Opinion
00-CV-0742E(Sr)
February 4, 2003.
MEMORANDUM and ORDER
This decision may be cited in whole or in any part.
Plaintiff commenced this negligence action in the New York State Supreme Court, Erie County on April 25, 2000 against Consolidated Rail Corporation ("Conrail"), Canadian American Transportation, Inc. ("CanAm"), Pierre Desmeules, DT Escort Service ("DT") and Nova Permit Pilot Cars ("Nova") in connection with an accident that had occurred at a railroad crossing in Corfu, N.Y. on May 29, 1998. The action was subsequently removed to this Court on August 25, 2000 and thereafter all of the defendants, except DT, served and filed Answers. DT never appeared and, pursuant to their requests, the Clerk of the Court entered default against DT in favor of plaintiff and Conrail on April 9, 2001, CanAm and Desmeules on April 11, 2001 and Nova on May 10, 2001. All parties subsequently filed motions for default judgment against DT on the issue of liability — Conrail on April 19, 2001, plaintiff on April 27, 2001, CanAm and Desmeules on May 15, 2001 and Nova on May 18, 2001.
A more detailed recitation of the facts and procedural history of this case is set out in this Court's May 29, 2002 Memorandum and Order.
Defendants have all asserted crossclaims against each other and, additionally, CanAm and Desmeules have asserted counterclaims against plaintiff.
On May 5, 2001 Conrail filed a motion for leave to file a third-party complaint against Ronald Kummer and Jon Doe, Inc. for indemnity or contribution. According to Conrail's motion, "Kummer and/or John Doe, Inc., carry on, and have carried on, business under a trade or fictitious name or names, including, but not limited to, DT Escort Services and/or DT Oversized Lease Trucks, and conducted activities in the State of New York giving rise to the incident [involving Brenton's injury]." Conrail's Mot. Leave File Third-Party Compl., Ex. B, ¶ 5. On May 16, 2001 plaintiff filed a motion for leave to file an amended complaint and sought to name "231543 Ontario, Inc., c.o.b. as Morley Holdings Limited o.a. DT Truck Escort and/or Donald Kummer a.k.a. Ronald Kummer, Inc." ("Morley Holdings") as a defendant, based on "further investigation" that revealed that such name may have been the proper target entity. May 16, 2001 Aff. of Patrick J. Donoghue, Esq., ¶ 8. On May 18, 2001 the motions for default judgment, Conrail's motion for leave to file a third-party complaint and plaintiff's motion for leave to file an amended complaint were all submitted to this Court. DT failed to appear and having received no opposition, the undersigned granted all of the respective motions that day by signing form orders that had been submitted by the parties.
Conrail never filed its proposed third-party complaint because plaintiff subsequently filed an amended complaint.
Morley Holdings Limited is the legal name of the corporation that does business as "DT Oversize Load Truck Escort Service."
Plaintiff filed an Amended Complaint May 22, 2001 and, without this Court's permission, named "Donald Kummer a.k.a Ronald Kummer" as an individual defendant. On June 26, 2001 this Court received a Notice of Stay of Proceedings ("Notice") from the Trustee in a bankruptcy proceeding that had been commenced by DT on May 7, 2001 in Ontario, Canada. Attached to the Notice were letters that had been sent to all of the other parties in this case from Taylor Leibow, Inc., the designated Trustee in DT's bankruptcy. The letters informed each party that they could not continue their claims against DT due to its May 7, 2001 bankruptcy filing and the letters also indicated that "bankruptcy notice and documents" had been forwarded to all of them on May 11, 2001. Thereafter, DT made its first appearance in this action by filing a September 25, 2001 Answer and subsequently, on May 8, 2002, it filed the instant motion to vacate the May 18, 2001 default judgment.
The Amended Complaint differed from plaintiff's proposed amended complaint that had been previously submitted and approved by the Court. Kummer, president of Morley Holdings, filed an August 13, 2001 motion to dismiss the Amended Complaint. This Court subsequently granted Kummer's motion and ordered plaintiff's amended complaint stricken from the record. The parties were directed to proceed on plaintiff's original complaint. See Brenton, at 9-10.
