Ajna Living, LLC v. Dig. Accessories TCM

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AJNA LIVING, LLC and HIGHFIVE BRANDS OPERATIONS, LLC, Plaintiffs, v. DIGITAL ACCESSORIES TCM LTD. and TCM INTERNATIONAL TRADE LTD., Defendants.

No. 22-cv-3127 (PKC)

United States District Court, S.D. New York

May 4, 2023

ORDER

P KEVIN CASTEL UNITED STATES DISTRICT JUDGE

Plaintiffs Ajna Living, LCC (“Ajna Living”) and Highfive Brands Operations, LCC move for entry of default judgment against defendants Digital Accessories TCM Ltd. (“Digital Accessories TCM”) and TCM International Trade Ltd. (“TCM International”). (ECF 46.) For the reasons set forth below, the defendants' answers are stricken and entry of default judgment against the defendants is granted.

BACKGROUND

Plaintiffs commenced this action by filing a complaint on April 15 2022. (ECF 1.) At the Court's direction, plaintiffs filed an amended complaint alleging the citizenship of the defendant corporations, as well as the citizenship of each of the constituent members of the plaintiff LLCs. (ECF 5; ECF 6.) In the amended complaint, plaintiffs allege that the sole member of plaintiff Ajna Living, LLC is plaintiff Highfive Brands Operations LLC, and the sole member of Highfive Brands Operations, LLC is Highfive Brands, Inc., a Delaware corporation with a principal place of business in New York. (ECF 6 ¶¶ 3-4.) Defendants are alleged to be Israeli corporations. (Id. ¶¶ 5-6.) Subject matter jurisdiction is properly based on diversity of citizenship.

Defendants appeared in this action through two attorneys, (ECF 13; ECF 14), waived service, (ECF 8), and filed answers, (ECF 16; ECF 17). The attorneys later moved to withdraw as counsel for defendants, stating that the defendants had ignored counsel's requests for cooperation with respect to discovery obligations and other matters. (ECF 22.) The attorneys served their motion to withdraw upon each of their clients and filed an affidavit of service. (ECF 25.) Defendants consented to the request to withdraw. (ECF 23.)

In an Order dated November 17, 2022, the Court granted the attorneys' motion to withdraw and set a case management conference for all parties on January 17, 2023. (ECF 30.) The Order also required defendants, which are entities and not natural persons, to retain an attorney admitted to practice in this Court. The Order stated in part:

DEFENDANTS DIGITAL ACCESSORIES TCM LTD. AND TCM INTERNATIONAL TRADE LTD SHALL CAUSE A NOTICE OF APPEARANCE TO BE FILED BY AN ATTORNEY ADMITTED TO PRACTICE IN THIS COURT ON OR BEFORE JANUARY 4, 2023 AND SAID ATTORNEY SHALL APPEAR AT THE JANUARY 17, 2023 2:30 P.M. HEARING. FAILURE TO COMPLY WILL RESULT IN STRIKING THE NON-APPEARING DEFENDANT'S ANSWER AND THE ENTRY OF A DEFAULT JUDGMENT AGAINST IT.

(Id.) At the direction of the Court, one of the attorneys served the defendants with a copy of the

The Court held the January 17, 2023 conference as scheduled. Neither defendant appeared. (Minute Entry for Jan. 17, 2023.) Plaintiffs thereafter filed a motion to compel the defendants to respond to discovery requests. (ECF 33.) The Court held another case management conference on February 3, 2023, and the defendants again failed to appear. (Minute Entry for Feb. 3, 2023; ECF 36.) The Court granted plaintiffs' motion to compel and warned in a written Order that defendants' failure to respond to the discovery requests by February 17, 2023, “will result in the striking of any answers filed by them and the entry of a default judgment against defendants.” (ECF 36.)

On February 22, 2023, having received no response from defendants to the discovery requests, plaintiffs filed a proposed Certificate of Default, which was rejected by the Clerk's Office because “an answer has been filed.” (ECF 37; ECF 44.) On March 21, 2023, the Court granted plaintiffs leave to file a motion for a default judgment without a Certificate of Default. (ECF 45.) Plaintiffs filed a motion for default judgment on March 23, 2023, and served the motion on the defendants the same day. (ECF 46; ECF 49.) Neither defendant has responded to the motion or participated in this action since the withdrawal of their attorneys.

DISCUSSION

“Federal Rule of Civil Procedure 55 is the basic procedure to be followed when there is a default in the course of litigation.” City of New York v. Mickalis Pawn Shop, LLC, 645 F.3d 114, 128 (2d Cir. 2011) (quoting Vt. Teddy Bear Co. v. 1-800 Beargram Co., 373 F.3d 241, 246 (2d Cir. 2004)). “Rule 55 provides a ‘two-step process' for the entry of judgment against a party who fails to defend: first, the entry of a default, and second, the entry of a default judgment.” Id. (quoting New York v. Green, 420 F.3d 99, 104 (2d Cir. 2005)).

