Rozich v. MTC Financial Incorporated

• Court: District Court, D. Arizona
• Decided: March 29, 2024
• Docket: 2:23-cv-00210
• Status: Unknown

Opinion

1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA

9 Robert Rozich, No. CV-23-00210-PHX-DWL

10 Plaintiff, ORDER

11 v.

12 MTC Financial Incorporated, et al.,

13 Defendants. 14 15 Pending before the Court is a motion to set aside default filed by Defendant First 16 Citizens Bank & Trust Co., dba CIT Bank, NA (“First Citizens”). (Doc. 39.) The motion 17 is fully briefed. (Docs. 44, 45.) For the following reasons, the motion is granted. As a 18 result, Plaintiff’s pending motions for a default judgment and prevailing-party attorneys’ 19 fees against First Citizens (Docs. 36, 37) are denied as well. 20 RELEVANT BACKGROUND 21 On December 13, 2022, Plaintiff commenced an action in Maricopa County 22 Superior Court by filing a complaint. (Doc. 8 at 11-16.) The three named defendants were 23 First Citizens, MTC Financial, Inc. (“MTC”), and LoanCare, LLC (“LoanCare”). (Id.) 24 Although the complaint is not a model of clarity as to the specific claims being asserted, it 25 appears to assert two claims, “Breach of contract, intentional tort” (id. at 11), and to seek 26 compensatory damages, punitive damages, and an injunction barring “the trustee’s sale of 27 [Plaintiff’s] Property set for December 14, 2022” (id. at 15). 28 Shortly after filing the complaint, Plaintiff sought and obtained a temporary 1 restraining order (“TRO”) that enjoined the then-impeding trustee’s sale of Plaintiff’s 2 property. (Doc. 42-1 at 2-5.) 3 On January 11, 2023, Plaintiff served First Citizens with the state-court complaint, 4 a summons, the TRO, and certain other documents. (Doc. 27-2.) 5 On the morning of January 12, 2023, the state-court judge held a hearing at which 6 Plaintiff’s counsel was present but Defendants were not present. (Doc. 42-1 at 2-3.) The 7 minute entry from that hearing concludes as follows: “IT IS ORDERED continuing the 8 Temporary Restraining Order. The Court states that it will wait until 4:30 p.m. on January 9 31, 2023 to verify service of process was effectuated on Defendants. At that time if 10 affidavits of service are available, the Court will issue a preliminary injunction that will 11 remain in effect throughout the duration of the case. . . . 9:10 a.m. Matter concludes.” (Id. 12 at 3.) 13 Later that same day—at 12:25 p.m., to be exact—Plaintiff filed proof of service as 14 to First Citizens, MTC, and LoanCare with the state-court clerk. (Docs. 27-1, 27-2, 27-3.) 15 On January 31, 2023, LoanCare removed this action to federal court. (Doc. 1.) 16 On March 6, 2023, the state-court judge issued an order explaining that, because 17 “the matter was removed to federal court” “before this Court could issue any [preliminary 18 injunction] order,” “IT IS ORDERED holding this case in abeyance at this time until the 19 matter is either resolved at the federal level or returned back to this Court.” (Doc. 42-1 at 20 5.) 21 On March 8, 2023, Plaintiff filed a stipulation of dismissal as to MTC, which was 22 granted. (Docs. 16, 19.) 23 On April 7, 2023, Plaintiff filed his operative pleading, the First Amended 24 Complaint (“FAC”). (Doc. 21.) As relevant here, the FAC added new claims against First 25 Citizens that had not been included in the original complaint, including claims under the 26 Real Estate Settlement Procedures Act (“RESPA”) and the Truth In Lending Act (“TILA”). 27 (Doc. 20-1 at 18-20.)1

