Court Opinion

ID: 2647396
Source: CourtListenerOpinion
Date Created: 2013-12-23 22:27:57.869378+00
Date Added: 2024-06-11T12:32:31.988905
License: Public Domain

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON

DANA AKHAVUZ and HASAN
AKHAVUZ, a married couple,                      No. 69234-8-1

                    Appellants,                 DIVISION ONE

             v.

TRACY ARNOLD MOODY and JOHN                     PUBLISHED OPINION
DOE MOODY d/b/a STUDIO SEVEN,
and SEVEN ENTERTAINMENT, INC., a                FILED:   December 23, 2013
Washington corporation,

                    Respondents.

      Becker, J. — At issue is an order vacating a default judgment almost a

year after it was entered. The motion to vacate should have been denied

because the insurer and defense counsel who failed to respond to the complaint

offered no excuse for the long delay. There is no "innocent insured" doctrine that

allows an insurer to escape responsibility by keeping its insured unaware that the

matter is being neglected.

                                  BACKGROUND

      Studio Seven, a heavy metal nightclub in Seattle, held a party on

Halloween night in 2010. Appellant Dana Akhavuz claims she attended the party
No. 69234-8-1/2

at Studio Seven and slipped and fell on fake blood that the performers were

using. Akhavuz had to undergo surgery for a broken ankle under general

anesthesia. A hairdresser, she was unable to work for months.

      According to a declaration she filed in connection with the default

judgment proceedings, Akhavuz called Studio Seven in November and

December 2010 to discuss her injuries and obtain information about the club's

insurance carrier. Akhavuz says the club's manager, Nicole Russell, was hostile

and refused to provide information about the insurer. Akhavuz and her husband

then retained attorney Pellegrino Certa.

       Certa wrote to Studio Seven in January 2011, asking the club to tender

the claim to its insurer and to acknowledge receipt. Certa's letter said that once

Studio Seven provided the insurer's information, "we will deal directly with your

insurer regarding this claim."

       On February 4, 2011, Studio Seven faxed Certa's letter to its insurer,

Founders Insurance Company. Russell and club owner Tracy Moody say in their

declarations that they provided information to Founders to assist in an

investigation, including a list of potential witnesses. Neither Founders nor Studio

Seven responded to Certa's letter.

       Akhavuz filed a personal injury suit against Studio Seven in May 2011.

She named Moody and his company, Seven Entertainment, Inc., as defendants.

Moody was served with the summons and complaint, discovery requests, and a

trial schedule on May 24, and his company was served 2 days later. Under Civil
No. 69234-8-1/3

Rule 4, the defendants had 20 days after the service of summons to appear and

answer the complaint.

      On May 25, 2011, Moody faxed the summons and complaint to Carlos

Ortiz, an insurance adjuster at Founders. On May 27, Ortiz contacted attorney

Certa and asked that Akhavuz submit a demand package to Founders. On June

13, Certa responded with Akhavuz's offer to settle the claim for $195,000. The

letter said the settlement offer would remain open for 30 days. Ortiz did not

respond to the settlement offer. And the defendants did not appear or answer.

      On June 16, 2011, three days after sending the demand letter, Akhavuz

filed a motion for default against Studio Seven. The court entered an order of

default the next day. On June 28, Akhavuz obtained a default judgment for

$433,046.58, including costs and statutory attorney fees.

      Akhavuz heard nothing further from Studio Seven or its insurer until five

months later.

       In November 2011, Ortiz, the claims adjuster for Founders, checked the

trial docket online and saw the order of default. Upon this discovery, Founders

retained Lane Powell attorney Barry Mesher as counsel for Studio Seven.

Mesher obtained a copy of all the pleadings and retained an investigator to

evaluate the allegations in the complaint.

       On November 16, 2011, Mesher called Certa. According to Certa, Mesher

indicated the defendants were aware of the default judgment and were

considering whether settlement was feasible or whether they would move to

vacate the default judgment. On November 25, Certa followed up this
No. 69234-8-1/4

conversation with an e-mail to Mesher in which he asked Mesher to let him know

Moody's intentions.

       Certa did not hear back from Mesher until March 8, 2012, when Mesher

called him to request a settlement conference. According to Certa, he and

Mesher agreed to meet on March 14. But on the morning of March 14, Certa

received a message that Mesher would be unable to attend the meeting.

