Pecarsky v. Galaxiworld.com Ltd, PLAINTIFFS-APPELLEES

• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
• Citation: 249 F.3d 167
• Docket Number: DEFENDANTS-APPELLANT,LARRY,Docket Nos. 00-7287,PLAINTIFFS-APPELLEES
• Parties: (2nd Cir. 2001) DAVID PECARSKY AND OVERALL SUPPLY, INC. ON BEHALF OF THEMSELVES AND ALL OTHERS,, v. GALAXIWORLD.COM LIMITED, FORMERLY KNOWN AS GAMING LOTTERY CORPORATION AND JACK BANKS, ALSO KNOWN AS JACQUES BENQUESUS,WELTMAN, DEFENDANT. (LEAD), 00-7295 (CON), 00-7655(CON)
• Decision Date: 01 August 2000

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249 F.3d 167 (2nd Cir. 2001) DAVID PECARSKY AND OVERALL SUPPLY, INC. ON BEHALF OF THEMSELVES AND ALL OTHERS, PLAINTIFFS-APPELLEES,
v.
GALAXIWORLD.COM LIMITED, FORMERLY KNOWN AS GAMING LOTTERY CORPORATION AND JACK BANKS, ALSO KNOWN AS JACQUES BENQUESUS, DEFENDANTS-APPELLANTS, LARRY WELTMAN, DEFENDANT. Docket Nos. 00-7287(LEAD), 00-7295 (CON), 00-7655(CON)
August Term, 2000 UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT Argued December 13, 2000
May 10, 2001

Defendant-appellant, Galaxiworld.com Limited ("Galaxiworld") appeals from a May 15, 2000 amended order and judgment of the United States District Court for the Southern District of New York (Robert P. Patterson, Jr., Judge) entering a default judgment against Galaxiworld in the amount of $22,084,844.

VACATED AND REMANDED.

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Sheldon Eisenberger, The Law Office of Sheldon Eisenberger, New York, New York for Defendants-Appellants.

Deborah Clark-Weintraub, Francis P. Karam, Milberg Weiss Bershad Hynes & Lerach LLP, New York, New York; Lester L. Levy, Robert C. Finkel, Wolf Popper LLP, New York, New York for Plaintiffs-Appellees.

Before: Cardamone, Parker, and Katzmann, Circuit Judges.

Parker, Circuit Judge

I. INTRODUCTION

On this appeal we must determine if the district court abused its discretion in this class action when it entered a default judgment against Galaxiworld in the amount of $22,084,844. In their original complaint, appellees claimed that Jack Banks ("Banks"), Larry Weltman ("Weltman"), and Galaxiworld committed fraud by making a series of material misrepresentations about Galaxiworld's acquisition and operation of a gambling paper product business. On May 29, 1998, Galaxiworld's motion to dismiss the complaint in the class action was denied. On January 10, 2000, after merits discovery had been substantially completed in the class action, Galaxiworld's predecessor counsel, Proskauer Rose LLP, filed a motion requesting, inter alia, permission to withdraw as counsel to the defendants. On January 13, 2000, at a hearing regarding Proskauer's withdrawal, attorneys for the plaintiffs in the class action moved for a default to be entered against the appellants. By February 16, 2000, following a series of orders and amended orders published by the district court, Proskauer Rose had been permitted to withdraw, and default judgment had been entered against Galaxiworld in this class action in the amount of $22,084,844. On February 24, 2000, Sheldon Eisenberger filed a notice of appearance for the individual defendants. On March 23, 2000, Eisenberger filed a notice of appearance

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for Galaxiworld, as its new counsel; he also filed a notice of appeal from the default judgment entered by Judge Patterson. For the reasons explained below, we hold that the district court abused its discretion when it entered a default judgment in the amount of $22,084,844 against Galaxiworld in this securities class action.

II. BACKGROUND

In this class action, plaintiffs-appellees, who were investors in Galaxiworld stock, alleged that during the class period (February 1, 1995 through May 24, 1996), defendants Galaxiworld, Banks, and Weltman committed fraud by making a series of materially false and misleading public statements that misrepresented Galaxiworld's acquisition and lawful operation of the Specialty Manufacturing division of Ace Novelty, Inc., a gambling paper product business. In addition, plaintiffs claimed that defendants knew or recklessly disregarded that Galaxiworld's financial statements were false and misleading. Plaintiffs claimed that, as a result of these misrepresentations, defendants were able to inflate Galaxiworld's stock price by issuing a series of false and misleading public statements that described Galaxiworld's proposed acquisitions of other businesses and proposed contracts with state lottery commissions. According to plaintiffs, defendants benefitted from their fraud by selling Galaxiworld common stock to investors in private placements.

