Petition for Writ of Certiorari — E. L. U. L. Realty Corp. v. Greyhound Exhibitgroup, Inc.
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92-882 | Fired
. ma NOV 19 4992
IN THE OFFICE OF THE CLERK
Supreme Court of the United States
October Term, 1992
GREYHOUND EXHIBITGROUP, INC.,
Respondent,
VS.
E.L.U.L. REALTY CORP.,
Petitioner,
ANTHONY GALLINA d/b/a GALLINA SPRINKLER SYSTEMS, and A
GALLINA SPRINKLER SYSTEMS and A. GALLINA HEATING AND
MECHANICAL SPRINKLER CORP.,
Defendants.
Petition for a Writ of Certiorari to the United
States Court of Appeals for the Second Circuit
NOEL W. HAUSER, Of Counsel
Stephen H. Penn & Associates
Attorneys for Elul Realty
10 Rockefeller Plaza
New York, New York 10020
(212) 245-4050
DICK BAILEY SERVICE (212) 608-7666 (718) 447-5358 (S16) 222-2470 (914) 682-0848 Fax (718) 273-802)
1-800-564-4913
QUESTIONS PRESENTED
1. In view of the teaching of
Fed. R. Civ. P. 8(d) that a
defendant in default does not
admit damages, did the Second
Circuit’s majority opinion
correctly rule that
plaintiff’s contributory
negligence in a _ negligence
case could not be shown in
mitigation of damages,
especially since applicable
State Law also provides for
mitigation in the
circumstances?
2. Is a plaintiff relieved of
its burden of demonstrating
causal relationship between
negligence and damages by the
mere fortuity of the
defendant’s default; and may
the defendant show concurrent
causes of the damages claimed
in mitigation?
3. Does Due Process permit a
Court to impose upon a
defendant in default the full
burden of damages sustained,
without any allocation as to
fault, notwithstanding that
the complaint alleged only
that the defendant had
exacerbated the damages?
4. Did the Circuit Court
improperly rule that the
defendant in default was
precluded from pursuing a
claim against the plaintiff
when the District Court had
specifically reserved judgment
on that issue?
iii
5. Does the Doctrine of
Collateral Estoppel, as
opposed to Res Judicata, apply
to a default judgment rendered
by a Federal Court applying
Federal Law?
6. Did the Second Circuit
properly conclude that a
defendant’s claim for
indemnity must be asserted as
a compulsory counterclaim
where conditions under which
indemnity was to be provided
did not exist at the time for
service of counterclaims and
in any event the facts giving
rise to the counterclaims were
unknown to the putative
counterclaimant?
7. Does Due Process permit a
Court to enter a default
Judgment against a defendant,
briefly in default in serving
a timely answer but with an
admittedly meritorious
defense, because the defendant
has failed to satisfy
financially onerous terms of a
conditional vacatur without so
much as a hearing to determine
whether the terms could be
met?
V
PARTIES TO THE PROCEEDINGS
The original parties to this
case were Greyhound Exhibitgroup, Inc.
("GEX"), as the plaintiff, and Elul
Realty Corp. ("Elul"), Anthony Gallina
d/b/a Gallina Sprinkler Systems and A.
Gallina Heating and Mechanical Sprinkler
Corp. (collectively, "the Gallina
defendants") as the defendants. The
Suit against the Gallina defendants
ended by voluntary discontinuance after
the action pr Elul proceeded to
inquest. Although the caption was not
altered, the only parties before the
Circuit Court were GEX, plaintiff-
appellee, and Elul, defendant-appellant.
Elul Realty Corp. has_ no
parent or subsidiaries.
Vi
TABLE OF CONTENTS
Questions Presented. ...... +. « ed
Parties to the Proceedings. .....v
Table of Authorities. ....... vii
Opinions Below. . .« « «= «© © «© = «© « eK
Jurisdiction of the Supreme Court. xiii
Statutes Involved. ....... . -Xiv
Statement of the Case. ......ei
Reasons for Granting the Writ. ... 14
ARGUMENT
I. The Formulation of GEX’s
Damages + a . . > * ~ . 7 . : i8
Rh. GempenGaege. « « « «& «6 » oe
B. Facts in Mitigation
of Damages. ... + « e« 21
II. The Effect of the Failure of a
Defendant in Default To Assert
Compulsory Counterclaims
And the Federal Rule on
Collateral Estoppel. ... .29
III. The Refusal To Modify the
Conditions for Vacatur of the
Default Deprived Elul of its
Constitutional Right
To a Day in Court. .... 40
Comelusi@h.e 2» « ts & & 6 & & SS Se
TABLE OF AUTHORITIES
Cases Pages
Amusement Business Underwriters Inc. v.
American Int’l Group,
66 N.Y.2d 878,
498 N.¥.&S.2G 760 (1985). ... .21
Carteret Savings and Loan Association
v. Jackson,
Si2 F.2G 36 (ist Cir. 1967). . .30
Dillon v. Twin State Gas & Electric Co.,
263 Ae AIR €N.He 19392). +. « « « 25
Fehlhaber v. Indian Trails, Inc.
425 F.2d 715 (3d Cir. 1970).23,.24
487 Elmwood Inc. v. Hassett
161 A.D.2d 1171, 556 N.Y.S.2d 425
(4th Dept. 1990). . . . « « « « $0
Hammond Packing Co. Vv. State of
Arkansas,
212 U.S. 322, 29 S. , °
mA. S30 (1906). -. 6-3 es ee
1)
(t
W
~
©
UWI
W
ty
Hovey v. Elliot,
iG7 U.S. 409, 17 &. Ct. 370, 42 L.
Oe SES S20 sac em x ele
Huddell v. Levin,
537 F.2d 726 (3d Cir. 1976). . .26
J & P Construction Co. Vv. Valta
Construction Co., ;
452 So.2d 857 (Ala. 1984)... .22
Jensen v. Chevron Corp.,
160 A.D.2d 767, 553 N.Y.S.2d 485
[a0 Ges S299G)« & & «a ss e8
viii
OO ——————————
Kinney v. G.W. Lisk Co.,
76 N.Y.2d 215,
557 N.Y¥.6.2@ 263 (1990)... « «39
Kohlenberger v. Tyson’s Foods,
510 S.W.2d 555 (Ark. 1974). .. 21
Lawlor v. National Screen Service,
349 U.S. 322, ¢5 3. CE. 665, 99 L-
Ed. Sanaa Cheeers.“s «+ 6 ee we ee ® USE
Logan v. Zimmerman,
455 U.S. 422, 102 &S. Ct. 1148, 71
i. i ee ae” er | |
Matter of Lombard,
739 F.2d 499 (10th Cir. 1984). .34
Matter of McMillan
579 F.2d 289 (3d Cit. 29786). .« «35
McClelland v. Climax Hosiery Mills,
20a Mekete S47 (1930). « « « « wi
Montgomery Elevator Co. v. Building
Engineer Services Co.,
730 F.2d 337 (5th Cir. 1984). . 39
Nichols v. Anderson,
788 F.2d 1140 (5th Cir. 1986). .32
Peter Fabrics, Inc. v. S.S. Hermes
765 F.2@ 306 (2@ Cir. 1985). . «37
Reynolds v. Hartford Accident’ and
Indemnity Co.,
278 F. Supp. 331 (S.D.N.¥. 1967)39
Scafidi v. Seiler,
199 N.J. 93, 574 A.2d 398 (1990) 26
ix
Steinhauser v. Hertz,
421 F.2d 1169 (2d Cir. 1970). . 26
Thorpe v. Thorpe,
364 F.2d 692 (C.A.D.C. 1966). . 41
Tibbetts v. IBM,
161 A.D.2d 581, 551 N.Y.S.2d
460 (20 Dept. i990). .... . .40
Transworld Airlines v. Hughes,
449 F.2d 51 (1971),
rev’d on other grounds
408, 0.8." 383 -C1073). oe eS, «20
Tutt v. Doby,
459 F.2G 23195 (€C.A.0.C. 1872)... «34
U.S. v. International Building Co.,
345 U.5. 502, 73 &. Ct. 807,
o? Teo Eee “S208 F900). 3 ee «SS
Treatises and Law Reviews
47 Am. Jur. 2d Judgments 1187. ... 21
AD MeleeRe 2G GOls «© &-% 6 ete lhl th hl UD
25A Corpus Juris Secundum
section 184 (1966 ed.). . .. . .21,.25
Harper, James and Gray,
The Law of Torts, section 20.3
Ce: Sd. RG bce be wa fe ee
King, Causation, Valuation and Chance
in Personal Injury Torts Involving
Preexisting Conditions
and Future Consequences,
90 Yale L.J. 1353 (1981). ... 26
J.W.
Practice,
Moore,
1B Moore’s Federal
§ 0.444[2] (1992 ed.). 34
Polasky, Collateral Estoppel—
Effects of Prior Litigation,
39 Iowa Law Review 217 (1954). . 35
Restatement (Second) of Judgments
§ 27 comment (e) (1980 ed.). ... . 35
Statutes
Fed. R. Civ. P.
Fed. R. Civ. P.
Fed. R. Civ. P.
N.Y. Civ. Prac.
OPINIONS BELOW
Neither the Judgment nor any
of the opinions rendered in this case
has been officially reported.
Unreported opinions relevant to this
Petition and annexed as an Appendix at
la to 68a are as follows:
Decision on Appeal of the
United States Circuit Court for the
Second Circuit: No. 92-7545 slip op.
(August 24, 1992);
Memorandum and Order of the
Hon. I. Leo Glasser, United States
District Judge, adopting Report and
Recommendation of United States
Magistrate Judge following inquest
(E.D.N.Y. April 22, 1992);
Memorandum and Order of United
States District Judge I. Leo Glasser
refusing to modify condition on vacatur
(E.D.N.Y. July 29, 1991).
JURISDICTION OF THE SUPREME COURT
The Judgment and Opinion of
the Second Circuit was rendered on
August 24, 1992. The jurisdiction of
this Court is invoked pursuant to 28
U.S.C. section 1254(1).
xiv
STATUTES INVOLVED
Fed. R. Civ. P. 8(d) provides:
"“Averments in a pleading to
which a responsive pleading is
required, other than those as
to the amount of damage, are
admitted when not’ denied in
the responsive pleading * * *"
28 U.S.C. (Underscoring added.)
Fed. R. Civ. P.
provides:
Compulsory counterclaims. A
pleading shall state as a
counterclaim any claim which
at the time of serving the
pleading, the pleader has as
against any opposing party, if
it arises out of the
transaction or occurrence
which is the subject matter of
the opposing party’s claim * *
ra
28 U.S.C.
Fed. R. Civ. P.
provides:
"Setting aside default. 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)."
13 (a)
55(c)
48 U.S.C.
The Fifth Amendment to the
United States Constitution provides, in
pertinent part, as follows:
"No person shall be .
deprived of life, liberty or
property, without due process
of law."
U.S. Constitution Amendment V.
New York CPLR 1411 provides in
pertinent part:
"In any action to recover
damages for * * *injury to
property * * * the culpable
conduct attributable to the
Claimant * * * including
contributory negligence shall
not bar recovery, but’ the
amount of damages otherwise
recoverable shall be
diminished in the proportion
which the culpable conduct
attributable to the claimant *
* .* bears to the culpable
conduct which caused the
damages."
28 U.S.C.
The Fifth Amendment to the
United States Constitution provides, in
pertinent part, as follows:
"No person shall be .. .
deprived of life, liberty or
property, without due process
of law."
U.S. Constitution Amendment V.
New York CPLR 1411 provides in
pertinent part:
"In any action to recover
damages for * * *injury to
property * * * the culpable
conduct attributable to the
claimant * * * including
contributory negligence shall
not bar recovery, but the
amount of damages otherwise
recoverable shall be
diminished in the proportion
which the culpable conduct
attributable to the claimant *
* * bears to the culpable
conduct which caused the
damages."
STATEMENT OF THE CASE
This case presents the
important Constitutional question
whether a defendant, briefly in default
in interposing its answer, may be denied
the right to prove an admittedly
meritorious defense by conditioning
without a hearing terms impossible to
Satisfy as a practical matter, thus
rendering the conditional vacatur
essentially an unconditional denial.
