NATIONAL BANKERS TRUST CORP., Plaintiff, v. PEAK LOGISTICS, LLC, SUMMITT TRUCKING LLC, PACER TRANSPORTATION SOLUTIONS INC., ZAPPOS.COM, INC., and DECKERS OUTDOOR, INC., Defendants. and PEAK LOGISTICS, LLC, Third-Party Plaintiff, v. ANDY TRANSPORT, INC., Third-Party Defendant.

 

No. 12-2268

 

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TENNESSEE, WESTERN DIVISION

 

2014 U.S. Dist. LEXIS 149204

 

 

October 20, 2014, Decided

October 20, 2014, Filed

 

 

COUNSEL:  [*1] For National Bankers Trust Corporation, a Tennessee corporation, Plaintiff: Kyle A. Young, ADAMS & REESE, LLP-Nashville, Nashville, TN; Randall J. Fishman, Richard S. Townley, BALLIN BALLIN & FISHMAN, Memphis, TN; Keith A. Aiken, NATIONAL BANKERS TRUST, Memphis, TN.

 

For Peak Logistics LLC, an Indiana limited liability company, Defendant, ThirdParty Plaintiff, Counter Defendant: Lewis Wilkinson Lyons, LEAD ATTORNEY, GLASSMAN EDWARDS WADE AND WYATT, Memphis, TN; Kyle A. Young, ADAMS & REESE, LLP-Nashville, Nashville, TN; Todd B. Murrah, GLASSMAN EDWARDS WADE & WYATT, PC, Memphis, TN.

 

For Summitt Trucking LLC, an Indiana limited liability company, Defendant, Counter Defendant: Lewis Wilkinson Lyons, LEAD ATTORNEY, GLASSMAN EDWARDS WADE AND WYATT, Memphis, TN; Kyle A. Young, ADAMS & REESE, LLP-Nashville, Nashville, TN; Todd B. Murrah, GLASSMAN EDWARDS WADE & WYATT, PC, Memphis, TN.

 

For Pacer Transportation Solutions Inc., an Ohio corporation, Zappos.com Inc., a Delaware corporation, Defendants, Counter Defendants: Kyle A. Young, ADAMS & REESE, LLP-Nashville, Nashville, TN; Lewis Wilkinson Lyons, GLASSMAN EDWARDS WADE AND WYATT, Memphis, TN; Todd B. Murrah, GLASSMAN EDWARDS WADE & WYATT, PC, [*2]  Memphis, TN.

 

For Deckers Outoor Inc., Defendant: Matthew Scott Mazza, LEAD ATTORNEY, PRO HAC VICE, LAW OFFICE OF MATTHEW S. MAZZA, Santa Barbara, CA; Kyle A. Young, ADAMS & REESE, LLP-Nashville, Nashville, TN.

 

For Andy Transport, Inc., ThirdParty Defendant, Counter Claimant: Kyle A. Young, ADAMS & REESE, LLP-Nashville, Nashville, TN.

 

JUDGES: S. THOMAS ANDERSON, UNITED STATES DISTRICT JUDGE.

 

OPINION BY: S. THOMAS ANDERSON

 

OPINION

 

ORDER GRANTING IN PART AND DENYING IN PART ANDY’S MOTION FOR PARTIAL SUMMARY JUDGMENT

Before the Court is Third-Party Defendant Andy Transport, Inc.’s (“Andy”) Motion for Partial Summary Judgment as to Peak Logistics, LLC (“Peak”) and Summitt Trucking LLC’s (“Summitt”) Claims, filed June 12, 2014 (D.E. # 178). Peak filed a Response in Opposition to the Motion (D.E. # 179), to which Andy filed a Reply (D.E. # 183). Futhermore, on October 2, 2014, National Bankers Trust (“NBT”) filed its Notice of Joinder in Andy’s Motion (D.E. # 194), to which Peak filed yet another Response (D.E. # 197). For the reasons stated below, Andy’s Motion for Partial Summary Judgment is GRANTED IN PART, DENIED IN PART.

 

BACKGROUND

The third-party litigation at issue stems from original litigation filed by NBT against [*3]  Defendants, including Peak. Peak then filed a third-party complaint against Andy (D.E. # 37), and Andy answered and counterclaimed against Defendants, including Peak and Summitt (D.E. # 50).1 Andy seeks summary judgment on several issues in Peak’s Third-Party Complaint: (1) whether Peak is entitled to its alleged lost profits; (2) whether Andy must indemnify Peak for the litigation; and (3) whether Peak may recover for Andy’s alleged fraudulent misrepresentation and negligence.

 

1   Throughout this Order, the Court refers only to Peak as the non-moving party. Andy claims that Summitt is the alter-ego of Peak, and thus Summitt’s alleged liability is based solely on the actions of Peak.

NBT is engaged in the business of factoring for motor carriers. (Pl.’s Compl. ¶ 1). NBT purchases its clients’ accounts receivable at a discount and takes a security interest in its clients’ assets to secure the purchase price. (Id. ¶ 15). NBT remits a portion of the purchase price, known as the “advance rate,” at the time of purchase, reserving a portion of the purchase price as further security. (Id. ¶ 16). NBT releases the reserved funds to its clients once the shipper pays the account. (Id. ¶ 17). One such [*4]  client was Andy. On August 15, 2011, NBT and Andy entered into a factoring agreement. (Id. ¶ 18). In October 2011, Peak and Andy entered into a Broker-Carrier Agreement (“Agreement”). (Andy’s Statement of Undisputed Facts ¶ 1). This Agreement between Peak and Andy is the subject of Peak’s claims against Andy and Andy’s counterclaims against Peak.

Andy’s relationship with NBT, on the other hand, is governed by the parties’ factoring agreement. Under the factoring agreement, Andy sold at least some of its receivables– including accounts that Peak owed to Andy–to NBT. (Joint Response to Mot. for Partial Summ. J. 3). The factoring agreement gave NBT, as assignee, the right to collect on at least some Andy’s open accounts, although the parties dispute the number of accounts actually purchased.2 NBT notified Peak of its purchase of the accounts from Andy, triggering Peak’s obligation to pay NBT what it originally owed Andy.

 

2   The parties dispute how many invoices that Andy sold or assigned to NBT as compared to how many invoices served as collateral in which NBT took a security interest.

On November 23, 2011, and January 5, 2012, Andy hauled two separate loads of Defendant Zappos.com’s (Zappos) [*5]  shoes–loads brokered by Peak. (Id.). Both were stolen. (Id). Peak claims that after the first theft, it communicated to Andy, in writing and verbally, that Peak would require implementation of additional security measures on Zappos loads to prevent future losses. (Peak’s Third-Party Compl. ¶ 12). Andy, Peak claims, did not implement or follow those additional measures, despite assuring Peak that it would do so. (Id. ¶ 13-19). Andy continued to carry the loads until the second theft. (Id. ¶ 18).

Andy states that its insurer paid $250,000.00 on each of the two thefts, but that Peak had to pay $82,333.45 in excess of Andy’s insurance coverage. (See id. ¶ 20). While Andy’s insurance claims were still pending, Peak began withholding payment on its open invoices with Andy, which affected both Andy and NBT. Peak continues to assert a right of setoff for the cargo loss and for the loss of business that it claims it incurred as a result of Andy’s alleged breach of the Broker-Carrier Agreement. (Id. ¶ 28). The alleged loss of business stems from Peak’s claim that Pacer Transportation Systems, Inc. (“Pacer”) stopped doing business with Peak after the cargo thefts. When NBT did not receive payment [*6]  on the factored receivables, it sued Peak on sworn account for $187,600.00. (Pl.’s Compl. ¶ 44). Peak then brought a third-party complaint against Andy, and Andy counterclaimed against the Defendants/Third-Party Plaintiffs, including Peak. The Court granted in part and denied in part Peak’s Motion for Summary Judgment on Andy’s counterclaims, and it does the same for Andy’s Motion for Partial Summary Judgment on Peak’s claims.

