Alternative Investment Solutions (General) Limited v. Next Up Funding, Inc. et al
OPINION & ORDER: The Clerk of Court is directed to vacate the entry of default as to Defendant Israel Hager. Hager's motion for leave to file a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure is granted as follows: Hager's motion is due no later than March 1, 2013. Plaintiff's response is due April 1, 2013, and any reply by Hager must be filed no later than April 15, 2013 to be considered. To the extent that Hager's motion seeks sanctions against Plaintiff's counsel under Rule 11 of the Federal Rules of Civil Procedure, or seeks leave to make such a Rule 11 motion, it is denied as utterly without merit. Plaintiff's motion for default judgment as to Defendants Hager and Robles is de nied. Plaintiff may submit an updated proposed default judgment order as to Defendants Next Up, WGC Group, and Lunn. Its request for costs associated with filing the request for entry of default is denied. (Signed by Judge John F. Keenan on 2/4/2013) (ft)
Case 1:09-md-02013-PAC Document 57
Filed 09/30/10 Page 1 of 45
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
ALTERNATIVE INVESTMENT SOLUTIONS
DOC #: _________________
DATE FILED: Feb. 4, 2013
as assignee DISTRICT COURT
Demelza DISTRICT OF NEW YORK :
In re FANNIE MAE 2008 SECURITIES
08 Civ. 7831 (PAC)
12 Civ. 6612 (JFK)
09 MD 2013 (PAC)
OPINION & ORDER
NEXT UP FUNDING, INC.,
OPINION & ORDER
JASON E. WRIGHT,
a/k/a “Jay Wright,”
ISRAEL J. HAGER,
WGC GROUP, INC.,
GEOFFREY H. LUNN,
HONORABLE PAUL A. CROTTY, United States District Judge:
WERNER F. ROBLES,
Defendants. a boom in home financing which was fueled, among
The early years of this decade saw
other things, by low interest rates and lax credit conditions. New lending instruments, such as
subprime mortgages (high credit risk loans) and Alt-A mortgages (low-documentation loans)
Jami boom going. Borrowers played a role too; they took on unmanageable risks on the
kept the Mills Vibbert
FULBRIGHT & JAWORSKI L.L.P.
assumption that the market would continue to rise and that refinancing options would always be
Defendant Israel Hager, pro se
available in the future. Lending discipline was lacking in the system. Mortgage originators did
John F. Keenan, United States District Judge:
not hold these high-risk mortgage loans. Rather than carry the rising risk on their books, the
Before the Court into the secondary mortgage market, often as securitized packages
originators sold their loansis Plaintiff Alternative Investment
Solutions’s mortgage-backed securities (“MBSs”). MBS markets grew almost exponentially.
known as (“Plaintiff” or “AIS”) motion for default judgment
against Defendantshousing bubble burst. In 2006, the demand forJ. Hager, WGC
But then the Next Up Funding, Inc., Israel housing dropped abruptly
Group, Inc., Geoffrey fall. Lunn, of the changing housing market, banks modified their
and home prices began to H. In light and Werner F. Robles. One of
these defendants, Israel unwilling to refinance home mortgages without refinancing.
lending practices and became Hager, has filed an objection to entry
of default and a motion for leave to file an untimely motion to
Unless otherwise indicated, all references cited as “(¶ _)” or to the “Complaint” are to the Amended Complaint,
dated June 22, 2009. For purposes of this Motion,1 allegations in the Amended Complaint are taken as true.
Defendant Hager’s motions are granted in part, as set
Plaintiff is the assignee of Demelza Holding Limited
(“Demelza”), which was formed to raise funding for a proposed
resort in Long Island.
Plaintiff alleges that Defendants Next
Up, Hager, and Jason Wright (“Wright”) induced Demelza to
participate in an investment scheme that was actually a fraud.
The scheme was sold to Demelza as “internal transaction whereby
Next Up would lease cash-backed bank instruments using an
investment from a client such as Demelza, leverage that money,
and then provide the client with a guaranteed return on its
investment.” (Compl. ¶ 16.)
