Scottsdale Insurance Company v. Hamerslag

Opinion

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 11 SCOTTSDALE INSURANCE Case No.: 23-CV-780 JLS (AHG) COMPANY, 12 ORDER GRANTING IN PART AND Plaintiff, 13 DENYING IN PART, PURSUANT TO v. CIVIL LOCAL RULE 7.1(f)(3)(c), 14 PERSPECTIUM CORPORATION’S STEVEN HAMERSLAG and 15 MOTION TO SET ASIDE ENTRY PERSPECTIUM CORP., OF DEFAULT OR, 16 Defendants. ALTERNATIVELY, MOTION TO 17 DISMISS

18 (ECF Nos. 4, 7, 8) 19 20 Presently before the Court is Defendant Perspectium Corporation’s (“Perspectium”) 21 Motion to Set Aside Entry of Default or, Alternatively, Motion to Dismiss (“Mot.,” ECF 22 No. 8). Plaintiff Scottsdale Insurance Company did not file a response to the Motion. See 23 generally Docket. On August 4, 2023, the Court took the Motion under submission without 24 oral argument pursuant to Civil Local Rule 7.1(d)(1). See ECF No. 12. Having carefully 25 considered Perspectium’s arguments and the applicable law, the Court GRANTS IN 26 PART AND DENIES IN PART Perspectium’s Motion. 27 / / / 28 / / / 1 BACKGROUND 2 The instant litigation arises out of an insurance dispute. Plaintiff alleges that it issued 3 an insurance policy in which it agreed to provide coverage for claims brought against either 4 Perspectium or Perspectium’s officers and directors. ECF No. 1 ¶¶ 1, 17 (the “Compl.”). 5 According to Plaintiff, Defendant Steven Hamerslag (“Hamerslag”) is the subject of a 6 separate lawsuit (the “Hamerslag Lawsuit”) stemming from conduct Hamerslag engaged 7 in during his service as a director of Perspectium. Id. ¶¶ 22–29. Plaintiff seeks a 8 declaratory judgment stating that it has no duty to defend or indemnify either Hamerslag 9 or Perspectium in connection with the Hamerslag Lawsuit. Id. ¶ 5. 10 According to facts alleged in the Hamerslag Lawsuit, Perspectium merged with 11 another company—BitTitan, Inc. (“BitTitan”)—at the direction of Hamerslag, who was an 12 investor in and director of both Perspectium and BitTitan. Id. ¶¶ 24–27. After the merger, 13 a third company—Idera, Inc. (“Idera”)—acquired BitTitan. Id. ¶ 27. The plaintiffs in the 14 Hamerslag Lawsuit—the founder of Perspectium, his spouse, and his family trust, id. ¶ 2— 15 allege that Hamerslag breached his fiduciary duties to Perspectium and its shareholders 16 through his actions relating to the merger and sale, id. ¶¶ 28–29. 17 Hamerslag sought coverage from Plaintiff regarding the Hamerslag Lawsuit, which 18 Plaintiff denied by letter. Id. ¶¶ 30–31. Plaintiff informed Hamerslag that the policy’s 19 “Insured vs. Insured Exclusion” applies to the Hamerslag Lawsuit. Id. ¶ 31. This 20 Exclusion provides—subject to certain exceptions, see id. ¶ 40—as follows: 21 Insurer shall not be liable for Loss under this Coverage Section on account of any Claim . . . brought or maintained by, on behalf of, in the 22 right of, or at the direction of any Insured in any capacity, any Outside 23 Entity or any person or entity that is an owner of or joint venture participant in any Subsidiary in any respect and whether or not 24 collusive[.] 25 26 Id. ¶ 21 (alterations in original). Plaintiff alleges that Perspectium’s founder, as a former 27 director and officer of Perspectium, is an “Insured” under the policy, as is his spouse. Id. 28 ¶¶ 36–37. So, per Plaintiff, the Hamerslag Lawsuit constitutes a claim “brought or 1 maintained by, on behalf of, in the right of, or at the direction of any Insured in any 2 capacity.” Id. ¶ 39. 3 On April 27, 2023, Plaintiff filed the instant lawsuit seeking declaratory relief. See 4 Docket. Plaintiff indicated that “[u]pon information and belief, Perspectium is a defunct 5 California corporation with its principal place of business in Texas.” Compl. ¶ 8. The 6 Court issued a summons the same day, see ECF No. 3, and Plaintiff filed proof of service 7 with respect to Perspectium on May 22, 2023, see ECF No. 4. Plaintiff’s process server 8 indicates that he personally served “CSC-Lawyers Incorporating Service, agent for service 9 of process, by serving Koy Saechao, Intake Specialist/Authorized to Accept Service of 10 Process” at “2710 Gateway Oaks Drive, Suite 150N, Sacramento, CA 95833.” ECF No. 11 4-1 at 2 (capitalization altered). Plaintiff then asked the Clerk to enter default as to 12 Perspectium on June 27, 2023. See ECF No. 6. The Clerk entered default as to Perspectium 13 the following day. See ECF No. 7 (the “Entry of Default”). 