Opinion
Civil No. 06cv1094 J (BLM).
April 18, 2007
Before the Court is Defendants Estate of Stephen Ray Hill, George Raymond Hill, David W. Hill, and National Brake Service, Inc.'s ("Defendants") Motion to Set Aside Entry of Default. [Doc. No. 18.] Plaintiff Salvador Roberto Torres ("Plaintiff") opposes Defendants' Motion to Set Aside Entry of Default. [Doc. No. 26.] In addition, Plaintiff has filed a Motion for Default Judgment. [Doc. No. 12.] The issues presented herein are decided without oral argument. See S.D. Cal. Civ. R. 7.1.d.1 (2006). For the reasons stated below, the Court GRANTS Defendants' Motion to Set Aside Entry of Default and DENIES Plaintiff's Motion for Default Judgment.
Procedural Background
On May 19, 2006, Plaintiff filed a Complaint alleging that Defendants violated his rights of artistic integrity under the Visual Artists Rights Act of 1990. (Compl. ¶ 1.) On August 11, 2006, the Court's Clerk entered default against Defendants. [Doc. No. 10.] On October 25, 2006, Plaintiff filed and served a Motion for Default Judgment against Defendants, and the Court ordered supplemental briefing on this Motion. [Doc. Nos. 12, 13.] In response, Plaintiff filed a supplemental brief. [Doc. No. 14.] Before the Court ruled on Plaintiff's Motion for Default Judgment, Defendants filed a Motion to Set Aside Entry of Default on January 10, 2007. [Doc. No. 17.] On February 20, 2007, Plaintiff filed an Opposition to Plaintiff's Motion to Set Aside Default. [Doc. No. 26.] On February 26, 2007, Defendants filed a Reply. [Doc. No. 28.]Factual Background
This matter arises out of the alleged defacement of a mural Plaintiff painted on the side of a building owned by Defendant Estate of Stephen R. Hill ("Estate"). ( See Defs.' Mot. at 1; Compl. ¶ 3.) The mural was painted with Defendants' permission. (David W. Hill Decl. ¶ 12.) Defendant National Brake Service's business is located in the building. (Defs.' Mot. at 1.) The remaining Defendants are named in their capacity as having an interest in the property as either heirs of the Estate or as the administrator thereof. ( Id.)
Stephen Ray Hill, owner of the property on which the mural at issue was painted, died in May 2005. (David W. Hill Decl. ¶ 4.) Defendants hired attorney Linda Wesson Greenberg, who is also a real estate broker, to handle the probate proceedings. (Id.) Defendant David W. Hill states that Stephen Ray Hill had "given Ms. Greenberg the listing for the property" before his death. ( Id. ¶ 5.) After Stephen Ray Hill's death, however, Defendants contacted Ms. Greenberg and told her that they no longer wanted to sell the property. ( Id.) Ms. Greenberg told Defendants that she had turned over the listing to her brother, Vann Wesson, who is also a real estate broker. ( Id.) According to Defendants, Ms. Greenberg stated that they had to sell the property, or they would be sued by the investors who had agreed to buy it. (Id.) On June 18, 2005, the mural was painted over, apparently at Mr. Wesson's direction. ( See id. ¶ 11; Pl.'s Opp'n to Defs.' Mot. at 3.) Defendants assert that they took no part in painting over the mural. (David W. Hill Decl. ¶ 11.)
Defendants eventually discovered that Ms. Greenberg had made arrangements to sell the property to her brother, Mr. Wesson. (Id. ¶¶ 8-9.) In October 2005, they retained attorney Bruce Sulzner to investigate the manner in which Ms. Greenberg was handling the Estate. (Id. ¶¶ 1, 8-9.) Mr. Sulzner advised Defendants that because Ms. Greenberg had made arrangements to sell the property to her brother, there was a possibility that she had a conflict of interest as their counsel, and they should consult another probate attorney. (See id. ¶ 9.) Because he did not practice probate law, Mr. Sulzner referred Defendants to probate attorney Bradley Nemeth, and Mr. Nemeth agreed to represent Defendants in matters relating to the Estate. (Id.) Thereafter, Mr. Wesson filed a motion to compel the Estate to sell the property to him. (Id. ¶ 10.)
