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FRANCOIS & CO., LLC, et al. v. Jamon Kirt NADEAU, et al.
PROCEEDINGS (in chambers): ORDER GRANTING DEFENDANTS JAMON KIRT NADEAU CRYSTAL BLAKE NADEAU, AND MAISON, LLC'S MOTION FOR RELIEF FROM FINAL JUDGMENT [Docket No. 64]
This matter is before the Court on Defendants Jamon Kirt Nadeau (“Jamon”), Crystal Blake Nadeau (“Crystal”), and Maison, LLC's (“Maison”) (collectively, “Defendants”) Motion for Relief from Final Judgment, filed February 14, 2020. (ECF No. 64.) Plaintiffs Francois & Company, LLC (“F&C”), Thierry Francois & Company, Inc. (“TFC”), and Thierry Francois (“Mr. Francois”) (collectively, “Plaintiffs”) opposed the Motion (“Opposition”) on March 2, 2020. (ECF No. 79.) Defendants replied (“Reply”) on March 9, 2020. (ECF No. 85.) The Court found this matter suitable for disposition without oral argument. See Fed. R. Civ. P. 78(b). For the reasons stated below, the Court GRANTS the Motion.
I. FACTUAL AND PROCEDURAL BACKGROUND
Plaintiffs allege the following. Plaintiff Thierry Francois (“Mr. Francois”) is a resident of Atlanta, Georgia. (Compl. ¶ 5, ECF No. 1.) Mr. Francois is the sole member of Plaintiff Francois & Company, LLC (“F&C”), and the principal shareholder of Plaintiff Thierry Francois & Company, Inc. (“TFC”). (Compl. ¶ 5.) F&C is a limited liability company organized and existing under the laws of Georgia, with its principal place of business in Atlanta, Georgia. (Compl. ¶ 3.) TFC is a corporation incorporated and existing under the laws of Georgia, with its principal place of business in Atlanta, Georgia. (Compl. ¶ 4.)
In March 2016, Mr. Francois and his acquaintance, Patrick Pepin, formed a Georgia corporation called F&P Group, Inc. (“F&P”), of which Mr. Francois and Mr. Pepin owned 80% and 20% respectively. (Compl. ¶ 19.) Mr. Pepin introduced Mr. Francois to Defendants Jamon “Jay” Kirt Nadeau and Crystal Blake Nadeau. (Compl. ¶¶ 7-8, 19.) Together, on April 26, 2016, they formed a limited liability company in Georgia named La Maison Mosaics (“LMM GA”). (Compl. ¶ 20.) LMM GA was owned 30% by Defendant JC Nadeau LLC (“JCN LLC”)—a California limited liability company owned by the Nadeaus—and 70% by F&P. (Compl. ¶ 20.)
On May 1, 2016, F&P and JCN LLC entered into an Operating Agreement regarding the operation of LMM GA. (Compl. ¶ 21.) Crystal Nadeau was the initial operating manager and Mr. Pepin was the initial financial manager, while Mr. Francois was not directly involved. (Compl. ¶ 22.) On June 10, 2016 and January 17, 2017, Mr. Pepin—on behalf of LMM GA—entered into verbal agreements for loans of $50,000 from TFC and $100,000 from Mr. Francois, respectively. (Compl. ¶¶ 22, 23.) Both agreements included promises that LMM GA would repay the loan amounts. (Compl. ¶¶ 31, 32.) By March 2017, only two payments totaling $6,625.00 had been made, which reduced the outstanding balance to $143,375. (Decl. of Thierry Francois in Supp. of App. for Default J. (“Francois Decl.”) ¶ 19, ECF No. 33-4.) On March 31, 2017, the parties memorialized Defendants' obligation to repay the remaining $143,375 via three separate promissory notes. (Compl. ¶ 34.) Plaintiffs allege that to date, no part of the remaining sum has been repaid. (Compl. ¶¶ 31, 32.)
