Opinion
Civil Action 6:19-cv-1510-DCC
03-24-2022
Therapia Staffing, LLC, Plaintiff, v. Quality Business Solutions, LLC f/k/a Quality Business Solutions, Inc., Defendant. Quality Business Solutions, LLC (f/k/a Quality Business Solutions, Inc.), Third Party Plaintiff, v. Sunz Insurance Solutions, LLC, and Wesco Insurance Company,Third Party Defendants.
REPORT OF MAGISTRATE JUDGE
Kevin F. McDonald United States Magistrate Judge
This matter is before the court on the motion to set aside default judgment of third party defendant Wesco Insurance Company ('Wesco”) (doc. 61). This motion was referred to the undersigned by the Honorable Donald C. Coggins, Jr., United States District Judge, by order entered February 28, 2022 (doc. 68), pursuant to 28 U.S.C. § 636(b)(1).
BACKGROUND
This case arises out of claims originally asserted by Therapia Staffing, LLC (“Therapia”) against Quality Business Solutions, LLC (f/k/a Quality Business Solutions, Inc.) (“QBS”) (doc. 1-1). Therapia retained QBS to handle the workers' compensation requirements for Therapia's employees (id.). In its amended complaint, Therapia asserted claims of misrepresentation and breach of contractual and fiduciary duties by QBS when QBS allegedly failed to apply proper workers' compensation codes to Therapia's employees and overcharged Therapia for workers' compensation insurance premiums (id.). On September 4, 2019, QBS filed a third party complaint against Wesco and Sunz Insurance Company (“Sunz”), alleging breach of contract and equitable indemnification for Therapia's claims (doc. 26). QBS specifically pointed to Wesco's compensation policy for the benefit of QBS's clients, including Therapia, which stated that “if your actual exposures are not properly described, we [Wesco] will assign proper classifications, rates, and premiums basis by endorsement to the policy” and that “[t]he premium shown . . . is an estimate. The final premium will be determined after this policy ends by using the actual, not estimated premium basis and the proper classifications and rates that lawfully apply to the business and work covered by this policy” (doc. 26-3 at 33-34). Upon the expiration of the Wesco policy, Sunz issued a similar policy to QBS and applied the classification codes assigned to Therapia's employees by Wesco (doc. 65 at 3).
On September 9, 2019, QBS served Wesco by delivering copies of the summons and complaint to the South Carolina Department of Insurance as required by South Carolina Code § 15-9-270 for service of process on insurance companies in South Carolina (doc. 28). The package Wesco received had over 400 pages of documents (doc. 26). The amended complaint was the first pleading within the package, instead of QBS's third party complaint against Wesco (doc. 61-1 at 16). Wesco was not listed in the case caption on the summons, but Wesco's name and address were listed directly below the caption next to the descriptor “third-party defendant's name and address” (doc. 65 at 1; doc. 26-1). Wesco admits it received the summons and complaint on September 13, 2019, and did not respond (doc. 66 at 11). On October 1,2019, QBS dismissed Sunz from the lawsuit without prejudice after determining the Sunz had relied on Wesco's classification code determinations (doc. 65 at 3; doc. 29). Wesco failed to file a responsive pleading or otherwise appear in this action (doc. 65 at 3). On November 4, 2019, QBS requested entry of default against Wesco, and the Clerk of Court entered default against Wesco that same day (docs. 33, 34).
On June 26, 2020, Therapia and QBS entered into a binding written confidential settlement agreement, and Therapia dismissed its claims against QBS with prejudice (doc. 47). On March 1, 2021, QBS filed a motion for default judgement against Wesco, and, on May 12, 2021, this motion was granted, awarding QBS $457,334.10, which amount included attorney's fees and costs (docs. 51,59). After the order was entered, QBS sought to serve a post-judgment demand letter on Wesco but was unable to do so until October 29, 2021, when QBS served Wesco's corporate registered agent in Delaware via certified mail (doc. 65 at 4). Wesco first learned of the default judgment when its agent received the order on November 3, 2021 (doc. 61-3, Patricia Nelson aff. ¶ 11)
On November 10, 2021, Wesco filed its motion to set aside default judgment that is now before the court for consideration (doc. 61). QBS filed a response in opposition on December 13, 2021 (doc. 65), and Wesco filed a reply on December 20, 2021 (doc. 66).