Mr. Sulzner later assisted Defendants in preparing complaints against Ms. Greenberg with the California Bar Association and the Department of Real Estate. (See David W. Hill Decl. ¶ 10.)
On December 12, 2005, Pablo Manga, counsel for Plaintiff, sent Mr. Nemeth a demand letter setting forth the details of Plaintiff's Visual Artists Rights Act claim and requesting a response from Mr. Nemeth. (Manga Decl. ¶ 2.) Mr. Nemeth never responded to this letter. (Id.) Mr. Manga sent Mr. Nemeth a second letter on January 10, 2006, and Mr. Nemeth again did not respond. (Id. ¶ 3.) On January 20, 2006, Mr. Manga called Mr. Nemeth to discuss Plaintiff's claim. (Id. ¶ 5.) Mr. Manga states that it appeared that Mr. Nemeth had not investigated Plaintiff's claim, and Mr. Nemeth suggested that Plaintiff should file a claim against Defendants. (Id.)
On May 19, 2006, Plaintiff filed his Complaint. [Doc. No. 1.] On June 14, 2006, declarations of service were executed by Plaintiff's process server as to Defendants Estate, David W. Hill, National Brake Service, and George Raymond Hill. [Doc. Nos. 4, 5, 6, 7.] Shortly thereafter, Defendant David W. Hill contacted Mr. Sulzner to inform him that he had been served with a lawsuit, and he sent Mr. Sulzner a copy of the Complaint. (Sulzner Decl. ¶ 14.) Mr. Sulzner then contacted Mr. Nemeth. (Id.) According to Mr. Sulzner, Mr. Nemeth advised him that he had contacted Plaintiff's counsel and proposed that Plaintiff's suit be joined with the pending probate action involving the Estate. (Id. ¶ 15.) The Court notes, however, that Plaintiff's counsel categorically denies that Mr. Nemeth contacted him and proposed that the two actions be joined. (See Pl.'s Opp'n to Defs.' Mot. at 16 n. 2.)
The declaration signed by the process server indicates that Defendant George Raymond Hill, the administrator of the Estate, accepted service on behalf of Defendant Estate and on behalf of Defendant National Brake Service.
Mr. Sulzner also asserts that Mr. Nemeth told him that it was likely that Plaintiff's action would be barred because it had been filed too late in relation to the probate proceedings. (Sulzner Decl. ¶ 16.) Mr. Sulzner then advised Defendants not to worry about the suit because Mr. Nemeth was handling it. (Id.) Mr. Sulzner states that he contacted Mr. Nemeth periodically to inquire whether Plaintiff had agreed to join his claim in the probate action. (Id. ¶ 18.) According to Mr. Sulzner, Mr. Nemeth stated that he still had not heard from Plaintiff's attorney. (Id.) Mr. Sulzner passed this information on to Defendants. (See id.; David W. Hill Decl. ¶¶ 12-13.)
On August 11, 2006, the Court's Clerk entered default against Defendants after they failed to file a responsive pleading. [Doc. No. 10.] The Court's Clerk sent Mr. Nemeth notice of the entry of default against Defendants. [See Doc. No. 11.] On August 14, 2006, Mr. Manga also mailed Mr. Nemeth notice of the entry of default and informed him that if Defendants did not file a motion to set aside the entry of default, then Plaintiff would file a Motion for Default Judgment. (Manga Decl. ¶ 15.) Mr. Nemeth never responded to this letter. (Id.) On October 25, 2006, Plaintiff filed a Motion for Default Judgment. [Doc. No. 12.] Plaintiff served the Motion for Default Judgment on Mr. Nemeth. (Mot. for Default J. Ex. E.)
