ALPS Property & Casualty Insurance Company v. Fidlow et al

Filing 47

MEMORANDUM OPINION. Signed by District Judge Henry E. Hudson on 2/21/2017. (sbea, )

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF VIRGINIA
Richmond Division

ALPS PROPERTY & CASUALTY

INSURANCE COMPANY,

Plaintiff,
Civil Action No. 3:16CV276-HEH

V.

BENNETT J. FIDLOW, et al,
Defendants.
MEMORANDUM OPINION

(Defendant's Motions to Quash Service of Process and
Set Aside the Clerk's Entry of Default)

This case involves an amalgam of interrelated lawsuits evolving from an

unsuccessful attempt to purchase the rights to a film entitled "Birth ofthe Dragon."' The
wake of this failed venture resulted in two separate lawsuits: one filed in the Superior

Court for the City of Los Angeles, California, and the other in the United States District
Court for the Eastern District of Virginia. This controversy is presently before the Court
on Defendant Kylin Network (Beijing) Movie & Culture Media Co., Ltd.'s ("Kylin")

Motions filed pursuant to Federal Rule of Civil Procedure 12(b)(5) to Quash Service of
Process (ECF No. 34) and to Set Aside the Clerk's Entry of Default under Federal Rule
of Civil Procedure 55(c) (ECF No. 37).

'Birth of the Dragon" is a film about martial arts master Bruce Lee.

Following the submission of supporting memoranda with accompanying affidavits
by both Plaintiff ALPS Property & Casualty Insurance Company ("ALPS") and Kylin,
the Court heard oral argument on February 6, 2017.
The central issue is whether Kylin was properly served by ALPS's process server

in Los Angeles, California on August 10, 2016. Kylin contends that service was effected
on the wrong individual and is thus invalid. ALPS counters that its process server

verified the identity of the individual served as James Pang ("Pang"), Chief Executive

Officer of Kylin. Alternatively, ALPS maintains that even if Pang was not the individual
served, service was nonetheless effective on Kylin.

The lawsuit that was originally filed in Los Angeles alleged legal malpractice on

the part of BennettJ. Fidlow ("Fidlow") in the negotiation of Kylin's acquisition of the
rights to "Birth of the Dragon." Kylin maintains that Fidlow breached his professional,

fiduciary, and ethical duties during the negotiation process by causing Kylinto enter into
an agreement with an entity that apparently owned no legal rights to the fihn. As a result
of Fidlow's allegedly inept representation, as part of the deal, Kylin paid $1 million to the
incorrectentity, as well as an additional $1 million to an agent facilitating the ineffectual
transaction. According to Kylin, Fidlow "engaged in further misconduct by placing a
false and unauthorized lien on the motion picture at issue in Kylin's name, and then

attempting to extort Kylin's litigation counsel after Kylin demanded that the lien be
removed." (Kylin's Mem. Support Mot. Quash 2, ECF No. 35.)

^Defendants Bennett J. Fidlow and the law firm Schroeder Davis—^the successor entity to the
firm Schroeder Fidlow, with which Fidlow was previously associated—^participated in oral
argument through counsel.

In the lawsuit filed in this Court, ALPS seeks declaratory relief as to coverage on

professional liability policies issued to Fidlow and his former law firm Schroder Davis.
The dispute at issue involves the complaint in the declaratory judgment action.
As mentioned above, the service of process controversy occurred on August 10,

2016. However, on May 20, 2016, APLS sent a written request to Pang and Leo Shi

Young ("Young"), Chief Executive Officer ofKylin Pictures International, Inc.^ ("Kylin
Pictures"), requesting them to waive service of process in the pending declaratory

judgment case in Virginia. (Pl.'s Br. Opp'n Ex. 1, ECF No. 38-1.) According to ALPS,

a copy of that Request for Waiver was also sent to Kylin's counsel, Michael E. Weinstein
("Weinstein"). {Id.)

