Court Opinion

ID: 183051
Source: CourtListenerOpinion
Date Created: 2011-01-19 20:56:18+00
Date Added: 2024-06-11T17:26:02.197307
License: Public Domain

NOT PRECEDENTIAL

                     UNITED STATES COURT OF APPEALS
                          FOR THE THIRD CIRCUIT
                              _______________

                                Nos. 10-1151 & 10-3440
                                  _______________

                         SOURCECORP INCORPORATED

                                          v.

          JAMES KENNETH CRONEY, JR.; KIMBERLEY D. CRONEY,

                                                     Appellants
                                   _______________

                   On Appeal from the United States District Court
                      For the Eastern District of Pennsylvania
                       (D.C. Civil Action No. 2-08-cv-05958)
                    District Judge: Honorable Petrese B. Tucker
                                 _______________

                               Argued November 17, 2010
                                   _______________

            Before: AMBRO, FISHER and GREENBERG, Circuit Judges

                          (Opinion filed: January 19, 2011)

Karl S. Myers, Esquire (Argued)
Stradley, Ronon, Stevens & Young
2600 One Commerce Square
2005Market Street
Philadelphia, PA 19103

      Counsel for Appellants

Howard J. Bashman, Esquire (Argued)
Suite G-22
2300 Computer Avenue
Willow Grove, PA 19090-0000

Mary Kay Brown, Esquire
Brown Stone Nimeroff
2001 Market Street, Suite 3420
Two Commerce Square
Philadelphia, PA 19103-0000

Christopher B. Trowbridge, Esquire
Bell Nunnally & Martin
3232 McKinney Avenue
Suite 1400
Dallas, TX 75204

       Counsel for Appellee
                                    _______________

                                       OPINION
                                    _______________

AMBRO, Circuit Judge

       This is a consolidated appeal from the District Court’s entry of a default judgment

against Defendant-Appellants Kenneth and Kimberly Croney, and the District Court’s

subsequent decision holding the Croneys in contempt of court and assessing monetary

damages and attorneys’ fees.1 We vacate and remand.

I.     Procedural Background

       A.     The District Court’s Entry of a Default Judgment

       The underlying lawsuit in this case, filed on December 23, 2008, alleges that the

Croneys engaged in a series of fraudulent transfers in order to avoid paying a judgment

1
  The District Court had jurisdiction over this diversity action pursuant to 28 U.S.C.
§ 1332. We have jurisdiction under 28 U.S.C. § 1291.

                                             2
awarded to Sourcecorp in a previous lawsuit. What followed was a procedural morass,

which we describe briefly.

       The Croneys moved to dismiss Sourcecorp’s suit on March 2, 2009, and the

District Court denied the motion in an order entered on October 8, 2009, triggering the

application of Fed. R. Civ. P. 12(a)(4)(A). That Rule required the Croneys to answer the

complaint within 14 days. However, the Croneys’ counsel failed to file an answer or

obtain an extension of time by the deadline. About three weeks after the deadline passed,

the District Court’s Courtroom Deputy signed and sent a letter to Sourcecorp’s counsel,

directing him to request from the Court Clerk an entry of default against the Croneys. 2

The Courtroom Deputy did not send a copy of this letter to the Croneys or their counsel.

       Sourcecorp’s counsel received the letter on November 30, 2009, and requested an

entry of default pursuant to Fed. R. Civ. P. 55(a) that day. The Court Clerk entered the

default on December 1. Seven days later, the Croneys moved to lift the default, and filed

a proposed answer. However, on the same day the District Court signed an order

entering judgment in favor of Sourcecorp, purportedly “upon consideration of Plaintiff’s

Request for Entry of Default Judgment.” The “Request for Entry of Default Judgment”

to which the Court referred was actually Sourcecorp’s request that the Court Clerk enter a

default against the Croneys.

