Tradewinds Airlines Inc. v. Soros et al

Filing 187

OPINION AND ORDER: # 103827 re: (137 in 1:08-cv-05901-JFK-AJP) MOTION to Strike Notice of Motion filed by Tradewinds Airlines Inc., (70 in 1:10-cv-08175-JFK-AJP) MOTION to Strike Notice of Motion filed by Coreolis Holdings, Inc., Tradew inds Holdings, Inc. For the foregoing reasons, Plaintiffs motion to strike Defendants sixteenth, twentieth, and twenty-first affirmative defenses is granted. Plaintiffs motion to strike the second, thirteenth, fourteenth, fifteenth, and seventeenth affirmative defenses is denied, except that the surviving affirmative defenses may not be used to litigate the merits of the North Carolina Action. Defendants may not use the second, thirteenth, or fourteenth affirmative defenses to pursue discovery as to the North Carolina Action. SO ORDERED.(Signed by Judge John F. Keenan on 12/17/2013) (ama) Modified on 12/18/2013 (ca).

USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: Dec. 17, 2013

UNITED STATES DISTRICT COURT
UNITED DISTRICT OF NEW YORK
SOUTHERN STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-----------------------------------X
-----------------------------------------------------------x
TRADEWINDS AIRLINES, INC.,
:
In re FANNIE MAE 2008 SECURITIES
::
08 Civ. 7831 (PAC)
LITIGATION
::
09 MD 2013 (PAC)
Plaintiff,
::
::
OPINION & ORDER
-against-----------------------------------------------------------x
:
GEORGE SOROS, and PURNENDU
:
CHATTERJEE,
:
:
08 Civ. 5901 (JFK)
HONORABLE PAUL A. CROTTY, United States District Judge: Civ. 8175 (JFK)
Defendants.
:
10
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COREOLIS HOLDINGS, INC., and
:
Opinion and Order
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TRADEWINDS HOLDINGS, INC., BACKGROUND
:
:
The early years of this decade saw a boom: home financing which was fueled, among
in
Plaintiffs,
:
other -against- interest rates and lax credit conditions. New lending instruments, such as
things, by low
:
:
subprime mortgages (high credit risk
GEORGE SOROS, and PURNENDU loans) and Alt-A mortgages (low-documentation loans)
:
CHATTERJEE,
:
kept the boom going. Borrowers played a role too; they took on unmanageable risks on the
:
Defendants.
:
assumption that the market would continue to rise and
-----------------------------------X that refinancing options would always be
APPEARANCES
available in the future. Lending discipline was lacking in the system. Mortgage originators did
FOR TRADEWINDS AIRLINES, INC.
Shawn high-risk mortgage loans. Rather than carry the rising risk on their books, the
not hold theseJ. Rabin
Ashley Simonsen
SUSMAN GODFREY LLPthe secondary mortgage market, often as securitized packages
originators sold their loans into
FOR COREOLIS HOLDINGS, INC. (“MBSs”). MBS markets grew almostINC.
known as mortgage-backed securities AND TRADEWINDS HOLDINGS, exponentially.
Ellen R. Werther
Bruce J.the housing bubble burst. In 2006, the demand for housing dropped abruptly
But then Ressler
RESSLER & RESSLER
and home prices began to fall. In light of the changing housing market, banks modified their
FOR GEORGE SOROS
Raymond and became unwilling to refinance home mortgages without refinancing.
lending practicesFitzgerald
David J. McCarthy
BUTLER, FITZGERALD, FIVESON & McCARTHY, P.C.
1

Unless otherwiseB. Klotzreferences cited as “(¶ _)” or to the “Complaint” are to the Amended Complaint,
Martin indicated, all
dated WILLKIE FARR & GALLAGHER all allegations in the Amended Complaint are taken as true.
June 22, 2009. For purposes of this Motion, LLP