14 On July 7, 2023, Perspectium filed the instant Motion, accompanied by the 15 Declaration of Joseph Horzepa (“Horzepa Decl.,” ECF No. 8-2). Horzepa states that he 16 serves as General Counsel for Idera and its subsidiaries, including BitTitan and 17 Perspectium. Horzepa Decl. ¶ 1. According to Horzepa, after Idera acquired BitTitan and 18 Perspectium, Idera converted Perspectium into a Delaware corporation in February of 19 2022. Id. ¶ 2. This conversion purportedly terminated Perspectium’s corporate existence 20 in California. Id. The newly-reformed Perspectium then named “Corporation Service 21 Company, 251 Little Falls Drive, Wilmington, Delaware, 19808” as its registered agent for 22 service of process. Id. Perspectium did not name a registered agent in California post- 23 conversion. Id. 24 Perspectium concedes that Koy Saechao and his employer CSC were “agents 25 authorized to receive service for Perspectium . . . at one time,” i.e., when Perspectium was 26 incorporated in California. Mot. at 17; see also ECF No. 8-4 at 1 (listing “1505 Corporation 27 CSC - Lawyers Incorporating Service” as Perspectium’s agent and Koy Saechao as a “CA 28 Registered Corporate (1505) Agent Authorized Employee[]”). But post-conversion, 1 Perspectium argues, “CSC and Koy Saechao were no longer and could not be legally 2 authorized agents for Perspectium.” Mot. at 17. 3 As Plaintiff served Koy Saechao after Perspectium’s alleged conversion took place, 4 see ECF No. 4, Perspectium requests that the Court dismiss Plaintiff’s Complaint for 5 defective service pursuant to Rule 12(b)(5) and set aside the Clerk’s Entry of Default on 6 that same basis, Mot. at 17–18. In the alternative, Perspectium asks this Court to set aside 7 the Clerk’s Entry of Default for good cause shown, pointing out that it did not receive 8 actual notice of the lawsuit until after the Clerk entered default. Id. at 10–14. 9 LEGAL STANDARDS 10 I. Local Rule 7.1(f)(3)(c) 11 Civil Local Rule 7.1(e)(2) requires the party against whom a motion is filed to file 12 an opposition or statement of non-opposition no later than fourteen days prior to the 13 motion’s noticed hearing. Under Civil Local Rule 7.1(f)(3)(c), “[i]f an opposing party fails 14 to file the papers in the manner required by Civil Local Rule 7.1.e.2, that failure may 15 constitute a consent to the granting of a motion or other request for ruling by the court.” 16 Courts regularly apply Civil Local Rule 7.1(f)(3)(c) to summarily grant unopposed 17 motions. See United States v. Warren, 601 F.2d 471, 473 (9th Cir. 1979) (per curiam); see 18 also, e.g., Park v. Washington Mut. Bank, No. 10 CV 1548 MMA AJB, 2010 WL 4235475, 19 at *1 (S.D. Cal. Oct. 21, 2010) (summarily granting a motion to quash service under Rule 20 12(b)(5)); Anderson v. Does 1-6, No. 18CV2137-JAH (WVG), 2019 WL 1017611, at *1 21 (S.D. Cal. Mar. 4, 2019) (summarily granting a motion to dismiss); Holandez v. Ent., LLC, 22 No. EDCV211755JGBSHKX, 2023 WL 2559209, at *3–4 (C.D. Cal. Jan. 5, 2023) 23 (summarily granting, under a similar local rule, a motion for conditional certification of a 24 collective action). 