First Nat. Bank of Telluride v. Fleisher, No. 98SC634.

• Decision Date: 30 May 2000
• Docket Number: No. 98SC634.
• Citation: 2 P.3d 706
• Parties: FIRST NATIONAL BANK OF TELLURIDE, Petitioner, v. Terrence J. FLEISHER, Respondent.
• Court: Colorado Supreme Court

2 P.3d 706

FIRST NATIONAL BANK OF TELLURIDE, Petitioner, v. Terrence J. FLEISHER, Respondent.

No. 98SC634.

Supreme Court of Colorado, En Banc.

May 30, 2000.

Lynch & Lynch LLC, Michael J. Lynch, Telluride, Colorado, Attorneys for Petitioner.

Zarlengo & Kimmell, LLC, Thomas J. Kimmell, Denver, Colorado, Attorneys for Respondent.

Justice MARTINEZ delivered the Opinion of the Court.

This case concerns the effect of failure to provide a defaulting party notice as required under C.R.C.P. 55(b) of proceedings underlying a judgment lien against him. We must determine whether failure to provide such notice constitutes a jurisdictional defect that renders a default judgment void. We also consider whether, and under what conditions, failure to provide notice constitutes a violation of the defaulting party's due process right to be heard in the proceeding against him.¹

We hold that lack of notice under C.R.C.P. 55(b) of a default judgment supporting a judgment lien is not a jurisdictional defect that renders the judgment and lien void. We therefore agree with the court of appeals' conclusion as to this issue. However, such lack of notice is a serious procedural error that can, in some instances, violate the due process rights of the defaulting party and, therefore, require vacating the default judgment. The facts of this case persuade us that the trial court correctly vacated a default judgment obtained without proper notice. We conclude, consequently, that the court of appeals incorrectly interpreted the trial court's 1993 order as "opening" rather than "vacating" the default judgment against Tharp. We therefore reverse the judgment of the court of appeals.

I.

While we focus in this case on the effect of lack of notice of a default proceeding, the central concern of the parties to the dispute before us lies elsewhere. Petitioner First National Bank of Telluride (Telluride) seeks reversal of the court of appeals' decision that Respondent Terrence J. Fleisher's (Fleisher) judgment lien on the property of a third party, Barry T. Tharp (Tharp), is superior to Telluride's deed of trust on the same property. Determining whether Fleisher's lien is superior to Telluride's deed of trust turns on the issue of whether Tharp was provided adequate notice of Fleisher's action against him. Therefore, understanding the issues presented in this case requires a detailed discussion of the dispute between Fleisher and Tharp. (Tharp is not a party to the case before us.)

In 1991 Fleisher brought an action for breach of a promissory note against Tharp. Tharp initially answered Fleisher's complaint, denying liability. In January 1992, Fleisher moved for summary judgment; however, Tharp had in the interim filed for bankruptcy and the bankruptcy court stayed Fleisher's action against Tharp pending the outcome of the bankruptcy proceeding. The trial court at this point issued a minute order, stating that it would assume that the bankruptcy proceeding would permanently foreclose any further action by Fleisher against Tharp and that it would dismiss Fleisher's action without prejudice by August 19, 1992, unless Fleisher indicated otherwise. The trial court also stated in the order that the dismissal would occur on this date without a further order being necessary.

On August 17, 1992, the bankruptcy court dismissed Tharp's proceeding. However, Fleisher failed to inform the trial court of the dismissal until October 1992, when he did so in the course of an ex parte communication with the trial court. The trial court then issued a minute order requiring Tharp to answer Fleisher's original motion for summary judgment by November 4, 1992. Because the order was mailed to the wrong address, however, Tharp received no notice of the trial court's order to respond and did not reply to Fleisher's motion. On November 6, 1992, the trial court issued a default judgment against Tharp. This judgment was entered on November 13, 1992 and Fleisher filed a judgment lien against the property at issue in this case on November 16, 1992.

On January 14, 1993, Tharp moved under C.R.C.P. 60 to vacate the November 1992 default judgment on the grounds that lack of notice of the trial court's order to respond to Fleisher's motion for summary judgment violated C.R.C.P. 55(b). On January 25, 1993, the trial court granted Tharp's request to vacate the judgment "pursuant to Rules 60(a) and/or (b)." In March 1995, the dispute between Fleisher and Tharp went to trial and the court eventually entered judgment on the merits in Fleisher's favor. Fleisher entered a second judgment lien on March 17, 1995.

