United States District Court, N.D. California
ORDER RE: DEFENDANT'S MOTION TO SET ASIDE
DEFAULT; PLAINTIFF'S APPLICATION FOR WRIT OF POSSESSION
AND INJUNCTIVE RELIEF RE: DKT. NOS. 14, 17
JACQUELINE SCOTT CORLEY UNITED STATES MAGISTRATE JUDGE
Plaintiff
Wells Fargo sues 6th Gear Holdings, Inc. (“6th
Gear”) under California state law arising out of 6th
Gear's alleged default of a financing agreement wherein
Plaintiff extended credit to 6th Gear to allow it to purchase
inventory for public sale. (Dkt. No. 1.)[1] Now before the
Court is 6th Gear's motion to set aside entry of
default.[2] (Dkt. No. 14.) Also pending before the
Court is Plaintiff's application for a writ of possession
seeking the return of specific items of inventory obtained by
6th Gear pursuant to the financing agreement and a Court
order enjoining 6th Gear from disposing of that inventory
pending its seizure, pursuant to Federal Rule of Civil
Procedure 64 and California Code of Civil Procedure section
512.010.[3] (Dkt. No. 17.) After careful consideration
of the parties' briefing and having had the benefit of
oral argument on November 21, 2019, the Court GRANTS 6th
Gear's motion to set aside default and DENIES
Plaintiff's application for a writ of possession because
it is again facially deficient.
BACKGROUND
I.
Complaint Allegations [4]
6th
Gear is a California corporation with its principal place of
business in Alamo, California. (Dkt. No. 1 at ¶ 3.)
Plaintiff entered into an inventory financing agreement (the
“Agreement”) with 6th Gear in November 2017.
Under the Agreement, Plaintiff agreed to finance 6th
Gear's purchase of inventory and 6th Gear agreed to pay
certain sums to Plaintiff. (Id. at ¶ 6.) 6th
Gear granted Plaintiff a security interest in all of 6th
Gear's personal property, including its “inventory,
equipment, fixtures, other goods, and all products and
proceeds of [same], ” as collateral (the
“Collateral”). (Id. at ¶ 7.)
Pursuant
to the Agreement, Plaintiff extended a line of credit to 6th
Gear, allowing it to acquire “certain types of
inventory to be sold to the public, including but not limited
to motorcycles, parts, accessories, and riding gear,
including but not limited to motorcycle helmets and
jackets” (“Inventory Collateral”).
(Id. at ¶¶ 9, 11.) Plaintiff performed its
obligations under the Agreement and alleges that 6th Gear
defaulted by failing to remit payment for Inventory
Collateral that 6th Gear “sold to third party buyers in
the ordinary course of its business, an activity described in
the commercial lending industry as selling ‘out of
trust.'” (Id. at ¶ 12.) On March 12,
2019, Plaintiff notified 6th Gear that it was in default
“for failure to make payment of $145, 994.86 when due,
which included $122, 566.10 in proceeds from sales of
Inventory Collateral.” (Id. at ¶ 13;
see also Dkt. No. 1-3, Ex. 3 at 2.) Plaintiff
demanded payment of the amount due by March 22, 2019 and
“confirmed its intent to accelerate the payment of all
debt owed . . . if [6th Gear] did not cure the
default.” (Dkt. No. 1 at ¶ 13.) 6th Gear failed to
cure its default by the deadline. (Id. at ¶
14.)
On
April 10, 2019, Plaintiff notified 6th Gear that Plaintiff
was terminating 6th Gear's line of credit and
accelerating the balance due and owing under the terms of the
Agreement, “which was $1, 499, 177.66.”
(Id. at ¶ 15; see also Dkt. No. 1-4,
Ex. 4 at 2.) Plaintiff further demanded that 6th Gear
surrender possession of the Inventory Collateral before April
15, 2019; 6th Gear did not cure the default or otherwise
comply with Plaintiff's demand. (Dkt. No. 1 at
¶¶ 15-16.) Plaintiff sent 6th Gear another notice
on July 10, 2019, “confirm[ing] that it had earlier
accelerated the balance owed” and notifying 6th Gear
that it was in default in the amount of $245, 238.33.
