Gold Star Resources LLC v. Balser et al

Filing 69

ORDER that Defendant Balser's Motion to Set Aside Default (Doc. 53 ) and Defendant Morris's Motion to Set Aside Default (Doc. 63 ) are granted, on the condition that Balser and Morris each file pleadings in response to Plaintiff's Amended Complaint (Doc. 42 ) no later than 10/20/15. FURTHER ORDERED that Plaintiff's Motion for Judgment by Default (Doc. 58 ) is denied. See order for details. Signed by Judge Neil V. Wake on 10/6/15. (NKS)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE DISTRICT OF ARIZONA

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Gold Star Resources, LLC,
Plaintiff,

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ORDER

v.

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No. CV-14-02733-PHX-NVW

Joseph D. Balser et al.,

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Defendants.

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Before the Court is Defendant Balser’s Motion to Set Aside Default (Doc. 53),

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Defendant Morris’s Motion to Set Aside Default (Doc. 63), Plaintiff’s Motion for

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Judgment by Default (Doc. 58), and the parties’ accompanying briefs. For the reasons

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that follow, the Defendants’ Motions to Set Aside Default will be conditionally granted

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and Plaintiff’s Motion for Judgment by Default will be denied.

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I.

BACKGROUND

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Plaintiff Gold Star Resources, LLC, (“Gold Star”) claims to be the victim of “a

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sophisticated scheme or confidence game designed to defraud.” (Doc. 42 at ¶ 9.) Here is

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how the “scheme” allegedly worked: Defendant Joseph Balser, a scientist, claimed to

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have a unique method for identifying and extracting gold and silver deposits from older

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mining claims. (Id.) Defendant James Morris, the owner of various mining properties in

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Arizona, vouched for Balser’s methods. (Id.) Other defendants confirmed Balser’s

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methods. (Id.) In reliance on these representations, Gold Star raised millions of dollars,

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bought hundreds of mining claims in Arizona, and began constructing a chemical plant

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for the purpose of extracting gold and silver. (Id. at ¶¶ 12, 13, 19.) The plant never

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produced any meaningful quantities of gold and silver, and Balser’s method could not be

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confirmed through an independent laboratory. (Id. at ¶¶ 20, 22.) Gold Star sued Balser

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and Morris for securities violations, racketeering, fraud, conversion, breach of covenant

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of good faith and fair dealing, breach of contract, and conspiracy. (Id. at ¶¶ 49-88.)

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Balser failed to respond to Gold Star’s amended complaint by March 23, 2015.

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Accordingly, Gold Star applied for entry of default as to Balser (Doc. 21), and default

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was entered on April 2 (Doc. 27).

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Likewise, Morris failed to respond to Gold Star’s amended complaint by April 4,

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2015. Accordingly, Gold Star applied for entry of default as to Morris (Doc. 28), and

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default was entered on April 10 (Doc. 29).

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On July 31, Balser moved to set aside the entry of default against him. (Doc. 53.)

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In his affidavit (Doc. 53-1), he explained he did not receive a copy of Gold Star’s

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complaint until weeks after service had been executed on March 1. He further explained

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that, due to his limited resources and communication capabilities, he was unable to retain

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an attorney quickly and was unable to explain his circumstances to his attorney until

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meeting with him on May 29.

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On August 17, Morris moved to set aside the entry of default against him. (Doc.

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63.) In his affidavit (Doc. 63-1), he explained he did not receive a copy of Gold Star’s

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complaint until May. He further explained he thought Balser’s attorney was representing

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him as well as Balser. After he discovered otherwise on July 17, he asked the Court for

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an extension of time and retained a lawyer, whom he instructed to file an answer as soon

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as possible.

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Gold Star opposes both motions. (Doc. 64.) In response to Balser’s motion, Gold

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Star argues that an email sent by Balser’s attorney on March 26, 2015, belies Balser’s

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claim that he could not quickly communicate with an attorney and indicates unreasonable

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delay. In response to Morris’s motion, Gold Star argues Morris’s affidavit is inadequate,

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false, and inconsistent with Balser’s affidavit.

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Gold Star also claims that neither

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defendant has a meritorious defense to the underlying allegations and that setting aside

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these defaults would unfairly prejudice Gold Star. For these same reasons, Gold Star

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moved for default judgment against Balser and Morris. (Doc. 58.)

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II.

