June 7, 2012
LUCE, SCHWAB & KASE, INC., A NEW JERSEY CORPORATION, PLAINTIFF-RESPONDENT,
SKI CONDITIONING INC., KEITH SMITH A/K/A KEITH A. SMITH AND KAROLE SMITH, DEFENDANTS-APPELLANTS.
On appeal from the Superior Court of New Jersey, Law Division, Essex County, Docket No. L-4920-10.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued February 1, 2012
Before Judges Axelrad and Ostrer.
The trial court denied defendants' motion to vacate a default judgment against them, and then denied their motion for reconsideration, finding they had not demonstrated excusable neglect or a meritorious defense. We are persuaded the court mistakenly exercised its discretion in denying the motion, and reverse.
Defendant Ski Conditioning, Inc. (Ski) entered into a credit agreement on December 27, 1995 with plaintiff Luce, Schwab & Kase, Inc. (LSK), a wholesaler of refrigeration, air conditioning and heating equipment. On the same day, Karole and her husband Keith, who was identified as Ski's president, also executed a "Guaranty of Past and Future Indebtedness," agreeing to remain personally liable for any of Ski's debts to LSK, and also agreeing to pay a 1.5 percent monthly "service charge" on past due bills, and a collection fee of 30 percent of any unpaid principal, interest and service charges.
On June 11, 2010, LSK filed a complaint against Ski, Keith and Karole, claiming $55,865.02 was due from Ski and unpaid on a book account for merchandise sold and delivered, and for "services rendered"; also due was $l6,759.50 as the thirty percent collection fee; and Karole and Keith were liable for the total amount of $72,624.52 as personal guarantors. Attached to LSK's complaint were the credit agreement, personal guaranties, and an April 16, 2010 statement, addressed to "Ski Conditioning" and reflecting a balance due of $55,865.02. The statement summarized fifty-seven separately numbered invoices, beginning with one dated November 24, 2008, and ending with one dated March 31, 2010. The last ten invoices, from June 30, 2009 through March 31, 2010, were month-end invoices for service charges. No payments were reflected for the entire period covered by the statement, although some credits were reflected for warranty returns.
The summons and complaint were served on Keith in early July. Although the return of service is not included in the record, the June 30, 2010 summons indicated that service on all three defendants would be made at what was identified as Keith's home address in the credit agreement. We presume Keith accepted service for Karole. See R. 4:4-4(a)(1) (authorizing service on a competent individual, at least fourteen years old, who is a "member of the household . . . then resid[ent]" at the defendant's "dwelling place or usual place of abode").
Defendants did not answer the complaint, and LSK obtained a default, serving defendants a copy of the request by letter dated August 18, 2010. LSK then obtained, on August 26, 2010, the clerk's entry of default judgment against all three defendants in amount of the $72,624.52, which was served on September 1, 2010.
Represented jointly by counsel, Karole and Keith moved for an order vacating the default judgment on November 22, 2010. In support of their motion, Keith and Karole attempted to excuse their failure to respond, and described their basis for defending the suit.
Regarding the failure to respond, Keith certified that his business had failed, he had been unemployed until July 26, 2010, and he had no funds to hire an attorney until November 4, 2010. He stated Karole was unaware of the lawsuit until she found papers pertaining to it in September 2010. He thus conceded that he failed to deliver the summons and complaint to her after it was served. He stated that he and his wife had been estranged. He certified he failed to respond to the complaint because he was "under stress over the divorce, no job, my lack of funds and health issues with one of our children."
Karole asserted she was unaware of the suit until late September. She stated she and Keith had marital difficulties for over a year while living in the same house, and she had filed for divorce September 20. After she became aware of LSK's lawsuit, she asked her divorce attorney to contact LSK's attorney in writing on September 24. Aside from her lack of actual knowledge until September, she said that her failure to respond was attributable to "stress over the divorce, [her] lack of funds and health issues with one of our children and a belief that [her] estranged husband was working on hiring an attorney."
