Summary
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"
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01 Civ. 1290 (CHS)
January 29, 2002
MEMORANDUM OPINION AND ORDER
This diversity suit for breach of contract concerns a consulting agreement between plaintiff RLS Associates, LLC ("RLS") and defendant the United Bank of Kuwait PLC ("UBK"). RLS filed and served its complaint in February 2001. In April, the Court entered a default against UBK and referred the case to Magistrate Judge Freeman for an inquest. Subsequently, UBK moved for relief from the default. The inquest has been stayed pending resolution of UBK's motion.
BACKGROUND
RLS is a Connecticut limited liability company with its principal place of business in Colorado. Its business is providing consulting and advisory services for investment products. UBK is a banking corporation with its principal place of business in London. UBK operated a Federal Branch in New York City from 1983 to 2000.
Between January 16, 1996 and February 14, 2000, RLS provided consulting services to the London office of UBK and was paid commissions pursuant to a series of consultancy agreements. The parties agreed that the contracts would be governed by English law, and they agreed to submit to the non-exclusive jurisdiction of the English courts. RLS alleges that a letter dated November 3, 1997 amended the consultancy agreements, entitling RLS to receive commissions for a period of one year following UBK's notice of termination. UBK terminated the consultancy agreements on February 14, 2000, and RLS is now suing for commissions due after the date of termination amounting to $250,000.
RLS filed its complaint on February 21, 2001 and served the summons and complaint on Daniel Volpe, the Liquidating Agent of UBK's Federal Branch, in New York on February 22, 2001. The summons directed UBK to serve upon plaintiffs attorney and file with the Court an answer to the complaint within twenty days. Volpe transmitted the summons and complaint to Graham Dunnachie, the Corporate Secretary of UBK, in the London office.
On March 8, 2001, Dunnachie wrote a letter to plaintiffs attorney which stated:
We acknowledge receipt of the summons from the United States District Court dated 21 February 2001 regarding a claim presented by you on behalf of RLS Associates LLC.
The United Bank of Kuwait PLC is not operating in the United States of America. We therefore do not understand why you are presenting a claim in the United States of America. The relevant contracts specify that they shall be governed by and construed in accordance with the laws of England and under which RLS Associates LLC submitted to the jurisdiction of the English courts.
For your information, our position is that the claim by RLS Associates is frivolous and without foundation and we should be pleased to pursue our defence in an English court.
Dunnachie claims in his affidavit that he believed that his letter fulfilled the Bank's obligation to answer the complaint and states that it was not his intention to waive any right to contest RLS's claims. Dunnachie Aff. ¶ 5.
Plaintiffs counsel, upon receiving Dunnachie's letter, faxed a response to Dunnachie on March 12, 2001, which stated:
Receipt is acknowledged of your letter dated March 8, 2001 acknowledging receipt of the Summons in the above referenced matter.
The matters brought to our attention in your letter are required timely to be presented to the United States District Court for the Southern District of New York either by motion or by way of answer.
It is our position that The United Bank of Kuwait was properly served and that the provisions contained in the agreement to which you refer were nonexclusive and did not deprive the appropriate United States District Court of jurisdiction in this matter.
We suggest that the Summons and Complaint be referred to your New York counsel for such response as counsel may see fit.
On March 15, a copy of Dunnachie's letter of March 8 was filed with the Clerk of the Court. Dunnachie does not explain in his affidavit in support of UBK's motion, or in his supplemental affidavit in support of UBK's reply, how the letter came to be filed with the Court. Thus, it is unclear whether Dunnachie mailed the letter to the Court on March 8, whether Dunnachie mailed the letter after receiving the March 12 fax from plaintiffs counsel, or whether the letter was filed in person by an attorney or other agent of UBK in New York. The Clerk of the Court construed the letter as an "Acknowledgement of Service" and reset the due date for UBK to answer the complaint from March 14 to March 28, 2001.
On April 13, 2001, having received no further response from UBK, RLS submitted an application for a default judgment, consisting of a proposed Clerk's Certificate noting defendant's default and a proposed Default Judgment ordering an inquest. The Clerk of the Court forwarded RLS's application to Chambers, without signing the Clerk's Certificate. On April 18, 2001, the Court signed the Default Judgment, and the case was referred to Magistrate Judge Freeman for an inquest to determine the amount of the judgment.
