Dimitrov v. Stavatti Aerospace Limited

1 WO [5] 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA [8] 9 Valentino Dimitrov, No. CV-23-00226-PHX-DJH 10 Plaintiff, ORDER 11 v. 12 Stavatti Aerospace Limited, et al., 13 Defendants. [14] 15 The Clerk of Court entered default under Federal Rule of Civil Procedure 55(a) 16 against Defendants John Simon; Stavatti Niagara, Ltd, a New York corporation; Stavatti 17 Aerospace, Ltd, a Wyoming corporation; Stavatti Heavy Industries Ltd, a Hawai’i 18 corporation; Stavatti Immobiliare, Ltd, a Wyoming corporation; Stavatti Industries, Ltd, a 19 Wyoming corporation; Stavatti Super Fulcrum, Ltd, a Wyoming corporation; Stavatti 20 Corporation, a Minnesota Corporation; Christopher Beskar; Patricia Mcewen; William 21 Mcewen; and Jean Simon (together the “Defaulting Defendants”). (Docs. 9; 12; 19). 22 Plaintiff Valentino Dimitrov (“Plaintiff’) has since filed two motions for default judgment 23 (Docs. 13; 20).1 Also pending is the Motion to Set Aside Entry of Default (Doc. 21)2 filed 24 by the Defaulting Defendants; Defendant Stavatti Ukraine; Defendant Stavatti Aerospace, [25] 1 The matters are fully briefed. As to Plaintiff’s first Motion for Default Judgement, the 26 Represented Defendants did not file a response and the time to do so has passed. As to Plaintiff’s second Motion for Default Judgment, the Represented Defendants filed a 27 Response (Doc. 22). Plaintiff has not filed a reply and the time to do so has passed. 28 2 The matter is fully briefed. Plaintiff filed a Response (Doc. 23) and Defendants filed a Reply (Doc. 25). 1 Ltd, a Minnesota corporation; and Defendant Maja Beskar (together the “Represented 2 Defendants”).3 The Court must decide whether the Represented Defendants have shown 3 good cause under Rule 55(c)4 to set aside the Clerk of Court’s entry of default against the 4 Defaulting Defendants. Fed. R. Civ. P. 55(c). The Court finds the Represented Defendants 5 have met their burden. So, the Court grants the Represented Defendants’ Motion and 6 denies Plaintiff’s Motions. 7 I. Background 8 According to its website, Stavatti Aerospace, Ltd (“Stavatti Aerospace”)5 “generates 9 revenues and net shareholder earnings through the design and production of major fixed 10 wing aircraft and aerospace vehicles” and “is owned by shareholders who elect a board of 11 directors who in turn appoint executive officers to manage the daily business affairs of the 12 corporation[.]” (Doc. 1-3 at 2). The twenty named Defendants in this matter are either 13 subsidiaries, entities, agents, executives, or employees of Stavatti Aerospace.6 14 (Doc. 1 at ¶¶ 8–29). 15 A. The $1 Million Investment Note 16 On February 27, 2022, Plaintiff and Stavatti Aerospace executed a Promissory Note 17 (Doc. 1-2) (the “Investment Note”) where Plaintiff invested $1 million as an angel investor. 18 It appears that Defendant Christopher Beskar signed the Investment Note through his 19 capacity as Chief Executive Officer of Stavatti Aerospace. (Id. at 3). However, the 20 Represented Defendants contend Defendant Christopher Beskar did not sign or authorize 21 the Investment Note—rather, Defendant Brian Colvin forged the signature by “using a 22 fraudulent transfer . . . from a blank form non-disclosure Agreement.” (Doc. 21 at 4). 23 The Investment Note obligated Stavatti Aerospace to repay the principal of the loan 24 3 The Represented Defendants include all Defendants in this action except Defendants Brian Colvin, Corrina Colvin, and Rudy Chacon. (Doc. 21 at 1). [25] 4 Unless where otherwise noted, all Rule references are to the Federal Rules of Civil 26 Procedure. 27 5 The Court assumes Stavatti Aerospace, Ltd, includes Defendant Stavatti Aerospace, Ltd, a Wyoming corporation; and Stavatti Aerospace, Ltd, a Minnesota corporation. [28] 6 One named Defendant encompasses Unknown Parties named as Does 1-10, inclusive. 1 by May 1, 2022. (Doc. 1-2 at 2). Plaintiff claims Stavatti Aerospace “never returned any 2 of the capital investment by Plaintiff”, and “never provided Plaintiff adequate assurances 3 as to Stavatti’s liquidity or intent to repay Plaintiff under the terms of the [Investment 4 Note.]” (Doc. 1 at ¶ 30). From June–July 2022, Plaintiff engaged in various 5 correspondence with Defendants Brian Colvin and Rudy Chacon requesting payments to 6 no avail. (Id. at ¶¶ 34–53). The Represented Defendants contend that, unbeknownst to 7 them, Defendant Brian Colvin “communicate[d] with Plaintiff referring to himself as 8 President of Stavatti Aerospace Ltd”, “perpetuat[ed] the deception that the two-month 9 maturity date had been acknowledged by the company”, and “provid[ed] excuses and 10 promises that were apparently intended to keep the unauthorized loan from scrutiny by the 11 company.” (Doc. 21 at 4). 