Rezapour et al v. Earthlog Equity Group, Inc. et al

Filing 19

ORDER granting 8 Motion to Set Aside Entry of Default and Default Judgment. Signed by District Judge Richard Voorhees on 10/1/2013. (cbb)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF NORTH CAROLINA
STATESVILLE DIVISION
CIVIL CASE NO. 5:12CV105-RLV
KAMRON REZAPOUR and TINA
REZAPOUR,

)
)
)
Plaintiffs,
)
)
v.
)
)
EARTHLOG EQUITY GROUP,
)
INC., and ROBERT E. ARMS
)
)
Defendants.
)
____________________________________)

ORDER

THIS MATTER is before the Court upon Defendants’ Motion to Set Aside Entry of
Default and Default Judgment with respect to Defendant Earthlog Equity Group, Inc.
(“Earthlog”), filed September 7, 2012. (Doc. 8).
This civil action was commenced by Plaintiffs Kamron and Tina Rezapour (“the
Rezapours”) in the Superior Court of Watauga County, North Carolina. Default was entered and
adjudged against Defendant Earthlog in the sum of $201,910 by the state court on July 17, 2012.
Defendant Robert E. Arms (“Arms”) removed the matter to this federal court on July 20, 2012.
The undersigned recently addressed the Rule 12(b)(6) Motion filed on behalf of
Defendant Arms. The Court determined that the Rezapours’s causes of action alleging breach of
contract (which encompasses the alleged breach of the implied covenant of good faith and fair
dealing), unfair and deceptive trade practices in violation of N.C. GEN. STAT. § 75-1.1, and
alternative claims alleging unjust enrichment and piercing the corporate veil sufficiently alleged

a plausible claim and, therefore, may proceed to discovery.1 This matter is now ripe for
disposition.
Earthlog’s motion is governed by Rule 60 of the Federal Rules of Civil Procedure and
informed by Rule 55(c).2 See Augusta Fiberglass Coatings, Inc. v. Fodor Contracting Corp.,
843 F.2d 808, 810 (4th Cir. 1988) (“Rule 60(b) must be read with due regard for Rule 55(c) . . .
.”). Rule 60 reads in pertinent part:
“On motion and just terms, the Court may relieve a party or its legal
representative from a final judgment . . . for the following reasons: (1) mistake,
inadvertence, surprise, or excusable neglect. . . .”
Fed. R. Civ. P. 60(b)(1). For purposes of Rule 60, “mistake” is defined as “some unintentional
act, omission, or error arising from ignorance, surprise, imposition, or misplaced confidence.”
47 AM. JUR. 2D Judgments § 687 (2013) (internal citation omitted).
The Fourth Circuit has “repeatedly expressed a strong preference that, as a general
matter, defaults be avoided and that claims and defenses be disposed of on their merits.”
Colleton Prepatory Academy, Inc. v. Hoover Universal, Inc., 616 F.3d 413, 417 (4th Cir. 2010)
(applying Rule 55(c)) (citing Tazco, Inc. v. Director, Office of Workers Compensation Program,
1

A thorough description of the underlying facts alleged, as well as the claims and defenses, may
be found in the Court’s Memorandum and Order issued July 1, 2013. (Doc. 15). For purposes of the
Court’s analysis and decision, both Defendants were treated as moving parties notwithstanding the
previous default judgment against Earthlog.
2

Rule 55(c), which applies to motions to set aside entry of default, recognizes application of
Rule 60 after default judgment. Rule 55(c) of the Federal Rules of Civil Procedure states:
“The court may set aside an entry of default for good cause, and it may set aside a
default judgment under Rule 60(b).”
Fed. R. Civ. P. 55(c) (2009) (emphasis added). If Rule 60(b) is satisfied, the good cause requirement
under Rule 55(c) will also be met. See Vick v. Wong, 263 F.R.D. 325, 330 (E.D.Va. 2009). On both
accounts, the pertinent North Carolina Rules of Civil Procedure mirror the federal rules discussed herein.
See N.C. R. Civ. P. §§ 1A-1, 1A-155 and 1A-160.

