Ornstein et al v. Canites et al

Filing 69

ORDER SETTING ASIDE ENTRIES OF DEFAULT by Judge Phyllis J. Hamilton. (pjhlc2S, COURT STAFF) (Filed on 1/29/2019)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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GERALD ORNSTEIN, et al.,

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United States District Court
Northern District of California

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Case No. 18-cv-01616-PJH

Plaintiffs,

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v.

ORDER SETTING ASIDE ENTRIES OF
DEFAULT

GIBSON T. CANITES, et al.,

Re: Dkt. No. 66

Defendants.

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Before the court is defendants Gibson T. Canites, Rose Liang-Canites, and Aaren

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R. Canites’ (the “defendants” or the “Canites”) motion to set aside the Clerk’s entries of

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default. The matter is fully briefed and suitable for decision without oral argument.

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Accordingly, the hearing set for February 13, 2018, is VACATED. Having read the

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parties’ papers and carefully considered their arguments and the relevant legal authority,

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and good cause appearing, the court hereby GRANTS defendants’ motion, for the

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following reasons.

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In short, the plaintiffs allege that in May 2016, they loaned $1,600,000 to the

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Canites. That loan was secured by a Deed of Trust against the Canites’ property located

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in San Francisco. In February 2017, the Canites stopped making loan payments and

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defaulted. The plaintiffs subsequently filed this action seeking, inter alia, judicial

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foreclosure. In April and May 2018, the Clerk of Court entered default against each of the

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Canites for failure to respond to plaintiffs’ complaint.

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A federal court may set aside an entry of default for "good cause." Fed. R. Civ. P.

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55(c). In determining whether good cause exists, the court considers three factors: (1)

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whether the plaintiff will be prejudiced, (2) whether the defendant had a meritorious

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defense, and (3) whether culpable conduct of the defendant led to the default. Bandt v.

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Am. Bankers Ins. Co. of Fla., 653 F.3d 1108, 1111 (9th Cir. 2011). This standard is

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disjunctive, meaning that the court may deny the request to vacate default if defendant

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fails to satisfy any of the three factors. See id.; see also U.S. v. Signed Personal Check

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No. 730 of Yubran S. Mesle, 615 F.3d 1085, 1091 (9th Cir. 2010). When considering

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whether to vacate a default under Rule 55(c), the court's "underlying concern . . . is to

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

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will be contrary to the result achieved by the default." Hawaii Carpenters’ Tr. Funds v.

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Stone, 794 F.2d 508, 513 (9th Cir. 1986).

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The party seeking to set aside entry of default bears the burden of showing good

United States District Court
Northern District of California

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cause under this test. Id. To ensure that cases are decided on the merits whenever

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possible, the court resolves any doubt regarding whether to grant relief in favor of

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vacating default. O'Connor v. Nevada, 27 F.3d 357, 364 (9th Cir. 1994).

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This is the second time defendants have requested the court set aside their

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defaults. On September 21, 2018, the court denied defendants’ first request because

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defendants “failed to articulate a meritorious defense to plaintiffs’ claims.” Dkt. 53 at 2.

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Instead, defendants’ first motion “only stated that ‘defendants have a legitimate defense

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in that they are entitled to a determination [as] to whether they are responsible for the

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alleged debt or specifically the amount they are responsible for.’” Id. Further, at the

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hearing on that motion, “defendants’ counsel conceded liability and stated that the

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Canites only dispute the amount they owe on the loan.” Id. at 3. Because that failed to

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show that defendants had a meritorious defense to plaintiffs’ claims, the court denied

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defendants’ motion to set aside their defaults. Id.

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Defendants’ present motion, filed by newly retained counsel, addresses the

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inadequacies of the prior motion. Contrary to defendants’ prior counsel’s

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representations, defendants now contend that they do have defenses to plaintiffs’ Sixth

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Cause of Action for “Fraud: Intentional Misrepresentation and Active Concealment.”

