Court Opinion

ID: 7803839
Source: CourtListenerOpinion
Date Created: 2022-08-26 14:06:27.346021+00
Date Added: 2024-06-11T16:29:44.096499
License: Public Domain

RENDERED: AUGUST 19, 2022; 10:00 A.M.
                       NOT TO BE PUBLISHED

                Commonwealth of Kentucky
                          Court of Appeals
                             NO. 2021-CA-1212-MR

SNR RAILOPS LLC                                                     APPELLANT

                 APPEAL FROM FLOYD CIRCUIT COURT
v.               HONORABLE THOMAS M. SMITH, JUDGE
                       ACTION NO. 20-CI-00341

DYING EMBER COAL
COMPANY LLC                                                          APPELLEE

                               OPINION
                       VACATING AND REMANDING

                                 ** ** ** ** **

BEFORE: CLAYTON, CHIEF JUDGE; CETRULO AND K. THOMPSON,
JUDGES.

CLAYTON, CHIEF JUDGE: SNR RailOps LLC (“SNR”) appeals from a default

judgment granted by the Floyd Circuit Court to Dying Ember Coal Company LLC

(“Dying Ember”). Upon review, we conclude that the trial court abused its

discretion in denying SNR’s motion to set aside the default judgment. We vacate

the default judgment and remand the case for further proceedings.
             SNR is a Kentucky limited liability company organized by Ray

Younan, a native of Australia. On November 28, 2018, SNR entered into a

contract to purchase coal from Dying Ember, a Kentucky limited liability company

which mines and sells coal. Between October 12, 2019, and December 3, 2019,

Dying Ember made four coal deliveries totaling $358,789.27 to SNR’s Ivel

Preparation Plant. The amount and cost of the shipments was confirmed in a series

of Statements issued by SNR’s agent, Stella Natural Resources. Under the terms

of the contract, payment was “to be made in full Friday week following

shipments.” According to the affidavit of John Honeycutt, the president of Dying

Ember, SNR did not pay for the shipments.

             Dying Ember filed a complaint against SNR and Younan on June 1,

2020, alleging nonpayment and claiming breach of contract, unjust enrichment,

and conversion. The complaint sought to recover the amount of the debt, pre- and

post-judgment interest, and attorney’s fees. The complaint was accompanied by

initial discovery requests including first interrogatories, as well as requests for

production of documents and admissions. At the time the suit was filed, the

Secretary of State listed SNR’s agent for service of process as

             Stella Natural Resources Inc.
             15992 U.S. Route 23
             Catlettsburg, KY 41129

                                          -2-
The Floyd Circuit Clerk attempted to serve Stella Natural Resources Inc. at this

address. On June 29, 2020, the certified mail was returned, stamped “Returned

Unserved 6-29-20 Vacant. Unable to Forward.”

             Dying Ember attempted service of the summons and complaint on

Business Filing Incorporated, the registered agent of Stella Natural Resources Inc.

Susan Johnson at Business Filing Incorporated acknowledged service and the

undated return card was filed by the Floyd Circuit Clerk on August 10, 2020.

             Dying Ember also employed a warning order attorney to effect

service. He filed his report on January 28, 2021, stating that he had mailed letters

to SNR RailOps, LLC, attention Stella Natural Resources, at 15992 U.S. Route 23,

Catlettsburg, Kentucky 41129 and to Ray Younan at an address in Australia. He

opined that SNR and Younan had been notified of the nature and pendency of the

action.

             Dying Ember additionally served the Secretary of State as the

statutory agent of SNR pursuant to Kentucky Revised Statutes (“KRS”)

454.210(3). The Secretary of State acknowledged service on February 13, 2021.

                                         -3-
              SNR did not file an answer to the complaint or respond in any other

way. On March 16, 2021, Dying Ember filed a motion for default judgment

against SNR.1

              Meanwhile, SNR retained an attorney, Matthew R. Lindblom, to

defend it in the action. According to Lindblom, he learned of Dying Ember’s

action through a search of CourtNet prior to March 16, 2021, and SNR retained

him thereafter. Lindblom contacted Dying Ember’s attorney on March 16, 2021,

prior to the filing of the motion for default judgment, to inform him that he was

representing SNR. He told Dying Ember’s attorney that the service attempts to

date had been ineffective and sought an agreement on a deadline to file an answer

to the complaint. Lindblom also requested copies of any other papers filed or

served in the case to date. Dying Ember’s attorney denied the request and

informed Lindblom that he was finalizing a motion for default judgment. He later

stated that he told Lindblom that “unfortunately no cooperation could be expected

other than allowed by the Civil Rules.” He explained that his orders “were not to

cooperate . . . for anything. And, I told Mr. Lindblom I was not able to do that.”

