From Casetext: Smarter Legal Research

Securities Exchange Commission v. Breed

United States District Court, S.D. New York
Aug 12, 2004
No. 01 Civ. 7798 (CSH) (S.D.N.Y. Aug. 12, 2004)


No. 01 Civ. 7798 (CSH).

August 12, 2004


Defendant Robert Breed ("Breed") and relief defendants Karine Goveia Breed, Patricia Breed, and Richard Breed (sometimes collectively "defendants") move pursuant to Rule 60(b), Fed.R.Civ.P., for an order vacating the judgments entered against them, and pursuant to Rule 62(b) for an order staying execution of the judgments. For the reasons that follow, defendants' motion is denied.


Defendant Robert Breed is a resident of Florida who was employed as a registered representative at several broker-dealers, including Alexander Wescott Co., Inc. The relief defendants are all relatives of Robert Breed.

The Securities and Exchange Commission ("SEC") alleges that from October 1996 to October 1997 Breed received and unlawfully traded or directed trading on tips containing material, nonpublic information about seven publicly traded companies. Breed received tips from Jeffrey Streich, whose source was Marisa Baridis, an employee of Morgan Stanley's Legal Compliance Department with access to confidential information about proposed acquisitions and other material events. Breed traded on these tips knowing they were based on inside information, and in exchange paid Streich a portion of the profits realized from such trades.

Breed traded six of the seven securities that were the subjects of Streich's tips in his own account for a profit of $54,710. He also tipped or directed trading in the accounts of Patricia Breed (his mother), Richard Breed (his brother), and Karine Goveia Breed (his then-girlfriend, now wife). Patricia Breed traded in five of the seven securities for a profit of $50,000; Richard Breed traded in all seven securities for a profit of $37,540; and Karine Breed traded in four of the securities for a profit of $65,450. Since most of the profits from Breed's illegal trading were realized in the accounts of his family members, each of the relief defendants made money through Breed's unlawful activities.

On August 21, 2001, the SEC filed a complaint against Breed based on claims arising from the Securities and Exchange Act of 1934, 15 U.S.C. § 78, et seq ("the Exchange Act"). It later added Patricia, Karine, and Richard Breed as relief defendants. After defendants failed to file answers, respond to various responsive pleadings, or appear for noticed depositions, I granted plaintiff's motions for default judgments against them, finding them liable for disgorgement, and holding Robert Breed liable for civil penalties. The Clerk of the Court entered judgments against all defendants.


The long and tortured procedural history of this case is partially recited in the Court's Order of December 3, 2002; Memorandum and Order, 2003 WL 118494 (S.D.N.Y. Jan. 13, 2003); and Memorandum and Order, 2004 WL 1171241 (S.D.N.Y. May 26, 2004), familiarity with which is assumed. It is a story replete with deadlines ignored, motions unopposed, inadequate pleadings, and obstinance demonstrated by defendants and their former counsel. I must now recount the complete procedural history revealed by the record, in order to determine whether the conduct of the defendants and their former counsel is sufficiently egregious, when considered with the other relevant circumstances, to merit default judgments against them.

Plaintiff first filed a complaint against Robert Breed on August 21, 2001, alleging various violations of the Exchange Act. Breed served an answer on October 1, 2001, denying all the complaint's substantive allegations. The Court having issued a scheduling order on November 28, 2001, plaintiff served Breed a First Set of Documents Request and Rule 26(a) Initial Discovery Disclosures (identifying Patricia, Karine, and Richard Breed), and also served on Patricia Breed a Rule 45 subpoena for documents. The Rule 45 subpoena specified a return date of March 27, 2002.

By letter to the Court on April 23, 2002, plaintiff indicated that Breed had failed to provide his Rule 26(a) disclosures and had not produced documents. Furthermore, plaintiff advised that Patricia Breed had failed to respond to her Rule 45 subpoena. Plaintiff requested an informal conference pursuant to Local Civil Rule 37.2 to resolve these discovery issues. By May 6, 2002, plaintiff had obtained Breed's Rule 26(a) disclosures as well as documents responsive to its requests, and therefore withdrew its request for a 37.2 conference. On the same day, plaintiff served a First Set of Interrogatories on Breed, requesting information concerning, inter alia, the whereabouts of Patricia, Karine, and Richard Breed.

On June 6, 2002, I received plaintiff's Unopposed Application for Modification of Scheduling Order. In it, plaintiff stated Patricia Breed had still not responded to its Rule 45 subpoena and that Breed's response to its First Set of Document Requests was "deficient in numerous respects." Unopposed Application, at 3 n. 1. Believing or at least hoping that extending the pretrial deadlines would rectify these delinquencies, I granted plaintiff's application.

By letter to the Court on July 3, 2002, plaintiff made a second request for a Rule 37.2 informal conference, submitting that it had failed to receive Breed's responses to its First Set of Interrogatories, which had been due on June 25, 2002. See Order, Dec. 3, 2002. As a result of this letter, the Court contacted the office of Kenneth Dunn, Esq., a Florida attorney and defendants' former counsel, on two separate occasions to check on the status of his response. After Court intervention, Breed submitted responses on July 16, 2002. However, even these responses were incomplete.

