Crystal Capitol, LLC v. Katharine McManus Barber ( 2007 )

IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
January 9, 2007 Session
CRYSTAL CAPITAL, LLC v. KATHERINE McMANUS BARBER
Appeal from the Circuit Court for Davidson County
No. 04C1523 Walter C. Kurtz, Judge
No. M2006-00027-COA-R3-CV - Filed on April 20, 2007
The trial court refused to set aside a default judgment based upon the defendant’s delay in filing a
motion to set aside. Because the defendant promptly notified the court that she had a meritorious
defense, because the only evidence in the record shows the defendant did not willfully ignore the
action against her, because the plaintiff has failed to allege or show any prejudice that would result
from setting aside the judgment, and because relief should be granted where there is any reasonable
doubt that the judgment by default should be set aside, we reverse.
Tenn R. App. P. 3 Appeal s of Right; Judgment of the Circuit Court
Reversed
PATRICIA J. COTTRELL, J., delivered the opinion of the court, in which JERRY SCOTT , SENIOR J.,
joined. WILLIAM C. KOCH , JR., P.J., M.S., filed a dissenting opinion.
Patricia A. McDade, Franklin, Tennessee, Thomas F. Bloom, Nashville, Tennessee, for the appellant,
Katherine McManus.
Mark A. Sexton, Little Rock, Arkansas, for the appellee, Crystal Capital, LLC.
OPINION
In May of 2004 plaintiff, Crystal Capital, LLC (“Crystal Capital”) sued Katherine McManus
to recover a credit card debt together with interest, attorney’s fees, and court costs. Crystal Capital
had purchased the debt from the credit card company. Since no answer had been filed, in September
of 2004 Crystal Capital moved for a default judgment. A hearing was held in October of 2004 on
the motion for default wherein Ms. McManus made no appearance. On November 4, 2004, the trial
court granted Crystal Capital a default judgment totaling approximately $17,500 which included the
amount of the debt, attorney’s fees, and interest.
Ten months after entry of the default judgment, in September of 2005, Ms. McManus1 filed
a Motion to Set Aside Default Judgment under Rule 60.02 of the Tennessee Rules of Civil
Procedure. It is undisputed that Ms. McManus was timely served a copy of the complaint.
According to the affidavit of Ms. McManus, when she received the complaint, she contacted an
attorney in Arkansas to represent her.2 Also according to her affidavit, when she learned the
Arkansas attorney had not been representing her, she sent letters to the trial court.3 These letters,
referenced in her affidavit, are not a part of the record. Ms. McManus did not attend the default
judgment hearing because, according to her affidavit, she is disabled, unable to drive a car, must rely
on the courtesies of others for her transportation, and apparently could not find a ride.
As to the action brought by Crystal Capital against her, Ms. McManus claims that she has
a valid and substantial defense on the merits - namely that she paid the credit card debt at issue in
July of 1999. In support of her defense, attached to her attorney’s affidavit in support of the Motion
to Set Aside is a cancelled check evidencing payment, her bank statement showing the check was
paid by the bank, and a credit card statement dated August of 1999 evidencing payment of the debt.
At no time before the trial court or on appeal has Crystal Capital disputed that Ms. McManus has
asserted a claim of a meritorious defense.4
The trial court held a hearing on the Motion to Set Aside on November 18, 2005. Although
it appears testimony was not presented at that hearing, a Statement of Evidence and Proceedings of
that hearing was approved by the trial judge and made a part of the record. According to the
Statement, after entry of the default judgment, Mr. McManus hired Tennessee counsel. Rather than
file a motion to set aside the default, counsel for Ms. McManus attempted to reach a settlement with
Crystal Capital in the hope of avoiding additional expense. After numerous attempts to reach the
other lawyer and after attempts to settle the matter proved fruitless, Ms. McManus’s attorney filed
a motion to set aside the judgment. It is important to note that although the letters Ms. McManus
said she wrote the court are not a part of the record, the Statement of the Evidence and Proceedings,
approved by the trial judge, makes reference to a November 8, 2004 letter written by Ms. McManus
to the court. This referenced letter was dated four (4) days after the default judgment against her had
been granted.
