Pacific Renewable Energy Solutions, Inc. v. Sedna Aire Americas, LLC

Opinion

1 2 3 4 5 IN THE UNITED STATES DISTRICT COURT 6 FOR THE TERRITORY OF GUAM 7

8 PACIFIC RENEWABLE ENERGY CIVIL CASE NO. 11-00019 SOLUTIONS, INC., 9 Plaintiff, 10 vs. 11 ORDER AND OPINION 12 SEDNA AIRE AMERICAS, LLC, ENERGY SPECIALTY SOURCE, LLC, ALAN E. 13 VERHONICH, DAVE R. HEIN, and ROCK W. HENDERSON, 14 Defendants. 15 16 This matter is before the court on a Motion to Set Aside Clerk’s Default and a Motion to 17 Set Aside Default Judgment filed by Defendants David R. Hein and Rock W. Henderson. 18 Having considered the Parties’ arguments and submissions, as well as relevant caselaw and 19 authority, the court hereby GRANTS the motions and issues the following opinion. 20 I. FACTUAL AND PROCEDURAL BACKGROUND 21 Pacific Renewable Energy Solutions, Inc. (the “Plaintiff”) entered into an exclusive 22 distributor agreement with Defendant Sedna Aire Americas, LLC (“ Defendant SAA”) for air 23 conditioners that were advertised to use significantly less electricity to cool than conventional air 24 conditioners through solar power. Compl. at ¶¶ 4, 12, 13, ECF No. 1. The Plaintiff alleges that 1 it was induced into expending monies in order to create and develop a new business in which 2 Defendant SAA’s air condition units would be the primary product. Id. at ¶ 14. According to the 3 Plaintiff, it allegedly made several payments by and through its majority shareholder Western 4 Sales Trading Company to Defendant SAA. Id. at ¶ 15. The Plaintiff further alleges that it made 5 additional payments to Defendant SAA, but that these payments, however, were delivered to 6 Defendant Energy Specialty Source, LLC (“Defendant ESS”) as a beneficiary. Id. at ¶ 16. 7 Plaintiff alleges that Defendant SAA delivered defective goods; Defendant SAA’s air condition 8 units were not shipped as promised; and the Plaintiff was induced to design a website for the new

9 business venture and hire a marketing consultant. Id. at ¶¶ 11, 20, 14. The Plaintiff further 10 alleges that Defendant Alan E. Verhonich (“Defendant Verhonich”), Defendant Rock W. 11 Henderson (“Defendant Henderson”) and Defendant Dave R. Hein (“Defendant Hein”) are 12 members of Defendant SAA, while Defendants Henderson and Hein are allegedly members of 13 Defendant ESS. Id. at ¶¶ 5, 7. The Plaintiff alleges that Defendants SAA and ESS are limited 14 liability companies organized in the state of Florida, and that Defendants Verhonich, Hein and 15 Henderson are residents of Florida. Id. at ¶¶ 3, 6, 8-10. 16 On June 14, 2011, the Plaintiff commenced this diversity action. See Compl., ECF No. 1. 17 The complaint alleges seven (7) causes of action: (1) breach of contract; (2) breach of express 18 warranty; (3) breach of warranty of merchantability and fitness for a particular purpose ; (4)

19 performance of deceptive trade practices under Guam’s Deceptive Trade Practices-Consumer 20 Protection Act; (5) intentional misrepresentation; (6) negligent misrepresentation; and (7) unjust 21 enrichment, or in the alternative, constructive fraud or fraudulent conveyance. Id. 22 On July 5, 2011, Defendant Hein was personally served. See Summons, ECF No. 8. 23 Defendant Henderson was served on September 28, 2011. See Summons, ECF No. 17. Neither 24 Defendants Hein nor Henderson filed a response to the complaint. 1 On August 8, 2011, default was entered against Defendants SAA, Hein and Verhonich. 2 ECF Nos. 11 and 12. On October 5, 2011, default was entered against Defendant ESS, and on 3 October 28, 2011 default was entered against Defendant Henderson. ECF Nos. 18 and 21. 4 On November 1, 2011, the Plaintiff moved for default judgment against all named 5 Defendants. See Pl.’s Req., ECF No. 22. On November 29, 2011, default judgment in the 6 amount of One Hundred Eighty-Three Thousand Nine Hundred Forty-Two and 04/100 Dollars 7 ($183,942.04) was entered against the Defendants. Default J., ECF No. 25. 8 On December 13, 2011, Defendants Hein and Henderson moved pro se to set aside the

