Results ByIQ, LLC v. Fanning et al

Filing 50

Order by Hon. Samuel Conti granting 42 Motion to Set Aside Default.(sclc1, COURT STAFF) (Filed on 7/10/2012)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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RESULTS BYIQ, LLC,

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Plaintiff,

For the Northern District of California

United States District Court

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v.

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NETCAPITAL.COM, LLC, NETWIRE,
INC., NETMOVIES, INC., and DOES 1
- 20, inclusive,
Defendants.

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) Case No. C 11-0550 SC
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) ORDER GRANTING DEFENDANTS'
) MOTION TO SET ASIDE DEFAULT
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I.

INTRODUCTION
On March 17, 2011, the clerk of the Court entered default

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against Defendants NetCapital.com, LLC, NetMovies, Inc.

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("NetMovies"), and NetWire, Inc. ("NetWire") (collectively,

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"Defendants"), and in favor of Plaintiff Results ByIQ

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("Plaintiff").

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move to set aside the Entry of Default on the ground their failure

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to respond to Plaintiff's action was the result of mistake and

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excusable neglect.

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briefed.

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Local Rule 7-1(b), the Court finds this matter appropriate for

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disposition without oral argument.

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Motion is GRANTED.

ECF No. 9 ("Entry of Default").

ECF No. 42 ("Mot.").

Defendants now

The motion is fully

ECF Nos. 47 ("Opp'n"), 48 ("Reply").

Pursuant to Civil

As detailed below, Defendants'

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II.

BACKGROUND
Plaintiff filed a Complaint for wire fraud against Defendants

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on February 7, 2011 and a First Amended Complaint ("FAC") on

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February 10, 2011.

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alleges that Defendants are incorporated in Delaware with a

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principal place of business at 165 Nantasket Beach Avenue, Hull,

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Massachusetts ("165 Nantasket").

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Defendants appear to be affiliated.

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Agreement") ¶ 1.

ECF Nos. 1 ("Compl."), 4 ("FAC").

FAC ¶¶ 4, 7-9.

The FAC

All three

See id. Ex. B ("Consulting

According to the FAC, the Defendants are the

United States District Court

For the Northern District of California

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alter-egos of John Fanning ("Fanning").1

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declared that he is a founder, manager, and officer of Defendants.

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ECF No. 18-1 ¶ 1.

Id. ¶ 13.

Fanning has

Plaintiff alleges that, pursuant to its Consulting Agreement

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with Defendants and at the insistence of Fanning, Plaintiff

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provided Defendants with hundreds of hours of services valued at

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tens of thousands of dollars.

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Consulting Agreement, which was signed by Defendants on October 27,

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2006, Defendants' address is 165 Nantasket.

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Agreement").

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FAC ¶¶ 21, 23-24.

According to the

Id. Ex. A ("Consulting

The Consulting Agreement also provides:

All notices under this Agreement shall be in writing,
and shall be deemed given when personally delivered,
sent by confirmed telecopy or other electronic means, or
ten (10) days after being sent by prepaid certified or
registered U.S. mail to the address of the party to be
noticed as set forth herein or such other address as
such party last provided to the other by written notice.

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Id. ¶ 7.

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Plaintiff alleges that Defendants failed to compensate
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Fanning was originally named as a Defendant in the Complaint and
FAC. Plaintiff voluntarily dismissed its claims against Fanning
without prejudice on March 20, 2011. ECF. No 10.
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Plaintiff for services rendered under the Consulting Agreement.

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recover, Plaintiff brought claims for violation of the Racketeer

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Influenced and Corrupt Organizations ("RICO") Act, 18 U.S.C. §§

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1961 et seq., fraud in the inducement, fraudulent conveyance,

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breach of contract, account stated, and open book account against

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Defendants.

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To

FAC ¶¶ 46-84.

Plaintiff, through a licensed process server, served a copy of

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the Summons, Complaint, and FAC on Tom Carmody ("Carmody") at 165

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Nantasket on February 15, 2011.

ECF No. 8 ("POS").

The process

United States District Court

For the Northern District of California

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server declares that Carmody "was identified as an officer

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qualified by law to accept service on behalf of [Defendants]."

