Hutchins v. Oakstone Law Group, PC ( 2024 )

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 FOR THE EASTERN DISTRICT OF CALIFORNIA 10 11 KENNETH D. HUTCHINS, Case No. 2:23-cv-00802-WBS-JDP 12 Plaintiff, ORDER 13 v. DENYING PLAINTIFF’S MOTION FOR DEFAULT JUDGMENT WITHOUT 14 OAKSTONE LAW GROUP, PC, PREJUDICE 15 Defendant. ECF No. 13 16 17 18 Plaintiff filed a complaint alleging that defendant, a California law corporation, 19 participated in a sham credit repair scheme in violation of the Credit Repair Organizations Act 20 (“CROA”), see 15 U.S.C. § 1679b; the California Credit Services Act, see Cal. Civ. Code 21 § 1789.13; and the California Fair Debt Settlement Practices Act, see Cal. Civ. Code 22 §§ 1788.302(a), (c). ECF No. 1. Defendant did not file a response to the complaint, and the 23 Clerk of Court has entered default. ECF No. 7. Plaintiff now moves for entry of default 24 judgment under Federal Rule of Civil Procedure 55(b). ECF No. 13. As explained below, 25 because plaintiff has not demonstrated that defendant is liable for the requested damages under 26 the CROA, I will deny the motion without prejudice.1 27 1 Pursuant to Local Rule 230(g), the hearing calendared for August 31, 2023, was vacated 28 and the motion was ordered submitted without oral argument. See ECF No. 16. 1 Background 2 Plaintiff alleges the following facts in the complaint: 3 In September 2020, while seeking to improve his credit score and reduce debt, plaintiff 4 “came across” the Litigation Practice Group, PC (“LPG”). ECF No. 1 ¶¶ 8, 9. LPG represented 5 that, for a monthly fee of approximately $725, it would “invalidate” plaintiff’s debts and have 6 them removed from his credit report “so that they would no longer . . . impact[] his credit 7 [score].” Id. ¶ 10. Based on these representations, plaintiff entered into a contract with LPG, and 8 set up automatic payments to allow LPG to withdraw $725.38 per month. Id. ¶¶ 11, 12. Over the 9 following twenty-eight months, plaintiff’s payments to LPG totaled over $20,000. Id. ¶¶ 13, 14. 10 In January 2023, plaintiff contacted LPG to cancel his contract because he had “not receive[d] 11 any of the benefits he was promised”; none of his financial obligations had been disputed or 12 invalidated, and he was “still being sought after for [his] debts.” Id. ¶¶ 14-16. Although plaintiff 13 was told by a representative of LPG that he would be refunded for “everything paid,” LPG never 14 provided a refund. Id. ¶¶17-21. Instead, on February 1, 2023, plaintiff was informed that his 15 account was transferred from LPG to defendant, a law firm that offers debt dispute services. Id. 16 ¶¶ 5, 22. Plaintiff, along with other LPG customers, was transferred to defendant to “continue the 17 ‘services’ purportedly being offered” while LPG was “deal[ing] with allegations of fraud and 18 potential dissolution.” Id. ¶ 5. 19 Following the transfer, defendant withdrew $725.38 from his account, “despite having no 20 authorization to do so and despite not performing any services . . . justifying the amount 21 charged.” ECF No. 1 ¶¶ 24-25. After plaintiff contacted defendant and “reiterated his desire to 22 cancel and receive a refund,” defendant canceled the agreement “without returning any money 23 that had been fraudulently taken.” Id. ¶¶ 26-27. 24 Legal Standard 25 Rule 55(a) of the Federal Rules of Civil Procedure instructs the court clerk to enter default 26 when a defendant “has failed to plead or otherwise defend, and that failure is shown by affidavit 27 or otherwise.” Fed. R. Civ. P. 55(a). Under Rule 55(b), a plaintiff may apply to the district court 28 for a default judgment. See Fed. R. Civ. P. 55(b)(2). An initial entry of default by the court clerk, 1 however, does not automatically entitle a plaintiff to a court-ordered judgment. “[T]he general 2 rule [is] that default judgments are ordinarily disfavored.” Eitel v. McCool, 782 F.2d 1470, 1472 3 (9th Cir. 1986) (citation omitted). “Whenever it is reasonably possible, cases should be decided 4 upon their merits.” Pena v. Seguros La Comercial, S.A., 770 F.2d 811, 814 (9th Cir. 1985) 5 (citation omitted). 