Audit Services v. Kraus Const., Inc., 79-80

• Decision Date: 23 July 1980
• Docket Number: No. 79-80,79-80
• Citation: 189 Mont. 94,615 P.2d 183,37 St.Rep. 1225
• Parties: AUDIT SERVICES, INC., a Montana Corp., Plaintiff and Respondent, v. KRAUS CONSTRUCTION, INC., a corp., and James Kraus, Sr., d/b/a Kraus Construction, Defendants and Appellants.
• Court: Montana Supreme Court

Page 183

615 P.2d 183

189 Mont. 94

AUDIT SERVICES, INC., a Montana Corp., Plaintiff and Respondent, v. KRAUS CONSTRUCTION, INC., a corp., and James Kraus, Sr. d/b/a Kraus Construction, Defendants and Appellants.

No. 79-80.

Supreme Court of Montana.

Submitted on Briefs May 27, 1980.

Decided July 23, 1980.

Barry T. Olson, Great Falls, for defendants and appellants.

Cure & Borer, Great Falls, for plaintiff and respondent.

HARRISON, Justice.

Appellants Kraus Construction, Inc., and James Kraus, Sr., appeal from an entry of a default judgment and an order refusing to vacate the judgment. The order of default was entered by the trial court due to appellants' failure to comply with earlier discovery orders. The sole issue before this Court is whether the trial court erred in failing to set aside the default judgment entered against appellants for failure to answer the interrogatories under the circumstances set forth below.

Respondent Audit Services, Inc., is a collection agency for a union trust fund. As such, it brought this action to enforce appellants' alleged obligation to make contributions to the trust fund under a collective bargaining compliance agreement.

Although the judgment here was entered on March 5, 1979, this lawsuit was initiated over three and one-half years earlier in October 1975. The facts reveal that this appeal is not concerned with the typical "first appearance" default judgment in which a defendant is served with summons and a complaint but fails to appear within twenty days as allowed by law. Rather, here the record initially presents a picture of a vigorously contested lawsuit. The record indicates that appellants were represented by three consecutive law firms. It further reveals that appellants subsequently abandoned their defenses, and only after several unsuccessful attempts by the District Court to have appellants reinvolve themselves did the court finally enter a default. Now, following the entry of the default by the District Court, appellants attack the default judgment essentially on procedural, rather than substantive, grounds.

In its original complaint filed October 6, 1975, respondent sought to collect $5,095.03 in delinquent contributions owed by appellant Kraus Construction, Inc., to respondent's assignors, trustees of a certain Montana construction industry employee benefit trust fund, together with reasonable attorney fees. Having been served with process, appellants failed to appear within twenty days of the service. A "first appearance" default judgment was entered. Execution issued and a judgment was collected by the Cascade County sheriff. The execution by the sheriff on funds of Kraus Construction, Inc., prompted appellants to take action. Appellants moved to set aside the default judgment, and following a hearing on December 11, 1975, the District Court granted the motion. On December 16, 1975, appellants filed their answer and added a counterclaim for a refund of $477.09 for alleged overpayments to respondent's assignors.

In January 1976 appellant moved for a return of the funds collected under the sheriff's levy. On February 4, 1976, the District Court ordered the return of a portion of those funds with the balance being deposited with the clerk of the court. On April 29, 1976, an affidavit of disqualification was filed by Pat Kraus. Pat Kraus is the wife of James Kraus, Sr., but the affidavit failed to allege any relation to the then sole defendant, Kraus Construction, Inc. Pursuant to the affidavit, the district judge disqualified himself and the Honorable R. J. Nelson assumed jurisdiction.

Discovery was initiated on June 25, 1976, with appellants' first interrogatories and requests for admissions. The balance of 1976 and the first ten months of 1977 were consumed by repeated appearances before the District Court over the sufficiency of respondent's answers to those requests and interrogatories, and by amending and supplementing versions of the interrogatories profounded by appellants and respondent's subsequent responses to them. During this time, Judge Nelson retired from the bench and was succeeded by the Honorable H. William Coder in January 1977. Because Judge Coder's former law firm was representing appellants, he disqualified himself, calling in first the Honorable W. W. Lessley and subsequently, the Honorable Joel G. Roth. It was not until November 1, 1977, that appellants had filed and Audit Services had answered four sets of interrogatories. In the interim, there had been two hearings called by appellants to question the sufficiency of those responses.

