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declining to reconsider vacatur of default judgment where failure to file timely answer was not willful, there was no prejudice to the plaintiff, and court could address the defendant's defenses on their merits
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01 Civ. 4019 (BSJ)
March 10, 2004
Opinion
Before the Court are Third-Party Defendants' motion to dismiss Third-Party Plaintiff's Complaint pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6) and Plaintiffs' motion for reconsideration of this Court's Order vacating the previously entered default judgment against Defendant Cuddlecoat, Inc. ("Cuddlecoat"). For the reasons set forth below, Third-'Party Defendants' motion to dismiss is GRANTED in part and DENIED-in part and Plaintiffs' motion for reconsideration is DENIED.
BACKGROUND
Defendant Warren Corporation ("Warren") is a private company engaged principally in the manufacture of fabrics and clothing. Defendant Cuddlecoat, until 1996, was engaged in the business of finishing fabrics and manufacturing clothing. Certain of Cuddlecoat's employees were members of the International Ladies' Garment Workers' Union, and Cuddlecoat was required to make payments to Plaintiff I.L.G.W.U. National Retirement Fund ("the Fund") pursuant to the Employee Retirement and Income Security Act ("ERISA").
Cuddlecoat was a customer of Warren and entered into a series of security and other agreements with Warren. In 1995, Warren commenced suit against Cuddlecoat, seeking to foreclose on its security. In January 1996, while the suit between Warren and Cuddlecoat was still pending, an involuntary Chapter 11 bankruptcy petition was filed against Cuddlecoat. The Fund and the New York Coat, Suit Dress, Rainwear Allied Workers Union, Local 89-221-1, UNITE, AFL-CIO ("the Union") each filed separate claims in the bankruptcy proceeding.
After the bankruptcy petition was filed, Warren and Cuddlecoat settled their individual litigation in an agreement under which Warren became the sole shareholder of Cuddlecoat. The timing and operation of that agreement remain in dispute between the parties to this action. The committee of unsecured creditors brought an adversary proceeding in the bankruptcy action seeking to hold Warren responsible for various creditors' claims against Cuddlecoat. Warren negotiated a settlement of the creditors committee's claims, and exchanged mutual releases with the Union. Warren did not obtain a release from the Fund, and the Union's release did not name the Fund as an entity included in the release.
Warren alleges that it did not obtain a specific release from the Fund because David Greenwald, an associate with Defendant Lewis, Greenwald, Clifton Nikolaidis, P.C. ("Lewis Greenwald"), stated that the Union's release would bind the Fund. Lewis Greenwald represented the Union in the settlement negotiations. Cuddlecoat was formally dissolved on September 23, 1998 and the bankruptcy proceeding was dismissed eleven months later.
In 2001, the Fund filed this action seeking to recover money owed to the Fund pursuant to ERISA. In response, Warren asserted a counter-claim against the Fund and filed a third-party action against the Union and Lewis Greenwald. Defendant Cuddlecoat failed to answer Plaintiff's Complaint and failed to appear or otherwise move with respect to the Complaint. Plaintiffs moved for default judgment against Cuddlecoat on or about October 17, 2p01. The Court granted the motion for default judgment on October 25, 2001.
Plaintiffs are seeking to recover for essentially the same claim they brought against Cuddlecoat in the bankruptcy proceeding — a claim for withdrawal liability pursuant to ERISA.
On October 26, 2001, the Court received a letter from Defendant Warren, asking that the Court either deny Plaintiff's motion for default judgment against Cuddlecoat or, in the alternative, grant Warren an extension of time to answer on Cuddlecoat's behalf. Upon learning that the Court had granted Plaintiffs' motion for default judgment, Warren moved, pursuant to Local Rule 6.3, for reconsideration of the default judgment entered against Cuddlecoat. In a telephone conference on January 25, 2002, the Court granted Warren's motion and vacated the default judgment. Plaintiffs now move for reconsideration of that decision.