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FOR PURNENDU CHATTERJEE
Kristin T. Roy
MORRISON COHEN LLP
Dustin F. Hecker
POSTERNAK BLANKSTEIN & LUND LLP
JOHN F. KEENAN, United States District Judge:
Plaintiffs TradeWinds Airlines, Inc. (“TradeWinds
Airlines”), Coreolis Holdings, Inc. (“Coreolis”), and TradeWinds
Holdings, Inc. (“TradeWinds Holdings”) (collectively, “the
TradeWinds Group” or “Plaintiffs”) hold an unsatisfied default
judgment against C-S Aviation Services (“C-S Aviation”).
Plaintiffs brought the instant actions to pierce the corporate
veil of C-S Aviation and recover from the company’s alleged
alter egos, Defendants George Soros and Purnendu Chatterjee.
Before the Court is Plaintiffs’ motion to strike
Defendants’ second, twelfth, thirteenth, fourteenth, fifteenth,
sixteenth, seventeenth, twentieth, and twenty-first affirmative
defenses.1

For the reasons that follow, Plaintiffs’ motion is

granted in part and denied in part.
I. Background
On November 14, 2003, the TradeWinds Group was sued in
North Carolina Superior Court (the “North Carolina Action”) by
Deutsche Bank Trust Company Americas (“Deutsche Bank”), which is
1

Although there are four separate answers, one for each Defendant in
each action, they raise substantially similar defenses. The
affirmative defenses are identified in this Opinion by the numbers
used in Soros’s answer to Plaintiffs’ amended complaint in the 2010
Action.

2

not a party to the instant litigation. See Deutsche Bank Trust
Co. Ams. v. TradeWinds Airlines, Inc., No. 03 CVS 12215, 2009 WL
1154861, ¶¶ 5-6 (N.C. Super. Ct. Apr. 29, 2009).

In January

2004, the TradeWinds Group filed a third-party complaint against
C-S Aviation and others, claiming breach of contract on a series
of aircraft leases, as well as fraudulent inducement and unfair
and deceptive trade practices associated with those leases. See
id. ¶ 6.

The TradeWinds Group ultimately settled with Deutsche

Bank, and the North Carolina court dismissed all of the
remaining claims, except those against C-S Aviation. See
id. ¶ 8.
C-S Aviation never filed an answer, and the North Carolina
court entered default against C-S Aviation in August 2004. See
id. ¶ 7.

Nearly four years later, in April 2008, TradeWinds

Airlines (acting alone) moved for entry of default judgment
against C-S Aviation. See id. ¶ 11.

The North Carolina court

held a hearing on the motion, which C-S Aviation did not attend.
See id. ¶ 12.

The court entered the default judgment on June

27, 2008, see id., and TradeWinds Airlines promptly filed an
action before this Court to pierce C-S Aviation’s corporate veil
and hold Soros and Chatterjee personally liable for the default
judgment (the “2008 Action”).
On August 27, 2008, C-S Aviation moved before the North
Carolina court to set aside the entry of default and the default

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judgment. See id. ¶ 16.

TradeWinds Holdings and Coreolis

initially moved to be added to the default judgment, but later
withdrew that motion and instead moved for default judgment. See
id. ¶¶ 17, 19–20.

Meanwhile, this Court granted Defendants’

request for a stay of the 2008 Action pending resolution of the
North Carolina Action. TradeWinds Airlines, Inc. v. Soros, No.
08 Civ. 5901, 2009 WL 435298, at *4 (S.D.N.Y. Feb. 23, 2009).
The North Carolina court set aside the default judgment but
did not disturb the entry of default. (Simonsen Decl. Ex. 2,
¶ 4.)

The parties were allowed to conduct discovery on damages,

and the court held a six-day hearing on damages in May 2010.
(Id. ¶¶ 4–5.)

No corporate representative of C-S Aviation

testified. (Id. ¶ 5)

On July 26, 2010, the court ordered

judgment for TradeWinds Holdings and Coreolis in the amount of
$11,544,000.00, and judgment for TradeWinds Airlines in the
amount of $16,111,403.00, with both amounts subject to trebling
and interest. (Id. ¶ 14.)
Three months later, on October 28, 2010, Coreolis and
TradeWinds Holdings filed their own action before this Court to
pierce C-S Aviation’s corporate veil to reach Soros and
Chatterjee (the “2010 Action”).

At Defendants’ request, the

2010 Action was also stayed, pending appeals in the North
Carolina Action. TradeWinds Airlines, Inc. v. Soros, Nos. 08

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Civ. 5901, 10 Civ. 8175, 2011 WL 309636, at *4 (S.D.N.Y. Feb. 1,
2011).
A panel of the North Carolina Court of Appeals unanimously
affirmed the default judgment. TradeWinds Airlines, Inc. v. C-S
Aviation Servs., 733 S.E.2d 162 (N.C. Ct. App. 2012).

