Opinion
02 Civ. 4307 (CSH)
May 28, 2004
Memorandum Opinion and Order
The above captioned case was originally assigned to the calendar of the late Judge Schwartz. Defendant moved by Order to Show Cause to vacate the default judgment entered against it by Judge Schwartz on December 11, 2002 for failure to file an answer. The motion came before me as the Judge sitting in Part I on January 12, 2004.
I issued an Order to Show Cause on defendant's motion on January 12, 2004 and scheduled its return for January 22, 2004. At the request of the parties, that date was moved to February 11, 2004. This extension provided time for the parties to file and serve responsive and reply briefs on the motion. On February 11, 2004, I heard oral argument by counsel for the parties. At the end of the hearing, I reserved decision. Having considered those arguments and the written submissions filed by the parties, and for the reasons that follow, I now vacate the default judgment.
I. BACKGROUND
A. The PartiesAt the times pertinent to this litigation, Roll Center, Inc., an Indiana corporation, engaged in the preparation and manufacture of speciality sheet metal. Roll Center was a wholly owned subsidiary of TransTec Group, Inc., a Michigan corporation, which was in turn a wholly owned subsidiary of TransTec PLC, a United Kingdom corporation (the "TransTec Companies"). In April 2002, Roll Center was administratively dissolved by the Indiana authorities for failure to pay corporate taxes and fees. While Roll Center is now known as "TransTec (RC) Inc.," I will refer to that company as "Roll Center" in this Opinion.
The plaintiff in this action is RCI HV, Inc ("RCI"), as successor-in-interest to H-V Roll Center, Inc. (sometimes collectively "HV"), which in 1998 purchased certain assets from Roll Center. The circumstances of that transaction and its aftermath are set forth in Part I. B., infra, For purposes of identifying the parties to the case, it is sufficient to say that an escrow account was established pursuant to the purchase agreement, funded by Roll Center as seller of the equipment in question, which was intended to secure any claims for indemnification in favor of HV as buyer in accordance with the provisions of the purchase agreement. The United States Trust Company of New York ("US Trust") was named as the escrow agent.
HV brought this action to obtain the funds held in escrow. Its original complaint named Roll Center and The Bank of America as defendants, the latter under the mistaken impression that The Bank of America had succeeded US Trust as escrow agent. In point of fact, The Bank of New York had succeeded US Trust in that capacity. Accordingly, plaintiff filed an amended complaint which eliminated The Bank of America as the second party defendant and named The Bank of New York in its place. The amended complaint repeats HV's allegations against Roll Center.
B. The Transactions in Suit
John Somers is named as representative of Roll Center and TransTec Group in a 1998 Asset Purchase Agreement for the sale of assets owned by Roll Center to plaintiff's predecessor in interest. James Jorgensen of the law firm of Hoeppner, Wagner Evans was counsel for the TransTec Companies in connection with that sale.
During much of the time pertinent to this motion, TransTec PLC was in receivership in the United Kingdom pursuant to a mortgage debenture not related to this case. The receivers, all partners of the accounting firm of Arthur Andersen, were John Talbot, Murdoch McKillog, and David Duggins. The United States representatives of these receivers were James Shinehouse and Wanda Underkoffler. Susan Moore of the law firm of Denton Wilde Sapte, whose offices are in London, England, was counsel for the receivers. James Plemmons of Dickinson Wright PLLC was counsel for TransTec PLC.
H-V Roll Center ("H-V"), plaintiff' s predecessor in interest, was the corporate purchaser of assets belonging to Roll Center, Inc. H-V was a subsidiary of Precision Industrial Corporation. Genesis Worldwide I, Inc. ("Genesis I') subsequently purchased H-V. Genesis I filed for bankruptcy, after which time Genesis Worldwide II, Inc. ("Genesis II") purchased H-V. RCI HV, plaintiff in this case, is a subsidiary of Genesis n and is the named successor-in-interest for indemnification claims derived from the 1998 Asset Purchase Agreement.
During periods of time critical to this litigation, Karl Frydryk was an officer of H-V; Walter Stasik was President and CEO of Genesis II; Bruce Marino was Vice President and General Counsel of Genesis II; and Elliot Davis of the law firm of Kirkpatrick and Lockhart LLP was counsel for RCIHV.
According to the submissions of the parties and documents contained in the court file, the facts surrounding this dispute are as follows. On or about July 24, 1998 plaintiff "H-V Roll Center, Inc., a Pennsylvania corporation," entered into an Asset Purchase Agreement (the "Agreement") with "TransTec PLC, a public limited company incorporated under the laws of England," "TransTec Group, Inc., a Michigan corporation and wholly-owned subsidiary of TransTec," and "Roll Center, Inc., an Indiana corporation and wholly-owned subsidiary "of TransTec Group. Agreement at 1. This Agreement was for the purchase of property and assets owned by Roll Center.
