Debt Registration Center LLC v. Virtue Law Group LLC

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES – GENERAL

Case No.: 8:24-cv-01050-FWS-ADS Date: December 9, 2024

Title: Debt Registration Center, LLC et al. v. Virtue Law Group, LLC et al.

Present: HONORABLE FRED W. SLAUGHTER, UNITED STATES DISTRICT JUDGE

Melissa H. Kunig N/A

Deputy Clerk Court Reporter

Attorneys Present for Plaintiffs: Attorneys Present for Defendants:

Not Present Not Present

PROCEEDINGS: ORDER TO SHOW CAUSE REGARDING THE COURT’S SUBJECT

MATTER JURISDICTION AND SETTING ASIDE ENTRY OF

DEFAULT [26]

I. Background

On May 14, 2024, Plaintiff Debt Registration Center, LLC and Plaintiff Vista Capital

Management, LLC (collectively, “Plaintiffs”) filed the Complaint, asserting claims for breach

of contract, breach of the implied covenant of good faith and fair dealing, negligence,

conversion, constructive fraud, and accounting against Defendant Virtue Law Group, LLC and

Defendant Quantum Processing, LLC (collectively, “Defendants”). (See generally Dkt. 1.)

Plaintiffs alleged the court has subject matter jurisdiction over these claims pursuant to 28

U.S.C. § 1332. (Id. ¶¶ 1-6.) On September 18, 2024, Plaintiffs filed proof of service as to

Defendant Quantum Processing, LLC, indicating that a process server delivered the summons

and Complaint to Defendant Quantum Processing, LLC’s “corporate specialist” authorized to

accept service of process.1 (Dkt. 13.)

1 After the court issued an order to show cause why this case should not be dismissed for failure

to timely serve Defendants under Federal Rule of Civil Procedure 4(m) on August 14, 2024,

(Dkt. 10), Plaintiffs requested additional time to file proof of service in light of settlement

discussions between the parties, (Dkt. 11). As a result, the court continued the deadline to file

proof of service from August 14, 2024, to September 18, 2024. (Dkt. 12); see also Fed. R. Civ.

P. 4(m).

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES – GENERAL

Case No.: 8:24-cv-01050-FWS-ADS Date: December 9, 2024

Title: Debt Registration Center, LLC et al. v. Virtue Law Group, LLC et al.

On September 26, 2024, the parties stipulated to extend the deadline for Defendants to

answer to the Complaint from September 27, 2024, to October 27, 2024. (Dkt. 16.) On

October 24, 2024, Plaintiffs filed a First Amended Complaint (“FAC”), adding Defendant

Gabriel A. Levy, Defendant Benjamin Greenwald, and Defendant Mendy Raskin and omitting

the claim for breach of the implied covenant of good faith and fair dealing. (Dkt. 17.) Plaintiffs

allegedly served the FAC by sending a copy of the FAC, along with several forms for

acknowledging service pertaining to the three new defendants, to Defendants’ counsel via the

CM/ECF system on October 24, 2024, and electronic mail on October 28, 2024.2 (See Dkt. 18;

Dkt. 18-1 ¶ 7 & Exh. A.)

On November 21, 2024, Plaintiffs requested an entry of default against Defendants.

(Dkt. 18.) The next day, Defendants’ counsel filed a declaration opposing Plaintiffs’ request for

default because Plaintiffs failed to file adequate proof of service with respect to the FAC. (Dkt.

19 ¶¶ 1-18.) On November 27, 2024, the clerk declined to enter default against Defendants due

to insufficient proof of service as to the FAC. (Dkts. 21, 22.)

On the same day, Plaintiffs filed an amended request for entry of default and a

“certificate of service,” stating that Plaintiffs’ counsel served the FAC on Defendants by

sending the FAC to Defendants’ counsel via CM/ECF and electronic mail on October 28, 2024.

(Dkts. 23, 24.) Defendants’ counsel then filed a second declaration opposing Plaintiffs’

amended request for entry of default due to improper service. (Dkt. 25.) On December 3, 2023,

the clerk entered default against Defendants. (Dkt. 26.) On December 4, 2024, Defendants

filed a Motion to Dismiss the Amended Complaint (“Motion to Dismiss”). (Dkt. 28.)

