United States District Court, D. Arizona
Neil V. Wake United States District Judge
Before the Court is Defendant Balser’s Motion to Set Aside Default (Doc. 53), Defendant Morris’s Motion to Set Aside Default (Doc. 63), Plaintiff’s Motion for Judgment by Default (Doc. 58), and the parties’ accompanying briefs. For the reasons that follow, the Defendants’ Motions to Set Aside Default will be conditionally granted and Plaintiff’s Motion for Judgment by Default will be denied.
Plaintiff Gold Star Resources, LLC, (“Gold Star”) claims to be the victim of “a sophisticated scheme or confidence game designed to defraud.” (Doc. 42 at ¶ 9.) Here is how the “scheme” allegedly worked: Defendant Joseph Balser, a scientist, claimed to have a unique method for identifying and extracting gold and silver deposits from older mining claims. (Id.) Defendant James Morris, the owner of various mining properties in Arizona, vouched for Balser’s methods. (Id.) Other defendants confirmed Balser’s methods. (Id.) In reliance on these representations, Gold Star raised millions of dollars, bought hundreds of mining claims in Arizona, and began constructing a chemical plant for the purpose of extracting gold and silver. (Id. at ¶¶ 12, 13, 19.) The plant never produced any meaningful quantities of gold and silver, and Balser’s method could not be confirmed through an independent laboratory. (Id. at ¶¶ 20, 22.) Gold Star sued Balser and Morris for securities violations, racketeering, fraud, conversion, breach of covenant of good faith and fair dealing, breach of contract, and conspiracy. (Id. at ¶¶ 49-88.)
Balser failed to respond to Gold Star’s amended complaint by March 23, 2015. Accordingly, Gold Star applied for entry of default as to Balser (Doc. 21), and default was entered on April 2 (Doc. 27).
Likewise, Morris failed to respond to Gold Star’s amended complaint by April 4, 2015. Accordingly, Gold Star applied for entry of default as to Morris (Doc. 28), and default was entered on April 10 (Doc. 29).
On July 31, Balser moved to set aside the entry of default against him. (Doc. 53.) In his affidavit (Doc. 53-1), he explained he did not receive a copy of Gold Star’s complaint until weeks after service had been executed on March 1. He further explained that, due to his limited resources and communication capabilities, he was unable to retain an attorney quickly and was unable to explain his circumstances to his attorney until meeting with him on May 29.
On August 17, Morris moved to set aside the entry of default against him. (Doc. 63.) In his affidavit (Doc. 63-1), he explained he did not receive a copy of Gold Star’s complaint until May. He further explained he thought Balser’s attorney was representing him as well as Balser. After he discovered otherwise on July 17, he asked the Court for an extension of time and retained a lawyer, whom he instructed to file an answer as soon as possible.
Gold Star opposes both motions. (Doc. 64.) In response to Balser’s motion, Gold Star argues that an email sent by Balser’s attorney on March 26, 2015, belies Balser’s claim that he could not quickly communicate with an attorney and indicates unreasonable delay. In response to Morris’s motion, Gold Star argues Morris’s affidavit is inadequate, false, and inconsistent with Balser’s affidavit. Gold Star also claims that neither defendant has a meritorious defense to the underlying allegations and that setting aside these defaults would unfairly prejudice Gold Star. For these same reasons, Gold Star moved for default judgment against Balser and Morris. (Doc. 58.)
“The court may set aside an entry of default for good cause . . . .” Fed.R.Civ.P. 55(c). “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. This standard, which is the same as is used to determine whether a default judgment should be set aside under Rule 60(b), is disjunctive, such that a finding that any one of these factors is true is sufficient reason for the district court to refuse to set aside the default.” United States v. Signed Pers. Check No. 730 of Yubran S. Mesle, 615 F.3d 1085, 1091 (9th Cir. 2010) (alterations and citations omitted).
“Crucially, however, judgment by default is a drastic step appropriate only in extreme circumstances; a case should, whenever possible, be decided on the merits. Additionally, while the same test applies for motions seeking relief from default judgment under both Rule 55(c) and Rule 60(b), the test is more liberally applied in the Rule 55(c) context . . . because in the Rule 55 context there is no interest in the finality of the judgment with which to contend.” Id. at 1091 & n.1 (alteration and citations omitted).
A. Neither Defendant Engaged in Culpable Conduct
“A defendant’s conduct is culpable if he has received actual or constructive notice of the filing of the action and intentionally failed to answer. . . . [T]he term ‘intentionally’ means that a movant cannot be treated as culpable simply for having made a conscious choice not to answer; rather, to treat a failure to answer as culpable, the movant must have acted with bad faith, such as an intention to take advantage of the opposing party, interfere with judicial decisionmaking, or otherwise manipulate the legal process.” Id. at 1092 (alteration and citations omitted) (emphasis in original). Typically, when a defendant’s conduct is ...