28 1 Plaintiff has acknowledged elsewhere that the FAC added new claims against First Citizens. (Doc. 31 at 3 [“The [FAC] was more than a restyling of facts, but also added 1 On May 22, 2023, LoanCare moved to dismiss the claims against it in the FAC. 2 (Doc. 25.) The motion later became fully briefed. (Doc. 26.) 3 On October 26, 2023, the Court granted LoanCare’s motion to dismiss. (Doc. 28.) 4 Later, after Plaintiff declined to file a Second Amended Complaint as authorized in the 5 dismissal order, the Court dismissed LoanCare. (Doc. 29.) 6 On November 14, 2023, the Court issued an order to show cause (“OSC”) why 7 Plaintiff’s claims against First Citizens should not be dismissed for failure to prosecute. 8 (Doc. 30.) 9 On November 28, 2023, Plaintiff filed a response to the OSC. (Doc. 31.) Plaintiff 10 affirmed his intent to pursue his claims against First Citizens, acknowledged that he 11 “inadvertently failed to effectuate service of the [FAC] on [First Citizens],” and expressed 12 his “hopes the Court will allow some additional time to effectuate the service of the [FAC] 13 of [First Citizens] and opportunity to respond.” (Id. at 2.) 14 On November 29, 2023, the Court deemed the OSC satisfied but ordered Plaintiff 15 to promptly serve First Citizens and file proof of service. (Doc. 32.) 16 On December 8, 2023, Plaintiff filed a proof of service indicating that First Citizens 17 had been served with the FAC on December 5, 2023. (Doc. 33.) 18 On December 20, 2023, MTC recorded a notice of trustee’s sale with the Maricopa 19 County Recorder, indicating that a trustee’s sale of Plaintiff’s property was scheduled for 20 March 27, 2024. (Doc. 42-1 at 7.) 21 On December 21, 2023, Plaintiff filed an application for default as to First Citizens. 22 (Doc. 34.) 23 On December 28, 2023, the Clerk entered default against First Citizens. (Doc. 35.) 24 On March 8, 2024, Plaintiff filed motions for default judgment and attorneys’ fees 25 against First Citizens. (Docs. 36, 37.) 26 That same day, counsel for Plaintiff and First Citizens began exchanging emails 27 regarding the planned trustee’s sale, with Plaintiff taking the position that the state-court 28 additional claims.”].) 1 TRO “remains enforceable” (Doc. 42-1 at 12) and First Citizens taking the position that 2 “[we] do not agree that a temporary restraining order issued by the Superior Court in 3 December, 2022 has remained in effect for the last 15 months notwithstanding removal of 4 the case to United States District Court” (Doc. 42-2 at 12). 5 On March 15, 2024, notwithstanding that disagreement, First Citizens agreed to 6 postpone the trustee’s sale to May 1, 2024. (Doc. 42-2 at 24.) Additionally, First Citizens 7 informed Plaintiff that it “would likely be open to a further postponement pending the 8 outcome of litigation.” (Id. at 12.) 9 On March 18, 2024, First Citizens filed a motion to set aside the default. (Doc. 39.) 10 That same day, First Citizens filed a response to the motion for default judgment. (Doc. 11 41.) 12 On March 21, 2024, Plaintiff filed a motion for expedited relief concerning the 13 trustee’s sale. (Doc. 42.) 14 On March 22, 2024, the Court issued an order requiring expedited briefing as to 15 First Citizens’ motion to set aside default and staying the briefing as to Plaintiff’s motions 16 for default judgment and attorneys’ fees. (Doc. 43.) 17 On March 26, 2024, Plaintiff filed an opposition to First Citizens’ motion to set 18 aside default. (Doc. 44.) 19 On March 28, 2024, First Citizens filed a reply in support of its motion to set aside 20 default. (Doc. 45.) Neither side requested oral argument. 21 DISCUSSION 22 I. Legal Standard 23 Under Rule 55(c) of the Federal Rules of Civil Procedure, the Court “may set aside 24 an entry of default for good cause.” To determine whether good cause exists to vacate an 25 entry of default, the Court considers the three Falk factors:2 “(1) whether the plaintiff will 26 be prejudiced, (2) whether the defendant has a meritorious defense, and (3) whether 27 culpable conduct of the defendant led to the default.” Falk v. Allen, 739 F.2d 461, 463 (9th

