Alternate Energy Holdings, Inc v. Giorgi et al
MEMORANDUM DECISION AND ORDER. IT IS HEREBY ORDERED as follows: 1. Plaintiff's Motion for Default Judgment (Dkt. 25 ) is DENIED. 2. Defendant's Motion to Vacate Default (Dkt. 29 ) is GRANTED. The Entry of Default (Dkt. 23 ) is VACATED. 3 . Plaintiff's Motion to Strike (Dkt. 35 ) is GRANTED. Defendants' Reply Brief (Dkt. 34 ) is HEREBY STRICKEN. 4. The parties are required to jointly file a litigation plan within 30 days. Failure by either party to timely cooperate in good faith in completing the litigation plan may be grounds for dismissal of the action or default against that party without further notice. Signed by Judge Edward J. Lodge. (Litigation Plan due by 2/16/2017.) (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by (km)
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO
Case No. 1:14-cv-00225-EJL-REB
ALTERNATE ENERGY HOLDINGS,
INC., a Nevada Corporation,
JOHN N. GIORGI, an individual; JOHN
N. GIORGI, P.C., a professional
corporation of unknown origin, inclusive,
Before the Court in the above-entitled matter are Plaintiff’s Motion for Default
Judgment and Motion to Strike as well as Defendant’s Motion to Vacate Default. The
matters are fully briefed and/or the time for filing any briefing has passed. The facts and
legal arguments are adequately presented in the briefs and record. Accordingly, in the
interest of avoiding further delay, and because the Court conclusively finds that the
decisional process would not be significantly aided by oral argument, this matter is
decided on the record without oral argument.
FACTUAL AND PROCEDURAL BACKGROUND
The underlying facts giving rise to this action involve Plaintiff’s, Alternate Energy
Holdings, Inc. (“AEHI”), and its former President, Donald Gillespie, attempt to obtain
funding to build a nuclear reactor in Idaho. Defendants John N. Giorgi and his law firm,
John N. Giorgi, P.C., were hired to assist in that endeavor. To secure the needed funding,
AEHI entered into various agreements and financial transactions with Hamilton Guaranty
Capital, LLC (“HGC”) including providing an advance fee of $2,000,500.00 and entering
into a financial services agreement. The law firm of Black & LoBello, LLP (“Black &
LoBello”) and attorney Andras Babero were used as the escrow agents for the advance
fee and an entity named General Equity Building Society (“GEBS”) in Auckland, New
Zealand purportedly set up an account to hold the money raised. Ultimately the deal
unraveled when certain truths about HGC, GEBS, and Mr. Babero were discovered.
Thereafter, AEHI and HGC both claimed the right to the advance payment that
was being held in escrow. AEHI’s attempts to recover the advance payment were
complicated by the filing of an action in this Court by the Securities and Exchange
Commission (“SEC”) against AEHI and Mr. Gillespie. Another action was filed by Black
& LoBello against HGC in the Nevada United States District Court.
On June 5, 2014, AEHI filed this case against Mr. Giorgi alleging claims of
professional malpractice, breach of fiduciary duty, and breach of the covenant of good
faith and fair dealing. (Dkt. 1.) Mr. Giorgi filed an Answer on November 14, 2014. (Dkt.
10.) Thereafter this case was stayed until July 6, 2015 to allow the two related cases to be
resolved. (Dkt. 15, 16.) On April 10, 2015, counsel for Mr. Giorgi requested leave to
withdraw. (Dkt. 17.) In the Court’s May 14, 2015 Order granting leave to withdraw, the
Defendants were advised to file written notice stating how they would be represented in
this matter and that failure to do so would be sufficient grounds for entry of default
against them. (Dkt. 18.)
The Defendants failed to timely file their written notice and, on July 14, 2016,
default was entered against them. (Dkt. 22, 23.) AEHI then filed a Motion for Default
Judgment. (Dkt. 25.) Mr. Giorgi then file a Notice of Appearance, Notice of Motion
Vacating any Default, an opposition to the Motion for Default Judgment, and a sur-reply
brief. (Dkt. 28, 29, 30, 34.) AEHI has responded to these filings and filed its own Motion
to Strike the Defendants sur-reply. (Dkt. 31, 33, 35.) The Court takes up these motions
Motion for Default Judgment
Under Federal Rule of Civil Procedure 55(b)(2), a party can apply to the district
court for entry of judgment by default after the clerk has entered the party's default based
on its failure to plead or otherwise defend itself. Whether to enter default judgment is in
the sole discretion of the court. See Lau Ah Yew v. Dulles, 236 F.2d 415 (9th Cir. 1956).
