Prosperity Funding, Inc. v. IDC Technologies, Inc

Opinion

NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION

PROSPERITY RECOVERY, INC., Case No. 20-CV-03679-LHK

Plaintiff, ORDER DENYING IDC’S MOTION FOR DEFAULT JUDGMENT v. Re: Dkt. No. 61 IDC TECHNOLOGIES, INC, et al., Defendants. Before the Court is Defendant IDC Technologies, Inc.’s (“IDC”) renewed motion for default judgment as to IDC’s crossclaims against Defendant Innova Consulting Services LLC (“Innova”). ECF No. 61. Having considered IDC’s submissions, the relevant law, and the record in this case, the Court DENIES IDC’s motion for default judgment and DISMISSES IDC’s counterclaims against Innova with prejudice. This case arises from the parties’ disputes over two related contracts: (1) a “Professional Services Agreement” (“PSA”) between Innova and IDC, ECF No. 1 ¶¶ 16–17, ECF No. 21 ¶¶ 9– 10; and (2) a “Factoring and Security Agreement” (“FSA”) between Innova, Defendant Vivos Group, Inc. (“Vivos”), and Plaintiff Prosperity Recovery, Inc. (“Plaintiff”), ECF No. 1 ¶¶ 11–12. As relevant to the instant motion, IDC contends that Innova assigned its rights to payment for work performed under the PSA to Plaintiff and that Innova must indemnify IDC for any claims brought by Plaintiff against IDC. Below, the Court describes in turn: (1) the parties; (2) the PSA; (3) the FSA; (4) the parties’ disputes regarding payments owed by IDC to Innova for work performed under the PSA; and (5) the procedural history of the instant case. A. The Parties Plaintiff Prosperity is a North Carolina corporation with its corporate headquarters in North Carolina. ECF No. 1 ¶ 1 (“Compl.”). Plaintiff is in the “factoring” business, which involves the buying and selling of assets called “Accounts.” Id. ¶ 9. In this context, the term “Account” refers to a party’s right to demand payment for goods or services that the party already has supplied. See id.; Cal. Com. Code § 9102(a)(2). Plaintiff purchases Accounts from companies and then attempts to collect payments on the Accounts from the companies’ customers (“Account Debtors”). Compl. ¶ 9; Cal. Com. Code § 9102(a)(3). Defendant IDC is a California corporation with its corporate headquarters in California. ECF No. 21 ¶ 1. IDC is “engaged in the business of providing information technology services.” Compl., Exhibit C, Recitals. IDC’s clients are “located in USA and Canada.” Id. Defendant Innova is a Delaware limited liability company with two members. ECF No. 21 ¶ 3. Because both of Innova’s members are residents of Virginia, Innova is a resident of Virginia. Id. Innova provides consulting services to information technology companies. Id. ¶ 9. Defendant Vivos is a Delaware corporation with its corporate headquarters in Delaware. ECF No. 1 ¶ 3. B. The Professional Services Agreement On July 15, 2018, Innova entered a “Professional Services Agreement” (“PSA”) with IDC “whereby Innova agreed to provide information technology consultants to IDC for placement and to perform work for IDC’s end-clients.” ECF No. 21 ¶ 9. “In return, IDC agreed to pay Innova for the hours worked by Innova’s consultants for IDC’s end-clients.” Id. However, the PSA specified that Innova would continue to be responsible for paying these consultants’ wages and for complying with any applicable federal and state employment laws. Id. ¶ 10(b). If IDC notified Innova that Innova had not paid wages to the consultants or had not complied with relevant employment laws, Innova’s failure to rectify the problem within seven days would allow IDC to terminate the PSA. Id. ¶ 10(g). Additionally, Innova agreed to indemnify IDC for any claims brought against IDC arising from Innova’s failure to pay wages or to comply with employment laws. Id. ¶ 10(d). The PSA also provided that, to receive payment for supplying consultants to IDC’s clients, Innova would have to submit monthly invoices that met certain requirements. Id. ¶ 10(e). Specifically, the invoices had to be based on hourly timesheets that were approved by IDC’s clients. Id. The PSA also entitled IDC to withhold any payment that IDC’s clients