Lee v. Karaoke City

Background

Beom Su Lee filed this action against, among others, NYC Karaoke. The United States Marshal served NYC Karaoke at the karaoke bar's address, but NYC Karaoke never appeared. The Clerk issued a certificate of default, and Lee moved for a default judgment. The court later entered a default judgment against NYC Karaoke on liability and referred the case to Magistrate Judge Stewart D. Aaron for a hearing to determine damages.

Before that hearing, Lee submitted a proposed default judgment referring to “NYC Karaoke (NYC Karaoke LLC).” During a conference, Lee mentioned both names. Judge Aaron directed Lee to state whether he sought judgment against NYC Karaoke or NYC Karaoke LLC and, if he meant the latter, to amend the complaint. Lee then asked the court not to enter a judgment against NYC Karaoke LLC and explained that NYC Karaoke LLC's attorney had said the two were different entities.

Legal standard

The court considered whether to set aside the liability default judgment even though no party had filed a motion asking it to do so. Because the damages hearing had not yet occurred, the liability ruling did not end the entire action and could still be changed. The court therefore applied Federal Rule of Civil Procedure 55(c)'s “good cause” standard, rather than the stricter standard for final judgments under Rule 60(b).

Under Rule 55(c), courts consider whether the default was deliberate, whether the defendant has a potentially valid defense, and whether setting aside the default would prejudice the plaintiff. No single factor automatically decides the issue.

Court's analysis

The court found that the deliberate-default factor neither favored nor opposed NYC Karaoke. NYC Karaoke had not appeared to explain why it defaulted, but Lee presented no evidence of bad faith or deliberate conduct. The court noted that NYC Karaoke's apparent lack of legal existence could help explain its failure to appear.

The potentially valid defense factor favored setting aside the judgment. The court explained that an entity must legally exist and have the capacity to be sued. Lee had presented no evidence that “NYC Karaoke” was a legal entity and had suggested that it was not. The court also reported that its search of the New York Department of State's corporate database did not find an entity named “NYC Karaoke,” although the search produced results for other similarly named entities, including NYC Karaoke LLC.

The court acknowledged that a plaintiff may sometimes amend a complaint or judgment to correct a misnamed defendant. But Lee had insisted that the judgment be entered specifically against NYC Karaoke and had so far declined Judge Aaron's invitation to amend the pleadings.

The court also found insufficient prejudice to Lee. Delay alone was not enough; prejudice would ordinarily require a loss of evidence, more difficult discovery, or a greater opportunity for fraud or collusion. Although Lee had spent time and resources preparing for the damages hearing, the court found that this was not enough to leave a liability judgment against a possibly nonexistent entity in place. The case against the other defendants had continued through discovery.

Disposition

The court vacated the default judgment as to liability against NYC Karaoke. Because of that ruling, a damages hearing was no longer needed. The court directed that, if Lee could identify a legal entity corresponding to NYC Karaoke, he could file an amended complaint adding that entity as a defendant by May 8, 2020. Otherwise, the court stated that after May 8 it would dismiss NYC Karaoke from the case because it was not an entity capable of being sued. The Clerk was directed to mail the order to Lee.