed 11/09/15 Page 2 of 26 personally serve Defendant’s president and resident agent, Salah Ibrahim. Plaintiff then attempted service of process by certified mail, on resident agent Ibrahim at Stonehouse’s registered office, addressing the certified mail to resident agent Ibrahim at the Fall Leaf Road address.2 On March 6, 2014, the United States Postal Service unsuccessfully attempted to deliver the certified mail to Ibrahim, and the following Notice was left at the Fall Leaf Road address: Notice Left (No Authorized Recipient Available) We attempted to deliver your item at 11:25 am on March 6, 2014 in LINWOOD, KS 66052 and a notice was left because an authorized recipient was not available. You may arrange redelivery by visiting http://www.usps.com/redelivery or calling 800-ASK-USPS, or may pick up the item at the Post Office indicated on the notice. If this item is unclaimed after 15 days then it will be returned to the sender. Information, if available, is updated periodically throughout the day. Please check again later.3 The certified mail was marked unclaimed and returned on March 21, 2014.4 Plaintiff then requested the Kansas Secretary of State to accept appointment for service of process of the Kansas Defendant corporation, pursuant to K.S.A. § 60-304(f).5 Plaintiff stated in the request that it made a direct attempt to serve the resident agent Ibrahim at the corporation’s registered office, and enclosed a certified copy of the return filed with this Court showing service on the resident agent has been attempted, and that the resident agent of the 2K.S.A. § 60-303(c) (allowing service of process by return receipt delivery, effected by certified mail). 3Hrg. Ex. 65. 4Id. 5Doc. 4, Ex. 1. 2 Case 2:14-cv-02046-JAR-KGG Document 19 Filed 11/09/15 Page 3 of 26 corporation could not with reasonable diligence be found at the registered office.6 The Secretary of State then forwarded notice of his receipt of process and another copy of the Complaint and Summons to Defendant’s resident agent Ibrahim at the corporation’s registered office on Fall Leaf Road.7 The certified mail was marked unclaimed and returned on April 22, 2014.8 Defendant did not answer the Complaint within the time allowed by law and stated on the Summons, and default was entered by the Clerk of the District Court on May 8, 2014.9 The Court then entered default judgment against Defendant on June 10, 2014, in the amount of $133,024.30, plus interest.10 Thereafter, Doran sent the following notices by certified mail to Defendant’s registered office, all of which went unclaimed: Plaintiff’s Proposed Bill of Costs (posted July 7 thru July 28, 2014);11 Registration of Judgment in State Court (posted August 27 through September 12, 2014);12 and Copy of State Court Proof of Service (November 11 through November 25, 2014).13 Defendant alleges that it learned that default judgment had been entered in this case on February 24, 2015, when Ibrahim attempted to sell real estate in Coffey County, Kansas, and learned that Plaintiff had registered the judgment in a number of counties in Kansas. Defendant 6Id. 7Hrg. Ex 66. 8Id. 9Doc. 6. 10Mtn. for Default J., Doc. 7; Judgment, Doc. 8. 11Hrg. Ex. 67. 12Hrg. Ex. 68. 13Hrg. Ex. 69. 3 Case 2:14-cv-02046-JAR-KGG Document 19 Filed 11/09/15 Page 4 of 26 moved to set aside the Clerk’s entry of default and the default judgment on April 6, 2015.14 Salah Ibrahim Salah Ibrahim is the President and sole officer of Stonehouse, a rental and investment company that has been in business since 1995. Ibrahim has always been the resident agent for Stonehouse, and testified that he understood the significance of maintaining a resident agent and resident office. Ibrahim is a civil engineer and considers himself a real estate investor; he travels frequently as part of his duties with the company. Stonehouse also employs Cheri Hayes, Ibrahim’s long-time partner, as a contract manager and Ibrahim’s assistant. Ibrahim testified that Stonehouse owns “hundreds” of properties in the state of Kansas, and that most are residential. The business and mailing address for Stonehouse is P.O Box 881, Lawrence, Kansas. At the time this lawsuit was filed, the registered office for Stonehouse was the Fall Leaf Road address, which is Ibrahim’s second home in rural Linwood, Kansas; Ibrahim has since changed that registered office to his residence in Lecompton, effective May 1, 2015.15 Ibrahim testified that Stonehouse does not conduct business from the Fall Leaf Road address, the house is not typically occupied, and that he goes to the house anywhere from twice a week to once every three months. He further testified that the Fall Leaf Road house is also Ms. Hayes’s residence and the couple sometimes goes there on weekends to get away from the city. In October 2005, the corporate charter of Stonehouse was revoked by the Secretary of State, due to failure to designate or maintain a resident agent and resident office.16 Ibrahim 14Doc. 12. 15Hrg. Ex. 75. The Fall Leaf Road address remains the resident office for Ibrahim’s companies South Auto Sales, LLC, Sumerian, LLC, and Paladium Group, LLC. Hrg. Exs. 76, 77, 78. 16Hrg. Ex. 74. 4 Case 2:14-cv-02046-JAR-KGG Document 19 Filed 11/09/15 Page 5 of 26 testified that there was no problem with the registered office at that time, and that the issue with the Secretary of State concerned the filing of Stonehouse’s annual report. Stonehouse continued to use the Fall Leaf Road address as the registered office after the corporation was reinstated, even though the mail there was not checked regularly. Ibrahim confirmed that the Certificate of Reinstatement issued in 2005 specifically states that a post office box is not permitted for a registered office in Kansas.17 Nevertheless, Ibrahim testified, the website for the Secretary of State lists the P.O. Box as the mailing address for Stonehouse. Ibrahim testified that as part of her management duties, Ms. Hayes picked up the mail at the Fall Leaf Road address most of the time, and would always claim certified mail if a notice was left in the mailbox. Ibrahim testified that it was his choice to serve as resident agent for Stonehouse, even though he used an attorney as resident agent with their law office as resident office for other of his businesses. He testified that he does not ignore certified mail notices because some of Stonehouse’s tenants send their rental payments via certified mail. Ibrahim testified that Patrick Doran represented Stonehouse in a foreclosure action brought in Geary County, Kansas by Lawrence Bank, as well as a second lawsuit brought by the bank in Franklin County, Kansas. Doran was brought into the case by another lawyer, Jonathan Laurans. Ibrahim testified that there was no engagement agreement and that Stonehouse paid Doran Law Office a retainer of between $3000 to $5000 per month. Ibrahim testified that Doran knew where Ibrahim lived in Lawrence and had been to his house; Doran had also been to Ibrahim’s other businesses, including a used car lot in Eudora, Kansas. Ibrahim testified about a ledger prepared by Stonehouse that reflected the total amount of legal fees paid Doran Law 17The Certificate of Reinstatement states that the address of the registered office in Kansas “must be a street address. A post office box is unacceptable.” Hrg. Ex. 74. 5 Case 2:14-cv-02046-JAR-KGG Document 19 Filed 11/09/15 Page 6 of 26 Office as $52,600.00.18 Ibrahim testified that most of those payments were hand-delivered by Ms. Hayes after Doran called her to request a check. The payments began in August 2012, and the last payment was made December 10, 2013, in the amount of $2000.00. Ibrahim testified that Doran’s role in the ultimate settlement of the case was minimal and expressed dissatisfaction with the representation he received from Doran Law Office.