On September 5, 2002, plaintiff served Rule 45 document subpoenas on relief defendants, using the address information provided in Breed's July 16, 2002 response to plaintiff's First Set of Interrogatories. This was not the first time plaintiff had attempted service of Rule 45 subpoenas on relief defendants, plaintiff having sought to serve them on April 2002 at their last known addresses. However, none of the relief defendants had responded to these subpoenas. They also failed to respond to plaintiff's re-served Rule 45 subpoenas.

On October 28, 2002, plaintiff attempted to send a "Wells notice" by FedEx to Karine Breed at her last known address, informing her of its intent to request SEC authority to seek leave to add her as a relief defendant and offering her an opportunity to explain why it should not do so. FedEx informed plaintiff that Karine Breed had moved from that address and left no forwarding address. Plaintiff then left several telephoned messages with Dunn requesting Breed's and Karine's current addresses and telephone numbers. Dunn did not respond to plaintiff's messages.

On November 14, 2002, plaintiff wrote a letter to the Court detailing these further delinquencies in its discovery proceedings, and requesting, for a third time, a 37.2 informal conference. On the same day, plaintiff at last received an overdue Rule 45 subpoena response from Patricia Breed that was woefully incomplete. The response was a two-page handwritten message indicating that she had destroyed documents including older bank and brokerage account statements, and failing to provide any other necessary documents.

Following plaintiff's November 14th letter, I ordered a telephone conference be held on December 4, 2002 among the Court and both parties. Plaintiff repeatedly left voice mail messages with Dunn over the next two weeks notifying him of the scheduled conference. But as the date loomed closer, it was clear that there would be no response from Dunn. On December 3, I issued an Order reporting plaintiff's grievances to date and ordering a "live" conference be held at the Courthouse on December 10, 2002. I also held that in the event "Breed or his counsel fail to appear, this Court will enter a default judgment in favor of the plaintiff SEC and against defendant Robert Breed. . . ." Order, Dec. 3, 2002, at 3.

On December 6, 2002, the Court received a letter from Dunn stating that he had not been made aware of the scheduled telephone conference of December 4th, and that he would be unable to attend the "live" conference of December 10th. Dunn also reported that notwithstanding the difficulties plaintiffs may have had with FedEx, "Karine Breed has been receiving all of the mail that the SEC has been sending her, including a subpoena that was hand delivered to her at her address." Dunn Letter dated December 6, 2002.

In light of Dunn's letter, I adjourned sine die the "live" December 10th conference, and ordered a future telephone conference take place. Coincidentally, that telephone conference was also held on December 10, 2002. Pursuant to that conference, I ordered defendant, on or before December 20, 2002, to serve upon SEC and file with the Court the present addresses of Robert and Karine Breed, and directed Dunn to apply for pro hac vice admission to the Southern District of New York, and to appoint local counsel no later than December 27, 2002.

Dunn ignored these instructions. On December 27, 2002, I received a letter from plaintiff requesting, for the fourth time, a Rule 37.2 conference, and noting that Dunn had failed to submit the present addresses of Robert and Karine Breed and had failed to apply for pro hac vice admission or appoint local counsel. Plaintiff requested a sanction for Dunn's failures and also noted several deficiencies in defendants' responses to plaintiff's interrogatories and document requests. That same day, Dunn responded with a letter to plaintiff, with a copy to the Court, indicating that defendants' discovery responses were being sent that day, that he was seeking a ten day extension to secure local counsel, and that he would not oppose plaintiff's motion to amend the complaint. Notably, Dunn also noted that he "received Breed's affidavit with the correct address on the 23rd, but" was "unaware of its receipt" due to the fact that he was out of the office. Dunn Letter dated December 17, 2002 (emphasis added).

On January 13, 2003 I issued a memorandum and order granting plaintiff's motion for leave to amend the complaint. 2003 WL 118494. Plaintiff promptly filed its first amended complaint on January 16, 2003, adding Patricia, Richard, and Karine Breed as relief defendants. Plaintiff concurrently served Breed and Dunn with the First Amended Complaint on that day. Karine and Richard Breed were personally served on January 22 and February 3, 2003, respectively.

On January 17, 2003, Robert Breed submitted a combined affidavit and supplemental discovery responses in which he provided, inter alia, his and Karine Breed's current address. From the time plaintiff filed its First Set of Interrogatories, it took no less than eleven months for Robert and Karine Breed to provide something as simple as their residential address.

On February 4, 2003, plaintiff filed an Application for Certificate of Default against Robert Breed. The grounds for its application were, inter alia, Breed's failure to answer to the First Amended Complaint or respond to the responsive pleading by the time they were due. On February 21st, plaintiff filed an Application for Certificate of Default against Karine Breed on the same grounds. Defendants did not oppose either application.

