Sunday, April 13, 2014

No Second Chance

LaFrance Architect v. Point Five Development, LLC, 2013 VT 115

By Andrew Delaney

This decision is cold comfort indeed for the defendant: yes, the trial court got it wrong when it explicitly declined to consider potential defenses in the context of vacating a default judgment—but no matter because defendant didn’t make a compelling showing that it had a meritorious defense. And so the cookie crumbles.

The case arises from a contractual dispute. Plaintiff architect and defendant developer entered into a contract to build a Walgreens. Architect sent an invoice, which developer responded to over a month later with a vague letter accusing architect of breaching the contract and screwing up the design. So architect filed a mechanic’s lien in the land records. Developer got a bond to remove the lien, but didn’t send a copy to architect. Architect filed a suit to perfect the lien and for damages.

Here’s where it gets interesting. Developer’s registered agent’s office was served with the summons and complaint, a motion for a writ of attachment, and a notice of hearing for an attachment hearing. Architect, noting the mediation and arbitration provisions of the contract, also requested that the court hold the attachment hearing, then stay the case. A copy of the whole shebang was sent (presumably via email) to developer’s New York attorney, who didn’t read it, but forwarded it to one of developer’s agents, who also didn’t read the pleadings. Oops.

So, the day before the attachment hearing, architect just moves for default and gets it—no notice to defendant was necessary. Architect also moved to continue and consolidate the attachment hearing with a damages hearing. Architect ended up with a nearly $70K attachment after the hearing. Because developer never filed an answer or notice of appearance, it wasn’t invited to that party.

But when architect tried to domesticate the judgment in New York, developer decided it was time to speak up. Developer filed a Rule 60 motion for relief from judgment in the (Vermont) trial court claiming mistake, inadvertence, excusable neglect, and that architect didn’t comply with the mediation and arbitration provisions in the contract.

The trial court didn’t want to hear it and denied the motion outright. Specifically, the trial court found that the we-didn’t-read-the-email or “law office error” explanation did not constitute excusable neglect as contemplated in Rule 60. The trial court explicitly refused to consider the merit of potential defenses. Developer appealed.

The SCOV majority begins its analysis by noting that the trial court’s ruling on a Rule 60 motion will only be disturbed if the trial court abused its discretion. The majority also notes that there is a preference that claims be heard on the merits—and default judgment takes that opportunity away.

Now, Rule 60 on its face seems to provide a reason to vacate or modify any judgment—in addition to five specific yet broad categories that warrant post-judgment relief, there’s a catchall “any other reason” provision in the rule. If one were to take the rule literally, it would seem that anything can be fixed with a Rule 60 motion. It’d seem to be the duct tape of the legal profession.

Perhaps because of this appearance, courts have limited the availability of Rule 60 relief to a certain degree. When the complained-of neglect stems from a law office dropping the ball, the courts are much less accommodating compared to when the same thing happens to an unrepresented party.

In this case, developer went the excusable-neglect route. The majority identifies three factors to be considered by a trial court when considering whether to vacate a default judgment in these circumstances: (1) whether the neglect was a mistake or the product of inadvertence; (2) whether it was excusable under the circumstances; and (3) whether the defendant has any good defenses. Here, the SCOV takes no issue with the trial court’s finding that the we-didn’t-read-the-email excuse was not the kind of excusable neglect contemplated by the rule. The majority does, however, conclude that the trial court’s refusal to even consider the potential defenses was in fact error.

Although the majority concludes that there was error, it notes that a remand is not necessary if it concludes as a matter of law that the defenses are no good. Against this backdrop, the majority considers developer’s two “meritorious defenses” (those are the majority’s quotation marks, not mine).

Developer raised a counterclaim based on alleged deficiencies in architect’s service. The majority first considers whether this was a compulsory counterclaim and concludes it was. As such, a default judgment would bar developer from bringing suit based on those deficiencies in the future.

Thus, the majority reasons that the counterclaim “could constitute a meritorious counterclaim supporting a decision to set aside a default judgment.” Note the “could” because the majority next considers whether the developer’s pleadings made out a case to support its claims. Here, the majority reasons that developer’s very general allegations are not specific enough to show a meritorious claim. Take note, girls and boys: the well-pled complaint just made a comeback. The majority notes that this is a more-exacting approach than general notice pleading requirements, justifying this departure by proceeding under Rule 60 as opposed to general pleading rules.

The majority also rejects developer’s mandatory-mediation-and-arbitration-clauses-apply argument. Here, the majority holds that developer’s delay in asserting those rights constituted waiver. While there is a general preference for arbitration, the majority reasons that it’s not an excuse to avoid responsibility to participate in a proceeding—in other words, if developer was going to assert the arbitration clause, it had plenty of opportunity to do so. The general thrust is that an arbitration clause is not an impenetrable shield and can by complete inaction be waived.

Justice Robinson dissents in part. The dissent reasons that the majority’s approach “widens a narrow exception to the enforceability of mandatory arbitration clauses”; bypasses the requirement that the trial court consider the merits of potential defenses; and extends waiver to places it’s not s’posed to go. The dissent would remand for the trial court to consider the “requisite factors, including the prejudice to plaintiff of setting aside the default judgment, the nature of defendant’s neglect, and the strength of defendant’s defense based on the mandatory mediation and arbitration clauses in the contract between the parties.”

The dissent first notes that the majority recognizes that the trial court got it wrong. Sure, failing to read your email isn’t ‘excusable neglect,” but there are a whole bunch of other factors in play here. The trial court is supposed to consider prejudice to the plaintiff, and the merits of defenses, and whether developer waived any defenses—none of that happened here. The majority, the dissent reasons, without saying it exactly like I will—is really reaching here. The entire rationale for affirming the trial court originated with the majority. This is particularly interesting when the majority is considering waiver. I call this the “do-as-I-say-not-as-I-do” approach when instructing my kids.

The dissent notes that “in most of the cases [cited by the majority], the defendant actively participated in court proceedings or affirmatively declined to participate in arbitration” The dissent also points out that “this is the only case in which an appeals court seeks to make a finding of prejudice and a conclusion of waiver in the first instance.”

The dissent finds the majority’s invocation of waiver particularly troubling given the procedural history of the case. Architect moved for default on the eve of the attachment hearing, without mentioning its request for a stay—it just skipped right to damages glossing over the mandatory arbitration and mediation clauses. Developer had no notice or legally recognized right to notice. Some might call this brilliant legal maneuvering; some might call it sneaky. The bottom line is that the majority’s finding of waiver and prejudice to architect on these facts is troubling to the dissent. If there is to be a finding of waiver, that’s supposed to occur in the trial court—it’s really a factual determination.

And that’s the crux of it. For the dissent, the latter part of the majority’s reasoning swallows up the former.

How many of you are double-checking your inboxes right now? Yeah, me too.

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