michael b. lubic (sbn 122591) kevin s. asfour (sbn 228993)€¦ · v. new target investments...

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NOTICE OF MOTION AND MOTION OF NEW TARGET TO SET ASIDE ENTRY OF DEFAULT

MICHAEL B. LUBIC (SBN 122591) KEVIN S. ASFOUR (SBN 228993) K&L GATES LLP 10100 Santa Monica Boulevard, Eighth Floor Los Angeles, California 90067 Telephone: 310.552.5000 Facsimile: 310.552.5001 Email: [email protected] [email protected] Attorneys for New Target Investments Limited

UNITED STATES BANKRUPTCY COURT

CENTRAL DISTRICT OF CALIFORNIA

LOS ANGELES DIVISION In re ZETTA JET USA, INC., a California corporation,

Debtor and Debtor in Possession.

Lead Case No. 2:17-bk-21386-SK Jointly Administered With: 2:17-bk-21387-SK (Zetta Jet PTE, Ltd., a Singaporean corporation) Chapter 7 Adv. Proc. No. 2:18-ap-01340-SK NOTICE OF MOTION AND MOTION OF NEW TARGET INVESTMENTS LIMITED TO SET ASIDE ENTRY OF DEFAULT; MEMORANDUM OF POINTS AND AUTHORITIES; AND DECLARATIONS OF CHAN YU YING AND MICHAEL B. LUBIC IN SUPPORT THEREOF [Relates to Docket No. 18] Date: March 13, 2019 Time: 9:00 a.m. Place: Courtroom 1575 255 East Temple Street Los Angeles, CA 90012

In re ZETTA JET PTE, LTD., a Singaporean corporation,

Debtor and Debtor in Possession.

JONATHAN D. KING, solely in his capacity as Chapter 7 Trustee of Zetta Jet USA, Inc. and Zetta Jet PTE, Ltd.,

Plaintiff,

v. NEW TARGET INVESTMENTS LIMITED, KEBO WU, DU YAN, GUOYUE (GRACE) HUANG, FOK KIN NING, LINKAGE ACCESS LIMITED, MISAKI GO, and JOHN DOE CORPORATION,

Defendants.

Case 2:18-ap-01340-SK Doc 23 Filed 02/15/19 Entered 02/15/19 18:36:10 Desc Main Document of 25

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1 NOTICE OF MOTION AND MOTION OF NEW TARGET TO SET ASIDE ENTRY OF DEFAULT

TO THE HONORABLE SANDRA R. KLEIN, UNITED STATES BANKRUPTCY

JUDGE; AND JONATHAN D. KING AS CHAPTER 7 TRUSTEE:

PLEASE TAKE NOTICE that on March 13, 2018 at 9:00 a.m., or as soon thereafter as the

matter may be heard, in Courtroom 1575 of the United States Bankruptcy Court located at 255 E

Temple Street, Los Angeles, CA 90012, defendant New Target Investments Limited (“New Target”)1

by and through its undersigned counsel, shall and hereby does move, pursuant to Fed. R. Bankr. P.

7012 and 7055, for an order setting aside entry of default (the “Motion”).

This Motion is supported by this Notice of Motion and Motion, the Memorandum of Points

and Authorities, and the Declarations of Chan Yu Ying and Michael B. Lubic filed concurrently with

this Motion, all pleadings and records on file in this case, and all evidence offered and arguments

made at or before any hearing on this Motion.

PLEASE TAKE FURTHER NOTICE that, pursuant to Local Bankruptcy Rule 9013-1(f),

any party wishing to oppose this Motion must file and serve a written response at least fourteen (14)

days prior to the hearing on this Motion. You must file your opposition with the clerk of the United

States Bankruptcy Court located at 255 E. Temple St., Los Angeles, California 90012. You must also

serve a copy of your opposition to the Motion upon counsel for the movants at the mailing address

indicated in the upper left-hand corner of the first page of this Motion, and upon the Office of the

United States Trustee located at 725 S. Figueroa St., 26th Floor, Los Angeles, California 90017. Any

failure to timely file and serve oppositions may result in any such oppositions being waived, and the

Court may enter an order granting the Motion without further notice.

1 New Target, by bringing this Motion, does not waive any defenses it has to the claims asserted by the Trustee and specifically preserves the right to assert any and all available defenses including the defenses set forth in Fed. R. Civ. P. 12(b)(1)-(7), including, without limitation, lack of personal jurisdiction, lack of subject matter jurisdiction, insufficient process, and insufficient service of process.


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WHEREFORE, New Target requests this Court enter an order:

1 Setting aside entry of default; and

2. For such other relief as is appropriate.

Respectfully submitted,

Michael B. Lubic Kevin Asfour K&L GATES LLP

Dated: February 15, 2019 By: /s/ Michael B. Lubic Michael B. Lubic

Attorneys for New Target Investments Limited


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i NOTICE OF MOTION AND MOTION OF NEW TARGET TO SET ASIDE ENTRY OF DEFAULT

TABLE OF CONTENTS

Page

I. INTRODUCTION ..................................................................................................................... 1

II. STATEMENT OF FACTS ........................................................................................................ 1

A. Zetta’s Scheme to Defraud New Target: The Jet Sale Transaction ................................2

B. Adversity to Cassidy; Transfer of Yacht in Partial Satisfaction of Personal Guaranties .......................................................................................................................2

C. The Trustee Commences this Adversary Proceeding .....................................................3

D. The Trustee Allegedly Serves New Target and Obtains Entry of its Default .................4

E. Related Proceedings in Australia ....................................................................................6

III. LEGAL ARGUMENT ............................................................................................................... 6

A. The Summons Did Not Comply with Fed. R. Bankr. P. 7012(a) and the Resultant Default is Invalid .............................................................................................................7

B. No Culpable Conduct Led to the Default ........................................................................9

C. New Target has Numerous Meritorious Defenses ..........................................................9

1. Insufficient Process and Service of Process ......................................................10

2. Fraudulent Transfer Laws Do Not Apply Extraterritorially .............................11

3. The Trustee’s Claims Are Barred by the Doctrine of Res Judicata ..................13

4. Trustee Seeks to Impermissibly Extend Doctrine of Alter Ego ........................15

5. The Trustee’s Complaint Fails to State a Claim for Violation of the Automatic Stay; Avoidance of Postpetition Transfer; and Turnover of Estate Property ..................................................................................................16

D. Plaintiff is Not Prejudiced by a Decision to Set Aside the Order of Default ................17

IV. CONCLUSION ........................................................................................................................ 18


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TABLE OF AUTHORITIES

Page(s)

Cases

Barclay v. Swiss Fin. Corp. Ltd. (In re Bankr. Estate of Midland Euro Exch. Inc.), 347 B.R. 708 (Bankr. C.D. Cal. 2006) ......................................................................................11, 12

Clark v. Bear Sterns & Co., Inc., 966 F.2d 1318 (9th Cir. 1992) ...................................................................................................14, 15

Cline v. Reetz-Laiolo, 329 F. Supp. 3d 1000 (N.D. Cal. June 28, 2018) ............................................................................13

Dependable Highway Exp., Inc. v. Navigators Ins. Co., 498 F.3d 1059 (9th Cir. 2007) .........................................................................................................14

Direct Mail Specialists v. Eclat Computerized Technologies., Inc., 840 F.2d 685 (9th Cir. 1988) ...........................................................................................................10

FOC Fin. Ltd. P’ship v. Nat’l City Commercial Capital Corp., 612 F. Supp. 2d 1080 (D. Ariz. 2009) ...............................................................................................7

Frisby Technologies, Inc., 2003 WL 22127904 (Bankr. M.D.N.C. Sept. 15, 2003) ..............................8

Greiling v. Zahoudanis, 2009 WL 700049 (C.D. Cal. March 13, 2009) .........................................................................15, 16

