Opinion ID: 2978008
Heading Depth: 2
Heading Rank: 2

Heading: motion to set aside the entry of default

Text: This Court reviews a district court’s decision to deny a motion to set aside an entry of default for an abuse of discretion. O.J. Distrib., Inc. v. Hornell Brewing Co., 340 F.3d 345, 352 (6th Cir. 2003). However, because of the policy favoring determinations on the merits, “a ‘glaring abuse’ of discretion is not required for reversal of a court’s refusal to relieve a party of the harsh sanction of default.” Berthelsen v. Kane, 907 F.2d 617, 620 (6th Cir. 1990); Shepard Claims Serv., Inc. v. William Darrah & Assoc., 796 F.2d 190, 193 (6th Cir. 1986) (“[A] strong preference for trials on the merits in federal courts has led to the adoption of a somewhat modified standard of review where defaults are involved.”). 7
Under Rule 55(c) of the Federal Rules of Civil Procedure, a “court may set aside an entry of default for good cause.” Fed. R. Civ. P. 55(c). This Court has established three factors relevant to the determination of whether “good cause” exists to set aside an entry of default pursuant to Rule 55(c): “(1) [w]hether culpable conduct of the defendant led to the default, (2) [w]hether the defendant has a meritorious defense, and (3) [w]hether the plaintiff will be prejudiced.” Waifersong, Ltd. v. Classic Music Vending, 976 F.2d 290, 292 (6th Cir. 1992); accord Weiss v. St. Paul Fire & Marine Ins. Co., 283 F.3d 790, 794 (6th Cir. 2002). While courts consider these same three factors in evaluating whether to set aside a default judgment under Rule 60(b), “[i]n practice a somewhat more lenient standard is applied to Rule 55(c) motions.” Shepard, 796 F.2d at 193; Waifersong, 976 F.2d at 292 (“[T]he methodolgy for considering these factors and the weight to be accorded to them depends on whether the court is confronted by an entry of default or a default judgment.”). Thus, although “all three factors must be considered in ruling on a motion to set aside an entry of default,” when a defendant has a meritorious defense and the plaintiff would not be prejudiced, “it is an abuse of discretion for a district court to deny a Rule 55(c) motion in the absence of a willful failure of the moving party to appear and plead.” Shepard, 796 F.2d at 194. On appeal, the parties do not dispute the district court’s conclusion that Defendants had meritorious defenses to the claims on which the court entered default.5 Thus, the only contested 5 Although the parties do not contest this issue on appeal, the presence of meritorious defenses weighs heavily in favor of setting aside the default. As the district court noted, “three of the named defendants—ExCelsius GmbH, Schwarzenau, and Ahern—likely have no liability under the Franchise Agreement, as ExCelsius [Ltd.] was the only signatory and the other three cannot be considered ‘sub-franchisees.’” (J.A. 729.) 8 issues with respect to setting aside the entry of default are whether Plaintiff would be prejudiced, and whether Defendants acted culpably.