LEGAL STANDARD
Under Federal Rule of Civil Procedure 55(c), “[t]he court may set aside an entry of default for good cause, and it may set aside a final default judgment under Rule 60(b).” Fed.R.Civ.P. 55(c). Federal Rule of Civil Procedure 60(b) provides that “[o]n motion and just terms, the court may relieve a party or its legal representative from a final judgment, order, or proceeding for [six] reasons.” Id. 60(b) (listing the six grounds for relief in 60(b)(1)-(6)). The primary grounds for relief being “mistake, inadvertence, surprise, or excusable neglect” under Rule 60(b)(1). Augusta Fiberglass Coatings, Inc. v. Fodor Contracting Corp., 843 F.2d 808, 810 (4th Cir. 1988). “Where defaults and judgments thereon are at issue, Rule 60(b) must be read with due regard for Rule 55(c).” Id.
“[T]o obtain relief from a judgment under Rule 60(b), a moving party must show that his motion is timely, that he has a meritorious defense to the action, and that the opposing party would not be unfairly prejudiced by having the judgment set aside.” Park Corp. v. Lexington Ins. Co., 812 F.2d 894, 896 (4th Cir. 1987). “If the moving party makes such a showing, he must then satisfy one or more of the . . . grounds for relief set forth in Rule 60(b) in order to obtain relief from the judgment.” Id.
“[D]efault judgments pit the court's strong preference for deciding cases on the merits against countervailing interests in finality and in preserving the court's ability to control its docket.” Heyman v. M.L. Mktg. Co., 116 F.3d 91, 94 (4th Cir. 1997).
Nevertheless, “where default judgments are at issue, over the years [the Fourth Circuit] has taken an increasingly liberal view of Rule 60(b).” Augusta Fiberglass, 843 F.2d at 810.
DISCUSSION
Timeliness
“All motions under Rule 60(b) must be made within a reasonable time, and motions under Rule 60(b)(1) must be made within one year of the date of entry of the judgment from which relief is sought.” Park Corp., 812 F.2d at 896 (citing Fed.R.Civ.P. 60(c)).
QBS contends that Wesco's motion is untimely because Wesco was properly served with summons over two years ago. Rule 60(c), however, sets out that timeliness for motions under 60(b)(1), (2), and (3) is measured from the “date of entry of the judgment,” not the date of service or the date of entry of default. Fed.R.Civ.P. 60(c). In this case, Wesco's motion for relief from the default judgment was timely. Wesco filed its motion for relief under Rule 60(b) within six months of the date the default judgment was entered and within seven days of the date that it learned of the judgment. Indeed, QBS's almost sixmonth delay in serving notice of the order granting the motion for default judgment seemed to be the primary cause of Wesco's delayed response to the default judgment.
The court must also consider whether the motion was made within a reasonable time. Id. Whether a party has taken “reasonably prompt” action to respond to an entry of default judgment “must be gauged in light of the facts and circumstances of each occasion.” United States v. Moradi, 673 F.2d 725, 727 (4th Cir. 1982) (finding that the defaulting party moved within a reasonable time when counsel immediately filed for relief upon learning of the default judgment and that the district court erred when it denied a motion to set aside default judgment). Furthermore, “relief from a judgment of default should be granted where the defaulting party acts with reasonable diligence in seeking to set aside the default and tenders a meritorious defense.” Id.
Here, Wesco first learned of the default when its agent received the order on November 3, 2021 (doc. 61-3, Nelson aff. ¶ 11). Wesco's motion to set aside the default judgment was filed seven days after receiving this notice, which this court considers to be within a reasonable time. See Park Corp. 812 F.2d at 896 (finding that there was “no question” the motion for relief from the default judgment was timely when the movant “filed its motion for relief . . . . within five months of the date the default judgment was entered and within fifteen days of the date that it learned of the judgment”). Accordingly, Wesco's motion to set aside default judgment was made within a reasonable time.