Additionally, the case poses the
question whether, consistent with Due
Process, a defendant in default in
answering may be burdened with the full
measure of his adversary’s damages,
unallocated as to fault or causation,
notwithstanding that the complaint as to
which the defendant defaulted did not
allege that the defendant had caused all
the damages but only that he _ had
exacerbated them. Stated otherwise,
this petition asks whether a plainties
that, by luck of the draw, obtains a
default judgment is thereby relieved
from the necessity of demonstrating that
the defendant in default caused all the
damages claimed. Important additional
questions are presented concerning the
interrelationship, if any, between Fed.
R. Ci¥. P. 13(a), dealing with
compulsory counterclaims, and the effect
thereof on traditional notions of
Collateral Estoppel in the context of a
default in answering, and the propriety
of a Circuit Court ruling on the issue
absent any determination in the District
Court.
These questions arise tron the
following set of facts and procedural
history. Petitioner, Elul Realty Corp.
(hereafter "Elul") was at all relevant
times the landlord of a commercial
building in Brooklyn, New York.
Respondent, Greyhound Exhibitgroup, Inc.
(hereafter "GEX") was the major tenant
in the building and conducted
manufacturing operations, including the
large scale use of combustible
substances, thereat. Early on Saturday
morning, February 13, 1988, a fire broke
out in GEX’s premises as a result of
horseplay among its employees, resulting
in substantial damage from contact with
the combustible substances.
Some months’ following the
fire, Elul initiated eviction
proceedings against GEX for non-payment
of rent. GEX, for its part, filed its
own suit against Elul (and the
Gallina parties defendant) alleging, in
substance, that the spread of the fire
was exacerbated because the fire
sprinkler system, the maintenance of
which was the =e responsibility of
the Gallina defendants, did not function
properly. Elul’s statutory agent for
the receipt of process was served.
Elul was covered by a $500,000
policy of liability insurance in its
favor; also, the lease between Elul and
GEX obligated GEX to furnish $1 million
in liability insurance for the benefit
of Elul. Possibly as a result of
confusion concerning primary
responsibility for the defense of the
action initiated against it by GEX, no
answer was interposed by Elul or any
insurance carrier in its behalf to GEX’s
complaint before due date of the answer
in November of 1988; and Elul’s default
was noted at that time. It is to be
observed that, according to the opinion
of the Second Circuit, Elul’s claims
0
w
against GEX for indemnity (based upon
GEX’s duty to furnish insurance as
provided by the lease) became barred and
forever foreclosed upon Elul’s default
in failing to serve an answer to the
complaint containing what the Second
Circuit found was. a "compulsory
counterclaim" within twenty days of
service upon its agent of the Summons
and Complaint.
Elul made its first
application to vacate its default as
early as December 1988. The application
to vacate was opposed by GEx, ironically
on the ground that Elul’s
insurance coverage of Only $500,000 was
not enough to pay the damages
occasioned.' It should be noted that,
Although obligated by the lease to
furnish $1 million in liability insurance
coverage for the benefit of Elul, GEX evidently
failed to keep the coverage in force, a fact
which first came to light when, ironically, GEX
+
in fact, GEX maintained first-party
coverage on its own property under a
policy which contained a $500,000
deductible clause; thus, the claims of
"inadequacy" of Elul’s insurance
coverage were being advanced by GEX’s
first-party insurance carrier as
subrogee for the amounts it was required
to pay to GEX.
Eventually, the Honorable John
L. Caden, United States Magistrate
Judge, to whom the matter of vacating
the default had been referred by then
United States District Judge
Joseph McLaughlin, recommended that the
default be vacated on the posting by
Elul of a bond for $1 million. In
reaching this conclusion the Magistrate
charged that Elul had insufficient insurance
coverage. This-was long after the time to file
a counterclaim, when Elul was already in
default.
ee
Caden observed that Elul had a
meritorious defense. However, Elul had
previously executed a mortgage on its
property to raise funds to repair the
fire damage without giving prior notice
to parties to the litigation, as
required by Magistrate Caden’s initial
interim Order, issued while the
Magistrate’s original Report and
Recommendation, proposing unconditional
vacatur, was awaiting consideration by
then-District Judge Joseph M.
McLaughlin. Because the mortgage had
been executed and no notice had been
given, Judge McLaughlin had recommitted
to the Magistrate the issue whether to
vacate the default, At that point
Magistrate Caden again recommended that
the default be vacated, this time
recommending the $1 million bond. This
was two years after the default and 23
months after Elul first made its
application to vacate. Judge McLaughlin
accepted Magistrate Caden’s second
recommendation and gave Elul only 30
days from November 7, 1990 (the date of
the Order) within which to produce and
file the $1 million bond.
In the meantime Elul and its
counsel had parted company, undoubtedly
because of the default, for which Elul
held counsel responsible, and because of
counsel’s failure to advise Elul of the
notice requirement earlier imposed by
the interim Order of Magistrate Caden.
At all events, Elul engaged new counsel
at the end of November 1990. Elul’s new
counsel then wrote the Honorable I. Leo
Glasser, United States District Judge,
who assumed responsibility for this case
upon Judge McLaughlin’s elevation to the
Second Circuit bench, on December 13,
Ce
1990, advising that Elul could not
furnish the $1 million bond but that it
was prepared to furnish alternative and
entirely adequate security. Judge
Glasser did not respond; instead, on or
about March 20, 1991, he signed an Order
directing an inquest.
Elul promptly moved for
reconsideration, offering in
substitution for the $1 million bond
(which Elul could not furnish because of
economic conditions), the building
itself as well as the personal
guarantees of its three principals
(individuals described by GEX itself as
people of vast personal financial
means). Judge Glasser refused without a
hearing to consider any modification of
the $1 million bond requirement, even
ruling that the application was denied
as untimely, and ignored Elul’s request
10
for an evidentiary hearing on its
claimed inability to post such a bond
and on the sufficiency of the
alternative collateral which Elul and
its principals had offered.
By this time it was painfully
clear to Elul and its new counsel that
GEX had failed to keep in force and
effect a policy of liability insurance
in favor of Elul in the sum of $1
million as required by GEX’s lease with
Elul. On Elul’s second application to
vacate or modify the $1 million bond
requirement, this point was made to
Judge Glasser and the Court was referred
to numerous cases decided by New York’s
appellate courts to the effect that,
where a tenant violates a provision in
its lease by which it is obligated to
furnish liability insurance for the
benefit of its landlord, the tenant is
————@<@<@«a«>J>n°
11
to be treated as a self-insurer for the
benefit of the landlord. Judge Glasser
did not pass on the issue at that time,
concluding that it should be dealt with
in terms of the damage award following
inquest, apparently on the grounds that
a defendant in default has the right to
be heard and to offer evidence on the
issue of damages, Fed. R. Civ. P. 8(d).
Judge Glasser nevertheless refused to
reduce the amount of the bond although
the insurance claim, for $1 million, was
obviously worth almost as much as GEX’s
Claimed damages of $1.5 million and
should easily have secured its potential
judgment.
At the inquest, GEX offered no
evidence whatever on the issue of
causation. Not improbably, its failure
to do so was due to the fact that the
existing proof unequivocably showed that
the fire originated in GEX’s premises as
a result of its employees’ horseplay;
and that, fairly read, GEX’s complaint
as to which Elul was in default simply
Claimed that the fire damage was
exacerbated, not caused, by the failure
of the fire sprinkler to. operate
properly. No effort was made by GEX to
distinguish between preexacerbation and
post-exacerbation damages; no effort was
made to apportion damages between the
parties according to the respective
culpability of each of them as required
by New York law; and Magistrate Caden,
who conducted the inquest, refused to
hear testimony from experts and firemen
who attended at the scene of the fire,
including the supervising Fire Marshal,
in the face of an Elul’s offer of proof
that the supervising Fire Marshal would
testify that the failure of the fire
13
sprinkler system to operate had
little or nothing to do with
exacerbating the fire and that what had
in fact exacerbated the fire was the
presence on the- premises. of the
combustible substances stored thereon by
GEX in violation of its lease. Judgment
for $1.5 million plus interest was
entered after inquest; Judge Glasser
adopted the Magistrate’s Report and
Recommendation without considering
Elul’s argument that GEX was cbligated
to prove causation with respect to
damages as well as liability; and the
Second Circuit, over Judge Altimari’s
strong dissent in this regard, affirmed.
14
REASONS FOR GRANTING
A_WRIT OF CERTIORARI
The decision rendered by Judge
Glasser directing entry of judgment, and
the affirmance thereof by the Second
Circuit, conflicts in at least three
respects with earlier well-settled
authority which forms the basis for
numerous decisions and rules of law
articulated by the United States Supreme
Court, by other Circuit Courts
throughout the United States and even
with one decision, followed by al]
courts, rendered by the Second Circuit
itself.
As will hereafter be
demonstrated, the decision below
overrules a significant body of case law
holding that the doctrine of collateral]
estoppel, as opposed to res judicata,
does not apply to a party in default to
preclude later assertion of independent
Claims against the beneficiary of the
default. The Second Circuit’s broad
interpretation of the compulsory
counterclaim rule, set forth at Fed. R.
Civ. P. 13(a), ignores entirely the
previously expressed limitations against
applicability of the rule of collateral]
estoppel as against parties in default.
Secondly, the decision below
ignores entirely the traditional
requirement in cases involving
unliquidated damages that the plaintiff
show a causal link between the wrongfu]
acts of the defendant and the damages
alleged to have been caused thereby.
This holding defies reason: Under the
Second Circuit’s new formulation, for
example, the party claiming damages ina
personal injury action arising out of an
automobile accident could recover
damages against a defendant in default
by showing he had lung cancer after, but
not before, the accident.
Thirdly, the Court below
ignored a decision by the Third Circuit
holding that, where state law provides
for application of comparative
negligence, a plaintiff’s proven
damages, in a diversity case, must be
reduced by the plaintiff’s own culpable
conduct in causing howe damages. To
the contrary, the Second Circuit held
that, by reason of the defendant’s
default, the plaintiff’s comparative
negligence cannot be shown, even in
mitigation, even where the complaint
does not claim that the plaintiff was
ee po fault, and even when the
complaint does not charge the defendant
with having caused all the damage.
Finally, the Court below
CO
ignored the principle that, where a
Court has imposed terms impossible to
meet aS a condition to vacating a
default, it deprives the defaulted party
of qts constitutional right to a day in
court if alternative terms which can be
Satisfied are not even considered.
18
ARGUMENT
I. THE FORMULATION OF GEX’S DAMAGES.
The Courts below disregarded
both settled case law and plainly worded
legislative enactments in fixing
plaintiff’s damages.
A. CAUSATION.
Fed. R. civ. P. 8 (da)
specifically excludes a defendant’s
default from having any impact’ on
Summed; stated otherwise, a defendant
in default makes no admissions as to the
damages claimed by the plaintiff. The
Courts below effectively held, though,
that while the default did not admit the
quantum of damages alleged, it somehow
admitted damages not alleged, i.e., the &
preexacerbation damages attributable to
GEX’s own fault, which were not alleged
to have been due to Elul’s fault.
The majority opinion rendered
til
19
in this case by the Second Circuit is
that the limitation imposed by Fed. R.
Civ. P. 8(d) deals only with the quantum
of damages and not the issue of
causation. The dissenting opinion of
Circuit Judge Altimari, relying upon the
venerable Second Circuit decision in
Transworld Airlines Inc. vs. Hughes, 449
F.2d 51, 69-70 (1971), rev’d on other
grounds, 409 U.S. 363 (1973)
(hereinafter, "TWA"), came to a contrary
conclusion. TWA holds that, in the case
of a default where the beneficiary
thereof seeks unliquidated damages, that
beneficiary must prove that the
defendant caused the damages before an
award can be made. The TWA Court stated
in pertinent part at 449 F.2d 70:
The default judgment did not
give TWA a blank check to
recover from Toolco any losses
it had ever suffered from
whatever source. It could
20
only recover those damages
arising from the acts’ and
injuries pleaded and in this
sense it was TWA’s burden to
show ‘proximate cause.’"
TWA’s teaching on the issue of
proximate cause where a defendant is in.
default has been followed by almost
every court on every level. The Second
Circuit’s majority opinion makes a
distinction in TWA’s teaching which does
not seem to be supported by reason or
principle and, on the contrary, opens
the door to mischievous results by
allowing the beneficiary of a default to
"prove" plainly unsupportable claims.
