Shepard Claims Service, Inc. v. William Darrah & Associates, a Foreign CorporationShepard Claims Service, Inc. v. William Darrah & Associates, a Foreign Corporation
A panel of this court entered an order granting an interlocutory appeal from the district court’s denial of a motion to set aside an entry of default. Having considered the briefs and oral argument of counsel together with the record on appeal, the court concludes that it must vacate the district court order and remand for further proceedings.
I.
A fairly full statement of facts is required. On August 21, 1984 Shepard Claims Services, Inc. (Shepard) filed this contract action in the district court against William Darrah & Associates (Darrah), with jurisdiction based on diversity of citizenship. The complaint alleged essentially that Darrah, a South Carolina-based insurance broker, failed to pay Shepard, a Michigan independent claims adjuster, for services rendered. Following some difficulty in service by mail, service in person was carried out on February 7, 1985.
On February 22, 1985 defendant Darrah’s attorney’s secretary seсured by telephone an extension of time for filing an answer. A confirmation letter from defense counsel, drafted and signed by the secretary with the vacationing counsel’s permission, stated:
This letter will confirm my secretary’s conversation with your secretary of February 22, 1985, to the effect that you havе granted my office 45 days from February 22, 1985, to answer the Complaint in the above captioned cause of action against my client, Will Darrah.
(Emphasis added). By April 10 defendant had filed no answer, so plaintiff Shepard requested that the clerk enter Darrah’s default. On April 19 Darrah filed a “Notice of Retention,” following оn April 26 with an answer and then on April 29 with a notice of affirmative defenses, a counterclaim, interrogatories and a request for production of documents. On May 1 defendant filed a response to plaintiff’s motion for default judgment (which had not been filed as of that time) and a motion to set aside еntry of default pursuant to
The district court held a hearing on pending motiоns on May 28, after which the court denied defendant’s motion to set aside entry of default. In its order the district court found that defendant’s attorney engaged in culpable conduct when he permitted his secretary to make arrangements for the extension and then failed to review the secretary’s letter upon returning from vacation.
The district court denied the defendant’s motion for reconsideration and certified the case for an interlocutory appeal pursuant to
II.
A.
In
United Coin Meter Co. v. Seaboard Coastline R.R.,
Following a hearing the district court found no “excusable neglect” on the part of the defendant. The court also concluded that the affidavits of the defendant failed to establish the existence of a meritоrious defense. The district court refused to set aside the default and entered a default judgment for the full amount sought in the complaint. A hearing was held on the defendant’s motion for reconsideration. The district court denied reconsideration, finding that there was no “good cause” for setting aside entry оf default or the default judgment.
This court reversed the district court in
United Coin,
finding that the criteria controlling the court’s decision on a
1. Whether the plaintiff will be prejudiced;
2. Whether the defendant has a meritorious defense; and
3. Whether culpable conduct of the defendant led to the dеfault.
B.
The present case differs from
United Coin
in at least one material respect. In
United Coin,
a default judgment was entered, whereas this interlocutory appeal was taken before entry of judgment. If the only issue relates to entry of default,
Shepard contends that the district court correctly found that counsel for the defendant was the “designer” of the agreement for additional time to plead, and that his failure to comply with the agreed limitations was “culpable negligence.” Shepard argues that the failurе of Darrah and its counsel to abide by the time limits they “designed” could properly be found willful, and therefore culpable, conduct.
III.
Trials on the merits are favored in federal courts and a “glaring abuse” of discretion is not required for reversal of a court’s refusal to relieve a party of the harsh sanction of default.
We recognize ... that such a standard does not vest the trial court with completely unfettered discretion____ [W]hen the grant of a default judgment precludes consideration of the merits of a case, “even a slight abuse [of discretion] may justify reversal.”
Since entry of default is just the first procedural stеp on the road to obtaining a default judgment, the same policy of favoring trials on the merits applies whether considering a motion under
Before considering whether the district court properly refused to set aside the default judgment in the case at bar, we note that there is a distinction between the appropriate standard for setting aside a default and that appropriate for setting aside a default judgment. See, e.g., 10 C. Wright & A. Miller, Federal Practice and Procedure § 2694 (1973). Once a defendant fails to file a responsive answеr, he is in default, and an entry of default may be made by either the clerk or the judge. A default judgment can be entered by a clerk only if a claim is liquidated or, if a claim is unliquidated, by the judge after a hearing on damages. A default can be set aside under rule 55(c) for “good cause shown,” but a default that has become final as a judgment can be set aside only under the stricter rule 60(b) standards for setting aside final, аppealable orders.
