BHPH Capital LLC v. JV Wholesalers LLC et al

Filing 65

ORDER that Plaintiff's Motion to Strike Defendant Victor C. Breen's Answer and Counterclaims (Doc. 33 ) is denied as moot. ORDERED that Defendant's Motion to Set Aside Default (Doc. 45 ) is granted. The Clerk of Court shall set aside the Clerk's Entry of Default (Doc. 35 ). IT IS FURTHER ORDERED that Plaintiff's Motion for Default Judgment (Doc. 40 ) is denied as moot. Signed by Judge Diane J Humetewa on 1/17/2023. (See Order for details.) (LFIG)

1

WO

2
3
4
5
6

IN THE UNITED STATES DISTRICT COURT

7

FOR THE DISTRICT OF ARIZONA

8
9

BHPH Capital LLC,
Plaintiff,

10
11

v.

12

JV Wholesalers LLC, et al.,

13

No. CV-22-00143-PHX-DJH
ORDER

Defendants.

14
15

Pending before the Court is Plaintiff BHPH Capital LLC’s (“Plaintiff”) Motion to

16

Strike Defendant Victor C. Breen’s Answer and Counterclaims (Doc. 33), Plaintiff’s

17

Motion for Default Judgment against Defendant James M. Lithgow (Doc. 40), and

18

Defendant Lithgow’s (“Defendant”) Motion to Vacate Entry of Default (Doc. 45). The

19

motions are fully briefed.

20

I.

Background

21

On January 26, 2022, Plaintiff filed a Complaint for breach of contract, breach of

22

duty of good faith and fair dealing, fraud, misrepresentation, civil conspiracy, and RICO

23

violations. (Doc. 1). On June 21, 2022, Plaintiff requested that the Clerk enter default

24

against Defendant under Rule 55(a) for failing to plead or otherwise defend the action.

25

(Doc. 32). The Clerk entered default on June 24, 2022. (Doc. 35). Two weeks later, on

26

July 6, 2022, Plaintiff filed a Motion for Default Judgment against Defendant. (Doc. 40).

27

On July 19, 2022, Defendant filed a Motion to Vacate the Clerk’s Entry of Default

28

(“Motion to Set Aside Default”). (Doc. 45).

1
2
3
4

II.

Discussion
The Court will begin with Plaintiff’s Motion to Strike then consider Defendant’s

Motion to Set Aside Default.
A. Motion to Strike Breen’s Answer and Counterclaims

5

The Court will deny Plaintiff’s Motion to Strike as moot. This is because Defendant

6

Breen filed for bankruptcy and the bankruptcy court stayed Plaintiff’s cause of action

7

against him under 11 U.S.C. § 362(a)(l). (Doc. 64 at 1–2). Plaintiff represents it will take

8

no further action against Defendant Breen in this case unless the automatic stay is lifted or

9

terminated. (Id.) The Court therefore denies Plaintiff’s Motion to Strike as moot.

10

B. Motion to Set Aside Default

11

Federal Rule of Civil Procedure 55(c) allows the court to set aside an entry of default

12

“for good cause.” See FOC Financial Ltd. Partnership v. National City Commercial

13

Capital Corp., 612 F.Supp.2d 1080, 1082 (D. Ariz. 2009) (citations omitted). “What

14

constitutes ‘good cause’ is within the discretion of the trial court.” Id. To determine “good

15

cause,” a court must “consider[ ] three factors: (1) whether [the party seeking to set aside

16

the default] engaged in culpable conduct that led to the default; (2) whether [it] had [no]

17

meritorious defense; or (3) whether reopening the default judgment would prejudice” the

18

other party. See Franchise Holding, LLC v. Huntington Restaurants Group, Inc., 375 F.3d

19

922, 925–26 (9th Cir. 2004). The burden rests on the moving party, but the factors are to

20

be “liberally interpreted” in favor of setting aside default. Haw. Carpenters’ Trust Funds

21

v. Stone, 794 F.2d 508, 513 (9th Cir. 1986); Nilsson, Robbins, Dalgarn, Berliner, Carson

22

& Wurst v. La. Hyrdrolec, 854 F.2d 1538, 1546 (9th Cir. 1988). “A case should, whenever

23

possible, be decided on the merits.” TCI Grp. Life Ins. Plan v. Knoebber, 244 F.3d 691,

24

697 (9th Cir. 2001).

