Shepard Claims Service, Inc. v. William Darrah & Associates

• Decision Date: 18 July 1986
• Docket Number: No. 85-1674,85-1674
• Parties: SHEPARD CLAIMS SERVICE, INC., Plaintiff-Appellee, v. WILLIAM DARRAH & ASSOCIATES, a foreign corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 190

796 F.2d 190

5 Fed.R.Serv.3d 393

SHEPARD CLAIMS SERVICE, INC., Plaintiff-Appellee, v. WILLIAM DARRAH & ASSOCIATES, a foreign corporation Defendant-Appellant.

No. 85-1674.

United States Court of Appeals Sixth Circuit.

Argued April 22, 1986.

Decided July 18, 1986.

Mark Shreve, Rosaland H. Rochkind argued, Garan, Lucow, Miller, Seward, Cooper & Becker, P.C., Detroit, Mich., for defendant-appellant.

George A. Hilborn, P.C., argued, Birmingham, Mich., for plaintiff-appellee.

Before LIVELY, Chief Judge; WELLFORD and NELSON, Circuit Judges.

LIVELY, Chief Judge.

A panel of this court entered an order granting an interlocutory appeal from the district court's denial of a motion to set aside an entry of default. Having considered the briefs and oral argument of counsel together with the record on appeal, the court concludes that it must vacate the district court order and remand for further proceedings.

I.

A fairly full statement of facts is required. On August 21, 1984 Shepard Claims Services, Inc. (Shepard) filed this contract action in the district court against William Darrah & Associates (Darrah), with jurisdiction based on diversity of citizenship. The complaint alleged essentially that Darrah, a South Carolina-based insurance broker, failed to pay Shepard, a Michigan independent claims adjuster, for services rendered. Following some difficulty in service by mail, service in person was carried out on February 7, 1985.

On February 22, 1985 defendant Darrah's attorney's secretary secured by telephone an extension of time for filing an answer. A confirmation letter from defense counsel, drafted and signed by the secretary with the vacationing counsel's permission, stated:

This letter will confirm my secretary's conversation with your secretary of February 22, 1985, to the effect that you have granted my office 45 days from February 22, 1985, to answer the Complaint in the above captioned cause of action against my client, Will Darrah.

(Emphasis added). By April 10 defendant had filed no answer, so plaintiff Shepard requested that the clerk enter Darrah's default. On April 19 Darrah filed a "Notice of Retention," following on April 26 with an answer and then on April 29 with a notice of affirmative defenses, a counterclaim, interrogatories and a request for production of documents. On May 1 defendant filed a response to plaintiff's motion for default judgment (which had not been filed as of that time) and a motion to set aside entry of default pursuant to Rule 55(c), Fed.R.Civ.P. On May 8 plaintiff filed its motion for default judgment and response to defendant's motion to set aside entry of default. Along with the motion to set aside entry of default defendant filed two affidavits, from defense counsel and his secretary, in which they stated their understanding of the extension to run 45 days in addition to the normal period of 30 days under Rule 4(e), Fed.R.Civ.P., rather than from February 22. Under this interpretation the answer would have been due on April 23. The confirming letter, according to the secretary, "contained a misstatement" of what she believed was the arrangement and what she informed her employer. Defense counsel did not review the confirming letter upon his return and apparently did not examine the file until the day he filed his "appearance." Defense counsel insists that he did not learn of the April 10 entry of default until April 29, by letter from opposing counsel.

The district court held a hearing on pending motions on May 28, after which the court denied defendant's motion to set aside entry of default. In its order the district court found that defendant's attorney engaged in culpable conduct when he permitted his secretary to make arrangements for the extension and then failed to review the secretary's letter upon returning from vacation.

The district court denied the defendant's motion for reconsideration and certified the case for an interlocutory appeal pursuant to 28 U.S.C. Sec. 1292(b) upon finding that "a substantial basis exists for a difference of opinion on the question of setting aside the default in this matter, and that an immediate appeal may materially advance the termination of this litigation."

II.

A.

In United Coin Meter Co. v. Seaboard Coastline R.R., 705 F.2d 839 (1983), this court considered a set of circumstances quite similar to those recorded in the present case. After the parties were unable to go forward with a scheduled hearing on the defendant's motion to dismiss, opposing counsel agreed to a 20-day period for the defendant to file an answer. Plaintiff's counsel construed the agreement as running from April 28, while defendant's counsel believed the time ran from May 5. When no answer was filed by April 28, plaintiff's counsel caused a default to be entered by the clerk. The only matter in dispute was the date from which the 20-day period was to run.