              Lindblom obtained a copy of the motion for default judgment from

the court clerk’s office after checking CourtNet to confirm it had been filed. On

1
  The motion did not request relief against Younan, stating that service on him may have been
lacking at that time.

                                              -4-
March 25, 2021, Lindblom filed an objection on behalf of SNR to the first motion

for default judgment. The objection explained that Lindblom had been recently

retained to represent SNR in the action and that SNR intended to file an answer to

complaint. It stated that SNR’s management team, which had been recently

replaced, was reviewing records relating to SNR’s relationship to Dying Ember

and would require discovery to respond fully to Dying Ember’s allegations. It

described the telephone conversation with Dying Ember’s attorney and informed

the court that Dying Ember had not withdrawn the motion for default judgment

even though it knew that SNR intended to respond to the complaint. The objection

challenged the validity of the service on SNR and argued that Dying Ember would

not be prejudiced by the denial of its motion. It stated that it did not have a copy of

the discovery requests and that Dying Ember refused to provide them. SNR’s

objection did not expressly state that it was entering a special appearance solely to

challenge service.

             The circuit court conducted a hearing, took the motion under

submission, and ordered the parties to participate in mediation within forty-five

days. The parties complied but the mediation was unsuccessful. The mediator

filed his report to the circuit court on June 2, 2021.

             Dying Ember then issued a new summons, complaint, and discovery

to SNR pursuant to KRS 14A.4-040(2), by serving SNR at its principal office

                                          -5-
address at 170 C&O Road, Ivel Coal Plant, Ivel, Kentucky, 41642, to the attention

of David Stone, the President of SNR. Dying Ember did not serve the new

summons on Lindblom or alert him of this new attempt at service. Dying Ember’s

counsel explained that he did not do so because Lindblom “had not indicated to me

that he was empowered to accept service.” Dying Ember also filed a motion for

renewed default judgment.

             SNR filed an objection to the second motion for default judgment,

noting that Dying Ember had not tried to notify SNR’s counsel that it was

attempting service for a second time. It also claimed that it had not yet filed an

answer to the complaint because it was waiting for the trial court to rule on the first

motion for default judgment that was still pending and ripe for ruling following the

failed mediation. SNR also filed an answer.

             Following a hearing, the trial court entered a default judgment and

awarded Dying Ember judgment in the amount of $358,789.27 plus interest. The

court accepted the assumption of service in accordance with KRS 14A.4-040 and

found that Dying Ember had stated its debt adequately and fully by affidavit and

documents. It further found that SNR had failed to counter that proof with any

testimony, affidavits, or documents.

             SNR filed a motion to reconsider and set aside entry of default

judgment, arguing that service had still not been completed when SNR filed its

                                          -6-
answer and that SNR had meritorious defenses to Dying Ember’s claims. It also

contended that good cause existed under Kentucky Rules of Civil Procedure (CR)

55.02 to set aside the default judgment, because SNR had provided a valid excuse

for the alleged default; had demonstrated a meritorious defense; and showed that

Dying Ember would not be prejudiced by setting aside the default judgment. SNR

also filed a motion under CR 6.02 to enlarge the period for filing its answer should

the trial court deem service to have been completed. Dying Ember filed a

response. Following a hearing, the trial court entered another default judgment

virtually identical to the earlier one but including language to make it “final and

appealable.” It also entered an order denying SNR’s motion to set aside and its

motion for an enlargement of time. This appeal by SNR followed.

             A party may request default judgment when “a party against whom a

judgment for affirmative relief is sought has failed to plead or otherwise defend[.]”

CR 55.01. “[D]efault judgments are not looked upon with favor as it is the policy

of the law to have every case decided on its merits.” Dressler v. Barlow, 729

S.W.2d 464, 465 (Ky. App. 1987). “Since every cause of action should be tried

upon the merits, the rendering of judgments by default ought to be withheld where

seasonable objection is made unless a persuasive reason to the contrary is

submitted.” Childress v. Childress, 335 S.W.2d 351, 354 (Ky. 1960).