On May 1, 2001, Judge Freeman signed a scheduling order which noted that liability had been established, required plaintiff to submit Proposed Findings of Fact and Conclusions of Law on the issue of damages no later than June 1, required defendant to submit its response no later than July 9, and warned that if defendant did not respond by July 9, the Judge's Report and Recommendation on plaintiffs damages would be based on plaintiffs written submission alone. The scheduling order was mailed to Dunnachie at UBK's London office.
RLS complied with the scheduling order and delivered a copy of its Proposed Findings of Fact and Conclusions of Law to Dunnachie's office in London on June 4, 2001. Dunnachie transmitted this document to UBK's attorneys in New York. Dunnachie claims in his affidavit that, although he knew there was to be an inquest, he was not aware that a default judgment had been entered until after he gave RLS's proposed findings and conclusions to counsel in New York. Dunnachie Aff. ¶ 6. On July 5, UBK's attorneys wrote to Judge Freeman to request an extension of time to respond and called plaintiffs counsel to inform him of the request. Judge Freeman granted an extension until July 23. On July 20, UBK filed this motion for relief from the default judgment and for a stay of the inquest. On July 24, Magistrate Judge Freeman adjourned defendant's time to respond on the damages inquest while defendant's motion was pending. As of the date of this Opinion, UBK's attorneys still have not formally entered an appearance in this case.
DISCUSSION
I. Legal Standards Governing Defaults and Default Judgments
Rule 55(a) of the Federal Rules of Civil Procedure provides that a plaintiff may request the Clerk of the Court to enter default against a defendant who "has failed to plead or otherwise defend as provided by these rules." See Enron Oil Corp. v. Diakuhara, 10 F.3d 90, 95 (2d Cir. 1993); Meehan v. Snow, 652 F.2d 274, 276 (2d Cir. 1981). Following entry of default, the plaintiff may then obtain a judgment by default pursuant to Rule 55(b) in one of two ways. If the plaintiffs claim is for a sum certain, and the defendant has not appeared, the Clerk of the Court can enter a judgment. Otherwise, the Court can hold a hearing to determine the amount of damages, if necessary, and then enter judgment. If the defendant has appeared, the defendant must be given written notice of the application for default judgment at least three days before the hearing. See Enron, 10 F.3d at 95.
Rule 55(c) provides that an entry of default may be set aside "for good cause shown" and that a default judgment may be set aside in accordance with Rule 60(b). The grounds for setting aside a judgment that appear in Rule 60(b) include "mistake, inadvertence, surprise, or excusable neglect." In practice, courts apply the same set of factors in considering motions to set aside defaults and motions to set aside default judgments, but the factors are applied more rigorously in the case of default judgments. Enron, 10 F.3d at 96; see, e.g., American Alliance Ins. Co. v. Eagle Ins. Co., 92 F.3d 57, 59 (2d Cir. 1996) (default judgment); Meehan, 652 F.2d at 277 (default). Those 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." Enron, 10 F.3d at 96.
Willfulness does not include mere carelessness or negligence but does encompass gross negligence, deliberateness, and bad faith; the degree of wilfulness determines how heavily that factor weighs against granting relief Eagle, 92 F.3d at 61; see also Gucci America, Inc. v. Gold Center Jewelry, 158 F.3d 631, 634-35 (2d Cir. 1998). Prejudice is not established by delay alone. Enron, 10 F.3d at 98. But if a defendant's default was willful and the defendant has no meritorious defense, an absence of prejudice to the plaintiff will not entitle the defendant to relief from a default judgment. Securities and Exchange Commission v. McNulty, 137 F.3d 732, 738 (2d Cir. 1998). Finally, in order to show that it has a meritorious defense, a defendant must present evidence of facts that would constitute a complete defense, although the defendant need not establish its defense conclusively. Id. at 740; Eagle, 92 F.3d at 61.
Defaults are generally disfavored and are reserved for rare occasions, because there is a preference for resolving disputes on the merits. Enron, 10 F.3d at 95-96. For this reason, doubts should generally be resolved in favor of the party seeking relief from the default. Id. at 96.