As part of the Agreement, "the Companies," referring to TransTec PLC, TransTec Group, and Roll Center, "jointly and severally [agreed to] indemnify, defend and hold harmless" the purchasing parties for a number of different potential commercial and environmental liabilities. Agreement at 30. In support of this indemnification, the Agreement provided that $250,000, or approximately one-third, of the purchase price for Roll Center's assets would be paid to an escrow fund, later to be disbursed depending upon the resolution of any potential claims for indemnification. According to the Escrow Agreement, which was entered into by Roll Center and H-V only, funds from the Escrow Account could only be disbursed pursuant to an agreement signed by both Roll Center and H-V or by a court order. United States Trust Company of New York ("US Trust") was the escrow agent.
On January 20, 2000 Karl Frydryk, writing on behalf of H-V Roll Center, provided written notice to all three TransTec Companies and to James L. Jorgensen, counsel to the TransTec Companies in connection with the Assent Purchase Agreement, of two potential litigation claims for which H-V would seek indemnification. One related to the sale of a "Sarclad Machine" (the "NEO" claim). The other was for liability derived from alleged environmental harms (the "Great Lakes" claim).
On July 26, 2000 the British law firm of Denton Wilde Sapte, counsel for TransTec PLC's receivers, wrote to Frydryk and representatives of all three TransTec Companies. In this letter Denton Wilde Sapte referred to the claims set forth in the January 20, 2000 letter, but took the positions that the NEO claim had been resolved and that the Great Lakes claim would not be pressed. Accordingly, counsel requested that H-V and Roll Center take appropriate steps to arrange for the release of the escrow funds and keep TransTec Group and TransTec PLC apprised of these efforts.
On July 27, 2000 Frydryk wrote to Susan Moore at Denton Wilde Sapte. In this letter Frydryk notified Moore that Genesis, through H-V, had outstanding claims for indemnification and, therefore, could not agree to release the escrow funds.
On August 25, 2000 Bruce Martino, Vice President and General Counsel of Genesis World Wide, then sole owner of H-V, wrote to all three TransTec Companies (i.e. Roll Center in Ann Arbor Michigan, TransTec Group in Ann Arbor Michigan, and TransTec PLC in Birmingham England), James L. Jorgensen (who represented the TransTec Companies in connection with the sale of Roll Center's assets), and Susan Moore at Denton Wilde Sapte, providing further details relating to the NEO claim and demanding payment from the escrow account for alleged damages arising from this claim.
On September 19, 2000, Martino addressed a second letter to the same parties, again seeking payment from the escrow account for damages relating to the NEO claim.
On February 25, 2002 Annette Kos, a representative of the Bank of New York, wrote a letter addressed to Wanda Underkoffler and to Bruce Martino notifying them that the Bank of New York had replaced US Trust as escrow agent, and that the escrow account and the funds therein had been transferred to the control and possession of The Bank of New York. Kos had previously been advised by Elliot Davis, representing plaintiff, in a letter dated February 19, 2002 and copied to James Shinehouse, that there were still claims outstanding on the escrow funds. Kos's February 25 letter provided the parties with account numbers and reaffirmed the requirement that a party agreement must precede any disbursement of funds from the account.
On March 1, 2002 Walter Stasik, President and CEO of Genesis, wrote to James Shinehouse, who Stasik accurately addressed as the representative in the United States of TransTec PLC. In this letter, Stasik reminded Shinehouse of the outstanding indemnity claims, which Stasik asserted amounted to $278,620, including interest. Stasik advised Shinehouse that if the enclosed "Joint Instructions to the Escrow Agent" was not signed and executed, Genesis would take legal action to recover the escrow funds. The text of Stasik's letter made it clear that he understood that Roll Center's name was now TransTec (RC) Inc.
On March 5, 2002 Dickinson Wright PLLC, counsel in the United States for TransTec PLC, wrote to US Trust (the former escrow agent) and requested that the escrow funds be turned over to the receivers of TransTec, then in receivership in the United Kingdom.
Dickinson Wright's letter dated March 5, 2002, signed by James Plemmons, a member of the firm, clearly came to the attention of plaintiff. By letter dated April 12, 2002, Eliot Davis of Kirkpatrick Lockhart LLP, counsel for HV, responded to Plemmons. Davis reasserted HV's indemnity claims, as described in Stasik's letter dated March 1, 2002, and went on to say:
I am also enclosing a joint instruction to the escrow agent for execution on behalf of TransTec. Kindly have the escrow instructions executed on behalf of TransTec and return them to me. I will make arrangements on behalf of RCI and delivery of the instructions to the escrow agent. As stated in the [March 1, 2002] letter, RCI will commence legal action to cause disbursement of the fund if we do not receive a prompt response.