6 The decision to grant or deny a default judgment is within the court’s discretion. See 7 Eitel, 782 F.2d at 1471. When exercising this discretion, the court may consider the following 8 factors: (1) the possibility of prejudice to the plaintiff, (2) the merits of the plaintiff’s substantive 9 claim, (3) the sufficiency of the pleading, (4) the sum of money at stake in the action, (5) the 10 possibility of a dispute concerning the material facts, (6) whether the default was due to excusable 11 neglect, and (7) the strong public policy favoring decisions on the merits. See id. at 1471-72. In 12 this context, all well-pleaded allegations of the complaint are taken as true, except for those 13 concerning the amount of damages. See TeleVideo Sys., Inc. v. Heidenthal, 826 F.2d 915, 917-18 14 (9th Cir. 1987) (citation omitted). 15 Entry of a default judgment for money is appropriate without a hearing if “the amount 16 claimed is a liquidated sum or capable of mathematical calculation.” Davis v. Fendler, 650 F.2d 17 1154, 1161 (9th Cir. 1981); see also Bostik, Inc. v. J.E. Higgins Lumber Co., 2013 WL 312074, at 18 *4 (N.D. Cal. Jan. 10, 2013) (requiring the plaintiff seeking default judgment to “‘prove up’ the 19 amount of damages, fees, and costs it requests by providing admissible evidence in the form of 20 clear declarations, calculations, witness testimony, or other documentation supporting its 21 request”). The damages award, however, cannot “differ in kind from, or exceed in amount, what 22 is demanded in the pleadings.” See Fed. R. Civ. P. 54(c)). 23 Discussion 24 Before determining whether the Eitel factors support entry of default judgment, the court 25 must confirm that jurisdiction exists over the subject matter and the parties. In re Tuli, 172 F.3d 26 707, 712 (9th Cir. 1999). Because the complaint’s first cause of action asserts violations of the 27 Credit Repair Organizations Act, a federal consumer protection statute designed to prevent fraud 28 and abuses in the credit repair industry, see 15 U.S.C. § 1679b, the court has subject matter 1 jurisdiction over this action. See 15 U.S.C. § 1679b; 28 U.S.C. § 1331 (“The district courts shall 2 have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the 3 United States.”). The court also has personal jurisdiction over the parties: plaintiff resides in 4 Sacramento, California, and defendant is a California corporation. See Daimler AG v. Bauman, 5 571 U.S. 117, 137 (2014) (“For an individual, the paradigm forum for the exercise of general 6 jurisdiction is the individual’s domicile; for a corporation, . . . the place of incorporation and 7 principal place of business are ‘paradig[m] . . . bases for general jurisdiction.’”) (quotations and 8 citations omitted); ECF No. 1 ¶¶ 4-5; California Secretary of State website, 9 https://bizfileonline.sos.ca.gov/search/business (last visited January 22, 2023).2 10 Additionally, the record reflects that defendant was properly served with the complaint. 11 See S.E.C. v. Ross, 504 F.3d 1130, 1138 (9th Cir. 2007) (“[S]ervice of process is the means by 12 which a court asserts its jurisdiction over the person.”). A corporation may be served in 13 accordance with state law where the district court is located. Fed. R. Civ. P. 4(e)(1), 4(h)(1)(A). 14 California law provides that a summons and complaint may be served by delivering a copy to a 15 corporation’s designated agent for service of process. Cal. Code Civ. Proc. § 416.10(a). Here, 16 the relevant proof of service states that, on May 17, 2023, a professional process server served a 17 copy of the complaint and summons on Sarai Marin, a registered agent of defendant. See ECF 18 No. 5; California Secretary of State website, https://bizfileonline.sos.ca.gov/search/business (last 19 visited January 22, 2023). 