Opinion ID: 771992
Heading Depth: 2
Heading Rank: 2

Heading: The Challenge to the Bond Condition

Text: 43 The principal arguments advanced by Lavi and Omega are that it was impermissible for the district court to condition vacatur of the default on their posting a $500,000 bond because the court did not find their default to have been willful and because satisfaction of the bond condition was impossible. Neither contention has merit. 44 Preliminarily, we note that, while Lavi and Omega argue principally that the bond condition was an abuse of discretion, one paragraph of their brief on appeal asserts that as a matter of law the district court had no authority to impose a bond prior to a final adjudication of the merits of the case because a District Court lacks 'power to issue a preliminary injunction preventing the defendant from transferring assets in which no lien or equitable interest is claimed' (Lavi/Omega brief on appeal at 18 (quoting Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308, 310 (1999) (emphasis in brief))). Their reliance on Grupo Mexicano is misplaced. That case involved a creditor's request for a preliminary injunction freezing certain of the defendant's assets. The bond condition imposed here is not an injunction, see, e.g., MacEwen Petroleum, Inc. v. Tarbell, 136 F.3d 263, 264 (2d Cir. 1998), and it did not impose a restraint on the alienation of any of defendants' property; it merely required Lavi and Omega, as a condition for vacating the defaults, either to hypothecate some of their assets or to purchase a bond, in order to assure that at least a portion of any judgment recovered by Powerserve would be satisfied. Further, at oral argument of this appeal, there appeared to be no dispute that a bond of the type ordered in this case would typically require a payment of one percent of the bond's face amount, here just $5,000. Plainly no asset freeze of the type at issue in Grupo Mexicano was ordered here. 45 In determining whether to exercise its discretion to set aside a default, see Part II.A. above, a district court has inherent power to impose a reasonable condition on the vacatur in order to avoid undue prejudice to the opposing party. Opening a default may prejudice a litigant in a number of ways, including by provid[ing] greater opportunity for fraud and collusion. 10A C. Wright, A. Miller & M. Kane, Federal Practice and Procedure §2699, at 169 (1998). The imposition of conditions as part of granting a Rule 55(c) motion can be used to rectify any prejudice suffered by the nondefaulting party as a result of the default and the subsequent reopening of the litigation. Id. §2700, at 170-71. 46 Accordingly, a number of circuits have approved of conditioning the vacatur of defaults or default judgments on the posting of security for payment of all or part of an eventual adjudicated judgment. See, e.g., Philips Medical Systems International B.V. v. Bruetman, 8 F.3d 600, 602-04 (7th Cir. 1993) (affirming $19 million default judgment after district court refused vacatur because of the defendant's failure to comply with condition that he deposit with the court more than $800,000 to secure partial satisfaction of the judgment in the event the plaintiff prevailed); Nilsson, Robbins, Dalgarn, Berliner, Carson & Wurst v. Louisiana Hydrolec, 854 F.2d 1538, 1546-47 (9th Cir. 1988) (approving district court's conditioning of vacatur on, inter alia, defendant's payment of plaintiff's attorneys' fees, and commenting that [i]n some cases, it may also be appropriate for the defendant to be required to post bond to secure the amount of the default judgment pending a trial on the merits); Thorpe v. Thorpe, 364 F.2d 692, 694 (D.C. Cir. 1966) (questioning the justification for the district court's requirement of a bond in an amount greater than the amount of the default judgment, but stating that [i]t may... be appropriate, in some cases, for the defendant to be required to post bond to secure the amount of the default judgment pending trial on the merits). This Court itself, in reversing a district court's refusal to vacate a default judgment, has ordered, when it seemed necessary to protect the plaintiff's rights, that the default judgment be vacated only on the condition that [the defendant] post a bond covering the amount claimed by [the plaintiff], including interest. First Fidelity Bank, N.A. v. Government of Antigua & Barbuda Permanent Mission, 877 F.2d 189, 196 (2d Cir. 1989). 47 Not every case will warrant conditioning vacatur on the posting of such a substantial bond. Whether there is justification for such a condition will depend on the circumstances of the case, and it is incumbent on the district court to make findings sufficient to permit appellate review of the condition's reasonableness. 48 In the present case, the district court in its July 1999 Order discussed the factors relevant to a determination of whether to vacate a default, resolved doubts as to willfulness in favor of Lavi and Omega, and expressly noted the concerns that led it to make the vacatur conditional. Those concerns were principally the delays caused by Lavi and Omega and the potential for a contrived unenforceability of an eventual judgment in favor of Powerserve. The court noted, inter alia, that two law firms had withdrawn from representing Lavi and Omega because of nonpayment of their bills; and it noted that the retaining lien asserted by the Spilky firm had apparently been resolved by a stipulation calling for Lavi and Omega to post a bond in the amount of $40,000 for that firm's fees, but that that bond had not been posted. The court also referred to the evidence that Lavi had ostensibly made large cash payments to his son Edmond, only to retain the use of that money via transfers from Edmond to Lavi's other son Edward, and then from Edward to Lavi's daughter Mottahedeh for the use of Lavi. And the court referred to the evidence that a more than $1.1 million judgment had recently been obtained against Lavi and Omega by Lavi's brother. The district court's expressions of concern based on this evidence of defendants' actual and potential transfers of assets, July Order at 10, are ample to permit appellate review of the justification for the bond condition. 49 Powerserve's descriptions of those events, presenting ample cause for concern, were apparently undisputed. The evidence of the Lavi family's circuitous wire transfers of moneys originating with Lavi and ultimately being used for Lavi, along with the large judgment obtained against Lavi and Omega by Lavi's brother, was aired at least as early as January 1999 in Powerserve's motion for a default judgment. The record does not indicate that Lavi or Omega ever offered any explanation of these events or any information to dispel the impression that the transfers and payments were collusive efforts to place their assets beyond the reach of judgment creditors. The district court's concern that Lavi and Omega might make additional transfers without fair consideration in order to prevent Powerserve from collecting a judgment was well grounded in the record, and the bond condition, imposed to allay that concern, was a reasonable one. 50 Lavi and Omega presented nothing to alleviate that concern in support of their motion to eliminate the bond condition. Further, their protestations of inability to post a bond were entirely conclusory. Although Lavi stated that he was unable to comply with the [bond] condition because he lacked the financial resources (Lavi Declaration ¶5), and that due to Omega's actual financial situation posting $500,000 bond is impossible at this time (Lavi Letter at 1), he provided no elaboration or explanation and proffered not a shred of evidence to support his assertions. In contrast, in response to those assertions, Powerserve presented documentary evidence showing that Lavi's assets totaled more than $5 million. Lavi and Omega presented nothing in reply to dispute that demonstration or to show that a $5,000 bond premium was beyond their means. 51 In all the circumstances, given the evidence presented by Powerserve, we see no abuse of discretion in either the district court's imposition of the bond condition or its refusal to lift that condition in order to relieve Lavi and Omega of their defaults.