Mountains of Spices LLC v. Lafrenz ( 2023 )

1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8 9 Mountains of Spices LLC, No. CV-21-01497-PHX-JAT 10 Plaintiff, ORDER 11 v. 12 Sara Lihong Wei Lafrenz, et al., 13 Defendants. 14 15 In this action Plaintiff Mountain of Spices, LLC sues to recover funds it allegedly 16 transferred to Defendants Sara Lihong Wei Lafrenz (“Sara”) and Maywind Trading, LLC 17 (“Maywind”). Plaintiff alleges that it sent the money with the understanding that Sara and 18 Maywind would facilitate its transfer to a specific predesignated borrower to be repaid with 19 interest. It further alleges that Sara, Maywind, and other Defendants instead used this 20 money for their own purposes and have refused to return it to Plaintiff. Before the Court is 21 Plaintiff’s motion for entry of final default judgment against Sara and Maywind only. (Doc. 22 70). The Court now rules. 23 I. BACKGROUND 24 The complaint depicts a world-spanning whistleblower “Movement” dedicated to 25 promoting liberty and fighting communism in China.1 Its members, mainly Chinese 26 nationals, are muckrakers, exposing by protest and publication the alleged crimes and 27 corruptions of the Chinese Communist Party. (See id.). Movement members are loosely 28 1 (See Doc. 22 at 1–2). The Court takes the facts in the complaint as true on a motion for default judgment. Geddes v. United Fin. Grp., 559 F.2d 557, 560 (9th Cir. 1977). 1 organized into so-called Farms by geographic location, with some Farms operating through 2 business entities and others operating less formally. (See id. at 2). Plaintiff alleges itself to 3 be part of this Movement. (Id.). 4 In the summer of 2020, Movement leaders conceived a scheme through which 5 members could earn interest by lending money to supporters. (Id. at 6). Sara, the leader of 6 the Farm in Phoenix, Arizona, was to gather money from Farms and individual members 7 and loan that money to a specific, pre-determined borrower. (Id.). The complaint describes 8 the ends to which the designated borrower was to put the loaned funds as “general working 9 capital purposes, . . . including . . . investment into equity markets or . . . operating 10 expenses,” but does not identify the borrower or specify the nature of its business. (Id.). 11 Sara designated Maywind to receive member funds for this “Loan Program,” and 12 chose her son, Defendant Xiuzhu “Devin” Wei, to serve as de-facto chief financial officer. 13 (Id. at 7). She also allegedly selected Jian Peng, Maywind’s sole member, as well as 14 Defendants Qisheng Chen (“Chen”) and Jianjun Wang (“Wang”) to assist her in 15 administering the loan program. (Id.; Doc. 42 at 8–9). Sara provided a loan agreement to 16 lenders and promised she would countersign and return the agreements. (See Doc. 22 at 8). 17 She promised she would account for all funds and report monthly to Plaintiff. (See id.). 18 And she promised she would lend to the designated borrower all funds the lenders 19 transferred to her. (See id. at 6, 8). 20 Plaintiff, relying on these promises, transferred nearly $4.6 million to Maywind 21 bank accounts from August to October of 2020. (Id. at 9; Doc. 70-1 at 2). Over the same 22 period and continuing into December of 2020 Plaintiff also directed six individual lenders 23 to send a total of just over $5.4 million to Maywind. (Doc. 22 at 9). Counting additional 24 transfers from other Farms and lenders the complaint suggests that Maywind and Sara 25 eventually received somewhere between $44 million and $90 million. 26 Sara, however, did not keep her promises. (See id. at 6–11). She failed to countersign 27 the loan agreements, failed to account for Plaintiff’s funds or provide reports, and failed to 28 detail whether or where Maywind had transferred Plaintiff’s money. (Id. at 8, 10–11). Sara 1 later indicated in statements in online chat groups that some money had been transferred 2 from Maywind to Wang and Chen. (Id. at 13). 3 Plaintiff commenced this action in August of 2021, naming as defendants Sara, 4 Devin, Maywind, Jian, Chen, and Wang, and claiming unjust enrichment, constructive 5 fraud, conversion, and negligent misrepresentation. (Doc. 1). Plaintiff has subsequently 6 filed two amended complaints and voluntarily dismissed the action as to Jian only. (Docs. 7 9; 22; 26). Wang, Chen, and Devin have each answered the complaint, but Sara and 8 Maywind have not. (Docs. 13; 50; 65). On Plaintiff’s motion the Clerk of Court entered 9 Sara’s and Maywind’s defaults, after which Plaintiff filed this motion for final default 10 judgment against them. (Docs. 34; 39; 70). 11 II. ANALYSIS 12 Once the clerk has entered default against a party, the Court has discretion to enter 13 a default judgment against that party. Aldabe v. Aldabe, 616 F.2d 1089, 1092 (9th Cir. 14 1980); and see Fed. R. Civ. P. 55(b)(2). However, in cases involving multiple claims or 15 parties a judgment as to fewer than all claims or parties is final “only if the court expressly 16 determines that there is no just reason for delay.” Fed. R. Civ. P. 54(b). In the absence of 17 such a finding, any such judgment “does not end the action as to any of the claims or parties 18 and may be revised at any time before” the entry of final judgment as to all claims and 19 parties. Id. The Court will first consider whether entry of default judgment is warranted, 20 and if whether such a judgment should be certified as final. 21 a. Entry of Default Judgment 22 In exercising its discretion to enter default judgment, a court may consider several 23 factors, including: 24 (1) the possibility of prejudice to the plaintiff, (2) the merits of plaintiff's substantive claim, (3) the sufficiency of the 25 complaint, (4) the sum of money at stake in the action; (5) the possibility of a dispute concerning material facts; (6) whether 26 the default was due to excusable neglect, and (7) the strong policy underlying the Federal Rules of Civil Procedure 27 favoring decisions on the merits. 