The complaint states that Defendant
Wright promised in an email that the scheme was insured and
guaranteed to produce a return. (Id. ¶ 17.)
It also alleges
that Wright and Hager represented to Demelza’s principals that
they had backgrounds in finance. (Id. ¶ 32.)
Plaintiff further claims that on the strength of these
promises, Demelza executed an agreement on October 13, 2010
(since assigned to Plaintiff) to provide $1 million to Next Up
with the expectation of receiving at least $7.2 million in
The same day, Demelza wired $1 million to an escrow
agent, which in turn wired the funds to Next Up the following
day, less a $10,000 fee. (Id. ¶¶ 33–47.)
According to Plaintiff, Defendants never provided a return
on the investment to Demelza.
Instead, Next Up disbursed the
almost $1 million to Defendant WGC in two separate wire
transactions on October 25 and November 2, 2010.
This was done
according to an agreement between Next Up and an entity,
“Concord Latin America, S.A./Dresdner Financial
Plaintiff claims that this entity is
a front used by Defendants WGC, Lunn, Robles, Vincent Curry, and
Michael Schmidt to defraud, and that they have done so before,
as evidenced by other legal actions filed against them. (Id. ¶¶
Plaintiff filed the complaint in this action on August 29,
2012, seeking money damages.
Service was made on Defendants
Next Up, Hager, WGC Group, Lunn, and Robles over the next
several weeks. 1
On September 21, 2012, Defendant Lunn wrote a
letter to the Court, advising that he intended to repay the
By Memo Endorsement, the Court directed him to contact
Plaintiff’s counsel by October 23, 2012.
Lunn never did so.
Defendant Robles answered the complaint on October 2, 2012.
Defendants Next Up and WGC Group have not answered or otherwise
Defendant Wright was also served, but advised that he filed for
bankruptcy in May 2012. Defendants Vincent Curry and Michael Schmidt
were never served.
appeared in this action, and no attorneys have filed notices of
appearance on their behalf. Cf. Grace v. Bank Leumi Trust Co.,
443 F.3d 180, 192 (2d Cir. 2006) (noting that corporations must
appear by counsel and cannot proceed pro se).
Defendant Hager’s answer was due to the Court on September
He failed to answer or otherwise respond to the
complaint by that date.
On October 5, 2012, Hager (representing
himself pro se) filed a motion requesting a thirty-day extension
The Court granted Hager’s motion, extending his
time through October 25, 2012.
However, on October 25, 2012,
Hager filed another motion for a thirty-day extension.
Court granted Defendant’s motion, extending his response
deadline to November 23, 2012, but stated that “no further
extensions will be granted.” (ECF No. 18.)
the pretrial conference on November 15, 2012, the Court agreed
to extend the answer deadline for all Defendants one final time,
to December 21, 2012. (ECF No. 19).
The Court’s Order directed,
“As to any defendants who have not filed an Answer by December
21, 2012, Plaintiff is entitled to move for entry of default
judgment and is not required first to bring an Order to Show
No Defendants have filed an answer since the date
of that Order.
On January 2, 2013, Plaintiff moved for certification of
default under Rule 55(a) of the Federal Rules of Civil Procedure
as to Defendants Next Up, Hager, WGC Group, and Lunn.
of Court certified default as to these Defendants on January 3,
On January 9, 2013, however, Defendant Hager filed the
instant motion objecting to entry of default and requesting
leave to file a motion to dismiss.
Plaintiff filed its
opposition to Hager’s motion on January 17, 2013 and also moved
for default judgment as to the defaulting Defendants, plus
Defendant Robles, on the same day.
Finally, on January 24,
2013, Hager filed his reply. 2
Federal Rule of Civil Procedure 55(a) directs the clerk of
court to enter default “[w]hen a party against whom a judgment
for affirmative relief is sought has failed to plead or
otherwise defend, and that failure is shown by affidavit or
otherwise.” Fed. R. Civ. P. 55(a); see City of New York v.