 

STANDARD OF REVIEW

Federal Rule of Civil Procedure 56(a) provides that a party is entitled to summary judgment if the moving party “shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”3 In reviewing a motion for summary judgment, the court views the evidence in the light most favorable to the nonmoving party,4 and it “may not make credibility determinations or weigh the evidence.”5 When the motion is supported by documentary proof such as depositions and affidavits, the nonmoving party may not rest on his pleadings but, rather, must present some “specific facts showing that there is a genuine issue for trial.”6 It is not sufficient “simply [to] show that there is some metaphysical doubt as to the material facts.”7 These facts must be [*7]  more than a scintilla of evidence and must meet the standard of whether a reasonable juror could find by a preponderance of the evidence that the nonmoving party is entitled to a verdict.8 When determining if summary judgment is appropriate, the Court should ask “whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.”9 In this Circuit, the nonmoving party must “put up or shut up” as to the critical issues of the claim.10 The Court must enter summary judgment “against a party who fails to make a showing sufficient to establish the existence of an element essential to that party’s case, and on which that party will bear the burden of proof at trial.”11

 

3   Fed. R. Civ. P. 56(a); see Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986); Eastham v. Chesapeake Appalachia, L.L.C., 754 F.3d 356, 360 (6th Cir. 2014).

4   Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S. Ct. 1348, 89 L. Ed. 2d 538 (1986).

5   Laster v. City of Kalamazoo, 746 F.3d 714, 726 (6th Cir. 2014).

6   Celotex, 477 U.S. at 324.

7   Matsushita, 475 U.S. at 586.

8   Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986).

9   Id. at 251-52.

10   Lord v. Saratoga Capital, Inc., 920 F. Supp. 840, 847 (W.D. Tenn. 1995) (citing Street v. J.C. Bradford & Co., 886 F.2d 1472, 1478 (6th Cir. 1989)).

11   Celotex, 477 U.S. at 322.

 

ANALYSIS

 

I. Contractual Claims

In its third-party complaint, Peak seeks a declaratory judgment on two issues, both rooted in the Broker-Carrier Agreement. Peak claims that Andy breached the Agreement, and therefore the Agreement affords Peak the remedies contained therein. Andy now asks for summary judgment as to these two issues. First, Andy asks the court to decide as a matter of law that Peak is not entitled [*8]  to offset payments for its alleged lost profits. Second, Andy seeks summary judgment on whether the indemnity provision in the Broker-Carrier Agreement requires Andy to indemnify Peak.

 

A. Applicable Law

 

1. Carmack Amendment

In its Notice of Joinder in Andy’s Motion for Partial Summary Judgment, NBT argues that Peak’s common-law claims against Andy are preempted by federal law under the Carmack Amendment to the Interstate Commerce Act, which governs shippers’ liability to carriers for damage to or loss of interstate shipments.12 Indeed, this Court has held that the Carmack Amendment preempts shippers’ state common-law suits against interstate commercial carriers of property.13 The Carmack Amendment, in an attempt to “relieve shippers of the burden of searching out a particular negligent carrier from among the often numerous carriers handling an interstate shipment of goods,”14 imposes absolute liability on a carrier for the “actual loss or injury to the property” sustained in transit.15 NBT asserts, then, that Peak may recover only actual damages from Andy under federal law, rather than consequential damages like its alleged loss of business.

 

12   49 U.S.C. § 14706; see UPS Supply Chain Solutions, Inc. v. Megatrux Transp., Inc., 750 F.3d 1282, 1285-86 (11th Cir. 2014). Neither party has alleged that the shipment was purely intrastate.

13   Racing Head Serv., LLC v. Mallory Alexander Int’l Logistics, No. 09-2605-STA-tmp, 2012 U.S. Dist. LEXIS 6713, at *54 (W.D. Tenn. Jan. 20, 2012) (citing W.D. Lawson & Co. v. Penn Cent. Co., 456 F.2d 419, 421 (6th Cir. 1972)).

14   Reider v. Thompson, 339 U.S. 113, 119, 70 S. Ct. 499, 94 L. Ed. 698 (1950).

15   49 U.S.C. § 14706(a)(1) [*9] ; see Camar Corp. v. Preston Trucking Co., 221 F.3d 271, 277 (1st Cir. 2000). NBT also notes that “[a] Carmack claim does not absolutely preclude recovery of special or consequential damages” and then embarks on a discussion of knowledge and foreseeability of such damages as the Court does below.

Federal preemption is an affirmative defense;16 therefore, Andy and NBT bear the burden of proof.17 The Carmack Amendment preempts shippers’ common-law claims against carriers, but federal courts have labored over the issue of whether brokers’ claims against carriers are likewise preempted.18 In Exel, Inc. v. Southern Refrigerated Transport, the District Court for the Southern District of Ohio determined that the Carmack Amendment did not impliedly preempt a broker’s breach-of-contract claim against a carrier.19 The court held that a “master agreement” between the broker and the carrier, much like the Broker-Carrier Agreement in this case, “falls outside of the shipper-carrier relationship and outside the preemptive field of the Carmack Amendment.”20 It also noted that the agreement was “a negotiated contract that establish[ed] an ongoing business relationship between sophisticated parties,” and that the agreement “did not focus on shipping under a bill of lading,” the instrument that establishes liability under the Carmack Amendment.21 In other words, the broker’s [*10]  claims were distinct from claims that the Carmack Amendment intends to preempt.

 

16   Brown v. Earthboard Sports USA, Inc., 481 F.3d 901, 913 (6th Cir. 2007). The failure to affirmatively raise preemption does not necessarily result in waiver. Moore, Owen, Thomas & Co. v. Coffey, 992 F.2d 1439, 1445 (6th Cir. 1993). While it may not be too late to raise the preemption issue in the summary judgment phase, Lindley v. Am. Home Mortg. Servicing Inc., No. 3:10-1108, 2012 U.S. Dist. LEXIS 165588, at *6-7 (M.D. Tenn. Nov. 20, 2012), NBT–not Andy–has raised the defense late in the proceedings. Nevertheless, the Court will take up the argument after it gave Peak an opportunity to respond.

17   Brown, 481 F.3d at 913.

18   See Exel, Inc. v. S. Refrigerated Transp., Inc., No. 2:10-cv-994, 2014 U.S. Dist. LEXIS 119024, at *13 (S.D. Ohio Aug. 26, 2014) (citing several cases with different holdings on the issue).

19   Exel, Inc. v. S. Refrigerated Transp., Inc., No. 2:10-cv-994, 2012 U.S. Dist. LEXIS 104740, at *15 (S.D. Ohio July 27, 2012). The Court noted preliminarily that the Carmack Amendment does not expressly preempt state law claims by brokers. 2012 U.S. Dist. LEXIS 104740, at *12.

20   2012 U.S. Dist. LEXIS 104740, at *15.

21   Id.; see 49 U.S.C. § 14706(a)(1) (providing recovery “under the receipt or bill of lading”).

In Andy and Peak’s Broker-Carrier Agreement, the parties specify that the “Carrier assumes the liability of a carrier pursuant to the Carmack Amendment . . . for loss, delay, damage to or destruction of any and all of Customer’s goods or property while under Carrier’s care, custody or control.”22 But just after this recitation, the Broker-Carrier Agreement also clarifies that the “Carrier shall be liable to Broker [*11]  for all economic loss, including consequential damages that are incurred by Broker or the Customer for any freight loss, damage or delay claim.”23 Such language persuades the Court that the Carmack Amendment’s limitation of liability for carriers does not preempt Peak’s contractual claims. Those claims are based on Peak’s independent and once-ongoing relationship with one of its business partners–a relationship defined by the Broker-Carrier Agreement and agreed to by Andy.24 Andy has made no allegation that Peak is simply enforcing the shipper’s claims as assignee; instead, Peak seeks damages for its own loss of business. As another District Court has explained, separate claims based on broker-carrier contracts do not raise the concern addressed by Carmack liability: a carrier will not be “‘placed in the untenable position of having to determine what [its] liability may be in many jurisdictions with differing laws'” because “parties to the contracts may reasonably expect that their contracts will be interpreted consistently by the law of the jurisdiction in which the contract was made.”25 Having determined that the Carmack Amendment does not preempt Peak’s contractual claims, the Court must decide which state’s law applies [*12]  to such claims.

