Qingdao Tang-Buy International Import & Export Co., Ltd. v. Preferred Secured Agents, Inc.

          ORDER SETTING ASIDE ENTRY OF DEFAULT

          LAUREL BEELER UNITED STATES MAGISTRATE JUDGE

         INTRODUCTION

         Qingdao Tang-Buy International Import & Export Company sued the defendants for breach of contract and fraud.^[1] In its Second Amended Complaint (“SAC”), Qingdao named Glenn Hartman as a defendant.^[2] Mr. Hartman did not answer or otherwise respond to the complaint within 21 days after service of process.^[3] The clerk of court thus entered default against him.^[4] Mr. Hartman appeared in May 2016 and moved to set aside the entry of default.^[5] Qingdao opposed the motion.^[6]

         The court can determine this matter without oral argument pursuant to Civil Local Rule 7-1(b). The court grants the motion for good cause shown and sets aside the entry of default.

         GOVERNING LAW

         The district court has discretion to set aside a default or a default judgment. Fed.R.Civ.P. 55(c), 60(b); Brandt v. Am. Bankers Ins. of Florida, 653 F.3d 1108, 1111-12 (9th Cir. 2011). More specifically, under Rule 55(c), a court may set aside an entry of default for “good cause.” See United States v. Signed Personal Check No. 730 of Yubran S. Mesle, 615 F.3d 1085, 1091 (9th Cir. 2010) (“Mesle”). To determine whether a defendant has shown good cause to justify vacating entry of default, a court considers three factors: (1) whether the defendant engaged in culpable conduct that led to the default; (2) whether the defendant lacked a meritorious defense; and (3) whether reopening the default would prejudice the plaintiff. See Id. (citing Franchise Holding II, LLC v. Huntington Rests. Group., Inc., 375 F.3d 922, 925 (9th Cir. 2004)). This standard is disjunctive, meaning that the court may deny the request to vacate default if any of the three factors is true. See Mesle, 615 F.3d at 1091 (citing Franchise Holding II, 375 F.3d at 925). “Crucially, however, ‘judgment by default is a drastic step appropriate only in extreme circumstances; a case should, whenever possible, be decided on the merits.’” Id. (quoting Falk v. Allen, 739 F.2d 461, 463 (9th Cir. 1984)).

         When considering whether to vacate entry of default under Rule 55(c), the court’s “underlying concern . . . is to determine whether there is some possibility that the outcome of the suit after a full trial will be contrary to the result achieved by the default.” Hawaii Carpenters’ Trust Fund v. Stone, 794 F.2d 508, 513 (9th Cir. 1986). The inquiry “is at bottom an equitable one, taking account of all relevant circumstances surrounding the party’s omission.” Brandt, 653 F.3d at 1111 (quoting Pioneer Inv. Servs. Co. v. Brunswick Ass’n Ltd., 507 U.S. 380, 395 (1993)). The decision ultimately lies in the discretion of the court. Brandt, 653 F.3d at 1111-12.

         As the party seeking to set aside entry of default, a defendant bears the burden of showing good cause under this test. Hawaii Carpenters’ Trust Fund, 794 F.2d at 513-14. To ensure that cases are decided on the merits whenever possible, the court resolves any doubt regarding whether to grant relief in favor of vacating default. O’Connor v. Nevada, 27 F.3d 357, 364 (9th Cir. 1994).

         ANALYSIS

         1. Mr. Hartman Did Not Act Culpably

         The first question under Rule 55(c) is “whether [the defendant] engaged in culpable conduct that led to the default.” Mesle, 615 F.3d at 1091. “[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” or otherwise defend the action. Id. at 1092 (quoting TCI Group Life Ins. Plan v. Knoebber, 244 F.3d 691, 697 (9th Cir. 2001) (emphasis in original)); Fed.R.Civ.P. 55(a).

         The parties do not dispute that Mr. Hartman knew of the pendency of the lawsuit.^[7] They dispute whether he intentionally failed to answer the lawsuit or acted in bad faith.^[8] “[C]onduct [is] culpable . . . where there is no explanation of the default inconsistent with a devious, deliberate, willful, or bad faith failure to respond.” TCI Group, 244 F.3d at 698 (emphasis added).

         The following is the timeline. Qingdao served Mr. Hartman with the complaint on January 27, 2016.^[9] Around February 1, defense counsel Hal Reiland was hospitalized; his wife notified the court and opposing counsel, and the court adjusted the case’s schedule.^[10] A week later, Mr. Reiland sent Mr. Hartman an email stating that he notified the court of his hospitalization, the case was on hold, and he planned to represent him in the pending matter in federal court unless Mr. Hartman decided to seek other counsel.^[11] Qingdao moved for entry of default on March 8, and the clerk entered default two days after.^[12] Mr. Hartman stated that he “understood that Mr. Reiland would represent him in ...