Opinion
99 CV 7589 (ILG)
May 10, 2002
MEMORANDUM ORDER
Defendant Warren Sulmasy ("Sulmasy") moves the Court, pursuant to Rules 55(c) and 60(b) of the Federal Rules of Civil Procedure, for an Order vacating a default judgment entered against him on October 25, 2000. For the reasons set forth below, Sulmasy's motion is granted.
BACKGROUND
The facts and procedural history of this case are complicated, and, accordingly, are set forth below in some detail. According to the complaint, plaintiff Jayme Dorrough ("Dorrough") is a resident of Tennessee, and is a principal of plaintiff Techlabs, Inc. ("Techlabs"). (See First Am. Compl. ¶¶ 1, 12.) Techlabs is a Florida corporation with its principal place of business in Fort Lauderdale, Florida. (See id. ¶ 2.) Defendant Sulmasy is a New York resident, and is the sole owner of defendant Harbor Securities, LLC ("Harbor"). See id. ¶¶ 5, 9.) Harbor is a New York limited liability company with its principal place of business in New York, New York. (See id. ¶ 3.) Defendant Pax Clearing Co., LP ("Pax") is an Illinois limited partnership, with its principal place of business in Chicago, Illinois. (See id. ¶ 4.) Though not explicated in the complaint, Harbor apparently is a broker-dealer of securities, and is a member of the Philadelphia Stock Exchange. Pax apparently also is a securities broker-dealer, and is a "clearing member of all principal stock option exchanges in the United States, including the Philadelphia Stock Exchange." (Affidavit of Kristen Hughes Kelly in Support of Defendant Pax Clearing Co.'s Motion to Compel Arbitration, and to Stay Pending Arbitration, and in Opposition to Plaintiff's Application for Preliminary Injunction, sworn to December 23, 1999, ¶¶ 2, 4.)
Plaintiffs commenced this action against on November 22, 1999. The claims in the complaint concern Harbor and Sulmasy's purported breach of an oral agreement, pursuant to which those defendants agreed to tender their interest in certain software to Techlabs in return for 200,000 shares of Techlabs stock. (See First Am. Compl. ¶¶ 8-13.) Techlabs allegedly tendered the stock to Sulmasy, but neither Sulmasy nor Harbor conveyed the interest in the software. When Techlabs demanded the return of the 200,000 shares of its stock, Sulmasy purportedly deposited those shares in Dorrough's trading account at Harbor. (See id. ¶ 11.) Dorrough then instructed Harbor to transfer those shares to an account at another brokerage. (See id. ¶ 12.) Dorrough also requested that Pax not process any trades of the shares by Harbor, or otherwise sell the shares. Pax, however, allegedly sold all of Dorrough's Techlabs shares. (See id. ¶ 13.)
Once the complaint was filed, the Clerk's office issued a summons for each of the defendants, and plaintiffs then attempted to effect service on them. On November 30, 1999, two affidavits of service were filed with the Court. The first affidavit of service indicates that "Plaintiff's [sic] Original Comp. and Appl. for Preliminary and Permanent Injunction" were served on Sulmasy on November 23, 1999, by delivering a copy of the same to "Jeff Able," a person of suitable age and discretion and a co-worker of Sulmasy, at Harbor's principal place of business. The affidavit of service also indicates that copies of these documents were mailed to Sulmasy, at this same address, in an envelope marked "Personal Confidential." The second affidavit of service indicates that Harbor also was served via delivery of these documents to "Jeff Able" at Harbor's principal place of business.
Approximately one month later, Pax moved to stay, and to compel arbitration of, the claims asserted against it. By stipulation and Order dated January 20, 2000, the parties agreed to discontinue this lawsuit vis-a-vis Pax. An NASD arbitration then was instituted by Pax against Harbor, Sulmasy, and Dorrough. Dorrough apparently has cross-claimed against Sulmasy and Harbor in that proceeding, asserting the same claims alleged in this case.