The North

Carolina Supreme Court denied review, rendering the judgment
final on June 12, 2013. TradeWinds Airlines, Inc. v. C-S
Aviation Servs., 743 S.E.2d 189 (N.C. 2013).

This Court lifted

the stays of the 2008 Action and the 2010 Action on July 10,
2013. (No. 08 Civ. 5901, ECF No. 107; 10 Civ. 8175, ECF No. 51.)
Plaintiffs now move to strike nine of Defendants’
affirmative defenses.

Defendants have withdrawn one of those

defenses, the twelfth, which contested the finality of the North
Carolina default judgment. (Defs.’ Mem. App. 2.)

Eight defenses

remain in dispute.
II. Discussion
A. Legal Standard
An affirmative defense is an “assertion of facts and
arguments that, if true, will defeat the plaintiff’s . . .
claim, even if all the allegations in the complaint are true.”
Black’s Law Dictionary 482 (9th ed. 2009).

A court may strike

any “insufficient defense or any redundant, immaterial,
impertinent, or scandalous matter.” Fed. R. Civ. P. 12(f).
Nevertheless, motions to strike are generally disfavored and

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will not be granted “unless it appears to a certainty that
plaintiffs would succeed despite any state of the facts which
could be proved in support of the defense.” William Z. Salcer,
Panfeld, Edelman v. Envicon Equities Corp., 744 F.2d 935, 939
(2d Cir. 1984) (internal quotation marks omitted), vacated on
other grounds, 478 U.S. 1015 (1986); see also Walsh v. City of
N.Y., 585 F. Supp. 2d 555, 557 (S.D.N.Y. 2008).

In order to

strike a defense as “insufficient,” not only must there be no
questions of law or fact that might allow the defense to
succeed, but the plaintiff must also show that it would be
prejudiced by the inclusion of the defense. See Coach, Inc. v.
Kmart Corps., 756 F. Supp. 2d 421, 425 (S.D.N.Y. 2010).

The

burden of additional discovery and increasing the duration and
expense of litigation can constitute sufficient prejudice. See,
e.g., id. at 426; Specialty Minerals, Inc. v. Pluess-Staufer AG,
395 F. Supp. 2d 109, 114 (S.D.N.Y. 2005).
B. Analysis
The parties no longer contest the finality of the North
Carolina default judgment.

Because it is a final judgment, this

Court must give it the same preclusive effect that it would have
in North Carolina. See Kremer v. Chem. Const. Corp., 456 U.S.
461, 466 (1982); Joseph v. Athanasopoulos, 648 F.3d 58, 61 (2d
Cir. 2011).

Thus, as both parties recognize, North Carolina

preclusion law governs.

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In North Carolina, when a plaintiff prevails in an earlier
suit, the cause of action merges with the judgment. See Thomas
M. McInnis & Assocs., Inc. v. Hall, 349 S.E.2d 552, 556–57 (N.C.
1986).

Merger prevents relitigation of “all matters . . . that

were or should have been adjudicated in the prior action.” Id.;
see also Whitacre P’ship v. Biosignia, Inc., 591 S.E.2d 870, 880
(N.C. 2004).

Thus, in a subsequent action on the judgment, “the

defendant cannot avail himself of defenses he might have
interposed . . . in the first action.” Restatement (Second) of
Judgments § 18 (1982); see also McInnis, 349 S.E.2d at 556–57.
As Defendants note, North Carolina courts have favorably cited
Restatement (Second) of Judgments § 18, (Defs.’ Mem. App. 1.),
which provides a helpful illustration of this principle:
A brings an action against B on a promissory note. B
defaults.
Judgment is given for A.
A brings an
action against B on the judgment. In this action B is
precluded from denying that he executed the note and
from setting up an affirmative defense such as fraud
or illegality.
Restatement (Second) of Judgments § 18 cmt. c, illus. 4.
Here, the TradeWinds Group prevailed in North Carolina,
merging the cause of action with the default judgment.

