#2218 signed 5-17-96
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
AMERICAN FREIGHT SYSTEM, INC.,
AMERICAN FREIGHT SYSTEM, INC.,
NATIONAL BUSINESS FURNITURE, INC.,
ADV. NO. 90-7368
ORDER GRANTING MOTION TO SET ASIDE SUMMARY JUDGMENT
AND QUASH ORDER OF GARNISHMENT
This proceeding is before the Court on the motion of defendant National Business Furniture, Inc.
(Furniture), to set aside a summary judgment and quash an order of garnishment enforcing that
judgment. Furniture appears by counsel Joseph M. Weiler. Plaintiff-debtor American Freight
System, Inc. (AFS), appears by counsel Kurt Stohlgren. The Court has reviewed the relevant
pleadings and is now ready to rule.
In 1990, AFS sued to recover freight charges allegedly owed for shipments it delivered to Furniture. The court clerk served Furniture by mail at 222 East Michigan, Milwaukee, Wisconsin, 53202, and by mail sent to CT Corporation System at a Madison, Wisconsin, address. No individual was named as an agent for either corporation. Nevertheless, counsel appeared for Furniture, and raised various issues, including a request to refer certain matters to the Interstate Commerce Commission. In April 1995, Furniture's counsel moved to withdraw from the representation, saying they had been informed that Furniture filed for bankruptcy in 1993, and none of its representatives could be located. Counsel served the motion on a Robert Bono of Adams Furniture Industries, Inc. (Adams), at an address in Georgia. The Court's order allowing the withdrawal was served on Furniture at the same Milwaukee address used for the original service of process and on Mr. Bono at the Georgia address.
About a month after entry of the order for withdrawal, AFS filed a motion for partial summary judgment. It served the motion by mail addressed to Furniture at the Milwaukee address, again naming no individual as the company's agent. The Court entered an order giving Furniture thirty days to commence a proceeding before the ICC or be deemed to have waived its asserted defenses and counterclaims; the order was served the same way the motion had been. No such action was commenced and, in January 1996, summary judgment for about $8,700 was granted. The judgment was first mailed to Furniture's 222 East Michigan address, but was returned to the Court. The clerk obtained a new address and remailed the judgment to Furniture on January 19. An order of garnishment was issued to M&I Marshall & Ilsley Bank in Milwaukee on March 14. Cynthia L. Sharrow, Bank Operations Assistant, filed an answer indicating the bank withdrew the garnished amount from Furniture's account, and is holding it in a bank-controlled account.
On April 1, Furniture filed its motion to set aside the summary judgment and the order of garnishment. It supported the motion with the affidavit of its corporate traffice manager, David Wierdsma, who claims to be responsible for handling this lawsuit for Furniture. He indicates Adams was the shipper of the goods that gave rise to AFS's claims for freight charges, although Furniture was to be billed for the shipments. For this reason, Adams's representative, Mr. Bono, hired counsel and otherwise handled the details of Furniture's defense. Mr. Wierdsma states he had no involvement in this case from about 1991 until Furniture's bank notified the company of the garnishment in March. He adds that Mr. Bono died in a plane crash in 1995, and counsel apparently withdrew because Mr. Bono did not respond to correspondence. He indicates Furniture moved its offices in April 1995 from 222 East Michigan to 735 North Water Street in Milwaukee. He swears he did not receive any of the motions or orders mailed to the 222 East Michigan address. Furniture contends the summary judgment was entered without notice, without hearing, and without considering any of its arguments. It suggests the judgment should be vacated in the interests of fairness and justice. At Furniture's request, the Court stayed the garnishment pending its decision on the motion.
In response to Furniture's motion, AFS asserts its motion for summary judgment has not been
returned undelivered, and complains Mr. Wierdsma states only that he personally did not receive
letters mailed to Furniture at 222 E. Michigan. It adds the record does not show that items
mailed to that address were not forwarded and received at Furniture's new address. AFS also
notes that Mr. Wierdsma did not state he has personal knowledge of Mr. Bono's death, and that
nothing else was presented to prove Mr. Bono's death or the time of his death relative to counsels'
withdrawal from the case. Finally, AFS complains that no evidence is presented to support
Furniture's claim it will suffer irreparable harm if the judgment and garnishment are not vacated,
and that irreparable harm is not relevant to vacating judgments.
