Indigo America, Inc. v. Big Impressions, LLC ( 2010 )

United States Court of Appeals
For the First Circuit
No. 08-2444
INDIGO AMERICA, INC.,
Plaintiff, Appellee,
v.
BIG IMPRESSIONS, LLC.,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. William G. Young, U.S. District Judge]
Before
Lynch, Chief Judge,
Stahl and Howard, Circuit Judges.
Seth H. Salinger for appellant.
Thomas W. Evans, with whom Zelle McDonough & Cohen LLP, was on
brief, for appellee.
February 24, 2010
HOWARD, Circuit Judge. This case comes to us following
the entry of default judgment against the defendant-appellant, Big
Impressions, LLC. On appeal, Big Impressions challenges, inter
alia, the district court's denial of its motion to set aside an
entry of default. For the reasons that follow, we vacate the
decision of the district court and remand for further proceedings.
I.
The seeds of this dispute were sown in 2005. That year,
Big Impressions, a printing company incorporated in Arkansas,
purchased an Indigo printing press ("Indigo Press") from the
plaintiff-appellee, Indigo America, Inc. ("Indigo"). In connection
with this purchase, Big Impressions entered into two contracts with
Indigo. One of these contracts, titled the "Purchase and Sale
Agreement," required Big Impressions to trade in two of its
commercial presses as part of the purchase price.
In June 2007, Indigo filed a breach of contract action
against Big Impressions in federal district court in Massachusetts.
Indigo claimed that Big Impressions violated the contracts at issue
by, among other things, not making two of its commercial presses
available for pick up. In due course, process was served in
Arkansas on Scott Wallace, the manager and sole member of Big
Impressions.
Wallace, in August 2007, filed an answer to the
complaint, purportedly on behalf of the corporation. This filing,
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however, contravened the long-standing rule barring persons who are
not licensed to practice law from representing corporations in
judicial proceedings. In re Las Colinas Dev. Corp., 585 F.2d 7, 13
(1st Cir. 1978). Although Wallace did not purport to be a member
of the bar, the court nevertheless accepted and docketed the
answer, and the case proceeded unhindered.
Over the course of the next eight months, Big Impressions
and Indigo engaged in settlement negotiations under the aegis of
the district court's settlement program. Ultimately, however,
these negotiations failed to bear fruit and, in May 2008, Indigo
requested that the court default Big Impressions. The basis of its
request was simple: a licensed attorney had yet to appear on
behalf of Big Impressions. On that basis, the clerk of court
entered default against Big Impressions.
Cross-motions ensued. Indigo filed a motion for default
judgment, and Big Impressions, after securing local counsel, filed
a motion to set aside the entry of default. In support of its
motion, Big Impressions provided a memorandum of law, a restated
answer, and an affidavit from Wallace. Through these materials,
Big Impressions asserted various defenses to Indigo's breach of
contract claims.
Unswayed by Big Impressions' showing, the district court
denied its motion and granted Indigo's request for a default
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judgment. The district court did not issue a memorandum of opinion
explaining its rulings. Big Impressions appealed.
II.
Big Impressions challenges both the court's denial of its
motion to set aside the entry of default and the entry of a default
judgment. Different standards exist for setting aside an entry of
default and for setting aside a default judgment. Venegas-
Hernandez v. Sonolux Records, 370 F.3d 183, 187 (1st Cir. 2004).
We need address only the standard for entry of default to decide
this case. See Coon v. Grenier, 867 F.2d 73, 75 n.5 (1st Cir.
1989) ("We deal only with the failure to set aside the entry of
default, for it constituted the error in this case. Plaintiff's
remonstrances anent the ensuing default judgment, and the manner in
which it was wrought, need not be addressed.").
Rule 55(c) provides that a court may set aside an entry
of default for "good cause." Fed. R. Civ. P. 55(c). There is no
mechanical formula for determining whether good cause exists and
courts may consider a host of relevant factors. See KPS & Assocs.
v. Designs by FMC, Inc., 318 F.3d 1, 12 (1st Cir. 2003). The three
typically considered are (1) whether the default was willful; (2)
whether setting it aside would prejudice the adversary; and (3)
whether a meritorious defense is presented. Id.; Coon, 867 F.2d at
77 (noting that these three factors "comprise the indicia employed
by most courts"). But that is not an exclusive list and courts may
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consider other relevant factors, including "'(4) the nature of the
defendant's explanation for the default; (5) the good faith of the
parties; (6) the amount of money involved; (7) the timing of the
motion [to set aside the entry of default].'" KPS & Assocs., 318
F.3d at 12 (quoting McKinnon v. Kwong Wah Restaurant, 83 F.3d 498,
503 (1st Cir. 1996)). Ultimately, the burden of demonstrating good
cause lies with the party seeking to set aside the default. Id.Our review of a district court's good cause ruling is
deferential. We review the court's factual findings, if there are
any, for clear error, Venegas-Hernandez, 370 F.3d at 187, and its
balancing of the relevant factors for an abuse of discretion. See
Conetta v. Nat'l Hair Care Ctrs., Inc., 236 F.3d 67, 75 (1st Cir.