Since

Plaintiffs’ veil-piercing claims are actions upon that judgment,
C-S Aviation is now barred from raising affirmative defenses
that it could have asserted in the earlier action (“the North
Carolina Defenses”).

If Soros and Chatterjee are the same

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parties as, or privies of, C-S Aviation, then they will also be
barred from raising the North Carolina Defenses.
Whether Soros and Chatterjee are the same parties as, or
privies of, C-S Aviation is the question that this litigation
will ultimately resolve.

As a consequence of the eventual

adjudication of the merits, Soros and Chatterjee either will or
will not be bound to the North Carolina default judgment.

At

this point in the litigation, it is not clear whether, as
Plaintiffs argue, veil piercing alone is sufficient under North
Carolina law to bind an alter ego to a judgment entered against
the corporation.

Alternatively, it may be the case, as

Defendants argue, that some combination of notice, control, and
the opportunity to litigate the action underlying the judgment
is also required.
There are several paths this case could take, but the Court
can see none that would allow the North Carolina Defenses to
succeed because none of those defenses would defeat Plaintiffs’
instant veil-piercing claims.

If Plaintiffs establish the

elements of veil piercing and satisfy whatever else may be
required under North Carolina’s same party or privy analysis,
then Soros and Chatterjee will be personally liable for the
default judgment whether the North Carolina Defenses are
meritorious or not.

Even if something more than veil piercing

is necessary to bind Soros and Chatterjee to the default

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judgment and Plaintiffs fail to satisfy that requirement, there
would still be no need for the North Carolina Defenses.

In that

scenario, Defendants would instead defeat the veil-piercing
claims by demonstrating that Soros and Chatterjee cannot be
personally bound by the North Carolina default judgment.
Thus, defenses that C-S Aviation could have raised in the
North Carolina Action are “insufficient” here because there are
no legal or factual scenarios where they would succeed in
defeating Plaintiffs’ instant claims.

Allowing the North

Carolina Defenses to remain would undoubtedly prejudice
Plaintiffs because relitigation of the North Carolina Action
would require additional discovery and increase the duration and
expense of the instant litigation.

This Court will therefore

strike those affirmative defenses that C-S Aviation could have
raised in the North Carolina Action.

Each disputed affirmative

defense will be analyzed in turn below.
1. Second Affirmative Defense
Affirmative Defense 2 asserts that “Plaintiffs have unclean
hands.” (2010 Soros Answer to Am. Compl. ¶ 31.)

The equitable

defense of unclean hands requires that plaintiffs “have acted
fairly and without fraud or deceit as to the controversy in
issue.” Dunlop-McCullen v. Local 1-S, 149 F.3d 85, 90 (2d Cir.
1998) (internal quotation marks omitted).

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Insofar as the

defense applies to the post–default judgment veil-piercing
claims, it cannot be stricken.
The defense cannot, however, be raised as to the North
Carolina Action.

North Carolina courts recognize unclean hands

as an affirmative defense, see, e.g., Hendrix v. Advanced Metal
Corp., 672 S.E.2d 745, 746 (N.C. Ct. App. 2009), which means it
must be raised in a responsive pleading, N.C. R. Civ. P. 12(b).
Thus, Defendants may not use the second affirmative defense to
litigate the merits of the North Carolina Action, nor may they
pursue discovery as to the North Carolina Action.
2. Thirteenth Affirmative Defense
The thirteenth affirmative defense asserts that, because it
resulted in a default judgment, the North Carolina Action was
not litigated on the merits. (2010 Soros Answer to Am. Compl.
¶ 42.)

Defendants may argue that they cannot be held personally

liable for the default judgment because the North Carolina
Action was not litigated on the merits.
cannot strike this defense.

Therefore, the Court

However, for the reasons stated

above, Defendants may not use this defense to litigate the
merits of the North Carolina Action, nor may they pursue
discovery as to the North Carolina Action.
3. Fourteenth Affirmative Defense
Defendants assert that due process requires the
relitigation of the merits of the North Carolina Action. (2010

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Soros Answer to Am. Compl. ¶ 43.)

Defendants may argue that

they cannot be personally liable for the default judgment
because the North Carolina Action lacked certain hallmarks of
due process.

Therefore, this defense cannot be stricken.