Mickalis Pawn Shop, LLC, 645 F.3d 114, 128 (2d Cir. 2011)
(describing entry of default as “a ministerial step to be
performed by the clerk of court”).
Under Rule 55(c), entry of
Hager’s reply is twenty pages — double the limit set forth in this
Court’s individual practices. The Court directs Hager to familiarize
himself with these practices, which can be found at http://www.nysd.
default may be set aside by a court “for good cause,” which in
the Second Circuit is evaluated in terms of these criteria:
“(1) whether the default was willful; (2) whether setting aside
the default would prejudice the party for whom default was
awarded; and (3) whether the moving party has presented a
meritorious defense.” Peterson v. Syracuse Police Dept., 467 F.
App’x 31, 33 (2d Cir. 2012) (citing Enron Oil Corp. v.
Diakuhara, 10 F.3d 90, 96 (2d Cir. 1993)).
The first factor, willfulness, may be found “where the
conduct of counsel or the litigant was egregious and was not
satisfactorily explained.” S.E.C. v. McNulty, 137 F.3d 732, 738
(2d Cir. 1998).
“Mere tardiness in meeting a court deadline
does not establish a willful default,” Gov’t Emps. Ins. Co. v.
Right Solution Med. Supply, Inc., No. 12-cv-0908, 2012 WL
6617422, at *3 (E.D.N.Y. Dec. 19, 2012), and “generally, in this
Circuit, willfulness does not include careless or negligent
errors even when the negligence is gross,” Burns v. Dailey, No.
5:12-cv-0229, 2012 WL 6201831, at *3 (N.D.N.Y. Dec. 12, 2012)
(citing Am. Alliance. Ins. Co., Ltd. v. Eagle Ins. Co., 92 F.3d
57, 61 (2d Cir. 1996)).
The second factor, prejudice, refers to more than simple
delay. See Enron Oil, 10 F.3d at 98.
“Rather, it must be shown
that delay will result in the loss of evidence, create increased
difficulties of discovery, or provide greater opportunity for
fraud and collusion.” Davis v. Musler, 713 F.2d 907, 916 (2d
Cir. 1983) (citation and internal quotation marks omitted); see
also New York v. Green, 420 F.3d 99, 110 (2d Cir. 2005) (adding
that delay may be prejudicial if it “thwart[s] plaintiff’s
recovery or remedy”).
The final factor to be considered is whether the defendant
has raised a meritorious defense.
To decide whether this is so,
the Court must consider “whether the evidence submitted, if
proven at trial, would constitute a complete defense.” Enron
Oil, 10 F.3d at 98.
“[T]he defendant need not establish his
defense conclusively,” nor must he show “a likelihood that it
will carry the day.” State St. Bank & Trust Co. v. Inversiones
Errazuris Limitada, 374 F.3d 158, 167 (2d Cir. 2004) (internal
citations and quotation marks omitted).
Nevertheless, he “must
present more than conclusory denials.” Pecarsky v.
Galaxiworld.com Ltd., 249 F.3d 167, 173 (2d Cir. 2001).
Second Circuit precedent is unclear on the question of how
the “meritorious defense” factor should be weighed against the
At least one court has stated that “the absence of a
meritorious defense is, on its own, enough to support entry of
default judgment.” Capital Records v. Defries, No. 11 Civ. 6808,
2012 WL 3041583, at *5 (S.D.N.Y. July 20, 2012) (citing State
St., 374 F.3d at 174; Sony Corp. v. Elm State Elecs., Inc., 800
F.2d 317, 320 (2d Cir. 1986)).
However, the Second Circuit has
also vacated a district court’s entry of default judgment after
finding that willfulness and prejudice were not established. See
Swarna v. Al-Awadi, 622 F.3d 123 (2d Cir. 2010).
panel concluded that it did not need to “address the
‘meritorious defense’ prong to find that default judgment was
improperly granted.” Id. at 143.