In an attempt to resolve the malpractice action filed against Fidlow, the parties
agreed to participate in mediation in Los Angeles on August 10, 2016. Prior to

scheduling the mediation, Fidlow's attorney in the legal malpractice action confirmed

with Kylin's counsel that Pang would be attending the mediation in person."^ (Pl.'s Br.
Opp'n Ex. 4 at H6, ECF No. 38-4.) Also attending the mediation was Young of Kylin
Pictures, and Kylin's two California attorneys Weinstein and David Jonelis ("Jonelis"),
along with a representative of ALPS, Fidlow's insurance carrier. {Id. at fl 10-12.)
Also present at the mediation site was Marco Toscano ("Toscano"), a private
process server affiliated with Santoni Investigations. According to Toscano's

declaration, he was present on August 10, 2016, at the location where he had been

^Kylin Pictures International, Inc. is a California corporation.
^Kylin contends that its participation inthe mediation was conditioned onPlaintiffs agreement
to not serve Kylin at the mediation session.

informed that the mediation would take place. (PL's Br. Opp'n Ex. 7, ECF No. 38-7.)
Toscano had a picture of an individual identified to him as Pang. At 9:00 a.m., he
observed an elevator stop and four individuals alight. {Id.) Three of the individuals

emerging from the elevator did not resemble the photograph he had been given of Pang.
The fourth person "looked like" Pang. {Id.) According to his declaration, Toscano

approached the individual resembling Pang and asked if he was in fact James Pang. {Id.)
The person responded affirmatively. {Id.) Toscano then advised the individual that he
had a summons and complaint for him. The individual Toscano identified as Pang
thanked him and "stretched his hand to receive the Summons and Complaint and walked

away. He went to talk to the attorneys who were checking in with the receptionist." {Id.)
Toscano filed his return of service with the United States District Court on September 15,

2016, reflecting personal service on Pang Hong (aka James Pang) on August 10,2016, at
9:00 a.m. (Return of Service, ECF No. 22.) The return also reflects that Toscano is a

registered process servicer in good standing in the judicial circuit in which the process
was served.

Later in the day on August 10, 2016, Weinstein sent an email to Timothy S. Beard
("Beard"), counsel for APLS, conveying the following message:

While I was attending a mediation today, a process server appeared and
handed a stack of documents to Mr. Leo Shi Young, who was attending the
mediation with me. The documents appear to be a summons and complaint
against Kylin Network (Bejing) Movie & Culture Company, LTD, among
others. I have no idea why you would attempt to serve Mr. Young with this
lawsuit as Mr. Young is not an officer or employee of this company. Nor is
he authorized in any way to accept service on behalf of this entity. In the
future, please direct your efforts elsewhere."

(PL'S Br. Opp'n Ex. 8, ECF No. 38-8.)

The following day, Beard responded: "[w]e have reviewed the facts and

circumstances surrounding the service of process yesterday at 1900 Avenue of the Stars,
Los Angeles, CA, and our conclusion is that service was valid and effective under Fed. R.
Civ. P. 4." {Id.)

On September 22, 2016, the SuperiorCourt of the State of Californiastayed

proceedings in the malpractice action against Fidlow until January 18,2017, to enable the
dispute to be resolved in Richmond, Virginia, in accordance with the forum selection
clause of Fidlow's retainer agreement with Kylin. (Stipulation of Facts Ex. 2, ECF No.

29-2.) Fidlow and his former law firm are situated in Richmond.
On November 28, 2016, ALPS filed with the Clerk of this Court a Request for

Entry of Default against Kylin. (ECF No. 30.) The records of this Court reflecting no
answer or responsive pleading being filed, the Clerk entered the default on December 1,
2016. (ECF No. 31.)

Based on their contention that the process server delivered the summons and

complaintin this case to the wrong individual, Kylin now moves the Court to quash
service and set aside the clerk's entry of default, pursuant to Fed. R. Civ. P. 12(b)(5) and
55(c). Although the Fourth Circuit has never directly addressed the issue, most

reviewing circuits have adopted the general principle that a plaintiff bears the initial
burden of establishing the validity of the service. See Freedom Watch, Inc. v. Org. ofthe
Petroleum Exporting Countries, 766 F.3d 74, 78 (D.C. Cir. 2014); Valquez-Robles v.
CommoLoCo, Inc., 757F.3dl,4(lst Cir. 2014); Grand Entm't Group, Ltd. v. Star Media

Sales, Inc., 988 F.2d 476,488 (3d Cir. 1993); Carimi v. Royal Caribbean Cruise Line,

959 F.2d 1344, 1346 (5th Cir. 1992); 4A Charles Alan Wright, Arthur R. Miller and
Adam N. Steinman, Federal Practice and Procedure § 1083 (4th ed. 2015).