28 1 Eitel v. McCool, 782 F.2d 1470, 1472–73 (9th Cir. 1986). In conducting this inquiry, the 2 Court “takes the well-pleaded factual allegations in the complaint as true.” DirecTV, Inc. 3 v. Huynh, 503 F.3d 847, 854 (9th Cir. 2007) (cleaned up). The Court will consider each of 4 the factors in turn. 5 i. Possibility of Prejudice to the Plaintiff 6 Plaintiff may be prejudiced because Sara and Maywind are not participating in this 7 litigation, potentially leaving Plaintiff without a remedy against them if the Court does not 8 enter default judgment. See Elektra Ent. Grp., Inc. v. Crawford, 226 F.R.D. 388, 392 (C.D. 9 Cal. 2005). This is particularly true in the case of Sara: Plaintiff has submitted documents 10 with its motion suggesting that Sara is both refusing to participate in this litigation and 11 declining to return Plaintiff’s money until a default judgment is entered. (See Doc. 70-1 at 12 66–67). 13 Further, in documents supporting its motion Plaintiff has demonstrated the 14 possibility that Sara and Maywind may be using Plaintiff’s money to pay their own 15 expenses. For example, Plaintiff has raised the possibility that Sara has used its funds to 16 pay part of a 57-million-dollar SEC judgment against her company or has transferred the 17 money from Maywind to an LLC Sara owns (Docs. 70–1 at 55, 72). Similarly, Maywind 18 has apparently paid millions of dollars to two law firms. (Doc. 70-1 at 45–50). While these 19 documents do not demonstrate that any Defendant has used Plaintiff’s funds rather than 20 funds from other sources in these expenditures, these documents along with the defaulted 21 Defendants’ failure to participate in this litigation are enough to demonstrate the possibility 22 of prejudice to Plaintiff if default judgment is not entered. The first factor therefore weighs 23 in favor of entering default judgment. 24 ii. Sufficiency of the Complaint and Merits of Plaintiff’s Claims 25 The second and third factors dealing with sufficiency of the complaint and the merits 26 of plaintiff’s claims—perhaps the most important among the Eitel factors—are usually 27 considered together. See, e.g., Ariz. Bd. of Regents v. Doe, 555 F. Supp. 3d 805, 816 (D. 28 Ariz. 2021). These factors require a court to consider “whether the plaintiff has stated a 1 claim on which it may recover.” Id. (cleaned up); see DirecTV, 503 F.3d 847, 854–55 (9th 2 Cir. 2007). The Court will review Plaintiff’s claims against Sara and Maywind to determine 3 whether each adequately states a claim. 4 1. Unjust Enrichment 5 Count One of the complaint is a claim for unjust enrichment against all Defendants. 6 (Doc. 22 at 14–15). Unjust enrichment requires “(1) an enrichment, (2) an impoverishment, 7 (3) a connection between the two, (4) the absence of justification for the enrichment and 8 impoverishment and (5) the absence of any remedy at law.” Loiselle v. Cosas Mgmt. Grp., 9 228 P.3d 943, 946 ¶ 9 (Ariz. App. 2010) (citation omitted). 10 This Court previously found that Plaintiff had stated a claim for unjust enrichment 11 on which it could recover against Devin. (Doc. 55 at 4–5). That analysis is largely 12 applicable to Plaintiff’s unjust enrichment claims against Sara and Maywind. Plaintiff was 13 made poorer when it transferred its funds to Maywind, Sara failed to lend them to the 14 designated borrower, and Plaintiff was deprived of the interest it expected to earn from the 15 loan. (Doc. 22 at 8–11; cf. Doc. 55 at 5). Sara and Maywind were enriched as a direct result 16 of this loss, as the money was transferred to Maywind accounts which Sara controlled. 17 (Doc. 22 at 7; cf. Doc. 55 at 5). Further, Plaintiff has alleged that the impoverishment and 18 corresponding enrichment were a result of Sara and Maywind misappropriating the money 19 without justification or authorization. (Doc. 22 at 12–14; cf. Doc. 55 at 5). 20 The only remaining question is whether, given that Plaintiff has also advanced 21 several tort claims against Sara and Maywind, Plaintiff has adequately alleged the fifth 22 element, the “absence of any remedy at law.” Even where remedies at law are sought in 23 the same action, unjust enrichment may be pleaded in the alternative. Adelman v. Christy, 24 90 F. Supp. 2d 1034, 1045 (D. Ariz. 2000). Because Plaintiff’s tort claims may yet fail, the 25 Court cannot say that Plaintiff has failed to adequately allege the fifth element of unjust 26 enrichment—although Plaintiff will be “barred from collecting a double recovery should 27 [it] prevail.” Id. Thus, the second and third factors weigh in favor of granting a default 28 judgment as to Count One against Sara and Maywind. 1 2. Constructive Fraud 2 Count Two of the complaint is a claim for constructive fraud against Sara and 3 Maywind. (Doc. 22 at 15–16). In Arizona a cause of action for constructive fraud arises 4 where the defendant, by failing to make a full and truthful disclosure of all material facts, 5 breaches a duty arising from a fiduciary or confidential relationship, inducing reliance by 6 the other to his detriment. Compare Rhoads v. Harvey Pubs., Inc., 700 P.2d 840, 846 (Ariz. 7 App. 1984) (citing Stewart v. Phx. Nat’l Bank, 64 P.2d 101, 106 (Ariz. 1937)); with Green 8 v. Lisa Frank, Inc., 211 P.3d 16, 33–34 ¶ 53–54 (Ariz. App. 2009). Recovery on a 9 constructive fraud theory is available “for representations as to future conduct, and not 10 merely as to past facts. . . . In other words, to use the homely western phrase, the party in 11 whom confidence is . . . reposed must ‘lay his cards on the table.’” Stewart, 64 P.2d at 106. 12 Fiduciary relationships are a subset of confidential relationships. See Standard 13 Chartered PLC v. Price Waterhouse, 945 P.2d 317, 335 (Ariz. 1996). In fiduciary 14 relationships “something approximating business agency, professional relationship, or 15 family tie impel[s] or induc[es] the trusting party to relax the care or vigilance he would 16 ordinarily exercise.” In re McDonnell’s Estate, 179 P.2d 238, 241 (Ariz. 1947) (citation 17 omitted). In such relationships the fiduciary holds “superiority of position” as demonstrated 18 by “substitution of the fiduciary’s will” for the beneficiary’s will in “material aspects of 19 the transaction at issue.” Standard Chartered, 945 P.2d at 335 (cleaned up). Other 20 confidential relationships are those which do not fall “into any well-defined category of the 21 law,” but in which there is the same “great intimacy, disclosure of secrets, intrusting of 22 power, and superiority of position in the case of the representative” as appears in fiduciary 23 relationships, such that they “should have like results.” Taeger v. Cath. Fam. & Cmty. 24 Servs., 995 P.2d 721, 726 ¶ 11 (Ariz. App. 1999). 