Zeller v. Bailey
| Decision Date | 28 July 2006 |
| Docket Number | 1041699. |
| Citation | 950 So.2d 1149 |
| Parties | Charles R. ZELLER v. Tracy BAILEY. |
| Court | Alabama Supreme Court |
Appeal from the Baldwin Circuit Court, No. CV-04-695, J. Langford Floyd, J Marion E. Wynne and Robert W. Waller of Wilkins, Bankester, Biles & Wynne, P.A., Fairhope, for appellant.
Thomas M. O'Hara of McDowell Knight Roedder & Sledge, LLP, Mobile, for appellee.
On Application for Rehearing
The opinion of April 28, 2006, is withdrawn, and the following is substituted therefor.
Charles R. Zeller appeals from the trial court's denial of his motion filed pursuant to Rule 60(b), Ala. R. Civ. P., to set aside a default judgment against him in the amount of $2,589,645.06. We affirm.
On August 6, 2003, Tracy Bailey, president of Instrumentation and Electrical of Alabama, Inc. ("I & E"), entered into a purchase contract with Scott Cope, pursuant to which Bailey would sell I & E to Cope for $100,000; Cope executed a promissory note for this amount. Under the terms of the purchase contract, Bailey had a first right of refusal on any subsequent sale of I & E. Contemporaneously with the purchase contract, Bailey entered into an employment agreement with I & E, in which Bailey agreed to act as president of I & E for three years.
On June 8, 2004, Bailey sued Cope, Zeller, and American Consertech, Inc. ("Consertech"). Cope and Zeller are the sole owners of Consertech. In the complaint, Bailey asserted against Cope claims of breach of the purchase contract, breach of the promissory note, breach of the employment agreement, and promissory fraud. Specifically, Bailey claimed, among other things, that following the sale of I & E to Cope, Cope failed to assume all of I & E's liabilities, defaulted on I & E's liabilities, failed to pay I & E's vendors, sold I & E to Zeller without notifying or otherwise providing Bailey the contractual right of first refusal, and defaulted on the promissory note. In a separate count, Bailey asserted these same claims against Cope, Zeller, and Consertech, alleging that they were using I & E as an alter ego. Specifically, Bailey claimed that Cope and Zeller used I & E as a sham corporation for the fraudulent purpose of creating cash flow for Consertech, while avoiding the debts and liabilities of I & E. Each defendant was served with a copy of the complaint via certified mail.
On August 30, 2004, the trial court entered default judgments against each defendant based on the defendants' failure to answer or to otherwise respond to the complaint. Cope thereafter hired attorney Marion E. Wynne to challenge the default judgments on behalf of Cope, Zeller, and Consertech. On September 7, 2004, Wynne filed a motion, accompanied by Cope's affidavit, requesting that the default judgments be set aside because the defendants' failure to respond had been due to inadvertence and excusable neglect. The motion and the affidavit averred, among other things, that Cope, as CEO of Consertech, was responsible for defending Consertech, as well as protecting Zeller's interests. The trial court granted this motion.
On October 28, 2004, counsel for Bailey served interrogatories and requests for production of documents on the defendants. The defendants did not respond.
On November 8, 2004, Wynne filed a motion to withdraw as counsel for the defendants, asserting that his clients had failed and/or refused to honor their fee arrangement with him and that Zeller had failed to communicate with Wynne after Wynne had made repeated efforts to contact him by telephone and fax. Wynne mailed a copy of his motion to withdraw to both Cope and Zeller; neither responded. The trial court granted Wynne's motion to withdraw as counsel for the defendants and ordered that all future notices regarding the action be sent to Cope and to Zeller.
On December 8, 2004, Bailey filed a motion to compel discovery of the document requests and interrogatories and mailed a copy of the motion to both Cope and Zeller. On December 13, 2004, the trial court entered an order compelling the defendants to respond to the requested discovery within 20 days. Neither defendant responded.
On January 10, 2005, Bailey filed a motion requesting that the trial court reenter the default judgments against each defendant. As grounds for his motion, Bailey recited the defendants' flouting of the trial court's discovery order. As further grounds, Bailey asserted that Cope and Zeller had failed to appear for their properly scheduled depositions in December 2004. Bailey mailed a copy of this motion to both Cope and Zeller.
