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Wells Fargo Commercial Distribution Finance, LLC v. 6th Gear Holdings, Inc.

United States District Court, N.D. California

December 6, 2019

WELLS FARGO COMMERCIAL DISTRIBUTION FINANCE, LLC, Plaintiff,
v.
6TH GEAR HOLDINGS, INC., Defendant.

          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 ...


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