Court Opinion

ID: 4404442
Source: CourtListenerOpinion
Date Created: 2019-06-07 09:05:40.97267+00
Date Added: 2024-06-11T14:35:03.864212
License: Public Domain

If this opinion indicates that it is “FOR PUBLICATION,” it is subject to
                  revision until final publication in the Michigan Appeals Reports.

                            STATE OF MICHIGAN

                             COURT OF APPEALS

STERLING BENEFITS, LLC, STERLING                                      UNPUBLISHED
AGENCY, INC., JOSEPH HANEY, and PAUL                                  June 6, 2019
MATTES,

               Plaintiffs-Appellants,
and

BOSQUETT & COMPANY,

               Plaintiff,

v                                                                     No. 342529
                                                                      Oakland Circuit Court
DAVID FISCHER and BOSQUETT &                                          LC No. 2009-103556-CK
COMPANY,

               Defendants-Appellees,
and

BARRY D. PAULSELL, GORDON ST. JOHN,
CONRAD CONTI, JOSEPH (JOE) HANEY,
STERLING INSURANCE GROUP, and RALPH
C. WILSON AGENCY,

               Defendants.

Before: STEPHENS, P.J., and GADOLA and LETICA, JJ.

PER CURIAM.

        Plaintiffs, Sterling Benefits, LLC, Sterling Agency, Inc., Joseph Haney, and Paul Mattes
(the Sterling plaintiffs), appeal by leave granted the order of the trial court granting the motion of
defendant, Bosquett & Company (Bosquett), to set aside a default judgment. We vacate and
remand.

                                                 -1-
                                             I. FACTS

        This case involves a default judgment entered against Bosquett in 2010. In 2006 and
2007, defendant Barry Paulsell1 attempted to purchase a minority stake in Bosquett, which was
owned by David Fischer. Paulsell allegedly paid Fischer $500,000, with the understanding that
he was purchasing a 25% ownership interest in Bosquett. Instead of issuing Paulsell the shares
of stock, however, Fischer and others allegedly engaged in fraudulent activities and sold
Bosquett’s assets for personal benefit. On September 2, 2009, Paulsell, on his own behalf and on
behalf of the corporation, sued Fischer, Bosquett,2 and other defendants, alleging fraud,
misrepresentation, breach of fiduciary duty, conversion, unjust enrichment, and tortious
interference with contractual relations.

       According to the record, the complaint was personally served upon Fischer, individually
and as the registered agent for Bosquett. Neither Fischer nor Bosquett filed a responsive
pleading in the case. On September 9, 2009, all parties appeared before the trial court for a
hearing on Paulsell’s motion for preliminary injunction. An attorney appeared at the hearing on
behalf of Fischer and Bosquett, indicating that he was representing Bosquett in its role as
defendant; the attorney did not enter a formal appearance in the case, however.

        Thereafter, by letter dated October 15, 2009, Paulsell’s counsel informed Fischer’s and
Bosquett’s attorney that he planned to seek a default unless an answer was filed. No answer was
filed, and Paulsell sought a default against Fischer and Bosquett, which was entered by the trial
court on October 26, 2009. The record indicates that Fischer and Bosquett were served with the
default by first-class mail. Paulsell then stipulated to dismiss his claims against the remaining
defendants, who were dismissed by order of the trial court dated October 30, 2009. The trial
court then closed the case, apparently inadvertently; on January 7, 2010, the trial court reopened
the case against Fischer and Bosquett.

        Paulsell thereafter moved for entry of a default judgment against Fischer and Bosquett,
seeking statutory treble damages for conversion, asking for judgment in the amount of
$1,500,000. Accompanying Paulsell’s motion was the June 7, 2007 letter from Fischer in which
he acknowledged on behalf of Bosquett receipt of $500,000 from Paulsell. Paulsell also
submitted an affidavit attesting to the payment and loss of that money. The trial court entered a
default judgment on January 8, 2010 in favor of Paulsell, and against Fischer and Bosquett, in
the amount of $1,500,000, plus attorney fees of $15,000. Apparently believing that Fischer and

1
  Paulsell was the original plaintiff in this case. On appeal, the Sterling plaintiffs have been
substituted as plaintiffs-appellants in place of Paulsell, as the real parties in interest following an
assignment by Paulsell. Paulsell v Fischer, unpublished order of the Court of Appeals, entered
April 19, 2018 (Docket No. 342529).
2
    Bosquett was thus named in the complaint as both plaintiff and defendant.