Mr. Sulzner asserts that he and Defendants heard nothing about the developments in the case, including the entry of default and Plaintiff's Motion for Default Judgment, until November 6, 2006. (Sulzner Decl. ¶¶ 18-24.) On that date, Defendant David W. Hill received a letter from Plaintiff's attorney stating that "Plaintiff's Motion for Final Default Judgment is currently pending before the Court and will be heard on December 18, 2006 at 10:30 a.m." (Id. Ex. 5.) Because Mr. Hill was unaware that a hearing had been scheduled, he called Mr. Sulzner "to find out if I had missed something." (David W. Hill Decl. ¶ 18.) Mr. Sulzner was also unaware of the hearing, and he attempted to contact Mr. Nemeth's office, but was unable to speak with him because he had left work due to illness. (Sulzner Decl. ¶ 26.) Mr. Sulzner states that throughout the rest of November, he had difficulty contacting Mr. Nemeth regarding the status of the default because Mr. Nemeth had become very ill and was not at his office. (Id. ¶¶ 26-33.) Mr. Sulzner states that when he eventually reached Mr. Nemeth in late November, Mr. Nemeth confirmed that he had been very ill. (Id. ¶ 30.) According to Mr. Sulzner, Mr. Nemeth stated that he had retained an attorney with experience in federal court matters to look over the default issue, and that he would have more information shortly. (Id.) Mr. Sulzner asserts that in early December, he had heard nothing further from Mr. Nemeth, and he attempted to contact him again, but Mr. Nemeth remained ill and was not at work. (Id. ¶ 31.) On December 18, 2006, Mr. Sulzner received a call from Mr. Nemeth's paralegal stating that Mr. Nemeth had suffered what appeared to be a heart attack and had been hospitalized. (Id. ¶ 33.) That same day, Mr. Sulzner contacted Plaintiff's attorney and attempted to persuade Plaintiff's counsel to stipulate to setting aside the default, but the parties were unable to reach an agreement. (Id. ¶¶ 39-40.) On January 10, 2007, Mr. Sulzner filed the instant Motion to Set Aside Entry of Default on behalf of Defendants. [Doc. No. 18.]
The Court later took the matter under submission, and no appearances were required on December 18, 2006. [Doc. No. 15.]
Legal Standard
Setting aside an entry of default is governed by Federal Rule of Civil Procedure 55(c), which provides that a default may be set aside for "good cause." See Fed.R.Civ.P. 55(c). "Good cause" to set aside an entry of default under Rule 55(c) is a lighter burden than that required under Federal Rule of Civil Procedure 60(b) when a party seeks to set aside a default judgment already entered. See Mendoza v. Wight Vineyard Mgmt., 783 F.2d 941, 945-46 (9th Cir. 1986); Meehan v. Snow, 652 F.2d 274, 276 (2d Cir. 1981) ("[T]he standard for setting aside the entry of a default pursuant to Rule 55(c) is less rigorous than the `excusable neglect' standard for setting aside a default judgment by motion pursuant to Rule 60(b)."). A "good cause" determination requires the application of a three-factor test: "[A] district court may deny a motion to vacate a default judgment if: (1) the plaintiff would be prejudiced if the [entry of default] is set aside, (2) defendant has no meritorious defense, or (3) the defendant's culpable conduct led to the default." Am. Ass'n of Naturopathic Physicians v. Hayhurst, 227 F.3d 1104, 1108 (9th Cir. 2000) (quotations and citation omitted). A district court is free to deny the motion if any of the three factors is true. Id.
In general, motions to set aside default should be liberally granted and are left to the discretion of the court. See Falk v. Allen, 739 F.2d 461, 463 (9th Cir. 1984). "[J]udgment by default is a drastic step appropriate only in extreme circumstances; a case should, whenever possible, be decided on the merits." Id. Any doubt should be resolved in favor of setting aside the default in order to decide a case on its merits. Schwab v. Bullock's, Inc., 508 F.2d 353, 355 (9th Cir. 1974).
Discussion
To determine whether Defendants' Motion to Set Aside Entry of Default should be granted, this Court must examine three factors: (1) whether Plaintiff would be prejudiced if the entry of default is set aside, (2) whether Defendants have a meritorious defense, and (3) whether Defendants' culpable conduct led to the default. See Hayhurst, 227 F.3d at 1108.
A. Prejudice to Plaintiff
The Court first examines whether Plaintiff would be prejudiced if the entry of default is set aside. Defendants argue that delay alone does not constitute prejudice, and that Plaintiff cannot demonstrate any prejudice other than a delay of several months. (Defs.' Mot. at 6.) In opposition, Plaintiff argues that Defendants' destruction of the mural has resulted in damage to his reputation as an artist. (Opp'n to Defs.' Mot. at 16.) According to Plaintiff, "[t]he longer the damage goes unremedied, the more his reputation as an artist suffers." (Id.)