With respect to defenses, Keith and Karole claimed that Ski was not indebted to LSK, because "any monies owed . . . were the responsibility of Airsmith, L.L.C." (Airsmith). They certified that Ski "went out of business on March 31, 2002," and Airsmith "made a final payment" on behalf of Ski's debts to plaintiff on October 24, 2006. Keith asserted he was only an employee of Airsmith, Karole was the limited liability company's sole member, and Airsmith also "went out of business" in September 2009. Attached to defendants' supporting brief was a copy, without an authenticating certification, of an October 24, 2006 check for $5000, drawn on the account of Airsmith LLC, with the notation "Note: Final Payment," and a corresponding page of a check register.*fn1
The court denied the motion on January 7, 2011 on the papers. Although the order states that the court has "considered oral argument," defendant has asserted without dispute that the court decided the motion on the papers. The court noted on the order, "Failure to establish excusable neglect R 4:50-1," but made no other findings of fact or conclusions of law.
Karole then retained her own attorney, who filed a motion to reconsider on February 4, 2011. She filed a supporting certification stating, "I also incorporate the prior Certifications previously filed. I have also reviewed all of the Motion papers submitted." However, she did not specifically certify to the truth of the additional facts set forth in her brief regarding her child's illness. Cf. 1:6-6 (evidence on motions not already appearing of record or judicially noticeable must be presented by affidavit on personal knowledge). She asserted in the brief that her child had been hospitalized before default judgment was entered. She argued the distraction of a child's serious illness constituted excusable neglect, citing Tradesmens National Bank & Trust Co. v. Cummings, 38 N.J. Super. 1, 4 (App. Div. 1955). As additional support for the claimed meritorious defense, she also asserted in the brief, apparently referring to Airsmith, that she was not involved in the firm's management and that she became the company's sole member because of her husband's poor credit. Although Keith did not file his own notice of motion for reconsideration, his attorney sent the court a letter purporting to join in Karole's motion.
LSK opposed the motion, arguing Karole had presented insufficient grounds for reconsideration, and noting that Keith had not formally filed a notice of motion. LSK did not address defendants' argument that any amounts due and owing LSK were Airsmith's obligation, not Ski's.
The court reconsidered its decision, but denied anew the motion to vacate the default judgment. The court concluded again there was no excusable neglect, without addressing Karole's claim of a family-member's illness or the failure of Keith to give her actual notice of the lawsuit. The court also found no meritorious defense, without addressing defendants' argument that LSK sought payment for sales to Airsmith, and not Ski, and the guarantees only applied to Ski's debts, stating:
[Defendants] failed to answer on the grounds that they were, the individual defendants were involved in marital difficulties and that in any event they couldn't afford to hire a lawyer for purposes of filing an answer.
And in any event with everything else going on and in light of the fact that the corporation had entered bankruptcy, they didn't feel that was a high priority for them to file an answer to the complaint.
I note parenthetically that the Court is now aware of the fact that the complaint against the individual defendants based upon the fact that the funds advanced and now due and owing to the plaintiff was in fact guaranteed.
Or payment guaranteed in any event, by the . . . defendants individually, which is why they were named.
The bankruptcy of the corporate entity is what the defendants claim represents their basis for a legitimate defense in likelihood of success of the merits.
The Court made the initial determination upon the motion initially that the reasons g[iven] did not constitute excusable neglect.
The Court has now had an opportunity at the motion, on the motion of the defendant to reconsider its ruling, and hereby reaffirms its initial determination that the motion to vacate default be denied and in reconsideration denies it once again on the basis that the failure to file an answer was not excusable.
Neglect in filing the answer was not excusable for reasons given, did not constitute sufficient excuse in this Court's view. Nor, have they shown a likelihood of success on the merits.
The court also held it was not required to state findings of fact and conclusions of law in support of its initial denial of the motion to vacate, stating:
That defendant/movant suggests that the Court failed to state its findings of fact and conclusions of law on the record at the time in which it denied the initial motion to vacate the default.