The Decision likewise overlooks the fact
that knowledgeable defendants are often
prepared to concede the issue of
liability in a proper case (rather than
incur the costs of a full-fledged
defense) where it appears that the
plaintiff has not suffered or cannot
aL
21
prove causation of substantial damage.
B. FACTS IN MITIGATION OF
DAMAGES.
Independent of the provisions
of Fed. R. Civ. P. 8(d), the rule in the
Federal Courts, the rule in the courts
of the state of New York—whose law
applies in this diversity case—and the
rule throughout the United States is
that a defendant in default is under no
disability whatever on the issue of
contesting damages and may prove any
facts in mitigation of damages. 25A
C.J7.S. Section 172 at 135; 47 Am. Jur.
2d Judg. Section 1187; 15 Aska. 3G GOT;
Amusement Business Underwriters Inc. vs.
American International Group, 66 N.Y.2d
878, 498 N.Y.S.2d 760 (1985); McClelland
vs. Climax Hosiery Mills, 252 N.Y. 347
(1930); Kohlenberger vs. Tyson’s Foods,
g bs
Inc., 510 S.W.2d 555 (Sup. Ct. Ark.
1974); J & P Construction Company vs.
Valta Construction Co., 452 So.2d 857
(Sup. Ct. Ala. 1984).
The New York legislature has
enacted comparative negligence
legislation which provides that, in an
action to recover damages for injury to
property, the damages otherwise
recoverable by the plaintiff upon a
showing of negligence on the part of the
defendant are to be reduced in
proportion to the culpability of the
plaintiff itself. The obvious import of
this rule deals with damages.
In Fehlhaber vs. Indian
Trails, Ine., 425 F.2d 715 (3d Cir.
1970), plaintiff sued defendant for
damages for negligence. Defendant
joined a third-party defendant which
defaulted in answering the third-party
complaint. Following disposition of the
———
22
main action between plaintiff and
defendant-third-party plaintiff, the
third-party plaintiff moved for judgment
against a third-party defendant in
default. The District Judge directed a
hearing to determine the comparative
degree of fault of the parties as a
predicate for the means of apportioning
damages between the third-party
plaintiff and third-party defendant, the
default of the latter notwithstanding.
Upon appeal by the third-party
plaintiff, the Third Circuit affirmed,
concluding that the degree of fault of
the respective parties:
". . . went to the extent of
. Gamages and, therefore, by
the express terms of Rule 8(d)
F.R.C.P. was not to be taken
as admitted by the default."
In stark contrast to the
decision by the Third Circuit, the
Second Circuit held, contrary to the
express language of Fed. R. Civ. P. 8(d)
and New York CPLR 1411, that plaintiff’s
culpability could not be shown in
mitigation of damages because of the
defendant’s default.
It is interesting to note that
in Fehlhaber, the District Court found
that the negligence of the third-party
defendant contributed only slightly to
the injuries sustained by the plaintiff.
Perhaps it was for that reason that the
third-party defendant, recognizing that
its exposure was very limited, decided
it was cheaper and easier to defend
against damages rather than the claim on
liability. The Second Circuit would
deprive it of the freedom to make that
determination by forcing the defendant
to undertake litigation that might cost
more than the value of the claims
asserted.
eiereernenememeereneiietteteneenmrieiisiitiaiiia iia ia
_
Closely related to the concept
of causation discussed above are the
concepts of consecutive and concurrent
negligence contributing to a loss
sustained by a plaintiff. It is an
elementary principle of the law of torts
that a defendant may not be held liable
in damages for injuries or conditions
caused by others. 25A C.J.S. Section
184. Particularly in point is Dillon
vs. Twin State Gas & Electric Co., 163
A. 111 (N.H. 1932), the famous case of a
boy who fell from a girder above a
bridge and was electrocuted by wires he
touched during the course of his fall.
The Court concluded that damages
recoverable from electrocution were
limited since the boy would in any event
have died or been seriously injured as a
result of the fall. Dillon was relied
upon by the Second Circuit in
26
Steinhauser vs. Hertz, 421 F.2d 1169 (2d
Cir. 1970). To the same effect, see
Huddell vs. Levin, 537 F.2d 726 (3d Cir.
1976); Scafidi vs. Seiler, 199 N.J. 93,
574 A.2d 398 (1990); King, Causation,
Valuation and Chance in Personal Injury
Torts Involving Pre-Existing Conditions
and Future Consequences, 90 Yale L.J.
1353 (1981); Harper, James and Gray, The
Law of Torts, Section 20.3 (2d ed.
1986).
At least three actors acting
concurrently or consecutively were the
cause of GEX’s damages: Elul, the
defendant; the Gallina defendants who
were responsible for maintaining the
fire sprinkler system; and Greyhound
itself. The Second Circuit not only
ignored a virtually unbroken line of
precedent requiring a plaintiff in a
tort case to prove proximate cause as to
27
damages as well as liability, but it
also ignored the principle articulated
by many other cases and dictated by due
process considerations that a defendant
should be required to pay only those
damages for which he is responsible. In
this connection it likewise ignored the
fact these same considerations prohibit
a court from entering judgment- on
default for an amount exceeding that
alleged in the complaint. In this case,
the Courts awarded GEX damages for the
full amount of loss associated with the
fire notwithstanding that the complaint
had only charged Elul with some of those
damages.
In its zeal to punish Elul for
its post-default actions (and the record
shows that no Court has ever found that
Elul’s post-default actions were
contemptuous or even deliberate,
28
although the courts willingly assumed
the worst), the Second Circuit bench
went so far as to usurp the right and
duty of District Judge Glasser to pass
on the issue, then sub judice, whether
Elul was entitled to a $1 million setoff
for liability insurance coverage which
GEX had agreed to furnish for the
benefit of Elul but had failed to
furnish. In his decision of July 29,
1991, Judge Glasser expressly ruled that
GEX’s failure to furnish coverage as
required under its lease with Elul
impacted on damages. Because Magistrate
Caden, who conducted the inquest,
refused to consider the issue, however,
Elul’s counsel moved to amend the
complaint to assert the claim—a motion
which, even as of this writing, District
Judge Glasser has not resolved.
Reasonable minds could differ
29
as to whether Elul’s claim in this
regard should be treated as a setoff in
mitigation of damages or as an
independent claim. Perhaps it is both.
In any event, with the matter undecided
in the District Court, the Second
Circuit ruled that Elul was foreclosed
from pursuing the issue because it could
have been asserted as a counterclaim;
and that since it had not been so
asserted because no answer had been
served the issue iS now altogether
foreclosed by the default. This subject
is treated at greater length in the next
section.
I. THE EFFECT OF FAILURE OF A
DEFENDANT IN DEFAULT TO ASSERT
COMPULSORY COUNTERCLAIMS AND THE
FEDERAL RULE ON COLLATERAL
ESTOPPEL.
A Writ of Certiorari should be
granted if only for the reason that the
30
broad reading by the Second Circuit of
the compulsory counterclaim requirement,
Fed. R. Civ. P. 13(a), on the subject of
issue-preclusion follows’ the First
Circuit’s ruling in Carteret Savings and
Loan Association vs. Jackson, 812 F.2d
36, 38 (1st Cir. 1987), but directly
conflicts with recent decisions from the
Fifth and Tenth Circuits and with the
results reached by most of the courts
that have considered the issue as well
as text writers and commentators.
In this case, GEX’s complaint
charged Elul only with negligence in the
maintenance of the fire sprinkler system
in the building where the fire occurred.
Elul does not dispute that, if the
Court’s refusal to vacate Elul’s default
in answering this complaint was
justified, the issue of Elul’s
negligence is res judicata. However,
31
in affirming the judgment of the
District Court, the Second Circuit went
much further: It held that Elul’s
default foreclosed it from litigating
other claims which, but for the default,
Elul could have asserted against GEX by
way of indemnity or by way of mitigation
of damages. In so doing, it disregarded
what must be considered as_ settled
contrary authority and even took the
extraordinary step of usurping the
District Judge’s right and duty to rule
on the issue in the first instance. In
effect, the Second Circuit sua sponte
extended the effect of Fed. R. Civ. P.
13 (a) far beyond its generally
understood reach in default or consent
judgment cases.
The principle of res judicata
is that an issue once tried and decided
is forever foreclosed; and the principle
32
is fully applicable to default
judgments. The related but clearly
distinguishable principle of collateral
estoppel, when applicable, stands for
the proposition that a party is
foreclosed from litigating an issue
which could have been, but was not,
litigated in earlier litigation
involving the same parties and related
but not identical subject matter.
In the instant action,
initiated by GEX in the District Court
on diversity grounds, the Second Circuit
ruled that Elul’s default foreclosed it
from asserting its claim for indemnity
or by way of mitigation of damages,
based upon GEX’s failure to maintain $1
million in insurance coverage for the
benefit of Elul, at a time when the
issue was sub judice before the District
Judge.
33
In Nichols vs. Anderson, 788
F.2d 1140 (5th Cir. 1986), the defendant
raised as a defense a judgment obtained
by default against the plaintiffs in an
earlier litigation where the subject
matter of the present action could have
been, but was not, determined. In
disallowing the defense, the Fifth
Circuit stated as follows:
In diversity cases, we apply
Federal Collateral Estoppel
Doctrine. Freeman vs. Lester
Coggins Trucking Inc., 771
F.2d 860 (5th Cir. 1985). The
party seeking to invoke
Collateral Estoppel must plead
the defense, Fed. R. Civ. P.
8(c), and show:
(1) That the issue at stake
be identical to the-= one
involved in prior litigation;
[and] (2) That the issue has
been actually litigated in the
prior litigation; and (3) That
the determination of the issue
in the prior litigation has
been a critical and necessary
part of the judgment in that
earlier action.
xk
34
The record before us does not
show that the validity of the
radius-exclusion clause - was
‘actually litigated’ in the
Arkansas proceedings. * * *
The default judgment status
militates against the
conclusion that the validity
vel non of the
radius-exclusion clause was
before the Court. It strains
credulity to believe’ that
Canal put the validity of the
clause at issue, and Woods
made no appearance.
Moore’s, supra, at § 0.444[2],
says this:
{[P)robably the preponderant
view, and we think the better
one, is that, as a general
proposition, a default
judgment has no Collateral
Estoppel effect. To invoke
the Doctrine of Collateral
Estoppel in default cases is
not only an oppressive
application of the Doctrine,
but it misconceives the nature
of a default judgment.
To the same effect, see Matter
Of Lombard, 739 F.2d 499 (10th Cir.
1984); Tutt vs. Doby, 459 F.2d 1195
(C.A.D.C. 1972); Lawlor v. National
Screen Service, 349 U.S.
322, 75 S. Ct. 865, 99 L.Ed. 1122
(1955); U.S. v. International Building
Co., 345 U.S. 502, 73 S. Ct. 807, 97
L.Ed. 1182 (1953); Matter of McMillan,
579 F.2d 289 (3d Cir. 1978); Restatement
(Second) Judgments (1980) § 27, comment
(e); Polasky, Collateral
Estoppel-Effects of Prior Litigation, 39
Iowa Law Review 217, 226 (1954).
Moreover, since the lease
between the parties did not call for GExX
itself to indemnify Elul against
liability claims, but rather to provide
insurance in favor of Elul therefor, the
Second Circuit’s conclusion that Elul
was required to assert as a compulsory
counterclaim. against GEX the latter’s
failure to obtain the insurance
presupposes that Elul had knowledge,
within 20 days of the service upon it of
36
GEX’s Summons and Complaint, that the
promised insurance was not in fact in
effect. Neither District Judge Glasser
nor the Second Circuit made a finding
that Elul was aware of GEX’s failure
during that time frame; on the contrary,
the record abundantly reflects Elul’s
understanding that such coverage was
indeed in force.
The Second Circuit’s reading
of the compulsory counterclaim rule
makes it preclusive on a defendant who
has failed to assert a counterclaim even
if it was unaware, and entirely
justified in being unaware, that such a
counterclaim existed. Elul respectfully
suggests that such a reading of the
compulsory counterclaim rule is clearly
violative of the Fifth Amendment to the
United States Constitution. The Second
Circuit’s decision was handed down
37
notwithstanding the fact that even as
late as June 1992, when GEX filed its
brief to the Second Circuit, GEX did not
concede that it had failed to obtain the
insurance as agreed, arguing instead in
its brief that there was no evidence
that it had failed to obtain the
coverage called for in the lease. In
fact, however, Magistrate Caden
disallowed any evidence on the issue at
the inquest.
