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STATE STREET BANK v. INVERSIONES ERRAZURIZ LIMIT.

November 5, 2002

STATE STREET BANK AND TRUST COMPANY, PLAINTIFF,
V.
INVERSIONES ERRAZURIZ LIMITADA (F/K/A INVERSIONES ERRAZURIZ S.A.), ET AL., DEFENDANTS.



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

  OPINION

This litigation concerns the propriety of a default judgment issued against defendants on November 30, 2001, for $140 million. Defendants filed a motion to vacate the default on December 19, 2001, asserting that the default was not willful, along with some nine allegedly meritorious counterclaim defenses and a contention that the vacatur of the default judgment would not prejudice the plaintiff. On February 4, 2002, the court filed an opinion, with which familiarity is assumed, No. 01 Civ. 3201, 2002 WL 181697, dismissing two of the claimed counterclaim defenses and referring the issues of willfulness of the default, the meritoriousness of the seven remaining counterclaim defenses and whether vacatur would cause prejudice to plaintiff to Magistrate Judge Frank Maas for further inquiry. On August 15, 2002, the magistrate judge filed his Report and Recommendation ("R&R") in which he found (at 12-20) that defendants had not willfully defaulted, that their counterclaim defenses lacked merit (id. at 20-39), and that to vacate the default judgment would prejudice plaintiff (id. at 39-43).

Defendants filed timely objections to the R & R on September 13, 2002, having been granted by stipulation and order an enlargement of time to file objections beyond the normal ten day deadline. Defendants

pursuant to the legal reasons set forth below, (a) object to these portions of the Magistrate [sic] Report, (b) they maintain that the evidence adduced at the Hearing shows the existence of a meritorious defense or counterclaim in this case, (c) they maintain that the evidence adduced at the Hearing shows that there would not be an impermissible level of prejudice to the Plaintiff if the default judgment were vacated and (d) they respectfully request that Judge Carter determine, as a matter of law, that they have satisfied their burden, under FRCP 60(b), of showing the existence of a meritorious defense or counterclaim, and that vacatur of the default judgment would not result in an impermissible level of prejudice to the Plaintiff herein.

(Defs.' Obj. at 3-4.) Defendants also objected to pages 20-29 of the R&R that they "have not shown the existence of a meritorious defense" and to pages 39-43 of the R&R that they have not shown that plaintiff would not be prejudiced if the motion to vacate the default judgment was granted. (Id.)

Plaintiff in its response to defendants' objections contended that except for their objection to the finding on the defense of the implied obligation of good faith and fair dealing, the objections to the remaining lack of meritorious defense and prejudice to plaintiff findings are not sufficiently specific and should be disregarded by the court. (Pl.'s Reply Mem. at 23-24.) In reply defendants repeat in summary their prior arguments. Neither side contests the R&R finding on the question of willfulness.

The court has reviewed: (1) the transcripts of April 3, 2002, in which the dates and contour of the forthcoming hearing before the magistrate judge was agreed to; (2) the May 23 and May 24, 2002 transcripts of the hearing itself; (3) all the exhibits introduced at the hearing, the R&R, the defendants' objections and letter reply to plaintiffs response, and plaintiffs response to defendants' objections.

The depositions of Messers. Foncillas or Trujillo, two lawyers in the Gibson, Dunn & Crutcher firm ("Gibson Dunn") were not read, but their testimony has no relevance to the issues under present consideration since at best it would concern the question of willfulness to which neither side objects or the reason Gibson Dunn refused to represent defendants in this proceeding, matters irrelevant to the issues presently under court consideration. Accordingly, review of the materials set forth above sufficed as to the merits of the counterclaim defenses and the issue of prejudice to meet the de novo review requirements of Rule 72(b), F.R.Civ.P. See United States v. Raddatz, 447 U.S. 667, 674 (1980).

Initial Proceedings in the District Court

Present counsel for defendants, early in December, 2001, advised the court that he now represented defendants, and against the court's advice that the proper response was a motion to vacate the default judgment filed an order to show cause. The court refused to accept that pleading and finally on December 19, 2001, defendants filed a motion to vacate the default judgment.

Defendants contended that the case is within the purview of F.R.Civ.P. 60(b), which provides that a default judgment may be set aside for reason of "mistake, inadvertence, surprise, or excusable neglect." In assessing the existence of excusable neglect, the court must determine: "(1) whether the default was willful; (2) whether the 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. 1996) (quoting Davis v. Musler, 713 F.2d 907, 915 (2d Cir. 1983)).

Defendants contended that their default was not willful but was based on a good faith belief that Gibson Dunn, the firm that had handled their legal affairs in the United States for some 25 years would represent them in this litigation. They asserted that the plaintiffs case should be dismissed on the grounds of forum non conveniens, and in addition alleged the following eight counterclaim defenses as part of their meritorious defense showing: (1) that plaintiff has impermissibly interfered with defendants' property prior to court judgment on the merits of their dispute (Defs.' Mem. at 107-11); (2) that plaintiff has engaged in activity constituting a breach of its implied duty of good faith and fair dealing under the credit and guaranty agreements (id. at 112); (3) that plaintiff has engaged in knowing, intentional and/or tortious interference with defendants' contractual relations, business operations and prospective economic advantage (id. at 113-16); (4) that plaintiff made fraudulent and/or negligent misrepresentations regarding their rights under the credit and guaranty agreements (id. at 116-17); (5)that plaintiff has breached its fiduciary duty required under the credit and guaranty agreements (id. at 118-20); (6) that plaintiffs case is defective in that it violates the conditions for bringing suit set forth in the credit and guaranty agreements (id. at 75); (7) that the default judgment is defective because it contains a declaratory ruling that restricts the assets of a non party to this lawsuit (Defs.' Reply Mem. at 5-9); and (8) that the default judgment is also defective in awarding damages against four defendants who are not guarantors under either the 1994 or 1996 credit agreements and against two defendants who are not guarantors under the 1996 credit agreement (id. at 10).

Defendants were ordered to confine their evidentiary submissions concerning the merits of their defenses to the seven counterclaim defenses specified in the court's opinion. "The purpose of [the hearing before Magistrate Judge Maas] is not to give defendants an opportunity to comb the case law for still more legal defenses to interpose in this case — the time for that endeavor has passed." Id. at *8, n. 16. In summary the court stated "defendants have not, as yet, presented sufficient evidence on the issues of willfulness, meritorious defense, and prejudice to justify vacating the default judgment. What they have done is raise a number of questions that warrant further briefing and factual inquiry. Accordingly, the court refers them to Magistrate Judge Frank Maas for report and recommendation." Id. at *9.

Proceedings Before The Magistrate Judge

Magistrate Judge Maas held a conference on April 3, 2002, with the parties and Mitchell A. Karlan and Richard J. Davis, attorneys from the Gibson Dunn firm. At the conference, the deposition of each of the attorneys of Gibson Dunn whom the parties wanted to depose was agreed to, and agreement was reached as well for the production of all documents from the firm deemed relevant by the parties. The parties agreed to submit supplemental responses to various interrogatories to satisfy the other side that the information given was full and complete.

A forthcoming evidentiary hearing was set at which point Magistrate Judge Maas inquired: "the sum of what I am going to hear is what will be set forth in your supplemental responses to the interrogatory and anything else you may garner from the three depositions that are ...


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