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ARGUS RESEARCH GROUP, INC. v. ARGUS SECURITIES

June 4, 2002

ARGUS RESEARCH GROUP, INC., PLAINTIFF,
V.
ARGUS SECURITIES, INC., DEFENDANT



The opinion of the court was delivered by: Arthur D. Spatt, U.S. District Judge

Memorandum of 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 Plaintiffs complaint.

BACKGROUND

On March 1, 2000, Argus filed this lawsuit and served Defendant with the summons and complaint. After Defendant failed to file an answer, Argus filed a request to enter default. On July 26, 2000, the Clerk of Court entered default against Defendant. On November 13, 2000, Argus moved for a default judgment. Defendant opposes Argus' request for a default judgment and seeks vacatur of the default pursuant to Federal Rule of Civil Procedure 55(c), arguing that its current owner did not have notice of this lawsuit until it received the motion for default judgment.

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 Securities.

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 default.

Analysis

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).

1. Willfulness

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, ...


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