The opinion of the court was delivered by: ROVNER
This is an action for securities fraud brought pursuant to
the Securities Act of 1933 and the Securities Exchange Act of 1934. The complaint includes a count for common law fraud. Plaintiff Harry Simon ("Simon") alleges that he was defrauded by defendants Pay Tel Management, Inc. ("Pay Tel"), Cornwall Securities, Inc. ("Cornwall"), Rothschild Registry International, Inc. ("Rothschild"), Pay Telephone Investors II ("PTI II"), and Barry Berman ("Berman") when he invested in defendant PTI II. On June 2, 1989, after defendants had failed for the third time to appear at court-ordered status hearings and pretrial conferences and had repeatedly failed to file their answer to plaintiff's complaint, the Court entered a default judgment against defendants, nunc pro tunc as of May 23, 1989, in the amount of $ 739,389.00 plus costs of suit of $ 120.00. Almost a full year later, on June 1, 1990, defendants filed the present motion to vacate that default judgment. For the reasons set forth below, the Court will deny defendants' motion and will permit the default judgment entered against defendants to stand.
Because the procedural history of this case was crucial to the entry of a default judgment, the Court will outline that history in some detail. Plaintiff filed his complaint in this action on February 8, 1989, alleging fraud in the sale to plaintiff of an interest in pay telephones under both the federal securities laws and the common law. The first status hearing in the case was held on March 27, 1989. This was the first hearing at which defendants failed to appear. On April 11, 1989, a second status hearing was held. William D. Kelly ("Kelly") appeared at that hearing on behalf of the defendants Pay Tel, Cornwall, PTI II, and the individual defendant Berman.
At the April 11 hearing, Kelly orally requested leave to file his appearance, which the Court granted on that date.
The next status was held on April 19, 1989. Kelly again appeared on behalf of defendants and requested an extension of time until May 10, 1989 for defendants to answer or otherwise plead to plaintiff's complaint. The Court allowed this first request for an extension of time.
The Court held another status hearing on May 9, 1989. Prior to appearing before the Court on that date, Kelly purportedly made a proposal to one of plaintiff's attorneys in an attempt to settle the case. Defendants offered to pay Simon $ 40,000.00 and to cancel the promissory notes covering plaintiff's investment in PTI II. Kelly's letter to Eric Moss ("Moss")
of May 9 advised Moss of plaintiff's response: "the plaintiff's attorney advised me that he did not believe that this would be sufficient to settle the case but he would discuss the offer with his client and call me back with a response." (Aff. of Eric H. Moss, at para 4 & Ex. B.) At the May 9 status, the Court scheduled a pretrial conference, to be held on May 16, 1989 before the Honorable Nicholas J. Bua, and also ordered that defendants answer or otherwise plead to plaintiff's complaint prior to the pretrial conference. The Court's minute order of May 16 reads:
Pretrial conference set for May 16, 1989 at 9:00 a.m. before Judge Bua. Defendant is to answer or otherwise plead before May 16, 1989. Status hearing held.
At the May 16 pretrial conference, defendants' attorney Kelly advised Judge Bua that his clients had failed to communicate with him regarding the status of the case, that he was accordingly unprepared to file defendants' answer as required by this Court's May 9 order, that he would be unable to participate in the pretrial conference, and that he soon would be filing a motion to withdraw as the attorney for defendants. (Aff. of Ira J. Bornstein, at para. 2.) Judge Bua did not enter a default judgment against defendants after this first pretrial but scheduled a second pretrial conference for May 23, 1989, and he directed Kelly to notify his clients of this new court date and of his intention to withdraw as their attorney in the case. Judge Bua also asked Kelly to instruct his clients that they must have another attorney present at the May 23 pretrial who was prepared to participate in the proceedings and that they must answer or otherwise plead to plaintiff's complaint before the May 23 pretrial or a default judgment would be entered against them. Judge Bua then told Kelly to prepare a motion to withdraw and to immediately serve that motion on his clients. (Id.)