25

At the outset, the Court need not review whether reopening the default judgment

26

would prejudice Plaintiff because Plaintiff does not contest this factor. (Doc. 54). Even

27

so, the Court finds vacating the default judgment here would not prejudice Plaintiff. See

28

Knoebber, 244 F.3d at 701 (“To be prejudicial, the setting aside of a judgment must result

-2-

1

in greater harm than simply delaying resolution of the case. Rather, ‘the standard is

2

whether [plaintiff’s] ability to pursue his claim will be hindered.’”) (internal citations

3

omitted)). As discussed below, Defendant filed his Motion to Set Aside Default less than

4

a month after it was entered, and Plaintiff provides no representations that setting aside the

5

judgment would result in greater harm than delayed resolution. Id.

6

i.

Culpable Conduct

7

Only intentional conduct is sufficiently culpable to deny a motion to set aside

8

default. Knoebber, 244 F.3d at 698 (“[W]e have typically held that a defendant’s conduct

9

was culpable for purposes of the [Rule 55(c) or 60(b)] factors where there is no explanation

10

of the default inconsistent with a devious, deliberate, willful, or bad faith failure to

11

respond.”). Defendant claims his first counsel did not file an answer and failed to properly

12

communicate with him. (Doc. 45 at 3). He says this prompted him to retain new counsel

13

and, once hired, Defendant’s new counsel timely filed an answer with affirmative defenses.

14

(Id.) Plaintiff responds that there is no good cause under Rule 55(c) because Defendant’s

15

failure to timely file an answer was not based on an error from Defendant’s first counsel’s

16

clerical staff. (Doc. 54 at 3).

17

The Court finds Defendant’s failure to timely answer was not culpable. Plaintiff

18

relies on Add Mktg. & Consolidation, Inc. v. Borg Produce Sales, Inc. to support the

19

proposition that relief under Rule 55(c) “is deemed appropriate where the failure of defense

20

counsel to file a timely answer was attributable not to his own personal fault, but to the

21

neglect of a member of his clerical staff.” 2008 WL 11340041, at *1 (D. Ariz. June 11,

22

2008). However, the court there did not adjudicate the motion for default under Rule 55(c)

23

and the Court accordingly rejects this argument. Id. (“the [counterdefendants] are not

24

proceeding under Fed. R. Civ. P. 55(c)”).1 Nothing in the record indicates a “devious,

25

deliberate, willful, or bad faith failure to respond.” Knoebber, 244 F.3d at 698. To the

26

contrary, Defendant filed his Motion to Set Aside Default under a month after it was

27

entered. (See Docs. 35; 45). Defendant appears to have diligently sought to set aside the

28

1

The court included this proposition in a footnote with a citation to an out-of-circuit district
court, which is not binding on this Court.
-3-

1

default judgment and, absent evidence otherwise, the Court therefore finds Defendant’s

2

conduct was not culpable.

3

ii.

Meritorious Defense

4

The movant “is required to make some showing of a meritorious defense as a

5

prerequisite to vacating an entry of default.” Haw. Carpenters’ Trust Funds, 794 F.2d at

6

513. To do so, the movant must “allege sufficient facts that, if true, would constitute a

7

defense[.]” United States v. Signed Personal Check No. 730 of Yubran S. Mesle, 615 F.3d

8

1085, 1094 (9th Cir. 2010).