Haw. Carpenters’ Trust Funds v. Stone, 794 F.2d 508 (9th Cir. 1986) .............................................................................................................7

Hennessey’s Tavern, Inc. v. American Air Filter Co., Inc., 204 Cal. App. 3d 1351 (1988) .........................................................................................................15

Hilton v. Guyot, 159 U.S. 113 202-03 (1895) ............................................................................................................14

In re Beck, No. 11-6633, 2011 WL 4623937 (Bankr. D. Ariz. Sep. 29, 2011) ...................................................7

In re International Nutronics, Inc., 28 F.3d 965 (9th Cir. 1994) .............................................................................................................13

In re Metcalfe & Mansfield Alternative Investments, 421 B.R. 685 (Bankr. S.D.N.Y. 2010) ............................................................................................14

In re Stone, 588 F.2d 1316 (10th Cir. 1978) .......................................................................................................10


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Kenneally v. Bank of Nova Scotia, 711 F. Supp. 2d 1174 (S.D. Cal. 2010) ...........................................................................................13

LaMonica v. CEVA Group PLC (In re CIL Ltd.), 582 B.R. 46 (Bankr. S.D.N.Y. 2018) ..............................................................................................12

MacLeod v. Tribune Publ’g Co., Inc. 52 Cal.2d 536, 343 P.2d 36 (1959) .................................................................................................18

Maxwell Commc’n Corp. PLC v. Societe Gen. PLC (In re Maxwell Commc’n Corp. PLC), 186 B.R. 807 (S.D.N.Y. 1995), aff’d on other grounds, 93 F.3d 1036 (2d Cir. 1996) ...............................................................................................................................................12

Mendoza v. Wight Vineyard Mgmt., 783 F.2d 941 (9th Cir. 1986) .............................................................................................................7

Microsoft Corp v. AT&T Corp., 550 U.S. 437, 127 S. Ct. 1746 (2007) .............................................................................................11

Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247, 130 S. Ct. 2869 (2010) .............................................................................................11

Nobel Sys., Inc. v. Celartem, Inc., 2013 WL 12147585 (C.D. Cal. July 22, 2013) .....................................................................9, 10, 17

Postal Instant Press, Inc. v. Kaswa, Corp., 162 Cal. App. 4th 1510, 77 Cal. Rptr. 3d 96 (Ct. App. 2008) ........................................................16

Re: Summons, Complaint and Instructions on New Target Investments Limited (Dkt. No. 5) .......................................................................................................................................4

RJR Nabisco, Inc. v. European Community, 136 S. Ct. 2090 (2016) ..............................................................................................................11, 12

Sec. Investor Prot. Corp. v. BLMIS (In re BLMIS), 513 B.R. 222 (S.D.N.Y. 2014) ........................................................................................................12

SEC v. Hickey, 322 F.3d 1123 (9th Cir. 2003) .........................................................................................................15

Smith v. Los Angeles Bookbinders Union No.63, 133 Cal. App. 2d 486, 284 P.2d 194 (1955) ...................................................................................18

Subafilms, Ltd. v. MGM-Pathe Commc’ns Co., 24 F.3d 1088 (9th Cir. 1994) ...........................................................................................................12

TCI Group Life Ins. Plan v. Knoebber, 244 F.3d 691 (9th Cir. 2001) (reversed on other grounds) .....................................................7, 9, 17


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U.S. v. Bhatia, 545 F.3d 757 (9th Cir. 2008) ...........................................................................................................13

United States v. Signed Personal Check No. 730 of Yubran S. Mesle, 615 F.3d 1085 (9th Cir. 2010) .......................................................................................................6, 9

Wasson v. Riverside County, 237 F.R.D. 423 (C.D. Cal. 2006) ....................................................................................................10

Statutes

11 U.S.C. § 362 .....................................................................................................................3, 13, 15, 16

11 U.S.C. § 362(a)(3) ............................................................................................................................16

11 U.S.C. § 502(d) ..................................................................................................................................3

11 U.S.C. § 541(a) ..................................................................................................................................3

11 U.S.C. § 541(d) ..................................................................................................................................3

11 U.S.C. § 542(a) ..................................................................................................................................3

11 U.S.C. § 548 ...............................................................................................................................11, 12

11 U.S.C. § 548(a)(1) ..............................................................................................................................3

11 U.S.C. § 549(a) ..................................................................................................................................3

11 U.S.C. § 550 .....................................................................................................................3, 11, 12, 17

11 U.S.C. § 1104 .....................................................................................................................................1

Rules

Fed. R. Bankr. P. 7012 .................................................................................................................. passim

Fed. R. Bankr. P. 7055 ....................................................................................................................1, 6, 8

Fed. R. Civ. P. 4 ....................................................................................................................................10

Fed. R. Civ. P. 12(b) .............................................................................................................................10

Fed. R. Civ. Pro. 55(c) .................................................................................................................. passim

Local Bankruptcy Rule 7055-1(a) ...........................................................................................................5

Rule 60(b) ...........................................................................................................................................6, 9

Rule 7004(e) ......................................................................................................................................8, 10

Rule 7012(a)’s .........................................................................................................................................8


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1 NOTICE OF MOTION AND MOTION OF NEW TARGET TO SET ASIDE ENTRY OF DEFAULT

MEMORANDUM OF POINTS AND AUTHORITIES

New Target Investments Limited (“New Target”), a company organized under the laws of

Samoa, hereby submits its Memorandum of Points and Authorities in support of its Motion as

follows:

I. INTRODUCTION

Good cause exists to set aside the Order of Default against Defendant New Target pursuant to

Fed. R. Bankr. P. 7055. Plaintiff recently obtained entry of default against New Target despite the

fact that no deadline for New Target to file an answer or responsive pleading was ever set by this

Court, as is required pursuant to Fed. R. Bankr. P. 7012. Accordingly, the entry of the order of

default against New Target was improper and Plaintiff’s process was ineffective. New Target did not

act in bad faith by failing to respond to the Trustee’s summons and complaint and, in fact, never

received notification that it had ever been served with the summons and complaint despite the

declaration of service filed by the Trustee. New Target only became aware that the Trustee was

taking that the position that service had been effected shortly before the Trustee moved for entry of

an order of default. Cause also exists to set aside the order of default against New Target because

New Target has numerous meritorious defenses to the claims asserted against it by the Trustee.

Moreover, setting aside the default would not cause Plaintiff any prejudice sufficient to justify

denying Defendant’s request.

II. STATEMENT OF FACTS

The Debtors commenced their bankruptcy cases (the “Bankruptcy Cases”) on September 15,

2017 by filing voluntary petitions for relief under chapter 11 of the Bankruptcy Code. On September

25, 2017, the Debtors filed an Emergency Motion to Approve Stipulation for Appointment of a

Chapter 11 Trustee Pursuant to 11 U.S.C. § 1104. On September 29, 2017, the Court entered an

order approving that motion, and the United States Trustee subsequently appointed Jonathan D. King

as the chapter 11 trustee in the Debtors’ chapter 11 cases. See Dkt. No. 155. On December 4, 2017,

this Court entered orders granting the Trustee’s motions to convert the Debtors’ chapter 11 cases to

cases under chapter 7 of the Bankruptcy Code. On December 5, 2017, the United States Trustee

appointed Jonathan D. King as chapter 7 trustee (the “Trustee”).


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A. Zetta’s Scheme to Defraud New Target: The Jet Sale Transaction

Kebo Wu (“Mr. Wu”) and Canning Fok Kin Ning (“Mr. Fok”) were the shareholders of

Falconwing Limited (“Falconwing”), which owned a Bombardier Global Express luxury jet aircraft,

serial number 9115 (the “Jet”). Prior to the commencement of the Bankruptcy Cases, on or about

August 15, 2017, Zetta Jet PTE, Ltd. (“Zetta Singapore”) entered into an Aircraft Purchase

Agreement (the “APA”) with Falconwing, Mr. Wu and Mr. Fok. Under the terms of the APA,

Falconwing, as Seller, transferred the Jet to Zetta Singapore, as buyer, for a purchase price of

$11,000,000 (the “Jet Sale Transaction”).

