UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
May 23, 1984
ADMIRAL HOME APPLIANCES, A DIVISION OF MAGIC CHEF, INC., A DELAWARE CORPORATION
TENAVISION, INC., A NEW JERSEY CORPORATION, APPELLANT
Appeal from the United States District Court for the District of New Jersey
Before SEITZ, Chief Judge, GARTH, Circuit Judge, and DIAMOND, District Judge.*fn*
This is an appeal from an order of the district court in a diversity action granting plaintiff a default judgment against defendant.
A complaint alleging breach of contract and a summons were served on defendant on May 14, 1982. On June 9, 1982, a default was entered by the clerk pursuant to Fed. R. Civ. P. 55(a) because of the defendant's failure to appear.
On June 28, 1982, defendant filed a notice of a motion to vacate the default and to allow an answer to be filed. After affidavits were filed, the district court held a hearing and denied the motion in a memorandum and order entered August 5, 1982. Thereafter, plaintiff moved for a default judgment on notice. Defendant did not appear and a monetary judgment was entered. This appeal followed.
Defendant first argues that the district court erred in not setting aside the default and the default judgment on grounds of inadequate notice. This argument is frivolous. Rule 55(a) does not require notice to the defaulting party before the clerk can enter a default. Defendant was given ample notice on the face of plaintiff's summons, which defendant's president concededly received, that a default could be entered if no answer was filed within 20 days.
The only notice requirement concerns the entry of a default judgment rather than a default. Rule 55(b)(2) requires that written notice of an application for a default judgment must be served on the party in default at least 3 days in advance of the hearing date. Here, however, plaintiff met that requirement by mailing to defendant on January 24, 1983, written notice of an application for a default judgment to be heard on February 14, 1983. We conclude that there was no infirmity in the notice given defendant.
Defendant's second assignment of error is that the district judge abused his discretion by not vacating the default on the grounds of defendant's excusable neglect, and because plaintiff and its counsel misrepresented to defendant's president, a lay person, the time available before he needed to enter a defense in this matter.
A fair reading of the district court's August 5, 1982 memorandum denying defendant's motion to vacate the default is that the distinct court found that defendant failed to show excusable neglect, inadvertence or mistake, and that he was not misled by plaintiff's counsel. The defendant's conduct need only be something more than mere negligence to be sufficiently culpable for this court to uphold the district judge's refusal to set aside the default. Hritz v. Woma Corp., No. 82-5607, slip op. at 9 (3d Cir. April 23, 1984). The record showed that defendant's president had notice of the pending action but chose to harass plaintiff and its counsel rather than obtain legal advice, although plaintiff's counsel repeatedly advised him to do so. These conversations took place on May 17 and 28, after the suit was filed and well before the date defendant's answer would have been due. The district court correctly found neither neglect, inadvertence nor mistake, but rather a knowing refusal by defendant to appear in this action and present its defenses in court.
Defendant's president also maintained in an affidavit that he had been misled by plaintiff and its counsel into believing that he would be given time to attempt to resolve the dispute before he would have to file an answer. The district judge found this affidavit inconsistent with a prior affidavit which did not mention any misleading statements by plaintiff. He also found that the affidavit failed to show what, if anything, defendant's president was attempting to do to resolve the dispute, and that it did not controvert the affidavits of plaintiff's counsel that repeated advice was given defendant's president to obtain legal counsel. On the basis of these findings, the district judge did not abuse his discretion by holding that this affidavit failed to show that defendant's default was the result of its president having been misled by plaintiffs.
Our prior cases make it clear that the party in default must show that the default was not caused by his own culpable conduct in order to have it set aside. Defendant has not made such a showing. The findings made by the district judge in his August 5, 1982 opinion are sufficient for this court to know the basis for his refusal to vacate the default. Farnese v. Bagnasco, 687 F.2d 761, 765-66 (3rd Cir. 1982). We conclude that the district judge was well within his discretion in refusing to vacate the default entered by the clerk on June 9, 1982. On appeal defendant has not attacked the default judgment entered on February 15, 1983. It follows that the district court's February 15, 1983 order entering a default judgment in plaintiffs' favor will be affirmed.
