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Eulalia C. Vann v. Aurora Loan Services LLC


March 21, 2011


The opinion of the court was delivered by: Lucy H. Koh United States District Court

United States District Court For the Northern District of California


Defendant Aurora Loan Services, LLC moves to set aside the Clerk's entry of default.

Pursuant to Civil Local Rule 7-1(b), the Court concludes that this motion is appropriate for 17 determination without oral argument and vacates the hearing set for March 24, 2011. Having 18 considered the parties' submissions and the relevant law, the Court GRANTS Defendant's motion 19 to set aside the default. Because the Court has determined that the entry of default should be set 20 aside, the Court also DENIES as moot Plaintiff's motion for default judgment and vacates the 21 hearing on default judgment scheduled for April 21, 2011.


Plaintiff initiated this action on October 20, 2010 by filing a Complaint and Petition for Preliminary Injunction with the district court. The Court construed Plaintiff's petition as a request 25 for a temporary restraining order to prevent Defendant from foreclosing on, selling, or evicting Plaintiff from her home. In an order dated November 3, 2010, the Court denied Plaintiff's request 27 for a TRO without prejudice on grounds that Plaintiff had not provided notice to the Defendant and had not made the showing required for issuance of a TRO without notice to the opposing party.

On December 23, 2010, Plaintiff filed a motion requesting that the Clerk of the Court enter default against Defendant. Req. for Entry of Default, ECF No. 8. Plaintiff attached proof of 5 service to the motion, indicating that Defendant was served on November 9, 2010. Proof of Service, attached to Proposed Order re: Mot. for Entry of Default, ECF No. 9. The Clerk entered 7 default on January 4, 2011, and Plaintiff filed a motion for entry of default judgment on January 14, 2011. Approximately one week later, on January 21, 2011, Defendant filed a motion to set 9 aside the entry of default.

See Order Denying Pl.'s Pet. for Prelim. Inj. & TRO, ECF No. 7.

In its motion, Defendant claims that it defaulted due to the untimely referral of the case to outside counsel. Counsel representing Defendant submitted a declaration explaining that his firm received an initial email referral from Defendant's in-house counsel on December 8, 2010. Decl. 13 of Charles Bell in Supp. of Mot. to Set Aside Default ("Bell Decl.") ¶ 4, ECF No. 12-2.

Apparently, however, Defendant's in-house counsel subsequently ceased to work for Defendant 15 and therefore did not follow-up on the referral. Id. Counsel claims that new in-house counsel 16 followed up on December 29, 2010 and provided the pertinent documents to his firm for review.

Id. ¶ 5. Only on January 7, 2011, when counsel reviewed the Court's docket, did he become aware 18 of the default. Id. ¶ 6. Counsel claims that he attempted to contact Plaintiff at that point, but was 19 unable to do so because Plaintiff had not listed a telephone number on the Complaint. Id.

Defendant claims that its delay was not intentional and that the internal situation with in-house 21 counsel has been addressed to ensure future compliance with filing deadlines. Defendant claims, in 22 addition, that Plaintiff previously filed a complaint containing the same allegations in state court, 23 and that the state court sustained Defendant's demurrer in that case without leave to amend.

Finally, Defendant notes that it moved to set aside the default only 17 days after default was 26 entered and asserts that Plaintiff will not suffer prejudice if the default is set aside. Plaintiff 27 opposes Defendant's motion, noting that Defendant was properly served and nonetheless chose to 28 ignore its responsibility to respond.

Defendant also submits a proposed Motion to Dismiss detailing its defenses to Plaintiff's claims.

II.Legal Standard

The Federal Rules provide that a "court may set aside an entry of default for good cause."

Fed. R. Civ. Pro. 55(c). Courts apply the same test to evaluate motions to set aside an entry of 4 default under Rule 55(c) as applied to motions to set aside default judgment under Rule 60(b). Cir. 2010). However, because a Rule 55(c) motion presents no concern about disturbing the 7 finality of a judgment, the test is applied more liberally in cases where default judgment has not 8 been entered. Id. three factors: (1) whether the defendant's culpable conduct led to the default; (2) whether the defendant has a meritorious defense; or (3) whether reopening the default (or in this case, setting aside entry of default) would prejudice the plaintiff. Id. at 1091; TCI Group Life Ins. Plan v. Knoebber, 244 F.3d 691, 696 (9th Cir. 2001). The standard is disjunctive, such that a finding of 14 any one factor may be sufficient reason for the district court to refuse to set aside the default.