The corporate entity referred to as "RCI" in this letter are the corporate entities collectively referred to as "HV" in this Opinion.
The "TransTec" Davis referred to in this letter was Roll Center. That is apparent because the proposed escrow instructions Stasik forwarded with his March 1, 2002 letter, forwarded again by Davis with the April 22, 2002 letter, contained lines for signature by "TransTec (RC) Inc., formerly known as Roll Center, Inc.," and "RCI HV, Inc., successor-in-interest to H-V Roll Center, Inc."
C. The Filing of Suit
On June 7, 2002, plaintiff filed its original complaint in this action, seeking a court order directing the payment of the escrow funds to it. The amended complaint, identifying The Bank of New York instead of The Bank of America as successor escrow agent from US Trust, was filed on June 13, 2002. The only defendant plaintiff charged with wrongdoing in both pleadings was "TransTec (RC) Inc., f/k/a Roll Center, Inc."
In August 2002 plaintiff filed a motion for an order permitting the alternative service of process upon Roll Center by serving the Secretary of State of Indiana, the state of Roll Center's incorporation. That motion was supported by an affidavit sworn to on August 23, 2002 by James E. Hannon, Jr., an associate with the firm of Kirkpatrick Lockhart. Hannon stated, inter alia, that all the firm's efforts "to locate [Roll Center] or any appropriate representative upon whom to effect service of process" had failed. August 23, 2002 affidavit at ¶ 8. On August 27, 2002, Judge Schwartz signed an order permitting plaintiff to effect service upon Roll Center by serving the Secretary of State of Indiana. Plaintiff did so on September 4, 2002.
D. The Entry of a Default Judgment
Roll Center did not answer the complaint. On October 31, 2002, plaintiff moved for a default judgment against Roll Center. In support of this Motion, Hannon submitted an affidavit dated October 30, 2002 (the "October 30, 2002 Affidavit"). There, Hannon recounted plaintiff' s efforts to provide notice to defendant, including service made upon the Indiana Secretary of State. In addition, Hannon reported that he "made a diligent search, including telephone and internet searches, to locate an address for TransTec or any of its officers, directors or agents upon whom to serve the Amended Complaint. All of these efforts have failed." October 30, 2002 Affidavit at 3. Counsel's reference to "TransTec" reflects the fact that Roll Center had changed it's name to "TransTec (RC) Inc."
Judge Schwartz signed an Order, entered on 17, 2002, granting the motion for default judgment and ordering the custodian of the Escrow Account to release its contents to plaintiff. Plaintiff subsequently used this Order to secure disbursement to itself of all funds in the Escrow Account. When Roll Center learned what had occurred, thirteen months after the default judgment was entered, it filed the present motion to vacate the default judgment, relying upon Rules 55(c) and 60(b), Fed.R.Civ.P.
II. DISCUSSION
A. General PrinciplesA party to litigation who, having been lawfully served with a pleading seeking a judgment for affirmative relief against him, fails to appear in the action or otherwise defend is vulnerable to being defaulted. The taking of a default is governed by Rule 55, Fed.R.Civ.P. Rule 55(a) provides that the clerk of a district court "shall enter the party's default" when it is made to appear that the party "has failed to plead or otherwise defend as provided by these rules . . ." Having entered the default, the clerk may enter a judgment when the claim is for a sum certain, if furnished with an affidavit of the amount due, and provided that defendant has been defaulted for failure to appear. Rule 55(b)(1). In any other case, application must be made to the court for a default judgment; and a defendant who has appeared is entitled to three days' written notice prior to the hearing on such application. Rule 55(b)(2).
A defaulted party may apply to be relieved of its default. The governing Rules are 55(c) and 60(b). Where the clerk has entered the default under Rule 55(a), Rule 55(c) provides that the court may set aside the entry "for good cause shown." If a judgment by default has been entered, the court may set it aside "in accordance with Rule 60(b)." Id. See, e.g., Enron Oil Corp. v. Diakuhara, 10 F.3d 90, 95 (2d Cir. 1993) ("A party may move pursuant to Rule 55(c) to set aside the entry of default for 'good cause' or to set aside the judgment in accordance with Rule 60(b).").
These provisions for relief are important because the law does not favor resolution of disputes by default, preferring instead that they be decided on the merits. In Enron, 10 F.3d at 96, the Second Circuit stated generally:
Default procedures, of course, provide a useful remedy when a litigant is confronted by an obstructionist adversary. Under such circumstances those procedural rules play a constructive role in maintaining the orderly and efficient administration of justice. Yet, because defaults are generally disfavored and are reserved for rare occasions, when doubt exists as to whether a default should be granted or vacated, the doubt should be resolved in favor of the defaulting party. In other words, "good cause" and the criteria of the Rule 60(b) set aside should be construed generously.