1
Apparently, at some point Ms. McM anus changed her last name to Barber. For simplicity, we will continue
to refer to her, however, as Ms. McM anus.
2
Crystal Capital’s attorney is located in Arkansas.
3
The record shows Ms. McManus was mailed a copy of the Motion for Default and the Default Judgment.
Nothing in the record disputes her receipt of these filings. Presumably she sent the letters to the court in response to
receiving one or both.
4
At oral argument, counsel for Crystal Capital readily acknowledged that his client purchased the debt from the
credit card company and did not have all the records on the account. Of course, the question of whether Ms. McM anus
actually owes the debt would be determined in a trial of the complaint brought by Crystal Capital.
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Recognizing “the dual concerns and conflicting interests on the one hand lending credence
to the court process versus the public policy of having cases decided on the merits,” and relying on
delay between the default judgment and Ms. McManus’s motion to set aside, the trial court found
the balance tipped in favor of upholding the judgment entered by default. Ms. McManus appealed.
ANALYSIS
As a general rule, the decision by a trial court to enter a default judgment or to refuse to set
aside a default judgment is discretionary. Patterson v. Rockwell Int’l, 665 S.W.2d 96, 100 (Tenn.
1984); Tennessee State Bank v. Lay, 609 S.W.2d 525, 527 (Tenn. Ct. App. 1980). The burden of
establishing an abuse of discretion is on the party seeking to overturn the trial court’s ruling on
appeal. Ballard v. Herzke, 924 S.W.2d 652, 659 (Tenn. 1996).
Under the abuse of discretion standard, a trial court’s ruling “will be upheld so long
as reasonable minds can disagree as to the propriety of the decision made.” A trial
court abuses its discretion only when it “applies an incorrect legal standard, or
reaches a decision which is against logic or reasoning or that causes an injustice to
the party complaining.” The abuse of discretion standard does not permit the
appellate court to substitute its judgment for that of the trial court.
Eldridge v. Eldridge, 42 S.W.3d 82, 85 (Tenn. 2001) (citations omitted).
Where a Rule 60 motion is addressed to a default judgment, case law has established specific
legal standards to be applied. The party seeking to set aside a default judgment has the burden of
demonstrating that it is entitled to relief based on one of the applicable grounds and that it has a
meritorious defense to the claims against it. Nelson v. Simpson, 826 S.W.2d 483, 485 (Tenn. Ct.
App. 1991). Nonetheless, if any reasonable doubt exists as to whether the default judgment should
be set aside, the court should grant relief. Id. 826 S.W.2d at 486; Keck v. Nationwide Sys., Inc., 499
S.W.2d 266, 267 (Tenn. Ct. App. 1973).
One can find numerous decisions where the courts make it clear they are anxious to
see cases determined on the merits whenever such is possible. It seems to be a
universal rule that when there is a reasonable doubt as to whether a default judgment
should be set aside upon a proper application, the court should exercise its discretion
in favor of granting the application so as to permit a determination of the cause upon
its merits.
Keck, 499 S.W.2d at 267.
Thus, although the trial court has discretion to deny a motion to set aside a default judgment,
that discretion should be exercised in favor of setting aside the judgment if there is a reasonable
question as to the grounds for such relief. This result is based on the well-settled preference for
giving every person a day in court to make his or her defense. Id. 499 S.W.2d at 266-67, citing
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Brown v. Brown, 86 Tenn. 277, 7 S.W. 640 (1887); Roberts v. Stewart, 9 Tenn. (1 Yer.) 390 (1830);
Fidelity-Phoenix Fire Ins. Co. v. Oliver, 25 Tenn. App. 114, 152 S.W.2d 254 (1941)).
In Tennessee State Bank v. Lay, supra, this court held that the trial court applied the wrong
standard in denying a motion to set aside a default judgment where the trial court had applied a
stringent standard for altering or setting aside a final judgment under Rule 60. Instead, we held, the
trial court should have applied the standard favoring the setting aside of default judgments so that
the dispute could be determined on its merits. Lay, 609 S.W.2d at 525.
