Opinion
CIVIL ACTION NO. 03-5971
February 23, 2004
ORDER-MEMORANDUM
AND NOW, this 23rd day of February, 2004, upon consideration of Defendants' "Motion to Set Aside the Entry of Default Pursuant to Fed.R.Civ.P. 55(c) and to Vacate the Default Judgment Pursuant to Fed.R.Civ.P. 60(b)" (Docket No. 15), Plaintiff's response thereto, and all related submissions, IT IS HEREBY ORDERED that the Motion is GRANTED. IT IS FURTHER ORDERED that the entry of default against Defendant William D. Spector, entered on the docket on December 24, 2003, and the entry of default against Defendant American Wrecking Corporation of N.J., entered on the docket on January 12, 2004, shall be SET ASIDE and the default judgment against both Defendants (Docket No. 12) is VACATED.
I. BACKGROUND
This case arises from a contract dispute between Plaintiff and Defendants. The Complaint alleges that Defendant American Wrecking Corporation of N.J. ("American Wrecking") was a general contractor for a project in Seaford, Delaware and contracted with Plaintiff to perform as a subcontractor. (Compl. ¶ 7.) On January 4, 2002, American Wrecking executed a Subcontract Agreement with Plaintiff whereby Plaintiff "agreed to supply materials and services as a subcontractor to American Wrecking on a time and materials basis." (Compl. ¶ 8.) Defendant William D. Spector ("Spector") entered into a Guaranty Agreement on January 4, 2002, pursuant to which he agreed to act as a guarantor of all payments due and owing by American Wrecking to Plaintiff. (Compl. ¶ 10.) The Complaint further alleges that there is a principal balance due and owing to Plaintiff by American Wrecking in the amount of $292,610.77 together with interest in the amount of $10,639.92 through March 6, 2003, interest in the amount of $96.20 per day accruing from March 6, 2003, and costs and attorneys fees pursuant to the Subcontract Agreement in the amount of $94,081.67. (Compl. ¶ 20.) The Complaint asserts one cause of action against American Wrecking for breach of contract in the amount of $387,332.36, plus per diem interest of $96.20 from March 6, 2003 (Count I) and one cause of action for breach of the Guaranty Agreement against Spector in the amount of $387,332.36, plus per diem interest of $96.20 from March 6, 2003 (Count II). (Compl. ¶¶ 16, 20, 23, 24.)
The Complaint was filed on October 27, 2003. Defendant Spector was served by certified mail on November 6, 2003. Defendant American Wrecking was served by certified mail (date unknown), and personally served on December 20, 2003. Defendant admits that American Wrecking's answer to the Complaint was due to be filed on January 9, 2004. (Defs.' Mem. at 1.) Following service of the Complaint, counsel for Defendants spoke with counsel for Plaintiff several times, beginning on November 14, 2003. (Borosko Aff. ¶¶ 4-6, Kahn Aff. ¶ 4.) Defendants' counsel requested an extension of time of thirty (30) days to respond to the Complaint so that the parties could attempt to settle their dispute. (Borosko Aff. ¶¶ 6-9.) Although, Plaintiff's counsel agreed to execute a stipulation to that effect if one was prepared by counsel for Defendants, such stipulation was never provided to Plaintiff's counsel. (Kahn Aff. ¶¶ 4-5, 7.) Counsel spoke on at least one additional occasion about settlement. (Borosko Aff. ¶ 12, Kahn Aff. ¶¶ 6-9.) In the interim, Defendants did not answer the Complaint.
Plaintiff filed a Request to Enter Default against Defendants on December 24, 2003. Plaintiff's counsel did not send a copy of this Request to counsel for Defendants, who did not learn that Plaintiff had requested a default until January 5, 2004. (Borosko Aff. ¶¶ 15-16.) Defendant Spector was on vacation between December 26, 2003 and January 2, 2004 and did not learn that the default had been entered until he returned to his office on January 5, 2004. (Spector Aff. ¶¶ 15-17.) He immediately sent a copy of the papers to his attorney. (Spector Aff. ¶ 18.) Counsel for Defendants contacted Plaintiff's counsel on January 5, 2004 concerning the default. (Borosko Aff. ¶ 17.) A default was entered on the docket against Defendant Spector on December 24, 2003 and against Defendant American Wrecking on January 12, 2004. On January 12, 2004, default judgment was entered by the Clerk of Court, pursuant to Federal Rule of Civil Procedure 55(b)(1), in favor of Plaintiff and against both Defendants in the amount of $427,346.76. Defendants filed the instant Motion on January 20, 2004.
