Opinion
No. 04 CV 0904 (SJ).
April 7, 2005
TRACHTENBERG, RODES FRIEDBERG, New York, NY, Leonard A. Rodes Attorney for Plaintiff.
BAUMAN, KATZ GRILL, LLP, New York, NY, Steven Cramer, Attorney for Defendant Timothy D. King.
CERTILMAN, BALIN, ADLER HYMAN, LLP, East Meadow, NY, Robert Connolly Attorney for Defendants William J. Reinhardt, W.J.R. Associates.
MEMORANDUM AND ORDER
Plaintiff Staples, Inc. ("Plaintiff") brought this action against Defendants W.J.R. Associates ("Defendant W.J.R.") and the members or former members of the W.J.R. Associates Partnership Carmine Evangelista, Robert H. Kane, William J. Reinhardt, James Sluyk, and Timothy D. King, seeking to recover damages for breach of contract, breach of warranty, and unjust enrichment. Presently before this Court is the moving Defendants' Motion to vacate the entry of default and for enlargement of their time to answer or otherwise move pursuant to Federal Rule of Civil Procedure 6(b)(2), and Plaintiff's Cross-Motion for entry of default judgment against the moving Defendants.
FACTUAL BACKGROUND
According to Plaintiff's Complaint, Defendants entered into an agreement on or about March 12, 2003 leasing to Plaintiff a large portion of a shopping center located at 1740 Utica Avenue ("the Property"). (Compl. ¶¶ 2, 11, 17.) Defendants allegedly represented to Plaintiff that they had authority to enter into the lease and that the Property was free of any mortgage liens except for those in favor of mortgagees who had given or would give non-disturbance agreements. (Id. ¶¶ 2, 20.)
In fact, however, the Property was already the subject of a mortgage foreclosure action by State Street Bank, the mortgagee by assignment of a mortgage given to Defendant W.J.R. Associates to secure at least $4.5 million in debt, in which a receiver had been judicially appointed in approximately April 2001. (Id. ¶¶ 2, 15-16.) State Street Bank did not provide a non-disturbance agreement regarding this lien, and thus the lien did not match Defendants' representations. (Id. ¶ 21.)
Defendants did admit during negotiations that they had defaulted under the State Street Bank mortgage. (Id. ¶ 18.) However, they did not reveal that a receiver had been appointed. (Id. ¶¶ 18, 22.) Additionally, Defendants claimed that financing was in place to permit them to cure the default and pay off the mortgage, and that all that was needed for the financing was to close the deal with Plaintiff, but Defendants never cured the default or paid off the mortgage. (Id. ¶¶ 18, 25.)
The lease executed by Plaintiff and Defendants expressly provided that Plaintiff would make substantial investments in improving the property, and Plaintiff allegedly invested over $1 million between March and August 2003 in preparing the leased premises for occupancy, in reliance on Defendants' representations. (Id. ¶ 19.)
After the lease was executed, and subsequent to Plaintiff's investments in the Property, the Property was sold at a foreclosure sale, and was transferred to the ownership of Realty Equity Holdings 3820 ("REH") on or about August 20, 2003. (Id. ¶ 26.) Plaintiff asserts that REH was aware that Plaintiff had entered into a long-term lease for rental of the property and that Plaintiff was making substantial investments in the property, and that the Defendants therefore received a higher price at the foreclosure sale. (Id. ¶ 27.)
REH informed Plaintiff that Plaintiff's lease with Defendants was terminated and that Plaintiff would therefore have to either quit the premises or enter into a new lease with REH. (Id. ¶ 28.) As Plaintiff had just invested over $1 million in the property, Plaintiff chose to enter into the new lease, despite the fact that the new lease was much less favorable to Plaintiff: the rent under the new lease is approximately 30% greater than the rent under the lease with Defendants, such that over the course of 20 years Plaintiff will pay an additional $1,766,537 in rent. (Id. ¶¶ 28-30.)
PROCEDURAL BACKGROUND
Plaintiff filed the Complaint in this case on March 3, 2004. All Defendants appear to have been properly served with process. A stipulation entered into by the parties granted Defendants, including the moving Defendants, additional time to answer or move with respect to the Complaint. (Pl. Mot. Default J. Ex. B.) New counsel to Defendants Reinhardt and W.J.R., Robert Connolly, then obtained Plaintiff's permission for an additional extension of time to plead. Defendant King filed an Answer on May 25, 2004 and Defendants Reinhardt and W.J.R. filed an Answer on June 21, 2004. The moving Defendants did not file an Answer or any other submissions during the time allotted.
