HOWARD JOHNSON INTERNATIONAL, INC. v. IMH, LLC et al

Filing 22

MEMORANDUM OPINION. Signed by Judge Esther Salas on 2/10/2017. (JB, )

Not for Publication
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY

HOWARD JOHNSON
INTERNATIONAL, INC.,
Plaintiff,
v.
IMH, LLC, et al.,
Defendants.

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Civil Action No. 14-5805 (ES) (JAD)
MEMORANDUM OPINION

SALAS, DISTRICT JUDGE
This matter is before the Court upon a motion to vacate default judgment by Defendants
Ashish Patel and Harpreet Singh (collectively, the “Moving Defendants”).

(D.E. No. 14).

Plaintiff Howard Johnson International, Inc. (“Plaintiff” or “Howard Johnson”) opposes the
motion. (D.E. No. 17). The Court decides this matter without oral argument. See Fed. R. Civ.
P. 78(b). For the reasons below, the Court GRANTS the Moving Defendants’ motion to vacate
default judgment.
1.

Factual & Procedural Background. On September 18, 2014, Howard Johnson

brought this action against Defendants IMH, LLC, Manpreet Singh, Ashish Patel and Harpreet
Singh. (D.E. No. 1). It asserted several causes of action stemming from an alleged breach of a
license agreement that permitted Defendant IMH to operate a Howard Johnson® guest lodging
facility. (See id.).

In relevant part, Howard Johnson alleged that the Moving Defendants

provided Howard Johnson with a personal guaranty of Defendant IMH’s obligations under the
license agreement. (See id. ¶¶ 34-36).

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On October 8, 2014, Howard Johnson served the Moving Defendants with the Summons
and Complaint in Houston, Texas. (D.E. No. 6). But the Moving Defendants failed to timely
plead or otherwise respond to the Complaint. And, on February 9, 2015, Howard Johnson
requested that the Clerk of Court enter default against the Moving Defendants. (D.E. No. 9). On
February 10, 2015, the Clerk of Court entered such default. Thereafter, Howard Johnson moved
for default judgment against Defendant IMH and the Moving Defendants (see D.E. No. 11),
which the Court granted after reviewing Howard Johnson’s submissions and holding oral
argument on November 12, 2015 (see D.E. Nos. 12 & 13). 1 Specifically, the Court entered
judgment against Defendant IMH and the Moving Defendants—jointly and severally—in the
amount of $342,915.88. (D.E. No. 13).
On June 20, 2016, Defendants Ashish Patel and Harpreet Singh moved to vacate the
default judgement entered against them pursuant to Federal Rules of Civil Procedure 55(c),
60(b)(1), and 60(b)(6). (See D.E. No. 14-1). That motion was filed by Daniel P. Bernstein, Esq.,
who also appeared on behalf of the Moving Defendants during a subsequent telephonic
conference with the Court on July 12, 2016. (See D.E. No. 16). Thereafter, on July 19, 2016,
Howard Johnson filed its opposition.

(D.E. No. 17).

On August 15, 2016, the Moving

Defendants substituted Mr. Bernstein for their current counsel, relaying to the Court that there
had been “communication issues” between themselves and Mr. Bernstein. (See D.E. Nos. 18 &
19). On August 19, 2016, the Moving Defendants submitted a reply in support of their motion.
(D.E. No. 21).
2.

The Moving Defendants’ Arguments.

Citing Rule 60(b)(1), the Moving

Defendants argue that default resulted from excusable neglect because they failed “to understand

1

Howard Johnson voluntarily stipulated to the dismissal of Defendant Manpreet Singh. (See D.E. Nos. 7 &

8).

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the legal process” and in light of “the great distance from their home to the litigation forum.”
(D.E. No. 21 at 4). They aver that they trusted their New Jersey attorney to their detriment
because—from January 2015 to June 2016—their “prior counsel’s desire to obtain expert support
for the[ir] defense prior to presenting it to the Court” caused the delay in filing their motion to
vacate default judgment. (See id.). The Moving Defendants contend that it is “unknown” why
that attorney failed to enter a notice of appearance, contact Howard Johnson’s counsel or
otherwise intervene in this action before June 2016. (See id.). Moreover, they argue that they
have a meritorious defense: that the executed guaranty is a result of a forgery. (See D.E. No. 141 at 4; D.E. No. 21 at 2). And the Moving Defendants assert that any prejudice that Howard
Johnson complains about is insufficient. (See D.E. No. 21 at 5-6).
Finally, citing Rule 60(b)(6), they argue that the interests of justice warrant setting aside
default judgment because, by January 2015, they had hired an attorney who waited to file
anything with the Court, failed to reach out to Howard Johnson’s counsel, and inexplicably
waited until June 2016 to file something with the Court. (Id. at 6-7). 2 The Moving Defendants
argue that the sanction of default here would be extreme because they have viable defenses that
are supported by expert analysis—and, without a hearing on the merits, “they will have six figure
judgements against them that will likely drive them into bankruptcy.” (Id. at 7).
3.