In support of its motion, DT initially argued that its failure to timely appear in this action was due to "excusable neglect" and that such a reason is a basis for vacatur of a default judgment pursuant to Rule 60(b) of the Federal Rules of Civil Procedure ("FRCvP"). Nova and Conrail filed opposing papers and argued that DT had not made the requisite showing in order to justify vacatur of the default judgment. DT then filed a Reply and argued for the first time that Conrail and Brenton — and possibly Nova, Desmeules and CanAm — had acted in bad faith by failing to inform this Court, at the May 18, 2001 hearing, of DT's Canadian bankruptcy filing. Conrail was then granted leave to file a sur-reply. In its sur-reply, Conrail denies any bad faith and attempts to explain the reasons for its failure to apprise the Court of DT's bankruptcy filing.
FRCvP 60(b) provides the standard for vacatur of a default judgment and states, in pertinent part, that a court may relieve a party from a default judgment for the following reasons: "(1) mistake, inadvertence, surprise, or excusable neglect; *** (3) fraud ***, misrepresentation, or other misconduct of an adverse party; *** or (6) any other reason justifying relief from the operation of the judgment." The decision to grant a FRCvP 60(b) motion is a matter of discretion as the district court is in the best position to evaluate the circumstances of the case and is in the best position to evaluate the credibility and good faith of the parties. Action S.A. v. Marc Rich Co., Inc., 951 F.2d 504, 507 (2d Cir. 1991). However, such discretion is limited to the extent that the Second Circuit has shown a preference for resolving disputes on the merits. See Enron Oil Corp. v. Diakuhara, 10 F.3d 90, 95 (2d Cir. 1993) (stating that the scope of a district court's discretion upon consideration of a motion to vacate a default judgment is limited by a "reflection of [the Second Circuit's] oft-stated preference for resolving disputes on the merits"). Accordingly, where doubt exists as to whether to vacate a default judgment, such doubt should be resolved in favor of the party in default. Meehan v. Snow, 652 F.2d 274, 277 (2d Cir. 1981). Finally, the Second Circuit has set forth three criteria that courts should consider in determining whether to vacate a default judgment pursuant to FRCvP 60(b), including (1) whether the default was willful, (2) whether the moving party has presented a meritorious defense and (3) the level of prejudice, if any, that the nonmovants would suffer as a result of vacatur. Gucci America, Inc. v. Gold Center Jewelry, 158 F.3d 631, 634 (2d Cir. 1998).
There is no doubt that DT willfully defaulted in this case. DT has not argued that it had not been properly served in this case or that its failure to appear was due to some kind of negligence. Rather, DT's failure to appear in this case was primarily due to the fact that its insurance carrier, CGU Insurance Company of Canada ("CGU"), initially denied coverage for this action. Kummer, President and sole shareholder of Morley Holdings, stated that it "did not have sufficient funds to defend this lawsuit" as a result of CGU's decision to disclaim coverage. Kummer Aug. 7, 2001 Aff. ¶¶ 23-24. Thus, DT's failure to appear in this action was the result of a calculated and deliberate decision based on an insufficiency of funds. Such deliberateness conclusively establishes that DT willfully defaulted. See Gucci, at 635 (holding that willfulness is established within the context of a FRCvP 60(b) motion when a party defaults deliberately).
According to DT, after Kummer had been served with plaintiff's summons and complaint, he had informed CGU of the action. CGU initially denied coverage claiming that the automobile liability coverage did not apply to DT's vehicles inasmuch as they were not directly involved in Brenton's accident. Aff. of Gregory V. Pajak, Esq., ¶ 13.