What is certain is that the question whether to grant entry
of default judgment or instead to vacate the entry of default is
ultimately left “to the sound discretion of the district court.”
Enron Oil, 10 F.3d at 95.
This discretion is to be exercised in
light of the fact that default judgment is “generally disfavored
and . . . reserved for rare occasions.” Mickalis, 645 F.3d at
129 (citations and internal quotation marks omitted); see also
Luft v. Crown Publishers, Inc., 906 F.2d 862, 865 (2d Cir. 1990)
(“A sanction so drastic as . . . entering a default judgment is
not ordinarily imposed unless the disobedience has been willful,
or in bad faith, or otherwise culpable.”).
And the Second
Circuit has repeatedly indicated that default is “particularly
disfavored by the law when . . . substantial sums of money are
demanded.” Enron Oil, 10 F.3d at 97 (citing Sony Corp., 800 F.2d
Where default judgment is sought against a pro se
defendant, the Second Circuit has stated that “[i]mplicit in the
right to self-representation is an obligation on the part of the
court to make reasonable allowances to protect pro se litigants
from inadvertent forfeiture of important rights because of their
lack of legal training.” Traguth v. Zuck, 710 F.2d 90, 95 (2d
Because Hager currently represents himself pro se,
his submissions will be “liberally construed in his favor,”
Simmons v. Abruzzo, 49 F.3d 83, 87 (2d Cir. 1995) (citing Haines
v. Kerner, 404 U.S. 519, 520 (1972)), and will be read “to raise
the strongest arguments that they suggest,” Green v. United
States, 260 F.3d 78, 83 (2d Cir. 2001) (citing Graham v.
Henderson, 89 F.3d 75, 79 (2d Cir. 1996)).
In the instant case, Defendants Next Up, WGC Group, and
Lunn have failed to appear, to answer the complaint, or move for
vacatur of the entry of default against them.
Entry of default
judgment against those Defendants is therefore wholly
Plaintiff’s basis for default judgment against Defendant
Robles is unclear.
Robles answered the complaint pro se, and
entry of default was neither requested of, nor entered by, the
clerk of court.
In its supporting declaration, Plaintiff
acknowledges that Robles filed an answer on October 2, 2012, but
then erroneously includes Robles in this statement:
the Defaulting Defendants has answered or responded to the
Complaint to date . . . [or] by December 21, 2012.” (Decl. ¶¶
Default judgment against Robles is therefore
inappropriate at this time.
As to Defendant Hager, Plaintiff urges that his default was
willful, that setting the default aside would prejudice
Plaintiff, and that Hager has asserted no meritorious defenses.
These questions will be discussed in turn.
Plaintiff first argues that Hager’s default was willful,
pointing out that “Hager has consistently been able to file
documents with the Court pro se, but has failed to file an
answer or to otherwise respond to the Complaint.” (Pl. Opp. at
Hager’s response, in short, is that the difficulties of
representing himself, combined with the effects of Hurricane
Sandy on his family, hampered his efforts to timely respond to
the complaint. (Reply at 5–6.)
To be sure, Hager has had more than enough time to answer
or respond since September 2012, and he has missed three
deadlines to do so.
On the other hand, Hager personally
appeared at both pretrial conferences in this action.
Plaintiff notes, Hager has prepared several documents in
connection with Plaintiff’s claim, evincing his intent to defend
It is apparent to the Court that Hager’s delays are
not the result of bad faith or an intentional abuse of process
but rather the failure to retain counsel and subsequent
difficulties that may naturally arise when defending oneself pro
se in federal court.
The Court therefore finds that Hager’s
default was not willful as understood in this Circuit.
The next factor is whether setting Hager’s default aside
would prejudice Plaintiff.
Plaintiff claims that it would,
because “[a]ny further delay may materially impact Plaintiff’s
ability to recover . . . through postjudgment relief.” (Pl. Opp.
