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STATE STREET BANK v. INVERSIONES ERRAZURIZ LIMIT.

United States District Court, Southern District of New York


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

On April 16, 2001, plaintiff filed suit against defendants in this court seeking to recover in excess of 100 million dollars owed pursuant to two credit agreements executed in 1994 and 1996 respectively. (Compl. ¶ 1.) Defendants filed no answer, but for several months the parties engaged in settlement discussions. In late June, 2001, the parties entered a stipulation extending the time to answer, in which defendants acknowledged service of process and the personal jurisdiction of the court. The stipulated extended time to answer passed, but the effort to reach an agreeable solution continued. On September 28, 2001, plaintiff, however, filed a motion for default judgment. The deadline for defendants to file responsive pleading to the motion passed with no word from defendants. On November 30, 2001, the court granted plaintiffs motion and entered default judgment for roughly 140 million dollars against defendants.

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).

In its February 4, 2002 opinion at *4-8, the court dismissed defendants' forum non conveniens claim and the first counterclaim defense, i.e., that plaintiff has impermissibly interfered with defendants' property prior to a court judgment. See State Street Bank and Trust Co. v. Inversiones Errazuriz Limitada, No. 01 Civ. 3201, 2002 WL 181697 (S.D.N.Y. February 4, 2002) (Carter, J.). The issue of willfulness, the seven remaining counterclaim defenses, and the question of the prejudice to plaintiff if the motion to vacate the default judgment was granted were referred to Magistrate Judge Frank Maas for further inquiry. Magistrate Judge Maas was to decide "whether the defendants possess a substantial meritorious defense, or whether the claims made in defendants' papers . . . are just `spurious.'" Id. at *8 (citing Ferraro v. Kuznetz, 131 F.R.D. 414, 420 (S.D.N.Y. 1990) (Patterson, J.)). Referral of these issues to Magistrate Judge Maas was to afford defendants the opportunity to present the compelling evidence they claimed to possess showing that the default was not willful, the lack of prejudice to plaintiff if defendants prevail, and the viability of their seven counterclaim defenses establishing their meritorious defense, thus making it appropriate for the court to vacate the default judgment.

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 to be taken and the Reilly deposition that was already taken, correct?"

Mr. M. Wolk: "I mean, that sounds fair to me and that's what I'll try to do."

The court: "So Mr. Moodhe and I can both be comfortable that when and if there is a hearing, none of your clients will be coming in and testifying about something that either hasn't been testified to previously by Gibson Dunn lawyers or hasn't been set forth in your interrogatory response as to the relevant issue of what promises or commitments were made."

Mr. M. Wolk: "That is fine."

The court: "O.K. I assume that works for you, Mr. Moodhe."

Mr. Moodhe: "Yes, your Honor, it does."

(Tr. at 36-37.)*fn1

A two day evidentiary hearing was held on May 23-24, 2002. At the hearing was Senator Francisco Javier Errazuriz-Talavera, head of the family having a controlling interest in Inversiones Errazuriz Limitada ("Inverraz") as well as in all the other defendants, Conor D. Reilly, a partner in Gibson Dunn, Jorge Sims, chairman of the Board of Inverraz, Francisco Javier Errazuriz-Ovalle, the Senator's son and general manager of Inverraz and Blake T. Franklin, a partner in Gibson Dunn who had handled or overseen the handling of various legal activities for the Senator and his many business operations for roughly 25 years.

Thereafter the parties filed their briefs. After review of the testimony adduced at the hearing and the parties' extensive briefing, Magistrate Judge Maas on August 15, 2002, filed his R&R holding that defendants' motion to vacate the default should be denied.

He made detailed and specific findings of fact and conclusions of law as to each issue submitted to him for inquiry. He concluded, after a thorough review of the facts and circumstances surrounding defendants' 25 year relationship with Gibson Dunn, that defendants' delay in responding to the instant action could not "be characterized as `wilful,'" and that therefore defendants "had met their burden with respect to this first element of the showing necessary to vacate the default judgment." (R&R at 20.)

