PMJ Capital Corp. v. The Lady Antoinette et al

Filing 203

OPINION AND ORDER re: 154 LETTER MOTION for Oral Argument regarding Defendants Frank Bauco and Antoinette Bauco filed a motion to modify this Courts Order of January 18, 2018, returnable on August 14, 2018 addressed to Judge Alison J. Nathan from Mitchell D. Cohen dat filed by PMJ Capital Corp., 149 MOTION for Release of Bond Obligation . filed by Antoinette Bauco, Frank Bauco. The Court denies the Baucos' motion to unconditionally vacate the default or mod ify the Court's prior order. The Court also hereby denies the Baucos' request for oral argument on this motion. See Dkt. No. 154. If the Baucos do not submit a letter to the Court within seven days of the date of this Opinion and Order info rming it that they have posted a bond in the amount of $92,749.92, the default will not be vacated. In any event, PMJ shall follow the briefing schedule for either a motion for default judgment or a motion for summary judgment set out in Magistrate Judge Aaron's Order dated June 12, 2019. Dkt. No. 199. This resolves Docket Numbers 149 and 154. SO ORDERED. (Signed by Judge Alison J. Nathan on 9/30/2019) (kv) Transmission to Finance Unit (Cashiers) for processing.

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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PMJ Capital Corp.,
Plaintiff,

16-cv-6242 (AJN)

-vOPINION & ORDER
Frank Bauco, et al.,
Defendants.

ALISON J. NATHAN, District Judge:
This case concerns a foreclosure action brought by Plaintiff PMJ Capital Corp. against a
vessel, the Lady Antoinette, and its owners, Frank and Antoinette Bauco. At issue is the Baucos'
request to be relieved of the condition that they post bond or other adequate security in order to
proceed with this action, as required by the Court's January 18, 2018 Memorandum Opinion &
Order. For the reasons provided below, the Court DENIES the Baucos' motion.

I.

FACTUAL BACKGROUND
The facts underlying this case are described in detail in the Court's January 18 Opinion.

See Dkt. No. 88. In brief, the case arose following the Baucos' default on a promissory note
provided by PMJ to 550 Realty Associates, LLC, of which Defendant Frank Bauco was a
managing member. See Dkt. No. 74, Ex. B. The $75,000 loan was personally guaranteed by the
Baucos. See Dkt. No. 74, Ex. C. The Baucos also executed a First Preferred Ship Mortgage on
the Lady Antoinette in favor of PMJ as further security for the loan. See Dkt. No. 74, Ex. D.
Under the terms of the Promissory Note, 550 Realty was to pay back the $75,000 loan at an
interest rate of 16%. See Dkt. No. 74, Ex. B. 550 Realty made payments on the Note for
approximately one year, but ceased payments in the summer of 2015. See Dkt. No. 79, Ex. 1

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13. In August 2016, PMJ brought this suit alleging that the Baucos were in default under the

terms of the Promissory Note and seeking to foreclose on the Lady Antoinette. See Dkt. No. 1.

II.

PROCEDURALBACKGROUND
The procedural background of this case is complex, but worth describing in some detail,

as it is particularly relevant to the motion now before the Court.
PMJ filed its Complaint on August 5, 2016. See Compl. According to PMJ, Phillip
Grimaldi, the Baucos' attorney at the time the Complaint was filed, accepted service of the
Summons and Complaint on their behalf on September 22, 2016. See Dkt. No. 13

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4. PMJ

agreed at that time to extend the time for the Baucos to respond until October 20, 2016 in
exchange for Grimaldi's acceptance of service of process. See Dkt. No. 57, Ex. 1.
On October 26, 2016, the Court authorized the issuance of a warrant for the arrest of the
Lady Antoinette upon application of PMJ. Dkt. No. 15. One day later, PMJ requested that the
Clerk of Court enter default against the Baucos because they had failed to file any responsive
pleading by October 20, 2016. See Dkt. No. 18. This request was denied without prejudice
because the Court was unable to conclude that service on Grimaldi was proper. See Dkt. No. 31.
The Lady Antoinette was arrested by the United States Marshal for the Southern District
of New York on November 30, 2016, see Dkt. No. 54, and PMJ informed Grimaldi of its arrest
on December 2, 2016, see Dkt. No. 57, Ex. 2. In late January 2017, Grimaldi notified PMJ that
he no longer represented the Baucos. Dkt. No. 57 ~ 7.
In response, PMJ decided to serve the Baucos personally on February 14, 2017, see Dkt.
No. 48; Dkt. No. 49, and in early March 2017, it informed the Baucos of the Lady Antoinette's
arrest, see Dkt. No. 57, Ex. 4. The Baucos failed to respond to the Complaint, and thus PMJ

