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Tozer v. Charles A. Krause Milling Co.

decided.: May 7, 1951.


Author: Staley

Before KALODNER, STALEY and HASTIE, Circuit Judges.

STALEY, Circuit Judge.

The issue before us on appeal is whether the district judge abused his discretion in dismissing a motion by defendant to set aside a default judgment.*fn1 We hold that his refusal to set aside the judgment was error.

On September 29, 1948, the Italian Cook Oil Corporation,*fn2 a New York corporation, instituted this action in the United States District Court for the Eastern District of Pennsylvania. The complaint alleged damages for a breach of an implied warranty of quality of crude corn oil, sold by defendant corporation to plaintiff. Defendant is a Wisconsin corporation which, since 1933, has been registered as a foreign corporation doing business in Pennsylvania. Pennsylvania has no relation to the cause of action, and was apparently chosen by plaintiff because it was a convenient forum. Diversity of citizenship is the basis of federal jurisdiction.

Service of process was made in the following manner. Under Pennsylvania law,*fn3 defendant corporation, upon registering as a foreign corporation, appointed the Secretary of the Commonwealth as its statutory agent to accept process. The court below, pursuant to Rule 4 of the Federal Rules of Civil Procedure, 28 U.S.C.A., appointed the Sheriff of Dauphin County to make service on the Secretary of the Commonwealth. The latter, upon being properly served, transmitted a copy of the process by registered mail addressed to defendant at its registered Pennsylvania office, 126 Chestnut Street, Philadelphia. The letter, however, was returned undelivered. 126 Chestnut Street had once been the address of a firm of independent brokers with whom defendant did business, and in registering as a foreign corporation, defendant designated this its Pennsylvania address. Defendant apparently had no branch office within the Commonwealty of Pennsylvania at that time. A year later, in 1934, the broker moved, and defendant failed to inform the Secretary of the Commonwealth of a change in its registered office. Thus, defendant corporation, according to its allegation, never receiver notice of this action prior to the entry of default judgment, which was entered on June 2, 1949.*fn4

On December 1, 1949, defendant filed its motion to set aside the default judgment and attached thereto a proposed answer to plaintiff's complaint. The motion alleged substantially the facts set forth above, plus the further averment that defendant had no notice of the filing of the complaint or of the subsequent entry of judgment until October 31, 1949, whereupon it promptly investigated the matter, and then filed its motion. The district court dismissed the motion, assigning as reasons therefor the gross neglect of defendant and the lack of a meritorious defense. This appeal followed.

A motion to set aside a default judgment is addressed to the sound discretion of the court, and should not be disturbed on review unless there has been abuse of such discretion. See Orange Theatre Corp. v. Rayherstz Amusement Corp., 3 Cir., 1942, 130 F.2d 185, 187. In a somewhat analogous situation, however, this court, in the interests of justice, has not hesitated to reverse an order and judgment dismissing a complaint with prejudice for lack of prosecution. Peardon v. Chapman, 3 Cir., 1948, 169 F.2d 909, 913.

The district judge stated that he was not convinced that defendant's answer stated a wholly meritorious defense.From our study of the complaint and proposed answer, we are of the opinion that the allegations of defendant's answer, if established on trial, would constitute a complete defense to the action.

Plaintiff's complaint is based on an alleged oral contract of August 20, 1946, made between it and H. L. Raclin & Sons on behalf of defendant for the sale to plaintiff of six tank cars of "crude corn oil." H. L. Raclin & Sons, it is averred, was authorized to bind defendant. Plaintiff urges that, by virtue of the oral contract, there arose an implied warranty that the corn oil would conform to certain alleged usages in the New York market, and that four of the six tank cars of corn oil delivered to plaintiff failed to conform. Defendant's answer denies that H. L. Raclin & Sons was authorized to bind defendant. Defendant alleges that the oil shipped to plaintiff was "Amerikorn Crude Oil - Mill Run" and that the sale was made "subject to the usual terms and conditions applicable to the sale of such commodity by the defendant." Defendant forthwith mailed to plaintiff memoranda and confirmations whereby it expressly negatived any express or implied warranties of quality. Thus, defendant does not appear to deny plaintiff's averment that there was an oral contract entered into between the parties on or about August 20, 1946; but there is a one hundred eighty degree disagreement as to the actual terms of that agreement.

We are unable to discern exactly how much weight the lower court placed on its conclusion that defendant did not present a wholly meritorious defense. Since that question is always an important factor in the consideration of a motion to set aside a default judgment, we must conclude that the lower court's decision was substantially influenced by it.

Defendant corporation bases its claim for relief from the default judgment on Rule 60(b) of the Federal Rules of Civil Procedure, which states: "On motion and upon such terms as are just, the court may relieve a party or his legal representative from a final judgment, order, or proceeding for the following reasons: (1) mistake, inadvertance, surprise, or excusable neglect * * * (6) any other reason justifying relief from the operation of the judgment." Defendant contends that it should have been granted relief under Subsection (b)(6); or, in the alternative, that it was guilty of only inadvertence or excusable neglect so as to entitle it to relief under Subsection (b)(1).

What is excusable neglect and what is inexcusable neglect can hardly be determined in a vacuum. The opinion of the court below does not reveal what standard was applied nor what factors were weighed. The recent cases applying Rule 60(b) have uniformly held that it must be given a liberal construction. Matters involving large sums should not be determined by default judgments if it can reasonably be avoided. Henry v. Metropolitan Life Ins. Co., D.C.Va., 1942, 3 F.R.D. 142, 144. Any doubt should be resolved in favor of the petition to set aside the judgment so that cases may be decided on that merits. Huntington Cab Co. v. American Fidelity & Casualty Co., D.C.W.Va., 1945, 4 F.R.D. 496, 498; Standard Grate Bar Co. v. Defense Plant Corp., D.C.Pa., 1944, 3 F.R.D. 371, 372. Since the interests of justice are best served by a trial on the merits, only after a careful study of all relevant considerations should courts refuse to open default judgments. We are of the opinion that the court below applied a standard of strictness rather than one of liberality in concluding that justice did not require that the judgment be set aside.

Pennsylvania law, of course, does not control in matters of federal procedure. Since service of process was made in the instant case on the basis of a Pennsylvania statute, however, an examination of Pennsylvania law would seem not inappropriate. See Huntington Cab Co. v. American Fidelity & Casualty Co., supra. In Howland v. Home Ins. Co. of N.Y., 1917, 67 Pa.Super. 276 service of process was made on the Insurance Commissioner of the Commonwealth as statutory agent for defendant, a foreign corporation doing business in Pennsylvania. The Commissioner sent the notice to defendant's home office in New York City, but it was mislaid by a clerk. Judgment by default was entered against defendant. In affirming the order of the lower court which opened the judgment, the Superior Court stated the problem in these words 67 Pa.Super at page 280: "The question which the court below was called upon to consider was not whether there had been a legal service, but did the officers of the company have actual knowledge that the summons had been issued and served upon the insurance commissioner." Other Pennsylvania cases make it clear that the general rule applied in Pennsylvania with respect to the opening of default judgments is one of utmost liberalty.*fn5

In dismissing defendant's motion, the lower court failed to weigh certain factors. Since the relief sought by defendant was essentially equitable in nature, it is proper for the court to consider whether any prejudice will result to plaintiff if the judgment is set aside. Henry v. Metropolitan Life Ins. Co., supra; Horning v. David, 1939, 137 Pa.Super. 252, 8 A.2d 729. The record here discloses that there are no intervening equities, and that no special harm would result to ...

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