II. Application of the Legal Standards to the Facts of this Case
Since the Court's default judgment on April 18, 2001 was not preceded by an entry of default by the Clerk and did not specify an amount of damages, it effectively functions as an entry of default. Thus, UBK properly brought a motion pursuant to Rule 55(c) to set aside the entry of default, rather than a motion pursuant to Rule 60(b) to set aside a default judgment, and the more lenient standard applies. See Traguth v. Zuck, 710 F.2d 90, 94 (2d Cir. 1983); Meehan, 652 F.2d at 276; cf. American Alliance, 92 F.3d at 59, 62 (despite lack of entry of default, reviewing denial of motion to vacate default judgment under Rule 60(b) standard rather than Rule 55(c), and deciding that reversal was required even under stricter standard).
UBK contests the entry of default on several grounds. First, UBK contends that Dunnachie's letter of March 8, 2001, which was filed with the Court, served as an answer to the complaint. Second, UBK argues that the Court had no jurisdiction over the dispute due to the provision in the parties' contract for jurisdiction in England. Third, UBK asserts that it was entitled to notice of RLS's motion for a default judgment, because UBK had appeared by virtue of the Dunnachie letter. Even if the default was entered properly, UBK argues that it is entitled to relief from the default because it did not default willfully, RLS would suffer no prejudice if the default were set aside, and UBK has meritorious defenses to RLS's claims. I will first address UBK's argument that the entry of default was improper.
A. Validity of the Entry of Default
As a preliminary matter, this Court's jurisdiction is not affected by the clause of the parties' contract providing for non-exclusive jurisdiction in England. That clause reads, "This Agreement shall be governed by and construed in accordance with the laws of England and the parties hereby submit to the non-exclusive jurisdiction of the English Courts." UBK makes the argument that the contractual term "non-exclusive" actually means "exclusive" under English law, unless special circumstances are present. UBK does not set forth the legal basis for this facially suspect conclusion in its brief but rather refers to the affidavit of an English attorney, Fiona Simpson, which is attached to UBK's motion. This affidavit is in fact a supplemental memorandum of law, and UBK provides no reason why the Court should consider legal arguments presented in the form of an affidavit.
In any event, the only case relied upon by Simpson for the proposition that a nonexclusive jurisdiction clause is actually an exclusive jurisdiction clause does not stand for that proposition at all. See ED F Man Ship Ltd v. Kvaerner Gibraltar Ltd (MV `Rothnie') 1996 CLC 1062 (Q.B.). The court in Rothnie did not dismiss the case for lack of jurisdiction but rather granted a stay on forum non conveniens grounds, because there was also a pending proceeding in Gibraltar dealing with the same claims. The court considered the fact that the parties had agreed to the nonexclusive jurisdiction of the courts of Gibraltar to be at least a very strong factor in the forum non conveniens analysis. Id. at 1066-69. Jurisdiction was not contested in that case. Nor does the parties' nonexclusive jurisdiction clause in the present case deprive the Court of jurisdiction. See RBS Fabrics Ltd. v. G. Beckers Le Hanne, 24 B.R. 198, 199-200 (S.D.N.Y. 1982).
I turn now to UBK's argument that the entry of default was erroneous because Dunnachie's letter was an answer to the complaint. UBK contends that the letter was responsive to the complaint and complied with the instruction contained in the summons that UBK serve on plaintiffs attorney an answer to the complaint within twenty days and file a copy with the Court within a reasonable period after service, or risk default judgment. Furthermore, UBK urges that the failure of the letter to comply with technical requirements of pleading did not constitute a default.