disputed in good faith. Id. ¶ 10(f). Pursuant to the PSA, Innova supplied IDC’s clients with multiple consultants from August 2018 through September 2019. Id. ¶ 11. C. The Factoring and Security Agreement On August 13, 2018, Plaintiff entered a “Factoring and Security Agreement” (“FSA”) with Innova and Vivos. Compl. ¶ 11. Under the FSA, Plaintiff agreed to purchase certain Accounts (“Purchased Accounts”) from Innova and Vivos and to provide Innova and Vivos with loans for running their businesses. Id. ¶ 12. To secure the loans, Plaintiff acquired an interest in all of Innova’s and Vivos’s assets, including all Accounts not included in the Purchased Accounts (“Remaining Accounts”). Id. ¶ 13. Additionally, Innova and Vivos appointed Plaintiff as their “attorney-in-fact.” Id. ¶ 14. This appointment gave Plaintiff several powers with respect to the Purchased Accounts and the Remaining Accounts. Id. For example, Plaintiff obtained the power to receive and to distribute payments owed to Innova and Vivos on all Accounts; the power to notify Account Debtors for all Accounts that payments should be made directly to Plaintiff; the power to file suit to collect payments owed on Purchased Accounts; and the power to contact Account Debtors for any purpose. Id.; see also id., Exhibit A at 6. Finally, the FSA defined several “Events of Default” and provided Plaintiff with additional powers “[u]pon the occurrence of any Event of Default.” See id. ¶ 14; id., Exhibit A at 10. Most importantly, the FSA provided that any Event of Default would allow Plaintiff to “collect all Accounts, regardless of whether such Accounts are Purchased Accounts.” See id. ¶ 14; id., Exhibit A at 10. D. The Parties’ Disputes Over Payments Owed to Innova Under the Professional Services Agreement Because certain payments owed by IDC to Innova for work performed under the PSA were included in the Purchased Accounts, the FSA gave Plaintiff the right to collect those payments from IDC. Compl. ¶ 24. Additionally, because the remaining payments owed by IDC to Innova for work performed under the PSA were included in the Remaining Accounts, the FSA gave Plaintiff a security interest in those remaining payments. Id. ¶ 31. On August 17, 2018, Plaintiff sent IDC a notice stating that Plaintiff had acquired an interest in all payments owed by IDC to Innova for work performed under the PSA. Id. ¶ 20. The notice requested that IDC make those payments directly to Plaintiff. Id. On August 28, 2018, IDC acknowledged receipt of Plaintiff’s notice. See id. ¶ 21; id., Exhibit D. IDC alleges that, in September 2019, “IDC learned that multiple Innova employees or contractors placed with IDC’s end-clients had not been paid wages or other compensation owed to them for services performed under the PSA for IDC’s end-clients.” ECF No. 21 ¶ 12. Accordingly, on September 10, 2019, IDC sent a letter to Innova demanding that Innova provide IDC with the names of all Innova consultants who had not been paid and with proof that Innova had complied with all relevant employment laws. Id. ¶ 13. IDC also demanded that Innova indemnify IDC for any claims arising from “Innova’s failure to compensate its employees.” Id. Because Innova failed to respond to IDC’s letter by the seven day deadline set by the PSA, IDC terminated the PSA on September 20, 2019. Id. ¶¶ 15–16. On September 26, 2019, IDC “sent a letter to Innova requesting that IDC provide a list of its employees paid by Innova that Innova placed with IDC’s end-clients.” Id. ¶ 17. On November 25, 2019, Innova filed a suit in California state court alleging that “IDC owes Innova a total of $1,315,123.83 for invoices submitted by Innova to IDC from August of 2018 through September of 2019.” Id. ¶ 18. On February 24, 2020, Plaintiff sent a letter to IDC demanding that IDC pay Plaintiff the amounts owed to Innova under the PSA. Id. ¶ 21. On February 25, 2020, IDC sent Innova a letter demanding that “Innova fully indemnify IDC from any such claims or actions instituted or pursued by [Plaintiff] against IDC.” Id. ¶ 22. E. Procedural History 1. Plaintiff’s Claims