Steven L. Lombardo v. Mercantile Resource Group, Inc.

Background

Steven L. Lombardo and Life Force Trust sued David R. Sanchez, Mercantile Resource Group, Inc., and Choctaw Indian Asset Recovery Trust doing business as Choctaw Management Group. The plaintiffs alleged that Lombardo and Sanchez had formed Mercantile Resource Group to share ownership and responsibilities for 82 mortgage bonds and had entered into contracts providing for equal ownership. Choctaw Management Group, of which Sanchez was a trustee, held the bonds.

The court previously entered default against the defendants and adopted a recommendation to enter default judgment and issue an injunction. Sanchez then moved to vacate the default judgment and set aside the underlying entry of default. He said he had not received the summons, complaint, or other case documents by personal service or mail, and that he learned about the judgment only around December 7, 2020. The plaintiffs argued that their agent, Clifford Wilkins, properly served Sanchez and confirmed receipt by telephone.

Legal standard

Federal Rule of Civil Procedure 55(c) permits a court to set aside an entry of default for good cause, while Rule 60(b) permits relief from a default judgment on grounds including mistake, surprise, or excusable neglect. The court applied three factors: whether the defendant engaged in culpable conduct leading to the default, whether the defendant had a meritorious defense, and whether vacating the judgment would prejudice the plaintiff. A finding against the defendant on any one factor could justify refusing relief.

Court’s analysis

The court found Sanchez’s motion timely because he filed it less than three months after the October 26, 2020 default judgment and within the one-year period applicable to his asserted grounds for relief.

On culpable conduct, the court found that Sanchez had provided a credible, good-faith explanation for failing to respond. The record contained conflicting accounts about whether Sanchez had been properly served, including different addresses and Sanchez’s assertion that Wilkins was not authorized to accept service for him. The court therefore did not find culpable conduct by Sanchez.

On the defense requirement, the court found that Sanchez had identified a meritorious defense. He alleged specific facts, including that the contract between him and Lombardo and an agency agreement were fabricated and that his signature had been electronically copied from another document. The court stated that it did not need to decide the truth of those allegations at this stage; it only needed to determine whether a legitimate defense existed and whether a full trial could produce a different result.

On prejudice, the court found that the plaintiffs would not be unfairly harmed by reopening the case. The court rejected the argument that possible loss in the value of the bonds was enough to show the required prejudice. It also noted that the plaintiffs sought injunctive relief rather than damages and that requiring them to litigate their claims on the merits was not, by itself, legally recognized prejudice.

Disposition

The court granted Sanchez’s motion to vacate the default judgment, extended his time to file his answer, directed him to file the proposed answer as a separate docket entry within one week, and ordered the Clerk to reopen the case. The court did not decide the underlying dispute over the bonds or the truth of Sanchez’s asserted defenses.