While plaintiffs served Robert, Karine, and Richard Breed with the First Amended Complaint, Patricia Breed was not yet served at that time. The explanation was furnished on February 7, 2003, when plaintiff filed an Application for Leave to Serve Patricia Breed by Alternative Means. According to plaintiff, its process servers made ten attempts to serve Patricia Breed, but were unable to do so. On at least several of these occasions, "there were cars parked in Patricia Breed's driveway when the process server attempted to effect service, thus suggesting that Patricia Breed was actively attempting to evade service." Application for Leave to Serve Patricia Breed, at 3. Patricia Breed, now represented (as are all defendants) by successor New York counsel, in an affidavit dated June 16, 2004, says that by reason of her occupation as a school teacher, "I was required to leave my home every morning by 6:30 a.m. and was at work all day. I never attempted to avoid service, but rather was simply not home for valid and legitimate reasons." Aff. of Patricia Breed, ¶ 2. Furthermore, Patricia Breed attests that she lives in a "gated residential community," and according to "guard records, the process server only attempted service" four times, not ten times as plaintiff claimed. Id. at ¶ 3. However, at the time plaintiff filed its application, it was not opposed by defendants, nor did Patricia provide an affidavit.

Meanwhile, also on February 7, 2003, Dunn at long last filed a Motion for Admission pro hac vice. I granted this motion and ordered admission of Dunn to the Bar of this Court pro hac vice on March 11, 2003.

On February 25, 2003, plaintiff filed an Application for Default Judgment against Robert and Karine Breed. This application was unopposed. However, on February 26, 2003, the Breeds submitted answers and jury trial requests on each of their behalfs. For Robert, Karine and Patricia Breed, the answers were untimely.

On June 17, 2003, plaintiff served notices of depositions and document requests on the relief defendants. Richard Breed's deposition was noticed for July 21, 2003, Karine Breed's noticed for July 28, 2003, and Patricia's for July 29th. Richard was called to respond to document requests and produce documents by July 17, 2003, and Karine and Patricia by July 25th. None of the relief defendants responded to the document requests or produced any documents. None appeared for his or her respective deposition or filed any objections to or sought protective orders from the noticed depositions.

On August 7, 2003, plaintiff sought, for the fifth time, a Rule 37.2 conference with the Court, as well as leave to file a motion for default against the relief defendants, pursuant to Fed.R.Civ.P. 37(d), for failure to respond to document requests and appear at depositions. Having obtained leave, plaintiff filed its motion for discovery sanctions, including default judgments against relief defendants, on October 8, 2003. This motion was unopposed. I granted plaintiff's motion on November 5, 2003, leading to discovery sanctions against relief defendants in the amount of $3,637.60. I also held Dunn jointly and severally liable for this payment.

Having failed to receive payment, plaintiff filed motions to hold Dunn and relief defendants in contempt, on November 24, and December 19, 2003, respectively. I granted plaintiff's motions, with the understanding that the contempt orders would be vacated once payment was received. Defendants' first attempt to make payments, on March 3, 2004, failed due to the fact that defendants made out the checks incorrectly. Subsequently, however, defendants evidently made payments properly to the SEC.

In the default judgments against defendants, I held that they were liable for disgorgement of all profits and proceeds received into any of their accounts as a result of the illegal conduct alleged in the first amended complaint, plus prejudgment interest. Robert Breed was also adjudged liable for civil penalties pursuant to various provisions of the Exchange Act. Pursuant to these judgments, Magistrate Judge Andrew Peck conducted an inquest to determine the amounts of disgorgement and prejudgment interest, and submitted his Report and Recommendation on April 30, 2004, to which defendants did not object.

By May 5, 2004, defendants finally retained new counsel. What happened procedurally from that point on has already been documented in prior orders and memoranda and need not be repeated for purposes of this motion. It is suffice to say that by June 2, 2004, I accepted Judge Peck's Report and Recommendation, directed entry of judgments, and directed the clerk of the court to enter and file proposed orders submitted by plaintiff setting forth Robert Breed's civil penalties. I also ordered substitution of counsel shortly thereafter. Defendants new counsel have now filed a motion to set aside the default judgments, pursuant to Rule 60(b) and for a stay of execution of judgments, pursuant to Rule 62(b). Plaintiff opposes this motion.


Rule 55(c), Fed.R.Civ.P., provides that a default judgment may be set aside under Rule 60(b) on various grounds. Defendants move to set aside the judgments pursuant to Rule 60(b)(1), which provides that a court may relief a party from final judgment for "mistake, inadvertence, surprise, or excusable neglect." In the context of default judgments, "courts have gone beyond the bare wording of the rule and established certain criteria which should be considered in deciding whether the designated standards have been satisfied." Brien v. Kullman Indus. Inc., 71 F.3d 1073, 1077 (2d Cir. 1995).

In the Second Circuit, it is well settled that a 60(b) analysis turns on the following criteria: "(1) whether the default was willful; (2) whether defendant has a meritorious defense; and (3) the level of prejudice that may occur to the nondefaulting party if relief is granted." American Alliance Ins. Co., Ltd. v. Eagle Ins. Co., 92 F.3d 57, 59 (2d Cir. 1996), quoting Davis v. Musler, 713 F.2d 907, 915 (2d Cir. 1983). I will consider each of these factors in turn.

