Farnese v. Bagnasco

• Decision Date: 31 August 1982
• Docket Number: Nos. 81-3130,82-1029,s. 81-3130
• Citation: 687 F.2d 761
• Parties: Andrew N. FARNESE, Appellee, v. Alberto M. BAGNASCO and Laila Covre, a.k.a. Laila Bagnasco. Appeal of Alberto M. BAGNASCO, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

Page 761

687 F.2d 761

Andrew N. FARNESE, Appellee, v. Alberto M. BAGNASCO and Laila Covre, a.k.a. Laila Bagnasco Appeal of Alberto M. BAGNASCO, Appellant.

Nos. 81-3130, 82-1029.

United States Court of Appeals Third Circuit.

Argued July 7, 1982.

Decided Aug. 31, 1982.

Nancy Akbari (argued), Jenkintown, Pa., for Bagnasco.

Edwin P. Rome, Norman E. Greenspan (argued), Blank, Rome, Comisky & McCauley, Philadelphia, Pa., for Farnese.

Before SEITZ, Chief Judge, and VAN DUSEN and SLOVITER, Circuit Judges.

OPINION OF THE COURT

SEITZ, Chief Judge.

Alberto Bagnasco appeals from the entry of a final judgment against him. This court has jurisdiction under 28 U.S.C. § 1291 (1976).

On January 9, 1981, Andrew Farnese filed a complaint in the United States District Court for the Eastern District of Pennsylvania, naming Bagnasco as defendant. The complaint alleged the following facts. Plaintiff, a resident of Philadelphia, and defendant, an Italian citizen, agreed in 1972 to form a joint venture, operating under the name Farnese & Bagnasco, for the purpose of aiding Italian governmental entities in obtaining financing for public works projects. Profits from the joint venture were to be split equally between the two. The joint venture earned $1,725,000 by the end of 1973. At defendant's direction, the profits were placed in the Swiss bank account of Farnese & Bagnasco, Law Office. In 1976, at a meeting in Philadelphia, the two agreed that defendant would invest the assets of the joint venture in gold. In January 1980, plaintiff asked defendant for an accounting and distribution of the joint venture's assets. Defendant refused.

A year later this complaint was filed, alleging that defendant had fraudulently concealed the joint venture's assets, and that he would continue to do so. The complaint sought an injunction against depletion or concealment of the joint venture's assets, an accounting, and one-half of the assets. On the basis of the verified complaint and plaintiff's accompanying affidavit, the district court issued a temporary restraining order (TRO), which was to continue until January 19, at which date a hearing on the preliminary injunction was scheduled. On January 19, the original defense counsel entered an appearance on behalf of defendant. The original defense counsel and counsel for plaintiff stipulated to the extension of the TRO until February 2, postponing the hearing on the preliminary injunction. Counsel later agreed to extend the TRO indefinitely.

On January 30, 1981, plaintiff filed an amended complaint. It differed from the original complaint only in that it also named defendant's wife as a defendant. She later successfully moved for dismissal of the complaint against her, and is no longer involved in this litigation.

The Federal Rules of Civil Procedure require a defendant to "serve his answer within 20 days after the service of the summons and complaint upon him." Fed.R.Civ.P. 12(a). Plaintiff's amended complaint extended the time limit, however. "A party shall plead in response to an amended pleading within the time remaining for response to the original pleading or within 10 days after service of the amended pleading, whichever period may be the longer." Fed.R.Civ.P. 15(a). Defendant thus had until February 9 to file an answer. He did not do so. On March 3, plaintiff moved for entry of judgment by default under Rule 55(b) of the Federal Rules of Civil Procedure. The clerk of the district court immediately entered defendant's default under Rule 55(a), which allows the clerk to enter a default "(w)hen a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend as provided by these rules." Fed.R.Civ.P. 55(a).

Meanwhile, the original defense counsel had moved on March 2 to withdraw as defendant's counsel, a request the district court granted two days later. On March 3, the same day the clerk entered defendant's default, there was a pre-trial conference at which counsel for plaintiff was introduced to defendant's new counsel. Bernard Chanin. There was no court reporter present at this conference, and thus there is no record evidence of what occurred at it. Chanin apparently claimed that plaintiff and defendant had executed a letter agreement in 1972 that controlled their business relationship. A photocopy of this letter agreement was submitted to the district court in August 1981, and thus we know that the letter agreement purported to provide that any disputes arising from the venture were to be submitted to Swiss courts, and that, until further agreement, plaintiff was not to share in any earnings of the venture.