In or about March 2002, Warren moved pursuant to Fed.R.Civ.P. 15 and 21 to file and serve an amended answer, counterclaim, and third-party complaint. Plaintiffs opposed this motion. In a Memorandum and Order, dated June 3, 2002, Magistrate Judge Eaton granted the motion. Third-Party Plaintiffs now move to dismiss Warren's Third-Party Complaint.
DISCUSSION
I. MOTION TO DISMISSWarren's Third-Party Complaint ("Warren Complaint") brings claims against the Union and Lewis Greenwald for fraud, negligent misrepresentation, and civil conspiracy. Essentially, Warren claims that the Third-Party Defendants — the Union and their counsel Lewis Greenwald — purposely misrepresented that the Settlement Agreement and releases resolved all claims by the Fund. The Warren Complaint also claims that the Union breached the 1997 Settlement Agreement with Warren by failing to provide a release for all "affiliates" —i.e. the Fund — as required by the Settlement Agreement.
A. Negligent Misrepresentation
"A claim for negligent misrepresentation can only stand where there is a special relationship of trust or confidence, which creates a duty for one party to impart correct information to another, the information given was false, and there was reasonable reliance upon the information given."Hudson River Club v. Consolidated Edison Co., 275 A.D.2d 218, 220 (1st Dep't 2000). Warren relies on the New York Court of Appeal's decision in Kimmell v. Schaefer, 89 N.Y.2d 257 (1996), to argue that discovery must be conducted to determine whether a non-fiduciary relationship existed between Warren and the Third-Party Defendants that nonetheless gave rise to a duty to speak truthfully in the course of the settlement negotiations'. However, Dallas Aerospace, Inc. v. CIS Air Corp., 352 F.3d 775 (2d Cir. 2003), explains that Kimmell did not eliminate the requirement of a "special relationship" for a negligent misrepresentation tort action.
In making this argument, Warren also relies upon Magistrate Judge Baton's June 3, 2002 Memorandum and Order allowing Warren to file its Third-Party Complaint, in which Magistrate Judge Eaton noted thatKimmell v. Schaefer did not include the word "fiduciary" in describing the relationship between parties that may give rise to a duty to speak with care. However, Magistrate Judge Baton's Memorandum and Order pre-dated the Second Circuit's Opinion in Dallas Aerospace, Inc. v. CIS Air Corp., 352 F.3d 775, 788-789 (2d Cir. 2003), which has clarified that Kimmell did not eliminate the basic requirement of a "special relationship" for a negligent misrepresentation tort action.
[Plaintiff] urges that Kimmell enunciated a new standard, exacting liability whenever the relationship between the parties is "such that in morals and good conscience the one has the right to rely upon the other for information." This is a misreading of the case. The court did not depart from the traditional understanding that "liability for negligent misrepresentation has been imposed only on those persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the injured party." Indeed, the assertedly "new" standard stated in Kimmell was a quotation from a New York Court of Appeals decision that preceded it by seven decades. See Int'l Prods. Co. v. Erie R.R. Co., 244 N.Y. 331, 155 N.E. 662, 664 (1927). Thus, Kimmell can hardly be understood to be novel or to have shifted New York law. In sum, Kimmell, which has since been limited by the New York Court of Appeals, see, e.g., Murphy v. Kuhn, 90 N.Y.2d 266, 660 N.Y.S.2d 371, 682 N.E.2d 972, 974-76 (1997), does nothing to undermine the basic requirement of a "special' relationship" for a negligent misrepresentation tort action.Dallas Aerospace, Inc. v. CIS Air Corp., 352 F.3d 775, 788-789 (2d Cir. 2003) (some internal citations omitted).
The "special relationship" required for a negligent misrepresentation tort has been described as "either actual privity of contract between the parties or a relationship so close as to approach that of privity."Prudential Ins. Co. v. Dewey Ballantine, Bushby, Palmer Wood, 80 N.Y.2d 377, 382 (1992). Warren has not alleged the existence of such a relationship, therefore the claim of negligent misrepresentation is DISMISSED.