Magistrate Judge Maas concluded that each of defendants' seven counterclaim defenses submitted to him for further inquiry (breach of obligation of good faith and fair dealing, tortious interference, fraudulent and/or negligent misrepresentations, breach of fiduciary duty under the credit and guaranty agreements, institution of suit violates conditions in the agreements for bringing suit, default judgment defective in restricting assets of a company not involved in the case, and default judgment defective in awarding damages against defendants not guarantors and therefore that defendants had failed to establish a meritorious defense) (R&R at 20-39) lacked merit. Although that alone required that the motion to vacate the default judgment be denied, see, e.g., Sony Corp. v. Elm State Electronics, Inc., 800 F.2d 317 (2d. Cir. 1986); National Union Fire Ins. Co. v. Allard, No. 87 Civ. 5368, 1989 WL 71168, at *1 (S.D.N.Y. 1989) (Stanton, J.), because the issue of prejudice had also been referred to him, he undertook to decide that question as well.

The magistrate judge at defendants' request had, prior to the evidentiary hearing, required plaintiff to detail in an interrogatory answer how it would be prejudiced if the default judgment were to be vacated. Plaintiff identified "a lengthy series of allegedly improper transactions involving Cosayach and its subsidiaries" (R&R at 40) to show that it would be prejudiced by vacatur of the default judgment. (See Defs.' Exh. O.) At the evidentiary hearing Sims had agreed that each of the transactions had occurred after Inverraz had defaulted on its loan payments. (Tr. at 232.) Sims' testimony that the transactions did not violate the credit agreement notwithstanding (id. at 228), Magistrate Judge Maas concluded that each of the post-default transactions violated the terms of the credit agreements (R&R at 40) since he found that Cosayach was a restricted subsidiary and could not be sold while Inverraz was in default, but that defendants "continue to ignore the plain language of their agreements, as well as the negative covenants designed to protect State Street's investment, there obviously is a substantial risk that such impermissible transactions will continue in the future if the default judgment is vacated". (R&R at 43.) He concluded that defendants had not met their burden of showing a lack of prejudice. (Id.)

Defendants' Objections and Plaintiffs Response

Defendants maintain that they have established "at least three meritorious defenses or counterclaims which, if established at trial, would be a complete defense and/or offset to plaintiff's claims: (a) conduct by the Plaintiff which . . . would constitute a breach of Plaintiffs implied obligation of good faith and fair dealing in the performance and/or enforcement of the subject loan and guaranty contracts entered into by the parties [this is a complete defense to Plaintiff's claims], (b) conduct by Plaintiff which . . . would constitute a tortious interference with the Chilean Defendants' contractual relations, business expectancies and prospective economic advantage in Chile [this is a complete, related counterclaim to the Plaintiffs claims] and (c) conduct by the Plaintiff which . . . would constitute a failure to fulfill a required condition precedent to the institution of this lawsuit in this Court [this is a complete defense to Plaintiff's claims]." (Defs.' Obj. at 4.)

The first objection as more fully articulated appears to be a counterclaim defense not heretofore argued before the magistrate judge or the district court to the effect that plaintiff had violated its implied covenant of good faith and fair dealing in seeking to extract from defendants collateral and other economic benefits as the price for its agreeing to approve a deal with SQM pursuant to which defendants would receive $140 million, $87 million of which would go to plaintiff and reduce defendants' indebtedness to plaintiff (Id. at 11-40.)

The second objection is a repetition of their failed argument before the magistrate judge that they had a meritorious counterclaim defense to the effect that plaintiff had been guilty of tortious interference with Inverraz's negotiations for the sale of the nitrate and iodine assets of Cosayach to SQM. The third objection was also a contention rejected by the magistrate judge to the effect that the suit is defective in that plaintiff failed to fulfill a required condition precedent prior to instituting this litigation.