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again requested the Clerk of Court enter default against them, see Dkt. No. 50, which the Clerk
of Court did on March 9, 2017, Dkt. No. 52.
PMJ then moved for an interlocutory sale of the Lady Antoinette on April 6, 2017. Dkt.
No. 55. The Baucos, in their first filing in this litigation, requested an extension of time to
respond to this motion on May 4, 2017, nine months after the Complaint was filed. See Dkt. No.
64. The Court granted the Baucos' request, Dkt. No. 65, and on May 16, 2017, they submitted
their opposition to PMJ's motion and moved to vacate the default, Dkt. No. 73.
In its January 18 Opinion, the Court vacated the default, noting that the balance of factors
was "close" but ultimately weighed in favor of vacating "given the general preference for
deciding cases on the merits." Dkt. No. 88 at 13. However, the Court conditioned vacatur on the
posting of a bond or other adequate security in the amount of $143,749.92 in order to "protect
PMJ's rights." Id. 13-15. In that order, the Court also declined to order interlocutory sale of the
Lady Antoinette, but noted that it conditioned the vacatur on the posting of security "in light of
the risk of the Vessel's deterioration and the costs that vacating the default may impose on PMJ."

Id. at 14. The Court ordered the Baucos to submit a letter to the Court within three days of
posting security and to file an answer within 14 days of the Opinion. Id. at 15.
On January 31, 2018, the Baucos filed an answer, Dkt. No. 90, as well as a letter
requesting (1) permission to inspect the Lady Antoinette in order to obtain a full appraisal of it
and (2) an extension of time to post the security required by the Court's January 18 Opinion.
Dkt. No. 91. The Court granted the Baucos permission to inspect the Lady Antoinette but made
no decision with respect to any other issues raised. Dkt. No. 100. On March 20, 2018, the
Baucos informed the Court that United Yacht Sales had performed an inspection of the Lady
Antoinette and its report indicated that the vessel was "really not ready for a sale." Dkt. No. 109

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at 1. According to the Baucos, the report listed several measures that should be taken to "prepare
the vessel for sale," and they requested permission to take these measures, as well as to allow
United Yacht Sales to market and sell it and "use those funds to post the bond required by the
Court in its prior order." Id. at 2. The Court subsequently granted the Baucos permission to
ready the Lady Antoinette for private sale and to pay the proceeds of any sale directly to the
Clerk of the United States District Court for the Southern District of New York. Dkt. No. 126.
The Baucos wrote to the Court on June 13, 2018, requesting "clarification regarding
whether [they] remain[ed] in default in light of their economic inability to place a bond pursuant
to the [Court's January 18 Opinion]. Dkt. No. 135 at 2. They also requested to use the funds
from sale of the Lady Antoinette to post security and to allow them to proceed in the case as if
the default had been vacated until such a time as they could post security from the sale of the
Vessel. Id. PMJ filed a response to this request, arguing that the Baucos were in effect moving
to vacate the default and requesting that the Court set a briefing schedule accordingly. Dkt. No.
137. This Court subsequently set a briefing schedule for the present motion. Dkt. No. 139.
On July 13, 2018, the deadline set for such a motion, the Baucos filed a motion styled as
a "motion to modify the January 1[8], 2018 order to permit for the proceeds from the sale of
vessel to be posted in lieu of bond or other form of adequate security." Dkt. No. 150. 1
Following several status updates to the Court indicating that a private buyer had not yet been
secured, on October 11, 2018, the Court ordered the Clerk of Court to issue a Writ of Venditioni

Exponas to the Marshal for the public sale of the Lady Antoinette to the highest bidder. Dkt. No.
164.

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The motion filed on July 13, 2018 was incorrectly filed and terminated as a result. See Dkt. No. 145. The Court
cites to the properly filed motion and accompanying memorandum of law throughout this Opinion and Order. See
Dkt. Nos. 149, 150.

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On the eve of public sale, which was to take place on November 9, 2018, the Baucos'
counsel informed the Court that defendant Antoinette Bauco had just filed for bankruptcy, that
all matters to which she was then a party were stayed as a result, and that the impending salescheduled for the next day-had to be cancelled. Dkt. No. 165. Following this eleventh-hour
notification, the Court stayed the sale in light of the automatic bankruptcy stay in place as of
Antoinette Bauco's filing of a bankruptcy petition the prior day. Dkt. No. 168. On February 12,
2019, PMJ notified the Court that the bankruptcy petition was dismissed on February 8, 2019, for
failure to file the schedules as required by 11 U.S.C. § 521(a)(l), Dkt. No. 178, and on February
20, 2019, the Court again ordered the Clerk of Court to issue a Writ of Venditioni Exponas to the
Marshal for the public sale of the Lady Antoinette to the highest bidder, Dkt. No. 185.
Ultimately, the Lady Antoinette was sold at public auction on Friday, April 26, 2019, for a credit
bid of $50,000 made by PMJ. See Dkt. No. 192.
Now before the Court is the Baucos' July 13 motion. Though styled as a "motion to
modify the January 1[8], 2018 order to permit for the proceeds from the sale of vessel to be
posted in lieu of bond or other form of adequate security," the Court treats it as a second motion
to vacate default. See Dkt. No. 139 (ordering the Baucos to submit "any motion to vacate the
default" by July 11, 2018, a deadline the Court subsequently extended to July 13, 2018). For the
reasons set forth below, the Baucos' motion is DENIED.

