Provident Security Life Insurance Company v. Gorsuch

• Decision Date: 01 October 1963
• Docket Number: No. 18307.,18307.
• Citation: 323 F.2d 839
• Parties: PROVIDENT SECURITY LIFE INSURANCE COMPANY, Appellant, v. John S. GORSUCH, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

323 F.2d 839 (1963)

PROVIDENT SECURITY LIFE INSURANCE COMPANY, Appellant, v. John S. GORSUCH, Appellee.

No. 18307.

United States Court of Appeals Ninth Circuit.

October 1, 1963.

Elsing & Crable, W. T. Elsing, and Francis R. Crable, Phoenix, Ariz., for appellant.

W. Lee McLane, Jr. and Nola McLane, Phoenix, Ariz., for appellee.

Before BARNES, HAMLEY and JERTBERG, Circuit Judges.

HAMLEY, Circuit Judge.

John S. Gorsuch, a stockholder in United Security Life (United), brought this action to have declared void a merger agreement entered into between United and Provident Security Life Insurance Company (Provident). District court jurisdiction is based on diversity of citizenship. Judgment was entered for plaintiff and defendant, Provident, appeals.

Gorsuch first attacked the validity of this merger during the course of the appeal to this court in Niesz v. Gorsuch, 9 Cir., 295 F.2d 909. That was a stockholder's derivative action in which Gorsuch, suing on behalf of United, sought to recover $314,794.19 for the corporation from certain individuals all but one of whom were or had been stockholders, directors or officers of United.

After the complaint had been filed in that action, a merger was consummated whereby Provident was to continue in existence as the surviving corporation and United was to cease to exist. The derivative action nevertheless proceeded as if United continued in existence, Provident not being added as a party. After trial, the trial court, among other things, set aside, as inadequate, a verdict in the sum of $20,000 against certain defendants, and entered judgment in the sum of $314,794.19 against these and certain other defendants. In the alternative, the trial court determined that the jury verdict was advisory only, and entered findings of fact and conclusions of law supporting its judgment for plaintiff in the amount indicated.

In that case the trial court made no specific findings with reference to the merger, but did find and conclude that United was and is a corporation and citizen of and domiciled in the State of Arizona. On appeal the defendants in that case challenged this finding, contending that United was no longer in existence and that neither United nor Gorsuch had capacity to continue with the lawsuit.

In resisting this challenge, Gorsuch contended, on appeal, that the merger was not valid because American Security Investment Co. (American) which voted 38.79% of United stock in favor of the merger assertedly did not have good title to that stock. Rejecting that contention we held that American had prima facie title to the stock and that if Gorsuch wanted to contest the legality of the merger "he should have done so in a direct action for that purpose." We further held that the merger was not subject to collateral attack in that action and that, for the purposes of that suit, the merger had been validly consummated, United having ceased to be a corporation.

These determinations led us to decide, without reaching the merits, that the judgment in the derivative action must be reversed because Gorsuch had lost his standing as a stockholder in United, and United had lost its capacity to be sued as a party defendant and its capacity as the real party in interest. The further proceedings which have since been had in that action are recounted in our decision therein, filed today, sub nom. DePinto v. Provident Security Life Insurance Company, 9 Cir., 323 F.2d 826.

Gorsuch having been precluded by our decision in Niesz v. Gorsuch, from challenging the validity of the merger in that action, instituted this direct and separate action on February 12, 1962. Specifically, he seeks a judicial declaration that the merger between United and Provident is void, and that United is a viable corporation still in existence. He also seeks an accounting on behalf of United of the moneys, assets and other property obtained from United in connection with the merger, together with all the income derived therefrom.

The cause came before the same district judge who acted in the derivative suit, both at the time of the initial judgment therein and in the further proceedings thereafter had.

In the course of the trial court proceedings both parties made a motion for summary judgment. Three days after plaintiff filed his motion for summary judgment, he filed a motion for judgment by default. This latter motion was based on the ground that defendant had not filed an answer within the time prescribed by rule, nor at all, and had not filed any motion having the effect of extending the time for filing an answer.

