Transaero, Inc. v. La Fuerza Area Boliviana

• Decision Date: 19 May 1994
• Docket Number: No. 1063,D,1063
• Citation: 24 F.3d 457
• Parties: TRANSAERO, INC., Plaintiff-Appellee, v. LA FUERZA AREA BOLIVIANA, an instrumentality of the Republic of Bolivia, a Foreign State, Defendant-Appellant. ocket 93-7903.
• Court: U.S. Court of Appeals — Second Circuit

Page 457

24 F.3d 457

29 Fed.R.Serv.3d 251

TRANSAERO, INC., Plaintiff-Appellee, v. LA FUERZA AREA BOLIVIANA, an instrumentality of the Republic

of Bolivia, a Foreign State, Defendant-Appellant.

No. 1063, Docket 93-7903.

United States Court of Appeals, Second Circuit.

Argued Feb. 22, 1994.

Decided May 19, 1994.

Ronald N. Cobert, Washington, DC (Grove, Jaskiewicz and Cobert, Andrew M. Danas, of counsel), for plaintiff-appellee.

Gregory B. Craig, Washington, DC (Williams & Connolly, James W. Shannon, Jr., of counsel), for defendant-appellant.

Before: NEWMAN and VAN GRAAFEILAND, Circuit Judges, and LASKER, District Judge. ^*

LASKER, District Judge:

The Air Force of the Republic of Bolivia ("BAF") appeals from a decision of the United States District Court for the Eastern District of New York, Jacob Mishler, Judge, which denied its motion for relief under Rule 60(b) of the Federal Rules of Civil Procedure from a default judgment entered against it on April 28, 1989.

The appeal from the order denying Rule 60(b) relief brings up for review only the denial of the motion and not the merits of the underlying default judgment. Branum v. Clark, 927 F.2d 698, 704 (2d Cir.1991). The standard for review is abuse of discretion. Id. For the reasons discussed below, we conclude that there was no abuse, but we remand for the limited purpose of assessing the mathematical accuracy of the default award to Transaero, Inc.

BACKGROUND

The action arises out of the alleged breach of a credit agreement between Transaero, a supplier of aircraft parts, and the Bolivian Air Force entered in May 1981. For a number of years before May 1981, Transaero had been selling aircraft parts to BAF, but had been experiencing delays in payment on outstanding invoices averaging six to twelve months. As a result, the present agreement was drafted to require BAF to pay 1.75% monthly interest (21% per year) on all purchases not paid within 120 days of shipment. By April 14, 1982, the Bolivian Air Force had accumulated an outstanding principal balance of $598,115.76.

On September 8, 1988, despite intervening payments by the Bolivian Air Force totalling $648,115.76, Transaero filed suit to collect $983,696.60 for outstanding principal and interest. The Bolivian Air Force failed to answer the complaint or to enter an appearance at a hearing scheduled by Judge Mishler for March 30, 1989 which resulted in an inquest on damages. ¹ On April 28, 1989, the Clerk of the Court entered a default judgment for Transaero in the amount requested. On May 12, 1993, over four years later, BAF

moved to set aside the default judgment under Rule 60(b). On August 12, 1993, Judge Mishler denied the motion.

DISCUSSION

BAF's primary argument on appeal is based on the so-called saving clause of Rule 60(b) which provides that "[t]his rule does not limit the power of a court ... to set aside a judgment for fraud upon the court." BAF argues that there has been a fraud on the court in this case because Transaero's counsel allegedly submitted a fraudulent affidavit in support of the 1989 motion for entry of the default judgment and the district court relied on the false statements made there in granting the motion.

BAF also argues that the default judgment should be set aside under clause (4) of Rule 60(b) which provides that, within a reasonable time from the time of judgment, "[o]n motion and upon such terms as are just, the court may relieve a party ... from a judgment [where] the judgment is void." Fed.R.Civ.P. 60(b)(4). The basis for this claim is BAF's contention that the district court lacked subject matter jurisdiction to enter the default judgment because Transaero's claim was not first submitted to compulsory arbitration, which, BAF maintains, was required in this case by the Local Rules of the Eastern District of New York.

Finally, BAF argues that the default judgment should be set aside under the catch-all clause of Rule 60(b) which provides for relief for "any other reason justifying relief from the operation of the judgment." Fed.R.Civ.P. 60(b)(6). BAF claims that Rule 60(b)(6) relief is warranted because of the district court's alleged failure to comply with section 1608(e) of the Foreign Sovereign Immunities Act, 28 U.S.C. Sec. 1602-11 (1994), which prohibits default judgments against foreign states unless the claimant establishes the right to relief by evidence satisfactory to the court and requires a copy of any default judgment to be sent to the foreign state. BAF also points out the disfavor with which courts view default judgments, especially those against foreign sovereigns. First Fidelity Bank, N.A. v. Government of Antigua & Barbuda-Permanent Mission, 877 F.2d 189, 196 (2d Cir.1989).

