Opinion
Civil Action No. 03-839
October 27, 2003
MAGISTRATE JUDGE'S REPORT AND RECOMMENDATION
I. RECOMMENDATION
For the reasons stated below, it is recommended that Golden's Motion for Relief from Default Judgment (Doc. 11) be granted. It is also recommended that Golden's Motion for Leave to File its Answer and Counterclaim Instanter (Doc. 13) be granted.
II. REPORT
BACKGROUND
1. Procedural and Factual History
The Plaintiff Dick Corporation ("Dick") commenced this action against Defendants W. Golden Construction, Inc. ("Golden") and RLI Insurance Co., Inc. ("RLI") in the Court of Common Pleas of Allegeny County on May 5, 2003. See Notice of Removal of Civil Action (Doc. 1; hereinafter cited as "Notice of Removal") ¶ 1.
The Complaint essentially involves a construction contract in which Dick served as general contractor to build a Life Sciences Building for The West Virginia University. See Compl. (attached as Ex. 1 to Notice of Removal) ¶ 5. In connection with the project, Dick subcontracted all "exterior site concrete work" to Golden — including demolition and removal of certain site concrete and construction of various structures — for a lump sum of $436,900. See id. ¶¶ 6, 7. Pursuant to the subcontract, Golden was required to obtain a performance bond and a payment bond (referred to collectively as "the Bonds"), both of which it subsequently procured from RLI. See id. ¶ 11.
According to Dick, Golden inadequately performed its work under the subcontract, and on May 8, 2002, Dick sent notice of default to Golden and asserted claims against RLI under the Bonds. See generally id. ¶¶ 14-24. After RLI allegedly delayed in investigating Dick's claims, Dick proceeded to complete the work itself. See generally id. ¶¶ 26-33. It now seeks to recover the costs of completing the project and other damages resulting from Golden's failure to properly perform under the subcontract. See. id. ¶ 46.
The Complaint specifically asserts two breach of contract claims against Golden: 1) breach of the subcontract, based generally on Golden's alleged failure to fulfill its obligations under the agreement, see Count I; and 2) breach of contract, based on Golden's alleged failure to pay Dick for its completion of the pre-abandonment work, see Count II. In addition, it asserts two claims against RLI: 1) breach of the Bonds, see Count III; and 2) violations of the West Virginia Unfair Trade Practices statute, W. Va. Code § 33-11-4, see Count V. Finally, it asserts the breach of an implied contract against both defendants. See Count IV.
On June 5, 2003, RLI filed a Notice of Removal ("the Notice") pursuant to 28 U.S.C. § 1441 and 1446, based on complete diversity of citizenship. See generally Notice of Removal. Two documents were attached to the Notice: a Consent to Removal ("Golden's Consent"), signed by Gregory Fedczak ("Fedczak"), Golden's president, see Consent to Removal (attached as Ex. 2 to Notice of Removal); and a Stipulation to Extend Time, providing that the defendants had until June 20, 2003 to file any responsive pleadings, see Stipulation to Extend Time (attached as Ex. 3 to Notice of Removal; hereinafter cited as "Stipulation").
On June 23, 2003, RLI filed an Answer and Crossclaim (Doc. 4). Based on Golden's failure to respond, Dick filed and obtained an entry of default against Golden on July 7, 2003. See Reg. to Enter Default (Doc. 8). On July 8, 2003, Dick filed and obtained a default judgment in the amount of $764,309.00 plus interests and costs. See Reg. for Default J. (Doc. 9).
On July 16, 2003 — eight days after the default judgment was entered and twenty-six days after answers were due — Golden filed a Motion for Relief from Default Judgment ("Golden's Motion for Relief"). See Mot. for Relief from Default J. (Doc. 11; hereinafter cited as "Mot. for Relief"). Included in Golden's Motion is a Memorandum in Support, see Mem. in Supp. (attached as 3-9 to Mot. for Relief; hereinafter cited as "Golden's Mem."), and an affidavit by Fedczak, see Aff. of Gregory Fedczak (attached as Ex. 1 to Mot. for Relief).
