Giacchi et al v. DirectBuy Inc et al

Filing 26

OPINION AND ORDER: Case No. 2:11CV41-PPS is DISMISSED WITHOUT PREJUDICE to the Giacchis claims therein being pursued in Case No. 2:09CV110-PPS. The Motion to Dismiss of DirectBuy and Beta Finance 3 is DENIED WITHOUT PREJUDICE. Signed by Chief Judge Philip P Simon on 8/25/2011. (cc: Giacchi) (rmn)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
HAMMOND DIVISION
DIRECTBUY, INC.,
Plaintiff,
v.
THOMAS GIACCHI and JOYCE GIACCHI,
Defendants.

THOMAS GIACCHI and JOYCE GIACCHI,
Plaintiffs,
v.
DIRECTBUY, INC. and
BETA FINANCE COMPANY, INC.,
Defendants.

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Case No. 2:09CV110- PPS/APR

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Case No. 2:11CV41-PPS/APR

OPINION AND ORDER
These related cases involve the legal aftermath of a failed franchise. DirectBuy, Inc.
operates a network of “buying clubs” through franchise agreements. Thomas and Joyce Giacchi
formed Trinity Innovative Enterprises, LLC, which established a DirectBuy franchise in
Allentown, Pennsylvania. This order addresses pending motions in two related cases involving
DirectBuy and the Giacchis.
In Case No. 2:09CV110, filed April 20, 2009, DirectBuy brings claims against the
Giacchis for breach of contract based on their personal guaranty of Trinity’s obligations, and for

unjust enrichment.1 The Clerk entered a default against both Giacchis on January 24, 2010, and
DirectBuy filed a motion for default judgment against both defendants on November 3, 2010.
Four months later, the Giacchis, appearing pro se, filed motions seeking to set aside the default
and for leave to file an answer and counterclaims.
Case No. 2:11CV41 consists of claims by the Giacchis against DirectBuy and Beta
Finance Company, Inc., a related company, based on the same franchise agreements and
relationships. This case was opened because the Bankruptcy Court for the Eastern District of
Pennsylvania transferred to this court the remaining claims of an adversary proceeding that had
been initiated there by Trinity and the Giacchis within Trinity’s Chapter 11 bankruptcy case,
after Trinity dismissed its claims in the matter. The bankruptcy judge expressly found that the
Giacchis’ claims were related to the first-filed proceedings in our Case No. 2:09CV110, and
transferred the remainder of the adversary proceeding “to be heard in conjunction with” Case
No. 2:09CV110. In the second suit, DirectBuy and Beta have filed a motion to dismiss.
Fed.R.Civ.P. 55(c) allows relief from entry of default for good cause. The moving party
must show (1) good cause to set aside the default, (2) quick action to correct the default, and (3)
the existence of a meritorious defense to the complaint. Cracco v. Vitran Express, Inc., 559 F.3d
625, 630-31 (7th Cir. 2009). While the same test applies for motions seeking relief from default
judgment under Rule 60(b), the test is “more liberally applied in the Rule 55(c) context.” Id.
Furthermore, “[w]hether or not to vacate a default is in the sound discretion of the district court.”
Sun v. Board of Trustees of University of Illinois, 473 F.3d 799, 810 (7th Cir. 2007).

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In a third related case, Case No. 2:11CV135, Trinity, through its bankruptcy trustee, brings
claims disputing the amounts it owes to DirectBuy following the franchise termination.
2

Here are the highlights of the relevant timeline. After service of DirectBuy’s complaint
on May 4, 2009, the Giacchis filed no responsive pleading in the district court (due around May
25), but instead filed an adversary proceeding in Trinity’s bankruptcy case on June 19, 2009,
seeking to enjoin DirectBuy from prosecuting its lawsuit here. The injunction was issued on
July 14, 2009 (without this court being advised), preliminarily enjoining DirectBuy from
continuing any action against Thomas & Joyce Giacchi. On the same date, the Giacchis filed a
separate adversary proceeding against DirectBuy & Beta, the one that was later transferred here
and became Case No. 2:11CV41. The injunction against the first district court action was later
dissolved by stipulation between attorney David Dunn, acting as counsel for Trinity and the
Giacchis, and attorney John Doroghazi for DirectBuy. The stipulation was signed by the
bankruptcy judge on December 10, 2009. The Giacchis have persisted in their allegation that
they were unaware of this at the time and did not authorize counsel to so stipulate on their
behalf.
Back here in the district court, DirectBuy then prompted the Clerk to enter default against
the Giacchis, which was done on January 24, 2010. DirectBuy apparently was in no hurry
thereafter for a default judgment, because only after a nudge from my show cause order nine
months later did DirectBuy finally file a motion for default judgment on November 3, 2010.
Thomas Giacchi filed his own bankruptcy petition on November 9, 2010, and the resulting
automatic stay affected Case No. 2:09CV110 until January 25, 2011, when the bankruptcy court
both lifted the stay and transferred the adversary proceeding here, resulting in the opening of
Cause No. 2:11CV41. After all the dust was settled and the claims in both directions were