and Plaintiff’s Motions for Default Judgment On June 3, 2020, Plaintiff filed a complaint asserting six claims against Innova, Vivos, and IDC. See Compl. ¶¶ 43–101. Specifically, Plaintiff asserted: (1) a breach of contract claim against IDC, id. ¶¶ 43–58; (2) a services rendered claim against IDC, id. ¶¶ 59–66; (3) an account stated claim against IDC, id. ¶¶ 67–76; (4) a declaratory judgment claim against Innova, Vivo, and IDC, id. ¶¶ 77–81; (5) a promissory estoppel claim against IDC, id. ¶¶ 82–92; and (6) a breach of contract claim against Innova and Vivos, id. ¶¶ 93–101. On June 8, 2020, Plaintiff served each defendant with the complaint. ECF Nos. 8–10. Accordingly, the deadline for each defendant to respond was June 29, 2020. See Federal Rule of Civil Procedure 12(a)(1)(A)(i). On June 17, 2020, Plaintiff and IDC filed a joint stipulation extending IDC’s deadline to respond to the complaint to July 14, 2020. ECF No. 12. On July 14, 2020, IDC filed an answer to Plaintiff’s complaint. ECF No. 20. On July 17, 2020, Plaintiff filed a motion for entry of default as to Innova and Vivos. ECF Nos. 23, 24. On July 20, 2020, the Clerk entered defaults as to Innova and Vivos with respect to Plaintiff’s claims. ECF Nos. 25, 26. On March 25, 2021, Plaintiff filed a motion for default judgment as to Innova and Vivos with respect to Plaintiff’s declaratory judgment claim and with respect to Plaintiff’s breach of contract claim against Innova and Vivos. ECF No. 54. On June 17, 2021, the Court denied Plaintiff’s motion for default judgment because Plaintiff had failed to address subject matter jurisdiction and personal jurisdiction. ECF No. 59 at 1–2. Although the Court granted Plaintiff leave to file a renewed motion for default judgment, the Court warned that Plaintiff’s failure to cure the jurisdictional deficiencies would result in denial of a subsequent motion for default judgment with prejudice. Id. at 2. On June 29, 2021, Plaintiff filed a renewed motion for default judgment as to Innova and Vivos. ECF No. 62. On December 21, 2021, the Court denied Plaintiff’s renewed motion for default judgment as to Innova and Vivos because Plaintiff had again failed to show that the Court has personal jurisdiction over Innova and Vivos. ECF No. 71. Accordingly, the Court dismissed Plaintiff’s claims against Innova and Vivos with prejudice. Id. 2. IDC’s Counterclaim and Crossclaims and IDC’s Motions for Default Judgment Meanwhile, on July 14, 2020, IDC filed a counterclaim against Plaintiff and six crossclaims against Innova. ECF No. 21. Specifically, IDC asserted: (1) an interpleader claim against Prosperity and Innova, id. ¶¶ 25–28; (2) a breach of contract claim against Innova, id. ¶¶ 29–32; (3) an intentional interference with prospective economic benefit claim against Innova, id. ¶¶ 33–38; (4) a negligent interference with prospective economic benefit claim against Innova, id. ¶¶ 39–43; (5) a contractual indemnification claim against Innova, id. ¶¶ 44–51; and (6) an implied indemnification claim against Innova, id. ¶¶ 52–56. Also on the same day, IDC served Innova with the crossclaims. ECF No. 22. On August 5, 2020, Plaintiff filed an answer to IDC’s counterclaim. ECF No. 31. On August 13, 2020, IDC filed a motion for entry of default as to Innova. ECF No. 32. On August 14, 2020, the Clerk entered default as to Innova with respect to IDC’s crossclaims. ECF No. 35. On March 25, 2021, IDC filed a motion for default judgment as to Innova with respect to IDC’s interpleader claim and with respect to IDC’s indemnity claims. ECF No. 55. On June 17, 2021, the Court denied IDC’s motion for default judgment because IDC had failed to address subject matter jurisdiction, personal jurisdiction, and the factors outlined in Eitel v. McCool, 782 F.2d 1470 (9th Cir. 1986). ECF No. 60 at 1–2. Although the Court granted IDC leave to file a renewed motion for default judgment, the Court warned that IDC’s failure to cure the jurisdictional and other deficiencies would result in denial of a subsequent motion for default judgment with prejudice. Id. at 2. On June 25, 2021, IDC