(Footnote omitted).
IV.
In a different setting the district judge’s orders in the present case might not constitute an abuse of discretion. However, we must consider the fact that the plaintiff suffered no prejudice by reason of the tardy pleadings and the defendant did present a meritorious defense in its. answer. These findings of the district court are clearly supported by the record. All three factors must be considered in ruling on a motion to set aside entry of default. However, when the first two factors militate in favor of setting aside the entry, it is an abuse of discretion for a district court to deny a
The conduct of Darrah’s counsel, Mark Shreve, was careless and inexcusable. Nevertheless, it is not necessary that conduct be excusable to qualify for relief under the “good cause” standard of
When the issuе is one of whether to set aside an entry of default so that the “good cause” standard ofRule 55(c) is applicable, it is not absolutely necessary that the neglect or oversight offered as reason for the delay in filing a responsive pleading be excusable.
The district court stated that defensе counsel’s conduct, “if not intentional, is certainly ‘culpable conduct’.” In making this finding the district court apparently relied on the negligence of the defendant’s lawyer in not reviewing the work of his secretary.
To be treated as culpable, the conduct of a defendant must display either an intent tо thwart judicial proceedings or a reckless disregard for the effect of its conduct on those proceedings. As in United Coin, the delay in the present case resulted from a dispute over the date from which an agreed extension was to run. Darrah’s attorney filed an entry of appearancе and an answer shortly after learning that default had been entered on the basis of Shepard’s interpretation of the agreement. The delay was not lengthy and there was no pattern of disregard for court orders or rules. Under these circumstances the strong policy in favor of deciding cases on their merits outweighs any inconvenience to the court or Shepard resulting from the relatively short delay in answering. We agree with the summary of court holdings in 6 Moore’s Federal Practice ¶ 55.01[2] at 55-61, 62 (1985 ed.):
Where the defaulting party and counsel have not shown disrespect for the court, or have given еvidence of respect for the court’s process by their haste in acting to set aside the default, the courts have been inclined towards leniency____ Clearly, however, the court may refuseto set aside a default, where the defaulting party has no meritorious defense, where the default is due to willfulness or bad faith, or where the defendant offers no excuse at all for the default.
(Footnotes omitted).
We do not believe it appropriate to attempt a precise definition of “culpable conduct.” Where the party in default satisfies the first two requirements for relief and moves promptly to sеt aside the default before a judgment is entered, the district court should grant the motion if the party offers a credible explanation for the delay that does not exhibit disregard for the judicial proceedings.
A default judgment deprives the client of his day in court, and should not be used as a vehicle for disсiplining attorneys.
Jackson v. Beech,
We can understand and sympathize with the reaction of the district court to Shreve’s conduct and his explanations or excuses. The “Notice of Retention” indicated that someone in Shreve’s office recognized that the time for pleading might be near, or past. Yet another week went by before Shreve filed his answer. The secretary’s affidavit ascribed the misunderstanding to a “misstatement” in the letter that the affiant herself wrote. The misunderstanding could have been cured if Shreve had examined the correspondence upon his return from vacation and contacted Shepard’s attorney for confirmation. Despite this evidence of inattention and disarray in defense counsel’s office, the fact remains that Shepard suffered no prejudice and Darrah would be deprived of an opportunity to present its defense at a trial if the default were not set aside.
Our disposition of the case does not preclude the district court from assessing or determining some appropriate penalty or sanction against the defendant or his counsel for the delay occasioned by the careless and inexcusable conduct of defendant’s counsel herein discussed.
The judgment of the district сourt is reversed, and the cause is remanded for further proceedings. No costs are allowed.
Notes
.
(c) Setting Aside Default. For good cause shown the court may set aside an entry of default and, if a judgment by default has been entered, may likewise set it aside in accordance with Rule 60(b).
. Rule 60(b) provides in part:
(b) Mistakes; Inadvertence; Excusable Neglect; Newly Discovered Evidence; Fraud, etc. On motion and upon such terms as are just, the court may relieve a party or his legal representative from a final judgment, order, or proceeding for the following reasons: (1) mistake, inadvertence, surprise, or excusable neglect____