The opinion of the court was delivered by: JOHN KOELTL, District Judge
The plaintiffs move by order to show cause for the entry of a default
judgment against defendants Inepar Administracao e Participates S.A.,
Inepar Industria e Construcoes S.A., Sade Vigesa Industrial e Servicos
S.A., Sade Vigesa Corporation of America, Sade Vigesa (Chile) S.A., and
Internacional de Engenharia S.A. (collectively, "the Inepar parties") in
an amount in excess of $400,000,000 because those parties failed to
appear by new counsel after being instructed by the Court to do so.
The record reflects that on July 11, 2003, at a conference in open
court, the Court granted the application of Orrick Herrington &
Sutcliffe to withdraw as counsel for the Inepar parties, who were then
directed to appear by new counsel within thirty days. The Court also
stated that "I'll just put in the order that if the Inepar parties do not
appear by new counsel by
August 11, 2003, any party may seek a default judgment against the
Inepar parties." (July 11, 2003 Tr. at 13-14.) The Court did not in fact
enter a written order as intended. Nevertheless, the Inepar parties did
not comply with the explicit direction of the Court at the July 11, 2003
hearing and, after August 11, 2003, were in default and were not
appearing by any counsel. Corporations are not authorized to appear other
than by counsel, and after August 11, 2003 the Inepar parties were not
represented by counsel and were in violation of the Court's Order to
appear by new counsel. After that point, the plaintiffs could have moved
for a default judgment. The plaintiffs, however, did not move for a
default judgment until about four months later when, on about December
19, 2003, they sought a default judgment against the Inepar parties.
The Inepar parties oppose the motion for a default judgment and
represent that they are prepared to proceed to defend the case. An
opposition to a motion for default judgment is evaluated under the same
standards that apply to a Rule 55(c) motion to set aside an entry of
default. See Fed.R.Civ.P. 55(c); Commercial Bank of
Kuwait v. Rafidain Bank, 15 F.3d 238, 243 (2d Cir. 1994); Meehan v.
Snow, 652 F.2d 274, 276 (2d Cir. 1981); Citadel Mgmt., Inc. v.
Telesis Trust, Inc., 123 F. Supp.2d 133, 142 (S.D.N.Y. 2000);
see generally Westvaco. Corp. v.
Viva Magnetics Ltd., No. 00 Civ. 9399, 2002 WL
1683454, at *2 (S.D.N.Y. July 24, 2002) (discussing principles applied
when defendant opposes motion for default judgment). The text of
Rule 55(c) allows an entry of default to be set aside for "good cause," and
courts evaluate whether "good cause" exists by considering: (1) whether
the default was willful; (2) whether the plaintiffs would be prejudiced
by the denial of the motion for default judgment; and (3) whether there
are any meritorious defenses to plaintiff's claims. See Commercial
Bank of Kuwait, 15 F.3d at 243; Meehan, 652 F.2d at 277;
Fashion Fragrance & Cosmetics v. Croddick, No. 02 Civ.
6294, 2003 WL 1824638, at *2-*3 (S.D.N.Y. Apr. 8, 2003) (applying three
factors in denying motion for default judgment).
The determination of whether to grant a motion for default judgment is
within the sound discretion of the district court. See Shah v. N.Y.
Dep't of Civil Serv., 168 F.3d 610, 615 (2d Cir. 1999); Enron
Oil Corp. v. Diakuhara, 10 F.3d 90, 95 (2d Cir. 1993); Westvaco
Corp., 2002 WL 1683454, at *2. However, "[i]t is well established
that default judgments are disfavored. A clear preference exists for
cases to be adjudicated on the merits." Pecarsky v. Galaxiworld.com
Ltd., 249 F.3d 167, 174 (2d Cir. 2001); see also Meehan,
652 F.2d at 277. Default judgments are thus "reserved for rare occasions"
and any "doubt[s] should be resolved in favor of the defaulting party."
Enron Oil Corp., 10 F.3d at 96; see also
Meehan, 652 F.2d at 277; Westvaco. Corp., 2002 WL 1683454,
at *2; Citadel Mgmt., 123 F. Supp.2d at 142.
In this case, it is unclear whether the failure to appear by new
counsel was willful. There is no question that the Court ordered the
Inepar parties to appear by new counsel and they did not. It is also
clear that when the Court issued its oral order on the record, a
representative of the Inepar parties was present in Court. Nevertheless,
the transcript does reflect that the Court did contemplate a written
order that was not entered. Cf. Westvaco. Corp., 2002 WL
1683454, at *2 (noting that doubts are to be resolved in favor of
defaulting party, and thus not characterizing default as "willful" where
facts were ambiguous as to reasonableness of defendants' belief that it
did not need to answer complaint).
In any event, this is not a case where the plaintiffs have demonstrated
any prejudice from the delay of about six months that it has taken the
Inepar parties to appear by new counsel. The claims between the
plaintiffs and another group of defendants-"the IVI parties" have
proceeded before Magistrate Judge Katz and were severed from the
plaintiffs' claims against the Inepar parties. There is no showing that
the claims against the Inepar parties would have proceeded more
expeditiously if they had appeared with new counsel earlier. If the
were in fact prejudiced by the delay by the Inepar parties in
obtaining new counsel, they should have moved for a default judgment
earlier. Satisfied to let those claims rest until the litigation with the
IVI parties was concluded, the plaintiffs cannot now claim that they were
harmed by the delay.
The Inepar parties claim that they have valid defenses on the merits
while the plaintiffs deny that is true. It is plain that on the brief
descriptions in the papers the Court could not decide whether there is in
fact any merit to any defenses, but a motion for a default judgment is
not the place to decide the ultimate merits of any defenses. It is clear
that given the preference for cases to be decided on the merits, the
substantial amount of the default judgment sought, and the expressed
willingness of the Inepar parties to have this case decided on the
merits, a default judgment should not be entered. See, e.g., Enron
Oil Corp., 10 F.3d at 96; Meehan, 652 F.2d at 277. If the
merits are as clear as the plaintiffs say, they can proceed with a motion
for summary judgment.
However, given the failure of the Inepar parties to appear by new
counsel and comply with the order of the Court, the denial of the motion
for a default judgment should be conditioned on the Inepar parties'
payment of the plaintiffs' costs and attorneys' fees in bringing the
current motion. See RLS Assocs. v. United Bank of Kuwait PLC,
No. 01 Civ. 1290, 2002
WL 122927, at *8 (S.D.N.Y. Jan. 29, 2002) (granting defendant's
Rule 55(c) motion to set aside entry of default, but awarding plaintiff
fees and costs because defendant was negligent in failing to retain
counsel and imposed upon plaintiff "the unnecessary burden of applying
for default judgment"); see also Powerserve Int'l, Inc. v.
Lavi, 239 F.3d 508, 515 (2d Cir. 2001) ("In determining whether to
exercise its discretion to set aside a default, a district court has
inherent power to impose a reasonable condition on the vacatur in order
to avoid undue prejudice to the opposing party." (citation omitted)).
Therefore, the motion for a default judgment is denied. The Inepar
parties are liable for the costs and attorneys' fees of the plaintiffs in
brining the present motion. The matter is referred to Magistrate Judge
Katz for further proceedings including the determination of the costs and
attorneys' fees of this motion and all further pretrial proceedings. The
parties should advise the Court and Magistrate Judge Katz if they consent
to a referral to Magistrate Judge Katz for all purposes.
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