But Plaintiff does not explain why this is the case.
Indeed, it is not clear that any actual prejudice would flow
from allowing Hager to respond to the complaint.
Doing so would
not “result in the loss of evidence, create increased
difficulties of discovery, or provide greater opportunity for
fraud and collusion.” Green, 420 F.3d at 110 (citations and
internal quotation marks omitted).
And while it may be true
that “Plaintiff’s ability to recover at all is jeopardized by
prolonged delay,” P. Opp. at 3, nothing is stopping Plaintiff
from pursuing recovery from the other defaulting Defendants once
default judgment is entered against them.
The law is clear that
delay alone is insufficient to find that Plaintiff has been
prejudiced by Hager’s default.
The final factor is whether Hager has presented a
Included in Hager’s motion is a section
entitled “Legal Grounds in Support of Automatic Dismissal if
Motions for Leave to File Motion to Dismiss Is Granted.” (Mot.
Because Hager proceeds pro se, the Court will construe
these “grounds” as his defenses, and will also consider the
defenses set forth in Hager’s reply memorandum. See Reply at 12–
In their current state, Hager’s defenses seem to be without
Some are factually untrue, such as the assertion that
Plaintiff has admitted that Defendant Lunn “is the party with
100% liability” to the exclusion of Hager. (Mot. at 5.)
vast majority of Hager’s defenses fatally misunderstand or
misconstrue Plaintiff’s claim against Hager such that there
appears to be no “credible evidence of facts that would
constitute a complete defense.” State Farm Mut. Auto. Ins. Co.
v. Cohan, 409 F. App’x 453, 456 (2d Cir. 2011) (citing Enron
Oil, 10 F.3d at 98); cf. Am. Alliance Ins. Co., 92 F.3d at 61
(“A defense is meritorious if it is good at law so as to give
the factfinder some determination to make.” (citation and
internal quotation marks omitted)).
Although the Court is not persuaded that Hager’s defenses
are meritorious, after weighing the three factors, the Court
nevertheless reluctantly concludes that it would be
inappropriate to enter default judgment against Hager at this
Default judgment is “the most severe sanction which the
court may apply,” and the Court is mindful that Plaintiff seeks
over $3 million from Hager — as far as he is concerned, a huge
sum. Mickalis, 645 F.3d at 129; see Enron Oil, 10 F.3d at 97
(defaults “are particularly disfavored by the law when
substantial rights are implicated, or when substantial sums of
money are demanded.” (citations omitted)).
If a large judgment
is to be entered against Hager, it should be only after a fuller
adjudication of the merits, and on the strength of briefing that
is less cursory than what has been presented to the Court by
both Plaintiff and Hager to this point.
The Court notes that its findings set forth in this
opinion, specifically that Hager lacked willfulness and bad
faith, are subject to Hager’s future compliance with the
schedule the Court sets below, as well as in the future.
Further disregard for this Court’s orders will be considered
evidence of “egregious and deliberate conduct,” Am. Alliance
Ins. Co., 92 F.3d at 61, and will weigh against Hager if
questions of default arise again.
The Clerk of Court is directed to vacate the entry of
default as to Defendant Israel Hager.
Hager's motion for leave
to file a motion to dismiss under Rule 12(b) (6) of the Federal
Rules of Civil Procedure is granted as follows:
Plaintiff's response is due
is due no later than March 1, 2013.
April 1, 2013, and any reply by Hager must be filed no later
than April 15, 2013 to be considered.
To the extent that Hager's motion seeks sanctions against
Plaintiff's counsel under Rule 11 of the Federal Rules of Civil
Procedure, or seeks leave to make such a Rule 11 motion, it is
denied as utterly without merit.
Plaintiff's motion for default judgment as to Defendants
Hager and Robles is denied.
Plaintiff may submit an updated
proposed default judgment order as to Defendants Next Up, WGC
Group, and Lunn.
Its request for costs associated with filing
the request for entry of default is denied.
New York, New York
United States District Judge
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