Falconwing was not paid in cash. Instead, Zetta Singapore entered into a series of agreements

with Mr. Fok, Mr. Wu, and New Target for the prepayment and allotment of Flight Hours (the “Flight

Hour Agreements”). Delivery of the executed Flight Hour Agreements was a condition to closing

under the APA.

The performance by Zetta Singapore of the Flight Hours Agreement between Mr. Wu and

Zetta Singapore, and the Flight Services Agreement between New Target and Zetta Singapore, were

guaranteed by way of personal guaranties issued by Geoffery Owen Cassidy (“Cassidy”) on or about

August 10, 2017 (the “Personal Guaranties”).

On September 15, 2017, Zetta Singapore commenced its voluntary chapter 11 bankruptcy

case. On September 19, 2017, Zetta Singapore wrote New Target to advise that the services under

the various Flight Hours Agreements, described above, could not be honored and that services under

those Agreements were suspended. The effect of the failure to honor the Flight Hour Agreements

was that in effect the Jet had not been paid for by Zetta Singapore. Accordingly, in the period of a

few weeks, Mr. Wu and Mr. Fok went from owning an $11,000,000 luxury jet aircraft free and clear

to being unsecured creditors in this bankruptcy case. On September 21, 2017, Falconwing, Mr. Wu

and Mr. Fok each assigned their rights, interests and obligations under the APA and their respective

Flight Hour Agreements to New Target.

B. Adversity to Cassidy; Transfer of Yacht in Partial Satisfaction of Personal Guaranties

Following the breach of the Agreements by Zetta, New Target attempted to enforce the

Personal Guaranties. Around the time of the commencement of the Bankruptcy Cases, Cassidy was


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meeting with personnel affiliated with Mr. Wu with the goal of inducing Mr. Wu to invest in Zetta as

part of a “rescue package.” Concurrently, New Target was negotiating with Cassidy regarding his

obligations under the Personal Guaranties. On or about September 28, 2017, while these negotiations

were in progress, Cassidy agreed to transfer his shares in Dragon Pearl Ltd. (the “Shares” of “DPL”)

to a nominee of New Target. DPL was the owner of the yacht, Dragon Pearl (the “Yacht”). At the

time the Shares were transferred, Cassidy did not deliver the possession of the Yacht to New Target.

New Target commenced actions against Cassidy in Hong Kong and, subsequently, Singapore. New

Target had no reason to know of the Trustee’s alleged interest in the yacht until it was arrested in

Australia at the request of the Trustee. Indeed, the location of the Yacht was not confirmed to New

Target until after its arrest. This occurred several weeks after the September hearing on the

appointment of a trustee. C. The Trustee Commences this Adversary Proceeding

On October 29, 2018, the Trustee commenced this adversary proceeding against New Target,

Kebo Wu, Du Yan, Guoyue (Grace) Huang, Misaki Go, John Doe Corporation, and Linkage Access

(collectively, “Defendants”), by filing his Adversary Complaint for Fraudulent Conveyance Under 11

U.S.C. §§ 548(a)(1)(A), § 548(a)(1)(B) and 550, Declaratory Judgment Under an Alter Ego Theory

Under 11 U.S.C. § 362, Imposition of Constructive Trust Under 11 U.S.C. § 541(d), Willful Violation

of the Automatic Stay Under 11 U.S.C. §§ 362 and 541(a), Avoidance of Postpetition Transfers

Under 11 U.S.C. § 549(a), Turnover of Estate Property Under 11 U.S.C. § 542(a), and Disallowance

of Claims Under 11 U.S.C. § 502(d) (the “Complaint”) (Dkt. No. 1).2

The Complaint seeks, among other things, to avoid an allegedly fraudulent transfer of the

Dragon Pearl, which was produced by an Australian luxury yacht manufacturer, Maritimo. According

to the Plaintiff, Cassidy, a principal of the Debtors, misappropriated funds belonging to the Debtors

and used such funds to purchase the Dragon Pearl. Complaint, ¶ 1.

As alleged in the Complaint, the circumstances by which Linkage became the owner of the

Dragon Pearl are multiple steps removed from the initial alleged use of funds by Cassidy. According

2 All docket references refer to this Adversary Proceeding unless they are preceded by “Lead Case,” in which case they refer to the docket in Bankruptcy Case No. 2:17-bk-21386-SK for debtor Zetta Jet USA, Inc.


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to the Complaint, Zetta Jet PTE, Ltd. (a Singaporean entity) paid Maritimo (an Australian entity) for

the Dragon Pearl and title was vested in DPL (a Marshall Islands company). That transaction took

place in December 2016, nearly a year before the Bankruptcy Cases were commenced and some eight

months before the Jet Sale Transaction. Notably, the Trustee has not sued Maritimo. According to

the Complaint, the Dragon Pearl was then later transferred from DPL to Linkage. The transfers

described in the Trustee’s Complaint appear to be the following:

1. Transfer of money from Zetta Jet PTE, Ltd. (“Zetta Singapore”) (a Singapore company) to Maritimo, the yacht builder (an Australian company).

2. Transfer of the yacht from Maritimo (an Australian company) to DPL (a Marshall Islands company).

3. Transfer of the shares of DPL from Cassidy (an Australian citizen resident in Singapore) to

Du Yan (believed to be a citizen and resident of China).

4. Transfer of the yacht (registered in the Marshall Islands and docked in Australia) from DPL (a Marshall Islands company) to Linkage (a British Virgin Islands company).

None of the above described transfers are alleged by the Trustee to be to, or from, Defendant

New Target. Instead, the Trustee alleges in the Complaint that DPL was owned by Du; that Du was

the “nominee” of New Target; and that New Target and Mr. Wu owned the Dragon Pearl indirectly

through DPL. While New Target never took title to the Dragon Pearl, the Trustee alleges that each of

the defendants is an alter ego of the other. See Complaint, ¶ 108 (“As such Wu, New Target, Huang,

Du, Linkage, and Go, as well as any John Doe Corporation discovered to be within the New Target or

Linkage corporate chain, are all alter egos of Wu . . .”). D. The Trustee Allegedly Serves New Target and Obtains Entry of its Default

On January 8, 2019, Plaintiff filed its Submission of Affidavit of Service Re: Summons,

Complaint and Instructions on New Target Investments Limited (Dkt. No. 5). The affidavit attached

thereto states that service of the Complaint and the Summons and Notice of Status Conference in

Adversary Proceeding [LBR 7004-1] (the “Summons”) was effected on New Target on December 7,

2018. The affidavit of service is from Launceston Wright, a legal secretary of Clarke Ey Koria

Lawyers, in Apia Samoa. The affidavit says that Launceston Wright “effected personal service of the

following documents on the registered office of New Target Investments Limited . . ., located at


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Vistra Corporate Services Centre, Ground Floor, NPF Building, Beach Road, Apia, Samoa . . . .”

The affidavit does not say how service was effected on the registered agent’s office.

A copy of the Summons that was issued by the Clerk of the Bankruptcy Court appears at Dkt.

No. 2-1. The Summons provides that all Defendants must file a written response by November 29,

2019, 30 days from the date of its issuance. Thus, according to the Summons allegedly served by

Plaintiff, New Target’s response deadline passed nearly a week before the date that service was

allegedly effected on New Target’s registered agent.

Although Plaintiff alleges that service was effected on New Target via its registered agent on

December 7, 2018, there is no record of New Target actually having received the Summons and

Complaint. Declaration of Chan Yu Ying (“Chan Decl.”), ¶ 4. New Target was never notified by its

registered agent that it has been served and the registered agent has stated that there is no record of its

office in Samoa ever having been served with the Summons or Complaint. Id., ¶ 4, 5.