II. LEGAL STANDARD
Defendants have moved to set aside the entry of default and to vacate the default judgment pursuant to Federal Rules of Civil Procedure 55(c) and 60(b). Rule 55(c) provides that "for good cause shown the court may set aside an entry of default and, if a judgment by default has been entered, may likewise set it aside in accordance with Rule 60(b)." Fed.R.Civ.P. 55(c). Rule 60(b) states that "on motion and upon such terms as are just, the court may relieve a party or a party's legal representative from a final judgment, order, or proceeding for the following reasons: (1) mistake, inadvertence, surprise, or excusable neglect. . . ." Fed.R.Civ.P. 60(b)(1). "The Court has broad discretion in deciding whether to set aside a default judgment." Natasha C. v. Visionquest, Ltd., No. Civ. A. 03-1903, 2003 WL 21999591, at *1 (E.D. Pa. Aug. 25, 2003) (citing Momah, M.D. v. Albert Einstein Med. Ctr., 161 F.R.D. 304, 307 (E.D. Pa. 1995)). "Default is not favored and all doubt should be resolved in favor of setting aside default and reaching a decision on the merits." 99 Cents Stores v. Dynamic Distr., No. Civ. A. 97-3869, 1998 WL 24338, at *4 (E.D. Pa. Jan. 22, 1998). Rule 55(c) motions, therefore, are generally construed in favor of the movant. American Telecom, Inc. v. First Nat'l Communications Network, Inc., No. Civ. A. 99-3795, 2000 WL 714685, at *1 (E.D. Pa. June 2, 2000).
The United States Court of Appeals for the Third Circuit has articulated four factors which the district court must consider when deciding whether to set aside a default judgment: "(1) whether lifting the default would prejudice the plaintiff; (2) whether the defendant has a prima facie meritorious defense; (3) whether the defaulting defendant's conduct is excusable or culpable; and (4) the effectiveness of alternative sanctions." Emcasco. Ins. Co. v. Sambrick, 834 F.2d 71, 73 (3d Cir. 1987) (citations omitted). The Third Circuit has noted that "a standard of `liberality,' rather than `strictness' should be applied in acting on a motion to set aside a default judgment, and that `(a)ny doubt should be resolved in favor of the petition to set aside the judgment so that cases may be decided on their merits.'" Medunic v. Lederer, 533 F.2d 891, 893-94 (3d Cir. 1976) (quoting Tozer v. Charles A. Krause Milling Co., 189 F.2d 242, 245-46 (3d Cir. 1951)). Furthermore, "matters involving large sums should not be determined by default judgments if it can reasonably be avoided." Tozer, 189 F.2d at 245.
III. DISCUSSION
A. Meritorious Defense
The threshold factor is whether the defendant has alleged facts which could constitute a meritorious defense to the plaintiff's cause of action. Resolution Trust Corp. v. Forest Grove, Inc., 33 F.3d 284, 288 (3d Cir. 1994). To assess this factor, the court may examine the defendant's answer, or if none was filed, the allegations in its motion to vacate the default judgment or set aside entry of default. Emcasco, 834 F.2d at 73; Kauffman v. Cal Spas, 37 F. Supp.2d 402, 405 n. 1 (E.D. Pa. 1999). It is not enough for Defendant to simply deny the factual allegations in Plaintiff's complaint. Rather, Defendant must allege facts which, if established, would enable Defendant to prevail in the action.United States v. $55,518.05 in U.S. Currency, 728 F.2d 192, 196 (3d Cir. 1984).
Defendants assert that they have a meritorious defense to the Complaint. They contend that the Subcontract Agreement in question is a lump sum contract, not a time and materials contract, and that the amount sought by Plaintiff in this proceeding is in excess of the amount agreed to by the parties in the lump sum contract. (Defs.' Mem. at 8, Spector Aff. ¶¶ 3-8.) Defendants also admit that work was done by Plaintiff in addition to that specified in the Subcontract Agreement, but contend that Plaintiff was paid for that work. (Spector Supp. Aff. ¶ 8). Defendants further maintain that Plaintiff was paid everything owed under the lump sum contract. (Id. ¶¶ 8-9.) The Court finds that the defense asserted by Defendants, that Plaintiff was paid all sums owed under the Subcontract Agreement, is a meritorious defense which, if proven, would allow Defendants to prevail in the action.
