Norsyn, Inc. v. Desai

• Decision Date: 10 December 2003
• Docket Number: No. 03-1001.,03-1001.
• Citation: 351 F.3d 825
• Parties: NORSYN, INC., Plaintiff-Appellant, v. R.M. DESAI, Personally and as CEO of Bank of India; Nari C. Pohani, Personally and as President of Pohani Commercial Purchasing Corp.; Robert Easton, Personally and as Managing Director of Charter Oak Asset Management, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 825

351 F.3d 825

NORSYN, INC., Plaintiff-Appellant, v. R.M. DESAI, Personally and as CEO of Bank of India; Nari C. Pohani, Personally and as President of Pohani Commercial Purchasing Corp.; Robert Easton, Personally and as Managing Director of Charter Oak Asset Management, Inc., Defendants-Appellees.

No. 03-1001.

United States Court of Appeals, Eighth Circuit.

Submitted: October 23, 2003.

Filed: December 10, 2003.

David Johnston, argued, Washington, DC, for appellant.

Neil K. Fulton, argued, Pierre, SD (Brent A. Wilbur, Pierre, SD, on the brief), for appellee.

Before LOKEN, Chief Judge, LAY and BOWMAN, Circuit Judges.

LAY, Circuit Judge.

This is an appeal from the district court's order denying the motion of Norsyn, Inc. ("Norsyn") for default judgment and dismissing its complaint without prejudice. The district court also imposed sanctions jointly and separately against Norsyn's counsel in the amount of the Defendants' attorney fees and costs. We now affirm in part and vacate in part.

I. BACKGROUND

In January 2002, Norsyn filed a complaint in South Dakota state court against three individuals, naming them personally and in their corporate capacities: R.M. Desai, CEO of Bank of India; Nari C. Pohani, president of Pohani Commercial Purchasing Corporation; and Robert Easton, managing director of Charter Oak Asset Management, Inc. (collectively, "Defendants"). Norsyn's complaint asserted claims of negligence per se, breach of contract, common law fraud, and securities fraud, arising out of a commercial financing agreement.

Following the filing of the complaint, Norsyn's Washington, D.C.-based counsel, David Johnston, attempted to effect service of process by sending a copy of the Summons and Complaint to each of the named Defendants by a private courier service. Defendants received the Summons and Complaint on January 30, 2002, thereby receiving actual notice of Norsyn's action. Near the end of February 2002, Defendants contacted Al Arendt, Norsyn's local counsel, to inquire whether Norsyn intended to take the position that proper service of process had been made. Arendt acknowledged that sending a Summons and Complaint via private courier did not constitute valid service under South Dakota law, and stated that he would "take care of getting proper service accomplished."

Defendants elected not to file a motion in South Dakota state court challenging the sufficiency of Norsyn's service of process. Instead, on February 26, 2002, Defendants removed the action to the United States District Court for the District of South Dakota¹ pursuant to 28 U.S.C. § 1441(d).² Following removal, Defendants neither engaged in motion practice nor filed an answer to Norsyn's complaint, instead opting to await proper service before taking any action. On June 17, 2002, Norsyn filed a motion for default judgment pursuant to Rule 55 of the Federal Rules of Civil Procedure, asserting that the entry of such was warranted due to Defendants' failure to file an answer.

By memorandum dated June 20, 2002, the district court notified the parties of its many concerns with the case, characterizing the action as "procedurally chaotic." Specifically, the district court raised serious questions regarding the sufficiency of service, noting that "[y]ou do not start a lawsuit in South Dakota (or anywhere else known to me) by using a carrier [sic] service," and questioned whether the Summons and Complaint were actually delivered to Defendants in light of Norsyn's failure to offer any valid proof of service. In addition, the district court expressed its disfavor with the conduct of Johnston and Arendt in litigating Norsyn's claims, raising the possibility of issuing sanctions against them under Rule 11 of the Federal Rules of Civil Procedure. The district court noted what it perceived to be attempts by Norsyn to extort money from Defendants under threat of criminal prosecution, and also opined that several of the substantive legal arguments advanced by Johnston and Arendt were wholly without merit.

On July 2, 2002, both parties responded to the district court's memorandum. Norsyn remained steadfast in its position that Defendants had either been properly served or voluntarily assumed an obligation to file an answer by removing the action, and further denied that the conduct of Johnston and Arendt was subject to sanctions under Rule 11. For their part, Defendants echoed the concerns articulated by the district court. They argued that Norsyn's attempt at service was defective, and that they were under no obligation to defend the action until proper service was made upon them. Defendants also argued that sanctions against Johnston and Arendt should issue for the reasons set forth by the district court. On July 17, 2002, the district court set the issue of Rule 11 sanctions for a hearing, issuing an Order to Show Cause to Johnston and Arendt.