                                         -7-
             When a default judgment has been entered, it may for “good cause”

be set aside in accordance with CR 60.02. CR 55.02. To show good cause, a party

must provide “(1) a valid excuse for the default; (2) a meritorious defense to the

claim; and (3) absence of prejudice to the non-defaulting party.” Statewide

Environmental Services, Inc. v. Fifth Third Bank, 352 S.W.3d 927, 930-31 (Ky.

App. 2011) (citations omitted).

             “Although default judgments are not favored, a trial court is vested

with broad discretion when considering motions to set them aside, and an appellate

court will not overturn the trial court’s decision absent a showing that the trial

court abused its discretion.” PNC Bank, N.A. v. Citizens Bank of Northern

Kentucky, Inc., 139 S.W.3d 527, 530 (Ky. App. 2003). The test for abuse of

discretion is whether the trial court’s decision was “arbitrary, unreasonable, unfair

or unsupported by sound legal principles.” First Horizon Home Loan Corp. v.

Barbanel, 290 S.W.3d 686, 688 (Ky. App. 2009).

             Under the standards established in our case law, the decision to grant

a default judgment may be held to be an abuse of discretion when the defendant

has made a timely objection to its entry. In Childress v. Childress, for example,

the defendant failed to timely answer or appear against the complaint. 335 S.W.2d

at 352. His attorney thereafter filed an untimely motion for leave to answer and

defend. The trial court denied the motion and entered default judgment. The

                                          -8-
judgment was reversed on appeal, with the court stating: “Since every cause of

action should be tried upon the merits, the rendering of judgments by default ought

to be withheld where seasonable objection is made unless a persuasive reason to

the contrary is submitted.” Id. at 354.

             Similarly, in Dressler v. Barlow, the plaintiff filed a motion for

default judgment against the defendant, who claimed she was never served the

summons and complaint. 729 S.W.2d at 464-65. The defendant’s attorney

discovered, by chance, that the motion for default judgment had been filed and

claimed neither he nor his client had received any notice of it. He went before the

court to object and requested leave to file a memorandum in opposition to the

motion. The trial court granted leave, and the attorney filed a memorandum

containing numerous meritorious defenses to the complaint and counterclaim. The

trial court nonetheless granted default judgment to the plaintiff. It was the opinion

of the appellate court that “it was an abuse of discretion for the trial court to grant

default judgment in favor of appellee, after having given appellant leave to show

cause why that judgment should not be reached, and defendant responded by

producing prima facie defenses and counterclaims.” Id. at 465.

             SNR asserts that it only received actual notice of the action filed by

Dying Ember on the same day Dying Ember filed its motion for default judgment.

It filed an objection nine days after receiving notice. The situation is unlike that in

                                           -9-
First Horizon v. Barbanel, an opinion affirming a grant of default judgment, in

which the defendants alleged improper service of the complaint but admitted they

had actual notice at least 22 days before the motion for default was filed. 260

S.W.3d at 689. The trial court held a hearing on the motion for default judgment

and SNR’s objection, assuming jurisdiction over the parties insofar as it ordered

them to participate in mediation and informed them it was taking the matter under

submission. While the parties were awaiting a ruling on the motion and objection

pending before the court, Dying Ember proceeded to file a new summons,

complaint, and discovery requests without informing SNR’s counsel. SNR filed

another objection and an answer. The trial court nonetheless entered a default

judgment in favor of Dying Ember, finding that service was complete in this

second instance, and subsequently denied SNR’s motion to set aside the default

judgment.

             SNR had sought to head off entry of the default judgment by filing a

seasonable objection and appearing before the court. Dressler, 729 S.W.2d at 465.

Under Childress and Dressler, the trial court’s grant of default judgment was an

abuse of discretion.

             Because the granting of default judgment was an abuse of discretion,

it follows that the order denying the motion to set aside the default judgment “must

                                        -10-
fall of its own weight.” Id. at 466. We offer no opinion on the issue of service of

process.

             The default judgment is hereby vacated, and the matter is remanded

for further proceedings.

             CETRULO, JUDGE, CONCURS.