In early 2017, Mr. Francois and Mr. Pepin agreed to part ways. (Compl. ¶ 24.) On March 31, 2017, Plaintiffs Francois and F&C, on the one hand, and Mr. Pepin, on the other, entered into a Termination Agreement, pursuant to which Mr. Francois transferred all of his and F&C's interest in F&P to Mr. Pepin, while Mr. Pepin transferred all of his interest in F&C to Mr. Francois. (Compl. ¶ 24.) On May 4, 2017, Mr. Pepin assigned F&P's 70% interest in LMM GA to Mr. Francois. (Compl. ¶ 25(a)). The same day, F&P and JCN LLC executed a written consent to the assignment and transfer of F&P's 70% interest to Mr. Francois, thus making Mr. Francois the majority owner of LMM GA. (Compl. ¶ 25(b)). Mr. Pepin then resigned as financial manager of LMM GA, and Mr. Francois was appointed as his replacement. (Compl. ¶ 25(c)).
After Mr. Pepin's departure, Mr. Francois and the Nadeaus decided to convert LMM GA into a California limited liability company, to be jointly owned by Mr. Francois and JCN LLC. (Compl. ¶ 26.) On May 24, 2017, LMM GA was converted to La Maison Mosaics, LLC (“LMM LLC”)—a California limited liability company and one of the Defendants in this case. (Compl. ¶ 27.) Crystal Nadeau submitted the required paperwork to the California Secretary of State, listing herself as the manager. (Compl. ¶ 27.) Plaintiffs allege that in the months that followed, Defendants failed to provide Mr. Francois with information necessary for him to perform his duties as LMM LCC's financial manager. (Compl. ¶ 28.)
On November 3, 2017, without Mr. Francois' knowledge, the Nadeaus cancelled and dissolved JCN LLC and filed a purported certification of cancellation of LMM LLC. (Compl. ¶ 28.) Unaware that this had occurred, on November 13, 2017, Mr. Francois' attorney sent Defendants a written letter demanding “full and immediate restoration of meaningful communication, and complete disclosure of all material information (operation and financial) relating to the company.” (Compl. ¶ 28.) On November 15, 2017, the Nadeaus responded to Mr. Francois' attorney “under letterhead of LMM LLC.” (Compl. ¶ 29.) Without disclosing their actions of November 3, 2017, Defendants stated that “the value of LMM is $0” and that they would “no longer be participating in the LLC.” (Compl. ¶ 29.) Mr. Francois' attorney responded with a demand that the Nadeaus make various financial and operational records available to Plaintiffs, to which Defendants never replied. (Compl. ¶ 30.) Plaintiffs allege that following the dissolution of LMM LLC, Defendants continued LMM LLC's business “under the umbrella of Defendants' newly-formed company Maison LLC, wrongly utilizing the assets of LMM LLC in doing so.” (Compl. ¶ 56.)
On April 23, 2018, Plaintiffs initiated the instant action by filing a Complaint against Defendants. (See Compl.) Defendants did not file answers to Plaintiff's Complaint or otherwise appear before the Court, either in person or via representative. On July 24, 2018, Plaintiff filed a request for the entry of default against Defendant. (Req. for Clerk to Enter Default, ECF No. 30.) The Clerk entered default against Defendant on July 25, 2018. (Default by Clerk, ECF No. 31.) Plaintiffs moved for default judgment on September 10, 2018. (Appl. for Default J. (“Appl.”), ECF No. 33.)
On January 8, 2019, the Court granted default judgment with respect to Plaintiffs' claims for: (1) breach of fiduciary duty; (2) breach of oral contract; (3) breach of written contract; and (4) unfair competition. (Order Granting in Part Plaintiffs' Motion for Default Judgment and Request for Attorneys' Fees Without Prejudice (“Default Judgment Order”), ECF No. 39, 21.) With respect to Plaintiffs' claims for intentional misrepresentation, concealment, and negligent misrepresentation, the Court denied default judgment without prejudice; with respect to Plaintiffs' claims for money had and received, open book account, and account stated, the Court denied default judgment with prejudice. (Id. at 21.)