Thus, the trial court’s discretion must be exercised by applying the standard applicable to
default judgments, and a trial court should set aside such a judgment if there is a reasonable question
as to the grounds for relief. The relevant criteria are whether the failure to respond or answer was
willful, whether the defendant has asserted a meritorious defense, and the extent of any prejudice to
the plaintiff if relief is granted. Nelson, 826 S.W.2d at 485; Tennessee Dep’t of Human Servs. v.
Barbee, 689 S.W.2d 863, 867 (Tenn. 1985). See also Henry v. Goins, 104 S.W.3d 475, 482 (Tenn.
2003).
The trial court’s order refusing to set aside the judgment by default does not specifically
address these three criteria. It appears the court put great weight on defendant’s delay in filing her
motion to set aside the judgment.5 The trial court stated,
The Court would further state that these are difficult cases because of the competing
interests and if the Defendant had filed a Motion within a few months of the
judgment being entered against her, the court may have set aside the judgment at that
time.
We do not believe the time lapse between the default judgment and the motion to set aside
should be the only, or even the predominant, consideration because the factors applicable to motions
to set aside default judgments must be determinative. Further, the real question of regarding delay
is the prejudice to the opposing party.
As to the delay between entry of the default judgment and defendant’s motion to set aside,
that delay should be considered as it relates to the willfulness of Ms. McManus’s failure to answer
or appear and to any prejudicial effect on Crystal Capital. The only evidence in the record relating
to events occurring during that time is found in the affidavit of Ms. McManus and that of her
Tennessee counsel as well as the Statement of the Evidence and Proceeding, none of which was
disputed or contradicted by Crystal Capital.
The evidence indicates that Ms. McManus attempted to protect her interests when she was
initially sued. After default judgment was sought and/or entered, she immediately informed the trial
5
The trial court was obviously looking to the part of Rule 60.02 requiring that the motion be made “within a
reasonable time.”
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court of her situation and her defense, i.e., that she had paid any debt on the credit card that was the
basis of the lawsuit. She also promptly hired Tennessee counsel. That attorney began attempts to
contact Crystal Capital’s attorney and to settle the matter. Apparently, those efforts took some time,
partially because it was difficult to reach opposing counsel.
While it would have been far preferable had Ms. McManus’s counsel immediately filed a
motion to set aside rather than contact Crystal Capital’s counsel, Crystal Capital does not dispute that
these contacts were made. Therefore, it appears that Crystal Capital was on notice that Ms.
McManus denied any liability and objected to the judgment that had been entered by default against
her.
Notice to opposing counsel does not constitute notice to the court. However, it is more
relevant to the issue of prejudice to Crystal Capital. Additionally, it appears from this record that
Ms. McManus attempted to promptly contact the court herself. Taking this into consideration,
coupled with the fact that Ms. McManus’s counsel promptly contacted Crystal Capital’s counsel, we
do not find the delay so unreasonable as to preclude relief under Rule 60, even if that standard were
the predominant consideration.
With regard to the factors enunciated by the Tennessee Supreme Court in Barbee, discussed
above, we first find that it was not shown that Ms. McManus’s failure to answer or appear prior to
entry of the judgment was willful. She was unable to personally appear since she is disabled and
unable to drive. She attempted to hire counsel both in Arkansas and Tennessee. As discussed above,
she tried to contact the court through letters. Second, Ms. McManus has submitted an affidavit and
documentary evidence to support her claim that she paid the debt in full years ago, establishing that
she is asserting a meritorious defense, thus justifying a trial on the merits of the complaint . Finally,
counsel for Crystal Capital was unable to articulate at oral argument any prejudice to his client if
relief is granted.
Based on the foregoing, we conclude that we must reverse the trial court’s judgment refusing
to set aside the default judgment, direct that the judgment by default be set aside, and remand the
case for trial.
Costs are taxed against Crystal Capital, LLC.
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PATRICIA J. COTTRELL, JUDGE
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