Howard Johnson’s Opposition. In opposition, Howard Johnson argues that

vacating default judgment would be prejudicial because it has “expended significant time and
effort, and has incurred great expense, to secure judgment against [the Moving] Defendants.”
(D.E. No. 17 at 4). It argues that there is no meritorious defense and, moreover, documents and
witnesses “may be more difficult to locate and memories will surely have faded” because any
2

(See also D.E. No. 21 at 7 (contending that the Moving Defendants trusted an attorney who told them “that
nothing can be done until the expert report was completed” and inexplicably failed to enter an appearance in this
action)).

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evidence offered “is now nearly two years older than it was the time of the original filing.” (Id.).
Indeed, Howard Johnson appears to challenge the merit of Moving Defendants’ proffered
defense, arguing that it had repeatedly told the Moving Defendants that they were “guarantors”
and—during settlement negotiations between June 2014 and December 2014—the Moving
Defendants never raised a forgery defense. (Id. at 4-5).
Finally, Howard Johnson argues that the Moving Defendants engaged in culpable
conduct because it is indisputable they became aware of the Guarantee on October 8, 2014 (when
they were served with the Complaint), but they waited until June 2016 to defend themselves
(when they filed their motion to vacate default judgment). (Id. at 5-6). Howard Johnson also
notes that the Moving Defendants retained counsel in January 2015 and hired a handwriting
expert in May 2015—but did nothing to defend against this action until they filed their motion on
June 20, 2016. (Id. at 6-8).
4.

Legal Standard. “The court . . . may set aside a final default judgment under

Rule 60(b).” Fed. R. Civ. P. 55(c). Federal Rule of Civil Procedure 60(b) provides, in relevant
part, that “[o]n motion and just terms, the court may relieve a party or its legal representative
from a final judgment, order, or proceeding for the following reasons: (1) mistake, inadvertence,
surprise, or excusable neglect; . . . or (6) any other reason that justifies relief.”
Although the Court of Appeals for the Third Circuit “has adopted a policy disfavoring
default judgments and encouraging decisions on the merits, . . . the decision to vacate a default
judgment is left to the sound discretion of the trial court.” Harad v. Aetna Cas. & Sur. Co., 839
F.2d 979, 982 (3d Cir. 1988) (citation omitted); see also United States v. $55,518.05 in U.S.
Currency, 728 F.2d 192, 194-95 (3d Cir. 1984) (“We recognize . . . that this court does not favor
entry of defaults or default judgments. We require doubtful cases to be resolved in favor of the

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party moving to set aside the default judgment so that cases may be decided on their merits.”
(citation and quotation marks omitted)).
5.

Federal Rule of Civil Procedure 60(b)(1).

“In exercising its discretion in

granting or denying a motion to set aside a . . . default judgment under Rule 60(b)(1), the district
court should consider: (1) whether the plaintiff will be prejudiced; (2) whether the defendant has
a meritorious defense; and (3) whether the default was the result of the defendant’s culpable
conduct.” United States v. $90,745.88 Contained in Account No. 9506826724 Held in the Name
of and/or the Benefit of Amiri Mbubu Auto Sales, LLC., at Bank of Am., 465 F. App’x 143, 145
(3d Cir. 2012) (citation, quotations marks and textual modifications omitted). 3 District courts in
the Third Circuit have recognized that the second factor—i.e., whether there is a meritorious
defense—is a threshold question. See, e.g., Days Inn Worldwide v. B.K.Y.K.-II, Inc., No. 16-452,
2016 WL 6126939, at *2 (D.N.J. Oct. 19, 2016); J & H Int’l v. Karaca Zucciye Tic. San A.S.,
No. 10-3975, 2012 WL 4742176, at *2 (D.N.J. Oct. 3, 2012).
6.

Rule 60(b)(1) warrants vacatur.
a.

First, the Court finds there exists a meritorious defense for purposes of the

three-part test required for a Rule 60(b)(1) analysis.

Defendant Ashish Patel provided an

affidavit in which he states that the signature on the guaranty-at-issue is not his and that a
“signature expert” supports this contention. (See D.E. No. 14-2 ¶¶ 14, 21, 23-25). Similarly,
Defendant Harpreet Singh provided an affidavit stating that he never signed the guaranty-atissue. (See D.E. No. 14-3). The Moving Defendants have also provided the Court with a copy
of an expert report purporting to question the validity of the signatures on the guaranty-at-

3

See also Budget Blinds, Inc. v. White, 536 F.3d 244, 256 (3d Cir. 2008) (“We require the district court to
consider the following factors in exercising its discretion in granting or denying a motion to set aside . . . a default
judgment under Rule 60(b)(1): (1) whether the plaintiff will be prejudiced; (2) whether the defendant has a
meritorious defense; (3) whether the default was the result of the defendant’s culpable conduct.” (citation omitted)).

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issue—which includes the background and qualifications of the retained expert. (See D.E. No.
14-6).

