United States District Court, D. Nevada
September 19, 2014
Kyle Gotshalk, et al.,
Peter Hellwig, et al., Plaintiffs Defendants
DEFENDANT STAKOOL'S MOTION TO SET ASIDE CLERK'S ENTRY OF DEFAULT [DOC. 51] AND
DENYING AS MOOT AND WITHOUT PREJUDICE PLAINTIFF'S MOTION FOR DEFAULT JUDGMENT
JENNIFER A. DORSEY, District Judge.
Plaintiffs formerly owned and controlled Stakool, a publicly traded company, until they allegedly sold their interest to defendants in exchange for company stock and cash that they allege was never fully paid. See Doc. 4. The parties engaged in protracted attempts at settling this contract and securities case, without complete success. There are two pending motions: Plaintiff's Application for Default Judgment, Doc. 48, which seeks a default judgment against remaining defendants Peter Hellwig, Anthus Life Corp., and Stakool, Inc.; and Stakool's motion to set aside the clerk's prior entry of default. Doc. 51. Considering the public policy favoring resolving cases on their merits, I find that Stakool should be entitled to assert its defenses, and I find good cause to set aside the default. Having revived the claims against Stakool, I deny the motion for default judgment against Stakool as moot. And as Hellwig and Anthus are similarly situated to Stakool and could be subject to different outcomes on the same legal theory if Stakool successfully defends itself, I deny plaintiffs' motion for default judgment against Hellwig and Anthus as premature and without prejudice.
A. Motion to Set Aside Clerk's Entry of Default [Doc. 51]
Fed. R. Civ. Proc. 55 provides a mechanism for obtaining a default judgment against a party who has failed to plead or otherwise respond to claims brought against it. Where this failure is "shown by affidavit or otherwise, " the clerk must enter that party's default. "The court may set aside an entry of default for good cause." "Good cause" is determined through three factors: (a) whether the defaulting party engaged in culpable conduct that led to the default, (b) whether there is a meritorious defense, and (c) whether reopening the case would cause prejudice to the Plaintiff. This test is disjunctive, and proof of any of these three factors may justify setting aside the default. Overarching all of these factors is the Ninth Circuit's stated policy favoring adjudication of disputes on their merits,  with doubts resolved in favor of setting aside the default.
A clerk's entry of default was entered against Stakool, who now moves to set it aside, in part because Stakool has a meritorious defense. Docs. 12, 13, 51. For example, Plaintiffs' claims against Stakool include a breach-of-contract claim, premised on Stakool's failure to issue 1.2 million shares of Stakool stock to plaintiffs after they relinquished control of the company. Docs. 4 at 6, 17; 51 at 2-5. Stakool argues that it can show that plaintiffs "relinquished any and all claims or rights they had with respect to the transaction at issue when they sold said claims or rights to third party... Ironridge Global IV, Ltd." Doc. 51 at 5. The documents attached to plaintiffs' opposition to the motion to set aside confirm that the Ironridge transaction occurred. Doc. 55-1 at 5. In light of the revelation of the Ironridge transaction-a fact absent from plaintiff's complaint-I find that Stakool may have a meritorious defense to this action or at least should be permitted to raise one given the public policy favoring resolving cases on their merits.
Having found one of the "good cause" factors satisfied, I need not necessarily consider whether Stakool engaged in culpable conduct or whether reopening of the case would prejudice the plaintiffs. However, I note that plaintiffs' "prejudice" argument-that reopening the case will allow Stakool's "rogue board of directors.... [f]urther opportunity for fraud and collusion"-appears meritless given the protracted, unilateral gamesmanship surrounding their attempts to secure a default judgment against Stakool. Doc. 55 at 11. For almost a year plaintiffs have, in one way or another, delayed adjudication of the merits of their request for default judgment against Stakool. If plaintiffs were genuinely aggrieved by the actions Stakool's "rogue board of directors" might take to injure the company, it defies logic they would have orchestrated almost a year of delays in bringing this motion. As to culpable conduct, the numerous communications between the parties demonstrate that, and that if a breakdown in communication occurred, the blame is shared equally. See Doc. 55-1. In sum, good cause exists to set aside the clerk's entry of default as to Stakool. The motion (Doc. 51) is granted; the default against Stakool (Doc. 13) will be set aside.
B. Motion for Default Judgment [Doc. 48]
As I have set aside the default against Stakool, I consider plaintiffs' motion for default judgment only against Peter Hellwig and Anthus Life Corporation, and I find that a default judgment against Hellwig or Anthus is premature due to the posture of the case.
Rule 54(b) states that "when multiple parties are involved, the court may direct the entry of a final judgment as to one or more, but fewer than all... parties only if the court expressly determines that there is no just reason for delay." Additionally, the Ninth Circuit follows the time-honored Frow doctrine for considering default judgments in multi-defendant cases: "where a complaint alleges that defendants are jointly liable and one of them defaults, judgment should not be entered against the defaulting defendant until the matter has been adjudicated with regard to all defendants." The Ninth Circuit extends this doctrine to cases where the co-defendants are "similarly situated" and defense of the claims will hinge on the same legal theory because "it would be incongruous and unfair to allow a plaintiff to prevail against defaulting defendants on a legal theory rejected by a court with regard to an answering defendant in the same action."
In their complaint, plaintiffs allege that "Stakool is vicariously liable and responsible for all of Hellwig's actions, omissions, and conduct." Doc. 4 at 5. Numerous counts in the plaintiffs' amended complaint are lodged against Hellwig, Anthus, and Stakool collectively and often without distinguishing their culpability of conduct. See Doc. 4. Thus, there is a very real possibility that if Stakool's defense is proven meritorious, it and the similarly situated defaulted defendants will experience different legal outcomes on the same claim. A straightforward application of the Frow doctrine precludes me from currently entering default judgment against either Hellwig or Anthus. Regardless, delaying entry of judgment will by no means prejudice plaintiffs, given their own history of unilateral delay. Plaintiffs' motion for a default judgment against Hellwig and Anthus is denied without prejudice.
IT IS HEREBY ORDERED that Defendant Stakool's Motion to Set Aside Clerk's Entry of Default [Doc. 51] is GRANTED. The clerk of court is directed to set aside the default against Stakool [Doc. 13].
It is FURTHER ORDERED that Plaintiff's Motion for Default Judgment [Doc. 48] is DENIED WITHOUT PREJUDICE as to Hellwig and Anthus; it is DENIED AS MOOT as to Stakool.