U.S. For Use of M-CO Const., Inc. v. Shipco General, Inc.

• Decision Date: 17 April 1987
• Docket Number: No. 86-2127,M-CO,86-2127
• Citation: 814 F.2d 1011
• Parties: UNITED STATES of America for the Use ofCONSTRUCTION, INC., Plaintiff-Appellee, v. SHIPCO GENERAL, INC., Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1011

814 F.2d 1011

7 Fed.R.Serv.3d 348

UNITED STATES of America for the Use of M-CO CONSTRUCTION INC., Plaintiff-Appellee, v. SHIPCO GENERAL, INC., Defendant-Appellant.

No. 86-2127.

United States Court of Appeals Fifth Circuit.

April 17, 1987.

Matthews & Branscomb, Charles D. Houlihan, Jr., San Antonio, Tex., for defendant-appellant.

Wm. W. Sommers, San Antonio, Tex., for plaintiff-appellee.

Appeal from the United States District Court for the Western District of Texas.

Before CLARK, Chief Judge, REAVLEY and WILLIAMS, Circuit Judges.

JERRE S. WILLIAMS, Circuit Judge:

In this appeal we consider whether the district court abused its discretion by entering a default judgment against Shipco General, Inc. or erred in calculating the damages Shipco owes to M-CO Construction, Inc. We uphold the default judgment but reverse and remand the award of damages.

I. Facts

The appellant, Shipco General, Inc., is an Idaho corporation that works as a prime contractor on federal government construction projects. In September 1982, the United States hired Shipco to remodel thirty-four quadplexes, or residential buildings, at the Randolph Air Force Base near San Antonio, Texas. Shipco in turn hired subcontractors to perform various tasks. To guarantee its obligations to its subcontractors, Shipco furnished a payment bond from Industrial Indemnity Corp., as required by the Miller Act, 40 U.S.C. Sec. 270a. Shipco then agreed to indemnify Industrial Indemnity for any loss resulting from the surety relationship.

In January 1983, Joseph McDorman formed M-CO Construction, Inc. That same month, Shipco hired M-CO to work as a subcontractor at the Randolph base. Shipco and M-CO signed three subcontracts: one covered painting work to be done by M-CO; the other two covered a variety of other jobs--including electrical, heating, air conditioning, plumbing, roofing, landscaping, and carpentry work. Each agreement specified the total amount to be paid to M-CO for work performed under that subcontract. M-CO agreed to perform its work "in the most sound, workmanlike ... manner." In addition, the subcontracts provided that M-CO would not take on extra work without a "written order" from Shipco.

M-CO began work in January 1983. Every month, M-CO presented receipts and bills for work completed that month, and Shipco paid M-CO for ninety percent of such work. Shipco retained ten percent under the terms of the contract, which also provided that Shipco would pay the retained sums after the remodeling was finished and the United States made final payment to Shipco. On June 24, 1983, Shipco terminated the painting contract on the claim that M-CO performed in an unworkmanlike manner. On August 24, 1983, Shipco terminated the other two subcontracts, asserting the same reason. On August 20, 1984, M-CO sued Industrial Indemnity and Shipco in the Western District of Texas under the Miller Act to recover $29,960--the "reasonable value" of its uncompensated work. ¹

II. Shipco Misses the Boat

Shipco answered the lawsuit, denied liability, and claimed--by affirmative defense and counterclaim--that M-CO failed to perform in a workmanlike manner. Industrial Indemnity cross-claimed for indemnification against Shipco. Shipco hired its regular counsel, Denver Snuffer of Murray, Utah, and local counsel, David Young of San Antonio, to defend the M-CO lawsuit. It was during discovery that Shipco or its attorneys ran aground.

On April 17, 1985, M-CO noticed the deposition of Shipco's representative for May 1, 1985 in San Antonio. Shipco neither moved for a protective order nor appeared for the deposition. M-CO moved for sanctions under Rule 37(b), Federal Rules of Civil Procedure, for Shipco's failure to appear. On June 14, 1985, the district court awarded M-CO $500 in sanctions and warned: "The Court will give defendant one more opportunity to comply with discovery. If plaintiff again files a notice of deposition and defendant again fails to appear, defendant's answer will be struck and a default judgment rendered."

On June 25, 1985, M-CO again noticed Shipco's deposition, this time for July 3, 1985, in San Antonio. Snuffer did not move for a protective order, but on July 2, he asked M-CO to reschedule the deposition. M-CO refused, and Shipco again failed to appear for the scheduled deposition. M-CO moved for sanctions, including a default judgment.