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pending in this court, the Giacchis finally appeared in 2:09CV110 in March 2011, seeking to
have the default set aside.
The Giacchis’ course in these litigations has been circuitous at best, and their efforts in
the bankruptcy court to avoid defending suit here ultimately failed. But viewing the larger
picture of the twin proceedings in the district court and in the bankruptcy court makes clear that
the Giacchis have been attempting with reasonable vigor to pursue their own claims and defend
against those of DirectBuy, such that a default here would be an undue procedural “gotcha” and
not in the interest of justice. The Seventh Circuit has “articulate[d] a policy of favoring trial on
the merits over default judgment.” Cracco, 559 F.3d at 631. Where the Giacchis were so active
in the bankruptcy proceedings relating to the same disputes, I conclude that they “did not
willfully ignore the pending litigation.” Id. Given the larger context, I deem the Giacchis to
have had good cause for their default here while pursuing matters in another court with
jurisdiction over the same disputes, to have acted reasonably quickly to correct their default once
it became clear that the disputes would be litigated in this court, and to have articulated in the
various related proceedings an adequate defense to DirectBuy’s claims for purposes of the
“lenient standards...established for the application of Rule 55(c).” Id. Furthermore, to the extent
prejudice plays any role, it is clear that DirectBuy was aware, based on the various proceedings
in the bankruptcy court, of the Giacchis’ claims and defenses to DirectBuy’s claims.
In the thankfully unusual circumstances of these two matters, I will exercise my
discretion in favor of setting aside the default and allowing the Giacchis to file their claims
against DirectBuy and Beta with their answer in 2:09CV110. This necessitates the denial of
DirectBuy’s motion for default judgment. Also consistent with the course I provisionally

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outlined in my March 3, 2010 order, I will dismiss Case No. 2:11CV41 without prejudice as
duplicative of the counterclaims now asserted in the earlier-filed case. This permits the parties’
disputes to be situated entirely within Case No. 2:09CV110, where the Giacchis’ claims in their
answer and counterclaims are more recently articulated than in the Adversary Complaint filed
more than two years ago in the bankruptcy court. This also weeds out the claims asserted (but
later dismissed) in the adversary proceeding by Trinity, which is not a party to either Case No.
2:09CV110 or 2:11CV41.2 DirectBuy and Beta’s motion to dismiss the claims as they were pled
in the adversary proceeding will be denied without prejudice, and they may file a fresh challenge
to the Giacchis’ fresher claims in response to the answer and counterclaims in 2:09CV110. In
view of these logistics (which are in lieu of a consolidation that would be more unwieldy), I will
direct the Clerk to enter on the docket of 2:09CV110 the name, address and other information for
the attorney representing Beta in 2:11CV41. DirectBuy and Beta will be granted twenty-one
days in which to file a pleading or motion in response to the Giacchis’ counterclaims.
ACCORDINGLY:
The motions of Thomas and Joyce Giacchi in Case No. 2:09CV110-PPS to Remove
Default [DE 19] and for Leave to File Answer and Counterclaim Out of Time [DE 20] are
GRANTED. The Clerk shall detach and separately docket and file the Giacchis’ Answer and
Counterclaim [DE 20-1].
DirectBuy, Inc.’s Motion for Default Judgment [DE 12] in Case No. 2:09CV110-PPS is
DENIED.

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Trinity’s parallel disputes with DirectBuy continue in the third related case before me, Case
No. 2:11CV135, to which the Giacchis are not parties.
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Case No. 2:11CV41-PPS is DISMISSED WITHOUT PREJUDICE to the Giacchis’
claims therein being pursued in Case No. 2:09CV110-PPS.
In Case No. 2:11CV41-PPS, the Motion to Dismiss of DirectBuy and Beta Finance [DE
3] is DENIED WITHOUT PREJUDICE.
The Clerk shall enter into the docket of Case No. 2:09CV110-PPS the attorney for Beta
Finance who has appeared for Beta in Case No. 2:11CV41-PPS.
DirectBuy and Beta Finance shall file their pleading or motion in response to the
Giacchis’ counterclaim in Case No. 2:09CV110-PPS within twenty-one days of the date of this
order.
SO ORDERED.
ENTERED: August 25, 2011
/s/ Philip P. Simon
Chief Judge
United States District Court

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