ANALYSIS

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“The court may set aside an entry of default for good cause . . . .” Fed. R. Civ. P.

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55(c). “To determine ‘good cause,’ a court must consider three factors: (1) whether the

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party seeking to set aside the default engaged in culpable conduct that led to the default;

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(2) whether it had no meritorious defense; or (3) whether reopening the default judgment

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would prejudice the other party. This standard, which is the same as is used to determine

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whether a default judgment should be set aside under Rule 60(b), is disjunctive, such that

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a finding that any one of these factors is true is sufficient reason for the district court to

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refuse to set aside the default.” United States v. Signed Pers. Check No. 730 of Yubran S.

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Mesle, 615 F.3d 1085, 1091 (9th Cir. 2010) (alterations and citations omitted).

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“Crucially, however, judgment by default is a drastic step appropriate only in

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extreme circumstances; a case should, whenever possible, be decided on the merits.

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Additionally, while the same test applies for motions seeking relief from default

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judgment under both Rule 55(c) and Rule 60(b), the test is more liberally applied in the

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Rule 55(c) context . . . because in the Rule 55 context there is no interest in the finality of

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the judgment with which to contend.”

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omitted).

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A.

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“A defendant’s conduct is culpable if he has received actual or constructive notice

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of the filing of the action and intentionally failed to answer. . . . [T]he term ‘intentionally’

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means that a movant cannot be treated as culpable simply for having made a conscious

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choice not to answer; rather, to treat a failure to answer as culpable, the movant must

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have acted with bad faith, such as an intention to take advantage of the opposing party,

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interfere with judicial decisionmaking, or otherwise manipulate the legal process.” Id. at

Id. at 1091 & n.1 (alteration and citations

Neither Defendant Engaged in Culpable Conduct

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1092 (alteration and citations omitted) (emphasis in original).

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defendant’s conduct is deemed culpable, “there is no explanation of the default

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inconsistent with a devious, deliberate, willful, or bad faith failure to respond.” Id.

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(citation omitted).

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Typically, when a

Balser

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Balser has offered a plausible explanation for his default, consistent with good

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faith conduct. According to his affidavit (Doc. 53-1), the complaint was served on him

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by delivery to his wife on March 1, 2015. He was living in a different city at the time,

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with limited contact with his family. The complaint was then placed with other mail,

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which was forwarded to him weeks later.

Due to his limited resources and

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communication capabilities, he could not retain an attorney quickly.

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eventually retained an attorney for him. He was not able to explain his circumstances to

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his attorney until meeting with him on May 29, 2015.

His employer

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In response to this explanation, Gold Star points to an email sent by Balser’s

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attorney on March 26, 2015. (Doc. 64-1.) From this email, Gold Star draws two

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inferences: (1) Balser’s affidavit is false because Balser was apparently able to contact an

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attorney quickly, and (2) Balser’s delay in moving to set aside default was unreasonable

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because he was represented by an attorney several days before default was entered.

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Neither of these inferences is valid.

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First, the fact that Balser had representation as of March 26, 2015, does not

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contradict his affidavit. Balser does not specify when he retained counsel. Although he

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states he was unable to explain his circumstances to his attorney until May 29, 2015, that

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statement is consistent with his claim of limited communication capabilities. Indeed,

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Balser’s attorney attested that, though he was retained on March 26, he was not able to

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collect essential information until meeting with Balser on May 29. (Doc. 65-1.)

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Second, the fact that Balser had representation as of March 26, 2015, does not

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make his delay in moving to set aside default unreasonable. Balser’s attorney acted

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prudently by emailing Gold Star’s attorney on March 26, asking for a withdrawal of entry

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of default. (Doc. 64-1.) The subsequent delay in moving to set aside default is somewhat

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understandable given that Balser’s attorney could not collect necessary information from

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Balser until May 29. (Doc. 65-1.)

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Even if the delay were unreasonable, it would not establish an “intention to take

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advantage of the opposing party, interfere with judicial decisionmaking, or otherwise

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manipulate the legal process.” Mesle, 615 F.3d at 1092 (citation omitted). At most,

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unreasonable delay would indicate error on the part of Balser’s attorney. And “on a

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motion to set aside a default or default judgment, courts have been reluctant to attribute to

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the parties the errors of their legal representatives.” Jackson v. Beech, 636 F.2d 831, 837

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(D.C. Cir. 1980) (citation omitted).

