Appeal from an order of the United States District Court for the Southern District of New York, Pierre N. Leval, J., denying appellants' motion to vacate a $516.222.91 default judgment. Reversed and remanded.
Van Graafeiland, Meskill and Pratt, Circuit Judges. Van Graafeiland, Circuit Judge, concurring.
Joseph H. Musler and Jacqueline Maloney appeal from an order of the United States District Court for the Southern District of New York, Pierre N. Leval, Judge, denying their motion under Fed. R. Civ. P. 55(c) and 60(b) to vacate a default judgment which was entered against them in the amount of $516,222.91. The judgment purportedly consisted of $256,573.50 in "actual liquidation damages", $100,000 in punitive damages, and $100,000 in attorneys' fees, plus interest and costs. Because defendants' motion raised substantial questions of law and fact which could not possibly be resolved on the papers that were submitted to the district court, we conclude that denial of the motion without a hearing was an abuse of discretion. Accordingly, we vacate the order and remand for further proceedings.
The origins of the present controversy can be traced back at least as far as December 1977, when Walter Davis commenced a lawsuit ("the first action") in the Southern District of New York against Joseph Musler and two corporations, Multiple Access, Inc. (MAI) and Itel Corp. (Itel). The gist of Davis's complaint, which embodied fourteen causes of action, was that defendants had schemed to wrongfully deprive him of a 10% ownership interest in MAI, as well as certain salaries and commissions. Musler, MAI's chief executive officer, allegedly masterminded this scheme. Itel was implicated because it had purchased all of MAI's stock shortly after Davis was ousted from that company. In his complaint, Davis demanded compensatory and punitive damages.
This first action went to trial before a jury in the Southern District in August 1979, and resulted in a verdict against all three defendants in the sum of $257,573.50. After this verdict was returned, Judge Sofaer granted Itel a new trial, but judgment was entered against Musler and MAI on December 6, 1979. Following a second trial, in which Itel prevailed, an appeal and a cross-appeal were taken to this court. In April 1981, the judgments against Musler and MAI, and in favor of Itel, were affirmed in all respects.
Davis initiated the instant action in January 1981, while the appeal and the cross-appeal in the first action were still pending. He named as defendants Musler, his wife Maloney, and six others who did not default and are not parties on this appeal. In his complaint Davis identified these defendants collectively as former employees, shareholders, officers and/or directors of MAI. He then briefly described the nature and status of the first action, emphasizing that the judgments he had obtained had not been satisfied in any part, despite the fact that execution had not been stayed. Against this backdrop, he set forth eight causes of action, all stemming from either the underlying activities which precipitated the first action or the manner in which that action had been defended. Among other things, Davis alleged that (1) the activities of all defendants, both before and after the trials, amounted to a conversion of his interest in MAI or Itel, a prima facie tort, and an interference with his prospective business advantage; (2) all defendants with the exception of Maloney were effectively bound by the judgments in the first action since (a) they had agreed to indemnify Itel for the "costs" of that action and (b) Davis was a third-party beneficiary of those agreements; (3) all defendants had entered into a "civil conspiracy" to assist in the defense of the first action; and (4) defendants Musler and Maloney had conspired to evade the judgment against Musler in the first action by sheltering their assets and moving their residence to Florida. The complaint sought $257,573.50 in actual damages -- the precise sum of the award in the first action. It also sought $1,000,000 in punitive damages and $100,000 in attorneys' fees.
After commencing his second action, Davis was temporarily unable to locate Musler and Maloney. Consequently, his original attempt to serve them with the summons and complaint in February 1981, at what he believed to be their New York address, was unavailing. Likewise, his continuing efforts to collect the judgment in the first action were also unsuccessful. Davis did, however, eventually manage to track down Musler and Maloney in Florida several months later. Thereupon, he initiated supplementary enforcement proceedings to collect the first judgment under Fed. R. Civ. P. 69 and arranged to have Musler and Maloney served with deposition notices and subpoenas in the Florida proceedings and the summons and complaint in the second action simultaneously.
To accomplish this, he engaged the services of one Nicholas Vassalotti, a licensed Florida private investigator. According to Vassalotti's affidavit of service, which was filed with the court below on August 11, 1981, Vassalotti arrived at the Musler-Maloney residence in West Palm Beach on June 3, 1981, and was greeted at the front door by a woman who roughly fit Maloney's description. Surprisingly, this woman denied ever having heard of "Jacqueline" or "Jacqueline Musler". After briefly consulting with a man who was working on the front lawn, who confirmed that "This is the Musler residence", Vassalotti returned to the door and knocked again. This time he was met by a man who claimed to be "Joe Marshall", but who produced a business card bearing the name "C. Paul Bellamy". Having seen enough, Vassalotti asserted that the man at the door was Joseph H. Musler and advised him that he had subpoenas and deposition notices as well as summonses and complaints for him and Jacqueline Maloney. When the man refused to accept service, Vassalotti informed him that he was leaving the papers on the railing at the front door.