That, in this Court's view, was not necessary in light of the fact that oral argument wasn't requested and the fact that the findings, the Court's findings and grounds for the denial were specifically set forth on the order itself.
And that in any event such findings are not necessary in the way in which conclusions might be necessary under such circumstances because it's difficult to set forth facts when the Court finds no facts in support of the application being made or at least the facts alleged. Even if found to be so, did not represent excusable neglect.
Karole, Keith and Ski filed a notice of appeal from the court's March 4, 2011 order on the motion for reconsideration.*fn2
As Ski did not join in the motion for reconsideration, we deem the appeal to be on behalf of only Keith and Karole. Although LSK questions whether Keith should be deemed an appellant, based on the informal manner in which he joined the motion for reconsideration, we treat the appeal to be on behalf of both individual defendants, since the trial court considered the motion to be on behalf of both of them.
Keith and Karole raise the following points on appeal:
THE STANDARD OF EXCUSABLE NEGLECT DOES NOT DEMAND PERFECTION OUT OF A DEFENDANT, BUT MERELY THOSE RESPONSES THAT ARE REASONABLE UNDER THE CIRCUMSTANCES.
THE CONFIDENTIAL RELATIONSHIP BETWEEN A HUSBAND AND WIFE RENDERED ANY NEGLECT DEMONSTRATED BY KAROLE SMITH EXCUSABLE.
THE TRIAL COURT FAILED TO APPLY THE LAW, MAKING A NAKED CONCLUSION
RATHER THAN A FINDING OF FACT.
COURT'S DECISION CITING A LACK OF MERITORIOUS DEFENSE AROSE FROM THE WHOLESALE ADOPTION OF PLAINTIFF'S FACTS WITHOUT A HEARING.
Our decision is guided by well-established principles. The decision whether to grant a motion to vacate a default judgment 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). See also U.S. Bank N.A. v. Guillaume, 209 N.J. 449, 467 (2012) (stating decision on motion to vacate default judgment "should not be reversed unless it results in a clear abuse of discretion"). 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). Likewise, the appellate court may reverse the trial court based on an abuse of discretion "when a decision is made without a rational explanation, inexplicably departed from established policies, or rested on an impermissible basis." U.S. Bank N.A., supra, 209 N.J. at 467 (internal quotations and citations omitted).
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 Cnty. 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, 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)). Although the movant bears the burden of demonstrating that its failure to answer should be excused and default judgment vacated, Jameson v. Great Atl. & Pac. Tea Co., 363 N.J. Super. 419, 425-26 (App. Div. 2003), certif. denied, 179 N.J. 309 (2004), close issues should be resolved in the movant's favor. Mancini, supra, 132 N.J. at 334 ("All doubts, . . . should be resolved in favor of the parties seeking relief.") (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, 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.").
A motion to vacate on the basis of excusable neglect under Rule 4:50-1(a) 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, 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 Schulwitz 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"). On the other hand, if there is a reasonable chance the outcome on the merits would be different, vacating the default judgment may be justified. "The underlying concern is to determine whether there is some possibility that the outcome of the suit after a full trial will be contrary to the result achieved by the default." Wright, Miller & Kane, 10A Federal Practice & Procedure § 2697 at 163 (3d ed. 1998).
The failure to respond to a complaint may be excusable when it arises from an oversight in good faith. "Carelessness may be excusable when attributable to an honest mistake that is compatible with due diligence and reasonable prudence." Mancini, supra, 132 N.J. at 335. But, the failure of a sophisticated business to develop procedures for the forwarding of papers within its organization was deemed inexcusable. Ibid. "'Obviously the greater the negligence involved, or the more willful the conduct, the less "excusable" it is[.]'" Manning Eng'g, Inc., supra, 74 N.J. at 125 n.5 (quoting 7 James W. Moore et al., Moore's Federal Practice, ¶ 60.27 (2d ed. 1975)).