DT also has not shown a meritorious defense. "A defendant seeking to vacate an entry of default must present some evidence beyond conclusory denials to support his defense." Enron Oil Corp., at 98. The issue for the court is not whether the defense will likely prevail at trial. Instead, the issue is whether the movant has presented sufficient evidence that, if proven true, would provide a complete defense. Ibid. DT has submitted cognizable defenses and crossclaims in its Answer — to wit, negligence of the plaintiff and other co-defendants — however, it has submitted no evidence in support of such defenses. Such absence of evidence can only lead this Court to conclude that DT has not shown a meritorious defense. Finally, the third inquiry relevant to a FRCvP 60(b) motion — whether the other parties will suffer prejudice if the motion is granted — weighs in favor of DT. None of the parties has argued that it will be prejudiced if DT's motion is granted. Indeed, no such prejudice would result from vacatur inasmuch as the default judgment is limited to the issue of DT's liability and because the parties would not be prevented from attempting to establish such liability at trial. In sum, the Court finds that DT willfully defaulted, that it has not presented sufficient evidence to present a meritorious defense and that no party would be prejudiced if the default judgment is vacated.
Included with DT's September 25, 2001 Answer are various discovery demands on the other parties. It is unclear if those demands were complied with or whether DT had conducted any meaningful discovery prior to its May 8, 2002 FRCvP 60(b) motion. In any event, DT had more than seven months to at least offer some evidence to this Court in support of its defenses.
Additionally, FRCvP 60(b) requires that the motion to vacate "be made within a reasonable time." In this case, DT waited almost 11 months until after the default judgment to file the present motion to vacate. While such a filing could arguably be considered unreasonable, the Court need not render judgment on the issue because DT's motion was filed within the one-year maximum allowed by FRCvP 60(b). See FRCvP 60(b) (stating that a motion to vacate "must be made within a reasonable time, and for reasons [based on excusable neglect] not more than one year after the [default judgment is entered]").
Such findings would have easily led this Court to deny DT's FRCvP 60(b) motion were it not for DT's bankruptcy filing and the subsequent conduct of the other parties in this case. Such events have forced the Court to consider three additional issues — viz., (1) whether a Canadian bankruptcy filing has any effect on an ongoing domestic civil lawsuit, (2) whether the parties opposing DT's FRCvP 60(b) motion have acted in bad faith by failing to inform this Court of such bankruptcy filing and (3) whether such bad faith, if any, justifies vacatur.
The Court first addresses whether this Court should recognize DT's Canadian Bankruptcy filing under the doctrine of comity and, if so, whether such filing should have stayed further proceedings in this Court against DT. Comity has been defined as "the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws." Allstate Life Ins. Co. v. Linter Group Ltd., 994 F.2d 996, 998-999 (2d Cir. 1993) (quoting Hilton v. Guyot, 159 U.S. 113, 164 (1895)). Comity may be granted if "it is shown that the foreign court is a court of competent jurisdiction, and that the laws and public policy of the forum state and the rights of its residents will not be violated." Id. at 999 (quoting Cunard S.S. Co. v. Salen Reefer Serv. AB, 773 F.2d 452, 457 (2d Cir. 1985). If the foreign court abides by "`fundamental standards of procedural fairness,' [then] granting comity is appropriate." Ibid. (quoting Cunard, at 457).
The Second Circuit has consistently recognized the appropriateness of extending comity to foreign bankruptcy proceedings. See Finanz AG Zurich v. Banco Economico S.A., 192 F.3d 240, 246 (2d Cir. 1999) ("We have repeatedly noted the importance of extending comity to foreign bankruptcy proceedings."). More importantly, this Circuit has found Canada to be a "sister common law jurisdiction with [bankruptcy] procedures akin to our own." Clarkson Co. Ltd. v. Shaheen, 544 F.2d 624, 630 (2d Cir. 1976); see also Cornfeld v. Investors Overseas Svcs., Ltd., 471 F. Supp. 1255, 1259 (S.D.N.Y.), aff'd, 614 F.2d 1286 (2d Cir. 1979) (explaining why Canadian bankruptcy proceedings should be recognized, and deferred to, based on the doctrine of comity). Furthermore, courts "uniformly grant comity to Canadian proceedings." In re Davis, 191 B.R. 577, 587 (Bankr.S.D.N.Y. 1996). Accordingly, this Court will extend comity to Canada's governing law over DT's bankruptcy proceedings — to wit, the Bankruptcy and Insolvency Act ("BIA").