III.

LEGAL STANDARD
Rule 55(a) of the Federal Rules of Civil Procedure provides that "[w]hen a party against

whom a judgment for affirmative relief is sought has failed to plead or otherwise defend ... the
clerk must enter the party's default." However, after such default is entered, the court may set it
aside for "good cause." Fed. R. Civ. P. 55(c). In determining whether good cause exists, courts

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balance three factors: "(1) the willfulness of default, (2) the existence of any meritorious
defenses, and (3) prejudice to the non-defaulting party." Bricklayers & Allied Craftworkers

Local 2, Albany, NY. Pension Fund v. Moulton Masonry & Constr., LLC, 779 F.3d 182, 186 (2d
Cir. 2015) (quoting Guggenheim Capital, LLC v. Birnbaum, 722 F.3d 444,455 (2d Cir. 2013)).
Other relevant equitable factors that may also be considered include "whether the failure to
follow a rule of procedure was a mistake made in good faith and whether the entry of default
would bring about a harsh or unfair result." Enron Oil Corp. v. Diakuhara, 10 F.3d 90, 96 (2d
Cir. 1993). "The dispositions of motions for ... relief from [defaults] under Rule 55(c) are left
to the sound discretion of a district court because it is in the best position to assess the individual
circumstances of a given case and to evaluate the credibility and good faith of the parties." Id. at
95 (emphasis added).
The Court previously considered a motion to vacate the default entered against the
Baucos in its January 18 Opinion. See Dk.t. No. 88. In that Opinion, the Court conditionally
granted the motion subject to the Baucos posting a bond or other form of adequate security in the
amount of$143,749.92. Id. at 15. In the over a year and a half since that Opinion was issued,
the Baucos have failed to post a bond or other adequate security in the amount required by the
Court. The Baucos now argue, in effect, that the Court should vacate the default unconditionally
"based upon [their] commitment [at the time the motion was filed] to sell the vessel and place the
proceeds with the Court." Dkt. No. 150 at 6. The Court, however, does not decide this motion
to vacate the default any differently because the balance of "good cause" factors has not
materially changed.

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A. Willfulness of Default and Meritorious Defenses
The Court's analysis of the willfulness of default and the existence of any meritorious
defenses in its January 18 Opinion remains unchanged by the passage of time. The Court now
restates, for the reasons set forth in that Opinion, that the Baucos' default was willful. See Dk.t.
No. 88 at 4-6. The Court further reiterates that they may be able to successfully claim usury and
necessary party defenses, though the likelihood of success on the latter defense is low. Id. at 611. The first factor thus weighs against setting aside the default, while the second factor weighs
in favor of doing so.

B. Prejudice
Prejudice may exist if the delay occasioned by vacatur would "thwart plaintiffs recovery
or remedy." New York v. Green, 420 F.3d 99, 110 (2d Cir. 2005) (internal quotation marks
omitted). The Court previously found that PMJ would suffer financial prejudice if the default
were vacated because the delay caused by vacating the default could "thwart [PMJ' s] recovery or
remedy," as the Lady Antoinette would continue to deteriorate and thus depreciate in value the
longer it remained out of water and not receiving maintenance. See Dk.t. No. 88 at 12-13.
Because the Lady Antoinette has since been sold, the possibility of its continued deterioration
and depreciation further thwarting PMJ' s recovery has been eliminated. Thus, PMJ would not at
this point suffer financial prejudice if the default was vacated. Accordingly, this factor, which
previously weighed against vacating the default, no longer does.