(citations omitted).
Rule 55(c) does not define the term "good cause"; nor does Rule 60(b) describe the strength of the showing a movant must make to bring itself within one of the Rule's several grounds for obtaining relief from a judgment. But Second Circuit case law furnishes additional guidance. Again, it is useful to quote Enron, 10 F.3d at 96, at some length:
[W]e have established three criteria that must be assessed in order to decide whether to relieve a party from default or from a default judgment. These widely accepted factors are: (1) whether the default was willful; (2) whether setting aside the default would prejudice the adversary; and (3) whether a meritorious defense is presented. Other relevant equitable factors may also be considered, for instance, whether the failure to follow a rule of procedure was a mistake and whether the entry of default would bring about a harsh or unfair result. Although the factors examined in deciding whether to set aside a default or a default judgment are the same, courts apply the factors more rigorously in the case of a default judgment, because the concepts of finality and litigation repose are more deeply implicated in the latter action.
(citations omitted).
B. Application of these Principles to this Case
The principal foundation for defendant's motion is the claim that plaintiff misled the Court by representing that it could not locate plaintiff and affect service of process in the normal manner. Relying on this representation, defendant argues, Judge Schwartz approved alternative service in the form of service upon the Indiana Secretary of State. Defendant claims that this alternative form of service was not reasonably calculated to provide notice to defendant that suit had been filed and that, because no notice was given, defendant was denied the opportunity to respond. Defendant argues that the default judgment should be vacated because any inattention on its part was inadvertent, plaintiff achieved the default by fraud and misrepresentation, the Court did not have personal jurisdiction over defendant, the case presents extraordinary circumstances, and because the default will cause defendant to suffer extreme hardship.
Plaintiff' s response comes in two waves. First, plaintiff points out that defendant's motions under Rules 60(b)(1) and 60(b)(3) are time-barred, the motion having been filed thirteen months after the entry of default judgment. Though the time limitation of twelve months set forth in Rule 60(b) does not explicitly cover claims under 60(b)(6), plaintiff correctly cites Grabois v. Dura Erect Corp., 981 F. Supp. 295, 298 (S.D.N.Y., 1997) for the proposition that a party moving under Rule 60(b) cannot seek relief under 60(b)(6) to avoid the strict time limitation when relief could be sought under other subsections of Rule 60(b). Since, in this circumstance, "mistake," "inadvertence," and "misrepresentation" lie at the heart of defendant's motion and no other grounds for relief have been brought forward, plaintiff correctly argues that Rule 60(b)(6) cannot provide defendant with either independent relief or a way to circumvent the one-year time limit imposed by Rule 60(b).
Second, plaintiff asserts that it abided by the strict notice requirements of Rule 4 and followed the guidance of the Court in pursuing alternative service. Having done what was required to affect personal service, plaintiff asserts that the judgment cannot be voided under Rule 60(b)(4) simply because defendant did not receive this notice. Plaintiff argues that its position in this regard is made stronger by the fact that notice was ineffective due exclusively to defendant's own inattention to its affairs. Plaintiff further asserts that, since TransTec Group and TransTec PLC were not named defendants and were not named as parties to the escrow agreement, plaintiff was not obliged to serve either of these parties.
In reply, defendant again contends that plaintiff' s conduct in this case, including its choice to name only Roll Center as a defendant, has been calculated to achieve a default and to prevent consideration of the indemnification claims on the merits. Defendant, relying on the text of the Asset Purchase Agreement, argues that plaintiff had an obligation to serve or otherwise notify TransTec Group and TransTec PLC that it was pursuing the escrow fluids through a civil action. Given this, defendant argues that plaintiff' s efforts to affect service on Roll Center were neither in good faith nor calculated to provide effective notice. Defendant also points out that the one-year time limitation set forth in Rule 60(b) does not affect motions under Rules 60(b)(4) and 60(b)(6).
It is clear from the record that the present suit was precipitated by the fact that Genesis II and the TransTec Companies could not reach an agreement as to the proper disbursement of funds held in the Escrow Account. The correspondence between the parties presented to this Court, but not to Judge Schwartz, also supports plaintiff' s representation that this failure to reach an agreement was at least a partial function of the fact that the parties had not engaged in any substantive discussion of plaintiff s indemnification claims. Absent substantive discussion and accommodation between the parties, it was certainly proper for plaintiff to pursue a resolution of its claims through litigation. This is, after all, what the courts are for.
