April 14, 2011
SALVATORE CARRANO, PLAINTIFF-RESPONDENT,
ANASTASIA DIBIZHEVA AND LYUBAKHON DIBIZHEVA, DEFENDANTS, AND ALFRED V. GELLENE, ESQ., DEFENDANT-APPELLANT.
On appeal from the Superior Court of New Jersey, Law Division, Union County, Docket No. L-3044-08.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued March 21, 2011
Before Judges Reisner and Ostrer.
The trial court denied defendant Alfred Gellene's motion to vacate a default judgment against him. Mindful that applications to vacate default judgments should be viewed with indulgence, we reverse because (1) defendant*fn1 offered a compelling excuse for not answering within time and promptly sought an order vacating the default judgment; (2) defendant has presented meritorious defenses; and (3) plaintiff would apparently suffer no irreparable prejudice if the judgment were vacated.
Defendant, an attorney, allegedly represented both sides in drafting a promissory note, executed September 29, 2006, that evidenced a purported loan by plaintiff Salvatore Carrano to Anastasia Dibizheva and Anastasia's mother, Lyubakhon Dibizheva. Carrano had maintained a "personal relationship" with Anastasia, which ended shortly after the note was signed.*fn2 He apparently knew the alleged conflict existed, as he had previously retained defendant to represent Anastasia in a child welfare matter.
According to the note's terms, Anastasia and Lyubakhon Dibizheva promised to repay $30,000 by September 29, 2008, "in consideration of value had and received between January 1, 2006 and September 1, 2006." The note imposed interest charges of two percent a month, described in the note as a "late fee," on the balance due each month after September 1, 2006. The note also conveyed "a lien on the net proceeds" that Anastasia might recover in a personal injury lawsuit filed on behalf of her son. The borrowers also agreed to pay the lender's reasonable fees and costs of collection. Defendant witnessed the note.
The borrowers allegedly defaulted on the note, and Carrano sued. The Dibizhevas did not file answers. Default was entered against them, but the trial court thereafter vacated the default by order dated September 23, 2009. The order vacating default also allowed Carrano to file an amended complaint adding Gellene as a defendant. The order required all three defendants to file their answers within the time allowed by the Rules of Court "or face a default judgment being instituted against them."
Carrano filed the amended complaint on October 5, 2009, asserting claims of negligence and breach of contract. Carrano alleged that defendant negligently drafted the note by including the wrong due date, and by describing the interest as a two-percent-a-month late fee, as opposed to twenty-four percent annual interest. Carrano also claimed that defendant failed to disclose and discuss his alleged conflict of interest.
Carrano asserted that he made the loan in reliance on defendant's actions. "In reasonable reliance on the accuracy of the Promissory Note . . . Carrano provided monies in the amount of $30,000.00 as a loan. . . ." He also alleged breach of contract, consisting of the borrowers' failure to pay the amount due, plus interest. He sought recovery of the sum certain of $45,640.95, utilizing an interest rate of eighteen percent (as opposed to the two percent a month in the note). Carrano also sought an accounting of the proceeds, if any, to the Dibizhevas from the lawsuit on behalf of Anastasia's son, which was mentioned in the note.
The Sheriff served defendant on October 15, 2009. Defendant did not answer in time.*fn3 Carrano's attorney promptly sought entry of default on December 1, 2009.
According to defendant's certification filed in support of his motion to vacate default, he called Carrano's attorney on December 2, 2009 and on numerous occasions in the following week and thereafter to request another copy of the complaint, which he could not locate. Defendant claimed that his calls were not returned. Carrano's attorney confirmed that defendant made multiple calls for a duplicate of the complaint, but he was out of the office and unable to respond. He asserted that one week after defendant's first call, his office staff left a voice-mail message for defendant, offering to provide a duplicate of the complaint if defendant paid for copying and postage charges.
However, plaintiff's counsel apparently did not disclose to defendant that by that time, he had already obtained entry of default pursuant to Rule 4:43-1. The record before us does not include proof of mailing of the entry of default as required.*fn4
See R. 4:43-1 (requiring service by ordinary mail). Defendant ultimately obtained a copy of the complaint from the clerk's office on January 7, 2010. Apparently he then learned that default had been entered.