But,

for the reasons discussed above, Defendants cannot use this
defense to litigate the merits of the North Carolina Action, nor
may they pursue discovery as to the North Carolina Action.
4. Fifteenth Affirmative Defense
This defense asserts that North Carolina did not have
personal jurisdiction over C-S Aviation. (2010 Soros Answer to
Am. Compl. ¶ 44.)

The North Carolina default judgment would not

be entitled to full faith and credit, and would have no
preclusive effect, if the North Carolina court lacked
jurisdiction over C-S Aviation. See Underwriters Nat’l Assurance
Co. v. N.C. Life & Accident & Health Ins. Guar. Ass’n, 455 U.S.
691, 704–05 (1982).

However, “[a] judgment is entitled to full

faith and credit — even as to questions of jurisdiction — when
the second court’s inquiry discloses that those questions have
been fully and fairly litigated and finally decided in the court
which rendered the original judgment.” Id. at 706 (internal
quotation marks omitted); see also Stone v. Williams, 970 F.2d
1043, 1057 (2d Cir. 1992).
Therefore, Defendants may argue that personal jurisdiction
was not “fully and fairly litigated and finally decided” in the

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North Carolina Action.

Since this argument would be a

collateral attack on the judgment, the Court will not strike
this affirmative defense.
5. Sixteenth Affirmative Defense
Soros and Chatterjee allege that Plaintiffs did not state a
valid claim against C-S Aviation in the North Carolina Action.
(2010 Soros Answer to Am. Compl. ¶ 45.)

In North Carolina,

failure to state a claim is a defense that can be raised at any
time until judgment. N.C. R. Civ. P. 12(b), (h)(2).

The Court

therefore grants Plaintiffs’ motion to strike the sixteenth
affirmative defense.
6. Seventeenth Affirmative Defense
Soros challenges Coreolis’s and TradeWinds Holdings’s
standing in the North Carolina Action. (2010 Soros Answer to Am.
Compl. ¶ 46.)

Standing is a component of subject matter

jurisdiction. See Aubin v. Susi, 560 S.E.2d 875, 878 (N.C. Ct.
App. 2002).

Therefore, this Court cannot strike this

jurisdictional defense for the same reason it cannot strike the
fifteenth affirmative defense. See also Underwriters Nat’l
Assurance, 455 U.S. at 704–05.
7. Twentieth Affirmative Defense
Defendants allege that Plaintiffs entered into an accord
and satisfaction with C-S Aviation. (2010 Soros Answer to Am.
Compl. ¶ 49.)

Accord and satisfaction is an affirmative defense

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in North Carolina that must be asserted in the responsive
pleading. N.C. R. Civ. P. 8(c), 12(b).

Therefore, the Court

grants Plaintiffs’ motion to strike the twentieth affirmative
defense.
8. Twenty-First Affirmative Defense
Soros and Chatterjee allege that “Plaintiffs have failed to
mitigate damages.” (2010 Soros Answer to Am. Compl. ¶ 50.)

This

defense is clearly directed at the damages awarded to the
Plaintiffs in the North Carolina default judgment.

It is not a

defense against the instant litigation, which merely seeks to
enforce that judgment against Defendants personally. (2008 Third
Am. Compl. ¶ 27; 2010 Am. Compl. ¶ 29.)
North Carolina courts recognize failure to mitigate damages
as an affirmative defense, see, e.g., Barfield v. Matos, 714
S.E.2d 812, 817 (N.C. Ct. App. 2011), which means it must be
raised in the responsive pleading, N.C. R. Civ. P. 12(b).

The

Court therefore grants Plaintiffs’ motion to strike the twentyfirst affirmative defense.
III. Conclusion
For the foregoing reasons, Plaintiffs’ motion to strike
Defendants’ sixteenth, twentieth, and twenty-first affirmative
defenses is granted.

Plaintiff’s motion to strike the second,

thirteenth, fourteenth, fifteenth, and seventeenth affirmative

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defenses is denied, except that the surviving affirmative
defenses may not be used to litigate the merits of the North
Carolina Action.

Defendants may not use the second, thirteenth,

or fourteenth affirmative defenses to pursue discovery as to the
North Carolina Action.
SO ORDERED.

Dated:

New York, New York
December 17, 2013
John F. Keenan
States District Judge

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