The Ninth Circuit has identified seven factors for the Court to consider in exercising its
discretion to enter default judgment: (1) potential prejudice to the plaintiff; (2) the merits
of plaintiff's substantive claim; (3) the sufficiency of the Complaint; (4) the amount at
stake in the action; (5) the possibility of a dispute concerning material facts; (6) whether
the default was due to excusable neglect; and (7) the strong policy underlying the Federal
Rules favoring a decision on the merits. Eitel v. McCool, 782 F.2d 1470, 1471–72 (9th
Additionally, where a party is in default, all well-pleaded factual allegations in the
complaint are taken as true, except as to the amount of damages. TeleVideo Sys., Inc. v.
Heidenthal, 826 F.2d 915, 917–18 (9th Cir. 1987). Rule 55(b)(2) states that the Court
“may” conduct a hearing prior to entering a default judgment. The Court is not required
to do so if the record reveals no issue of material fact. Kashin v. Kent, 457 F.3d 1033,
1043 (9th Cir. 2006).
Applying the Eitel factors to this case, the Court finds most of the factors weigh
against entering default judgment. The delay resulting from Defendants failure to timely
appear has caused AEHI some prejudice but that prejudice is outweighed by the other
factors. As to the second and third factors regarding the sufficiency and merits of the
claims, the Court finds there are significant questions as to whether the claims in the
Complaint are viable. In particular, whether the Defendants’ alleged involvement in the
failed attempt to raise funds is sufficient to sustain the malpractice and breach claims
made in the Complaint. The fourth factor – amount at stake – also weighs against default
judgment as AEHI seeks a large judgment in the amount of $630,425.80. (Dkt. 25.) As to
the fifth factor, the parties dispute the material facts in this case; in particular with regard
to Mr. Giorgi’s actions, involvement, and knowledge concerning the transactions in
The sixth factor – excusable neglect – is also disputed by the parties. Mr. Giorgi
contends he never received the Court’s Order directing him to file a notice of appearance.
AEHI disputes this claim. The Court finds this factor to weigh in favor of default
judgment. Despite Defendants’ representations, the Order was served upon Defendants at
their address of record and Defendants made their appearance and filed the instant
motions when faced with the possibility of default judgment being entered.
The final Eitel factor weighs heavily against entering default judgment in this
case. The strong policy favoring deciding cases on their merits applies particularly where,
as here, the parties dispute the substance and merits of the claims.
While this case has lingered on far too long, the Court concludes that on balance
the factors weigh against entering default judgment in this case. For these reasons, the
Court denies AEHI’s Motion for Default Judgment.
Motion to Vacate Entry of Default
“The court may set aside an entry of default for good cause....” Fed. R. Civ. P.
55(c). The “good cause” standard that governs vacating an entry of default under Rule
55(c) is the same standard that governs vacating a default judgment under Rule 60(b). See
TCI Group Life Ins. Plan v. Knoebber, 244 F.3d 691, 696 (9th Cir. 2001). The Ninth
Circuit has recognized three factors to be used when determining whether good cause
exists: 1) whether the defendant’s culpable conduct led to the default; 2) whether the
defendant has a meritorious defense; and 3) whether reopening the default judgment
would prejudice the plaintiff. United States v. Signed Pers. Check No. 730 of Yubran S.
Mesle, 615 F.3d 1085, 1091 (9th Cir. 2010) (citing Franchise Holding II, LLC v.
Huntington Rests. Group, Inc., 375 F.3d 922, 925-26 (9th Cir. 2004)). The factors are
disjunctive, so the Court may deny relief if any of the three factors are met. Am. Ass'n of
Naturopathic Physicians v. Hayhurst, 227 F.3d 1104, 1108 (9th Cir. 2000). The party
seeking to set aside the entry of default carries the burden of demonstrating that relief is
warranted. See Franchise, 375 F.3d at 926. The Court is mindful that “‘judgment by
default is a drastic step appropriate only in extreme circumstances; a case should,
whenever possible be decided on the merits.’” Mesle, 615 F.3d at 1091 (citing Falk, 739
F.2d at 463).
Defendants argue they never received the Orders advising them that they were
required to file a notice of appearance within fourteen days and they assert defenses to
AEHI’s claims. (Dkt. 29, 30.) AEHI disputes the Defendants’ contentions and further
argue it has been prejudiced in this case by the substantial delay in resolving this case.
(Dkt. 33.) For many of the same reasons discussed with regard to AEHI’s Motion for
Default Judgment, the Court finds good cause has been shown to vacate the default
entered in this case.
As to the first factor, the parties dispute whether Defendants’ culpable conduct
caused the default and whether Defendants have a meritorious defense. There are two
lines of cases within the Ninth Circuit regarding the correct standard for evaluating the
“culpable conduct” factor for purposes of setting aside a default. See Rafferty v. Keypoint
Government Solutions, Inc., Case No. 4:16-cv-00210-BLW, 2016 WL 7340281, at *2 (D.
Idaho Dec. 19, 2016). One line of cases holds that “a defendant’s conduct is culpable if
he has received actual or constructive notice of the filing of the action and intentionally
failed to answer.” TCI Group, 244 F.3d at 697 (quoting Alan Neuman Prods., Inc. v.