Respondent's discovery began with the deposition of James Kraus, Sr., taken November 17, 1977. He was the principal in Kraus Construction, Inc., and an originally-named defendant. (It should be noted that the Kraus Construction, Inc. was not organized as a corporation until February, 1976, some five months after the lawsuit began.) Also in November 1977, a representative of respondent conducted a new audit of appellants' records covering the period of May 1, 1975 to June 30, 1977.

Following the deposition of James Kraus, Sr., respondent moved to amend its complaint to combine the amounts claimed in the original complaint with the delinquencies revealed by the audit conducted in November 1977. The amended complaint also sought to hold James Kraus, Sr., personally liable for the debts of Kraus Construction, Inc.

A hearing on the request to amend the complaint was set for December 21, 1977. However, one day before that hearing, appellants' attorneys moved ex parte to withdraw. The motion indicated that a copy had been served on appellants. On the same day, the court ordered that the attorneys could withdraw. The court's order stated that a copy was to be served by the sheriff on James Kraus, Sr., and that appellants were to appear through new counsel within twenty days. Respondent, in turn, vacated its December 21, 1977, hearing.

Appellants failed to comply with the court's order and did nothing. On January 30, 1978, respondent renoticed its hearing on the motion for leave to amend the complaint. Hearing on the motion was set for February 15, 1978. Since appellants had failed to retain new counsel, a copy of the notice was served upon their former attorneys and upon James Kraus, Sr., personally.

On February 15, 1978 appellants retained new counsel and appeared at the hearing on the motion for leave to amend the complaint. On February 23, 1978, the court granted respondent Services leave to file a portion of its amended complaint. Appellants filed their answer on March 14, 1978.

On April 27, 1978, respondent filed its first requests for admissions. These requests set forth respondent's theory of its case, asking Kraus Construction, Inc., to admit that it was a party to various collective bargaining agreements and trust agreements underlying respondent's claim. Appellants were further asked to admit the accuracy of the audits underlying the dollar amount of the amended complaint. Copies of these audits were attached to the exhibits for the requests for admission. Appellants filed a timely response to the requests. They denied the accuracy of the audits, specifically denying first that all of the persons listed in the audit were employees and second, that the persons listed therein performed work coming under the scope of relevant collective bargaining agreements.

Based on those denials, respondent filed its first interrogatories on June 2, 1978. Those interrogatories sought specific information underlying appellants' denial asking which of the persons listed in the audits of appellants' payroll records were not in fact its employees, and which of them did not perform work coming within the scope of the collective bargaining agreements. Appellants failed to answer those interrogatories or to tender any objections to them.

Having received no answers to the interrogatories, on October 3, 1978, respondent moved for an order compelling appellants under Rule 37, M.R.Civ.P. A hearing on this motion was set for October 25, 1978. One day before the hearing, on October 24, 1978, appellants' attorneys made an ex parte application to the District Court to withdraw as counsel. This application was granted, and another of respondent's motions to bring this lawsuit to fruition had to be put off. As with the withdrawal of appellants' first counsel, the District Court ordered a copy of the order allowing the withdrawal of appellants' second counsel and requiring new counsel to appear within twenty days to be served upon James Kraus, Sr. Once again, appellants failed to obey the court's order.

On January 3, 1979, respondent, after waiting approximately two months for appellants to do something, renoticed its request for a hearing on the long- pending motion to compel answers to the interrogatories submitted some seven months earlier. Hearing was set for January 17, 1979. Once again, a copy was sent to James Kraus, Sr., and to his former attorneys. The District Court on its own initiative reset the hearing from January 17, 1979 to January 25, 1979, because of a conflict in its calendar. An order for the change of this date was served on James Kraus, Sr., and there is no denial that he received it.

Pursuant to the court's order, a hearing on respondent's motion to compel answers to interrogatories was finally held on January 25, 1979. No appearance was made by or on behalf of appellants. However, the relief awarded by the District Court was strictly in accord with that provided by Rule 37, M.R.Civ.P. Appellants were given an additional twenty days to answer the interrogatories, or in lieu thereof, their answer was deemed stricken such that their default could be entered. A copy of this order dated January 29, 1979, was served on James Kraus, Sr., and he does not deny receiving it. Appellants failed to obey the final order of the court by answering the interrogatories, and no new counsel appeared...