For the substance of these two objections, the court is referred "to their prior submissions" before the district court and the magistrate judge. (Id.) In these prior submissions defendants contend that plaintiff engaged in tortious interference with defendants' attempt to make a deal with SQM for the sale of the assets of Cosayach for $140 million, $87 million of which plaintiff would receive in partial payment of defendants' debt to plaintiff, and that in not allowing that deal to be consummated plaintiff violated its obligation of good faith and fair dealing. The failure to fulfill a prerequisite for institution of the lawsuit is based on a condition in the participation agreement between State Street and the participants for instituting a lawsuit against them, in which defendants were not parties.

In addition, defendants object to pages 20-29 of the R&R holding that they have not established a meritorious counterclaim defense and to pages 39-43 of the R&R that they have not shown a lack of prejudice warranting vacatur of the default judgment. (Id. at 3-4.)

Plaintiff filed a response to defendants' objections to the R&R on October 4, 2002. Plaintiff challenged every argument of defendants, contending that none of the seven counterclaim defenses had merit and that plaintiff would be prejudiced if the default judgment was vacated. (Pl.'s Reply Mem. at 7-14.) Plaintiff relies on the evidentiary hearing before the magistrate judge and New York law, citing Astor Holdings, Inc. v. Roski, No. 01 Civ. 1905, 2002 WL 72936, at *19 (S.D.N.Y. Jan. 17 2002) (Lynch, J.) to support its contention that defendants' tortious interference contention cannot constitute a meritorious defense and should be rejected. (Pl.'s Reply Mem. at 14-17.)

Plaintiff also asserts that defendants, in now arguing that plaintiff violated its contractual duty of good faith and fair dealings in demanding collateral before it would give consent to defendants' concluding negotiations with a third party for the sale of the assets of Cosayach, have stated a new defense not raised previously before the district court or the magistrate judge. They contend that defendants cannot raise anything other than what the district court referred to the magistrate judge, and that in any event the contention lacks merit and should be dismissed. (Id. at 17-21.)

In its final argument, plaintiff contends that defendants' objections are not sufficiently specific to warrant de novo review by the district court, and that absent a finding of clear error the R&R should be adopted as the opinion and judgment of the court. (Id. at 21-24.)

In a reply filed on October 7, 2002, defendants for the most pad reiterate in summary form their original arguments. (See Defs.' Lt. Reply.)

DETERMINATION

In arguing for the first time that plaintiff has violated its implied covenant of good faith and fair dealing in not consenting to defendants consummating a $140 million deal without first receiving new collateral, defendants have rephrased their good faith and fair dealing counterclaim defense into a seemingly hybrid tortious interference violation of the implied covenant of good faith and fair dealing counterclaim defense. This defense could be dismissed summarily since defendants did not raise this as one of their meritorious counterclaim defenses either before the district court or the magistrate judge. As indicated ante, they were specifically limited to fuller exploration of only those counterclaim defenses raised in the district court which had been referred to the magistrate judge for further inquiry pursuant to Rule 55(c), F.R.Civ.P.

Defendants' tortious interference objection does not seem to comply sufficiently with the specifications of Rule 72(b) since filing prior submissions before the district court and the magistrate cannot qualify as the required specific objections to the R&R. Camardo v. General Motors Hourly-Rate Employees Pension Plan, 806 F. Supp. 380, 381-82 (W.D.N.Y. 1992) (stating that it is "improper . . . to attempt to relitigate the entire content of the hearing before the Magistrate Judge by submitting papers to a district court which are nothing more than a rehashing of the same arguments and positions taken in the original papers submitted to the Magistrate Judge"); Barratt v. Joie, No. 96 Civ. 0324, 2002 WL 335014, at *1 (S.D.N.Y. March 4, 2002) (Swain, J.) ("[w]hen a party . . . simply reiterates his original arguments, the Court reviews the Report and Recommendation only for clear error") (citing Camardo, 806 F. Supp. at 382.).

Defendants' objection to pages 29-39 of the R&R to the effect that they have not made out a meritorious defense and/or counterclaim and to pages 39-43 of the R&R to the effect that they have not shown that plaintiff would be subject to an impermissible level of prejudice (Defs.' Obj. at 3-4) constitute generalized objections which do not require de novo review. Greene v. WCI Holdings Corp., 956 F. Supp. 509, 517 (S.D.N.Y 1997) (Edelstein, J.); see also Vargas v. Keane, No. 93 Civ. 7852, 1994 WL 693885, at *1 (S.D.N.Y. Dec. 12, 1994) (Mukasey, J.).