Similar to the automatic stay provision of United States bankruptcy law, the BIA provides for an automatic stay of civil actions against a debtor upon the filing of bankruptcy. Section 69.3(1) of the BIA provides that
"Subject to subsection (2) and sections 69.4 and 69.5, on the bankruptcy of any debtor, no creditor has any remedy against the debtor or the debtor's property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy, until the trustee has been discharged." Bankruptcy and Insolvency Act, R.S.C., ch. B-3, s. 69.3(1) (1985) (Can.).
In addition, the BIA states that bankruptcy occurs upon "the date of *** the filing of an assignment by the [debtor]." BIA, at § 2.1. DT filed its assignment in bankruptcy on May 7, 2001, therefore its creditors — which include the litigants in this case — should have thereafter been prohibited from continuing their civil actions in this matter. However, this Court was prevented from extending comity to the BIA and its automatic stay provision because it was unaware of DT's bankruptcy filing. Such unawareness existed on May 18, 2001, when the undersigned granted the default judgment against DT and now leads the Court to consider whether any of the parties has acted in bad faith by failing to inform this Court of DT's bankruptcy filing.
The BIA defines a creditor as "a person [or corporation] having a claim, unsecured, [or otherwise], provable as a claim under this Act." BIA, at § 2.
As previously discussed, the parties appeared before the Court on May 18, 2001 and submitted various motions, including their motions for default judgment against DT. DT failed to appear and filed no opposition to the default judgment motions and none of the attorneys present at the hearing informed the Court that DT had previously filed for bankruptcy in Canada on May 7, 2001. Consequently, the Court signed the default judgment forms that had been submitted by the parties and ordered a default judgment against DT as to its liability. The Court subsequently learned that plaintiff and Conrail — and likely CanAm, Nova, and Desmeules — had known about DT's bankruptcy filing at the time of the May 18, 2001 hearing. Such was revealed when plaintiff later submitted his opposition to Kummer's August 13, 2001 motion to dismiss. Included in plaintiff's opposition papers had been a March 16, 2001 letter which had been sent via facsimile from Marjan Neceski, Esq., counsel for Conrail, to Patrick Donoghue, Esq., counsel for plaintiff. The letter reads as follows:
"As discussed, we believe that we are now able to identify the proper corporate entity conducting activities as DT based on the Notice of Bankruptcy of Morley Holdings Limited o/a DT Truck Escort Service dated May 11, 2001.
"We conducted a Dye Durham corporate profile and name search for Morley Holdings Limited, and also for a similarly named company referred to as `Morley Katz Holdings Limited.' The results of our searches are enclosed. Based upon this information, it appears that Morley Katz Holdings Limited is unrelated to the subject proceedings. However, we believe that the following entity should be added as a party to this proceeding:
`231543 Ontario, Inc., c.o.b. as Morley Holdings Limited o.a. DT Truck Escort Service[.]'
"Further, Donald Kummer may have acted as the alter ego of this entity and, we think, should also be added as a party and be identified as follows: `Donald Kummer a.k.a. Ronald Kummer[.]'
"If you are agreeable to amending plaintiffs' [sic] complaint to add these two parties (in addition to, and not in lieu of `DT Escort Services' as presently named), then proceeding on an amended complaint (as opposed to a third-party complaint by Conrail) would be the `cleanest' course of proceeding to ensure the proper target parties are in.
"I plan on trying to reach Mr. Oliveri and Mr. Sorrels shortly to fill them in on our discussion and suspect they will be on board. We can then present the matter with unanimity to Judge Elfvin. Please do not hesitate to call with any questions regarding the above or if you wish to discuss this matter further." Donoghue Sep. 18, 2001 Aff., Ex. B (emphasis added).
