Puddu v. NYGG, LTD.

Background

The plaintiffs, described in the opinion as stockholders of 6D Global Technologies, Inc., brought a putative securities class action against 6D, NYGG (ASIA), LTD., Benjamin Tianbing Wei, also known as Benjamin Wey, and other defendants. The operative pleading was the Second Amended Complaint, filed on April 4, 2016. It alleged that Wey was 6D’s alleged “unofficial CEO,” beneficially owned 46% of 6D’s stock through a China-based investment banking firm he controlled, and controlled 6D’s operations. The complaint asserted claims against Wey under Section 10(b) of the Securities Exchange Act, Rule 10b-5, and Section 20(a) of that Act.

Wey was served with the original complaint and summons in January 2016, although the parties disputed whether service was proper. The plaintiffs did not ask the clerk to enter a default against him until September 2018. After the plaintiffs supplied additional service materials for the amended pleadings, the clerk entered a certificate of default on April 30, 2019. Wey later appeared through counsel and filed a motion to dismiss, but that motion was terminated because the default had already been entered. He then moved to vacate, or set aside, the default under Rule 55(c) of the Federal Rules of Civil Procedure.

Legal standard

Under Rule 55(c), a court may set aside an entry of default for “good cause.” The court considered three factors: whether the default was willful, whether the defendant had a potentially meritorious defense, and whether setting aside the default would prejudice the non-defaulting party. The court emphasized the Second Circuit’s strong preference for resolving disputes on their merits and explained that these factors are applied less strictly to an entry of default than to a final default judgment.

Analysis

Prejudice. The plaintiffs argued that vacating the default might make it harder to obtain documents from Wey and 6D and that evidence might have been destroyed. The court found those assertions speculative and unsupported. It held that delay alone does not establish prejudice and noted that the plaintiffs themselves waited more than two years before requesting entry of default. This factor favored vacating the default.

Willfulness. The court found that Wey knew he had been named as a defendant but accepted his explanation that he did not remember being served and believed his deadline to respond had not begun. The court also considered his attendance at a settlement conference and his filing of a motion to dismiss shortly after the default was entered. Although the court described Wey’s conduct as potentially careless or grossly negligent, it concluded that the conduct did not rise to the level of willfulness. This factor also favored vacatur.

Meritorious defenses. To satisfy this factor, Wey did not have to prove that his defenses would ultimately succeed. He had to provide more than conclusory denials and show that his defenses, if proven, could completely defeat the claims. The court concluded that his terminated motion to dismiss contained detailed factual and legal arguments and that the securities claims might be vulnerable to dismissal for failure to state a claim. The court therefore found that Wey met the low threshold for showing a potentially meritorious defense.

Conditional vacatur. The plaintiffs alternatively asked the court to require Wey to waive any motion to dismiss or motion for judgment on the pleadings. The court declined to impose that condition, finding it unreasonable and noting that the plaintiffs had provided no authority supporting it. The court stated that it would consider, and was likely to grant, a request for reasonable attorneys’ fees and costs caused by the default. The court directed the parties to confer about those amounts and allowed the plaintiffs to submit a request if they could not agree.

Disposition

Judge Alison J. Nathan granted Wey’s motion to vacate the default. Wey was ordered to respond to the Second Amended Complaint within 14 days of the opinion and order. The opinion did not decide the ultimate merits of the plaintiffs’ securities claims.