Albright, 862 F.2d 1388, 1392 (9th Cir. 1988)). A second line of cases, however, suggests
that if a defendant has received actual or constructive notice of an action and fails to
answer, this conduct alone is indicative of culpability. See Franchise Holding II, 375
F.3d at 926.
Under either standard, the Defendants’ conduct is culpable. Defendants’
explanation for not having timely filed their notice of appearance in this case notes first
that this matter had been stayed and Defendants believed it was still on hold and, second,
that Defendants “cannot recall having received anything that would have prompted
[them] to respond in 14 days….” (Dkt. 29.) The record indicates otherwise. All of the
filings made in this case since defense counsel withdrew, including the Order requiring
Defendants to appear within fourteen days, were served upon the Defendants at the same
address which is their current address record. (Dkt. 19, 22, 23, 24.) Again, Defendants
did not respond to these filings until faced with the possibility of default judgment being
entered. The only explanation given is a “mistake of fact.” (Dkt. 29.) The Court finds this
reasoning is insufficient given Mr. Giorgi is an attorney and a named Defendant in this
action who is sophisticated enough to have timely filed his appearance in this matter.
Although the Court recognizes that the Defendants’ culpability is a sufficient basis
upon which to deny the motion, the Court declines to do so here. See In re Hammer, 940
F.2d 524, 526 (9th Cir. 1991) (“[t]his tripartite test is disjunctive,” meaning that the
district court would be free to deny the motion if any of the three factors was true.) The
reasons discussed above with regard to denying the request for entry of default judgment
also apply here to vacating the entry of default. While AEHI will suffer some prejudice
from the delay, there has not been a great deal of litigation done in this matter thus far
and delay, in and of itself, does not overcome the strong policy in favor of deciding cases
on their merits. TCI, 244 F.3d at 696, 700 (citing Falk v. Allen, 739 F.2d 461, 463 (9th
Cir. 1984) (“[t]o be prejudicial, the setting aside of a judgment must result in greater
harm than simply delaying resolution of the case. Rather, ‘the standard is whether
[plaintiff's] ability to pursue his claim will be hindered.’”). Merely being forced to litigate
on the merits cannot be considered prejudicial for purposes of lifting a default judgment.
Id. (“had there been no default, the plaintiff would of course have had to litigate the
merits of the case, incurring the costs of doing so. A default judgment gives the plaintiff
something of a windfall by sparing her from litigating the merits of her claim because of
her opponent's failure to respond; vacating the default judgment merely restores the
parties to an even footing in the litigation.”).
Moreover, the Defendants have set forth meritorious defenses to the claims raised
in the Complaint. The burden on a party seeking to vacate a default judgment is not
extraordinarily heavy. TCI, 244 F.3d at 700 (citing In re Stone, 588 F.2d 1316, 1319 n. 2
(10th Cir. 1978) (explaining that the movant need only demonstrate facts or law showing
the trial court that "a sufficient defense is assertible"). The parties here dispute whether
the factual allegations are sufficient to sustain the claims in addition to disputing the facts
themselves. For all of the reasons stated in this Order, the Court finds that Defendants
have shown good cause exists to set aside the default in this matter. Therefore, the Court
will grant Defendants Motion.
Motion to Strike
AEHI seeks to strike the Defendants’ sur-reply brief as an improper filing under
Local Civil Rule 7.1. (Dkt. 35.) The Court agrees with AEHI and will strike Defendants’
sur-reply brief. As the responding party to AEHI’s Motion for Default Judgment, under
Local Civil Rule 7.1 the Defendants were allowed to file one response brief. See Local
Civ. R. 7.1(c). AEHI may then file a reply brief. The Rule does not allow Defendants to
file a brief in reply to AEHI’s reply brief. At the very least, Defendants should have
asked for leave of the Court to submit their sur-reply. For these reasons, AEHI’s Motion
to Strike is granted and the Court has not considered Defendants’ reply brief. (Dkt. 34.)
NOW THEREFORE IT IS HEREBY ORDERED as follows:
Plaintiff’s Motion for Default Judgment (Dkt. 25) is DENIED.
Defendant’s Motion to Vacate Default (Dkt. 29) is GRANTED. The Entry
of Default (Dkt. 23) is VACATED.
Plaintiff’s Motion to Strike (Dkt. 35) is GRANTED. Defendants’ Reply
Brief (Dkt. 34) is HEREBY STRIKEN.
The parties are required to jointly file a litigation plan within 30 days.
Failure by either party to timely cooperate in good faith in completing
the litigation plan may be grounds for dismissal of the action or default
against that party without further notice. The Court’s litigation plan
form may be found on the District Court’s website, www.id.uscourts.gov,
DATED: January 17, 2017
Edward J. Lodge
United States District Judge
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