       In June 2012, Mesher left Lane Powell and became a shareholder at

another firm.

       On June 8, 2012, Lane Powell attorneys Gabriel Baker and Jennifer

Sheffield took over Studio Seven's defense. They reviewed the investigator's

report, obtained witness declarations, and spoke with Moody. According to

Moody, this was the first notice he had that a default judgment had been entered

against him. (Neither Moody nor defense counsel have commented on the
November 2011 phone call in which Mesher allegedly told Certa that the

defendants were aware of the judgment.)

       On June 13, 2012, Baker called Certa to ask that Akhavuz agree to vacate

the default judgment. This was the first time Certa had heard from any

representative of Studio Seven since March, when Mesher cancelled the

settlement conference. Akhavuz did not agree to vacate the judgment.

       On June 27, 2012, the defendants filed a motion to vacate the default

judgment that had been entered on June 28, 2011. Under Civil Rule 60(b), a

court may relieve a party from a final judgment, but a motion to vacate must be

made within a reasonable time, and if on grounds of mistake, inadvertence,
No. 69234-8-1/5

surprise, or excusable neglect, "not more than 1 year after the judgment, order,

or proceeding was entered." The defendants filed their motion with one day to

spare. They argued the judgment should be vacated "so that Studio Seven is not

unfairly penalized for its insurer's handling of this matter."

       On July 25, 2012, after hearing argument and considering the factors

identified in White v. Holm. 73 Wash. 2d 348, 438 P.2d 581 (1968), the trial court

vacated the default judgment and reset the matter for trial.

       Akhavuz appeals.

                                    DISCUSSION

       This court reviews a ruling on a motion to vacate a default judgment for

abuse of discretion. Morin v. Burris, 160 Wash. 2d 745, 753, 161 P.3d 956 (2007).

A court abuses its discretion only when its decision is manifestly unreasonable or

based on untenable grounds. Showalter v. Wild Oats, 124 Wash. App. 506, 510,

101 P.3d 867 (2004). Default judgments are "generally disfavored in Washington

based on an overriding policy which prefers that parties resolve their disputes on

the merits." Showalter, 124 Wash. App. at 510. "But we also value an organized,

responsive, and responsible judicial system where litigants acknowledge the

jurisdiction ofthe court to decide their cases and comply with court rules." Little
v. King, 160 Wash. 2d 696, 703, 161 P.3d 345 (2007). When balancing these

competing policies, the fundamental principle is whether or not justice is being

done. Griggs v. Averbeck Realty. Inc., 92 Wash. 2d 576, 582, 599 P.2d 1289

(1979).
No. 69234-8-1/6

       A party against whom a default judgment has been entered may move for

vacation of the judgment pursuant to CR 60. The trial court's discretion in

deciding whether to set aside a default judgment revolves around two primary

and two secondary factors first articulated in White. These factors are: (1) there

is substantial evidence to support at least a prima facie defense; (2) the failure to

timely appear and answer was due to mistake, inadvertence, surprise, or

excusable neglect; (3) the moving party acted with due diligence after notice of

the default judgment; and (4) no substantial hardship will result to the opposing

party. White, 73 Wash. 2d at 352.

       The first two factors are primary; factors three and four are secondary:

              The first two are the major elements to be demonstrated by
       the moving party, and they, coupled with the secondary factors,
       vary in dispositive significance as the circumstances of the
       particular case dictate. Thus, where the moving party is able to
       demonstrate a strong or virtually conclusive defense to the
       opponent's claim, scant time will be spent inquiring into the reasons
       which occasioned entry of the default, provided the moving party is
       timely with his application and the failure to properly appear in the
       action in the first instance was not willful. On the other hand, where
       the moving party is unable to show a strong or conclusive defense,
       but is able to properly demonstrate a defense that would, prima
       facie at least, carry a decisive issue to the finder of the facts in a
       trial on the merits, the reasons for his failure to timely appear in the
       action before the default will be scrutinized with greater care, as will
       the seasonability of his application and the element of potential
       hardship on the opposing party.

White, 73 Wash. 2d at 352-53.