An initial conference in the case was held on October 19, 2004, at which the moving Defendants did not appear. Defendants Reinhardt and W.J.R., who did appear, were represented by Connolly, who was advised that he should inform Plaintiff's counsel by October 22, 2004 whether he would represent the moving Defendants as well. Connolly apparently stated that he had been discussing the question of representation with the moving Defendants. (Rodes Aff. ¶ 6.) Plaintiff expressed an intention at this conference to seek a default against the moving Defendants.
On November 3, 2004 Plaintiff filed an affidavit requesting entry of default against the moving Defendants. On November 22, 2004 Plaintiff filed new requests for the Clerk of Court to enter notices of default against the moving Defendants, and on December 13, 2004 the Clerk of Court entered the notations of default.
Shortly afterwards, on December 21, 2004, counsel for Defendants Sluyk, Evangelista, and Kane (collectively, "the moving Defendants" or "Defendants") notified the Court and the other parties that these Defendants would be filing a motion to vacate the default and proposing a briefing schedule. Pursuant to the briefing schedule, which was approved by this Court and was not opposed by Plaintiff, Defendants filed the motion to vacate on December 31, 2004. In early February 2005, Plaintiff filed the Cross-Motion for default judgment.
DISCUSSION
I. Defendants' Motion to Vacate the Entry of Default and Plaintiff's Motion to Enter Default Judgment
The Second Circuit "has expressed on numerous occasions its preference that litigation disputes be resolved on the merits, not by default." Cody v. Mello, 59 F.3d 13, 15 (2d Cir. 1995). Dismissal is considered "a harsh remedy to be utilized only in extreme situations" and "the most severe sanction which the court may apply." Id. (internal quotations and citations omitted). Defaults are particularly disfavored when the case presents contested issues of fact. Brown v. DeFilippis, 695 F.Supp. 1528, 1530 (S.D.N.Y. 1988).
Under Federal Rule of Civil Procedure Rule 55, "[f]or good cause shown the court may set aside an entry of default." Because this Rule does not define "good cause," the Second Circuit has established three primary criteria to be considered in deciding whether to vacate a default or a default judgment: "(1) whether the default was willful; (2) whether setting aside the default would prejudice the adversary; and (3) whether a meritorious defense is presented." Enron Oil Corp. v. Diakuhara, 10 F.3d 90, 96 (2d Cir. 1993). None of these factors is determinative; each is to be weighed and balanced with the others. Gumbs Thomas Publishers, Inc. v. Lushena Books, 2003 WL 21056983, *2 (E.D.N.Y. 2003) (citing Commercial Bank of Kuwait v. Rafidain Bank, 15 F.3d 238, 243 (2d Cir. 1994)).
The Court may also consider "[o]ther relevant equitable factors [such as] . . . whether the entry of default would bring about a harsh or unfair result." Enron Oil Corp., 10 F.3d at 96. Additionally, where substantial sums of money are at stake this may tip the balance of equities in favor of vacating a default.Id. at 97. In general, "courts should liberally grant motions to vacate default judgments so that trial on the merits may be had and justice may be done." Brown, 695 F.Supp. at 1530. Ultimately, the decision whether to grant a motion to vacate a default judgment is within the sound discretion of the district court. U.S. v. Alongi, 346 F.Supp.2d 394, 395 (E.D.N.Y. 2004) (citing State Street Bank Trust Co. v. Inversiones Errazuriz Limitada, 374 F.3d 158 (2d Cir. 2004)).
A. Whether the Default Was Willful
The Second Circuit has interpreted willfulness in the default judgment context "to refer to conduct that is more than merely negligent or careless." E-Business Holdings, LLC v. Webgenius.com. Inc., 2004 WL 2884311, *1 (S.D.N.Y. 2004) (citingSEC v. McNulty, 137 F.3d 732, 738 (2d Cir. 1998). Courts have held defaults to be willful "when a defendant simply ignores a complaint without action, or when a lawyer neglects a case for an extended period of time." Brown v. DeFilippis, 695 F.Supp. 1528, 1530 (S.D.N.Y. 1988) (internal citations omitted). A default may also be found willful where the conduct of the litigant or counsel "was egregious and was not satisfactorily explained." E-Business Holdings, 2004 WL 2884311 at *1.