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conduct.

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2.

Therefore, Balser has not engaged in culpable

Morris

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Morris has also offered a plausible explanation for his default, consistent with

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good faith conduct. According to his affidavit (Doc. 63-1), the complaint was served on

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him by delivery to a homeless man staying at his house on March 14, 2015. Morris was

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out of town and had allowed the man to stay at his house. The man did not tell Morris of

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the complaint. Morris first discovered the complaint when he returned home in May.

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Morris then spoke with Balser, who said his attorney would represent both of them. It

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was not until July 17 that Morris found out he was not being represented. He then asked

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the Court for an extension of time and retained a lawyer. He instructed his lawyer to file

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an answer as soon as possible.

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Gold Star contends Morris’s affidavit is inadequate, false, and inconsistent with

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Balser’s affidavit. No persuasive evidence supports these contentions. Morris’s affidavit

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suffices to show he did not engage in culpable conduct.

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B.

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“All that is necessary to satisfy the ‘meritorious defense’ requirement is to allege

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sufficient facts that, if true, would constitute a defense: the question whether the factual

Both Defendants Have Raised Meritorious Defenses

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allegation is true is not to be determined by the court when it decides the motion to set

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aside the default.” Mesle, 615 F.3d at 1094 (alteration and citations omitted).

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Balser raises various defenses in his affidavit (Doc. 53-1), including: his methods

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are valid scientific processes; he always honestly represented his processes and

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conclusions; he never planned to deceive; he never had a written agreement regarding his

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services; and he never made the statements attributed to him in the complaint. These

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facts, if true, would constitute meritorious defenses. Gold Star’s contention that the

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defenses are false is beside the point.

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Morris raises defenses in his motion to set aside default (Doc. 63): he denies the

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scheme attributed to him in the complaint, and he points out that the land sale contracts

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he sold contained no warranties or promises that would give rise to Gold Star’s claims

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against him. These facts, if true, would also constitute meritorious defenses.

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C.

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“To be prejudicial, the setting aside [of the default] must result in greater harm

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than simply delaying resolution of the case. Rather, the standard is whether plaintiff’s

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ability to pursue his claim will be hindered.” TCI Grp. Life Ins. Plan v. Knoebber, 244

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F.3d 691, 701 (9th Cir. 2001) (alteration and citations omitted).

Plaintiff Would Not Be Prejudiced by Setting Aside the Defaults

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Setting aside these defaults will not hinder Gold Star’s ability to pursue its claims.

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There is no indication the defaults have resulted in “tangible harm such as loss of

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evidence, increased difficulties of discovery, or greater opportunity for fraud or

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collusion.” Thompson v. Am. Home Assur. Co., 95 F.3d 429, 433-34 (6th Cir. 1996),

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quoted with approval in Knoebber, 244 F.3d at 701.

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Gold Star contends the defaults have prolonged the litigation, increased its costs,

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and given the defendants an opportunity to plan for an adverse outcome. But this is just

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to say the defaults have caused delay. Mere delay is not prejudice.

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/ / /

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/ / /

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/ / /

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III.

CONCLUSION

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For the reasons stated above, good cause exists to set aside the entry of default as

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to defendants Balser and Morris. This good cause extends to the defendants’ spouses,

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who are parties to this action only because Gold Star contends the defendants incurred

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liability in furtherance of the communities of their respective marriages. (Doc. 42 at 2.)

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Entry of default as to defendants Balser and Morris will therefore be set aside, on

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the condition that they each file pleadings in response to Gold Star’s amended complaint

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no later than October 20, 2015. Gold Star’s request for attorney’s fees is denied without

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prejudice to renewal at the end of this case, when all requests for attorney’s fees may be

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considered at once. Gold Star’s motion for default judgment will be denied.

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IT IS THEREFORE ORDERED that Defendant Balser’s Motion to Set Aside

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Default (Doc. 53) and Defendant Morris’s Motion to Set Aside Default (Doc. 63) are

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granted, on the condition that Balser and Morris each file pleadings in response to

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Plaintiff’s Amended Complaint (Doc. 42) no later than October 20, 2015.

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IT IS FURTHER ORDERED that Plaintiff’s Motion for Judgment by Default
(Doc. 58) is denied.
Dated this 6th day of October, 2015.

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Neil V. Wake
United States District Judge

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