In this connection, the
decision in Peter Fabrics, Inc. vs. S.
S. Hermes, 765 F.2d 306 (2d Cir. 1985)
(Friendly, J.), is instructive. In
Peter Fabrics, the third-party plaintiff
made claim for damages against the
third-party defendant, which claim the
third-party defendant successfully
resisted. It was only at trial that an
agreement obligating the third-party
38
plaintiff to indemnify the third-party
defendant surfaced, having been produced
by counsel for the third-party
plaintiff. Counsel for the defendant
then advised the Court of his ignorance
of the contract as well as the indemnity
provision.
Following the trial and
dismissal of the third-party complaint,
the Trial Court granted leave to the
third-party defendant to amend its
answer to incorporate a counterclaim for
indemnity as permissive, Fed. R. Civ. P.
13(b). In granting the motion, the
Trial Judge took the position that the
claim for indemnity had not matured
until the primary claims had _ been
resolved. Peter Fabrics is direct
authority for the proposition that a
claim for indemnity is not matured until
the occasion for indemnity arises—at
39
least in circumstances where the party
who would assert it had no knowledge at
the time he served his answer.
In the instant case, Elul’s
Claims against GEX for breach of the
insurance clause of the lease did not
mature for indemnity purposes” until
judgment -was entered by the District
Court in April 1992. See, also,
Montgomery Elevator Co. vs. Building
Engineer Services Co., 730 F.2d 377 (5th
Cir. 1984); Reynolds vs. Hartford
Accident and Indemnity Company, 278 F.
Supp. 331 (S.D.N.Y. 1967).
There can be no question that
under the law of New York, GEX’s failure
to furnish the $1 million insurance
coverage for the benefit of Elul as
provided by its lease made GEX itself
Elul’s insurer. Kinney vs. G.W. Lisk
Co., 76 N.¥.2d 215, 557 N.Y.S.2d 283
40
(1990); 487 Elmwood Inc. vs. Hassett, et
al., 161 A.D.2d 1171, 556 N.Y.S.2d 425
(4th Dept. 1990); Tibbetts vs. IBM, 161
A.D.2d 581, 551 N.Y.S.2d 160 (2d Dept.
1990); Jensen vs. Chevron Corp., 160
A.D.2d 767, 553 N.Y.S.2a 485 (2d Dept.
1990). See, also, Judge Glasser’s
Memorandum and Order dated July 29, 1991
at 10 n.3 at 62a.
Itt. THE REFUSAL TO MODIFY THE
CONDITIONS FOR VACATUR OF THE
DEFAULT DEPRIVED ELUL OF ITS
CONSTITUTIONAL RIGHT TO A DAY
IN COURT.
The United States Constitution
provides protection against a party
being deprived of property without Due
Process of Law. Denial of a day in
Court to a defendant to prove what is
admittedly a meritorious defense for
failure to comply with a Court Order
with which compliance is impossible is a
violation of that party’s Constitutional
41
rights because it is deprived by
operation of the default judgment of its
property. Many cases support this view.
See, e.g-, Hammond Packing Co. vs. State
of Arkansas, 212 U.S. 322, 53 L.Ed. 530,
29 §.Ct. 370 (1908); Hovey vs. Elliot,
167 U.S. 409, 42 L.Ed. 215, 17 S. Ct.
841 (1897); Logan vs. Zimmerman,
455 U.S. 422, 71 L.Ed. 2d 265, 102 S.
Ct. 1148 (1983). In Thorpe vs. Thorpe,
364 F.2d 692 (C-A.D.C. 1966), the Court
reversed a bond requirement imposed by
as a condition to vacating a party’s
default upon a showing that’ the
defaulted party was unable to comply
with the condition imposed. The Court
stated in pertinent part at 695:
If appellant’s claim that he
simply is unable tc comply
with a condition imposed is
true, serious questions are
raised, questions having an
aura of denial of due process
of law. See Societe
42
Internationale, ete., vs.
Rogers, 357 U.S. 197, 209-210,
78 S. Ct. 1067, 2 bkeBG. 2C
1255 (1958), where the Supreme
Court stated, in another
context, that imposition of an
‘impossible’ condition of a
litigant’s right to a trial on
the merits raises
Constitutional difficulties *
x *
These authorities are
especially applicable here, since the
District Court refused to even consider
Elul’s claim of that compliance would be
impossible or to direct that a hearing
be conducted on that issue or to
consider Elul’s willingness to furnish
adequate alternate security, an offer
which the Second Circuit accepted as a
condition to staying enforcement of the
District Court’s judgment pending its
consideration of Elul’s appeal.
Concededly, a Court has the
power to refuse to vacate a default ina
proper case. Such a case might be where
43
the party in default lacks a meritorious
claim or defense (here Magistrate Caden
observed that it appeared Elul had a
meritorious defense) or has repeatedly
been guilty of willful contumacious
conduct. Similarly, it cannot be denied
that a Court has the power to impose
terms aS a condition to an Order
vacating a party’s default. However,
where the party in default admittedly
has a meritorious claim or defense, and
the default has not been found to have
been - willful, deliberate or
contumacious, the imposition of terms
which in a practical sense cannot be
complied with, resulting in a party’s
denial of his day in Court and
consequential deprivation of property,
clearly violates that party’s
Constitutional rights, especially where
the party in default is a defendant and
44
the monetary sums involved are
relatively substantial. This is such a
case.
CONCLUSION
For all of the foregoing
reasons, a Writ of Certiorari to the
Second Circuit should be granted and a
stay of enforcement of the judgment of
the United States District Court for the
Eastern District of New York should
issue pending consideration on the
merits of Elul’s appeal to this Court.
Dated: New York, New York
October 30, 1992
Respectfully submitted,
NOEL W. HAUSER, Of Counsel
Stephen H. Penn & Associates
Attorneys for Elul Realty
la
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
No. 1954--August Term 1991
(Argued: July 14,1992 Decided: August 24, 1992)
Docket No. 92-7545
GREYHOUND EXHIBITGROUP, INC.,
Plaintiff-Appellee,
oe) <<
E.L.U.L. REALTY CORP.,
Defendant-Appellant,
ANTHONY GALLINA d/b/a GALLINA SPRINKLER
SYSTEMS, and A. GALLINA SPRINKLER SYSTEMS
and A. GALLINA HEATING AND MECHANICAL
SPRINKLER CORP.,
Defendants.
Before:
ALTIMARI, MAHONEY, and WALKER,
Circuit Judges.
2a
Appeal from the final judgment of the United States
District Court for the Eastern District of New York,
Honorable I. Leo Glasser, Judge, substantially adopting
Magistrate Judge John L. Caden's’ report § and
recommendation and awarding plaintiff $1,496,425.82 in
damages. The sum was calculated by means of a post
default judgment inquest conducted in the course of
plaintiff's action for property and other damages suffered as
a result of a fire in defendant's warehouse.
Affirmed.
Judge Altimari concurs in part and dissents in part in a
separate opinion.
KENNETH A. BLOOM, NEW YORK, NEW YORK
(Douglas B. Lang, Cozen and O'Connor,
of counsel), for Plaintiff-Appellee.
NOEL W. HAUSER, NEW YORK, NEW YORK
(Stephen H. Penn & Associates, of counsel),
for Defendant-Appellant.
WALKER, Circuit Judge:
This is an appeal from the final judgment of the
3a
United States District Court for the Eastern District of New
York, Honorable I. Leo Glasser, Judge, adopting the report
and recommendation of Magistrate Judge John L. Caden.
The case involves _ plaintiff-appellee's, Greyhound
Exhibitgroup, Inc. ("GEX"), claim for damages allegedly
caused by the defendant-appellant's, E.L.U.L. Realty Corp.
("ELUL"), negligence in conjunction with a warehouse
fire. During the relevant period, GEX was a tenant in
ELUL's warehouse. The particular dispute before us stems
from the fact that ELUL defaulted in this action by failing
to timely answer GEX's complaint. Upon the district court's
entry of default against ELUL, the case was referred to the
magistrate judge to conduct an inquest into the actual
amount of financial injury that GEX suffered. See 28
U.S.C. § 636(b)(2); Fed. R. Civ. P. 53. At the close of the
inquest, the magistrate judge recommended to the district
court that ELUL be ordered to pay GEX $1,496,425.60 in
damages. The district court adopted the magistrate judge's
report and recommendation substantially in its entirety, and
4a
entered judgment against ELUL for $1,496,425.82, along
with costs and interest at the New York State statutory rate
of 9%.
On appeal ELUL raises a host of issues, all of which
we find to be without merit.
BACKGROUND
This litigation has an extremely knotted procedural
and factual history which we need not fully untangle in
order to address the issues raised on this appeal. The
following discussion will suffice for the purposes of our
analysis.
GEX is a Delaware corporation, with its principal
place of business in Elk Grove Village, Illinois. It is
engaged in the production, assembly and storage of exhibits
used in trade sales. ELUL is a New York corporation, with
its principal place of business in Brooklyn, New York.
Among other properties, ELUL
Sa
owns and operates a warehouse (the "warehouse") located
at 14 Whale Square, Brooklyn, New York. In January
1983, the parties entered into a lease agreement whereby
GEX rented a substantial portion of the warehouse in which
to conduct its business. On February 13, 1988, a fire broke
out on the premises causing considerable property damage
to GEX and other tenants.
In September 1988, GEX commenced this diversity
action against ELUL, and others, alleging, inter alia, that
the fire damage it suffered resulted from ELUL's negligent
failure to maintain the warehouse's sprinkler system in
good working order. GEX sought $1,500,000 in
compensatory damages. On November 22, 1988, after
ELUL failed to timely appear, answer, or otherwise make a
motion with respect to GEX's complaint, the district court
adjudged ELUL to be in default and ordered that an inquest
be scheduled in order to determine the appropriate damage
6a
award. Over four months later, on April 12, 1989 ELUL
moved the district court to vacate its entry of default. The
district court referred the question of vacatur to Magistrate
Judge Caden for a report and recommendation.
On September 12, 1989, Magistrate Judge Caden
entered an order and recommendation requiring that ELUL
give written notice to all parties regarding any change in
Status as to ELUL's ownership or encumbrance of the
warehouse property, and recommending that the default be
set aside upon that condition. GEX filed objections to the
recommendation. The district court was informed that
ELUL had, in bad faith, violated the recommendation's
notice condition by mortgaging the warehouse property for
an additional $4.5 million on January 18, 1990 without
advising either the court or GEX. Accordingly, the district
court recommitted ELUL's vacatur motion to Magistrate
Judge Caden for further consideration.
7a
Upon reconsideration, the magistrate judge found that:
The history of this case leaves little room for
doubt that an unconditional vacatur would
provide [ELUL] with an opportunity for fraud
and could seriously prejudice [GEX]. The red
flag of caution is amply supported by the
combination of [ELUL's] consistent failure to
observe court-imposed deadlines, the evidence
of its attempts to secrete or dissipate a
substantial asset, and the extended discourse
over the existence and extent of insurance.
Nevertheless, Magistrate Judge Caden determined that
ELUL should have the opportunity to litigate this sizeable
claim on the merits. So as to allay his concern that GEX's
ability to collect on any potential judgment might be
prejudiced by ELUL's intervening actions, on July 23,
1990, he recommended that the entry of default be vacated
upon the condition that ELUL post a $1 million bond
within thirty days after issuance of the district court's order.
By order dated November 7, 1990, the district court
adopted Magistrate Judge Caden's recommendation.
Consistent with its previous conduct, ELUL failed to
timely post the $1 million bond. In a letter dated December
13, 1990, ELUL asserted, inter alia, that it was unable to
satisfy the bond requirement. On March 20, 1991, the
district court denied ELUL's application for relief from its
prior order requiring ELUL to post bond, entered judgment
for GEX, and again ordered that an inquest be held to set
plaintiff's damages. In what had become a familiar refrain,
ELUL moved to vacate the district court's March 20th
order. The district court reiterated the magistrate's findings
in stating that:
[I]t is readily apparent that Elul holds little
regard for rules of civil procedure and for orders
of the court. The court lacks confidence that
Elul would observe an order to maintain the
Status quo. A vacatur would simply provide Elul
with an opportunity for further wrongdoing, at
the expense of GEX.
