Lund v. Brown

• Decision Date: 22 September 2000
• Docket Number: No. 981778.,981778.
• Citation: 2000 UT 75,11 P.3d 277
• Parties: Kurtis LUND dba Kurt Lund Construction and B & B Drywall, Inc., Plaintiffs and Appellants, v. Fon Ray BROWN, III, Sally Brown, and John Does and Jane Does 1-10, Defendants and Appellees.
• Court: Utah Supreme Court

11 P.3d 277

2000 UT 75

Kurtis LUND dba Kurt Lund Construction and B & B Drywall, Inc., Plaintiffs and Appellants, v. Fon Ray BROWN, III, Sally Brown, and John Does and Jane Does 1-10, Defendants and Appellees.

No. 981778.

Supreme Court of Utah.

September 22, 2000.

Diane H. Banks, Robert A. Garda, Jr., Salt Lake City, for plaintiffs.

Christopher L. Daines, Logan, for defendants.

DURRANT, Justice:

¶ 1 Plaintiffs below, Kurtis Lund (Lund) and B & B Drywall (B & B) appeal the trial court's denial of their motion to vacate an entry of default judgment. We reverse and remand.

BACKGROUND

¶ 2 In September 1996, Fon and Sally Brown (the Browns) hired Lund to construct a house. Lund hired B & B as a subcontractor to install drywall. Lund worked on the house between October 1996 and May 1997. B & B worked on the house in April and May 1997. When the Browns refused to pay them for their work, Lund and B & B filed mechanic's liens.

¶ 3 In November 1997, Lund and B & B filed an action in district court seeking to foreclose on their liens. Specifically, they both sought reimbursement for their own work and Lund also sought reimbursement for its work and the work performed by the subcontractors, including B & B. The Browns filed an answer and counterclaim on December 15, 1997, alleging that Lund had breached the construction contract. In addition, the Browns alleged that B & B had breached its contract with Lund, thereby causing damages to the Browns as the intended third party beneficiaries. The Browns sought money damages and an order releasing the liens.

¶ 4 On December 29, 1997, before replies to the Browns' counterclaim were due, Lund filed for bankruptcy in the United States Bankruptcy Court for the District of Utah. Lund's claim against the Browns therefore became an asset of his bankruptcy estate. Lund notified both the trial court and the Browns of the bankruptcy proceedings. Because Lund and B & B believed that bankruptcy code section 362(a) automatically stayed any actions involving property of the bankruptcy estate, neither Lund nor B & B filed a reply to the Browns' counterclaim.

¶ 5 Without providing notice, the Browns' counsel, Mr. Garda, sought a default judgment against Lund and B & B for failing to reply to the counterclaim. On May 21, 1998, the trial court entered defaults against Lund and B & B. On May 28, the trial court entered default judgments, declaring Lund's and B & B's liens invalid and requiring B & B to pay specified damages and attorney fees. The Browns' counsel notified Lund and B & B by mail of the default judgments on June 17, 1998.

¶ 6 Shortly thereafter, Lund and B & B filed a motion to set aside the default judgments pursuant to Utah Rule of Civil Procedure 60(b). Lund and B & B argued that the judgments should be vacated under the "mistake, inadvertence, surprise, or excusable neglect" prong of rule 60 because they had believed the bankruptcy case stayed any further actions regarding their complaint or the counterclaim. Lund and B & B asserted several other reasons why the judgments should be set aside, including that the Browns did not provide them required notice of the default actions.

¶ 7 The Browns countered that they complied with all notice requirements, that the bankruptcy stay did not apply to B & B, and that the stay did not prohibit a declaratory judgment, such as one invalidating the mechanic's lien, against Lund. The Browns claimed that neither Lund nor B & B had any justifiable reason for failing to respond to the counterclaim. The Browns argued in the alternative that even if Lund or B & B could satisfy rule 60(b), the default judgments should not be vacated because neither of them had demonstrated the existence of a "meritorious defense" to the counterclaim.

¶ 8 The trial court denied Lund's and B & B's motion to vacate "[f]or reasons stated" by the Browns. Lund and B & B now appeal. On appeal we must decide whether the trial court correctly determined that (1) neither Lund nor B & B had a reasonable excuse for failing to respond to the counterclaim and that (2) Lund and B & B did not have a "meritorious defense" to the counterclaim.

STANDARD OF REVIEW

¶ 9 As to the first issue, a trial court has broad discretion in deciding whether to set aside a default judgment. See Katz v. Pierce, 732 P.2d 92, 93 (Utah 1986) (per curiam). Though broad, the court's discretion is not unlimited. As a threshold matter, a court's ruling must be "based on adequate findings of fact" and "on the law." May v. Thompson, 677 P.2d 1109, 1110 (Utah 1984) (per curiam). A decision premised on flawed legal conclusions, for instance, constitutes an abuse of discretion.

