Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-casd-3_11-cv-00358/USCOURTS-casd-3_11-cv-00358-1/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Other Contract

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FILED 

SEP 2 0 1011 I 

CLERK, U.S. DISTRICT COURT 

SOUTHERN DISTRI T OF CALIFORNIA 

BY DEPUTY 

UNITED STATES DISTRICT COURT 

SOUTHERN DISTRICT OF CALIFORNIA 

RANCHO MOUNTAIN PROPERTIES, 

INC., 

Plaintiff, 

vs. 

RAY GRAY and LINDA GRAY, 

Defendants. 

CASE NO. ll-CV-00358 BEN (BLM) 

ORDER DENYING MOTION TO 

VACATE DEFAULT AGAINST 

DEFENDANT LINDA GRAY 

[Docket No. 17] 

Presently before the Court is Defendant Linda Gray's Motion to Vacate Default Against 

Defendant Linda Gray. (Docket No. 17.) For the reasons stated below, the Motion is DENIED. 

BACKGROUND 

This action arises from a guaranty executed by Defendants Ray Gray and Linda Grayl (husband 

and wife) to secure the purchase of real property located in Paciences, California, by Pfau, Pfau & 

Pfau, LLC ("Pfau"). On August 28, 2006, Pfau entered into a loan with CMR Mortgage Fund II, LLC 

("CMR II") for the purpose of acquiring land and developing residential lots. (Compl. ~~ 7,8.) The 

loan was secured by liens on real property located in San Diego, Fresno, and San Benito Counties. (Id 

~ 11.) CMR II loaned $19,500,000 in principal to Pfau. (Id ~ 9.) Defendants made, executed, and 

delivered a General Guaranty and Indemnity Agreement ("Guaranty") pursuant to which Defendants 

guaranteed "the punctual payment when due, whether at stated maturity, by acceleration or otherwise, 

1 Although Defendants claim to be proceeding pro se, Attorney James N. Maynard is listed 

as the attorney to be noticed on the docket. 

- 1 - llcv00358 

Case 3:11-cv-00358-BEN-BLM Document 21 Filed 09/20/11 Page 1 of 4
1 ofall of[Pfau 's] indebtedness, obligations and liabilities to the Lender." (PI. Opp., Exh. A [Guaranty], 

2 at 12.) 

3 Pfau's and Defendants' obligations under the loan and related Guaranty were assigned by CMR 

4 II to ING USA Annuity and Life Insurance Company, which assigned the obligations to Lion II 

5 Customs Investments, LLC, which then assigned the obligations to Plaintiff. (ld., 14.) Starting on 

6 July 1, 2008, Pfau failed to make timely interest payments, thereby constituting a default under the 

7 loan. (ld., 15.) On December 16,2008, Pfau filed for bankruptcy. (PI. RJN, Exh. A [Chapter 11 

8 Petition].)2 

9 On February 18,2011, Plaintiffinitiated this action to recover amounts due under the Guaranty, 

10 as a result of Pfau's default. After foreclosing on certain secured property, Plaintiff claims that 

11 $10,941,369.47 is still due from Pfau and, thus, Defendants. (CompI., 19.) Plaintiff personally 

12 served Ray Gray on February 22, 2011. (Docket No. 13.) Plaintiff served Linda Gray on April 19, 

13 2011 by sending a copy ofthe summons andcomplaintto (1) P.O. Box 538, Fallbrook, CA 92088 by 

14 regular mail and (2) 2656 Vista de Palomar, Fallbrook, CA 92028 by registered mail, return receipt 

15 requested. (Docket No. 14.) Ray Gray filed amotion to dismiss, which was denied on June 15,2011. 

16 As Linda Gray did not appear or otherwise respond to the complaint, Plaintiff requested an entry of 

17 default against Linda Gray on June 24, 2011. (Docket No. 15.) The Clerk entered the requested 

18 default three days later. (Docket No. 16.) 

19 Presently before the Court is Linda Gray's Motion to Vacate Entry of Default. Linda Gray 

20 argues that the Guaranty provides for service by registered mail, return receipt requested, but the proof 

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2 Plaintiff requests that the Court take judicial notice of two court documents filed in Piau, 

2S Piau & Piau, LLC v. Rancho Mountain Properties, Inc. (In re Piau, Piau & Piau, LLC), Case No. 

08-12840-PBl1 (Bankr. S.D. CaL): (1) the Chapter 11 Petition filed by Pfau, Pfau & Pfau, LLC, 26 filed on December 16,2008 and (2) the Order on Motion to Dissolve filed on December 22, 2010. 

The Court GRANTS this request for judicial notice, but only for purposes ofnoticing the existence 

27 ofthe action and the claims made therein. See In re Bare Escentuals, Inc. Sec. Litig., 745 F. Supp. 