On January 14, 2019, the Plaintiff filed its Request for Clerk to Enter Default Under LBR

7055-1(a) (Dkt. No. 10). At the same time, Plaintiff also sought entry of an order of default against

Linkage Access Limited (“Linkage”). (Dkt. No. 9). When the Request for Default was filed, K&L

Gates represented New Target in the Bankruptcy Cases (although it had not appeared on behalf of

New Target in this adversary proceeding). Despite the fact that Plaintiff’s counsel knew that K&L

Gates represented New Target in the Bankruptcy Cases, it did not inform K&L Gates of Plaintiff’s

intention to seek entry of a default against either New Target or Linkage. Declaration of Michael B.

Lubic (“Lubic Decl.”), ¶ 4.

Plaintiff’s initial request for default was not entered by the Court.3 The Plaintiff filed its

Renewed Request for Clerk to Enter Default Under LBR 7055-1(a) as to New Target Investments

Limited (“Renewed Request for Default”) (Dkt. No. 16) on January 18, 2019. The Renewed Request

for Default, like Plaintiff’s initial request for default, states that the deadline for New Target to file an

answer or other responsive pleading expired on January 6, 2019─but these statements by Plaintiff are

3 The Court entered a notice that default had not been entered on account of the fact that a conformed copy of the executed Service of Summons form was not attached, because no declaration required under Local Bankruptcy Rule 7055-1(a) was attached to the request, and because no proof of service and copy of the Summons was attached to the request. See Dkt. No. 11.


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false, as the alleged January 6 deadline was not contained in the Summons and was not ordered by

the Court. Rather, the Summons specified a response deadline of November 29, 2018 (which passed

before service was allegedly accomplished). Thus, Plaintiff represented to the Court in its Renewed

Request for Default that New Target’s deadline to answer or file a responsive pleading was 30 days

from the date that the Summons and Complaint were allegedly served—a contention which is flatly

contradicted by the Summons, on its face.

Plaintiff obtained entry of default from the Clerk of the Court three business days later, on

January 23, 2019 (the “Order of Default”). K&L Gates has conferred with Plaintiff’s counsel, stated

its intention to move to set aside the default, agreed to accept service on behalf of New Target, and

accordingly requested that the Plaintiff stipulate to entry of an order vacating the Order of Default.

Lubic Decl., ¶ 5. Plaintiff has refused to do so. Id. As a result, Defendant New Target expeditiously

prepared and filed this Motion seeking to set aside the Order of Default. E. Related Proceedings in Australia

The Dragon Pearl is located in Australia, and the Trustee has commenced a series of

proceedings in the Australian Courts against DPL and Linkage. Through those proceedings, the

Trustee has sought to establish ownership of the Dragon Pearl. The Australian courts have entered a

final determination that the Trustee did not own the yacht at the time it was titled in DPL. See

Supplemental Declaration of Maurice G.R. Lynch in Support of New Target’s Opposition to

Trustee’s Motion for Order Approving Letter of Request (Main Case Dkt. No. 871) (“Lynch Decl.”).

More recently, the Australian courts ruled in favor of Linkage on its summary judgment motion,

denying the Trustee’s fraudulent transfer claims under Australian law. Lubic Decl., ¶ 6. At this

point, all of the Trustee’s appeals in Australia have been exhausted. Id.

III. LEGAL ARGUMENT

The Federal Rules provide that a “court may set aside an entry of default for good cause.”

Fed. R. Bankr. P. 7055(c), incorporating Fed. R. Civ. Pro. 55(c). Courts apply the same test to

evaluate motions to set aside an entry of default under Rule 55(c) as applied to motions to set aside

default judgments under Rule 60(b). United States v. Signed Personal Check No. 730 of Yubran S.

Mesle, 615 F.3d 1085, 1091 n.1 (9th Cir. 2010). However, because a Rule 55(c) motion presents no


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concern about disturbing the finality of a judgment, the test is applied more liberally in cases where

default judgment has not been entered. Id.

To determine whether good cause exists to set aside entry of default, courts have considered

three factors: (1) whether the defendant’s culpable conduct led to the default; (2) whether the

defendant had meritorious defense; or (3) whether reopening the default (or in this case, setting aside

entry of the default) would prejudice the plaintiff. TCI Group Life Ins. Plan v. Knoebber, 244 F.3d

691, 696 (9th Cir. 2001) (reversed on other grounds). “Although the burden rests on the moving

party, the factors are to be ‘liberally interpreted’ in favor of setting aside default.” FOC Fin. Ltd.

P’ship v. Nat’l City Commercial Capital Corp., 612 F. Supp. 2d 1080, 1082 (D. Ariz. 2009) (quoting

Haw. Carpenters’ Trust Funds v. Stone, 794 F.2d 508, 513 (9th Cir. 1986)). Where the movant

timely seeks relief, and 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 (9th Cir. 1986) (internal quotations omitted; alteration in

original). In this case, “good cause” exists to set aside the default because, as detailed below, the

Summons was non-compliant with the Federal Rules of Bankruptcy Procedure and, moreover, was

served after the specified response deadline had expired; the default was not entered on account of

any “culpable” conduct by New Target; New Target has meritorious defenses; and setting aside the

default would not prejudice the Plaintiff.

A. The Summons Did Not Comply with Fed. R. Bankr. P. 7012(a) and the Resultant Default is Invalid

First and foremost, significant procedural error makes entry of the Default Order by the Clerk

of the Court improper, warranting that this Motion be granted. In particular, the Trustee’s request for

default was premised on New Target’s alleged failure to respond to the Complaint within thirty (30)

days of the date that the Trustee alleges that it effected service. The Summons, however, indicated

that the response deadline had already passed before the date of purported service. For this reason,

alone, Plaintiff’s purported service of process was invalid. In re Beck, No. 11-6633, 2011 WL

4623937, at *2 (Bankr. D. Ariz. Sep. 29, 2011) (“service of an expired summons is a nullity and

insufficient to subject a defendant to the bankruptcy court’s jurisdiction”). Additionally, New Target

has no record of having been served in the first place. Chan Decl., ¶ 5.


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Even apart from the foregoing defects, however, the deadline for New Target to respond to

the Complaint should have been specially set by this Court, rather than using the “standard” response

timeframe of 30 days, which applies only to service in the United States. In that regard, Rule 7012(a)

of the Federal Rules of Bankruptcy Procedure provides:

If a complaint is duly served, the defendant shall serve an answer within 30 days after the issuance of the summons, except when a different time is prescribed by the court. The court shall prescribe the time for service of the answer when service of a complaint is made by publication or upon a party in a foreign country4.

Fed. R. Bankr. P. 7012(a) (emphasis added). Here, even assuming arguendo that New Target was

actually served with the Summons, the Court had not prescribed the time for service of the answer for

New Target, a foreign entity organized under the laws of Samoa. New Target only became aware

that the Trustee believed that he had effected service on New Target on or about January 8, 2019,

when the Trustee filed his affidavit of service. But at that time, no response deadline had been set as

was required by Rule 7012(a). Accordingly, the Court should set aside the Order of Default entered

by the Clerk of the Court. See Frisby Technologies, Inc., 2003 WL 22127904, at *3 (Bankr.

M.D.N.C. Sept. 15, 2003) (setting aside default, in part, because “the court failed to prescribe the

time for service of the answer for the Defendants, both of whom were parties in a foreign country”).

Indeed, relying on Rule 7012(a)’s requirement that the court specially set the time for a foreign

defendant to answer, the Frisby court explicitly held that “[a] time period allowing 30 days from the

issuance of the summons to file an answer was improper, as evidenced by the fact that the affidavit of

service indicates that the summons was not received until after the 30 day period had expired.” Id. at

*3 (emphasis in original).