             THOMPSON, K., JUDGE, DISSENTS AND FILES SEPARATE
OPINION.

THOMPSON, K., JUDGE: Respectfully, I dissent. I believe the Floyd Circuit

Court’s judgment should be affirmed as: (1) Dying Ember properly provided proof

that it had the right to collect on an established debt (as Dying Ember repeatedly

delivered coal to SNR, SNR confirmed receipt of each load of coal and the

payment due, and SNR failed to pay); (2) Dying Ember properly served SNR; and

(3) SNR failed to establish good cause for the default judgment to be set aside

(SNR failed to establish that it had a valid excuse for failing to timely answer, a

meritorious defense to the claimed debt, and the absence of prejudice to Dying

Ember). I believe the circuit court acted appropriately within its discretion in

granting a default judgment against SNR in favor of Dying Ember and declining to

set it aside. I would affirm.

             As the majority opinion has detailed, Dying Ember was compelled to

attempt service on SNR five different ways over the course of more than a year,

including through a warning order attorney and the Secretary of State. These

                                         -11-
extreme measures were necessitated because SNR violated KRS 271B.5-010,

which states that “[e]ach corporation shall continuously maintain in this

Commonwealth a registered office and a registered agent that comply with KRS

14A.4-010.”

              The circuit court specifically found in granting the renewed motion

for default judgment that the fifth service attempt was effective, serving SNR at its

principal office through KRS 14A.4-040(2). KRS 14A.4-040(1) provides for

service on an entity’s registered agent, or under KRS 14A.4-040(2) if it has no

registered agent or that agent cannot be served with reasonable diligence that the

entity “may be served by registered or certified mail, return receipt requested,

addressed to the entity or foreign entity at its principal office and to the attention of

the person or office appropriate for giving notice to the entity or foreign entity.” I

am confident that the circuit court was correct in determining that SNR was

properly served in accordance with KRS 14A.4-040(2) as the evidence associated

with the first attempt at service demonstrated that SNR lacked a proper registered

agent at the address given for service to the Secretary of State, necessitating that

other means be employed to serve it.

              However, that does not mean that some of the earlier attempts to serve

SNR may not have been effective as well. KRS 14A.4-040(3) states “[t]his section

does not prescribe the only means, or necessarily the required means, of serving an

                                          -12-
entity or foreign entity.” CR 4.04(5) provides: “Service shall be made upon a

corporation by serving an officer or managing agent thereof, or the chief agent in

the county wherein the action is brought, or any other agent authorized by

appointment or by law to receive service on its behalf.” See PNC Bank, N.A. v.

Citizens Bank of Northern Kentucky, Inc., 139 S.W.3d 527, 529-30 (Ky. App.

2003) (footnote omitted) (concluding service on a local branch manager of a bank

was effective). Service through the warning order attorney or Secretary of State

may have been proper if they complied with KRS 14A.4-040(2) or CR 4.04(5).

             I agree with both Dying Ember and the circuit court that SNR has

failed to demonstrate any good cause to set aside the properly entered default

judgment against it. As the majority correctly states, to show good cause, a party

must provide “(1) a valid excuse for the default; (2) a meritorious defense to the

claim; and (3) absence of prejudice to the non-defaulting party.” Statewide

Environmental Services, Inc. v. Fifth Third Bank, 352 S.W.3d 927, 930-31 (Ky.

App. 2011). It appears that this test was first adopted in Kentucky in Perry v.

Central Bank and Trust Company, 812 S.W.2d 166, 170 (Ky.App. 1991), which

relied on 7 W. BERTELSMAN AND K. PHILIPPS, Kentucky Practice, CR 55.02,

comment 2 (4th ed. 1984).

             However, the majority Opinion then declines to apply this test.

Instead, the majority relies on Childress v. Childress, 335 S.W.2d 351 (Ky. 1960)

                                        -13-
and Dressler v. Barlow, 729 S.W.2d 464 (Ky.App. 1987), cases that predate this

test, to affirm. Because these cases predate this test, they have limited precedential

value and I disagree that reversal is warranted based on them.