In open court on March 6, in a proceeding at which it appears that no court reporter was present, there was a colloquy between the court and counsel for the parties. What happened at this proceeding is not clear because of the absence of a record and because the only finding ever made in regard to this proceeding was simply that defendant "fail(ed) to produce a document, the authenticity of which plaintiff wished to test, after defendant agreed to do so."

On March 18, plaintiff filed a "notice for application for default judgment," accompanied by a lengthy memorandum. Two days later, defendant, represented by new counsel, moved pursuant to Rule 55(c) to set aside the entry of default. The district court denied defendant's motion in July. Defendant moved to reconsider his motion to set aside the default, which the district court denied in October. The district court later took evidence on plaintiff's application for damages, and entered a judgment of $3.7 million against defendant, who then moved for a new trial on damages under Rule 59 of the Federal Rules of Civil Procedure. Defendant appealed from the order entering the default judgment (No. 81-3130). The district court subsequently denied the Rule 59 motion. The defendant then appealed from various orders including those refusing to reopen the default and denying reconsideration of such order (No. 82-1029).

The first notice of appeal was premature, and thus has no effect. See Fed.R.App.P. 4(a)(4). We will dismiss that appeal.

The primary issue in the second appeal which is properly before us is whether the district court abused its discretion in denying the motion to set aside the default entered after defendant failed to respond to plaintiff's complaint in a timely fashion. The district court's decision is governed by Rule 55(c) of the Federal Rules of Civil Procedure, which provides that, "For good cause shown the court may set aside an entry of default...."

This court has required the district court to consider two factors in exercising its discretion under Rule 55(c) after entry of a default: (1) whether setting aside the default would prejudice the plaintiff, and (2) whether defendant has asserted a meritorious defense. See Medunic v. Lederer, 533 F.2d 891, 893 (3d Cir. 1976). Although we have not squarely held that defendant's culpability in allowing the default is also a relevant consideration, we believe that it is. See Keegel v. Key West & Caribbean Trading Co., 627 F.2d 372, 373 (D.C.Cir.1980). Cf. Livingston Powdered Metal, Inc. v. NLRB, 669 F.2d 133, 136 (3d Cir. 1982) (citing Keegel with approval in a discussion of the standards for challenging a default judgment under Federal Rule of Civil Procedure 60(b)).

We commence our analysis by pointing out that this court has often emphasized that it does not favor defaults, and that in a close case doubts should be resolved in favor of setting aside the default and obtaining a decision on the merits. E.g., Medunic, 533 F.2d at 894; Hutton v. Fisher, 359 F.2d 913, 916 (3d Cir. 1966).

First, we find no evidence in the record, nor does plaintiff point to any, that plaintiff will be prejudiced by setting aside the default. At oral argument, counsel for plaintiff asserted that his client would be prejudiced because testing the authenticity of the 1972 letter agreement becomes more difficult with the passage of time. We express no view on the merits of this argument, because there are no facts in the record that support it, and plaintiff does not appear to have presented it to the district court. Consequently, the district court could not have relied on this argument in exercising its discretion.

Second, defendant has proffered at least one meritorious defense. If the letter agreement is authentic, then the District Court for the Eastern District of Pennsylvania is not the proper forum for resolution of their dispute, and in any event plaintiff has no claim on the assets of Farnese & Bagnasco. The letter agreement, if proved, would be the basis of a meritorious defense. See, e.g., Keegel, 627 F.2d at 374; Hutton, 359 F.2d at 916. Cf. Tozer v. Charles A. Krause Milling Co., 189 F.2d 242, 244 (3d Cir. 1951) (in seeking relief under Rule 60(b) from a default judgment, the issue is whether allegations, if established, would make out meritorious defense).

Third, we consider whether defendant's culpability may have led to the default. Plaintiff does not point to, and we find no evidence of record to support a finding that defendant's conduct in allowing the default was willful or in bad faith. Nor did the district court so find. Indeed, the record tends to indicate no more than that defendant or his counsel was neglectful.

Defendant filed an affidavit in support of his motion to set aside the default. Plaintiff filed no contradictory material. Defendant explained why the default occurred. He was in Europe on January 10, when he learned of the original complaint. Defendant telexed an old friend at a large Philadelphia law firm, and asked him to represent defendant. That lawyer could not do so because of a conflict of interest, but gave defendant the name of the original defense counsel. They spoke for the first time on January 18. They had communication difficulties, and in a telephone conversation on February 25, they had a...