Commercial Litigation and Arbitration

Default Judgment — Rules Governing Inquests

The plaintiff in Banco de Chile v. Lavanchy, 2008 U.S. Dist. LEXIS 91499 (S.D.N.Y. Nov. 6, 2008) commenced this civil RICO action against a former employee alleging that, “‘unbeknownst to it,’ the defendant acted as the ‘undisclosed financial agent for former Chilean President Augusto Pinochet ("Pinochet") and used his financial relationship with [the plaintiff bank] to engage’ in numerous transactions that violated United States statutes proscribing money laundering and to commit acts of fraud against the bank.”

At an inquest, the complaint's factual allegations must be accepted as true except as they relate to damages. See Au Bon Pain Corp. v. Artect, Inc., 653 F.2d 61, 65 (2d Cir. 1981). In addition, the plaintiff is entitled to all reasonable inferences from the evidence presented. See id. However, where the complaint is not well-pleaded, liability is not conceded. See Bambu Sales, Inc. v. Ozak Trading, Inc., 58 F.3d 849, 854 (2d Cir. 1995) (citing Trans World Airlines v. Hughes, 449 F.2d 51, 69 (2d Cir. 1971), rev'd on other grounds, 409 U.S. 363, 93 S. Ct. 647 [1973]) (a judgment by default entered on the well-pleaded allegations in the complaint establishes liability). ***

A court must evaluate whether a basis for damages exists in a circumstance where a judgment by default is rendered, and a plaintiff must establish the quantum of damages in a post-default inquest, "unless the amount is liquidated or susceptible of mathematical computation." Flaks v. Koegel, 504 F.2d 702, 707 (2d Cir. 1974) (citations omitted). "[U]nless the amount of damages [is] absolutely certain, the court is required to make an independent determination of the sum to be awarded." S.E.C. v. Writ. Dynamics, Inc., 515 F.2d 801, 814 (2d Cir. 1975). A court should not award damages if the evidence presented by a plaintiff, at an inquest, does not adequately provide a reasonable basis for determining damages. See In re Crazy Eddie Litigation, 948 F. Supp. 1154, 1160 (E.D.N.Y. 1996) (citation omitted).

In conducting an inquest, a court need not hold a hearing. It may rely upon, inter alia, detailed affidavits and documentary evidence, "as long as it ensured that there was a basis for the damages specified in the default judgment." Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., 109 F.3d 105, 111 (2d Cir. 1997) (quotation omitted). In order to "satisfy the [ ] obligation [imposed on a court] to ensure that the damages [are] appropriate" it cannot just accept a plaintiff's statement of the damages. Id. A court "must first examine the validity of [a plaintiff's] claims to determine the extent of damages [it is] legally entitled to recover . . . ." Crazy Eddie, 948 F. Supp. at 1161. A "district court has discretion under Rule 55(b)(2) once a default is determined to require proof of necessary facts and need not agree that the alleged facts constitute a valid cause of action . . . ." Au Bon Pain, 653 F.2d at 65 (citation omitted).

When the pleaded allegations are found to be: 1) inconsistent; (2) "contrary to facts of which the court will take judicial notice;" or (3) "contrary to uncontroverted material in the file of the case," a finding that the allegations in the complaint are not well-pleaded may be made. Trans World Airlines, 449 F.2d at 63 (quotations and citations omitted), rev'd on other grounds, 409 U.S. 363, 93 S. Ct. 647 [1973]); see also Liberty Mut. Ins. Co., 969 F.2d at 1388 (citing Fed. R. Evid. 201[b]).

Held, “the preceding three factors are present in the instant action.” Default judgment unwarranted.

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