However, the court has reviewed this matter de novo because dispositions on procedural grounds are generally not favored, and in view of the sum of money at stake, a study of the record and the law by both the magistrate judge and the court should provide double assurance that the final disposition is a fair one.

The tortious interference defense, for example, as originally stated, was that plaintiff had caused Inverraz to fail in negotiating with SQM for the sale of the assets of Cosayach for $140 million by giving SQM notice of this litigation and requiring it not to come to an agreement in the negotiations without their consent.

The evidence shows, however, that SQM was advised of litigation against Inverraz, filed on March 26, 2001, in New York state court by Bank of New York's ("Bony") Chilean lawyer shortly thereafter. The state court litigation is totally unrelated to this case. (Tr. at 50, 221; Pl. Ext 1.) After learning on March 26, 2001, of the Bony litigation, at the next meeting of SQM and Inverraz SQM announced that it would not conclude the Cosayach negotiations without the "written permission of those who had started the lawsuit." (Id. at 189-90, 223.) This case was not instituted until April 16, 2001, and a copy of the complaint was subsequently forwarded to SQM.

In ¶¶ 42-44 of the complaint, plaintiff alleges that the proposed sale of the assets of Cosayach to SQM would violate both the 1994 and 1996 credit agreements because under the terms of those agreements, while in default in payments of the loan, Inverraz could not sell its own assets or those of certain of its subsidiaries termed "restricted subsidiaries." By letters of April 24 and 26, 2001, Inverraz promised plaintiffs counsel that it would not sell any of Cosayach's assets to SQM without plaintiffs prior consent. (Tr. at 56; Pl. Exh. 2.) Negotiations among defendants SQM and the lenders continued, but on October 5, 2001, SQM advised Inverraz that it would not close the deal. (Tr. at 36, 67; Pl. Ext. 6.) In its letter terminating further negotiations SQM refers to both "internal and external" difficulties as cause for its action. (Pl. Exh. 6.)

Under New York law, which is controlling, a viable tortious interference with a prospective contract claim must establish a business relation with a third party, defendants' interference with that relationship, which interference was for the sole purpose of harm to plaintiff or that improper, dishonest, or unfair means were used, and that injury to the business relationship occurred. See Astor Holdings, Inc., 2002 WL 72936, at *19 (citing Nadel v. Play-by-Play Toys & Novelties Inc., 208 F.3d 368, 382 (2d. Cir. 2000) (citations omitted)).

At the time of the SQM negotiations Cosayach was a Restricted Subsidiary, defined to include any Chilean company of which Inverraz directly or indirectly owned 75 percent of the voting stock or held a 75 percent financial interest. (Defs.' Exh. G and K, § 10B). Jorge Sims, chair of the Inverraz Board, conceded that Cosayach was a restricted subsidiary (Tr. at 202, 234), and Inverraz was unquestionably in default at the time of the attempted sale. (Id. at 232.) Plaintiff had every right to insist that Cosayach assets not be sold without its permission, and its insistence that defendants adhere to their bargain cannot support a tortious interference claim, since it was an understandable attempt by plaintiff to protect its considerable financial investment.

Defendants' allegation that SQM chose not to proceed without the consent of the American lenders because, after receipt of threats from Bony and plaintiff, it did not want to jeopardize its relationships with American financial institutions (id. at 57), and the Senator's testimony that the deal fell through because Bony and plaintiff unreasonably withheld consent (id. at 66) is belied by the record. Moreover, even if it were true, plaintiff could not be guilty of tortious interference with the contract negotiations because under the circumstances such action would have been motivated by protection of plaintiff, not harm to Inverraz.