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The process server also declares that 165 Nantasket is the

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principal office of NetWire and NetMovies in Massachusetts, as

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registered with the Massachusetts Secretary of State.

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Id.

Id.

After Defendants failed to answer or otherwise respond to this

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action, the clerk of the Court entered default on March 17, 2011.

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Entry of Default.

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judgment in the amount of $259,131.05.

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Approximately two weeks later, Defendants moved to dismiss for lack

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of proper service through their counsel of record, William W.

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Bunting III ("Bunting").

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not move to set aside the default.

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On June 20, 2011, Plaintiff moved for default

ECF No. 18.

ECF No. 17 at 2.

At that time, Defendants did

In an Order dated October 18, 2011, the Court denied both

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Plaintiff's motion for default judgment and Defendants' motion to

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dismiss.

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Plaintiff had met its burden of demonstrating effective service

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since Defendants were served at the address specified by the

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Consulting Agreement and Defendants offered no evidence to indicate

ECF No. 25 ("Oct. 18 Order").

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The Court found that

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that they had notified Plaintiff of a change of address in the

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intervening years.

Id. at 7-8.

On December 30, 2011, Bunting moved to withdraw as counsel for

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Defendants.

ECF No. 27.

In a declaration filed concurrently with

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the motion, Bunting explained that he wished to withdraw because

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Defendants had failed to pay their invoices or respond to his

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communications.

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held a hearing on the matter on March 30, 2012, at which time Garet

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Damon O'Keefe ("O'Keefe") requested to be substituted as counsel

ECF No. 27-2 ("Bunting Decl.") ¶¶ 3-4.

United States District Court

For the Northern District of California

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for Defendants.

ECF No. 39.

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withdraw and O'Keefe's request to replace him.

The Court

The Court granted Bunting's motion to
Id.

Soon after O'Keefe was appointed as Defendants' counsel of

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record, he filed the instant motion to aside the entry of default,

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as well as affidavits by Carmody and Fanning that attempt to

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explain Defendants' delay in responding to Plaintiff's lawsuit.

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ECF Nos. 43 ("Fanning Aff."), 44 ("Carmody Aff.").

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attorney, states he is not an officer or employee of Defendants,

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but he shares office space with them at 165 Nantasket.2

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Aff. ¶¶ 1-2.

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Nantasket, a gentleman, presumably Plaintiff's process server,

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handed him several envelopes, presumably Plaintiff's service of

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process.

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in a junk mail pile "which is sometimes forwarded or delivered to

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Netcapital.com LLC upon request or otherwise discarded."

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Fanning indicates that he never received these envelopes, declaring

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Carmody, an

Carmody

Carmody states that, on February 15, 2011, at 165

Id. ¶ 3.

Carmody states that he placed those envelopes

Id. ¶ 4.

Specifically, Carmody states that his office is located at 165
Nantasket Boulevard, Hull, Massachusetts. Carmody Decl. ¶ 1. The
Consulting Agreement identifies Defendants' address as 165
Nantasket Beach Avenue, Hull, Massachusetts. Neither party
addresses this inconsistency.
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that he did not learn about this lawsuit until late April or early

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May 2011 and that he contacted Bunting sometime thereafter.

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Fanning Aff. ¶¶ 7-9.

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October 18 Order, Bunting "failed and refused to file a motion to

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set aside entry of the default, even though he was duty bound to do

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so . . . ."

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Fanning also states that, after the Court's

Id. ¶¶ 11-12.

There are several holes in Defendants' account.

It is unclear

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why Defendants designated 165 Nantasket as their address for

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service of process when they had no one at that address to accept

United States District Court

For the Northern District of California

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service of process on their behalf.

It is unclear why Carmody, an

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attorney, failed to affirmatively inform the process server that he

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was not authorized to accept service of process on behalf of

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Defendants.

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process server in a junk mail pile.

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ceased communicating with and compensating Bunting after the Court

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entered its October 18 Order.

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was "duty bound" to file a motion to set aside the default when his

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clients refused to cooperate with him.

