St. Paul Mercury Insurance Company v. M&T Bank Corporation
Filing
31
OPINION & ORDER re: 14 MOTION Vacate Entry of Default filed by M&T Bank Corporation. For the foregoing reasons, Plaintiff's application for default judgment is denied. Defendant's motion to vacate the entry of default is granted. The parties are directed to comply with the Case Management Order filed contemporaneously with this opinion. (Signed by Judge John F. Keenan on 12/4/2012) (mro)
Case 1:09-md-02013-PAC Document 57
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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ST. PAUL STATES DISTRICT COURT
:
UNITED MERCURY INSURANCE
COMPANY,
:
SOUTHERN DISTRICT OF NEW YORK
:
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Plaintiff,
:
In re FANNIE MAE 2008 SECURITIES
:
:
LITIGATION
:
-against:
:
:
:
M&T BANK CORPORATION,
:
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:
Defendant.
:
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Filed 09/30/10 Page 1 of 45
USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: Dec. 5, 2012
08 Civ. 7831 (PAC)
No. MD 2013 (PAC)
09 12 Civ. 6322 (JFK)
OPINION & ORDER
OPINION & ORDER
HONORABLE PAUL A. CROTTY, United States District Judge:
JOHN F. KEENAN, United States District Judge:
BACKGROUND1
Before the Court is Plaintiff St. Paul Mercury Insurance
The early years of this decade saw a boom in home financing which was fueled, among
Company’s (“St. Paul” or “Plaintiff”) application for default
other things, by low interest rates and lax credit conditions. New lending instruments, such as
judgment against Defendant M&T Bank Corporation (“M&T” or
subprime mortgages (high credit risk loans) and Alt-A respond timely to
“Defendant”), after Defendant failed tomortgages (low-documentation loans)
kept the boom going. Borrowers played a role too; they took on Defendant likewise
Plaintiff’s complaint filed August 17, 2012. unmanageable risks on the
assumption that the entry of default be that refinancing options would
requests that the market would continue to rise andvacated. This Court always be
available in Order Lending Cause on October 19, 2012, directing
entered an the future.to Showdiscipline was lacking in the system. Mortgage originators did
not hold these high-risk cause loans. Rather than carry the rising risk on their be
Defendants to show mortgage why default judgment should not books, the
originators The matter was heard on November 26, 2012, and the
entered. sold their loans into the secondary mortgage market, often as securitized packages
known have filed supplemental briefs markets grew of their
parties as mortgage-backed securities (“MBSs”). MBSin supportalmost exponentially.
But positions. For the reasons demand for housing dropped abruptly
respectivethen the housing bubble burst. In 2006, thethat follow, Plaintiff’s
and home prices began to fall.
application is denied. In light of the changing housing market, banks modified their
lending practices and became unwilling to refinance home mortgages without refinancing.
I.
Background
Plaintiff and Defendant, or their related entities, have
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hadUnless otherwise indicated, all references cited as “(¶ _)” or to the “Complaint” are to the Amended Complaint,
a series of business dealings relating to the purchase and
dated June 22, 2009. For purposes of this Motion, all allegations in the Amended Complaint are taken as true.
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sale of bonds and insurance coverage. (Ans. ¶ 48.)
The parties
entered into an indemnity contract dated June 24, 2008 whereby
Defendant agreed to indemnify Plaintiff relating to any surety
bonds issued on behalf of Defendant. (Compl. ¶¶ 5–9.)
Defendant purchased a bond from Plaintiff, No. 469PB0944,
for a term starting on November 1, 2009. (Id. ¶ 13.)
Defendant
refers to this bond as a “fidelity bond” and asserts that the
purpose of which is “‘to protect a firm against certain types of
losses, including, but not limited to, those caused by the
malfeasance of its officers and employees, and the effect of
such losses on the firm’s capital.” (Ans. ¶ 44 (citing FINRA
Regulatory Notice 09-44).)
On November 23, 2009, Plaintiff and Defendant executed an
addendum to the June 24, 2008 indemnity contract, the function
of which is hotly disputed by the parties.
The text of the
addendum appears to add the October 30, 2009 bond to the list of
bonds covered under the June 24, 2008 indemnity contract.
(Compl. Ex. B.)
However, Defendant contends that Plaintiff’s
agents led Defendant to believe that this addendum did not
confer any additional obligations on Defendant but rather was
meant solely to eliminate the possibility of Plaintiff having to
make double payment to Defendant. (Ans. ¶ 56 (“Ms. Dennis
[Plaintiff’s agent] expressly represented that the sole purpose
and effect of the Addendum was to ensure that M&T could not
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recover for the same lost dollars under both the Fidelity Bond
and the Banker's Blanket Bond.”).)
Plaintiff maintains that
Defendant’s characterization is untrue, and that the parties
understood that the addendum operated to bring the October 30,
2009 bond under the June 24, 2008 indemnity contract. (Pl. Br.
at 14–15.)
The parties’ disagreement about the addendum is significant
because, in accordance with the October 30, 2009 bond, St. Paul
paid out a claim to an M&T subsidiary totaling $868,995.56.
(Compl. ¶¶ 22–27.)
This action arises out of the fact that
Plaintiff now seeks indemnity in that amount, on the basis of
the November 23, 2009 addendum.
Defendant’s answer was due to the Court on October 10,
2012, but it did not file an answer by that date, and the Clerk
of Court certified Defendant’s default on October 18, 2012.