II. Discussion

The court first addresses whether Plaintiffs have adequately established the court’s

subject matter jurisdiction over this action, and then considers whether Defendants have

provided sufficient good cause to set aside default.

2 To date, Plaintiffs have not filed any proofs of service as to Defendant Levy, Defendant

Greenwald, or Defendant Raskin. (See generally Dkt.)

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES – GENERAL

Case No.: 8:24-cv-01050-FWS-ADS Date: December 9, 2024

Title: Debt Registration Center, LLC et al. v. Virtue Law Group, LLC et al.

A. Subject Matter Jurisdiction

“Federal courts are courts of limited jurisdiction, possessing only that power authorized

by Constitution and statute.” Gunn v. Minton, 568 U.S. 251, 257 (1994) (citation and internal

quotation marks omitted). This threshold requirement “‘spring[s] from the nature and limits of

the judicial power of the United States’ and is ‘inflexible and without exception.’” Steel Co. v.

Citizens for a Better Env’t, 523 U.S. 83, 94–95 (1998) (quoting Mansfield, C. & L.M. Ry. Co. v.

Swan, 111 U.S. 379, 382 (1884). Therefore, district courts “have an independent obligation to

determine whether subject-matter jurisdiction exists, even in the absence of a challenge from

any party.” Arbaugh v. Y&H Corp., 546 U.S. 500, 514 (2006); see also Fed. R. Civ. P. 12(h)(3)

(“If the court determines at any time that it lacks subject matter jurisdiction, the court must

dismiss the action.”).

“In civil cases, subject matter jurisdiction is generally conferred upon federal district

courts either through diversity jurisdiction, 28 U.S.C. § 1332, or federal question jurisdiction,

28 U.S.C. § 1331.” Peralta v. Hisp. Bus., Inc., 419 F.3d 1064, 1069 (9th Cir. 2005). As

relevant here, diversity jurisdiction requires both complete diversity between the parties and an

amount in controversy greater than $75,000. See 28 U.S.C. § 1332(a); Strawbridge v. Curtiss, 7

U.S. (3 Cranch) 267, 267 (1806); In re Digimarc Corp. Derivative Litig., 549 F.3d 1223, 1234

(9th Cir. 2008) (“Diversity jurisdiction requires complete diversity between the parties—each

defendant must be a citizen of a different state from each plaintiff.”).

In the FAC, Plaintiffs allege that the court has subject matter jurisdiction pursuant to 28

U.S.C. § 1332 because: (1) both Plaintiffs are “California corporations,” headquartered in either

Placentia, California or San Clemente, California; (2) Defendant Virtue Law Group, LLC is a

New Jersey corporation, headquartered in New York City, New York; (3) Defendant Quantum

Processing, LLC, is a Delaware corporation; (4) Defendant Levy is a resident of New York and

a managing member of Defendant Virtue Law Group, LLC; (5) Defendant Greenwald is a

resident of New York and a managing member of Defendant Quantum Processing, LLC;

(6) Defendant Mendy Raskin is a resident of New York and a managing member of Defendant

Quantum Processing, LLC; and (7) Plaintiffs seek more than $75,000.00 in damages. (FAC

¶¶ 1-9.)

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES – GENERAL

Case No.: 8:24-cv-01050-FWS-ADS Date: December 9, 2024

Title: Debt Registration Center, LLC et al. v. Virtue Law Group, LLC et al.

The court finds these allegations are insufficient to establish complete diversity of

citizenship. The FAC suggests Plaintiffs, Defendant Virtue Law Group, LLC, and Defendant

Quantum Processing, LLC are limited liability companies. (FAC ¶¶ 3-6.) To establish the

citizenship of a limited liability company, the complaint must allege the citizenship of each of

the limited liability company’s members. See Johnson v. Columbia Props. Anchorage, LP, 437

F.3d 894, 899 (9th Cir. 2006) (“[A]n LLC is a citizen of every state of which its

owners/members are citizens.”); NewGen, LLC v. Safe Cig, LLC, 840 F.3d 606, 611 (9th Cir.

