Zurich American Insurance Company v. Solvis Staffing Services, Inc.

[9] 10 UNITED STATES DISTRICT COURT 11 SOUTHERN DISTRICT OF CALIFORNIA [12] 13 ZURICH AMERICAN INSURANCE Case No.: 3:18-CV-0517 W (NLS) COMPANY, et al., [14] ORDER GRANTING PLAINTIFFS’ Plaintiffs, 15 MOTION FOR ENTRY OF DEFAULT v. AND DEFAULT JUDGMENT [DOC. [16] 17] SOLVIS STAFFING SERVICES, INC, [17] et al., [18] Defendants. [19] 20 Pending before the Court is Plaintiffs’ motion for entry of default and default 21 judgment against Defendant. [Doc. 17.] The Court decides the matter on the papers 22 submitted and without oral argument. See Civ. L.R. 7.1(d.1). For the reasons stated 23 below, the Court GRANTS Plaintiffs’ motion. [Doc. 17.] 24 // 25 // 26 // 27 // 28 // 1 I. BACKGROUND 2 Plaintiffs Zurich American Insurance Company and Zurich American Insurance 3 Company of Illinois (Collectively, “Zurich”) issued workers compensation insurance 4 policies to Defendant Solvis Staffing Services, Inc. (“the Policies”). (Compl. [Doc. 1] ¶ 5 10.) The Policies require Zurich to pay benefits under the relevant workers compensation 6 laws and to defend against any claim, proceeding, or suit arising under the Policies. (Id. 7 ¶¶ 17, 18.) 8 Zurich alleges the Policies were issued because Solvis misrepresented the nature of 9 its business on its application. (Compl. ¶ 7.) On the application, Solvis denied it 10 functioned as a Professional Employer Organization (“PEO”). (Id. Ex. 4 [Doc. 1-2] p. 11 22.)1 However, Zurich contends that an investigation into the services provided by Solvis 12 revealed Solvis actually provided services as a PEO. (Id. ¶¶ 27–56.) Specifically, the 13 Complaint alleges Solvis entered into agreements with other staffing companies whereby 14 these companies utilized Solvis’ Policies to submit workers compensation claims. (Id. ¶¶ 15 34, 35.) 16 As a result of the investigation into Solvis’ activities, Zurich issued a notice of 17 rescission on January 8, 2018 rescinding the Policies. (Compl. ¶ 56.) By March 9, 2018, 18 Zurich filed the instant lawsuit. Zurich then attempted to serve the summons and 19 complaint on Solvis at its principal place of business, and on both directors of the 20 company. (Meno Decl. [Doc. 17-2] ¶¶ 5–7.) Before Zurich effectuated service, however, 21 Solvis filed for Chapter 7 bankruptcy. (Mot. for Default [Doc. 17] 3:7–10.) 22 The U.S. Bankruptcy Court for the Southern District of California appointed James 23 L. Kennedy as the Chapter 7 Trustee (“Trustee”) on behalf of the Debtor, Solvis. (See 24 Notice of Appearance [Doc. 6] 1:20–22.) Zurich then initiated an Adversary Proceeding 25 against Solvis, entitled Zurich American Insurance Company, et al. v. Solvis Staffing [28] 1 Services, Inc., et al., Adversary Case No. 18-01291-LA7. Subsequently, Trustee and 2 Zurich entered into a stipulation in which Trustee agreed to withdraw opposition to 3 Zurich’s motion for relief from stay and agreed not to contest the relief sought in this 4 action. (Mot. for Misc. Relief Ex. 2 [Doc. 4] pp. 8–11; Notice of Appearance pp. 1, 2.) 5 Zurich now moves for entry of default and default judgment against Solvis. (Mot. 6 for Default.) For the reasons that follow, the motion will be granted. [7] 8 II. LEGAL STANDARD 9 Rule 55(b)(2) of the Federal Rules of Civil Procedure governs applications to the 10 court for default judgment. See Fed. R. Civ. P. 55(b)(2). Default judgment is available 11 where the plaintiff establishes: (1) defendant has been served with the summons and 12 complaint and default was entered for their failure to appear; (2) defendant is neither a 13 minor nor an incompetent person; (3) defendant is not in military service or not otherwise 14 subject to the Soldiers and Sailors Relief Act of 1940; and (4) if defendant has appeared 15 in the action, that defendant was provided with notice of the application for default 16 judgment at least three days prior to the hearing. See, e.g., 50 U.S.C. § 521 ; Fed. R. Civ. 17 P. 55 ; Twentieth Century Fox Film Corp. v. Streeter, 438 F. Supp. 2d 1065, 1070 (D. 18 Ariz. 2006 ). 19 Entry of default judgment is within the trial court’s discretion. See Taylor Made 20 Golf Co. v. Carsten Sports, Ltd., 175 F.R.D. 658, 660 (S.D. Cal. 1997) (citing Lau Ah 21 Yew v. Dulles, 236 F.2d 415, 416 (9th Cir. 1956)). In making this determination, the 22 court considers the following factors: (1) the possibility of prejudice to the plaintiff, (2) 23 the merits of plaintiff's substantive claim, (3) the sufficiency of the complaint, (4) the 24 sum of money at stake in the action, (5) the possibility of a dispute concerning the 25 material facts, (6) whether the default was due to excusable neglect, and (7) the strong 26 policy underlying the Federal Rules of Civil Procedure favoring decisions on the merits. 