On the same day, Golden filed a Motion for Leave to File Answer with Counterclaim Instanter ("Golden's Motion for Leave"). See Def. W. Golden Constr., Inc.'s Mot. for Leave to File Answer with Countercl. Instanter (Doc. 13). Golden's Motion for Leave includes a proposed Answer to Plaintiff's Complaint and Counterclaim against Plaintiff. See Def. W. Golden Constr., Inc.'s Answer to Pl.'s Compl. and Countercl. against Pl. (attached as Ex. A to Mot. for Leave; proposed Answer hereinafter cited as "Answer"; proposed Counterclaim hereinafter cited as "Countcl.").
Pursuant to this court's order on July 18, 2003 (Doc. 16), responses to Golden's motions were due by August 1, 2003. Both Dick and RLI have filed timely memoranda supporting their respective positions on these motions. See Mem. in Opp. to W. Golden Constr., Inc.'s Mot. For Relief from Default J. (Doc. 20; hereinafter cited as "Dick's Mem."); RLI Ins. Co.'s Mem. in Supp. of Motion for Relief from Default J. (Doc. 21). Thus, Golden's motions are now ripe for adjudication.
2. Legal Standard
A court may set aside an entry of default "for good cause shown." Fed.R.Civ.P. 55(c). Where a judgment by default has already been entered, it may be set aside in accordance with Federal Rule of Civil Procedure 60(b) ("Rule 60(b)"). See Fed.R.Civ.P. 55(c). Rule 60(b) lists as possible grounds for relief: "mistake, inadvertance, surprise, or excusable neglect. . . ." Fed.R.Civ.P. 60(b). As a default judgment has already been entered, Rule 60(b) provides the appropriate analytical framework in this instance.
Although the court explicitly addresses the issue of setting aside the default judgment under the Rule 60(b) standard, this analysis also implicitly resolves the issue of whether to set aside the underlying entry of default. See Feliciano v. Reliant Tooling Co., 691 F.2d 653, 656 (3d Cir. 1982) ("[A]ny reasons sufficient to justify the vacation of a default judgment under Rule 60(b) will also justify relief from a default entry.") (citation omitted).
The determination of whether to set aside a default judgment under Rule 60(b) is not resolved by "a rigid formula or [a] per se rule," but is within the sound discretion of the court. See Zawadski de Bueno v. Bueno Castro, 822 F.2d 416, 419 (3d Cir. 1987) (citation omitted). In exercising that discretion, the court must consider: 1) whether the plaintiff would be prejudiced if the default is lifted; 2) whether the defendant has a prima facie meritorous defense; and 3) whether the defaulting defendant's conduct is excusable or culpable. See id. at 419-420 (citing other decisions from the United States Court of Appeals for the Third Circuit ("the Third Circuit")).
The undersigned recognizes that some courts have included a fourth element in this test — that is, "the effectiveness of alternative sanctions." See, e.g., Emcasco Ins. Co. v. Sambrick, 834 F.2d 71, 73 (3d Cir. 1987); Cassell v. Philadelphia Maintenance Co., 198 F.R.D. 67, 69 (E.D. Pa. 2000). Neither party has briefed this element, nor do the facts of this case warrant such sanctions; thus, sanctions will not be addresses in the analysis below.
In general, default judgments are highly disfavored because the "interests of justice are best served by reaching a decision on the merits." Natasha C. v. Visionquest, Ltd., 2003 WL 21999591 at *1 (E.D. Pa. Aug. 25, 2003) (citations omitted). The Third Circuit has thus required that in a "close case, doubts should be resolved in favor of setting aside the default and reaching the merits." Zawadski de Bueno, 822 F.2d at 420 (citations omitted). Accordingly, "motions to set aside default judgments are construed in favor of the movant." Natasha C., 2003 WL 21999591 at *1 (citations omitted). In addition, if a district court refuses to reopen a judgment by default, it must make explicit findings concerning the factors it considered in rendering its decision. See Emcasco Ins. Co. v. Sambrick, 834 F.2d 71, 74 (3d Cir. 1987).