It is unclear why Carmody placed the package from the
It is unclear why Defendants

Finally, it is unclear why Bunting

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III. DISCUSSION
"[J]udgment by default is a drastic step appropriate only in

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extreme circumstances; a case should, whenever possible, be decided

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on the merits."

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"The court may set aside entry of default for good cause . . . ."

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Fed. R. Civ. P. 55(c).

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consider[ ] three factors: (1) whether [the party seeking to set

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aside the default] engaged in culpable conduct that led to the

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default; (2) whether [it] had [no] meritorious defense; or (3)

Falk v. Allen, 739 F.2d 461, 463 (9th Cir. 1984).

"To determine good cause, a court must

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whether reopening the default judgment would prejudice the other

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party."

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Mesle ("Mesle"), 615 F.3d 1085, 1091 (9th Cir. 2010) (internal

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quotations omitted).

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that a finding that any one of these factors is true is sufficient

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reason for the district court to refuse to set aside the default."

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Id.

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entry of default here.

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United States District Court

For the Northern District of California

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United States v. Signed Pers. Check No. 730 of Yubran S.

"This standard . . . is disjunctive, such

As detailed below, all three factors favor setting aside the

A.

Culpable Conduct

"[A] defendant's conduct is culpable if he has received actual

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or constructive notice of the filing of the action and

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intentionally failed to answer."

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Knoebber, 244 F.3d 691, 697 (9th Cir. 2001) (internal quotations

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omitted).

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offers a credible, good faith explanation negating any intention to

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take advantage of the opposing party, interfere with judicial

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decisionmaking, or otherwise manipulate the legal process is not

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'intentional' under our default cases, and is therefore not

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necessarily . . . culpable or inexcusable."

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defendant's conduct may be considered culpable "where there is no

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explanation of the default inconsistent with a devious, deliberate,

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willful, or bad faith failure to respond."

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TCI Grp. Life Ins. Plan v.

"Neglectful failure to answer as to which the defendant

Id.

In contrast, a

Id. at 698.

The Court finds that Defendants' failure to timely respond to

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this lawsuit does not rise to the level of culpable conduct.

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is no indication that Defendants received notice of this lawsuit

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until after default had been entered.

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service on behalf of Defendants and then deposited the pertinent

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documents into a junk mail box.

Carmody effectively accepted

See POS; Carmody Aff. ¶ 3-4.

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There

From

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there, the documents were likely discarded.

See Carmody Aff. ¶¶ 4-

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5.

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Plaintiff's fault.

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specified in the Consulting Agreement and Carmody, who effectively

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accepted service on behalf of Defendants, offered no indication

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that Defendants no longer resided at that address.

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should have either notified Plaintiff of a change of address or

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established a system that kept documents served on 165 Nantasket

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out of the junk mail box.

The fact that these documents never reached Defendants was not
Defendants were served at the address they

Defendants

Nevertheless, the Court cannot conclude

United States District Court

For the Northern District of California

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that Defendants intended to take advantage of Plaintiff or

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interfere with judicial decisionmaking.

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notify Plaintiff of a change of address could have merely been an

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administrative oversight.

Defendants' failure to

Plaintiff argues that Defendants engaged in culpable conduct

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by failing to respond to the communications of their attorney,

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Bunting, after the Court's October 18 Order.

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argument lacks merit.

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engaged in culpable conduct which led to the default.

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615 F.3d at 1091.

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months after the default was entered and, therefore, could not have

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led to the default.

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purportedly culpable conduct led them to file an untimely motion to

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set aside the default.

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would establish that the instant motion was filed too late.3

Opp'n at 2-3.

This

The pertinent inquiry is whether Defendants
See Mesle,

The conduct targeted by Plaintiff occurred

Plaintiff may be arguing that Defendants'

However, Plaintiff cites no authority which

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Plaintiff also argues that "the instant motion is an untimely
motion for reconsideration of the [October 18] ORDER." The Court
disagrees. In the October 18 Order, the Court found that
Plaintiff's service of process was proper. In the instant motion,
Defendants do not argue otherwise. Instead, they merely contend
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B.

Meritorious Defense

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"A defendant seeking to vacate a default judgment must present

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specific facts that would constitute a defense. . . .