20 Turning to the Eitel analysis, the court first considers the merits of plaintiff’s claims and 21 the sufficiency of the complaint. These factors are often treated as the most important and can be 22 analyzed together, as they ask whether the allegations in the complaint “are sufficient to state a 23 claim on which the [plaintiff] may recover.” See Danning v. Lavine, 572 F.2d 1386, 1388 (9th 24 Cir. 1978); Fed. Nat. Mortg. Ass’n v. George, 2015 WL 4127958, at *3 (C.D. Cal. July 7, 2015); 25 Dr. JKL Ltd. v. HPC IT Educ. Ctr., 749 F. Supp. 2d 1038, 1048 (N.D. Cal. 2010). 26 27 2 The court takes judicial notice of defendant’s entity profile from the California Secretary of State’s website. Fed. R. Evid. 201; see Gerritsen v. Warner Bros. Entm’t, Inc., 112 F. Supp. 28 3d 1011, 1033-34 (C.D. Cal. 2015). 1 In the first cause of action, plaintiff claims that defendant is liable under the provisions of 2 the CROA that prohibit “any person” from “mak[ing] or us[ing] any untrue or misleading 3 representation of the services of the credit repair organization,” see 15 U.S.C. § 1679b(a)(3), and 4 from “engag[ing], directly or indirectly, in any act, practice, or course of business that constitutes 5 or results in the commission of, or an attempt to commit, a fraud or deception on any person in 6 connection with the offer or sale of the services of the credit repair organization,” see 15 U.S.C. 7 § 1679b(a)(4). Plaintiff further alleges that defendant violated 15 U.S.C. § 1679b(b), which 8 prohibits a “credit repair organization” from “charg[ing] or receiv[ing]any money or other 9 valuable consideration for the performance of any service which the credit repair organization has 10 agreed to perform for any consumer before such service is fully performed.” Plaintiff also states 11 violations of 15 U.S.C. §§ 1679c, 1679d and 16979e, which require a credit repair organization to 12 provide a written contract for services, a notice of cancellation, and a disclosure statement. See 13 ECF No. 1 ¶¶ 37-45. 14 Plaintiff asserts that defendant, by “perpetuating” LPG’s fraudulent practices, is liable not 15 only for its own misconduct, but also for LPG’s unlawful acts. See ECF No. 1 ¶¶ 28, 45(b); ECF 16 No. 13 at 7-8. In the motion for default judgment, he requests actual damages under the CROA in 17 the amount of $20,308.96, which he asserts is the total sum that he paid to LPG.3 See ECF No. 13 18 at 8, 10. 19 Plaintiff’s complaint and motion do not demonstrate that defendant is liable for the 20 payments made to LPG. In particular, he does not identify a specific theory of joint liability to 21 support his damages request, and even if he had, the factual allegations in the complaint lack 22 sufficient detail to allow the court to draw a reasonable inference that defendant is legally 23 responsible for LPG’s unlawful acts. See, e.g., ECF No. 1 ¶¶ 5, 38 (broadly alleging that 24 defendant “has a relationship with” LPG and that defendant “stepp[ed] into the shoes of LPG” to 25 “perpetuate the fraud”). Critically, there are no facts describing the nature of the relationship 26 3 Plaintiff’s damages calculation is based on twenty-eight monthly payments of $725.32, 27 and not $725.38 as alleged in the complaint. See ECF No. 13 at 10. Plaintiff also seeks $5,000 in statutory damages under Cal. Civ. Code § 1788.305(b)(1)(A), and reasonable attorneys’ fees and 28 costs. See ECF No. 13 at 8-10. 