In October 2019, Plaintiffs applied for and obtained orders to Defendants to appear for judgment debtor examinations on December 4, 2019. (See ECF Nos. 42–51.) However, on November 27, 2019, Plaintiffs moved to postpone the examinations due to their inability to effect personal service on each of the Defendants and/or their respective agents for service of process. (ECF No. 52.) The Court accordingly postponed the examinations and re-set them for February 19, 2020. (ECF Nos. 59–63.)
On February 14, 2020, Defendants filed the instant Motion for relief from the final judgment entered in January 2019. They first argue that the case should be dismissed and the judgment should be set aside due to lack of proper service, because they were never served properly and had no actual notice of the lawsuit. (Mot. 15–16.) In the alternative, they argue that regardless of the supposed defects in service, the judgment should still be set aside because they did not engage in culpable conduct that led to the default, they have meritorious defenses, and there would be no prejudice to Plaintiffs. (Mot. 17–21.)
II. SERVICE OF SUMMONS AND COMPLAINT
Defendants' overarching argument is that they were never properly served with the summons and complaint in this lawsuit, and they were never put on notice of the lawsuit. Accordingly, the Court first addresses the issue of substituted service of the summons and complaint.
A. Legal Standards
A party is not bound by a judgment in a litigation where the party has not been properly served. Mason v. Genisco Technology Corp., 960 F.2d 849, 850 (9th Cir. 1992). Therefore, a defect in the service of process can justify setting aside an entry of default or a final judgment. S.E.C. v. Internet Solutions for Business, Inc., 509 F.3d 1161, 1165 (9th Cir. 2007).
California law generally requires that service be accomplished either by personal service or by “substituted service,” which can be effected by:
“․ leaving a copy of the summons and complaint at the person's dwelling house, usual place of abode, usual place of business, or usual mailing address other than a United States Postal Service post office box ․ in the presence of a competent member of the household or a person apparently in charge of his or her office, place of business, or usual mailing address ․ and by thereafter mailing a copy of the summons and of the complaint by first-class mail, postage prepaid to the person to be served at the place where a copy of the summons and complaint were left. Service of a summons in this manner is deemed complete on the 10th day after the mailing ․”
Cal. Code Civ. P. § 415.20.
For substituted service on corporations, California Code of Civil Procedure (“CCP”) section 417.10(a) additionally requires that the process server's affidavit show the “manner of service and facts showing that the service was made in accordance with this chapter.” Cal. Code Civ. P. § 417.10. The comments additionally provide that:
“The affidavit or certificate must state or show, in addition to the time, place, and manner of service, etc., that: (1) the place of delivery is the office of a person who may be served under those sections, and the name and title or representative capacity, if any, of such person, (2) the time of delivery was during usual office hours, (3) the name and title, if any, of the person to whom the papers were delivered, and that and he had been determined by the process server to be the person apparently in charge of such office ․”
Finally, for individuals, the following requirements apply:
“[t]he additional matters that must be stated or shown are: ․ (3) that the person in whose presence the papers had been left was determined after careful inquiry by the process server to be a competent member of the household or a competent person apparently in charge of such business, as the case may be ․”
Generally, a plaintiff's proof of service constitutes “prima facie evidence of valid service which can be overcome only by strong and convincing evidence.” S.E.C., 509 F.3d 1161 at 1163.
Here, Defendants allege that the only service performed of the Summons and Complaint on any of the Defendants in this matter was at the Nadeaus' residence at 8:17pm on May 28, 2018, on a “John Doe” generally described as being “White, Male, 40 Years Old, Black Hair, Brown Eyes, 6 Feet, 180 Pounds.” (ECF Nos. 25–29.) However, neither Crystal nor Jamon Nadeau fit this description—Crystal reports she is approximately 5'9” and 130 pounds, while Jamon is 6'3” and about 280 pounds. (Mot. Ex. 1, Decl. of Crystal Nadeau in Supp. of Motion (“CN Decl.”), ECF No. 64-1, ¶ 22.) Additionally, the Nadeaus declare they were at a family Memorial Day barbecue that evening, do not know of anyone who would have been at or inside their home at the time, and believe that if anyone was there, it would have been an uninvited trespasser unknown to them. (Mot. 15; CN Decl. ¶¶ 27–29.)
