Waterscape Resort LLC v. 70 West 45th Street Holding LLC

Background

Waterscape Resort LLC, Assa Realty LLC, and Gemstone Group LLC sued 70 West 45th Street Holding LLC and Waterscape Resort IT LLC. The plaintiffs served the defendants through the New York Secretary of State under Section 303 of the New York Limited Liability Company Law. The defendants did not answer by the October 1, 2021 deadline. The Clerk entered default on October 15, 2021.

The plaintiffs later moved for default judgment, which is a judgment entered because a defendant failed to respond. Before that motion was decided, defendants’ counsel appeared, opposed the motion, and cross-moved to vacate the default, meaning to set aside the entry of default.

Legal standard

Under Federal Rule of Civil Procedure 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 setting it aside would prejudice the plaintiffs, and whether the defendants presented a potentially meritorious defense. The standard is less demanding when the court has entered only a default, rather than a default judgment. The court also considered the preference for resolving disputes on their merits.

Court’s analysis

Willfulness. The defendants argued that their default was unintentional because they never received the summons and complaint. They said the papers were sent to a hotel they owned and operated that had been closed since March 2020 because of the COVID-19 pandemic. The plaintiffs argued that the defendants had listed a different address with the New York Secretary of State. The court stated that even if that were true, failing to update an address would not by itself establish a willful default.

The court also noted that the defendants appeared and sought to vacate the default shortly after learning about the lawsuit. Their representatives had communicated with the plaintiffs in November and December 2021 while attempting to resolve the dispute, and the court did not view that conduct as deliberate delay or bad faith. The court therefore found that the default was not willful.

Prejudice. The plaintiffs did not argue that setting aside the default would prejudice them. The court found no evidence that the short delay had caused lost evidence, increased discovery difficulties, or an opportunity for fraud or collusion. This factor favored vacating the default.

Potentially meritorious defense. The defendants argued that the plaintiffs had consented to their use of the trademark and had waited unreasonably long to bring the action. The court identified these arguments as the defenses of acquiescence and laches. For purposes of vacating a default, a defendant need not show that the defense is likely to succeed; the defendant must provide evidence that, if proven at trial, could constitute a complete defense.

The defendants submitted an affidavit asserting that the parties’ conduct showed the plaintiffs consented to continued use of the trademark after a license agreement authorizing that use expired. Although the plaintiffs disputed this account and argued that the defenses were unavailable, the court held that the competing accounts should be tested through the adversarial litigation process. It found that the defendants met the low threshold for showing a potentially meritorious defense.

Disposition

The court granted defendants’ motion to vacate the default. It denied plaintiffs’ motion for default judgment as moot and directed the Clerk of Court to terminate the motions at docket entries 16 and 24. The defendants were ordered to respond to the complaint no later than June 7, 2022. The opinion did not decide whether the alleged trademark infringement occurred or whether either side would ultimately prevail.