Evidence of a Defense

       Here, the trial court ruled Studio Seven had a defense to Akhavuz's

claims. It is not clear whether the court deemed the defense virtually conclusive
No. 69234-8-1/7

or merely a prima facie defense. Studio Seven argued primarily that Akhavuz

could not show the club or its owner had actual or constructive notice of the fake

blood that allegedly caused her fall, as required in premises liability cases like

Wiltse v. Albertson's, Inc.. 116 Wash. 2d 452, 805 P.2d 793 (1991). Studio Seven

also offered club manager Russell's declaration, stating that a floor supervisor

routinely inspects the premises for any debris, spills, or other hazards, and the

declaration of an employee who reported that a "5 feet and one inch tall, white,

over-weight" woman said she had fallen outside the premises.

      Akhavuz responded that Russell's comments about regular maintenance

practices did not address the critical issue of the maintenance and inspection

efforts that night. Akhavuz asserted she did not meet the physical description of

the patron the employee described as having fallen outside the club, so there

was no genuine dispute as to the location of her fall. Akhavuz reasoned she had

proven actual notice because Studio Seven's own promotional flyers indicated

they were aware the performers would be using fake blood. Studio Seven

conceded it was aware the band "Spiderface" used fake blood on stage, but

understood the band "does not spray the fake blood into the general public

areas."

       Based on this record, we conclude Studio Seven did not present a

conclusive defense, but rather a prima facie defense sufficient to carry the issue

of liability to trial. See White, 73 Wash. 2d at 353; see also Berger v. Dishman

Dodge, Inc., 50 Wash. App. 309, 311, 748 P.2d 241 (1987) (prima facie defense
No. 69234-8-1/8

established by unchallenged findings that defendant dealership regularly

removed snow and ice from the viewing lot where customer slipped).

Mistake, Inadvertence, or Excusable Neglect

       Where a defendant is unable to show a conclusive defense, "the

plausibility and excusability of the defaulted defendants' reason for failing to

initially and timely appear in the action deserve grave, if not dispositive,

consideration." White. 73 Wash. 2d at 353-54. Here, the trial court ruled that it did

not matter that Founders knew about the default judgment as early as November,

2011. The court determined that Studio Seven and Moody were innocent

insureds similar to the defendants in White and ruled as a matter of law that "the

negligence of an insurer cannot be imputed to innocent insureds." The Studio
Seven defendants "only needed to show that they acted with diligence once they

were personally made aware of the default judgment."

       Studio Seven contends its failure to appear and answer is excusable

because owner Moody believed that Founders was handling the litigation. Studio

Seven's brief, without citing authority, repeatedly refers to the "innocent insured

doctrine." In fact, no such doctrine exists. What is just and proper must be

determined by the facts of each case, not by a hard and fast rule applicable to all

situations regardless of the outcome. Ljttje, 160 Wash. 2d at 703; Griggs, 92 Wash. 2d

at 582.

          For the proposition that an "innocent insured" must be excused for delays

attributable to the insurer or defense counsel, Studio Seven relies primarily on

White and Berger, 50 Wash. App. at 312. In White, the plaintiff's complaint alleged

                                           8
No. 69234-8-1/9

Holm was negligent when he ran into her on foot outside his business, causing

her to fall and break her leg. White, 73 Wash. 2d at 349. Defendant Holm first

heard about the suit in a radio newscast and immediately consulted his insurance

agent, an insurance adjuster, and a separate attorney. As a result of these

conversations, and an agreement the adjuster had Holm sign, Holm believed that

"although coverage was questioned, his insurance carrier would provide legal

counsel." White, 73 Wash. 2d at 349. Once he was served, Holm sent the papers

to the insurance adjuster, who forwarded them to the insurance carrier with a

statement that Holm would be represented by his own attorney until coverage

was determined. "Because of this misunderstanding as to who would provide

interim legal counsel," Holm failed to timely appear or answer. White, 73 Wash. 2d

at 350. White obtained a default judgment.

       Holm filed a motion to vacate the default judgment 11 days after the

judgment was granted. The trial court denied the motion. The Supreme Court

reversed, concluding that under these circumstances, "any culpable neglect on

the part of the insurer" should not be imputed to the Holms, "who were otherwise

found to be blameless." White, 73 Wash. 2d at 354. "The fact that Mr. Holm did not

persistently pursue the adjuster with inquiries relative to the progress of the

matter, if such failure be a significant factor in other circumstances, is mitigated

somewhat in the instant case by the alacrity with which the default was claimed

and the judgment entered, as well as by the promptness with which the motion to

set aside the default was submitted." White, 73 Wash. 2d at 355.