The trial was set for August 6, 1985. At Docket Call on August 5, Young but not Snuffer appeared for Shipco. When the district court asked Young why a default should not be entered, Young replied:

You put me on the spot, Judge. I am local counsel for Shipco. I have been ... unsuccessful in locating [Shipco's] attorney, Mr. Denver Snuffer.... I just called his office ..., and his secretary told me that he was home sick this morning....

I have written to him a number of times without response. I have called his office without response. I really don't feel that I should say anything substantive on the merits of the case.

The district court then ordered that Shipco's pleadings be struck and entered a default judgment against Shipco.

On January 2, 1986, the district court held a hearing to determine the amount of M-CO's damages, and on January 30, the district court issued its final judgment, awarding M-CO $28,026.21 plus attorneys' fees plus interest since the date M-CO filed suit. The district court also granted a default judgment for Industrial Indemnity against Shipco, ² awarding attorneys' fees plus indemnification for any amount M-CO collects from Industrial. In addition, the district court granted partial summary judgment for M-CO against Industrial Indemnity for the amount of the default judgment against Shipco.

Shipco, having hired new counsel to navigate the troubled waters of this appeal, now challenges the entry of default and the calculation of damages.

III. The Default Judgment

Rule 37(b)(2)(C) authorizes a district court to strike pleadings of and enter a default judgment against a party that fails to comply with a discovery order. See National Hockey League v. Metro Hockey Club, Inc., 427 U.S. 639, 96 S.Ct. 2778, 49 L.Ed.2d 747 (1976); Batson v. Neal Spelce Associates, Inc., 765 F.2d 511 (5th Cir.1985). We review the entry of a default judgment for abuse of discretion. Batson, 765 F.2d at 514; Bluitt v. Arco Chemical Co., 777 F.2d 188, 190 (5th Cir.1985).

Rule 55(c) provides that a district court may set aside a default judgment "for good cause shown," ³ and we also review a district court's refusal to set aside a default judgment for abuse of discretion. See United States v. One Parcel of Real Property, 763 F.2d 181, 183 (5th Cir.1985). Batson enumerated four factors that the district court should consider before granting a default judgment: (1) whether the violation was willful or in bad faith rather than simply due to inability to comply, (2) whether less drastic sanctions would effect the goals of Rule 37(b), (3) whether the violation prejudiced the opposing party's trial preparation, and (4) whether the client knew of or participated in the violation or simply misunderstood a court order or innocently hired a derelict attorney. Batson, 765 F.2d at 514. ⁴ Batson also held that the district court must consider expressly the effectiveness of less severe sanctions. Id. at 516.

Although dismissal and default judgment are "draconian" sanctions that the district court should impose only as a last resort, id. at 515, their use might deter litigants from flouting discovery orders in the future. National Hockey League, 427 U.S. at 643, 96 S.Ct. at 2781. We find that the district court did not abuse its discretion in entering and refusing to set aside the default judgment against Shipco.

The district court found that Shipco failed to appear for the May 1 deposition, failed to respond to M-CO's two motions for sanctions, and failed to explain its behavior at the August 5 Docket Call. In addition, it violated the court's valid discovery order by failing to appear for the July 3 deposition. The district court also expressly found that a lesser sanction--the $500 fine--had failed to coerce compliance in the past and would not be effective a second time. We have upheld dismissals under Rule 37(b)(2)(C) against a party that misses a deposition appearance in violation of a court order. See Bonaventure v. Butler, 593 F.2d 625, 626 (5th Cir.1979); Kabbe v. Rotan Mosle, Inc., 752 F.2d 1083, 1084 (5th Cir.1985). Here, together with other defaults, Shipco missed two.

Shipco's appellate counsel argues that we should not punish Shipco for the omissions of its lawyers. The D.C. Circuit recently expressed similar concerns when it reversed a default judgment and instead directed the district court to consider sanctions against the attorney responsible rather than his unwitting client. See Shea v. Donohoe Construction Co., 795 F.2d 1071 (D.C.Cir.1986) (holding that the district court should warn the client--not just its lawyers--before entering a default). We share the D.C. Circuit's sympathy for a client whose counsel defaulted. But here we stress that the putative author of the default was Shipco's regular counsel, having continuity of employment with the company. The district court did not abuse its discretion, and we uphold the entry of default judgment.

IV. Damages

Although we affirm the granting of the default judgment, we reverse the award of damages to M-CO and remand for a new determination of damages. Shipco tried to rebut M-CO's damage claims by showing that M-CO did poor quality work. M-CO argued that the district court's sanction established that Shipco breached, that M-CO did not, and, therefore, that M-CO performed "in the most ... workmanlike" way, as required by the contract. The district court excluded Shipco's evidence of poor quality and did not explain how and under what theory it calculated M-CO's damages.

A default judgment is a judgment on the merits that conclusively...