27 Eitel v. McCool, 782 F.2d 1470, 1471-72 (9th Cir. 1986). [28] 1 Upon entry of default, the factual allegations in plaintiff's complaint, except those 2 relating to damages, are deemed admitted. E.g., Televideo Sys., Inc. v. Heidenthal, 826 3 F.2d 915, 917-18 (9th Cir. 1987) (quoting Geddes v. United Fin. Group, 559 F.2d 557 , 4 560 (9th Cir. 1977)). Where the amount of damages claimed is a liquidated sum or 5 capable of mathematical calculation, the court may enter a default judgment without a 6 hearing. Davis v. Fendler, 650 F.2d 1154, 1161 (9th Cir. 1981). When it is necessary for 7 the plaintiff to prove unliquidated or punitive damages, the court may require plaintiff to 8 file declarations or affidavits providing evidence for damages in lieu of a full evidentiary 9 hearing. Transportes Aereos De Angola v. Jet Traders Invest. Corp., 624 F.Supp. 264 , 10 266 (D. Del. 1985). [11] 12 III. DISCUSSION 13 A. Entitlement to Default 14 Default is a two-step procedure. Fed. R. Civ. P. 55. An entry of default must 15 precede an entry of default judgment. Id.; 10A Charles Alan Wright & Arthur R. Miller, 16 Federal Practice and Procedure § 2682 (4th ed. 2019). Thus, the Court must first address 17 whether entry of default is appropriate. 18 Entry of default is appropriate where the defendant “fails to plead or otherwise 19 defend.” See Fed. R. Civ. P. 55(a). Here, Solvis has failed to defend. 20 On April 11, 2019, Trustee appeared on behalf of Solvis and filed a notice of 21 abandonment of defense.2 (Notice of Appearance pp. 1, 2.) Upon abandonment, Solvis 22 regained the ability to defend this action in its own name. See Catalano v. C.I.R., 279 23 F.3d 682, 685 (9th Cir. 2002). However, California law prohibits a suspended 24 corporation from exercising any right, power, or privilege, “[e]xcept for the purposes of 25 filing an application for an exempt status or amending the articles of incorporation as [27] 2 A Chapter 7 Trustee is vested with the right to sue and/or defend any action pending against the [28] 1 necessary either to perfect that application or to set forth a new name.” Cal. Rev. & Tax. 2 Code § 23301. Solvis’ corporate status was suspended as of July 25, 2018 (Meno Decl. ¶ 3 8), and there is no indication Solvis is attempting to reinstate its active status. As such, 4 Solvis is barred from participating in this suit. 5 Because Solvis has failed to plead or otherwise defend, the Court grants Zurich’s 6 request for entry of default. [7] 8 B. Eitel Factors 9 Weighing the Eitel factors, the Court finds default judgment is appropriate. If the 10 Court denied default judgment, Zurich would unnecessarily continue litigating an 11 uncontested dispute. As discussed below, Zurich’s allegations sufficiently plead the five 12 causes of action asserted in the Complaint, and there is no apparent reason to doubt the 13 merits of Zurich’s substantive claims. Additionally, Solvis has made no showing that 14 their failure to respond to the lawsuit was due to excusable neglect, nor is there any 15 apparent possibility of a dispute concerning the material facts. Because the factors weigh 16 in Zurich’s favor, the Court, while recognizing the public policy favoring decisions on 17 the merits, will grant default judgment. [18] 19 C. Merits of Zurich’s Five Causes of Action 20 1. Rescission 21 Zurich’s first cause of action is for rescission of the Policies issued to Solvis. 22 (Compl. p. 12.) An insurer may rescind a policy when the insured misrepresents or 23 conceals material information in its insurance application. LA Sound USA, Inc. v. St. 24 Paul Fire & Marine Ins. Co., 156 Cal. App. 4th 1259, 1272 (2007). 25 The Complaint alleges Solvis misrepresented or concealed material information on 26 its insurance application. (Compl. ¶¶ 7–9.) Zurich attached documents demonstrating 27 that Solvis represented itself as a temporary staffing organization. (See Compl. Exs. 1– [28] 1 4.) Despite this representation, the Complaint alleges Solvis provided services as a PEO. 2 (Id. ¶¶ 7–12.) 