Following a hearing the district court found no "excusable neglect" on the part of the defendant. The court also concluded that the affidavits of the defendant failed to establish the existence of a meritorious defense. The district court refused to set aside the default and entered a default judgment for the full amount sought in the complaint. A hearing was held on the defendant's motion for reconsideration. The district court denied reconsideration, finding that there was no "good cause" for setting aside entry of default or the default judgment.

This court reversed the district court in United Coin, finding that the criteria controlling the court's decision on a Rule 55(c) motion had not been satisfied. In agreement with other courts, we concluded that three factors determine the outcome of such a motion:

1. Whether the plaintiff will be prejudiced;

2. Whether the defendant has a meritorious defense; and

3. Whether culpable conduct of the defendant led to the default.

705 F.2d at 845. See Hritz v. Woma Corp., 732 F.2d 1178, 1181 (3d Cir.1984); Feliciano v. Reliant Tooling Co., Ltd., 691 F.2d 653, 656 (3d Cir.1982); Keegel v. Key West & Caribbean Trading Co., Inc., 627 F.2d 372, 373 (D.C.Cir.1980); Falk v. Allen, 739 F.2d 461, 463 (9th Cir.1984) (per curiam); Meehan v. Snow, 652 F.2d 274, 277 (2d Cir.1981) (per curiam). See also 6 Moore's Federal Practice p 55.10 at 55-59 (1985 ed.) In United Coin the plaintiff did not claim prejudice and this court found that the defendant had established a meritorious defense, one "good at law" without reference to the likelihood of success. The decisive issue was whether the default resulted from the defendant's "culpable conduct." In determining that the third requirement had not been met, we repeatedly stated that the defendant's conduct had not been "willful." Id.

B.

The present case differs from United Coin in at least one material respect. In United Coin, a default judgment was entered, whereas this interlocutory appeal was taken before entry of judgment. If the only issue relates to entry of default, Rule 55(c), Fed.R.Civ.P., ¹ provides the standard--"good cause shown." After entry of a default judgment, the court may set the judgment aside "in accordance with Rule 60(b)," ² which lists several grounds for relief from judgment. Despite this difference the district court and the parties in the present case recognized United Coin as the controlling decision. However, the district court found the United Coin opinion "ambiguous as to the precise definition of culpable conduct." On appeal Darrah argues that United Coin is not ambiguous, that it clearly adopted the "willful conduct" definition by citing with approval cases from other circuits that equated culpable conduct with willfulness. The sole reference to negligence in the United Coin opinion is contained in a discussion of the standards applicable to a Rule 60(b) motion, under which "excusable neglect" is a ground for relief. Darrah asserts that nothing in the opinion indicates that the "good cause" standard of Rule 55(c) is satisfied by a showing of counsel's negligence.

Shepard contends that the district court correctly found that counsel for the defendant was the "designer" of the agreement for additional time to plead, and that his failure to comply with the agreed limitations was "culpable negligence." Shepard argues that the failure of Darrah and its counsel to abide by the time limits they "designed" could properly be found willful, and therefore culpable, conduct.

III.

Rule 55(c) leaves to the discretion of the trial judge the decision whether to set aside an entry of default. However, a strong preference for trials on the merits in federal courts has led to the adoption of a somewhat modified standard of review where defaults are involved. In United Coin we wrote:

Trials on the merits are favored in federal courts and a "glaring abuse" of discretion is not required for reversal of a court's refusal to relieve a party of the harsh sanction of default.

705 F.2d at 846 (citing Keegel, 627 F.2d at 373-74). The Fifth Circuit came to a similar conclusion in Williams v. New Orleans Public Service, Inc., 728 F.2d 730, 733-34 (1984):

We recognize ... that such a standard does not vest the trial court with completely unfettered discretion.... [W]hen the grant of a default judgment precludes consideration of the merits of a case, "even a slight abuse [of discretion] may justify reversal."

Since entry of default is just the first procedural step on the road to obtaining a default judgment, the same policy of favoring trials on the merits applies whether considering a motion under Rule 55(c) or Rule 60(b). In practice a somewhat more lenient standard is applied to Rule 55(c) motions where there has only been an entry of default than to Rule 60(b) motions where judgment has been entered. As the court stated in Chrysler Credit Corp. v Macino, 710 F.2d 363, 368 (7th Cir.1983), "Although the elements for relief under Rule 55(c) and Rule 60(b) are substantially the same, the standards...