Defendants argue that the district court abused its discretion in finding that Plaintiff would be prejudiced by setting aside the default. Plaintiff’s arguments regarding prejudice center on the “increased difficulties in discovery” that it alleges resulted because of Defendants’ delay. In evaluating prejudice, this Court has emphasized that “delay alone is not a sufficient basis for establishing prejudice. Rather, it must be shown that delay will result in the loss of evidence, create increased difficulties of discovery, or provide greater opportunity for fraud and collusion.” INVST Fin. Group, Inc. v. Chem-Nuclear Sys., Inc., 815 F.2d 391, 398 (6th Cir. 1987) (quoting Davis v. Musler, 713 F.2d 907, 916 (2d Cir. 1983)) (internal quotation marks and citations omitted). Agreeing with Plaintiff’s representations, the district court found that Plaintiff would face increased difficulties in discovery based on the fact that “Ahern . . . indicated that a number of the documents that would show [D]efendants’ inflated expenses no longer exist, so it will be more difficult for the plaintiff to account for this now that the 14 months have passed.” (J.A. 730.) In addition, the district court determined that Defendants “put a complete stop to” discovery, causing evidence to become “stale with the passage of time” and increasing “the difficulty in finding witnesses . . . whose memories have unquestionably faded.” (Id.) We conclude that Plaintiff failed to establish that it would be prejudiced by setting aside the entry of default. Plaintiff has not shown that evidence was lost, or that it would have any increased difficulties obtaining relevant discovery. The record does not support the district court’s finding that 9 evidence was lost as a result of Defendants’ delay.6 In advancing the “lost evidence” argument, Plaintiff relied on Ahern’s declaration, asserting that “it is now impossible to get accurate information about the true cost figures” that Defendants used to inflate their profits. (J.A. 740.) Despite Plaintiff’s characterization, the declaration provides no support for its argument. Ahern’s declaration stated that “[t]he decision to inflate and overstate the expenses in the reports . . . was conscious and deliberate. . . . . The overstatement of expenses was done on an ad hoc basis, and I am unable to accurately quantify the amount the expenses were overstated.” (J.A. 597-98.) Ahern did not state that he now was unable to calculate the amounts that were overstated, or that he no longer has access to documents which would enable him to arrive at such amounts. Instead, it never was possible to determine the amount of inflated expenses because the overstatement “was done on an ad hoc basis.” (J.A. 598.) Further, Plaintiff provided no evidence that specific witnesses’ memories faded beyond maintaining that “witnesses’ memories are bound to fade with the passage of time.” As noted above, “delay alone is not a sufficient basis for establishing prejudice.” INVST Fin. Group, Inc., 815 F.2d at 398. In finding that Plaintiff would suffer prejudice from setting aside the default, the district court also cited the loss of goodwill Plaintiff experienced during the time that Defendants failed to participate in the proceedings. The district court found that Defendants’ failure to defend successfully frustrated the plaintiff’s attempt to stop the loss of goodwill with its European customers. Loss of goodwill and marketplace harm caused by the defendants’ continuing unfair competition using the plaintiff’s equipment with the plaintiff’s customers was irreparable harm that cannot be regained or even accurately 6 In fact, as a result of Plaintiff’s secret agreement with Ahern, Plaintiff obtained a wider scope of documents than its discovery orders sought. Thus, while Defendants did not respond to Plaintiff’s discovery requests, Plaintiff received all the documents it sought through discovery from Ahern. 10 measured at this point. . . . [A]t this point, the plaintiff is relegated to attempting to recover the economic harm it suffered by recovering for the reduction in the value of its assets when they were sold in August of 2005. (J.A. 1785.) However, Plaintiff sold its business—including the right to use the name Hotwork and all of the equipment associated with its hotwork operations—in August of 2005, before Defendants delayed the progress of the lawsuit by failing to respond to discovery and other court orders. Further, although the district court noted that Plaintiff no longer could pursue an injunction, the dismissal of Plaintiff’s preliminary injunction motion resulted from its own failure to request a hearing or otherwise act on its motion, and not as a consequence of Defendants’ conduct. The district court therefore abused its discretion in finding that setting aside the entry of default would prejudice Plaintiff.