Meritorious Defense
To establish a meritorious defense under Rule 60(b), “all that is necessary . . . is a presentation or proffer of evidence, which, if believed would permit either the court or the jury to find for the defaulting party.” Moradi, 673 F.2d at 727. Wesco raises defenses to the breach of contract and equitable indemnification claims supported by evidence in the form of affidavits (doc. 61-1 at 8-10; docs. 61-2 through 61-5). QBS contends that Wesco presents merely “self-serving conclusions” to support its motion to set aside the default judgment, which would be insufficient under Consolidated Masonry & Fireproofing Inc. v. Wagman Construction Corp (doc. 65 at 9 (citing 383 F.2d 249, 251-52 (4th Cir. 1967) (finding that the conclusory statements by the defendant that “did no more than state that plaintiff breached the contract . . . fell far short of providing the court with a satisfactory explanation of the merits of the defense”))). Consolidated Masonry, however, is factually distinguishable from this case; here, unlike the defaulting party in Consolidated Masonry, Wesco has presented evidence to support its contention that it did not breach its contract with QBS by underwriting the policy and accepting the codes. The indemnification claim is based on whether Wesco breached its contract with QBS. Thus, if the contract claim could be decided in Wesco's favor, then the indemnification claim could fail as well. This court finds that, at this stage, Wesco has provided sufficient evidence that, if believed, “either the court or a jury [could] find for the defaulting party.” Moradi, 673 F.2d at 727.
Prejudice to the Party Not in Default
While over two years have passed since QBS filed its third party complaint against Wesco,“delay in and of itself does not constitute prejudice to the opposing party.” Colleton Preparatory Acad., Inc. v. Hoover Universal, Inc., 616 F.3d 413, 418 (4th Cir. 2010). The Fourth Circuit has considered several factors in determining whether a nonmoving party is prejudiced, including whether “testimony was made unavailable by the delay [,] . . . records [were] made unavailable by the delay, [and presentation of] evidence for the plaintiff which could have been presented earlier . . . was prevented by the delay.” Lolatchy v. Arthur Murray, Inc., 816 F.2d 951, 952 (4th Cir. 1987).
QBS contends that vacating the default judgment rewards Wesco's delay and that it has already engaged in extensive discovery without “the benefit of any discovery from Wesco” (doc. 65 at 12-13). QBS further argues that it would be prejudiced by the court setting aside the default judgment after its settlement with Therapia, which cannot be “unwound” at this point (id. at 13). While the court recognizes that QBS has already entered into a settlement with Therapia regarding the parent action in this case, QBS as third party plaintiff would still be expected to carry the burden of proving Wesco's liability as a third party defendant regardless of the prior settlement. See Colleton, 616 F.3d at 419 (“[N]o cognizable prejudice inheres in requiring a plaintiff to prove a defendant's liability, a burden every plaintiff assumes in every civil action filed in every federal court.").
Furthermore, QBS's arguments against granting the motion to set aside the default judgment due to prejudice are shadowed by its own delay in moving for default judgment. As Wesco highlights in its reply brief, “QBS's delay in filing for default judgment, waiting a year and a half after entry of default to file a motion for default judgment,” not to mention its almost six-month delay in serving the order granting default judgment, indicates that QBS was in no hurry to dispose of the suit (doc. 66 at 8). Therefore, the undersigned finds that Wesco has shown that QBS would not be unfairly prejudiced by having the default judgment set aside.