25 Relationships which may be confidential in nature include husband–wife, parent– 26 child, guardian–ward, attorney–client, partners, joint adventurers, director–corporation, 27 broker–client, agent–principal, and trustee–beneficiary. Rhoads, 700 P.2d at 847 (citation 28 omitted). By contrast, confidential relationships are ordinarily not recognized in cases 1 involving only arms-length commercial transactions, such as those creating a debtor– 2 creditor relationship. Compare Standard Chartered, 945 P.2d at 335; with Stewart, 64 P.2d 3 at 106. 4 In arguing that it adequately alleged confidential relationships between itself and 5 Sara and Maywind respectively, Plaintiff relies on Autoville, Inc. v. Friedman, 510 P.2d 6 400 (Ariz. App. 1973). There the Arizona Court of Appeals stated that transfer of property 7 to another for a specific purpose creates a fiduciary duty: 8 Where one intrusts his property to another for a particular 9 purpose, it is received in a fiduciary capacity; and, when turned into money, that is also received in the same capacity. It does 10 not belong to the agent, and he can lawfully exercise no power or authority over it, except for the benefit of his principal, and 11 only as authorized by him. If the agent uses it for his own purposes . . . it is a conversion of that which does not belong to 12 him. 13 Id. at 404 (quoting Britton v. Ferrin, 63 N.E. 954, 956 (N.Y. 1902)). Examination of 14 Autoville and Britton reveals that this duty arises as part of an agent–principal relationship. 15 See Autoville, 510 P.2d at 404; Britton, 63 N.E. at 956. The Court therefore construes 16 Plaintiff’s reliance on Autoville as an argument that Sara and Maywind were its agents. 17 An agency may be created by “conduct of the principal which, reasonably 18 interpreted, causes the agent to believe that the principal desires him so to act on the 19 principal’s account.” State Farm Mut. Ins. Co. v. Long, 492 P.2d 718, 721 (Ariz. App. 20 1972) (quoting Restatement (Second) of Agency § 26 (Am. L. Inst. 1958)). The complaint 21 alleges that Plaintiff and Sara agreed that Sara would collect, document, and track its funds 22 and issue loans to the borrower. (Doc. 22 at 7–8). Sara (plainly) could have reasonably 23 concluded from Plaintiff’s instructions to her to act on its behalf in this matter that Plaintiff 24 desired her to act on its behalf. Plaintiff therefore has adequately alleged an agency 25 relationship between itself and Sara. 26 Similarly, Plaintiff alleged that it “established a relationship” with Maywind and 27 “entrusted . . . Maywind with its funds for purposes of the Loan Program, including that 28 they would only be provided to the Borrower.” (Doc. 22 at 15). Further, the complaint 1 alleges that Sara designated Maywind to receive Plaintiff’s funds, told Jian (Maywind’s 2 owner) that Maywind would “assist in receiving and administering . . . funds,” and 3 provided Maywind’s bank account information to Plaintiff, whereupon Plaintiff sent 4 Maywind the funds. (Doc. 22 at 6–10). The complaint therefore alleges actions by Sara and 5 Plaintiff from which Maywind could have reasonably concluded that it was to act on 6 Plaintiff’s behalf in receiving and holding the funds. Thus, the Court finds that Plaintiff has 7 adequately alleged an agency relationship between itself and Maywind, either as a direct 8 agent or as Sara’s subagent. 9 In Arizona, an “agreement to act on behalf of the principal causes the agent to be a 10 fiduciary.” Valley Nat’l Bank v. Milmoe, 248 P.2d 740, 744 (Ariz. 1952); see Autoville, 11 510 P.2d at 404; Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 682 P.2d 12 388, 401–02 (Ariz. 1984); Restatement (Second) of Agency § 387; see also Restatement 13 (Second) of Agency § 428 cmt. a (stating that a subagent “owes to the principal all the 14 duties of a fiduciary to a beneficiary”). Thus, in adequately alleging agency relationships 15 between itself, Sara, and Maywind, Plaintiff has by the same token adequately alleged 16 fiduciary relationships. 17 The Court also finds that the complaint adequately alleges that Sara breached her 18 alleged duty of “full and truthful disclosure of all material facts” to Plaintiff. The complaint 19 alleges that Sara misled Plaintiff by misstatements or omissions concerning the “purpose 20 and use of the funds obtained from Plaintiff, including that the Loan Program funds would 21 only be provided to the third-party Borrower,” and that she made these and other 22 misrepresentations knowing they were false. (Doc. 22 at 15–16). The complaint further 23 alleges that Plaintiff would not have sent the funds but for these misrepresentations. Thus, 24 Plaintiff adequately states a claim for constructive fraud against Sara by alleging that Sara 25 breached a duty of truthfulness to Plaintiff, thereby inducing Plaintiff’s detrimental 26 reliance. 27 The same cannot be said for the complaint’s allegations regarding Maywind. While 28 the complaint is replete with allegations of Maywind’s dishonesty toward Plaintiff, it 1 contains no indication that Plaintiff reasonably and detrimentally relied on any of 2 Maywind’s acts or omissions. According to the complaint, after Plaintiff transferred the 3 money Maywind refused to provide documentation regarding Maywind’s bank accounts, 4 refused to return the money, transferred the money to unauthorized persons, and falsely 5 asserted in another lawsuit that Plaintiff’s funds belong to Maywind. (Doc. 22 at 10–13, 6 15). Plaintiff therefore has certainly alleged that Maywind breached a duty of truthfulness 7 to Plaintiff in a manner which is detrimental to Plaintiff. 