These fatal procedural defects, by themselves, are sufficient grounds to set aside the Order of

Default. Moreover, a detailed examination of each of the Rule 55(c) factors discussed below provides

4Rule 7004(e) provides that the time limit for serving a summons within the United States is seven days, so that a defendant has at least 23 days to respond to the summons. While Bankruptcy Rule 7055 does not provide guidance the court for setting a response date, presumably the reason for having the court set the date is so that it can take into account the extra time needed to serve a summons in a foreign country and the additional complexities a foreign defendant would have understanding the papers and engaging counsel in the United States such that a foreign defendant has a reasonable time to respond.


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a separate, independent basis on which the Court should set aside the Order of Default, so that this

case may be decided on its merits.

B. No Culpable Conduct Led to the Default

The first of the factors courts consider under a Rule 55(c) analysis is whether the defendant’s

culpable conduct led to the entry of the default. “[A] defendant’s conduct is culpable if he has

received actual or constructive notice of the filing of the action and intentionally failed to answer.”

TCI Group, 244 F.3d at 697. “[I]n this context the term ‘intentionally’ means that a movant cannot

be treated 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 decision-making, or otherwise manipulate the

legal process.’” Signed Pers. Check No. 730 of Yubran S. Mesle, 615 F.3d at 1092 (quoting TCI

Group, 244 F.3d at 697)).

Defendant New Target did not purposefully ignore this suit in order to achieve some sort of

advantage over the Plaintiff. Quite the opposite is true. New Target has no record of ever having

been served and only learned that the Trustee believed that New Target had been properly served

when it filed its affidavit of service on January 8, 2019. No actual deadline to respond was in place

either then or now. The only deadline to respond stated in the Summons had long since passed. By

failing to respond, New Target gained no advantage over the Trustee, and its failure to respond was

justifiable. New Target’s counsel thereafter approached the Trustee’s counsel in an effort to resolve

the defective default by stipulation, to no avail. For all of these reasons, there is no culpable conduct

that would warrant denying the relief requested by New Target so as to prevent this case from being

decided on its merits.

C. New Target has Numerous Meritorious Defenses

New Target has numerous defenses to the claims asserted by the Trustee. “The meritorious

defense requirement is more liberally applied on a Rule 55(c) motion to set aside entry of default than

on a Rule 60(b) motion to set aside default judgment.” Nobel Sys., Inc. v. Celartem, Inc., 2013 WL

12147585, at *4 (C.D. Cal. July 22, 2013) (internal quotations and alteration omitted) (quoting Mesle,

615 F.3d at 1091 n.1). The movant need not prove the merits of its defense(s) in order to set aside the


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default. Rather, under this factor, the movant need only allege sufficient facts that, if true, would

constitute a defense. Id. (finding sufficient facts to support potentially meritorious defense where

defendant contended that it did not have sufficient minimum contacts to support jurisdiction, among

other defenses). See also In re Stone, 588 F.2d 1316, 1319 n.2 (10th Cir. 1978) (defendant must show

sufficient facts or law to show that “a sufficient defense is assertable”). The numerous defenses that

New Target has to the Trustee’s Complaint include, but are not limited to the following:

1. Insufficient Process and Service of Process

“A federal court does not have jurisdiction over a defendant unless the defendant has been

served properly under Fed. R. Civ. P. 4.” Direct Mail Specialists v. Eclat Computerized

Technologies., Inc., 840 F.2d 685, 688 (9th Cir. 1988). Pursuant to Fed. R. Civ. P. 12(b)(4) and

12(b)(5), which are made applicable to this Adversary Proceeding by Fed. R. Bankr. P. 7012, a

defendant may bring a motion to dismiss for insufficiency of process and service of process. Rule

12(b)(4) concerns the form of process rather than the manner or method of service, while a Rule

12(b)(5) motion is used to challenge the mode of delivery or lack of delivery of the plaintiff’s

summons and complaint. See Wasson v. Riverside County, 237 F.R.D. 423, 424 (C.D. Cal. 2006).

Defendant New Target has meritorious arguments both that process was insufficient, and that service

of process was insufficient.

In support of New Target’s insufficient process argument, as set forth above, the Summons

improperly described the response date as a date that lapsed prior to the date that Plaintiff alleges

service was effected. The Summons used by Plaintiff, indicating a response deadline 30 days from

the date of issuance, is a standard summons applying to defendants located within the United States.

Plaintiff did not, as is required, have the Court set a response deadline for the foreign defendants and

serve a corrected summons that incorporated a court-imposed deadline for the foreign defendants.5

5 In bankruptcy adversary proceedings, the response deadline for a defendant located in the United States is 30 days from the issuance of the summons. See Fed. R. Bankr. P. 7012(a) (“If a complaint is duly served, the defendant shall serve an answer within 30 days after the issuance of the summons”). If, hypothetically, New Target were not a foreign entity, then the response deadline listed in the Plaintiff’s Summons would have been proper─but in that scenario, Plaintiff would have been required to serve the Summons and Complaint within 7 days after the Summons was issued (see Fed. R. Bankr. P. 7004(e)), which it plainly failed to do. In any event, the 30-day rule explicitly does not apply to service in a foreign country, which is what occurred here.


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Additionally, New Target has a defense that service of process was ineffective. According to

the registered agent of New Target in Samoa, it never received service of the Summons and

Complaint and therefore never notified New Target that it had been served. In connection with this

Motion, New Target has submitted a declaration attesting to the fact that it has no record of ever

being served. Chan Decl., ¶ 4-5. Although Plaintiff has submitted an affidavit of service stating that

personal service was effected on New Target’s registered agent in Samoa, no explanation of how

personal service was effected in provided in the affidavit. New Target’s allegation, if true, means

that service of process was ineffective.

2. Fraudulent Transfer Laws Do Not Apply Extraterritorially

None of the transfers that are the subject of the Complaint can be avoided in the Adversary

Proceeding because sections 548 and 550 of the Bankruptcy Code do not apply extraterritorially to

transactions outside the United States. “It is a basic premise of our legal system that, in general,

‘United States law governs domestically but does not rule the world.’” RJR Nabisco, Inc. v. European

Community, 136 S. Ct. 2090, 2100 (2016) (quoting Microsoft Corp v. AT&T Corp., 550 U.S. 437,

454, 127 S. Ct. 1746 (2007)). Therefore, when construing the application of federal laws, courts

apply the “presumption against extraterritoriality.” The presumption provides that “[a]bsent clearly

expressed congressional intent to the contrary, federal laws will be construed to have only domestic

application.” Id. (citing Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247, 255, 130 S. Ct. 2869

(2010)). The question is whether Congress has “affirmatively and unmistakably instructed that the

statute” will apply to foreign conduct.” Id. The presumption “serves to protect against unintended

clashes between our laws and those of other nations which could result in international discord.”

Barclay v. Swiss Fin. Corp. Ltd. (In re Bankr. Estate of Midland Euro Exch. Inc.), 347 B.R. 708, 718

(Bankr. C.D. Cal. 2006).

Under Morrison, the court examines whether there is clear, affirmative indication that the

statute applies extraterritorially. If not, the court then determines whether the case involves a

domestic application of the statute by considering whether the conduct relevant to the statute’s focus

occurred in the United States. “If the conduct relevant to the focus occurred in a foreign country, then


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the case involves an impermissible extraterritorial application regardless of any other conduct that

occurred in U.S. territory.” Nabisco, 136 S. Ct. at 2101.

In In re Bankr. Estate of Midland Euro Exch. Inc., 347 B.R. 708 (Bankr. C.D. Cal. 2006), this

Court (Judge Geraldine Mund, presiding) considered whether Section 548 of the Bankruptcy Code

applies extraterritorially. The trustee sought to set aside, under Section 548, monies paid to a foreign

exchange brokerage incorporated under the laws of England and headquartered in London. The

funds transferred “originated from a bank account in London and, although transferred through a

bank account in New York, eventually ended up in another bank account in England.” Id. at 715.