In the meantime, however, neither Harbor nor Sulmasy answered or otherwise appeared in this action. Thus, on March 2, 2000, plaintiffs' counsel requested that the Clerk's office enter the default of Harbor and Sulmasy. Before notices of default were entered, however, Magistrate Judge Gold held a telephone conference. At that telephone conference, Sulmasy was represented by Steven Cunningham, Esq., an attorney with McCabe Flynn, LLP. At that time, Cunningham apparently asserted that service on Sulmasy had not been properly effected. Instead of requiring the parties to deal with a formal motion to dismiss for insufficient service, Magistrate Judge Gold gave plaintiffs until July 15, 2000, to re-serve Sulmasy and Harbor.
Plaintiffs then sent copies of the summons and complaint to Cunningham at McCabe Flynn, in an attempt to effect service. Cunningham, however, sent the summons and complaint back to plaintiffs' counsel, insisting that McCabe Flynn "did not agree to accept service on behalf of Harbor, nor did Judge Gold order us to do so." (Sulmasy Aff. Ex. B.) Cunningham's letter made no mention of service with respect to Sulmasy. Sulmasy was not personally served with the summons and complaint until September 22, 2000.
It is unclear if plaintiffs' counsel sent only one summons and complaint to Cunningham, in order to serve only one defendant (i.e., only one of Sulmasy and Harbor), or if two copies of the summons and complaint were mailed in an attempt to serve both Sulmasy and Harbor.
In a letter to Magistrate Judge Gold dated August 7, 2000, plaintiffs' counsel indicated that Magistrate Judge Gold had in fact ordered plaintiffs to serve Harbor and Sulmasy by serving the summons and complaint on the McCabe Flynn law firm. (See Jordaan Aff. Ex. D.) Magistrate Judge Gold's Order, however, nowhere mentions the method by which plaintiffs were to serve Sulmasy and Harbor.
On September 19, 2000, Magistrate Judge Gold held another telephone conference, in which Cunningham once again participated. In that telephone conference, Magistrate Judge Gold, apparently believing that service on Sulmasy had been effected, ordered Sulmasy to answer or move by October 6, 2000, on pain of default. That same day, Cunningham wrote to Sulmasy, and stated:
Please be advised that, pursuant to an order by Magistrate Judge Gold of the United States District Court for the Eastern District of New York, your time to answer in the above-referenced matter has been extended to October 6, 2000. You max either retain counsel in this matter, or make a pro se appearance. A failure to file an answer or make a motion to stay proceedings pending arbitration may result in a default judgment against you.
(Jordaan Aff. Ex. B.)
According to Sulmasy, his attorneys then began negotiating an agreement with plaintiffs' counsel pursuant to which this action would be stayed and the claims raised herein would be resolved in the pending arbitration. Sulmasy asserts that the parties agreed to this arrangement, and, in reliance thereon, he withdrew a motion to dismiss that he had filed in the arbitration proceeding. (See Sulmasy Aff. ¶ 6 Ex. E.) On October 11, 2000, Sulmasy's counsel faxed plaintiffs' counsel, confirming the parties' agreement and indicating that the motion to dismiss had been withdrawn. (See id.) Plaintiffs, however, assert that they never agreed to such an arrangement. (See Pl. Mem. at 4.) Accordingly, on that same date, plaintiffs moved for default judgments against Sulmasy and Harbor. After the Clerk noted the defaults of Sulmasy and Harbor, the Court granted the (unopposed) motion for default judgments on October 25, 2000.
The default judgment motion papers do not indicate that they were served on either Sulmasy or Harbor.