9 Clerk’s Entry of Default pursuant to Fed. R. Civ. P. Rule 55(c). Defs.’ Mot. to Set Aside Clerk’s 10 Default, ECF No. 27. In opposition to said motion, the Plaintiff contended that Defendants Hein 11 and Henderson had moved under the incorrect rule because default judgment had already been 12 entered. Pl.’s Notice of Failure to Comply with Federal Rules of Civil Procedure, ECF No. 28. 13 The Plaintiff further argued therein that Defendants Hein and Henderson brought their motion 14 purposefully late in order to delay adjudication of the case. The Plaintiff argued that Defendant 15 Henderson waited seventy-six (76) days after he had been served to take any action through the 16 motion to set aside the entry of default, and that such delay was caused by Defendant Henderson 17 himself who had purposefully evaded service of process. The Plaintiff asserted that Defendants 18 Hein and Henderson acted in bad faith in delaying to answer and that such was further evidence

19 of their fraudulent scheme. Furthermore, the Plaintiff indicated that it feared that the Defendants 20 will use any delay they create to hide and transfer assets in Florida to complete their scheme. 21 Finally, the Plaintiff argued that the moving Defendants have no meritorious defenses to support 22 their motion. 23 On January 30, 2012, Defendants Hein and Henderson moved pro se to set aside the 24 default judgment entered against them, arguing that there is good cause to set aside the default 1 judgment pursuant to Fed. R. Civ. P. Rule 60(b). Defs.’ Mot. to Set Aside Default Judgment, 2 ECF No. 30. Therein, Defendants Hein and Henderson claim they have meritorious defenses; 3 the Plaintiff will not suffer prejudice from the requested relief; and they, as the moving 4 Defendants, did not engage in any culpable conduct. The Plaintiff filed its opposition on 5 February 13, 2012, and Defendants Hein and Henderson subsequently filed their reply pro se on 6 March 30, 2012. See Pl.’s Opp’n, ECF No. 31, and Defs.’ Reply, ECF No. 33. 7 On October 23, 2012, the hearing was held on the instant motions. Defendant Hein 8 informed the court that counsel, Attorney Hamlin, had just been retained and requested the court

9 to continue the hearing. See Mins., ECF No. 36. The Plaintiff expressed that it would not object 10 to the continuance if Defendants Hein and Henderson did retain Attorney Hamlin; however, the 11 Plaintiff indicated that it would object if Attorney Hamlin’s representation was tentative, because 12 the Plaintiff believed that there had been a pattern of using procedural maneuvers to gain delay. 13 In response, Defendants Hein and Henderson indicated that they had signed an agreement with 14 Attorney Hamlin. The hearing was continued to November 15, 2012. See Tr., ECF No. 43. 15 At the hearing held on November 15, 2012, Defendants Hein and Henderson appeared 16 telephonically. Defendant Henderson informed the court that he was unable to access 17 documentation. He further informed the court that they did not have counsel and that they were 18 continuing to proceed pro se. The Plaintiff objected to a continuance of the hearing. The court

19 overruled the Plaintiff’s objection and continued the hearing until November 27, 2012 to allow 20 Defendants Hein and Henderson the opportunity to be heard. See Mins., ECF No. 42. 21 Defendants Hein and Henderson were ordered to file their documents in support of their motions 22 by November 23, 2012. 23 Defendants Hein and Henderson did not file any documents by November 23, 2012. 24 Consequently, on November 23, 2012, Plaintiff’s counsel filed an objection to the moving 1 Defendants’ use of any additional documents at the motion hearing based on their failure to file 2 such. See ECF No. 44. 3 The hearing on the instant motions was conducted January 24, 2013. 4 II. ANALYSIS 5 A. Legal Standard 6 A district court may set aside the entry of default upon a showing of good cause pursuant 7 to Fed. R. Civ. P. Rule 55(c). Once a default judgment has been entered, relief must be sought 8 under Fed. R. Civ. P. Rule 60(b). District courts have the discretion to relieve a party from a