The court concluded that nothing in the text of Section 548 indicates a congressional intent for

extraterritorial application and that any policy considerations could not overcome the presumption

against extraterritoriality, especially in light of the Ninth Circuit’s pronouncement that policy

considerations alone are insufficient to overcome the presumption. Id. at 718 (citing Subafilms, Ltd. v.

MGM-Pathe Commc’ns Co., 24 F.3d 1088, 1096 (9th Cir. 1994)). The Midland court dismissed the

trustee’s complaint without leave to amend.

As set forth in Midland, section 548 does not include a clear indication that it was meant to

apply extraterritorially. Additionally, the Trustee’s Complaint in this case does not concern a

domestic application of the statute. As set forth above, each and every individual transfer alleged in

the Complaint takes place among foreign entities abroad. As such, the Trustee’s attempt to apply

Section 548 to the transfers alleged above is impermissible. Other courts have reached similar

conclusions with respect to the avoidance provisions of the Bankruptcy Code. See, e.g., LaMonica v.

CEVA Group PLC (In re CIL Ltd.), 582 B.R. 46, 96 (Bankr. S.D.N.Y. 2018) (transfer trustee sought

to avoid and recover under section 548 and 550 of the Bankruptcy Code was not a domestic transfer

and therefore could not be avoided); Sec. Investor Prot. Corp. v. BLMIS (In re BLMIS), 513 B.R. 222,

231 (S.D.N.Y. 2014) (the “Trustee therefore may not use section 550(a) to pursue recovery of purely

foreign subsequent transfers”); Maxwell Commc’n Corp. PLC v. Societe Gen. PLC (In re Maxwell

Commc’n Corp. PLC), 186 B.R. 807 (S.D.N.Y. 1995) (“Because Congress has not ‘clearly

expressed’ its desire that § 547 govern extraterritorial conduct, . . . that section cannot apply to the

foreign transfers at issue in this case”), aff’d on other grounds, 93 F.3d 1036 (2d Cir. 1996).


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For the foregoing reasons, New Target’s defense that the Bankruptcy Code’s fraudulent

transfer laws do not apply extraterritorially is a meritorious defense.

3. The Trustee’s Claims Are Barred by the Doctrine of Res Judicata

The Trustee, in addition to asserting fraudulent transfer claims against the Defendants, asserts

various causes of action all premised on his assertion that the bankruptcy estate has an interest in the

Dragon Pearl. For instance, the Trustee requests that this Court impose a constructive trust for the

Dragon Pearl under the theory that the estate has always retained beneficial title to and equitable

interest in the yacht because Cassidy purchased it with funds that were misappropriated from Zetta

Singapore.6 Based on this same theory that Zetta Singapore is and has always been the true owner of

the Dragon Pearl, the Complaint asserts counts for violation of the automatic stay under section 362,

avoidance of a postpetition transfer of estate property under section 549, and turnover of estate

property under section 542.

Claims premised in an alleged ownership in the Dragon Pearl fail, however, because the

Federal Court of Australia has ruled against the Trustee on the issue of whether the Dragon Pearl is

property of the bankruptcy estate. Lynch Decl., ¶ 16. Even more recently, the Federal Court of

Australia ruled against the Trustee on the issue of whether the transfer of the Dragon Pearl

constituted a fraudulent transfer. Lubic Decl., ¶ 6. All of the Trustee’s appeals in Australia have

been exhausted. Id. The Trustee is barred by res judicata from relitigating all of these claims.

Res judicata, or claim preclusion, provides that a final judgment on the merits by a court of

competent jurisdiction bars further claims by parties or their privies based on the same cause of

action. See U.S. v. Bhatia, 545 F.3d 757, 759 (9th Cir. 2008); In re International Nutronics, Inc., 28

F.3d 965, 969 (9th Cir. 1994). In determining whether successive lawsuits involve the same cause of

action, the court considers (1) whether rights or interests established in the prior judgment would be

destroyed or impaired by prosecution of the second action, (2) whether substantially the same

6 The constructive trust “claim” is not, in reality a cause of action. “A constructive trust is not an independent cause of action but merely a type of remedy for some categories of underlying wrong . . .” Cline v. Reetz-Laiolo, 329 F. Supp. 3d 1000, 1025 (N.D. Cal. June 28, 2018) (internal quotations omitted) (addressing constructive trust theory in connection with a cause of action for conversion). See also Kenneally v. Bank of Nova Scotia, 711 F. Supp. 2d 1174, 1191 (S.D. Cal. 2010) (granting motion to dismiss constructive trust claim on basis that it is not an independent cause of action under California law).


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evidence is presented in the two actions, (3) whether the two suits involve infringement of the same

right, and (4) whether the two suits arise out of the same transactional nucleus of facts. See Clark v.

Bear Sterns & Co., Inc., 966 F.2d 1318, 1320 (9th Cir. 1992).

U.S. courts may give res judicata effect to foreign judgments on the basis of comity, although

application of the doctrine is discretionary. In re Metcalfe & Mansfield Alternative Investments, 421

B.R. 685, 699 (Bankr. S.D.N.Y. 2010). Comity is the recognition which one nation allows within its

territory to the legislative, executive or judicial acts of another nation. See Dependable Highway

Exp., Inc. v. Navigators Ins. Co., 498 F.3d 1059, 1067 (9th Cir. 2007). Neither a matter of absolute

obligation nor “mere courtesy,” a U.S. court will not apply comity where enforcing the foreign

interests is fundamentally prejudicial to those of the domestic forum. See id. If, however, the foreign

forum provides “a full and fair trial abroad before a court of competent jurisdiction, conducting the

trial upon regular proceedings, after due citation or voluntary appearance of the defendant, and under

a system of jurisprudence likely to secure an impartial administration of justice between the citizens

of its own country and those of other countries, and there is nothing to show either prejudice in the

court, or in the system of laws under which it is sitting,” the U.S. court should enforce the judgment.

In re Metcalfe & Mansfield Alternative Investments, 421 B.R. at 698 (quoting Hilton v. Guyot, 159

U.S. 113 202-03 (1895)).

Here, the Federal Court of Australia has entered a final judgment denying the Trustee’s

request for a constructive trust for the Dragon Pearl in an action that he brought against DPL. When

the Trustee thereafter commenced a similar action against Linkage, the court applied the doctrine of

res judicata in dismissing the action. The Australian appellate court concluded that there has been a

final adjudication that neither Zetta Singapore nor the Trustee had a claim in rem to the Dragon Pearl

at the time it was owned by DPL.

Accordingly, New Target has a meritorious defense to the Trustee’s claims for constructive

trust, violation of automatic stay, turnover of estate property, and avoidance of postpetition transfer

because all such claims are premised on the Trustee’s assertion of a claim in rem to the Dragon Pearl.

The Australian court has already ruled that the Trustee had the opportunity to try his action for a

constructive trust in Australia and has entered a final judgment against the Trustee, which was later


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affirmed. See Clark v. Bear Sterns & Co., Inc., 966 F.2d 1318, 1320 (9th Cir. 1992) (res judicata bars

all grounds for recovery that could have been asserted in a prior suit, whether they were or not.).

More recently, the Australian Court has ruled in Linkage’s favor on its summary judgment motion,

denying the Trustee’s fraudulent transfer claims under Australian law. Lubic Decl., ¶6. Accordingly,

New Target has a meritorious defense that the Trustee’s claims for fraudulent transfer also barred by

the doctrine of res judicata.

4. Trustee Seeks to Impermissibly Extend Doctrine of Alter Ego

Count III of the Complaint is for “Declaratory Judgment – Alter Ego Under 11 U.S.C. § 362.”