(PACER No. 7.)
After Defendant was served with the Order to
Show Cause, it filed an answer that also asserted a counterclaim
for fraud. (Ans. ¶¶ 42–69.)
Defendant now petitions the Court
to vacate the entry of default and opposes entry of default
judgment, claiming that the employees at its retail bank
location must have misplaced the summons and complaint.
It
further argues that the default was not willful, that setting
the default aside will not prejudice Plaintiff, and that it has
meritorious defenses.
Chief among these defenses is the
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misunderstanding regarding November 23, 2009 addendum, which
Defendant argues is the result either of Plaintiff’s fraud or
mutual mistake.
Defendant also urges that Plaintiff’s
interpretation of the addendum would cause the October 30, 2009
bond to be illegal under FINRA rules, since indemnity would
defeat the purpose of protecting the bondholder’s capital.
For
its part, Plaintiff persists in seeking entry of default
judgment, on the grounds that Defendant has not demonstrated the
existence of a meritorious defense.
II.
a.
Discussion
Legal Standard
Federal Rule of Civil Procedure 55(a) directs the clerk of
court to enter default “[w]hen a party against whom a judgment
for affirmative relief is sought has failed to plead or
otherwise defend, and that failure is shown by affidavit or
otherwise, the clerk must enter the party’s default.” Fed. R.
Civ. P. 55(a); see City of New York v. Mickalis Pawn Shop, LLC,
645 F.3d 114, 128 (2d Cir. 2011) (describing entry of default as
“a ministerial step to be performed by the clerk of court”).
Under Rule 55(c), entry of default may be set aside by a court
“for good cause,” which in the Second Circuit is evaluated in
terms of these criteria:
“(1) whether the default was willful;
(2) whether setting aside the default would prejudice the party
for whom default was awarded; and (3) whether the moving party
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has presented a meritorious defense.” Peterson v. Syracuse
Police Dept., 467 F. App’x 31, 33 (2d Cir. 2012) (citing Enron
Oil Corp. v. Diakuhara, 10 F.3d 90, 96 (2d Cir. 1993).
“When
the defaulted defendant opposes default judgment, courts treat
the opposition as a motion to vacate entry of default and
examine whether good cause exists to vacate the entry.” Capitol
Records v. Defries, 2012 WL 3041583, *5 (S.D.N.Y. July 20, 2012)
(citations omitted)).
If the Court determines that the entry of default should
stand, then it has the discretion to enter default judgment
against the defendant. See Mickalis, 645 F.3d at 129.
However,
the Second Circuit has described default judgments as “the most
severe sanction which the court may apply,” stating that they
are “generally disfavored and are reserved for rare occasions.”
Id. (citations and internal quotation marks omitted).
In urging the Court to enter default judgment, Plaintiff
does not claim that Defendant’s default was willful, or that it
would be prejudiced if the default was set aside.
Plaintiff
contends only that Defendant has not met its burden of
presenting a meritorious defense.
To decide whether this is so,
the Court must consider “whether the evidence submitted, if
proven at trial, would constitute a complete defense.” Enron, 10
F.3d at 98.
“[T]he defendant need not establish his defense
conclusively,” nor must he show “a likelihood that it will carry
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the day.” State St. Bank & Trust Co. v. Inversiones Errazuris
Limitada, 374 F.3d 158, 167 (2d Cir. 2004) (internal citations
and quotation marks omitted).
Nevertheless, he “must present
more than conclusory denials,” Pecarsky v. Galaxiworld.com Ltd.,
249 F.3d 167, 173 (2d Cir. 2001), and if no meritorious defense
is presented, entry of default judgment may be appropriate, see
State Farm Mut. Auto. Ins. Co. v. Cohan, 409 F. App’x 453, 456
(2d Cir. 2011).
b.
Application
At the heart of the instant case lies a disputed contract
addendum, with the parties insisting upon starkly different
interpretations of the provision and the circumstances of its
execution.
Given the factual nature of the dispute, the paucity
of evidence in the record thus far, and the “strong preference
for resolving disputes on the merits,” it would be wholly
inappropriate to award the severe sanction of default judgment
to Plaintiff. Mickalis, 645 F.3d at 129 (citation and internal
quotation marks omitted).
At this early stage, it is impossible
for the Court to make final determinations regarding the
strength of the parties’ legal positions — or the credibility of
their affiants, upon whom they rely heavily to support their
versions of the facts in this case.
Defendant has met its
burden of setting forth a defense that, if proven, would prevent
recovery by Plaintiff. See American Alliance Ins. Co., Ltd. v.
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Eagle Ins. Co.,
92 F.3d 57, 61
(2d Cir. 1996)
("'A defense is
meritorious if it is good at law so as to give the factfinder
some determination to make.'"
(quoting Anilina Fabrique de
Colorants v. Aakash Chemicals and Dyestuffs, Inc . , 856 F.2d 873,
879
(7th Cir. 1988))).
The Court declines to take the rare step
of ending this litigation before a serious consideration of the
facts and issues can be presented.
The case should proceed in
earnest.
III. Conclusion
For the foregoing reasons, Plaintiff's application for
default judgment is denied.
entry of default is granted.
Defendant's motion to vacate the
The parties are directed to comply
with the Case Management Order filed contemporane ously with this
opinion.
SO ORDERED.
Dated:
New York, New York
December Lf ' 2012
~?~
John F. Keenan
United States District Judge
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