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Home Loan Investment Bank, F.S.B., F/K/A Ocean Bank, F.S.B v. Goodness and Mercy

April 30, 2011

HOME LOAN INVESTMENT BANK, F.S.B., F/K/A OCEAN BANK, F.S.B., PLAINTIFF,
v.
GOODNESS AND MERCY, INC.; MARY GILLIAM, HARRIET A. GILLIAM, NEW YORK STATE DEPARTMENT OF TAXATION & FINANCE, NEW YORK STATE WORKERS' COMPENSATION BOARD, THE UNITED STATES OF AMERICA, CAPITAL ONE BANK (USA), N.A. AND JOHN DOE NOS. 1-100, DEFENDANTS.



The opinion of the court was delivered by: Spatt, District Judge.

MEMORANDUM OF DECISION AND ORDER

Plaintiff Home Loan Investment Bank ("Home Loan" or "the Plaintiff") commenced this mortgage foreclosure and deficiency judgment action on August 13, 2010, against Goodness & Mercy, Inc. ("G&M" or "the Corporate Defendant"), Mary Gilliam, and Harriet Gilliam ("the Individual Defendants" and together with G&M "the Defendants") based on the Defendants alleged default under the terms of various agreements securing a Small Business Administration ("SBA") loan in the amount of $525,000. On November 30, 2010, based on the Defendants failure to timely answer or otherwise respond to the complaint, the Plaintiff moved for an entry of default, which was subsequently entered by the Clerk of the Court on December 6, 2010. Presently before the Court is the Defendants' motion pursuant to Federal Rule of Civil Procedure 55 ("Rule 55") to vacate the entry of default. For the reasons discussed below, the Defendants' motion is denied.

I. BACKGROUND

A. Factual Background

Plaintiff Home Loan is a national banking association organized and existing under the laws of the United States of America, with its office and principal place of business in Warwick, Rhode Island. On December 15, 2006, defendant Goodness & Mercy, Inc. executed a Small Business Administration Note in favor of Home Loan in the principal amount of $525,000 (the "Note"). In order to secure the loan, G&M also executed: (1) a Mortgage and Security Agreement (the "Mortgage") creating a mortgage lien in favor of Home Loan on two properties-67 East Main Street, Riverhead, New York 11901 (the "Commercial Property") and 23 Midway Drive, Riverhead, New York 11901 (the "Residential Property" and together with the Commercial Property, the "Mortgaged Properties"); and (2) a Security Agreement (the "Security Agreement") granting a security interest in favor of Home Loan in the collateral defined therein (the "Collateral"). (Compl., ¶¶ 16--18.)

To further secure the loan, defendants Mary Gilliam and Harriet Gilliam, in their personal capacities, each executed an unconditional guarantee (the "Unconditional Guarantees"). Finally, Mary Gilliam also executed a Collateral Mortgage and Security Agreement in favor of Home Loan (the "Collateral Mortgage" and together with the Note, Security Agreement, and Unconditional Guarantees, the "Loan Documents"). (Compl., ¶¶ 19--21.)

Pursuant to the Note, G&M agreed to pay Home Loan monthly installments of principal and interest payments commencing two months after the date of the loan. If G&M failed to make timely payments, Home Loan had the right, without notice or demand, to: (1) require immediate payment of all amount owing under the Note; (2) collect all amounts owing from G&M or Harriet and Mary Gilliam; (3) file suit and obtain judgment; (4) take possession of any Collateral; and (5) sell, lease, or otherwise dispose of any Collateral at public or private sale without advertisement. (Compl., ¶ 25.) Furthermore, under the terms of the Mortgage and Collateral Mortgage, G&M's failure to pay any portion of the debt within ten days of the due date constitutes an event of default, at which time Home Loan has the right to accelerate the debt and to commence and maintain foreclosure proceedings as to the Mortgaged Properties. (Compl., ¶ 26.) Finally, pursuant to the Unconditional Guarantees, in the event that G&M defaulted on the Note, upon written demand, Harriet and Mary Gilliam were required to pay all amounts due under the Note and pay all expenses that Home Loan may incur in enforcing the Unconditional Guarantees. (Compl., ¶ 28.)

According to Home Loan, G&M failed to make the required monthly principal and interest payments due under the Note on March 1, 2010, April 1, 2010, May 1, 2010, June 1, 2010, July 1, 2010, and August 1, 2010 in the amount not less than $543,968.20. On May 19, 2010, Home Loan sent a letter to G&M, Harriet Gilliam, and Mary Gilliam to inform them of the defaults, and that Home Loan was exercising its right to declare the remaining unpaid principal balance of the Note and all other amounts payable under the Loan Documents in the amount of $535,233.90 to be paid no later than June 1, 2009-presumably intended to state June 1, 2010 (the "May 19th Letter"). (Compl., Ex. H.) Also in the May 19th Letter, Home Loan informed G&M, Harriet Gilliam and Mary Gilliam that if the outstanding payments were not made by June 1, 2010, Home Loan would initiate foreclosure proceedings and/or take other actions available to it under the Loan Documents. As indicated above, G&M, Harriet Gilliam, and Mary Gilliam failed to make the required payments, and therefore Home Loan commenced the instant litigation.