12 On October 10, 2022, Plaintiff’s Counsel, Mr. George Chebat, sent a letter 13 addressed to various Stavatti entities7 titled “Demand for Repayment on $1 Million 14 Investor Note” (Doc. 23-1 at 2–8) (the “October Demand Letter”). The Represented 15 Defendants claim it was only then did Defendant Christopher Beskar “finally learn[] of the 16 note and its default; until that time [Defendant Brian] Colvin had been interfacing with 17 Plaintiff without keeping Stavatti abreast of the true state of affairs.” (Doc. 21 at 4). 18 On October 24, 2022, Defendant Christopher Beskar responded to the October 19 Demand Letter (Doc. 26-8) (the “October Response”). He justified the lack of payment on 20 the Investment Note due to delays in other investment opportunities. (Id. at 2–5). He 21 further expressed Stavatti Aerospace’s commitment to repay Plaintiff “within the next 15 22 to 90 days.” (Id. at 7). 23 B. Procedural History 24 On February 3, 2023, Plaintiff filed a Complaint (Doc. 1) against Defendants 25 alleging violations of the Federal Racketeer Influenced and Corrupt Organizations Act, 26 7 The October Letter was addressed to Stavatti Aerospace; Defendant Stavatti Immobiliare, Ltd; Defendant Stavatti Niagara, Ltd, a New York corporation; Defendant Stavatti Super 27 Fulcrum, Ltd, a Wyoming corporation; Defendant Stavatti Industries, Ltd, a Wyoming corporation; Defendant Stavatti Ukraine; and Defendant Stavatti Corporation, a Minnesota 28 Corporation. (Doc. 23-1 at 2). [1] 18 U.S.C. § 1961 et seq.; breach of contract, fraud, conversion, breach of the covenant of 2 good faith and fair dealing, breach of fiduciary duty, negligence, intentional 3 misrepresentation, negligent misrepresentation, unjust enrichment, tortious interference 4 with a contract, civil conspiracy. (Id. at ¶¶ 68–174). Seven weeks passed and no Defendant 5 answered or otherwise appeared to defend. 6 On March 28, April 3, and June 9, 2023, Plaintiff requested the Clerk of Court to 7 enter default against the Defaulting Defendants. (Docs. 8; 11; 18). The Clerk granted each 8 of Plaintiff’s requests. (Docs. 9; 12; 19). Plaintiff then filed two motions for default 9 judgment against the Defaulting Defendants on April 6 and July 13, 2023, respectively. 10 (Docs. 13; 20). On July 14, 2023, the Represented Defendants appeared for the first time 11 and moved to set aside the Court of Clerk’s entries of default under Rule 55. (Doc. 21). 12 II. Legal Standard 13 Rule 55(c) provides that “[t]he court may set aside an entry of default for good 14 cause[.]” Fed. R. Civ. P. 55(c). The court’s discretion in setting aside an order of default 15 is especially broad where, as here, a party seeks to set aside the entry of an order of default 16 before the entry of a default judgment. See Mendoza v. Wight Vineyard Mgmt., 783 F.2d 17 941, 945 (9th Cir. 1986). In evaluating a motion to set aside default rather than a default 18 judgment, any doubt should be resolved in favor of the motion to set aside the default so 19 that cases may be decided on their merits. See O’Connor v. State of Nev., 27 F.3d 357 , 364 20 (9th Cir. 1994). 21 “What constitutes ‘good cause’ is within the discretion of the trial court.” FOC 22 Financial Ltd. Partnership v. National City Commercial Capital Corp., 612 F.Supp.2d 23 1080, 1082 (D. Ariz. 2009) (citations omitted). The court should consider three factors 24 when conducting a good cause analysis under Rule 55(c): (1) whether the moving party 25 engaged in culpable conduct that led to the default; (2) whether there is prejudice to the 26 non-moving party; and (3) whether the moving party had a meritorious defense. See 27 Franchise Holding II, LLC v. Huntington Restaurants Group, Inc., 375 F.3d 922 , 925-26 28 (9th Cir. 2004). 