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PMJ Capital Corp. v. Bauco

United States District Court, S.D. New York

January 18, 2018

PMJ Capital Corp., Plaintiff,
Frank Bauco, et al., Defendants.


          ALISON J. NATHAN, District Judge:

         This case concerns a vessel foreclosure action brought by Plaintiff PMJ Capital Corp. ("PMJ"). At issue are two cross-motions: (1) a motion by PMJ to order the interlocutory sale of Defendant The Lady Antoinette ("the Vessel"); and (2) a motion by Defendants Frank and Antoinette Bauco ("the Baucos") to vacate the default entered against them on March 9, 2017. For the reasons provided below, the Court conditionally grants the vacatur, provided that the Baucos provide security, and denies the motion for an interlocutory sale.

         I. BACKGROUND

         In 2013, the Baucos sought a loan from PMJ. According to Frank Bauco, he needed the loan to cover his personal expenses. See Dkt. No. 80, Ex. A ("Bauco Affidavit") ¶¶ 16-20. On November 20, 2013, PMJ entered a loan agreement with 550 Realty Associates, LLC ("550 Realty"), of which Mr. Bauco was a managing member. See Dkt. No. 74, Ex. B ("Promissory Note"). Under the terms of the Promissory Note ("the Note"), PMJ gave 550 Realty $75, 000, which 550 Realty agreed to pay back at an interest rate of 16%. Id. Also on November 20, 2013, the Baucos signed a Guaranty of Payment, personally guaranteeing the Note. See Dkt. No. 74, Ex. C ("Guaranty of Payment"). In addition, to secure the loan, the Baucos executed in favor of PMJ a First Preferred Ship Mortgage on the Vessel, which they own. See Dkt. No. 74, Ex. D ("First Preferred Ship Mortgage"). After fees were taken out of the $75, 000 loan payment, 550 Realty received approximately $65, 500 from PMJ. See Bauco Affidavit ¶ 26. According to Mr. Bauco, the money from the loan "was used for primarily personal, family, and household purposes." See Id. ¶ 28.

         550 Realty made payments on the Note for approximately one year. See Bauco Affidavit ¶ 27; Dkt. No. 79, Ex. 1 ("State Court Complaint") ¶ 13. There is no evidence that 550 Realty or the Baucos made any payments to PMJ after July 2015. See Bauco Affidavit ¶ 27; State Court Complaint ¶ 13.

         Therefore, in August 2016, PMJ brought suit against the Baucos and the Vessel[1] alleging that the Baucos were in default under the terms of the Guaranty and the Mortgage and seeking to foreclose on the Vessel. See Dkt. No. 1 ("Complaint").

         According to PMJ, on September 22, 2016, the Baucos' attorney at the time, Phillip Grimaldi, accepted service of the Summons and Complaint on behalf of the Baucos. See Dkt. No. 13 ("Affirmation of Service") ¶ 4. In exchange, PMJ agreed to extend the time for the Baucos to respond until October 20, 2016. See Dkt. No. 57, Ex. 1 ("Emails with Grimaldi"). According to Mr. Bauco, at some point Grimaldi assured him that Grimaldi would file an answer in response to PMJ's complaint. Bauco Affidavit ¶ 7.

         On October 26, 2016, upon PMJ's application, the Court authorized the issuance of a warrant for the arrest of the Vessel. Dkt. No. 15 ("Order Authorizing Issuance of Warrant"). Around the same time, PMJ requested an entry of default against the Baucos because they had failed to file any responsive pleading. See Dkt. No. 18 ("First Request for Entry of Default"). The Court denied the request without prejudice because it could not conclude that service on Grimaldi clearly constituted proper service. See Dkt. No. 31 ("Order Denying Default").

         On November 30, 2016, the United States Marshal for the Southern District of New York arrested the Vessel. See Dkt. No. 54 ("Receipt and Return of Service Executed"). A few days later, on December 2, 2016, PMJ informed Grimaldi of the Vessel's arrest. See Dkt. No. 57, Ex. 2 ("12/2/16 Letter to Grimaldi"). In late January 2017, Grimaldi informed PMJ that he no longer represented the Baucos. Dkt. No. 57 ("Ware Declaration") ¶ 7.