             As for Childress, besides predating this test, it is distinguishable

considering the facts and the Court’s reasoning. Childress was a divorce case in

which the husband who failed to answer was illiterate, with the wife claiming the

husband had waived any right in property which belonged to her by signing a

written property settlement in exchange for $500. While the husband did not

answer in time, when he did retain an attorney the husband requested to be allowed

to answer, and filed an affidavit that explained that he did not know what he was

signing, his wife acted to defraud him and explained that the property belonged to

him solely or jointly with the wife (as some property was derived from his

daughter and other property was acquired by both their efforts during the

marriage). The husband’s request to be allowed to answer occurred before any

other action in the case, besides the wife taking noticed depositions, had occurred.

             The Court emphasized that it would treat this matter differently

“[b]ecause of public concern” in “divorce proceedings[,]” noting “[d]efault

judgments in divorce cases are not looked upon with favor even in regard to

property rights.” Childress, 335 S.W.2d at 353-54. The Court also emphasized

that “[i]n the present case, the delinquent defendant had sought to head off the

                                         -14-
entry of the default judgment by his motion [to be allowed to file an answer which

was filed before the court made its judgment approving the property settlement].

That fact is a significant and important consideration.” Id. at 354. The Court also

emphasized “the husband in this case made a prima facie showing that the release[]

he signed may be unfair and he may have been taken advantage of.” Id.

             I am also not convinced that Dressler, 729 S.W.2d 464, requires a

different result. Dressler essentially sought to separate certain broad

pronouncements in Childress from the specifics involved in that case; I do not

agree that Childress should be interpreted as it was in Dressler. However, even

Dressler is distinguishable as the case involved private individuals and a suit

involving a land contract, and that case did not have the protracted history here of a

party having actual notice and in fact participating in the suit prior to service it

deemed adequate and then making no timely response after conclusively adequate

service. Our Courts routinely distinguish Dressler with little comment. See, e.g.,

First Horizon Home Loan Corp. v. Barbanel, 290 S.W.3d 686 (Ky.App. 2009);

Perry, 812 S.W.2d 166.

             Additionally, while the same result might have occurred in Childress

had the test been employed there, I am far from certain that the same result would

have occurred in Dressler, as the Court specifically rejected the defendant’s excuse

for not answering, that she did not recall being served, and that she did not receive

                                          -15-
notice of the motion for default, noting that service by the sheriff was conclusive

and no service of the motion for default was required where she had not appeared

in the case. Dressler, 729 S.W.2d at 465. This appears to show that the defendant

did not have a valid excuse for the default. While, regarding the second part of the

test, the Court referenced the fact that the defendant in responding raised prima

facie defenses and counterclaims, there was no judgment on whether these

appeared to be meritorious. Id. There was also no consideration as to whether

there was an absence of prejudice to the non-defaulting party.

             Barbanel, 290 S.W3d 686, a more recent case which the majority

Opinion rejects, is apropos as it involves a default by a corporation; it provides

guidance helpful to a resolution here. In Barbanel, the Court affirmed the denial of

a motion to set aside a default against two banks. The Court found significant that

despite First Horizon’s complaining that it did not receive appropriate notice of the

complaint as it was served through the Secretary of State rather than its registered

agent, the fact that the bank admitted to having actual notice at least twenty-two

days before the motion for default was filed (as it submitted a motion for an

extension of time to file its response and then let the extension period lapse). 290

S.W.3d at 689. The Court emphasized that carelessness in handling a complaint is

not good cause for setting aside a default. Id.

                                         -16-
               Although the majority Opinion quotes the test for good cause, it

avoids applying it, even declining to offer an opinion on whether the service of

process was effective. In doing so, I believe the majority Opinion does not

properly review this case. Applying the test is required and the issue of whether

the fifth attempt at service was appropriate is integral to the issue of whether there

was a valid excuse for the default. I would affirm the circuit court’s factual finding

that the service at SNR’s principal place of business was effective and apply the

test for good cause to conclude that the circuit court did not err in failing to set

aside the default judgment as none of the three factors were satisfied.

               SNR did not raise any valid excuse for the default as it has not

provided a valid basis for failing to file a timely answer. SNR had actual notice of

the complaint as of March 16, 2021, if not sooner, and has admitted as much.2 In

opposing the first default motion, SNR stated a desire to file an answer and

investigate Dying Ember’s claims but failed to request the opportunity to file a

belated answer at that time. While this may be excused if the first four attempts at

service were defective, SNR still knew there was a pending suit and should have

understood that its timely answer would be required upon proper service.