This policy against default judgments is particularly strong in cases such as this, where the amount of the default judgment is significant. See, e.g., Frof, Inc. v. Harris, 695 F. Supp. 827, 831 (E.D. Pa. 1988) (noting specifically that "matters involving large sums should not be determined by default if it can be reasonably avoided") (citations omitted). In Frof, the court found that $43,465.83 was a "considerable [amount] and [concluded that] its disposition should not be determined by a default judgment." See id. Here, the amount at issue is $762,309.00, nearly 18 times the amount involved in Frof.
The court does not reach the parties' arguments under Federal Rule of Civil Procedure 55(b)(2) ("Rule 55(b)(2)") — specifically, whether the service was improper because Golden made an "appearance by implication" and was thus entitled to notice and a three-day waiting period before the entry of default judgment. See, e.g., Golden's Mem. at 4-5; Dick's Mem. at 3-6. First, Golden has failed to cite binding precedent that clearly demonstrates that its Consent to Removal ("Consent") constitutes an implied appearance. See Golden's Mem. at 4-5. Second, to the extent that its Consent can be construed as an appearance, the failure to give notice under Rule 55(b)(2) does not in itself require that the court vacate a default judgment. See, e.g., Natasha C. v. Visionquest, Ltd., 2003 WL 21999591 at * 2 (E.D. Pa. Aug. 25, 2003) (stating "[the] failure to give notice [under Rule 55(b)(2)] does not mandate that this Court vacate the default judgment . . . [i]nstead, the decision to set aside the default judgment remains a matter of discretion pursuant to [Federal Rules of Civil Procedure] 55(c) and 60(b)") (citations to decisions by district courts in Pennsylvania omitted). Thus, the undersigned will rely solely on the analytical framework set out above. See supra p. 5-6.
1. Meritorious Defense
The threshold issue in determining whether to set aside a default judgment is the existence of a meritorious defense. See Interior Finish Contractors Ass'n of Delaware Valley v. Drywall Finishers Local Union No. 1955, 625 F. Supp. 1233, 1239 (E.D. Pa. 1985). A meritorious defense exists when the "allegations [in the] defendant's answer, if established at trial, would constitute a complete defense to the action." Natasha C. v. Visionquest, Ltd., 2003 WL 21999591 at *4 (E.D. Pa. Aug. 25, 2003) (quoting United States v. $55,518.05 in U.S. Currency, 728 F.2d 192, 195 (3d Cir. 1984)). The defendant must allege specific facts — something beyond a general denial — and cannot be "couched solely in conclusory language."Mumps Audiofax, Inc. v. McBride Assocs., Inc., 2001 WL 1450616 at *1 (E.D. Pa. Nov. 13, 2001) (quoting $55,518.05 in U.S. Currency, 728 F.2d at 195-96). The defendant, however, need not "prove beyond a shadow of a doubt that [it] will win at trial, but merely show that [it has] a defense to the action which at least has merit on its face." Dizzley v. Friends Rehabilitation Program, Inc., 202 F.R.D. 146, 148 (E.D. Pa. 2001) (quoting Emcasco Ins. Co. v. Sambrick, 834 F.2d 71, 74 (3d Cir. 1987)); see also Natasha C. v. Visionquest, Ltd., 2003 WL 21999591 at *4 (quoting same).
Here, Dick claims that Golden has failed to plead specific facts sufficient to allege a complete defense to the Complaint. See generally Dick's Mem. at 6-8. Instead, Golden has purportedly relied solely on "repeated perfunctory allegations and general denials without the support of any specific underlying facts and which provide no factual basis on which a meritorious defense can be inferred." See id. at 7.
To be sure, the list of general denials cited by the Plaintiff would by themselves be insufficient to show the existence of a meritorious defense. See id. at 7, n. 4. Nevertheless, after considering the factual allegations contained in the Defendant's Counterclaim — which is explicitly incorporated by reference into its Answer, see Answer ¶ 29 — the undersigned finds that Defendant has sufficiently averred facts that, if proven, would constitute a valid defense to the Complaint.