8 But Plaintiff has not alleged, as would be required to state a claim for constructive 9 fraud, that any such detriment was caused by justifiable reliance induced by Maywind’s 10 breach of duty. (See Docs. 22 at 15–16; 70 at 10–11); and see Dawson v. Withycombe, 163 11 P.3d 1034, 1057–59 (Ariz. App. 2007). Nor can the Court discern any such reliance from 12 the complaint. For example, Plaintiff could theoretically have alleged that Maywind knew 13 before the funds were transferred that Sara’s misrepresentations were false yet remained 14 silent in breach of its duty of truthfulness. In this scenario, Plaintiff’s funds transfer could 15 be said to have been undertaken in reliance on Maywind’s omission. (See Docs. 22; 70 at 16 3–4, 10–11). But Plaintiff does not allege this. Rather, Plaintiff only alleges that it relied 17 on Sara’s misrepresentations in transferring the funds. (See id. at 3–4, 10–11, 13 18 (“[Plaintiff] suffered all of these damages based on its reliance o[n] Sara’s falsehoods and 19 its trust in her . . . .”); see also Doc. 70 at 17 (“[B]ased on Sara’s misrepresentations . . . 20 Sara and Maywind improperly obtained . . . [Plaintiff’s] funds . . . .”)). Because Plaintiff 21 has failed to allege that it was induced to detrimental reliance by a breach of Maywind’s 22 duty to it, Plaintiff has necessarily also failed to state a claim for constructive fraud against 23 Maywind. 24 Consequently, while the second and third Eitel factors weigh in favor of entering 25 default judgment as to Count Two against Sara, they weigh heavily against entering such 26 judgment against Maywind. 27 28 1 3. Conversion 2 Count Three of the complaint is a claim for conversion against Sara and Maywind, 3 among other Defendants. (Doc. 22 at 16–17). Conversion is “an intentional exercise of 4 dominion or control over a chattel which so seriously interferes with the right of another to 5 control it that the actor may justly be required to pay the other the full value of the chattel.” 6 Universal Mktg. & Ent., Inc. v. Bank One, 53 P.3d 191, 193 ¶ 6 (Ariz. App. 2002) (citing 7 Restatement (Second) of Torts § 222 cmt. a (Am. L. Inst. 1965)) (cleaned up). In 8 determining the seriousness of the interference courts may consider (among other factors): 9 the extent and duration of the actor’s control over the chattel; the actor’s intent to assert 10 control inconsistent with the owner’s right of control; the actor’s good faith; and the 11 inconvenience and expense caused to the owner. See Miller v. Hehlen, 104 P.3d 193, 203 12 ¶ 34 (Ariz. App. 2005) (citing Restatement (Second) of Torts § 222A(2)). To state a claim 13 for conversion a plaintiff must “have had the right to immediate possession of the personal 14 property at the time of the alleged conversion.” See Case Corp. v. Gehrke, 91 P.3d 362, 15 365 ¶ 11 (Ariz. App. 2004) (citation omitted). Additionally, where the property allegedly 16 converted is money, a plaintiff must allege facts showing both that the money “can be 17 described, identified, or segregated,” and “an obligation to treat it in a specific manner.” 18 See id. Further, a “conversion claim cannot be maintained . . . to collect on a debt that could 19 be paid by money generally.” Id. at 366–67 ¶ 18 (citation omitted). 20 The Court finds that Plaintiff has adequately stated a claim for conversion against 21 Sara and Maywind. First, the facts alleged satisfy the elements of a conversion claim under 22 Arizona law. The complaint alleges that Sara and Maywind intentionally exercised 23 dominion over Plaintiff’s money by refusing to return it and by using it for purposes that 24 they knew Plaintiff had not authorized, including transferring it to Wang and Chen. (Doc. 25 22 at 12–13, 16–17). This alleged interference is serious enough to require Sara and 26 Maywind to pay the full value of the chattel, as the facts above demonstrate bad faith and 27 continuing interference with Plaintiff’s ability to utilize millions of dollars which it 28 rightfully should possess. 1 Second, the facts alleged satisfy additional restrictions on conversion claims 2 involving money. As the Arizona Court of Appeals has pointed out, many limitations on 3 conversion actions for money are intended to prevent a contract dispute between a debtor 4 and a creditor from turning into a tort action. Koss Corp. v. Am. Express Co., 309 P.3d 898, 5 914 ¶ 54 (citing Chicago Title Ins. Co. v. Ellis, 978 A.2d 281, 287–88 (N.J. Super. Ct. App. 6 Div. 2009)). Where funds are fraudulently obtained, however, the recipient never 7 “obtain[s] a right to exercise dominion or control over the money,” and the money 8 “continue[s] to belong to its owner” just as it would “where it has been stolen by a thief.” 9 Chicago Title, 978 A.2d at 287–88. In such cases no debtor–creditor relationship is formed. 10 Id.; and see Autoville, 510 P.2d at 404. In the absence of a debtor–creditor relationship the 11 restriction against conversion claims to collect on debts that could be paid by money 12 generally cannot apply. 13 As discussed, the complaint alleges both that Sara and Maywind were obliged to 14 treat the funds in a specific manner (by lending them to the designated borrower) and that 15 the funds were obtained fraudulently. Thus, under the facts alleged no debtor–creditor 16 relationship between Plaintiff and Sara or Maywind was formed, the money rightfully 17 belonged to Plaintiff at all times, and restrictions on conversion actions between debtors 18 and creditors for money do not apply. Additionally, the funds are describable in that the 19 complaint alleges the precise amount transferred to Maywind’s bank account and the dates 20 on which the funds were transferred.2 Plaintiff has therefore stated a claim for conversion 21 against Sara and Maywind. The second and third Eitel factors weigh in favor of entering 22 default judgment as to Count Three against Sara and Maywind. 