The opinion of the court was delivered by: Arthur D. Spatt, U.S. District Judge
Decision and Order
Plaintiff, Argus Research Group, Inc. ("Argus") brought this trademark
infringement action against Defendant Argus Securities, Inc. ("Defendant"
or "Argus Securities"). Currently before the Court are Argus' motion for
default judgment and Defendant's cross-motion for an order setting aside
the entry of default and allowing Defendant to submit an answer to
On September 1, 2000, Mr. John Klukewycz, known professionally as
John Kay ("Kay"), bought control of Defendant from his predecessor in
interest, John M. Cook II ("Cook"), after completing the second of two
stock purchases. While Kay concedes that the company was properly served
with the complaint in this action, he avers he knew nothing of this
action nor the entry of default when he took control of Argus
Securities. On the contrary, Kay contends that Cook warranted that there
were no outstanding legal claims against the company when he bought Argus
In his affidavit, Kay testifies that he first learned of the action
against Argus Securities in November 9, 2000 when Argus served its motion
for default judgment on Defendant. He states that Cook never disclosed to
him that he had been served with the summons and complaint in this
action. On February 23, 2001, Kay retained counsel, who responded by
letter to Plaintiff four days later. On April 26, 2001, both parties
appeared before United States Magistrate Judge Arlene Lindsay who ordered
the parties to mediation. From June through November 2001, the parties
engaged in a series of mediation sessions. After the mediation proved
unsuccessful, Defendant filed its cross-motion to vacate the entry of
Federal Rule of Civil Procedure 55(c) provides that "[for good cause
the court may set aside an entry of default." Although Rule 55(c) does
not define "good cause," the Second Circuit has established three
criteria to assess whether to relieve a party from the entry of default:
(1) whether the default was willful (2) whether the setting aside of the
default would prejudice the adversary and (3) whether a meritorious
defense is presented. Enron Oil v. Diakuhara, 10 F.3d 90, 96 (2d Cir.
1993). Other relevant equitable factors may also be considered when a
party requests to set aside an entry of default. Id. Specifically, the
district court can look at whether the failure to follow a rule of
procedure was a mistake in good faith as well as whether the entry of
default would bring about a harsh or unfair result. Id. Further, the
Second Circuit has stated that courts are to construe the term "good
cause" generously and when doubt exists as to whether a default should be
vacated, the doubt should be resolved in favor of the defaulting party.
Id. The Second Circuit strongly prefers dispute determination on the
merits, recognizing that "dismissal is a harsh remedy to be utilized only
in extreme situations." Cody v. Mello, 59 F.3d 13, 15 (2d Cir. 1995)
(internal quotations omitted); Shah v. New York State Dept. of Civil
Service, 168 F.3d 610, 615 (2d Cir. 1999).
To find that a default was willful, it must be clear that the
defaulting party engaged in deliberate or egregious conduct. See Gucci
America Inc. v. Gold Center Jewelry, 158 F.3d 631, 634-635 (2d Cir.
1998); America Alliance Ins. Co. v. Eagle Ins. Co., 92 F.3d 57, 61 (2d
Cir. 1996). Negligence or carelessness does not amount to willfulness.
SEC v. McNulty, 137 F.3d 732, 738 (2d Cir.), cert. denied, 525 U.S. 931
(1998). On the other hand, the court may find a default to have been
willful where the conduct of counsel or the litigant was egregious and
was not satisfactorily explained. See, e.g., American Alliance Insurance
Co. v. Eagle Insurance Co.,
92 F.3d 57, 60-61 (2d Cir. 1996) (discussing
cases). The standard for setting aside an entry of default pursuant to
Federal Rule of Civil Procedure 55(c) is less rigorous than the standard
for setting aside a default judgment pursuant to Rule 60(b). American
Alliance, 92 F.3d at 59.
Defendant argues that since its current management was unaware of this
action, its failure to answer cannot be considered willful. Argus,
however, counters with the fact that the former president of Defendant,
Cook, who had knowledge of this action, continues to be President and
work in Defendant's office in Florida. Argus further points out that
although the new management clearly had notice of this lawsuit in
November, it still did nothing for three months until it retained counsel
at the end of February. Finally, Argus argues that if Cook did indeed
fail to disclose the existence of this lawsuit, Defendant should look to
Cook for indemnification.
A review of the record reveals that Defendant's conduct falls short of
the deliberate standard for willfulness contemplated by the Second
Circuit. For example, in American Alliance Insurance Co. v. Eagle
Insurance Co., 92 F.3d 57, 60-61 (2d Cir. 1996), the Second Circuit
vacated a default judgment that resulted from a filing error committed by
a clerk for in-house counsel. In reaching its decision, the court focused
on whether the default was the result of "willful" conduct. Although the
lawyer had not discovered the misfiling for two months, the court stated
that, because the act was merely one of carelessness or negligence, the
harsh application of a default judgment was inappropriate. Id. A default
judgment, according to the court, should be entered only in the event of
either deliberate conduct or bad faith, neither of which was present in
that case. Id. Similarly, in Davis v. Mushler, 713 F.2d 907 (2d Cir.
1983), the Second Circuit cautioned that "the extreme sanction of a
default judgment must remain a weapon of last, rather than first,
resort, which should only be imposed upon a serious showing of willful
default." Id. at 916 (internal quotations and citations omitted).
Here, after receiving notice of Plaintiffs motion for entry of default
judgment, Defendant retained counsel and has appeared in all subsequent
court appearances. After participating in the mediation sessions,
Defendant expeditiously moved to vacate the default entered by the
Clerk. Since Kay has acted diligently since he received notice of this
lawsuit, Defendant's conduct does not rise to the level of conduct that
the Second Circuit has found to be willful. See e.g., SEC v. McNulty, 137
F.3d at 738 (Defendant failed to answer complaint, even after Plaintiff
had repeatedly warned him that it would move for entry of default);
Commercial Bank of Kuwait v. Rafidain Bank, 15 F.3d 238, 243-44 (2d Cir.
1994) (default deemed willful where, ...