A motion to vacate a default judgment "is addressed to the sound discretion of the court." SEC v. McNulty, 137 F.3d 732, 738 (2d Cir. 1998). In considering such a motion, a trial judge must consider two important yet contravening principles. On the one hand, "because defaults are generally disfavored and are reserved for rare occasions, when doubt exists as to whether a default should be granted or vacated, the doubt should be resolved in favor of the defaulting party." Enron Oil Corp. v. Diakuhara, 10 F.3d 90, 96 (2d. Cir. 1993). On the other hand, "Courts have an interest in expending litigation, [and] abuses of process may be prevented by enforcing those defaults that arise from egregious or deliberate conduct." McNulty, 137 F.3d at 738. Thus while general public policy favors resolution of disputes on the merits, concerns of judicial efficiency militate against accommodating that policy to an extreme.


A. Whether Defendants' Defaults were Willful

Willful failure has been defined as "any intentional or conscious failure as distinguished from involuntary non-compliance." Roberts v. Norden Div., United Aircraft Corp., 76 F.R.D. 75, 80 (E.D.N.Y. 1977). When determining willfulness, a trial judge may "look for bad faith, or at least something more than mere negligence," Am. Alliance, 92 F.3d at 60. However, "a finding of bad faith is [not] a necessary predicate to concluding that a defendant acted `willfully' for the purposes of Rule 60(b)(1)." Gucci Am., Inc., Guess?, Inc. v. Gold Ctr. Jewelry, 158 F.3d 631, 635 (2d Cir. 1998). Instead, "it is sufficient that the defendant defaulted deliberately." Id.

There are two reasons for holding that defendants acted willfully. First, the actions and inactions of the defendants themselves demonstrate willful failure. Second, in the circumstances of this case the willful behavior of defendants' former counsel should fairly be imputed to defendants. 1) Relief Defendants acted willfully

Relief defendants' principal argument is that default judgments are unwarranted because any failures on their part are properly attributed to their former counsel rather than themselves. Particularly with respect to the noticed depositions, defendants contend that the reason they failed to attend was "because, quite simply they were not aware of the depositions." Memorandum in Support of Motion to Set Aside Default Judgments, at 12. According to defendants, the deposition notices and requests for production, which the SEC served upon Dunn, were never forwarded to them. Consequently they had "absolutely no knowledge that depositions were noticed by the SEC." Id. Defendants allege that it was not until they were personally served with the SEC's Motion for Discovery Sanctions, including Default Judgments against them, that they knew of the SEC's notice of depositions and document requests.

Even assuming that defendants were unaware of the deposition notices and requests for production submitted by the SEC on June 17, 2003, this does not relieve defendants of all wrongdoing. As the SEC noted in its Memorandum in Support of its Motion for Discovery Sanctions, "relief defendants' failure to appear for their depositions is simply the latest in a long series of defendants' thumbing their noses at this Court, the SEC and the judicial process generally." Memorandum, October 8, 2003, at 1 (emphasis added). See also, SEC's Opposition to Motion to Set Aside the Default Judgments, July 8, 2004, at 13 ("The record, as established by defendants' own submission and other evidence, is that defendants actively obstructed this action from the start. . . .").

The long list of failures that can be attributed to relief defendants themselves, rather than their attorney, can be found from the very beginning of this case — when they failed to respond to plaintiff's Rule 45 subpoenas. Plaintiff first served a Rule 45 subpoena to Patricia Breed on February 25, 2002. She did not respond until November 14th of that year, and then only with a two-page handwritten response that had no accompanying documents. Karine and Richard Breed were also personally served with Rule 45 subpoenas, first in April of 2002, then again on September 5, 2002. None of these subpoenas were ever answered on time, if at all. Then on December 6, 2002, Dunn submitted a letter to the Court in which he admitted that "Karine Breed has been receiving all of the mail that the SEC has been sending to her, including a subpoena that was hand delivered to her at her address" (emphasis added).

There is evidence that Patricia Breed's egregious behavior began even earlier. On October 18, 2000, SEC staff contacted Patricia Breed in an attempt to locate Breed, and followed up that conversation with a confirming letter by fax. In a subsequent telephone conversation, Patricia stated that she did not know her son's whereabouts, and provided a New York phone number for him that was no longer in service. However, telephone records show that, beginning fifteen minutes after her initial contact with the SEC, Patricia Breed contacted Robert in Boca Raton, Florida three times in two hours. After several more inquiries, the SEC sent Patricia an investigative subpoena, to which she never responded. In total, she ignored five separate letters from plaintiff between October and November 2000. Pursuant to a separate subpoena, Sprint Communications Company notified plaintiff that Patricia Breed had changed her telephone number and disconnected her fax machine on November 17, 2000, the day after the investigative subpoena was initially faxed.

The cases cited by relief defendants in support of their position all hang on a party's unawareness of its judicial responsibilities. See e.g., Flaks v. Koegel, 504 F.2d 702, 711 (2d Cir. 1974) (noting defendants' principal argument that they did not receive court letters and were unaware of their contents); Vindigni v. Meyer, 441 F.2d 376, 377 (2d Cir. 1971) (noting that plaintiff's attorney reportedly disappeared, and plaintiff was "unaware of the status of his action of the service of the interrogatories and notice of the taking of his deposition" and therefore did not respond); United Sheeplined Clothing Co. Inc. v. Arctic Fur Cap Corp., 165 F. Supp. 193, 194 (S.D.N.Y. 1958) (client stated "he had not been notified by his attorney that he was required to appear for the taking of the deposition," and attorney "admitted that he had not notified his client of the time of the taking of the deposition"). In the instant case, relief defendants' failure to timely respond to Rule 45 subpoenas is sufficient to find their conduct willful. However, their egregious behavior does not end there.