Sulmasy now moves the Court for an Order vacating the default judgment against him. Sulmasy argues that plaintiffs agreed to stay this matter in return for the withdrawal of his motion to dismiss in the arbitration proceeding, that plaintiffs "violated this agreement by seeking a default judgment, and that he was not aware that plaintiffs sought a default judgment against him. See Def. Mem. at 1-3.) Sulmasy also asserts that plaintiffs will not be prejudiced by vacating the default judgment, because they have been litigating their claims in the arbitration proceeding. (See id.) Plaintiffs oppose Sulmasy's motion by arguing that Sulmasy willfully refused to answer the complaint, and unreasonably delayed before seeking relief from the default judgment. (See Pl. Mem. at 6-8.)
DISCUSSION
I. Standards for Vacating a Default Judgment
Rule 55(c) of the Federal Rules of Civil Procedure permits a court to set aside a default judgment "for good cause shown" and "in accordance with Rule 60(b)." Rule 60(b) provides numerous circumstances in which a court may relieve a party from judgment, including mistake, inadvertence, surprise, or excusable neglect (Rule 60(b)(1)); fraud, misrepresentation, or other misconduct of an adverse party (Rule 60(b)(3)); where the judgment is void (Rule 60(b)(4)); or any other reason justifying relief from the judgment (Rule 60(b)(6)). Relief from a default judgment is entrusted to the sound discretion of the Court, and depends upon the circumstances of the case and the credibility and good faith of the parties. See Enron Oil Corp. v. Diakuhara, 10 F.3d 90, 95 (2d Cir. 1993).
The Second Circuit has repeatedly indicated that "the preference is for the District Court to reach judgments on the merits and not by way of default judgments." Shah v. N.Y. State Dep't of Civil Serv., 168 F.3d 610, 615 (2d Cir. 1999) (citations omitted); accord Cody v. Mello, 59 F.3d 13, 15 (2d Cir. 1995); Enron Oil, 10 F.3d at 95. Indeed, the entry of a judgment by default is a "drastic remed[y], and should be applied only in extreme circumstances." Marfia v. T.C. Ziraat Barkasi, N.Y. Branch, 100 F.3d 243, 249 (2d Cir. 1996) (quoting Indep. Prods. Corp. v. Loew's Inc., 283 F.2d 730, 733 (2d Cir. 1960)); see also Enron Oil, 10 F.3d at 96 ("defaults are generally disfavored and are reserved for rare occasions"). For these reasons, "good cause" and the criteria of Rule 60(b) are to be construed liberally, and, if doubt exists as to whether a default should be vacated, the doubt should be resolved in favor of the defaulting party. Enron Oil, 10 F.3d at 96. Motions to vacate therefore are generally granted liberally. Ladner v. Proportional Count Assocs., Inc., No. 96-CV-2190, 2001 WL 1328443, at *1 (E.D.N.Y. Sept. 17, 2001).
Typically, a court must assess three criteria in determining whether a default judgment should be set aside. Those criteria are: (1) whether the default was willful; (2) whether setting aside the default would prejudice the adversary; and (3) whether a meritorious defense is presented. Pecarsky v. Galaxiworld.com Ltd., 249 F.3d 167, 171 (2d Cir. 2001); S.E.C. v. McNulty, 137 F.3d 732, 738 (2d Cir. 1998); Enron Oil, to F.3d at 96. A court may also consider whether the default will bring about a "harsh or unfair result." Enron Oil, 10 F.3d at 96. However, where service of process has not been properly effected, the court lacks personal jurisdiction over the defaulting defendant, and a default judgment entered against him is void and must be vacated. See e.g., United States v. Folabit, No. 99-CV-857, 2001 WL 1776156, at *2 (E.D.N.Y. Nov. 30, 2001) (citation omitted); United States v. Cally, 197 F.R.D. 27, 28 (E.D.N.Y. 2000); Triad Energy Corp. v. McNell, 110 F.R.D. 382, 385 (S.D.N.Y. 1986).
II. The Default Judgment Against Sulmasy Must Be Vacated
In light of the above-stated principles, it is clear that the default judgment entered against Sulmasy must be vacated, for numerous reasons.
