U.S. Commodity Futures Trading Commission v. Safety Capital Management, Inc. et al

Filing 39

ORDER ADOPTING REPORT AND RECOMMENDATIONS: Motion to Vacate is granted. SO Ordered by Judge Raymond J. Dearie on 7/31/2017. (Ramesar, Thameera) (Main Document 39 replaced on 7/31/2017) (Ramesar, Thameera).

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UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK

U.S. COMMODITY FUTURES TRADING

COMMISSION,

REPORTAN0r"p^fe^

Plaintiff,

RECOMMENDATIO
-against15-CV-5551

SAFETY CAPITAL MANAGEMENT,INC.
d/b/a FOREXNPOWER,GNS CAPITAL,INC.

d/b/a FOREXNPOWER,JOHN H. WON,
SUNGMI KANG,and TAE HUNG KANG
a/k/a KEVIN KANG,

FILED

IN CLERK'S OFFICE

US DISTRICT COURT E.D.N.Y.

*

JUL 3 1 20t7 5

Defendants.

BROOKLYN OFFICE
Peggy Kuo, United States Magistrate Judge:

Plaintiff U.S. Commodity Futures Trading Commission ("CFTC" or "Plaintiff) brought

this action against Safety Capital Management,Inc.("Safety") and GNS Capital, Inc.("GNS")

(collectively, the "Corporate Defendants"), Sungmi Kang ("S. Kang") and Tae Hung Kang ("T. H.
Kang")("the Kang Defendants"), and John H. Won ("Won")(Won,S. Kang,and T. H. Kang,
collectively, the "Individual Defendants," and together with the Corporate Defendants,

"Defendants"), alleging violations of the Commodity Exchange Act,7 U.S.C.§ 1 et seq. and CFTC
Regulations, 17 C.F.R. § 1 et seq. (See Compl., Dkt. 1.) The Corporate Defendants are New York

corporations, and GNS was registered with the CFTC as a commodity pool operator and
commodity trading advisor. {Id. ^^1,5,18-19.) The Individual Defendants were officers,
employees, and agents of Safety; Defendants Won and S. Kang were also officers, employees, and

agents of GNS. (W.

8-9, 20-22.) The Individual Defendants are residents of Queens. (W.^^ 20-

22.)

Before this Court on referral from the Honorable Raymond J. Dearie is Won's Motion to

Vacate an Entry of Default. (See Dkt. 35; Order, May 17, 2017.) For the reasons stated herein, the

S/ RJD

undersigned respectfully recommends that Wen's Motion be granted.
BACKGROUND

Plaintiff commenced this action by filing the Complaint on September 24, 2015, alleging that

Defendants fraudulently solicited investors and prospective investors and misappropriated investors'
funds. (Compl.^ 1, Dkt. 1.) Defendant Won was served on October 2, 2015, by personal service
on a "suitable age person," at his "place of Work,""156-14 Sanford Avenue, Flushing, NY 11355,"
and by first class mail to the same address. (Aff. of Service, Dkt. 7.) The Affidavit of Service

indicates that this person was "Hanna Won."' (Id) The Corporate Defendants were served on
October 5, 2015. (Affs. of Service, Dkts. 5-6.) Neither Won nor the Corporate Defendants
answered, and Plaintiff requested a Certificate of Default as to all three on November 25, 2015.
(Dkt. 8.) Default was entered as to Won and the Corporate Defendants on November 30, 2015.
(Dkts. 9-11.)

Plaintiff was granted extensions of time to serve the Kang Defendants(Order, December

22, 2015; Dkt. 17), and permission to serve them by publication (Dkt. 17), which Plaintiff did on
August 22, 2016, and again on September 1, 2016 (Affs. of Service, Dkts. 18, 20-21, 23). Plaintiff

then obtained an updated address for the Kang Defendants^ and served them at the new address on
December 20, 2016. (Affs. of Service, Dkts. 28-29.) The Kang Defendants' answer was due on
January 10, 2017 (Fed. R. Civ. P. 12(a)(l)(A)(i)), and none was filed. However, on February 28,
2017, Plaintiff mailed to the Kang Defendants a letter informing them that Plaintiff would seek

default if they did not answer by March 15, 2017 (Dkts. 30-31) — effectively extending to that date
the time for the Kang Defendants to answer. The Kang Defendants, together with Won,filed an
answer,

se^ on March 15, 2017. (Dkt. 33.)