filed a renewed motion for default judgment as to Innova with respect to IDC’s interpleader claim and with respect to IDC’s indemnity claims. ECF No. 61 (“Mot.”). Pursuant to Federal Rule of Civil Procedure 55(b)(2), the Court may enter a default judgment when the Clerk, under Rule 55(a), has previously entered a party’s default. Fed. R. Civ. P. 55(b). “The district court’s decision whether to enter a default judgment is a discretionary one.” Aldabe v. Aldabe, 616 F.2d 1089, 1092 (9th Cir. 1980). Once the Clerk enters default, all well- pleaded allegations regarding liability are taken as true, except with respect to damages. See Fair Hous. of Marin v. Combs, 285 F.3d 899, 906 (9th Cir. 2002) (“With respect to the determination of liability and the default judgment itself, the general rule is that well-pled allegations in the complaint regarding liability are deemed true.”); TeleVideo Sys. v. Heidenthal, 826 F.2d 915, 917– 18 (9th Cir. 1987) (“[U]pon default the factual allegations of the complaint, except those relating to the amount of damages, will be taken as true.”). However, the “defendant is not held to admit facts that are not well-pleaded or to admit conclusions of law.” See DIRECTV, Inc. v. Hoa Huynh, 503 F.3d 847, 854 (9th Cir. 2007). As a threshold step, “when entry of judgment is sought against a party who has failed to plead or otherwise defend, a district court has an affirmative duty to look into its jurisdiction over both the subject matter and the parties.” In re Tuli, 172 F.3d 707, 712 (9th Cir. 1999) (citations omitted). Indeed, a “judgment entered without personal jurisdiction over the parties is void.” Id. Additionally, “the party seeking to invoke the court’s jurisdiction bears the burden of establishing that jurisdiction exists.” Scott v. Breeland, 792 F.2d 925, 927 (9th Cir. 1986) (citing Data Disc, Inc. v. Sys. Tech. Assocs., 557 F.2d 1280, 1285 (9th Cir. 1977)). “Factors which may be considered by courts in exercising discretion as to the entry of a default judgment include: (1) the possibility of prejudice to the plaintiff, (2) the merits of plaintiff’s substantive claim, (3) the sufficiency of the complaint, (4) the sum of money at stake in the action; (5) the possibility of a dispute concerning material facts; (6) whether the default was due to excusable neglect, and (7) the strong policy underlying the Federal Rules of Civil Procedure favoring decisions on the merits.” Eitel v. McCool, 782 F.2d 1470, 1471–72 (9th Cir. 1986). IDC seeks default judgment as to Innova with respect to two sets of claims: (1) the interpleader claim against Innova and Plaintiff; and (2) the indemnity crossclaims against Innova. See Mot. at 2, 14–16. Specifically, with respect to the interpleader claim, IDC seeks a judgment declaring that “Prosperity holds the sole right of payment from IDC” with respect to all monetary obligations owed by IDC to Innova for work performed under the [Professional Services Agreement] and that Innova “does not have the right to enforce claims on the [obligations] against IDC.” Id. at 14–15. In turn, with respect to the indemnity claims, IDC seeks a judgment declaring that Innova must indemnify IDC for any damages that Plaintiff obtains from IDC. Id. at 15–16. The Court begins by explaining why, despite the Court’s dismissal of Plaintiff’s claims against Innova, the Court must consider IDC’s crossclaims against Innova. The Court then addresses whether IDC has established personal jurisdiction over Innova. Because the Court finds that IDC has not established personal jurisdiction over Innova, the Court need not address whether IDC has satisfied the other requirements necessary for an entry of default judgment. A. Although the Court Has Dismissed Plaintiff’s Claims Against Innova, the Court Must Consider IDC’s Crossclaims Against Innova On December 21, 2021, the Court dismissed Plaintiff’s claims against Innova with prejudice because Plaintiff failed to establish that the Court has personal jurisdiction over Innova. ECF No. 71. Thus, the Court must determine whether the dismissal of Plaintiff’s