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First, defendants contend that because they were not aware of the liens, they could not
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have intentionally mislead plaintiffs. Dkt. 66-2, Gibson Canites Decl. ¶ 11. Second,

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defendants argue that because the liens were public records recorded against the

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property prior to plaintiffs loaning defendants any money, plaintiffs were on constructive

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notice of the liens and thus could not reasonably rely on any statements made by the

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defendants. Id.; Cal. Civ. Code § 1213.

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Plaintiffs do not substantively challenge those defenses. Instead, plaintiffs argue

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that those defenses are irrelevant because plaintiffs offered to stipulate to dismiss the

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Sixth Cause of Action, but defendants refused. Plaintiffs have provided no authority to

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support that unintuitive proposition. Nor have plaintiffs moved the court to dismiss that
claim. Accordingly, the court finds that defendants have satisfied their burden to show a

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United States District Court
Northern District of California

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meritorious defense exists.

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The court also finds that defendants have met the first and third factors identified

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above. With respect to whether they will be prejudiced, plaintiffs only argue that

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defendants are attempting to stall the inevitable foreclosure of the property and that any

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continued delay will prevent plaintiffs from accessing their capital. That is not a

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cognizable prejudice. TCI Grp. Life Ins. Plan v. Knoebber, 244 F.3d 691, 701 (9th Cir.

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2001) (“To be prejudicial, the setting aside of a judgment must result in greater harm than

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simply delaying resolution of the case.”) overruled on other grounds by Egelhoff v.

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Egelhoff ex rel. Breiner, 532 U.S. 141, 121 (2001). With respect to whether culpable

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conduct of the defendants led to the default, defendants have shown that they did not

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intentionally fail to answer, and plaintiffs have provided no evidence to the contrary. See

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Yubran, 615 F.3d at 1092.

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Lastly, plaintiffs request that if the court grants the motion, it should do so on the

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condition that defendants’ pay plaintiffs’ attorneys’ fees—totaling $3,210—incurred as a

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result of defendants’ conduct. Dkt. 67-1, Lloyd Decl. ¶ 18. Defendants failed to oppose

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that request. A district court has discretion to impose attorneys' fees as a condition on

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the setting-aside of an entry of default. See Nilsson, Robbins, Dalgarn, Berliner, Carson

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& Wurst v. La. Hydrolec, 854 F.2d 1538, 1546–47 (9th Cir. 1988). “By conditioning the
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setting aside of a default, any prejudice suffered by the non-defaulting party as a result of

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the default and the subsequent reopening of the litigation can be rectified.” Id. at 1546.

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The court finds that plaintiffs have incurred unnecessary legal expenses as a result of

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defendants’ conduct. In addition, the court finds that the requested attorneys’ fees

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reasonably compensate plaintiffs for costs incurred obtaining the entries of default and

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responding to the defendants’ first motion—a frivolous motion that all but ignored the

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test’s “meritorious defense” factor—and second motion to set aside those defaults.

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For the foregoing reasons, defendants’ motion to set aside the Clerk’s entries of
default is GRANTED, on the condition that defendants pay plaintiffs $3,210 in attorneys’
fees. Defendants’ Answer shall be filed by February 12, 2019, and shall be accompanied

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United States District Court
Northern District of California

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by a declaration attesting to the payment of the above amount.

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In addition, a Further Case Management Conference shall be held on February

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21, 2019, at 2:00 p.m., in Courtroom 3, 3rd Floor, Federal Building, 1301 Clay Street,

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Oakland, California. The parties shall appear in person or through lead counsel and shall

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be prepared to discuss all items referred to in Fed. R. Civ. P. 16(c) and Civil L. R. 16-10.

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The parties shall file a joint case management statement no later than seven (7) days

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before the date of the conference.

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IT IS SO ORDERED.

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Dated: January 29, 2019
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PHYLLIS J. HAMILTON
United States District Judge

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