2016) (“[W]ith respect to a limited liability company, the citizenship of all of the members must

be pled.”). However, the FAC fails to allege the citizenship of either Plaintiffs’, Defendant

Virtue Law Group, LLC’s or Defendant Quantum Processing, LLC’s members.3 (See generally

FAC.) Because “the citizenship of all of the [LLC] members must be pled,” NewGen, LLC, 840

F.3d at 611, the court concludes Plaintiffs have not adequately established complete diversity as

required for subject matter jurisdiction under 28 U.S.C. § 1332. See Kanter v. Warner-Lambert

Co., 265 F.3d 853, 857 (9th Cir. 2001) (“Absent unusual circumstances, a party seeking to

invoke diversity jurisdiction should be able to allege affirmatively the actual citizenship of the

relevant parties.”) (citations omitted).

Accordingly, Plaintiffs are ORDERED TO SHOW CAUSE in writing by December

16, 2024, why this case should not be dismissed for lack of subject matter jurisdiction. Failure

to demonstrate a basis for the court’s subject matter jurisdiction or comply with court orders

will result in dismissal. See Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377

(1994) (“It is to be presumed that a cause lies outside this limited jurisdiction, and the burden of

establishing the contrary rests upon the party asserting jurisdiction.”) (citations omitted);

Arbaugh, 546 U.S. at 514 (“The objection that a federal court lacks subject-matter jurisdiction .

. . may be raised by a party, or by a court on its own initiative, at any stage in the litigation,

even after trial and the entry of judgment.”); Scholastic Ent., Inc. v. Fox Ent. Grp., 336 F.3d

3 The FAC does allege the citizenship of Defendant Virtue Law Group, LLC’s and Defendant

Quantum Processing, LLC’s managing members. (See FAC ¶¶ 7-9.) However, these

allegations are insufficient to establish the citizenship of Defendant Virtue Law Group, LLC or

Defendant Quantum Processing, LLC for purposes of diversity jurisdiction because Plaintiffs do

not indicate that the managing members are the sole members of the limited liability companies.

See NewGen, LLC, 840 F.3d at 611.

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES – GENERAL

Case No.: 8:24-cv-01050-FWS-ADS Date: December 9, 2024

Title: Debt Registration Center, LLC et al. v. Virtue Law Group, LLC et al.

982, 985 (9th Cir. 2003) (“While a party is entitled to notice and an opportunity to respond

when a court contemplates dismissing a claim on the merits . . . it is not so when the dismissal is

for lack of subject matter jurisdiction.”).

B. Motion to Set Aside Default

On December 4, 2024, Defendants filed the Motion to Dismiss. (Dkt. 28.) As discussed

above, the clerk entered default as to both Defendants one day earlier, on December 3, 2024.

(Dkt. 26.) Although Defendants do not explicitly request that the court set aside default in the

Motion, Defendants provide substantial information regarding the circumstances leading to the

entry of default. (See, e.g., Dkt. 28 at 2-5.) With the benefit of this briefing, the court construes

the Motion as seeking to set aside the December 3, 2024, entry of default. See, e.g., Everest

Indem. Ins. Co. v. Demarco, 2013 WL 12136578, at *2 (C.D. Cal. June 10, 2013) (“[A] formal

motion is not required to set aside default . . . .”); Brown Jordan Int’l Inc. v. Boles, 375 F.

App’x 700, 701 (9th Cir. 2010) (“[T]he label on a motion has little or no significance.”); United

States v. Robles, 2022 WL 1138111, at *1 (D. Guam Apr. 18, 2022) (“[A] court will construe a

motion, however styled, to be the type proper for the relief requested.”).

Federal Rule of Civil Procedure 55(a) provides that the clerk must enter default when “a

party against whom a judgment for affirmative relief is sought has failed to plead or otherwise

defend.” Fed. R. Civ. P. 55(a). An entry of default is void if it was procedurally improper. See

Direct Mail Specialists, Inc. v. Eclat Computerized Techs., Inc., 840 F.2d 685, 689 (9th Cir.

1988) (“[T]he issue is whether [the defendant] appeared. If it did, a default entered by the clerk

is void ab initio.”). Alternatively, the court may set aside an entry of default for “good cause.”

Fed. R. Civ. P. 55(c); see also United States v. Signed Pers. Check No. 730 of Yubran S. Mesle,

615 F.3d 1085, 1091 (9th Cir. 2010) (listing the three factors courts consider in analyzing good

cause to set aside an entry of default under Rule 55(c)).