'Plaintiff asserts that Hanna Won is Defendant Won's wife but submits nothing to support this. (See PL's Mot. in
Opp'n at 4, Dkt. 36.)

2 S. Kang and T. H. Kang arc married to one another and live at the same residence.
2

An Initial Conference was held before the undersigned on April 12, 2017, which Defendant
Won attended. (See Min. Entry, Apr. 12, 2017.) At the conference. Won was advised of the

Certificate of Default entered against him, and given a deadline of May 12, 2017 for moving to
vacate the certificate. (7^.) Won timely filed the Motion to Vacate on May 12,2017. (Dkt. 35.)
DISCUSSION

I.

Legal Standard

A litigant may seek to vacate an entry of default pursuant to Federal Rule of Civil Procedure
55(c), which provides that an entry of default may be set aside for "good cause." Fed. R. Civ. P.

55(c). The Second Circuit has "established three criteria that must be assessed in order to decide
whether to relieve a party from default or from a default judgment:(1) whether the default was
willful;(2) whether setting aside the default would prejudice the adversary;(3) whether a meritorious

defense is presented." Rnron Oil Corp. v. Diakuhara^ 10 F.3d 90,96(2d Cir. 1993); see also bricklayers
Allied Crajtworkers Lj)cal2 Pension Fund ex rel O'Sick v. Moulton Masony ^Construction, LLC,779
F.3d 182,186 (2d Cir. 2015).

When the question is one of setting aside a default — as opposed to a default judgmentthese factors are assessed less rigorously, because there are fewer concerns about "the concepts of
finality and litigation repose." Enron Oil, 10 F.3d at 96; see Sream Inc. v. SaakshiEnters. Inc., No. 16CV-1408(NG)(RML),2017 WL 2633510, at *2(E.D.N.Y.June 15, 2017)("[i]mportantly, the

standard for vacating an entry of default pursuant to Rule 55(c)...is less rigorous than vacating a
default judgment pursuant to Rule 60(b)"(emphasis in the original)). And although "[t]he

dispositions of motions... [to vacate an entry of default] are left to the sound discretion ofa district
court...," Enron Oil, 10 F.3d at 95, the Second Circuit maintains an "oft-stated preference for

resolving disputes on the merits." Id. at 96. In addition,"[a] party appearing without counsel is
afforded extra leeway in meeting the procedural rules governing litigation—" Id. Therefore,"a

district court should...grant leave to set aside the entry of default freely when the defaulting party is
appearing pro se." Id.
II.

Analysis

A. Willfulness

"[Wjillfulness, in the context of a default...refer[s] to conduct that is more than merely

negligent or careless, but is instead egregious and not satisfactorily explained." Brickl<^'ers^ 779 F.3d
at 186 (quoting S.E.C. v. McNuliy, 137 F.3d 732, 738 (2d Cir. 1998))(citation omitted)(punctuation
omitted). Even a defendant who was "grossly negligent" in failing to answer was not necessarily

willful; "[rjather, the defaulting party must have engaged in deliberate or egregious conduct." Sream
Inc., 2017 WL 2633510, at *2. Indeed,"a showing that a default was inadvertent is sufficient...to

vacate a default judgment." Global Gold Mining LLC v. y^vas^an, 983 F. Supp. 2d 378, 387(S.D.N.Y.
2013).

Won states that, inter alia, he was never personally served and the person who was served did

not know that the Complaint was for Won. (Mot. to Vacate ^ 2(d), Dkt. 35.) In addition, since

filing the Answer on March 15, 2017, Won has attended the Initial Conference and timely filed the
Motion to Vacate, suggesting his diligence in attempting to participate in this litigation. Won's
default seems to have been inadvertent, rather than willful.