The moving Defendants assert that the default was not willful, but rather inadvertent, a consequence of a misunderstanding of their legal obligations and rights and of miscommunication between the parties. (Defs.' Memo. Law at 2; Evangelista Aff.) More specifically, the moving Defendants claim that because they transferred their partnership interests to Defendant Reinhardt, who agreed to indemnify them for any liability regarding the partnership, they believed their individual interests would be represented through the defense of the partnership, Defendant W.J.R. (Evangelista Aff. ¶ 8.) They allegedly believed that either no representation would be necessary, or that the indemnification agreement would be sufficient for counsel to Defendant W.J.R. to represent them. (Id. ¶ 9.) Defendants also state that they did not attempt to prevent the entry of a notation of default because:
With the Clerks [sic] entry of default imminent, but not yet entered, a motion to vacate the default was premature, and a motion to simply enlarge the time for Defendant's [sic] time to answer would have been rendered moot upon the Clerk's entry of a default. In the interest of judicial economy, the Movants herein simply waited for the Clerk's entry to make the instant motion.
(Connolly Decl. ¶ 3.)
Plaintiffs contend that the default was willful because Defendants were on notice of the litigation and simply chose not to respond even after enlargement of the time to answer, and that arguments similar to those proffered by Defendants were rejected in the cases of Sexton v. M.V. Silver Happiness, 1997 WL 642348 (E.D.N.Y. Sept. 9, 1997) and Jet Star Enterprises Ltd. v. CS Aviation Services, 2004 WL 350733 (S.D.N.Y. Feb. 24, 2004).
The Court finds that Defendants' purported concern for "judicial economy" is implausible, given that Defendants were clearly aware that a motion for default would issue and would likely — and, in fact, did — generate voluminous filings in the form of motions for entry of a notation of default, motions for entry of default judgment, cross-motions to vacate, exhibits to the motions and cross-motions, and motions and letters relating to discovery on the default motions and cross-motions. Judicial economy is clearly undermined, not advanced, when litigants default and then attempt to vacate the default. The Court also finds that it is unclear why Defendants could not have presented their arguments regarding indemnification earlier on in the litigation, particularly since any confusion as to whether counsel to Defendant W.J.R. or Defendant Reinhardt would indemnify the moving Defendants should have been easily resolved, given that Defendants W.J.R. and Reinhardt and the moving Defendants are all represented by the same attorney, who of course had access to the indemnification agreements as well as the ability to confer with the various Defendants. Finally, Defendants' proffered explanation only serves to suggest that they actually considered the question of whether to attempt to avoid defaulting, and chose, instead, to "simply wait." (Connolly Decl. ¶ 3.) Accordingly, the Court must find that the default was willful. However, this factor must be weighted against the remainder of the factors, which are discussed below.
B. Whether Setting Aside the Default Would Prejudice Plaintiff
The Second Circuit has held that "delay alone is not a sufficient basis for establishing prejudice. Rather, it must be shown that delay will 'result in the loss of evidence, create increased difficulties of discovery, or provide greater opportunity for fraud and collusion.'" Davis v. Musler, 713 F.2d 907, 916 (2d Cir. 1983) (internal citations omitted).
The moving Defendants assert that Plaintiff would not be prejudiced if the default were set aside because the litigation and discovery are in the early stages. Defendants assert that if the default is set aside and they are permitted to file an Answer the Complaint, their Answer will contain essentially the same responses, defenses, and affirmative defenses as those already set forth by other Defendants against whom default has not been entered, except for the contention that the moving Defendants were not partners in W.J.R. at any time relevant to the litigation. (Defs.' Memo. Law at 3.) Therefore, they argue, Plaintiff will not be obligated to address any new issues not already raised.
Plaintiff contends that they will be prejudiced by a vacatur of the default because depositions and document discovery have already been completed. (Pl. Mem. Law at 14.) Plaintiff suggests that "a default lasting many months gives rise to a presumption that the plaintiff will be prejudiced by a vacatur of a defendant's default." (Id. at 14 (citing Badian v. Brandaid Communications Corp., 2004 WL 1933573 at *4 (S.D.N.Y. Aug. 30, 2004).) Plaintiff points to cases indicating that a delay may cause prejudice because witnesses and evidence may have become more difficult to locate, and witnesses' memories may have faded. (Id.) In this case, it is hard to imagine — and Plaintiff has not demonstrated — that witnesses' memories will have faded substantially or that evidence will have become more difficult to obtain, given that less than a year has elapsed since the original deadline for filing of Answers to the Complaint, and less than six months has gone by since Plaintiff sought to obtain an entry of default. Moreover, it appears that the evidence against these Defendants will overlap almost completely with that which will be used against other Defendants, and evidence specific to these Defendants has been produced in the course of litigating the Motions for Default Judgment and for Vacature of the Entry of Default, so that it does not appear that discovery will pose a problem. The Court therefore finds that Plaintiff will not be prejudiced if the default is vacated.
