834 F.2d 1114 (1st Cir. 1987), 87-1332, United States v. Baus

Docket Nº:87-1332.
Citation:834 F.2d 1114
Party Name:UNITED STATES of America, Plaintiff, Appellee, v. Bernard V. BAUS, et al., Defendants, Appellants.
Case Date:December 11, 1987
Court:United States Courts of Appeals, Court of Appeals for the First Circuit

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834 F.2d 1114 (1st Cir. 1987)

UNITED STATES of America, Plaintiff, Appellee,


Bernard V. BAUS, et al., Defendants, Appellants.

No. 87-1332.

United States Court of Appeals, First Circuit

December 11, 1987

Heard Oct. 6, 1987.

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Richard A. Kaye with whom Kathleen L. Torres and Kaye, Fialkow, Richmond & Rothstein, Boston, Mass., were on brief, for appellants.

Lydia Pelegrin, Asst. U.S. Atty., with whom Daniel F. Lopez-Romo, U.S. Atty., Hato Rey, P.R., was on brief, for appellee.

Before BOWNES, Circuit Judge, TIMBERS, [*] Senior Circuit Judge, and SELYA, Circuit Judge.

BOWNES, Circuit Judge.

The appellants in this action are guarantors of a loan from the Economic Development Administration (EDA), an agency of the United States Government, to National Medical Products Corporation (NMP), a now-defunct manufacturer of medical supplies in Puerto Rico. When NMP defaulted on the loan, the government filed suit in United States District Court in Puerto Rico to collect on the guaranties. The case was eventually settled and judgment entered

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against the guarantors in accordance with a stipulation of settlement. Seven years later, the government, for the first time, moved to execute its judgment. The guarantors filed a motion for relief from judgment under Rule 60(b)(6) of the Federal Rules of Civil Procedure. The district court denied the motion as untimely. The guarantors raise two claims on appeal: (1) the judgment in this case was not a final one because it was contingent upon a further determination of damages by the district court, and (2) the district court abused its discretion in denying the Rule 60(b)(6) motion. We reverse and remand.


On April 17, 1970, Bernard V. Baus, Regine Lagier Baus, Samuel H. Casey, Imogene McCraw Casey, Robert S. Warshaw, and Elaine S. Warshaw executed a joint and several guaranty for a $217,800 loan from EDA to NMP. The guarantors were all stockholders in NMP. The EDA loan was secured by a chattel mortgage on all of NMP's machinery and equipment, but the guaranty provided that, in the event NMP defaulted, EDA could collect directly from the guarantors without first exhausting its rights to the collateral. And default NMP did, in December of 1974. At that time, representatives of EDA took possession of NMP's plant and all of its contents, including $100,000 worth of finished products in inventory. On May 28, 1976, the government filed a complaint against the guarantors in Puerto Rico district court seeking to collect $146,277.19, the balance due on NMP's loan.

During the pendency of that action, Gary Fischer, the president of NMP, notified EDA that an unsecured creditor had obtained a judgment against NMP and had attached various items of NMP's machinery which were included in EDA's mortgage. Fischer told EDA that the loss of this crucial equipment would substantially lessen the value of the remaining equipment. He also asked EDA to take measures to secure the plant in order to prevent this kind of illegal attachment, as well as theft and vandalism. EDA took no action at that time and the attached items were auctioned off and removed from the plant.

In March of 1978, the guarantors entered into negotiations with the government to settle the ongoing lawsuit. An agreement in principle was reached and the first draft of a stipulation of settlement circulated on March 20. Under its terms, the guarantors confessed liability in return for the government's promise to attempt to retrieve the equipment attached by the unsecured creditor and "to exhaust their remedies against the entire mortgaged collateral, foreclosing said mortgage in complete or partial satisfaction" of the guarantors' obligation. The first draft was rejected by the guarantors because it provided that they waived all defenses to liability. Thereafter, a second draft was drawn up, which eliminated the waiver of defenses language and also provided that the government would have the mortgaged collateral appraised, the appraisal to serve as a "protective bid" at the auction. This draft was approved and executed by all parties. On May 15, 1978, the district court entered judgment against the guarantors in accordance with the terms and conditions of the stipulation. 2

After obtaining judgment, the government waited six months before undertaking its promised proceedings against the unsecured creditor and nearly two years before conducting the foreclosure sale in March of 1980. For most of this time, and despite NMP's complaints, the plant remained unlocked and unguarded. As a result, various NMP assets, including the $100,000 worth of finished inventory, were stolen or vandalized. By the time of the public auction, the government could obtain only

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$37,227 for the assets of NMP; after deduction for expenses, the net proceeds were $12,131. 3 The government's appraisal had placed a $411,000 market value and $128,000 liquidation value on NMP's assets, exclusive of the $100,000 in stolen inventory. The government did not enter a protective bid at the auction.

