UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA
June 13, 2011
KRIS KASZUBA, ET AL.,
FIDELITY NATIONAL DEFAULT SERVICES, ET AL.,
The opinion of the court was delivered by: Hon. Dana M. Sabraw United States District Judge
ORDER GRANTING DEFENDANTS' MOTIONS TO SET ASIDE ENTRY OF DEFAULT AND DENYING AS MOOT PLAINTIFFS' MOTIONS FOR DEFAULT JUDGMENT
Pending before the Court are (1) Defendants OCTFCU Mortgage Co. LLC ("OCTFCU") and Schools First Federal Credit Union's ("SFFCU") motion to set aside entry of default, (2) Defendant Fidelity National Default Services's ("Fidelity National") motion to set aside entry of default, and (3) Plaintiffs' motions for default judgment against all Defendants. (Docs. 27, 30-32.) For the following reasons, Defendants' motions to set aside entry of default are granted and Plaintiffs' motions for default judgment are denied as moot.
This case involves a loan obtained by Plaintiffs on or about September 28, 2005, which is secured by a Deed of Trust on their property. (Complaint at ¶ 10.) The loan was funded by OCTFCU, a former affiliate of SFFCU. (Id.) Plaintiffs eventually defaulted on the loan and received a Notice of Default on July 16, 2010. (Id. at ¶ 14.) The Notice of Default also included a Substitution of Trustee substituting in Fidelity National as the Trustee. The Substitution of Trustee was signed on October 21, 2010 by SFFCU, as successor in interest to OCTFCU. (Id. at ¶ 15.) However, it was notarized on October 19, 2010. (Id.) A Notice of Sale was posted on the front of the complex in which Plaintiffs' property is located on January 11, 2011 by Fidelity National, although it was dated January 13, 2011. (Id.) A foreclosure sale was scheduled for February 4, 2011. (Id. at 1.)
On January 21, 2011, Plaintiffs filed a Complaint against Defendants Fidelity National, OCTFCU, and SFFCU. (Doc. 1.) The Complaint sets forth eight claims for relief: (1) unfair and deceptive practices, (2) negligence, (3) breach of fiduciary duties, (4) fraud, (5) predatory lending practices, (6) to set aside and vacate the trustee's sale, (7) rescission of the Deed of Trust, and (8) application for a temporary restraining order ("TRO"). On January 24, 2011, the Court issued an Order denying Plaintiffs' application for a TRO. (Doc. 2.) On February 2, 2011, Plaintiffs filed an amended motion for a TRO and preliminary injunction, seeking this Court's order enjoining the foreclosure sale. (Doc. 4.) The Court issued an Order on February 4, 2011 granting Plaintiffs' amended motion for a TRO and ordering Defendants to show cause, on or before February 8, 2011, why a preliminary injunction should not be issued enjoining Defendants from taking such actions until the termination of this case. (Doc. 5.) The Court scheduled a hearing on Plaintiffs' motion for a preliminary injunction for February 10, 2011 at 1:30 p.m. Plaintiffs appeared at the hearing, but Defendants did not. The Court issued an Order granting Plaintiffs' motion for a preliminary injunction on February 10, 2011. (Doc. 16.)
On March 14, 2011, upon request by Plaintiffs, the Clerk entered default as to each of the Defendants. (Doc. 23.) OCTFCU and SFFCU filed a motion to set aside entry of default on April 4, 2011. (Doc. 27.) On April 26, 2011, Plaintiffs filed motions for default judgment as to each of the Defendants. (Doc. 30, 31.) On May 5, 2011, Fidelity National filed a motion to set aside entry of default. (Doc. 32.)
A. Motions to Set Aside Entry of Default
Entry of default may be set aside for good cause. Fed. R. Civ. Pro. 55(c). The court examines three factors when determining whether there is good cause: (1) whether the defendant's culpable conduct led to the default; (2) whether defendant has a meritorious defense; and (3) whether setting aside the default will prejudice the plaintiff. TCI Group Life Ins. Plan v. Knoebber, 244 F.3d 691, 696 (9th Cir. 2001); Franchise Holding II, LLC, v. Huntington Rests. Grp., Inc., 375 F.3d 922, 926 (9th Cir. 2004). A court can deny the motion if consideration of any of the three factors weighs in favor of maintaining the default. Franchise Holding, 375 F.3d at 926 (citing Am. Ass'n of Naturopathic Physicians v. Hayhurst, 227 F.3d 1104, 1108 (9th Cir. 2000)). The defaulting party bears the burden of showing the default should be set aside. Id. However, "judgment by default is a drastic step appropriate only in extreme circumstances; a case should, whenever possible, be decided on the merits." United States v. Signed Personal Check No. 730 of Yurban S. Mesle, 615 F.3d 1085, 1091 (9th Cir. 2010)(quoting Falk v. Allen, 739 F.2d 461, 463 (9th Cir. 1984)). A court's discretion to set aside a default is "especially broad" where an entry of default, as opposed to a default judgment, is being set aside.. O'Conner v. Nevada, 27 F.3d 357, 364 (9th Cir. 1994).