If the letter had been filed by a pro se defendant, then it might be appropriate for the Court to construe the letter liberally and treat it as a motion to dismiss for lack of jurisdiction or even as an answer to the complaint. See Traguth, 710 F.2d at 95 ("T]he court [must] make reasonable allowances to protect pro se litigants from inadvertent forfeiture of important rights because of their lack of legal training."); accord Enron, 10 F.3d at 96. As a corporation, however, UBK is not entitled to appear pro se but rather must be represented by an attorney. See Rowland v. California Men's Colony, 506 U.S. 194, 201-02 (1993) ("It has been the law for the better part of two centuries . . . that a corporation may appear in the federal courts only through licensed counsel."); Eagle Assoc. it Bank of Montreal, 926 F.2d 1305, 1308 (2d Cir. 1991); Jones v. Niagara Frontier Transp. Auth., 722 F.2d 20, 22 (2d Cir. 1983). The Second Circuit has explained the reasons for requiring a corporation to appear in court only by an attorney:
[T]he conduct of litigation by a nonlawyer creates unusual burdens not only for the party he represents but as well for his adversaries and the court. The lay litigant frequently brings pleadings that are awkwardly drafted, motions that are inarticulately presented, proceedings that are needlessly multiplicative.Jones, 722 F.2d at 22. The letter filed by Dunnachie in response to RLS's complaint aptly demonstrates these concerns. Since a corporation may appear in court only through counsel, Dunnachie's letter may not be construed as an answer or motion on behalf of UBK.
UBK argues that even if the letter may not be treated as an answer to the complaint, it does serve as an appearance such that UBK was entitled to notice of the motion for a default judgment under Rule 55(b). UBK reasons that the default judgment is void, because UBK did not receive notice of RLS's application for a default judgment.
It is doubtful that Dunnachie's letter constituted an appearance, first because a corporation must appear through counsel, and second because UBK did not evidence a clear intent to defend. See Rogers v. Hartford Life and Accident Ins. Co., 167 F.3d 933, 937 (5th Cir. 1999) ("[T]o qualify as an appearance and trigger Rule 55(b)(2)'s notice requirements, the defendant's actions merely must give the plaintiff a clear indication that the defendant intends to pursue a defense . . . ."). Dunnachie's letter said, "we should be pleased to pursue our defence in an English court," and UBK did not obtain counsel upon receipt of the complaint to litigate the case in this Court, despite RLS's fax urging UBK to refer the complaint to New York counsel. See Wilson v. Moore and Assoc., Inc., 564 F.2d 366, 369 (9th Cir. 1977) (letter by officer of defendant corporation to plaintiff, filed with court, did not constitute appearance where plaintiff had warned defendant to secure counsel); but see Dalminter v. Jessie Edwards, Inc., 27 F.R.D. 491 (S.D. Tex. 1961) (letter by officer of defendant corporation to plaintiff served as appearance).
Regardless of whether UBK appeared and was entitled to notice under Rule 55(b), there could not have been any violation of the notice requirement. First, the notice requirement had not yet been triggered. Rule 55(b) states that a party who has appeared "shall be served with written notice of the application for judgment at least 3 days prior to the hearing on such application." The notice requirement does not apply to the entry of default under Rule 55(a). As explained supra, the Court's default judgment on April 18, 2001 effectively functioned as an entry of default. Judge Freeman had not yet scheduled a hearing on RLS's application for default judgment when UBK moved for relief from the default. Second, even though the notice requirement had not yet been triggered, UBK did in fact receive written notice of the application for judgment when it received Judge Freeman's scheduling order and RLS's Proposed Findings of Fact and Conclusions of Law. Therefore, UBK did not fail to receive notice prior to a hearing on RLS's application for default judgment.
B. Relief from the Entry of Default
Although default was properly entered against UBK for failure to answer or otherwise defend, it is appropriate to grant UBK relief from the default in these circumstances. As explained supra, the factors considered by courts in determining whether to grant relief from a default 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." Enron, 10 F.3d at 96. Where a final default judgment has not yet been entered, these factors should be applied liberally.
The parties energetically contest the willfulness of UBK's default. RLS points out that UBK has litigated extensively in both federal and state courts in New York, using New York counsel, and that UBK disregarded RLS's suggestion that UBK refer the complaint in this case to its New York counsel. In fact, counsel for UBK did not contact the Court until July 5, 2001, more than four months after the complaint was served on February 22, 2001, and more than two months after Judge Freeman's scheduling order was issued on May 1, 2001. In these circumstances, RLS contends, UBK's default must be interpreted as willful. Furthermore, RLS asserts that UBK chose not to litigate this case, because UBK did not want the case to come to the attention of the Comptroller of the Currency while UBK was in the process of surrendering its Federal Branch license. According to RLS, before UBK could withdraw the Federal Branch's capital equivalency funds, UBK was required to certify that there were no claims pending against it in the United States.