On January 22, 2003, Karine Breed was personally served with a first amended complaint in which plaintiff added her as a relief defendant. Her answer and responsive pleading was due on February 11th. When Karine failed to respond to the complaint in any way, plaintiff filed an Application for a Certificate of Default against her. Not until February 26th, more than two weeks after the due date, did Karine submit an answer of any kind.

Meanwhile, plaintiff's process servers made ten attempts to serve Patricia Breed, but were unable to do so. On at least several of these occasions, "there were cars parked in Patricia Breed's driveway when the process server attempted to effect service, thus suggesting that Patricia Breed was actively attempting to evade service." Given her prior contumacious attitude towards the SEC generally and her demonstrated willingness to mislead, see note 1, supra, I simply do not find credible either her explanation that her duties as a schoolteacher prevented her from being home or that service was only attempted four times rather than ten. Rather, there is an evident likelihood that Patricia Breed attempted to and did evade service of process.

In any event, the actions of the relief defendants, independent of the conduct of their counsel, clearly demonstrate that their defaults were willful. I need not find that their actions were done in bad faith — although there is every indication that this is so. It is sufficient that plaintiff has established that defendants defaulted deliberately.

2) Robert Breed's Conduct was Willful

On January 13, 2003, I "ORDERED that the defendant and relief defendants shall answer, move or otherwise respond to the First Amended Complaint within the time specified by the Federal Rules of Civil Procedure." 2003 WL 118494, at *3. Breed was served with the First Amended Complaint by FedEx on January 15, 2003, and signed for his package on the next day, January 16, 2003. Fed.R.Civ.P. 12(a)(1)(A) states that a defendant shall serve an answer within 20 days of being served with the summons and complaint. This gave Breed until February 5th to answer. In defiance of my order, he did not do so until February 21, 2003. This alone is sufficient grounds to enter default judgment against Breed. See Mason Tenders District Council Welfare Fund v. M M Contracting Consulting, 193 F.R.D. 112, 115 (S.D.N.Y. 2000) ("Defendants claim that . . . their sole error was failing to timely recognize that their counsel negligently failed to file an answer in this action. However, in most circumstances, under the Rule 60(b), a client is not . . . excused from the consequences of his attorney's nonfeasance or negligence.") (citations omitted).

Breed's answer and jury trial request was filed with this Court on February 26, 2003. A certificate of service signed by Breed himself certified that a true and correct copy had been furnished by U.S. Mail and facsimile on February 21, 2003 to James T. Meyers, attorney for the SEC. Confusingly, there appears to be two errors in the Clerk of the Court's docket sheet. First, Breed's answer is said to have been filed on February 6, 2003. This is an error, as it was not filed until the 26th of that month. Second, Breed is said to have had until January 27, 2003 in which to answer the First Amended Complaint. This is also an error, as Breed had until February 5th, in accordance with the federal rules of civil procedure. Perhaps the lesson to be learned is that attorneys should not merely trust the docket sheet to provide necessary deadlines, but should also conduct their own, independent research and verification. In any event, it remains the case that Breed failed to answer the complaint by the due date.

However, there are further reasons to find fault with Breed's conduct. I have already documented the painful and lengthy road plaintiff had to traverse in order to extract from Breed something as simple as a residential address. In fact, in a letter to the Court dated December 27, 2002, Breed's former counsel Dunn noted that he "received Breed's affidavit with the correct address on the 23rd [of December]". This was after I had ordered Breed to serve upon the SEC and file with the Court his and Karine's present addresses on or before December 20, 2002. See Order, December 10, 2002. Breed failed to provide his attorney with the necessary information before the Court's due date. Therefore, the failure to meet the due date is attributable to Breed himself, rather than his counsel. Finally, Breed failed to provide proper responses to numerous document requests early in the case, including the First Set of Interrogatories. In one instance, for example, Breed had promised to "furnish a list of such information for which he has persona knowledge," including the whereabouts of his wife, mother, and brother, but had failed to do so in any semblance of a reasonable amount of time. See Plaintiff's Unopposed Application for Modification of Scheduling Order, June 6, 2002, at 3.

For these reasons, Robert Breed's actions demonstrate that his default was also willful.

3) Dunn's Conduct is Imputed to Defendants

Finally, defendants submit that any egregious behavior on the part of their former counsel should not be imputed to them. Plaintiff rebuts this argument and suggests that defendants should be responsible for the actions of their former counsel.

Generally, a party who has "voluntarily chose[n]" an attorney "as his representative" cannot "avoid the consequences of the acts or omissions of this freely selected agent." Link v. Wabash R.R. Co., 370 U.S. 626, 633-34 (1962). Rather, "[t]he adequacy of notice and hearing respecting proceedings that may affect a party's rights turns, to a considerable extent, on the knowledge which the circumstances show such party may be taken to have of the consequences of his own conduct." Id. at 632. This is so because "[a]ny other notion would be wholly inconsistent with our system of representative litigation in which each party is deemed bound by the acts of his lawyer-agent." Id. at 634.