2001); Coon, 867 F.2d at 78. Here, however, we are presented with
little to review. The district court did not explain its decision
or, from all that appears, make any factual findings. Without the
benefit of the court's views, we proceed to examine the relevant
factors ourselves. See Coon, 867 F.2d at 76-78 (analyzing the
factors where there was a paucity of findings to review).
There seems to be no dispute that two of the factors cut
in favor of Big Impressions. When the clerk entered default
against it, Big Impressions promptly filed a motion to set aside
the default. And Big Impressions argues, without objection from
Indigo, that the amount of money at stake -- approximately $173,000
-- is a significant sum given its economic situation. A third
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factor, the good faith of the parties, appears to be in equipoise,
as neither party alleges that the other acted in bad faith.
Turning to the other four factors often used, they are the subject
of controversy here, and we examine them in turn.
Big Impressions claims that its default was not willful.
It asserts that its principal, Wallace, believed that he had acted
appropriately when he filed an answer on behalf of Big Impressions.
According to Big Impressions, Wallace was simply unaware of the
rule barring a person who is not licensed to practice law from
representing a corporation in court. This claim finds support in
the record. Wallace attested to his ignorance of the relevant rule
in an affidavit.
For its part, Indigo argues that Wallace's claim of
ignorance lacks credibility. Citing to Wallace's affidavit, Indigo
contends that Wallace "admit[ted] that he received extensive legal
advice about this matter from his Arkansas counsel." The affidavit
does not support Indigo's argument, however. It addresses an
entirely unrelated matter -- meetings Wallace and his attorney had
with Indigo representatives in 2005 concerning the purchase of the
Indigo Press.
Turning to the prejudice factor, we conclude that it too
cuts in favor of Big Impressions. Simply put, we fail to see how
Indigo will be prejudiced if the default is set aside. To be sure,
Indigo claims that it will be prejudiced, noting that setting aside
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the default would further postpone a judgment in its favor. But,
as we have noted in the past, "in the context of a Rule 55(c)
motion, delay in and of itself does not constitute prejudice." KPS
& Assocs., 318 F.3d at 15; see also FDIC v. Francisco Inv. Corp.,
873 F.2d 474, 479 (1st Cir. 1989) (explaining that "[t]he issue is
not mere delay, but rather its accompanying dangers: loss of
evidence, increased difficulties of discovery, or an enhanced
opportunity for fraud or collusion.").
At the risk of lingering too long on this point, we note
further that Indigo's delay-based prejudice argument falls
particularly flat here because it easily could have prevented the
delay. Indigo could have moved to strike the answer or for a
default judgment twenty days after Wallace was served with process,
as the answer he filed, though docketed, was impermissible. See
Fed. R. Civ. P. 12 (providing that a defendant must serve an answer
within 20 days after being served with the summons or complaint).
Instead, Indigo waited over eight months before requesting that the
court default Big Impressions, even engaging Big Impressions in
settlement negotiations during this time span. Although no bad
faith is suggested in Indigo's delay in seeking an entry of default
here, finding prejudice under these circumstances could have the
unfortunate consequence of incentivizing parties to ambush
opponents on the basis of self-induced prejudice.
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The next factor to be considered -- the existence (or
lack thereof) of a meritorious defense -- has obvious significance
in the analysis. Where no meritorious defense exists, it makes
little sense to set aside the entry of default, as doing so would
merely delay the inevitable. Here, Big Impressions argues that
Indigo's victory in the breach of contract action is by no means
foreordained and says that it asserted several meritorious defenses
below, including the defenses of "prior breach of contract" and
"failure of consideration." It also contends that Wallace's
affidavit, submitted in support of its motion to set aside the
default, sets forth allegations that could support other defenses
including "fraud in the inducement."
Establishing the existence of a meritorious defense is
not a particularly arduous task. "[A] party's averments need only
plausibly suggest the existence of facts which, if proven at trial,
would constitute a cognizable defense." Coon, 867 F.2d at 77; see
also Conetta, 236 F.3d at 75 (noting, in discussing the meritorious
defense requirement, that the defendant had an "arguable defense on
some aspects of the claims against it").