The court thereupon denied that ELUL's motion to
vacate its entry of default judgment.
9a
In December 1991, Magistrate Judge Caden conducted
an inquest to assess GEX's damages. He received evidence
regarding the costs that GEX incurred as a result of fire
damage to trade exhibit works under construction, to
supplies, goods and other materials, and to rental
properties, as well as additional freight and storage charges
that flowed from the loss of warehouse space. During the
inquest, ELUL attempted to introduce evidence regarding
comparative negligence of GEX that allegedly contributed
to the warehouse fire. Furthermore, ELUL tried to argue
that any damage award should be generally off-set by the
$1 million amount of fire insurance which GEX was
contractually obligated to provide under the lease but failed
to obtain, and, more specifically, that the award for
additional freight and storage costs should be off-set by the
$250,000 in rental payments that GEX withheld from
ELUL after the fire. ELUL contended that these factors
10a
should be considered in mitigation of damages.
The magistrate judge refused to consider any evidence
with regard to ELUL's proposed set-offs. Upon conclusion
of the inquest, he recommended to the district court that
ELUL pay GEX $1,496,425.60 in damages. On April 22,
1992, the district court adopted the magistrate's report and
recommendation substantially in its entirety (merely
correcting a slight mathematical error), and entered final
judgment against ELUL in the amount of $1,496,425.82.
ELUL moved in the district court to stay the enforcement
of GEX's judgment pending appeal, which motion was
denied. Ordering that ELUL post a $200,000 supersedeas
bond, as well as furnish a note and supporting mortgage on
the property to GEX for the amount of the judgment, a
panel of this Court stayed its enforcement. This appeal
followed.
lla
DISCUSSION
The core of ELUL's argument on appeal is that during
the post-default inquest, both the magistrate judge and the
district court erroneously refused to consider evidence in
"mitigation of damages." ELUL contends that GEX'’s: (1)
alleged comparative negligence with respect to the
warehouse fire; (2) failure to provide fire insurance as
required by lease; and (3) withholding of rental payments,
represent valid set-off claims regarding the extent of GEX's
damages and, thus, should have been addressed by the court
at the inquest. In response, GEX argues that ELUL is
merely attempting to reopen the question of its substantive
liability, which had been definitively closed by ELUL's
failure to answer its complaint. We believe that the rule
governing the scope of damage mitigation at a post-default
inquest is not as clear cut as either ELUL or GEX would
have it.
a
12a
While a party's default is deemed to constitute a
concession of all well pleaded allegations of liability, it is
not considered an admission of damages. See Flaks v.
Koegel, 504 F.2d 702, 707 (2d Cir. 1974); Fed. R. Civ. P.
8(d). Damages, which are _ neither susceptible of
mathematical computation nor liquidated as of the default,
usually must be established by the plaintiff in an
evidentiary proceeding in which the defendant has the
opportunity to contest the amount. See Flaks, 504 F.2d at
707; see also U.S. v. DiMucci, 879 F.2d 1488, 1497 (7th
Cir. 1989); cf. Fed. R. Civ. P. 55(b)(2). The question before
us now is whether and to what extent at a post-default
inquest, a defaulting party may seek to mitigate damages by
interposing set-off claims.
1) GEX's Comparative Negligence
Concerning the scope of damage recovery pursuant to
a default judgment, we have stated that:
13a
The outer bounds of recovery allowable are of
course measured by the principle of proximate
cause. The default judgment did not give
[plaintiff] a blank check to recover from
[defendant] any losses it had ever suffered from
whatever source. It could only recover those
damages arising from the acts and injuries
pleaded and in this sense it was [plaintiff's]
burden to show "proximate cause." On the other
hand, there was no burden on [plaintiff] to show
that any of [defendant's] acts caused the well-
pleaded injuries, except as we have indicated
that it had to for the purpose of establishing the
extent of the injury caused [plaintiff], in dollars
and cents.
Trans World Airlines, Inc. v. Hughes, 449 F.2d 51, 70 (2d
Cir. 1971), rev'd on other grounds, 409 U.S. 363 (1973).
ELUL reads our statement in Hughes to mean that
"default or not, a plaintiff must show that the actions of the
defendant were the proximate cause of the damages
|
claimed by the plaintiff." ELUL's argument continues that
because New York law (which presumably controls the
|
outcome of this diversity case) permits the apportionment
attributable to each party, see N.Y. Civ. Prac. L. & R. 1411
of damages based upon the percentage of culpability
l4a
(McKinney 1976 & Supp. 1992), it should have been
allowed at the inquest to prove GEX's relative fault with
respect to the warehouse fire, and mitigate its damages
accordingly. Judge Altimari, in his dissent from this portion
of the majority opinion, adopts ELUL's argument. We think
that both ELUL and the dissent read Hughes too broadly.
There is a categorical distinction between the element
"proximate cause," as it pertains to the assignment of
liability in the first instance, and "proximate cause" as it
relates to the ministerial calculation of damages in the
context of a default judgment. With regard to lability, the
concept of proximate cause supplies the legal nexus
between act and injury, and provides a necessary basis for
awarding compensation. Where it is properly alleged in a
complaint, proximate cause--going to __ liability--is
completely and irrefutably established upon the defendant's
15a
default. See Flaks, 504 F.2d at 707; see also Benny v.
Pipes, 799 F.2d 489, 495 (9th Cir. 1986), cert. denied, 484
U.S. 870 (1987); Fed. R. Civ. P. 8(d). However, as
employed in Hughes, the concept of proximate cause was
merely used to set the limits of recovery according to the
injuries that were conceded by default. Thus, in the Hughes
context, the application of proximate cause presumes that
liability has been established, and requires only that the
compensation sought relate to the damages that naturally
flow from the injuries pleaded. 449 F.2d at 70.
In its complaint, GEX sufficiently alleged that ELUL's
negligence was the proximate cause of the fire damage.
Those allegations were deemed admitted upon ELUL's
failure to timely answer. ELUL's contention, that it should
have been permitted to introduce evidence of GEX's
comparative negligence, effectively contests settled issues
of liability, i.e., who in fact caused the fire damage. If
16a
accepted, ELUL's position would undermine both our
decision in Hughes as well as the general policy governing
default. To permit ELUL to argue comparative fault under
the guise of damage mitigation now, at the inquest stage of
the proceedings, would deny GEX the benefit of Rule 8(d).
But cf. Fehlhaber v. Indian Trails, Inc. 425 F.2d 715, 717
(3d Cir. 1970) (where third-party complaint, inter alia,
requested the court to determine relative fault, default by
third-party defendant did not preclude the court from
assessing damages according to comparative negligence).
2) GEX's Failure to Acquire Fire Insurance
According to ELUL, GEX breached its lease
obligation to furnish $1 million in fire insurance. Citing
New York law, see, e.g., Kinney v. G.W. Lisk Co., 76
N.Y.2d 215, 219, 557 N.Y.S.2d 283, 285-86 (1990), ELUL
claims that GEX is liable for the amount of insurance that it
failed to provide and, as a result, the district court should
17a
have off-set GEX's damage award by $1 million. GEX
responds that, post-default, ELUL was procedurally barred
rom raising a claim for an insurance set-off. We agree with
GEX.
The essential facts concerning GEX's alleged failure to
indemnify ELUL by supplying fire insurance were " 'so
logically connected [to GEX's claim against ELUL for fire
damage] that considerations of judicial economy and
fairness dictate[d] that all the issues be resolved in one
lawsuit.’ " United States v. Aquavella, 615 F.2d 12, 22 (2d
Cir. 1979) (quoting Harris v. Steinem, 571 F.2d 119, 123
(2d Cir. 1978)). On this score, ELUL's claim against GEX
was a compulsory counterclaim. See id.; Fed. R. Civ. P.
13(a). By failing to assert it in a timely responsive pleading,
ELUL is now foreclosed from raising it in any subsequent
proceeding--including the post-default damages inquest
presently under review. See Taylor v. City of
18a
Ballwin, 859 F.2d 1330, 1333 n.7 (8th Cir. 1988) ("By
choosing not to respond, [defendants] will not now be
heard to deny this claim; nor will they be allowed to raise a
counterclaim for set-off."); Cateret Sav. & Loan Ass'n v.
Jackson, 812 F.2d 36, 38 (list Cir. 1987) ("When a
defendant is defaulted for failure to file a pleading, the
default applies to whatever the party should have
pleaded"); 6 C. WRIGHT, A. MILLER & M. KANE,
FEDERAL PRACTICE AND PROCEDURE § 1417
(1990).
3) GEX's Additional Freight and Storage Costs
As part of its overall damage award, the district court
ordered ELUL to nay GEX $90,857.44 for certain freight
and storage costs incurred as a result of GEX's loss of
warehouse space. At the inquest, the magistrate judge
refused to consider ELUL's claim that GEX had already
made itself whole in this regard by reducing its warehouse
19a
rental payments. ELUL argues that the district court's
award reimbursing GEX for these costs effectively granted
GEX partial double recovery. While we hold that ELUL's
default did not deny it the right to assert its claim for
withheld lease payments against GEX, we agree with the
district court's decision to defer consideration of this claim
until the disposition of the separate landlord/tenant action
commenced by ELUL.
In asserting its right to a set-offfor withheld lease
payments, ELUL is not seeking to litigate issues of liability
that were determined in GEX's favor as a result of the
default. Rather, ELUL proffered the evidence at issue in
order to establish that GEX had mitigated its freight and
storage cost damages by withholding lease payments that
GEX was contractually obligated to make to ELUL under
the lease. Because the evidence of lease payments allegediy
owed and not paid by GEX concerned issues of damages--
20a
not liability--Rule 8(d) does not preclude ELUL from
asserting and the district court from considering this
evidence at the inquest. Indeed, if the district court's
decision to refuse to consider evidence of alleged
withholdings by GEX foreclosed ELUL's ability to assert
its right to recover withheld lease payments from GEX, the
decision would have been in error. GEX bore the burden of
proving "in dollars and cents" each item of damage it
claimed, Hughes, 449 F.2d at 70, and ELUL had a right to
proffer evidence rebutting each damage claim, including by
introducing evidence of mitigation of damages by GEX.
However, ELUL has not lost its ability to assert its
alleged right to payments under the lease as a result of the
district court's decision to deny consideration of the set-off
claim. The district court's decision to deny any set-off was
premised upon the fact that ELUL has independently
asserted its lease payment claim in a separate pending
2la
landlord/tenant action against GEX. For reasons of
efficiency, the district court chose to defer consideration of
ELUL's alleged right to the withheld lease payments until
hearing the lease-related action. Greyhound Exhibitgroup,
Inc. v. ELUL Realty Corp., No. CV-88-3039, slip op. at 7
(E.D.N.Y. May 11, 1992). The district court apparently was
concerned that resolution of ELUL's lease-related claim
might involve consideration of a range of factual and legal
issues unrelated to GEX's tort claims and ies unduly delay
disposition of this action. Moreover, the outcome of the
landlord/tenant action could undo any set-off ELUL might
achieve were it permitted to assert its claim for lease
payments at the inquest.
We believe that the district court is in the best position
to determine the most efficient and expeditious means of
resolving the procedurally and factually complicated
litigations arising from the warehouse fire. And, given that
22a
ELUL remains free to assert--and GEX remains free to
challenge--the withheld lease payments claim in the
pending landlord/tenant action, we can find no error in the
district court's refusal to consider the lease payments claim
at the inquest.
CONCLUSION
While at times the repercussions of default may seem
harsh, "(t]he purpose behind default jdugments. . .is to
allow district courts to manage their dockets efficiently and
effectively." Merrill Lynch Mortgage Corp. v. Narayan,
908 F.2d 246, 253 (7th Cir. 1990). If we were to allow a
defaulting party to contest liability and interpose general
set-offs at the damages inquest, we would eviscerate the
rule governing defaults, and for all practical purposes
deprive the district courts of this important case
management tool. On the other hand, a defaulting party
must be permitted to contest the actual compensatory
23a
amount claimed with respect to any particular item of
damages, inccluding through proof of mitigation of
damges. ELUL--through its claim for withheld lease
payments--may be able to establish that GEX mitigated its
freight and storage cost damages. And this damage-related
claim was not foreclosed by ELUL's default. However, the
district court acted within its discretionary power to
manage its docket in withholding consideration of ELUL's
lease payments claim until hearing of ELUL's pending
landlord/tenant action.