In support, the Nadeaus attach: (1) several declarations—their own, as well as some of the family members also in attendance at the barbecue; (2) a number of date- and time-stamped photographs from the evening including a cupcake spread, several individuals (presumably family members or friends) in a swimming pool, and other family party scenes; and (3) a statistics printout of the Dodgers-Phillies baseball game from that night which ended at approximately 8:42pm, and which all declarants affirm the Nadeaus watched at the party in its entirety. (CN Decl.; Mot. Exs. 3, 5, 6 (photographs); Ex. 4 (baseball-reference.com printout); Exs. 15–19 (declarations from Sherri, Merissa, Kyle, Stephanie, and Larry Nadeau)).
Finally, the Nadeaus point to several typographical and other formatting errors in the proofs of service that indicate they were nothing more than “sloppily executed” boilerplate forms that were not sufficient to constitute proper service. (Mot. 15.) For example, the proof of service for Jamon Nadeau states that “John Doe” was a female, while the other proofs of service indicate “John Doe” was a male. (Compare ECF No. 26 with ECF Nos. 25, 27–29.) Additionally, the proof of service for Maison, LLC noted the date of service as “Sun., May 28, 2017 at: 8:17pm,” which was the incorrect year (the complaint was not filed until April 2018). (ECF No. 29.)
In sum, the Nadeaus argue that Plaintiffs' attempts at serving them with the summons and complaint, as documented in the proofs of service, are not sufficient for proper service of the lawsuit. Their declarations and supporting exhibits indicate that the “John Doe” described on the proofs did not match Jamon Nadeau or Crystal Nadeau, nor did he match anyone they knew that could have been at their house. (Reply 9.) Additionally, without any of the CCP-required notes from the process server regarding the name and title of the John Doe who received the papers, or any description of how the process server “determined” John Doe “to be the person apparently in charge of such office” or “to be a competent member of the household” at all, the proofs of service are “purely conclusory” and do not evidence proper service. (Cal. Code Civ. P. § 417.10; Reply 9–10.) Finally, the Nadeaus highlight that the time of supposed service, 8:17pm on a federal holiday, would have been well outside the “usual office hours” described in the CCP's provisions for substituted service. Therefore, “John Doe” was nothing more than a “mystery man” that could not accept service of the summons and complaint on behalf of any of the Defendants. (Reply 5–7.)
Plaintiffs respond that their proofs of service, made under oath by a registered California process service, “fully and convincingly evidence service on Defendants by substituted service, effective as of June 15, 2018.” (Opp'n 8.) Here, they argue that the Nadeaus' denial that they ever received any documents is belied by the process server's proofs of service, not only as to leaving the documents with someone at the Nadeau residence, but also as the server's follow-up mailing. (Opp'n 9.) Plaintiffs' counsel also attaches photographs of five packages of papers comprising the motion for default judgment, which show that they were delivered to the Nadeau residence, received, and then returned to the post office with “refused” handwritten on each one. (Id.) Finally, Plaintiffs insist that the clear typographical errors in their proofs of service are “to no avail” and “of no consequence,” and that they have “undertaken to obtain amended proofs of service” to correct those mistakes. (Id; ECF Nos. 71–78.)
On the whole, although Plaintiffs' original proofs of service constituted prima facie evidence of proper service, the Court finds that Defendants have provided “strong and convincing” evidence to refute the presumption of proper service. S.E.C., 509 F.3d 1161 at 1163. Generally, if service of process is insufficient but a reasonable prospect exists that the plaintiff can properly serve the defendant, the court quashes service but retains the case. Wright & Miller, Fed. Practice and Procedure, § 1354, Motions to Dismiss—Quashing Service of Process, 5B (3d ed). Therefore, the Court ORDERS Plaintiffs to make proper service upon Defendants within fourteen (14) days of this Order. Regardless, the action is not dismissed on grounds of improper service, so the Court proceeds to the question of setting aside default judgment.