23 24 2 (Doc. 22 at 9–10); cf. Koss, 309 P.3d at 915 ¶ 55 (citing Chicago Title, 978 A.2d at 288) (finding that “funds placed in an account” can be “described by the amounts of the 25 checks”); Autoville, 510 P.2d at 402, 404 (holding a dealership liable for conversion of proceeds of a truck sale where $1,200 from the sale was specified in advance to be remitted 26 to the truck’s owner but was instead “pocketed” by the defendants); see also Dan B. Dobbs et al., Dobbs’ Law of Torts § 711 (2d ed. 2022) (ebook) (citing In re Estate of Johnson, No. 27 1 CA-CV 09-0447, 2010 WL 2927438 (Ariz. App. 2010)) (“If the defendant, without authority to do so, transfers funds from the plaintiff's account to his own or another account, 28 he is a converter even though the transfer is purely a bookkeeping entry, not a physical movement of cash.”) 1 4. Negligent Misrepresentation 2 Count Four of the complaint is a claim for negligent misrepresentation against Sara. 3 (Doc. 22 at 17–18). In Arizona, the “elements of negligent misrepresentation are: (1) the 4 defendant provided false information in a business transaction; (2) the defendant intended 5 for the plaintiff to rely on the incorrect information or knew that it reasonably would rely; 6 (3) the defendant failed to exercise reasonable care in obtaining or communicating the 7 information; (4) the plaintiff justifiably relied on the incorrect information; and (5) 8 resulting damage.” KB Home Tucson, Inc. v. Charter Oak Fire Ins. Co., 340 P.3d 405, 412 9 ¶ 30 n.7 (Ariz. App. 2014). Arizona law does not recognize negligent misrepresentation 10 claims based on promises of future conduct or incorrect statements of future events.3 11 Plaintiff’s claim for negligent misrepresentation fails because each of the alleged 12 misrepresentations Plaintiff claims caused its damages were either promises of future 13 conduct or were made after Plaintiff transferred the money. Plaintiff alleges that, before it 14 transferred the money, Sara told Plaintiff that she would provide executed loan agreements, 15 issue funds to the designated borrower, and provide a monthly accounting of funds received 16 by Maywind and lent to the borrower. (Doc. 22 at 8–9). Plaintiff also alleges that, after it 17 transferred the money, Sara told Plaintiff that she had transferred the funds to the 18 designated borrower and failed to tell Plaintiff that she had actually used the funds for her 19 own personal purposes. (See id. at 6, 10, 12–13; Doc. 70 at 12–13). The alleged 20 misrepresentations in the former group are promises of future action which as a matter of 21 law cannot form the basis for a negligent misrepresentation claim. The alleged 22 misrepresentations in the latter group could not have been relied upon in transferring the 23 funds because Sara allegedly made them after the funds had been transferred. 24 25 26 3 McAlister v. Citibank, 829 P.2d 1253, 1261 (Ariz. App. 1992). Unlike claims of negligent 27 misrepresentation, actual fraud claims may be based on “unfulfilled promises” so long as such promises “were made with the present intent not to perform.” Id. at 1260 (citation 28 omitted). However, negligent misrepresentation and actual fraud are separate torts. Id. at 1261. 1 Thus, Plaintiff has failed to adequately state a claim for negligent misrepresentation 2 against Sara. The second and third Eitel factors therefore weigh against entry of default 3 judgment against Sara as to Count Four. 4 iii. Sum of Money at Stake 5 The third factor weighs against granting the requested damages of $9,966,846 but 6 not against granting a lesser sum of $4,550,000. Although “Rule 55 does not limit the 7 amount of money that can be awarded in a default judgment, . . . . courts are ordinarily 8 reluctant to enter a default judgment when the stakes are high.” Hydentra HLP Int. Ltd. v. 9 Porn69.org, No. CV-15-00451-PHX, 2016 WL 3213208, at *1 (D. Ariz. June 10, 2016). 10 A large sum of money at stake may therefore weigh against entry of default judgment. See 11 Hawks v. Seery, No. 21-00092-PHX, 2021 WL 5162536, at *4 (D. Ariz. Nov. 5, 2021); J 12 & J Sports Prods., Inc. v. Cardoze, No. C 09–05683, 2010 WL 2757106, at *5 (N.D. Cal. 13 July 9, 2010) (citing Eitel, 782 F.2d at 1472). Nonetheless, where the amount sought is 14 directly proportional to the harm a plaintiff incurred, this factor does not preclude entry of 15 default judgment. See NewGen, LLC v. Safe Cig, LLC, 840 F.3d 606, 617 (9th Cir. 2016). 16 The nearly $10 million Plaintiff seeks in damages is a substantial sum of money, as 17 is the nearly $4.6 million it alleges it sent to Maywind. The third factor weighs against 18 entry of default judgment as to the former sum because that number is both large and not 19 proportional to Plaintiff’s alleged injury. As the Court will discuss more fully below, the 20 complaint fails to explain how third parties sending money to Maywind harmed Plaintiff, 21 and otherwise fails to demonstrate Plaintiff’s standing to sue for the return of that money. 22 Thus, the larger sum Plaintiff seeks is more than twice the damages to which its complaint 23 demonstrates entitlement, and is not proportional to the seriousness of Sara and Maywind’s 24 conduct toward the Plaintiff. However, the nearly $4.6 million Plaintiff alleges it sent to 25 Maywind at Sara’s direction is directly proportional to Plaintiff’s alleged harm. The fourth 26 Eitel factor therefore does not bar entry of default judgment in the amount of that lesser 27 sum. 28 1 iv. Possibility of Dispute Concerning Material Facts 2 The fifth Eitel factor does not weigh in favor either of granting or denying Plaintiff’s 3 motion. On the one hand, because default has been entered the well-pleaded facts in the 4 complaint are deemed admitted as against Sara and Maywind. PepsiCo, Inc. v. Cal. Sec. 5 Cans, 238 F. Supp. 2d 1172, 1177 (C.D. Cal. 2002) (citing TeleVideo Sys. Inc. v. 6 Heidenthal, 826 F.2d 915, 917–18 (9th Cir. 1987)). And thus far the answering Defendants 7 have either professed a lack of knowledge regarding Plaintiff’s allegations or denied them 8 only as to themselves. (See Docs. 50; 65). But because each of Plaintiff’s allegations 9 against the non-defaulted Defendants hinges on whether Sara obtained the money 10 wrongfully, there remains a possibility that the circumstances surrounding Sara’s 11 procurement of the money will become subject to dispute as the litigation progresses. 