1 between defendant and LPG that indicate, for example, that they operated under joint control, or 2 that they otherwise did not function as separate entities. And while the complaint states that 3 plaintiff’s account was transferred from LPG to defendant in early 2023, this is not sufficient to 4 show that defendant was engaged in a scheme or course of business to fraudulently induce 5 customers to purchase LPG’s bogus credit repair services. Cf. Zimmerman v. Cambridge Credit 6 Counseling Corp., 529 F. Supp. 2d 254, 280 (D. Mass. 2008) (predicating liability of individual 7 and corporate defendants on CROA’s “course of business” provision and “alter ego” doctrine, 8 where corporate defendants “engaged in a single overarching scheme to attract customers [with 9 misleading representations], charge them up-front fees and otherwise behave in contravention of 10 CROA, and funnel the resulting profits to the [individual defendants who controlled the 11 corporations] through their entwined finances”), aff’d sub nom. Zimmerman v. Puccio, 613 F.3d 12 60 (1st Cir. 2010).4 Indeed, the only factual allegations in the complaint about defendant’s 13 misconduct are that defendant, following the transfer of plaintiff’s account, charged him without 14 performing any credit repair services, and refused to provide a refund.5 15 Because plaintiff has not sufficiently pled facts or provided authority to demonstrate that 16 defendant is liable for the payments made to LPG, entry of default judgment is not appropriate. 17 See, e.g., Williams v. Phoenix Law PC, Case No. 3:23-cv-05437-TMC (W.D. Wash. Nov. 3, 18 2023) (denying motion for default judgment on similar facts because plaintiff did not establish a 19 20 4 Plaintiff asserts, without identifying supporting authority, that because defendant is a “person” who violated the CROA, defendant is liable for the payments made to LPG, pursuant to 21 CROA’s damages provision that states “[a]ny person who fails to comply with any provision of this subchapter with respect to any other person shall be liable to such person in an amount equal 22 to the sum of . . . any amount paid by the person to the credit repair organization.” See 15 23 U.S.C. § 1679g(a)(1) (emphasis added); ECF No. 13 at 8. The court is not persuaded, however, that section 1679g(a)(1) subjects defendant to liability for the payments to LPG absent factual 24 allegations that indicate that defendant was operating in conjunction with LPG to solicit customers to sign fraudulent contracts for credit repair services. 25 5 The court notes that the complaint contains inconsistent allegations as to the type and frequency of the fees that defendant charged. In the factual summary of the complaint, plaintiff 26 alleges that defendant made one unauthorized withdrawal of $725.38 from his account. See ECF 27 No. 1 ¶¶ 25-27. Under the CROA cause of action, however, plaintiff alleges that defendant unlawfully charged him unspecified “up-front fees and monthly fees . . . instead of just taking the 28 money that was set up through Plaintiff’s automatic payments.” See id. ¶ 41. 1 | legal entitlement to the damages sought against defendant). 2 In reaching this determination, the court notes that plaintiffs request for damages is also 3 | deficient because he did not provide a declaration or other evidence to substantiate the amount. 4 | Although he attached a copy of his payment history to LPG as an exhibit to the motion, this 5 | record only captures the payments that he made from September 2020 through January 2022. See 6 | ECF No. 13-1. In any event, counsel’s declaration does not authenticate this exhibit, and plaintiff 7 | did not submit a personal declaration attesting to any facts concerning his payments or the 8 | accuracy of the exhibit. See ECF No. 13-3. 9 Conclusion 10 Based on the above, it is hereby ORDERED that plaintiff's motion for default judgment, 11 | 13, is denied without prejudice. 12 13 4 IT IS SO ORDERED. 15 ( 1 Ow — Dated: _ February 8, 2024 Q_—— 16 JEREMY D. PETERSON 7 UNITED STATES MAGISTRATE JUDGE 18 19 20 21 22 23 24 25 26 27 28