But see id. at 643 (J. Black, dissenting) ("[I]t seems to me to be contrary to the most fundamental ideas of fairness and justice to impose the punishment for the lawyer's failure to prosecute upon the plaintiff who, so far as this record shows, was simply trusting his lawyer to take care of his case. . . .").

As a result, this circuit has "consistently declined to relieve a client under subsection (1) [of Rule 60(b)] of the `burdens of a final judgment entered against him due to the mistake or omission of his attorney by reason of the latter's ignorance of the law or other rules of the court, or his inability to efficiently manage his caseload.'" Nemaizer v. Baker, 793 F.2d 58, 62 (2d Cir. 1986), quoting United States v. Cirami, 535 F.2d 736, 739 (2d Cir. 1976) (" Cirami I"), rev'd on other grounds, 563 F.2d 26 (2d Cir. 1977) (" Cirami II"). "Mere dissatisfaction in hindsight with choices deliberately made by counsel is not grounds for finding the mistake, indavertance, surprise or excusable neglect necessary to justify Rule 60(b)(1) relief." Nemaizer, 793 F.2d at 62.

On the other hand, there are certain limited instances where courts have not faulted individuals for the conduct of their counsel. One such grounds lies in Rule 60(b)(6), a catch-all rule under which judgments may be vacated for "any other reason justifying relief from the operation of the judgment." In the Second Circuit, in order to find relief under 60(b)(6), a movant to show "exceptional circumstances" or "extreme hardship," which mandate relief from judgment. E.g., Cirami II, 563 F.2d at 32, 35 (vacating default judgment under 60(b)(6) relief after movant established that his attorney suffered from a mental illness that caused him to neglect his duties and assure defendants that he was sufficiently attending to them); Vindigni, 441 F.2d at 377 (finding relief justifiable where there was "the unusual fact of the complete disappearance of plaintiff's attorney"). Defendants do not move under 60(b)(6); nor could they demonstrate exceptional circumstances or extreme hardship sufficient to justify relief thereunder.

Another exception to the general principle that clients must suffer the consequences of her counsel's errors — and one that rests in 60(b)(1) relief — is when an attorney leaves her clients completely unaware of her own willful actions which lead to a default judgment. An early example of this exception is United Sheeplined Clothing Co., Inc., v. Arctic Fur Cap Corp., 165 F. Supp. 193 (S.D.N.Y. 1958), in which the trial court granted a default judgment against plaintiff, after defendant failed to appear at a deposition. Defendant's counsel later admitted that he had not notified his client of the deposition, had not appeared for the deposition, and had not appeared to argue against a motion for default judgment — even though his client was ready to have his deposition taken at any reasonable time — because "the defendant had told him it would not be able to pay him any fee, and he felt he did not wish to spend any time for which he would not be compensated." 165 F. Supp. at 194. The Court determined that the "failure of the defendant to appear was due to the neglect of the defendant's attorney rather than unwillingness on the part of the defendant to appear." Id. What is more, by the time plaintiff filed its motion for default judgment, the problem had been evidently rectified. See id. ("I am advised that the deposition has been proceeding since that time.") Under the circumstances, the Court denied the motion for a default judgment.

Likewise, in Flaks v. Koegel, 504 F.2d 702 (2d Cir. 1974), former counsel for defendant submitted an affidavit noting his failure to make defendant aware of key orders and letters of the trial court, prompting the Second Circuit to vacate the default judgment under Rule 60(b) and remand the case for an evidentiary hearing to determine the question of defendants' willfulness. See id. at 712 ("The affidavits then before the court depicted Koegel as a victim of the neglect of disaffected counsel, unaware of the crucial orders we have recounted, ready and able to comply and also seeking an evidentiary hearing to establish his bona fides. If counsel rather than the client were at fault and if serious efforts to obtain new counsel had been made under the handicaps described, then the order entering the default judgment was an abuse of discretion" (citing cases)).

This particular exception is a narrow one. Clients cannot rely on their ignorance of their case to obtain 60(b)(1) relief. Rather, clients must undertake "diligent efforts" to induce their attorney to "fulfill his duty" to the case. Dominguez v. United States, 583 F.2d 615, 618 (2d Cir. 1978). A client who takes no interest in a case until after a default judgment has been executed against her cannot then claim to have been made unaware by her counsel. Rather, "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." McNulty, 137 F.3d at 740. In sum, where the record "fails to establish any gross negligence or misleading of the appellants by counsel and is bereft of any indication of client diligence," no Rule 60(b) relief may be granted. Cirami I, 535 F.2d at 741.

The gross negligence demonstrated by defendants' former counsel is without doubt. The record is replete with instances where Dunn failed to file proper documents, respond to interrogatories, or oppose motions of any kind. Furthermore, defendants concede that Dunn was responsible for failing to notify them of their noticed depositions, and failing to produce documents in connection with those depositions. What defendants now argue is that Dunn's gross negligence should not be imputed to them because they made reasonable attempts to closely monitor his handling of the lawsuit.