         Given Grimaldi's statement and the Court's earlier denial of its request for an entry of default, PMJ decided to serve the Baucos personally, which it did on February 14, 2017. See Dkt. No. 48 ("Affidavit of Service on Frank Bauco"); Dkt. No. 49 ("Affidavit of Service on Antoinette Bauco"). In addition, in early March 2017, PMJ informed the Baucos of the Vessel's arrest. See Dkt. No. 57, Ex. 4 ("3/2/17 Letter to Baucos").

         When the Baucos failed to respond to the complaint, PMJ again requested to enter default against them. See Dkt. No. 50 ("Second Request for Entry of Default"). This time, on March 9, 2017, the Clerk of the Court entered a Certificate of Default against the Baucos. Dkt. No. 52 ("Certificate of Default").

         On April 6, 2017, PMJ moved for an interlocutory sale of the Vessel. Dkt. No. 55 ("Motion for Interlocutory Sale"). On May 4, 2017, the Baucos, in their first filing in this litigation, requested an extension of time to respond to PMJ's motion. See Dkt. No. 64. The Court granted the extension, Dkt. No. 65, and on May 16, 2017, the Baucos submitted their opposition to PMJ's motion and also moved to vacate the default, Dkt. No. 73 ("Cross Motion to Set Aside Default").

         The Court addresses each motion in turn, beginning with the Baucos' motion to vacate the default.


          Under Rule 55(a) of the Federal Rules of Civil Procedure, "[w]hen a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend ..., the clerk must enter the party's default." However, after such default is entered, "[t]he court may set aside an entry of default for good cause." Fed.R.Civ.P. 55(c). The standard for vacating a default is more lenient than that for a default judgment, but the "good cause" factors are the same for both. See Meehan v. Snow, 652 F.2d 274, 276 (2d Cir. 1981); Enron Oil Corp. v. Diakuhara, 10 F.3d 90, 96 (2d Cir. 1993). Courts assess three criteria to determine whether "good cause" exists: "(1) the willfulness of default, (2) the existence of any meritorious defenses, and (3) prejudice to the non-defaulting party." Bricklayers & Allied Craftworkers Local 2, Albany, N.Y.Pension Fund v. Moidton Masonry & Constr., LLC, 779 F.3d 182, 186 (2d Cir. 2015) (quoting Guggenheim Capital, LLC v. Birnbaum, 722 F.3d 444, 455 (2d Cir. 2013)). The Second Circuit has expressed a strong "preference for resolving disputes on the merits." New York v. Green, 420 F.3d 99, 104 (2d Cir. 2005) (quoting Powerserve Int'l, Inc. v. Lavi, 239 F.3d 508, 514 (2d Cir. 2001)).

         The Baucos contend that all three "good cause" factors weigh in favor of vacating the default here.

         A. Willfulness of Default

          The Baucos argue that the default was not willful but was instead the result of negligence by their former counsel, Grimaldi. See Diet. No. 74 ("Opposition to Motion for Interlocutory Sale") ¶¶ 28-32.

         The Second Circuit has interpreted willfulness "to refer to conduct that is more than merely negligent or careless." S.E.C. v. McNulty, 137 F.3d 732, 738 (2d Cir. 1998). Instead, willful conduct is that which is "egregious" and "not satisfactorily explained." Id. However, "a finding of bad faith is [not] a necessary predicate to concluding that a defendant acted 'willfully.'" Gucci Am., Inc. v. Gold Or. Jewelry, 158 F.3d 631, 635 (2d Cir. 1998). Thus when a defendant "does not deny that he received the complaint, the court's orders, ... or that he never answered the complaint, " and "does not contend that his non-compliance was due to circumstances beyond his control, " an inference of willful default is justified. Guggenheim Capital, LLC, 722 F.3d at 455. "[D]efaults have been found willful where, for example, an attorney failed, for unexplained reasons, to respond to a motion for summary judgment, or failed, for flimsy reasons, to comply with scheduling orders . . . ." McNulty, 137 F.3d at 738-39 (internal citations omitted).

         Moreover, "where the attorney's conduct has been found to be willful, the willfulness will be imputed to the party himself where he makes no showing that he has made any attempt to monitor counsel's handling of the lawsuit." Id. at 740. When a party has "diligently inquired of [his] attorney as to the status of [his] case 'three or four times a week' over a six-month period and ... the attorney ha[s] given assurances on each occasion that the matter [i]s being handled properly, " the party is not responsible for the attorney's neglect. Id. But when a party does "not talk to his attorney for nearly a year, and . . . receive[s] no bills ...

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