Here, the circumstances are not sufficiently extreme to warrant the drastic step of default judgment. A consideration of the factors relevant to determining whether good cause exists further supports setting aside the defaults entered against Defendants.
A defendant's actions may be culpable where "he has received actual or constructive notice of the filing of the action and intentionally failed to answer" and where he or she acts "with a devious, deliberate, willful, or bad faith failure to respond." TCI Group, 244 F.3d at 697-99 (quotation omitted; emphasis in original). "[A] movant cannot be treated as culpable simply for having made a conscious choice not to answer; rather, to treat a failure to answer as culpable, the movant must have acted with bad faith, such as an 'intention to take advantage of the opposing party, interfere with judicial decisionmaking, or otherwise manipulate the legal process.'" Mesle, 615 F.3d at 1092 (quoting TCI Group, 244 F.3d at 697). Here, all Defendants argue their actions were not culpable because they did not believe they were properly served with the Complaint in this action and therefore elected not file responsive pleadings.*fn1
SFFCU claims it did not believe it was properly served with the Summons and Complaint, which were left with Cecilia Reyes, a Member Service Representative working at the front desk of SFFCU's Santa Ana office. SFFCU contends it first became aware that there was any contention that it had been properly served with legal process in this matter when it was served with a copy of Plaintiffs' request for entry of default. SFFCU claims to have then immediately begun investigating the matter and to have filed its motion to set aside the entry of default within several weeks. OCTFCU argues it did not believe it was properly served because its registered agent was never served, although the Court notes Plaintiffs have filed a certificate of service indicating service was made at the same address listed for the registered agent. Fidelity National states it believed it had not been properly served because Mr. Seidenwurm was not personally served and because Plaintiffs delivered copies of the Summons and Complaint themselves. Plaintiffs have submitted declarations indicating service was made by a professional process server and copies were given directly to Mr. Seidenwurm. Plaintiffs further argue Defendants had knowledge of the action, received notice of the Summons and Complaint, and failed to respond out of inexcusable neglect due to lack of management and organizational skills. However, this does not sufficiently establish Defendants' actions were culpable. There is no evidence that Defendants acted in bad faith or willfully delayed their responses to prejudice Plaintiffs. Accordingly, consideration of this factor weighs in support of setting aside the defaults.
A party seeking to vacate entry of default must present specific facts that would constitute a defense, but the burden is not extraordinarily heavy. TCI Group, 244 F.3d at 700. "All that is necessary to satisfy the 'meritorious defense' requirement is to allege sufficient facts that, if true, would constitute a defense." Mesle, 615 F.3d at 1094. The Court does not determine the truth of the factual allegations on a motion to set aside entry of default, as such question is properly the subject of later litigation. Id. SFFCU and OCTFCU submit a draft motion to dismiss in support of their motion to set aside default, in which they argue this Court does not have subject matter jurisdiction over the action due to the lack of diversity among the parties and the absence of a federal question.*fn2
Fidelity National states it was sued solely as a trustee and the only allegation against it in the Complaint is that, on January 11, 2011, it posted a notice of sale on Plaintiffs' property that was dated January 13, 2011. Fidelity National argues, even if this allegation is true, it is not a basis for monetary damages against Fidelity National and Plaintiffs cannot allege Fidelity National's actions harmed them because Fidelity National's actions were in compliance with California Civil Code § 2924f(b)(1). As Defendants have sufficiently demonstrated they have meritorious defenses for purposes of these motions, consideration of this factor also weighs in favor of setting aside the entries of default.
Defendants argue there is no prejudice to Plaintiffs in setting aside the entries of default because the defaults were only recently entered and Defendants are prepared to expeditiously proceed with the matter. Plaintiffs claim they will be prejudiced by the setting aside of the entries of default because their right to retain their residence will be jeopardized. However, this goes to the merits of Plaintiffs' claims and, as stated above, there is a strong preference for determining cases on their merits, as opposed to on default judgment. Furthermore, as Defendants acknowledge, the preliminary injunction granted by the Court will remain in effect until such time as it is dissolved by motion or by Defendants prevailing on the merits. Accordingly, consideration of the potential prejudice to Plaintiffs weighs in favor of setting aside the entries of default.
In light of the above, and the preference to hear cases on the merits absent extreme circumstances, the Court grants Defendants' motions to set aside entry of default.
B. Motions for Default Judgment
Because the Court grants Defendants' motions to set aside entry of default against them, Plaintiffs' motions for default judgment are denied as moot.
For the foregoing reasons, Defendants' motions to set aside entry of default are granted. Accordingly, Plaintiffs' motions for default judgment are denied as moot.
IT IS SO ORDERED.