However, Circuit Courts have also consistently found that where a plaintiff files a

signed return of service, the burden of proof shifts to the defendant. Therefore, "[a]

signed return of service constitutes prima facie evidence of valid service 'which can be
overcome only by strong and convincing evidence.'" O'Brien v. RJ. O'Brien & Assocs.,
Inc., 998 F.2d 1394, 1398 (7th Cir. 1993);

also S.E.C. v. Internet Sols, for Bus., Inc.,

509 F.3d 1161, 1165-66 (9th Cir. 2007) ("[A] defendant moving to vacate a default

judgment based on improper service of process, where the defendant had actual notice of
the original proceeding but delayed in bringing the motion until after entry of default

judgment, bears the burden of proving that service did not occur."); accordBurda Media,
Inc. V. Viertel, 417 F.3d 292, 299 (2d Cir. 2005); Bally Exp. Corp. v. Balicar, Ltd, 804
F.2d398, 401 (7th Cir. 1986).

Bothparties agree that service of process on a foreign corporation is governed by
Fed. R. Civ. P. 4(h). The rule prescribes several means by which such service may be
effected. These include complying with "internationally agreed means of service ...
such as those authorized by the Hague Convention," Fed R. Civ. P. 4(f)(1), or by
"delivering a copy of the summons and of the complaint to an officer, a managing or
general agent, or any other agent authorized by appointment or by law to receive service
of process." Fed. R. Civ. P. 4(h)(1)(B). The Federal Rules of Civil Procedure also
permit service by "following state law for serving a summons in an action brought in
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courts of general jurisdiction in the state where the district court is located or where
service is made." Fed. R. Civ. P. 4(e)(1).

The law of the state in which service was made—California—^provides that aside
from the person designated as agent for service of process by a corporation, service can
be made "[t]o the president, chief executive officer, or other head of the corporation, a
vice president, a secretary or assistant secretary, a treasurer or assistant treasurer, a

controller or chief financial officer, a general manager, or a person authorized by the

corporation to receive service of process." Cal. Civ. Proc. Code § 416.10(b). California
law also allows the service of process on a foreign corporation transacting business in

Californiaby personal service on "any officer of the corporation or its general manager in
the state." Cal. Corp. Code § 2110.

Because the service of process in this case was adequate under the law of

California and consistent with the requirements of Fed. R. Civ. P. 4(h)(1)(B), an analysis

under the analogous law of Virginia is unnecessary. Despite Kylin's tenacious assertions
to the contrary, the circumstantial evidence preponderates in Plaintiffs favor, irrespective
of who was physically served with the complaint and summons.

It was certainly more than a coincidence that Young and Pang stepped off the
elevator together on August 10, 2016, in route to the mediation with the attorneys for
Kylin at their side. It is undisputed that they were attending a mediation to resolve a
lawsuit filed by Kylin. Although the record is admittedly inexact as to the formal
relationship between Kylin and Kylin Pictures, the records of the California Secretary of
State reflect that Young and Pang share a common business address: 1801 Century Park,
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E, Suite 1090, Los Angeles, California. The records, filed October 20, 2016, further

reveal that Pang is the Chief Executive Officer of Kylin Pictures Inc., and Young serves

as its Secretary, Chief Financial Officer, and member of the Board of Directors. (PL's

Br. Opp'n Ex. 3, ECF No. 38-3.)'
Although there is a dispute between the parties as to whether the process server

served Pang or Young, it is clear that Weinstein was aware that one of them had been
served with a summons and complaintagainst Kylin. (PL's Br. Opp'n Ex. 8.) ALPS has

therefore demonstrated by a preponderance of the evidence that Kylin was aware that
they had been served by legal process. Moreover, based on the response of ALPS's
counsel to Weinstein's email of August 10,2106, disclaiming proper service of his client,
ALPS considered service proper and the underlying lawsuit to be viable. {Id.) A

reasonable attorney at that point in time would have taken steps to gather information and
take responsive action. SeeArmco, Inc. v. Penrod-Stauffer Bldg. Sys., Inc., 733 F.2d
1087, 1089 (4th Cir. 1984) (When there is actual notice, every technical violation of the
rule or failure of strict compliance may not invalidate the service of process.).
Furthermore, California courts have construed the term "general manager" in
California Civil Procedure Code § 416.10 quite broadly. "General manger" can even

include the American subsidiary of a foreign company, despite the fact that they are

