Dongguan Fengshang Industrial Co., Ltd v. Soho Partners Group, LLC

Background

Dongguan Fengshang Industrial Co., Ltd. brought the action based on alleged breaches of purchase orders. Its amended complaint added Ringerjeans LLC and Charles Azrak and alleged that they were alter egos of Soho Partners Group, LLC and Michael Fashion Consulting LLC; it also alleged fraud by Azrak. The clerk entered a Certificate of Default against the defendants on September 29, 2022. The defendants then moved to vacate the default, and Dongguan moved for a default judgment.

Legal standard

Because the clerk had entered a default but the court had not entered a default judgment, the court applied Federal Rule of Civil Procedure 55(c). That rule permits a court to set aside an entry of default for good cause. The court considered the default’s willfulness, whether the defendants had a potentially meritorious defense, and the prejudice to Dongguan if the default were vacated. The court also considered other equitable factors and noted the strong preference for resolving cases on their merits.

Analysis

The court said it could not determine on the existing record whether the defendants’ default was willful. The defendants disputed service, asserting that three companies were not served through authorized persons and that Azrak did not reside at the address where he was allegedly served. Dongguan contended that all four defendants were properly served. The court concluded that an evidentiary hearing would be needed to decide service, but found that no hearing was necessary because the default should be vacated even assuming the defendants’ conduct was willful.

The court found that the defendants had shown potentially meritorious defenses. Ringerjeans and Azrak asserted that they had no contractual or other business relationship with Dongguan, and the court stated that Dongguan would bear the burden of establishing that they were alter egos of other defendants. Soho Partners and Michael Fashion, which the opinion identifies as the defendants that entered into the purchase orders, asserted that the apparel orders were delivered late in breach of the purchase-order terms. The court found these defenses plausible at this stage.

The court also found that Dongguan had not shown significant prejudice from vacating the default. It stated that Dongguan might face delay in recovering a money judgment if it ultimately prevailed, but that prejudgment interest at the New York statutory rate could compensate for that delay. The court also noted that Dongguan previously had agreed to stipulate to vacating the Certificate of Default before settlement negotiations failed.

Disposition

The court held that the equities favored vacating the entry of default. It granted the defendants’ motion to vacate the default and denied Dongguan’s motion for a default judgment. The court ordered the defendants to respond to the amended complaint by January 5, 2023. The opinion did not resolve whether service was proper or the merits of Dongguan’s underlying claims.