GARTH, J., dissenting:
It is the settled doctrine in this circuit that a standard of liberality should apply in determining whether to set aside default judgments. See, e.g., Gross v. Stereo Component Systems, Inc., 700 F.2d 120, 122 (3d Cir. 1983). In my opinion, it is impossible to determine on this record whether the district court correctly applied this standard to the present case, or even considered the three factor analysis mandated by our cases. I would therefore remand the matter for proceedings consistent with our precedents. Accordingly, I respectfully dissent.
Whether or not to reopen a default judgment is a decision generally committed to the discretion of the trial court. Tozer v. Charles A. Krause Milling Co., 189 F.2d 242, 244 (3d Cir. 1951). Yet in exercising that discretion, this Court has established several factors which the trial judge must consider: 1) whether the plaintiff will be prejudiced if the default is lifted; 2) whether the defendant has a meritorious defense; and 3) whether the default was the result of the defendant's culpable misconduct. E.g., United States v. $55,518.05 in U.S. Currency, 728 F.2d 192, 195 (3d Cir. 1984).
In this case, plaintiff Admiral conceded that it would not be prejudiced by reopening the default. The district court found, however, that Tenavision had not articulated a meritorious defense, nor demonstrated the absence of culpable misconduct. I favor a remand, however, because I am satisfied that Tenavision did articulate a defense which might prevail at trial. Moreover, I cannot tell on this record whether Tenavision's neglect found by the district court meets the requisite standard of willfulness or bad faith established by this Court.
In determining whether Tenavision has demonstrated a meritorious defense, some mention must be made of the underlying facts. Tenavision, a commercial outlet for electrical appliances, apparently sent Admiral, a manufacturer of such appliances, a purchase order for 356 washers and 356 dryers on September 27, 1981. Burt Lerner, the president of Tenavision, alleged, however, that this purchase order was not accepted by Admiral, which insisted that a check accompany that order, and that he thereupon cancelled the purchase order. Tenavision asserts that this constitutes a viable defense.
The district court found, however, that these facts did not state a meritorious defense. The court first noted that the affidavit of Burt Lerner which recited the aforementioned events was "hearsay." App. at 48. A defendant, however, need not prove his meritorious defense by admissible defense; he need only assert or articulate it. See Farnese v. Bagnasio 687 F.2d 761, 764 (3d Cir. 1982) (accepting defendant's proffered defense without proof of authenticity). Indeed, another Court of Appeals had held that "even a hint of a suggestion" of a meritorious defense would be sufficient. Keegel v. Key West & Caribbean Trading Co., 627 F.2d 372, 374 (D.C. Cir. 1980).*fn1 Keegel, it should be observed, has been cited with approval by this Court in Livingston Powdered Metal, Inc. v. NLRB, 669 F.2d 133 (3d Cir. 1982) and Farnese v. Bagnasco, 687 F.2d 761 (3d Cir. 1982).
The district court also found that Tenavision did not establish a meritorious defense in any event. The court stated that "All that is said is that the order was cancelled, but that is precisely the breach relied on by the complainant to state the claim. Cancellation is an element of the claim, not a defense." App. at 48 (Memorandum Order of August 5, 1982).
I believe, however, that this misconstrues the basic contract concepts of offer and acceptance. If, as Lerner contended, Admiral never affirmatively accepted his purchase order before he sought to revoke it, then no contract would ever have been formed, and there could be no breach. Alternatively, the fact that Admiral refused to process the purchase order without prepayment by check might be construed as a rejection of the offer. If there was such a rejection, then the offer died at that moment, and no contract would be possible without a new offer, even if ther was no cancellation by Tenavision.
Because it appears that the district court misapprended the defense raised by Tenavision, on this ground alone I would remand this matter so that the trial judge may exercise his discretion guided by correct legal precepts.
