Summary
finding that in order to show prejudice, "Plaintiffs must establish that relief would hinder their ability to pursue their claims through loss of evidence, increased potential for fraud, or substantial reliance on the default or judgment."
Summary of this case from Johnson v. Berke Young International, LLCOpinion
Civil Action No. 03-6032.
March 3, 2004
ORDER — MEMORANDUM
AND NOW, this 3rd day of March, 2004, upon consideration of Defendants' "Motion to Vacate and Open the Entry of Default" (Docket No. 8) and Plaintiffs' response thereto, IT IS HEREBY ORDERED that the Motion is GRANTED. IT IS FURTHER ORDERED that the entry of default against Defendant OneBeacon Insurance Company, entered on the docket on January 15, 2004, shall be VACATED AND OPENED.
I. BACKGROUND
Plaintiffs have brought this action seeking a declaration that coverage is owed to the Scully Company and Village Green Associates, L.P., a/k/a Village Green Apartments (collectively "Scully"), under a commercial general liability policy and an umbrella policy issued to Coin Automated Laundry Equipment, Inc. ("CALECO") by OneBeacon Insurance Group ("OneBeacon"), for claims arising from an explosion in building A of the Village Green Apartments on June 16, 2001. (Compl. ¶ 1.) The Complaint alleges the following facts. Scully had entered into an agreement with CALECO on February 2, 2001, whereby CALECO was provided space in the Village Green Apartments in which to install and maintain coin operated washers, dryers and related equipment. (Id. ¶ 9.) Their agreement required CALECO to obtain liability insurance naming Scully as an additional insured. (Id. ¶ 10.) CALECO obtained a comprehensive general liability policy from OneBeacon having a policy period of July 1, 2000 to July 1, 2001, with limits of liability of $1,000,000 per occurrence (the "primary policy"). (Id. ¶ 11.) The primary policy had an additional insured endorsement extending coverage to any organization that CALECO "promised would be added as an additional insured for claims arising out of CALECO's ongoing operations." (Id. ¶ 12.) OneBeacon also issued an umbrella policy to CALECO having a policy period of July 1, 2000 to July 1, 2001, having limits of liability of $9,000,000 per occurrence (the "umbrella policy"). (Id. ¶ 14.) The umbrella policy provides excess coverage and includes as insureds organizations for which "CALECO was obligated by contract to provide additional insured status for claims arising out of CALECO's operations." (Id. ¶ 15.)
On June 16, 2001, there was an explosion in building A of the Village Green Apartments that was caused when flood waters entered the laundry room leased to CALECO, lifted the gas dryer off the floor, and broke the gas pipe. (Id. ¶ 19.) Scully and CALECO are defendants in three suits brought in the Court of Common Pleas of Philadelphia County arising out of this explosion. (Id. ¶¶ 20-22.) On June 28, 2001, Scully demanded that OneBeacon defend and indemnify it in these Common Pleas Court actions as an additional insured under the policies issued to CALECO. (Id. ¶ 24.) On October 22, 2001, OneBeacon denied coverage on the basis that the accident did not arise out of CALECO's operations or equipment. (Id. ¶ 25.) On January 15, 2002, Scully tendered its defense and indemnification as an additional insured under the OneBeacon policies to counsel for CALECO. (Id. ¶ 26.) Caleco's counsel reaffirmed OneBeacon's denial on July 22, 2002. (Id. ¶ 27.)
Scully seeks a declaration that it is an additional insured under the primary and umbrella policies and that it is entitled to coverage in the form of a defense and indemnity under these polices for the claims asserted in the Common Pleas Court actions. (Id. ¶ 29.) Scully also seeks damages for OneBeacon's breach of the insurance contract and damages for OneBeacon's bad faith. (Id.)
The Complaint was filed on October 31, 2003. OneBeacon was personally served on December 16, 2003. OneBeacon failed to timely answer or otherwise move in response to the Complaint. The Clerk entered the default on the docket against OneBeacon on January 15, 2004. On January 21, 2004, Plaintiffs moved for the entry of Judgment of Default against OneBeacon. OneBeacon filed the instant Motion on January 28, 2004. OneBeacon filed an Answer to the Complaint on January 30, 2004.