(Id. at ¶ 17; see also Dkt. No. 1-5,
Ex. 5 at 2.) Plaintiff demanded payment of that amount on or
before July 17, 2019. (Dkt. No. 1 at ¶ 17.)
Despite
Plaintiff's demands, 6th Gear refuses to surrender
possession of 63 specific items of Inventory Collateral
“valued at $706, 726.48” (“Lender-Financed
Inventory”) and has not paid the balance owed on the
accelerated Agreement. (Id. at ¶¶ 18-20.)
6th Gear has made “a partial payment of $317, 990,
” but still owes Plaintiff “a total of $710,
838.27 in unpaid principal, exclusive of interest and other
charges” as of August 2, 2019.[5] (Id. at ¶ 22.)
Plaintiff
brings a cause of action for “claim and delivery”
seeking immediate possession of the Lender-Financed Inventory
or its value if not delivered. (Id. at ¶¶
25-35; see also Id. at 8.) Further, Plaintiff
requests a temporary restraining order and preliminary
injunction prohibiting 6th Gear “from disposing,
selling, transferring, commingling, converting, or otherwise
using the [Lender-Financed Inventory] without turning over
all proceeds of any such sale immediately to
[Plaintiff]” until disposition of Plaintiff's claim
and delivery cause of action. (Id. at 8.) Plaintiff
also seeks attorneys' fees, expenses, and costs incurred
in enforcing its interest in the Agreement, as allowed under
the Agreement. (Id. at ¶ 21; see also
Id. at 8.)
II.
Procedural History
Plaintiff
filed the underlying complaint on August 9, 2019, seeking the
same relief sought by the instant application. (See
Dkt. No. 1 at ¶¶ 25-41.) Plaintiff served 6th Gear
with the summons and complaint on August 15, 2019. (Dkt. No.
8.) Plaintiff then filed an application for writ of
possession two weeks later. (Dkt. No. 9.) The Court issued an
order on October 8, 2019 denying the application without
prejudice because it was deficient on its face for failing to
provide 6th Gear with proper notice pursuant to California
Code of Civil Procedure section 512.040. (See Dkt.
No. 13 at 2-3.)
After
6th Gear failed to respond to the complaint or otherwise
appear in this action, Plaintiff filed a motion for entry of
default with the Clerk of Court on September 23, 2019,
(see Dkt. No. 11), which the Clerk granted on
September 27, 2019, (see Dkt. No. 12). 6th Gear
filed the pending motion to set aside entry of default two
weeks later on October 10, 2019. (Dkt. No. 14.) Plaintiff
timely filed its opposition on October 24, 2019. (Dkt. No.
18.) 6th Gear did not file a reply.
Plaintiff
filed the instant application for writ of possession on
October 14, 2019 and noticed the application for hearing on
November 21, 2019. (Dkt. No. 17.) 6th Gear did not initially
object to the application but requested an opportunity to do
so at the initial case management conference on November 7,
2019; the Court granted 6th Gear's request and also
allowed Plaintiff to file a reply.[6] (See Dkt. No. 25.)
6th Gear timely filed its objection to Plaintiff's
application, (Dkt. No. 26), and Plaintiff filed its reply,
(Dkt. No. 27). Plaintiff then filed the amended declaration
of Mr. Franch in support of its application on November 21,
2019. (Dkt. No. 29.)
The
Court heard oral argument on both 6th Gear's motion to
set aside entry of default and Plaintiff's application
for writ of possession on November 21, 2019. At the hearing
the Court instructed Defendant to file a response to
Plaintiff's amended declaration within one week;
Defendant did not do so.
DISCUSSION
I.
Motion to Set Aside Entry of Default
A
district court may set aside the entry of default upon a
showing of “good cause.” Fed.R.Civ.P. 55(c).
“The ‘good cause' standard that governs
vacating an entry of default under Rule 55(c) is the same
standard that governs vacating a default judgment under Rule
60(b).” Franchise Holding II, LLC v. Huntington
Rests. Grp., Inc., 375 F.3d 922, 925 (9th Cir. 2004).
