Thursday, April 24, 2014

Setting Aside a Default in Federal Court

Federal Rule of Civil Procedure Rule 55 governs defaults and default judgments.  It provides in pertinent part the following:
(a) Entering a Default. When a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend, and that failure is shown by affidavit or otherwise, the clerk must enter the party's default.
(b) Entering a Default Judgment.
(1) By the Clerk. If the plaintiff's claim is for a sum certain or a sum that can be made certain by computation, the clerk—on the plaintiff's request, with an affidavit showing the amount due—must enter judgment for that amount and costs against a defendant who has been defaulted for not appearing and who is neither a minor nor an incompetent person.
(2) By the Court. In all other cases, the party must apply to the court for a default judgment. A default judgment may be entered against a minor or incompetent person only if represented by a general guardian, conservator, or other like fiduciary who has appeared. If the party against whom a default judgment is sought has appeared personally or by a representative, that party or its representative must be served with written notice of the application at least 7 days before the hearing. The court may conduct hearings or make referrals—preserving any federal statutory right to a jury trial—when, to enter or effectuate judgment, it needs to:
(A) conduct an accounting;
(B) determine the amount of damages;
(C) establish the truth of any allegation by evidence; or
(D) investigate any other matter.
(c) Setting Aside a Default or a Default Judgment. The court may set aside an entry of default for good cause, and it may set aside a default judgment under Rule 60(b).

FRCP Rule 60 entitled,  “Relief from a Judgment or Order at 60(b) specifies those grounds for relief from a final judgment, order or proceeding(s) including default and default judgment.  It reads as follows:

 (b) Grounds for Relief from a Final Judgment, Order, or Proceeding. On motion and just terms, the court may relieve a party or its legal representative from a final judgment, order, or proceeding for the following reasons:
1)      mistake, inadvertence, surprise, or excusable neglect;
2)      newly discovered evidence that, with reasonable diligence, could not have been discovered in time to move for a new trial under Rule 59(b);
3)      fraud (whether previously called intrinsic or extrinsic), misrepresentation, or misconduct by an opposing party;
4)      the judgment is void;
5)      the judgment has been satisfied, released, or discharged; it is based on an earlier judgment that has been reversed or vacated; or applying it prospectively is no longer equitable; or
6)      any other reason that justifies relief.
FRCP Rule 60(c) addresses timing issues with respect to setting aside a judgment, order or proceeding as follows:
(c) Timing and Effect of the Motion.
1)      Timing. A motion under Rule 60(b) must be made within a reasonable time—and for reasons (1), (2), and (3) no more than a year after the entry of the judgment or order or the date of the proceeding.
2)      Effect on Finality. The motion does not affect the judgment's finality or suspend its operation.
Finally, Rule 60(d) addresses other powers bestowed upon the court with respect to relief.
(d) Other Powers to Grant Relief. This rule does not limit a court's power to:
1)        entertain an independent action to relieve a party from a judgment, order, or proceeding;
2)        grant relief under 28 U.S.C. §1655 to a defendant who was not personally notified of the action; or
3)        set aside a judgment for fraud on the court.
Under Rule 55(c), the court may set aside an entry of default for good cause, and it may set aside a default judgment under Rule 60(b).” “The ‘good cause’ standard that governs vacating an entry of default under Rule 55(c) is the same standard that governs vacating a default judgment under Rule 60(b).” Franchise Holding II,LLC. v. Huntington Restaurants Group, Inc., 375 F.3d 922, 925 (9th Cir. 2004).
Notwithstanding, courts have broader discretion in evaluating relief from an entry of default. See Brady v. United States, 211 F.3d 499, 504 (9th Cir. 2000) (“[A] district court’s discretion is ‘especially broad’ when . . . it is entry of default that is being set aside, rather than a default judgment.”). The standard is applied generously and more liberally where only a default has been entered with no accompanying default judgment. See Cracco v. Vitran Exp., Inc., 559 F.3d 625, 630-31 (7th Cir. 2009); In re OCA, Inc., 551 F.3d 359, 370 (5th Cir. 2008).
The Ninth Circuit has held that there are three factors to be considered when weighing whether or not there is good cause: (1) whether the defendant’s culpable conduct led to the default; (2) whether the defendant has a meritorious defense; or (3) whether reopening the default judgment would prejudice the plaintiff. Franchise Holding II, 375 F.3d at 925. “Where timely relief is sought from a default . . . and the movant has a meritorious defense, doubt, if any, should be resolved in favor of the motion to set aside the [default] so that cases may be decided on their merits.” Mendoza v. Wight Vineyard Mgmt., 783 F.2d 941, 945-46 (9th Cir. 1996).
However, “judgment by default is a drastic step appropriate only in extreme circumstances; a case should, whenever possible, be decided on the merits.” Mesle, 2010 WL 3025014, at *3 (citing Falk v. Allen, 739 F.2d 461, 463 (9th Cir. 1984)).
Culpable Conduct.
A defendant’s conduct is culpable “if he has received actual or constructive notice of the filing of the action and intentionally failed to answer.” TCI Group Life Ins. Plan v. Knoebber, 244 F.3d 691, 697 (9th Cir. 2001) (emphasis in original). As the Ninth Circuit has explained, in the context of a motion to set aside default, the term “intentionally” means that “a movant cannot be treated as culpable simply for having made a conscious choice not to answer; rather, to treat a failure to answer as culpable, the movant must have acted with bad faith, such as an intention to take advantage of the opposing party, interfere with judicial decision making, or otherwise manipulate the legal process.” Mesle, at *4. “Neglectful failure to answer as to which the defendant offers a credible, good faith not intentional.” TCI Group, 244 F.3d at 697. Typically, a defendant's conduct is culpable for purposes of the good cause factors “where there is no explanation of the default inconsistent with a devious, deliberate, willful, or bad faith failure to respond." Id. Simple carelessness is not sufficient to treat a negligent failure to reply as inexcusable, at least without a demonstration that other equitable factors, such as prejudice, weigh heavily in favor of denial of the motion to set aside a default. Id.

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