According to UBK, Dunnachie conscientiously followed the directions in the Summons and did not realize that anything was amiss until he received RLS's submission for the inquest, at which point Dunnachie referred the matter to counsel. UBK explains that Dunnachie was unfamiliar with American court procedure because UBK's London office had never before litigated in the U.S. and had not been involved in litigation concerning the Federal Branch. As for RLS "s allegations concerning the closing of the Federal Branch, UBK denies those allegations and asserts that they are implausible considering the timing of events. UBK certified to the Comptroller of the Currency on January 24, 2001 that all claims against the Federal Branch as of the date of closure, September 30, 2000, had been fully paid or settled. On March 1, 2001, the Comptroller of the Currency notified UBK that all liquidation requirements were satisfied and that the Capital Equivalency Deposit could be withdrawn. UBK asserts that this case could have had no effect on the liquidation of the Federal Branch, because the claim in this case is not against the Federal Branch and, even if it were, the complaint was served on February 22, 2001, after the date of closure of the Branch, after UBK's final certification, and only a week before the Comptroller authorized release of the Capital Equivalency Deposit. Furthermore, UBK asserts that its failing to defend a lawsuit would not make the Comptroller less likely to discover the lawsuit.
Resolving all doubts in favor of UBK, the party seeking relief from the default, see Enron, 10 F.3d at 96, the facts show that UBK was careless or negligent in failing to retain counsel immediately to defend in this case, but the facts do not show that UBK's default was grossly negligent, deliberate, or in bad faith. See Eagle, 92 F.3d at 61. UBK made a timely, although inadequate, response to the complaint and summons when Dunnachie wrote his March 8 letter to plaintiffs counsel, which was filed with the Court; and UBK made a timely response to Judge Freeman's scheduling order when counsel for UBK requested an extension of time on July 5. RLS's theory that UBK defaulted to avoid disclosure to the Comptroller of the Currency, which could amount to bad faith if true, is not convincing on the facts presented.
In some cases, courts have found corporate defendants to have willfully defaulted where they defied court orders to retain counsel. See United We Stand America, Inc. v. United We Stand, America New York, Inc., 128 F.3d 86, 89 (2d Cir. 1997) (upholding denial of motion to vacate default judgment where district court ordered defendant corporation to obtain counsel and defendant's efforts at compliance were a sham); Bank of Montreal, 926 F.2d at 1310 (upholding district court's determination that corporate defendant willfully defaulted by disregarding court order to appear through counsel); Veronica v. West, No. 97 Civ. 6560, 2001 WL 1597804, at *4-5 (E.D.N.Y. Nov. 6, 2001) (granting motion for default judgment and finding no basis for relief from such judgment where defendant corporation failed to comply with court order to retain counsel and failed to respond to amended complaint). In some other cases, courts have found that corporate defendants did not willfully default even though they failed to comply with court orders to obtain counsel. Pecarsky v. GalaxiWorld.com Ltd., 249 F.3d 167, 171-73 (2d Cir. 2001) (finding no willfulness where defendant corporation diligently tried to comply with court order to obtain counsel but court did not allow sufficient time); Powerserve Int'l, Inc. v. Lavi, 239 F.3d 508, 513-16 (2d Cir. 2001) (upholding vacatur of default judgment on ground that corporation's failure to comply with court order to retain counsel was not willful, and upholding imposition of $500,000 bond as condition of vacatur). Since UBK was not ordered by the Court to obtain counsel, I decline to find that UBK's failure to retain counsel to draft its response to the complaint amounts to willful default.
If UBK had neither retained counsel nor attempted to respond to the complaint on its own, despite RLS's warning to refer the complaint to counsel, then in those circumstances UBK's default might be treated as willful. See Original Appalachian Artworks, Inc. v. Yuil Int'l Trading Corp., 105 F.R.D. 113, 115-17 (S.D.N.Y. 1985) (denying motion to set aside default judgment where plaintiffs counsel repeatedly advised defendant corporation to obtain counsel and where defendant made no response to plaintiff and made no attempt to appear in court). or if UBK had consulted counsel regarding this case but had decided not to retain counsel to defend the suit, default might be treated as willful. See Brand v. NCC Corp., 540 F. Supp. 562, 564 (E.D. Pa. 1982) (denying motion for relief from default judgment where corporate defendant hired counsel to settle suit but not to defend suit and tried to appear pro se despite court's instruction that appearance through counsel was necessary).
