Milestone Operating, Inc. and Dstj, L.L.P. v. Exxonmobil Corporation

IN THE SUPREME COURT OF TEXAS
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NO . 11-0647
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MILESTONE OPERATING, INC. AND DSTJ, L.L.P.,
PETITIONERS,
v.
EXXONMOBIL CORPORATION,
RESPONDENT
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ON PETITION FOR REVIEW FROM THE
COURT OF APPEALS FOR THE FOURTEENTH DISTRICT OF TEXAS
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PER CURIAM
JUSTICE LEHRMANN did not participate in the decision.
In this case, we consider whether the defendants satisfied the first element of the Craddock
test for setting aside a no-answer default judgment. See Craddock v. Sunshine Bus Lines, Inc., 133
S.W.2d 124, 126 (Tex. 1939) (requiring a new trial if the defendant shows (1) that the default was
neither intentional nor the result of conscious indifference, (2) a meritorious defense, and (3) that a
new trial would cause neither delay nor undue prejudice). Because the evidence in this case
established that the defendants’ failure to answer was not intentional or the result of conscious
indifference, the defendants’ motion for new trial could not be denied on the ground that the
defendants failed to satisfy the first Craddock element. Accordingly, we reverse the court of
appeals’ judgment and remand the case to that court.
This appeal arises from a suit by ExxonMobil Corporation against DSTJ, L.L.P. and
Milestone Operating, Inc. (collectively Milestone), alleging that Milestone breached the parties’
Farmout Agreement by failing to notify ExxonMobil that “payout” had occurred on a well that was
subject to that agreement. Under the Farmout Agreement, “payout” triggered ExxonMobil’s election
to either escalate its overriding royalty interest or convert to a working interest. After Milestone
failed to answer, ExxonMobil filed a motion for default judgment. ExxonMobil alleged that its
private process server, Thomas Barber, properly served Donald Harlan—DSTJ’s partner and
Milestone Operating, Inc.’s director and registered agent—with citation and a copy of ExxonMobil’s
petition. ExxonMobil obtained a default judgment that awarded it almost $1.8 million, which
included unliquidated damages, prejudgment interest, attorney’s fees, and costs.
Milestone filed a timely motion for new trial, arguing that service on Harlan was defective,
and that Milestone established the necessary Craddock elements to set aside the default judgment.
The trial court denied the motion for new trial. The court of appeals affirmed the trial court’s denial
of Milestone’s motion for new trial, holding that Milestone failed to meet its burden to satisfy
Craddock’s first element. 346 S.W.3d 101, 109. But the court of appeals reversed the portion of the
judgment awarding unliquidated damages. Id. at 112.
Milestone asserts two grounds for reversal. First, Milestone contends that the evidence
established that the failure to answer was not intentional or due to conscious indifference. Second,
Milestone argues that service of process was defective because Harlan was not personally informed
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of the nature of the process. When a default judgment is attacked by a motion for new trial, the
critical question is: “Why did the defendant not appear?” Sutherland v. Spencer, ___ S.W.3d ___,
___ (Tex. 2012) (quoting Fid. & Guar. Ins. Co. v. Drewery Constr. Co., 186 S.W.3d 571, 574 (Tex.
2006) (per curiam)) (internal quotation marks omitted). Milestone does not challenge whether the
suit papers were actually received—only that service was defective. Therefore, our analysis focuses
on whether Milestone offered sufficient evidence to meet its burden under the first element of the
Craddock test.1 See id. at ___ (“[I]f the defendant received the suit papers and has some other reason
for not appearing, then the default judgment must be set aside if the defendant proves the three
elements of the Craddock test.”).
Under Craddock, a trial court must set aside a default judgment if (1) “the failure of the
defendant to answer before judgment was not intentional, or the result of conscious indifference on
his part, but was due to a mistake or an accident”; (2) “the motion for a new trial sets up a
meritorious defense”; and (3) granting the motion “will occasion no delay or otherwise work an
injury to the plaintiff.” 133 S.W.2d at 126. We must look to the knowledge and acts of the
defendant to determine whether the defendant satisfied its burden as to the first Craddock element.
Dir., State Emp. Workers’ Comp. Div. v. Evans, 889 S.W.2d 266, 269 (Tex. 1994). The absence of
an intentional failure to answer rather than a real excuse for not answering is the controlling fact.
Craddock, 133 S.W.2d at 125. A defendant satisfies its burden under this element when its factual
assertions, if true, negate intentional or consciously indifferent conduct by the defendant and the
1
Because the court of appeals addressed only Craddock’s first element, we limit our review to that
determination. See 346 S.W .3d at 109; Sutherland, ___ S.W .3d at ___.
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factual assertions are not controverted by the plaintiff. Sutherland, ___ S.W.3d at ___. Consciously
indifferent conduct occurs when “the defendant knew it was sued but did not care.” Fidelity, 186
S.W.3d at 576.
“An excuse need not be a good one to suffice.” Id. As in Sutherland, Milestone offered an
excuse that was not controverted and, if true, negated intentional or consciously indifferent conduct
on its part. See Sutherland, ___ S.W.3d at ___. Specifically, Milestone alleged that Harlan did not
recall being served with ExxonMobil’s petition on March 19, 2009, even after reviewing his office
notes and speaking to the people with whom he works about that day’s events. Harlan testified that
Milestone had been sued at least four times prior to ExxonMobil’s suit, he was served with process
in each of those suits, and it was his routine to turn over the suit papers to Milestone’s legal counsel.
Yet Harlan testified that he did not remember being served or turning over any suit papers to
Milestone’s legal counsel in this case. Although ExxonMobil offered the testimony of Lynn Tatar,
Barber’s fiancée, who maintained that she saw Barber hand Harlan the suit papers, ExxonMobil did
not controvert Harlan’s testimony that he does not recall being served.2 Nor did ExxonMobil
controvert Milestone’s evidence that detailed Harlan’s familiarity with being served with process and
his procedure for responding to such service.
We conclude that the evidence here shows that Milestone’s failure to answer was neither
intentional nor the result of consciously indifferent conduct. See Fidelity, 186 S.W.3d at 576.
Milestone therefore provided a sufficient excuse to satisfy Craddock’s first element. See Sutherland,
2
Barber passed away prior to the hearing on Milestone’s motion for new trial. Tatar testified that she
accompanied Barber to Harlan’s office on the date that Barber served Harlan.
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___ S.W.3d at ___. The trial court’s denial of Milestone’s motion for new trial thus cannot be
affirmed on the ground that its excuse for not answering was insufficient. The court of appeals erred
when it held otherwise. This holding comports with the policy that “an adjudication on the merits
is preferred in Texas.” Holt Atherton Indus., Inc. v. Heine, 835 S.W.2d 80, 86 (Tex. 1992).
Accordingly, we grant the petition for review, and without hearing oral argument, we reverse the
court of appeals’ judgment and remand the case to that court for consideration of the second and
third Craddock elements. See TEX . R. APP . P. 59.1.
OPINION DELIVERED: October 26, 2012
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