C. Other Equitable Factors
This Court may also consider other equitable factors in determining whether "good
cause" exists to vacate a default, including whether "the failure to follow a rule of procedure was

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a mistake made in good faith and whether the entry of default would bring about a harsh or
unfair result." Enron Oil, 10 F.3d at 96.
Events that have transpired since the Court's January 18 Opinion strongly suggest that
the Baucos' failure to follow a rule of procedure was not a mistake made in good faith. Since
that Opinion was issued over a year and a half ago, the Baucos have failed to post the required
security and have nonetheless continued to litigate this case as if not in default. On March 16,
2018, the Baucos' counsel failed to appear at the conference the Court scheduled following
issuance of the January 18 Opinion. See Dkt. No. 107. Furthermore, though the Court expresses
no opinion as to whether it was made in bad faith, Antoinette Bauco' s filing of a bankruptcy
petition-which was ultimately automatically dismissed for her failure to file the required
bankruptcy schedules within 45 days of the petition date, see In re: Antoinette Bauco, No. 1836879 (cgm) (Bankr. S.D.N.Y.)-on the eve of public sale of the Lady Antoinette delayed that
sale by over five months. Most recently, the Baucos' counsel failed to meet briefing deadlines
that he himself proposed because he was on a family vacation that was scheduled more than two
weeks before he proposed the briefing schedule. See Dkt. No. 202. The Court infers from the
Baucos' conduct since issuance of the January 18 Opinion, and their demonstrated inability to
comply with court orders and deadlines, that their failure to timely respond to PMJ' s Complaint
was not a mistake made in good faith.
Finally, the entry of default here would not bring about a harsh or unfair result because
the Baucos have had over a year and a half to satisfy the condition the Court placed on the
vacatur of default in its January 18 Opinion and have failed to do so. Accordingly, the other
equitable factors this Court considers weigh against vacating the default.

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D. Balance of Factors
The balance of factors remains close: the default was willful, it was likely not the result
of a good faith mistake, and the entry of default would not bring about a harsh or unfair result.
However, the Baucos have at least one potentially meritorious defense, and the possibility of
financial prejudice to PMJ has evaporated with the sale of the Lady Antoinette, such that any
delay vacating the default may occasion will not further prejudice it. Given the general
preference for deciding cases on the merits, and the fact that the balance of factors does not more
clearly favor PMJ or the Baucos than it did when the Court last considered this issue, the Court
again vacates the default on the same condition imposed in its January 18 Opinion.
Conditioning vacatur on the posting of a bond or other adequate security in the amount of
$143,749.92 remains necessary. The possibility that PMJ will be unable to fully recover due to
deterioration and depreciation of the Lady Antoinette has been realized with the $50,000 sale of
the Vessel. However, as already noted, because the Vessel has now been sold, PMJ will not
suffer further financial prejudice from any delay occasioned by vacatur of the default.
Nonetheless, the Baucos should not now benefit from their own failure to post bond or other
adequate security over a year and a half ago. Vacatur thus remains conditioned on the Baucos'
posting a bond or other form of adequate security in the amount of $92,749.92, which, when
added to the $50,000 credit bid for which PMJ purchased the Lady Antoinette at public auction,
equals the minimum amount PMJ stated it was entitled to in its Complaint. See Compl. 1 30.

E. Motion to "Modify the Court's Prior Order"
Were this Court to treat the Baucos' motion as one to modify the Court's January 18
Order under Federal Rule of Civil Procedure 54(b ), the Baucos would fare no better. They assert
that the "underlying premise of [their] motion seeks to satisfy the second prong of the [January

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18] Order[,] which requires[] 'other form of adequate security' to protect PMJ." Dkt. No. 151 at
2-3 (referencing the condition the Court set in its January 18 Opinion that the default would be
vacated "provided that the Baucos post a bond or other form of adequate security in the amount
of $143,749.92"). In other words, the Baucos argue that the Court should "modify its order" to
deem the proceeds of the sale of the Lady Antoinette an "other form of adequate security" such
that the condition on vacatur is satisfied by the Baucos' commitment to place those proceeds
with the Court upon its sale. However, this argument presupposes that the Lady Antoinette
would gamer more than the required security when sold-a set of circumstances which has not
come to pass. With the benefit of hindsight, the Court finds that the proceeds of the Vessel's sale
cannot constitute an "other form of adequate security" because they do not amount to the
$143,749.92 set by this Court in its January 18 Opinion. The Court thus denies the Baucos'
motion for this additional reason.

IV.

CONCLUSION
The Court denies the Baucos' motion to unconditionally vacate the default or modify the

Court's prior order. The Court also hereby denies the Baucos' request for oral argument on this
motion. See Dkt. No. 154.
If the Baucos do not submit a letter to the Court within seven days of the date of this

Opinion and Order informing it that they have posted a bond in the amount of $92,749.92, the
default will not be vacated. In any event, PMJ shall follow the briefing schedule for either a
motion for default judgment or a motion for summary judgment set out in Magistrate Judge
Aaron's Order dated June 12, 2019. Dkt. No. 199.
This resolves Docket Numbers 149 and 154.
SO ORDERED.

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Dated: September _ _ , 2019
New York, New York

United States District Judge

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