Greyhound Exhibitgroup, Inc. v. E.L.U.L. Realty Corp.

• Decision Date: 24 August 1992
• Docket Number: No. 1954,D,1954
• Citation: 973 F.2d 155
• Parties: GREYHOUND EXHIBITGROUP, INC., Plaintiff-Appellee, v. 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. ocket 92-7545.
• Court: U.S. Court of Appeals — Second Circuit

Page 155

973 F.2d 155

GREYHOUND EXHIBITGROUP, INC., Plaintiff-Appellee, v. 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.

No. 1954, Docket 92-7545.

United States Court of Appeals Second Circuit.

Argued July 14, 1992.

Decided Aug. 24, 1992.

Kenneth A. Bloom, New York City (Douglas B. Lang, Cozen and O'Connor, of counsel), for plaintiff-appellee.

Noel W. Hauser, New York City (Stephen H. Penn & Associates, of counsel), for defendant-appellant.

Before: ALTIMARI, MAHONEY, and WALKER, Circuit Judges.

WALKER, Circuit Judge:

This is an appeal from the final judgment of the 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 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 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 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.

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 ELUL's motion to vacate its entry of default judgment.

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 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.

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.

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. Di Mucci, 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:...