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STATE STREET BANK AND TRUST CO. v. INVERSIONES ERRAZURIZ

February 4, 2002

STATE STREET BANK AND TRUST COMPANY, PLAINTIFF
V.
INVERSIONES ERRAZURIZ, LIMITADA (F/K/A INVERSIONES ERRAZURIZ S.A.), SUPERMERCADOS UNIMARC S.A. (F/K/A COMMERCIAL E INMOBILIARIA UNIMARC S.A.), PESQUERA NACIONAL S.A., UNIMARC ABASTECIMIENTOS S.A., CIDEF S.A., SALMONES UNIMARC S.A., INDUSTRIA FORESTAL REGIONAL S.A., CIDEF ARGENTINA S.A., CORPORACIÓN DE INVERSIONES Y DESARROLLO FINANCIERO CIDEF S.A., AND SOCIEDAD CONTRACTUAL MINERA COMPAÑIA DE SALITRE Y YODO PRIMERA REGIÓN (F/K/A COMPAÑIA DE SALITRE Y YODO PRIMERA PRIMERA REGIÓN S.A.), DEFENDANTS.



The opinion of the court was delivered by: Robert L. Carter, District Judge.

  Defendants Inversiones Errazuriz Limitada, et al., move, pursuant to F.R.Civ.P. 55(c) and 60(b), to vacate the $140 million default judgment entered against them by this court on November 21, 2001. Plaintiff State Street Bank and Trust Company opposes the motion. For the reasons set forth below, defendants' motion to vacate is denied for the time being. However, certain issues pertaining to the willfulness of the default, the merits of specific defenses advanced by defendants, and the level of prejudice plaintiff would experience if the default judgment were vacated are referred to Magistrate Judge Frank Maas for further inquiry.

BACKGROUND

On April 16, 2001, plaintiff filed suit against defendants, in this court, seeking to recover over $100 million owed to plaintiff pursuant to two Credit Agreements executed in 1994 and 1996, respectively. (Compl. ¶ 1.) Defendants did not answer the complaint but, for several months thereafter, the parties engaged in ongoing settlement negotiations. In late June of that year, the parties even signed a stipulation extending the time to answer and acknowledging personal jurisdiction and service of process. The stipulation expired, but still the talks continued. Then, on September 28, 2001, plaintiff broke off negotiations and filed a motion for default judgment. Plaintiff requested, and received, an entry of default. The deadline to reply came and went with no word from defendants. On November 30, 2001, this court granted plaintiff's motion, entering default judgment against defendants for approximately $140 million dollars. Finally, on December 19, 2001, defendants reappeared, filing a motion to vacate the substantial default judgment entered against them. Plaintiff opposed, bringing events to where they now stand.

DISCUSSION

Since a default judgment is already in place in this case, F.R.Civ.P. 55(c) requires that defendants' motion to vacate be reviewed in accordance with the standards set forth in F.R.Civ.P. 60(b).*fn1 Defendants argue that this case falls under the provision of F.R.Civ.P. 60(b), which states that a default judgment may be set aside for reason of "mistake, inadvertence, surprise, or excusable neglect." In assessing a claim of excusable neglect, courts typically make three inquiries: "(1) whether the default was willful; (2) whether defendant has a meritorious defense; and (3) the level of prejudice that may occur to the non-defaulting party if relief is granted." Am. Alliance Ins. Co., Ltd. v. Eagle Ins. Co., 92 F.3d 57, 59 (2d Cir. 1993) (quoting Davis v. Musler, 713 F.2d 907, 915 (2d Cir.1983))

Because it is defendants who move to vacate, they bear the burden of demonstrating that their default was not willful, that they have meritorious defenses, and that no prejudice would result from reopening the judgment. See Sony Corp. v. Elm State Electronics, Inc., 800 F.2d 317, 320 (2d Cir. 1986) (citing 10 Wright, Miller & Kane, Federal Practice and Procedure Civil 2d § 2693 at 478). This burden is not trivial: if the moving party fails to make even one of the three aforementioned showings, vacatur should be denied. See Barnes v. Printron, Inc., No. 93 Civ. 5085, 1999 WL 335362, at *3 (S.D.N.Y. May 25, 1999) (Keenan, J.) ("[A] finding of willfulness obviates the need to continue the inquiry with respect [to] the existence of a meritorious defense and prejudice.").

Defendants' burden, however, is also eased somewhat by the countervailing consideration that "[s]trong public policy favors resolving disputes on the merits." Am. Alliance Ins. Co., Ltd., 92 F.3d at 61; see also Cody v. Mello, 58 F.3d 13, 15 (2d Cir. 1995) (collecting cases that demonstrate this Circuit's clear "preference that litigation disputes be resolved on the merits, not by default"). Given this strong preference, courts often resolve reasonable "doubts in favor of the party seeking relief from judgment to facilitate resolution of disputes on their merits." Barnes, 1999 WL 335362, at *3 (quoting Corchia v. Metropolitan Life Ins. Co., No. 94-7058 Civ., 1996 WL 18953, at *1 (S.D.N.Y. Jan. 17, 1996) (Keenan, J.)); see also Pecarsky v. Galaxiworld.com Ltd., 249 F.3d 167, 172 (2d Cir. 2001). The presumption against default is particularly strong where, as here, substantial sums of money are demanded. See Sony Corp., 800 F.2d at 320 (listing cases that suggest default is disfavored where large sums of money are involved).