Delay alone is not a sufficient basis for establishing prejudice for purposes of opposing a motion to set aside entry of default. See TCI Group Life Ins. Plan v. Knoebber, 244 F.3d 691, 695 (9th Cir. 2001); Berthelsen v. Kane, 907 F.2d 617, 621 (6th Cir. 1990); Davis v. Musler, 713 F.2d 907, 916 (2d Cir. 1983); Feliciano v. Reliant Tooling Co., 691 F.2d 653, 656-57 (3d Cir. 1982). The standard in determining prejudice is whether the plaintiff's ability to pursue his claim will be hindered if the entry of default is set aside. See Falk v. Allen, 739 F.2d 461, 463 (9th Cir. 1984). If a delay will result in "tangible harm such as loss of evidence, increased difficulties of discovery, or greater opportunity for fraud or collusion", the delay is considered prejudicial. Knoebber, 244 F.3d at 701 (citing Thompson v. Am. Home Assurance Co., 95 F.3d 429, 433-34 (6th Cir. 1996)).
Plaintiff has failed to establish that setting aside the entry of default would result in tangible harm affecting his ability to pursue his claim. Plaintiff does not assert that Defendants' delay resulted in loss of evidence. Nor does Plaintiff argue that Defendants' delay will make discovery more difficult, or that his ability to recover on any eventual judgment or remedy has been thwarted. If it is the case that the alleged harm to Plaintiff's reputation has been exacerbated by Defendants' delay, Plaintiff will have ample opportunity to seek compensation for the additional harm as the case progresses. Accordingly, the Court FINDS that Plaintiff has failed to demonstrate that he will be prejudiced if the entry of default is set aside.
B. Meritorious Defense
The Court next examines whether Defendants have set forth a meritorious defense. Defendants argue that they are not liable for the destruction of Plaintiff's mural because their former attorney and her brother directed that the mural be covered with paint. (Defs.' Mot. at 6.) Defendants also argue that Plaintiff's claim "may be barred by the Probate Code." (Id.) In opposition, Plaintiff argues that his claims are not barred by the Probate Code because his claims "are not `creditor's claims' against a decedent, but instead are claims that arose after the decedent building-owner's death." (Pl.'s Opp'n to Defs.' Mot. at 13.) Plaintiff also argues that the Probate Court has no jurisdiction to hear claims arising under the Visual Artists Rights Act. ( Id. at 15.) Finally, Plaintiff asserts that an executor is personally liable for any torts committed by him or his agents in the course of administering an estate. (Id.)
In considering whether a defendant has a meritorious defense, a court must 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 Funds v. Stone, 794 F.2d 508, 513 (9th Cir. 1986). Because the preferred disposition of any case is upon the merits, the showing of a meritorious defense does not involve a heavy burden of proof. Tri-Continental Leasing Corp., Inc. v. Zimmerman, 485 F. Supp. 495, 497 (N.D. Cal. 1980). Thus, a party seeking to set aside a default need not prove his defense by a preponderance of the evidence. Id. Rather, the defaulting party must only produce evidence that establishes a factual or legal basis for the tendered defense. Id. In other words, the defaulting party must set forth a defense "which at least raises a serious question regarding the propriety of a default judgment and which is supported by a developed legal and factual basis." Jones v. Phipps, 39 F.3d 158, 165 (7th Cir. 1994).
Defendants have not set forth a meritorious defense as to their claim that the Probate Code bars Plaintiff's action. Defendants fail to cite any provision of the Probate Code in support of their defense. Defendants do not set forth the statute of limitations period for claims against an estate, nor do they set forth facts indicating when the statute of limitations began to run. Nor do they indicate when the statute of limitations expired. Defendants thus have failed to produce competent evidence that establishes the factual or legal basis for their Probate Code defense.
