Wandel v. Gao

Background

Katherine Wandel brought this securities action individually and on behalf of similarly situated people, alleging violations of the Securities Act of 1933 involving Phoenix Tree Holdings Limited’s initial public offering. The complaint named Wenbiao Li, who was alleged to have been one of Phoenix Tree’s directors during the offering, along with other individuals and entities.

The plaintiffs attempted to serve Li at a residence in Fremont, California, in late December 2020. After four unsuccessful attempts, the process server left the papers with a woman identified as “Jane Doe,” described as approximately 70 years old. Li did not respond to the complaint or amended complaint, and the clerk entered a certificate of default against him on May 24, 2021. Li moved to vacate the default less than two weeks later.

Service of Process

Li submitted a sworn declaration stating that he had not been to, or lived at, the California address for the previous 12 years and instead lived in China. He said the property belonged to his former wife, to whom he had deeded his interest, and that he had never received papers related to the case.

The plaintiffs relied on the process server’s affidavit and argued that property records showed Li still co-owned the California address. They also argued that Li’s mortgage payments and an incomplete attachment to the grant deed created questions about whether he had actually stopped residing there.

The court explained that proper service is generally required for personal jurisdiction over a defendant. Service on an individual may be made personally, at the person’s dwelling or usual residence with a suitable resident, through an authorized agent, or as permitted by state law. Although the process server’s affidavit initially created a presumption that service was proper, Li’s sworn denial rebutted that presumption. The court found that his denial, the divorce decree, and the grant deed presented a conflicting but plausible account showing that the California address may not have been his residence when service was attempted.

The court held that Li had adequately challenged service and that this independently justified vacating the entry of default. It also rejected the plaintiffs’ request for discovery and an evidentiary hearing at this stage. The court reasoned that a hearing was not necessary because it was vacating, rather than imposing, a default.

Good Cause Under Rule 55(c)

The court separately held that good cause supported vacating the default under Federal Rule of Civil Procedure 55(c). Courts consider whether the default was willful, whether vacating it would prejudice the opposing party, and whether the defendant has presented a potentially meritorious defense.

First, the court found that Li’s default was not willful. The plaintiffs speculated that Li knew about the lawsuit because he had been a Phoenix Tree director and the case had received publicity, but they offered no evidence that he had actually learned about the case before the default. His motion was filed less than two weeks after the default was entered, which strongly suggested that he had not deliberately failed to respond.

Second, the court found little indication of prejudice to the plaintiffs. Discovery had not begun, and the plaintiffs did not show that vacating the default would cause the loss of evidence, make discovery more difficult, or increase the risk of fraud or collusion. The possibility of delay and additional expense from serving Li in China was insufficient by itself to establish prejudice.

Third, the court found that Li had offered potential defenses that went beyond conclusory denials. He appeared prepared to join some defenses raised by other defendants, including an argument that the complaint did not allege an actionable misstatement or omission because the defendants could not have predicted the course of the COVID-19 pandemic. He also identified facts that might support dismissal for lack of personal jurisdiction.

Ruling

The court granted Defendant Wenbiao Li’s motion to vacate the entry of default and directed the clerk to vacate the default entered at ECF No. 67. The order did not decide whether the plaintiffs’ securities claims against Li would succeed, and it did not enter a default judgment against him.