Business Court Casts Doubt On $55 Million Default Judgment

This case from the North Carolina Business Court involves the world's 29th richest man, the City of Detroit, and a $55 million default judgment.  Oh, and airplanes too.  Big ones.

All this and more was discussed in the Business Court's decision today in Deutsche Bank Trust Company Americas v. Tradewinds Airlines, Inc.2009 NCBC 12 (N.C. Super. Ct. April 29, 2009). 

The $55 Million Default

The saga began when TradeWinds, an air freight carrier, obtained an entry of default against C-S Aviation in August 2004.  C-S was once the world's largest lessor of A300 aircraft, and had leased planes to TradeWinds. 

The entry of default was obtained jointly by TradeWinds, its sole shareholder, TradeWinds Holdings, and another company, Coreolis Holdings.  The three parties did not pursue a default judgment.

Four years passed.  TradeWinds by then had been sold.  Its new owners included the General Retirement System of the City of Detroit and the Police and Fire Retirement System of the City of Detroit. 

TradeWinds learned that the plaintiff in a New York lawsuit had pierced the corporate veil of C-S Aviation.  That was a worthwhile endeavor.  The shareholders of C-S Aviation are George Soros, who Forbes Magazine says is the 29th richest man in the world (the "S"); and Purnendu Chatterjee, also a "wealthy individual," according to the Court (who is the "C.")

TradeWinds decided to pursue a big payday.  It moved in April 2008, without TradeWinds Holdings or Coreolis, to secure the missing default judgment.  It obtained that on June 27, 2008.  The judgment was a whopper: $54,867,872.49.  The very next day, TradeWinds filed suit in the Southern District of New York against Soros and Chatterjee to recover the $55 million.  A month later, TradeWinds filed for bankruptcy protection in Florida in what the Court described as an apparent effort to "shield" the default judgment.  Op. ¶73.

The Motion To Set Aside

Coreolis and TradeWinds Holdings didn't appreciate being left out of this potential multi-million dollar recovery.  They filed a motion in the Business Court to be added as beneficiaries of the judgment.  By then, C-S had moved to set aside both the entry of the default and the default judgment in the Business Court based on service of process, personal jurisdiction, and "extraordinary circumstances."

Judge Tennille deferred ruling on the Motion, noting the multi-state litigation pending concerning his default judgment, including a Bankruptcy Court stay.  He said "like aircraft lined up for departure, the litigation involving TradeWinds is stacked up on the taxiway awaiting clearance for takeoff."  Op. ¶2.  The Court didn't make any definitive ruling in the case because of the Bankruptcy Court stay, but stated what it was likely to do once the stay was lifted.

Service of Process

C-S, a Delaware corporation, claimed that the service of the Third Party Complaint was invalid because Delaware law (8 Del. Code §321) requires in-person delivery of service on a Delaware corporation.  TradeWinds had served C-S by certified mail addressed to C-S' registered agent, CT Corporation, which C-S contended was inadequate.  That was perfectly valid service under Rule 4 of the North Carolina Rules of Civil Procedure.

Judge Tennille ruled that the argument of C-S was "unpersuasive," and that "the local law of the forum determines the method of serving process and of giving notice of the proceeding to the defendant."  Op. ¶36.  North Carolina law therefore controlled the question of service of process.

The Judge further held that he could look to Delaware substantive law "to decide whether the party is properly qualified as an 'agent' to receive service of process," but that he was "not bound by Delaware's restrictions on the manner in which service on a duly qualified agent must be conducted."  Op. ¶36, 39.

C-S further quibbled that the Affidavit of Service filed electronically with the Business Court didn't show a signature reflecting receipt.  The return receipt in the paper file at the Guilford County Superior Court did have the missing signature, however, and Judge Tennille held that the statute permitted him to consider not only "the attached registry receipt" but also "other evidence satisfactory to the court of delivery to the addressee."  Op. ¶51; N.C. Gen. Stat. §1-75.10(a)(4)b.

Personal Jurisdiction

The jurisdictional question turned on N.C. Gen. Stat. Sec. §1-75.4 which permits jurisdiction if there has been "solicitation or services activities . . . carried on within this State by or on behalf of the defendant."  C-S said it hadn't solicited TradeWinds in North Carolina, and that it was actually TradeWinds that had initially approached it. 

The Court said that this made no difference, holding that "C-S Aviation negotiated a contract for the leasing of aircraft, made assurances about the aircraft engine performance, induced TradeWinds to enter into the contract, maintained an ongoing relationship with TradeWinds, renegotiated the agreement that resulted in better leasing terms for TradeWinds, and delivered the aircraft to TradeWinds in North Carolina. . . . C-S Aviation directed its efforts toward TradeWinds, who, while operating out of a North Carolina airport, was a North Carolina resident."  Op. ¶68.

Jurisdiction was therefore proper in North Carolina.

Default Judgment

It doesn't appear that the default judgment will stand.

Judge Tennille observed that he had the power under Rule 60(b)(6) to set aside a default judgment if "(1) extraordinary circumstances exist, (2) justice demands the setting aside of the judgment, and (3) the defendant has a meritorious defense." 

Although the Court didn't set aside the default judgment, it said that it was likely to do so once the bankruptcy court stay was lifted, based on the following:

  • The sheer size of the award itself was "an extraordinary circumstance in favor of setting aside a default judgment."
  • There were "significant procedural irregularities with respect to the Entry of Default and the Default Judgment." 
  • Although the entry of default was entered on behalf of three parties, only TradeWinds sought and obtained the default judgment.

Op. ¶¶71-72.  The Court concluded that "[a] full hearing on damages with all affected parties represented and participating would provide a more just resolution than the procedural gamesmanship now being employed."  Op. ¶73.  

The Court further expressed concerns about what it described as a "lack of transparency on the part of TradeWinds, particularly its failure to disclose the divergence of interests between TradeWinds and the other parties to the Entry of Default."  Op. ¶73.

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