                                          9
No. 69234-8-1/10

       Studio Seven did not present evidence of a genuine "misunderstanding"

as to who was to mount its defense, as occurred in White. Studio Seven

correctly believed Founders was responsible. Founders, while recognizing its

responsibility, offers no excuse for its delay. Ortiz, the adjuster, states he

assumed the parties "were in the process of settlement negotiations" after

receiving Akhavuz's demand letter in June 2011. But he does not explain why

Founders made no response to the settlement offer and took no action until

November 2011. And once Ortiz discovered the default in November 2011 and

retained Lane Powell, there was still no formal response to the lawsuit until the

motion to vacate was filed on June 27, 2012, one day short of a year after the

default judgment was entered. Thus, Studio Seven's situation is not analogous

to the defendant's in White.

       In Berger, the plaintiff slipped on ice while looking for a new vehicle at the

Dishman Dodge lot. Berger. 50 Wash. App. at 310. Dishman tendered defense of

Berger's claim to its insurance company. The insurance company in turn

assigned the claim to a subsidiary, American International Adjustment Company.

Dishman was served on May 19, 1986, and the complaint was forwarded and

received by American's claims manager, Chuck Abbott, four days later. On June

26, 1986, the court entered a default judgment awarding Berger nearly $100,000.

That same day, Berger's attorney contacted American's office and notified Abbott

about the default judgment.

       The following day, counsel for the dealership filed a notice of appearance

and sent Berger's attorney a letter requesting he consider setting aside the

                                          10
No. 69234-8-1/11

default. On July 25, a month after the default judgment was entered, Dishman

moved to vacate the judgment. Abbott, the claims manager, testified by affidavit

that he had made a mistake and "sent the wrong case file to the law firm."

Berger. 50 Wash. App. at 311. Abbott did not discover the mistake until June 26,

when Berger's attorney called him to notify him of the default judgment. The trial

court agreed to vacate the judgment, entered findings offact and conclusions of

law, and ordered Dishman to pay Berger's attorney fees.

       In contrast to the defendants' argument in this case, plaintiff Berger

argued on appeal that only the acts of the insured defendant could be
considered, not those of the insurer. Division Three of the Court of Appeals

disagreed. After considering cases from several other jurisdictions, the court

concluded, "While no Washington case has directly so held, one can conclude

that the acts or omissions of an insurer can be imputed to the insured defendant."

Berger. 50 Wash. App. at 312. The court reasoned, "'a delay solely attributable to

an oversight or mistake on the insurance carrier's part will excuse a default

where the insured has no reason to believe his interests are not being

protected.'" Berger. 50 Wash. App. at 312, quoting Baskerville v. Philadelphia

Newspapers. Inc., 278 Pa. Super. 59, 419 A.2d 1355, 1356 (1980). The court

affirmed the ruling setting aside the default judgment.

       Unlike the defendant in Berger who had no reason to believe that his

interests were not being protected, Studio Seven did have reason to wonder

what happened with Akhavuz's suit. The Studio Seven defendants heard nothing

about the lawsuit for more than a year after forwarding the complaint to

                                         11
No. 69234-8-1/12

Founders, yet made no effort to confirm that it was being defended, even though

they had been served with a case schedule setting trial for October 2012. As

noted in White. 73 Wash. 2d at 355, a defendant's failure to "pursue the adjuster

with inquiries relative to the progress of the matter" is a factor that can weigh

against a finding of excusable neglect, and in this case, it does.

       And unlike in Berger. where the claims adjuster sent the wrong case file to

the law firm, neither Founders nor Lane Powell points to any "mistake." They

provide nothing whatsoever to explain the delay of more than a year after

Akhavuz filed suit. There is a cryptic allusion to attorney Barry Mesher leaving

Lane Powell, but the firm's attorneys do not say whether, or how, his exit

contributed to the delays and inaction.