 

22   Broker-Carrier Agreement ¶ 9.

23   Id.

24   See Intransit v. Excel N. Am. Rd. Transp., Inc., 426 F. Supp. 2d 1136, 1141 (D. Or. 2006).

25   Transcorr Nat’l Logistics, LLC v. Chaler Corp., No. 1:08-cv-00375, 2008 U.S. Dist. LEXIS 104472, at *7-8 (S.D. Ind. Dec. 19, 2008) (quoting Intransit, 426 F. Supp. 2d at 1141).

 

2. Choice of Law

Both the lost profits issue and the indemnity issue are rooted in the Broker-Carrier Agreement, a contract between the two parties. The Broker-Carrier Agreement calls for the application of Indiana law in the event of a dispute related to the agreement. A federal court sitting in diversity applies the choice of law rules of the forum state.26 Tennessee courts follow the rule of lexi loci contractus: the law of the state in which the contract was executed is presumed to be the applicable law, “absent a contrary intent.”27 Furthermore, a choice-of-law provision in the Broker-Carrier Agreement calls for the application of Indiana law. Tennessee courts will honor a contractual choice-of-law provision “if the state whose law is chosen bears a reasonable relation to the transaction and absent a violation of the forum state’s public policy.”28 Here, neither party objects to the application of Indiana law, and Indiana is the place of contracting. Thus, Indiana substantive law applies to the claims.

 

26   Montgomery v. Wyeth, 580 F.3d 455, 459 (6th Cir. 2009).

27   Messer Griesheim Indus. v. Cryotech of Kingsport, Inc., 131 S.W.3d 457 (Tenn. Ct. App. 2003) (citing Ohio Cas. Ins. Co. v. Travelers Indem. Co., 493 S.W.2d 465, 467 (Tenn. 1973)).

28   Bright v. Spaghetti Warehouse, No. 03A01-9708-CV-00377, 1998 Tenn. App. LEXIS 286, at *13 (Tenn. Ct. App. Apr. 29, 1998) (citing Arcata Graphics v. Heidelberg Harris, 874 S.W.2d 15, 27 (Tenn. Ct. App. 1993)).

 

B. Analysis

 

1. Lost Profits

Peak’s [*13]  claim for lost profits stems from the loss of cargo while in Andy’s hands. Peak alleges that it sustained “damages to business reputation, lost profits, and other consequential damages as a result of Andy’s acts and omissions.”29 Andy seems to refer to this group of damages collectively as “lost profits.” It is a group of damages that relate to Peak’s alleged loss of business with Pacer, its former client. Essentially, Andy asks the Court to determine as a matter of law (1) that the Agreement does not provide for such damages, and (2) that such damages were not foreseeable. Andy does not concede that it breached the Agreement; however, for the purposes of this section, the Court assumes that Andy did breach the Agreement.

 

29   Peak’s Third-Party Compl. ¶ 24.

At issue is the interpretation of paragraph 9 of the Broker-Carrier Agreement. In the Agreement, Andy is the “Carrier,” and Peak is the “Broker”:

 

Carrier shall pay to Broker, or allow Broker to deduct from the amount Broker owes Carrier, Customer’s full actual loss for the kind and quantity of commodities so lost, delayed, damaged or destroyed. Carrier shall be liable to Broker for all economic loss, including consequential damages that [*14]  are incurred by Broker or the Customer for any freight loss, damage or delay claim.30

 

 

First, Andy argues that paragraph 9 of the Broker-Carrier Agreement does not permit recovery of economic loss “as a result of Peak losing brokerage business.” Peak, on the other hand, argues that such consequential damages are expressly provided for in the Agreement.

 

30   Broker-Carrier Agreement ¶ 9.

The interpretation of a contract is generally a question for the court,31 and “[t]he ultimate goal of any contract interpretation is to determine the intent of the parties at the time that they made the agreement.”32 Indiana courts read the plain language of the contract in context, “construing it so as to render each word, phrase, and term meaningful, unambiguous, and harmonious with the whole.”33 If a reasonable person could find that the contract is subject to more than one interpretation, then it is ambiguous, and the Court must look to the evidence of the parties’ intent.34 There is no question that paragraph 9 of the Agreement allows Peak to recover some sort of “consequential damages” after a breach. The real question is whether those “consequential damages” include only economic losses from the sale of the cargo that [*15]  was actually stolen, or whether they include economic losses from Peak’s alleged lost brokerage business with Pacer.

 

31   Clyde E. Williams & Assocs. v. Boatman, 176 Ind. App. 430, 375 N.E.2d 1138 (Ind. Ct. App. 1978) (citing Ebert v. Grain Dealers Mut. Ins. Co., 158 Ind. App. 379, 303 N.E.2d 693, 698 (Ind. Ct. App. 1973)).

32   Citimortgage, Inc. v. Barabas, 975 N.E.2d 805, 813 (Ind. 2012).

33   Id. (citing Trustcorp Mortg. Co. v. Metro Mortg. Co., 867 N.E.2d 203, 213 (Ind. Ct. App. 2007)).

34   Id.

Andy bases its construction of the Agreement on foreseeability. It argues that the parties did not intend for “consequential damages” to include Peak’s loss of business with Pacer because such damages were not foreseeable at the time of contracting. Generally, consequential economic loss “may include lost profits and loss of goodwill or business reputation.”35 But Indiana courts follow the rule of Hadley v. Baxendale in limiting consequential damages to reasonably foreseeable economic losses;36 therefore, whether or not Peak may actually recover for the consequential damages it demands is a question of foreseeability. While the language of the contract itself sheds light on the parties’ intentions to allow consequential damages,37 “the question of whether the injury suffered was a natural and proximate result of [a party’s] breach which can fairly be said to have been within the contemplation of the parties at the time the contract was entered [is a] question[] of fact to be resolved by the jury.”38 While Andy claims that two stolen truckloads were [*16]  completely unforeseeable and that it had “no knowledge of Peak’s relationship with Pacer,”39 a jury will have to determine, factually, “whether the damages suffered were within the contemplation of the parties.”40 Andy’s Motion for Partial Summary Judgment on the issue of lost profits is DENIED.

 

35   Black’s Law Dictionary 531 (9th ed. 2009).

36   See Johnson v. Scandia Assocs. 717 N.E.2d 24, 31 (Ind. 1999) (citing Strong v. Commercial Carpet Co., 163 Ind. App. 145, 322 N.E.2d 387, 391-92 (1975)).

37   ViaStar Energy, LLC v. Motorola, Inc., No. 1:05-cv-1095, 2006 U.S. Dist. LEXIS 78331, at *14-15 (S.D. Ind. Oct. 26, 2006).

38   Strong, 322 N.E.2d at 392 (emphasis added); see also Wilson v. Kauffman, 156 Ind. App. 307, 296 N.E.2d 432, 437 (Ind. Ct. App. 1973) (“Strictly speaking the interpretation of the contract is not submitted to the jury insofar as the question is one of construction and a question of law, but, the facts on which that construction rests must be determined by the jury.”).

39   Apparently NBT and Peak also believed, even after the first theft, that “the second theft was not foreseeable.” (Mem. in Supp. of Joint Mot. for Summ. J. as to Andy’s Counterclaims 11, ECF No. 164-1). Peak argues, however, that this statement did not involve foreseeability of lost profits. (Joint Response to Mot. for Summ. J. 6 n.1, ECF No. 179).

40   Strong, 322 N.E.2d at 392 n.2 (citing Hadley v. Baxendale, (1854) 156 Eng. Rep. 145).

 

2. Indemnity

 

a. Contractual Indemnity

Andy asks the court to enter summary judgment on Peak’s indemnity claim. The Broker-Carrier Agreement’s indemnity provision states the [*17]  following:

 

[Andy] shall defend, indemnify, and hold [Peak] harmless from and against all loss, liability, damage, claims, fines, costs or expenses, including attorney’s fees, arising out of or in any way related to (i) the performance of services pursuant to this Agreement and (ii) the performance or breach of this Agreement, by [Andy], its employees or independent contractors working for [Andy] (collectively, the “Claims”), including, but not limited to, Claims for or related to personal injury (including death), property damage and Carrier’s possession, use, maintenance, custody or operation of the Equipment.