2d 1052, 1067 (N.D. Cal. 2010) ("[T]he court may take judicial notice of the existence of unrelated 

28 court documents, although it will not take judicial notice of such documents for the truth of the 

matter asserted therein."). 

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of service indicates that she was served by regular mail? Linda Gray argues that as a result, she did 

not receive notice of this lawsuit. Plaintiff opposed the Motion. Linda Gray did not file a reply to 

Plaintiff s opposition. The Court took the Motion under submission without oral argument, pursuant 

to Local Civil Rule 7.1.d. 

DISCUSSION 

A court has the power to set aside entry ofdefault "for good cause." FED. R. CIV. P. 55( c). In 

determining whether "good cause" exists, courts consider: "whether the defendant's culpable conduct 

led to the default; whether the defendant has a meritorious defense; and whether reopening the default 

judgment4 would prejudice the plaintiff." TCI Group Life Ins. Plan v. Knoebber, 244 F.3d 691,696 

(9th Cir. 2001). The party seeking to set aside an entry of default bears the burden ofdemonstrating 

that all three ofthese factors favor vacating default. Id 

The Court will consider whether Linda Gray has a meritorious defense. "A defendant seeking 

to vacate a default judgment must present specific facts that would constitute a defense." Id at 700. 

A "mere general denial without facts to support it" is insufficient to show a meritorious defense. 

Madsen v. Bumb, 419 F.2d 4, 6 (9th Cir. 1969). 

First, Linda Gray argues that "foreclosures undertaken by the plaintiff violate controlling 

California law and, therefore, no moneys are due under the guaranty sued upon." (Def. Mot. at 6.) 

Linda Gray, however, does not offer specific facts detailing how the foreclosure was unlawful. In 

addition, Plaintiff was not required to foreclose on the underlying property before suing under the 

Guaranty. (PI. Opp., Exh. A [Guaranty], at 15 ("The Lender may collect from Guarantor without first 

foreclosing on any real or personal property collateral pledged by Borrower.").) The legal status ofthe 

foreclosure, therefore, is irrelevant to whether Linda Gray is obligated to pay Pfau's unpaid debts to 

Plaintiff. 

Second, Linda Gray argues that "the broad waivers in the guaranty, apparently including a 

3 Although Linda Gray was served by regular mail at P.O. Box 538, Fallbrook, CA 92088, 

she was served by registered mail at 2656 Vista de Palomar, Fallbrook, CA 92028. (Docket No. 

14.) 

4 The standard that governs vacating a default judgment under Rule 60(b) is the same as the 

standard that governs vacating an entry ofdefault under Rule 55(c). TCI, 244 F.3d at 696. 

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waiver of bankruptcy protection, present a substantial issue as to whether the guaranty is 

unconscionable or violates California Business and Professions Code section 17200, which prohibits 

practices that are 'unfair,' 'unlawful' or 'fraudulent.'" (Def. Mot. at 7.) Although Linda Gray does not 

cite to a specific provision of the Guaranty, it appears that she is referring to Section 5( d), which 

provides that the Guarantor waives: 

Any defense based on: (1) any legal disability ofBorrower, (ii) any release, discharge, 

modification, impairment or limitation ofthe liability of Borrower to the Lender from 

any cause, whether consented to by the Lender or arising by operation oflaw or from 

any bankruptcy or other voluntary or involuntary proceeding, in or out ofcourt, for the 

adjustment ofdebtor-creditor relationships (hereinafter, an "Insolvency Proceeding") 

and (iii) any rejection or disaffirmance of the Loan, or any part of it, or any security 

held for it, in any such Insolvency Proceeding. 

(PI. Opp., Exh. A [Guaranty), at 14 (emphasis added).) 

This provision ofthe Guaranty provides that ifPfau is discharged in bankruptcy, this will not 

provide Defendants a defense to payment of the Guaranty. Under California law, a guarantor 

"promise[s) 'to answer for the debt, default, or miscarriage of another.'" In re Steve's Furniture 

Warehouse, Inc., 46 B.R. 80, 82 (Bankr. S.D. Cal. 1985) (quoting CAL. CIV. CODE § 2787). To hold 

that the provision at issue here is unconscionable would be contrary to a guarantor's function to answer 

for the default ofthe borrower. Linda Gray does not cite, nor is the Court aware, ofany case that holds 

otherwise. 

Accordingly, Linda Gray has not shown that she has a meritorious defense. As this factor is 

dispositive, the other two factors need not be addressed. 

CONCLUSION 

For the reasons set forth above, Defendant Linda Gray's Motion to Vacate Default is DENIED. 

. Z 

es District Court Judge 

-4- IIcv00358 

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