Thus, both Donoghue and Neceski — and probably Oliveri and Sorrels — knew that DT had filed for bankruptcy in Canada as early as May 16, 2001; yet, not one of them apprised the Court of such information just two days later at the May 18, 2001 hearing. Indeed, such information would have likely persuaded this Court to deny the parties' motions for default judgment against DT. In a May 29, 2002 Memorandum and Order by which Kummer's motion to dismiss had been granted, this Court noted
Such is likely because according to the last paragraph of Neceski's letter, he was planning to "reach Mr. Oliveri and Mr. Sorrels shortly to fill them in on our discussion." It has not been suggested by anyone that Neceski subsequently took some other course of action and therefore Oliveri and Sorrels presumably knew of DT's bankruptcy filing at the May 18, 2001 hearing.
"[DT's bankruptcy filing was not disclosed by any of the parties moving for a default judgment] against DT and, had they done so, this Court may not have granted their motions for default judgment and most certainly would not have signed their form order granting default judgment against DT that day." See Brenton, at 5 n. 4.
In its sur-reply, Conrail initially tries to explain why it failed to inform the Court of DT's bankruptcy filing and then cites to the BIA and argues why its stay provision does not apply in this case. As for its failure to inform the court of DT's bankruptcy filing, Conrail admits that it received notice of DT's bankruptcy filing on May 16, 2000 but argues that such did not "place any of DT's unsecured `lawsuit creditors,' including Conrail, on notice that a stay under Canadian law was in any way being claimed." Conrail's Sur-Reply Mem., p. 4. Further, Neceski states:
"It did not occur to me on May 18, 2002 ***, that, in the absence of anything at all in the notice from the DT bankruptcy trustee which in any manner referenced or touched upon the notion of a stay under Canadian law, that this otherwise uncomplicated invitation to make a claim *** might somehow effect [sic] Conrail's pending motion. In hindsight, it seems the fact that the Trustee — who both knows [sic] Canadian bankruptcy law and knew when he issued the notice that this U.S. lawsuit was ongoing — did not issue any kind of stay notice with that May 16, 2002 mailing would have suggested that no stay under Canadian law was being claimed." Neceski Aff. ¶ 7 (emphasis in original).
The Court is skeptical of Conrail's explanation for failing, at the May 18, 2001 hearing, to inform the Court of DT's bankruptcy filing. In essence, Conrail's account can best be described as an attempt to rely on its own ignorance of the law. Such reliance is rejected because ignorance of the law — foreign or otherwise — by an attorney is not a valid excuse for failing to keep the Court adequately informed about the relevant circumstances concerning a party to this litigation. Second, the Court doubts the truthfulness of Conrail's account. Even assuming that Neceski, and the other attorneys in this case, did not know the specific ramifications that DT's Canadian bankruptcy filing had on this case, the Court finds it hard to believe that all of them failed to even consider the possibility. In other words, Neceski's assertion that "it did not occur to [him] on May 18, 2002" that the Canadian bankruptcy filing "might somehow affect Conrail's pending motion" is not credible. Indeed, if the parties were in doubt about the effect of DT's bankruptcy filing, they should have researched the matter. Even a cursory review of federal caselaw and Canadian bankruptcy law would have revealed at least the possibility that DT's Canadian bankruptcy filing might operate to stay the continuation of these domestic proceedings. Finally, Neceski's individual claim of ignorance is particularly disturbing considering the fact that he is licensed to practice in New York and in Ontario, Can., where DT filed its application for bankruptcy.
In addition, the Court notes that no other party besides Conrail has offered any explanation to the Court for its failure to provide information about DT's bankruptcy during the May 18, 2001 hearing. Thus, while these comments are primarily directed at Conrail and plaintiff, they apply equally to all of the other parties that were present at the May 18, 2001 hearing.