DISCUSSION AND CONCLUSIONS
With certain exceptions not applicable here, Federal Rule of Bankruptcy Procedure 9024 provides that Federal Rule of Civil Procedure 60 applies to cases under the Bankruptcy Code. In relevant part, Rule 60 provides:
(b) On motion and upon such terms as are just, the court may relieve a party or a party's legal
representative from a final judgment, order, or proceeding for the following reasons:
(1) mistake, inadvertence, surprise, or excusable neglect;
(2) newly discovered evidence which by due diligence could not have been discovered in time to
move for a new trial under Rule 59(b);
(3) fraud (whether heretofore denominated intrinsic or extrinsic), misrepresentation, or other
misconduct of an adverse party;
(4) the judgment is void;
(5) the judgment has been satisfied, released, or discharged, or a prior judgment upon which it is
based has been reversed or otherwise vacated, or it is no longer equitable that the judgment
should have prospective application; or
(6) any other reason justifying relief from the operation of the judgment.
Although Furniture's motion does not cite this rule, the Court believes Furniture is suggesting that relief might be granted based on excusable neglect or perhaps because the judgment is void.
The summary judgment was not technically a default judgment because Furniture had appeared and defended against AFS's claims, but it was very similar to one since Furniture's counsel had withdrawn before AFS's motion for summary judgment was filed and Furniture subsequently failed to respond to the motion. The Tenth Circuit has indicated that default judgments should be available only when the adversary process has been halted by "an essentially unresponsive party." Cessna Finance Corp. v. Bielenberg Masonry Contracting, Inc., 715 F.2d 1442, 1444 (1983). Many courts have indicated a great preference to have matters decided on the merits rather than by default, e.g., Gulley v. Orr, 905 F.2d 1383, 1386 (10th Cir. 1990), especially when large amounts of money are involved, Hutton v. Fisher, 359 F.2d 913, 916 (3d Cir. 1966). It seems to be very common to find excusable neglect and set aside defaults against businesses where employees who received service of process failed to forward it to the proper person in the company. In re DaShiell, 124 B.R. 242 (Bankr.N.D.Ohio 1990) (default set aside although summons and complaint were properly mailed to defendant-bank and signed for by bank employee since not forwarded to persons responsible for handling lawsuits for bank); In re Snyder, 67 B.R. 872 (Bankr.W.D.Pa. 1986) (default judgment avoiding creditor's lien set aside where motion seeking such relief did not make clear to lay employees that motion was in essence lawsuit that could substantially alter creditor's rights); Ellington v. Milne, 14 F.R.D. 241 (D.N.C. 1953) (default set aside where unknown employee placed summons and complaint in insurer's storage files so neither its legal department nor any of its officers knew of the suit until documents were discovered nearly a year after default was entered); Montez v. Tonkawa Village Apartments, 215 Kan. 59, 523 Pl.2d 351 (1974) (trial court abused discretion by refusing to set aside default judgment where service was made on resident manager of apartment complex who assumed other notices were sent to superiors and forgot to discuss matter with them; numerous federal court cases discussed at 62-65); see also Ameday v. U.S. Trucking Co., 62 F.R.D. 72 (D.Pa. 1974) (default set aside where U.S. marshal was twice unable to locate defendant's place of business, corporation had closed office in state where suit was brought but failed to inform secretary of state of forwarding address, and corporation learned of suit only when it received letter telling of default judgment). But see North Central Illinois Laborers District Council v. S.J. Groves & Sons Co., Inc., 842 F.2d 164 (7th Cir. 1988) (no abuse of discretion to refuse to set aside default order to submit grievance to arbitration where corporate defendant claimed filing or clerical error caused in-house counsel to be unaware of service of process because district court could reasonably view this as careless and within defendant's meaningful control); cf. In re State Exchange Finance Co., 896 F.2d 1104 (7th Cir. 1990) (in suit to collect on promissory note, court indicated entry of default is becoming more common sanction, especially in collection cases against sophisticated obligors). In deciding whether a creditor should be permitted, due to "excusable neglect," to file a proof of claim after the chapter 11 bar date has passed, the Supreme Court recently indicated that the determination whether neglect is excusable is an equitable one that should be based on all the relevant circumstances. Pioneer Investment Servs. Co. v. Brunswick Associates, L.P., ___ U.S. ___, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993). Relevant circumstances include "the danger of prejudice to the [opposing party], the length of the delay and its potential impact on judicial proceedings, the reason for the delay, including whether it was within the reasonable control of the movant, and whether the movant acted in good faith." 123 L.Ed.2d at 89-90. The Court believes this definition of excusable neglect should be applied under Rule 60(b) as well.