claims against Innova prevents IDC from asserting crossclaims against Innova and moving for default judgment on such crossclaims. Although there is relatively little case law addressing what must happen to crossclaims against a defendant when all original claims against that defendant are dismissed for lack of jurisdiction, several district courts have stated that the crossclaims survive if there is an independent basis for jurisdiction. See, e.g., Nat'l Tr. for Historic Pres. v. 1750 K Inv. P'ship, 100 F.R.D. 483, 486 (E.D. Va. 1984) (“Generally, dismissal of the original claim out of which the cross-claim arises does not result in dismissal of the cross-claim if it stands on independent jurisdictional grounds.”); Elliott v. Fed. Home Loan Bank Bd., 233 F. Supp. 578, 588–89 (S.D. Cal. 1964), rev'd on other grounds, 386 F.2d 42 (9th Cir. 1967) (holding that a “Cross-claim . . . will vest jurisdiction in the court if there is an independent ground of jurisdiction on the Cross- claim, regardless of jurisdiction or lack of it on the original action”). Additionally, a leading treatise on federal civil procedure states that “the dismissal of the original suit or of a counterclaim therein for lack of . . . jurisdiction will require the court also to dismiss the crossclaim, unless that claim is supported by an independent basis of . . . jurisdiction.” Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure § 1433 Crossclaims—Jurisdiction and Venue over Crossclaims (3d ed.). Accordingly, in the following section, the Court addresses whether IDC has independently established personal jurisdiction over Innova. B. IDC Has Failed to Show that Innova is Subject to Personal Jurisdiction in California IDC argues that Innova is subject to specific personal jurisdiction in California because IDC’s crossclaims arise from the Professional Services Agreement (“PSA”) and because Innova has sued IDC in California. For the reasons below, the Court rejects IDC’s arguments. Under Ninth Circuit law, specific personal jurisdiction over a nonresident defendant is appropriate when (1) the nonresident defendant “purposefully direct[s] his activities or consummate[s] some transaction with the forum or resident thereof; or perform[s] some act by which he purposefully avails himself of the privilege of conducting activities in the forum”; (2) the claim “arises out of or relates to the defendant’s forum-related activities”; and (3) the exercise of jurisdiction is reasonable. Schwarzenegger v. Fred Martin Motor Co., 374 F.3d 797, 802 (9th Cir. 2004). If the plaintiff succeeds in satisfying the first two prongs, the burden shifts to the nonresident defendant to “present a compelling case” that the exercise of jurisdiction would not be reasonable. Id. IDC contends that Innova established substantial contacts with California by “entering into a contract with IDC in which it agreed to have its employees work in California and then having them actually work in California.” Mot. at 13. Additionally, IDC contends that Innova “availed itself of the benefits of California by filing a lawsuit against IDC in Santa Clara County Superior Court.” Id. However, the United States Supreme Court has held that, under the due process clause, a nonresident defendant is not subject to jurisdiction in a forum simply because the defendant has made a contract with a resident of the forum. See Burger King Corp. v. Rudzewicz, 471 U.S. 462, 478 (1985) (“If the question is whether an individual’s contract with an out-of-state party alone can automatically establish sufficient minimum contacts in the other party’s home forum, we believe the answer clearly is that it cannot.”). Instead, to determine whether a contract with a resident of a forum subjects a nonresident to personal jurisdiction in the forum, courts must evaluate “prior negotiations and contemplated future consequences, along with the terms of the contract and the parties’ actual course of dealing.” Id. at 479. California state courts have interpreted these principles to mean that “‘the breach of a contract made and to be performed in the