Because UBK attempted to respond to the complaint pro se, and had not been told by the court that it was not permitted to do so, it did not willfully default. See Onondaga County Carpenters Pension and Health Funds v. Industrial Contracting, Inc., No. 96 Civ. 325, 1997 WL 176323, at *1 (N.D.N.Y. Apr. 7, 1997) (finding that defendant corporation's president exhibited good faith by responding to plaintiff and contacting the court). In making this determination, I am mindful of the widely expressed preference for resolving disputes on their merits and the liberal standard applicable to motions for relief from defaults under Rule 55(c).
Having deciding that UBK did not willfully default, I turn now to the remaining considerations in a motion for relief from a default: prejudice to the plaintiff and the assertion of meritorious defenses by the defendant. Neither of these factors is strongly contested in this case.
While RLS does not specifically address the issue of prejudice in its brief, RLS does point out that, because UBK failed to begin actively defending this suit until two business days before its submission to Judge Freeman was due, RLS had to complete the task of producing its Proposed Findings of Fact and Conclusions of Law for Judge Freeman. This amount of prejudice is insufficient to deny UBK relief from the default in this case. Nevertheless, because UBK's negligence in failing to retain counsel to respond to the complaint caused RLS the unnecessary burden of applying for default judgment, RLS may recover from UBK the costs incurred as a result of the default, including an allowance for attorney's fees reasonably incurred in this regard. See Powerserve Int'l, 239 F.3d at 515 ("The imposition of conditions as part of granting a Rule 55(c) motion can be used to rectify any prejudice suffered by the nondefaulting party as a result of the default and the subsequent reopening of the litigation.") (quoting Charles A. Wright, Arthur R. Miller Mary Kay Kane, Federal Practice and Procedure § 2700, at 170-71); Bicicletas Windsor, S.A. v. Bicycle Corp. of America, 783 F. Supp. 781, 788-89 (S.D.N.Y. 1992) ("[B]ecause BCA's negligence was the cause of the entry of default in this case, BCA must bear the costs incurred because of the default."); see also Hendricks v. New York City Bd. of Educ., No. 98 Civ. 4279, 1998 WL 898122, at *2 (S.D.N.Y. Dec. 23, 1998); Forte v. East Harlem Block Schools, Inc., No. 91 Civ. 6942, 1993 WL 7577, at *4 (S.D.N.Y. Jan. 7, 1993).
RLS's brief does not address UBK's assertion that it has a potentially meritorious defense. UBK argues that the amendment to the parties' contract upon which RLS relies is void because all the contracting parties did not approve it, as the contract required, and because there was no consideration for the amendment. Furthermore, UBK argues that even if the amendment is valid, it does not require the payments to which RLS claims it is entitled. Finally, UBK argues that it was not unjustly enriched, because RLS performed only the services required under the original contract. Because the defenses presented by UBK, if supported at trial, could defeat RLS's claims, the final requirement for granting relief from the default is met.
CONCLUSION
For the foregoing reasons, defendant United Bank of Kuwait PLC's motion for relief from the entry of default under Rule 55(c) of the Federal Rules of Civil Procedure is granted. Defendant must bear the attorney's fees and costs incurred by plaintiff RLS Associates, LLC because of the default. Defendant is directed to file and serve an answer to the complaint, and counsel for defendant are directed to enter an appearance, on or before February 22, 2002.
RLS may quantify the fees and costs by an affidavit of counsel detailing the relevant attorneys' time spent, an itemized statement of out-of-pocket costs, and contemporaneous time sheets supporting the time claimed. See New York State Assoc. for Retarded Children, Inc. v. Carey, 711 F.2d 1136, 1147-48 (2d Cir. 1983).
Counsel for the parties are directed to attend a status conference at 2:00 p.m. on March 5, 2002, in Courtroom 17C, 500 Pearl Street.
It is SO ORDERED.