RageOn Part II: Judge Denies New Ex Parte to Release Levied Funds

BACKGROUND

As previously discussed, Atari sued RageOn.com for facilitating the sale of counterfeit Atari merch on its platform. After RageOn failed to respond to Atari’s Complaint, Atari obtained a default judgment and had the U.S. Marshal seize $882,000 from RageOn’s bank account. RageOn then fired its counsel (Betty Tufariello), and hired new counsel (Arash Beral of Freeman Freeman and Smiley LLP) and applied, ex parte, for an order setting aside the default judgment. The Court denied that ex parte motion, but did grant RageOn’s request to prevent further enforcement of the judgment until the Court could hear a properly noticed motion to set aside the default, scheduled for August.

RAGEON FILES A NEW EX PARTE APPLICATION

After the Court denied RageOn’s initial ex parte application, RageOn filed a new ex parte application, this time moving for an order releasing $612,192 of the $882,000 on the grounds that RageOn needs those funds to operate its business pending a decision on the motion to set aside the entry of default to vacate the default judgment.

DISTRICT COURT DENIES NEW EX PARTE APPLICATION

The Court begins by explaining that the standard for a TRO is the same as for a preliminary injunction. As a reminder, the plaintiff must establish: (1) a likelihood of success on the merits; (2) likelihood of irreparable harm without the preliminary relief; (3) that the balance of equities tips in his favor; and (4) that an injunction is in the public interest. However, if a plaintiff seeks a mandatory injunction, “she must establish that the law and facts clearly favor her position, not simply that she is likely to succeed.” The Court further explains that “mandatory injunctions should not issue in ‘doubtful cases.’”

Next, the Court explains that to set aside a default judgment, the defendant must show the default wasn’t a result of its culpable conduct, that it has a meritorious defense, and that reopening the default judgment wouldn’t prejudice the plaintiff. If any one of these factors is true, the Court can refuse to set aside the default.

Here, the Court observed that it “could not conclude that the default was not the result of Defendant’s culpable conduct.” The Court points out that RageOn’s CEO was both aware that its prior counsel missed the deadline to respond and that default was entered. The Court also observes that the CEO never saw any draft response to the Complaint, had “apparent conflicts and other issues” with prior counsel, and provided no new evidence to satisfy RageOn’s burden to show that the facts on the issue of fault “clearly favor” it.

After denying RageOn’s request for a mandatory temporary restraining order on that basis, the Court nevertheless goes on to address the 2nd factor (irreparable injury), even though it’s a moot point, to address the veracity of some of RageOn’s statements. In the motion to set aside the entry of default and vacate the default judgment, RageOn had argued that the U.S. Marshal seized “all of RageOn’s money,” rendering it “unable to pay employee wages already earned, unable to pay vendors and suppliers, unable to continue employing workers, and unable to purchase new merchandise to resell.” However, in support of its new ex parte application, RageOn submitted evidence that it has a “working line of capital through Shopify” that “takes 14% of daily sales for its loan to RageOn,” and that shortly after the Marshal levied the funds, RageOn obtained $295,000 in “emergency loans.” The Court then pointed to another $47,149.93 left in the account as well as projected gross profits of $275,000 in July, $261,250 in August, and $247,500 in September, with net income exceeding $30k each month. The Court concludes that “[t]hese figures cast serious doubt on [RageOn’s] statements to the Court that without the levied funds, it would be unable to pay employees and vendors and unable to purchase necessary supplies.”

After going through some additional math and figures, the Court ultimately determines that “seeking to obtain ‘financial health’ is not the same as suffering irreparable harm.”

THE HORIZON

With a hearing still set for August to determine RageOn’s motion to set aside the default judgment, RageOn will have to come up with a persuasive case for why it lacked culpability, in particular, for failing to respond to the Complaint. In the meantime, it will continue to have no access to the $882,000 levied — a great reminder to us all of the pressure good enforcement of judgment work can have on a defendant.

[Special thanks to Docket Navigator for access to the docket and pleadings]