First American Financial Corporation v. HomeFree USA, Inc.

Filing 28

REPORT AND RECOMMENDATIONS re 23 MOTION for Leave to File Memorandum and Affidavit filed by HomeFree USA, Inc., 15 MOTION to Vacate Default Judgment filed by HomeFree USA, Inc., 18 MOTION for Default Judgment as to HomeFree USA, Inc. filed by First American Financial Corporation Signed by: Judge Magistrate Judge Susan K. Gauvey Objections to R&R due by 7/1/2013 Responses due by 7/1/2013. Signed by Magistrate Judge Susan K. Gauvey on 6/12/2013. (aos, Deputy Clerk)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
FIRST AMERICAN FINANCIAL
CORPORATION

*

Plaintiff

*

V.

*

CIVIL NO. 1:12-cv-02888-ELH

*
HOMEFREE USA, INC.
*
Defendant.
*

REPORT AND RECOMMENDATION
There are three motions presently pending before the court:
Defendant’s Motion to Vacate Order of Default Judgment and Leave
to File Answer (ECF No. 15), defendant’s Motion for Leave of
Court to File Memorandum of Law in Support of Defendant’s Motion
to Vacate Order of Default (ECF No. 23) and plaintiff’s Motion
for Entry of Default Judgment by Clerk (ECF No. 18).
is complete.

Briefing

By orders of reference dated December 12, 2012 and

April 12, 2013, the Honorable Ellen L. Hollander referred the
above motions to a magistrate judge for review (ECF Nos. 19 and
25).

For the following reasons, I recommend that defendants’

motions be GRANTED and the plaintiff’s motion be DENIED.
I.

Background

A. Factual Background

1 

Plaintiff First American Financial Corporation (“First
American”) alleges the following in its complaint.

On or about

October 25, 2006, defendant Homefree USA Inc. (“Homefree”),
entered into a loan agreement with NHSA JPS, LLC (“NHSA”)
whereby NHSA agreed to make loan advances to HomeFree not to
exceed the sum of two million dollars.

(ECF No. 1, ¶ 6).

On or

about September 22, 2009, NHSA and Homefree entered into a First
Amended Loan Agreement.

(Id.).

Pursuant to the Loan Agreement

as Amended, NHSA made advances of $2,173,824.26 to Homefree.
(Id., ¶ 7).

NHSA’s rights under the loan were subsequently

assigned to plaintiff.

(Id. at ¶ 8).

any payments on the loan.

Defendant failed to make

(Id. at ¶ 12).

Defendant was given

notice of its default but all loan payments remain outstanding.
(Id. at 13).

As a result, plaintiff asks for judgment in the

amount of $2,500,000, prejudgment interest through the date of
judgment, costs and expenses, and reasonable attorney’s fees.
(Id. at 14).
B. Procedural Background
Plaintiff filed a complaint based on diversity jurisdiction
on September 27, 2012.

(ECF No. 1).

Defendant was served on

October 19, 2012.

(ECF No. 9).

Its answer was due on or before

November 9, 2012.

On November 9, defendant’s counsel, Robert

Sharp Jr., filed a motion for admission pro hac vice.

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(ECF No.

10).

The motion was rejected, however, due to Mr. Sharp’s

failure to sign the document.

(ECF No. 12).

On November 14, the Clerk entered an entry of default.
(ECF No. 13).

On November 28, Mr. Sharp filed a corrected

motion to appear pro hac vice.

(ECF No. 14).

On the same day,

defendant filed a motion to vacate the entry of default.
No. 15).

(ECF

Plaintiff filed a response opposing this motion on

December 3, 2012, and a motion for default judgment on December
4, 2012.

(ECF No. 17; ECF No. 18).

Defendant filed an

opposition to plaintiff’s motion for default judgment on
December 21, 2012.

(ECF No. 21).

On April 9 2013, defendant filed a motion requesting the
Court’s leave to file a memorandum and affidavit in support of
its November 28 motion to vacate the entry of default.
23).

(ECF No.

Defendant acknowledges that Local Rule 105.1 requires that

a memorandum be attached to defendant’s initial motion to
vacate, but asks for the Court’s leave to belatedly file its
memorandum and affidavit in support of the motion.