A claim for alter ego is not itself a cause of action for substantive relief. See Hennessey’s Tavern, Inc.

v. American Air Filter Co., Inc., 204 Cal. App. 3d 1351, 1359 (1988). The Trustee does not allege

that New Target was the recipient of any of the alleged transfers, or that it took possession of, or

exercised control over, any of the property that the Trustee asserts that the Debtors’ estate may

recover. The Trustee in this adversary proceeding seeks a declaratory judgment that “Wu, New

Target, Huang, Du, Linkage, and Go, as well as any John Doe Corporation discovered to be within

the New Target or Linkage corporate chain, are all alter egos of Wu and one another . . . .”

Complaint, ¶ 108. The Trustee asks that this Court impose a sweeping and impermissible application

of the alter ego theory, across individuals and separate entities.

The traditional alter ego relationship imposes a corporation’s liabilities on an individual

shareholder. See Greiling v. Zahoudanis, 2009 WL 700049, at *2 (C.D. Cal. March 13, 2009). The

Ninth Circuit Court of Appeals summarized California alter ego law as follows: We have previously determined that California law recognizes an alter ego relationship, such that a corporation’s liabilities may be imposed on an individual, only when two conditions are met: (1) there is such a unity of interest and ownership that the individuality or separateness, of the said person and corporation has ceased, and (2) an adherence to the fiction of the separate existence of the corporation would . . . sanction a fraud or promote injustice.

SEC v. Hickey, 322 F.3d 1123, 1128 (9th Cir. 2003) (internal quotations omitted). The Ninth Circuit

also emphasized, with respect to the first requirement, that “[o]wnership is a prerequisite to alter ego

liability, and not a mere ‘factor’ or ‘guideline.’” Id.

Here, the Trustee seeks to do much more. It seeks to hold an entity (New Target) liable for the

debts of entirely separate entities, and debts of individuals who are not shareholders or owner of New


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Target. This is not permissible and does not comply with the ownership prerequisite. California law

has rejected broad applications of the alter ego doctrine such as this. Pursuant to California law, for

instance, a third party outsider cannot reach corporate assets to satisfy claims against an individual

shareholder (so-called “outside” or “third party” reverse veil piercing). See Greiling, 2009 WL

700049, at *3 (applying Postal Instant Press, Inc. v. Kaswa, Corp., 162 Cal. App. 4th 1510, 77 Cal.

Rptr. 3d 96 (Ct. App. 2008) and concluding that outside reverse piercing theory, alleged as an alter

ego theory, fails as a matter of law). The Trustee attempts, contrary to California law, to apply

reverse veil piercing. The Trustee also goes a step farther and attempts to apply the alter ego theory to

individuals (and entities, including New Target) who are not owners of their alleged alter egos. New

Target therefore has a meritorious defense to the Trustee’s attempt to apply the theory of alter ego

against New Target. 5. The Trustee’s Complaint Fails to State a Claim for Violation of the Automatic

Stay; Avoidance of Postpetition Transfer; and Turnover of Estate Property

Count V of the Trustee’s Complaint alleges that all Defendants violated the automatic stay

imposed by 11 U.S.C. § 362. The Trustee alleges that the “Defendants willfully violated the

automatic stay by (a) colluding with Cassidy to place assets of the Debtor Zetta PTE’s estate beyond

the reach of the Trustee, Zetta PTE, and Zetta PTE’s legitimate creditors, and (b) engaging in a

pattern of deception and lack of candor before this Court and the Chapter 11 Trustee . . . .” The

Complaint fails to state a claim for violation of the automatic stay.

Section 362 of the Bankruptcy Code provides that “a petition filed under section 301, 302, or

303 of this title” imposes a stay of, among other things, “any act to obtain possession of property of

the estate or property from the estate or to exercise control over property of the estate.” See 11 U.S.C.

§ 362(a)(3). The Debtors never owned the Dragon Pearl, and the Dragon Pearl therefore could not

have been property of the estate at the time the Bankruptcy Cases were commenced. The stay

imposed by the commencement of the Bankruptcy Cases does not apply to property of non-debtors

such as DPL and by its terms, only applies to “property of the estate.”

According to the Complaint, the Dragon Pearl was purchased with estate funds some nine

months prior to the commencement of this case, on December 5, 2016. At such time, no stay was in

place. Furthermore, according to the Complaint, Mr. Cassidy conducted the purchase transaction on


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behalf of DPL, not the Debtors. To the extent that any ownership interest in the Dragon Pearl was

later transferred by DPL (or anyone else) to any of the Defendants, such transfer was of assets that

were not part of the bankruptcy estates of the Debtors. In sum, the Complaint never alleges that the

property allegedly transferred to the Defendants was property of the estate at the time it was

transferred. The Trustee wishes to apply the automatic stay retroactively, to impose liability for

engaging in a transaction that he believes is avoidable pursuant to Sections 548 and 550 of the

Bankruptcy Code. The Trustee’s claim for violation of the stay has no legal basis, and is contrary to

the plain language of the Code.

The Trustee also asserts claims against all Defendants for Avoidance of Postpetition Transfer

(Count VI) and Turnover of Estate Property (Count VII). Both those claims, like the claim for

violation of the automatic stay, presuppose that the Dragon Pearl was property of the estate at the

time of the commencement of the Bankruptcy Cases and was transferred thereafter. However, the

Trustee alleges no facts supporting the contention that the Dragon Pearl was ever owned by the

Debtors, or constituted property of the estate. The Dragon Pearl, and the shares of DPL are not

property of the Debtors’ estates, and the Trustee does not, and cannot, allege otherwise in the

Complaint. D. Plaintiff is Not Prejudiced by a Decision to Set Aside the Order of Default

The final factor considered by courts in a Rule 55(c), which is whether the Plaintiff will suffer

any prejudice if relief is granted, also weighs in favor of granting New Target’s Motion. The result

of vacating the default is that this case will be decided on the merits as opposed to on an improper

(because no response deadline was entered) technicality. A plaintiff is only prejudiced by a decision

to set aside a default if it results “in greater harm than simply delaying resolution of the case.” TCI

Group, 244 F.3d at 701. The plaintiff’s ability to pursue his claim must actually be hindered. Id.

Here, the Plaintiff suffers no prejudice on account of the Order of Default being vacated, and will be

in the same position as before the entry of default was entered. See Nobel Sys., 2013 WL 1214585 at

*4. At most, the Plaintiff may argue that resolution of this case has been delayed7. That, however, is

an insufficient basis to refuse to set aside the Order of Default. 7 The delay, however, was caused by the failure of the Trustee’s counsel to comply with Rule 7012(a) and have the Court set the response date.


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Furthermore, any attempt by the Trustee to argue that it has suffered a prejudicial delay in the

resolution of these proceedings should be rejected in light of the fact that Plaintiff’s counsel failed to

notify counsel for New Target of its intention to seek entry of default. Had Plaintiff’s counsel done

so, New Target could have opposed entry of the order of default and avoided having to file this

Motion. Plaintiff’s counsel had an ethical duty to warn opposing counsel of its intention to seek entry

of default. See Smith v. Los Angeles Bookbinders Union No.63, 133 Cal. App. 2d 486, 500, 284 P.2d

194, 201 (1955) (disapproved on other grounds in MacLeod v. Tribune Publ’g Co., Inc. 52 Cal.2d

536, 551, 343 P.2d 36, 44 (1959)). In fact, under California law, in the absence of a prior warning of

default, courts are inclined to grant motions to set aside defaults. See id.

For all of these reasons, the factors weigh heavily favor of setting aside the Order of Default

and permitting this action to be litigated on its merits.