state’ may be sufficient to support the exercise of personal jurisdiction” over a nonresident. See Roman v. Liberty University, Inc., 162 Cal. App. 4th 670, 679 n.1 (2008) (quoting Martin v. Detroit Lions, Inc., 32 Cal. App. 3d 472 (1973)). Although IDC’s renewed motion for default judgment contends that the PSA required Innova’s employees to work in California, Mot. at 13, the PSA states only that Innova was required to perform work “in USA and Canada.” See Compl., Exhibit C, Recitals. IDC’s crossclaims themselves merely allege that “IDC placed multiple consultants employed or contracted by Innova with [IDC’s] end-clients.” ECF No. 21 ¶ 11. Because IDC’s renewed motion for default judgment cannot cite any factual allegations supporting personal jurisdiction in IDC’s crossclaims themselves, IDC’s renewed motion for default judgment relies entirely on a declaration in support of the renewed motion. See Mot. at 13 (citing ECF No. 61-2 ¶ 5). However, the declaration merely states that “Innova agreed to provide IT consultants to IDC for placement and to perform work for IDC’s end-clients.” ECF No. 61-2 ¶ 5. Thus, the PSA, IDC’s crossclaims themselves, and the supporting evidence for IDC’s renewed motion make no mention of ties to California. Thus, IDC has provided no evidence that Innova’s employees worked in California. IDC also fails to explain why Innova’s lawsuit against IDC subjects Innova to personal jurisdiction. After stating that Innova “availed itself of the benefits of California by filing a lawsuit against IDC in Santa Clara County Superior Court,” IDC summarily asserts that Innova’s lawsuit subjects Innova to personal jurisdiction. See Mot. at 13 (“Why Innova failed to file a response in District Court while maintaining its lawsuit against IDC in Santa Clara County Superior Court is unknown.”). However, even if Innova’s lawsuit qualifies as a substantial contact with California, IDC must also show that IDC’s interpleader and indemnity claims “arise[] out of or relate[] to” Innova’s lawsuit. Schwarzenegger, 374 F.3d at 802. Because IDC has not even attempted to make that showing, the Court cannot conclude that Innova’s lawsuit subjects Innova to specific personal jurisdiction. Thus, the Court finds that IDC has not established personal jurisdiction over Innova. The Court finds that allowing IDC to amend its crossclaims against Innova or to file a third motion for default judgment would be futile and cause undue delay. See Leadsinger, Inc. v. BMG Music Publ’g, 512 F.3d 522, 532 (9th Cir. 2008). IDC’s first motion for default judgment failed to address personal jurisdiction, subject matter jurisdiction, and the Eitel default judgment factors. See ECF No. 60 at 1–2. The Court warned IDC that failure to cure these deficiencies would result in the dismissal of a subsequent motion for default judgment with prejudice. Id. at 2. IDC’s renewed motion for default judgment fails to establish personal jurisdiction. Indeed, IDC’s argument that the PSA required Innova’s employees to work in California is directly 1 contradicted by the PSA, which merely states that Innova’s employees were required to work “in 2 USA and Canada.” See Compl., Exhibit C, Recitals. 3 IDC’s failure to provide evidence establishing personal jurisdiction almost a year after 4 filing its crossclaims shows that leave to amend would be futile and cause undue delay. Thus, the 5 Court dismisses IDC’s crossclaims against Innova with prejudice. See Facebook, Inc. v. 6 Pedersen, 868 F. Supp. 2d 953, 961 (N.D. Cal. 2012) (explaining that when a plaintiff fails to 7 establish personal jurisdiction in the context of a motion for default judgment, dismissal is 8 appropriate). 9 V. CONCLUSION 10 For the foregoing reasons, the Court DENIES IDC’s motion for default judgment and 11 DISMISSES IDC’s crossclaims against Innova with prejudice. IT IS SO ORDERED.

Dated: December 21, 2021

Lucy & KOH = 16 United States Circuit Judge” = i 18 19 20 21 22 23 24 25 26

Sitting by designation on the United States District Court for the Northern District of California. 28 Case No. 20-CV-03679-LHK