In this case, an entry of default was procedurally improper because Defendants neither

failed to plead nor defend. Defendants did not fail to plead because the time to file a responsive

pleading or motion has not elapsed. Rule 15(a)(3) mandates that “any required response to an

amended pleading must be made within the time remaining to respond to the original pleading

or within 14 days after service of the amended pleading, whichever is later.” Fed. R. Civ. P.

15(a)(3). Per the parties’ stipulation, the time to respond to the Complaint expired on October

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES – GENERAL

Case No.: 8:24-cv-01050-FWS-ADS Date: December 9, 2024

Title: Debt Registration Center, LLC et al. v. Virtue Law Group, LLC et al.

27, 2024. (Dkt. 16.) However, the second deadline contemplated by Rule 15(a)(3), which

terminates fourteen days after service of an amended pleading, had not expired at the time

default was entered because Plaintiffs have not properly served Defendants.

Rule 5(b) dictates the proper methods of service for amended pleadings. See Fed. R. Civ.

P. 5(a)(1)(B) & (b). As discussed above, Plaintiffs indicate they served the FAC on Defendants

by sending a copy of the FAC via CM/ECF and electronic mail to defense counsel on October

28, 2024. (Dkt. 23.) Rule 5(b)(2)(E) does authorize service of an amended pleading by

“sending it to a registered user by filing it with the court’s electronic-filing system or sending it

by other electronic means that the person consented to in writing.” Fed. R. Civ. P. 5(b)(2)(E).

However, Plaintiffs could not properly serve Defendants under this provision because neither

Defendants nor defense counsel were registered CM/ECF users on the alleged date of service

and Defendants did not consent to service by electronic mail in writing.4 (Dkt. 20; Dkt. 25 ¶¶ 6-

13 & Exh. 7); see also L.R. 5-3.2.1 (“Individuals who have not appeared in the case in this

Court or who are not registered for the CM/ECF System must be served in accordance with

[Federal Rule of Civil Procedure] 5, and proof of service on such individuals must be made by

declaration in the form required by L.R. 5-3.1.2.”).

Absent “exceptional good cause,” “actual notice by means other than that authorized by

Rule 5(b) does not constitute valid service.” Magnuson v. Video Yesteryear, 85 F.3d 1424,

1431 (9th Cir. 1996) (citation omitted); see also De Freitas v. Hertz Corp., 720 F. Supp. 3d 993,

1009 (D. Nev. 2024) (“The Ninth Circuit has permitted parties to overcome technically

defective service if they can show “exceptional good cause” for failing to comply with Rule

5(b).”) (citation omitted). Based on the present state of the record, the court concludes

Plaintiffs have not provided “exceptional good cause” excusing their failure to comply with

Rule 5(b), particularly because defense counsel repeatedly communicated to Plaintiffs’ counsel

both that service by electronic mail was insufficient and that Defendants’ intended to defend

this suit. (See, e.g., Dkt. 19 ¶¶ 6-14, Exhs. 1-4; Dkt. 25 ¶¶ 7-20 & Exhs. 1-7); cf. Magnuson, 85

4 Furthermore, defense counsel told Plaintiffs that he did not receive any service via the

CM/ECF system, (Dkt. 19 ¶¶ 6-7, 11-14 & Exh. 4; Dkt. 25 ¶¶ 7-20 & Exh. 8), and service via

the court’s electronic-filing system “is not effective if the filer or sender learns that it did not

reach the person to be served.” Fed. R. Civ. P. 5(b)(2)(E).

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES – GENERAL

Case No.: 8:24-cv-01050-FWS-ADS Date: December 9, 2024

Title: Debt Registration Center, LLC et al. v. Virtue Law Group, LLC et al.

F.3d at 1431 (holding no exceptional good cause excused the defendant’s failure to serve a Rule

68 judgment in accordance with Rule 5(b) where the defendant failed to explain why it could

not personally serve the plaintiff or present any evidence suggesting the plaintiff consented to

service by alternative means). Because Plaintiffs have yet to effectuate valid service of the

FAC on Defendants,5 the court concludes the deadline for Defendants to file a responsive

pleading or motion has not expired under Rule 15(a)(3).