II. LEGAL STANDARD
OneBeacon has moved to set aside the entry of default pursuant to Federal Rule of Civil Procedure 55(c). Rule 55(c) provides that "for good cause shown the court may set aside an entry of default." Fed.R.Civ.P. 55(c). "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: "(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."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)).
III. DISCUSSION
A. Meritorious Defense
The threshold factor is whether the OneBeacon 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 OneBeacon to simply deny the factual allegations in Plaintiff's complaint. Rather, OneBeacon must allege facts which, if established, would enable it to prevail in the action.United States v. $55,518.05 in U.S. Currency, 728 F.2d 192, 196 (3d Cir. 1984).
OneBeacon asserts that it has a meritorious defense to the Complaint. It contends that Scully's claim that it is an additional insured is barred or limited by the additional insured endorsement in th primary policy. (Def.'s Mot. ¶ 40, Ans. at 6.) OneBeacon maintains that the additional insured endorsement limits additional insured status to "liability arising out of your ongoing operations performed for that insured." (Ans. at 6.) OneBeacon claims that Scully is not an additional insured with respect to the Common Pleas Court actions because the rigid steel gas pipe that broke and caused the explosion was installed, owned and maintained by Scully; Scully was responsible for providing the natural gas that powered the gas dryer; the dryer at issue was not operating at the time of the loss; and there were no CALECO employees on site at the time of the loss. (Id. at 6-7.) OneBeacon further asserts that Plaintiffs' claims are barred or limited by the other insurance clauses of the primary and umbrella policies. (Id. at 8-9.) The Court finds that the defenses asserted by OneBeacon, that Scully is not an additional insured under the OneBeacon insurance policies, and that Plaintiffs' claims are barred by the other insurance provisions of the OneBeacon insurance policies, are meritorious defenses which, if proven, would allow OneBeacon to prevail in this action.
B. Prejudice
The second consideration is whether prejudice would inure to Plaintiffs should relief from the default be granted. Emcasco, 834 F.2d at 73. Plaintiffs argue that they will suffer prejudice from any additional delay in resolving this lawsuit in their favor because the limits of liability of the OneBeacon insurance policies may be exhausted by the time OneBeacon is caused to defend and indemnify Scully in the Common Pleas Court actions. (Pls.' Mem. at 25-26.) 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 Plaintiffs 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, Plaintiffs must establish that relief would hinder their ability to pursue their claims through loss of evidence, increased potential for fraud, or substantial reliance on the default or judgment. Feliciano, 691 F.2d at 657. Plaintiffs have not alleged that vacating the entry of default would hinder their ability to pursue their claims through loss of evidence, increased potential for fraud, or substantial reliance on the default. Plaintiffs also have not alleged any facts which could establish that the policy limits of the OneBeacon policies would be exhausted prior to the conclusion of this suit. The Court finds, accordingly, that Plaintiffs would not be prejudiced if OneBeacon's Motion were granted.
C. Culpable Conduct
The third factor is the culpability of OneBeacon'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. 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).
OneBeacon argues that its failure to timely answer the Complaint was caused by "an organizational mishap," due, in part, to Plaintiff's failure to comply with the provisions of Federal Rule of Civil Procedure 4 in serving the Complaint. (Def.'s Mot. ¶¶ 45-49.) Plaintiffs contend that OneBeacon's failure to answer the Complaint was an intentional attempt to further delay coverage of Scully as an additional insured under the terms of the OneBeacon policies and to delay assumption of Scully's defense in the Common Pleas Court actions. (Pl.'s Mem. at 20-24.) However, Plaintiffs have not presented any evidence that OneBeacon's 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 OneBeacons' 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. Plaintiffs have not requested the imposition of alternative sanctions in this proceeding. The Court does not find that OneBeacon has acted in bad faith or that it has 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 vacating and opening the default entered in this case. OneBeacon's Motion is, therefore, granted.