C. Whether a Meritorious Defense Has Been Presented
A party seeking to vacate a default need not conclusively establish the validity of a defense but merely that the defense raises a serious question. Brown, 695 F.Supp. at 1530 (citingDavis v. Musler, 713 F.2d 907, 916 (2d Cir. 1983)). The moving Defendants state that they have presented meritorious defenses, as set forth in their proposed Answer. (Evangelista Aff. Ex. B.) The proposed Answer asserts that the moving Defendants were not general partners in W.J.R. at any time relevant to Plaintiff's Complaint. (Id. ¶ 11.) It also sets forth two defenses: the claims that Defendants possessed good title to the Subject Property at all times, and that Defendants had legal authority to enter into the agreement with Plaintiff because they had not been notified that a receiver had been confirmed. (Id. ¶¶ 44-45.) Additionally, it sets forth seven affirmative defenses: that the Complaint fails to state a claim upon which relief can be granted, estoppel, waiver, laches, the doctrine of unclean hands, Plaintiff's asserted failure to mitigate damages, and Plaintiff's asserted failure to follow the prerequisites for commencing litigation pursuant to the subject lease agreement. (Id. at ¶¶ 46-52.)
Plaintiff argues that the moving Defendants were, in fact, members of the partnership at the time of the negotiation and execution of the lease, and in support of this claim have produced documents indicating that the transfers of partnership interests were not signed by two of the moving Defendants, Defendants Kane and Evangelista, until after the lease had been executed. (Pl. Mem. Law Ex. J.) Additionally Plaintiff argues that none of the Defendants may actually assert this defense because their "Business Certificate for Partners" on file in the Kings County Clerks' Office was never modified, in violation of Section 130 of the General Business Law.
The Court finds, however, that even if this defense turns out to be meritless, Defendants have raised questions with respect to other defenses, such as whether they possessed good title to the Subject Property at all times and had not been notified that a receiver had been confirmed, waiver and estoppel, and Plaintiff's asserted failure to follow the prerequisites for commencing litigation pursuant to the subject lease agreement. (Defs.' Mem. Law; Reinhardt Aff. ¶ 5.) Defendants need not conclusively establish that these defenses will ultimately prove fruitful, but only raise serious questions as to the possibility that the defenses are meritorious. Brown, 695 F.Supp. at 1530. The Court is reluctant to conclude at this stage of the litigation that Defendants have asserted no meritorious defenses.
D. Equitable Considerations
The Plaintiff in this case seeks to hold Defendants jointly and severally liable for more than $1 million in damages. (Compl. ¶ 1.) Plaintiff intends to hold Defendants personally liable, since the partnership is now insolvent. (Pl. Mem. Law at 14.) The Court finds that to effectively impose a more than $1 million penalty upon Defendants for their relatively brief and not particularly egregious default would be excessive and inequitable.
E. Balancing of the Factors
For the reasons stated above, the Court finds that the default was willful, but that setting aside the default will not prejudice Plaintiff, that Defendants have set forth potentially meritorious defenses, and that equitable considerations favor vacatur of the default. A balancing of the factors identified by the Second Circuit for assessing defaults under Federal Rule of Civil Procedure 55, Enron Oil Corp., 10 F.3d at 96, therefore leads the Court to the conclusion that the default must be vacated. Defendants' Motion to Vacate the Default is GRANTED and Plaintiff's Motion for Entry of Default Judgment is DENIED.
II. Defendants' Motion for Enlargement of Time to Answer or Respond
As the Court has found that the entry of default against Defendants should be vacated, the Court has effectively found that their neglect in regards to the default should be excused, as required by Federal Rule of Civil Procedure 6(b)(2). The Court therefore holds that the moving Defendants shall be granted twenty (20) days from the entry of this Order on the record to file their proposed Answer and affirmative defenses.
CONCLUSION
For the reasons stated herein, the moving Defendants' Motion to Vacate the Default is GRANTED. Plaintiff's Motion to Enter Default Judgment is DENIED. The moving Defendants' motion for enlargement of time to answer or otherwise respond is GRANTED. The Clerk of Court is directed to vacate the entry of default.
SO ORDERED.