1 III. Discussion 2 The Court must decide whether the Represented Defendants have shown good cause 3 to set aside the Clerk of Court’s entry of default. The Court will address each of the three 4 consideration factors in turn. 5 A. Culpable Conduct 6 As to the first factor, the Represented Defendants argue they did not engage in 7 culpable conduct because their failure to appear was not willful. (Doc. 21 at 8–9). They 8 aver that on April 25, 2023—nine days after being served—they initially retained 9 Mr. Andrew as counsel who (1) misrepresented that he was an Arizona licensed attorney; 10 (2) did not answer the complaint or otherwise appear in this action despite his assurances; 11 (3) took the Represented Defendants’ money under false pretenses; and (4) “put [the 12 Represented Defendants] in the situation they are now in.” (Id. at 5).8 The Represented 13 Defendants argue that failure to file a responsive pleading was not their fault, and they 14 promptly retained new counsel upon learning the true state of Mr. Andrew’s affairs. 15 (Docs. 21 at 5; 26 at 6). They further contend they made reasonable efforts to communicate 16 with Plaintiff and his Counsel through the October Response, yet Plaintiff’s counsel 17 remained unresponsive and “continued to press forward with his claims.” (Doc. 21 at 8). 18 On the other hand, Plaintiff argues the Represented Defendants’ conduct was 19 culpable because they had actual notice of the action when they were served and 20 intentionally ignored the summons. (Doc. 23 at 8). He maintains that the Represented 21 Defendants’ experience with Mr. Andrew does not constitute excusable neglect because 22 Represented Defendants “had adequate time to find alternative counsel.” (Id. at 10). 23 1. Exceptions for Grossly Negligent Counsel 24 A defendant’s conduct is typically deemed “culpable” where “there is no 25 explanation of the default inconsistent with a devious, deliberate, willful, or bad faith 26 failure to respond.” TCI Grp. Life Ins. Plan v. Knoebber, 244 F.3d 691 , 698 (9th Cir. 27 2001), as amended on denial of reh’g and reh’g en banc (May 9, 2001). Only intentional 28 8 Defendant Chris Baker represents he reported Mr. Andrews to the State Bar of Arizona. (Docs. 26 at 6; 26-7) 1 conduct is sufficiently culpable to deny a motion to set aside default. Id. 2 As to conduct on part of a parties’ counsel, the general rule is “parties are bound by 3 the actions of their lawyers, and alleged attorney malpractice does not usually provide a 4 basis to set aside” default. Casey v. Albertson’s Inc., 362 F.3d 1254, 1260 (9th Cir. 2004) 5 (citing Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P’ ship, 507 U.S. 380, 397 (1993) 6 (stating that parties are “held responsible for the acts and omissions of their chosen 7 counsel”)). However, the Ninth Circuit carved out an exception to this rule in Cmty. Dental 8 Services. v. Tani: default “may” be set aside where counsel commits “gross negligence.” [9] 282 F.3d 1164, 1169 (9th Cir. 2002); see also Williams v. Los Angeles Sheriff's Dep’t, 2020 10 WL 5948286 , at *9–10 (C.D. Cal. June 29, 2020) (examining the Tani exception in the 11 context of a Rule 55(c) motion). Gross negligence is defined as when a parties’ counsel 12 displays neglect “so gross that it is inexcusable.” Tani, 282 F.3d at 1168 . The rationale 13 for this exception is that “[w]hen an attorney is grossly negligent . . . the judicial system 14 loses credibility as well as the appearance of fairness, if the result is that an innocent party 15 is forced to suffer drastic consequences.” Id. at 1170 . 16 In Tani, the Ninth Circuit held that the defense counsel committed gross negligence 17 when he “virtually abandoned his client by failing to proceed with his client’s defense.” [18] Id. It found that by explicitly misrepresenting to the client that the case was proceeding 19 properly and he was performing his responsibilities, the defense counsel deprived his client 20 of the opportunity to take action to preserve his rights. Id. at 1171 . Furthermore, there was 21 “no evidence in the record that [the defendant’s own] conduct in any way formed a part of 22 the [court’s] justification for ordering the default judgment.” Id. at 1172 . 