Opinion ID: 870682
Heading Depth: 2
Heading Rank: 3

Heading: The circuit court abused its discretion in denying the motion to set aside default

Text: Wai`ola argues that the circuit court abused its discretion in denying its motion to set aside the entry of default. In denying the motion, the circuit court ruled in its August 11, 2004 order as follows: 1. [Wai`ola] made a conscious choice not [to] be represented by private legal counsel and therefore, failed to answer Ala Loop's cross-claim in a timely manner. Therefore, it cannot be said that [Wai`ola] was guilty only of excusable neglect. .... 3. [Wai`ola] has failed to satisfy the necessary criteria for setting aside an entry of default, and therefore, its Motion to Set Aside Entry of Default Dated May 24, 2004, Filed Herein July 6, 2004, should be denied. HRCP Rule 55 governs the entry of default and default judgments. With regard to the entry of default, it provides in pertinent part as follows: (a) Entry. When a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend as provided by these rules and that fact is made to appear by affidavit or otherwise, the clerk shall enter the party's default. .... (c) Setting Aside Default. For good cause shown the court may set aside an entry of default and, if a judgment by default has been entered, may likewise set it aside in accordance with Rule 60(b). We review the denial of a motion to set aside default for abuse of discretion. Hupp v. Accessory Distrib., Inc., 1 Haw.App. 174, 177, 616 P.2d 233, 235 (1980) (holding that an application under Rule 55(c), Hawai`i Rules of Civil Procedure to set aside entry of default is addressed to the sound discretion of the court); see also Gonsalves v. Nissan Motor Corp., 100 Hawai`i 149, 158, 58 P.3d 1196, 1205 (2002). Defaults are generally disfavored. See Rearden Family Trust v. Wisenbaker, 101 Hawai`i 237, 254, 65 P.3d 1029, 1046 (2003) (holding that defaults and default judgments are not favored and [] any doubt should be resolved in favor of the party seeking relief, so that, in the interests of justice, there can be a full trial on the merits) (citations omitted). In BDM, Inc. v. Sageco, Inc., 57 Haw. 73, 549 P.2d 1147 (1976), this court held that a party seeking to set aside a default must demonstrate the following three factors: In general, a motion to set aside a default entry or a default judgment may and should be granted whenever the court finds (1) that the nondefaulting party will not be prejudiced by the reopening, (2) that the defaulting party has a meritorious defense, and (3) that the default was not the result of inexcusable neglect or a wilful act. Id. at 76, 549 P.2d at 1150 (citations omitted). In BDM , we observed that the showing necessary to set aside the entry of default was lower than that needed to set aside a default judgment. Id. (It should be noted that a motion to set aside a default entry, which may be granted under Rule 55(c) `for good cause shown', gives the court greater freedom in granting relief than is available on a motion to set aside a default judgment where the requirements of Rule 60(b) must be satisfied.) (citation omitted). This is a reasonable distinction, since the entry of default occurs at a more preliminary stage of the case than does the entry of judgment. Applying these principles here, we conclude that the circuit court abused its discretion in denying the motion to set aside the entry of default. In denying the motion, the circuit court appeared to find that Wai`ola's conduct constituted inexcusable neglect. However, the circumstances here are dissimilar from those in which relief from default is typically denied. For example, this is not a case in which a defendant that was properly served with a complaint fails to answer without any reason, or for an improper reason. See, e.g., Pogia v. Ramos, 10 Haw.App. 411, 416-17, 876 P.2d 1342, 1345 (1994) (noting that the circuit court properly refused to set aside default when defendant claims that she did not answer because she was having `problems with her marriage,' claimed that she did not understand what the legal papers meant, and believed that when she signed the summons, that was all she `had to do.'). To the contrary, Wai`ola wanted to defend against the cross-claim, tendered the defense to the AG within a few days of being served, and continued to aggressively pursue representation by the AG thereafter, culminating in the filing of the petition for writ of mandamus. Nor is this a case in which the defaulting party failed to file an answer without seeking the approval of the court for the delay. See, e.g., Hupp v. Accessory Distrib., Inc., 1 Haw. App. at 178-79, 616 P.2d at 236 (holding that the circuit court properly refused to set aside default when defendant's insurer failed to file an answer for nine months without seeking approval of