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burden on a party seeking to vacate a default judgment is not

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extraordinarily heavy."

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necessary to satisfy the 'meritorious defense' requirement is to

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allege sufficient facts that, if true, would constitute a defense."

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Mesle, 615 F.3d at 1094.

TCI, 244 F.3d at 700.

But the

"All that is

Here, Defendants have filed a Proposed Answer which sets forth

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United States District Court

For the Northern District of California

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denials of several key allegations in Plaintiff's complaint,

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fifteen affirmative defenses, and four counterclaims.4

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Decl. Ex. A ("Proposed Answer").

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sets forth a number of facts which tend to support these denials

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and defenses.

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they may be able to prevail on the merits.

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that the burden on Defendants is not particularly heavy here, the

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Court finds that Defendants' Proposed Answer and Fanning's

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Affidavit are sufficient to satisfy the meritorious defense

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requirement.

Fanning Aff.

Fanning

Additionally, Fanning's Affidavit

If Defendants' denials are true, then
In light of the fact

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that their failure to respond to the Complaint in a timely manner
was due to excusable neglect.
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The Court notes that many of Defendants' proposed affirmative
defenses clearly lack merit. For example, Defendants' first
affirmative defense, failure to state a claim, is not a proper
affirmative defense. See Barnes v. AT & T Pension Ben. PlanNonbargained Program, 718 F. Supp. 2d 1167, 1174 (N.D. Cal. 2010).
Further, many of Defendants' proposed affirmative defenses amount
to little more than labels and conclusions and, thus, fail to
allege sufficient facts to place Plaintiff on notice of the
underlying factual bases of the defense. See Dion v. Fulton
Friedman & Gullace LLP, 11-2727 SC, 2012 WL 160221, at *2 (N.D.
Cal. Jan. 17, 2012). Nevertheless, the Court cannot conclude that
Defendants' entire Proposed Answer lacks merit.
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Answer since Defendants have not presented any admissible evidence

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of a meritorious defense.

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Defendants were not required to present admissible evidence.

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motion to set aside the entry of default, factual allegations are

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sufficient.

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issue with several of the factual and legal contentions set forth

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in Defendants' Proposed Answer.

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unwilling to make a summary determination of these matters at this

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United States District Court

Plaintiff argues that the Court should disregard the Proposed

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For the Northern District of California

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stage of the litigation, especially since it is unclear which facts

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are undisputed.

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on Plaintiff's RICO claims, which may entitle Plaintiff to treble

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damages, would serve the interests of justice.

However, as noted above,

See Mesle, 615 F.3d at 1094.

On a

Plaintiff also takes

Opp'n at 4-6.

The Court is

Further, the Court finds that additional briefing

Accordingly, the Court finds that Defendants have alleged

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Opp'n at 3.

sufficient facts to satisfy the meritorious defense requirement.

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C.

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The final factor concerns whether setting aside the default

Prejudice to Plaintiff

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would prejudice Plaintiff.

Prejudice results where a plaintiff's

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ability to pursue its case would be hindered.

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701.

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considered prejudicial for purposes of lifting a default . . . ."

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Id.

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result in setting aside the default.

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that the final factor has been satisfied.

TCI, 244 F.3d at

"[M]erely being forced to litigate on the merits cannot be

Here, Plaintiff does not identify any prejudice that would
Accordingly, the Court finds

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IV.

CONCLUSION
For the reasons set forth above, the Court GRANTS Defendants

NetCapital.com, LLC, NetMovies, Inc., and NetWire, Inc.'s motion to

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set aside the Entry of Default.

The default entered in favor of

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Plaintiff Results ByIQ and against Defendants is hereby VACATED and

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set aside.

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pleading within ten (10) days of this Order.

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a case management conference for August 31, 2012, at 10:00 a.m., in

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Courtroom 1, 450 Golden Gate Avenue, San Francisco, California.

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The parties shall file one joint case management statement seven

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(7) days prior to the case management conference.

Defendants shall file and serve their responsive
The Court hereby sets

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United States District Court

For the Northern District of California

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IT IS SO ORDERED.

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Dated:

July 10, 2012
UNITED STATES DISTRICT JUDGE

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