B. Fraud Claim
In order to state a claim for fraud, a plaintiff must allege: (1) a material misrepresentation of fact, (2) made with knowledge of its falsity, (3) with intent to deceive, (4) justifiable reliance, and (5) damages. Mergler v. Crystal Properties Assoc., Ltd., 179 A.D.2d 177, 181 (1st Dep't 1992). Here, Warren cannot show, as a matter of law, that it justifiably relied on any statements by opposing counsel, Lewis Greenwald, regarding the binding effect of the Settlement Agreement and the releases on the Fund. Therefore the motion to dismiss is GRANTED.
"[I]t is a well-settled principle that neither a party nor his attorney may justifiably rely on the legal opinion or conclusions of his or her adversary's counsel." Aglira v. Julien Schlesinger, P.C., 214 A.D.2d 178, 185 (1st Dep't 1995);see also Karsanow v. Kuehlewein, 232 A.D.2d 458, 458-459 (2d Dep't 1996) ("plaintiffs' allegation that they consented to the inclusion of a non-recourse clause in the extension agreements because [defendant's attorney] assured them that such a provision was `customary' is insufficient to establish a claim for fraud. The plaintiffs could not reasonably rely on the legal opinions or conclusions of their adversary's counsel.").
In response, Warren argues that Kimmell v. Schaefer recognized that "a duty to speak truthfully may arise in a commercial context and in relationships that are not `traditional' fiduciary relationships." (Warren Mem. at 6-7). Warren argues that, in light ofKimmel, discovery will be required to determine whether a duty to speak truthfully existed between Warren and the Third-Party Defendants. Warren appears to argue that, if such a duty existed, Warren was justified in relying upon Lewis Greenwald's statements. (Warren Mem. at 7). However, as explained above, the Second Circuit has examined and rejected Warren's interpretation of Kimmel. See Dallas Aerospace, Inc. v. CIS Air Corp., 352 F.3d 775, 788-789 (2d Cir. 2003). Therefore, Kimmel does not alter the established New York law that neither a party nor his attorney may justifiably rely on the legal opinion or conclusions of his or her adversary's counsel. The motion to dismiss Warren's fraud claim is GRANTED.
C. Civil Conspiracy
It is well settled under New York law that there is no substantive tort of conspiracy. See Goldstein v. Siegel, 19 A.D.2d 489, 493 (1st Dep't 1963). "In order to state a claim for conspiracy, therefore, there must be allegations of an independent actionable tort." Antonios A. Alevizopoulos Assocs. v. Comcast Int'l Holdings, Inc., 100 F. Supp.2d 178, 187-188 (S.D.N.Y. 2000). Here, the Court has dismissed all of Warren's claims that sound in tort, therefore, the claim of civil conspiracy must also be DISMISSED. See Demalco, Ltd, v. Feltner, 588 F. Supp. 1277, 1278 (S.D.N.Y. 1984) ("the gravamen of a claim of conspiracy is the underlying independent tort, and if the independent tort has not been adequately pleaded, the conspiracy claim will also fail").
D. Breach of Contract
Warren alleges that the Union breached the Settlement Agreement by failing to deliver a release that complied with paragraph 6 of the agreement. Paragraph 6 states that:
Simultaneously with the execution of this Agreement, each of the Secured Creditor and the Union will execute and deliver mutual releases (the form and substance of each of which has been mutually agreed to by the parties) of any and all claims or causes of action that any party to this Settlement ever had, now has or hereafter can, shall or may have, against any other such party (including claims by or against each such parties' affiliates, subsidiaries, officer, directors, employees, agents representatives, controlling entities, legal and other retained professionals) for, upon, or by reason of any matter, cause or thing whatsoever from the beginning of the World to the date of this Agreement.
(Warren Compl. Ex. B) (emphases added).
As Judge Eaton explained in his June 3, 2002 Memorandum and Order, this claim turns upon the meaning of the word "affiliates," as used in paragraph 6, and upon the process by which the word "affiliates" was omitted from the releases. As there appear to be factual issues regarding this claim, the motion to dismiss is DENIED.