12 v. Excusable Neglect 13 The record contains no indication that Sara’s or Maywind’s defaults were due to 14 excusable neglect. Both Sara and Maywind have been duly served with the summons and 15 second amended complaint. (Compare Doc. 19, with Doc. 21, and Doc. 70 at 5; and 16 compare Doc. 30 at 5, with Doc. 32). Despite having notice of the action, neither Sara nor 17 Maywind have responded in any way. Further, in granting Plaintiff’s motion for alternative 18 service this Court found that Sara appeared to be evading service, making it unlikely that 19 her failure to answer was due to excusable neglect. (Doc. 30 at 4). Thus, the sixth Eitel 20 factor weighs in favor of entering default judgment against Sara and Maywind. 21 vi. Policy Favoring Decision on the Merits 22 While “[c]ases should be decided upon their merits whenever reasonably possible,” 23 Eitel, 782 F.2d at 1472, where a defendant wholly fails to respond to the complaint a 24 decision on the merits becomes “impractical, if not impossible,” PepsiCo, 238 F. Supp. 2d 25 at 1177. In such cases, “the default mechanism is necessary to deal with wholly 26 unresponsive parties who otherwise could cause the justice system to grind to a halt.” Ariz. 27 Bd. of Regents, 555 F. Supp. 3d at 816. Because neither Sara nor Maywind have answered 28 the complaint this factor does not weigh against entry of default judgment. 1 Considering all the factors, the Court concludes that entry of default judgment is 2 appropriate as to Plaintiff’s claims of unjust enrichment, conversion, and (against Sara 3 only) constructive fraud. But Plaintiff has failed to state a claim against Maywind for 4 constructive fraud and against Sara for unjust enrichment, and entry of default judgment 5 on these claims would not therefore be proper. See DirecTV, 503 F.3d at 855. These 6 inadequately stated claims will be dismissed rather than left to “linger on the Court’s 7 docket.” Ariz. Bd. of Regents, 555 F. Supp. 3d at 819 (citation omitted). 8 b. Damages 9 Having determined the claims for which default judgment is warranted, the Court 10 must now consider the appropriate remedy for each claim. The Court need not take as true 11 allegations in the complaint related to the amount of damages. Geddes v. United Fin. Grp., 12 559 F.2d at 560 (citation omitted). “Plaintiff’s burden of ‘proving up’ damages is relatively 13 lenient,” as most of the factual and legal predicates entitling a plaintiff to damages are 14 deemed admitted upon default. See Phillip Morris USA, Inc. v. Castworld Prods., Inc., 219 15 F.R.D. 494, 498 (C.D. Cal. 2003). But Plaintiff’s demand for relief must be specific, and 16 “if the facts necessary to determine damages are not contained in the complaint, or are 17 legally insufficient, they will not be established by default.” Id. (first citing Cripps v. Life 18 ins. Co. of N. Am., 980 F.2d 1261, 1267 (9th Cir. 1992); then citing Fed. R. Civ. P. 8(a)(3)). 19 Additionally, a “default judgment must not differ in kind from, or exceed in amount, what 20 is demanded in the pleadings.” Fed R. Civ. P. 54(c). 21 Plaintiff demands damages “against all of the Defendants, jointly and severally, for 22 all damages sustained as a result of Defendants’ wrongdoing, in an amount to be proven at 23 trial.” (Doc. 22 at 18). Plaintiff’s motion for default judgment similarly demands that 24 judgment be entered jointly and severally against Sara and Maywind, specifying damages 25 of $9,966,866, the amount plaintiff transferred to Maywind. (Doc. 70 at 18). Of this 26 amount, as discussed, approximately $4.6 million was sent directly by Mountain of Spices 27 to Maywind, while an additional $5.4 million was sent by others. The Court will determine 28 1 whether Plaintiff has adequately “proved up” its damages before turning to the appropriate 2 remedy for each claim. 3 i. Entitlement to Damages 4 Plaintiff has shown entitlement to damages in the amount of the $4,550,000 it sent 5 to Maywind. (See Doc. 70-1 at 23–24, 28–34, 36). 6 However, Plaintiff has failed to show entitlement to damages for the $5.4 million 7 other lenders sent to Maywind. Although Plaintiff includes evidence with its motion 8 showing that the money was indeed transferred, Plaintiff does not explain why it should be 9 compensated for an economic loss sustained by third parties. (See Docs. 22 at 1–19; 70-1 10 at 22–25, 36, 38, 40, 42). Rather, the unstated assumption of the complaint appears to be 11 that causing others to transfer money to Maywind is enough to enable it to sue for 12 compensation for the loss of that money. If there is a legal reason entitling Plaintiff to these 13 damages, it is not explained in either the complaint or the motion for default judgment— 14 notwithstanding Plaintiff’s belated assertion in its motion that the $5.4 million was “sent 15 to Maywind by six individuals who had loaned these funds” to Plaintiff. (Doc. 70 at 18 16 (citing Qidong Xia Decl., Doc. 70-1 at 23)). 17 This showing of entitlement to damages for the $5.4 million is deficient. Initially, 18 the complaint does not demonstrate that Plaintiff has standing to sue for money lost by 19 others. Standing requires at minimum that a plaintiff demonstrate that “it has suffered an 20 injury in fact.” Krottner v. Starbucks Corp., 628 F.3d 1139, 1141 (9th Cir. 2010) (cleaned 21 up). Because the complaint does not contain facts showing how an injury to third parties is 22 an injury to Plaintiff, it does not demonstrate standing to sue for the $5.4 million. 23 Because this deficiency is fundamental it also carries through to create other 24 problems with Plaintiff’s case. Plaintiff’s unjust enrichment claim would fail with respect 25 to the $5.4 million because Plaintiff could not have been impoverished by losing funds it 26 never owned. Plaintiff’s conversion claim would likewise fail because Plaintiff has not 27 shown a right of possession of the $5.4 million at the instant of conversion. And Plaintiff’s 28 constructive fraud claim would fail because Plaintiff has not shown the loss of the $5.4 1 million was a detriment to it. Similarly, the Court would be unable to award damages to 2 compensate Plaintiff for a loss it did not suffer. 