Defendant’s

memorandum and affidavit were attached to the motion.
19, plaintiff filed its opposition to this motion.
Briefing is complete on all the three motions.
II.

Analysis

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On April

A. Motion for Leave of Court to File Memorandum of Law in
Support of Defendant’s Motion to Vacate Order of Default
(ECF No. 23)
At the outset, the Court must determine whether to consider
defendant’s late submission of a memorandum and two affidavits
in support of its motion to vacate entry of default.

Pointing

to Fed. R. Civ. P. 6(b), plaintiff argues that defendant has
failed to demonstrate “excusable neglect” sufficient to allow
the Court to consider its untimely submission.
4).

(ECF No. 26, 3-

In reply, defendant argues that the strong preference that

defaults be avoided mandates that its submission be reviewed.
(ECF No. 27, 2).
The Fourth Circuit has interpreted “excusable neglect” to
encompass “late filings caused by inadvertence, mistake, or
carelessness, as well as by intervening circumstances beyond the
parties control.”

Symbionics Inc. v. Ortlieb, 432 Fed. Appx.

216, 219 (4th Cir. 2011)(quoting Pioneer Inv. Servs. v.
Brunswick Assocs. Ltd. P'ship, 507 U.S. 380, 388 (U.S. 1993)).
The Supreme Court has found that the inquiry is “at bottom an
equitable one, taking account of all relevant circumstances
surrounding the party’s omission,” including:
the danger of prejudice to the [non-movant], 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.

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Pioneer, 507 U.S. at 388; Symbionics, 432 Fed. Appx. at 219.
Defendant here has not advanced any specific excuse for its
failure to submit a memorandum of law accompanying its motion to
set aside entry of default.

Despite this failure, the Court

finds that equity requires that the memorandum and accompanying
affidavit be reviewed.

Plaintiff faces little prejudice due to

the late filing: the Court is yet to rule on the motion and
plaintiff has had the opportunity to respond to the memorandum
and affidavit.

Second, and more important, defendant rightly

notes that there is a strong policy that defaults be avoided and
that motions to set aside a default be liberally construed. In
furtherance of this policy, the Court would benefit by counsel’s
advocacy.

Third, a large amount of money is at issue and

defendant asserts that there exists a meritorious defense.
While defendant has not conducted itself admirably in the case
thus far, its failures appear to be based on inadvertence or
carelessness.

Accordingly, the Court shall consider its

memorandum and affidavit in light of all the relevant
circumstances, in the pursuit of justice.
B. Defendant’s Motion to Vacate Order of Default and
For Leave to File Answer (ECF No. 15)
Pursuant to Fed.R.Civ.P. 55(c), a court may “set aside an
entry of default for good cause.”

The Fourth Circuit has a

“strong policy that cases be decided on their merits.” United

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States v. Shaffer Equip. Co., 11 F.3d 450, 453 (4th Cir. 1993).
Default judgments are generally viewed as a “drastic method of
effecting compliance with the rules of procedure.”
Prac. & Proc. Civ. § 2693 (3d ed.).

10A Fed.

As such, a motion to set

aside a default must be “liberally construed in order to provide
relief from the onerous consequences of defaults and default
judgments.” Colleton Preparatory Acad., Inc. v. Hoover
Universal, Inc., 616 F.3d 413, 421 (4th Cir. 2010) (quoting
Tolson v. Hodge, 411 F.2d 123, 130 (4th Cir. 1969)).

Generally,

“[a]ny doubts about whether relief should be granted should be
resolved in favor of setting aside the default so that the case
may be heard on the merits.” Tolson, 411 F.2d at 130.

This

policy is particularly strong in cases involving large sums of
money or when injunctive relief is requested.

10A Fed. Prac. &

Proc. Civ. § 2693 (3d ed.).
In analyzing a motion to set aside entry of default, a
district court should consider the following factors: (1)
whether the moving party has a meritorious defense; (2) whether
it acts with reasonable promptness; (3) the personal
responsibility of the defaulting party; (4) the prejudice to the
party; (5) whether there is a history of dilatory action; and
(6) the availability of sanctions less drastic.

