Elco Securities, LTD v. Dear Cashmere Holdings, Inc.

Background

Elco Securities, Ltd. sued Dear Cashmere Holdings, Inc., also known as Swifty Global, asserting claims for breach of contract, breach of fiduciary duty, negligence, conversion, unjust enrichment, breach of the implied covenant of good faith and fair dealing, and fraud. Elco also sought a declaration that it remained the legal and beneficial owner of its original investment and related interest and conversion rights.

According to the complaint, Elco invested $68,000 in a promissory note issued by Cashmere. The note was destroyed in a hurricane, Cashmere did not repay it when it matured on September 20, 2019, and Cashmere agreed to accrue the $68,000 principal and $17,299 in interest. Elco also had a right to convert the debt into Cashmere shares. Elco alleged that Cashmere later reduced the amount shown as owed to $40,000 and then to zero, without any payment or other compensation that justified the reductions. Elco also alleged that Cashmere claimed Elco had partially sold the note to Platinum Properties and that Elco’s request to convert $20,000 into shares received no response.

Elco filed the complaint on July 20, 2023. After later filing an affidavit stating that Cashmere had been served on November 30, 2023, Elco sought default judgment because Cashmere had not answered or appeared. The court first denied an earlier default-judgment motion for failure to comply with the court’s rules. Elco then filed the renewed motion addressed in this opinion.

Cashmere opposed the renewed motion. Its chairman stated that Cashmere’s registered agent had no record of receiving the summons and complaint, that Cashmere was unaware of the case, and that its failure to respond was not intentional or strategic. Cashmere asked to defend the case on its merits and later filed an answer. The court treated Cashmere’s opposition as a motion to set aside the entry of default under Federal Rule of Civil Procedure 55(c).

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 meritorious defense, and whether setting aside the default would prejudice the plaintiff. A meritorious defense need not be likely to succeed; the evidence must be enough that, if proven at trial, it would provide a complete defense. The court also noted that default judgments are disfavored and that disputes generally should be resolved on their merits.

Court’s Analysis

Willfulness. The court found that Elco had not provided enough evidence to show that Cashmere deliberately avoided service or intentionally failed to respond. Elco argued that Cashmere had taken conscious steps to avoid service. Cashmere argued that it did not receive the summons and complaint and responded promptly after learning about the case. The court resolved the uncertainty in Cashmere’s favor and credited its prompt appearance and effort to defend the matter.

Meritorious defense. Cashmere asserted that the note had been sold to two other entities, GPL and LUKI, in transactions totaling $68,000. Cashmere also asserted that GPL and LUKI fully converted the debt into shares, which it argued settled the note completely. The court found that these assertions presented a potentially complete defense if proven. The court did not decide whether Cashmere’s account was true; it stated that issue was not to be decided on the default-judgment motion.

Prejudice. Elco argued that it had been harmed by the time and expense of filing motions and attempting service. The court held that litigation-related time and costs were not enough to show the type of prejudice required to keep the default in place, such as lost evidence, more difficult discovery, or a greater opportunity for fraud or collusion.

Disposition

The court denied Elco’s motion for default judgment. It set aside the entry of default against Cashmere, terminated the renewed motion from the docket, and ordered all parties to appear for a conference on June 20, 2024. It also directed the parties to file a joint letter and proposed civil case-management and scheduling documents by June 13, 2024.