However, Defendants have set forth a meritorious defense as to their claim that they did not participate in the mural's destruction. Defendants have provided declarations stating that they did not paint over the mural. (See David W. Hill Decl. ¶¶ 11, 14; George R. Hill. Decl. ¶¶ 9-10.) Defendants also have provided declarations stating that they opposed the sale of the property to Mr. Wesson, the party who allegedly ordered the mural's destruction. (See David W. Hill Decl. ¶¶ 5-6; George R. Hill. Decl. ¶¶ 5-6.) There is no evidence in the record indicating that Mr. Wesson was Defendants' agent or was acting with their authorization when he allegedly ordered the mural to be covered. Defendants thus have set forth a factual basis for their defense that they did not destroy the mural. Because there is "some possibility that the outcome of the suit after a full trial will be contrary to the result achieved by the default," the Court FINDS that Defendants have set forth a meritorious defense. See Stone, 794 F.2d at 513.
C. Culpable Conduct
The Court next examines whether Defendants' culpable conduct led to the entry of default. Defendants assert that they were not culpable because they "had no idea that the required pleadings had not been filed or that a default had been taken." (Defs.' Mot. at 4.) Defendants assert that they believed their probate attorney, Mr. Nemeth, was working with Plaintiff's counsel to combine Plaintiff's claim with other claims against the Estate. (Id.) Defendants state that as soon as they discovered that default had been entered, they immediately consulted Mr. Sulzner, who attempted to negotiate a stipulation with Plaintiff to set aside the entry of default. (Id.) In opposition, Plaintiff points out that each Defendant received personal service of the Summons and Complaint on June 14, 2006, well before the Clerk's entry of default on August 11, 2006. ( See Pl.'s Opp'n to Defs.' Mot. at 9.) Plaintiff asserts that Mr. Nemeth refused to respond to correspondence from Plaintiff's counsel stating that Plaintiff would seek default judgment if Defendants did not respond to the Complaint. (Id.) Plaintiff argues that Defendants' conduct was intentional because they did not seek an extension of time to file an Answer, did not enter into good faith negotiations regarding Plaintiff's claim, and did not initiate any contact with Plaintiff until the Court took Plaintiff's Motion for Default Judgment under submission in December 2006. (Id. at 10.)
Because default judgments are generally disfavored, the Ninth Circuit has narrowly defined conduct that will qualify as culpable. See TCI Group Life Ins. Plan v. Knoebber, 244 F.3d 691, 697 (9th Cir. 2001). To amount to culpable, a defendant's conduct must be "`willful, deliberate, or evidence of bad faith.'" Id. (quoting Am. Alliance Inc. v. Eagle Ins. Co., 92 F.3d 57, 61 (2d Cir. 1996)). "Neglectful failure to answer as to which the defendant offers a credible, good faith explanation negating any intention to take advantage of the opposing party, interfere with judicial decisionmaking, or otherwise manipulate the legal process is not `intentional' under our default cases, and is therefore not . . . culpable or inexcusable." See id. at 697-98. Additionally, the Ninth Circuit has held that where an attorney engages in grossly negligent or egregious conduct that results in default, that default may be set aside. See Community Dental Servs. v. Tani, 282 F.3d 1164, 1170 (9th Cir. 2002).
The Court recognizes that Tani dealt with a defendant's motion to set aside default judgment, rather than a motion to set aside entry of default, as presented in the instant case. See 282 F.3d at 1168. However, when ruling on a motion to set aside entry of default, district courts are permitted to consider and liberally interpret the standards for granting relief from a default judgment. See Hawaii Carpenters' Trust Funds v. Stone, 794 F.2d 508, 513 (9th Cir. 1986). The Court thus is permitted to consider whether Defendants' counsel was grossly negligent as part of its analysis of the instant Motion.
In Tani, the defendant's attorney ignored court orders, neglected motions, missed hearings and other court appearances, failed to file pleadings or serve them on opposing counsel, and otherwise "virtually abandoned his client by failing to proceed with his client's defense," comprehensively amounting to "the client's receiving practically no representation at all." Id. at 1170-71. The situation was exacerbated because the attorney repeatedly represented to the defendant that he was performing his responsibilities. Id. at 1171. The Ninth Circuit set aside the default judgment against the defendant because his attorney's conduct "depriv[ed] him of the opportunity to take action to preserve his rights." Id.