2004). The party moving to set aside the entry of default bears the burden of demonstrating that 17 these factors favor setting aside the default. TCI Group, 244 F.3d at 696. "Crucially, however, 'judgment by default is a drastic step appropriate only in extreme circumstances; a case should, 19 whenever possible, be decided on the merits.'" Mesle, 615 F.3d at 1091 (quoting Falk v. Allen, 739 F.2d 461, 463 (9th Cir. 1984)). Accordingly, "where there has been no merits decision, 21 appropriate exercise of district court discretion . . . requires that the finality interest should give 22 way fairly readily, to further the competing interest in reaching the merits of a dispute." TCI Group, 244 F.3d at 696.

for evaluating the "culpable conduct" factor for purposes of setting aside a default. One line of 28 cases holds that "a defendant's conduct is culpable if he has received actual or constructive notice

United States v. Signed Personal Check No. 730 of Yubran S. Mesle, 615 F.3d 1085, 1091 n.1 (9th 6

To determine whether good cause exists to set aside entry of default, the court considers

United States District Court For the Northern District of California

Franchise Holding II, LLC. v. Huntington Restaurants Group, Inc., 375 F.3d 922, 926 (9th Cir. 16


A.Culpable Conduct

There appears to be some disagreement within the Ninth Circuit as to the correct standard 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)). These cases indicate 3 that "[n]eglectful failure to answer as to which the defendant offers a credible, good faith 4 explanation negating any intention to take advantage of the opposing party, interfere with judicial 5 decisionmaking, or otherwise manipulate the legal process" is not intentional and should not 6 necessarily be considered culpable conduct. TCI Group, 244 F.3d at 697-98. Rather, a defendant's 7 conduct should be deemed culpable when "there is no explanation of the default inconsistent with a 8 devious, deliberate, willful, or bad faith failure to respond." Id. at 698.

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.

(9th Cir. 1988). The Ninth Circuit has recently clarified that this standard for culpability is 14 inappropriate where the defaulting party is not represented by counsel or is otherwise not legally 15 sophisticated. Mesle, 615 F.3d 1093. The Ninth Circuit also suggested that the Franchise Holding

II standard is "not the ordinary standard for Rule 55(c) and 60(b) motions" and that such an 17 approach may not be consistent with the Supreme Court's interpretation of "excusable neglect" in F.3d 1092-93. Nonetheless, the Ninth Circuit did not reject Franchise Holding II, but instead 20 limited the application of its more stringent standard. Attempting to reconcile the two lines of 21 cases, the Ninth Circuit stated that "[w]hen considering a legally sophisticated party's culpability in 22 a default, an understanding of the consequences of its actions may be assumed, and with it, 23 intentionality." Id. (emphasis added).

Here, Defendant is represented by counsel and is a frequent party to foreclosure actions similar to that brought by Plaintiff. Thus, Mesle appears to grant this Court discretion to assume 26 culpability based solely on Defendant's failure to answer. In this instance, however, the Court does 27 not find that such an assumption of culpability is warranted. Clearly, Defendant's failure to file a 28 timely answer is unfortunate and must not be repeated. Nonetheless, this case is quite different

See Franchise Holding II, LLC. v. Huntington Restaurants Group, Inc., 375 F.3d 922, 926 (9th Cir.2004); Direct Mail Specialists, Inc. v. Eclat Computerized Technologies, Inc., 840 F.2d 685, 690

United States District Court For the Northern District of California

Pioneer Investment Services Co. v. Brunswick Associates Ltd., 507 U.S. 380 (1993). Mesle, 615 from Franchise Holding II. There, after the plaintiff filed suit and served the defendants, the 2 parties engaged in negotiations to attempt to settle the case. Franchise Holding II, 375 F.3d at 924-3 25. When negotiations broke down, the plaintiff gave the defendant clear notice that it intended to 4 litigate the case. Id. at 925. When the defendant failed to answer, the plaintiff sought entry of 5 default and approximately eight months later obtained a default judgment. Id. Despite repeated 6 notice of the consequences of its failure to litigate, the defendant did not file anything with the 7 district court until the plaintiff began collecting on the default judgment, almost a year after the

Here, in contrast, Defendant did not have any contact with Plaintiff beyond its receipt of the Complaint, and it responded within 17 days after the Clerk entered default. Certainly, Defendant's in-house and outside counsel should have been aware of the consequences of failing to answer in a timely manner. It appears, however, that its failure to answer resulted from mere negligence or 13 inadvertence, rather than an attempt to manipulate the legal process or take advantage of Plaintiff.