 

 

Peak claims that it should be indemnified for its attorney fees and losses for the suit brought by NBT against Peak. Under Indiana law, “indemnification clauses are strictly construed and the intent to indemnify must be stated in clear and unequivocal terms.”41 Indiana courts use the standard rules of contract construction in interpreting indemnity provisions, and such interpretation is a question of law.42

 

41   Fresh Cut, Inc. v. Fazli, 650 N.E.2d 1126, 1132 (Ind. 1995) (citing Wilson Leasing Co. v. Gadberry, 437 N.E.2d 500, 501 (Ind. Ct. App. 1982)).

42   L.H. Controls, Inc. v. Custom Conveyor, Inc., 974 N.E.2d 1031, 1047 (Ind. Ct. App. 2012).

Generally, there are two types of indemnification coverage: first-party coverage and third-party coverage. Under Indiana law, it is “the general understanding” that indemnification [*18]  clauses cover third-party liability.43 In other words, “‘indemnity is a form of compensation in which a first party is liable to pay a second party for a loss or damage the second party incurs to a third party.'”44 Here, the Court agrees with Andy that the indemnity provision above is ambiguous as to whether it applies to first-party claims. As in L.H. Controls v. Custom Conveyor, there is no plain language in the provision “clearly and unambiguously stating” that Andy is required to cover the costs “associated with any cause of action asserted even by parties to the agreement in a breach of contract action between the parties.”45 After that finding, the Indiana court in L.H. Controls construed the agreement against the drafter and concluded that it did not cover first-party claims.46 The Court finds that the same analysis applies to the indemnity provision in the Broker-Dealer Agreement. Thus, Andy is not required to indemnify Peak in its lawsuit against Andy.47

 

43   Id. (citing Indianapolis City Mkt. Corp. v. MAV, Inc., 915 N.E.2d 1013, 1023 (Ind. Ct. App. 2009)).

44   Id. (quoting 41 Am. Jur. 2d Indemnity § 1 (2005)).

45   Id.

46   Id.

47   Peak never argues in its Response that the Court should interpret the indemnity provision in the Brokerage Agreement as covering first-party indemnification. Rather, it only argues that [*19]  NBT’s claims against Peak constitute third-party litigation.

Peak also claims, however, that the indemnification provision requires Andy to indemnify Peak in its litigation with NBT. NBT, Peak claims, is a third-party. Indeed, NBT was not a party to the Broker-Carrier Agreement. But Andy argues that the indemnity provision in the Agreement does not cover Peak’s costs associated with NBT’s lawsuit, since NBT is only enforcing the rights assigned to it by Andy.

It is a “well-settled principle of contract law that a valid assignment gives the assignee neither greater nor lesser rights than those held by the assignor.”48 NBT is “stepping into Andy’s shoes,” and thus for the claims that NBT brings against Peak, NBT is acting as Andy. NBT purchased invoices representing payments owed by Peak to Andy, and for those invoices–the ones owned by NBT–Andy does not have the right to recover. Instead, Andy assigned its rights to NBT. In support of its contention that NBT is a third party, Peak contends that “Andy and NBT have conflicting interests.” While it is true that Andy does not control NBT’s actions, Andy and NBT do not have conflicting interests as to whether NBT pays the accounts. Both parties [*20]  want Peak to pay the entire amount of invoices that they allege remain open. These include the invoices allegedly payable to Andy and the invoices that Andy allegedly sold to NBT. Thus, under the specific facts of this case, NBT is a first party with respect to the indemnity agreement. Andy’s Motion for Partial Summary Judgment as to Peak’s contractual indemnity claims is GRANTED.

 

48   In re Marriage of Pettit, 626 N.E.2d 444, 447 (Ind. 1993).

 

b. Common-law Indemnity

Andy also seeks summary judgment on Peak’s common-law, or “implied-indemnity” claim. Peak argues that dismissing Peak’s implied indemnity claim would be premature because the Court has not ruled that Peak acted wrongfully in offsetting its alleged losses. But generally, Indiana law allows a party to bring an action for common-law indemnification only “in the absence of an express contractual or statutory right to indemnity.”49 As described in the previous section, the parties are subject to an indemnification provision in the Broker-Dealer Agreement. That provision only applies to third-party indemnity. Thus, in the current action, Peak must defend its own claim for its alleged loss of business. Andy’s Motion for Partial Summary Judgment as to common-law indemnity is GRANTED.50

 

49   INS Investigations Bureau, Inc. v. Lee, 784 N.E.2d 566, 575 (Ind. Ct. App. 2003); see also [*21]  41 Am. Jr. 2d Indemnity § 20 (“The law will not imply a right of indemnity where the parties have entered into a written contract with express indemnification provisions.”).

50   Andy’s Motion for Partial Summary Judgment only asks for a determination as a matter of law on the indemnity claims as they relate to Peak’s claims for lost profits. (Mem. in Supp. of Mot. for Partial Summ. J. 3-4, ECF No. 178-1). Thus, in this Order, the Court has not interpreted the indemnity provision in the Broker-Carrier Agreement as to Peak’s payment to Zappos for the deficit of $82,333.45 that was allegedly absorbed after Andy’s insurance paid $500,000.

 

III. Tort Claims

Peak makes two tort claims in its third-party complaint. It alleges (1) that Andy fraudulently misrepresented to Peak that it was implementing additional security measures, and (2) that Andy was negligent in failing to use reasonable care to prevent loss or damage to cargo in its possession. The economic loss doctrine applies to bar both claims.

 

A. Choice of Law

Before the Court can analyze the substance of Peak’s tort claims, it must determine which state’s law applies to the claims. A federal court sitting in diversity applies the choice-of-law [*22]  rules of the forum state.51 For tort cases, Tennessee follows the “most significant relationship” approach of the Restatement (Second) of Conflict of Laws.52 Under the approach, the law of the place of injury will normally apply unless another state has a more significant relationship to the occurrence and the parties.53 In analyzing the relationship, Tennessee courts take into account several contacts listed in Restatement section 145, which explains the guiding principles for torts.54 These contacts include (a) the place where the injury occurred, (b) the place where the conduct causing the injury occurred, (c) the domicile, residence, nationality, place of incorporation and place of business of the parties, and (d) the place where the relationship between the parties is centered.55 The Court considers all of the contacts “according to their relative importance with respect to the particular issue.”56

 

51   Montgomery v. Wyeth, 580 F.3d 455, 459 (6th Cir. 2009).

52   Messer Griesheim Indus. v. Cryotech of Kingsport, Inc., 131 S.W.3d 457, 474 (Tenn. Ct. App. 2003) (citing Hataway v. McKinley, 830 S.W.2d 53, 59 (Tenn. 1992)).

53   Other Restatement sections treat individual torts, providing a default rule for the specific tort in question. For example, for fraud and misrepresentation, section 148 provides that if the misrepresentation and the action in reliance occurred in the same state, that state’s law applies. Restatement (Second) of Conflict of Laws § 148(1). It then provides that, as here, [*23]  “if the plaintiff’s action in reliance [on the misrepresentation] took place in whole or in part in a state other than that where the false representations were made,” the forum is to consider other contacts. Id. § 148(2). The Court is unaware of any Tennessee court’s treatment of section 148, but courts appear to rely upon section 145’s general factors for most torts.

54   Gov’t Emps. Ins. Co. v. Bloodworth, No. M2003-02986-COA-R10-CV2007, 2007 Tenn. App. LEXIS 404, at *84 (Tenn. Ct. App. June 29, 2007).

55   Hataway, 830 S.W.2d at 59 (citing Restatement (Second) of Conflict of Laws § 145 (1971)).

56   Restatement (Second) of Conflict of Laws § 145 (1971).

First, the Court notes that the injury in question–Peak’s alleged losses as a result of Andy’s negligence and fraudulent misrepresentation–occurred in Indiana, which is also Peak’s place of business. Thus, unless a different state has a more significant relationship to the occurrence and the parties, Indiana law will apply. The conduct causing the injury–Andy’s alleged negligence in failing to implement security measures and its alleged fraudulent misstatement–occurred in California, Andy’s place of business. Most importantly, however, Indiana is the place where the parties’ relationship is centered.57 Both parties brief only Indiana law, a recognition of the importance of this last contact. The Court [*24]  thus holds that Indiana law applies to the tort claims, as Indiana is the state with the most significant relationship to the parties and to the occurrence.