Howard Johnson’s only protestation seems to be that the Moving Defendants had

previous opportunities to raise their forgery defense. (See D.E. No. 17 at 5 (characterizing
Moving Defendants’ forgery-related contentions as “suspect in light of the evidence in this case”
and citing their failure to raise such contentions during settlement negotiations)). But “the
defaulting party does not have to show that they will prevail at trial; rather, all they must show is
that, on its face, their defense is litigable.” Glashofer v. N.J. Mfrs. Ins. Co., No. 15-3601, 2016
WL 4204549, at *3 (D.N.J. Aug. 9, 2016) (emphasis added). After all, if they can prove this
defense, the Court sees no reason—nor has Howard Johnson offered any—why they wouldn’t be
absolved of liability. See $55,518.05 in U.S. Currency, 728 F.2d at 195 (“The showing of a
meritorious defense is accomplished when allegations of [a] defendant’s answer, if established
on trial, would constitute a complete defense to the action.” (citation and quotation marks
omitted)).
b.

Second, the prejudice that Howard Johnson complains of relating to time,

effort, and expense is insufficient—particularly given the Third Circuit’s policy of disfavoring
default judgments and encouraging decisions on the merit. See Sourcecorp Inc. v. Croney, 412
F. App’x 455, 459-60 (3d Cir. 2011) (“Default judgments are disfavored in our Circuit . . . . [W]e
have previously held that the costs associated with continued litigation normally cannot
constitute prejudice.”); Days Inn Worldwide, 2016 WL 6126939, at *2 (“Plaintiff has not
identified any special harm that it will suffer if the Court vacates its entry of default judgment.”).
And, as the Moving Defendants aptly point out (see D.E. No. 21 at 6), Howard Johnson fails to
identify particular witnesses or documents that may be missing or lost given the passage of
time—and, furthermore, this case appears to primarily involve documentation that has already

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been filed with the Court. In sum and substance, Howard Johnson’s complaints about prejudice
involve “difficulties [that] will almost always follow the vacation of a judgment, and they cannot
alone outweigh the Third Circuit’s strong preference that cases be decided on the merits.” See
Wong v. Cortislim Int’l Inc., No. 13-4524, 2015 WL 3866225, at *2 (D.N.J. June 23, 2015).
c.

Third, the Court is not persuaded that default judgment in favor of Howard

Johnson’s stemmed from culpable conduct. Rather, default judgment appears to have resulted
from the apparently inexplicable conduct of the Moving Defendants’ prior counsel. As the
Moving Defendants now explain, their prior counsel—who was retained in January 2015 (e.g.,
D.E. No. 14-2 ¶ 19)—inexplicably failed to enter a notice of appearance, contact Howard
Johnson’s counsel, and proceeded with acquiring expert support for the forgery-defense before
intervening in this action. Resolving doubts in favor of the Moving Defendants, the Court
declines to construe such inexplicable conduct as culpable conduct warranting the extreme
sanction of default judgment.

In other words, the Court is unconvinced that the Moving

Defendants’ conduct—not their prior counsel’s—evidences bad faith. 4 Bolstering the Court’s
finding is that a large sum of money is involved here—which the Third Circuit long ago held
counsels against resolution by default judgment. See Tozer v. Charles A. Krause Mill, Co., 189
F.2d 242, 245 (3d Cir. 1951) (“Matters involving large sums should not be determined by default
judgments if it can reasonably be avoided. Any doubt should be resolved in favor of the petition
to set aside the judgment so that cases may be decided on their merits.”). 5

4

Cf. Days Inn Worldwide, 2016 WL 6126939, at *3 (“[I]t appears that Defendants were proactive in their
attempt to find counsel to represent them in this District. . . . Thus, Defendants’ attorney—and not Defendants
alone—is partially to blame for Defendants’ unresponsiveness in this matter.” (internal citations omitted)).

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The Court thus finds that applying Rule 60(b)(1) warrants vacating default judgment and need not reach the
parties’ arguments concerning Rule 60(b)(6). That said, however, the Court notes that applying Rule 60(b)(6) would
likely also warrant vacatur. “Although the text of Rule 60(b)(6) states simply that a court may grant relief from a
final judgment for ‘any other reason that justifies relief,’ courts have added a requirement that a party seeking Rule
60(b)(6) relief must demonstrate the existence of ‘extraordinary circumstances’ that justify reopening the judgment.”

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7.

Conclusion. For the reasons above, the Court will vacate its November 12, 2015

Order of Default Judgment (D.E. No. 13) and re-open this action so the Court may reach a
decision on the merits. An appropriate Order accompanies this Memorandum Opinion.
s/Esther Salas
Esther Salas, U.S.D.J.

Budget Blinds, 536 F.3d at 255 (footnote omitted). “[A] showing of extraordinary circumstances involves a showing
that without relief from the judgment, an ‘extreme’ and ‘unexpected’ hardship will result.” Id. (citation and
quotation marks omitted). Here, as discussed, inexplicable conduct from the Moving Defendants’ prior attorney
threatens sanctioning the Moving Defendants with a very large sum of money. This is not a case where the moving
parties “seek[] relief from a judgment that resulted from the [parties’] deliberate choices.” See id. And, although
the Court has separately considered whether the proffered defense is meritorious for purposes of Rule 60(b)(1), the
Court is mindful in this context of the Moving Defendants facing a $342,915.88 judgment—while contesting
(through affidavits and an expert report) that they signed the guaranty-at-issue.

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