IV. CONCLUSION

“Good cause” exists to set aside the Order of Default. Default should not have been entered

in this case because no response deadline for New Target was set by this Court, as is specifically

required by Rule 7012(a) when serving a defendant in a foreign country. Furthermore, even on its

face, the Summons was invalid in that it purported to require a response that was due before the

Summons was allegedly served. The failure to respond therefore was not a violation of the

Bankruptcy Rules, and the Plaintiff’s process was ineffective. Additionally, any failure to respond

was not a result of culpable conduct by New Target, New Target has numerous meritorious defenses,

and Plaintiff would suffer no prejudice if the Order of Default was set aside. New Target easily

establishes the low threshold under Fed. R. Civ. P. 55(c) analysis in order to set aside an order of

default. Defendant New Target respectfully asks this Court to set aside the Order of Default and

permit it to defend this case on the merits.

Respectfully submitted, Michael B. Lubic Kevin S. Asfour K&L GATES LLP

Dated: February 15, 2019 By: /s/ Michael B. Lubic

Michael B. Lubic

Attorneys to New Target Investments Limited


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1 DECLARATION OF MICHAEL B. LUBIC

502077217 v4

DECLARATION OF MICHAEL B. LUBIC

I, Michael B. Lubic, hereby declare as follows:

1. I am a partner with the law firm of K&L Gates, LLP (“K&L Gates”), counsel to New

Target Investments Limited (“New Target”), and specially appearing and limited-purpose counsel for

Linkage Access Limited (“Linkage”). Unless otherwise specified, I have personal knowledge of the

facts set forth below and, if called upon to testify, I would and could competently testify to the

matters set fort in this Declaration. I submit this Declaration in support of (i) New Target

Investments Limited’s Motion to Set Aside Entry of Default; and (ii) Linkage Access Limited’s

Motion to Set Aside Entry of Default (collectively, the “Motions”).

2. On January 8, 2019, I first learned that the Trustee believed that he had effected

service of the Summons and Complaint1 on New Target and Linkage. I learned of the Trustee’s

purported service based upon my review of Docket Numbers 3-5 in this Adversary Proceeding, which

were entered the same day (January 8, 2019). These items were emailed to me by the Trustee’s

noticing agent, Omni.

3. I am informed and believe that New Target is a Samoan entity and Linkage is a British

Virgins Islands entity. Promptly after learning of the Trustee’s purported service, we inquired of

New Target to ascertain whether its agent had actually been served and we reached out to Linkage

which, at that time, was not a client of K&L Gates. Concurrently, we identified and engaged counsel

in Samoa and the British Virgin Islands to advise regarding service in those jurisdictions.

4. K&L Gates has appeared for New Target in the Bankruptcy Cases and has

corresponded in the past with counsel for the Trustee regarding matters in the Bankruptcy Cases.

However, prior to brining the Motions, K&L Gates had not appeared in this Adversary Proceeding on

behalf of any of the Defendants. Although Trustee’s counsel knew that K&L Gates represents New

Target in the Bankruptcy Cases, Trustee’s counsel never contacted me or my firm to notify us prior to

the Trustee’s filings to obtain entry of orders of default against New Target and Linkage in this

matter.

1 Capitalized terms shall have the meanings given to them in the Motions unless otherwise defined herein.

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2 DECLARATION OF MICHAEL B. LUBIC

502077217 v4

5. On January 29, 2019, I emailed counsel to the Trustee and requested a time when we

could talk about the defaults. I subsequently emailed counsel to the Trustee on January 30 and on

February 4 about having a call. On February 5, I called counsel to the Trustee and left a voicemail.

Counsel to the Trustee returned the call later that day. In our call, I explained to counsel to the

Trustee why we believed service was ineffective and asked Trustee’s counsel whether the Trustee

would stipulate to set aside the orders of default entered against Linkage and New Target (Dkt. Nos.

17, 18) (collectively, the “Defaults”). During our conversation, I offered that K&L Gates would

accept service on behalf of Linkage and New Target in exchange for a stipulation setting aside the

Defaults and an agreement that New Target and Linkage would have 60 days to respond to the

Complaint. Trustee’s counsel did not respond to my proposal until February 10, 2019. On February

10, 2019, Trustee’s counsel stated that the Trustee would not stipulate to set aside the Defaults,

necessitating that K&L Gates file the Motions.

6. I am informed and believe that Linkage’s motion for summary judgment in the

avoidance action in Australia was granted in or about December 2018. I am further informed and

believe that all of the Trustee’s appeals in Australia have been exhausted.

I declare under penalty of perjury under the laws of the United States of America that the

foregoing is true and correct and that this Declaration was executed at Los Angeles, California on

February 15, 2019.

/s/ Michael B. Lubic Michael B. Lubic

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This form is mandatory. It has been approved for use by the United States Bankruptcy Court for the Central District of California.

June 2012 F 9013-3.1.PROOF.SERVICE

PROOF OF SERVICE OF DOCUMENT I am over the age of 18 and not a party to this bankruptcy case or adversary proceeding. My business address is K&L Gates LLP, 10100 Santa Monica Boulevard, Eighth Floor, Los Angeles, California 90067. A true and correct copy of the foregoing document entitled NOTICE OF MOTION AND MOTION OF NEW TARGET INVESTMENTS LIMITED TO SET ASIDE ENTRY OF DEFAULT; MEMORANDUM OF POINTS AND AUTHORITIES; AND DECLARATIONS OF CHAN YU YING AND MICHAEL B. LUBIC IN SUPPORT THEREOF will be served or was served (a) on the judge in chambers in the form and manner required by LBR 5005-2(d); and (b) in the manner stated below: 1. TO BE SERVED BY THE COURT VIA NOTICE OF ELECTRONIC FILING (NEF): Pursuant to controlling General Orders and LBR, the foregoing document will be served by the court via NEF and hyperlink to the document. On February 15, 2019, I checked the CM/ECF docket for this bankruptcy case or adversary proceeding and determined that the following persons are on the Electronic Mail Notice List to receive NEF transmission at the email addresses stated below:

• Robbin L. Itkin [email protected], [email protected];[email protected]

• United States Trustee (LA) [email protected] Service information continued on attached page 2. SERVED BY UNITED STATES MAIL: On February 15, 2019, I served the following persons and/or entities at the last known addresses in this bankruptcy case or adversary proceeding by placing a true and correct copy thereof in a sealed envelope in the United States mail, first class, postage prepaid, and addressed as follows. Listing the judge here constitutes a declaration that mailing to the judge will be completed no later than 24 hours after the document is filed. John K Lyons DLA PIPER LLP (US) 444 West Lake St, Ste 900 Chicago, IL 60606-0089 Service information continued on attached page 3. SERVED BY PERSONAL DELIVERY, OVERNIGHT MAIL, FACSIMILE TRANSMISSION OR EMAIL (state method for each person or entity served): Pursuant to F.R.Civ.P. 5 and/or controlling LBR, on February 15, 2019, I served the following persons and/or entities by personal delivery, overnight mail service, or (for those who consented in writing to such service method), by facsimile transmission and/or email as follows. Listing the judge here constitutes a declaration that personal delivery on, or overnight mail to, the judge will be completed no later than 24 hours after the document is filed. Via Federal Express The Honorable Sandra R. Klein United States Bankruptcy Court/Central District of California Edward R. Roybal Federal Building and Courthouse 255 E. Temple Street, Suite 1582 / Courtroom 1575 Los Angeles, CA 90012 Service information continued on attached page I declare under penalty of perjury under the laws of the United States that the foregoing is true and correct. February 15, 2019 Jonathan Randolph /s/ Jonathan Randolph Date Printed Name Signature

Case 2:18-ap-01340-SK Doc 23-3 Filed 02/15/19 Entered 02/15/19 18:36:10 Desc Proof of Service Page 1 of 1

michael b. lubic (sbn 122591) kevin s. asfour (sbn 228993)€¦ · v. new target investments...

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