Rule 60(b)(1) - Mistake, Inadvertence, Surprise, or Excusable Neglect
“Although the clear policy of the Rules is to encourage dispositions of claims on their merits, . . . trial judges are vested with discretion, which must be liberally exercised, in entering such judgments and in providing relief therefrom.” Moradi, 673 F.2d at 727 (citing Reizakis v. Loy, 490 F.2d 1132, 1135 (4th Cir. 1974); Fed.R.Civ.P. 55(c), 60(b)). Rule 55(c) and Rule 60(b) motions are analyzed using the same factors; however, “the burden on a movant seeking relief under the two rules is not the same.” Colleton, 616 F.3d at 420 (citing Moradi, 673 F.2d at 727-28). Rule 60(b) motions request relief from judgment and thus implicate an interest in “finality and repose,” which is not the case “when default has been entered under Rule 55(a) and no judgment has been rendered.” Id. Thus, “Rule 60(b)'s ‘excusable neglect' standard is a more onerous standard than Rule 55(c)'s ‘good cause' standard, which is more forgiving of defaulting parties because it does not implicate any interest in finality.” Id. (citing Johnson v. Dayton Elec. Mfg. Co., 140 F.3d 781,785 (8th Cir.1998) (“Although the same factors are typically relevant in deciding whether to set aside entries of default and default judgments, [m]ost decisions ... hold that relief from a default judgment requires a stronger showing of excuse than relief from a mere default order. This is a sound distinction.”) (ellipsis and brackets in original; citations omitted)). Additionally, “when dismissal is caused by the negligence of a party . . ., the [court's interest in finality and efficiency] dominate[s] and the party must adequately defend its conduct in order to show excusable neglect.” Heyman v. M.L. Mktg. Co., 116 F.3d 91,94 (4th Cir. 1997) (citing Augusta Fiberglass, 843 F.2d at 811).
In Park Corp., cited by both QBS and Wesco, the defaulting party lost the summons and complaint as a result of mishandling by its own employees and offered no explanation of its disappearance or evidence of procedures for handling such documents to prevent such a loss. 812 F.2d at 897. The Fourth Circuit found that this conduct did not constitute excusable neglect under Rule 60(b)(1). Id. That case, however, is distinguishable from the present case. In Park Corp., “unlike here, the defaulting party offered no explanation for the disappearance of the summons and complaint, and made no showing that its internal procedures were designed to avoid such occurrences.” Colleton, 616 F.3d at 420.
Here, Wesco admits to its mishandling of this matter and offers an explanation of why it believed that it was not a party to the action (doc. 61-1 at 15-18). Wesco is a wholly owned subsidiary of AmTrust Financial Services, Inc. (“AmTrust”), which receives “several thousands of documents each year for service of process” (id. at 14-16). AmTrust's inhouse litigation counsel testified that he can recall only five or six instances of entries of default and/or default judgment against an AmTrust entity in the last five years (doc. 61-5, Michael Rasnick aff. ¶ 13). Wesco submits the following explanation of what occurred with regard to its receipt of the package that included the third party complaint.
For documents served through [its registered agent Corporation Service Company (“CSC”)], there is a formal procedure to ensure each document is appropriately handled. This procedure works successfully almost all the time, and there have only been rare occasions of lawsuits against an AmTrust company going into default. (See Affidavit of Michael Rasnik ¶ 13). This
case, unfortunately, is an example of an understandable mistake occurring in the procedure, which resulted in Wesco not responding to QBS's Third-Party Complaint.
For documents served through CSC, AmTrust receives the documents via e-mail from CSC. (See Affidavits of Patricia Nelson ¶ 4 and Michael Rasnik ¶ 8). The majority of documents served through CSC are subpoenas related to Workers' Compensation claims. The rest of the documents are claims related and corporate legal related. (See Affidavit of Patricia Nelson ¶ 8). AmTrust receives e-mail notifications from CSC several times throughout the day. There are approximately twenty AmTrust employees who are copied on the e-mail notifications. (See Affidavit of Michael Rasnick ¶ 9).
Patricia Nelson, a litigation paralegal for AmTrust, keeps the comprehensive Service of Process Legal Log ("SOP Log") in the New York office. (See Affidavit of Patricia Nelson ¶ 8). Ms. Nelson logs all matters from the CSC notifications on the SOP Log. The AmTrust employees copied on the e-mail notifications will review the matter to see whether it falls within their department. Depending on the type of matter, Ms. Nelson also can send the documents to the appropriate AmT rust employee. (See Affidavit of Patricia Nelson ¶ 7). She reviews the SOP Log throughout the day to ensure that each notification is open and someone is handling the matter. She will send a follow-up email making sure someone has responded or handled it. She notes in the SOP Log the responses from the AmTrust employees after they review the matters. (See Affidavit of Patricia Nelson ¶ 7).
