Mountains of Spices LLC v. Lafrenz

653 F.Supp.3d 665

MOUNTAINS OF SPICES LLC, Plaintiff, v. Sara Lihong Wei LAFRENZ, et al., Defendants.

No. CV-21-01497-PHX-JAT

United States District Court, D. Arizona

Filed January 27, 2023

Signed January 26, 2023

Celeste Herr, Pro Hac Vice, David E. Hutchinson, Pro Hac Vice, Eric T. Schmitt, Pro Hac Vice, William John Quinlan, Quinlan Law Firm LLC, Chicago, IL, for Plaintiff.

Paul E. Green, Pro Hac Vice, Scott H. Palmer PC, Addison, TX, for Defendant Qisheng Chen.

Xiuzhu Wei, Dumfries, VA, Pro Se.

Jianjun Wang, Richmond, TX, Pro Se.

ORDER

James A. Teilborg, Senior United District Judge

In this action Plaintiff Mountain of Spices, LLC sues to recover funds it allegedly transferred to Defendants Sara Lihong Wei Lafrenz ("Sara") and Maywind Trading, LLC ("Maywind"). Plaintiff alleges that it sent the money with the understanding that Sara and Maywind would facilitate its transfer to a specific predesignated borrower to be repaid with interest. It further alleges that Sara, Maywind, and other Defendants instead used this money for their own purposes and have refused to return it to Plaintiff. Before the Court is Plaintiff's motion for entry of final default judgment against Sara and Maywind only. (Doc. 70). The Court now rules.

I. BACKGROUND

The complaint depicts a world-spanning whistleblower "Movement" dedicated to promoting liberty and fighting communism in China.¹ Its members, mainly Chinese nationals, are muckrakers, exposing by protest and publication the alleged crimes and corruptions of the Chinese Communist Party. (See id.). Movement members are loosely organized into so-called Farms by geographic location, with some Farms operating through business entities and others operating less formally. (See id. at 2). Plaintiff alleges itself to be part of this Movement. (Id.).

In the summer of 2020, Movement leaders conceived a scheme through which members could earn interest by lending money to supporters. (Id. at 6). Sara, the leader of the Farm in Phoenix, Arizona, was to gather money from Farms and individual members and loan that money to a specific, pre-determined borrower. (Id.). The complaint describes the ends to which the designated borrower was to put the loaned funds as "general working capital purposes, . . . including . . . investment into equity markets or . . . operating expenses," but does not identify the borrower or specify the nature of its business. (Id.).

Sara designated Maywind to receive member funds for this "Loan Program," and chose her son, Defendant Xiuzhu "Devin" Wei, to serve as de-facto chief financial officer. (Id. at 7). She also allegedly selected Jian Peng, Maywind's sole member, as well as Defendants Qisheng Chen ("Chen") and Jianjun Wang ("Wang") to assist her in administering the loan program. (Id.; Doc. 42 at 8-9). Sara provided a loan agreement to lenders and promised she would countersign and return the agreements. (See Doc. 22 at 8). She promised she would account for all funds and report monthly to Plaintiff. (See id.). And she promised she would lend to the designated borrower all funds the lenders transferred to her. (See id. at 6, 8).

Plaintiff, relying on these promises, transferred nearly $4.6 million to Maywind bank accounts from August to October of 2020. (Id. at 9; Doc. 70-1 at 2). Over the same period and continuing into December of 2020 Plaintiff also directed six individual lenders to send a total of just over $5.4 million to Maywind. (Doc. 22 at 9). Counting additional transfers from other Farms and lenders the complaint suggests that Maywind and Sara eventually received somewhere between $44 million and $90 million.

Sara, however, did not keep her promises. (See id. at 6-11). She failed to countersign the loan agreements, failed to account for Plaintiff's funds or provide reports, and failed to detail whether or where Maywind had transferred Plaintiff's money. (Id. at 8, 10-11). Sara later indicated in statements in online chat groups that some money had been transferred from Maywind to Wang and Chen. (Id. at 13).

Plaintiff commenced this action in August of 2021, naming as defendants Sara, Devin, Maywind, Jian, Chen, and Wang, and claiming unjust enrichment, constructive fraud, conversion, and negligent misrepresentation. (Doc. 1). Plaintiff has subsequently filed two amended complaints and voluntarily dismissed the action as to Jian only. (Docs. 9; 22; 26). Wang, Chen, and Devin have each answered the complaint, but Sara and Maywind have not. (Docs. 13; 50; 65). On Plaintiff's motion the Clerk of Court entered Sara's and Maywind's defaults, after which Plaintiff filed this motion for final default judgment against them. (Docs. 34; 39; 70).