According to the Counterclaim, the Plaintiff: 1) failed to timely authorize the Defendant's commencement of work at the scheduled time, causing delays in the Defendant's work schedule, see Countercl. ¶ 4; 2) accelerated the Defendant's performance, imposing "unreasonable and unrealistic deadlines" without compensation, see id. ¶ 4; 3) refused to compensate the Defendant after unforeseen site conditions were discovered that required additional work outside the contract, see id. ¶ 5; 4) improperly interfered with the Defendant's suppliers, making it impossible for the Defendant to obtain supplies and materials needed to complete its performance, see id. ¶ 6; and 5) refused to negotiate with the Defendant in good faith to reach a mutually acceptable plan to allow both parties to complete its performance, see id. ¶ 7. The Defendant further alleges that Plaintiff's improper termination of the contract has affected its ability to obtain surety bonds, rendering it impossible to continue in its line of work. See id. ¶ 9.
If proven, these facts could support, at least, several of the Defendant's affirmative defenses — e.g. excuse ( see Fourth Defense, Answer ¶ 24), waiver and release of claims ( see Fifth Defense, Answer ¶ 25), breach of the implied duty of good faith and fair dealing ( see Eighth Defense, Answer ¶ 28), or a complete off-set of all of the Plaintiff's alleged damages due to the Plaintiff's own breach ( see Ninth Defense, Answer at ¶ 29).
The undersigned therefore finds that the Defendant has met its burden of showing possible defenses that have "at least has merit on [their] face." Dizzley, 202 F.R.D. at 148 (citation omitted).
2. Prejudice
Prejudice arises when "[the] plaintiff's claim would be materially impaired because of the loss of evidence, an increased potential for fraud or collusion, substantial reliance on the entry of default, or other substantial factors." Natasha C. v. Visionquest, Ltd., 2003 WL 21999591 at *3 (E.D. Pa. Aug. 25, 2003) (quotingDizzley v. Friends Rehabilitation Program, Inc., 202 F.R.D. 146, 147-48 (E.D. Pa. 2001)).
Dick argues that setting aside the default judgment causes prejudice in two regards. First, the default judgment "may obviate the need to litigate Dick's affirmative claims against Golden and/or RLI in this action at all, or at least may substantially reduce the issues. . . ." Dick's Mem. at 8. Thus, Dick claims that setting aside the judgment would substantially impact its right to recover. See id. Second, setting aside the default judgment would delay the conclusion of the litigation. See id.
Both arguments have been rejected by district courts in Pennsylvania. See, e.g., Cassell v. Philadelphia Maintenance Co., 198 F.R.D. 67, 69 (E.D. Pa. 2000) (stating "the fact that a plaintiff will have to litigate an action on the merits rather than proceed by default does not constitute prejudice") (quoting Choice Hotels Int'l, Inc. v. Pennave Assocs., Inc., 192 F.R.D. 171, 174 (E.D. Pa. 2000); see also, e.g., Natasha C. v. Visionquest, Ltd., 2003 WL 21999591 at *3 (stating "mere delay in satisfying a claim rarely establishes the degree of prejudice necessary" to prevent the opening of a default judgment") (citingFeliciano v. Reliant Tooling Co., 691 F.2d 653, 656-57 (3d Cir. 1982) and Cassell, 198 F.R.D. at 69.).
The Plaintiff has failed to show the loss of evidence, increased potential for fraud or collusion, or substantial reliance on the default judgment; therefore, there is no prejudice that precludes setting aside the default judgment.
3. Culpable Conduct
The third factor to consider is whether Golden failure to timely file responsive pleadings was the result of culpable conduct on the part of Golden. "Culpable conduct means [dilatory behavior] taken willfully or in bad faith." Natasha C. v. Visionquest, Ltd., 2003 WL 21999591 at *5 (E.D. Pa. Aug. 25, 2003) (quoting Gross v. Stereo Component Sys., Inc., 700 F.2d 120, 123-24 (3d Cir. 1983)). As a threshold matter, "more than mere negligence must be demonstrated." E.I. DuPont De Nemours Co. v. The New Press, Inc., 1998 WL 159050 at *4 (E.D. Pa. March 16, 1998) (quoting Hritz v. Woma Corp., 732 F.2d 1178, 1183 (3d Cir. 1984); see also Cassell v. Philadelphia Maintenance Co., 198 F.R.D. 67, 69 (E.D. Pa. 2000).