                                                 -2-
Bosquett did not have assets to satisfy the judgment, Paulsell never attempted to collect on the
judgment.3

        Meanwhile, in September 2009, Sterling Benefits, LLC, allegedly purchased Bosquett’s
assets, including various customer accounts. That purchase agreement allegedly provided for
commissions to be paid to Bosquett, which Sterling allegedly did not pay. In 2016, Bosquett
sued Sterling, seeking payment of the commissions.

         In 2018, Sterling purchased the default judgment from Paulsell, apparently anticipating
offsetting the default judgment against any amounts it might be determined to owe Bosquett in
the Sterling-Bosquett litigation. Bosquett thereafter filed in this case an emergency motion for
relief from the default judgment, arguing that the default should be set aside because the 2009
complaint had not specifically sought damages against Bosquett. The trial court, with a new trial
judge presiding, granted Bosquett’s motion, concluding that because the complaint had not
sought money damages against Bosquett, Paulsell’s motion for default seeking money damages
against Bosquett had been a misrepresentation to the trial court. The Sterling plaintiffs now
appeal to this Court, challenging the trial court’s order setting aside the default judgment as to
Bosquett.

                                        II. DISCUSSION

                                 A. STANDARD OF REVIEW

        We review a trial court’s decision to set aside a default judgment for an abuse of
discretion. Village of Edmore v Crystal Automation Sys Inc, 322 Mich. App. 244, 255; 911 NW2d
241 (2017). Similarly, we review a trial court’s decision on a motion for relief from judgment
for an abuse of discretion. CD Barnes Assoc, Inc v Star Heaven, LLC, 300 Mich. App. 389, 421-
422; 834 NW2d 878 (2013). If the trial court’s decision is within the range of reasonable and
principled outcomes, it has not abused its discretion. Ronnisch Constr Group, Inc v Lofts on the
Nine, LLC, 499 Mich. 544, 552; 886 NW2d 113 (2016). The interpretation and application of a
court rule is a question of law that we review de novo. Alder v Dormio, 309 Mich. App. 702, 707;
872 NW2d 721 (2015).

                                          B. MCR 2.603

        The Sterling plaintiffs first contend that the trial court abused its discretion when it set
aside the default judgment under MCR 2.603(D)(1). We agree.

       In Michigan, public policy discourages setting aside defaults and default judgments that
have been properly entered. Alken-Ziegler, Inc v Waterbury Headers Corp, 461 Mich. 219, 229;

3
 The parties do not dispute that Fischer discharged the underlying $500,000 debt in his 2011
bankruptcy.

                                                -3-
600 NW2d 638 (1999). At the times relevant to this case,4 MCR 2.603(D) provided for the
setting aside of a default judgment as follows, in relevant part:

         (D)    Setting Aside Default or Default Judgment

         (1) A motion to set aside a default or a default judgment, except when grounded
         on lack of jurisdiction over the defendant, shall be granted only if good cause is
         shown and an affidavit of facts showing a meritorious defense is filed.

         (2) Except as provided in MCR 2.612, if personal service was made on the party
         against whom the default was taken, the default, and default judgment if one has
         been entered, may be set aside only if the motion is filed

                (a) before entry of a default judgment, or

                (b) if a default judgment has been entered, within 21 days after the default
                judgment was entered.

         (3) In addition, the court may set aside a default and a default judgment in
         accordance with MCR 2.612.

        Thus, MCR 2.603(D)5 permits a trial court to grant relief from a default judgment when
the movant shows good cause and also files an affidavit of facts showing a meritorious defense.
MCR 2.603(D)(1). A party can show good cause by establishing “(1) a substantial defect or
irregularity in the proceedings upon which the default is based, (2) a reasonable excuse for
failure to comply with the requirements which created the default, or (3) some other reason
showing that manifest injustice would result from permitting the default to stand.” Shawl v
Spence Bros, Inc, 280 Mich. App. 213, 221; 760 NW2d 674 (2008) (quotation marks and citations
omitted).