The Asset Purchase Agreement between the parties gave plaintiff the right to seek indemnification from all three of the TransTec Companies "jointly and severally." Agreement at 30. It also made provisions for contacting the parties, including contact information for each of the Companies, their agents, and their counsel. Agreement at 31, 38-39. As was its right, plaintiff elected to pursue its litigation claims only against defendant Roll Center. In this circumstance, plaintiff was not technically required to serve a copy of its complaint on either TransTec Group or TransTec PLC, particularly given the fact that plaintiff and Roll Center were the only parties to the Escrow Agreement.
Section 9.3 of the Agreement titled "Notice to Indemnifying Party" appears to explicitly contemplate the possibility that only one of the Companies could serve as the "indemnifying part" for plaintiff. Agreement at 31.
Nonetheless, I think it clear that plaintiff acted inequitably when, after tailoring its complaint to state a cause of action against Roll Center alone, it deliberately refrained from giving either TransTec Group or TransTec PLC notice of the suit, or inquiring of those clearly interested entities how service upon Roll Center, their moribund subsidiary, could be effected.
The Supreme Court articulated the pertinent principle in described the In Mullane v. Central Hanover Bank Trust Co., 339 U.S. 306, 314 (1950):
An elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.Mullane considered the constitutionality of a New York Banking Law provision which allowed a trustee, petitioning for a binding judicial settlement of accounts, to give notice to all beneficiaries by publication in a local newspaper. The Supreme Court held that the statutory notice by publication was sufficient as to any trust beneficiaries whose interests or addresses were unknown to the trustee, but such notice failed to pass due process muster in respect of known beneficiaries whose whereabouts were also known to the trustee. As to those known beneficiaries, the Court said:
In some situations the law requires greater precautions in its proceedings than the business world accepts for its purposes. In few, if any, will it be satisfied with less. Certainly, it is instructive, in determining the reasonableness of the impersonal broadcast notification here used, to ask whether it would satisfy a prudent man of business, counting his pennies but finding it in his interest to convey information to many persons whose names and addresses are in his files. We are not satisfied that it would.339 U.S. at 319-320. The case at bar presents the converse situation: plaintiff clearly concluded that it would not to be in its interest to give the parent TransTec companies notice of its action against Roll Center, such notice being the inevitable consequence of plaintiff's asking those companies how Roll Center could be served. That plaintiff's conduct was inequitable is demonstrated by the facts established by the record on the present motion.
Based on the record before it, the Court makes the following findings of fact: 1) during the months prior to the filing of this lawsuit TransTec PLC, its receivers, TransTec Group, and Roll Center, as the parties with contractual and actual interests in the escrow funds, exhibited and pursued their interests in those funds by contacting and corresponding with principles and representatives of RCI HV and Genesis II, principally through TransTec PLC, its receivers, and their representatives; 2) plaintiff and its parents knew about this correspondence and knew who had apparent authority to pursue these interests on behalf of the TransTec Companies; 3) plaintiff did not share these facts with Judge Schwartz either when it requested permission to pursue alternative service or when it moved for a default judgment; and 4) plaintiff and its representatives did not provide notice of this lawsuit to TransTec PLC, its receivers, or their representatives.
Based on these findings of fact, which are well-supported on the record before this Court, plaintiff cannot claim that it took all appropriate steps to notify the appropriate parties that there was a suit pending. Plaintiff sued and attempted to serve Roll Center, Inc. At the time of this attempted service the date of sale for Roll Center's assets was nearly four years past. Roll Center was, as was noted in the August 23, 2002 Affidavit of James Hannon, no longer a functioning corporate entity.
Plaintiff also attempted to serve John Somers in Michigan. While Somers was identified as contact for Roll Center and for TransTec Group in the original Asset Purchase Agreement, he was never, at least according to the record before this Court, an active or passive participant in the ongoing debate between Genesis n and TransTec PLC's receivers over the merits of the indemnification claims and proper disbursement of the escrow funds. The same is true for Alfred Beeken, who once served as a contact for Roll Center. In short, plaintiff attempted to serve parties who had not been part of its disputes over the escrow funds in several years but did not notify parties who had been active participants in these disputes only a few months prior.
In the Amended Complaint, plaintiff asserts that "RCI has not responded to any of HV's requests to indemnify HV and provide joint instructions to the Bank for disbursement of the Escrow Account." This representation to the Court was true to the letter. However, the problem is that the correspondence described supra was not between plaintiff and Roll Center, but rather, predominantly, between representatives from Genesis and representatives of TransTec PLC. Plaintiff's submissions to Judge Schwartz clearly implied that nobody from the seller's side was taking an interest in the Escrow Account and the funds it held. In the circumstances of the case, that was not a fair inference. Nonetheless, plaintiff and counsel led Judge Schwartz to draw it and did nothing later to correct it.