However, on the same day, upon Carrano's request, the clerk entered default judgment against defendant pursuant to Rule 4:43-2(a). The clerk apparently relied upon a December 1, 2009 "Certification of Proof" by Carrano, who alleged that defendant's drafting errors caused a dispute between Carrano and the borrowers and put the total amount owing "at risk." After giving credit for payments made, and including fees of over $3000, Carrano sought judgment in the amount of $47,619.90. The record before us includes no proof of service of the default judgment on defendant. See R. 4:43-2(c) (requiring service on the defaulting defendant by ordinary mail).
Allegedly unaware that default judgment had already been entered, defendant attempted to file a motion to vacate default on January 12, 2010 under Rule 4:43-3. The clerk returned the motion because defendant failed to attach his answer, as well as the filing fee. He tried again on January 19, 2010, but the clerk returned the papers because defendant again failed to include his filing fee. Defendant ultimately succeeded in filing his motion on January 26, 2010.
In support of his motion, defendant referred to his efforts beginning in December 2009 to file an answer to the complaint. He also asserted that he had meritorious defenses. Although he conceded that he made an error in drafting the note, defendant asserted that Carrano knew he was representing the borrowers. He also argued that Carrano suffered no damages due to the errors in the note.
The trial court denied the motion on February 19, 2010. The court treated it as a motion to vacate default judgment under Rule 4:50-1, which imposes a more demanding test for relief than a motion to vacate default under Rule 4:43-3. See N.J. Mfrs. Ins. Co. v. Prestige Health Group, LLC, 406 N.J. Super. 354, 360 (App. Div.) (noting that the standard for vacating default, which requires "[a] mere showing of good cause," is less stringent than the test for vacating default judgment), certif. denied, 199 N.J. 543 (2009). The court found no excusable neglect because it found that defendant did not exercise due diligence or reasonable prudence in answering the complaint. Given its finding on excusable neglect, the court found it unnecessary to consider whether defendant presented a meritorious defense.
Thereafter, Carrano's counsel filed a motion for "directed verdict, summary judgment" against the Dibizhevas, accompanied by a certification dated March 3, 2010. The court granted the motion by order filed March 19, 2010, noting that no opposition was filed. The court awarded judgment against the Dibizhevas in the amount of $53,325.21, and dismissed with prejudice Anastasia Dibizheva's counterclaim for intentional infliction of emotional distress.*fn5
Defendant filed a notice of appeal in April 2010. After an appellate settlement conference, he then moved before this court in late May 2010 for a remand to allow him to file a new motion before the trial court in which he would expressly seek relief from the default judgment under Rule 4:50-1, and address the stringent standards governing a motion under that Rule. We granted the remand motion on June 17, 2010. Defendant promptly filed his second motion with the trial court on July 7, 2010.
In support of his second trial court motion, defendant asserted for the first time that he had been suffering from depression and other personal and financial problems in late 2009. As a result, he lost track of when his answer was due, and misplaced the complaint. Thus, he was unable to fulfill his obligation to answer the complaint timely. He referred again to his efforts to answer in December 2009. He also asserted that he had meritorious defenses, particularly as they related to whether his actions caused Carrano harm. Amplifying the argument regarding a meritorious defense that he made in January 2010, defendant asserted that his actions did not affect Carrano's ability to collect on the note, which evidenced the debt. Defendant asserted that he, at no time, indicated to Carrano that the debt could be collected.
Plaintiff opposed the motion. Carrano's counsel asserted that defendant's drafting errors gave the Dibizhevas a basis to contest the debt and impede Carrano's collection efforts. He alleged that defendant was guilty of conflicts of interest, demonstrated a lack of diligence, and was not candid with his clients. He also argued that defendant's claim of emotional health problems was "new, unverifiable [and made] in an effort to gain sympathy with the Court."