Our courts have found excusable neglect arising from a party's or a party's family's health problems. Tradesmens Nat'l Bank & Trust Co., supra, 38 N.J. Super. at 4 (affirming finding of excusable neglect where seventy-seven year-old defendant was coping with "mental upset" of wife's death and son's brain tumor, and failed to distinguish the summons and complaint from other notices he had been receiving). See Bergen-Eastern Corp. v. Koss, 178 N.J. Super. 42, 45 (App. Div.) (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"), appeal dismissed as improvidently granted, 88 N.J. 499 (1981); 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"). See also 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").
Where service is proper, but it is questionable whether the person responsible for answering received actual notice, our courts are receptive to vacating default judgment. See Mancini, supra, 132 N.J. at 335-37 (neglect arising out of misplaced notices in mailroom was not excusable, but default vacated under Rule 4:50-1(f)); Davis, supra, 317 N.J. Super. at 99-101 (complaint properly served on a corporate agent, and corporation's inadequate procedures for forwarding complaint to appropriate individuals for response was not excusable, but default judgment vacated under Rule 4:50-1(f), as the corporation moved promptly once appropriate persons became aware of the suit). See also Wright, Miller & Kane, 10A Federal Practice & Procedure § 2695 at 124 (3d ed. 1998) ("[W]hen defendant presents evidence that he received no actual notice of the suit in time to answer, the court is likely to grant relief."). We have also found excusable neglect where a defendant reasonably assumes that his counsel, who was handling other actions, was addressing the complaint at issue. Regional Constr. Corp. v. Ray, 364 N.J. Super. 534, 541 (App. Div. 2003).
We have recognized that a defendant's promptness in moving to vacate a default judgment is a factor that favors granting the motion. Ibid. (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, supra, 363 N.J. Super. at 428 (noting the "speed and diligence with which A & P moved to attempt to vacate the default judgment"); 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., 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., 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."*fn3
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.
In determining whether a moving party has asserted a "meritorious defense," the court must scrutinize the proposed answer and other materials submitted in support of the motion. "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, 214 N.J. Super. 300, 304 (App. Div. 1986) ("[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. "Normally, [the] failure to plead the details of what the meritorious defense is would be fatal to an application for reopening of a judgment." Marder, supra, 86 N.J. Super. at 318-19 (movant merely alleged it had an meritorious defense "but failed to include a statement as to what the meritorious defense was"). 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."). On the other hand, a defendant need not prove a likelihood of prevailing on the merits. Ibid. Although the movant in Marder presented no meritorious defense regarding liability, we still vacated the judgment as there remained an issue regarding the amount of damages. Marder, supra, 86 N.J. Super. at 319.
In T & S Painting & Maint. v. Baker Residential, 333 N.J. Super. 189 (App. Div. 2000), the plaintiff obtained a default judgment for $10,000 it claimed was due under a contract. We reversed the trial court's denial of the motion to vacate default, holding the defendant presented a sufficiently meritorious defense in certifying "that [the] plaintiff had breached its contract by unilaterally terminating the work which was contracted, prompting [the] defendant to avail itself of the contractually provided remedy to withhold certain payments." Id. at 193. We also deemed significant "the absence of specific contentions by [the] plaintiff" in support of its claim. Ibid.
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 these principles, we conclude the court mistakenly exercised its discretion in denying the motion for reconsideration. We note at the outset the trial court failed, particularly with respect to its denial of defendants' initial motion, to adhere to the dictates of Rule 1:7-4(a), requiring a motion judge to state factual findings and correlate them with the relevant legal conclusions. Bare conclusions of the sort included in the court's initial order do not suffice. Curtis v. Finneran, 83 N.J. 563, 570 (1980). A trial court's "[f]ailure to perform that duty 'constitutes a disservice to the litigants, the attorneys and the appellate court.'" Id. at 569-70 (quoting Kenwood Assocs. v. Bd. of Adjustment, 141 N.J. Super. 1, 4 (App. Div. 1976)).