“To determine ‘good cause,' a court must
consider three factors: (1) whether the party seeking to set
aside the default engaged in culpable conduct that led to the
default; (2) whether it had no meritorious defense; or (3)
whether [setting aside the default] judgment would prejudice
the other party.” United States v. Signed Pers.
Check No. 730 of Yubran S. Mesle, 615 F.3d 1085, 1091
(9th Cir. 2010) (internal quotation marks, citation, and
alterations omitted). The moving party bears the burden of
showing that these factors weigh in favor of granting the
motion to set aside default. Franchise Holding II,
375 F.3d at 925-26. The standard is disjunctive; thus,
“the district court [is] free to deny the motion if any
of the three factors [is] true.” Id. at 926
(internal quotations marks omitted). Put another way, the
defendant must show that “any of these factors favor[s]
setting aside the default, ” and the default may stand
if any of the three factors weighs against the defendant.
Id.
When
considering whether to set aside default, a court must bear
in mind that “judgment by default is a drastic step
appropriate only in extreme circumstances; a case should,
whenever possible, be decided on the merits.”
Mesle, 615 F.3d at 1091 (internal quotation marks
and citation omitted); see also Falk v. Allen, 739
F.2d 461, 463 (9th Cir. 1984). In addition, any doubt about
the cause of default should be resolved in favor of the
motion to set aside the default so that the case may be
decided on its merits. O'Connor v. State of
Nev., 27 F.3d 357, 364 (9th Cir. 1994).
Here,
consideration of the “good cause” factors
supports setting aside the entry of default. In support of
its motion, 6th Gear submits the declaration of its Chief
Executive Officer (“CEO”) John Schafer. (Dkt. No.
14-1.) Mr. Schafer's declaration demonstrates that 6th
Gear's failure to timely answer the complaint is
excusable because Mr. Schafer thought the company was being
represented by its former attorney when, in reality, it was
not. (Id. at ¶ 6.) After being served on August
15, 2019, 6th Gear sent a copy of the complaint and other
documents to an attorney that represented it in a previous
matter, Michael Sieving. (Id. at ¶ 5.) However,
Mr. Sieving was on vacation at the time and did not know that
6th Gear was relying on him for representation in the matter.
(Id. at ¶ 6.) By the time Mr. Sieving informed
6th Gear that he could not represent it, on or around
September 9, 6th Gear's window to timely file an answer
had closed. (Id. at ¶ 6.) 6th Gear then
obtained new representation and moved to set aside default
two weeks after the Clerk's entry of default on September
27, 2019. (See generally Dkt. No. 14.)
6th
Gear's forwarding of the complaint to its prior attorney
on the day it was served shows that 6th Gear acted in good
faith and that it relied on the belief that it had the
benefit of counsel in this litigation. 6th Gear, thus, did
not act culpably in failing to answer. The Court is similarly
satisfied that 6th Gear has made an adequate showing that it
has potentially meritorious defenses, especially given the
declaration of Mr. Schafer submitted in conjunction with 6th
Gear's objection to Plaintiff's application for writ
of possession. (See Dkt. Nos. 14 at 7 (asserting
defenses including bad faith, unclean hands, substantial
compliance, latches, mistake, and arguing that it did not
breach the Agreement) & 26-1 at ¶¶ 14, 16
(attesting that after it received Plaintiff's March 12,
2019 notice of default 6th Gear “made a total of 5
direct debits and wire transfers to [Plaintiff] between March
12 and March 22” in the amount of $138, 576.59, and
“made over 31 wire transfers and 5 direct debits
totaling $1, 145, 815.05 to [Plaintiff] pursuant to the
Agreement” between March 12, 2019 and October 4,
2019).)
Finally,
the potential prejudice to Plaintiff in setting aside the
entry of default does not outweigh the general rule that
“whenever possible, [cases should] be decided on the
merits.” See Mesle, 615 F.3d at 1091 (internal
quotation marks and citation omitted). Simply put, the facts
surrounding 6th Gear's default do not reflect
“extreme circumstances” such that this case
should not be decided on the merits. See id.
Accordingly,
the Court grants 6th Gear's motion to set aside the entry
of default.
II.
Application for ...