Appeal from the United States District Court for the Eastern District of Pennsylvania.
Weis, Sloviter, and Becker, Circuit Judges.
This is an appeal from the district court's denial of appellant's motion to set aside a default judgment entered against it for failure to timely answer the complaint. Because no prejudice accrued to the plaintiff, a potentially meritorious defense was available to the defendant, and defendant's conduct in failing to timely answer was not willful, we vacate the order and remand for further proceedings.
The complaint in this diversity action was filed on March 17, 1982 in the United States District Court for the Eastern District of Pennsylvania by Gross & Kowit, a Pennsylvania partnership, seeking to recover from defendant Stereo Component Systems, Inc. (SCS), a Massachusetts corporation, $24,056.25 plus interest, costs, and attorneys' fees allegedly due it by defendant, the lessee of its property in Pennsauken, New Jersey. No answer was filed by April 12, 1982, the due date. On April 13, 1982, at the request of plaintiff's counsel, the clerk of the district court entered a default judgment in the amount requested for failure to answer. Promptly after learning this, SCS filed a Motion to Set Aside Default Judgment under Federal Rules of Civil Procedure 55(b), 55(c) and 60(b).*fn1 SCS alleged that the failure to timely file an answer resulted from excusable neglect and that Gross & Kowit had not been prejudiced by the delay. SCS also asserted that it had several meritorious defenses to Gross & Kowit's claim; the most important of these was the claim that the assignment of the Pennsauken lease by order of a bankruptcy court, over SCS' objection, terminated its liability on the lease.
The affidavits attached to the Motion to Set Aside Default Judgment set forth the following facts which are essentially undisputed. Diane J. Sigmund, an attorney with the Philadelphia law firm of Wolf, Block, Schoor & Solis-Cohen, had been acting as local counsel for SCS in a proceeding initiated by Brendern Enterprises, Inc. (Brendern), SCS' assignee of the leasehold in question, under Chapter 11 of the Bankruptcy Code in the Eastern District of Pennsylvania. The bankruptcy court approved the assignment of the lease from Brendern to Robert Lockwood or his nominee over the objection of SCS. The bankruptcy court order required Lockwood to pay all past due rents upon assignment but the bankruptcy judge refused to decide whether the assignment would relieve SCS of any further liability on the lease. Lockwood's nominee, Brookline Corp., which took possession of the leasehold premises, failed to meet its obligations and in turn filed for protection under Chapter 11.
On December 2, 1981 Gross & Kowit's counsel, Richard D. Solo, wrote Sigmund demanding payment by SCS of $15,006.57 on the lease, composed of rent and additional obligations that either Brendern or Brookline had failed to pay, and damage to the premises done by Brookline. Solo further stated that his instructions were to attempt to resolve the matter amicably and to file a complaint only if no settlement was forthcoming. Sigmund transmitted this letter to John J. Griffin, of the Boston firm of Rackemann, Sawyer & Brewster, general counsel for SCS. Griffin did not authorize her to engage in settlement negotiations and Sigmund did not respond to Solo's letter.
On February 9, 1982 Solo wrote Sigmund again. In this letter he corrected Gross & Kowit's damage claim to $24,056.25, by including certain additional rent. Solo stated that he took the failure to respond to his previous letter as an indication that there would be no settlement negotiations. Therefore, he continued, Gross & Kowit would be compelled to proceed to suit. Sigmund transmitted this letter to Griffin, but again gave no response to Solo.
On March 15, 1982 an associate of Solo telephoned Sigmund to inform her that the complaint against SCS was about to be filed and to find out whether she would accept service. Sigmund said that she was not authorized to accept service. The complaint was filed on March 17, 1982 and received by SCS on March 22, 1982. SCS immediately mailed it to Griffin; it was received in Griffin's office on March 23, 1982. Griffin, who was on vacation, did not see the complaint until March 29, 1982. He then forwarded the complaint to Sigmund but apparently did not enclose a cover letter with the complaint or any other instruction as to how she was to proceed.
Sigmund received the complaint on April 5, 1982. Over the next several days she attempted to telephone Griffin in order to ascertain whether he wanted her to handle the case and, if so, when service of the complaint had been effected. Griffin was unavailable. Sigmund then wrote Griffin on April 8, 1982, asking the same questions. That letter was received by Griffin's office on April 12, 1982 but because Griffin was away from the office he did not see the letter until, at the earliest, April 14, 1982.
On April 7, 1982 Solo had written Sigmund advising her that the complaint had been served, that the answer would soon be overdue, that his client would tolerate no further delay, and that he intended to seek the entry of a default judgment unless a timely answer was filed. Sigmund apparently received this letter on the morning of April 12, 1982, the last day for a timely filed answer. Sigmund immediately telephoned Solo, related her difficulties in reaching Griffin and her doubt as to whether she was authorized to represent SCS in this matter, and told Solo that she would get back to him as soon as she was able to reach Griffin. Sigmund also asked when the answer was due. Solo answered that he did not know and that the associate who had the information was not yet in that morning.
Sigmund's affidavit states that "she at all times believed that [Solo] would afford her the opportunity to reach Mr. Griffin before taking further action." Solo denies having so implied, and points to his letter of April 7 as making clear that no further delay would be tolerated. There was no further communication between Solo and Sigmund until well after the entry ...