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Case of the Day: Box v. Dallas Mexican Consulate General

The case of the day is Box v. Dallas Mexican Consulate General (N.D. Tex. 2013). The case was on remand from the Fifth Circuit. I wrote about the earlier decision in September 2012. In short, Box was a real estate broker; the claim arose out of Box’s work attempting to find new premises for the consulate and was for breach of contract, fraud, etc. The procedural posture was pretty much the same as in yesterday’s case of the day: the consulate failed to appear in the action; Box sought and obtained a default judgment; the consulate then moved for relief from the judgment under FRCP 60(b)(4) on the grounds that the court lacked jurisdiction under the FSIA.

The orthodox view, which we saw in Bell Helicopter, is that when a defendant has not appeared in a case, the defendant can later seek relief from a default judgment, and if the court lacked jurisdiction, the judgment is void, period:

Relief sought on the ground of the invalidity of the judgment may be obtained without regard to time limits, except when a statute of limitations applies to the claim for relief from the judgment itself. The justification for permitting such a delayed challenge to judicial authority varies according to the ground of invalidity that is availed of by the applicant. … When the person knew about the action but perceived that the court lacked territorial or subject matter jurisdiction, he is given a right to ignore the proceeding at his own risk but to suffer no detriment if his assessment proves correct. The right to challenge jurisdiction makes him an instrument for confining judicial authority to its prescribed limits. The fact that the challenge may be asserted after judgment gives it additional weight and effect. In any case, no public purpose is served by protecting the judgment. By hypothesis the proceeding was infected by fundamental error, usually attributable to the plaintiff’s own acts or omissions. Since the judgment was by default no significant investment of judicial effort was made. Thus, the judgment is supported by none of the considerations supporting preclusion and properly may be treated as wholly abortive.

Restatement (Second) of Judgments § 65 cmt. b.

The court in Box, though, took a narrower view. It reasoned that because the consulate had actual notice of the lawsuit, but chose not to defend, it was entitled to relief under FRCP 60(b)(4) only if there was “no arguable basis” on which the court could have exercised subject matter jurisdiction.

As we saw in Bell Helicopter, a defendant with a real jurisdictional argument has some strategic possibilities to consider. But Box shows that before even thinking about a default, a defendant should first make sure that the relevant jurisdiction adheres to the traditional view of void judgments.

Case of the Day: In re Vitro

The case of the day is In re Vitro S.A.B. de C.V. (Bankr. N.D. Tex. 2012). Vitro, a Mexican glass manufacturer, was in reorganization proceedings in Nuevo León, Mexico under the Ley de Concursos Mercantiles. In 2011, Vitro began a Chapter 15 bankruptcy proceeding in the Northern District of Texas and sought to enjoin lawsuits by its creditors against the guarantors of its debt, who were not themselves in insolvency proceedings. The bankruptcy judge denied Vitro’s motion for an injunction, and the creditors sued the guarantors (which were Vitro subsidiaries) in the New York Supreme Court. The New York court entered a declaratory judgment in favor of the creditors declaring that Vitro’s reorganization proceeding would not affect the creditors’ rights against the guarantors. The New York court also enjoined the guarantors from assenting to the Mexican reorganization plan for which Vitro was seeking approval. But Vitro asked the Texas bankruptcy judge to enjoin the creditors from seeking injunctive relief in the New York state courts, and the Texas judge agreed. Thus the guarantors ultimately were able to vote on the Mexican reorganization plan. Unsurprisingly, they voted in favor: the plan “not only modifies the debts owed by Vitro SAB to the noteholders under various indentures, it also novates and extinguishes the guarantees, effectively discharging the obligations of Vitro SAB’s non-debtor subsidiary guarantors to the noteholders.”

The Mexican court approved the reorganization plan, but the creditors continued to take various collection actions against the Vitro subsidiaries/guarantors. Vitro asked the Texas bankruptcy judge to recognize and enforce the Mexican judgment approving the plan and thus to enjoin the creditors’ collection activities on the grounds that the guarantors’ obligations had been extinguished in the Mexican proceedings, even though the guarantors were not themselves in insolvency proceedings.

The bankruptcy judge refused to recognize and enforce the Mexican court’s decision extinguishing the claims against the guarantors, relying primarily on public policy considerations; Section 1506 of the Bankruptcy Code provides:

Nothing in this chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States.

The judge noted: “Generally speaking, the policy of the United States is against discharge of claims for entities other than a debtor in an insolvency proceeding, absent extraordinary circumstances not present in this case.” The judge reached this conclusion even though he was not persuaded by the doomsday arguments the creditors advanced, which claimed that a decision in favor of Vitro would damage the United States financial markets.

While the judge ultimately ruled in favor of the creditors, I’d like to note that he rejected the corruption argument the creditors made about Mexico’s judiciary. The creditors’ expert witness testified persuasively about corruption in Mexico generally, but the court found no evidence that the Vitro proceedings themselves had been corrupted.

The Vitro case is being closely watched by the bankruptcy bar, so I expect we will have more news to report as the case winds its way through the appeal process.

Case of the Day: Gramercy Insurance Co. v. Kavanagh

Memo to foreign defendants: If you want to avoid service of process by concealing your foreign address from the plaintiff, don’t hire a US lawyer to enter an appearance in the action. The case of the day, Gramercy Insurance Co. v. Kavanagh (N.D. Tex. 2011), is a case in point. Gramercy sued Kennedy and others seeking a declaration that it was not obligated to indemnify the defendants under a guaranty. The defendants were British. The defendants’ lawyer (who represented Kennedy as well as the others) refused to give Gramercy’s lawyer Kennedy’s address for service of process purposes. So on Gramercy’s motion, the court authorized alternate service on Kennedy’s lawyer under Rule 4(f). The moral of the story: if you want to insist on putting the plaintiff through its paces and forcing the plaintiff to effect service of process under the Hague Convention, don’t appear in the US case.