25 Courts do so with good reason. “[Civil Local Rule 7.1(f)(3)(c)] is designed to relieve 26 the court of the burden of reviewing the merits of a motion without the benefit of full 27 briefing, because such a review requires a significant amount of scarce judicial time.” Luna 28 v. U.S. Bank, N.A., No. 09-CV-2807-L NLS, 2011 WL 1099795, at *1 (S.D. Cal. Mar. 24, 1 2011). Moreover, by empowering district courts to decline to rule “upon issues which 2 remain unfocused” and which lack “that clear concreteness” provided by the “clash of 3 adversary argument exploring every aspect of a multifaceted situation embracing 4 conflicting and demanding interests,” Civil Local Rule 7.1(f)(3)(c) serves the same goals 5 that underlie prudential restrictions on federal courts’ issuance of advisory opinions. See 6 United States v. Fruehauf, 365 U.S. 146, 157 (1961); United States v. Windsor, 570 U.S. 7 744, 759–60 (2013). 8 A district court’s exercise of discretion pursuant to Civil Local Rule 7.1(f)(3)(c) is 9 informed by the factors outlined in Ghazali v. Moran, 46 F.3d 52, 53 (9th Cir. 1995) (per 10 curiam). These factors include “(1) the public’s interest in expeditious resolution of 11 litigation; (2) the court’s need to manage its docket; (3) the risk of prejudice to the 12 defendants; (4) the public policy favoring disposition of cases o[n] their merits; and (5) the 13 availability of less drastic sanctions.” Id. (quoting Henderson v. Duncan, 779 F.2d 1421, 14 1423 (9th Cir.1986)). 15 II. Rule 12(b)(5) 16 A district court cannot exercise jurisdiction over a defendant without proper service 17 of process. Omni Cap. Int’l, Ltd. v. Rudolf Wolff & Co., 484 U.S. 97, 104 (1987); S.E.C. 18 v. Ross, 504 F.3d 1130, 1138–39 (9th Cir. 2007). Federal Rule of Civil Procedure 12(b)(5) 19 thus authorizes a defendant to raise by motion the defense of “insufficient service of 20 process.” Once a defendant challenges service, the plaintiff bears the burden of 21 establishing valid service pursuant to Federal Rule of Civil Procedure 4. Brockmeyer v. 22 May, 383 F.3d 798, 801 (9th Cir. 2004). 23 If the plaintiff is unable to satisfy its burden of demonstrating effective service, a 24 court may either dismiss the action or quash service and allow the plaintiff to serve the 25 defendant again. Stevens v. Sec. Pac. Nat’l Bank, 538 F.2d 1387, 1389 (9th Cir. 1976). 26 “Where it appears that effective service can be made and there is no unfair prejudice to the 27 defendant, quashing service rather than dismissing the action, and leaving the plaintiff free 28 to effect proper service, is the appropriate course.” Wick Towing, Inc. v. Northland, No. 1 C15-1864JLR, 2016 WL 3461587, at *2 (W.D. Wash. June 21, 2016) (citing 2 Umbenhauer v. Woog, 969 F.2d 25, 30 (3d Cir. 1992)). 3 III. Motion to Set Aside Default 4 Pursuant to Federal Rule of Civil Procedure 55(c), “[t]he court may set aside an entry 5 of default for good cause.” Courts have broad discretion in deciding whether to vacate an 6 entry of default. See Mendoza v. Wight Vineyard Mgmt., 783 F.2d 941, 945 (9th Cir. 1986) 7 (per curiam). It is the defendant’s burden to establish that good cause to vacate the entry 8 of default exists. TCI Grp. Life Ins. Plan v. Knoebber, 244 F.3d 691, 696 (9th Cir. 2001), 9 overruled on other grounds by Egelhoff v. Egelhoff ex rel. Breiner, 532 U.S. 141 (2001). 10 The Ninth Circuit has held that “[t]he ‘good cause’ standard that governs vacating 11 an entry of default under Rule 55(c) is the same standard that governs vacating a default 12 judgment under Rule 60(b).” Franchise Holding II, LLC v. Huntington Rests. Grp., Inc., 13 375 F.3d 922, 925 (9th Cir. 2004). Thus, in assessing good cause, a district court considers 14 three factors: 15 (1) whether [the defendant] engaged in culpable conduct that led to the default; (2) whether [the defendant] had a meritorious 16 defense; or (3) whether reopening the default judgment would 17 prejudice [the plaintiff]. As these factors are disjunctive, the district court [is] free to deny the motion “if any of the three 18 factors [are] true.” 19 20 Id. at 926 (quoting Am. Ass’n of Naturopathic Physicians v. Hayhurst, 227 F.3d 1104, 1008 21 (9th Cir. 2000)). 