         In this case, Bosquett failed to show good cause to set aside the 2010 default judgment.
Bosquett did not identify a defect in the proceedings leading to the default judgment. Bosquett
was personally served with Paulsell’s complaint, naming Bosquett as both a plaintiff and a
defendant. Although Bosquett’s counsel stated during the September 9, 2009 hearing that he
represented Bosquett in its role as defendant, Bosquett nonetheless did not file a responsive
pleading. Paulsell also produced documentation to support his assertion that he contacted
Bosquett’s attorney before seeking the default, but Bosquett still did not file a responsive
pleading or otherwise seek to avoid default. Bosquett also did not provide any reasonable excuse
for its failure to participate in the proceedings in the trial court leading to the default judgment;
its failure to avoid default appears to have been intentional.

4
    MCR 2.603 was amended effective May 1, 2019.
5
 The Sterling plaintiffs do not contend that Bosquett was personally served with the default, and
accordingly, do not dispute that the 21-day limit in MCR 2.603(D)(2)(d) does not apply.

                                                 -4-
        Bosquett now argues that allowing the default judgment to stand would result in manifest
injustice because the underlying complaint failed to state a cause of action against it. When a
claim fails to state a cause of action that would support a judgment, a default judgment based on
that complaint may result in manifest injustice. See Hunley v Phillips, 164 Mich. App. 517, 523;
417 NW2d 485 (1988). Bosquett argues that because Paulsell’s complaint in this case did not
specifically seek an award of money damages against it, the default judgment against it is
invalid. We disagree. Paulsell’s complaint identifies Bosquett as both a plaintiff and a
defendant. Although Paulsell’s complaint is not a model of precision, each count of the
complaint seeks relief from “defendants” generally, and Bosquett, indisputably, was a defendant,
as Bosquett’s attorney acknowledged at the September 9, 2009 hearing. Entry of a judgment
against Bosquett was not manifestly unjust to Bosquett based on the pleadings to that point,
because Bosquett was on notice of the allegations of the complaint, and as a defendant, Bosquett
could reasonably have expected to be held liable to Paulsell, yet apparently chose not to avoid
default.

         Moreover, demonstrating good cause alone is not sufficient to set aside a default
judgment; MCR 2.603(D) also requires an affidavit of facts showing a meritorious defense. A
demonstration of good cause and an affidavit of meritorious defense are two separate
requirements; both are required and may not be blurred into one requirement. Huntington Nat’l
Bank v Ristich, 292 Mich. App. 376, 390; 808 NW2d 511 (2011). Here, the record indicates that
Bosquett failed to submit an affidavit of meritorious defense before the trial court. Because
Bosquett failed to show good cause and also failed to submit an affidavit of meritorious defense,
the trial court abused its discretion when it set aside the default judgment insofar as its decision
rested on MCR 2.603(D).

                                          C. MCR 2.612

       The Sterling plaintiffs next contend that the trial court abused its discretion when it
granted Bosquett relief from the default judgment under MCR 2.612(C).6 Again, we agree.
Grounds for relief from judgment are set forth by MCR 2.612(C), which provides in relevant
part:

       (C) Grounds for Relief From Judgment.

       (1) On motion and on just terms, the court may relieve a party or the legal
       representative of a party from a final judgment, order, or proceeding on the
       following grounds:

               (a) Mistake, inadvertence, surprise, or excusable neglect.

6
  We reject Bosquett’s suggestion on appeal that the trial court set aside of the default judgment
as a correction of a “clerical mistake” under MCR 2.612(A)(1), given that the record does not
support that conclusion.

                                                -5-
              (b) Newly discovered evidence which by due diligence could not have
       been discovered in time to move for a new trial under MCR 2.611(B).

              (c) Fraud (intrinsic or extrinsic), misrepresentation, or other misconduct of
       an adverse party.

               (d) The judgment is void.