A. Improper Service of Process
Although not addressed by the parties, it appears that service was not properly effected. With regard to the original attempt to serve Sulmasy, plaintiffs appararently failed to serve him with a summons. Indeed, the original affidavit of service filed with the Court states that only a complaint and an application for preliminary and permanent injunctions were served on Sulmasy, yet the affidavit of service filed after Sulmasy was personally served states that a summons was delivered along with these documents. (Compare Jordaan Aff. Ex. F with Jordaan Aff. Ex. G.) Without serving a summons, the original attempt at service on Sulmasy was ineffective. See Fed.R.Civ.P. 4(c), (e); 1 James Wm. Moore et al., Moore's Federal Practice § 4.50[2] (3d ed. 2000) ("Service of a complaint without a summons constitutes ineffective service of process."); see also N.Y. C.P.L.R. § 308.
The mere fact that Sulmasy had knowledge of this lawsuit is insufficient to cure plaintiff's failure to properly effect service. See, e.g., Brown v. Pratt Whitney Div., No. CivA3:96CV0525, 1997 WL 573462, at *3 (D. Conn. Aug. 28, 1997) ("mere knowledge of a lawsuit . . . is insufficient to confer personal jurisdiction over the defendant in the absence of valid service of process") (citations omitted); 1 James Wm. Moore et al., Moore's Federal Practice § 4.03[l] (3d ed. 2000) ("Service that complies with Rule 4 . . . may establish personal jurisdiction; actual notice without compliance with the Rule does not.") (emphasis added).
Section 308 of New York's Civil Practice Law and Rules is relevant because, under the Federal Rules of Civil Procedure, service on an individual is proper if effected under the law of the forum state. Fed.R.Civ.P. 4(e)(1).
Moreover, plaintiffs' subsequent attempts at service also were insufficient. These attempts to serve Sulmasy were well beyond the 120-day deadline for service set forth in Rule 4(m) of the Federal Rules. Recognizing this fact, Magistrate Judge Gold extended plaintiffs' time to serve Sulmasy to July 15, 2000. Yet plaintiffs' next attempt at service — in which copies of the summons and complaint allegedly were mailed to Sulmasy's attorney — was ineffective, and plaintiffs' last try — when the summons and complaint were personally delivered to Sulmasy — was beyond the deadline imposed by Magistrate Judge Gold. Accordingly, it appears that service was never properly effected on Sulmasy, and thus the default judgment is void and must be vacated.
Mailing copies of the summons and complaint to Sulmasy's attorney was insufficient to properly effect service. It is well settled that "service of process on an attorney not authorized to accept service for his client is ineffective." Santos v. State Farm Fire Cas. Co., 902 F.2d 1092, 1094 (2d Cir. 1990); accord Shuster v. Nassau County, No. 96 Civ. 3635, 1999 WL 9847, at *3 (S.D.N.Y. Jan. 11, 1999); Levy v. Am. Airlines, No. 90 Civ. 7005, 1993 WL 205857, at *10 (S.D.N.Y. June 9, 1993). The question, then, is whether Sulmasy — either explicitly or implicitly — indicated that McCabe Flynn was authorized to accept service on his behalf. See Olympus Corp. v. Dealer Sales Serv., Inc., 107 F.R.D. 300, 305 (E.D.N.Y. 1985). Certainly, there is no evidence indicating that Sulmasy explicitly authorized McCabe Flynn to accept service for him. Nor are there any implicit indicia suggesting that Sulmasy had so authorized the law firm. Although the firm sent the summons and complaint back to plaintiffs' counsel and, in doing so. only mentioned that it was not authorized to accept service on behalf of Harbor (and made no mention of Sulmasy), this fact is insufficient to infer that Sulmasy had authorized the law firm to accept service, because "[a]n agent's authority to act cannot be established solely from the agent s actions; the authority must be established by an act of the principal." Fed. Deposit Ins. Corp. v. Oaklawn Apartments, 959 F.2d 170, 175 (10th Cir. 1992); accord United States v. Ziegler Bolt Parts Co., 111 F.3d 878, 882 (Fed. Cir. 1997); see also Royal Swan Navigation Co. v. Global Container Lines, Ltd., 868 F. Supp. 599, 602 (S.D.N.Y. 1994) ("Physically accepting process for another party does not mean the acceptor was appointed to do so."); 4A Wright Miller, Federal Practice and Procedure § 1097 (2d ed. 1990) (same).