Defendants' new hybrid "implied covenant of good faith and fair dealing and tortious interference" claim is without merit as well. This claim, a variation of the one just discussed, seems to be that plaintiff acted with a bad faith purpose because it sought as a price for giving consent to the sale of Cosayach's assets to SQM for $140 million, $87 million of which would be applied to the $140 million owed plaintiff to extract from Inverraz additional collateral and other economic benefits to which it was not entitled, thereby violating its implied covenant of good faith and fair dealing. By withholding its consent under such circumstances, plaintiff is alleged to have "frustrated the Chilean defendants' reasonable contractual expectations that: (a) their assets could be sold to pay their debt to the plaintiff and (b) the plaintiff would facilitate, not prevent, the sale of assets for this purpose." (Defs.' Obj. at 11, emphasis and caps removed). Thus, the argument concludes plaintiffs bad faith refusal deprived defendants of $140 million to pay plaintiff and other senior creditors, causing damages which constitute a complete defense to plaintiffs claims. (14. at 12.) Defendants cite a long series of New York and federal case law, Restatement of Contracts, other treatises and a Harvard Law Review article (see id. at 19-40), discussing the implied covenant of good faith and fair dealing. Unfortunately, the cited legal authority is totally inapposite.

The implied covenant of good faith and fair dealing applies to the performance and execution of an existing contract. Neither party may act to deny the other the fruits of the contract. Bank of New York v. Sasson, 786 F. Supp. 349, 353 (S.D.N.Y. 1992) (Mukasey, J.). This implied covenant does not require a party to act against his own self interest even though the other party's interest may be incidentally adversely affected by the party's action. M/A-Coin Sec Corp. v. Galesi, 904 F.2d 134, 136 (2d Cir. 1990) (per curiam); Van Valkenburgh, Nooger & Neville, Inc. v. Hayden Publ'g Co., 30 N.Y.2d 34, 46 (1972). The plaintiff had the right to withhold its consent to the sale of Cosayach's assets because under the terms of the agreements it was a restricted subsidiary which Inverraz could not sell while in default on payment of the loan. As we have seen, Cosayach was a restricted subsidiary and Inverraz was in default.

There was no explicit language in the loan agreements or guaranty that the parties may not unreasonably withhold its consent, leaving it free to withhold consent for any reason and "no implied obligation to act in good faith exists to limit the choice." Teachers Ins. and Annuity Ass'n of Am. v. Wometco Enters. of Am., 833 F. Supp. 344, 349 (S.D.N.Y. 1993) (Sprizzo, J.) (holding that a party's insistence that, before it will consent to refinancing proposal, the other party must agree to new terms was not a breach of good faith). Nor does the covenant apply to settlement negotiations, extensions, or modifications of the existing contract. See Sasson, 786 F. Supp. at 354; Village on Canon v. Banker's Trust Co., 920 F. Supp. 520, 535 (S.D.N.Y. 1996) (Koeltl, J.). Thus, this counterclaim defense cannot survive.

Defendants seem confused as to the status of the case before the magistrate judge. They place great reliance on Davis v. Musler, 713 F.2d 907, 916 (2d Cir. 1983), Keegel v. Key West & Caribbean Trading Co., 627 F.2d 372, 374 (D.C. Cir. 1980) and cognate cases in which further fact finding was needed before the motion for default judgment could be upheld. In Keegel, the court indeed stated that defendants' allegations as to a meritorious defense were sufficient if they contained "even a hint of a suggestion" which if proved at trial would be a complete defense. Unfortunately for defendants this case has moved beyond the status of Davis, Keegel and the others relied on.

In none of those cases had there been any fact finding. Defendants had not been permitted to present any evidentiary proof in support of their contentions that they had a meritorious defense. Indeed, in Davis, the Second Circuit faulted the district judge for not using Rule 55(c) to allow further exploration of the meritorious defense claim. Defendants' argument would have been on point if the motion to vacate the default judgment had been denied while the matter was initially before the district court without defendants being given the opportunity to provide some evidence that they had a meritorious defense. The referral to Magistrate Judge Maas was for the purpose of allowing defendants to provide evidence that the default had not been willful, that they had a meritorious defense, and a lack of prejudice to plaintiff if the default judgment was not vacated.