9 judgment or order for reason of “mistake, inadvertence, surprise, or excusable neglect” pursuant 10 to Fed. R. Civ. P. Rule 60(b), provided that the party moves for such relief within one year. TCI 11 Group Life Ins. Plan v. Knoebber, 244 F.3d 691, 695 (9th Cir. 2001). 12 The application of Rule 60(b) is committed to the discretion of the district court. TCI 13 Group, 244 F.3d at 695. As a general matter, Rule 60(b) is “remedial in nature and ... must be 14 liberally applied.” Falk v. Allen, 739 F.2d 461, 463 (9th Cir. 1984). More specifically, in 15 applying the general terms of Rule 60(b) to default judgments, the Ninth Circuit has emphasized 16 that such judgments are “appropriate only in extreme circumstances; a case should, whenever 17 possible, be decided on the merits.” Falk, 739 F.2d at 463. 18 Where a defendant seeks relief under Rule 60(b)(1) based upon “excusable neglect,” the

19 court applies the same three factors governing the inquiry into “good cause” under Rule 55(c). 20 These factors, which courts consistently refer to as the “Falk factors” are: (1) whether culpable 21 conduct of the defendant led to the default; (2) whether the moving party has no meritorious 22 defense; and (3) whether re-opening the default would prejudice the non-moving party. Falk, 739 23 F.2d at 463. These factors are disjunctive, and the court is free to deny the motion to vacate a 24 default judgment if any of the three factors is true. American Ass'n of Naturopathic Physicians v. 1 Hayhurst, 227 F.3d 1104, 1108 (9th Cir. 2000). 2 It is the movant’s burden to show the existence of a justification for Rule 60(b) relief. 3 Cassidy v. Tenorio, 856 F.2d 1412, 1415 (9th Cir. 1988). Because Defendants Hein and 4 Henderson are proceeding pro se, the court construes their pleadings liberally. Morrison v. Hall, 5 261 F.3d 896, 899 n.2 (9th Cir. 2001). “The Supreme Court ... has made it clear that pleadings of 6 pro se litigants are to be held to less rigorous standards than those drafted by attorneys.” Cripps 7 v. Life Ins. Co. of North America, 980 F.2d 1261, 1268 (9th Cir. 1992) (citing Haines v. Kerner, 8 404 U.S. 519, 520 (1972)). Additionally, the Ninth Circuit has stated that “[its] rules for

9 determining when a default should be set aside are solicitous towards movants, especially those 10 whose actions leading to the default were taken without the benefit of legal representation.” 11 United States v. Signed Personal Check No. 730 of Yubran S. Mesle, 615 F.3d 1085, 1089 (9th 12 Cir. 2010). For these reasons, the court construes the movants’ motions and submissions 13 liberally in determining whether they have satisfied their evidentiary burdens. 14 B. Culpable Conduct 15 The Plaintiff argues that Defendants Hein and Henderson (hereinafter referred to 16 collectively as “Defendants”) made an intentional, calculated decision not to respond to the 17 Plaintiff’s complaint. The Plaintiff contends that the Defendants have met the requisite Ninth 18 Circuit standard for culpability by not responding when they had knowledge of the complaint.

19 The Plaintiff argues that the Defendants’ culpability extends further given its contention that 20 Defendant Henderson evaded service on multiple occasions by setting up appointments for 21 service of process then breaking them, ignoring further communications and evading personal 22 service of process until he was eventually found in Georgia. 23 The Defendants contend that their conduct is excusable rather than culpable. For their 24 part, the Defendants do not deny that they did not file a response in the time allotted for under 1 the rules; rather, they assert they did not do so because they were unable to retain local counsel 2 who did not have a conflict with the Plaintiff’s managing director. The Defendants contend that 3 they contacted approximately six (6) to eight (8) attorneys, and, in support thereof, submitted an 4 email from one (1) firm declining representation because of a conflict of interest. See Defs.’ 5 Reply, Ex. C, ECF No. 33. The Defendants also indicate that they were under the mistaken 6 impression that Defendant Verhonich was responsible for responding to the complaint. In 7 support of this position, the Defendants submitted a draft produced by Defendant Verhonich. 8 See Defs.’ Reply, Ex. A, ECF No. 33. According to the Defendants, Defendant Verhonich never