II. Motion for Reconsideration
Plaintiffs move for reconsideration of this Court's Order, dated January 25, 2002 ("January 25 Order"), vacating the default judgment previously entered against Defendant Cuddlecoat. Plaintiffs contend that the Court overlooked controlling legal authority, which allows the entry of default judgment against a dissolved corporation, when issuing the January 25 Order. However, the Court did not base its decision to vacate the default judgment on the mere fact that Cuddlecoat was a dissolved corporation. While the Court did consider the dissolved status of Cuddlecoat, the Court explicitly stated that its decision was "based on considerations in all of the letters that I have seen." (1/25/02 Tr. at 4).
Rule 55(c) of the Federal Rules of Civil Procedure provides that "for good cause shown the court may set aside an entry of default and, if a judgment by default has been entered, may likewise set it aside in accordance with Rule 60(b)." Relief from default is to be granted at the discretion of the court upon consideration of the individual circumstances of the case and the credibility and good faith of the parties. See Enron Oil Corp. v. Diakuhara, 10 F.3d 90, 95 (2d Cir. 1993). In deciding a motion to vacate a default judgment, the Court focuses on three considerations with regard to the meaning of "good cause": (1) the willfulness of the default; (2) the potential prejudice to the adversary; and (3) the presentation of a meritorious defense.See In re Chalasani, 92 F.3d 1300, 1307 (2d Cir. 1996). Other factors that may be considered include whether the failure to follow a rule of procedure was a mistake made in good faith and whether the entry of default would bring about an unfair result. See Enron Oil, 10 F.3d at 96.
Here, the Court does not believe that Cuddlecoat's default was willful, but rather it was directly attributable to its dissolved status. The vacatur of the default judgment does not prejudice Plaintiffs, and permitting Warren to answer or retain counsel on Cuddlecoat's behalf would allow for the presentation of Cuddlecoat's possible defenses and thus a decision on the merits. To the extent that Plaintiffs may wish to argue that Warren — Cuddlecoat's dissolving shareholder — may not answer or retain counsel on Cuddlecoat's behalf, the Court directs Plaintiffs to submit supplemental briefing, limited to this issue, no later than 30 days from the date of this Opinion. Warren's response, if any, shall be filed no later than two weeks after any brief submitted by Plaintiffs. Lastly, the Court has reviewed the submissions by the parties and is convinced that one or more of Warren's defenses may be meritorious.
Plaintiffs argue that the vacatur will result in prejudice because, "without such a default judgment, the Fund is unable to conduct the post-judgment discovery necessary to satisfy its statutorily imposed fiduciary duty to the Fund's beneficiaries." (Pl. Mem. at 6-7). This argument is not persuasive. Plaintiff's will be permitted to conduct post-judgment discovery in the event they obtain judgment on the merits.See Davis v. Musler, 713 F.2d 907, 916 (2d Cir. 1983) ("delay alone is not a sufficient basis for establishing prejudice. . . . Rather, it must be shown that delay will result in the loss of evidence, create increased difficulties of discovery, or provide greater opportunities for fraud and collusion.").
The Court finds that there was "good cause" to vacate the previously entered default judgment. Moreover, the Second Circuit strongly prefers dispute determination on the merits and directs district courts to resolve any doubts regarding vacatur of a default in favor of a trial on the merits. See Shah v. New York State Dept. of Civil Service, 168 F.3d 610, 615 (2d Cir. 1999). Therefore, Plaintiffs' motion for reconsideration is DENIED.
CONCLUSION
Third Party Defendants' motion to dismiss is GRANTED with respect to Warren's fraud, negligent misrepresentation and civil conspiracy claims and DENIED with respect to Warren's breach of contract claim. Plaintiffs' motion for reconsideration of the Order vacating default judgment against Cuddlecoat is DENIED. Plaintiffs' brief on the issue of whether Warren may answer or retain counsel on Cuddlecoat's behalf must be submitted within 30 days from the date of this Opinion. Warren's response, if any, is due two weeks thereafter.The parties are further directed to inform the Court in writing of the status of this action no later than 30 days from the date of this Opinion.