Enron Oil Corp. v. Diakuhara, X-L

CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)
Writing for the CourtCARDAMONE
Citation10 F.3d 90
Decision Date08 December 1993
Docket NumberX-L,D,No. 1626,1626
Parties, RICO Bus.Disp.Guide 8447 ENRON OIL CORP., Enron International Incorporated, Enron Corp., Plaintiffs-Appellees, v. Masonori ("Mike") DIAKUHARA, Bulk Oil (U.S.A.), Inc., Brian Frith, Isla Petroleum Inc., Clive DC Joy-Morancho, Akira Kikuchi, Thomas N. Mastroeni, Louis J. Borget, Nichimen Corporation,ine Enterprises, Ltd., OMAC Limited, OMAC Trading Limited, Petropol Energy, Inc., Rigoil (UK) Limited, Rigoil, Inc., Roanne Trust Company (Jersey) Limited, Roanne Trust Co., Ltd., Robert L. Schweitzer, Southwest Oil & Commodities, Inc., St. Helier Trust Company Limited, Tomo Petroleum, Inc., Videogroup, Inc., Defendants, Ronald Z. Fuchs, Defendant-Appellant. ocket 92-9158.

Raymond A. Connell, New York City (Connell Losquadro & Zerbo, of counsel), for defendant-appellant.

George A. Salter, New York City (Davis, Scott, Weber & Edwards, P.C., Gregory A. Markel, Orrick, Herrington & Sutcliffe, of counsel), for plaintiffs-appellees.

Before: CARDAMONE and MAHONEY, Circuit Judges, and PARKER, District Judge. *

CARDAMONE, Circuit Judge:

Ronald Fuchs, a former trader in the petroleum market, appeals from a default judgment of the United States District Court for the Southern District of New York (Edelstein, J.), entered October 8, 1992, that held him jointly and severally liable in damages with two co-defendants. Fuchs was at the time appearing pro se and failed to file an answer precisely within the time limits set by the Federal Rules of Civil Procedure. For this failure, the district court first entered a default against him and later a purported default judgment for more than $257 million. Fuchs contends the district court abused its discretion when, after ordering the entry of default under Federal Rule of Civil Procedure 55(a), but before entering default judgment under Rule 55(b)(2), it refused to set aside the default under Rule 55(c). We reverse because such extreme measures should be reserved by a trial court as a final, not a first, sanction imposed on a litigant.

A. Underlying Fraud

Enron Corporation and its subsidiaries Enron Oil and Enron International (collectively, Enron or plaintiff) are Delaware corporations with their principal places of business in Houston, Texas. Enron is engaged in the business of trading petroleum and petroleum products. It hired Louis Borget in 1984 to oversee its oil trading activities and Thomas Mastroeni to maintain its trading accounts and books. At the same time, the firm established trading policies and limits designed to restrict its market exposure and to protect it from large trading losses.

Beginning in 1985, according to the complaint Enron filed, Borget and Mastroeni--acting in concert with others--defrauded and stole from Enron by entering into a series of trades exceeding Enron's internal trading limits. Plaintiff alleges that by the time this multifarious scheme came to light in October 1987, Borget and Mastroeni had misappropriated $5.9 million from the firm. Enron asserts that Borget and Mastroeni also left it with open positions on the market that the firm was required to cover at a cost to it of an additional $142 million.

Plaintiff further alleges that as part of their fraudulent plan Borget and Mastroeni actively deceived Enron's independent auditors. For example, in March 1987, realizing that an inspection of Enron's open market positions was scheduled, they instructed Enron oil trader Robin Eves to enter into four separate contracts to sell one million barrels of unleaded gasoline to the Bulk Oil Company, and at the same time to enter an agreement with Bulk Oil that these four contracts would never be executed. Eves undertook these transactions with Bulk Oil's executive vice president, defendant Ronald Fuchs, on Fuchs responds that he thought the transactions proposed by Eves were typical "roll-over" deals. In any event, he continues, since the dollar amount involved was outside of his trading authority, he brought the proposal to the attention of Bulk Oil's president, Jacob Schreiber, who approved the contracts as a routine transaction. When Enron then failed to confirm its end of the arrangement, Schreiber told Fuchs to cancel the contracts, which was done. Fuchs avers that he never spoke with anyone at Enron other than Eves, and had no knowledge that the aborted transactions were outside Enron's trading limits or designed to evade its auditors' inspection.

March 13, 1987. The purported transfers--which Enron now insists Fuchs knew were sham contracts--effectively camouflaged from its financial examiners Enron's actual trading position.