In his Affidavit in Support of [the] Amended Motion to Permit Alternative Service of Process, James E. Hannon, Jr. of Kirkpatrick and Lockhart (the same firm that wrote to TransTec PLC's attorney James Plemmons in relation to the indemnification claims on April 12, 2002), averred that he is "familiar with the facts and proceedings in this action," August 23, 2002 Affidavit at 1, and further stated that plaintiff attempted to "obtain a waiver of service from RCI in accordance with Fed.R.Civ.P. 4(d)." Id. at 2. In the course of these efforts plaintiff learned that Roll Center had been "administratively dissolved as a corporation . . . and that RCI's last registered agent was Mr. Alfred D. Beeken, with a listed address of a post office box in Gary, Indiana." Id. Hannon represented to the Court that he attempted to mail papers both to Mr. Beeken and to John Somers, who is listed as a contact for Roll Center in the Asset Purchase Agreement. When these efforts failed, Hannon averred that he "conducted telephone and internet searches in an attempt to locate RCI or any appropriate representative upon whom to effect service of process. All of these efforts have failed." August 23, 2002 Affidavit at 1, 2 (emphasis added).
Hannon essentially repeated these sworn representations in his Affidavit dated October 30, 2002, filed in support of plaintiffs Motion for Entry of Default Judgment (the "October 30, 2002 Affidavit"). There, Hannon recounted plaintiff's efforts to notify defendant, including service upon the Indiana Secretary of State. In addition, Hannon reported that he "made a diligent search, including telephone and internet searches, to locate an address for TransTec or any of its officers, directors or agents upon whom to serve the Amended Complaint. All of these efforts have failed." October 30, 2002 Affidavit at 3 (emphasis added).
While this and similar representations to the Court may have been factually accurate in a narrow sense, they effectively misled the Court into believing that no "appropriate representative" could be found. This was, of course, not the case. To the contrary, TransTec PLC had, through its agents and attorneys, been pursuing its interests in the escrow account. Hannon knew, or should have known, about these efforts given the fact that his firm had, as recently as April 12, 2002, corresponded with James Plemmons, attorney for TransTec PLC, regarding the indemnification claims. TransTec's negotiation strategy may have been, as plaintiff characterizes it, marked mostly by "intransigence." Plaintiffs Response at 16. That certainly gave plaintiff and Genesis n good reason to suspend negotiations and pursue a lawsuit. The alleged intransigence of the TransTec Companies does not, however, justify plaintiffs failure to reveal these efforts, no matter how frustrating, to Judge Schwartz.
Counsel's representation of "diligence" in his October 30, 2002 Affidavit may be an exception. Given the circumstances of which counsel professed to be aware, it stretches credulity to believe his claim that a diligent search for an appropriate object of service had been undertaken when the most obvious course, contacting the parent companies, had not been pursued.
The reason why is obvious. Plaintiff was asking Judge Schwartz to approve alternative service and, later, to sign a default judgment. The basis of these requests was that defendant could not be found and, due to this fact, had not answered the complaint. In making these requests plaintiff and counsel led Judge Schwartz to believe that no "appropriate representative" of defendant could be found to receive service. If Judge Schwartz had been fully informed about all "facts and proceedings," of which counsel and plaintiff were aware, relevant to the dispute over the escrow funds and the motions before him, then in all likelihood he would have (1) directed plaintiff to ask the representatives of TransTec Group and TransTec PLC, with whom plaintiff's representatives had been acrimoniously corresponding, where and to whom to send service upon Roll Center (thereby revealing to those interests the commencement of the action), and (2) withheld entering a default judgment against Roll Center in the interim. There is no reason to doubt that such a communication would have produced quick results from one or more of the TransTec Companies or TransTec PLC's receivers.
Plaintiff withheld critical information from Judge Schwartz that was immediately relevant to the decisions it was asking him to make. Further, through counsel, plaintiff conducted itself in a manner that seems to have been designed to mislead the Court rather than to inform. As a result, Judge Schwartz's order granting the plaintiff's motion for a default judgment was, unbeknownst to the Judge, improvidently made.
In its motion to vacate the default judgment against it, defendant Roll Center invoked Rules 55(c) and 60(b)(1), (3), (4) and (6). Fed.R.Civ.P. As noted in Part II. A., supra, Rule 55(c) does not apply since its sole function is to set aside an entry of default made by the clerk of the court pursuant to Rule 55(a). If, as in the case at bar, a judgment by default has been entered, the movant for relief is relegated to the several grounds specified in Rule 60(b).
