AEye, Inc. v. All Blue Falcons FZE

Background

AEye, formerly known as CF Finance Acquisition Corp. III, sued All Blue Falcons FZE for breach of a subscription agreement. Falcons had agreed to purchase 500,000 shares for $5,000,000, subject to specified closing conditions, but did not send the money. Falcons answered, asserted defenses and counterclaims for breach of contract and fraudulent inducement, and sought a declaration that AEye had breached the agreement and had fraudulently induced Falcons to enter it.

Falcons’ lawyer withdrew in June 2023 because Falcons could no longer afford its legal fees. The court directed Falcons to obtain new counsel. Falcons did not do so or provide the required status update. The clerk entered a Certificate of Default on September 5, 2023. The opinion states that Falcons did not receive later court orders, AEye’s request for the default, or AEye’s motion for default judgment until June 2024. Falcons then retained new counsel, appeared at a court hearing, and moved to vacate the default.

Legal standard

Under Federal Rule of Civil Procedure 55(c), a court may set aside an entry of default for “good cause.” Courts consider whether the default was willful, whether the defendant has a potentially valid defense, and whether removing the default would prejudice the plaintiff. The court applied the more lenient standard for setting aside an entry of default because no default judgment had yet been entered.

Court’s analysis

The court found that Falcons’ default was not willful. Although Falcons was negligent in failing to promptly obtain new counsel, the court found no evidence of bad faith or deliberately egregious conduct. Falcons had not received the later filings and court orders, and it acted promptly after learning about the default and the pending default-judgment motion.

The court also found that Falcons had potentially valid defenses. Falcons alleged that AEye had not satisfied the agreement’s closing conditions, which could mean that Falcons’ payment obligation was never triggered. Falcons also alleged that AEye made false statements and provided flawed projections and valuations that induced Falcons to sign the agreement. The court emphasized that it was not deciding whether these defenses would ultimately succeed; at this stage, the defenses only needed enough factual support to warrant testing at trial.

The court rejected AEye’s claimed prejudice. Delay and litigation expenses alone were insufficient. AEye did not show that relevant evidence had likely been lost or that Falcons would be unable to participate in discovery. The court also found that concerns about collecting a possible future judgment did not justify keeping the default in place, although those concerns could be addressed through a bond.

Bond and attorneys’ fees

The court granted AEye’s request to condition vacatur on a bond because Falcons was experiencing financial difficulties and AEye had raised concerns about recovering a future judgment. But the court set the bond at $500,000 rather than the $5,000,000 AEye requested, stating that the larger amount could interfere with Falcons’ ability to litigate and could lead to another default.

The court also ordered Falcons to pay AEye’s reasonable attorneys’ fees and costs related to obtaining the Certificate of Default and filing the default-judgment motion. The court found that Falcons’ failure to obtain counsel or seek more time caused AEye to incur those additional expenses, even though the default itself was not willful.

Disposition

Judge Valerie Figueredo granted Falcons’ motion to vacate the Certificate of Default and directed the Clerk of Court to vacate it. Falcons was ordered to pay AEye’s reasonable attorneys’ fees and costs connected with the default proceedings and to post a $500,000 bond by March 28, 2025. The court terminated AEye’s motion for default judgment as moot. The opinion did not decide the merits of AEye’s breach-of-contract claim or Falcons’ defenses and counterclaims.