 

57   Although this is not a contract action, the parties’ relationship is centered where the parties formed the Broker-Carrier Agreement–in Indiana. Furthermore, the Agreement provides that the laws of Indiana will apply in the event of dispute. The parties’ reliance on Indiana law as determinative of Peak’s tort and contract claims also gives weight to the Court’s application of the economic loss doctrine. See infra Part III.B.

 

B. Analysis

Before even reaching the substance of the two tort claims–negligence and fraudulent misrepresentation–the Court examines the economic loss doctrine under Indiana law as it did in ruling on Peak and Summitt’s Motion for Summary Judgment.58 Although Andy clearly sets forth its argument that purely economic damages are barred by the economic loss doctrine, Peak fails to address the argument in its response. The doctrine “precludes tort liability for purely economic loss–that is, pecuniary loss unaccompanied by any property damage or personal injury.”59 Under Indiana law, “[i]n the context of contract disputes, [*25]  the doctrine has been phrased as requiring that where a contract exists, the contract is the only available remedy.”60

 

58   Andy also argued that the Court should grant summary judgment on Peak’s fraudulent misrepresentation claim because the claim is not pled with sufficient particularity. The Court does not decide on this ground, but it does note that Andy answered Peak’s complaint without objecting to the sufficiency of its pleading under Rule 9(b). Almost two years later, Andy claims that Peak’s complaint does not plead with particularity.

59   Stender v. BAC Home Loans, No. 2:12-cv-41, 2013 U.S. Dist. LEXIS 30353, at *10 (N.D. Ind. Mar. 6, 2013) (citing Indianapolis-Marion Cnty. Pub. Library v. Charlier Clark & Linard, P.C., 929 N.E.2d 722, 727 (Ind. 2010)); see also supra note 43.

60   Id. (citing Thalheimer v. Halum, 973 N.E.2d 1145, 1151 (Ind. Ct. App. 2012)).

 

1. Fraudulent Misrepresentation

Indiana has firmly applied the doctrine to bar recovery of economic loss when the plaintiff sues for negligent misrepresentation, with some exceptions;61 it has never directly addressed whether it would apply the doctrine to a fraudulent misrepresentation claim alleging purely economic loss. Furthermore, “[i]n states adopting the economic loss rule, courts struggle with the questions of if, when, and how the economic loss rule should apply to claims arising out of a defendant’s fraudulent conduct.”62 Under Indiana law, however, applying the doctrine [*26]  to the specific facts of Peak’s fraudulent misrepresentation claim follows logically from the doctrine’s rationale.

 

61   See Indianapolis-Marion Cnty. Pub. Library, 929 N.E.2d at 742; see also Black’s Law Dictionary 531 (9th ed. 2009) (“Many states recognize an exception to this rule when the defendant commits fraud or negligent misrepresentation, or when a special relationship exists between the parties (such as an attorney-client relationship).”).

62   R. Joseph Barton, Drowning in a Sea of Contract: Application of the Economic Loss Rule to Fraud and Negligent Misrepresentation Claims, 41 Wm. & Mary L. Rev. 1789, 1790 (2000).

Peak alleges that Andy fraudulently misrepresented that it would honor additional security procedures imposed by Peak. Peak states that it relied on Andy’s misrepresentation and suffered economic damages as a result. Those damages include the loss that Peak absorbed when Andy’s insurance did not cover the full repayment of value of the stolen loads, as well as Peak’s alleged lost profits. Both of these losses are “economic”–“pecuniary loss unaccompanied by any property damage or personal injury (other than damage to the product or service itself).”63 In essence, Peak’s claim of fraudulent misrepresentation is a tort claim that coincides with Andy’s duties under the Broker-Carrier [*27]  Agreement. In other words, Andy’s alleged “breach” of a common-law duty is more adequately framed as an alleged breach of the Broker-Carrier Agreement, which is the real issue between the parties.64 Thus, the economic losses Peak alleges “are viewed as disappointed contractual or commercial expectations” and are barred by the economic loss doctrine.65 Andy’s Motion for Partial Summary Judgment as to Peak’s fraudulent misrepresentation claim is GRANTED.

 

63   Indianapolis-Marion Cnty. Pub. Library, 929 N.E.2d at 726.

64   Neither party chose to brief the court on the alleged misrepresentation’s effect on the Broker-Carrier Agreement, which defines the duties of the parties and states that the Broker-Carrier Agreement “supersedes all other agreements.” See Broker-Carrier Agreement ¶ 15.

65   Gunkel v. Renovations, Inc., 822 N.E.2d 150, 154 (Ind. 2005) (citing Am. United Logistics, Inc. v. Catellus Dev. Corp., 319 F.3d 921, 926 (7th Cir. 2003)).

 

2. Negligence

Peak alleges negligence because “Andy, by and through its agents, employees or representatives failed to act reasonably under the circumstances in allowing the loads to be stolen.”66 But, as noted previously, under Indiana law plaintiffs cannot recover purely economic losses caused by defendants’ negligence.67 The Supreme Court of Indiana makes it clear that this applies not just to products liability actions, but also to negligence actions in the context [*28]  of service agreements:

 

Indiana law under the Products Liability Act and under general negligence law is that damage from a defective product or service may be recoverable under a tort theory if the defect causes personal injury or damage to other property, but contract law governs damage to the product or service itself and purely economic loss arising from the failure of the product or service to perform as expected.68

 

 

The Broker-Carrier Agreement imposes the same duty of care on Andy that Peak wishes to impose through common-law negligence. As with its fraudulent misrepresentation claim, the alleged breach of this common-law duty is also an alleged breach of the Broker-Carrier Agreement: Andy “agrees to use reasonable care and due diligence in the protection of said goods and shipments.”69 Peak’s alleged economic losses, then, are better determined by the contractual rights of the parties. Andy’s Motion for Partial Summary Judgment as to Peak’s negligence claim is GRANTED.

 

66   Peak s Third-Party Compl. ¶ 46.

67   Indianapolis-Marion Cnty. Pub. Library, 929 N.E.2d at 726-27.

68   Gunkel, 822 N.E.2d at 153.

69   Broker-Carrier Agreement ¶ 20.

 

CONCLUSION

For the reasons stated, Andy’s Motion for Partial Summary Judgment is GRANTED IN PART, DENIED IN PART [*29] .

IT IS SO ORDERED.

/s/ S. Thomas Anderson

S. THOMAS ANDERSON

UNITED STATES DISTRICT JUDGE

Date: October 20, 2014.

ROYAL & SUN ALLIANCE INSURANCE PLC, Plaintiff, v. CASTOR TRANSPORT, LLC, et al., Defendants.

 

Case No. 13-cv-01811-BAS(DHB)

 

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF CALIFORNIA

 

2014 U.S. Dist. LEXIS 159901

 

 

November 13, 2014, Decided

November 13, 2014, Filed

 

 

COUNSEL:  [*1] For Royal & Sun Alliance Insurance PLC, Plaintiff: Dennis A Cammarano, LEAD ATTORNEY, Cammarano Law Group, Long Beach, CA.

 

For Castor Transport, LLC, Transportes Castores De Baja California S.A. de C.V., Defendants: William J Baker, LEAD ATTORNEY, Moreno and Associates, Chula Vista, CA.

 

JUDGES: Hon. Cynthia Bashant, United States District Judge.

 

OPINION BY: Cynthia Bashant

 

OPINION

 

ORDER: (1) GRANTING MOTION TO SET ASIDE DEFAULT (ECF NO. 31); AND (2) TERMINATING AS MOOT MOTION FOR DEFAULT JUDGMENT (ECF NO. 29)

On November 18, 2013, the Clerk of the Court entered default against Defendant Transportes Castores de Baja California S.A. de C.V. (“Defendant”) (ECF No. 12.) On May 30, 2014, Plaintiff Royal & Sun Alliance Insurance, Plc (“Plaintiff”) filed a motion for default judgment against Defendant. (ECF No. 29.) Defendant now moves to set aside the entry of default. (ECF No. 31.) Plaintiff opposes. (ECF No. 34.)

The Court finds these motions suitable for determination on the papers submitted and without oral argument. See Civ. L.R. 7.1(d)(1). For the following reasons, the Court (1) GRANTS Defendant’s motion to set aside the default; and (2) TERMINATES AS MOOT Plaintiff’s motion for default judgment.