The trial court denied defendant's second motion. The court found no excusable neglect because "[s]ix months have passed since judgment was entered." Apparently rejecting defendant's certification, the court found that defendant "has not provided any factual or legal support" of his claimed personal issues. The court did not address the merits of defendant's defenses.
The court also rejected defendant's additional arguments, specifically that the judgment should be vacated because: (1) the theory upon which judgment was sought differed from the theory allegedly in the complaint; (2) the nature of the claim against him was not susceptible to computation of a sum certain; and (3) a judgment was already entered against the Dibizhevas. The court also found no basis to vacate the judgment for "any other reason justifying relief" under Rule 4:50-1(f).
This appeal followed.
Defendant argues that the default judgment should have been vacated based on any one of four grounds authorized by Rule 4:50-1: (1) under subsection (a), defendant's neglect in answering the complaint was excusable; (2) under subsection (c), plaintiff misrepresented the basis of his claim against defendant; (3) under subsection (e), the entry of summary judgment against the Dibizhevas constituted a satisfaction of judgment; and (4) under subsection (f), enforcing the judgment would be unjust, oppressive and inequitable. Defendant also argues that the clerk of the court exceeded his or her authority to enter default judgment under the circumstances. Because we find that the court mistakenly exercised its discretion in rejecting defendant's claim of excusable neglect particularly in light of the apparent merit of defendant's defenses, we shall not address defendant's remaining points.
We first review general principles that govern a motion to vacate a default judgment. We then examine the essential concepts of "meritorious defense" and "excusable neglect," and other factors that a trial court may consider in determining whether to vacate a default judgment under Rule 4:50-1.
The decision whether to grant such a motion is "left to the sound discretion of the trial court, and will not be disturbed absent an abuse of discretion." Mancini v. EDS, 132 N.J. 330, 334 (1993). However, where the trial court gives insufficient deference to the principles governing the motion, an appellate court must reverse. Davis v. DND/Fidoreo, Inc., 317 N.J. Super. 92, 100-01 (App. Div. 1998), certif. denied, 158 N.J. 686 (1999).
A motion to vacate default judgment implicates two often competing goals: the desire to resolve disputes on the merits, and the need to efficiently resolve cases and provide finality and stability to judgments. "The rule is designed to reconcile the strong interests in finality of judgments and judicial efficiency with the equitable notion that courts should have authority to avoid an unjust result in any given case." Manning Eng'g, Inc. v. Hudson County Park Comm'n, 74 N.J. 113, 120 (1977); see also Hodgson v. Applegate, 31 N.J. 29, 43 (1959) (interest in finality must be balanced with the goal of doing justice in the case); Nowosleska v. Steele, 400 N.J. Super. 297, 303 (App. Div. 2008) (stating that courts have liberally exercised power to vacate default judgment "in order that cases may be decided on the merits").
In balancing these two goals, our system is sympathetic to the party seeking relief, because of the high value we place on deciding cases on the merits. "A court should view 'the opening of default judgments . . . with great liberality,' and should tolerate 'every reasonable ground for indulgence . . . to the end that a just result is reached.'" Mancini v. EDS, supra, 132 N.J. at 334 (quoting Marder v. Realty Constr. Co., 84 N.J. Super. 313, 319 (App. Div.), aff'd, 43 N.J. 508 (1964)). Close issues should be resolved in the movant's favor. "All doubts, . . . should be resolved in favor of the parties seeking relief." Ibid. (citing Arrow Mfg. Co. v. Levinson, 231 N.J. Super. 527, 534 (App. Div. 1989)). That is so because of the importance we attach to securing a decision on the merits. Davis v. DND/Fidoreo, Inc., supra, 317 N.J. Super. at 100-01 (stating that doubts should be resolved in favor the applicant in order secure a trial upon the merits). At bottom, the decision whether to grant or deny a motion to vacate a default judgment must be guided by equitable considerations. Prof'l Stone, Stucco & Siding Applicators, Inc. v. Carter, 409 N.J. Super. 64, 68 (App. Div. 2009) (stating that "Rule 4:50 is instinct with equitable considerations").