The Claim of Fraud on the Court.

BAF points to a string of representations made by Transaero's counsel in his affidavit in support of the 1989 motion for entry of the default judgment which, BAF maintains, were fraudulent. BAF charges that the affidavit falsely labelled Transaero's claim as one for principal and interest, when it was really for interest only; sought compound interest in violation of New York law; claimed interest for a longer period, at a higher rate and on a greater amount than authorized by the credit agreement and New York law; and sought judgment on a breach of contract claim, even though it was time-barred.

Fraud on the court is "fraud which seriously affects the integrity of the normal process of adjudication." Gleason v. Jandrucko, 860 F.2d 556, 559 (2d Cir.1988). It involves "far more than an injury to an individual litigant" or "a case of a judgment obtained [simply] with the aid of a witness who, on the basis of after-discovered evidence, is believed possibly to have been guilty of perjury." Id. (citations omitted) (alteration in original). The concept embraces "that species of fraud which does or attempts to, defile the court itself, or is a fraud perpetrated by officers of the court so that the judicial machinery cannot perform in the usual manner its impartial task of adjudging cases presented for adjudication." Kupferman v. Consolidated Research & Mfg. Corp., 459 F.2d 1072, 1078 (2d Cir.1972) (quoting 7 Moore's Federal Practice p 60.33, at 515 (1971 ed.)).

The representations by plaintiff's counsel specified above did not constitute a fraud on the court. For example, Transaero had a good faith basis for believing that BAF had acknowledged Transaero's entitlement to compound interest because BAF failed to make timely objections to Transaero's invoices and had made partial payments on its debt in 1984 and 1986. Similarly, Transaero had a good faith basis for believing that its breach of contract claim was not time-barred when it filed suit in September 1988, since the limitations period was not obviously triggered until Moreover, BAF has presented no evidence of bad faith or dishonesty by Transaero's counsel. Indeed, as the district court points out in its opinion below, all the documentary evidence on which BAF now bases its claim of fraud on the court was submitted to the district court itself by Transaero's counsel in connection with the very motion for entry of the default judgment. The up-front submission of this documentary evidence fundamentally undermines BAF's claim of fraud on the court. BAF's response to this point--that a busy district judge cannot be expected to sort through a disorganized record--is unpersuasive.

BAF repudiated the payments Transaero claimed under the credit agreement in April 1987--well within the four year limitations period governing the sale of goods under the U.C.C. Finally, as discussed below in the section on BAF's claim under Rule 60(b)(4), there is no merit to BAF's claim that, because Transaero's claim was for interest only, the district court lacked jurisdiction to enter the default judgment.

The Rule 60(b)(4) Claim.

The Local Rules of the Eastern District of New York, where the default judgment was entered, require the Clerk of the Court to "designate and process for compulsory arbitration all civil cases ... wherein money damages only are being sought in an amount not in excess of $100,000.00 exclusive of interest and costs." N.Y. Rules of Court, App. C Sec. 3(A), at 797 (McKinney 1994). BAF argues that, since Transaero's claim is one for interest only, the claim ought to have been submitted to arbitration pursuant to the local rule. BAF maintains that, because the case was not arbitrated as allegedly required, the case was not ripe for review and the district court lacked subject matter jurisdiction to decide it. Hence, according to BAF, the judgment is void and should be set aside under Rule 60(b)(4) of the Federal Rules of Civil Procedure.

Invoices submitted by Transaero to the Bolivian Air Force show that Transaero applied the Air Force's last payment to the outstanding principal debt and that, apparently, from that time on, BAF owed interest only. In Edwards v. Bates County, 163 U.S. 269, 16 S.Ct. 967, 41 L.Ed. 155 (1896), the Supreme Court held that, for purposes of calculating the adequacy of the amount in controversy for diversity jurisdiction under a predecessor statute to 28 U.S.C. Sec. 1332(a), the circuit court should have included the value of the matured interest coupons attached to the bonds issued by the defendant. The Supreme Court stated that "when the interest evidenced by a coupon has become due and payable the demand based upon the promise contained in such coupon is no longer a mere incident of the principal indebtedness represented by the bond, but becomes really a principal obligation." Id. at 272, 16 S.Ct. at 969.

It seems clear under Edwards that where, as here, interest is owed as part of an underlying contractual obligation, unpaid interest becomes part of the principal for jurisdictional purposes. We see no reason to treat such interest differently for purposes of determining the scope of compulsory arbitration under the Local Rules of the Eastern District...