## Facts

- MJK Clearing, Inc. (a securities clearing firm) participated in stock-loan transactions involving GenesisIntermedia, Inc. (GENI) stock.
- Ramy El-Batrawi was GENI’s CEO, board chair, and a major shareholder.
- The trustee alleged GENI stock was lent through multiple intermediaries in a chain in which cash collateral flowed down the chain and ultimately reached El-Batrawi and another major shareholder entity.
- The trustee alleged a scheme to manipulate GENI’s stock price, followed by a collapse that left MJK unable to recover more than $200 million in collateral from counterparties, contributing to MJK’s insolvency.
- After MJK entered bankruptcy, the trustee sued El-Batrawi and others for securities-law violations and common-law fraud.
- The trustee served El-Batrawi by mail at a California address believed to be his residence (not returned as undeliverable), attempted additional mailings to other addresses (returned), and obtained permission to serve by publication in a Los Angeles newspaper for four consecutive weeks.
- El-Batrawi did not appear for over three years; the clerk entered default, and the trustee pursued a default judgment after settling with other defendants.
- El-Batrawi first appeared shortly after the trustee moved for default judgment and sought to set aside the default and/or default judgment, claiming lack of notice, defective service, meritorious defenses, and lack of prejudice.
- The district court denied relief from default and entered a $67.5 million default judgment against El-Batrawi.

## Issues

1. Whether the district court abused its discretion in refusing to set aside the entry of default and default judgment based on culpability, the existence of a meritorious defense, and prejudice to the trustee.
2. Whether the district court erred in awarding $67.5 million in damages without sufficient findings or evidentiary support.

## Decision

- The court of appeals affirmed the denial of the motion to set aside default and upheld the default judgment as to liability.
- The court held service was adequate under the governing rules despite El-Batrawi’s denial of actual notice, and his multi-year failure to appear was culpable.
- The court concluded El-Batrawi did not present a sufficiently detailed meritorious defense and that reopening the case would prejudice the trustee given the age and posture of the litigation and reliance in settlements.
- The court vacated the $67.5 million damages award and remanded for specific findings and, if needed, an evidentiary hearing to determine damages.

## Legal Principles

- A district court’s refusal to set aside default or default judgment is reviewed for abuse of discretion and turns on: (1) culpability of the defaulting party, (2) whether the party has a meritorious defense, and (3) prejudice to the nondefaulting party.
- Proper service under the applicable rules can be sufficient even if the defendant denies actual notice; actual notice is not a prerequisite when service complies with Rule 4.
- To show a meritorious defense for relief from default, a defendant must present a factual basis that, if believed, would permit a defense; conclusory assertions are inadequate.
- Default establishes liability on well-pleaded factual allegations, but it does not establish the amount of damages; damages must be supported by competent evidence and sufficiently explained, particularly when not a sum certain.

## Conclusion

The court upheld the default judgment on liability because service was adequate, the defendant’s prolonged nonappearance was culpable, the asserted defenses lacked factual support, and reopening the case would prejudice the trustee, but it required a renewed and transparent damages determination supported by specific findings and an adequate evidentiary basis.


Stephenson v. El-Batrawi, 524 F.3d 907 (8th Cir. 2008)