The Rule establishes six alternative grounds for relief from a final judgment, whether obtained by default or after a trial on the merits.*fn6 We focus on defendant's claim of excusable neglect under Rule 4:50-1(a). A motion to vacate on that ground must be brought "within a reasonable time" but not later than one year after judgment. R. 4:50-2. Although not expressly included in the Rule, it is well-settled that a defendant claiming excusable neglect must also demonstrate that he or she has a meritorious defense. Marder v. Realty Constr. Co., supra, 84 N.J. Super. at 318. The justification for requiring a showing of meritorious defenses is simple. There is little point in setting aside a default judgment, sacrificing interests in repose and burdening a plaintiff and the court with additional litigation, if the ultimate result will inevitably be the same. See Shulwitz v. Shuster, 27 N.J. Super. 554, 561 (App. Div. 1953) (requiring the showing of a meritorious defense so "[t]he time of the courts, counsel and litigants [is] not . . . taken up by . . . a futile proceeding").
Our courts have found excusable neglect arising from a party's or an attorney's mental or emotional health problems. See N.J. Div. of Youth & Family Servs. v. T.J.B., 338 N.J. Super. 425, 434-35 (App. Div. 2001) (reversing denial of motion to vacate default judgment where defaulting parents were "intellectually challenged"); Bergen-Eastern Corp. v. Koss, 178 N.J. Super. 42, 45 (App. Div.), appeal dismissed as improvidently granted, 88 N.J. 499 (1981) (finding of excusable neglect affirmed where defendant was elderly widow who, although not incompetent, suffered from "continuing, serious psychiatric problems with several hospitalizations for mental illness"); Tradesmens Nat'l Bank & Trust Co. v. Cummings, 38 N.J. Super. 1, 4 (App. Div. 1955) (affirming finding of excusable neglect where defendant's "mental upset" over wife's death and son's illness led him to ignore complaint); cf. Novack v. Chait, 241 N.J. Super. 614, 623 (App. Div. 1990) (reversing dismissal of complaint for failure to answer interrogatories where plaintiff suffered from "extensive physical and psychiatric problems").
We do not find inconsistent our decision in Shannon v. Acad. Lines, Inc., 346 N.J. Super. 191, 197-98 (App. Div. 2001). In that case, we affirmed the decision of the Director of the Division of Civil Rights, who found that the emotional health problems of the corporate defendant's agent were not sufficient to warrant vacating default. However, the employee who had received service of the complaint and numerous subsequent papers in the case, did nothing in response for a year and a half while the case was pending, though he continued to function in his job. Id. at 195, 198. Recognizing that vacating default would contravene the public policy interests underlying the Law Against Discrimination, we affirmed after applying the deferential standard of review of administrative agency action. Id. at 197-98. That case certainly highlights that application of the Rule requires a fact-sensitive analysis taking into account the totality of circumstances. A court must scrutinize a claim of mental health problems as it would any other proffered excuse.
We may also look to federal courts' well-reasoned interpretations of the comparable federal rule, Federal Rule of Civil Procedure 60(b), on vacating default judgments. See Hodgson v. Applegate, supra, 31 N.J. at 35 ("It is therefore proper to draw on the experience of the federal courts with [Federal Rule of Civil Procedure 60(b)] to aid in the solution of comparable problems that arise under our rule."). There is persuasive federal authority that physical or mental illness may constitute excusable neglect. See, e.g., TCI Group Life Ins. Plan v. Knoebber, 244 F.3d 691, 699 (9th Cir. 2001) (defendant was distraught over death of husband and was being treated for depression); Tri-Continental Leasing Corp. v. Zimmerman, 485 F. Supp. 495, 497 (N.D. Cal. 1980) (attorney failed to file timely answer because he suffered from "incapacitating mental condition").