Defendants are attempting to distinguish their case from McNulty, where the defaulting party did not discuss his case with his counsel at any time for nearly a year. See McNulty, 137 F.3d at 736 ("Shanklin does not show that he discussed the suit with Rucker at any time between October 1994 and September 1995" (citation omitted)). Due to the client's total lack of effort to ascertain the status of the litigation, the McNulty court held that the attorney's willfulness should be imputed to the party himself, since "he makes no showing that he has made any attempt to monitor counsel's handling of the lawsuit." Id. at 740.

Here, by contrast, defendants argue that they made dutiful attempts to monitor Dunn's handling of the case. They assert that they "contacted Mr. Dunn on numerous occasions, coordinated through Robert, concerning this action and to discuss the status of the litigation." Memo in Support of Motion to Set Aside Default Judgments, at 15. However, there is a critical aspect of McNulty which defendants fail to see — one that is fatal to their argument. McNulty does not teach that it is sufficient to avoid willfulness merely to "monitor" an attorney's handling of one's lawsuit. Rather, the attorney must also have given assurances — false assurances — that "the matter was being handled properly." Id. at 740.

The underlying case on which the McNulty court finds its principle is Cirami II, cited supra. In that case, the defendants had, "through an intermediary, diligently inquired of their attorney as to the status of their case `three or four times a week' over a six-month period. . . .'" McNulty, 137 F.2d at 740 (citation omitted). According to the intermediary, the attorney "assured me that everything was being taken care of. . . ." Cirami II, 563 F.2d at 33. As it turned out, the attorney was suffering from a mental disorder, and the assurances that he passed on to defendants were false. In fact, he had done nothing on the case, leading to defendants' default. Under those circumstances, the Court held that the default judgment must be vacated due to "extraordinary circumstances," pursuant to Rule 60(b)(6).

In fact, it is not clear whether McNulty is a 60(b)(1) or 60(b)(6) holding. If it is the latter, it's holding may not be applicable to defendants at all.

Likewise, in L.P. Steuart, Inc. v. Matthews, 329 F.2d 234 (D.C. Cir. 1964), cert. denied, 379 U.S. 824 (1964), a case cited in Cirami I, appellee made "numerous inquiries" of his former counsel who "refused to answer such inquiries" but "assured appellee from time to time that the case was proceeding and that settlement of it would be made soon." Id. at 235 (internal quotations omitted). In that case, the D.C. Circuit upheld the District Court's decision to reinstate the case despite appellee's initial failure to prosecute.

These cases show the rules in this circuit to be that willfulness of an attorney may be imputed to a client who does not monitor his own case, but such willfulness may not be imputed to a client who does monitor his case. However, in order to establish the latter proposition, defendants must also show that their former counsel made false assurances regarding the status of the lawsuit. In this case, Dunn most assuredly did not. Defendants own affidavits admit, time and again, that their counsel notified them that "the entry of a default was not crucial because it could be easily appealed and that he would be appealing the default judgment," and furthermore that "in any event, default judgments are usually never collected as a practical matter." Aff. of Patricia Breed, ¶ 13, Robert Breed, ¶¶ 16, 19; Richard Breed ¶¶ 11, 12. In other words, after consulting with their attorney, defendants knew that he would not oppose the SEC's Motion for Default Judgments, that he would not move to vacate the defaults, and that the only action he would take would be on appeal. Yet defendants are obligated to make "diligent efforts" to " induce" their attorney to "fulfill his duty," Dominguez, 583 F.2d at 618 (emphasis added), in order to avoid having their attorney's egregious behavior imputed to them. In this case, defendants admit that they knew that their attorney's inaction was about to lead to default judgments against them, and yet took no action. In these circumstances, Dunn's willful conduct may fairly be imputed to the defendants.

For the reasons stated in Parts IV.A.1. and 2. of this opinion, the defendants' own willful conduct is sufficient to preclude Rule 60(b)(1) relief, quite apart from any imputation of their attorney's conduct to them.

B. Meritorious Defenses

Among the three criteria courts use to determine whether to vacate a default judgment under Rule 60(b)(1), "willfulness is preeminent, and a willful default will not normally be set aside." Heymann v. Brechner, No. 95 Civ. 1329 (CSH), 1996 WL 580915, at *3 (S.D.N.Y. Oct. 9, 1996), citing Brien, 71 F.3d at 1078, citing Action S.A. v. Marc Rich Co., Inc., 951 F.2d 504, 507 (2d Cir. 1991), cert. denied, 503 U.S. 1006 (1992) ("A default should not be set aside when it is found to be willful."). Consideration of the remaining criteria does not give rise to equities sufficient to outweigh the impact of defendants' willful conduct.