On July 30, 2002, a hearing was held on the Order to Show Cause, in which Johnston and Arendt were represented by separate counsel. Following the hearing, the district court announced its intention to impose sanctions jointly and severally against Johnston and Arendt in the amount of Defendants' attorney fees and costs to date. On November 6, 2002, after reviewing the parties' submissions, the district court entered a written order awarding sanctions in favor of Defendants in the amount of $10,268.71. By prior written orders, the district court also denied Norsyn's motion for default judgment and dismissed its complaint, sua sponte, without prejudice.

II. ANALYSIS

A. Denial of Default Judgment

We review the district court's denial of a motion for default judgment for an abuse of discretion. See Harris v. St. Louis Police Dep't, 164 F.3d 1085, 1086 (8th Cir.1998). Under the Federal Rules of Civil Procedure, such a motion may be granted only in those instances in which "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). If the party against whom a default judgment is sought has incurred no obligation under the Federal Rules of Civil Procedure to "plead or otherwise defend" the action, the district court does not abuse its discretion in refusing to grant such relief. In fact, the converse is true. See Emery v. Hunt, 272 F.3d 1042, 1046 (8th Cir.2001) ("A district court abuses its discretion if it commits an error of law."). Therefore, we must first inquire whether Defendants had an obligation to answer (i.e., "to plead or otherwise defend") Norsyn's complaint.

In answering this question, we begin with the text of Federal Rule of Civil Procedure 81(c), which governs procedure in removed actions. Rule 81(c) addresses the factual scenario present in this case:

In a removed action in which the defendant has not answered, the defendant shall answer or present the other defenses or objections available under these rules within 20 days after the receipt through service or otherwise of a copy of the initial pleading setting forth the claim for relief upon which the action or proceeding is based, or within 20 days after the service of summons upon such initial pleading, then filed, or within 5 days after the filing of the petition for removal, whichever period is longest.

Fed.R.Civ.P. 81(c). Of these three potential triggering dates, Norsyn emphasizes the last, arguing that default judgment was proper by virtue of Defendants' failure to answer within five days after filing the petition for removal. In essence, Norsyn argues that by invoking the removal jurisdiction of the district court, Defendants voluntarily assumed an obligation to respond to the complaint.³

We find this argument without merit. The Seventh Circuit has considered an identical argument under facts materially indistinguishable from the present case. See Silva v. City of Madison, 69 F.3d 1368 (7th Cir.1995), cert. denied, 517 U.S. 1121, 116 S.Ct. 1354, 134 L.Ed.2d 522 (1996). The plaintiff in Silva filed a complaint against the City of Madison in Wisconsin state court. Shortly after receiving a copy of the complaint, yet never having been properly served under Wisconsin law, the City removed the action to the United States District Court for the Western District of Wisconsin. The City filed no court documents following removal, instead awaiting proper service by the plaintiff. Believing that the City had failed to answer within the time required by the Federal Rules of Civil Procedure, the plaintiff moved for default judgment. The district court denied plaintiff's motion.

On appeal, the Seventh Circuit affirmed the district court. It stated that a responsive pleading is only required to be filed within the latest of the three periods specified in Rule 81(c). Id. at 1371. Therefore, the simple act of removal could not trigger any obligation to answer, as such a reading would eviscerate the clause "whichever period is longest" from the plain text of Rule 81(c). Rather, the Seventh Circuit held that nothing short of proper service of process could trigger a defendant's obligation to answer under Rule 81(c), reasoning that "[r]equiring a responsive pleading before service is effected is at odds with a fundamental principle of federal procedure-that a responsive pleading is required only after service has been effected and the party has been made subject to the jurisdiction of the federal courts." Id. at 1376.

The Supreme Court has approved of the Seventh Circuit's ruling in Silva. See Murphy Bros., Inc. v. Michetti Pipe Stringing, Inc., 526 U.S. 344, 355, 119 S.Ct. 1322, 143 L.Ed.2d 448 (1999) (stating that the Seventh Circuit "rightly determined" that the defendant's obligation to file an answer under Rule 81(c) did not arise until proper service of process). As interpreted, Rule 81(c) reflects the "longstanding tradition in our system of justice," id. at 350, 119 S.Ct. 1322, that a defendant is under no duty to respond to the rules of a...