On May 29, 1998, Galaxiworld's motion to dismiss the complaint in the class action was denied because the plaintiffs' allegations gave rise to a strong inference of defendants' scienter under the Private Securities Litigation Reform Act of 1995. See In re Gaming Lottery Sec. Litig., No. 96 CIV. 5567, 96 CIV. 7527, 96 CIV. 7936, 1998 WL 276177 (S.D.N.Y. May 29, 1998). On February 23, 1999, a class consisting of all the persons who purchased Galaxiworld common stock in the American or Canadian securities markets between February 1, 1995 and May 24, 1996 was certified. See In re Gaming Lottery Sec. Litig., 58 F. Supp. 2d 62 (S.D.N.Y. 1999). By December 1999, plaintiffs had substantially completed merits discovery and had prepared the case for trial. On January 10, 2000, Galaxiworld's predecessor counsel, Proskauer Rose LLP, applied to the district court for an order (1) permitting Proskauer to withdraw as counsel to defendants and (2) directing payment of the outstanding fees and expenses. The district court set a hearing date of January 13, 2000.

Service of the order to show cause was directed to be made on Banks and Weltman. Banks claimed that he received the order to show cause on January 11, 2000 by fax. Neither Banks, nor Galaxiworld through any representative, appeared at the January 13, 2000 hearing. At the January 13, 2000 hearing, attorneys for the plaintiffs in the class action moved for a default to be entered against the appellants. On the same date, the district court entered an order which, inter alia, (1) granted Proskauer's motion to withdraw as counsel, (2) granted Proskauer's motion for payment of legal fees and expenses in the amount of $762,611.34, (3) directed Galaxiworld to pay Proskauer the said amount by January 18, 2000, (4) ordered Banks to cause Galaxiworld to pay the said amount by January 18, 2000, (5) restrained Galaxiworld from transferring any funds or assets until it satisfied the order and judgment, and (6) provided that if Galaxiworld failed to file a notice of appearance within five days, by January 18, 2000, a default judgment may be entered against Galaxiworld. On January 18, 2000, Banks wrote two letters to the district court explaining that he had not received the

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court's January 13, 2000 order until January 17, 2000 and that he was attempting to find new counsel. In these letters, Banks requested thirty days to find new counsel. The district court denied this request. On January 19, 2000, Banks wrote another letter to Judge Patterson objecting to the January 13, 2000 order, which had been entered without Galaxiworld being heard on the issues decided. In response to Banks's letter of January 19, Judge Patterson vacated the judgment, set a new hearing date of January 25, 2000, and instructed Galaxiworld to appear by counsel on that date to show cause why judgment for Proskauer should not be entered. Judge Patterson also granted Proskauer's request that Banks and Weltman be ordered to appear at the January 25, 2000 hearing.¹

On January 24, 2000, Banks, on behalf of Galaxiworld, advised the district court that it was unable to retain new counsel and requested thirty more days to do so. The district court denied this request at the January 25, 2000 hearing. On January 25, 2000, Banks and Galaxiworld failed to appear in court and Judge Patterson issued an order and judgment on January 26, 2000 modifying the previous judgment for Proskauer and awarding Proskauer a judgment in the amount of $569,536.48. Weltman, who had recently ceased to be Galaxiworld's CFO, did appear by telephone and gave testimony upon questioning by Proskauer. In addition, plaintiffs' counsel made comments and two Proskauer partners testified. At the close of the hearing, Judge Patterson addressed plaintiffs' January 13, 2000 motion and declared Galaxiworld in default and reserved decision on the amount. In the order and judgment of January 26, 2000, Judge Patterson ordered that a default judgment in the underlying securities fraud action be entered against Galaxiworld and that an inquest regarding the amount of damages be held on February 9, 2000.

At the inquest on February 9, 2000, neither Banks, nor Weltman, nor counsel for Galaxiworld appeared. On February 16, 2000 based on the testimony of plaintiffs' damages expert at the inquest, Judge Patterson signed an order and judgment against Galaxiworld in the amount of $22,084,844.

On February 24, Sheldon Eisenberger filed a notice of appearance on behalf of the individual defendants and appeared at a pre-trial conference on behalf of the individual defendants on February 25, 2000. At the February 25, 2000 hearing, Eisenberger made it clear that he did not represent the corporate defendant and was not then moving to vacate the default judgment. On March 23, 2000, twenty-nine days after he...