We have considered all of ELUL's other arguments
and find them to be without merit.
Affirmed.
ALTIMARI, Circuit Judge, concurring in part and
dissenting in part:
It is clear that a default judgment has the effect of
24a
conclusively establishing two elements of a plaintiff's case:
whether a defendant's acts or omissions were negligent and
whether those acts or omissions proximately caused an
injury to a plaintiff. See Trans World Airlines, Inc. v.
Hughes, 449 F.2d 51, 69-70 (1971), rev'd on other grounds,
409 U.S. 363 (1973). However, Trans World Airlines was
equally clear in holding that a default does not alleviate
plaintiffs burden of establishing that the injury was the
proximate cause of all of the damages claimed by the
defendant. Id; see also Fehlhaber v. Indian Trails, Inc., 425
F.2d 715, 717 (3d Cir. 1970) (holding that a default
judgment did not preclude the court from assessing
damages according to comparative negligence). Put
differently, a default judgment establishes whether a
plaintiff suffered damage; it does not, however, establish
the amount of those damages. The holding in Trans World
Airlines is both binding and sensible, but the majority pays
25a
it no heed. Because the majority's opinion is at odds with
binding circuit precedent, I must respectfully dissent from
that portion of the majority's decision which holds that
where the damages "naturally flow fro.a the injuries
pleaded", a default removes from a plaintiff the burden of
establishing that the amount of damages claimed was
proximately caused by the injury suffered.
As the majority indicates, the underlying action in this
case stemmed from a fire on February 13, 1988, at a
warehouse owned by appellant Elul Realty Cop. ("Elul").
Appellee Greyhound Exhibitgroup, Inc. ("GEX") was a
tenant in the building, and suffered significant property
damage as a result of the fire. In its complaint, GEX did not
allege that Elul's negligence caused the fire. Rather, the
complaint asserts that the fire spread as a result of Elul's
negligence in maintaining a sprinkler system.
At the hearing on damages, the magistrate refused to
26a
=~
allow the Supervising Fire Marshall in attendance at the
fire to testify in Elul's behalf. The Fire Marshall had
previously submitted an investigative report in which he
described how the fire originated through "horseplay"
among a few of GEX's employees. In an affidavit, the Fire
Marshall concluded that even if the sprinkler system had
been fully operational it would have had a negligible effect
in controlling the fire. As the Fire Marshall noted, the
sprinkler head above the point of origin of the fire was in
the roof. Therefore, according to the Fire Marshall, even if
the sprinkler system had been fully operational, by the time
sufficient heat had risen to activiate it, the fire would have
already reached the flammable liquid stored by GEX, and
the sprinkler system could not have controlled the fire.
However, the Fire Marshall's testimony was deemed
irrelevant by the magistrate, since it did not speak to the
amount of damages caused by the fire.
4
27a
The district court did not question the exclusion of this
testimony; neither does the majority. Indeed, according to
the majority, to permit the introduction of evidence of
GEX's contributory negligence "effectively contests settled
issues of liability, i.e. who in fact caused the fire damage."
This statement makes clear that the majority's decision, by
inflating the admission of liability to encompass damages
as well as injury, has sub silentio relieved the plaintiff of
the burden of proving "those damages arising from the acts
and injuries pleaded", Trans World Airlines, 449 F.2d at 70,
in direct contravention of Trans World Airlines’ holding
that a default judgment only proves "the fact of. . .the
injury", not the extent thereof. /d. The end result of this
compression is that the plaintiff is relieved of its burden of
showing that the breach of the duty of care, for which
defendant is liable, proximately caused the damages
alleged. See Trans World Airlines, 449 F.2d at 70.
28a
Elul's default established its liability only as to the fact
of the injury alleged, not the extent of the damages
proximately caused by that injury. /d. at 69. This is because
when a defendant defaults, the "burden of establishing
proximate cause is satisfied as to liability if proximate
cause is adequately alleged in the complaint." /d. at 70
(emphasis in original). However, the default judgment did
not relieve GEX of establishing that the injury proximately
caused by Elul's negligence was in turn the ne of the
"damages arising from the acts and injuries pleaded and in
this sense it was [plaintiffs] burden to show 'proximate
cause." Jd. In other words, Elul's default established the
existence of its liability, not the extent of its liability. /d. at
70; see also Restatement (Second) of Torts § 454 cmt b.
(1965) (proof of proximate cause is necessary for the
establishment of liability, as well as for the establishment
of the amount of damages where liability is admitted).
29a
Under Trans World Airlines, Elul's default precluded
it from grounding its defense on an assertion that it
properly maintained the sprinkler system. The default also
established that Elul's negligent act proximately caused the
fire to spread, which was the injury alleged. Jd. at 70.
However, the default judgment did not give GEX a "blank
check" to recover damaes "it had suffered from whatever
source." Jd. Consequently, GEX had the burden of proving
that all of the damages alleged were proximately caused by
the spread of the fire, which by reason of the default was
admitted to have been the proximate result of Elul's
negligent acts or omissions. In order to meet this burden,
GEX should have been required to prove that none of the
damages was proximately caused by the negligence of its
own employees in starting the fire or in its negligent
storage of flammable materials.
Because the district court failed to require GEX to
30a
submit such proof, and in fact denied Elul the opportunity
to submit proof that the damages were not the sole result of
the injury for which it was liable, I would vacate the award
and remand for a determination of the extent to which
Elul's negligence proximately caused the damages suffered
by GEX.
3la
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
GREYHOUND EXHIBITGROUP, INC.,
Plaintiff,
MEMORANDUM AND ORDER
-against- CV-88-3039
ELUL REALTY CORP. et al.,
Defendants.
GLASSER, United States District Judge:
Plaintiff Greyhound Exhibitgroup ("GEX") obtained a
default judgment against defendant Elul Realty ("Elul") for
damages arising out of a fire at GEX's Brooklyn premises.
In October 1991, this court appointed Magistrate Judge
Caden as special master, pursuant to 28 U.S.C. § 636(b)(2)
and Fed. R. Civ. P. 53, for the determination of damages.
The magistrate held hearings on December 2, 3, 4, and
11, 1991. Voluminous compilations of exhibits -- at least
four volumes worth, each roughly the dimensions of the
32a
Manhattan phone directory -- were received, and numerous
witnesses provided sworn testimony. On February 21,
1992, Magistrate Judge Caden issued a report and
recommendation that plaintiff GEX be awarded
a
$1,496,425.60 of the requested $2,438,810.91 in damages.
Both parties entered objections to various components of
the recommendation, which are considered in turn below.
DISCUSSION
At the outset, it is essential to note the governing
standard of review. This court referred the issue of damages
to Magistrate Judge Caden under Rule 53, which sets forth
the contours of special master referrals. Specifically,
subsection (e)(2) states that in a non-jury action, "the court
shall accept the master's findings of fact unless clearly
erroneous." A determination "is ‘clearly erroneous' when
although there is evidence to support it, the reviewing court
on the entire evidence is left with the
definite and firm conviction that a mistake has been
committed." United States v. United States Gypsum Co.,
333 U.S. 384, 395 (1948).
Accordingly, the court accords substantial deference
to the magistrate's findings in considering the objections
discussed below.
I. Plaintiff's Objections
A. Category IX: Clean-Up of Customers’ Property
Plaintiff GEX alleged $300,000 in damages for the
cleaning of customers' property (stored by GEX at their
premises) damaged by smoke and soot in the fire. On
behalf of GEX, Victor Ruggiero testified to his belief that
roughly 1,500 customer cases in storage at the time of the
fire were damaged. Tr. 14.! Based on @ sample of 25
cleaned cases, Ruggiero had previously estimated the
cleaning cost per case at $100. Exh. 98. Ruggiero also
testified that the cleanup of an unspecified number of cases
ICitations to the record of the December 1991 inquest are abbreviated
as "Tr."
34a
took place over nearly a year, and he revised his estimate of
the cost to $200/case during testimony, based on such
factors as customer returns of inadequately cleaned
displays.
The magistrate denied this component of the damages
request in its entirety. He noted specifically that aside from
the $100 cleanup estimate breakdown, GEX produced no
documents substantiating this claim. Specifically, the
magistrate observed that the number of cases was suggested
only by Ruggiero's recollection; that the $100/case cost was
based on a small sample relative to the alleged total; and
that no support aside from Ruggiero's conclusory statement
supported the $200 figure.
This court accepts the magistrate's recommendation.
While GEX did offer evidence in support of the claim, the
proof is hardly of the convincing character necessary for
rejection of the magistrate's finding. The mere fact that
GEX's evidence was "credible", Plaintiff's Obj. 1 3, does
not oblige the finder of fact of fact to credit them. Because
any court could choose either to accept or discount the slim
evidence adduced by GEX on this issue, this court cannot
conclude that the finding below constitutes clear error.
B. Category X: Improvements and Betterments
Plaintiff GEX also alleged $193,514 in damage to
improvements made by GEX to its Brooklyn facility.
GEX's witness John Mansfield testified that GEX had
installed, among other things, carpeting, ceilings, walls,
wallpaper, partitions, shop bathrooms, and an employee
locker room. Tr. 200-02. A detailed post-fire estimate of
the cost to restore the premises to their prior condition was
prepared by C.J. Rubino & Co., Exh. 13A; that estimate is
the basis for GEX's claim for $193,514.
2The court is aware, aS was the magistrate, that the fire itself
necessarily left GEX in a difficult position regarding the production of
proof. At the same time, however, the court cannot be expected to
credit allegations made without any substantial support or
corroboration, whether by documentary evidence or other witness
testimony.
36a
Magistrate Judge Caden denied this component of
damages in its entirety. His recommendation is based on
the fact that most of the repair work detailed in the Rubino
report was not actually performed, and that the minimal
repairs actually done after the fire were possibly included
as losses in other categories. Tr. 203-09. GEX contends that
this finding is irrelevant, and argues that damages should be
measured by the value of the loss itself rather than by the
extent of subsequent restoration.
While GEX raises an interesting point, the magistrate's
finding should be accepted. The subject matter of this
category -- improvements to the premises -- is conceptually
distinct from GEX's works in process, materials, and other
property. Paragraph 3 of the lease for the premises, Def.
Exh. I, states that
All fixtures and all paneling, partitions, railings,
and like [illegible], installed in the premises at
any time, either by Tenant or by [illegible] in
Tenant's behalf, shall, upon installation, become
the property of Landlord and shall remain upon
and be surrendered with the demised premises .
37a
The term of the original five-year lease ran from January 1,
1983 to December 31, 1987; rider paragraphs 43 and 44
provided GEX with rights to 2 three-year renewals to the
end of 1993. The fire took place on February 13, 1988; as
GEX's present submission concedes, Elul terminated GEX's
lease legally in June 1988.
Under these circumstances, GEX is not entitled to
recover for this property damage. In a similar case
involving landlord-tenant liability for fire damage in a
commercial building, the First Department made the
following observations:
The second counterclaim to recover $14,000 for
improvements allegedly made by the tenant,
should have been dismissed since the lease was
terminated in accordance with its provisions
under the decision of the Appellate Term, and
on such termination the alleged improvements
by the terms of the lease became the property of
the owner.
Airway Supermarkets, Inc. v. Santone, 102 N.Y.S.2d 649,
650 (1st Dep't 1951).
38a
Il. Defendant Elul's Objections
As an initial matter, defendant Elul raises several legal
objections to the proceedings below. All such objections
should be denied.
First, Elul contends that under Rule 8(d) its default
does not free GEX from the burden of showing that Elul's
actions were the proximate cause of GEX's injury. Elul's
contention has no merit, and must be rejected; by
defaulting, Elul has (under the express terms of Rule 8(d))
conceded all matters raised in the complaint save the
amount of damages. The only requirement imposed on
GEX is to establish that the specific injuries alleged were
caused by the fire for which Elul has implicitly assumed
responsibility. On this point, the record of the magistrate's
inquest is replete with proof that the damages alleged and
awarded were caused by the fire.
Elul also argues that GEX's apparent failure to obtain
39a
a $1,000,000 insurance policy for negligence, as specified
in paragraph 49 of the lease agreement, requires a reduction
for failure to mitigate damages. While GEX argues that this
clause is invalid under New York General Obligations
Law, this court need not reach a decision on that issue. That
questions awaits resolution in Elul's separate lawsuit
against GEX; the present proceeding is concerned solely
with the damages sustained by GEX as a result of Elul's
conceded negligence.