3 Nor is Plaintiff’s assertion in its motion that third parties “loaned” Plaintiff the 4 money by sending it to Maywind enough to correct this deficiency. This assertion is much 5 closer to a contradiction of the facts in the verified complaint than it is to an elaboration of 6 them. The complaint alleges that Plaintiff “entered into loan agreements with individuals 7 to bundle those individual contributions to provide them to the Loan Program, and 8 individual supporters of the Movement could also directly participate in the Loan 9 Program.” (Doc. 22 at 6). Plaintiff has not provided any such loan agreements between it 10 and the lenders of the $5.4 million, and the fact that those lenders provided their funds 11 directly and unbundled to Maywind strongly suggests that they were in the latter group 12 rather than the former. Further, as discussed, at no point does the complaint allege that the 13 $5.4 million was loaned to Plaintiff. In view of this inconsistency, Plaintiff’s conclusory 14 declaration that funds were loaned to it “is insufficient to support such a substantial 15 damages award.” Cf. Kiwijet, LLC v. Xiamen Hayonex Int’l Logistics Co., No. 2:21-cv- 16 07512, 2022 WL 2155973, at *4 (C.D. Cal. June 2, 2022) (declining to award a multi- 17 million-dollar default judgment where no evidence beyond statements in a declaration 18 supported that amount); Talavera Hair Prods. Inc. v. Taizhou Yunsung Elec. Appliance 19 Co., No. 18-CV-823, 2021 WL 3493094, at *16 (S.D. Cal. Aug. 6, 2021) (same). 20 The Court therefore finds that Plaintiff has not met its burden on default judgment 21 of proving up its damages with respect to the $5.4 million, but has met this burden with 22 respect to the $4,550,000. 23 ii. Type of Damages 24 The usual measure of damages as a remedy for conversion is the fair market value 25 of the chattel at the time of trial, or if not in possession at the time of trial, the fair market 26 value at the time of the conversion. In re 1969 Chevrolet, 656 P.2d 646, 650 (Ariz. App. 27 1982). In either case, because the chattel in question is $4,550,000 in U.S. currency, the 28 value would be the same. 1 The Court finds that liability for the alleged conversion is joint and several as 2 between Sara and Maywind. Joint and several liability in Arizona was largely abolished by 3 the Uniform Contribution Among Tortfeasors Act. Yslava v. Hughes Aircraft Co., 936 P.2d 4 1274, 1277 (Ariz. 1997) (citing Ariz. Rev. Stat. § 12-2506(A). Section 12-2506 provides 5 that in actions “for personal injury, property damage or wrongful death, the liability of each 6 defendant for damages is several only and is not joint” with certain exceptions. Ariz. Rev. 7 Stat. § 12-2506(A). Section 12-2501(G) in turn provides that “‘property damage’ means 8 both physical damage to tangible property and economic loss caused by breach of duty.” 9 Id. § 12-2501(G). It follows from these sections that, outside of personal injury or wrongful 10 death claims, comparative fault is not imposed where property is intangible or not 11 physically damaged, or where economic loss is caused by something other than a breach 12 of duty. 13 The conversion claim here is not a claim for personal injury or wrongful death. Nor 14 is breach of duty an element of conversion. And even if the electronically transferred funds 15 that are the subject of the conversion claim can be considered tangible property, there is no 16 allegation that these funds were somehow physically damaged. Thus, UCATA does not 17 apply and joint and several liability is available, as under the common law, where (as here) 18 the injury done is indivisible. See Yslava, 936 P.2d at 1277; Fagerberg v. Phx. Flour Mills 19 Co., 71 P.2d 1022, 1024, 1029 (Ariz. 1937) (affirming a judgment finding several directors 20 of a corporation jointly and severally liable for conversion where they used corporate funds 21 for personal investments).4 22 The appropriate damage award for Plaintiff’s constructive fraud claim is also 23 $4,550,000. See Gibraltar Escrow Co. v. Thomas J. Grosso Inv., Inc., 421 P.2d 923, 925– 24 25 4 Alternatively, even if the converted funds are considered tangible property which was 26 physically damaged Plaintiff has adequately alleged that Sara and Maywind acted in concert by pleading facts indicating that they consciously agreed to intentionally convert 27 Plaintiff’s funds by receiving them in Maywind’s bank account and using them for unauthorized purposes. (See Doc. 22 at 12–13, 16–17). Thus, even if UCATA applies 28 liability would still be joint and several under the “acting in concert” exception. See Ariz. Rev. Stat. § 12-2506(D)(1). 1 26, 929 (Ariz. App. 1966) (awarding in damages the payment amount of a fraudulently 2 induced loan). 3 Because Plaintiff is entitled to judgment on these tort claims, Plaintiff has a “remedy 4 at law” which is “clear, adequate, and complete” against Sara and Maywind, “depriv[ing] 5 equity of jurisdiction” and causing Plaintiff’s unjust enrichment claims against them to fail. 6 See Loiselle, 228 P.3d at 947 ¶ 14. The Court will therefore dismiss Plaintiff’s unjust 7 enrichment claim as to Sara and Maywind. 8 Although the Court has found that Plaintiff is entitled to default judgment on 9 multiple claims, Plaintiff may not recover more than once for the same harm. Burgess v. 10 Premier Corp., 727 F.2d 826, 837 (9th Cir. 1984); Hall v. Schulte, 836 P.2d 989, 994 (Ariz. 11 App. 1992) (“A plaintiff is entitled to be made whole in damages, and that is all.”). 12 Therefore, because the complaint demonstrates that the Plaintiff has lost $4,550,000, the 13 Court will upon entry of judgment against Sara and Maywind award damages only in that 14 amount, plus post-judgment interest. 15 c. Entry of Final Judgment 16 Having determined the claims on which Plaintiff is entitled to default judgment and 17 the appropriate remedies for those claims, the only remaining question is whether the Court 18 should enter final default judgment given that other Defendants remain in the case. This 19 decision “is left to the sound judicial discretion of the district court,” based on a 20 determination of whether there is “any just reason for delay,” considering “judicial 21 administrative interests as well as the equities involved.” Curtiss-Wright Corp. v. Gen. 22 Elec. Co., 446 U.S. 1, 8 (1980). 