III. GOOD CAUSE TO SET ASIDE DEFAULT JUDGMENT
A. Legal Standards
Federal Rule of Civil Procedure (“Rule”) 60(b) governs relief from a judgment or order. Fed. R. Civ. P. 60(b). In the Ninth Circuit, the standard for vacating a default judgment under Rule 60(b) is the same “good cause” standard for vacating an entry of default under Rule 55(c). Franchise Holding II, LLC v. Huntington Rests. Grp., Inc., 375 F.3d 922, 925 (9th Cir. 2004) (citing TCI Grp. Life Ins. Plan v. Knoebber, 244 F.3d 691, 696 (9th Cir. 2001), overruled on other grounds by Egelhoff v. Egelhoff ex rel. Breiner, 532 U.S. 141, 121 S.Ct. 1322, 149 L.Ed.2d 264 (2001)). “To determine good cause, a court must consider three factors: (1) whether the party seeking to set aside the default engaged in culpable conduct that led to the default; (2) whether it had no meritorious defense; or (3) whether reopening the default judgment would prejudice the other party.” United States v. Signed Personal Check No. 730 of Yubran S. Mesle, 615 F.3d 1085, 1091 (9th Cir. 2010) (quoting Franchise Holding II, 375 F.3d at 925–26) (internal quotation marks omitted). “[T]he party seeking to vacate a default judgment bears the burden of demonstrating that these factors favor vacating the judgment.” TCI, 244 F.3d at 696 (citing Cassidy v. Tenorio, 856 F.2d 1412, 1415 (9th Cir. 1988)).
Because this three-factor test is disjunctive, “a finding that any one of [the three] factors is true is sufficient reason for the district court to refuse to set aside the default.” Mesle, 615 F.3d at 1091 (internal citations omitted). Nonetheless, due to the strong federal policy in favor of deciding cases on the merits whenever possible, “judgment by default is a drastic step appropriate only in extreme circumstances.” Id. (quoting Falk v. Allen, 739 F.2d 461, 463 (9th Cir. 1984) (internal quotation marks omitted)); see also Bonita Packaging Co. v. O'Sullivan, 165 F.R.D. 610, 614 (C.D. Cal. 1995) (“[A]ny doubts as to whether a party is in default should be decided in favor of the defaulting party.”) (internal citations and quotation marks omitted).
1. Culpable Conduct
A defendant's conduct is culpable if the defendant “has received actual or constructive notice of the filing of the action and intentionally failed to answer.” TCI, 244 F.3d at 697 (quoting Alan Neuman Prods., Inc. v. Albright, 862 F.2d 1388, 1392 (9th Cir. 1988) (internal quotation marks omitted) (emphasis in original)). Courts may consider a defendant's neglectful failure to answer in determining whether to set aside default. Id. at 697–98. However, the “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’ ․ and is therefore not necessarily ․ culpable or inexcusable.” Id. (emphasis omitted). Ultimately, a defendant's neglectful failure to answer, without more, is typically not “culpable” unless “there is no explanation of the default inconsistent with a devious, willful, or bad faith failure to respond.” Id. at 698. In evaluating a defendant's alleged culpability, courts are to accept the defendant's uncontested factual allegations accompanying the motion to set aside default as true. See Falk, 739 F.2d at 464.
Defendants argue simply that they did not have any knowledge of the lawsuit until they were served with the second subpoenas of judgment debtor examinations on December 22, 2019. (Mot. 17.) Plaintiffs offer no response other than that “[a]s discussed elsewhere herein, this is demonstrably false.” (Opp'n 19.)
For the reasons discussed above, the Court finds Defendants have offered a sufficiently good-faith explanation negating a finding that they intended to take advantage of Plaintiffs, interfere with judicial decisionmaking, or otherwise manipulate the legal process. TCI, 244 F.3d at 697. Plaintiffs have maintained that their proofs of service were legally sufficient to constitute service of process, but have not raised any factual challenges to Defendants' allegations accompanying the Motion.1 As such, the Court accepts them as true, and for the purposes of this factor, finds that Defendants did not have actual or constructive notice of the filing of this action, and therefore could not have intentionally failed to answer.