9 followed through as was promised. The Defendants further contend Defendant Henderson did 10 not purposefully evade service as Defendant Henderson is a resident of Georgia; Defendant 11 Henderson attempted to see if a power of attorney could be appointed to receive the summons; 12 and Defendant Henderson remained in constant communication with the Sheriff’s Department 13 attempting to serve the summons. 14 The Ninth Circuit defines culpable conduct for Rule 60(b) purposes as conduct for which 15 “there is no explanation of the default inconsistent with a devious, deliberate, willful, or bad faith 16 failure to respond.” TCI Group, 244 F.3d at 698. As the Ninth Circuit explained: 17 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 18 decisionmaking, or otherwise manipulate the legal process is not ‘intentional’ under our default cases, and is therefore not necessarily – 19 although it certainly may be, once the equitable factors are considered– culpable or inexcusable. 20 Id. at 697-698. The Ninth Circuit has only found culpability based simply on the failure to 21 answer after being provided with notice in some limited circumstances in which the moving 22 party was “a legally sophisticated entity or individual,” and has specifically cautioned against 23 such a finding when the individual was “not a lawyer” and “was unrepresented at the time of the 24 default.” Mesle, 615 F.3d at 1093. 1 Based on the foregoing, the court finds that the conduct of the Defendants was not 2 culpable. The court finds that although the Defendants plainly did not act wisely, their conduct 3 and explanation of the default are neither devious, deliberate, willful nor indicative of a bad faith 4 failure to respond. The Defendants have made an adequate showing that they had no intention to 5 take advantage of the opposing party, interfere with judicial decision making, or otherwise 6 manipulate the legal process. 7 C. Meritorious Defense

8 The Ninth Circuit has held that to demonstrate the existence of a meritorious defense, a 9 party must offer up more than mere conclusory assertions but “must present specific facts that 10 would constitute a defense” if the litigation was permitted to proceed. TCI Group, 244 F.3d at 11 700 (quoting Madsen v. Bumb, 419 F.2d 4, 6 (9th Cir. 1969)). “A mere denial without facts to 12 support it is not enough to justify vacating a default or default judgment.” Franchise Holding II, 13 LLC v. Huntington Restaurants Group, Inc., 375 F.3d 922, 926 (9th Cir. 2004) (quoting Madsen, 14 419 F.2d at 6). 15 The Ninth Circuit has noted that the burden on the party moving to vacate a default 16 judgment “is not extraordinarily heavy”; the only requirement is that “a sufficient defense is 17 assertible” and litigation of the claims would not be “a wholly empty exercise.” TCI Group, 244 18 F.3d at 700. All that is necessary to satisfy the “meritorious defense” requirement is to allege 19 sufficient facts that, if true, would constitute a defense: “the question whether the factual allegation [i]s true” is not to be determined by the court when it decides 20 the motion to set aside the default. Rather, that question “would be the subject of the later litigation.” 21 Mesle, 615 F.3d at 1094 (quoting TCI Group, 244 F.3d at 700). 22 In the instant case, the Defendants argue that if given the opportunity to proffer a defense, 23 they will file a 12(b)(1) motion for lack of subject matter jurisdiction, contending that the 24 underlying exclusive distributor agreement, which they submitted as an exhibit, has a binding 1 arbitration clause that is controlling. See Defs.’ Mot. to Set Aside Default J., Ex., ECF No. 30. 2 The Defendants also claim that the Plaintiff will have to pierce the corporate veil, which will 3 necessitate the application of Florida caselaw, if they want to sue the Defendants in their 4 personal capacities. Finally, the Defendants contend that they have not intermingled their assets 5 with Defendants SAA and ESS. 6 The Plaintiff contends that it does not matter whether the Defendants intermingled their 7 assets; the Florida legal standard for piercing the corporate veil is irrelevant; and the arbitration 8 clause is unenforceable.

9 The court finds that, without reaching the full merits of the defense relating to lack of 10 subject matter jurisdiction on the basis of the arbitration clause, the Defendants have at least 11 articulated a valid argument. The Defendants assert that the arbitration clause in the contract at 12 issue here precludes this court from deciding any claims. The Plaintiff, however, counters that 13 Guam law precludes the enforcement of binding arbitration agreements in the sale of goods 14 unless certain circumstances occur. Section 32104(c), Title 5 Guam Code Annotated, states the 15 following: 16 An agreement to arbitrate constitutes an important waiver of the right of access to the courts. Therefore, as to any agreement to arbitrate executed after the effective 17 date of this chapter, the agreement to arbitrate any matter arising out of the sale of goods or services for any amount of consideration, or any matter or contingency 18 arising therefrom, shall be treated as a waiver of rights under this chapter, is not binding on any consumer unless there is full compliance both with this section 19 and with this chapter, each party is represented by an attorney, and the agreement to arbitrate is signed by the attorneys representing each of the parties. 20 The ultimate success of the Defendants’ defense is not presently before the court, and so 21 the court declines to make this determination at this time. At this stage, the issue is simply 22 whether further litigation “would not be a wholly empty exercise.” TCI Group, 244 F.3d at 700. 23 Based on the foregoing and given the preference to have cases decided on the merits, the court 24 believes that the Defendants have met their burden of showing a meritorious defense. 1 D. Prejudice 2 The final factor to consider is whether vacating the default judgment and permitting the 3 Defendants to answer would prejudice the Plaintiff. “To be prejudicial, the setting aside of a 4 judgment must result in greater harm than simply delaying the resolution of a case. Rather, ‘the 5 standard is whether [plaintiff’s] ability to pursue his claim will be hindered.’” TCI Group, 244 6 F.3d at 701. For a delay to be prejudicial, it must “result in tangible harm such as loss of 7 evidence, increased difficulties of discovery, or greater opportunity for fraud or collusion.” 8 Thompson v. American Home Assurance Company, 95 F.3d 429, 433–34 (9th Cir. 1996). Being