Pursuant to Judge Bua's directive, Kelly prepared a motion to withdraw his appearance as the attorney for defendants. The motion was noticed for hearing on May 23, 1989, the date of the scheduled pretrial conference before Judge Bua. In his motion, Kelly stated that since filing his appearance on behalf of defendants, "he has made numerous efforts to obtain certain information about this case, evaluate the merits of the Plaintiff's claims and assess the Defendants' potential defenses to the action," that he "has not, however, received sufficient cooperation from corporate counsel or the Defendants to allow him to properly evaluate this case despite requests for same," and that this lack of information and cooperation necessitated his withdrawal. (Motion to Withdraw Appearance, at paras. 2-4.)
The motion further stated that by serving a copy on defendants, Kelly "hereby advises them that their failure to file a substitute appearance and answer on or before the date of this motion could result in an adverse ruling, including the entry of a default judgment." (Id. at para. 5.) The certificate of service attached to the motion reflects that the motion was mailed to defendants on May 16, 1989. At the May 23 pretrial, Kelly also advised Judge Bua that he had faxed to defendants' New York counsel a letter describing the contents of the motion to withdraw. (Bornstein Aff., at para. 3.)
At the May 23 pretrial conference before Judge Bua, no substitute attorney appeared on behalf of defendants. Moreover, defendants still had not answered or otherwise pleaded to plaintiff's complaint. Kelly did appear at the May 23 pretrial. He advised Judge Bua that, although he had mailed defendants the motion to withdraw and had faxed a letter to their New York counsel describing the contents of that motion, he still had not heard from his clients. (Id.) Therefore, Kelly was unprepared to participate in the pretrial conference and requested that Judge Bua permit him to withdraw. (Id.) Judge Bua granted Kelly's motion and, in accordance with his statements at the May 16 pretrial, entered a default judgment against defendants. Judge Bua ordered plaintiff to submit a draft order of default judgment. After plaintiff submitted the draft order, this Court entered the following judgment on June 2, 1989:
By default in favor of plaintiff Harry Simon and against defendants Pay Tel Management, Inc., Cornwall Securities, Inc., Pay Telephone Investors II and Barry Berman under Counts I, II, III and IV of the complaint in the amount of $ 763,389.00 plus costs of suit of $ 120.00. This order be and is hereby entered nunc pro tunc as of May 23, 1989.
After entering the above order, the Court heard nothing further from defendants until June 1, 1990, when they filed the present motion to vacate the default.
On June 7, 1989, Moss placed a telephone call to Ira J. Bornstein ("Bornstein"), one of the attorneys for plaintiff, and expressed an interest in settling the judgment that had been entered against defendants. (Bornstein Aff., at para. 7.) Thus, defendants presumably had notice of the default judgment by that date. Bornstein and Moss spoke again on June 29, 1989, and in a series of conversations thereafter, the parties attempted to negotiate how defendants would pay off the judgment. (Id. at para. 7.) The negotiations focused on how defendants would raise the money to pay the debt owed to Simon.
Initially, defendants represented that the money would come from a "Swiss transaction," which was scheduled to close in June 1989. When that closing was delayed and Simon was not paid, Bornstein wrote Moss a letter dated July 19, 1989, advising him that Simon had directed Bornstein "to initiate post-judgment proceedings unless this matter is settled immediately." (Aff. of Ira J. Bornstein II, at Ex. A (emphasis in original).)
On July 25, 1989, Moss advised Bornstein that defendants no longer would use the proceeds of the Swiss transaction to pay plaintiff but that they instead would utilize money realized from a transaction in Texas scheduled to close within a week. (Id. at para. 12.) On August 4, 1989, Moss informed Bornstein that the Texas deal had closed and that the money realized would be used to pay plaintiff. (Id. at para. 13 & Ex. C.) Bornstein and Moss again spoke on August 11, 1989. In that conversation, Moss informed Bornstein that defendants had decided to pay Simon ...