       On December 9, 2009, the Croneys filed a motion seeking to undo the default

judgment, and Sourcecorp filed a motion for judgment on the day after that. On

2
 An entry of default is a purely ministerial act carried out by a court clerk on request in
cases in which a defendant has “failed to plead or otherwise defend.” Fed. R. Civ. P.
55(a).
                                              3
December 11, the District Court denied the Croneys’ motion, describing in a one-

paragraph footnote why they had failed to show their entitlement to relief. Following that

decision, the Croneys filed additional motions aimed at undoing the default judgment, all

of which were denied in a one-sentence order entered on January 5, 2010. Finally, on

January 8, the District Court entered a final judgment ordering that the Croneys pay

Sourcecorp approximately $1.5 million in damages and attorneys’ fees.

       B.     The Contempt Motion and Subsequent Order

       Immediately following the District Court’s entry of final judgment, Sourcecorp

moved for an injunction freezing the Croneys’ assets. Eventually, the Croneys consented

to, and the District Court entered, an injunction forbidding the m from spending or

transferring money, with certain exceptions, including that the y were permitted to spend

$25,000 per month on general living expenses. With that injunction in place, the District

Court stayed execution of the judgment pending appeal.

       On May 26, 2010, Sourcecorp moved the District Court to hold the Croneys in

contempt of the injunction, charging that they had spent money on luxuries (such as

country club memberships and a trip to France), written checks out to cash, and made

other proscribed payments and transfers between themselves individually, and on behalf

of companies owned by them. In a short memorandum and order, the District Court

agreed that the Croneys had violated the injunction and ordered them to pay damages in

                                            4
the amount of $146,157 plus $12,120.50 in attorneys’ fees, for a total of slightly over

$158,000. The Court also lifted the stay of execution of the judgment. 3

       This appeal followed.

II.    Analysis

       A.     Standard of Review

       This Court reviews de novo the Croneys’ argument that the District Court’s

judgment is void because it was entered in violation of their due process rights. Budget

Blinds, Inc. v. White, 536 F.3d 244, 251 n.5 (3d Cir. 2008); Boughner v. Sec’y of Health,

Educ. & Welfare, 572 F.2d 976, 977 (3d Cir. 1978). However, if the District Court’s

judgment is not void, we review for abuse of discretion its refusal to set aside the entry of

default. In re The Home Rests., Inc., 285 F.3d 111, 115 (1st Cir. 2002). Finally, we

review contempt findings and associated sanctions for abuse of discretion, revers ing only

where the decision “is based on an error of law or a finding of fact that is clearly

erroneous.” Marshak v. Treadwell, 595 F.3d 478, 485 (3d Cir. 2009) (internal quotation

marks and citation omitted).

       B.     The Default Judgment

       The Croneys make three primary arguments as to why we should reverse the

District Court’s entry of a default judgment: (1) that the Courtroom Deputy’s ex parte

letter was improper; (2) that the District Court erred as a matter of law by entering the

default judgment without adhering to the requirements of Rule 55(b); and (3) that the

3
 On August 16, 2010, our Court stayed the execution of the judgment pending the
outcome of this appeal.
                                              5
District Court abused its discretion by failing to weigh properly the factors applicable to

the motions to lift the default judgment. The Croneys also argue that these purported

legal errors are individually or collectively sufficient to amount to a due process

violation. We agree with the Croneys that the District Court did not properly apply Rule

55(b), and we vacate and remand on that basis.

       Rule 55 sets forth a two-part process for obtaining a default and then a default

judgment. First, when a defendant has “failed to plead or otherwise defend,” “the clerk

must enter the party’s default.” Fed. R. Civ. P. 55(a). Then, in cases like this one, in

which the defendant has appeared, Fed. R. Civ. P. 55(b)(2) governs the process for

converting a “default” into a “default judgment.” That Rule states, in relevant part, that

       the party must apply to the court for a default judgment. . . . 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.

       Thus, a defendant who has appeared in a case generally is entitled to no less than

seven days’ advance notice of any motion for default judgment. However, some courts

of appeals have held that, at least under egregious circumstances, district courts may

enter default judgments sua sponte and, moreover, may do so without advance notice to

the defendant. See, e.g., Goldman, Antonetti, Ferraiuoli, Axtmayer & Hertell v. Medfit

Intern., 982 F.2d 686, 692-93 (1st Cir. 1993) (district court did not err in granting default

                                              6
judgment sua sponte, and without first notifying defendant, when defendant had failed to

appear for trial).