              (e) The judgment has been satisfied, released, or discharged; a prior
       judgment on which it is based has been reversed or otherwise vacated; or it is no
       longer equitable that the judgment should have prospective application.

               (f) Any other reason justifying relief from the operation of the judgment.

        (2) The motion must be made within a reasonable time, and, for the grounds
       stated in subrules (C)(1)(a), (b), and (c), within one year after the judgment, order,
       or proceeding was entered or taken. Except as provided in MCR 2.614(A)(1), a
       motion under this subrule does not affect the finality of a judgment or suspend its
       operation.

       (3) This subrule does not limit the power of a court to entertain an independent
       action to relieve a party from a judgment, order, or proceeding; to grant relief to a
       defendant not actually personally notified as provided in subrule (B); or to set
       aside a judgment for fraud on the court.

      Bosquett argues that in this case, MCR 2.612(C)(1)(f) justifies setting aside the default
judgment. We observe, however, that “[w]ell-settled policy considerations favoring finality of
judgments circumscribe relief under MCR 2.612(C)(1).” Rose v Rose, 289 Mich. App. 45, 58;
795 NW2d 611 (2010). In that case, this Court stated:

       The first five grounds for vacating a judgment, subrules (a) through (e), delineate
       narrow, time-critical pathways for relief. Subrule (f) indisputably widens the
       potential avenues for granting relief from a judgment. But the competing
       concerns of finality and fairness counsel a cautious, balanced approach to subrule
       (f), lest the scale tip too far in either direction. Thus, while permitting relief under
       this subrule for “any other reason” justifying it, our courts have long required the
       presence of both extraordinary circumstances and a demonstration that setting
       aside the judgment will not detrimentally affect the substantial rights of the
       opposing party. [Id. at 58.]

Generally, extraordinary circumstances are considered to arise when the judgment was obtained
by the “improper conduct of a party.” Rose, 289 Mich. App. at 62. Moreover, this Court has
explained that a reason put forth as a basis for relief under subsection (f) must not otherwise fall
within subsections (a)-(e). See Alder, 309 Mich. App. at 708.

       In this case, the trial court concluded that Paulsell had made some mistake or
misrepresentation to the trial court when obtaining the default judgment, because the complaint
had not sought money damages specifically from Bosquett. We note that the record does not

                                                 -6-
support this conclusion. Although Paulsell’s complaint was not a model of pleading, each count
of the complaint sought damages from the “defendants” generally, and Bosquett was named as a
defendant. The complaint thus arguably alleged liability for all defendants, including Bosquett,
for the funds Paulsell paid to Fischer, and Paulsell’s subsequent efforts to secure a default
judgment against Bosquett when it failed to respond to the complaint do not necessarily
demonstrate misrepresentation or subterfuge by Paulsell.

        Moreover, even if the facts supported a finding of misrepresentation, this ground cannot
support setting aside the default under MCR 2.612(C)(1)(f) because it falls squarely within
subsections (a) or (c), which is a time-limited ground that must be brought within one year of the
entry of the judgment. Bosquett has identified no “extraordinary circumstances” beyond those
circumstances that it argues demonstrate misrepresentation or fraud, being that the complaint and
the default judgment do not match. Accordingly, Bosquett did not establish a basis justifying
relief under MCR 2.612(C)(1)(f), and the trial court abused its discretion when it set aside the
default judgment based on its finding of a misrepresentation.

         In addition, contrary to Bosquett’s assertion, MCR 2.612(C)(3) does not provide a basis
for relief from the judgment in this case. MCR 2.612(C)(3) provides that the court may entertain
an independent action to relieve a party from judgment or set aside the judgment for fraud on the
court. Here, Bosquett did not pursue an independent action, and the trial court indicated that it
was not making a finding of fraud on the court. Bosquett therefore was not entitled to relief from
judgment under MCR 2.612(C)(3).

       The order of the trial court setting aside the default judgment is vacated and remanded for
proceedings consistent with this opinion. We do not retain jurisdiction.

                                                            /s/ Cynthia Diane Stephens
                                                            /s/ Michael F. Gadola
                                                            /s/ Anica Letica

                                               -7-