3 Accordingly, the Court finds Zurich is entitled to a default judgment as to the first 4 cause of action for rescission of the Zurich Policies. [5] 6 2. Zurich is Entitled to Recoupment and Restitution of Defense and Indemnity Payments [7] 8 Zurich’s second, third, and fourth causes of action seek recoupment and restitution 9 of fees and benefits bestowed upon Solvis. (Compl. ¶¶ 63–72.) These actions derive 10 from the first cause of action for rescission. As such, California Civil Code § 1692 11 provides: 12 When a contract has been rescinded in whole or in part, any party to the contract may seek relief based upon such rescission by (a) bringing an action [13] to recover any money or thing owing to him by any other party to the 14 contract as a consequence of such rescission or for any other relief to which he may be entitled. A claim for damages is not inconsistent with a claim for [15] relief based upon rescission. The aggrieved party shall be awarded complete 16 relief, including restitution of benefits, if any, conferred by him as a result of the transaction and any consequential damages to which he is entitled. [17] 18 As previously stated, Zurich established a basis for rescission of the Policies. The 19 second, third, and fourth causes of action re-allege the same allegations supporting 20 Zurich’s rescission claim. (Compl. ¶¶ 63, 65, 67.) Under California Civil Code § 1692, 21 the Court finds Zurich is entitled recoupment and restitution of fees and benefits 22 bestowed upon Solvis. [23] 24 3. Declaratory Relief 25 Zurich’s final cause of action requests a declaration that: the Zurich Policies with 26 Solvis are rescinded ab initio; Zurich has no duty to defend or indemnify Solvis in the 27 underlying claims for workers’ compensation benefits nor a duty to respond to those 28 underlying claims; Zurich is entitled to recoup defense fees, costs and indemnity paid on 1 behalf of Solvis; and restitution in an amount equal to the benefits conferred upon Solvis 2 as defense fees, costs and indemnity. (Compl. ¶¶ 74a–d.) 3 The Declaratory Judgment Act provides: “[i]n a case of actual controversy within 4 its jurisdiction … any court of the United States, upon the filing of an appropriate 5 pleading, may declare the rights and other legal relations of any interested party seeking 6 such declaration, whether or not further relief is or could be sought.” 28 U.S.C. § 7 2201(a). 8 Here, the Complaint alleges complete diversity amongst the parties and implicates 9 a case or controversy. (See Compl. ¶¶ 1–3, 7–14.) Accordingly, declaratory relief is 10 appropriate. For the reasons discussed throughout this order, the Court finds Zurich is 11 entitled to declaratory relief. [12] 13 D. Requested Relief – Recoupment and Restitution 14 Because Zurich is entitled to default judgment, the remaining issue is the requested 15 relief. Zurich requests judgment for $913,796.77 against Solvis on the second cause of 16 action for recoupment of defense fees and costs, third cause of action for recoupment of 17 indemnity costs, and fourth cause of action for unjust enrichment. (Mot. for Default 18 13:8–11.) 19 Under California Civil Code § 1692, Zurich is entitled to recover any money owed 20 as a consequence of rescission. The evidence and declarations attached confirm Zurich 21 incurred damages of $913,796.77. (See Peat Decl. [Doc. 17-1] ¶¶ 3–6, Ex. 1.) 22 Accordingly, the Court will award the damages requested. [23] 24 IV. CONCLUSION AND ORDER 25 For the foregoing reasons, the Court GRANTS Plaintiffs’ motion for entry of 26 default and default judgment [Doc. 17.] and ORDERS as follows: 27 1. DEFAULT is hereby ENTERED against Defendant Solvis Staffing 28 Services, Inc. 1 2. DEFAULT JUDGMENT is entered in favor of Plaintiffs Zurich American 2 Insurance Company and Zurich American Insurance Company of Illinois, 3 and against Defendant Solvis Staffing Services, Inc. for: (1) the first cause of 4 action for Rescission of the Policies numbered WC 5714483-00 and WC 5 5714484-00; (2) the second cause of action for Recoupment of Defense Fees 6 and Costs; (3) the third cause of action for Recoupment of Indemnity Costs; 7 (4) the fourth cause of action for Restitution; and (5) the fifth cause of action 8 for Declaratory Relief. 9 3. The Court AWARDS Plaintiffs Zurich American Insurance Company and 10 Zurich American Insurance Company of Illinois $913,796.77 in damages 11 against Defendant Solvis Staffing Services, Inc. 12 4. The Court DECLARES: (1) the Policies issued by Plaintiffs Zurich 13 American Insurance Company and Zurich American Insurance Company of 14 Illinois (collectively, “‘Zurich’’) to Defendant Solvis Staffing, Inc. (“Solvis”) 15 are rescinded ab initio; (2) Zurich has no duty to defend or indemnify Solvis 16 in the underlying claims for workers’ compensation benefits nor a duty to 17 respond to those underlying claims; (3) Zurich is entitled to recoup defense 18 fees, costs and indemnity paid on behalf of Solvis; and (4) Zurich is entitled 19 to restitution in an amount equal to the benefits conferred upon Solvis as 20 defense fees, costs and indemnity. 21 IT IS SO ORDERED. 22 ||Dated: August 14, 2019 \ pe InLor 24 Hn. 7 omas J. Whelan 5 United States District Judge