       Here, the District Court neither followed the notice provision of Rule 55(b), nor

did it intentionally enter the default judgment sua sponte. Rather, it stated that it was

entering the default judgment “upon consideration of Plaintiff’s Request for Entry of

Default Judgment.” The problem is that, at the time the Court entered that order,

Sourcecorp had not requested entry of default judgment, but had merely sought to have

the Clerk indicate that the Croneys were in default.

       We cannot conceive of a way that such a procedure is adequate to sustain the entry

of default judgment. Default judgments are disfavored in our Circuit, Budget Blinds,

Inc., 536 F.3d at 258, and the notice procedure created by Rule 55 is integral to ensuring

that litigants’ rights are adequately protected. Further, even if there might exist a

situation in which a district court could reasonably enter a default judgment sua sponte—

for example, where it is clear that a litigant has utterly abandoned the case—this is not

such a case.

       Nor does the District Court’s January 8 order, in which it ordered relief and finally

disposed of the case, save the default judgment in this case. While that order was issued

pursuant to a motion of which the Croneys received notice, it is not clear that that the

District Court actually considered anew whether it was appropriate to enter a default

judgment against the Croneys, or whether it was simply proceeding based on its earlier

                                              7
order. Absent a clear indication from the Court that it had discovered the earlier

procedural mistake and taken pains to correct it, we must reverse the default judgment. 4

       Finally, we note that, even if the default judgment were entered absent procedural

problems, we would find it difficult, if not impossible, to affirm that judgment. In

deciding whether to set aside a default (under Fed. R. Civ. P. 55(c)) or a default judgment

(under Fed. R. Civ. P. 60(b)(1) or (b)(6)), a district court is to consider “(1) whether the

plaintiff will be prejudiced; (2) whether the defendant has a meritorious defense; [and]

(3) whether the default was the result of the defendant’s culpable conduct.” United States

v. $55,518.05 in United States Currency, 728 F.2d 192, 195 (3d Cir. 1984); Feliciano v.

Reliant Tooling Co., Ltd., 691 F.2d 653, 656 (3d Cir. 1982) (stating that three factors

should be considered whether a default or a default judgment is at issue, though they

should be applied more leniently in the case of a default). In some cases, our Court has

also considered “the effectiveness of alternative sanctions.” E.g., Emcasco Ins. Co. v.

Sambric, 834 F.2d 71, 73 (3d Cir. 1987).

4
  We also reject Sourcecorp’s argument that the December 9 judgment was not a genuine
default judgment because it did not order any relief, and that therefore the January 8 order
is the only default judgment in this case. Our Court has previously defined a “final
judgment” as one that “leaves nothing for the court to do but execute the judgment.”
Penn West Associates, Inc. v. Cohen, 371 F.3d 118, 125 (3d Cir. 2004) (internal quotation
marks and citation omitted). However, nothing in the text of Rule 55 requires that a
default judgment also be a final judgment. Further, Sourcecorp’s reliance on Chudasama
v. Mazda Motor Corp., 123 F.3d 1353, 1364 n.27 (11th Cir. 1997), is misplaced. That
case involved a purported “default judgment” that was entered by the clerk, not the judge.
Therefore, it was far more clear that a simple error in terminology was at work, because
the court clerk was not empowered to issue a default judgment in the first place . Here, in
contrast, it is implausible that the District Court understood itself to be doing anything
but entering a true default judgment, particularly given that the court clerk had already
noted the Croneys’ default.
                                              8
       The District Court weighed those factors in a half-page footnote appended to its

December 11 Order. In that footnote, the Court stated, in relevant part:

       Here, Defendants have not described their alleged meritorious defenses
       with any specificity, and lifting an entry of default judgment at this point in
       the proceedings will serve to prejudice Plaintiffs, as they would be required
       to expend additional funds to litigate this matter. Defendants’ conduct here
       is culpable, and if not, negligent, given that the parties have, according to
       Defendants, participated in some disco very, and as such, Defendants[] were
       on notice that responsive pleadings were to be filed by a specified date.
       Defendants will not be granted more “bites at the apple” than the Rules
       allow, and here, Defendants had sufficient notice of their duty to respo nd.
       As a result, the Court will deny their motion.