Golden claims its failure to respond in a timely manner was based on two factors. First, operating under the "reasonable" belief that its interests would be represented by RLI's attorney, it did not seek out independent counsel. See Golden's Mem. at 3. Second, after becoming aware that RLI's counsel could not represent it, difficulties were encountered in obtaining alternate counsel. See id. Specifically, it alleges that it contacted attorney Dave Greenberg, who refused representation because he was retiring. See id. It then contacted attorney John Ross in Ohio, who subsequently referred the matter to Golden's current counsel, attorney Todd A. Harpst. See id. Golden allegedly did not meet with counsel to review this lawsuit until July 15, 2003, nearly a month after answers were due. See id.
Golden maintains that its difficulty in obtaining counsel justified its delayed response. See id. at 9. It relies on a decision by the United States District Court for the Eastern District of Pennsylvania inAmerican Telecom for the proposition that such difficulties, though potentially negligent, do not constitute bad faith. See id. at 9; Am. Telecom, Inc. v. First Nat'l Communications Network, Inc., 2000 WL 714685 (E.D. Pa. June 2, 2000).
Dick does not dispute the fact that Golden encountered difficulties in obtaining counsel; instead it claims that American Telecom is distinguishable. See Dick's Mem. at 9-10. Relying on decisions by district courts in Delaware and New York, it argues that neither "extreme difficulty" in finding an attorney nor the "mistaken but genuine belief that her interest would be represented and by counsel for her co-defendants" can be construed as excusable negligence. See id. at 10-11; see also United States v. A Single Story Double Wide Trailer, 727 F. Supp. 149 (D. Del. 1989) and United Bank of Kuwait, Plc., v. Enventure Energy Enhanced Oil Recover Assocs. — Charco Redono Butane, 755 F. Supp. 1195 (S.D.N.Y. 1989).
After carefully considering these arguments, the undersigned finds that Golden's conduct — while not condoned by the court — constitutes excusable neglect.
First, the court in American Telecom found that difficulty in obtaining counsel is, at least, a mitigating factor in determining culpable conduct. See Am. Telecom, Inc., 2000 WL 714685 at *4; see also E.I. DuPont De Nemours Co. v. The New Press., 1998 WL 159050 at *4 (finding defendant's conduct was not willful or in bad faith where defendant experienced difficulties in obtaining counsel); A Single Story Double Wide Trailer, 727 F. Supp. at 153-54 (stating "[e]xtreme difficulty in obtaining representation is a mitigating factor in the [culpability] analysis") (citations omitted). Viewing Golden's allegations in the most favorable light, the undersigned concludes that the its difficulty in obtaining counsel, paired with its initial confusion as to whether it needed to obtain counsel, weigh in favor of finding that its conduct was not willful or in bad faith.
The undersigned notes that Dick disputes the reasonableness of Golden's uncertainty in regard to Golden's need to seek independent counsel. See Dick's Mem. at 11. For the purposes of this Motion, however, the court must resolve all doubts in favor of Golden. See Dizzley v. Friends Rehabilitation Program, Inc., 202 F.R.D. 146, 148 (E.D. Pa. 2001) (citing Gross v. Stereo Component Sys., 700 F.2d 120, 122 (3d Cir. 1989)).
In addition, the court recognizes that Golden failed to contact Dick or attempt to get time extensions for filing a response, as the plaintiff had done in American Telecom. See Dick's Mem. at 9-10;American Telecom, Inc., 2000 WL 714685 at *4. Although this distinction is relevant, the undersigned does not believe American Telecom represents the outer limit of excusable neglect. See, e.g., Emcasco Ins. Co. v. Sambrick, 834 F.2d 71 (3d Cir. 1987), discussed below. Thus, Golden's failure to contact Dick is not in itself sufficient to make a finding of culpable conduct.