Rule 60(b) provides in pertinent part that the Court may relieve a party from a judgment on the grounds of "mistake, inadvertence, surprise, or excusable neglect," Rule 60(b)(1); "fraud . . . or other misconduct of an adverse party," Rule 60(b)(3); "the judgment is void," Rule 60(b)(4); or for "any other reason justifying relief from the operation of the judgment," Rule 60(b)(6). The gravamen of Roll Center's motion is that plaintiff obtained the default judgment against it by fraud. But a motion under Rule 60(b)(3) will not lie, because Rule 60(b) also provides that a motion for relief from a judgment "shall be made within a reasonable time, and for reasons (1), (2), and (3) not more than one year after the judgment . . . was entered or taken." Judge Schwartz's order was entered on December 12, 2002. Roll Center did not make its motion until January 12, 2004, more than a year later.
But that is not an end of the matter. After setting forth the times within which motions must be made under its several subsections, Rule 60(b) goes on to provide: "This rule does not limit the power of a court to entertain an independent action to relieve a party from a judgment. . . . or to set aside a judgment for fraud upon the court." The Second Circuit has characterized this provision as "the saving clause of Rule 60(b)," pursuant to which "[r]elief may also be obtained at any time by way of an independent action to set aside a judgment for 'fraud upon the court.'" Gleason v. Jandrucko, 860 F.2d 556, 558-59 (2d Cir. 1988). See also King v. First American Investigations, Inc., 287 F.3d 91, 95 (2d Cir. 2002) ("King's motion to vacate [a judgment] for fraud upon the court is not subject to the one year limitation period," citing Rule 60(b)); Hadges v. Yonkers Racing Corp., 48 F.3d 1320, 1325 (2d Cir. 1995) (same). As the cited cases illustrate, the Second Circuit does not require that a party seeking relief from a judgment file a separate "independent action" to avail itself of Rule 60(b)'s saving clause; a claim of "fraud upon the court" is routinely evaluated within the procedural context of a Rule 60(b) motion.
Accordingly, the question becomes whether Roll Center, on its Rule 60(b) motion, has demonstrated that, in obtaining a default judgment against Roll Center, plaintiff committed a "fraud upon the court" in the person of Judge Schwartz. For the reasons that follow, I conclude that this question must be answered in the affirmative, and the judgment vacated.
"'[F]raud upon the court' as distinguished from fraud on an adverse party is limited to fraud which seriously affects the integrity of the normal process of adjudication" Gleason v. Jandrucko, 860 F.2d 556, 559 (2d Cir. 1988). It involves "'far more than an injury to a single litigant'" or "'a case of a judgment obtained [simply] with the aid of a witness who, on the basis of after-discovered evidence, is believed possibly to have been guilty of perjury.'" Id. (quoting Hazel-Atlas Glass Co. v. Hartford-Empire Co., (alteration in original). "Fraud upon the court" in the context of Rule 60(b) addresses "that species of fraud which does or attempts to, defile the court itself, or is a fraud perpetrated by officers of the court so that the judicial machinery cannot perform in the usual manner its impartial task of adjudging cases presented for adjudication." Kupferman v. Consolidated Research Mfg. Corp., 459 F.2d 1072, 1078 (2d Cir. 1972) (quoting 7 Moore's Federal Practice P 60.33, at 515 (1971 ed.)). See also Transaero, Inc. v. La Fuerza Area Boliviana, 24 F.3d 457, 460 (2d Cir., 1994). "An attorney is an officer of the court and owes the court fiduciary duties and loyalty. When an attorney misrepresents or omits material facts to the court, or acts on a client's perjury or distortion of evidence, his conduct may constitute a fraud on the court." Trehan v. Von Tarkanyi, 63 B.R. 1001, 1006 (S.D.N.Y., 1986) (emphasis added).
The "fraud on the court" provision of Rule 60 sounds in the equitable power of the courts. As such, it is "characterized by flexibility which enables it to meet new situations which demand equitable intervention, and to accord all the relief necessary to correct the particular injustices involved in these situations." Hazel-Atlas, 322 U.S. at 248. This Court, like all courts, is endowed with the "inherent power to ascertain whether their judgments were obtained by fraud." Leber-Krebs, Inc. v. Capitol Records, 779 F.2d 895, 899 (2d Cir., 1985). In the Court's opinion, the conduct of plaintiff and its counsel in this case clearly rises to the level of "fraud on the court."
In cases where a party brings a dispositive motion on an ex parte basis, here seeking the extraordinary relief of default judgment, the normal benefits of the adversary system are absent and a judge must rely on the representations of parties and their counsel, serving as officers of the court. Here, Judge Schwartz relied upon representations made by plaintiff and counsel that they were taking every reasonable step within the horizon of their knowledge to find someone to accept service on behalf of Roll Center. In fact, plaintiff and counsel had not taken the most obvious step, which would have been to contact Roll Center's parent companies and their agents to ask them whom to serve and where. Had this possibility been presented to Judge Schwartz, there can be no doubt that he would have required that such steps be taken before considering either the motion for alternative service or the subsequent motion for default.