^Inanearlier filing onJanuary 20, 2016, with the California Secretary of State, a Statement of
Information revealed that Pang and Young were on record sharing office space at 842 Corriente
Point Drive, Redwood City, California. Again, the Statement of Information listed Pang as the
Chief Executive Officer of Kylin Pictures, Inc., and Young as its Secretary, Chief Financial
Officer, and member of the Board of Directors. (PL's Br. Opp'n Ex. 2, ECF No. 38-2.) Pang
and Young are also both officers of Kylin Pictures International, Inc., another California
corporation. {See PL's Br. Opp'n Ex. 5, ECF No. 38-5.)
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separate legal entities. See Falco v. Nissan N. Am., Inc., 987 F. Supp. 2d. 1071, 1075-76
(C.D. Cal. 2013); Yamaha Motor Co., Ltd. v. Super. Ct. ofOrange Cty., 94 Cal. Rptr. 3d

494, 498-501 (Cal. App. 2009) (citing Cosper v. Smith & Wesson Arms Co., 346 P.2d
409 (1959)). The Supreme Court of California has determined that its service of process
statutes are satisfied if service is effected on an agent "of sufficient character and rank to

make it reasonably certain that the defendant will be appraised of the service made."

Cosper, 346 P.2d at 413 (internal quotation marks and citations omitted). Of course,
whether service of the agent can impute service on Kylin must be determined by the
particular facts of this individual case. Id.

Whether a parent company can be properly served through its subsidiary tends to
turn on two cardinal factors. First, whether the "parent corporation was foreign and

otherwise not readily available for service within California." UnitedStates ex rel. Miller
V. Pub. WarehousingCo. KSC, 636 F. App'x 947, 949 (9th Cir. 2016) (unpublished

opinion). Second, the reviewing court considers whether there is a "sufficiently close
connection" between the parent and subsidiary, such that the subsidiary is the parent's
"general manager" in California. Id.

Aside from the presence of Kylin Pictures, Inc., there is no other evidence that
Kylin maintains corporate offices in California. There is no evidence in the record
indicating the frequency of Pang's presence in California, or his availability for service
aside from the mediation on August 10, 2016. As discussed above, filings with the
California Secretary of State reveal that Pang and Young have a close business

relationship.^ Therefore, even if Young was inadvertently served with process, the record
at hand is sufficient to impute service on Kylin/
Alternatively, Kylin maintains that if its Motion to Quash Service of Process is
denied, the Court should find that there is good cause to set aside the Clerk of the Court's

entry of Default. Federal Rule of Civil Procedure 55(c) enables a court to set aside an
entry of default for good cause. Kylin's Motion to Set Aside the Default entered on
December 1, 2016, is primarily premised on its contention that valid service of process is

an indispensable prerequisite to the entry of default judgment. Kylin correctly argues that
absent effective service of process, a court does not acquire personal jurisdiction over a

party and consequently, any defaultjudgment resulting is void. However, for the reasons
discussed above, their pivotal argument fails.

Kylin next turns to the equitable considerations governing the Court's exercise of
discretion in ruling on Rule 55(c) motions. Kylin is correct that this Court's analysis

begins with the "strong preference that, as a general matter, defaults be avoided and that
claims and defenses be disposed of on their merits." Colleton Preparatory Acad., Inc. v.
Hoover Universal, Inc., 616 F.3d 413,417 (4th Cir. 2010). Unquestionably, as a general

principle, the law disfavors defaultjudgments. Tazco, Inc. v. Dir., Office of Workers
Comp. Program, U.S. Dep't ofLabor, 895 F.2d 949, 950 (4th Cir. 1990).

^Inhis sworn declaration, Byron S. Hollis ("Hollis"), California counsel for Fidlow, states that
he was present during the mediation session on August 10,2016. Hollis further indicated that
"[t]he mediator advised me that Mr. Pang was in attendance, along with Leo Shi Young, whom
the mediator [the Hon. Robert W. Thomas] described as head of Kylin's U.S. operations." (PL's
Br. Opp'n Ex. 4, at K11, ECF No. 38-4.)

^Inhis declaration. Young states that before the mediation, "a process server showed up and
handed a stack of papers to me." (Kylin's Reply Br. Ex. 1, ECF No. 41-1.)
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In reviewing motions to set aside default, the United States Court of Appeals for
the Fourth Circuit has established an analytical framework founded on a number of

equitable factors. In conducting such analysis, a district court "should consider whether
the moving party has a meritorious defense, whether it acts with reasonable promptness,

the personal responsibility of the defaulting party, the prejudice to the party, whether
there is a history of dilatory action, and the availability of sanctions less drastic." Payne

ex rel. Estate ofCalzada v. Brake, 439 F.3d 198,204 (4th Cir. 2006); see also Colleton
Preparatory Acad., 616 F.3d at 417-20.