On this same point, Elul argues that this court's
decision of July 29, 1991, denying Elul's motion to vacate
the default against it, expressly countenances consideration
of the indemnity clause of lease paragraph 49. Elul points
specifically to page 10, note 3 of that decision, which does
not support Elul's claim. A careful reading of that footnote
makes clear that "Elul's contention . . . implicates the
amount of damages, not liability . . . ." At issue then was
40a
the supposed unfairness of requiring Elul to post a
$1,000,000 bond, when Elul anticipated liability less than
that amount. What "may be argued at the damages inquest~
to be held by this court" is the amount of damages itself,
rather than the validity of paragraph 49, which may or may
not be a legitimate basis for relief in Elul's separate action.
A. Category I: Work in Process
Elul asserts that the award of $307,465 in this category
is predicated on improper methods of calculating the extent
of loss. Specifically, Elul asserts that actual cash value,
rather than cost of replacement, is the appropriate measure
of damages.
This court adopts the magistrate's findings. As the
magistrate noted, GEX provided extensive documenation
supporting the excess cost of completing each. job
occasioned by the fire's damage. See Exhs. 2, 3, 14, 106-14.
Both GEX and the magistrate calculated the total
4la
damage on each job by aggregating toial costs, and then
comparing that cost to the original job estimate provided to
the customer. GEX also provided testimony that such
estimates were extremely accurate projections of actual
costs. Tr. 306.
Given this method, it cannot be said that GEX's
damages were improperly calculated. Elul's contentions
notwithstanding, GEX is entitled to be made whole on its
loss; in this case, such redress necessarily incorporates the
excess costs, and the profit, associated with completing a
pending order.
Elul specifically attacks Exhibit 111, which supports
GEX's claim for roughly $216,000 in connection with the
"Olympus Camera” job. Although Elul claims to detect no
rhyme or reason to this exhibit, this court's examination of
the calculations on the face of page 1 of that document
leaves it in no doubt that GEX did indeed incur such excess
42a
costs as a result of the fire.
B. Category II: Supplies, Goods ther Materials
GEX alleged damages of $255,344 in this category.
The magistrate awarded the amount of $231,491; this
figure _ based on a recalculated total of $261,716 Tess
$15,000 improperly included for contingent losses (Exh.
139 p. 2) and $15,225 in accounting errors (Exh. 139 p. 3).
The remainder of the damages was moped by extensive
documentation. Exhs. 12, 24, 25-54, 97, 139.
The magistrate's recommendation is adopted, as Elul!'s
various objections to this component of the damages award
are without merit. In particular, Elul argues that various
summary sheets and replacement documents were
improperly introduced as proof of loss. Defendant's
attention is appropriately directed to Rules of Evidence
1004 and 1006.
_ Catego : Rental Properties
GEX requested $938,671 for damage sustained to
materials rented (and infrequently sold) to customers for
43a
display use. Because GEX's proposed figure reflected the
actual selling price of the materials damaged (Exh. 5), and
because GEX had no reasonable expectation of actually
selling the goods, the magistrate awarded instead the total
replacement cost of $552, 462. Exh. 5; Tr. 322-24.
Elul contends that the proper measure of damages was
instead the actual cash value of the properties. Elul argues
that at least some of the properties in question were well
into their life of service, had apparently already produced
substantial revenue, and were obsolete or in used condition.
However, the extent and nature of these factors is not clear
on the record; given the magistrate's ability to observe the
testimony given, and his thorough review of the documents
submitted, it cannot be said that his decision -- awarding
GEX less than 59% of its asserted claim -- was clearly
erroneous in this respect.
Finally, Elul contends (correctly) that several of the
properties listed on page 2 of Exhibit 5 were jointly owned
by GEX with other parties. Elul alleges that in many
instances the co-owners have initiated action against it and
GEX for these proportionate shares, and that Elul is thereby
exposed to double liability. However, this court is of the
opinion that in any such separate action Elul may implead
GEX for any amount of double liability. Accordingly, the
magistrate's finding is adopted.
D. Category V: Overtime and Payroll
GEX provided proof of additional payroll costs of
$82,936.49 during the inquest; subsequently, GEX asserted
(in its post-inquest submissions) an extra $20,000 in newly
discovered costs. The magistrate accepted only that portion
proven at the inquest, and awarded the amount of
$82,936.49.
Elul objects that this figure amounts to double
counting. Specifically, Elul asserts that Exhibit 111 (the
above-mentioned "Olympus Camera" job) appears to
include overtime costs and other excess payroll associate
with the post-fire work performed at Chicago. While the
exhibits themselves are not altogether clear on this point,
GEX's post-inquest submissions demonstrate that its
damage request (in the amount of $102,070.59) does not
include costs allocated to other categories of damages.
Pitff's. Proposed Findings of Fact at 19 n.4. In fact, the
magistrate's report makes specific reference to this
calculation.
Accordingly, the magistrate's finding is adopted.
E. Category VIII: Freight and Storage
GEX alleged $90,857.44 in damages incurred from
transporting exhibits to, and storing them in, a New Jersey
facility after the fire. The magistrate accepted this amount
on the basis of extensive documentary proof. Exhs. 62-96;
Tr. 184-92.
Elul contends that any such costs should be offset
against GEX's conceded reductions in rent payment for the
same periods. This contention is without merit; Elul
remains free to contest this issue (along with the paragraph
49 indemnity clause) in its separate landlord-tenant action.
The only relevant fact for the purpose of this proceeding is
that GEX suffered injury in the amount of the magistrate's
award, which this court adopts.
Il
The magistrate's report and recommendation is
adopted in its entirety. The Clerk of the Court is directed to
enter judgment for plaintiff in the amount of
$1,496,425.82,3 along with the costs of this action, and
interest at the New York statutory rate of 9%, according to
the following schedule:
A. Work in Process: $307,465.00 in damages, accrued as
of February 13, 1988, the date of the fire;
3This figure represents the sum of the damage components awarded by
the magistrate. It corrects minor mathematical and transcription errors
in part XII of the magistrate's report.
47a
B. Supplies, Goods, and Other Materials: $231,491.00,
accrued as of February 13, 1988;
C. Rental Properties: $552,462.00, accrued as of February
13, 1988;
D. Blueprints and Models: $18,700, accrued as of
February 13, 1988;
E. Overtime and Premium Payroll: $82,936.49, accrued as
of the reasonable intermediate date of February 26, 1988;
F. Storage Income: $78,929.25, accrued as of the
reasonable intermediate date of August 13, 1988;
G. Cleanup - Miscellaneous: $179,255.24, accrued as of
the reasonable intermediate date of March 1, 1988;
H. Freight and Storage: $90,857.44, accrued as of the
reasonable intermediate date of September 1, 1988;
I. Salvage: A reduction of damages in the amount of
$45,670.60, with a corresponding deduction for interest
accruing thereon from March 9, 1988.
SO ORDERED.
Dated: Brooklyn, New York |. LEO GLASSER, U.S.D.J.
April 22, 1992
48a
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
GREYHOUND EXHIBITGROUP, INC.
Plaintiff,
MEMORANDUM
AND ORDER
CV-88-3039
-against-
ELUL REALTY CORP., ANTHONY GALLINA
d/b/a/ GALLINA SPRINKLER SYSTEMS and
A. GALLINA HEATING & MECHANICAL
SPRINKLER CORP.,
Defendants.
GLASSER, United States District Judge:
This case arose from a fire that occurred on February
13, 1988 at a warehouse located at 14 Whale Square,
Brooklyn, New York. Plaintiff was a tenant in the building,
which was owned by Defendant E.L.U_L. Realty Corp.
("Elul"], and allegedly suffered Significant property
damage as a result of the fire. Elul has moved, inter alia,
49a
for an order vacating a default judgment signed on March
20, 1991. To decide the otucome of Elul's motion, it is
necessary to review the procedural history of the case.
On September 30, 1988 Greyhound Exhibitgroup, Inc.
{"GEX"] filed a complaint alleging $1.5 million in
damages.! On Nobember 22, 1988 a default judgment was
entered against Elul for failing to respond to the complaint.
Approximately four months later, on April 12, 1989, Elul
sought to vacate the judgment. While the motion was
pending, the court held a number of conferences, during
which Elul made several conflicting representations as to
the amount of its liability insurance. At one conference Elul
asserted that it had liability insurance in the amount of
$500,000; at other conferences it stated the amount was $2
million and $3 million. Also while the motion was
lina Report and Recommendation written by Magistrate Caden and
adopted by Judge McLaughlin in a Memorandum and Order dated
November 7, 1990, the amount of GEX's claimed damages was stated
to be $6 million. That was an error because the complaint seeks
recovery in the amount of $1.5 million.
50a
pending, GEX asked for assurances that Elul would not
sell, transfer or encumber the building until after the
motion had been decided. An Elul officer, Samuel Weis,
responded that the company had no intention to sell the
Whale Square property. However, according to a real estate
broker's affidavit submitted by GEX in answer to Weis’
representation, the property was already on the market for
Sale. Despite these inconsistent representations, on
September 12, 1989 Magistrate Caden recommended that
the default judgment be set aside. He also ordered that Elul
give written notice to all parties of any change in status as
to ownership or equity respecting 14 Whale Square. Both
parties appealed.
While the appeal was pending, plaintiff conducted a
title search revealing that on January 18, 1990 a $4.5
million mortgage had been taken out on the Whale Square
property, which had already been encumbered by a
Sla
subordinate mortgage in the amount of $3 million. Elul did
not provide notice of the second mortgage, as required by
Magistrate Caden. After learning about the new
encumbrance, Magistrate Caden ordered Elul to provide a
written report on the status of the property's mortgage. Elul
did not comply with the order, nor did it provide a witness
for a deposition that had been scheduled at that time. Soon
thereafter, Judge McLaughlin recommitted the default issue
to Magistrate Caden for reconsideration of his earlier
recommendation.
On July 23, 1990 Magistrate Caden issued a Report
and Recommendation in which he stated that "this is indeed
a close case," but that "sound judicial policy favor[s]
resolution of disputes on the merits." He recommended that
the default be vacated on the condition that Elul post a $1
million bond thirty days after the district court issued its
order. Magistrate Caden recommended the use of a bond as
52a
a device to prevent further opportunity for fraudulent
activity, in light of the history of the litigation.
Several parties filed timely objections to the
Magistrate's report. Nonetheless, Judge McLaughlin
adopted Magistrate Caden's report as his own decision and,
in a Memorandum and Order dated November 7, 1990,
ordered Elul to post the bond. More than thirty days later,
in a letter to the court dated December 13, 1990, Elul
asserted, inter alia, that it was unable to satisfy the bond
requirement. On March 20, i991, this court? denied Elul's
application for relief from Judge McLaughlin's decision,
entered a judgment of default on liability and scheduled an
inquest on damages.
In the present motion Elul seeks to vacate the March
20 default judgment. It also seeks a modification of the
bond requirement or, in the alternative, leave to appeal
pursuant to 28 U.S.C. § 1292(b). Plaintiff cross-moves for
2Judge McLaughlin was appointed to the Court of Appeals for the
Second Circuit and the case was reassigned.
53a
sanctions pursuant to Rule 11, Fed. R. Civ. P.
DISCUSSION
A. Vacating the Default.
Elul's motion to vacate the default judgment was made
pursuant to Rules 5S(c) and 60(b), Fed. R. Civ. P. Rule
55(c) provides that "[f]or 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)." A threshold question in the present case
is whether the court should rely on the standard of Fed. R.
Civ. P. 55(c), which permits a court to set aside a default
entry for "good cause shown," or on the stricter standard of
Rule 60(b), which governs relief from a default judgment.
The answer to this question turns on whether the March 20
order, denominated a "Judgment", is construed as default
entry or as a default judgment.