On January 13, 2005, the trial court entered an order, compelling the deposition of Zeller within 20 days from the date of the order. The trial court mailed notice of the order to Zeller. Zeller did not respond.
The trial court scheduled a hearing on the reentry of the default judgments for February 15, 2005, and served each defendant with notice of the hearing. Attorney Brent Day appeared at the hearing on behalf of Cope. Zeller was neither present nor represented by counsel at the hearing. Thereafter, the trial court reentered a default judgment against Zeller in the amount of $2,589,645.06. Notice of this judgment was issued to Zeller. The trial court scheduled an April 2005 trial date for Cope and granted him additional time to respond to the requested discovery.
On March 16, 2005, the trial court reentered a default judgment against Cope for failure to respond to discovery. Additional notices that a default judgment had been entered against him were mailed by the trial court to Zeller at his residence.
On June 8, 2005, Day filed a motion to withdraw as counsel, asserting that Cope had failed to respond to discovery requests, that Cope had failed to maintain contact with Day, and that Cope was not available for a scheduled deposition. The trial court granted this motion.
On May 27, 2005, Zeller, through Wynne, filed a motion, pursuant to Rule 60(b), Ala. R. Civ. P., seeking to have the second default judgment against him set aside on the grounds of inadvertence and excusable neglect.1 In his motion and supporting affidavit, Zeller claimed that he was a resident of Texas; that he had nothing to do with the purchase of I & E other than lending money to Cope in a separate transaction to finance the purchase; that he had no interest in the revenues of I & E; that he never controlled any of the funds of I & E; and that he had relied on Cope to handle the defense of Bailey's action against them. The trial court denied the motion; Zeller appealed.
A trial court has broad discretion in deciding whether to grant or deny a motion to set aside a default judgment. Kirtland v. Fort Morgan Auth. Sewer Serv., Inc., 524 So.2d 600 (Ala.1988). In reviewing an appeal from a trial court's order refusing to set aside a default judgment, this Court must determine whether in refusing to set aside the default judgment the trial court exceeded its discretion. 524 So.2d at 604. That discretion, although broad, requires the trial court to balance two competing policy interests associated with default judgments: the need to promote judicial economy and a litigant's right to defend an action on the merits. 524 So.2d at 604. These interests must be balanced under the two-step process established in Kirtland.
We begin the balancing process with the presumption that cases should be decided on the merits whenever it is practicable to do so. 524 So.2d at 604. The trial court must then apply a three-factor analysis first established in Ex parte Illinois Central Gulf R.R., 514 So.2d 1283 (Ala.1987), in deciding whether to deny a motion to set aside a default judgment. Kirtland, 524 So.2d at 605. The broad discretionary authority given to the trial court in making that decision should not be exercised without considering the following factors: "1) whether the defendant has a meritorious defense; 2) whether the plaintiff will be unfairly prejudiced if the default judgment is set aside; and 3) whether the default judgment was a result of the defendant's own culpable conduct." 524 So.2d at 605.
As previously noted, Bailey asserted various claims against Cope, Zeller, and Consertech, alleging that I & E was their alter ego. Specifically, Bailey claimed that Cope and Zeller had fraudulently used I & E to create cash flow for Consertech, while avoiding the payment of I & E's debts and liabilities. Zeller asserts no defense relating to the alter ego theory. Instead, he relies on statements contained in Cope's affidavit regarding misrepresentations allegedly made by Bailey to Cope. Although Zeller admits that he has no personal knowledge regarding these alleged misrepresentations, he nevertheless asserts that these statements in Cope's affidavit provide a meritorious defense to the underlying claims. Bailey, on the other hand, argues that Zeller cannot rely on hearsay statements as a defense and that Zeller is collaterally estopped from relitigating the claims on which a default judgment against Cope has been entered.
Suffice it to say, even assuming that hearsay statements would be sufficient to meet the meritorious-defense requirement for setting aside a default judgment and further assuming that Zeller, under an alter ego theory, stands in Cope's shoes and can assert defenses available to Cope, Zeller has cited no authority, as required by Rule 28, Ala. R.App. P., to rebut Bailey's contention that Zeller is precluded from relitigating Cope's liability in view of the default judgment that has been entered against Cope. For purposes of this appeal we accept Bailey's contention that Zeller does not have a meritorious defense.
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