Moreover, even if Plaintiffs could demonstrate “exceptional good cause” rendering their

service by electronic mail valid, an entry of default would be improper because Defendants

have demonstrated an “intent to defend.” See Fed. R. Civ. P. 55(a). Here, Defendants opposed

both requests for entry of default, arguing that the time to file a responsive pleading had not

expired due to improper service and providing evidence of their attempts to meet and confer

with Plaintiffs regarding the Motion to Dismiss. (See, e.g., Dkt. 19 ¶¶ 6-14, Exhs. 1-4; Dkt. 25

¶¶ 7-20 & Exhs. 1-7.) In addition, Defendants filed the Motion to Dismiss one day after the

entry of default. (See generally Mot.) The court concludes these efforts demonstrate an “intent

to defend” sufficient to preclude an entry of default. See Fed. R. Civ. P. 55(a), advisory

committee’s note to 2007 amendment (“Acts that show an intent to defend have frequently

prevented a default even though not connected to any particular rule.”).

In sum, the entry of default against Defendants was procedurally improper and is thus

void. Direct Mail Specialists, 840 F.2d at 689; see also Dewey v. L.A. City Coll. Fin. Aid

Office, 2023 WL 3431897, at *2 (C.D. Cal. May 5, 2023) (“Where entry of default was entered

despite improper service of process, there is good cause to set aside the default as void.”);

McCain v. Cal. Highway Patrol, 2011 WL 5169372, at *3 (E.D. Cal. Oct. 28, 2011) (collecting

cases for the proposition that “a clerk’s entry of default may be set aside as void when default

was entered in the absence of proper service of process”). Further, setting aside the entry of

default in this case is consistent with the Ninth Circuit’s policy in favor of deciding cases on the

merits. See Mesle, 615 F.3d at 1091 (stating “judgment by default is a drastic step appropriate

only in extreme circumstances” and “a case should, whenever possible, be decided on the

merits”) (quoting Falk v. Allen, 739 F.2d 461, 463 (9th Cir. 1984)); Mendoza v. Wight Vineyard

5 The court notes Plaintiffs have not provided any proof of service as to Defendant Virtue Law

Group, LLC with respect to either the Complaint or FAC.

CENTRAL DISTRICT OF CALIFORNIA

CIVIL MINUTES – GENERAL

Case No.: 8:24-cv-01050-FWS-ADS Date: December 9, 2024

Title: Debt Registration Center, LLC et al. v. Virtue Law Group, LLC et al.

Mgmt., 783 F.2d 941, 945 (9th Cir. 1986) (“Where timely relief is sought from a default and the

movant has a meritorious defense,” any doubts “should be resolved in favor of the motion to set

aside default so that cases may be decided on their merits.”) (quoting Schwab v. Bullock’s Inc.,

508 F.2d 353, 355 (9th Cir. 1974)). Therefore, the court ORDERS the clerk to STRIKE the

entry of default, (Dkt. 26).

Because Defendants are no longer in default, the court DISCHARGES the December 3,

2024, Order to Show Cause directing Plaintiffs to file a motion for default judgment before

December 26, 2024. (Dkt. 27.) In addition, the court, on its own motion, CONTINUES the

hearing on Defendants’ Motion to Dismiss from January 2, 2025, to January 23, 2025, at 10:00

a.m. in Courtroom 10D. See Mediterranean Enters., Inc. v. Ssangyong Corp., 708 F.2d 1458,

1465 (9th Cir. 1983) (“The trial court possesses the inherent power to control its own docket

and calendar.”). Any opposing brief must be filed on or before January 2, 2025, and any reply

brief must be filed on or before January 9, 2025. See L.R. 7-9 & 7-10.

III. Disposition

For the reasons stated above, the court ORDERS the following:

1. Plaintiffs are ORDERED TO SHOW CAUSE in writing why this case should not be

dismissed for lack of subject matter jurisdiction by December 16, 2024.

2. The clerk shall STRIKE the entry of default against Defendant Virtue Law Group,

LLC and Defendant Quantum Processing, LLC, (Dkt. 26);

3. The court’s December 3, 2024, Order to Show Cause directing Plaintiff Debt

Registration Center, LLC and Plaintiff Vista Capital Management, LLC to file a

motion for default judgment before December 26, 2024, (Dkt. 27), is

DISCHARGED.

4. The hearing on Defendants’ Motion to Dismiss is CONTINUED from January 2,

2025, to January 23, 2025, at 10:00 a.m. in Courtroom 10D. The parties shall file the

opposition and reply briefs consistent with timeframes set out in the Local Rules.