Second, Golden's promptness in responding to the default judgment further suggests a lack of culpability. Specifically, Golden's response falls within well within time frames set forth under the Federal Rules of Civil Procedure and relevant case law from the Third Circuit. See Fed.R.Civ.P. 60(b) (requiring that a motion to vacate default judgment be made not more that one year after the judgment was entered); see also Emcasco Ins. Co. v. Sambrick, 834 F.2d 71, 75, 76 (3d Cir. 1987) (setting aside a default judgment where defendant did not file an answer for more than six weeks after it was due, stating that while "nothing in the record suggests that this neglect was excusable . . . [in the absence of] `flagrant bad faith[,]' [the defendant's] delinquency did not warrant the `extreme' action of refusal to vacate the default judgment"). Here, Golden's Motion was filed eight days after the default judgment was entered and less than four weeks after answers were due pursuant to the parties' Stipulation to Extend Time. Compare Mot. for Relief (filed on July 16, 2003) with Reg. for Default J. (filed and entered July 8, 2003) and Stipulation (requiring answers to be filed by June 20, 2003). It follows under Rule 60(b) and Emcasco that Golden's timely response — where the record otherwise does not demonstrate any "flagrant bad faith" — again weighs in favor of setting aside the default judgment.
Accord also Frof, Inc. v. Harris, 695 F. Supp. 827, 831 (E.D. Pa. 1988) (finding that defendant's motion was timely and that negligence was excusable where the motion was filed nine months after entry of default).
Finally, recalling the court's "inherent power to ignore minor procedural defects because they should whenever practicable, reach the merits or a case," the undersigned again recognizes that any doubts as to culpability must be resolved in favor of Golden. See Dizzley v. Friends Rehabilitation Program, Inc., 202 F.R.D. 146, 147 (E.D. Pa. 2001) (citing Jorden v. Nat'l Guard Bureau, 877 F.2d 245, 251 (3d Cir. 1989). Because Golden has provided an adequate excuse in this instance, and because Dick has not shown any countervailing evidence of bad faith, the court finds that Golden's conduct does not rise to the level of culpable conduct. Accord Dizzley, 202 F.R.D. at 148 (stating "[t]he Court accepts [the defendant's] explanation as valid, especially because evidence of dilatory intent must appear independently in the record . . . even if [the plaintiff] had presented some, the Court would nonetheless be required to resolve all doubts in favor of the defaulting party") (internal citations omitted).
To the extent that this court's result differs from the results in the decisions cited by Dick — e.g.,United States v. A Single Story Double Wide Trailer, 727 F. Supp. 149 (D. Del. 1989); United Bank of Kuwait, Plc., v. Enventure Energy Enhanced Oil Recover Assocs. — Charco Redono Butane, 755 F. Supp. 1195 (S.D.N.Y. 1989) — they are not binding on this court and therefore it chooses not to follow them.
The undersigned concludes that Golden has shown the possibility of a meritorious defense; that there is no prejudice to Dick in setting aside the default judgment; and that Golden's conduct does not manifest the requisite level of culpability to prevent the default judgment from being set aside. It is therefore recommended that the District Court grant Golden's Motion and set aside the entry of default and default judgment against Golden.
Dick requests, in the alternative, that the court postpone deciding the merits of Golden's Motion until it is given the opportunity to depose a corporate representative from Golden in regard to whether Golden made an appearance and whether Golden's conduct was culpable. See Dick's Mem. at 12. This request is rejected. Accord Mumps Audiofax, Inc. v. McBride and Associates, Inc., 2001 WL 1450616 at *1 (E.D. Pa. Nov. 13, 2001) (denying plaintiff's request to conduct further discovery on issues relating to motion to set aside entry of default).
Having concluded that the default judgment should be set aside, it is also recommended that the District Court grant Golden's Motion for Leave to File Answer With Counterclaim Instanter, thus permitting it to file its Answer and Counterclaim.
III. CONCLUSION
For the reasons stated above, it is recommended that the District Court grant Golden's Motion for Relief from Default Judgment. In addition, it is recommended that it grant Golden's Leave to File its Answer and Counterclaim Instanter.
In accordance with the Magistrates Act, 28 U.S.C. § 636(b)(1)(B) and (C), and Rule 72.1.4(B) of the Local Rules for Magistrates, objections to this report and recommendation are due by November 12, 2003. Response to objections are due by November 24, 2003.