The trial court thereafter filed a memorandum decision and order denying defendant's motion for summary judgment, granting plaintiff's like motion, and providing that a form of summary judgment conforming to the foregoing rulings might be presented for signature and entry. In this same decision and order the court also granted the motion for default.

A judgment denominated "Summary Judgment" was entered for Gorsuch and against Provident on May 15, 1962, this being the same date that judgment was entered for Provident in the further proceedings in the derivative action.

The court judicially declared that the merger was and remains null and void and that United is a viable corporation still in existence. Provident was ordered to account to United as prayed for in the complaint. The final decretal provision of this judgment is that "* * * the enforcement of said judgment shall be stayed until the further order of the Court."

Defendant moved to set aside the default, vacate the judgment, and grant a rehearing pursuant to Rules 59 and 60, Federal Rules of Civil Procedure. These motions were denied whereupon defendant appealed.

The questions first presented here have to do with the order granting the motion for default.¹

The complaint was filed on February 12, 1962, and, according to plaintiff's motion for default, the summons and complaint were duly served upon defendant on the same day.² Under Rule 12(a), Federal Rules of Civil Procedure, a defendant, other than the United States or an officer or agency thereof, is required to serve his answer within twenty days after the service of the summons and complaint upon him unless the court directs otherwise pursuant to Rule 4(e), and except where this period is altered by the service of a motion permitted under Rule 12.

The trial court did not, pursuant to Rule 4(e) specify a different period within which the answer should be served. It follows that the answer should have been served by March 5, 1962,³ unless the period for serving the answer was extended by serving, before March 5, 1962, a motion permitted under Rule 12. No answer had been served by March 19, 1962 when the motion for judgment by default was filed.

A motion denominated motion for summary judgment was filed on March 5, 1962, and was presumably served on the same date. Plaintiff argues that a motion for summary judgment is not a motion "permitted" under Rule 12, and therefore the service of that motion did not extend the time for serving the answer beyond March 5, 1962.

Defendant apparently accepts plaintiff's assertion that a motion for summary judgment is not "permitted" by Rule 12. It argues, however, that the motion which was served, despite its heading, was actually a motion to dismiss for failure of the complaint to state a claim, and was therefore "permitted" under Rule 12(b). Defendant argues, alternatively, that if the serving of the described motion did not extend the time for serving the answer, the denial of its motion to set aside the default was, in any event, an abuse of discretion.

The district court may, pursuant to Rules 55(c) and 60(b), Federal Rules of Civil Procedure, and for good cause shown, set aside a judgment by default. The disposition of a motion to set aside a default judgment is a matter which lies largely within the discretion of the district court. Hiern v. St. PaulMercury Indem. Co., 5 Cir., 262 F.2d 526, 530. An abuse of discretion in denying such a motion is not shown unless the district court was clearly wrong in finding that good cause had not been shown for the motion to set aside the default judgment. See Ferraro v. Arthur M. Rosenberg Co., 2 Cir., 156 F.2d 212, 214.

The cause here shown by defendant in support of its motion to set aside the default judgment was that: (1) before the expiration of the period within which an answer could have been timely filed, defendant appeared, and served and filed a timely motion for summary judgment; (2) the motion was not frivolous, but raised substantial questions which, if decided in defendant's favor, would have warranted judgment in its favor, thereby obviating the need of an answer; (3) defendant, in good faith although perhaps erroneously, believed that such motion was a "permitted" motion under Rule 12, thereby extending the time for serving an answer; (4) plaintiff was not prejudiced by the failure to serve an answer because plaintiff had himself filed a motion for summary judgment without awaiting the service of an answer or action on his motion for default, and the district court had granted such motion; (5) defendant's answer, lodged with its motion to set aside the default judgment, tendered additional substantial defenses, including laches and the statute of limitations, not advanced in its motion for summary judgment.

In our opinion the district court was clearly wrong in finding, in effect, that these circumstances do not constitute good cause for setting aside the judgment by default on the ground of excusable neglect. See Rule 60(b) (1), Federal Rules of Civil Procedure. We are of the view that the showing here made for opening the default was substantially stronger than that which was made in Barber v. Turberville, 94 U.S.App.D.C. 335, 218 F.2d 34, in which an order denying a motion to open a default was reversed.

Denial of appellant's motion to open the default was therefore an...