On appeal, Defendants also argue that their conduct in failing to respond to discovery and other court orders was excusable, and not culpable. In the context of a Rule 55(c) motion, “it is not absolutely necessary that the neglect or oversight offered as reason for the delay in filing a responsive pleading be excusable.” Shepard, 796 F.3d at 194. Instead, for a defendant’s actions to constitute culpable conduct, the “defendant must display either an intent to thwart judicial proceedings or a reckless disregard for the effect of its conduct on those proceedings,” rather than negligent conduct. Id. In addition, “[w]hen asked to set aside an entry of default, a court considers . . . [a] defendant’s culpability[] in the general context of determining whether a petitioner is deserving of equitable relief.” Waifersong, 976 F.2d at 292. In connection with Defendants’ motion to set aside the entry of default, Schwarzenau submitted an affidavit stating that he and Ahern had determined that Ahern would have primary 11 responsibility for handling the lawsuit. Schwarzenau asserted that he agreed to dismiss local counsel in Kentucky based on Ahern’s assurances that, according to an international law expert that he claimed he consulted, Plaintiff would have to seek a judgment in Germany before Defendants could be held liable for money damages. Schwarzenau further stated that he did not receive any court orders or other notification that he could be subject to an entry of default until August of 2006. At that time, he immediately contacted a German attorney and retained local counsel in Kentucky, who moved to set aside the entry of default. Despite Schwarzenau’s explanations, the district court concluded that Defendants’ conduct demonstrated an intentional disregard for the court’s proceedings, and therefore constituted culpable conduct. The district court also determined that Plaintiff’s secret negotiations with Ahern to obtain relevant documents did not affect its finding that Defendants acted culpably. The district court thus rejected Schwarzenau’s assertion that he did not receive any court orders, a finding that is supported by the record. Although Defendants argue that Schwarzenau did not receive the June 2006 order warning that a failure to appear could result in the entry of default, the record makes clear that the district court ordered that a copy of the order be sent to the individual defendants’ personal addresses, and also required their former counsel to send them copies of the orders via standard and electronic mail. However, the district court did credit Schwarzenau’s statements that Ahern had responsibility for handling the lawsuit and that Schwarzenau was unfamiliar with the American legal system, statements which explain Schwarzenau’s failure to act even if he did receive copies of the court’s orders. While the facts suggest that Schwarzenau made a conscious—although misguided—decision to ignore the district court proceedings, his explanation demonstrates that he did not intend to 12 disrespect the court proceedings. By acting quickly to set aside the default, Defendants “have given evidence of respect for the court’s process,” favoring leniency for Defendants. Shepard, 796 F.2d at 194 (quoting 6 Moore’s Federal Practice ¶ 55.01[2] at 55-61 (1985 ed.)). Also reducing the culpability of Defendants’ actions is Plaintiff’s own conduct. The district court failed to take into account Plaintiff’s own inaction for much of the time that Defendants were absent from the litigation, including its failure to pursue its preliminary injunction motion, as well as Plaintiff’s surreptitious conduct in negotiating an agreement with Ahern without Defendants’ knowledge. See Burrell v. Henderson, 434 F.3d at 834 (6th Cir. 2006) (finding that the plaintiff’s “fail[ure] to prosecute her claim for 16 months” and the fact that “the case was handled improperly by multiple parties” “diminishe[d] [the defendant’s] culpability” and made it unfair to leave in place the default judgment). Considering Defendants’ conduct “in the general context of determining whether [Defendant] is deserving of equitable relief,” Waifersong, 976 F.2d at 292, we conclude that the district court abused its discretion in denying Defendants’ motion to set aside the entry of default. While the district court was understandably frustrated by Defendants’ conduct, Defendants’ meritorious defenses, the complete absence of any prejudice to Plaintiff, Plaintiff’s own conduct, as well as “the strong policy in favor of deciding cases on their merits,” Shepard, 796 F.2d at 194, all warrant setting aside the entry of default. See id. (noting that “when the first two factors militate in favor of setting aside the entry, it is an abuse of discretion for a district court to deny a Rule 55(c) motion in the absence of a willful failure . . . to appear”). However, as this Court previously has noted, the finding that the entry of default should be set aside “does not preclude the district court from . . . determining some appropriate . . . sanction” against Defendants for the delay caused by their conduct. Id. at 195. 13 Finally, because we conclude that the district court should have set aside the entry of default, it is necessary to vacate the district court’s award of damages to Plaintiff. Therefore, we do not reach the parties’ arguments regarding the issue of damages.