Keegel's "hint of a suggestion of a meritorious defense" is no longer applicable. Defendants no longer write on a blank page. The page is filled with testimony of the principal defendants concerning their activities relevant to the loan agreements and guaranties undertaken. Defendants cannot now articulate a meritorious defense or even as a "hint of a suggestion" of such when the evidentiary record makes clear what is articulated or hinted has no ment.

Although defendants must supply more than a hint of a suggestion that a meritorious defense exists, even at this stage of the proceedings they are not required to make a showing of such a defense with the finality necessary in a trial on the merits. Davis v. Musler, 713 F.2d at 916 ("a defendant seeking to vacate a default judgment need not conclusively establish the validity of the defense(s) asserted") (internal citations omitted). When, as here, defendants have been given the opportunity to show that a viable defense exists, they are required to provide some credible indication that if the default judgment is vacated, defendants will be able at trial to establish with finality a meritorious defense which has a reasonable chance of carrying the day.

This the defendants have been unable to do. They keep repeating or rephrasing the claims asserted at the outset before the district court and reiterated before the magistrate judge. The assertions are now empty cant either without support in the record or at war with the evidence thus far adduced. Since defendants have the burden of proof, their failure, when given the opportunity, to establish even the rudimentary elements of a meritorious defense is fatal.

Defendants claim they have not had the opportunity to secure evidence from plaintiffs. Yet, when on April 3, 2002, preparation for the evidentiary hearing was being discussed, defendants requested only some supplemental responses from plaintiff to their interrogatories which they stated would suffice. At the April 3 conference it was clear that the magistrate judge would have ordered plaintiff to provide any evidence reasonably sought. A claim now that they did not have the opportunity to secure needed evidence to flesh out a meritorious defense will not suffice. Moreover, the court's instructions in referring the case to Magistrate Judge Maas are clear: "the factual record regarding defendants' seven remaining counterclaims is simply too incomplete for the court to conclude one way or the other whether they constitute meritorious defenses. . . . After defendants have been given an opportunity to flesh out the factual foundation for each counterclaim, Magistrate Judge Maas will decide" the nature of the defense. State Street Bank and Trust Co., 2002 WL 181697, at *8. There could be no misunderstanding from that language that the purpose of the reference to the magistrate judge was to provide defendants with a forum before which they could show a sufficient evidentiary basis for setting this matter down for trial on the merits. . . . It now seems evident that defendants have failed to present proof even minimally sufficient to show the existence of a meritorious defense because they have no meritorious defense. The Senator, his son, and Sims insist on misstating the terms of the agreements, and defendants' counsel repeats these misstatements in asserting that valid counterclaims and defenses exist, but the constant repetition of untruths cannot remove their falsity.

As to the other counterclaim defenses: (1) fraudulent and negligent misrepresentations, (2) good faith and fair dealing, (3) fiduciary duty owed under the Credit and Guaranty Agreements, (4) lack of standing by plaintiff to institute this litigation without fulfilling condition precedent, (5) improper restriction in default judgment, (6) improper guarantors as defendants and (7) the issue of prejudice to plaintiff, Magistrate Judge Maas has carefully and thoroughly measured all of these issues against the evidence adduced at the May 23-24 hearing before him, made findings of fact and conclusions of law and, having considered the applicable legal principles, concluded in each instance that defendants had not met their burden of stating a meritorious counterclaim defense and that plaintiff would be subject to an impermissible level of prejudice if the default judgment was vacated. The court finds his determinations to be correct both on the facts and the law.

For the reasons articulated in the R&R, the court incorporates the findings of fact and conclusions of law of the magistrate judge on those issues in the opinion and judgment of the court. The court also adopts the uncontested R&R of the magistrate judge that the default was not willful.

In sum, it is the opinion and judgment of the court that while the default was not willful, defendants have failed to establish a meritorious defense or that plaintiff would not be prejudiced if the default judgment is vacated.

Accordingly, defendants' motion to vacate the default judgment is denied.

IT IS SO ORDERED


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