                    United States Court of Appeals
                          FOR THE EIGHTH CIRCUIT
                                   ___________

                                    No. 00-3247
                                   ___________

Timothy S. Forsythe; Randy E.            *
Brehmer; Ted S. Haines,                  *
                                         *
             Appellees,                  *
                                         * Appeal from the United States
       v.                                * District Court for the
                                         * District of Minnesota.
John L. Hales; Comstar BioCapital, Inc., *
a British Virgin Islands corporation,    *
                                         *
             Appellants.                 *
                                    ___________

                             Submitted: June 15, 2001
                                 Filed: July 2, 2001
                                  ___________

Before MURPHY, MAGILL, and BEAM, Circuit Judges.
                           ___________

MAGILL, Circuit Judge.

       Appellees Timothy S. Forsythe, Randy E. Brehmer, and Ted S. Haines sued
several defendants, including John L. Hales and Comstar BioCapital, Inc. ("Comstar"),
alleging that they had engaged in various securities violations. After reaching a
settlement with the other defendants in the case, Appellees moved for various
sanctions, including default judgment, against Hales and Comstar due to their delays
and discovery violations. The district court1 entered default judgment against Hales
and Comstar in the amount of $1,821,698. Hales and Comstar now appeal, and we
affirm.

                                          I.

       In January 1998, Appellees filed a lawsuit against West America Securities
Corporation ("West America"), Gregory R. Myers, Dennis A. Pearson, Jr., Richard W.
Simpson, Hales, and Comstar. Appellees alleged that the defendants had accepted
money to purchase stock, but then either failed to deliver the shares into Appellees'
accounts at all or delayed delivery for months without notifying Appellees. As a result
of the defendants' alleged conduct, Appellees were unable to sell the stock when they
desired to do so. West America moved to compel NASD arbitration and the case was
stayed on June 11, 1998, pending outcome of the arbitration. In February 1999, Hales
and Comstar filed an answer through Robert P. Lowell, a California attorney who was
not admitted to practice before the district court. Appellees reached a tentative
settlement with defendants West America, Myers, Pearson, and Simpson in September
1999, and the stay was subsequently lifted.

       On September 27, 1999, the magistrate judge set a pretrial conference for
October 29, 1999. Lowell appeared at the pretrial conference by telephone, but the
magistrate judge informed him that because he was not admitted to practice before the
court and had not associated with local counsel, he would not be permitted to
participate in the conference under Local Rule 83.5. The magistrate judge then
afforded Hales and Comstar time to retain counsel in compliance with the rule.



      1
      The Honorable Richard H. Kyle, United States District Judge for the District
of Minnesota, adopting the report and recommendation of the Honorable John M.
Mason, United States Magistrate Judge for the District of Minnesota.

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       As no attorney had filed a notice of appearance on behalf of Hales and Comstar
by November 10, 1999, the magistrate judge issued an order directing all parties to
obtain counsel admitted to practice before the court by November 22. Hales personally
e-mailed the district court on November 22, requesting an extension until November
29 to retain new counsel. The court granted Hales' request, but Hales nevertheless
failed to retain appropriately licensed counsel by the requested date.

       By December 1999, Hales and Comstar had committed numerous discovery
violations, failing to (1) submit the required pre-discovery disclosures, (2) respond to
Appellees' Interrogatories or Document Requests, or (3) appear for a scheduled
deposition. Appellees warned Hales and Comstar that their continuing failure to
engage in the discovery process could force Appellees to seek a default judgment.
When Hales and Comstar continued to be unresponsive, Appellees moved for various
sanctions, including a default judgment.

       The magistrate judge scheduled a hearing on Appellees' sanctions motion on
January 7, 2000. On January 6, Lowell filed two documents with the court, requesting
(1) that his clients be given a two-week continuance to obtain local counsel and
respond to Appellees' motion, and (2) that he be permitted to appear by telephone. The
court denied permission to appear by telephone. The motion for a continuance was
summarily denied, as Lowell had no authority to file such a motion. As a result, the
hearing was held as scheduled on January 7, 2000. No appearance was made on behalf
of Hales or Comstar. However, the magistrate judge did not grant Appellees' motion
for default judgment, but rather entered an order requiring Hales and Comstar to appear
before the court on February 2, 2000, and show cause why a default judgment should
not be entered against them. The order also required Hales and Comstar to appear at
the February 2 hearing with counsel admitted to practice before the court.

