Opinion ID: 772603
Heading Depth: 1
Heading Rank: 3

Heading: Application of the Falk Standard

Text: 20 1. Culpable Conduct: In this case, the district court's refusal to vacate the default judgment cannot be justified by any culpable conduct on the part of Janet Knoebber, the crossclaim defendant. Rather, considering all the circumstances, Janet's neglect in failing to answer Kathleen's crosscomplaint is excusable, not culpable. 21 The usual articulation of the governing standard, oft repeated in our cases, is that 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. Alan Neuman Prods., supra, at 1392 (emphasis added); see also Meadows, supra, at 521. Intentional  in many legal contexts means an act or omission taken by an actor knowing what the likely consequence will be. See, e.g., Restatement of Torts 2d S 8A cmt. b; Wayne LaFave, Substantive Criminal Law S 3.5. So one might think, reading this standard out of context, that a litigant who receives a pleading, reads and understands it, and takes no steps to meet the deadline for filing a responsive pleading acted intentionally in failing to answer, without more, and therefore cannot meet the culpability standard. 22 If that were our standard under Rule 60(b)(1), it would have to be revised after Pioneer Investment. Pioneer Investment made clear that the word neglectencompasses simple, faultless omissions to act and, more commonly, omissions caused by carelessness. 507 U.S. at 388. In the first category, for example, are situations where a party may choose to miss a deadline although for a very good reason, such as to render first aid to an accident victim discovered on the way to the courthouse. Id. Such an omission is intentional in the usual sense of that term; that is, it is the result of a conscious choice. Nonetheless, it is neglect--that is,  `giv[ing] little attention or respect'  to the filing deadline in light of other considerations, id.--and the question becomes whether that neglect is excusable, a question answered, as we have noted and as Pioneer Investment spells out, by considering a bevy of equitable considerations. To suppose that the making of a conscious choice, without more, precludes a finding that neglect is excusable cannot be squared with Pioneer Investment. 23 Our cases, however, have not used the term intentional in this sense. Instead, what we have meant is something more like, in the words of a recent Second Circuit opinion addressing the same issue, willful, deliberate, or evidence of bad faith. American Alliance Ins. Co., supra, 92 F.3d at 61. Neglectful failure to answer as to which the defendant offers a credible, good faith explanation negating any intention to take advantage of the opposing party, interfere with judicial decisionmaking, or otherwise manipulate the legal process is not intentional under our default cases, and is therefore not necessarilyalthough it certainly may be, once the equitable factors are considered--culpable or inexcusable. 24 In Gregorian v. Izvestia, for example, the defendants failed to respond to a lawsuit because they believed that the court lacked subject matter jurisdiction over them under the Foreign Sovereign Immunities Act. Although the defendants did not dispute that they received notice of the lawsuit, we found the case distinguishable from those cases in which we havefound a party's conduct to be culpable. 871 F.2d 1515, 1522 (9th Cir. 1989). We explained that culpability  involves not simply nonappearance following receipt of notice of the action, but rather conduct which hindered judicial proceedings as to which subject matter jurisdiction was unchallenged. Id. at 1525 (distinguishing Pena, supra, 770 F.2d 811). 25 Similarly, in the recent Bateman case, an attorney left the country for a family emergency, missing the deadline to answer a motion for summary judgment while he was away, and did not contact the district court or opposing counsel until 16 days after his return because it took that long for him to recover from his trip and sort through his mail. Summary judgment was granted in the interim as unopposed. Applying the Pioneer Investment factors, we noted that his reasons for the delay were weak, but not the result of deviousness or willfulness, id., and, applying the remaining Pioneer Investment factors, we concluded that because the lawyer acted in good faith, without prejudice to the opposing party, and with minimal delay or impact on the judicial proceedings, his neglect was excusable. Id. at 1225. Noteworthy for present purposes is that the fact that the attorney knew that the summary judgment motion response would be due while he was away, yet did nothing about obtaining an extension, did not preclude a finding of excusable neglect. See id. at 1223. 4 26 As a final example, in Falk v. Allen, the default judgment case in this court most similar to this one, we vacated a default judgment entered against an individual defendant, a tenant sued by her landlord, excusing Allen's failure to appear at the hearing because she was leaving the country for medical treatment in Korea the following day. 739 F.2d at 461. Although Allen did not move to set aside the default judgment until some five months later, Falk also found this conduct not culpable because Allen did not return from Korea until two months after the judgment, and had difficulty obtaining assistance from the local legal services office. Id. at 464. 