2

U.S. Dep't of Labor, 895 F.2d 949, 950 (4th Cir.1990) (“The law disfavors default judgments as
a general matter.”); Consolidated Masonry & Fireproofing, 383 F.2d at 251 (“Generally a
default should be set aside where the moving party acts with reasonable promptness and alleges a
meritorious defense.”)). “Any doubts about whether relief should be granted should be resolved
in favor of setting aside the default so that the case may be heard on the merits.” Tolson v.
Hodge, 411 F.2d 123, 130 (4th Cir. 1969).
In this case, Defendants assert that default judgment against Earthlog should be set aside
in that it was entered due to mistake or inadvertence on the part of Earthlog (and / or its
registered agent), that this motion was filed within thirty days of entry of default, and that
Earthlog has a meritorious defense under the contract asserted by Plaintiffs. The Rezapours
oppose Earthlog’s motion.
Applying the Rule 60 criteria liberally, Lolatchy v. Arthur Murray, Inc., Defendant
Earthlog’s default was the result of mistake, inadvertence, or excusable neglect. 816 F.2d 951,
954 (4th Cir. 1987) (citing the onerous consequences of defaults and default judgments as
rationale for construing Rule 60 liberally). According to Plaintiffs’ counsel, service was sent
June 16, 2012. (Pls.’ Exh. A / Affidavit of Service, 11). LegalZoom3 notified Arms about the
lawsuit via email on June 25, 2012. (Def.’s Exh. 3 / Thomas Aff., ¶¶ 5, 6). A hard copy of the
summons and complaint were received by Arms the next day, on June 26, 2012. (Def.’s Exh. 4).
3

The Court takes judicial notice that LegalZoom, Inc. (“LegalZoom”) is an online legal portal
that offers automated software options for individuals who want to prepare their own legal documents or
gain a general understanding of the law in a given area. LegalZoom’s “Terms of Use” Disclaimer
describes the parameters of LegalZoom’s capabilities  “LegalZoom and its Services are not substitutes
for the advice of an attorney.”. See http://www.legalzoom.com/legal/general-terms/terms-of-use. Arms
contracted with LegalZoom to provide registered agent service in the State of Tennessee for Earthlog.
(Thomas Aff., ¶ 3). Unbeknownst to Arms, LegalZoom then contracted with its subsidiary, United States
Corporation Agents, Inc. (“USCA”), which officially designated itself as the registered agent in
Tennessee on Earthlog’s behalf. (Thomas Aff., ¶ 3).
3

There was no date stamped on the certified mail receipt to indicate when USCA, Earthlog’s
registered agent, actually received service. (Def.’s Exh. 2). In addition, Plaintiffs did not
initially provide a copy of the affidavit of service to either Earthlog or Arms.4 According to
Defendants, because Plaintiffs did not provide a certification of service reflecting that USCA
received service on June 15 (or 16) rather than June 25, Earthlog operated under the impression
that it had ten more days to respond than the rules allowed.5 (Def.’s Mem. Supp., 67 / Def.’s
Exh. 2). When one accepts Defendants’ representation as factually correct, Earthlog was
mistaken in believing that the trigger for calculating its response period was June 25, 2013.
There is nothing in the record to suggest that Earthlog or Arms intentionally failed to answer.
To the extent Earthlog was neglectful in not seeking to verify or confirm the date of
service and trigger for its response period calculation, where the party itself bears no personal
responsibility for the error, the neglect of a party’s attorney may be deemed excusable. See e.g.,
Augusta Fiberglass Coatings, Inc., 843 F.2d at 811 (“While Moradi does not mention “excusable
neglect” or any of the other grounds for relief under Rule 60(b), its import is that, when the party
is blameless, his attorney’s negligence qualifies as a “mistake” or as “excusable neglect” under
Rule 60(b)(1).”) (citing United States v. Moradi, 673 F.2d 725, 728 (4th Cir.1982)). The
undersigned applies the same rationale under these facts since LegalZoom was responsible for
providing the registered agent service and for contracting with USCA. 6

4

Defendants do not state whether the affidavit of service was provided to USCA. Reportedly,
Plaintiffs provided an affidavit of service July 10, 2012  after the response period had expired.
5

Earthlog’s ability to formulate a response between the time Earthlog received notice of the
lawsuit and the response deadline is not the issue. Rather, Earthlog did not realize its response was due.
6

While the culpability of a party, or a party’s attorney, is a factor in the Rule 55(c) and Rule
60(b) analyses, the question whether Earthlog or its registered agent shoulders the greater share of the
blame for the error here is not determinative.
4