Immediately following the auction in 1980, the government provided the guarantors with invoices for the goods auctioned off, but it was not until June of 1985 that the guarantors were given a "statement of account" prepared by EDA, indicating their total alleged indebtedness under the stipulation. In the meantime, the guarantors had undertaken negotiations with three successive Assistant United States Attorneys in Puerto Rico to settle their obligation. Each assistant stated that the judgment was not final and that a judicial determination of indebtedness would be necessary before the United States could collect its debt. Each declined to seek such a judicial determination or to execute the judgment. Then, in September of 1984, the government requested that the judgment be certified for registration in another district. Despite the fact that judgments in favor of the United States can be executed in any district without registration, 28 U.S.C. Sec. 2413, 4 the clerk for the United States District Court in Puerto Rico certified the judgment on September 26, 1984, and forwarded it to the United States Attorney for the Southern District of New York. Since only final judgments can be registered, 28 U.S.C. Sec. 1963, 5 the clerk's action amounted to certifying that the judgment was final.

In April of 1985, the United States Attorney in New York demanded full payment of NMP's outstanding debt from Robert and Elaine Warshaw, who were residents of New York. Instead of a challenge to the judgment in New York, a motion for relief from judgment was filed in the United States District Court for Puerto Rico. In support of their Rule 60(b)(6) motion, the guarantors set forth a number of verified factual allegations relating to the execution of the stipulation and subsequent events. 6 The gist of the guarantors' argument was that the government had breached its obligations under the settlement agreement, both by the way it foreclosed on NMP's assets and by attempting to execute the judgment without a judicial determination of indebtedness, and thus was not entitled to enforce the agreement against the guarantors.

The guarantors also pointed out to the district court that the ninth paragraph of the stipulation, as written, contained a typographical error and was incomplete. The pertinent portion of the paragraph reads:

9. In consideration of the above, defendants acknowledge their debt as guarantors and agree to pay plaintiff for any possible deficiency outstanding after plaintiff auctions the mortgaged collateral and hereby confess to judgment up to the amount of said possible 30 days from the date of the auction; in compliance with the agreement of the parties, the details of which are set forth below....

(Emphasis indicates place of omitted language). In the first draft, the waiver of defenses language had appeared between

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the words "possible" and "30 days," but, in the process of deleting that language, some additional language was also inadvertently deleted. The guarantors claimed that the language inadvertently deleted gave them the right to retain all defenses and objections, that the parties intended the final stipulation to read as follows:

9. In consideration of the above, defendants acknowledge their debt as guarantors and agree to pay plaintiff for any possible deficiency outstanding after plaintiff auctions the mortgaged collateral and hereby confess to judgment up to the amount of said possible [deficiency, retaining all possible defenses and objections, said confessed judgment to be final and enforceable within] thirty (30) days from the date of the auction, in compliance with the agreement of the parties, the details of which are set forth below....

(Brackets indicate guarantors' claimed language).

The government moved to dismiss the guarantors' motion but neither submitted counteraffidavits nor contested any of the factual allegations made by the guarantors. Rather, relying on the guarantors' allegations, the government argued that the motion was untimely and failed to put forth sufficient justification for extraordinary relief under Rule 60(b)(6). The government made no argument regarding the missing language in paragraph nine of the stipulation.

In a short opinion, the district court agreed with the government:

We find that defendants, who were aware of the foreclosure proceedings held on March 10, 1980, have failed to assert any justifiable grounds for waiting over five years before coming to the Court to complain of the Government's alleged breach of its duties under the stipulation.

Even assuming defendants' position is correct and that it was for the Court to assess the deficiency, the...

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