5 Again, our holding was not that Allen was unaware that she was supposed to answer the complaint, but that her knowing failure to answer was for understandable reasons, and in no way designed to obtain strategic advantage in the litigation. 27 In contrast, we have typically held that a defendant's conduct was culpable for purposes of the Falk factors where there is no explanation of the default inconsistent with a devious, deliberate, willful, or bad faith failure to respond. See, e.g., Kingvision Pay-Per-View Ltd. v. Lake Alice Bar, 168 F.3d 347, 350 (9th Cir. 1999) (defendant bar owners ignored the summons and complaint despite frequent chats with their lawyers during the period for answer, and filed false affidavits claiming they had not been served); Pena, supra, 770 F.2d at 815 (defendant insurer had provided its customers and state insurance regulators with an incorrect address, thereby precluding service of process on the company); Alan Neuman Prods., supra, 862 F.2d at 1390 (when served, defendant did not admit who he was and refused to accept the papers from the process server, who laid them at [his] feet, and then retained counsel to check the docket for a return of service); Meadows, supra, 817 F.2d at 522 (defendants, the Dominican Republic and a Dominican public housing agency, were culpable in not answering the complaint because they wereaware of the relevant federal law, . . . fully informed of the legal consequences of failing to respond, . . . and sufficiently sophisticated and experienced in the requirements of American law to protect [their] interests); Richmark Corp. v. Timber Falling Consultants, Inc., 937 F.2d 1444, 1449 (9th Cir. 1991) (foreign defendant revealed familiarity with U.S. courts by retaining local counsel to protect its interests in other matters); Direct Mail Specialists, Inc. v. Eclat Computerized Tech., Inc., 840 F.2d 685, 690 (9th Cir. 1988) (defendant was a lawyer, presumably . . . well aware of the dangers of ignoring service of process); see also Benny v. Pipes, 799 F.2d 489, 494 (9th Cir. 1986) (defendants' failure to answer complaint was culpable when defendants had first filed motions to extend their time to answer, indicating an ability to deal with legal requirements). 6 28 Applying our established understanding of the Falk culpability prong, we conclude that because of her exigent personal circumstances, especially her mental state, and because of her lack of familiarity with legal matters, 7 Janet's failure to answer was not culpable. Janet had been widowed less than a year before Kathleen's action against her, and was distraught. She was in a psychiatrist's care for her severe depression, and was taking several strong psychoactive medications. For the twenty days during which she should have answered Kathleen's cross-claim, Janet was in the process of selling her home and moving herself and her two small children from California to Florida. 29 Importantly, there is no suggestion that Janet deliberately tried to manipulate the legal system. Her diligence in seeking to set aside the default judgment reveals no disrespect for the courts. Rather, like Falk, this is a case where a party unfamiliar with the legal system defaulted at a time of extreme personal difficulty; indeed, the circumstances here were, if anything, more exigent than in Falk. 8 Under all the circumstances, we consider Janet's conduct to be excusable. 30 2. Meritorious Defenses: Turning to the meritorious defense factor, we conclude -with relative ease, but only because of a recent case of this court-that Janet has a potentially meritorious defense. 9 31 A defendant seeking to vacate a default judgment must present specific facts that would constitute a defense. See Madsen v. Bumb, 419 F.2d 4, 8 (9th Cir. 1969) (holding that district court had not erred in declining to vacate default judgment when defendant offered mere general denial without facts to support it). But the burden on a party seeking to vacate a default judgment is not extraordinarily heavy. See, e.g., In re Stone, 588 F.2d 1316, 1319 n.2 (10th Cir. 1978) (explaining that the movant need only demonstrate facts or law showing the trial court that a sufficient defense is assertible). That is why, for example, we held in Falk v. Allen thatthe defendant had a meritorious defense to an unlawful detainer action when she alleged that her landlord repeatedly accepted her late rental payments. Under Guam law, this allegation was sufficient to raise the defense of waiver, and the question whether the factual allegation was true would be the subject of the later litigation. See Falk, supra, 739 F.2d at 463. 32 Here, on the basis of the factual allegations that appear in the interpleader and cross-claim pleadings, Janet Knoebber may be entitled to a share of the $50,000 policy based on California law, even though Kathleen is the designated beneficiary. See Emard v. Hughes Aircraft Co., 153 F.3d 949 (9th Cir. 1998), cert. denied sub nom. Stencel v. Emard, 525 U.S. 1122 (1999). 