Axial Group, LLC v. Zachert

Background

Axial Group, LLC alleged that Zachert Private Equity GmbH and Olaf Zachert used Axial’s members-only online platform and agreed to Axial’s membership agreement and terms of service. The agreement required a user who completed a deal first introduced or identified through the platform to disclose the deal and pay Axial a success fee. Failure to comply resulted in liquidated damages equal to twice the success fee, plus interest and collection costs, including attorney’s fees.

Axial alleged that Olaf Zachert acquired Brands Within Reach, LLC on September 24, 2020, but did not notify Axial or pay the success fee. Axial also alleged that, after it independently discovered the transaction, Zachert sent a doctored email that purported to show timely notice. Axial sought the success fee, the additional fee described in the agreement, and costs and attorney’s fees, based on breach of contract, unjust enrichment, and fraudulent misrepresentation.

Procedural History and Legal Standard

The defendants initially filed an answer. After their second set of attorneys moved to withdraw, the court ordered Zachert Private Equity to obtain new counsel and required Olaf Zachert either to notify the court that he would proceed without a lawyer or to obtain new counsel. The order was served on the defendants, but no new counsel appeared and Olaf Zachert did not notify the court that he would proceed without a lawyer. Axial then obtained a Clerk’s Certificate of Default and moved for default judgment.

The defendants’ opposition to default judgment was treated as a motion under Federal Rule of Civil Procedure 55(c) to set aside the entry of default. Rule 55(c) permits relief from default for “good cause.” The court considered whether the default was willful, whether the defendants had a potentially complete defense, and whether setting aside the default would prejudice Axial. The court also considered the preference for deciding disputes on their merits and the general disfavor of default judgment.

Court’s Analysis

The court found that the default was willful. The defendants had been served with the order requiring them to obtain counsel or otherwise contact the court, received a warning about possible default, and offered no explanation for failing to comply. Their later response came only after Axial had moved for default judgment and served that motion.

The defendants conceded that they failed to disclose the deal and failed to pay the success fee. They offered four asserted defenses: that the fee could not be owed because the deal’s value later fell to zero; that the contract barred unjust-enrichment recovery; that Axial could not prove detrimental reliance on the allegedly fraudulent email; and that the additional nondisclosure fee was an unenforceable penalty.

The court rejected or found irrelevant the first three arguments. It concluded that the agreement unambiguously assessed the success fee when the deal occurred, not based on its later value; that the unjust-enrichment argument depended on whether a valid contract existed; and that detrimental reliance was not relevant to the relief Axial sought because Axial was not seeking additional damages for misrepresentation. The court said the penalty argument might provide a defense to part of the damages and had not been fully briefed, so it could not conclude that the argument had no chance of success. That argument weighed slightly in favor of setting aside the default as to the penalty portion, but the overall factors weighed against setting aside the default.

Disposition

The court granted Axial’s motion for default judgment and ordered that default judgment be entered against Olaf Zachert and Zachert Private Equity GmbH on the breach-of-contract, unjust-enrichment, and misrepresentation claims. The defendants were made jointly and severally liable for $750,000 in actual damages and were also ordered to pay Axial’s costs and attorney’s fees. If the parties could not agree on fees and costs, Axial was directed to file an application with supporting records within 30 days. The court retained jurisdiction over fees and costs, directed the Clerk to close the default-judgment motion and denied the defendants’ motion to amend their answer as moot, and closed the case.