22 Courts “should apply the[se] factors more liberally” when assessing a motion to set 23 aside an entry of default rather than a default judgment. Page v. Banks, No. 24 07CV2254JM(BLM), 2008 WL 2037763, at *2 (S.D. Cal. May 12, 2008) (citing Haw. 25 Carpenters’ Tr. Funds v. Stone, 794 F.2d 508, 513 (9th Cir. 1986)). Ultimately, there is a 26 strong preference for deciding cases on their merits, and therefore any doubts should be 27 resolved in favor of setting aside the default. Direct Mail Specialists, Inc. v. Eclat 28 Computerized Techs., Inc., 840 F.2d 685, 690 (9th Cir. 1988). 1 ANALYSIS 2 Perspectium’s Motion was set for hearing on August 10, 2023. See Mot. at 1. Civil 3 Local Rule 7.1(e)(2) therefore required Plaintiff to respond by July 27, 2023. Yet 4 Plaintiff—who is represented by counsel—filed no response to the Motion, even when the 5 Court took the Motion under submission on August 4, 2023. See ECF No. 12; Docket. 6 Plaintiff has continued to submit filings in this matter, see ECF No. 13, but has offered no 7 excuse for its failure to oppose Perspectium’s Motion, see generally Docket. As Plaintiff 8 did not respond within the time set by Civil Local Rule 7.1(e)(2), the Court proceeds to its 9 analysis of whether the Ghazali factors support granting Perspectium’s Motion pursuant to 10 Civil Local Rule 7.1(f)(3)(c). 11 The public’s interest in the expeditious resolution of litigation, the Court’s need to 12 manage its docket, and the public policy favoring disposition of cases on their merits weigh 13 in Perspectium’s favor. Ruling on the Motion without the benefit of Plaintiff’s 14 arguments—or, in the alternative, delaying resolution of this Motion still further by 15 ordering Plaintiff to respond—will waste valuable judicial time and delay the ultimate 16 resolution of this case. See Luna, 2011 WL 1099795, at *1. Relatedly, maintaining the 17 status quo—the Clerk’s Entry of Default—will not help this case progress toward an 18 ultimate disposition on the merits. See Direct Mail Specialists, 840 F.2d at 690; Park, 2010 19 WL 4235475, at *1. 20 Further, because the Court elects a less drastic sanction than dismissal of this action, 21 the availability of less drastic sanctions does not weigh in Plaintiff’s favor. The Court 22 could—as Perspectium requests, Mot. at 17—exercise its discretion to dismiss this entire 23 action, see Bovier v. Bridgepoint Educ./Ashford Univ., No. 317CV01052GPCJMA, 2018 24 WL 1010503, at *2 (S.D. Cal. Feb. 22, 2018). But Perspectium’s Motion offers no 25 evidence suggesting either (1) that Plaintiff will be unable to properly serve Perspectium 26 or (2) that Perspectium will suffer prejudice if this Court declines to dismiss the action. 27 See Pathak v. Omaha Steaks Int’l, Inc., No. 10-7054 RSWL RZX, 2011 WL 1152656, at 28 *2 (C.D. Cal. Mar. 28, 2011). Hence, the Court will instead quash Plaintiff’s previous 1 || attempt at service and order Plaintiff to re-serve Perspectium. See id.; Fed. R. Civ. P. 4(m) 2 || (noting that where a plaintiff has not served a defendant within 90 days, a court may “order 3 || that service be made within a specified time’). 4 The balance of the Ghazali factors weighs in favor of setting aside the Clerk’s Entry 5 || of Default and ordering Plaintiff to re-effect service on Perspectium pursuant to Civil Local 6 ||Rule 7.1(f)(3)(c). As such, the Court has the option of granting Perspectium’s Motion 7 || based on Plaintiff's failure to respond, and it chooses to do so. 8 CONCLUSION 9 In light of the foregoing, the Court GRANTS IN PART AND DENIES IN PART 10 || Perspectium’s Motion to Set Aside Default or, Alternatively, Motion to Dismiss (ECF 11 8). The Court VACATES the Clerk’s Entry of Default as to Perspectium (ECF No. 7) 12 |}and QUASHES Plaintiff's attempted service on Perspecttum (ECF No. 4). The Court 13 || GRANTS Plaintiff thirty (30) days from the electronic filing date of this Order to serve 14 Perspectium in accordance with applicable federal or state law. The Court otherwise 15 || DENIES Perspectium’s Motion. 16 IT IS SO ORDERED. 17 || Dated: November 8, 2023 (een 18 on. Janis L. Sammartino 19 United States District Judge

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