9 forced to litigate on the merits cannot be considered prejudicial because the plaintiff would have 10 had to litigate the merits of the case had there been no default. TCI Group, 244 F.3d at 701. 11 The parties dispute whether the Plaintiff would suffer prejudice if the court sets aside the 12 entry of default judgment. The Defendants contend that there exists no conceivable prejudice to 13 the Plaintiff. According to the Defendants, there will be ample opportunity for the Plaintiff to 14 seek discovery upon the re-opening of this case; there is no indication that setting aside the 15 default will provide greater opportunity for fraud or collusion; and the delay in their appearance 16 does not rise to the level of prejudice sufficient to outweigh the strong interest in adjudicating 17 disputes on their merits. Defs.’ Mot., ECF No. 30. The Plaintiff contends that it has hired law 18 firms and process servers to secure service of process in the case and to enforce proceedings in

19 Florida. The Plaintiff further indicates that it is concerned that the Defendants may have 20 conveyed their property to avoid a collection action. 21 The court finds the Plaintiff’s proffered bases for a finding of prejudice unpersuasive. 22 Granting the Defendants’ motions will obviously prejudice the Plaintiff in that the ultimate 23 resolution of the case will be delayed; but, delay alone is insufficient to establish prejudice. In 24 the case at bar, no evidence in the record suggests a real risk that the Plaintiff will not be able to 1 enforce a judgment entered in this case against the Defendants if the default judgment is set 2 aside. Moreover, the Plaintiff’s additional basis for a finding of prejudice—that the delay of this 3 action may have permitted the Defendants to hide or fraudulently convey assets—is unsupported. 4 In the absence of any evidence of such conduct on the Defendants’ part, the Plaintiff’s argument 5 appears speculative. Accordingly, the court finds that the Plaintiff’s ability to pursue its claim 6 will not be hindered by setting aside the default judgment. 7 Taking all of the factors in consideration, the court hereby finds that the clerk’s entry of 8 default and the default judgment entered against Defendants Hein and Henderson should be set

9 aside. The Defendants have met their burden in demonstrating good cause. First, the 10 Defendants’ conduct was not culpable. The Defendants made an adequate showing that they had 11 no intention to take advantage of the opposing party, interfere with judicial decisionmaking or 12 otherwise manipulate the legal process. Second, the Defendants met their burden of showing a 13 meritorious defense. Third, the record does not support the conclusion that the Plaintiff would 14 be unduly prejudiced by granting the Defendants’ motion to set aside the default judgment. In 15 addition to the three factors discussed above, the Defendants timely moved to set aside the 16 default judgment. Furthermore, the court gives great weight to the established policies favoring 17 resolution of claims on the merits and disfavoring default judgments, especially when a pro se 18 party is the subject of the default.

19 III. CONCLUSION 20 For the reasons set forth above, the court hereby GRANTS the Defendants’ motions to 21 set aside the clerk’s default and default judgment. Specifically, the court orders the following: 22 1. The underlying entry of default and default judgment entered against Defendants Hein 23 24 1 and Henderson are hereby vacated; ' and 2 2. Defendants Hein and Henderson are ordered to answer or otherwise respond to the 3 complaint no later than April 30, 2013. Failure to do so may result in the court 4 reinstating the default judgment. 5 IT IS SO ORDERED. 6 7 /s/ Frances M. Tydingco-Gatewood 2 Chief Judge 8 me @ Dated: Apr 02, 2013

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 ||! Defendants Hein and Henderson requested that their motions also apply to Defendant ESS. Pursuant to General Rule 20.1 of the District Court of Guam, a corporation may not appear pro 24 || se in a case in this court. Accordingly, the court declines to vacate the default judgment as it relates to Defendant ESS. 12