23 The possibility of inconsistent liability in cases involving several defendants may 24 constitute a just reason to delay entry of final judgment as to less than all defendants. See 25 In re First T.D. & Inv., Inc., 253 F.3d 520, 532 (9th Cir. 2001). This rule originally applied 26 where defendants were alleged to be jointly liable, but has been extended to cases where 27 defendants are jointly and severally liable or merely similarly situated. See id. (first citing 28 Frow v. De La Vega, 82 U.S. 552 (1872); then citing Gulf Coast Fans, Inc. v. Midwest 1 Elecs. Imps., Inc., 740 F.2d 1499, 1512 (11th Cir. 1984)); 10A Charles A. Wright & Arthur 2 R. Miller, Federal Practice and Procedure § 2690, 96 (4th ed. 2016). 3 Plaintiff argues that entry of final default judgment is proper because there is no just 4 reason for delay and the allegations against the defaulted and non-defaulted Defendants are 5 based on different legal theories such that differing judgments might not be illogical. (Doc. 6 70 at 16). Specifically, Plaintiff notes that the constructive fraud claim is alleged only 7 against Sara and Maywind. (Id. at 17). Plaintiff further argues that the liability of the 8 defaulted and non-defaulted Defendants is theoretically and factually distinct because 9 Sara’s and Maywind’s liability for unjust enrichment and conversion stems from 10 improperly obtaining Plaintiff’s funds through Sara’s misrepresentations, while Chen and 11 Wang’s liability stems from later improperly receiving those funds from Sara and 12 Maywind. (Id.). 13 The Court declines for two reasons to enter final default judgment against Sara and 14 Maywind. First, the complaint claims that all Defendants are jointly and severally liable. 15 (Doc. 22 at 18) (“Plaintiff demands . . . damages . . . against all of the Defendants, jointly 16 and severally, . . . .”). Specifically, with respect to Count Three the complaint alleges that 17 “Sara, . . . Maywind, Wang, and Chen intentionally acted in concert” to convert Plaintiff’s 18 funds. See Ariz. Rev. Stat. § 12-2506(D); (F)(1) (stating that “a party is responsible for the 19 fault of another person, if . . . the party and the other person were acting in concert” to 20 commit an intentional tort.). Because Wang and Chen are still defending this case a default 21 judgment against Maywind or Sara for conversion cannot be certified as final. 22 Second, while it is true that the claims and their supporting factual allegations differ 23 somewhat between Defendants, the wrong which lies at the heart of each of the torts 24 alleged, and which if borne out by evidence would make each Defendant’s actions tortious, 25 is in each case essentially the same wrong. The essence of Plaintiff’s grievance is that Sara 26 and Maywind were obliged to use Plaintiff’s funds to extend a loan to a specific borrower 27 to generate interest for Plaintiff and other investors, but instead used the money for other, 28 unauthorized, purposes. As discussed, it is this alleged obligation and subsequent breach 1 which forms the basis of the constructive fraud claim, which in the unjust enrichment 2 framework makes each Defendant’s enrichment unjust, and which in the conversion 3 framework makes Plaintiff the rightful possessor at the instant of conversion and makes 4 Sara’s transfer of Plaintiff’s funds to Chen and Wang tortious. 5 Thus, as this litigation progresses, whether Sara and Maywind obtained the money 6 wrongfully will be relevant to Wang’s and Chen’s defenses against charges of conversion 7 and unjust enrichment. Wang and Chen will consequently have the incentive and 8 opportunity to attempt to show that Sara and Maywind did not obtain Plaintiff’s funds 9 fraudulently or use them for an unauthorized purpose. If an attempt to disprove this 10 foundational allegation is successful, it appears likely that Wang and Chen would not be 11 liable for unjust enrichment or conversion. In that eventuality a final default judgment 12 against Sara and Maywind which assumes the truth of that foundational allegation would 13 be jarringly incongruous with a contrary disposition, resting on the rebuttal of the very 14 same allegation, in Wang and Chen’s favor. Cf. Unicolors, Inc. v. NB Bro. Corp., No. CV- 15 16-2268, 2017 WL 3579489, at *2 (C.D. Cal. June 14, 2017) (declining to enter default 16 judgment where defendants had sold copyright-infringing garments in separate sequential 17 acts because proving the garments did not infringe in the first place would render 18 judgments inconsistent). The Court therefore finds that the best course is to delay entry of 19 final judgment until all claims are adjudicated as to all defendants. 20 Upon resolution of Plaintiff’s claims against all non-defaulted Defendants in a 21 manner not inconsistent with the default judgment contemplated in this order, Plaintiff may 22 move this Court for entry of final default judgment against Sara and Maywind. 23 III. CONCLUSION 24 For the foregoing reasons, 25 IT IS ORDERED that Plaintiff’s motion for default judgment (Doc. 70) is granted 26 in part and denied in part as specified herein. (The Clerk of the Court shall not enter a 27 separate judgment at this time.) 28 1 IT IS FURTHER ORDERED that, within 5 days of resolution of Plaintiffs claims 2|| against all non-defaulted Defendants (if such resolution is not inconsistent with the default 3 || judgment to which this order finds entitlement) Plaintiff may move this Court for entry of 4|| final default judgment in the amount of $4,550,000 plus post-judgment interest, jointly and severally against Sara and Maywind. 6 IT IS FINALLY ORDERED that Count One against Sara and Maywind, Count 7\| Two against Maywind, and Count Four are dismissed without prejudice for failure to state 8 || aclaim. 9 Dated this 26th day of January, 2023. 10 11 2 12 James A. Teilborg 13 Senior United States District Judge 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 -22-