Franchise Holding II v. Huntington Rest., 03-15434.

• Decision Date: 20 July 2004
• Docket Number: No. 03-15434.,03-15434.
• Citation: 375 F.3d 922
• Parties: FRANCHISE HOLDING II, LLC, a Delaware limited liability company, Plaintiff-Appellee, v. HUNTINGTON RESTAURANTS GROUP, INC., a Texas corporation; Golden Management, Inc., a Florida corporation; Richard P. Beattie, an individual; Michelle Beattie, an individual, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

375 F.3d 922

FRANCHISE HOLDING II, LLC, a Delaware limited liability company, Plaintiff-Appellee, v. HUNTINGTON RESTAURANTS GROUP, INC., a Texas corporation; Golden Management, Inc., a Florida corporation; Richard P. Beattie, an individual; Michelle Beattie, an individual, Defendants-Appellants.

No. 03-15434.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted February 12, 2004.

Filed July 20, 2004.

COPYRIGHT MATERIAL OMITTED

Robert J. Stumpf, Jr., Sheppard Mullin Richter & Hampton LLP, San Francisco, CA, for the appellants.

Kristin Linsley Myles, Munger, Tolles & Olson LLP, San Francisco, CA, for the appellee.

Appeal from the United States District Court for the District of Arizona; Frederick J. Martone, District Judge, Presiding. D.C. No. CV-02-00066-FJM.

Before: SCHROEDER, Chief Judge, TALLMAN, and CALLAHAN, Circuit Judges.

CALLAHAN, Circuit Judge:

Huntington Restaurants Group, Inc., Richard P. Beattie and Michelle Beattie (collectively, "HRG") appeal the district court's denial of their motion to set aside an entry of default and a default judgment. While the law favors deciding disputes on the merits, the district court's decision here to deny HRG's motion to set aside the entry of default and default judgment was squarely within its discretion. Furthermore, the district court clerk had the authority to enter the default judgment. For these reasons, we affirm.¹

Background

This case arises out of HRG's default on four related loans. In July 2000, Atherton Capital (Franchise Holding's predecessor-in-interest) lent Huntington Restaurants Group, Golden Management, Inc., and another entity nearly $20 million. Richard P. Beattie and Michelle Beattie personally guaranteed those loans. HRG secured the loans with various Denny's restaurants in Georgia and Florida, which HRG or Golden Management owned. Atherton later assigned the loans to Franchise Holding II, LLC ("Franchise Holding").

The terms of the loans obligated HRG to make payments every month until paid off. Within less than a year, business difficulties arose and HRG defaulted. Franchise Holding responded by exercising its right under the loan to declare the balance of the loan immediately due and payable. HRG made no further payments. In June 2001, HRG and Franchise Holding began negotiating a workout arrangement, which ultimately proved unsuccessful.

Franchise Holding then brought a diversity action against HRG in the United States District Court for the District of Arizona. The complaint alleged, in part, a breach of contract and a breach of guarantee. It also alleged that, as of December 20, 2001, defendants owed Franchise Holding $27,954,521.38.

Franchise Holding properly served the various defendants between February and March 2002. On March 4, 2002, William Miller, HRG's Arizona counsel, executed an Acceptance/Acknowledgment of Service of the summons and complaint on behalf of HRG.

The parties attempted to negotiate a settlement, but the negotiations began to sour, at least from Franchise Holding's perspective. Accordingly, Franchise Holding sent a letter, dated April 18, 2002, to HRG stating that, because of a break down in negotiations, it had "no choice but to pursue all of their rights and remedies, including (among others) pursuing foreclosure sales on the earliest available dates and promptly prosecuting all existing litigation." Several days later, on April 23, 2002, Franchise Holding filed an Application for Entry of Default against HRG. The district court clerk entered default the same day.

Approximately seven months later, on December 12, 2002, Franchise Holding filed an Application for Entry of Default Judgment against HRG. It asked for $24,874,870.09 on the grounds that HRG had failed to appear or otherwise defend the action and that this claim was for a "sum certain." The district court clerk entered a default judgment for the requested amount, plus interest, on January 27, 2003. On March 12, 2003, Franchise Holding began collecting upon the judgment by applying for writs of garnishment against HRG.

That same day, HRG made its first filing in the district court, a motion to set aside the entry of default and the default judgment under Federal Rules of Civil Procedure 55(c) and 60(b), respectively.² HRG claimed that (a) setting aside the default would not prejudice Franchise Holding, (b) HRG had a defense to the default judgment amount, (c) HRG's default in the district court was excusable, and (d) the clerk lacked jurisdiction to enter the default. In support of this motion, HRG submitted declarations from its lawyers stating that HRG and Franchise Holding had an understanding that, so long as negotiations were continuing in good faith, the Arizona action would not proceed. Franchise Holding countered with affidavits that no such understanding existed.