We are unpersuaded by the court's statement, in its opinion on the motion to reconsider, that findings regarding the initial motion were not necessary because oral argument was not requested. Nor do we agree the court's "findings and grounds for the denial were specifically set forth on the order itself," which included only the conclusory statement that excusable neglect had not been established.
Even on the motion to reconsider, the court reaffirmed its finding that no excusable neglect was demonstrated, but did not address any of the facts presented by the parties, including their financial difficulties, their divorce, their child's illness, and, in Karole's case, her lack of actual notice until after default judgment was entered and her reliance on her estranged husband to answer the complaint. The court also did not address with any specificity defendants' allegation that LSK had ceased doing business with Ski in 2006, and Airsmith alone was liable for any amounts due and owing.
In view of the court's failure to provide an appropriate explanation for its exercise of discretion, we are not bound to defer. See U.S. Bank N.A., supra, 209 N.J. at 467 (abuse of discretion when decision made "without a rational explanation") (internal quotations and citations omitted). Based on our own review of the record, and mindful of the liberality with which motions to vacate default judgment should be considered, we discern sufficient grounds for finding excusable neglect. Both parties were under the stress of financial difficulty, divorce, and the serious illness of a child. The initial motion to vacate was filed roughly three months after entry of the judgment. While that it is not immediate, it does not reflect excessive delay. LSK has shown no particular prejudice from vacating the judgment that could not be adequately addressed by the court.
Additionally, Karole's non-response is explained by her lack of actual notice of the suit until September, after judgment was already entered.*fn4 She acted promptly and asked her divorce attorney to contact LSK in writing (although Karole has supplied neither the letter nor LSK's response). Karole also relied on her estranged husband to handle the response.
Turning to the presence of a meritorious defense, we are satisfied that defendants have provided more than bald allegations in support of their claimed defense. They have not simply denied liability under the guarantees. They have asserted that Ski ceased business, and that any debt was the responsibility of Airsmith, whose debts defendants had not personally guaranteed. They provided a document, the 2006 cancelled check marked "final payment," which they claim reflects the parties' understanding that Ski had ceased being LSK's customer no later than 2006. Defendants have thus presented details comparable to those the defendant presented in T & S Painting & Maintenance, supra.
We recognize significant gaps in Karole and Keith's defenses. Regarding their claim that Airsmith and not Ski was LSK's customer during the time period covered by LSK's April 2010 statement, defendants offer no contemporaneous documentary support. We do not know to whom - Airsmith or Ski - the invoices were addressed, although the final statement was addressed to Ski. We also do not know from whose account the last payments were drawn. Keith does not certify to any express oral or written notice to LSK that Ski ceased operations, and Airsmith would operate in its place.
On the other hand, in opposing the motion to reconsider, LSK chose not to respond directly to Keith's and Karole's factual allegations in defense of the suit. Apparently, the same salesman who witnessed Keith and Karole's signatures on the personal guaranty in 1995 was still the salesman reflected on the April 2010 statement. Neither he nor anyone else from LSK offered, in opposition to the motions, a certification that repudiated defendants' allegations, provided copies of the multiple invoices that may have been addressed to Ski as opposed to Airsmith, or offered other documents in support of plaintiff's claim. Cf. T & S Painting & Maintenance, supra, 333 N.J. Super. at 193 (noting plaintiff's failure to provide "specific contentions" in support of its contract claim for amount due). We may presume that if there were conclusive proof that defendants' proffered defense lacked merit, LSK would have presented it.
We also hesitate to impose too great a burden at this stage. Defendants have done more than simply certify they have a defense. They presented details. We are also mindful that it apparently would be particularly difficult for Karole to present more details or supporting documentation at this stage, as she stated she was not directly involved in Airsmith's management.
Reversed and remanded.