 

I. BACKGROUND

Plaintiff commenced [*2]  this action on August 6, 2013 against Defendant and Castor Transport, LLC (“Castor Transport”) alleging non-delivery of cargo, negligence, breach of contract, and breach of bailment. (ECF No. 1 (“Compl.”.) On September 10, 2013, a summons was returned executed by Plaintiff as to Defendant. (ECF No. 6.) The Proof of Service of Summons stated that Plaintiff served Defendant on August 29, 2013 by means of substituted service by leaving the documents with or in the presence of Jonathan Arias. (Id. at 2.) Thereafter, Plaintiff mailed copies of the summons, complaint, civil case cover sheet, and notice of party with financial interest to Defendant c/o Jose L. Sanchez, 10031 Marconi Drive 3F, San Diego, CA 92154. (Id. at 2-3.) Defendant did not file a responsive pleading.

On November 14, 2013, Plaintiff requested that the Clerk of the Court enter default against Defendant. (ECF No. 11.) The Clerk entered default on November 18, 2013. (ECF No. 12.) On May 30, 2014, Plaintiff filed a motion for default judgment against Defendant. (ECF No. 29.) Thereafter, on July 17, 2014, Defendant moved to set aside the default. (ECF No. 31.)

 

II. LEGAL STANDARD

A federal court does not have jurisdiction over a defendant unless [*3]  the defendant has been served properly under Rule 4 of the Federal Rules of Civil Procedure. Direct Mail Specialists, Inc. v. Eclat Computerized Techs., Inc., 840 F.2d 685, 688 (9th Cir. 1988). “However, ‘Rule 4 is a flexible rule that should be liberally construed so long as a party receives sufficient notice of the complaint.'” Id. (quoting United Food & Commercial Workers Union v. Alpha Beta Co., 736 F.2d 1371, 1382 (9th Cir. 1984). “Nonetheless, without substantial compliance with Rule 4 neither actual notice nor simply naming the defendant in the complaint will provide personal jurisdiction.” Id. (citation and internal quotations omitted). “A general appearance or responsive pleading by a defendant that fails to dispute personal jurisdiction will waive any defect in service or personal jurisdiction.” Benny v. Pipes, 799 F.2d 489, 492 (9th Cir. 1986).

If a complaint is properly served, failure to make a timely answer or otherwise defend will justify entry of default. Fed. R. Civ. P. 55(a). Under Rule 55(c) of the Federal Rules of Civil Procedure, the court “may set aside an entry of default for good cause.” Fed. R. Civ. P. 55(c). The court’s good cause analysis considers the following three so-called “Falk factors”: “(1) whether the plaintiff will be prejudiced, (2) whether the defendant has [no] meritorious defense, and (3) whether culpable conduct of the defendant led to the default.” Brandt v. Am. Bankers Ins. Co. of Fla., 653 F.3d 1108, 1111 (9th Cir. 2011) (quoting Falk v. Allen, 739 F.2d 461, 463 (9th Cir. 1984)). These factors are disjunctive and a district court may deny a motion to set aside default if any of the three factors is true. Franchise Holding II, LLC v. Huntington Rests. Grp., Inc., 375 F.3d 922, 926 (9th Cir. 2004). Nonetheless, a district court is not, [*4]  as a matter of law, required to deny a motion to set aside entry of default upon a finding of any of the factors. See Brandt, 653 F.3d at 1111. The defendant moving to set aside default bears the burden of showing that any of these factors favor setting aside default. Id.

Notably, “[j]udgment by default is a drastic step appropriate only in extreme circumstances; a case should, whenever possible, be decided on the merits.” Falk, 739 F.2d at 463. Thus, “[w]here timely relief is sought from a default . . . and the movant has a meritorious defense, doubt, if any, should be resolved in favor of the motion to set aside the [default] so that cases may be decided on their merits.” Mendoza v. Wight Vineyard Mgmt., 783 F.2d 941, 945-46 (9th Cir. 1986) (quoting Schwab v. Bullock’s Inc., 508 F.2d 353, 355 (9th Cir.1974)). The court has broad discretion in setting aside entry of default. Id. at 945.

 

III. ANALYSIS

 

A. Jurisdiction

Defendant first argues that it was not validly served with the summons and complaint, and therefore this Court has no jurisdiction over Defendant and the default should be set aside. (ECF No. 31-2 at pp. 2, 5.) In its opposition, Plaintiff does not specifically address this contention. Rather, Plaintiff argues that Defendant and Castor Transport are closely related companies and Defendant was well aware of this lawsuit as early as September 11, 2013. (ECF No. 34 at pp. [*5]  1, 5-6.)

A court may set aside an entry of default because of improper service under Rule 4. See S.E.C. v. Internet Solutions for Bus. Inc., 509 F.3d 1161, 1165 (9th Cir. 2007) (“Internet Solutions”). However, a defendant moving to set aside entry of default based on improper service of process, where the defendant had actual notice of the original proceeding but delayed in bringing the motion until after entry of default, bears the burden of proving that service did not occur. Id.

 

1. General Appearance

As an initial matter, “[a] general appearance or responsive pleading by a defendant that fails to dispute personal jurisdiction will waive any defect in service or personal jurisdiction.” Benny, 799 F.2d at 492. “An appearance ordinarily is an overt act by which the party comes into court and submits to the jurisdiction of the court. This is an affirmative act involving knowledge of the suit and an intention to appear.” Id. (citation omitted).

Prior to entry of default, Plaintiff contends that individuals “representing themselves to be from [Defendant],” including Jose L. Sanchez, his son Luis Antonio Sanchez, and Defendant’s Mexico counsel, Victor Manuel Sanchez Quiroz, attended a meeting at his counsel’s office in Long Beach, California in which everyone in attendance discussed the facts of [*6]  the case and other matters relevant to the litigation on September 11, 2013. (ECF Nos. 34 at pp. 2, 5-6; 34-2 at ¶ 3.) While informal contacts have sufficed to constitute an appearance, this is true only when the party demonstrates a clear purpose to defend the suit. See Wilson v. Moore & Assocs., Inc., 564 F.2d 366, 368-69 (9th Cir. 1977).

Here, it is uncertain whether any of the individuals at the meeting actually represented Defendant. Plaintiff’s counsel contends that although he was not provided with their business cards, each of the four attendees indicated they were with Defendant. (ECF No. 34-2 at ¶ 3.) However, Defendant asserts that Jose L. Sanchez is a member of Castor Transport,1 an entirely separate company, and is not, and has never been, an officer or director of Defendant. (ECF No. 31-1 (“Sesma Decl.”)2 at ¶¶ 4-5.) Moreover, Defendant does not mention the meeting in support of its motion to set aside default. Rather Defendant, by means of a declaration from its corporate attorney and Secretary of the Counsel, contends that it first became aware of the lawsuit by means of a communication from Mr. Sanchez shortly prior to the Early Neutral Evaluation Conference (“ENE”), which occurred in March 2014. (Id. at ¶¶ 4-5; 23, 24.)3 Carlos Villgran [*7]  Cervantes, a corporate lawyer for Defendant, thereafter travelled to San Diego and observed the hearing. (Id.) Thus, who, if anyone, represented Defendant at the September 2013 meeting is unclear. Regardless, there is no indication that Defendant demonstrated a clear purpose to defend the suit during this meeting. There is no indication settlement discussions occurred. See Wilson, 564 F.2d at 368-69. Accordingly, the Court declines to find that Defendant made an appearance in this matter by attending this meeting thereby waiving any defects in service or personal jurisdiction.

 

1   The Court notes that Jose L. Sanchez has filed a declaration in this case stating that he was the owner of Castor Transport, which is a separate entity from Defendant and has a separate owner. (ECF No. 14 at Exh. 1.) The Court further notes that in the Order following the ENE held on March 17, 2014, Mr. Sanchez appeared as a representative of Castor Transport and not of Defendant. (ECF No. 24.)