     During the period between the January 7 and February 2 hearings, Hales and
Comstar did not file any discovery responses. On February 2, Hales and Comstar

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appeared before the court with counsel admitted to practice in the District of
Minnesota; however, counsel explained that he had been retained just the day before
and had no knowledge of the case. Neither Hales, Comstar, nor their attorney provided
the district court with a justification for their failure to respond to discovery, or to
engage counsel properly licensed to appear in the case at any time over the preceding
twenty-five months. Because he concluded that Hales and Comstar presented no
substantive grounds for denying Appellees' motion, the magistrate judge recommended
that default judgment be entered against them.

       The district court conducted a de novo review of the magistrate judge's report
and recommendation, and adopted it with the exception of the imposition of a $3400
sanction, an amount for which the district court found no basis in the record. The
district court directed the clerk to enter default against Hales and Comstar and
instructed the magistrate judge to hold a hearing to determine the amount of damages
to which Appellees were entitled.

       The magistrate judge conducted a hearing at which Appellees contended that
their damages should be calculated under a "wrongful conversion of securities" theory,
while Hales and Comstar argued that the court should use an "out-of-pocket" damages
theory. The magistrate judge recommended use of Appellees' theory of damages. The
district court adopted the magistrate judge's recommendation and entered judgment in
accordance.

                                          II.

A.    Default Judgment

       The parties disagree as to the standard we are to apply in reviewing the district
court's grant of default judgment. Appellees contend that we review the district court's
decision for abuse of discretion. In contrast, Hales and Comstar assert that in

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determining whether to overturn a default judgment, we must consider: (1) whether the
conduct of the defaulting party was blameworthy or culpable; (2) whether the
defaulting party had a meritorious defense; and (3) whether the other party would be
prejudiced if the default were excused. See Johnson v. Dayton Elec. Mfg. Co., 140
F.3d 781, 784 (8th Cir. 1998). However, Johnson addressed the standard to be applied
in reviewing a district court's refusal to set aside an entry of default pursuant to Rule
60(b), rather than the court's entry of default itself. Here, neither Hales nor Comstar
moved to set aside the entry of default under Rule 60(b), and therefore, we need not
apply the procedure for review of such motions. See Ackra Direct Mktg. Corp. v.
Fingerhut Corp., 86 F.3d 852, 856 (8th Cir. 1996). Accordingly, we must consider
only whether the district court abused its discretion in entering default judgment against
Hales and Comstar. See id.

       Default judgment is appropriate where the party against whom the judgment is
sought has engaged in "willful violations of court rules, contumacious conduct, or
intentional delays." Id. However, "default judgment is not an appropriate sanction for
a 'marginal failure to comply with time requirements.'" Id. (citation omitted). Here,
defendants' conduct includes a complete failure to engage in discovery and failure to
appear at depositions and hearings set by the court. Most significantly, Hales and
Comstar failed to engage counsel admitted to practice before the district court for a
period of twenty-five months, from the inception of the lawsuit until the very day before
the hearing at which they were required to show cause why default should not be
entered against them.2 This conduct provides ample basis for a grant of default
judgment. See, e.g., Ackra, 86 F.3d at 857 (finding that defendant's failure to obtain


      2
        Hales and Comstar argue that the period of delay in obtaining licensed counsel
was a mere three months, running from November 2, 1999, when the stay was lifted,
until February 2, 2000, when they appeared with admitted counsel. However,
defendants' failure to appear through admitted counsel dates back at least to the filing
of their answer by Lowell on February 18, 1999.

                                           -5-
substitute counsel, respond to discovery, and comply with orders of the court provided
ample basis for district court's grant of default judgment for $1.2 million); Comiskey
v. JFTJ Corp., 989 F.2d 1007, 1009 (8th Cir. 1993) (holding default was the
appropriate remedy for failure to comply with numerous court orders and discovery
requests).