On March 13, 2003, the district court held a telephonic hearing. At the conclusion of the hearing, the court denied HRG's motion to set aside the default. HRG now appeals. This court subsequently granted a motion to stay enforcement of the default judgment. We now affirm the district court and vacate our stay.

Discussion

1. HRG's Rule 55(c) motion to set aside the entry of default

Rule 55(c) provides that a court may set aside a default for "good cause shown." We review the district court's factual findings for clear error and, if those findings are not clearly erroneous, we review the court's decision to deny HRG's Rule 55(c) motion for an abuse of discretion. See Alan Neuman Prods., Inc. v. Albright, 862 F.2d 1388, 1391 (9th Cir. 1989).

The "good cause" standard that governs vacating an entry of default under Rule 55(c) is the same standard that governs vacating a default judgment under Rule 60(b). See TCI Group Life Ins. Plan v. Knoebber, 244 F.3d 691, 696 (9th Cir. 2001). The good cause analysis considers three factors:

(1) whether HRG engaged in culpable conduct that led to the default; (2) whether HRG had a meritorious defense; or (3) whether reopening the default judgment would prejudice Franchise Holding. See id. As these factors are disjunctive, the district court was free to deny the motion "if any of the three factors was true." American Ass'n of Naturopathic Physicians v. Hayhurst, 227 F.3d 1104, 1108 (9th Cir. 2000).

HRG bore the burden of showing that any of these factors favored setting aside the default. See TCI Group, 244 F.3d at 697. The district court found that HRG failed to meet its burden regarding all three. We review each in turn.

a. Culpability

The district court found that, due to the high stakes involved, HRG's failure to seek an extension of time for filing a responsive pleading went to HRG's "culpable conduct." HRG disputes this, arguing that the parties had reached a side-agreement to extend the filing deadlines while the parties were in negotiations. Franchise Holding denies that such an agreement ever existed. Unfortunately for HRG, even if the parties did enter into a side-agreement, HRG remains culpable for the entry of default.

The side-agreement alleged by HRG provided that Franchise Holding would not pursue litigation while negotiations were continuing in good faith. Franchise Holding, however, explicitly warned HRG that negotiations had broken down and that it was proceeding with litigation. Thus, under the terms of the alleged side-agreement, HRG was on notice that Franchise Holding would pursue litigation. HRG nevertheless failed to file anything with the district court until after Franchise Holding began collecting on the default judgment. If a defendant "has received actual or constructive notice of the filing of the action and failed to answer," its conduct is culpable. Direct Mail Specialists, Inc. v. Eclat Computerized Techs., Inc., 840 F.2d 685, 690 (9th Cir.1988) (quoting Meadows v. Dominican Republic, 817 F.2d 517, 521 (9th Cir.1987)).

The district court's denial on culpability grounds of HRG's motion was therefore within its discretion.

b. Meritorious Defense

The district court reasoned that HRG "had conceded the question of liability," which went "a long way to suggesting that at least as to liability the defendant has no meritorious defense." HRG now contends that while it may have conceded liability, it nevertheless contested the extent of the deficiency owed. To justify vacating the default judgment, however, HRG had to present the district court with specific facts that would constitute a defense. See Madsen v. Bumb, 419 F.2d 4, 6 (9th Cir.1969). HRG never did this. Instead, it offered the district court only conclusory statements that a dispute existed. A "mere general denial without facts to support it" is not enough to justify vacating a default or default judgment. Id.

Thus, denying HRG's motion on the second factor was well within the district court's discretion.

c. Prejudice

Franchise Holding argued below that any delay in judgment would allow HRG to move and hide assets. The district court agreed, stating that "there certainly is the possibility" that setting aside the default judgment would prejudice Franchise Holding. HRG disputes this finding, maintaining that it is willing and able to settle any dispute. HRG's behavior suggests otherwise. It has not made a single payment in two years. It filed no pleadings with the district court until after the clerk entered the default.

Accordingly, we conclude that the district court did not abuse its discretion by denying HRG's motion on the ground that any further delay would prejudice Franchise Holding.

d. Excusable Neglect

HRG alternatively argues that the district court should have set aside the default judgment under Rule 60(b) for excusable neglect. Excusable neglect is an equitable concept that takes account of factors such as "prejudice, the length of the delay and impact on judicial proceedings, the reason for the delay, including whether it was within the reasonable control of the movant, and whether the movant acted in...