2   Plaintiff filed an objection to Mr. Sesma’s declaration (ECF No. 35) and argued in its opposition that Mr. Sesma does not have firsthand knowledge of the facts asserted and that “[n]owhere in the declaration is any assertion that Mr. Sesma has firsthand knowledge [*8]  of the facts asserted.” (ECF No. 34 at p. 9.) However, Mr. Sesma states in paragraph 1 of his declaration that he has “personal knowledge of the facts stated in this declaration.” (Sesma Decl. at ¶ 1.) He further states that in preparing the declaration he relied upon his knowledge and review of Defendant’s business records, which he uses “in the normal course of [his] duties as attorney for [Defendant].” (Id. at ¶ 2.) The Court will therefore consider Mr. Sesma’s declaration and give it the weight the Court deems appropriate.

3   Defendant erroneously refers to May 2014, which the Court will construe as a mistake because Defendant affirmatively states it was aware of the lawsuit prior to the ENE which occurred in March 2014.

As noted above, Mr. Cervantes, a representative of Defendant appeared at the ENE, thus indicating actual knowledge of the lawsuit at least as early as March 17, 2014. (See ECF Nos. 23, 24.) By this time, however, default had already been entered against Defendant. Nonetheless, in determining whether there has been waiver of service, the Court also finds that Mr. Cervantes’ attendance at the ENE did not constitute an appearance. Defendant asserts that Mr. Cervantes participated [*9]  in the ENE simply as an observer and, although “the judge was gracious enough to provide him with a copy of the complaint,” Mr. Cervantes “made himself clear enough that he was not authorized to accept service of process on behalf of the corporation.” (Sesma Decl. at ¶ 10.) There is no assertion to the contrary. The Court therefore finds that Mr. Cervantes’ attendance did not manifest a clear purpose to defend the suit. See Benny, 799 F.2d at 492-93 (finding that contacts with the court, including filing motions to extend time to defend a suit, which do not manifest a clear purpose to defend do not constitute an appearance). Accordingly, the Court turns to whether service was properly effectuated pursuant to Rule 4.

 

2. Service

Federal Rule of Civil Procedure 4(h)(1) provides that a foreign corporation4 may be served:

 

(1) in a judicial district of the United States:

 

(A) in the manner prescribed by Rule 4(e)(1) for serving an individual; or

(B) by delivering a copy of the summons and of the complaint to an officer, a managing or general agent, or any other agent authorized by appointment or by law to receive service of process and–if the agent is one authorized by statute and the statute so requires–by also mailing a copy of each to the defendant….

 

 

 

 

Fed. R. Civ. P. 4(h)(1). “A signed return of [*10]  service constitutes prima facie evidence of valid service which can be overcome only by strong and convincing evidence.” Internet Solutions, 509 F.3d at 1166 (citation and quotations omitted). The burden cannot be met with a mere conclusory denial of service. Id. at 1167.

 

4   Plaintiff’s Complaint alleges that Defendant “was a foreign corporation organized under the laws of Mexico.” (Compl. at ¶ 3.) Defendant affirms that it is a business entity incorporated under the federal laws of Mexico and the State of Guanajuato, Mexico. (Sesma Decl. at ¶ 3.)

Federal Rule of Civil Procedure 4(e)(1) provides that an individual may be served in any judicial district of the United States by “following state law for serving summons in an action brought in courts of general jurisdiction in the state where the district is located or where service is made.” Fed. R. Civ. P. 4(e)(1). California law allows a party to effect service on a corporation by serving the person designated as agent for service of process or the “president, chief executive officer, or other head of the corporation, a vice president, a secretary or assistant secretary, a treasurer or assistant treasurer, a controller or chief financial officer, a general manager, or a person authorized by the corporation to receive service of process” by personal [*11]  delivery or by “leaving a copy of the summons and complaint during usual office hours in his or her office or, if no physical address is known, at his or her usual mailing address . . . with the person who is apparently in charge thereof, and by thereafter mailing a copy of the summons and complaint . . . to the person to be served at the place where a copy of the summons and complaint were left.” Cal. Code Civ. P. §§ 416.10, 415.10, 415.20(a). Rule 4(h)(1)(B) sets forth a similar standard. See Fed. R. Civ. P. 4(h)(1)(B).

Despite the language of Rule 4, however, service of process may also “be made upon a representative so integrated with the organization that he will know what to do with the papers. Generally, service is sufficient when made upon an individual who stands in such a position as to render it fair, reasonable and just to imply the authority on his part to receive service.” Direct Mail Specialists, Inc., 840 F.2d at 688 (quotations and citation omitted).

It does not appear Plaintiff has complied with these requirements. According to the Proof of Service of Summons, Plaintiff served the summons and complaint by leaving a copy of the summons and complaint at the office of Castor Transport in San Diego in the presence of Jonathan Arias and thereafter mailing a copy to Mr. Sanchez at the same office address [*12]  in San Diego. (ECF No. 11.) Defendant asserts that Mr. Sanchez and Mr. Arias have never been agents for service of process for Defendant, never been officers or directors of Defendant, and have never been authorized to accept service on behalf of Defendant. (Sesma Decl. at ¶ 4.) Defendant’s only registered agents for service of legal documents are Mario Cesar Guillen Sesma and/or Claudia Ivette Anzaldo Gallegos at Boulevard Jose Maria Morelos #2975, Colonia Alfaro, Leon, Guanajuato, Mexico. (Id. at ¶¶ 3, 7.) Defendant further asserts that Mr. Sanchez is a member of Castor Transport, Defendant has neither used nor maintained any office in California, and all of Defendant’s officers, directors, and employees live and work in Mexico. (Id. at ¶¶ 5, 10.)

Plaintiff does not dispute these assertions. Rather, Plaintiff contends that Mr. Sanchez represented himself as being “from” or “with” Defendant at the meeting in September 2013 (ECF Nos. 34 at p. 1; 34-2 at ¶ 3), used an email address purportedly associated with Defendant (ECF No. 34-2 at ¶¶ 8-9), and his signature block on an email identifies him as being with “Castores Tijuana” (id. at ¶ 9). This is insufficient to establish Mr. Sanchez [*13]  as an agent, officer or director, or person otherwise authorized to accept service on behalf of Defendant. While the Court recognizes the potential for Plaintiff’s confusion, there is nothing confirming that Mr. Sanchez is even an employee of Defendant, much less that it was fair, reasonable and just to imply Mr. Sanchez had the authority to receive legal service on behalf of Defendant. Accordingly, the Court finds that Defendant has not been served pursuant to Rule 4 and entry of default should be set aside. An analysis of the Falk Factors below further supports setting aside entry of default.

 

B. Falk Factors

 

1. Culpability

A defendant’s conduct is culpable if it has “received actual or constructive notice of the filing of the action and intentionally failed to answer.” TCI Grp. Life Ins. Plan v. Knoebber, 244 F.3d 691, 697 (9th Cir. 2001) (emphasis in original) (citation omitted), overruled in part on other grounds by Egelhoff v. Egelhoff ex rel. Breiner, 532 U.S. 141, 121 S. Ct. 1322, 149 L. Ed. 2d 264 (2001). The term “intentionally” does not mean a court can treat a defendant as culpable “simply for having made a conscious choice not to answer; rather, to treat a failure to answer as culpable, the movant must have acted with bad faith, such as an intention to take advantage of the opposing party, interfere with judicial decisionmaking, or otherwise [*14]  manipulate the legal process.” United States v. Signed Pers. Check No. 730 of Yubran S. Mesle, 615 F.3d 1085, 1092 (9th Cir. 2010) (“Mesle”) (internal quotations omitted). “Neglectful failure to answer as to which the defendant offers a credible, good faith explanation negating any intention to take advantage of the opposing party, interfere with judicial decision-making, or otherwise manipulate the legal process is not ‘intentional.'” TCI Grp., 244 F.3d at 697-98. Such conduct is not necessarily culpable or inexcusable, although it may be “once the equitable factors are considered.” Id.

Defendant argues its conduct is excusable because it was not aware of the lawsuit until March 2014. (ECF No. 31-2 at p. 5.) As discussed above, there is no confirmation that Defendant received a copy of the complaint and summons prior to the entry of default. Moreover, Defendant states that it was not aware that it was a defendant in this lawsuit prior to being informed of the ENE in early 2014. (Sesma Decl. at ¶ 10.) While Defendant was indisputably aware of the lawsuit, as well as the entry of default, in March 2014, and did not move to set aside the default until after a motion for default judgment was filed in May 2014, Defendant has maintained the reasonable position that [*15]  it was never served. Arguably, Defendant should have sought to set aside the entry of default shortly after the ENE. However, there is no indication that Defendant has acted with bad faith or attempted to avoid service or otherwise manipulate the legal process. Accordingly, the Court finds Defendant’s conduct did not lead to the default.