33 Emard involved facts similar to those in this case. Ginger Emard held a life insurance policy through her employer. Her first husband, Alex Stencel, was the beneficiary. After divorcing Stencel and remarrying, Emard did not complete a new designation of beneficiary form. When Emard died, her second husband asserted a claim to all or part of the policy as community property under California law, relying, as does Janet in this case, on the rule of California law that when life insurance premiums are paid with community property funds, the resulting policy is an asset of the community.  Life Ins. Co. of North America v. Cassidy, 35 Cal. 3d 599, 605 (1984). Under that community property rule, a spouse may not be divested of her community property interest by the designation of another beneficiary without her consent, but instead may recover her community share of the asset. See id.; see also In re Marriage of O'Connell, 8 Cal. App. 4th 565, 57778 (1992). 34 The insurance plan in Emard argued that ERISA preempts California community property law to the extent that state law would entitle someone other than the designated beneficiary of an ERISA plan to the plan's proceeds, but we rejected that contention. See Emard, supra, at 952. So the Cassidy principle continues to govern the distribution of life insurance benefits in California. And under California law, a court distributing community property must determine what share of each community asset was purchased with community, rather than separate, funds. See Polk v. Polk , 228 Cal. App. 2d 763, 781 (1964). Finally, California community property law regards a life insurance policy designating a spouse as the beneficiary as an inchoate gift to the spouse that becomes her separate property upon the insured's death. See Sieroty v. Silver, 58 Cal. 2d 799, 804 n.2 (1962); In re Miller's Estate, 23 Cal. App. 2d 16, 18 (1937); 11 Witkin, Summary of California Law, Community Property S 27(b) (1990). 35 Applying these Cassidy and related rules, Janet Knoebber has alleged facts sufficient to present a meritorious defense to Kathleen's counterclaim. Kathleen contends that even if Janetretains a community property interest in Thomas' life insurance policies, Janet has already received $123,000, or more than half of the total assets, and that Janet therefore has no right to any share of the $50,000 policy. But under California law, as just delineated, the $123,000 policy may be Janet's separate property, of no relevance to the community property distribution as between Janet and Thomas' estate. 10 And although Kathleen remains the $50,000 policy's named beneficiary, since the premiums paid during Thomas' marriage to Janet were paid from community funds, some portion of the $50,000 life insurance policy may be a community asset. 36 Janet has thus presented a meritorious defense to Kathleen's cross-claim, although whether she recovers and the amount of her recovery is still to be determined after the judgment is reopened. 37 3. Prejudice to the Plaintiff: The final factor to consider is whether vacating the default judgment would prejudice Kathleen. 38 To be prejudicial, the setting aside of a judgment must result in greater harm than simply delaying resolution of the case. Rather, the standard is whether [plaintiff's] ability to pursue his claim will be hindered. Falk, supra, 739 F.2d at 463; see also Thompson, supra, 95 F.3d at 433-34 (to be considered prejudicial, the delay must result in tangible harm such as loss of evidence, increased difficulties of discovery, or greater opportunity for fraud or collusion). 39 It should be obvious why merely being forced to litigate on the merits cannot be considered prejudicial for purposes of lifting a default judgment. For had there been no default, the plaintiff would of course have had to litigate the merits of the case, incurring the costs of doing so. A default judgment gives the plaintiff something of a windfall by sparing her from litigating the merits of her claim because of her opponent's failure to respond; vacating the default judgment merely restores the parties to an even footing in the litigation. See Bateman, 231 F.3d at 1225 (no prejudice simply because a party loses a quick victory due to an opponent's procedural default and must litigate on the merits). 40 Janet filed her motion to set aside the default judgment less than a month after it was entered, well within the oneyear limit imposed by Rule 60(b). Since the entry of the default judgment against her, Janet has litigated diligently, and Kathleen points to no harm due to the short delay. Rather, Kathleen argues only that vacating the judgment would harm her because it would require her to continue litigating. But, as we have seen, the ordinary cost of litigating is simply not cognizable under Falk's prejudice factor. Nor has Kathleen suf-fered any cognizable prejudice merely by incurring costs in litigating the default. While Kathleen was, of course, entitled to litigate her claim any way she chose to, the fact that she chose to oppose vacating the default and was unsuccessful in doing so cannot establish prejudice.