Plaintiff and counsel for plaintiff omitted from sharing with Judge Schwartz information that was relevant and necessary to a proper evaluation of their motion for alternative service and their subsequent motion for default. The denial to defendant of a fair opportunity to answer and pursue plaintiffs claims on the merits is an injustice that is "'sufficiently gross to demand a departure' from rigid adherence to the doctrine of res judicata." United States v. Beggerly, 524 U.S. 38, 46 (1998) (quoting Hazel-Atlas 322 U.S. at 244). Defendant's motion is, therefore, granted.
Defendant is also entitled to relief under Rule 60(b)(4). Plaintiffs claim to have satisfied the notice requirements set forth in Rule 4 of the Federal Rules of Civil Procedure turns on the validity of their granted motion for alternative service. That motion was granted on the basis of imperfect information and false impressions that were enabled by plaintiff and, given that the motion was made ex parte, were the sole responsibility of plaintiff to correct. The request for alternative service should not have been granted. It is clear that had plaintiff not withheld relevant information from Judge Schwartz it would not have been granted. Since alternative service should not have been allowed it follows that personal jurisdiction was not properly established and, on this basis, the judgement is void.
There is, on the basis of the foregoing analysis, more than sufficient grounds to vacate the default judgment entered against defendant. With respect to the additional requirements imposed by the law of this Circuit, it is clear that defendant did not willfully default. To the contrary, it was never notified of the claims pending against it. These claims turn on the merit or demerit of plaintiff's two indemnification claims. Defendant asserts that these claims are not covered by the indemnification agreement, that the claims themselves are without merit, and that plaintiff's asserted damages are excessive. All of these defenses appear to be sufficiently colorable to sustain defendant's request that plaintiff's claims be considered on the merits.
Finally, plaintiff will not be unfairly prejudiced if defendant's motion to vacate the default is granted. Plaintiff will, by order of this Court, be required to post security and it will be required to defend its claims on the merits. Plaintiff may find this to be an unwelcome burden, but it is not unfairly prejudicial in the sense contemplated by Rule 60(b). Moreover, any additional hardship imposed on plaintiff by virtue of the passage of time since it filed suit and received a default judgment are solely the result of plaintiff s conduct and are rightly plaintiff's to bear.
CONCLUSION
The parties had, and, it would seem, still have, a disagreement as to the proper disbursement of the funds formerly held in Escrow Account. The parties could not resolve these disagreements. In this circumstance, plaintiff acted within its rights in bringing an action in court seeking a court order releasing and disbursing the funds. Plaintiff should have, however, provided defendant with sufficient notice and opportunity to be heard. This task could have been accomplished with little effort by contacting those parties, defendant's parent corporations and their representatives, who were actively interested in defending against this suit. Plaintiff should have notified TransTec PLC and its receivers in order to find a proper target for service of its claim. The Court is confident that, had plaintiff brought the existence of these parties to the attention of Judge Schwartz, he would have ordered them to do so before allowing alternative service on the Indiana Secretary of State and before approving a default judgment. Those parties and Roll Center are now fully aware of the suit against their interests. Consistent with the doctrinal preferences prevalent in this Circuit, they deserve an opportunity to resolve this contest on the merits. Accordingly the Court makes the following Order:1. The default judgment entered by Judge Schwartz in the above captioned matter on December 2002 is vacated.
2. Defendant is directed to file and serve its responsive pleadings on or before June 25, 2004.
3. In the exercise of its discretion, the Court directs plaintiff to post security in a form acceptable to the Clerk, the principal amount of which shall be comprised of (1) the amount of funds previously disbursed to plaintiff from the Escrow Account referred to in this Opinion, and (2) the amount of interest that would have accrued on those funds had they remained in the Escrow Account from the date of that disbursement to the date plaintiff posts the security called for by this Order. Failing the posting of such security, the Court will enter judgment in favor of defendant and against plaintiff in an amount calculated in a comparable manner.
As noted in text, and made plain in cases such as Enron, 10 F.3d 90, defendant's motion under Rule 60(b) for relief from the default judgment depends for its resolution upon principles of equity. Assuming arguendo (no view on the question is intimated by this Opinion) that defendant will at the end of the case be held entitled to a return of the funds that were deposited in the Escrow Account, it is equitable, given plaintiff's conduct in obtaining the default judgment, to require plaintiff to secure defendant's recovery of such a judgment When a party succeeds in a claim for the return of an escrow deposit, interest is calculated at the rate provided for in the escrow agreement, and not at the New York statutory rate of 9% per annum specified in N.Y. CPLR § 5001(a). See Reckson Operating Partnership, LP. v. New York State Urban Development Corp., 300 A.D.2d 291, 751 N.Y.S.2d 279 (A.D.2d 2002).
The foregoing is SO ORDERED.