 

2. Meritorious Defense

The underlying concern of this factor “is to determine whether there is some possibility that the outcome of the suit after a full trial will be contrary to the result achieved by the default.” Haw. Carpenters’ Trust Funds v. Stone, 794 F.2d 508, 513 (9th Cir. 1986). The party in default is therefore required to make “some showing of a meritorious defense.” Id. Notably, “the standards for setting aside entry of default under Rule 55(c) are less rigorous than those for setting aside a default.” Id.

The Complaint seeks damages related to two truck accidents in Mexico which occurred while the trucks were carrying irrigation systems owned by John Deere Water, Inc. (“John Deere”) from the United States to Mexico. (Compl. at ¶¶ 6-12.) Plaintiff insured John Deere against the loss and, having paid the losses for the cargo, is seeking recovery, as a subrogee, of the amounts it paid. (Id. at ¶ 1.) Plaintiff alleges causes [*16]  of action for non-delivery of cargo, negligence, breach of contract, and breach of bailment. (Id. at ¶¶ 1-22.)

Defendant does not dispute that it was the carrier of the John Deere freight damaged in Mexico. (Sesma Decl. at ¶ 13.) Rather, it asserts the following defenses: (1) no valid service of process; (2) no personal jurisdiction; (3) Mexican law applies to this case; (4) John Deere was at fault for the accidents through its negligent loading of the freight; and (5) John Deere apparently recovered its merchandise so it is not clear whether it suffered any damages at all. (ECF No. 31-2 at p. 7.)

In support of its first three defenses, Defendant contends that, as required by law, it only operates in the country of Mexico and does not do business in California. (Sesma Decl. at ¶ 6.) Therefore, it works together with Castor Transport “in a symbiotic business relationship” whereby Castor Transport handles transport in the United States and Defendant handles transport in Mexico. (Id.) Defendant further argues, without citation, that all carriers transporting freight in Mexico are subject to the laws and regulations of Mexico. (Id. at ¶ 13.) Defendant also contends that “[i]t appears that improperly [*17]  loaded containers were the cause of both accidents” and John Deere loaded both truck containers. (Id.) Lastly, Defendant contends that John Deere “apparently recovered some or all of their freight,” thus the amount Plaintiff is seeking is too high. (Id.)

The Court finds at least some of these defenses to be potentially meritorious. Notably, the Court previously granted a motion to dismiss the claims for non-delivery of cargo under the Carmack Amendment, 49 U.S.C. § 14706, et seq., filed by Castor Transport because the complaint “provides an insufficient factual basis to reasonably draw an inference” that the Carmack Amendment applies. (ECF No. 16.) The Carmack Amendment provides jurisdiction over motor carrier liability for transportation between “the United States and a place in a foreign country to the extent the transportation is in the United States.” 49 U.S.C. § 13501(1)(E); see also Project Hope v. M/V IBN SINA, 250 F.3d 67, 75 (2d. Cir. 2001) (“[I]f the final intended destination at the time the shipment begins is a foreign nation, the Carmack Amendment applies throughout the entire portion of the shipment taking place within the United States, including intrastate legs of the shipment.”).

Liability is imposed under the Carmack Amendment, in relevant part, as follows:

 

[A] carrier and any other carrier that delivers … property and is providing transportation or service subject [*18]  to jurisdiction under [49 U.S.C. § 13501] are liable to the person entitled to recover under the receipt or bill of lading. The liability imposed … is for the actual loss or injury to the property caused by (A) the receiving carrier, (B) the delivering carrier, or (C) another carrier over whose line or route the property is transported in the United States or from a place in the United States to a place in an adjacent foreign country when transported under a through bill of lading ….

 

 

49 U.S.C. § 14706(a)(1). “A bill of lading is a contract between the carrier and the shipper.” OneBeacon Ins. Co. v. Haas Indus., Inc., 634 F.3d 1092, 1098 (9th Cir. 2011). A through bill of lading is a bill of lading “that covers the entire shipment from the point of origin to destination, even though different carriers may be used to perform various segments of the shipment.” N. Marine Underwriters, Ltd. v. FBI Express, Inc., 2009 U.S. Dist. LEXIS 126741, 2009 WL 7326068, at *3 (S.D. Tex. Apr. 20, 2009) (citing Commercial Union Ins. Co. v. Sea Harvest Seafood Co., 251 F.3d 1294, 1302 (10th Cir. 2001); Mapfre Tepeyac, SA v. Robbins Motor Transp., Inc., 2006 U.S. Dist. LEXIS 90000, 2006 WL 3694502, at *3 (S.D.Tex. Dec.13, 2006)). Whether a particular document is a through bill of lading is a question of fact. Union Pac. R.R. Co. v. Greentree Transp. Trucking Co., 293 F.3d 120, 127 (3rd Cir. 2002).

Even if the Carmack Amendment applies, however, a carrier is not liable for damages if it can show that the damage was caused by “(a) the act of God; (b) the public enemy; (c) the act of the shipper himself; (d) public authority; (e) or the inherent vice or nature of the goods.” Mo. Pac. Co. v. Elmore & Stahl, 377 U.S. 134, 137, 84 S. Ct. 1142, 12 L. Ed. 2d 194 (1964); see also Ward v. Allied Van Lines, Inc., 231 F.3d 135, 139-40 (4th Cir. 2000).

Here, in granting Castor Transport’s motion to dismiss the Carmack Amendment claim, the Court [*19]  noted as follows:

 

Although the complaint does not foreclose an inference that Castor [Transport] is liable for the loss under the Carmack Amendment, it provides an insufficient factual basis to reasonably draw such an inference, as both Defendants are lumped together, and the involvement of each Defendant is not distinguished from the other with respect to such relevant facts as identity of the contracting parties, any bills of lading, cargo loading, or possession of cargo at the time of the accidents.

 

 

(ECF No. 16 at p. 3, lines 10-14.) These issues remain unclear. Accordingly, the Court finds that Defendant has made some showing of a meritorious defense.

 

3. Prejudice

Prejudice is determined by whether Plaintiff’s ability to pursue its claim will be hindered. See Knoebber, 244 F.3d at 701 (citing Falk, 739 F.2d at 463). “To be prejudicial, the setting aside of a judgment must result in greater harm than simply delaying resolution of the case.” Id. Rather, “the delay must result in tangible harm such as loss of evidence, increased difficulties of discovery, or greater opportunity for fraud or collusion.” Id. (quoting Thompson v. Am. Home Assurance Co., 95 F.3d 429, 433-34 (6th Cir. 1996)). Being forced to litigate on the merits cannot be considered prejudicial for purposes of removing entry of default. Id. Vacating the [*20]  entry of default “merely restores the parties to an even footing in the litigation.” Id.

Plaintiff argues that it will be prejudiced because “[h]ad [Defendant] appeared in the case, Plaintiff’s decision whether to amend its complaint or proceed on its remaining causes of action may have been different.” (ECF No. 34 at p. 7, lines 19-21.) Plaintiff further argues that it has had no opportunity to request discovery from Defendant as the discovery cutoff date was October 31, 2014, and the deadline to disclose expert witnesses was August 22, 2014. (Id. at pp. 7-8.) Given that the Court is amenable to modifying the Scheduling Order issued in this case to allow Plaintiff to amend its complaint and conduct discovery as necessary, the Court finds that Plaintiff’s ability to pursue its claim will not be hindered and therefore there will be no prejudice to Plaintiff caused by setting aside the entry of default.

 

IV. CONCLUSION

For the foregoing reasons, the Court GRANTS Defendant’s motion to set aside the entry of default (ECF No. 31). The Court also TERMINATES AS MOOT Plaintiff’s motion for default judgment (ECF No. 29). The Court further ORDERS as follows:

1. Plaintiff shall serve Defendant within thirty (30) days [*21]  of the date of this Order.

IT IS SO ORDERED.

DATED: November 13, 2014

/s/ Cynthia Bashant

Hon. Cynthia Bashant

United States District Judge