Pursuant to Rule 55, once a defendant fails to file a
S4a
responsive answer, he or she is in default and an entry of
default may be made by either the clerk or the judge. A
default judgment may be entered by a clerk only if a claim
is liquidated or, if a claim is unliquidated, by the judge after
a hearing on damages. Thus, a default judgment can be
entered only after damages have been determined. See Dow
Chemical Pacific Ltd. v. Rascator Maritime, S.A., 782 F.2d
329 (2d Cir. 1986) (order denominated "Default Judgment"
held not to be final because it expressly ordered inquest on
damages; only thereafter would final judgment be entered);
Jackson v. Beech, 636 F.2d 831, 835-36 (D.C. Cir. 1980)
(Rule 60(0)'s standard applicable only after damage award
became final and appealable). In the present case the March
20 order cannot be considered a final judgment pursuant to
Rule 60(b) because the damages were unliquidated and had
not been determined when it was entered. Indeed, an
inquest on damages is currently
5Sa
scheduled but has not yet been held. Accordingly, the
lower standard of Rule 55(c) governs the outcome of the
motion to vacate. .
Federal Rule of Civil Procedure 55(c) provides that a
court may set aside an entry of default for "good cause
shown." To determine whether a default judgment should
be set aside, courts in the Second Circuit must consider
three factors: (1) whether the default was willful; (2)
whether setting aside the default would prejudice the non-
defaulting party; and (3) whether the defendant presented a
meritorious defense. Brock v. Unique Racquetball and
Health Clubs, Inc., 786 F.2d 61, 64 (2d Cir. 1986);
Marziliano v. Heckler, 728 F.2d 151, 156 (2d Cir. 1984). A
district court must explain its Rule 55 (c) ruling with
explicit reference to the foregoing three criteria.
Marziliano, 728 F.2d at 156. This court's analysis of the
three factors follows.
56a
1. Willfulness. Courts have held a default to be willful
when a defendant knew about the complaint and failed to
respond. Marziliano v. Heckler, 728 F.2d 151, 156 (2d Cir.
1984) (default held willful where defendant's attorney,
without explanation, failed to inform the court about a
stipulation extending defendant's time to respond).
Willfulness has been found where the defendant fails to
comply with the court's orders. See Ferraro v. Kuznetz, 131
. F.R.D. 414, 419 (S.D.N.Y. 1990). Courts have also held the
default to be willful when a lawyer neglects a case for an
extended period of time. Walpex Trading Co. v.
Yacimientos Petroliferos Fiscales Bolivianos, 109 F.R.D.
692 (S.D.N.Y. 1986).
In the present case Elul's failure to answer the
complaint resulted in the entry of default on November 22,
1988. Elul's current counsel has alleged that the default
occurred as a result of the negligence of Elul's previous
counsel. This excuse is not persuasive. It is undisputed that
the summons and complaint were properly served on Elul's
registered agent, who was an attorney. It is also undisputed
that Elul's general counsel was aware of _ the
commencement of the suit and could have filed a response
to the complaint. Elul's explanation that the delay was
caused by difficulty in contacting the appropriate insurance
carrier is not convincing because Elul has not submitted
any factual support for its allegations. As Magistrate Caden
noted in his Report and Recommendation, Elul has not
provided specific dates when it attempted to contact the
insurer in an attempt to dispel the confusion, nor has Elul
asserted that it sought an extension of time from GEX or
the court.
This is not a case in which counsel acted with gross
negligence, whereas the client acted with extreme
diligence. In such a case, a court might find that the client
should not be held accountable for the attorney's conduct
and that the client would be entitled to relief from a default.
See, e.g., Vindigni v. Meyer, 441 F.2d 376, 378 (2d Cir.
1971) (counsel completely disappeared, client diligently
tried to locate attorney to ascertain status of case, and relief
granted); In this case, by contrast, Elul has offered no
evidence showing that it acted diligently and responsibly in
defending the present case. The court concludes that Elul's
default was willful. See United States v. Cirami, 535 F.2d
736, 741 (2d Cir. 1976) (record revealed no gross
negligence by counsel and no evidence of client diligence
and, therefore, relief was denied).
2. Prejudice to Plaintiff. The Second Circuit has held
that "delay alone is not a sufficient basis for establishing
prejudice." Davis v. Musler, 713 F.2d 907, 916 (2d Cir.
59a
1983). To establish prejudice, plaintiff must demonstrate
that the delay will cause other types of harm, such as a loss
of evidence, difficulty in discovery or a likelihood of fraud
and collusion. See id.
The three-year history of the present case establishes
that a vacatur would provide Elul with an opportunity for
further wrongdoing, such as disobedience of court orders
and rules of civil procedure. Elul's misdeeds and
misrepresentations have been ongoing since the
commencement of the case, when Elul offered
contradicting statements as to the amount of liability
insurance it carried: in approximately December 1988, it
was believed that Elul had $500,000 in insurance; in
February 1989 Elul represented that it had $2 million; in
March 1989, the figure was said to be $3 million; and on
August 31, 1989 Elul cited the $2 million amount. Later in
the proceedings, despite assurances to the court that it
would not sell or encumber the Whale Square property,
Elul in fact put the property on the market.
Notwithstanding a court order to provide written notice to
all parties in the event of a change in ownership or equity,
Elul obtained a $4.5 million mortgage without notifying the
court or the other parties. Elul also ignored the court's order
to provide a written explanation of the status of the
mortgage and failed to provide a witness at a scheduled
deposition.
Most recently, Elul failed to comply with this court's
bond requirement. Elul has attempted to excuse the last
delinquency on the ground that it simply was not able to
obtain the requisite funds. Elul's apparent good intentions
are belied, however, by the fact that although Elul has
known about the bond requirement since November 7,
1990, it has never attempted to amend the requirement
through proper legal mechanisms. Elul's protest against the
bond requirement by letter dated December 13, 1990,
6la
without a formal motion, affidavit, or reference to legal
authority did not conform to any rule of civil procedure.
Moreover, it was untimely, because Elul submitted it after
the 30-day period had expired.
Upon review of the entire record of this litigation, it is
readily apparent that Elul holds little regard for rules of
civil procedure and for orders of the court. The court lacks
confidence that Elul would observe an order to maintain the
Status quo. A vacatur would simply provide Elul with an
opportunity for further wrongdoing, at the expense of GEX.
3. Meritorious Defense. A party's defense may be
deemed meritorious for default purposes if the defense
raises a significant issue; a party need not establish the
merits of the defense conclusively. Marziliano, 728 F.2d at
156. However, a defense that is merely superficial,
‘conclusory or equivocal will not satisfy this prong of the
test. Id. at 156-57.
62a
Elul's defense in this case is that GEX was the party
responsible for the fire, which originated in the portion of
the warehouse rented by GEX. Elul conceded that the
sprinkler system did not operate at the time of the fire, but
alleged that the sprinkler was located in an area under
plaintiff's exclusive control. "Under these circumstances,"
Elul stated in its motion papers, "it is fair to assume that if
the trier of fact were to find Elul guilty of any negligence
whatever, it would be far less proportionally to that of
[GEX] itself." Memorandum of Law at 16. Elul did not,
however, offer a shred of evidence in support of this "fair
assumption" and it is not credible.3
3E ul argues that under the lease agreement GEX was required to
obtain liability insurance to indemnify Elul for the first $1 million in
damage caused by GEX. Elul contends that if, as GEX alleges, the fire
caused damage in the amount of $1.5 million, then the $1 million bond
requirement was unjust. After GEX's payment of the first $1 million in
damages, Elul asserts it would be liable for Significantly less than the
amount of the bond. To the extent that Elul's contention has any merit,
it implicates the amount of damages, not liability, and may be argued
at the damages inquest to be held by this court.
63a
In light of Elul's willfulness and the great risk of
prejudice to GEX if relief from the default were granted,
Elul's weak arguments on the merits do not persuade the
court that relief from the default is justified. Elul's
application to vacate the March 20 Judgment is hereby
denied, pursuant to Federal Rule of Civil Procedure 55(c),
because good cause has not been shown.4
B. Interlocutory Appeal
Elul has sought an order granting leave to appeal
pursuant to 28 U.S.C. § 1292(b). Before certifying a
question for interlocutory appeal under § 1292(b), a court
must determine whether its order involves a controlling
question of law as to which there is "substantial ground for
difference of opinion," and whether an immediate appeal
4To the extent that Elul's motion seeks to vacate Judge M¢Laughlin's
Memorandum and Order, the motion is denied. Four months ago, on
March 20, 1991, Elul sought the same relief and this court denied that
request. Elul has offered no new information or argument that the court
finds persuasive.
64a
will materially advance the ultimate termination of the
litigation. C. Wright & A. Miller § 3930. In the present
case, in light of Elul's consistent refusal to observe court
orders and federal rules, the propriety of the default
judgment on liability cannot seriously be disputed. In
addition, granting leave to appeal would not expedite
resolution of the case against Elul. On the contrary, an
immediate appeal seems best calculated to materially delay
such ultimate determination. Accordingly, Elul's request for
certification of the issue of the default is denied.
C. Rule 11 Sanctions.
Plaintiffs cross-motion for sanctions is based on Elul's
representation that it is not able to post the $1 million bond,
as required by Judge McLaughlin's Memorandum and
Order. GEX contends that that representation is so
egregious it warrants sanctions under Rule 11, Fed. R. Civ.
65a
P.> Plaintiff argues that Elul has $2.8 million in equity in
the Whale Square property and that counsel for Elul
admitted that Elul "has other assets." Plaintiff also states
that Elul has not accounted for the $4.5 million mortgage
proceeds.
Elul responds that it has no means of obtaining the $1
million bond. It asserts that the mortgage proceeds have
been reinvested in the Whale Square property. Sam Weis,
identified as an "officer" of Elul, stated in an affidavit that
the company is not able to obtain financing from its
primary lender, Republic National Bank, and furnished a
letter denying Elul a letter of credit. He further stated that
SRule 11, Fed. R. Civ. P., provides that the signature of an attorney on
a pleading or motion constitutes a pledge that:
to the best of the signer's knowledge, information, and
belief formed after reasonable inquiry it is well grounded
in fact and is warranted by existing law or a good faith
argument for the extension, modification or reversal of
existing law, and that it is not interposed for any
improper purpose, such as to harass or to cause
unnecessary delay or needless increase in the cost of
litigation.
SS
66a
Elul is prepared to offer the building as collateral ‘for the
bond, but represented that the building would not be
acceptable to bonding companies.
When considering a motion for sanctions pursuant to
Rule 11, the critical issue is "whether reasonable inquiry
could have warranted the belief that the filing of this
motion was justified" in fact and law. Virgin Atlantic
Airways, Ltd. v. National Mediation Board, 132 F.R.D.
342, 345 (E.D.N.Y. 1990). In deciding whether to impose
sanctions, the court is guided by the standards set forth in
Eastway Construction Corp. v. New York, 762 F.2d 243,
253-54 (2d Cir. 1985):
[A] showing of subjective bad faith is no longer
required to trigger the sanctions imposed by the
rule. Rather, sanctions shall be imposed against
an attorney and/or his client when it apppears
that a pleading has been interposed for any
improper purpose, or where, after reasonable
67a
inquiry, a competent attorney could not form a
reasonable belief that the pleading is well
grounded in fact and is warranted by existing
law, or a good faith argument for the extension,
modification or reversal of existing law.
. .. Courts must strive to avoid the wisdom of
hindsight in determining whether a pleading
was valid when signed, and any and all doubts
must be resolved in favor of the signer. But
where it is patently clear that a claim has
absolutely no chance of success under the
existing precedents, and where no reasonable
argument can be advanced to extend, modify or
reverse the law it stands, Rule 11 has been
violated.
{Emphasis and citations omitted.] Under these standards,
plaintiff's cross-motion for sanctions must be denied. GEX
has asserted that Elul had sufficient equity in 14 Whale
Square and elsewhere to obtain funding. Elul has countered
that it simply did not have sufficient assets to do so. Both
parties’ contentions suffer from a lack of persuasive,
concrete, factual support, making it impossible for the court
to determine, based on the evidence in the record, whether
Elul actually could have obtained the requisite bond.
68a
The court cannot assess whether Elul's statements were true
or false, and whether they were the product of reasonable
investigation. Accordingly, the court cannot say that it is
"patently clear" that Elul's representations violated Rule 11.
In sum, Elul's motion for an order vacating the default
is denied, as are Elul's motions to amend Judge
McLaughlin's Memorandum and Order, Elul's motion to
consolidate a separate action for GEX's allegedly unpaid
rent and a related request for attachment. Finally, GEX's
cross-motion for sanctions is also denied.
SO ORDERED.
Dated: Brooklyn, New York
July 29, 199]
I. LEO GLASSER, U.S.D.J.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.