United States District Court, N.D. Texas, Dallas Division
FINDINGS, CONCLUSIONS, AND RECOMMENDATION OF THE
UNITED STATES MAGISTRATE JUDGE
REBECCA RUTHERFORD, UNITED STATES MAGISTRATE JUDGE
the Court in this civil fraud action are three motions
related to, or filed by, Defendant Kirk Zajac: (1)
Plaintiffs' Motion for Default Judgment against Zajac
(ECF No. 141); (2) Zajac's Motion to Set Aside
Clerk's Entry of Default (ECF No. 181); and (3)
Zajac's Motion for Leave to File an Answer (ECF No. 182).
For the following reasons, Plaintiffs' motion should be
denied, and Zajac's motion to set aside the Clerk's
entry of default should be granted. In view of these
recommendations, Zajac's motion for leave to file an
answer is granted.
filed their Original Complaint on January 26, 2017, asserting
claims for fraud against Zajac and several other defendants.
Compl. (ECF No. 1). Plaintiffs served Zajac four days later,
on January 30, 2017. Return 8 (ECF No. 17-1). However, Zajac
failed to timely answer or otherwise defend against
Plaintiffs' claims. So, Plaintiffs obtained a Clerk's
Entry of Default against Zajac, on April 4, 2017. Entry of
Def. (ECF No. 24). On May 22, 2018, the District Court
directed Plaintiffs to file a motion for a default judgment
against Zajac, which Plaintiffs filed on June 5, 2018. May
22, 2018 Hr'g Tr. 81:25-82:1-10 (ECF No. 140); Mot. (ECF
No. 141). By their motion, Plaintiffs ask the Court to award
damages against Zajac in the amount of $11, 067, 910.80,
which they represent is the amount Plaintiffs paid to
Defendants United Toxicology, Medicus Laboratories, and U.S.
Toxicology for lab services purportedly requested from by Dr.
Sekhar Rao, Dr. Yun Kim, and Dr. Vinay Parameswara, as part
of a fraudulent scheme perpetrated by Defendant Erik Bugen
and Zajac. In response, Zajac filed a motion to set aside the
Clerk's Entry of Default and a motion for leave to file
an answer. Mots. (ECF Nos. 181, 182). The interested parties
have had a full opportunity to respond to the issues raised
by these motions, and the matters are ripe for disposition.
district court may set aside an entry of default for
“good cause.” Fed.R.Civ.P. 55(c); Lacy v.
Sitel Corp., 227 F.3d 290, 291-92 (5th Cir. 2000). To
determine whether good cause to set aside a default exists,
courts generally consider three, non-exclusive factors: (1)
whether the default was willful; (2) whether setting aside
the default would prejudice the plaintiff; and (3) whether
the defendant can present a meritorious defense. Id.
at 292 (citing Dierschke v. O'Cheskey (In re
Dierschke), 975 F.2d 181, 183-84 (5th Cir. 1992)). A
court may also consider other factors, such as whether the
defendant acted expeditiously to correct the default, whether
any public interest is implicated, and whether the defendant
could suffer a significant financial loss.
Dierschke, 975 F.2d at 184.
the first factor, “willfulness” means an
intentional failure to respond to the litigation. In re
OCA, Inc., 551 F.3d 359, 370 n.32 (5th Cir. 2008)
(citing Lacy, 227 F.3d at 292). In the Fifth
Circuit, willfulness is determined by applying the excusable
neglect standard. US Green Bldg. Council, Inc. v.
Wardell, 2015 WL 5164068, at *2 (N.D. Tex. Sept. 1,
2015) (citing Stevenson v. Verizon Wireless, LLC,
2009 WL 188188, at *2 & n.* (N.D. Tex. Jan. 27, 2009);
CJC Holdings, Inc. v. Wright & Lato, Inc., 979
F.2d 60, 64 (5th Cir. 1992) (noting that
“willfulness” under Fed.R.Civ.P. 55(c) and 60(b)
is the same and holding that the former willful standard
should be replaced with “the less subjective excusable
neglect standard in the future”). Excusable neglect
includes “‘simple, faultless omissions to act
and, more commonly, omissions caused by
carelessness.'” US Green Bldg. Council,
2015 WL 5164068, at *2 (quoting Pioneer Inv. Servs. Co.
v. Brunswick Assocs. Ltd. P'ship, 507 U.S. 380, 388
(1993)). Here, Zajac explains that his failure to timely file
an answer was the result of his mistaken belief that his
co-defendant Erik Bugen would hire an attorney to respond on
their behalf. Def.'s Br. 2 (ECF No. 181-1); Def.'s
App. 105 (ECF No. 181-2).
declaration filed in support of his motion to set aside the
default, Zajac explains that he worked for Bugen as an office
manager. Def.'s App. 105-06. After Plaintiffs served him
in this litigation, Zajac contacted Bugen who informed him
that they “were ‘in this together,' and that
[Bugen] would retain an attorney on [Zajac's] behalf to
defend against the lawsuit.” Id. 105.
