Opinion ID: 2978008
Heading Depth: 4
Heading Rank: 2

Heading: Defendants’ Culpable Conduct

Text: 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.