¶ 10 Moreover, the nature of a default judgment and the equitable nature of rule 60 provide further limits. See id.; see also Schwab v. Bullock's Inc., 508 F.2d 353, 355 (9th Cir.1974) (explaining limits to trial court's discretion under Federal Rule of Civil Procedure 60 (which is virtually identical to Utah's rule 60)); 11 Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 2857, at 257-58 (2d ed.1995) (stating that "[b]ased on the remedial nature of Rule 60(b), the discretion of the district court to deny a motion for relief is limited"). For example, we have stated that a trial court's "discretion should be exercised in furtherance of justice and should incline towards granting relief in a doubtful case to the end that the party may have a hearing." Helgesen v. Inyangumia, 636 P.2d 1079, 1081 (Utah 1981) (citing Warren v. Dixon Ranch Co., 123 Utah 416, 420, 260 P.2d 741, 743 (1953)); see also Katz, 732 P.2d at 93 (stating that courts should be indulgent toward vacating default judgments where the defaulted party demonstrates a reasonable justification or excuse for failing to answer). Likewise, we have stated that "if default is issued when a party genuinely is mistaken to a point where, absent such mistake, default would not have occurred, the equity side of the court . . . [should] grant relief." May, 677 P.2d at 1110.

¶ 11 Based on these principles, this court has stated that "`it is quite uniformly regarded as an abuse of discretion to refuse to vacate a default judgment where there is reasonable justification or excuse for the defendant's failure to appear, and timely application is made to set it aside.'" Helgesen, 636 P.2d at 1081 (quoting Mayhew v. Standard Gilsonite Co., 14 Utah 2d 52, 54, 376 P.2d 951, 952 (1962)). Thus, while we review the trial court's decision in the instant case for abuse of discretion, we emphasize that the court's discretion is not unlimited.

¶ 12 As to the second issue on appeal, we review for correctness the trial court's determination of whether a defense is meritorious. See Erickson v. Schenkers Int'l Forwarders, Inc., 882 P.2d 1147, 1148 (Utah 1994).

ANALYSIS

I. RULE 60(b)

¶ 13 Rule 60(b) provides that a "court may in the furtherance of justice 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." Utah R. Civ. P. 60(b)(1).

¶ 14 Lund and B & B offer two grounds for their argument that the trial court abused its discretion in failing to set aside the default judgment. First, they argue that they were reasonably justified, for rule 60(b) purposes, in not replying to the Browns' counterclaim because of the bankruptcy stay. Second, they assert that the Browns' failure to notify them of the default motion justifies their failure to respond.

¶ 15 With respect to the first contention, the Browns countered, and the trial court agreed, that the bankruptcy stay did not prohibit actions against a nondebtor like B & B nor did it prohibit a declaratory judgment against the debtor, Lund, and, therefore, neither Lund nor B & B had a justifiable reason for not responding.

¶ 16 We need not decide the exact scope of the bankruptcy stay in order to find that Lund's and B & B's reliance on the stay merits relief from the default judgment. For rule 60(b) purposes, it is enough to state that there is substantial support for Lund's and B & B's interpretation of bankruptcy law. In other words, under rule 60(b), Lund and B & B need not show that their interpretation of bankruptcy law is legally correct, but merely that they possessed a reasonable, good faith belief that the bankruptcy stay was effective against the Browns' counterclaim. In this regard, it is worth noting that the bankruptcy stay provision "is drafted so broadly that it encompasses all types of legal proceedings," including "actions seeking injunctive or similar relief as well as actions seeking money judgments." 1 Collier Bankruptcy Manual ¶ 362.03[1] (Lawrence P. King ed., 3d ed.1999). For this reason, any party "seeking to take action against the debtor or its property is well advised to assume that the stay applies and seek relief by appropriate proceedings in the bankruptcy court." Id. ¶ 362.03[4][b].

¶ 17 Pertinent to the instant case, the bankruptcy code imposes an automatic stay on any action against the debtor that was or could have been commenced prior to the bankruptcy, and on any act to obtain, or exercise control over, property of the bankruptcy estate. See 11 U.S.C.A. § 362(a)(1), (3) (1993). Lund's mechanic's lien constituted a legal interest in the Browns' home, see, e.g., Utah Code Ann. § 38-1-3 (1997), which became protected property of the bankruptcy estate. See 11 U.S.C.A. § 541(a)(1) (1993). Therefore, Lund and B & B were reasonably justified in not responding to the assertion in the counterclaim that the liens should be released because any attempt to do so could potentially violate the stay as an act "to exercise control over property of the [bankruptcy] estate." Id. § 362(a)(3).

¶ 18 Further, B & B justifiably believed that a bankruptcy stay prohibits actions against nondebtors in some situations. For instance, the bankruptcy code forbids "prose...