23 2. Gross Negligence on Part of the Represented Defendants’ Prior Counsel is Not Chargeable to the Represented Defendants [24] 25 The Court finds the Tani exception applies to the present matter. Like the grossly 26 negligent defense counsel in Tani, Mr. Andrews assured the Represented Defendants that 27 the case was proceeding smoothly and “he was taking care of the matter”, yet did not 28 perform his responsibilities. Mr. Andrew did not answer the complaint or otherwise appear 1 in front of this Court. (Doc. 21 at 5). Indeed, “conduct on the part of a client’s alleged 2 representative that results in the client’s receiving practically no representation at all clearly 3 constitutes gross negligence[.]” Tani, 282 F.3d at 1171 . Mr. Andrews further 4 misrepresented that he was licensed to practice law within this district, which is clearly 5 inexcusable conduct. (Doc. 21 at 5). There is no other evidence in the record showing the 6 Represented Defendants’ own intentional conduct contributed to their default. Upon 7 learning in June 2023 that Mr. Andrews was not appropriately licensed, the Represented 8 Defendants promptly retained new counsel and filed the present motion to set aside default 9 in July 2023. (Docs. 21 at 5; 26 at 7). 10 The Court finds Mr. Andrew’s gross negligence is not chargeable to the Represented 11 Defendants and they are not otherwise culpable. When resolving any doubt in favor of the 12 Represented Defendants so that case may be decided on the merits, as the Court must under 13 Rule 55, this first factor weighs in favor of setting aside default. See O’Connor, [14] 27 F.3d at 364 . 15 B. Prejudice to Plaintiff 16 As to the second factor, Plaintiff claims that setting aside entry of default will 17 prejudice him because he “has expended his resources in the pursuit of justice before this 18 Court for months[.]” (Doc. 23 at 5). But to be prejudicial, the setting aside of the default 19 “must result in greater harm than simply delaying the resolution of the case. The standard 20 is whether the Plaintiff’s ability to pursue his claim will be hindered.” TCI Grp., 244 F.3d 21 at 701 . Here, Plaintiff’s ability to pursue his claim is not hindered; it is merely delayed. 22 Nor does the cost of litigation demonstrate sufficient prejudice. Id. (“For had there been 23 no default, the plaintiff would of course have had to litigate the merits of the case, incurring 24 the costs of doing so.”). Moreover, where default judgment has not been entered, the lack 25 of prejudice to Plaintiff favors granting the motion to set aside entry of default. See J & J 26 Sports Productions, Inc. v. Valle, 2013 WL 4083622 , at *3 (D. Ariz. Aug. 13, 2013). 27 The Court therefore concludes the facts are insufficient to show that vacating the 28 default would burden Plaintiff’s ability to pursue his claims. This second factor weighs in favor of setting aside default. 2 C. Meritorious Defense 3 Under the final factor, a defendant must present specific facts that would constitute 4|| ameritorious defense. See TCI Grp., 244 F.3d at 700 . But this burden is not extraordinarily heavy. Jd. A defendant need only allege sufficient facts that, if accepted as true, would || establish a defense. Id.; see also United States v. Signed Personal Check No. 730 of Yubran 7\| S. Mesle, 615 F.3d 1085, 1094 (9th Cir. 2010). “[T]he question whether the factual 8 || allegation [i]s true” is not to be determined by the court when it decides the motion to set aside the default, but is instead “the subject of the later litigation.” TCI Grp., 244 F.3d at || 700. The Represented Defendants argue they have defense because the Investment Note 11 || “was not approved by Stavatti Aerospace [] and was fraudulent [sic] created and concealed || from Stavatti by [Defendant Brian] Colvin for what now appears to be obvious reasons, 13 || namely [Defendant] Brian Colvin’s self-interest.” (Doc. 21 at 7). When accepting these 14|| facts as true, the Court finds that Defendant has a meritorious defense to Plaintiffs claim. IV. Conclusion 16 The good cause factors under Rule 55(c) favor setting aside the entries of default in || this action. The Court finds that the Represented Defendants’ conduct leading to the 18 || default was not culpable, setting aside the default would not prejudice Plaintiff, and the 19 || Represented Defendants have alleged facts sufficient to establish a meritorious defense. 20 Accordingly, 21 IT IS ORDERED that the Represented Defendants’ Motion to Set Aside Entry of Default (Doc. 21) is granted. Plaintiff Valentino Dimitrov’s Motions for Default 23 || Judgment (Docs. 13; 20) are thereby denied as moot. 24 IT IS FINALLY ORDERED that the Represented Defendants must file a 25 || responsive pleading on or before November 17, 2024. 26 Dated this 17th day of October, 2023. / . fo □ \Le □ 27 norable' Diangd. Huretewa 28 United States District Fudge -8-