B. Prejudice to Plaintiff

Whether the non-defaulting party would be prejudiced by vacating a default "has been

described as the single most persuasive reason" to deny a motion to vacate. Global Gold Mining, 983
F. Supp. 2d at 387 (citation omitted). "To demonstrate prejudice,[Plaintiff] must establish that
delay will result in the loss of evidence, create increased difficulties of discovery, or provide greater

opportunity for fraud or collusion." Id. at 388. Plaintiff contends only that it would suffer prejudice
because it would have to expend the resources necessary to fully litigate this action, including

conducting discovery. (See PL's Mot. in Opp'n at 6, Dkt. 36.) Expending resources to conduct
discovery is different from increasing the difficulty of discovery. Plaintiff also does not allege a loss of
evidence or greater opportunity for fraud or collusion.

Plaintiff suggests that it would suffer prejudice because a vacatur of Won's default "could
also delay any motion for default judgment against GNS—" (Jd. at 7.) However,"delay alone is

not a sufficient basis for establishing prejudice." MD Produce Corp. v. 231 Food Corp.^ 304 F.R.D. 107,

110(E.D.N.Y. 2014)(quoting Davis v. Musler^ 713 F.2d 907,916 (2d Cir. 1983)). And Plaintiff could .
have moved for default judgment against Won and the Corporate Defendants at any time after the
Certificate of Default was entered on November 30,2015. They did not do so. Plaintiff would not

suffer the prejudice required to justify denying the vacatur of default.
It should also be noted that this litigation is now moving forward against Won's co-

defendants, the Kangs. It is highly likely that the case against all three individuals can move forward
simultaneously. Won has already filed an answer and discovery can commence immediately upon
vacatur of his default.

C. Meritorious Defense

A defendant seeking to vacate a default "need only meet a low threshold to satisfy [the
meritorious defense] factor." MD Produce, 304 F.R.D. at 110. "[A] defense is meritorious if it is
good at law so as to give the fact-finder some determination to make. Likelihood of success is not
the measure. [Defendant's] allegations are meritorious if they contain even a hint of a suggestion

which, if proven at trial, would constitute a complete defense." Weisel v. Piscbel, 197 F.R.D. 231, 239
(E.D.N.Y. 2000)(citations omitted); seeMD Produce, 304 F.R.D. at 110.

Won claims that he has repaid any money he owes and that he acted in good faith with

respect to the allegations in the Complaint. (See Mot. to Vacate ^ 3, Dkt. 35.) Plaintiff argues that
"(gjood faith is not a defense to fraud if the defendant acted willfully." (Mot. in Opp'n at 8, Dkt.

36.) However, whether'^on acted willfully has not been established, and indeed suggests that if
default were vacated there would be determinations for the fact-finder to make. Given the low

threshold required for this factor, Won has sufficiently demonstrated the existence of a meritorious
defense.

An entry of default should be vacated if doing so is "equitable and appropriate." Global Gold
Mining,983 F. Supp. 2d at 388. In light of the less rigorous standard for vacating an entry of default,
and the strong preference for adjudication on the merits, the undersigned concludes that vacatur is

equitable and appropriate in this instance, and respectfully recommends that Won's Motion be
granted.
CONCLUSION

Based on the foregoing, it is respectfully recommended that the Motion to Vacate the Entry

of Default be granted. Plaintiff is directed to serve a copy of this Report and Recommendation on
Defendants by certified mail, and to file proof of service on the docket within five (5) days of the
entry of this Report.

Any objection to this Report must be filed in writing with the Clerk of Court within fourteen
(14) days of service. 28 U.S.C. § 636(b)(1); Fed. R. Civ. P. 72(b). Failure to timely file any such

objection waives the right to appeal the District Court's Order. 28 U.S.C. § 636(b)(1); Fed. R. Civ.
P. 72(b).
SO ORDERED:

P^Kuo
PEGGY KUO

United States Magistrate Judge

Dated:

Brooklyn, New York
July 11,2017