According to the SOP Log, AmTrust received the package which included QBS's Third-Party Complaint from CSC on September 13, 2019. (See Affidavit of Patricia Nelson ¶ 9). The package had 446 pages of documents, and it placed the Amended Complaint as the first pleading within the package, instead of QBS's Third-Party Complaint. (See Affidavit of Matthew Zender ¶ 8). Because it appeared to Ms. Nelson that the claim involved a Workers' Compensation matter, Ms. Nelson forwarded the package to Mike Roddy, Director of Workers' Compensation Claims, and Matthew Zender, Senior Vice President, Workers' Compensation Product Management. (See Affidavit of Patricia Nelson ¶ 9). Mr. Zender reviewed the package, and he emailed Ms. Nelson regarding his review. (See Affidavit of Matthew Zender ¶ 10). . . .
Unfortunately, when Mr. Zender reviewed the voluminous documents in the package, he mistakenly believed that the matter did not involve claims against Wesco. (See Affidavit of Matthew Zender ¶ 9). Mr. Zender is not an attorney and does not have experience with federal court litigation. (See Affidavit of Matthew Zender ¶ 7). The Summons from the District Court did not list Wesco in the caption. Further, the document immediately following the Summons was the Amended Complaint filed by Therapia against QBS. (See Affidavit of Matthew Zender ¶ 8). The Third-Party Complaint is buried within the package of 446 pages of documents. After reviewing the package, Mr. Zender stated via e-mail to Ms. Nelson that the matter did not involve claims against Wesco. (See Affidavit of Matthew Zender ¶ 10).(Doc. 61-1 at 15-18).
Based on all the circumstances, Westco has shown that its default was the result of a misunderstanding regarding whether it was a named party in this lawsuit and not a systematic failure to effectively handle process nor an attempt to intentionally make itself unavailable in hopes of avoiding judicial consequences. As Wesco presents in its motion (doc. 61-1 at 14), it “had in place reasonable internal controls designed to prevent or discover such losses,” and this error represents the “occasional breakdown” described by Park Corp. as excusable neglect. Park Corp., 812 F.2d at 898 (Haynsworth, J., concurring). Wesco has shown excusable neglect sufficient to warrant the setting aside of the default judgment under Rule 60(b)(1).
In light of the circumstances described herein, as well as the court's strong preference for deciding cases on the merits, the undersigned recommends that the district court exercise its discretion to grant Wesco relief from default judgment.
CONCLUSION AND RECOMMENDATION
According, it is recommended that Wesco's motion to set aside default judgment (doc. 61) be granted.
IT IS SO RECOMMENDED.
The attention of the parties is directed to the important notice on the following page.
Notice of Right to File Objections to Report and Recommendation
The parties are advised that they may file specific written objections to this Report and Recommendation with the District Judge. Objections must specifically identify the portions of the Report and Recommendation to which objections are made and the basis for such objections. “[I]n the absence of a timely filed objection, a district court need not conduct a de novo review, but instead must ‘only satisfy itself that there is no clear error on the face of the record in order to accept the recommendation.'” Diamond v. Colonial Life & Acc. Ins. Co., 416 F.3d 310 (4th Cir. 2005) (quoting Fed.R.Civ.P. 72 advisory committee's note).
Specific written objections must be filed within fourteen (14) days of the date of service of this Report and Recommendation. 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 72(b); see Fed.R.Civ.P. 6(a), (d). Filing by mail pursuant to Federal Rule of Civil Procedure 5 may be accomplished by mailing objections to:
Robin L. Blume, Clerk
United States District Court
250 East North Street, Suite 2300
Greenville, South Carolina 29601
Failure to timely file specific written objections to this Report and Recommendation will result in waiver of the right to appeal from a judgment of the District Court based upon such Recommendation. 28 U.S.C. § 636(b)(1); Thomas v. Arn, 474 U.S. 140 (1985); Wright v. Collins, 766 F.2d 841 (4th Cir. 1985); United States v. Schronce, 727 F.2d 91 (4th Cir. 1984).