In addition, the fact that Earthlog did not delay in seeking relief under the federal rules
weighs in favor of granting relief. Earthlog filed the instant motion within thirty days of
discovering the default judgment. (Def.’s Mem. Supp., 4 n. 2). Arms avers that he was unaware
of the default judgment against Earthlog issued by the state court until after removal and after
Plaintiffs filed the Amended Complaint.7 (Def.’s Exh. 4 / Arms Aff., ¶ 7). Earthlog represents
that once it learned of the default judgment, it immediately undertook an investigation to discern
the reason for the delayed notice following service upon its registered agent.
The Court, in its discretion, also finds that under the liberal Rule 60(b) standard, Earthlog
asserts a meritorious defense to at least one aspect of Plaintiffs’ breach of contract claim. A
meritorious defense exists if a litigant proffers evidence that, “if believed, would permit either
the court or the jury to find for the defaulting party.” Moradi, 673 F.2d at 727. At this stage,
Earthlog’s burden to show a meritorious defense is relatively slight. See e.g., Consol. Masonry
& Fireproofing, Inc. v. Wagman Constr. Corp., 383 F.2d 249, 251 (4th Cir. 1967) (noting that
meritorious defense requirement is minimal). In support of its motion, Earthlog points to the
provision in the underlying contract that provides for payment of additional funds, and a
potential increase in the contract price in the event of deviations or additions from what was
previously agreed upon. (Def.’s Mem. Supp., 5). It is undisputed that after execution of the
contract, the parties realized that the original proposed floor plans would have to be reversed.
The parties also discussed the addition of an escape hatch. Defendant Arms requested an
additional sum of money to cover the addition of the escape hatch to the plans and Plaintiff
refused. While the contract terms do not provide for a windfall to either party such that Earthlog
7

Plaintiffs challenge the veracity of Arms’s representation. (Pls.’ Mem. Opp’n, 9). In light of
the fact that default judgment issued just three days prior to removal, it’s conceivable that Arms missed it
or that the state court record was not up-to-date on July 20, 2012.
5

might expect to retain the entire deposit even though it never even broke ground on construction,
the contract ensured that Defendants would not be required to provide a complete refund of the
down payment. The plain language of the contract only requires a ten percent refund of the
$200,000 down payment in the event the Owners (Rezapours) decided to void the contract.
(Agreement, 3). The contract states that Earthlog (as the “Basic Shell Supplier”) is entitled to
retain the balance of the down payment to cover any cost incurred and lost business
opportunities. (Agreement, 4). Plaintiffs’ ability to obtain any portion of the refund is also
dependent upon the appropriate written notice being provided to Defendants.8
Finally, the Court is not persuaded that setting aside default judgment would result in
significant or unfair prejudice to Plaintiffs. Prejudice to the non-defaulting party may be
measured by considering whether any attendant delay:
(1) made it impossible for the non-defaulting party to present some of its
evidence; (2) made it more difficult for the non-defaulting party to proceed with
trial; (3) hampered the non-defaulting party's ability to complete discovery; and
(4) was used by the defaulting party to collude or commit a fraud.
Vick v. Wong, 263 F.R.D. 325, 330 (E.D. Va. 2009) (internal citation omitted). The nondefaulting party’s ability to present evidence and proceed to trial is the most important
consideration. Vick, 263 F.R.D. at 330 (internal citations omitted). Delay and inconvenience
alone are insufficient to cause prejudice. Id. Specifically, the inconvenience of having to
continue with litigation, versus enjoying the benefit of default, does not amount to prejudice. Id.
8

Under the Agreement:

30 Business Days before construction date a written notice, by Certified mail must be
given to obtain this refund. All Materials supplied by the “Basic Shell Supplier” beyond
the necessary materials to fulfill this contract, including any cost over runs will be C.O.D.
at the job site.
(Agreement, 4).
6

Here, Plaintiffs claim they will suffer prejudice if they are forced to amend their
Complaint again. Plaintiffs suggest that the time and money spent litigating the Rule 12 motion
will have been lost. That is not so. Plaintiffs’ factual allegations have now been tested pursuant
to Rule 12(b)(6), including Plaintiffs’ alternative claim seeking to pierce the corporate veil of
Earthlog.9 Inclusion of Earthlog as a named Defendant (again) does not require the Court to
revisit its earlier ruling. Moreover, the posture of the case weighs in favor of setting aside
default judgment. No discovery has been undertaken since the Court only recently issued its
Rule 12(b)(6) decision.
For all of these reasons, Earthlog’s motion will be allowed.
IT IS HEREBY ORDERED that Defendants’ Motion to Set Aside Entry of Default and
Default Judgment is GRANTED.

Signed: October 1, 2013

9

Regardless of Earthlog’s status as a party, Earthlog will be subject to the discovery requests of

Plaintiffs.
7