Our courts have also recognized that a defendant's promptness in moving to vacate a default judgment is a factor that favors granting the motion. Regional Constr. Corp. v. Ray, 364 N.J. Super. 534, 541 (App. Div. 2003) (affirming finding of excusable neglect "when examined against the very short time period between the entry of default judgment and the motion to vacate"); Jameson v. Great Atl. & Pac. Tea Co., 363 N.J. Super. 419, 428 (App. Div. 2003) (noting the "speed and diligence with which A & P moved to attempt to vacate the default judgment"), certif. denied, 179 N.J. 309 (2004); Morales v. Santiago, 217 N.J. Super. 496, 504-05 (App. Div. 1987) (reversing denial of motion to vacate because, among other factors, "[s]ellers moved to vacate the judgment soon after it was entered"). As noted above, the motion to vacate implicates the interest in finality and repose. However, when the ink has barely dried on the default judgment, the interest in repose does not loom as large.
"[W]here the judgment has been in effect for only a brief period of time before the motion to vacate is filed, . . . a plaintiff's expectations regarding the legitimacy of the judgment and the court's interest in the finality of judgments are at their nadir." Regional Constr. Corp. v. Ray, supra, 364 N.J. Super. at 545.
Related to the promptness with which a defaulting party moves to correct his or her oversight is the prejudice to the plaintiff if default judgment is vacated. Here, we refer to prejudice beyond the burden to plaintiff of proving entitlement to relief. The Rule authorizes the court to condition an order vacating default judgment "upon such terms as are just." R. 4:50-1. Relief awarded under this aspect of the rule must be "reasonably proportionate to the prejudice suffered by plaintiff." Regional Constr. Corp. v. Ray, supra, 364 N.J. Super. at 543. A court may compel a defendant seeking to vacate default to reimburse the plaintiff for the fees and costs "in pursuit of the default judgment or in responding to the motion to vacate."*fn7 Ibid. However, in some cases, a plaintiff may detrimentally rely on the default judgment and adjust his or her affairs accordingly, such that unwinding the judgment would result in significant or irreparable harm. The absence of such prejudice is a factor favoring a decision to vacate default judgment.
A plaintiff's failure to notify the defendant of the entry of default is another factor that may support vacating a default judgment that is obtained thereafter. Failure to provide notice of entry of default is significant if notice would have prompted the defendant to file a timely motion to vacate default under the more lenient standard of Rule 4:43-3. "[F]ailure to provide the notice required by the last sentence in R. 4:43-1 [regarding notice of entry of default] raises an issue that requires examination by the trial court of whether sufficient excusable neglect was established to permit relief from the judgment under R. 4:50-1(a) [regarding vacating default judgment]." Dynasty Bldg. Corp. v. Ackerman, 376 N.J. Super. 280, 285 (App. Div. 2005). A plaintiff's failure to provide timely notice of the entry of the default judgment may also support a motion to vacate if the failure of notice causes delay. "[P]laintiff's failure to comply with the applicable notice requirements [governing entry of a default judgment] provides further support for our conclusion that the default and default judgment should be set aside." Rosenberg v. Bunce, 214 N.J. Super. 300, 306 (App. Div. 1986).
Lastly, we address the concept of a "meritorious defense." The court must scrutinize the proposed defense. "We must examine defendant's proposed defense to determine its merit." Bank of New Jersey v. Pulini, 194 N.J. Super. 163, 166 (App. Div. 1984). In some cases, the meritoriousness of a defense may be apparent on the face of the complaint. See Rosenberg v. Bunce, supra, 214 N.J. Super. at 304. ("[W]e perceive from the face of the complaint, answer and other pleadings genuine issues as to liability and damages.") On the other hand, the bald denial of a plaintiff's complaint is usually insufficient to demonstrate that a meritorious defense exists. See 10 James W. Moore et al., Moore's Federal Practice - Civil ¶ 55.70 (3d ed. 2011) ("While the burden is not high, mere denials or conclusory allegations are not sufficient."). The defendant need not prove a likelihood of prevailing on the merits. 10 James W. Moore et al., Moore's Federal Practice - Civil ¶ 55.70 (3d ed. 2011).
In the final analysis, a court must consider the totality of circumstances in reaching an equitable result. In so doing, the court must consider defendant's explanation for his or her failure to answer or to participate in the litigation, the meritoriousness of the defenses, and other factors, such as prejudice to the plaintiff.
