Indigo America, Inc. v. Big Impressions, LLC

Opinion

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,

-2- 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

-3- 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

-4- 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

-5- 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

-6- 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.

-7- 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,"

-8- 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))).

-9- 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

-10- 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.

-11-