the court, based on insurer's understanding that it had an `open' extension of time from [plaintiff's] attorneys). After stipulating with Ala Loop for two extensions to answer, Wai`ola, with the AG specially appearing on its behalf, filed a motion on February 25, 2004, asking for an extension of time to answer or otherwise respond. The motion noted the existence of the conflict between Wai`ola and the AG, and suggested that the court extend the deadline until approximately 30 days after the motion was heard on March 18, 2004, since that interval may be long enough to work out the differences that remain[.] The court granted the extension to April 19, 2004. On April 19, Wai`ola filed the motion for a stay, noting that it had been unable to resolve the dispute with the AG and accordingly was about to file a petition for writ of mandamus. Nor is this a case in which there was a lengthy delay between the entry of default and the filing of the motion to set the default aside. See, e.g., Pogia, 10 Haw.App. at 413-14, 876 P.2d at 1344 (noting that the motion to set aside entry of default and default judgment was not filed until more than 3 years after entry of default and nine months after entry of judgment). Default was entered on May 24, 2004, Wai`ola agreed to representation by the AG on June 2, 2004, and the motion to set aside default was filed on July 6, 2004. In the circuit court's August 11, 2004 Order denying Wai`ola's motion to set aside default, the court found that [Wai`ola] made a conscious choice not [to] be represented by private legal counsel and therefore, failed to answer [the] cross-claim in a timely manner. Therefore, it cannot be said that [Wai`ola] was guilty only of excusable neglect. However, the record does not support the conclusion that Wai`ola could have retained private counsel to file an answer. To the contrary, the record contains a declaration from Wai`ola's director that details the organization's extremely limited financial resources, and states that Wai`ola could not afford to retain private counsel. Ala Loop argues that Wai`ola's ability to obtain attorney Sandra Song to appear specially on its behalf to file the motion to stay and the petition for a writ of mandamus indicates that it could have retained private counsel to file an answer. However, it is unclear from the record whether Song was retained or acting pro bono, and whether she would have been willing to appear for the purpose of filing an answer, with the potentially more significant involvement in ongoing litigation that such an appearance could entail. Ala Loop also contends that in January of 2004, Wai`ola's board authorized the expenditure of $10,000 to construct a temporary building on the site at issue here. However, the record does not establish that those funds were in fact expended. Finally, it is noteworthy that once default was entered, Wai`ola agreed to the AG's demand that it relinquish its potential HRS § 302A-1184 defense, and the AG entered the case on Wai`ola's behalf. The fact that Wai`ola eventually accepted representation from the AG under these circumstances belies the suggestion that it had the resources available to hire its own counsel. This is not to say that Wai`ola was without fault in its approach to its dispute with the AG. Most notably, Wai`ola should not have waited until April 19, 2004, the last day of the extension that had been granted by the circuit court, to file the motion for a stay so that it could pursue the mandamus petition. The circuit court, in its order granting the extension, had clearly warned Wai`ola that it could be defaulted for failing to answer or otherwise respond by April 19. In those circumstances, the entry of default was appropriate, as would be other sanctions such as requiring Wai`ola to pay Ala Loop's attorneys' fees and costs in connection with the ensuing motion to set aside default. However, the circuit court went further and denied the motion to set aside, thereby imposing the ultimate sanction of denying Wai`ola the opportunity to defend on the merits. In the circumstances of this case, where Wai`ola could not afford private counsel and could obtain representation by the attorney general only by relinquishing its primary defense on the merits, imposition of that sanction was an abuse of discretion. [44] Rearden Family Trust, 101 Hawai`i at 255, 65 P.3d at 1047 (concluding that circuit court abused its discretion by defaulting defendant for failing to attend a settlement conference, since lesser sanction[s] would better serve the interest of justice) (citation and internal brackets omitted). This is particularly so given the fact that the court was being asked to set aside the entry of default, rather than a default judgment, see BDM, 57 Haw. at 76, 549 P.2d at 1150, and the relative promptness with which the motion was brought.