28 2 Courts “consistently” refer to these factors as the “Falk factors.” Brandt v. Am. Bankers Ins. Co. of Fla., 653 F.3d 1108, 1111 (9th Cir. 2011) 1 Cir. 1984). “This standard, which is the same as is used to determine whether 2 a default judgment should be set aside under Rule 60(b), is disjunctive, such that a finding 3 that any one of these factors is true is sufficient reason for the district court to refuse 4 to set aside the default.” United States v. Signed Pers. Check No. 730 of Yubran S. Mesle, 5 615 F.3d 1085, 1091 (9th Cir. 2010). “Crucially, however, judgment by default is a drastic 6 step appropriate only in extreme circumstances;3 a case should, whenever possible, be 7 decided on the merits.” Id. (quotation marks omitted). The movant “bears the burden of 8 proving the existence of a justification” to set aside the default. Cassidy v. Tenorio, 856 9 F.2d 1412, 1415 (9th Cir. 1988). 10 The decision whether to vacate the entry of default “is committed to the discretion 11 of the district courts” and is “at bottom an equitable one, taking account of all relevant 12 circumstances surrounding the party’s omission.” Brandt v. Am. Bankers Ins. Co. of Fla., 13 653 F.3d 1108, 1112 (9th Cir. 2011). “The court’s discretion is especially broad where, as 14 here, it is entry of default that is being set aside, rather than a default judgment.” Mendoza 15 v. Wight Vineyard Mgmt., 783 F.2d 941, 945 (9th Cir. 1986). “[W]here timely relief is 16 sought from a default judgment and the movant has a meritorious defense, doubt, if any, 17 should be resolved in favor of the motion to set aside the judgment so that cases may be 18 decided on their merits.” Schwab v. Bullock’s Inc., 508 F.2d 353, 355 (9th Cir. 1974). The 19 same reasoning applies—with at least as much force—to relief from entry of default.