       Our problem with what the Court did particularly concerns the first and third

factors. First, we have previously held that the costs associated with continued litigation

normally cannot constitute prejudice. E.g., Emcasco Ins. Co., 834 F.2d at 74; Feliciano,

691 F.2d at 656-57 (“delay in realizing satisfaction on a claim rarely serves to establish [a

sufficient] degree of prejudice”). Additionally, the District Court found that the Croneys’

failure to file an answer was “culpable, and if not, negligent.” But the standard is

“culpable;” mere negligence should not weigh against the Croneys. Hritz v. Woma

Corp., 732 F.2d 1178, 1183 (3d Cir. 1984) (“[a]ppropriate application of the culpable

conduct standard requires that as a threshold matter more than mere negligence be

demonstrated”). And, if the District Court had applied the proper legal standard, we

would be forced to conclude that it abused its discretion by finding that the Croneys’

attorney’s failure to file an answer on time was culpable conduct sufficient to support the

imposition of a default judgment. Cf. Carter v. Albert Einstein Med. Ctr., 804 F.2d 805,

808 (3d Cir. 1986) (reversing dismissal imposed as sanction for discovery violations

                                              9
where fault was attorney’s, not client’s, and client promptly fired attorney upon learning

of violation).

       However, it is the second factor—whether the Croneys have a meritorious

defense—that makes this case close. We shall not engage in the futile exercise of

remanding a case in which there is no potential defense. $55,518.05 in U.S. Currency,

728 F.2d at 195-96. And the Croneys’ presentation of potential defenses is thin at best.

In their brief in our Court, the Croneys merely list six purported “defenses,” some of

which are not actually defenses, but rather general statements of law (such as that a “veil

piercing theory” is a “very difficult claim to prove”). Nonetheless, we think the Croneys’

assertions that individual transfers of money were not fraudulent, but rather reasonable

payments for services actually rendered, are—barely—sufficient to support a remand.

       Accordingly, we vacate and remand the District Court’s decision entering a default

judgment against the Croneys.

       C.        The Contempt Order

       The Croneys argue that the contempt order should fall with the default judgment,

but that even if it does not, they did not viol ate the terms of the injunction and the District

Court abused its discretion in its award of damages, sanctions, and attorneys’ fees. We

agree with the Croneys that, under the circumstances presented in this case, the civil

contempt order cannot survive our decision to vacate the default judgment.

       Sourcecorp sought and obtained an injunction only after the District Court entered

the default judgment, and both the injunction and the subsequent contempt order were

designed to protect Sourcecorp’s rights under that judgment. See Mann v. Calumet City,

                                              10
588 F.3d 949, 955 (7th Cir. 2009) (purpose of civil contempt is to “protect a litigant’s

rights”). However, we hold today that Sourcecorp has not yet demonstrated its

entitlement to judgment. While it is “true that the reversal of the decree does not

retroactively obliterate the past existence of the violation[,] . . . it does more than destroy

the future sanction of the decree. . . . [T]he right which it affected to create was no right

at all.” Id. (quoting Salvage Process Corp. v. Acme Tank Cleaning Process Corp., 86

F.2d 727 (2d Cir. 1939)). Thus, Sourcecorp is not entitled to compensation based on the

Croneys’ violation of an order that would not have been in place but for the premature

entry of default judgment. 5

       Accordingly, we vacate the District Court’s rulings entering the default judgment

against the Croneys and holding them in contempt, and remand for further proceedings

consistent with this opinion.

5
  We are sensitive to Sourcecorp’s concern that the Croneys may dissipate their assets
and those of their companies before Sourcecorp has an opportunity to obtain and collect
on a judgment. However, this concern is best raised and addressed through the
preliminary injunction mechanism on remand, and not through a contempt proceeding
that is ultimately premised on the faulty default judgment.
                                              11