In any case, Defendants also alleged that immediately after receiving the subpoenas for judgment debtor examinations, Crystal Nadeau “searched online for the case,” “took action to see what had happened,” “searched for an attorney, which was difficult due to the holidays,” and then one week into the new year, “delivered a letter to the court explaining that she and Jamon had no notice of the lawsuit prior to receiving the subpoena.” (Mot. 5; see also Mot. Ex. 2, ECF No. 64-2, “Letter to Hon. Abrams.”) Two days later, she retained current counsel, and this Motion was filed promptly thereafter. (Mot. 6.) Defendants have not challenged these allegations.
In sum, this factor weighs in favor of setting aside the default judgment.
2. Meritorious Defense
A defendant seeking to vacate a default judgment must present specific facts that would constitute a defense. See TCI Group Life Ins. Plan, 244 F.3d at 700 (citing Madsen v. Bumb, 419 F.2d 4, 7 (9th Cir. 1969)). The burden on defendant is relatively low, and courts leave questions regarding the truth of any such factual allegations for a later stage in the litigation. See id. (internal citations omitted).
Here, Plaintiffs obtained default judgment against Defendants on the following claims: (1) breach of fiduciary duty; (2) breach of oral contract; (3) breach of written contract; and (4) unfair competition. (Default Judgment Order 21.)
a) Breach of Fiduciary Duty
The elements of a cause of action for breach of fiduciary duty are: (1) the existence of a fiduciary duty; (2) breach of the fiduciary duty; and (3) damages. Fields v. QSP, Inc., No. CV 10-5772 CAS SSX, 2011 WL 1375286, at *3 (C.D. Cal. Apr. 8, 2011) (citing Pellegrini v. Weiss, 165 Cal. App. 4th 515, 524, 81 Cal.Rptr.3d 387 (2008)). “A fiduciary relationship is any relation existing between parties to a transaction wherein one of the parties is ․ duty bound to act with the utmost good faith for the benefit of the other party.” Gilman v. Dalby, 176 Cal. App. 4th 606, 613, 98 Cal.Rptr.3d 231 (2009).
Here, Defendants assert that once Mr. Francois transferred his ownership of LMM to JCN, thereby making JCN the sole member of LMM, Mr. Francois was no longer a member of LMM—rather, he was only a creditor of LMM. Moreover, Defendants assert that Mr. Francois and F&C waived any duty to comply with the LMM Operating Agreement by breaching it themselves, that they are estopped from arguing that the Nadeaus were not transferred 100% of LLM, and that they have unclean hands.
As such, Defendants have met their burden of presenting specific facts of a legitimate defense to the fiduciary duty claim, both by raising new factual allegations to challenge Plaintiffs', and by raising specific affirmative defenses.
b) Breach of Oral and Written Contract
The elements are the same for causes of action for breach of written and oral contracts: (1) existence of a contract; (2) plaintiff's performance or excuse for nonperformance; (3) defendant's breach; and (4) damages to plaintiff as a result of the breach. Body Jewelz, Inc. v. Valley Forge Ins. Co., 241 F. Supp. 3d 1084, 1090 (C.D. Cal. 2017); see also Edelist v. Bank of Am., N.A., No 15.-cv-09008-R, 2016 WL 7448140, at *2 (C.D. Cal. Feb. 24, 2016).
There appear to be two oral agreements at issue—entered into on June 10, 2016, and January 17, 2017—in which Plaintiffs TFC and Mr. Francois agreed to loan LMM GA a total of $150,000 and LMM GA promised to repay Plaintiffs. (Default Judgment Order 8.) These agreements were memorialized as written contracts in the form of three separate promissory notes between Plaintiffs and Defendants that apparently went unpaid. (Id.) At the default judgment phase, the Court found that the Nadeaus could be held individually liable for the LMM LLC, JCN LLC, and Maison LLC's failure to pay through the alter-ego doctrine. (Id. at 9.)