Like the attorney in Tani, Defendants' probate attorney, Mr. Nemeth, made numerous errors while handling Defendants' case, and he assured Defendants' other attorney, Mr. Sulzner, that the case was proceeding as planned. Before Plaintiff's action was filed, Mr. Nemeth failed to respond to several letters and phone calls from Plaintiff requesting that the parties discuss Plaintiff's claims. (See Manga Decl. ¶¶ 2-5.) Once the Complaint was filed, Mr. Nemeth did not file a responsive pleading, even though he assured Mr. Sulzner that Plaintiff's suit likely would be barred by the Probate Code. (See Sulzner Decl. ¶ 16.) Although Mr. Nemeth told Mr. Sulzner that he was waiting for Plaintiff to decide whether he wanted to join his suit with the pending probate proceedings, Plaintiff categorically denies that Mr. Nemeth ever suggested that the two actions be joined. (See id. ¶ 15; Pl.'s Opp'n to Defs.' Mot. at 16 n. 2.) Despite the fact that Mr. Nemeth received notice of both the Clerk's entry of default and Plaintiff's Motion for Default Judgment, he never informed Defendants of these developments. (See David W. Hill Decl. ¶ 21.) After the Clerk of the Court entered default, Plaintiff sent Mr. Nemeth a letter notifying him that Plaintiff would file a Motion for Default Judgment if Defendants did not file a motion to set aside the default. (Manga Decl. ¶ 15.) However, Mr. Nemeth never responded to this letter. (Id.) Nor did he file a motion to set aside the entry of default, even though he told Mr. Sulzner that he had retained an attorney with experience in federal court matters to look over the default issue. (See Sulzner Decl. ¶ 30.) Viewed in light of the totality of the circumstances, Mr. Nemeth's conduct appears to be at least as negligent as that of the defendant's attorney in Tani. Mr. Nemeth's failure to respond to Plaintiff's correspondence or to file any document in this case suggests that he "virtually abandoned his client by failing to proceed with his client's defense." See Tani, 282 F.3d at 1170-71. His deficient representation of Defendants was worsened by the fact that he failed to apprise Defendants of the developments in the case and represented that he was performing his responsibilities, thereby "depriving [Defendants] of the opportunity to take action to preserve [their] rights." See id. at 1171. Because the facts indicate that Defendants' failure to file a responsive pleading resulted from counsel's grossly negligent conduct, the Court FINDS that Defendants' conduct was not culpable. See id. at 1169 ("[W]here the client has demonstrated gross negligence on the part of his counsel, a default judgment against the client may be set aside.").
Even if Mr. Nemeth's conduct did not rise to the level of gross negligence, Defendants have set forth facts demonstrating that their failure to file a responsive pleading was not deliberate or willful. Defendants relied on the representations of Mr. Sulzner and Mr. Nemeth that Plaintiff's Complaint was being addressed. ( See David W. Hill Decl. ¶ 12.) Mr. Nemeth never informed Defendants that default had been entered against them or that Plaintiff had filed a Motion for Default Judgment, and this deprived Defendants of the opportunity to take action to preserve their rights until they learned of the entry of default in November 2006. ( See id. ¶ 20.) Once Defendants learned from Plaintiff's counsel that default had been entered, they immediately contacted Mr. Sulzner for advice. ( See id. ¶ 18.) Mr. Sulzner attempted to negotiate with Plaintiff's counsel to set aside the default, and when his attempt was unsuccessful, he filed the instant Motion to Set Aside Entry of Default. ( See Sulzner Decl. ¶¶ 39-49.) The facts submitted by Defendants support their explanation that they failed to respond to Plaintiff's Complaint because they thought that Mr. Nemeth was negotiating with Plaintiff and that he had filed the required pleadings. The Court thus FINDS no indication that Defendants intentionally failed to answer or that they sought to manipulate the legal process.
In sum, all three of the factors used to determine whether an entry of default should be set aside weigh in Defendants' favor. Accordingly, the Court GRANTS Defendants' Motion to Set Aside Entry of Default.
Conclusion
For the reasons set forth above, the Court GRANTS Defendants' Motion to Set Aside Entry of Default [Doc. No. 18], and the Court GRANTS Defendants leave to file their answer within ten days of the date stamped "Filed" on this Order. Plaintiff's Motion for Default Judgment [Doc. No. 12] is DENIED.
IT IS SO ORDERED.