A. Willfulness

The first inquiry this court must make in assessing defendants' claim of excusable neglect is whether their default was willful. Mere negligence, even if gross, does not necessarily rise to the level of willful default. See Am. Alliance, 92 F.3d at 60, 61. However, no showing of bad faith on the part of the defaulting litigants is necessary to deny relief. Gucci, 158 F.3d at 635. And it is well settled that a default judgment should not be vacated "where the moving party ha[s] apparently made a strategic decision to default." Am. Alliance, 92 F.3d at 60 (citations omitted)

In this case, defendants deny that their default was deliberate or even grossly negligent. They claim their failure to respond to plaintiff's motion was the result of an erroneous belief that Gibson Dunn & Crutcher ("Gibson Dunn"), the firm that had represented them in settlement negotiations with plaintiff, would serve as their litigation counsel as well. (See Defs.' Mem. at 96.) Defendants insist that, when Gibson Dunn declined to do so, they were caught completely by surprise. Their allegedly unexpected abandonment forced defendants to quest for new counsel at precisely the time they otherwise would have been opposing plaintiff's motion for default. See Id. To make matters worse, the first firm defendants enlisted to take over their defense, Thacher Proffitt & Wood, had to withdraw almost immediately because of a potential conflict of interest. Id. at 93. As a result, defendants claim they were forced yet again, through no fault of their own, to search for substitute counsel. Finally, in early November, defendants found their man in Michael B. Wolk, the attorney who represents them in the instant action. (Wolk Aff.) Mr. Wolk promptly contacted the court with news of his retainer and set about producing the massive motion to vacate filed by defendants on December 19th. By this time, however, it had been some two weeks since this court granted plaintiff's request for default judgment, and nearly three months since plaintiff first filed for the same.

While on the subject of Mr. Wolk, the court feels compelled to add a few words admonishing his conduct thus far in this case. Mr. Wolk has repeatedly tried the court's patience, submitting his initial motion late,*fn2 refusing to file said motion in the form ordered by the court,*fn3 and disrupting a court-sanctioned deposition, just to mention a few examples of his obstinate behavior. The court is mindful that Mr. Wolk has labored under difficult circumstances. However, so many of his problems have been self-imposed, the result of his inability to follow the court's clear directions.*fn4 Mr. Wolk is strongly advised to pay closer heed in all future interactions with the magistrate judge and this court.

Returning to the matter at hand, plaintiff predictably contests defendants' benign description of events, characterizing their default as a deliberate tactical decision designed to "buy time before being subject to a judgment . . . to which they have no defense." (Pl.'s Opp'n Mem. at 8.) In support of this troubling indictment, plaintiff offers the deposition of Connor Reilly, a Gibson Dunn attorney who represented defendants during their abortive settlement negotiations with plaintiff. At first glance, Mr. Reilly's statements seem to seal the case against defendants. Particularly problematic for their account is Mr. Reilly's testimony that, as early as April 2001, he had informed defendants that his firm would not represent them in this action, and that they should seek and retain separate trial counsel. Id. at 5 (citing Reilly Dep. at 58-59). Plaintiff takes pains to emphasize this point, along with Mr. Reilly's assertion that he repeatedly reminded defendants, both before and after June 2001, that the time to respond to plaintiff's complaint had expired. Id. (citing Reilly Dep. at 66-67)

In response, however, defendants counter with relevant evidence that resuscitates their claims. They offer detailed billing records and e-mails that establish Mr. Reilly was only one of several Gibson Dunn attorneys who worked on behalf of defendants, and that he was not even the senior partner in charge of defendants' account. (Defs.' Reply Mem. at 23 (citing Defs.' Reply Affs. and Ex. B thereto).) These points are probative because they raise the possibility that other attorneys at Gibson Dunn besides Mr. Reilly may have promised defendants the firm's litigation services, just as defendants say occurred. The aforementioned records also show that Gibson Dunn billed defendants specifically for litigation-related services on a number of occasions. Much of this litigation work was performed well after Mr. Reilly says he first informed defendants they should retain new litigation counsel. The work apparently even stretched into the immediate aftermath of September 27th, when plaintiffs served notice of their intention to seek a default judgment.*fn5

Finally, defendants also provide a copy of a receipt indicating that, on October 10th, shortly after plaintiff filed for default judgment, defendants wired $200,000 to Gibson Dunn. Defendants say that shortly thereafter, Gibson Dunn abruptly severed all ties with them. While the foregoing evidence does not establish the existence of an agreement between defendants and Gibson Dunn, it does tend to corroborate defendants' good faith (if erroneous) expectation that Gibson Dunn would continue to represent their interests in litigation against plaintiff. There is thus some possibility that this erroneous expectation, coupled with their attendant inability to find a new representation, were what led to their default. If defendants were to prove that the foregoing is really what happened, this case would be substantially similar to Pecarskv v. Galaxiworld.com ...


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