Here, while Defendants do not contest that LMM failed to repay the amounts loaned by Mr. Francois and TFC, they specifically allege that they did not act as alter egos, that they never commingled funds, that LMM's books and assets were separate and apart from their individual books and assets, and that when they formed Maison LLC, they capitalized it independently and indeed waited until after Mr. Francois had left the business and LMM had been dissolved. (Reply 13.)
As such, Defendants have met their burden of presenting specific facts of a legitimate defense to the breach of oral and written contract claims, specifically with regard to the application of the alter-ego doctrine, in light of their allegations regarding LMM's dissolution and their independent capitalization of Maison, LLC.
c) Unfair Competition
Finally, California's Unfair Competition Law (“UCL”) prohibits “any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising.” Cal. Bus. & Prof. Code § 17200. “[A] business act or practice need only meet one of the three criteria—unlawful, unfair, or fraudulent—to be considered unfair competition under the UCL.” Daro v. Superior Court., 151 Cal. App. 4th 1079, 1093, 61 Cal.Rptr.3d 716 (2007), as modified on denial of reh'g (July 3, 2007).
An “unlawful” business practice is “anything that can be properly be called a business practice and that at the same time is forbidden by law.” Nat'l Rural Telecommunications Co-op. v. DIRECTV, Inc., 319 F. Supp. 2d 1059, 1074 (C.D. Cal. 2003), on reconsideration in part (June 5, 2003) (citing Smith v. State Farm Mut. Auto. Ins. Co., 93 Cal. App. 4th 700, 717–18, 113 Cal.Rptr.2d 399 (2001)). To sustain a cause of action for unlawful business practices, a plaintiff must “state with reasonable particularity the facts supporting the statutory elements of the violation.” Casault v. Fed. Nat. Mortg. Ass'n, 915 F. Supp. 2d 1113, 1128-29 (C.D. Cal. 2012), aff'd sub nom. Casault v. One W. Bank FSB, 658 F. App'x 872 (9th Cir. 2016) (citing Khoury v. Maly's of California, Inc., 14 Cal. App. 4th 612, 618, 17 Cal.Rptr.2d 708 (1993)). Alternatively, an “unfair” business practice is one that either “offends an established public policy” or is “immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers.” McDonald v. Coldwell Banker, 543 F.3d 498, 506 (9th Cir. 2008). Finally, a “fraudulent” business practice is one by which “[reasonable] members of the public are likely to be deceived.” Rubio v. Capital One Bank, 613 F.3d 1195, 1204 (9th Cir. 2010) (alterations in original).
At the default judgment stage, the Court found that Plaintiffs' allegations of Defendants' various acts were sufficient to meet at least the “unfair” standard for the UCL, including but not limited to: JCN LLC (and by extension, the Nadeaus) treating company property as their own; failing to distribute net cash or allocate profits and losses; commingling company funds; cancelling LMM LCC without Plaintiffs' knowledge; and using LMM LLC's assets—such as financial resources, goodwill, and trade secrets—to continue the business through a new company. (Default Judgment Order 12.)
However, Defendants have now made several factual allegations that could constitute a meritorious defense to the UCL claim. For example, Defendants assert that after they took over LMM, they were “frozen out of future sales” by Mr. Francois, so they had no choice but to shut down the business. (Reply 13.) They also reiterate their factual allegations that they did not commingle company funds or otherwise treat company property as their own. Again, leaving the truth of these factual allegations to a later stage in the litigation, the Court finds this sufficient to meet the relatively low bar of a meritorious defense. TCI, 244 F.3d at 700.
d) Summary of Meritorious Defenses
In sum, Defendants have alleged specific facts and affirmative defenses sufficient to constitute meritorious defenses to the four causes of action on which Plaintiffs previously obtained default judgment. The Court finds that their legal arguments are non-frivolous and the Court would benefit from more expanded briefing on the issues raised. Accordingly, this factor weighs in favor of setting aside default.
