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Israel Aircraft Industries v. Standard Precision

decided: July 7, 1977.


Appeals from orders of the U.S. District Court for the Southern District of New York, Robert L. Carter, J., dismissing complaint after trial and jury verdicts because of alleged fraud on the Court and failure to respond to discovery. Orders reversed insofar as they dismiss the complaint; verdicts set aside as to all parties except defendant North American Rockwell Corporation and matter remanded to District Court for a new trial.

Van Graafeiland, Circuit Judge, Mehrtens*fn* and Pierce,*fn** District Judges.

Author: Van Graafeiland


These are appeals from orders setting aside jury verdicts in favor of the plaintiffs and dismissing the complaint sua sponte for failure of the plaintiffs to disclose the existence of certain releases given by the individual plaintiffs to their employer, Israel Aircraft Industries, Ltd. (IAI). We affirm the orders to the extent that they set aside the jury verdicts but reverse insofar as they dismiss plaintiffs' complaint. We remand the matter to the District Court for retrial as to all of the defendants except North American Rockwell Corporation, which was exonerated from liability on the original trial.

This action arises out of the 1970 crash of an IAI jet airplane manufactured by Rockwell with Standard Precision, hereinafter Standard, as one of its subcontractors.*fn1 The individual plaintiffs were IAI employees who sustained injuries when they bailed out of the falling plane. A substantial portion of IAI's property loss was covered by insurance which was paid. Thereafter, IAI's insurance carrier, pursuing its subrogation rights under the policy, commenced this action in IAI's name to recover for the loss. The carrier's attorneys for purposes of this suit were Condon & Forsyth of New York City. At the request of their client, Condon & Forsyth also sued on behalf of the injured employees, all of whom were residents of Israel. The defendants interposed a counterclaim against IAI for indemnity and contribution towards any damages they might have to pay the injured crew members. Thereafter, the New York firm of Fuchsberg & Fuchsberg was substituted for the Condon firm as attorneys for the individual plaintiffs. This somewhat unusual sequence of events laid the groundwork for the misunderstandings which resulted in the orders appealed from.

Before the action was commenced, English counsel for the Condon firm sent a questionnaire to IAI seeking pertinent information from the injured employees. Included among the questions were inquiries concerning payments received by the employees because of their injuries. Their answers indicated that payments totaling ninety thousand Israeli pounds (approximately $11,000) had been paid to them by their employer and would have to be repaid out of any recovery in the proposed litigation. Similar information was given by the employees when their pretrial depositions were taken by the defendants.*fn2 All counsel involved assumed that these payments were in the nature of Workmen's Compensation, such as would be paid under the law of New York; and, for this reason, none of the attorneys sought more detailed information concerning the transaction. In fact, the payments were made voluntarily in exchange for releases exonerating IAI from liability for the accident.

The original releases were placed in the personnel files of the injured employees but were not forwarded to New York with the many other documents needed to process the litigation. IAI asserts that the releases were never requested of it by counsel for its subrogated insurance carrier and that they were not forwarded on IAI's own initiative because it believed they were limited releases exonerating IAI alone and therefore had no relevance to the third-party action. IAI also avers that it was not informed that a counterclaim was being interposed against it as a result of the personal injury claims, pointing out that the defense of this counterclaim was routinely undertaken by the attorneys for its insurance carrier.

Counsel representing the Condon firm agrees that he made no request of IAI for the personnel records of the injured employees, despite the fact that a demand for production of these records was made by Standard's attorneys and despite counsel's subsequent assurance to Standard's attorneys that he was in the process of obtaining them. When Standard moved at a later date to dismiss IAI's complaint for failure to answer interrogatories and produce documents, one of IAI's attorneys stated in an opposing affidavit that plaintiffs had already produced a substantial number of documents "which constituted all the documents in its possession which relate to the facts of this case." In the same affidavit, the attorney stated upon information and belief that substituted counsel for the injured employees had transmitted or were in the process of transmitting to defendant's counsel the employees' personnel records. Substituted counsel swear, however, that they did not know of the existence of the releases and of course did not deliver them to defendants.