II. ANALYSIS

Once the clerk has entered default against a party, the Court has discretion to enter a default judgment against that party. Aldabe v. Aldabe, 616 F.2d 1089, 1092 (9th Cir. 1980); and see Fed. R. Civ. P. 55(b)(2). However, in cases involving multiple claims or parties a judgment as to fewer than all claims or parties is final "only if the court expressly determines that there is no just reason for delay." Fed. R. Civ. P. 54(b). In the absence of such a finding, any such judgment "does not end the action as to any of the claims or parties and may be revised at any time before" the entry of final judgment as to all claims and parties. Id. The Court will first consider whether entry of default judgment is warranted, and if whether such a judgment should be certified as final.

a. Entry of Default Judgment

In exercising its discretion to enter default judgment, a court may consider several factors, including:

(1) the possibility of prejudice to the plaintiff, (2) the merits of plaintiff's substantive claim, (3) the sufficiency of the complaint, (4) the sum of money at stake in the action; (5) the possibility of a dispute concerning material facts; (6) whether the default was due to excusable neglect, and (7) the strong policy underlying the Federal Rules of Civil Procedure favoring decisions on the merits.

Eitel v. McCool, 782 F.2d 1470, 1472-73 (9th Cir. 1986). In conducting this inquiry, the Court "takes the well-pleaded factual allegations in the complaint as true." DirecTV, Inc. v. Huynh, 503 F.3d 847, 854 (9th Cir. 2007) (cleaned up). The Court will consider each of the factors in turn.

i. Possibility of Prejudice to the Plaintiff

Plaintiff may be prejudiced because Sara and Maywind are not participating in this litigation, potentially leaving Plaintiff without a remedy against them if the Court does not enter default judgment. See Elektra Ent. Grp., Inc. v. Crawford, 226 F.R.D. 388, 392 (C.D. Cal. 2005). This is particularly true in the case of Sara: Plaintiff has submitted documents with its motion suggesting that Sara is both refusing to participate in this litigation and declining to return Plaintiff's money until a default judgment is entered. (See Doc. 70-1 at 66-67).

Further, in documents supporting its motion Plaintiff has demonstrated the possibility that Sara and Maywind may be using Plaintiff's money to pay their own expenses. For example, Plaintiff has raised the possibility that Sara has used its funds to pay part of a 57-million-dollar SEC judgment against her company or has transferred the money from Maywind to an LLC Sara owns (Docs. 70-1 at 55, 72). Similarly, Maywind has apparently paid millions of dollars to two law firms. (Doc. 70-1 at 45-50). While these documents do not demonstrate that any Defendant has used Plaintiff's funds rather than funds from other sources in these expenditures, these documents along with the defaulted Defendants' failure to participate in this litigation are enough to demonstrate the possibility of prejudice to Plaintiff if default judgment is not entered. The first factor therefore weighs in favor of entering default judgment.

ii. Sufficiency of the Complaint and Merits of Plaintiff's Claims

The second and third factors dealing with sufficiency of the complaint and the merits of plaintiff's claims—perhaps the most important among the Eitel factors—are usually considered together. See, e.g., Ariz. Bd. of Regents v. Doe, 555 F. Supp. 3d 805, 816 (D. Ariz. 2021). These factors require a court to consider "whether the plaintiff has stated a claim on which it may recover." Id. (cleaned up); see DirecTV, 503 F.3d 847, 854-55 (9th Cir. 2007). The Court will review Plaintiff's claims against Sara and Maywind to determine whether each adequately states a claim.

1. Unjust Enrichment

Count One of the complaint is a claim for unjust enrichment against all Defendants. (Doc. 22 at 14-15). Unjust enrichment requires "(1) an enrichment, (2) an impoverishment, (3) a connection between the two, (4) the absence of justification for the enrichment and impoverishment and (5) the absence of any remedy at law." Loiselle v. Cosas Mgmt. Grp., 224 Ariz. 207, 228 P.3d 943, 946 ¶ 9 (Ariz. App. 2010) (citation omitted).

This Court previously found that Plaintiff had stated a claim for unjust enrichment on which it could recover against Devin. (Doc. 55 at 4-5). That analysis is largely applicable to Plaintiff's unjust enrichment claims against Sara and Maywind. Plaintiff was made poorer when it transferred its funds to Maywind, Sara failed to lend them to the designated borrower, and Plaintiff was deprived of the interest it expected to earn from the loan. (Doc. 22 at 8-11; cf. Doc. 55 at 5). Sara and Maywind were enriched as a direct result of this loss, as the money was transferred to Maywind accounts which Sara controlled. (Doc. 22 at 7; cf. Doc. 55 at 5). Further, Plaintiff has alleged that the impoverishment and corresponding enrichment were a result of Sara and Maywind misappropriating the money without justification or authorization. (Doc. 22 at 12-14; cf. Doc. 55 at 5).

The only remaining question is whether, given that Plaintiff has also advanced several tort claims against Sara and Maywind, Plaintiff has adequately alleged the fifth element, the "absence of any remedy at law." Even where...