B. Prejudice
The second consideration is whether prejudice would inure to Plaintiff should relief from the default or judgment be granted. Delay in realizing satisfaction on a claim rarely constitutes prejudice sufficient to prevent relief. Feliciano v. Reliant Tooling Co. Ltd., 691 F.2d 653, 656-57 (3d Cir. 1982). Nor does the fact that Plaintiff will be required to further litigate the action on the merits constitute prejudice. Choice Hotels Int'l, Inc. v. Pennave Assoc., Inc., 192 F.R.D. 171, 174 (E.D. Pa. 2000). Rather, Plaintiff must establish that relief would hinder its ability to pursue its claims through loss of evidence, increased potential for fraud, or substantial reliance on the default or judgment.Feliciano, 691 F.2d at 657. Furthermore, the court may exercise its power under Rule 60(b) to impose specific terms and conditions upon reopening of a judgment or default in order to cure prejudice to the Plaintiff.Id. at 657.
Plaintiff does not assert that it would suffer any prejudice if Defendants' Motion were granted. It does, however, express a concern that any delay would allow Defendants to dissipate assets from American Wrecking. Plaintiffs have not, however, alleged any facts which could establish either that such dissipation has already occurred or even that such dissipation is likely to occur. The Court finds, accordingly, that Plaintiff would not be prejudiced if Defendants' Motion were granted.
C. Culpable Conduct
The third factor is the culpability of the defendant's conduct. Default is appropriate where the defendant displays flagrant bad faith or callous disregard of the rules. Emcasco, 834 F.2d at 75. Even an unexcused failure to file an answer to a complaint generally does not constitute flagrant bad faith or justify the "extreme" sanction of refusal to vacate entry of default. Id. Where the defendant requests that a default judgment be set aside for mistake or excusable neglect under rule 60(b), the court must take into account all relevant circumstances surrounding defendant's conduct. Scott v. U.S. EPA, 185 F.R.D. 202, 206 (E.D. Pa. 1999) (quoting Pioneer Inv. Serv. Co. v. Brunswick Assoc., Ltd., 507 U.S. 380, 395 (1993)). Such circumstances include: (1) the danger of prejudice to the non-movant; (2) the length of the delay and its potential impact on judicial proceedings; (3) the reason for the delay, including whether it was within reasonable control of the movant; and (4) whether the movant acted in good faith. Id. Although neither inadvertence nor ignorance or mistakes related to the rules constitute excusable neglect, the court may still vacate default where the evidence does not indicate flagrant bad faith or callous disregard. Brokerage Concepts, Inc. v. Nelson Med. Group, No. Civ. A. 99-5214, 2000 WL 283849, at *3 (E.D. Pa. Mar. 15, 2000).
Plaintiff argues that Defendants' failure to answer the Complaint was an intentional attempt to further delay Defendants' payment of their obligations to Plaintiff. (Pl.'s Mem. at 6-7.) However, Plaintiff has not presented any evidence that Defendants' failure to timely answer the Complaint was the result of flagrant bad faith or callous disregard of the rules as opposed to misunderstanding or mere negligence. See Emcasco, 834 F.2d at 75. The Court finds, according to the facts presented by the parties, that Defendants' conduct was not culpable.
D. Alternative Sanctions
Courts issue alternative sanctions in cases where they are troubled by the behavior of the party seeking to set aside the default. American Telecom, 2000 WL 714685, at *8. Punitive sanctions, however, are inappropriate absent evidence of bad faith or willful misconduct, or where the defendant sets forth a meritorious defense. Id.; see also Brokerage Concepts, 2000 WL 283849, at *4. Plaintiff has not requested the imposition of alternative sanctions in this proceeding. The Court does not find that Defendants have acted in bad faith or that they have exhibited willful misconduct. Consequently, the Court finds that the imposition of alternative sanctions is not appropriate in this matter.
In conclusion, the Court finds that all four factors favor setting aside the defaults entered in this case and vacating the default judgment entered against Defendants. Defendants' Motion is, therefore, granted.