2
  It strains all credibility to believe that SNR had no notice of the pending lawsuit but just
happened to employ counsel who just happened to search for pending actions against it on
CourtNet and it only received notice that way. While I do not opine on the effectiveness of
service attempts one through four, I suspect that SNR received notice of the pending lawsuit
through them prior to this time.

                                               -17-
Certainly, by the time SNR was properly served on June 2, 2021, it should have

been prepared to file an answer within twenty days of service being deemed

effective, or at least request an enlargement of time to answer before its answer

was due, rather than taking no action at all. SNR had far more than the twenty-two

days of notice deemed sufficient in Barbanel, even if its answer was not due at the

onset. SNR has no excuse for waiting until after the second motion for default was

filed to file an answer.

             Additionally, SNR’s excuses for not timely answering are specious.

While SNR complained of ineffective service earlier and argues that it was

improper for Dying Ember to serve it at its principal business address rather than

being served through counsel, it cannot establish any requirement that it be served

in such a manner. Indeed, given SNR’s history of deeming service ineffective, I

believe it is highly probable that had SNR been served through its counsel rather

than at its principal place of business, it would dispute that such service was

effective where it never waived statutory service or consented to such. Dying

Ember acted appropriately in serving SNR pursuant to KRS 14A.4-010(2) after

SNR complained it had not been properly served. SNR had counsel and should

have anticipated that its complaint of improper service would result in another

attempt to serve it in a manner permitted by statute.

                                         -18-
             Unlike the illiterate husband in Childress, SNR is an LLC who by its

own admission is run by a management team. A management team should be

capable of understanding that any process should be brought to its counsel’s

attention so that it can be properly addressed in a timely manner.

             Additionally, SNR’s untimely answer was problematic as it was not

verified, did not challenge this latest service of process by raising ineffective

service as an affirmative defense, was not accompanied by any affidavits or any

other proof disputing the merits or the effectiveness of this latest service of

process, and it was also not accompanied by a motion for enlargement of time.

Compare with Childress in which the defendant sought permission to file an

untimely answer prior to any motion for default being filed. As there is no valid

excuse for SNR’s failure to file a timely answer, the default was proper and need

not be set aside.

             While the failure to satisfy the first factor requires us to affirm, I am

also confident that SNR did not satisfy factors two or three, either. SNR has not

presented any proof of a meritorious defense despite having months to do so

between when it first began participating in the case after the first motion for

default was filed and when the second motion for default was filed, as part of its

response to this second motion, or when it asked that the default be set aside.

Unlike in Childress, SNR did not file any affidavits or other proof to establish

                                         -19-
fraud or another meritorious defense. SNR has only vaguely argued in its answer

that:

             [U]pon information and belief it or one or more of its
             affiliates has had a business relationship with the Plaintiff
             in the past but current management for SNR does not
             currently have complete information regarding the extent
             of that relationship. Accordingly, and based on the
             allegations in the Complaint and the documents attached
             to the Complaint, SNR denies the allegation that Plaintiff
             sold coal to SNR and SNR refused to pay.

The answer is odd, as SNR had three months to investigate the relationship and

what occurred but seems to know nothing further than it did at that time. Instead,

below in opposing the motions for default judgment, SNR made vague allegations

through counsel as to unfair dealings which it apparently cannot substantiate.

             Finally, SNR has failed to show a lack of prejudice to Dying Ember if

the default were to be set aside. I note that there was specific discussion during a

hearing before the circuit court that many claimants are seeking payment from

SNR and delay may deny Dying Ember any recovery, with the majority’s reversal

and directions essentially putting Dying Ember at the back of the line.

             When “the excuses for failing to answer are weak, as are the defenses

. . . we cannot say [and should not say] it was an error or abuse of discretion for the

trial court either to grant the default judgment or to refuse to set it aside.” Perry,

812 S.W.2d at 170. This matter needs to be finally concluded and Dying Ember

needs to be paid for the coal it delivered to SNR.

                                          -20-
           Accordingly, I dissent.

BRIEFS FOR APPELLANT:                 BRIEF FOR APPELLEE:

Matthew R. Lindblom                   Calvin R. Tackett
Louisville, Kentucky                  Whitesburg, Kentucky

                                     -21-