Schwab v. Bullock's Inc.

• Decision Date: 01 November 1974
• Docket Number: No. 72-2269,72-2269
• Citation: 508 F.2d 353
• Parties: 1974-2 Trade Cases 75,365 Leon SCHWAB, Plaintiff-Appellee, v. BULLOCK'S INC., a corporation, et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 353

508 F.2d 353

1974-2 Trade Cases 75,365

Leon SCHWAB, Plaintiff-Appellee, v. BULLOCK'S INC., a corporation, et al., Defendants-Appellants.

No. 72-2269.

United States Court of Appeals, Ninth Circuit.

Nov. 1, 1974, Rehearing Denied Jan. 6, 1975.

John F. O'Hara of Parker, Milliken, Kohlmeier, Clark & O'Hara (argued), Los Angeles, Cal., Asa D. Sokolow (argued) of Rosenman, Colin, Kay, Petschek, Freund & Emil, New York City, for defendants-appellants.

Glenn Warner (argued) of Karpf, Leibow & Warner, Beverly Hills, Cal., for plaintiff-appellee.

Before HUFSTEDLER and TRASK, Circuit Judges, and NEILL, ¹ District judge.

OPINION

HUFSTEDLER, Circuit Judge:

B.B.S.K. Corporation ('BBSK') appeals from an order denying its motion under Rule 60(b) of the Federal Rules of Civil Procedure to vacate a $540,000 default judgment. We reverse.

Schwab filed an antitrust action against three cosmetics manufacturers and two retailers, charging them with conspiracy to refuse to sell the manufacturers' products to his drugstore, for which Schwab sought damages of $250,000, trebled. One of the defendants named was Germaine Monteil Cosmetiques Corporation, a Delaware corporation ('Germaine-Delaware'). Germaine-Delaware's counsel advised Schwab that he had sued the wrong corporation. The named corporation two years earlier had acquired all the assets of and the name 'Germaine' from Germaine Monteil Cosmetiques Corporation, a New York corporation ('Germaine-New York'), and the Delaware corporation had never participated in any of the activities alleged in the complaint.

Germaine-New York changed its name to BBSK after the sale of its assets and thereafter did not operate as a functioning business entity. BBSK was promptly placed in liquidation and finally dissolved in April, 1970, over a year before judgment by default was entered against it. It assets were distributed to its officers-stockholders, Guy and Germaine Bjorkman, Morton Kamerman, and David Starr. Germaine-Delaware's counsel informed Schwab's counsel, Harold Fendler, by letter of the correct business address of BBSK in New York and the correct addresses of its corporate officers.

On October 8, 1970, Schwab amended his complaint and for the first time named BBSK as a defendant. He dismissed Germaine-Delaware. Schwab made one attempt to serve the amended complaint personally on BBSK. His counsel, Fendler, acquired the services of a New York lawyer, Tifford, to accomplish service, and on October 3, 1970, Tifford went to BBSK's office in New York to effect service. He did not succeed, but he could not recall the reason for his failure. He could not remember whether the office door was locked or whether he entered the office and was told that he had the wrong office. The effort to serve the officers personally was equally fleeting.

On October 14, 1970, Fendler told Tifford to abandon further effort to locate or to serve BBSK or any of its officers personally, because Fendler had decided to serve the Secretary of State of New York. An associate of Fendler obtained an order from the district court on October 22, 1970, authorizing service on BBSK, a dissolved corporation, by serving the summons and amended complaint on the Secretary of State, pursuant to New York law (N.Y. Business Corp. Law, McKinney's Consol.Laws, c. 4, 304(a), 306(b)). Service was made on the Secretary on October 28, 1970. The Secretary mailed the summons and amended complaint to the address listed for Germaine-New York. The mailing was returned to the Secretary undelivered because Germaine-New York had changed its address years before, and the building in which its former office was located had been demolished. No one followed up the abortive mailing. Actual service of the amended complaint was never made on BBSK or any of its officers.

In April, 1971, Schwab settled his case against all the defendants except BBSK for $20,000 total and dismissed them with prejudice, reserving his action against BBSK. On August 30, 1971, Schwab obtained a default judgment against BBSK for $540,000. No effort was exerted to notify Starr or any of the other officers of BBSK that a default judgment had been entered, until the first two weeks of January, 1972, when, without difficulty, Schwab served notice on each of BBSK's officers to take their depositions. The officers forthwith retained counsel and moved to vacate the default.

In support of the motion, each officer filed an affidavit denying knowledge of the pendency of the action and the entry of default until January, 1972, and each averred the existence of a meritorious defense and the lack of prejudice to Schwab if vacation were granted. Schwab denied neither the existence of a meritorious defense nor lack of prejudice. The district court rejected the motion after hearing principally on the ground that BBSK secretary David Starr knew that the action was pending before default was entered, and his knowledge, imputable to BBSK and the other three officers, defeated BBSK's claim for relief under Rule 60(b).

In reviewing the district court's finding that Starr had actual knowledge that the action was pending, we must heed the important policy considerations governing disposition of a motion to vacate a default judgment. While a district judge has discretion to grant or deny a 60(b) motion to vacate a default judgment, that discretion is limited by three important considerations. First, Rule 60(b) is remedial in nature and therefore must be liberally applied (e.g., Butner v. Neustadter (9th Cir. 1963) 324 F.2d 783, 786; 7 J. Moore, Fed. Prac., P60.10(7), (9); P60.18(8)). Second, default judgments are generally disfavored; whenever it is...