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A federal judge’s finding that an Internet gambling company was in default in a shareholder class action suit and must pay plaintiffs $22 million has been reversed by the 2nd U.S. Circuit Court of Appeals. The court found that federal Judge Robert P. Patterson Jr. of the U.S. District Court for the Southern District of New York abused his discretion when he found Galaxiworld.com in default in January 2000, shortly after Judge Patterson granted a motion by the company’s lawyers, Proskauer Rose, to withdraw as counsel. The appellate court’s decision was based, in part, on the fact that Proskauer Rose had a retaining lien on its client’s files due to a billing dispute in the case, Pecarsky v. Galaxiworld.com, 00-7287. “Focusing on the complexity of this securities litigation, the short time in which Galaxiworld was expected to find new counsel, and the inability of Galaxiworld to present prospective new counsel with the case files due to Proskauer’s retaining lien, we hold that Galaxiworld’s default lacked the requisite willfulness necessary to justify upholding a default judgment,” Judge Fred I. Parker said in the 2nd Circuit decision. The suit was based on charges that the company, along with senior executives Jack Banks and Larry Weltman, committed fraud by misrepresenting facts about the company’s acquisition and operation of a gambling paper product business: the Specialty Manufacturing Division of Ace Novelty Inc. Plaintiffs charged that Banks, Galaxiworld’s president, and Weltman, the company’s chief financial officer, made the misrepresentations to inflate the company’s stock price. Enmeshed in a billing dispute after four years of representing Galaxiworld, Proskauer Rose moved to withdraw as counsel on Jan. 10, 2000. At a hearing three days later, plaintiffs, represented by Milberg Weiss Bershad Hynes & Lerach and Wolf Popper, moved for a default judgment. The defendants did not appear at the hearing, and later claimed they did not receive notice about the hearing until after it was held. After giving the defendants one extension, Judge Patterson held another hearing on Jan. 26. At that time, the judge granted Proskauer Rose’s motion for an order directing the defendants to pay attorneys’ fees, and also entered a default judgment on the underlying securities case. After reviewing the evidence, Judge Patterson set the amount of the default in the securities case at just over $22 million at a subsequent hearing on Feb. 16. The Jan. 26 hearing went forward even though Banks had told Patterson by letter that despite having received one extension, he still had been unable to obtain new counsel and wanted another extension. That request was denied by the judge. In March, having finally obtained new counsel, the defendants appealed the default order to the 2nd Circuit. APPELLATE RULING Judge Parker noted that Banks was in no position to represent the company without counsel present, and that “in light of Galaxiworld’s repeated contact with the district court and apparent efforts to obtain new counsel, we cannot say that Galaxiworld deliberately chose not to appear.” Moreover, he said, the record revealed that the defendants “were not ignoring the court’s orders; instead, they made repeated efforts to inform the court of their difficulties in finding new counsel.” Parker also said that when compared to other cases in which default judgment have been entered, the district court ordered the default in the Galaxiworld case “more quickly than usual.” He said that one issue in dealing with a move to vacate a default judgment is whether a defendant presents more than “conclusory denials” in trying to show that it has a meritorious defense. Here, he said, in response to a claim they knew of or recklessly disregarded inaccuracies in Galaxiworld’s financial statements, the defendants had already argued that they relied on the advice of their accountants. “Because these claims, if proven at trial, would constitute a complete defense, [defendants] have demonstrated a meritorious defense for purposes of vacating the default judgment entered against them,” Parker said. Senior Judge Richard J. Cardamone and Judge Robert Katzmann joined in the opinion. Sheldon Eisenberger represented the defendants. Plaintiffs in the class action against Galaxiworld.com were represented by Deborah Clark-Weintraub and Francis P. Karam, with Milberg Weiss, and Lester R. Levy and Robert C. Finkel, with Wolf Popper.

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