"A defense is meritorious if it is good at law so as to give the factfinder some determination to make." Am. Alliance, 92 F.3d at 61. While defendants "need not prove [their] defense on a motion to vacate," they must do more than make "conclusory denials." DirectTV, Inc. v. Rosenberg, No. 02 Civ. 2241 (RCC), 2004 WL 345523 (S.D.N.Y. Feb. 24, 2004), citing Enron Oil Corp., 10 F.3d at 98. "The test of such a defense is measured not by whether there is a likelihood that it will carry the day, but whether the evidence submitted, if proven at trial, would constitute a complete defense." Enron Oil Corp., 10 F.3d at 98. Defendants must "state defenses legally sufficient to defeat plaintiff's claim and present facts supporting their arguments." American Arbitration Ass'n v. Defonseca, No. 93 Civ. 2424 (CSH), 1997 WL 102495, at *2 (S.D.N.Y., Mar. 6, 1997).

Defendants' proffered defenses consists almost entirely of their own affidavits. Relief defendants simply claim that they had no knowledge of the existence of any material, non-public insider information. Robert Breed asserts that he had no knowledge of the existence of any insider information at the time he made the trades at issue. This is despite the fact that defendants concede that Robert, Richard, and James Allan Breed (Robert's father) discussed the stocks at issue during the time in which defendants are accused of making insider trades, and that Robert spoke with Streich regarding the stocks. I am to take defendants at their word that none of them had any reason to believe that the stocks discussed were subject to privileged or inside information.

Defendants also assert that Robert, Richard, and James discussed stocks other than those at issue between October 1996 and October 1997, that they performed their own independent research and analysis, and that all defendants sustained losses in their accounts on several stocks traded during that time period. While these are supporting allegations, they do not disprove the allegation of insider trading.

With regard to defendants' affidavits, I am reminded of the common wisdom expressed by Judge Casey in DirecTV, cited supra, which is that "I didn't do it," is not a meritorious defense. Id. at *2. In a 60(b) motion, defendants are obligated to assert facts rather than conclusory statements. Defendants simply assert that "affidavits . . . are a sufficient means by which to set forth evidence of meritorious defenses," without any accompanying support in law. Reply to Plaintiff SEC's Opposition to Motion, at 5 n. 5. Even if I were to assume that this were so, defendants' prior behavior thoroughly undermines their credibility. I conclude that defendants have not demonstrated a meritorious defense.

While defendants make efforts to distinguish their case from SEC v. Alexander, No. 00 Civ. 7290 (LTS), 2004 WL 1468528 (S.D.N.Y. June 28, 2004), a case cited by plaintiff in support of the proposition that notarized statements by an alleged tipper are insufficient to set forth a meritorious defense, defendants fail to affirmatively support their own proposition that affidavits are sufficient with any case law of their own.

C. Prejudice to the Parties

Defendants assert that plaintiff will not be substantially prejudiced if it is forced to litigate this case on the merits, three years after it filed its initial complaint. To the contrary, substantial prejudice is manifest in the considerable resources plaintiff has already spent in attempting to move this case forward. Plaintiff will also be prejudiced by the difficulty of finding necessary witnesses and obtaining discovery. As plaintiff asserts, and defendants do not deny, Patricia Breed has already destroyed documents subject to subpoena. Robert Breed may be hiding ill-gotten profits with his family members. Under the circumstances, "without a prompt resolution of [plaintiff's] claim[s], there is a danger of dissipation of defendant's only known assets." Essex Cement Co. v. Caribene Investments, Ltd., No. 89 Civ. 2859 (KMW), 1991 WL 3027, at *3 (S.D.N.Y. Jan. 8, 1991). Plaintiff will be prejudiced if the default in this case were vacated.

Defendants assert that plaintiff is disingenuous when it submits that it would have difficulty finding witnesses and obtaining documents. Defendants assert that since the SEC waited nearly five years prior to filing its civil action against Breed, it cannot avail itself of a claim of prejudice regarding discovery. On the other hand, for the past three years defendants have been on notice of the charges against them. Plaintiff is correct to be concerned that any further delay may prejudice it from obtaining a resolution of its claims, if, as is asserted, defendants are destroying subpoena documents or hiding ill-gotten profits.


For the foregoing reasons, defendants' motion to vacate the judgment entered against them pursuant to Rule 60(b)(1) is denied.

That resolution also disposes of defendants' companion motion under Rule 62(b) for a stay of execution on or enforcement of the judgments. Rule 62(b) provides in pertinent part that a trial court has the discretion to stay execution or enforcement "pending the disposition of a motion . . . for relief from a judgment or order made pursuant to Rule 60 . . ." Defendants' Rule 60 motion having been disposed of, Rule 62(b) has no office to perform. Accordingly defendants' motion under Rule 62(b) is also denied.


Summaries of

Securities Exchange Commission v. Breed

United States District Court, S.D. New York
Aug 12, 2004
No. 01 Civ. 7798 (CSH) (S.D.N.Y. Aug. 12, 2004)
Case details for

Securities Exchange Commission v. Breed

Case Details


Court:United States District Court, S.D. New York

Date published: Aug 12, 2004


No. 01 Civ. 7798 (CSH) (S.D.N.Y. Aug. 12, 2004)

Citing Cases

White Plains Hous. Auth. v. Getty Props. Corp.

Similarly, where a "party seeking to set aside [a] default judgment submit[s] affidavits showing that it had…

U.S. v. Strickland

See Oviatt v. Pearce, 954 F.2d 1470, 1476 n. 4 (9th Cir. 1992) (holding that a county jail system could be…