In April 1993, after the default judgment had been vacated but before the dispute with Fleisher went to trial, Tharp obtained a loan from Telluride. Tharp used the loan to refinance the property at issue here and to pay off several liens that were senior to Fleisher's judgment lien that was subject to the trial court's January 1993 order. Prior to Telluride's approval of the loan, an officer of its title company inquired as to the status of Fleisher's action against Tharp. The officer discovered that Fleisher had secured a judgment lien against Tharp's property but that the judgment was vacated in January 1993. Telluride subsequently executed and recorded a deed of trust on the property. In 1996 Telluride began foreclosure proceedings on its deed of trust. Fleisher then brought an action for declaratory judgment that his November 1992 judgment lien was superior to Telluride's April 1993 deed of trust.

The trial court in Fleisher's action for declaratory judgment found that, because Fleisher's November 1992 judgment lien was obtained without notice to Tharp, the judgment supporting the lien properly was vacated. Consequently, the trial court concluded that the November 1992 judgment lien was without effect and that Telluride was entitled to summary judgment because its April 1993 deed of trust took priority. The court of appeals reversed, concluding that the November 1992 judgment lien had been set aside on grounds other than those challenging the jurisdiction of the trial court. Therefore, the judgment was "irregular" rather than void. Fleisher's November 1992 judgment had been "opened" rather than "vacated" and, because Fleisher ultimately prevailed in March 1995 on the merits of his claim, the judgment lien was superior to Telluride's deed of trust.

II.

We first consider whether the court of appeals correctly held that, under Weaver Construction Co. v. District Court, 190 Colo. 227, 545 P.2d 1042 (1976), lack of notice as required by C.R.C.P. 55(b)² in an action underlying a judgment lien does not constitute a jurisdictional defect and therefore does not render the underlying judgment void. We agree with the court of appeals' conclusion.

We begin with a review of Weaver and related decisions. The petitioner, Weaver Construction Co., sought to prevent the district court from setting aside a default judgment against the defendants in the underlying action and from destroying the priority of Weaver's judgment lien. See Weaver, 190 Colo. at 229,

545 P.2d at 1043. The district court set aside the default judgment and resulting judgment lien because defendant Robert Grinnell had not received proper service and because defendant Joy Grinnell demonstrated excusable neglect and stated a meritorious defense. See id. at 229-30, 545 P.2d at 1044. We held that the district court's decision to set aside the default judgment on these grounds was within the scope of its discretion. See id. at 231, 545 P.2d at 1044-45.

We then turned to the issue of whether the lower court's decision to set aside the default judgment could affect Weaver's judgment lien. See id. at 231, 545 P.2d at 1045. This issue required us to identify the difference between opening and vacating a default judgment. See id. We stated that "when a judgment is opened the defendant is allowed to answer on the merits of the claim, but the original judgment and judgment lien remain in effect as security pending the resolution of the trial on the merits." Id. at 232, 545 P.2d at 1045 (emphasis in original). If the plaintiff succeeds on the merits after the judgment is opened, the judgment lien retains its original force as if the judgment were never opened. See id. If the defendant prevails, then the judgment and judgment lien are vacated — "dissolved as though they never existed." Id.

However, if a default judgment is set aside on jurisdictional grounds, it must be vacated. See id. Because in Weaver a defendant in the underlying action alleged a lack of service of process, we observed that "where a judgment is procured without service of process on the defendant, there is a want of personal jurisdiction, and the judgment is considered void." Id. Elementary principles of due process require, under such circumstances, vacation of a void judgment during a trial on the merits. See id.

It follows that whether a default judgment is opened or vacated turns on the basis for setting the judgment aside. "Generally, where a judgment is set aside on grounds other than those challenging the jurisdiction of the court, the judgment is opened . . . . Where a judgment is set aside on jurisdictional grounds, it is vacated." Id. at 232, 545 P.2d 1042 (emphasis in original). We determined that as to defendant Robert Grinnell the default judgment was vacated because, due to lack of proper service of process, the trial court did not have personal jurisdiction over him. See id. at 233, 545 P.2d at 1046. Therefore, the judgment lien was void regarding Robert Grinnell. However, we held that the default judgment was only opened concerning defendant Joy Grinnell. The trial court found that she was subject to its jurisdiction, although she was entitled to answer on the merits due to excusable neglect and statement of a meritorious defense. Even though the default judgment was set aside, therefore, the judgment lien remained in effect...