B. There is Good Cause for Vacating the Default Judgment
Even if service had been proper, vacating the default would still be appropriate. First, there can be little doubt that Sulmasy's default was not willful. "[W]illfulness, in the context of a default, . . . refer[s] to conduct that is more than merely negligent or careless," and instead is "egregious and . . . not satisfactorily explained." McNulty, 137 F.3d at 738. Sulmasy has provided a satisfactory explanation for his default, namely, plaintiffs' purported agreement to stay this case in return for his withdrawal of the motion to dismiss in the arbitration matter. Sulmasy's default therefore was not willful.
Plaintiffs' assertion that no such agreement had been reached is not persuasive. Indeed, Sulmasy has submitted evidence that his attorneys communicated to plaintiffs' counsel their understanding that such an agreement had been reached, and plaintiffs' counsel does not appear to have challenged that characterization at that time. (See Sulmasy Aff. Ex. E; Jordaan Aff. Ex. E.) Furthermore, plaintiffs' own evidence indicates that such an agreement had been offered to Sulmasy. (See Jordaan Aff. Ex. D ("Pax had entered into a Stipulation and Stay with the Court pending arbitration of these matters. Although counsel for Plaintiff offered the same deal to Defendants Sulmasy and Harbor, vis-a-vis a stay pending arbitration, Plaintiff has yet to hear back from either of them at this time.") (emphasis added).)
Second, plaintiffs cannot seriously argue that they will be prejudiced by vacating the default. Plaintiffs argue that Sulmasy's delay in seeking to vacate the default is sufficient to constitute prejudice. (See Pl. Mem. at 6.) Plaintiffs are incorrect; the Second Circuit has made it clear that delay alone is insufficient to constitute prejudice. Cody, 59 F.3d at 16 ("[D]elay alone is not a sufficient basis for establishing prejudice."); Enron Oil, 10 F.3d at 98 (same); Davis v. Musler, 713 F.2d 907, 916 (2d Cir. 1983) (same). Furthermore, Sulmasy's delay is understandable, given that plaintiffs appear to have failed to serve Sulmasy with their motion for a default judgment against him. Finally, the delay does not appear to have rendered it more difficult for plaintiffs to prove their claims, nor is it likely that the delay resulted in the destruction of evidence, and plaintiffs do not contend otherwise. Plaintiffs therefore have failed to demonstrate that any prejudice will result from vacating the default judgment. See Action S.A. v. Marc Rich Co., 951 F.2d 504, 507-08 (2d Cir. 1991); Davis, 713 F.2d at 916.
Indeed, such a claim appears untenable in light of the fact that plaintiffs are proceeding with the arbitration, in which they concededly are pressing the same claims raised in this lawsuit.
Third, and finally, refusing to vacate the default judgment against Sulmasy would produce an unfair result. Indeed, the claims asserted in this lawsuit admittedly are parallel to the claims asserted by plaintiffs in the arbitration proceeding. To permit plaintiffs to recover of Sulmasy in this action by default while these claims are being actively litigated in arbitration would effectively render the arbitration proceeding meaningless.
CONCLUSION
For the foregoing reasons, Sulmasy's motion to vacate the default judgment entered against him is granted. In addition, the Court notes that Sulmasy has requested, in passing, that this case be stayed pending arbitration, in the event the default judgment is vacated. Plaintiffs have not responded to this request. In light of the fact that the claims raised in this action parallel the claims raised in the arbitration, there appears to be no reason not to stay this case in favor of arbitration. Accordingly, this action will be stayed in favor of the NASD arbitration proceeding.