        Hales and Comstar rely primarily on Seventh Circuit authority in support of their
argument that the district court abused its authority. See Anilina Fabrique de Colorants
v. Aakash Chems. & Dyestuffs, Inc., 856 F.2d 873 (7th Cir. 1988). However, in that
case, the district court told the defendant that it faced default if it did not either get
counsel and request a continuance or settle the case. Id. at 875. The defendant
obtained counsel who did appear and request a continuance, but the district court
granted default judgment against it nonetheless. Id. at 876. The Seventh Circuit held
the district court's action constituted an abuse of discretion. Id. at 877-78. In contrast,
in this case, the district court instructed Hales and Comstar that default judgment would
be granted if they failed to (1) appear with admitted counsel and (2) show cause why
default should not be entered. Though Hales and Comstar appeared with counsel, they
failed to show cause why default should not be granted. Thus, unlike the defendants
in Anilina, Hales and Comstar did not fulfill the requirements of the district court for
avoiding a default judgment and therefore Anilina is inapposite.

       Appellants also argue that their misconduct was far less serious than that of the
defendants in Ackra, who submitted late and nonresponsive discovery responses for
twenty-two months prior to the withdrawal of their counsel, and failed to obtain
substitute counsel for over a year thereafter. Ackra, 86 F.3d at 854-55. In fact, the
conduct of Hales and Comstar in this case is, if anything, more egregious than that at
issue in Ackra, as Hales and Comstar failed to retain qualified counsel from the very
beginning of the litigation and entirely failed to participate in discovery. Furthermore,
rather than immediately granting default judgment when the defendants failed to appear
at the default judgment hearing, as did the court in Ackra, here, the magistrate judge

                                           -6-
issued an order affording Hales and Comstar the opportunity to obtain counsel and
appear before the court to show cause why Appellees' motion for default should not be
granted. Though Hales and Comstar finally obtained counsel and appeared at the
hearing, both they and their attorney were unable to show cause why default judgment
should not be entered against them. Therefore, under our precedent in Ackra, the
district court's grant of default judgment was entirely within its discretion.

B.    Damages

       Hales and Comstar contend that the district court erred in calculating the amount
of damages awarded against them. The amount of damages in a nonjury case is within
the discretion of the trial court, and we will not overturn a damages award unless
clearly erroneous. Taylor v. Pre-Fab Transit Co., 616 F.2d 374, 375 (8th Cir. 1980).
Appellees argue, and the district court agreed, that the proper measure of damages was
under the so-called "New York Rule," which states that when a defendant has
wrongfully converted the plaintiff's securities, the proper measure of damages is either
"the price at the time of conversion or the highest intermediate value reached within a
reasonable time after notice of the conversion by the plaintiff, whichever is greater."
Myzel v. Fields, 386 F.2d 718, 746 (8th Cir. 1967). Hales and Comstar assert that the
New York Rule should not have been applied in this case, and that Appellees' damages
should be limited to their out-of-pocket losses.

       In concluding that the New York Rule should be used in calculating Appellees'
damages, the district court relied on our decision in Davis v. Merrill Lynch, Pierce,
Fenner & Smith, 906 F.2d 1206 (8th Cir. 1990). Although Davis dealt with "churning"
of investment accounts, its reasoning is equally applicable here. In contrast, the cases
cited by Hales and Comstar supporting application of an out-of-pocket measure of
damages are inapposite, as they involve misrepresentations or material omissions made
to cause a plaintiff to purchase a security or bond at an inflated price. See, e.g., Harris
v. Union Elec. Co., 787 F.2d 355 (8th Cir. 1986).

                                           -7-
       In Davis, we recognized that in certain securities cases, out-of-pocket damages
are inadequate, because if such a measure of damages were adopted, brokers would be
free to engage in wrongdoing "with impunity so long as the net value of the account did
not fall below the amount originally invested." 906 F.2d at 1218. As in Davis, if the
district court had applied an out-of-pocket measure of damages here, the effective result
would be to permit Hales and Comstar to withhold Appellees' stock for any length of
time, as long as at the time they turned the stock over to Appellees, the market price
was above the price Appellees had paid. In contrast, if Appellees' stock had been
delivered in a timely fashion, they would have been able to sell it at the highest price
it reached in the interim period. Accordingly, the out-of-pocket measure of damages
would have no deterrent effect, and would not adequately compensate Appellees for
their loss, while applying the New York Rule results in the correct measure of
damages. Therefore, the district court did not clearly err in applying the New York
Rule in calculating the damages awarded against Hales and Comstar.

                                          III.

      For the reasons set forth above, we AFFIRM the judgment of the district court.

      A true copy.

             Attest:

                     CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.




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