According to Zajac, he did not realize Bugen had misled him,
until after Bugen had been sentenced on federal criminal
charges relating to the same conduct that underlies
Plaintiffs' allegations in this lawsuit. Id.
Zajac then acted expeditiously to cure the default. He hired
counsel and filed a motion to set aside the entry of default
and a motion for an extension of time to answer, along with a
also states that he informed Plaintiffs' counsel early in
the litigation that Bugen was managing his defense.
Id. Plaintiffs do not dispute this assertion, nor do
they contend that Zajac ever communicated to their counsel
that he had no intention of defending the claims against him.
In view of all the circumstances, the Court finds that
Zajac's failure to respond was not willful. Stelax
Indus., Ltd. v. Donahue, 2004 WL 733844, at *10 (N.D.
Tex. Mar. 25, 2004) (holding that the defendants' default
was excusable where they were under the false impression that
the co-defendant's attorney represented them).
the second factor, a defense is meritorious “if [it]
contain[s] even a hint of a suggestion which, proven at
trial, would constitute a complete defense . . . [including]
broad and conclusory allegations.” Parker v. Bill
Melton Trucking, Inc., 2016 WL 5704172, at *4 (N.D. Tex.
Oct. 3, 2016) (quoting Sea Horse Marine Inc. v. Black Elk
Energy Offshore Operations, L.L.C., 2015 WL 4079831, at
*4 (E.D. La. July 6, 2015)) (internal quotation marks
omitted). Zajac alleges in his proposed answer that he had no
knowledge of the object and purpose of the alleged conspiracy
to commit fraud and, to the extent he furthered the alleged
fraud, he did so unknowingly. Answer 32 (ECF No. 182-1). He
further alleges that Plaintiffs' claims under the Texas
Theft Liability Act are barred by limitations. Id.
33. Without expressing any opinion on the merits of the
parties' claims and defenses, the Court concludes that
Zajac has presented a meritorious defense to Plaintiffs'
the third factor, “[t]here is no prejudice to the
plaintiff where ‘the setting aside of the default has
done no harm to plaintiff except to require it to prove its
case.'” Lacy, 227 F.3d at 293 (quoting
Gen. Tel. Corp. v. Gen. Tel. Answering Serv., 277
F.2d 919, 921 (5th Cir. 1960)). Nor does mere delay, by
itself, constitute prejudice. Id. Rather,
“‘the plaintiff must show that the delay will
result in the loss of evidence, increased difficulties in
discovery, or greater opportunities for fraud and
collusion.'” Id. (quoting Berthelsen
v. Kane, 907 F.2d 617, 621 (6th Cir. 1990) (per
curiam)). Here, Plaintiffs bear at least some responsibility
for any delay in the litigation against Zajac, since they did
not move for a default judgment until June 5, 2018, and only
then at the Court's direction. The only prejudice
Plaintiffs identify is that they have “limited examples
of Zajac's various forms of electronic communication that
he used to communicate with Next Health, its employees, Erik
Bugen, and other unnamed co-conspirators” and that he
might no longer have access to those communications.
Pls.' Resp. 4 (ECF No. 200). However, Plaintiffs may
serve discovery requests on Zajac to obtain the information
and evidence they seek, and their speculation that Zajac
might not have access to certain documents does not approach
a level that could constitute prejudice.
all the evidence related to the Rule-55(c) inquiry, the Court
concludes that Zajac has established good cause. Therefore,
the Court should GRANT Defendant Zajac's Motion to Set
Aside Clerk's Entry of Default (ECF No. 181) and direct
the Clerk of Court to set aside the entry of default against
the Clerk's Entry of Default should be set aside,
Plaintiffs are not entitled to a default judgment. The Court
should DENY as moot Plaintiffs' Motion for Default
Judgment against Defendant Kirk Zajac (ECF No. 141). AAR
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