The case thus proceeded to trial with the court and defense counsel concededly having no knowledge of the releases and with plaintiffs' counsel allegedly having no such knowledge. The trial was bifurcated; and the jury, deciding the liability issue separately, found that Standard's negligence contributed 35% to the crash and IAI's negligence 65%. Thereafter, when the trial was continued on the issue of damages, the District Judge informed counsel in open court in the absence of the jury that, as a result of the jury's verdict on liability, he intended to charge that the individual plaintiffs would henceforth be in the position of suing both IAI and Standard. Although the District Judge later decided that this charge should not be given, his statement prompted one of the injured plaintiffs to inform his attorney that the crew members may have signed some kind of release which prevented them from suing their employer. During the luncheon recess on that same day, the employees' attorney questioned counsel for IAI concerning the possible existence of releases and was informed that counsel knew of no such documents. However, because of the inquiry, IAI counsel sent a telegram to IAI in Israel inquiring about releases and seeking copies if they existed.*fn3

Several days later, the jury returned a verdict finding the property damage of IAI to be $860,000 and the personal injury damages of the three crew members to be a total of $425,000. When he returned to his office following this verdict, IAI counsel found a reply to his telegram which contained a rough translation of a release executed by the plaintiff Landau, the original of which was in Hebrew, with information that substantially similar releases had been signed by the other two crew members. Counsel made immediate arrangements to secure advice from an Israeli attorney as to the legal effect of the documents and thereafter went personally to Israel to inquire further into the matter. Upon his return to the United States, he moved on behalf of IAI to assert the releases as a defense to Standard's counterclaim and to reduce the crew members' recovery from Standard by 65%, the amount of IAI's proportionate share of liability.

Needless to say, the District Judge was greatly upset when he learned of the undisclosed releases. Instead of granting IAI's motion, he dismissed the complaint sua sponte under Fed.R.Civ.P. 60(b) for fraud perpetrated on the court and under Fed.R.Civ.P. 37(b)(2)(C) for failure to make discovery. This order, reported at 72 F.R.D. 456 is the first order on appeal. Thereafter, appellants moved for reargument at which they would have an opportunity to be heard and at which IAI might be represented by separate counsel instead of the attorneys for its subrogated insurance carrier. The order denying this application is the second order before us on this appeal.*fn4

Appellants' argument that their action should not have been dismissed without a hearing is not without precedential support. It has been held, for example, that although a judge has the power to set aside a judgment obtained as a result of fraud on the court, see Kupferman v. Consolidated Research & Manufacturing Corp., 459 F.2d 1072, 1078 (2d Cir. 1972), this power should rarely be exercised upon the basis of affidavits alone, without giving the parties an opportunity to be heard. Universal Oil Products Co. v. Root Refining Co., 328 U.S. 575, 580, 90 L. Ed. 1447, 66 S. Ct. 1176 (1946); see Jackson v. Irving Trust Co., 311 U.S. 494, 499, 85 L. Ed. 297, 61 S. Ct. 326 (1941). Moreover, where the court not only vacates a judgment, but also dismisses the complaint, a question of due process may arise if this is done sua sponte without a hearing. See Societe Internationale v. Rogers, 357 U.S. 197, 209, 2 L. Ed. 2d 1255, 78 S. Ct. 1087 (1958); Securities & Exchange Commission v. Research Automation Corp., 521 F.2d 585, 588 (2d Cir. 1975); Flaks v. Koegel, 504 F.2d 702, 712 (2d Cir. 1974). We prefer, however, not to dispose of this appeal on the basis of this quasi-procedural argument. The reputations of two established New York law firms, an internationally known Israeli corporation and at least five individuals are at stake. They are entitled to have this appeal decided on the merits.

Because no hearing was held below, we may examine the affidavits submitted by appellants to the District Court in the same fresh light as did the District Judge. Orvis v. Higgins, 180 F.2d 537, 539 (2d Cir.), cert. denied, 340 U.S. 810, 95 L. Ed. 595, 71 S. Ct. 37 (1950). We have made such an examination and have painstakingly reviewed the entire record. Having done so, we conclude that neither appellants nor their attorneys were guilty of a fraud upon the court. There were misunderstandings, lack of communication and, in some instances, carelessness. However, there was no intentional fraud.

We have here a situation in which IAI paid a total of $11,000 to three employees, whose personal injuries a jury found to be worth $425,000. It is most unlikely that either IAI or its employees intended that the releases given in return for this relatively modest payment would exonerate the manufacturer of the plane and all other third parties who might be responsible for the crash.*fn5 It is equally unlikely that either IAI or its insurance carrier would jeopardize the possible recovery of almost one million dollars for the loss of the IAI jet by deliberately concealing the fact that IAI had settled with its employees for $11,000. Indeed, the very logistics of attempted concealment indicate that it was never intended. Concealment would require cooperative deceit by ...

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