20 3 In Mesle, the Ninth Circuit faulted the district court for “omitt[ing] any mention of the ‘extreme circumstances’ requirement for judgment by default,” which was “no minor 21 omission,” as “it fundamentally altered the standard, turning the court’s attention to everyday oversights rather than to whether there were any extreme circumstances.” 615 22 F.3d at 1091. Nevertheless, the Ninth Circuit subsequently clarified that “[t]he ‘extreme circumstances’ policy language was intended to remind courts that default judgments are 23 the exception, not the norm, and should be viewed with great suspicion,” and courts should “keep this policy concern in mind,” but courts are not required “in addition to applying 24 [the] three [Falk] factors, to articulate why a particular case presents ‘extreme circumstances.’” United States v. Aguilar, 782 F.3d 1101, 1106 (9th Cir. 2015). Rather, 25 “faithful application of the Falk factors ensures that default judgments will stand only in extreme circumstances.” Id. “For example, if a claimant has no meritorious defense . . . , 26 then it is unclear what a further inquiry into ‘extreme circumstances’ would accomplish.” Id. See also Gregorian v. Izvestia, 871 F.2d 1515, 1526 (9th Cir. 1989) (“‘Extraordinary 27 circumstances’ analysis has in fact been supplanted by the three-part [Falk] test . . . . Therefore, the district court’s determination that the case does not present ‘extraordinary 28 circumstances’ does not support its refusal to set aside the default judgment under Rule 60(b)(6).”). 1 Mendoza, 783 F.2d at 945. 2 II. Analysis 3 Having considered the parties’ arguments and the Falk factors, the Court concludes 4 the default against First Citizens should be set aside. 5 As for the first Falk factor, a plaintiff is prejudiced if his ability to pursue his claim 6 has been “hindered” due to delay resulting in “tangible harm such as loss of evidence, 7 increased difficulties of discovery, or greater opportunity for fraud or collusion.” TCI Grp. 8 Life Ins. Plan v. Knoebber, 244 F.3d 691, 701 (9th Cir. 2001). “To be prejudicial, the 9 setting aside of a judgment must result in greater harm than simply delaying resolution of 10 the case.” Id. “[M]erely being forced to litigate on the merits cannot be considered 11 prejudicial.” Id. 12 Here, Plaintiff’s prejudice arguments (Doc. 44 at 10-11) ring hollow in light of the 13 unusual procedural posture of this case. Although Plaintiff served First Citizens with the 14 complaint and summons in January 2023, Plaintiff took no steps to pursue his claims 15 against First Citizens over the next 10 months, eventually prompting the Court to issue an 16 OSC in November 2023 why those claims should not be dismissed for failure to prosecute. 17 (Doc. 30.) In response, Plaintiff belatedly affirmed his intention to pursue his claims 18 against First Citizen but acknowledged he had not served the FAC on First Citizens. (Doc. 19 31.) The FAC was not served until December 2023 and default was not entered until later 20 that month. (Docs. 33, 35.) Even assuming the default was properly entered despite 21 Plaintiff’s failure to serve a new summons alongside the FAC,4 First Citizens’ delay in 22 4 Because Plaintiff properly served First Citizens with the original complaint and 23 summons on January 11, 2023, when this action was still pending in state court (Doc. 27- 2), First Citizens was required to respond to the complaint by early February 2023. See 24 Fed. R. Civ. P. 81(c). Once First Citizens failed to do so, Plaintiff could have applied for a default under Rule 55(a). Plaintiff did not do so. Instead, more than two months after 25 removal, Plaintiff filed the FAC, which added new claims against First Citizens that were not asserted in the original complaint. As a result, and as Plaintiff acknowledged in his 26 response to the OSC, Plaintiff was required to serve First Citizens with the FAC “under Rule 4.” (Doc. 31 at 3, quoting Fed. R. Civ. P. 5(a)(2).) Rule 4(c), in turn, provides that 27 “[a] summons must be served with a copy of the complaint.” However, when Plaintiff served First Citizens with the FAC on December 5, 2023, his process server did not also 28 serve a summons. (Doc. 33.) According to First Citizens, this means the default should not have been entered at all. (Doc. 39 at 6.) 1 responding to the FAC was relatively short (and pales in comparison to the nearly year- 2 long period in which Plaintiff failed to prosecute his claims against First Citizens). There 3 is no reason to believe that memories have faded and evidence has disappeared due to First 4 Citizens’ conduct. 5 Turning to the second Falk factor, “[a] defendant seeking to vacate a default 6 judgment must present specific facts that would constitute a defense,” but “the burden on 7 a party seeking to vacate a default judgment is not extraordinarily heavy.” Mesle, 615 F.3d 8 at 1094. “All that is necessary to satisfy the ‘meritorious defense’ requirement is to allege 9 sufficient facts that, if true, would constitute a defense”—the truth of those facts is “the 10 subject of the later litigation.” Id. Nevertheless, “conclusory statements” will not suffice, 11 and a “mere general denial without facts to support it is not enough to justify vacating a 12 default or default judgment.” Franchise Holding II, LLC. v. Huntington Restaurants Grp., 13 Inc., 375 F.3d 922, 926 (9th Cir. 2004). “A complete lack of meritorious defenses itself 14 constitutes an extreme circumstance.” United States v. Aguilar, 782 F.3d 1101, 1107 (9th 15 Cir. 2015). Setting aside default “in the absence of some showing of a meritorious defense 16 would cause needless delay and expense to the parties and court system.” Hawaii 17 