Here, Big Impressions has met its burden. In support of
its "prior breach" and "failure of consideration" claims, Big
Impressions submitted an affidavit in which Wallace attested that
the Indigo Press did not perform as warranted. Although Indigo
characterizes Wallace's testimony as lacking "evidentiary support,"
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it is sufficient given that the litigation is in a pre-discovery
stage.1 Moreover, Big Impressions' fraud in the inducement2 claim
appears to be at least colorable. Wallace attested that throughout
the negotiation process, Indigo employees (1) represented to him
that he was only required to trade in one of his company's two
presses in connection with his purchase of the Indigo Press and (2)
presented him with drafts of the Purchase and Sale Agreement that
reflected these representations. According to Wallace, Indigo then
presented him with a Purchase and Sale Agreement that required him
to trade in both presses and hurried him into signing it. While
Indigo asserts that the parol evidence rule bars consideration of
Wallace's various dealings with Indigo, it is well-established in
Massachusetts that "'[t]he parol evidence rule does not apply when
1
Indigo also says that Wallace's claim that the Indigo Press
did not perform as warranted is "belated" because he failed to make
this specific claim in the answer that he filed. Wallace's answer,
however, denied the allegations of breach set forth in Indigo's
complaint. No more was needed at the pleading stage. See Fed. R.
Civ. P. 8(b)(1)(B)(providing that a party must "admit or deny the
allegations asserted against it by an opposing party"); see also 5
Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal
Practice and Procedure § 1268 (3d. ed. 1998) (noting, in discussing
"argumentative denials," that "practitioners would be wise to limit
themselves to simple denials, rather than adding additional facts
by responding indirectly rather than directly").
2
To establish fraud in the inducement at trial, Big
Impressions would need to prove "the elements of common law deceit
which include 'misrepresentation of a material fact, made to induce
action, and reasonable reliance on the false statement to the
detriment of the person relying.'" Commerce Bank & Trust Co. v.
Hayeck, 709 N.E.2d 1122, 1127 (Mass. App. Ct. 1999) (quoting Hogan
v. Riemer, 619 N.E.2d 984, 988 (Mass. App. Ct. 1993) (internal
citation omitted))).
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the complaining party alleges fraud in the inducement.'" Id.(quoting McEvoy Travel Bureau, Inc. v. Norton Co., 563 N.E.2d 188,
193 n.5 (Mass. 1990)).
The final factor to be considered is the nature of the
defendant's explanation for the default. We again note that for
several months neither Indigo nor the district court gave any
indication that something was amiss; the answer had been docketed
and the case was steered to the settlement program. Nevertheless,
Wallace set the default in motion when he failed to apprise himself
of the rule at issue. His explanation is plausible but not strong.
See United States v. $23,000 in U.S. Currency, 356 F.3d 157, 164
(1st Cir. 2004) (recognizing, in the default judgment context, that
"ignorance of the rules . . . do[es] not usually constitute
excusable neglect") (internal quotation marks omitted)). Moreover,
we also note that Arkansas, the state where Wallace's company is
incorporated, permits only licensed attorneys to represent
corporations in court. McAdams v. Pulaski County Circuit Court,
956 S.W.2d 869, 870 (Ark. 1997).
Having considered the relevant factors, we are left with
the question of whether the district court abused its discretion in
refusing to set aside the default. Because district courts are
better positioned to evaluate many of the relevant factors, we are
ordinarily reluctant to disturb their good cause rulings on appeal.
Payne v. Brake, 439 F.3d 198, 205 (4th Cir. 2006) ("The disposition
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of motions made under Rule[]55(c) . . . is a matter which lies
largely within the discretion of the trial judge and his action is
not lightly to be disturbed by an appellate court.") (citation
omitted); see also KPS & Assocs., 318 F.3d at 12-13. Here,
however, there is little reason to defer to the district court's
ruling. The district court did not explain why it denied Big
Impressions' motion to set aside the default, making it difficult
to tell what motivated the court's decision. Although this lack of
an explanation may have been inconsequential had the court's ruling
been amply supported by the record, that simply is not the case
here. Under circumstances such as these, and given our preference
for resolving disputes on the merits, Conetta, 236 F.3d at 75, we
conclude that this case should proceed further.
III. Conclusion
For the reasons provided above, the case is remanded with
directions to vacate the default judgment, remove the default, and
permit the action to proceed in the normal course.
Vacated and remanded. No costs on appeal.
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