1. Entry of Default

Rule 55(a) provides that a default may be entered against a defendant that has failed to “plead or otherwise defend.” Rule 55(a), Fed.R.Civ.P. “Although Rule 55(a) contemplates that entry of default is a ministerial step to be performed by the clerk of court, . . . a district judge also possesses the inherent power to enter a default . . . .” Mickalis Pawn Shop, 645 F.3d at 128 (citations omitted).

It “is settled law that a corporation may not appear in a lawsuit against it except through an attorney, and that, where a corporation repeatedly fails to appear by counsel, a default judgment may be entered against it pursuant to Rule 55 . . . .” Grace v. Bank Leumi Trust Co. of N.Y., 443 F.3d 180, 192 (2d Cir. 2006) (quoting SEC v. Research Automation Corp., 521 F.2d 585, 589 (2d Cir. 1975)). More specifically, the failure by a defendant corporation to obtain counsel in accordance with a court order is deemed “a failure, under Rule 55(a), to otherwise defend as provided by these rules.” Eagle Associates v. Bank of Montreal, 926 F.2d 1305, 1310 (2d Cir. 1991) (quotations omitted) (quoting Shapiro, Bernstein & Co. v. Continental Record Co., 386 F.2d 426, 427 (2d Cir. 1967) (per curiam)); Mickalis Pawn Shop, 645 F.3d at 130.

The Court concludes that the defendants have failed to “otherwise defend” this action under Rule 55(a). Defendants received an explicit notice of the consequences of failing to obtain new counsel and defend this action. Specifically, the Court's November 17, 2022 Order contained a clear, non-technical warning that failure to retain new counsel by January 4, 2023, and appear via counsel at the January 17 conference would result in the striking of the defendants' answers and the entry of default judgment against them. The defendants did not retain new counsel by January 4 and did not appear through counsel at the January 17 and February 3 conferences. As of the date of this Order, they remain unrepresented and have not communicated with the Court about the requirements of the Court's Orders or otherwise participated in this action. The Court concludes that the defendants are in default.

2. Entry of Default Judgment

“A court's decision to enter a default against defendants does not by definition entitle plaintiffs to an entry of a default judgment.” Bricklayers & Allied Craftworkers Local 2, Albany, N.Y. Pension Fund v. Moulton Masonry & Construction, LLC, 779 F.3d 182, 187 (2d Cir. 2015). Upon a finding of default, a court must still determine if the factual allegations of the complaint, taken as true, establish liability as a matter of law. See id.; Mickalis Pawn Shop, 645 F.3d at 137.

a. Allegations Against Digital Accessories TCM

The amended complaint establishes the liability of Digital Accessories TCM as a matter of law. Taking plaintiffs' factual allegations as true, Digital Accessories TCM entered into an asset purchase agreement (the “APA”) with the plaintiffs and a broker on May 3, 2021. (ECF 6 ¶ 9.) Pursuant to the APA, “Digital Accessories TCM agreed to purchase all of the assets of Ajna's eCommerce business and related domain names . . . for an initial purchase price of $350,000.00 USD” as well as an additional “Earnout Amount” based on the performance of the assets through September 30, 2021. (Id. ¶¶ 10-11.) The APA required Digital Accessories TCM to deposit the Earnout Amount into an escrow account by October 31, 2021, but Digital Accessories failed to do so. (Id. ¶¶ 15-16.) The amended complaint therefore establishes that Digital Accessories TCM breached the APA.

The parties to the APA later entered into an agreement to resolve their dispute regarding the Earnout Amount (the “Settlement Agreement”). (Id. ¶¶ 21-22.) Under the Settlement Agreement, plaintiffs agreed to release their claims against Digital Accessories TCM concerning the breach of the APA in exchange for Digital Accessories TCM's agreement to pay plaintiffs $330,431.58 by April 1, 2022 (the “Settlement Amount”). (Id. ¶¶ 23, 26.) Defendant TCM International represented that it would fund the Settlement Amount on behalf of the undercapitalized Digital Accessories TCM. (Id. ¶¶ 24-25.) Defendants failed to pay the Settlement Amount by April 1, 2022. (Id. ¶ 28.) The amended complaint therefore establishes that Digital Accessories TCM breached the Settlement Agreement.

b. Allegations Against TCM International

The amended complaint alleges that Digital Accessories TCM is a shell for TCM International and that the defendants acted as alter egos during the negotiation of the APA and during settlement negotiations. (Id. ¶¶ 1, 43.) “In a diversity case, [courts] apply the choice of law rules of the forum state-in this case New York-to determine what law governs alter ego or piercing the corporate veil analysis.” American Fuel Corp. v. Utah Energy Development Co., 122 F.3d 130, 134 (2d Cir. 1997).

Generally New York choice of law principles dictate that the law of the state of incorporation applies. See Fletcher v. Atex, Inc., 68 F.3d 1451, 1456 (2d Cir. 1995). The defendant companies are incorporated under the laws of Israel, but since no p...