9

Defendant asserts two defenses: First, he argues Plaintiff’s service is defective under

10

Federal Rule of Civil Procedure 4(m). (Doc. 45 at 3). Second, Defendant appears to

11

contend he has fulfilled his obligations under the contract.2 (Id. at 4). He claims his

12

affidavit “shows he denies defrauding Plaintiff and that he was a silent partner owning 35%

13

of the Borrower entity—which was reduced down to 10% after he was diagnosed with

14

prostate cancer.” (Id.) Defendant says these facts “establish that he should be heard and

15

be allowed to defend this case on the merits.” (Id.) Plaintiff counters that Defendant

16

consented to this Court’s jurisdiction in the Loan Agreement and, even if he did not, good

17

cause exists for this Court to retroactively extend the time to for Plaintiff serve Defendant

18

under Rule 4(m). (Doc. 54 at 4). Plaintiff further contends Defendant waived his

19

exhaustion of collateral defenses in the Loan Agreement. (Id. at 5).

20

As to the defective service, Defendant contends that the service on Mr. Lithgow is

21

defective because it was effected on May 25, 2022 (Doc. 31), after the statutory service

22

period of 90 days. See Fed. R. Civ. P. 4(m). The Complaint here was filed on January 26,

23

2022. (Doc. 1). Plaintiff served Defendant on May 25, 2022. (Doc. 31). This is outside

24

the 90-day requirement. The Court therefore finds that Defendant has alleged sufficient

25

facts that, if established, would constitute a meritorious defense.

26
27
28

As to the breach of contract claim, the Court is further persuaded that Defendant has
2

Although the Complaint contains seven Counts (Doc. 1 at 6–12), Plaintiff represents it
seeks a default judgment against Defendant only as to Defendant’s liability on his
“guaranty of the amounts owing under the Loan Agreement,” but nonetheless represents it
“reserves its rights to pursue its fraud and other claims against [Defendant] (and others).”
-4-

1

potentially meritorious defenses. Plaintiff alleges it entered a contract with Defendant

2

whereby Defendant personally guaranteed the loan. (Doc. 1, ¶¶ 12, 13). Defendant

3

allegedly breached the contract by failing to “pay the amount due on the Guaranteed

4

Obligations.” (Id. at ¶ 46). Defendant asserts that he did not breach the contract because

5

he “sold 25 percent of the shares back to the other partners and [] retained 10 percent and

6

was a silent partner due to illness.” (Doc. 45-1 at ¶ 38). Defendant further contends that

7

he “thought the amount is being paid down.” (Id. at ¶ 39). These facts, accepted as true,

8

satisfy the meritorious defense requirement. The Court therefore finds that denial of

9

Defendant’s motion would neither serve Rule 55(c) nor the interests of justice. See Haw.

10

Carpenters’ Trust Funds, 794 F.2d at 513 (“The underlying concern . . . is to determine

11

whether there is some possibility that the outcome of the suit after a full trial will be

12

contrary to the result achieved by the default.”); Nilsson, et al., 854 F.2d at 1546 (noting

13

that “modern federal procedure favors trials on the merits”) (internal citation omitted).

14

A case should be decided on the merits whenever possible and judgment by default

15

is “appropriate only in extreme circumstances[.]” Mesle, 615 F.3d at 1089. Those extreme

16

circumstances are plainly not present here, and the Court therefore grants Defendant’s

17

Motion to Set Aside Default.

18

Accordingly,

19

IT IS ORDERED that Plaintiff’s Motion to Strike Defendant Victor C. Breen’s

20

Answer and Counterclaims (Doc. 33) is denied as moot.

21

IT IS FURTHER ORDERED that Defendant’s Motion to Set Aside Default (Doc.

22

45) is granted. The Clerk of Court shall set aside the Clerk’s Entry of Default (Doc. 35).

23

IT IS FINALLY ORDERED that Plaintiff’s Motion for Default Judgment (Doc.

24
25

40) is denied as moot.
Dated this 17th day of January, 2023.

26
27
28

Honorable Diane J. Humetewa
United States District Judge

-5-