See Pioneer Investment, 507 U.S. 380, 394-95 (1993) ("for purposes of Rule 60(b), 'excusable 15 neglect' is understood to encompass situations in which the failure to comply with a filing deadline 16 is attributable to negligence"). Defendant has not attempted to avoid service or otherwise to thwart Plaintiff's attempt to litigate her claims. See Mesle, 615 F.3d at 1094 ("behavior that we have 18 found culpable usually involves conduct by parties that is calculated to help them retain property in 19 their possession, and avoid liability by staying out of court: for instance, when companies act to 20 avoid service in order to thwart their customers' attempts to bring suit against them"). Rather, Defendant appeared promptly after learning of the default and now appears quite willing to litigate 22 the case. Thus, particularly given the more lenient standard applied to Rule 55(c) motions in which 23 default judgment has not been entered, the Court does not believe that Defendant's conduct should 24 be considered culpable. 25 26

Clerk initially entered default.*fn1 Id. at 925-26. 9

United States District Court For the Northern District of California

B.Meritorious Defense

"A defendant seeking to vacate a default judgment must present specific facts that would constitute a defense. But the burden on a party seeking to vacate a default judgment is not 4 extraordinarily heavy." Mesle, 615 F.3d 1094 (quoting TCI Group, 244 F.3d at 700). Rather, the 5 defendant satisfies the meritorious defense requirement if it alleges sufficient facts that, if true, 6 would constitute a defense. Id. Whether or not those allegations are true is not determined by the 7 court upon the motion to set aside the default, but would be the subject of later litigation. Id.

Here, Defendant clearly satisfies the meritorious defense requirement. First, Defendant alleges that Plaintiff previously filed a very similar complaint against it in state court, and that the 10 state court sustained Defendant's demurrer to that complaint without leave to amend. Defendant submitted a copy of the state court order sustaini ng the demurrer with its moving papers. Second,

For the Northern District of California United States District Court

Defendant submitted a proposed motion to dismiss that outlines its defenses to Plaintiff's 13 pleadings. Based on the review of the motion, the Court finds that Defendant has raised colorable 14 arguments that Plaintiff's pleading is deficient as a matter of law and that Defendant, as the 15 servicer of Plaintiff's loan, cannot be held liable for much of the conduct alleged. Defendant also 16 alleges that it followed all applicable laws and the terms of Plaintiff's forbearance agreement when 17 it foreclosed on Plaintiff's home. Such allegations, if true, would constitute a meritorious defense.

Accordingly, this factor supports setting aside the default.

C.Prejudice to Plaintiff

"To be prejudicial, the setting aside of a judgment must result in greater harm than simply delaying resolution of the case" or "being forced to litigate on the merits." TCI Group, 244 F.3d at 701; accord Mesle, 615 F.3d 1094. Rather, "[t]he standard is whether [the plaintiff's] ability to 23 pursue his claim will be hindered." Falk, 739 F.2d at 463. As Defendant points out, its delay of 24 slightly over a month in responding to the Complaint is unlikely to have a prejudicial effect on Plaintiff's ability to pursue her claim. Nor has Plaintiff suggested any reason why this fairly small 26 delay will cause her prejudice. Accordingly, the Court concludes that setting aside the default 27 would not cause Plaintiff any prejudice sufficient to justify denial of Defendant's motion.

D.Setting Aside the Entry of Default is Warranted

Based on the above analysis, the Court concludes that none of the three "good cause" factors justifies refusing to set aside the entry of default. The Ninth Circuit has recently 4 emphasized that "judgment by default is a drastic step appropriate only in extreme circumstances" 5 and instructed district courts not to ignore its "oft stated commitment to deciding cases on the 6 merits whenever possible." Mesle, 615 F.3d at 1091. Considering this instruction and the more 7 liberal standard applied to Rule 55(c) motions, the Court finds that Defendant's motion to set aside 8 the entry of default must be granted. However, Defendant is advised that the Court expects it to 9 strictly comply with all further deadlines, orders, and rules applicable to this action.


For the Northern District of California

For the foregoing reasons, the Court GRANTS Defendant's motion to set aside the entry of default. Because Defendant is no longer in default, the Court DENIES as moot Plaintiff's motion 13 for default judgment. The hearings previously set for March 24, 2011 and April 21, 2011 are 14 hereby VACATED. Defendant shall file and serve its proposed motion to dismiss no later 15 than Wednesday, March 23, 2011. 16


United States District Judge

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