Carpenters’ Tr. Funds v. Stone, 794 F.2d 508, 513 (9th Cir. 1986). When the movant 18 makes “no showing of a meritorious defense,” it would be “an abuse of discretion to set 19 aside the entry of default.” Id. 20 First Citizens has easily met its burden of identifying a meritorious defense. First 21 Citizens has enclosed, as an attachment to its motion, a draft Rule 12(b)(6) motion to 22 dismiss all of Plaintiff’s claims in the FAC. (Doc. 39 at 31-37.) Among other things, the 23 draft motion argues that Plaintiff’s Arizona Consumer Fraud Act (“ACFA”) and RESPA 24 claims must be dismissed because they fail to state a claim. (Id. at 35-36.) In an earlier 25 order in this case, the Court accepted variants of those same arguments when dismissing 26 Plaintiff’s ACFA and RESPA claims against LoanCare. (Doc. 28.) Plaintiff acknowledges 27 this “ruling . . . will likely apply to [First Citizens] as well.” (Doc. 44 at 10.) Although 28 Plaintiff goes on to argue that the Court should nevertheless resolve the second Falk factor 1 against First Citizens, because the earlier ruling “has become the law of the case without 2 any effort by [First Citizens], and [First Citizens] should not be rewarded by allowing it to 3 take the defense of another” (id. at 9), the Court respectfully disagrees that this is how the 4 second Falk factor operates—all that First Citizens was required to do was identify a 5 meritorious defense and it has done so. 6 Finally, under the third Falk factor, “[a] defendant’s conduct is culpable if he has 7 received actual or constructive notice of the filing of the action and intentionally failed to 8 answer.” Mesle, 615 F.3d at 1092 (brackets omitted). “[I]n this context the term 9 ‘intentionally’ means that a movant cannot be treated as culpable simply for having made 10 a conscious choice not to answer; rather, to treat a failure to answer as culpable, the movant 11 must have acted with bad faith, such as an intention to take advantage of the opposing 12 party, interfere with judicial decisionmaking, or otherwise manipulate the legal process.” 13 Id. (quotation marks omitted). A defendant is culpable “where there is no explanation of 14 the default inconsistent with a devious, deliberate, willful, or bad faith failure to 15 respond.” Id. “[S]imple carelessness is not sufficient to treat a negligent failure to reply 16 as inexcusable, at least without a demonstration that other equitable factors, such as 17 prejudice, weigh heavily in favor of denial of the motion to set aside a default.” Id. 18 However, “[w]hen considering a legally sophisticated party’s culpability in a default, an 19 understanding of the consequences of its actions may be assumed, and with it, 20 intentionality.” Id. at 1093 (emphasis added).5 The Court “retains the discretion (but not 21 the obligation) to infer intentionality from the actions of a legally sophisticated party and 22 to thereby find culpability.” Idaho Golf Partners, Inc. v. Timberstone Mgmt. LLC, 2015 23 WL 1481396, *4 (D. Idaho 2015). “A district court may exercise its discretion to deny 24 5 The Ninth Circuit in Mesle noted that this “is not the ordinary standard for Rule 25 55(c) and 60(b) motions”—the standard which is “consistent with” the Supreme Court’s decision in Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P’ship, 507 U.S. 380, 394-95 26 (1993), which held that “an inadvertent or negligent omission” could establish excusable neglect. 615 F.3d at 1092-93; see also TCI Grp. Life Ins. Plan v. Knoebber, 244 F.3d 691, 27 697 (9th Cir. 2001), as amended on denial of reh’g and reh’g en banc (May 9, 2001), overruled on other grounds by Egelhoff v. Egelhoff ex. rel. Breiner, 532 U.S. 141 (2001) 28 (“To suppose that the making of a conscious choice, without more, precludes a finding that ‘neglect’ is ‘excusable’ cannot be squared with Pioneer Investment.”). || relief to a defaulting defendant based solely upon a finding of defendant’s culpability, but need not.” Brandt, 653 F.3d at 1112. “[W]here the defendant has a meritorious defense 3 || and any prejudice can be cured,” a court’s finding that the defendant “acted culpably [does] 4|| not preclude it, as a matter of law” from granting relief under Rule 60(b)(1) or Rule 55(c). || Id. 6 Much of the parties’ briefing, which includes references to a cybersecurity event 7\| that purportedly afflicted First Citizens’ statutory agent in December 2023, concerns 8 || whether First Citizens’ conduct should be considered culpable. The Court finds it || unnecessary to decide the culpability issue in light of how the first and second Falk factors 10 || were resolved. Even assuming First Citizens’ conduct was culpable—First Citizens makes 11 || no effort to explain its failure to respond to the initial complaint after being served in January 2023—the Court would exercise its discretion to set aside the default given the 13} lack of prejudice to Plaintiff, the existence of meritorious defenses, and the principle that 14]| “doubt, if any, should be resolved in favor of the motion to set aside the [default] so that 15 || cases may be decided on their merits.” Schwab, 508 F.2d 353 at 355. 16 Accordingly, 17 IT IS ORDERED that: 18 1. First Citizens’ motion to set aside default (Doc. 39) is granted. 19 2. The Clerk shall set aside the default against First Citizens (Doc. 35). 20 3. First Citizens shall, within 14 days of the issuance of this order, answer or otherwise respond to the FAC. 22 4. Plaintiff's motions for default judgment and attorneys’ fees (Docs. 36, 37) || are denied. 24 Dated this 29th day of March, 2024. 25 26 Lom ee” 27 f CC —— Dominic W. Lanza 28 United States District Judge

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