The district court also found that Tenavision had not demonstrated excusable neglect in failing to answer Admiral's complaint. Our precedents, however, have required a showing not merely of negligence or inexcusable neglect when a district court denies the vacation of a default judgment, but rather, in order to justify a refusal to set aside such a default, "wilfulness" or "bad faith" must be found. Hritz v. Woma, No. 82-5607, slip op. at 8-9 (3d Cir. April 23, 1984); Gross, 700 F.2d at 764-65; Feliciano v. Reliant Tooling Co., 691 F.2d 653, 657 (3d Cir. 1982). This requirement may be met by intentional failure to comply with court-mandated procedures, or by such reckless disregard of repeated communications from the court or plaintiff that bad faith can be imputed. Hritz, slip op. at 9.
The majority opinion recites that "[t]he defendant's conduct need only be more than mere negligence to be sufficiently culpable for this court to uphold the district judge's refusal to set aside the default." Maj. op., typescript at 4 (citing Hritz). While it is true that Hritz does state that "the culpable conduct standard requires that, as a threshold matter, more than mere negligence be demonstrated," Hritz, slip op. at 9, that statement constituted no more than an introduction to the discussion which followed, which emphasized that "willfulness" and "bad faith" must be shown to meet this Court's standards. In concluding its discussion, the Hritz court, in further describing an appropriate standard, stated that "[r]eckless disregard for repeated communications from plaintiffs and the court, combined with failure to investigate the source of a serious injury, can satisfy the culpable conduct standard." Id. Thus, Hrizt in remanding to the district court, was concerned with knowing or reckless disregard as potential sources of culpable conduct -- a far cry from "something more than mere negligence." In my view, therefore, the majority opinion has not followed the Hritz standard, by which we are bound. "Something more than mere negligence" is hardly the equivalent of willfulness, bad faith, or reckless or knowing disregard for court mandated procedures.
The record in this case might support a finding that Lerner was imprudent and negligent in failing to refer Admiral's suit to Tenavision's attorneys.The record also reveals that Lerner was somewhat arrogant in his dealings with Admiral's attorneys. However, it is difficult to tell from the district court's recital in its opinion whether Lerner's actions, which were characterized as arrogant and "in disregard of the consequences" was an attitude exhibited prior to the filing of the plaintiff's complaint on May 14, 1982, or subsequent to the filing of the complaint. Nowhere in the district court's opinion is there a finding that there was a "knowing refusal by defendant to appear in this action and present its defenses in court." Maj. op., typescript at 4. Indeed, the only event which was recited by the district court giving rise to Lerner's "attitude" was a reference to a February 2, 1982 letter from the plaintiff to the defendant which proposed an amount for which the claim could be resolved. Apparently in response, Lerner stated that he would not pay the claim, and was then told that suit would be filed.
Whether this amounts to wilful or bad faith conduct, I am not in a position to say at this juncture, since this is a finding which should be made in the first instance by the district court. I register serious doubt as to whether a precomplaint attitudes or actions can form the basis of district court findings which lead to refuse to vacate a default. In any event, because the district court did not have the benefit of Hritz, Feliciano, and Gross at the time it ruled on Tenavision's default, it could not have known that a showing of wilfulness or bad faith was required in order to satisfy our case law, and consequently it did not judge Lerner's conduct against those standards.
Under these circumstances, I believe that the proper course is to remand this matter for reconsideration of the issues in light of the precedents which have been established by this Court since the matter was first decided by the district court. Indeed, this was exactly the action which was taken in Hritz v. Woma, slip op. at 9. On remand, the district court may re-evaluate the exercise of its discretion as to whether the default should be reopened, and I express no opinion as to what the outcome ought to be. I am of the opinion, however, that such discretion must be based upon correct legal principles before we may perform our appellate function of determining whether that discretion was abused, and therefore we are not in a position to pass on the appropriateness of the refusal to vacate the default at this time.*fn2
Because I can perceive no reason in this case to depart from our established practice of remanding matters such as the one represented here for further proceedings, I must respectfully dissent from the majority disposition of this matter. If we are to require that the district court adhere to a standard of liberality in determining whether to vacate a default judgment -- and this Court has consistently expressed a preference that litigated matters be resolved on the merits -- then it appears clear to me that, at the very least, a remand must be ordered.