Nevertheless, Conrail contends that the BIA's automatic stay provision — Section 69.3(1) — never applied to any of the litigants in this case because all of their claims had ultimately been deemed invalid and thus, cannot be considered to be "provable claims." Id. at 5. Such an argument is without merit. Section 69.3(1) acts to stay all proceedings "for the recovery of a claim provable in bankruptcy." BIA, at § 69.3(1). The stay therefore acts to stay the continuation of any actions commenced in order to recover on a claim that is capable of being proved in bankruptcy. Conrail's initial claim which it filed in DT's bankruptcy proceeding was at least capable of being proven at the outset and therefore was subject to the automatic stay. Conrail's interpretation of section 69.3(1) is erroneous. There is simply nothing within the language of the section to indicate that, when a claim is subsequently deemed unprovable by the Trustee, the claim is then somehow retroactively exempted from the previously triggered automatic stay. Thus, the ultimate disposition of Conrail's bankruptcy claim has no bearing on whether section 69.3(1) initially operated to stay its continuation of this collateral proceeding against DT. Simply put, all of the proceedings in this case should have been stayed upon DT's May 7, 2001 bankruptcy filing. Consequently, the motions for default judgment against DT should have been denied on May 18, 2001.
A "`claim provable in bankruptcy', *** includes any claim or liability provable in proceedings under this Act by a creditor." See BIA, at § 2. Provable is defined as "capable of being proved." See Black's Law Dictionary 1240 (7th ed. 1999). Further, the BIA defines "claims provable" as:
"All debts and liabilities, present or future, to which the bankrupt is subject on the day on which the bankrupt becomes bankrupt or to which the bankrupt may become subject before the bankrupt's discharge by reason of any obligation incurred before the day on which the bankrupt becomes bankrupt shall be deemed to be claims provable in proceedings under this Act." BIA, at § 121(1) (emphasis added).
Arguably, the default judgments rendered by this Court are effectively void. See Rexnord Holdings, Inc. v. Bidermann, 21 F.3d 522, 527-528 (2d Cir. 1994) (discussing how the automatic stay provision of the U.S. Bankruptcy Code applies to judicial proceedings conducted subsequent thereto); see also In re 48th St. Steakhouse, Inc., 835 F.2d 427, 431 (2d Cir. 1987) (finding creditor's termination notice to be void because it was served on debtor in violation of 11 U.S.C. § 362(a)(1)); see also In re Endres, 12 B.R. 404, 405 (Bankr.D.Wis. 1981) (holding that a default judgment rendered in state court was void because it had been ordered after the debtor's bankruptcy petition in violation of the Bankruptcy Code's automatic stay provision). However, the Court need not determine whether the default judgment is void inasmuch as it will be vacated on other grounds.
The Court realizes that the ultimate decision whether to vacate a default judgment is a matter of discretion and equity and that the Court should, and has, taken many factors into account. In this case, such factors include the conduct of DT in deliberately defaulting, the conduct of its adversaries in failing to inform this Court of DT's bankruptcy filing, the bankruptcy filing itself and the Second Circuit's preference for resolving disputes on the merits rather than ordering default judgments. Consideration of such factors, in totality, leads the Court to conclude that DT's FRCvP 60(b) motion should be granted.
DT is partly to blame for the default judgment. It willfully defaulted by choosing not to initially appear in this action and, then, after default judgment had been rendered against it, waited another eleven months before moving to vacate such. That conduct must however be weighed against the misconduct of plaintiff, Conrail, CanAm and Desmeules — whether intentional or not — in failing to inform this Court of DT's bankruptcy filing. Finally, significant consideration is given to the fact that DT's bankruptcy filing — which occurred prior to this Court's granting of the default judgment — should have operated to stay these proceedings. To summarize, the Court finds that DT's willful conduct is collectively outweighed by the conduct of its adversaries, by the bankruptcy filing and by the fact that any doubt as to whether to grant or deny the FRCvP 60(b) motion should be resolved in favor of the defaulting party.
The Court declines Conrail's request to condition vacatur on a proviso that DT post a bond in an amount equal to Conrail's property damage claim. In addition, the Court will not grant Conrail its attorney fees incurred as a result of this motion.
Accordingly, it is ORDERED that DT's motion to vacate the default judgment entered against it on May 18, 2001 is granted, that the defendants shall respond to DT's crossclaims within 30 days of the filing of this Order and that the parties are directed to appear before this Court on Thursday, April 10, 2003 at 1:00 p.m., or as soon thereafter as the matter may be heard, in order to show cause why this action should continue against DT in light of its Canadian bankruptcy filing.