The third and final factor courts are directed to consider is whether setting aside the default judgment would result in prejudice to the other side. An order setting aside a default judgment prejudices the plaintiff when the order would hinder the plaintiff's ability to pursue his claim. See Falk, 739 F.2d at 463. No prejudice exists, however, where setting aside default merely delays resolution of the case. See TCI, 244 F.3d at 701. Likewise, plaintiffs do not suffer prejudice by being compelled to litigate their claims on the merits. See id. (holding that plaintiff is not prejudiced by incurring costs of litigating or opposing default); Bateman v. U.S. Postal Serv., 231 F.3d 1220, 1225 (9th Cir. 2000) (finding that plaintiff would endure no prejudice from order setting aside judgment because order would deprive him only of “a quick victory”).
In the instant case, more than a year passed between the entry of default and the filing of this instant Motion. Plaintiffs allege that over time, Defendants have “destroyed the business entity that was the subject of this matter, LMM LLC (CA),” and that they claim all physical assets of the business have either been discarded, absorbed into their new business, or have otherwise “disappeared into thin air.” (Opp'n 18.) Plaintiffs argue that Defendants' delay in appearing in this action allowed them to evade discovery in 2018, and this has “severely prejudiced Plaintiffs' ability to ascertain the evidentiary details necessary to prove all aspects of its case, much less to enforce any judgment against Defendants.” (Id.) In sum, they complain that even “imposing a condition of full payment ․ would not fully compensate for this prejudice sufficiently to justify granting relief from the Judgment at this late date.” (Id.)
In response, Defendants reject these implications that they have destroyed or discarded evidence as “without proof” and “irresponsible speculation.” (Reply 15.) Here, they argue that the vast majority of the useful evidence in this case “should be in the possession of the principals,” and that “the odds of memories fading or documents being destroyed are low compared to a case where much information lies in the hands of third parties.” (Id.) Defendants also assert that the Court can account for any possible spoliation through normal case management procedures. (Id.). Finally, Defendants emphasize the Ninth Circuit's clear guidance that the passing of time itself does not constitute prejudice. See Mesle, 615. F.3d at 1095; TCI, 244 F.3d at 701 (holding “the setting aside of a judgment must result in greater harm than simply delaying resolution of the case”).
If default were set aside, and if the Court were to reopen this case, this would undoubtedly inconvenience Plaintiffs given the nearly two years that have passed since they first initiated this case. However, this does not constitute cognizable prejudice. Accordingly, this factor weighs in favor of setting aside default.
C. Weighing of the Factors
In sum, the good-cause factors identified by the Ninth Circuit all favor setting aside default. Pursuant to the Court's discretion to set aside default, and bearing in mind the public policy favoring decisions on the merits, the Court GRANTS the Motion and sets aside the default judgment against Defendants.
For the foregoing reasons, the Court GRANTS Defendants' Motion for Relief from Final Judgment. Plaintiffs are ordered to make proper service of the summons and complaint on Defendants within fourteen (14) days of this Order. Defendants' Answer will be due twenty-one (21) days from the issuance of this Order. All outstanding subpoenas are quashed.
IT IS SO ORDERED.
1. Plaintiffs filed “Objections to Defendants' Declarations” (ECF No. 83) and “Evidentiary Objections to Declarations of Defendants in Reply” (ECF No. 86) on March 2, 2020 and March 9, 2020. Their objections are almost exclusively to the relevance of Defendants' statements; nowhere do Plaintiffs raise any factual challenges to their content (ECF Nos. 83, 86, passim (“Not relevant (to the issues involved in this motion) (no dispute as to whether Crystal or Jamon Nadeau were at home at 8:17 PM on 5/28/2018, vs. at the barbecue elsewhere)”.)
THE HONORABLE S. JAMES OTERO, UNITED STATES DISTRICT JUDGE
Response sent, thank you
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Docket No: CASE NO.: 5:18-cv-00843 SJO (PLAx)
Decided: April 07, 2020
Court: United States District Court, C.D. California.
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