After over three months elapsed without either Musler or Maloney filing an answer, Davis returned to the Southern District and initiated default proceedings. As a preliminary step, he obtained a certificate from the clerk of the court, dated September 16, 1981, noting defendants' default. He then submitted that certificate to Judge Leval, together with a copy of the judgment in the first action, an itemized statement of the amounts allegedly due in the second action, a proposed default judgment, and an affidavit in support thereof, sworn to by his attorney, John J. Phelan, III. In this affidavit, which was also dated September 16, 1981, Phelan outlined the causes of action alleged in the second complaint and claimed damages in "the liquidated amount" of $457,573.50. He further explained that $256,573.50 of this sum represented "actual liquidation damages", based on the judgment in the first action; $100,000 represented attorneys' fees, "based upon the time expended by plaintiff's counsel in recovering this judgment"; and $100,000 represented punitive damages, which were "calculated by reference to the amount of attorneys' fees and loss of use of money in excess of legal interest." Phelan offered no explanation of why this last component of the damages demanded had been reduced from the $1,000,000 originally sought in the second complaint.
Beyond the routine representations that neither Musler nor Maloney was an infant, an incompetent, or in the military, Phelan further asserted that the previously filed affidavit of service, sworn to by Vassalotti, established that "copies of the summons and complaint were personally served on the defendants Joseph H. Musler and Jacqueline Maloney on June 3, 1981." Finally, Phelan noted that the time within which to respond to the complaint had long since expired.
The district judge signed the default judgment on September 22, 1981. He apparently saw no need to first resort to Fed. R. Civ. P. 55(b)(2), which provides in part that "if, in order to enable the court to enter [a default] judgment * * * it is necessary to take an account or to determine the amount of damages or to establish the truth of any averment by evidence or to make an investigation of any other matter, the court may conduct such hearings or order such references as it deems necessary and proper". Judgment was formally entered on September 28, 1981.
Meanwhile, at the same time that the default judgment was being processed in the Southern District, Davis's supplementary proceedings in the first action were being actively contested in Florida. On September 24, 1981, Musler voluntarily appeared for a deposition in the Florida proceedings, pursuant to an agreement between Phelan and Musler's local counsel, Samuel I. Burstyn. At this deposition, Phelan presented Burstyn with a copy of the complaint in the second action. Burstyn then sent to Judge Leval a letter dated September 28, 1981, the body of which is reproduced below in its entirety:
The undersigned represents Mr. and Mrs. Joseph Musler, two of the defendants in the referenced suit. In the course of my general representation of them, I received a copy of the instant complaint from John Phelan, Esquire, on Thursday, September 24, 1981. This copy was delivered to me in connection with a matter not directly pertaining to the instant litigation.
After discussions with Mr. and Mrs. Musler, I am convinced that they were not ever personally served with this complaint. They further advised me that the claims advanced are devoid of merit. It is their intention, if no default has yet been entered, to deny the claims of the Plaintiff. Further, in the event that any default activity has occurred, they desire to vacate any Orders relating thereto on personal jurisdictional grounds, as well as on the basis of defective service.
I am currently endeavoring to engage the services of counsel in New York on behalf of Mr. and Mrs. Musler.
Would you be so kind as to have your secretary advise the undersigned of the status of this matter?
Obviously, Judge Leval could not have considered this letter prior to the entry of the default judgment. As is discussed more fully below, the record is unclear as to whether he or his staff ever responded to it, and as to whether the letter was considered in connection with the ensuing motion to vacate the judgment.
On January 7, 1982, over three months after the default judgment was entered and Burstyn wrote to Judge Leval, Musler and Maloney, now represented by New York counsel, formally filed their motion to vacate under Fed. R. Civ. P. 55(c) and 60(b). The specific grounds for relief asserted were first, that the judgment had occurred as a result of "mistake, inadvertence, surprise, or excusable neglect", Fed. R. Civ. P. 60(b)(1); second, that the judgment was void for lack of personal jurisdiction, Fed. R. Civ. P. 60(b)(4); and third, that defendants had meritorious defenses to the action, namely, res judicata as to Musler and failure to state a claim upon which relief could be granted as to Maloney.
In support of their motion, defendants submitted, among other things, an affidavit sworn to by Musler, in which he offered the following version of the events leading to the default:
2. That sometime after June 3, 1981, I did receive various documents that were left at my home apparently by a process server.
3. That the documents appeared to be documents relating to a judgment obtained against me by one WALTER B. ...