B. Procedural History

On August 13, 2010, Home Loan commenced this instant action against G&M, Mary Gilliam, and Harriet Gilliam based on their alleged default under the Loan Documents, seeking a judgment of foreclosure on the Mortgaged Properties, immediate possession of the Collateral, and deficiency judgments against G&M, Harriet Gilliam and Mary Gilliam for: (1) the unpaid principle amounts under the Loan Documents, unpaid interest, and all late charges, which as of August 4, 2010 amounted to $543,968.20; (2) attorneys' fees, costs, and disbursements, which have accrued and which will continue to accrue until the amount due under the Note and Mortgage are paid in full; and (3) any and all additional fees that are due or may become due and payable as provided under the terms of the Loan Documents until the amount due under the Loan Documents is paid in full.

Also named as defendants were possible judgment creditors or potential holders of tax liens, including the New York State Department of Taxation & Finance; New York State Workers' Compensation Board; and Capital One Bank (USA), N.A. In addition, the United States of America was named as a defendant based on its tax lien on the property of Marion Gilliam. Finally, Home Loan also named certain "Doe Defendants" representing unknown individuals "holding or claiming to hold certain leaseholds, tenancies, sub-tenancies, possessory or other interests, including partnership interests, in and to any judgment or liens upon the Mortgaged Properties, or any portion thereof." (Compl., ¶ 12.)

According to the Affidavit of Service sworn to by William J. Wittenhagen, service on G&M, Harriet Gilliam, and Mary Gilliam was effectuated on October 15, 2010, by leaving a copy of the summons and complaint at the G&M offices located at 67 East Main St., Riverhead, New York 11901, with Ann "Doe", a G&M manager and co-worker of Harriet and Mary Gilliam, who stated that she was authorized to receive service on behalf G&M and Harriet and Mary Gilliam. (See Affidavit of Service, Docket Entry No. 2.) The Affidavit of Service also states that a copy of the summons and complaint was mailed to Harriet and Mary Gilliam on October 18, 2010 at their last known address, which was listed as their "pob" (place of business),

67 East Main Street, Riverhead, New York 11901. It is undisputed that G&M received the summons and complaint that was delivered on October 15, 2010, and therefore G&M's answer was due on November 5, 2010. Less clear is whether Harriet and Mary Gilliam were served consistent with this Affidavit of Service on October 15, 2010. However, neither Harriet or Mary Gilliam contest that they received a copy of the summons and complaint at their home address, 23 Midway Drive, Riverhead, New York 11901, on November 2, 2010. Accordingly, Harriet and Mary Gilliam's answer was due on or about November 23, 2010.

On November 30, 2010, after the Defendants had failed to make an appearance or otherwise answer the complaint, Home Loan moved for an entry of default as against G&M, Harriet Gilliam, and Mary Gilliam. According to Harriet Gilliam, also on November 30, 2010, she contacted counsel for the Plaintiff requesting an extension of time to Answer. However, counsel for the Plaintiff did not get back to Harriet Gilliam until December 3, 2010, when he advised her that he would not consent to an extension of time. Therefore, on December 6, 2010, Harriet Gilliam contacted the Court to request a sixty (60) day extension of time to file an Answer on the grounds that: 1) she had been involved in discussions with one of the Plaintiff's representatives regarding modification of the loan; 2) under New York State Real Property Law the Plaintiff was required to participate in a court ordered settlement conference and had failed to do so; 3) Mary Gilliam was being treated for a medical condition and Harriet Gilliam was her only caretaker; and 4) she was seeking the advice of counsel (the "Extension Letter"). (See Docket Entry No. 7.)

On the same day that the Court received the Extension Letter, the Clerk of the Court entered a notation of default as to G&M, Harriet Gilliam, and Mary Gilliam pursuant to Fed. R. Civ. P. 55(a). In light of the notation of default, this Court denied the requested extension to Answer, without prejudice, and informed the defendants that they may file a motion to vacate the default. (See Docket Entry No. 10.) Accordingly, on December 12, 2010, the Defendants filed the motion to vacate the entry of default that is presently before this Court.

II. DISCUSSION

Rule 55(a) of the Federal Rules of Civil Procedure provides that "[w]hen a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend . . . the clerk shall enter the party's default." Fed. R. Civ. P. 55(a). Once an entry of default has beenmade, the defendant may move to set aside the default entry pursuant to Fed. R. Civ. P. 55(c) for "good cause shown." Fed. R. Civ. P. 55(c). Where, as here, there has been an entry of default by the Clerk of the Court, but no default judgment, the Court decides the motion to vacate the entry of default pursuant to Rule 55(c), which is more lenient than the standard to set aside a default judgment under Rule 60(b). See Meehan v. Snow, 652 F.2d 274, 276 (2d Cir. 1981) ("[T]he standard for setting aside the entry of a default pursuant to Rule 55(c) is less rigorous than the 'excusable neglect' standard for setting aside a default judgment by motion pursuant to Rule 60(b).").

The question for the Court, then, is whether that Defendant's motion is supported by good cause; an inquiry that turns on the Court's analysis of three factors. In determining whether good cause exists to set aside an entry of default, courts should consider: (1) "the willfulness of the default"; (2) "the existence of a meritorious defense"; and (3) "the level of prejudice that the non-defaulting party may suffer should relief be granted." Pecarsky v. Galaxiworld.com, Ltd., 249 F.3d 167, 171 (2d Cir. 2001) (citations omitted). "Other relevant equitable factors may also be considered, for instance, whether the failure to follow a rule of procedure was ...


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