       Insurance companies do not have an automatic right to vacation of a

default judgment when they fail to communicate to an insured that nothing is

being done. If an insurer's reasonable excuse for a short delay can be attributed

to the defendant for purposes of weighing the second White factor as was done

in Berger, there is no reason why the insurer's lack of a reasonable excuse for a

lengthy delay cannot also be attributed to the defendant.

       In addition to the existence of a genuine "misunderstanding" or "mistake,"

a notable feature distinguishing White and Berger from this case is that the

defendants moved to vacate the default judgment within a much shorter time

period. In White, the defendant moved to vacate 11 days after the default

judgment was entered. In Berger. it was 29 days. See also Calhoun v. Merritt.

46 Wash. App. 616, 621, 731 P.2d 1094 (1986) (defendant entered notice of

                                          12
No. 69234-8-1/13

appearance 17 days after default judgment was entered and moved to vacate a

month later; court held genuine misunderstanding between insurer and insured

as to who was responsible for answering complaint was excusable); Norton v.

Brown. 99 Wash. App. 118, 992 P.2d 1019, 3 P.3d 207 (1999) (misunderstanding

between insured and insurer about how to respond to summons and complaint

was excusable where notice of appearance was filed on defendant's behalf a few

hours prior to default judgment being entered, defendant tried repeatedly over

next 10 months to contact plaintiffs lawyer about the lawsuit, and defendant's

counsel only learned of the default after filing a motion to compel), review denied.

142Wn.2d 1004 (2000).

       A default judgment is normally viewed as proper "only when the adversary

process has been halted because of an essentially unresponsive party." Norton.

99 Wash. App. 118, 126, 992 P.2d 1019 (2000). citing Gage v. Boeing Co.. 55 Wn.

App. 157, 160-61. 776 P.2d 991. review denied, 113Wn.2d 1028(1989). Studio

Seven has presented no evidence of mistake or misunderstanding on the part of

its insurer or counsel that would excuse the lengthy delay. The Studio Seven

defendants themselves did not inquire whether the lawsuit had been resolved.

Under these circumstances, the negligence of Studio Seven's insurer and

counsel are attributable to Studio Seven. The lack of a response to the lawsuit

by Studio Seven and its agents essentially halted the adversary process.

Secondary Factors: Due Diligence and Substantial Hardship

       Where a party's defense is prima facie but not conclusive, we may also

consider the secondary factors of due diligence and substantial hardship. White,

                                         13
No. 69234-8-1/14
73 Wash. 2d at 353. Due diligence after discovery of a default judgment

contemplates the prompt filing of a motion to vacate. Calhoun. 46 Wash. App. at

619; see also In re Estate of Stevens. 94 Wash. App. 20, 35, 971 P.2d 58 (1999)

(three months was too long to wait). Studio Seven moved to vacate three weeks

after Moody claims he and his company received notice of the judgment. But as

discussed above, the insurance company and defense counsel had notice of the

judgment many months earlier. The motion to vacate was not filed with due

diligence. Luckettv. Boeing Co.. 98 Wash. App. 307, 313, 989 P.2d 1144 (1999)

(diligence not shown where attorney delayed four months in bringing the motion

to vacate), review denied, 140 Wash. 2d 1026 (2000).

       The fourth factor to be considered is whether the party that obtained the

default judgment will experience "substantial hardship" if it is vacated. White. 73
Wash. 2d at 352. The prospect of having to go to trial is not, by itself, enough to

constitute substantial hardship. Pfaff v. State Farm Mut. Auto. Ins. Co.. 103 Wn.

App. 829, 836, 14 P.3d 837 (2000), review denied, 143 Wash. 2d 1021 (2001). But

here, the significant risk that the evidence has gone stale as a result of the delay

does constitute a hardship. Studio Seven and its insurer had access to and

control over critical evidence for the purposes of their own investigation as soon

as the suit was filed, while Akhavuz is still waiting for an answer to her complaint

and responses to her discovery requests. This factor weighs against vacating

the judgment.

       In summary, under in the circumstances of this case, the negligence of the

insurer and assigned counsel can be imputed to the insured. Inexcusable

                                         14
                        No. 69234-8-1/15

                        neglect is the dispositive factor that should have guided the trial court to deny the

                        motion to vacate.

                               Reversed and remanded for reinstatement of the default judgment.

                        WE CONCUR:

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