In this case, it is clear that Furniture intended to defend against AFS's claims, as it did so for over four years, and it responded fairly quickly once it learned of the judgment entered against it. While Furniture's arrangement to have Adams handle its defense strikes the Court as unusual, it does explain why Furniture did not immediately learn the attorneys defending it had withdrawn from the representation. Of course, Mr. Bono's death may provide a further explanation, but the Court will not rely on Mr. Wierdsma's assertion of that event in light of AFS's doubts about it. Although Furniture probably had an obligation to inform the Court and AFS when it changed addresses, its failure to do so is also less culpable in light of its understanding that Adams was protecting its interests. Furthermore, AFS did not mail its motion for summary judgment to the person to whom Furniture's counsel mailed his motion to withdraw, an option that would have improved the chances Furniture might have responded. Finally, even if AFS's motion was forwarded to Furniture's new address, the fact AFS chose to direct the letter simply to the corporate entity and not to any specific person would have greatly reduced the chances the letter would have been routed to the appropriate person within the organization. Since AFS did not bother to indicate to whom it thought its letter should be directed, the Court is not willing to require Furniture to provide proof of nondelivery beyond Mr. Wierdsma's sworn statement that he should have but did not receive it. As a leading treatise has said in discussing the mailing of a request for waiver of service under a relatively new provision in the Civil Rules: "Paragraph 2(A) [of Rule 4(d)] clearly requires that a request for waiver of service by a corporate defendant be addressed to a person qualified to receive service. The general mail rooms of large organizations cannot be required to identify the appropriate individual recipient for institutional summons, let alone determine whether to waive service." 4A Wright & Miller, Fed. Prac. & Pro. Civil 2d §1092.1, 1995 pocket part, p. 8. AFS's chosen address subjected Furniture to the risk of losing this lawsuit simply because the employee assigned the relatively menial task of sorting the company's mail failed to determine the person to whom such a letter should be routed. AFS has not alleged Furniture's failure to respond to AFS's form summary judgment motion has caused it to be prejudiced, nor does the Court see how significant prejudice could have occurred. The Court believes Furniture is entitled to relief from the summary judgment because its failure to respond to AFS's motion was the result of excusable neglect.
In fact, the Court at least wonders whether addressing a letter to a corporate entity without directing it to a particular person connected with the entity satisfies the requirements of the rules of procedure, which are designed to satisfy the constitutional due process requirements of notice and an opportunity to be heard. A judgment entered in violation of the constitutional requirements is void. Orner v. Shalala, 30 F.3d 1307, 1310 (10th Cir. 1994). The Court has previously determined such mail service addressed only to an entity and not to its officer or agent is insufficient to satisfy the requirements of Bankruptcy Rule 7004(b)(3) or Kansas statutes for serving the summons and complaint that commence a lawsuit. American Freight System v. American Electric (In re American Freight System), 153 B.R. 906 (Bankr.D.Kan. 1993). While Rule 7004(b)(3) expressly requires such service to be directed to an entity's officer or agent, Civil Rule 5, made applicable by Bankruptcy Rule 7005, simply requires subsequent pleadings to be served on a "party" or its "attorney" if it is represented by one. Obviously, a party's attorney will always be a person who is aware of the lawsuit and at least should recognize the significance of pleadings and other documents mailed to him or her. The Court is inclined to believe the rulemakers did not express in Rule 5 a requirement that service on a "party" be directed to an officer or agent of an opposing entity because they were aware that entities could appear in federal court only through an attorney. See Flora Construction Co. v. Fireman's Fund Ins. Co., 307 F.2d 413, 414 (10th Cir. 1962), cert. denied 371 U.S. 950 (1963). If they considered the problem which has arisen in this case, the rulemakers probably assumed later pleadings would be directed to the same officer or agent as the original summons and complaint unless the entity had requested they go to someone else.
For these reasons, the Court concludes that Furniture's motion to set aside the summary judgment entered against it should be and it is hereby granted. Consequently, since it depends on the existence of that judgment, the order of garnishment is likewise vacated, and M & I Marshall & Ilsley Bank is released from its obligations under the garnishment.
IT IS SO ORDERED.
Dated at Topeka, Kansas, this _____ day of May, 1996.
JAMES A. PUSATERI
CHIEF BANKRUPTCY JUDGE