Applying the foregoing principles, we find that the trial court mistakenly exercised its discretion in denying defendant's motion to vacate the default judgment. We find that defendant did present cognizable evidence of an acceptable excuse for his failure to answer. That excuse is strengthened by his prompt efforts to correct his default and plaintiff's apparent failure to provide him with notice of the entry of default. Defendant has presented meritorious defenses that are evident based on the modest record before us. Lastly, nothing in the record indicates that plaintiff would suffer substantial prejudice if the default judgment were vacated.
Accepting his undisputed certification, defendant suffered from emotional health issues that interfered with his ability to cope with the obligations of his practice. While he did not describe the kind of extensive or serious mental illness or emotional health issues present in the cases reviewed above, he nonetheless was, to a significant degree, incapacitated from addressing the needs of his practice and the suit against him personally. Under the circumstances, his neglect was excusable.
While the trial court rejected defendant's claims of emotional problems as unproved, his certification presented cognizable evidence. R. 1:6-6. The court did not, before ruling, allow defendant the opportunity to supplement his certification with additional corroborating evidence. Plaintiff's counsel questioned, but provided no evidence to dispute defendant's assertions.*fn8 Thus, the trial court, in effect, made inappropriate credibility findings based on an undisputed certification.
Moreover, we view defendant's neglect not solely as the neglect of an attorney, who is usually held to a higher standard of diligence. Rather, we view defendant with the sometimes greater indulgence reserved for a party who is unable to cope with the demands of litigation. Given the significance of the claims against him, and his emotional state, his neglect was excusable.
Defendant's promptness in seeking to vacate default and then his persistence and diligence in seeking to vacate the default judgment also support our conclusion that his neglect was excusable. The trial court mischaracterized defendant's efforts in finding that defendant had allowed six months to pass before filing his motion. Defendant filed his first motion in January 2010. After the court denied it in February, he filed a timely appeal. Thereafter, he filed a motion for remand and a second trial court motion. Cf. Prof'l Stone, Stucco & Siding Applicators, Inc. v. Carter, supra, 409 N.J. Super. at 68-69 (reversing trial court's denial of second motion to vacate default judgment and stating, "there is no reason to look askance at a second motion that follows hard on the heels of a first that was denied because in movant's haste - prompted by pending collection proceedings - the motion failed to adequately present the issues for a ruling on its merits").
In this case, plaintiff's apparent failure to serve defendant with entry of default also tends to support vacating default judgment. As noted above, there is no proof in the record that plaintiff duly served defendant with the entry of default or the entry of default judgment. Defendant actively attempted to obtain a copy of the complaint and to respond to plaintiff's claims. Had defendant been notified that default had been entered December 1, 2009, there is a fair likelihood that he would have filed his motion to vacate default, subject to the less stringent standard, before plaintiff obtained default judgment. Instead, defendant apparently learned of the entry of default after he obtained a copy of the complaint from the court in early January 2010, the same day that default judgment was entered.
We also see no prejudice to plaintiff that cannot be remedied pursuant to the court's power to condition its decision "upon such terms as are just." R. 4:50-1. Plaintiff has alleged no extraordinary prejudice or detrimental reliance on the default judgment.
Finally, defendant appears to have meritorious defenses. Even if defendant had a conflict of interest and drafted the note negligently, Carrano needs to prove that defendant's negligence caused damages, and if so, how much. According to the note itself, Carrano apparently transferred funds to Anastasia Dibizheva over a nine-month period. At the end of that period, he obtained a promise from Anastasia and her mother, drafted by defendant, to repay the funds.
Thus, defendant apparently has a meritorious defense that his actions did not induce Carrano to extend credit in the first place. We recognize that Carrano has asserted that defendant's negligence gave rise to defenses by the Dibizhevas, which in turn impeded his collection efforts. However, that claim raises fact issues suitable for disposition on the merits.
We therefore reverse the order denying defendant's motion to vacate the default judgment, and remand for further proceedings consistent with this opinion.
Reversed and remanded.