This lawsuit seeks declaratory judgment defining coverage in a policy issued by
ALPS to Fidlow, and a law firm with which he was previously associated. That law firm,
Schroder Fidlow, now known as Schroder Davis, is also a party to this action pertaining

to coverage for potential claims arising from Fidlow's representation of Kylin in its

attempt to acquire rights to the film "Birth of the Dragon." Kylin is an alleged third party
beneficiary as a result of any indenmification rights it may have under the insurance
policy issued by APLS. Kylin is therefore alleged to be a necessary party to any
coverage action. See Va. Code § 55-22.

Distilled to its essence, ALPS seeks a declaration of no coverage based on its
contention that Fidlow was aware of a potential claim by Kylin when he submitted an
application for the insurance policy in controversy. Kylin rejoins that Fidlow was

unaware at the time of application that he would be subject to a malpractice action as a
result of his alleged mishandling of the movie rights acquisition. Therefore, Kylin
contends, "Fidlow was under no duty to 'disclose' a malpractice claim which didn't
11

exist." (Kylin's Reply Br. 6, ECF No. 41.) Consequently, Kylin maintains that there is a
material issue of fact in dispute as to whether it has a meritorious defense. Kylin

emphasizes its belief that it is entitled to a hearing on the merits to resolve the dispute.
However, Kylin has proffered no evidence demonstrating a likelihood of prevailing on
the merits based on its nuanced parsing of the policy language.

Notwithstanding Kylin's claim of a meritorious defense, ALPS highlights two of
the Payne factors which it contends should sway the Court's exercise of discretion.
These are Kylin's failure to act with reasonable promptness and prejudice to the other

parties. With respect to prejudice, counsel for both Fidlow and the Schroder Davis law
firm advised the Court that they have reached a settlement agreement with ALPS.

Central to the agreement is the concession by Fidlow and Schroder Davis that there is no
coverage under the policy at issue. Counsel for both Fidlow and Schroder Davis
represented to the Court during oral argument that their agreement was predicated on the
entry of default against Kylin, which presumably brought the litigation to a close. The
attorneys further represented that if the entry of default is set aside by the Court, it would
have the effect of unwinding an agreement which required approximately one month to
negotiate. Furthermore, both Fidlow and Schroder Davis would incur additional
litigation expenses.

Secondly, the attorneys for ALPS, Fidlow, and Schroder Davis stress the lack of
diligence on the part of Kylin and its attorney, Michael Weinstein, in neglecting to make
reasonable inquiry about the summons and complaint served on August 10,2016. In
their view, it was a calculated strategic move rather than an act of inadvertence or
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mistake. Weinstein's email of August 10, 2016, acknowledged that he, as Kylin's

counsel, was aware that process had been served on either Pang or Young, both of whom
were affiliated with the constellation of Kylin companies. Even if process was served on

Young rather than Pang, responsibility for Kylin's inaction and consequent default

apparently lies squarely with Kylin and Weinstein.^ They apparently chose to hold their
cards pending resolution of the California litigation. Furthermore, given the current
posture of the case, where all other parties have settled their differences, it does not

appear that any available sanctions could place this case on a reasonable course of
unburdensome resolution.

In the final analysis, the four most directly relevant Payne factors weigh against

setting aside the Clerk's entry of default in this case. Mindful of the Fourth Circuit's well
enshrined "policy in favor of merits-based adjudication" and disfavor of default

judgment, the immediate case differs in several respects from the typical case in which
relief from the entry of default is warranted. ColletonPreparatory Acad., 616 F.3d at
418.

Kylin has not convinced the Court that it has a plausible argument supporting

insurance coverage, particularly when the other more directly affected parties—Fidlow
and Schroder Davis—have conceded otherwise. Furthermore, this is not the commonly

encountered case where a party or their attorney served with process is simply

This is not to imply that Kylin's current counsel, Stephen P. Pierce and J. Chapman Petersen,
are in any way responsible for Kylin's failure to timely respond to the complaint.
13

inadvertent or inattentive. Their inaction was a conscious choice, arguably a risky
business decision. This is the rare disfavored case where the default must stand.

Based on the foregoing analysis, Kylin's Motions to Quash Service of Process and
to Set Aside the Clerk's Entry of Default will be denied.

An appropriate Order will accompany this Memorandum Opinion.

/s/

Henry E. Hudson
United States District Judge

Date: fA.^l,2o/7
Richmond, VA

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