B. Proceedings Below

On April 21, 1988 Enron filed a complaint in the Southern District of New York alleging various violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), breaches of fiduciary duty, fraud, and fraudulent conveyances. It named as defendants Borget and Mastroeni, and several others, including Bulk Oil and Ronald Fuchs. Fuchs was personally served on April 22, 1988 and appeared then by counsel.

On July 22, 1988 plaintiff filed an amended complaint that was personally served on Fuchs' counsel. All the defendants were given until August 1, 1988 to respond to the amended complaint. On that date, Fuchs and Bulk Oil filed a motion pursuant to Fed.R.Civ.P. 12(b)(6) to dismiss plaintiff's complaint for failure to state a cause of action. Other defendants made the same motion and various parties made discovery requests. On September 1, 1988 Enron filed papers in opposition to Bulk Oil and Fuchs' Rule 12(b)(6) motion.

Fuchs' attorney thereafter notified the district judge that he could not continue to represent Fuchs because Fuchs was unable to pay counsel fees. In an order and stipulation dated October 23, 1989 the district court relieved counsel and noted that defendant would appear thereafter as a pro se litigant. In December 1989 Bulk Oil filed a petition for protection under the bankruptcy laws, staying further proceedings against the oil company. See 11 U.S.C. Sec. 362 (1988).

A court conference was held on January 25, 1990 to resolve discovery disputes. At the conference plaintiff successfully sought leave to file a second amended complaint. The district court deferred decision on defendants' outstanding motions to dismiss the first amended complaint, stating it had reviewed the parties' motions with respect to the earlier complaint, and "if the defendants are contemplating similar or duplicative motions on the [second] amended complaint, I will be very much displeased."

Enron filed its second amended complaint on March 26, 1990, serving a copy on Fuchs by regular mail. The allegations concerning Fuchs' role in the alleged fraud in the second amended complaint were substantially the same as those in the first amended complaint. On April 9, 1990--referring specifically to "all papers filed on August 1, 1988 in support of the motion to dismiss the first amended complaint"--two defendants, not including Fuchs, moved to dismiss the second amended complaint. After several months of active discovery, plaintiff settled with a number of the defendants, who were then dismissed from the case. As of May 1991 plaintiff had outstanding claims only against defendants Fuchs, Borget, and Mastroeni--each of whom had failed to answer Enron's second amended complaint.

On April 24, 1991 Fuchs sent a letter to the district court, with a copy to plaintiff, informing it that Enron's second amended complaint "was not served to me." Fuchs also wrote, "I received information that the court had found me in default and if this is true, I ask that Your Honor would vacate any Order based on Enron's Application." A week later, on May 2, Enron responded to Fuchs' letter by stating, "Plaintiffs have not filed an application for default judgment.... Mr. Fuchs is also wrong about not being served with the Second Amended Complaint; he was served by mail on March 26, 1990."

On June 3, 1991 Enron applied for an order directing the clerk of the court to enter defaults under Fed.R.Civ.P. 55(a), and for default judgments under Fed.R.Civ.P. 55(b)(2), against defendants Fuchs, Mastroeni, and Borget. It served a notice of this default application on Fuchs by hand, and informed him that the application would be made before the court on June 11, 1991. Plaintiff's counsel provided an affidavit in support of its application in which it stated that, despite Fuchs' claims to the contrary, he had in fact been served by mail with the second amended complaint, and that he had been served personally with the original complaint.

In answer to Enron's default application, Fuchs sent a hand-delivered letter to Enron on June 5, 1991 with a copy to the district court. Fuchs repeated his previous assertion that he had never been served with the second amended complaint and argued that therefore he could not be in default. Fuchs continued: "I believe that rather than arguing back and forth and wasting court time with motions for default, it would be more helpful if you could send to me Enron's Second Amended Complaint...." Plaintiff complied with this request by delivering a copy of the second amended complaint to Fuchs on June 10, 1991.

In a letter to the district court dated June 11--the following day--Fuchs made a motion that Enron's default request be denied. In a supporting affidavit, he affirmed: "It is only today, June 10th, 1991, that I have received from Enron's attorneys their Second Amended Complaint.... I confirm its acceptance and will reply it [sic] shortly." There is some question as to when, if ever, the district court received Fuchs' letter and affidavit. Although Fuchs states the correspondence was sent to the district court and Enron on June 11, the docket sheet does not reflect the receipt of these papers.

Apparently without the benefit of Fuchs'...

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