Payne v. Brake,

439 F.3d 198, 205 (4th Cir. 2006); see also Consolidated Masonry
& Fireproofing, Inc. v. Wagman Constr. Corp., 383 F.2d 249, 251
6 

(4th Cir. 1967).

The Court will address the first five factors

in turn.1
1. Meritorious Defense
Defendant contends that the loan at issue was not properly
assigned to plaintiff.

In support, defendant submits the loan

agreement, which contains the clause: “[t]his agreement is not
assignable without the prior written consent of the other party,
which shall not be unreasonably withheld.”

(ECF No. 23-4, 9).

Defendant has also submitted the affidavit of James M. Griffin,
Chief Operating Officer of Homefree, who states that he “refused
to give . . . consent to any assignment of the NHSA loan” to
First American.

(ECF No. 23-3, ¶ 7).

As such, plaintiff

argues, the central issue is whether this consent was
unreasonably withheld, a question of fact reserved for trial.
(ECF No. 23-1, 5).
In reply, plaintiff argues that it did in fact receive
written consent to the assignment (ECF No. 26, 8-9), and submits
email correspondence between the parties as support.
26-4 and 26-5).

(ECF Nos.

While the emails appear to show that defendant

was agreeable to the assignment as of September – October 2010,
it is also clear that the parties anticipated execution of a
written assignment.

No one claims that such a written

1

 Plaintiff has not requested alternative sanctions in this case.  

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assignment was executed by an authorized representative of
defendant.
Alternatively, plaintiff argues that defendant unreasonably
withheld consent to the assignment.

(ECF No. 26, 9).

has sets forth its reasons for denying assignment.

Defendant

Whether the

facts will support that those were the reasons and whether those
reasons provide a reasonable basis for withholding consent will
have to be litigated.
Accordingly, plaintiff’s arguments are premature.

To

establish a meritorious defense, the moving party need only
proffer evidence that, if believed, would permit a finding for
the defaulting party.

Augusta Fiberglass Coatings, Inc. v.

Fodor Contracting Corp., 843 F.2d 808, 812 (4th Cir. 1988).
Plaintiff has neither argued nor supported that the proffered
reasons for withholding consent are unreasonable under the
contract and governing law.

Thus, defendant has offered

evidence that, if taken as true, might permit a finding in its
favor.

Any dispute over the credibility or strength of this

evidence is reserved for subsequent proceedings.

The Court

finds that for purposes of this motion, defendant has offered a
meritorious defense, and this factor weighs for the defendant.

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2. Reasonable Promptness
Plaintiff notes that the motion to vacate was filed almost
three weeks after the time for pleading was expired.

While

acknowledging that the “delay itself was not lengthy,” plaintiff
argues that “the circumstances were egregious.”
3).

(ECF No. 17,

The circumstances of the delay are more relevant to factor

three, the responsibility of the defaulting party, and will be
addressed infra.

As plaintiff acknowledges that the delay here

was relatively short, the Court finds this factor weighs for the
defendant.

3. Personal Responsibility of Defendant
Plaintiff argues that defendant bears significant
responsibility for the default: “Homefree was well aware that a
lawsuit had been filed against it seeking more than $2,000,000
in damages, and it had a substantial opportunity to retain
counsel well before the time for its response to the Complaint
was due.”

(ECF No. 17, 4).

Plaintiff further argues that this

failure was particularly egregious because defendant
“purposefully chose to ignore the rules establishing the time
period to respond to a Complaint.”

(ECF No. 17, 4).

In

response, defendant acknowledges responsibility for the default,
but argues that its error was neither intentional nor egregious:
“Defendant simply didn’t do it right.”

9 

(ECF No. 23-1, 4).

In considering personal responsibility, district courts in the
Fourth Circuit have found that default judgment “is reserved
only for cases where the party’s noncompliance represents bad
faith or complete disregard for the mandates of procedure and
the authority of the trial court.”

Russell v. Krowne, No. DKC

08-2468, 2013 WL 66620 (D. Md. Jan. 3, 2013); Mezu v. Morgan
State Univ., No. 09–2855, 2010 WL 1068063, at *6 (D.Md. Mar.18,
2010).
The Court agrees with defendant that this is a case of
negligence – but not gross negligence or bad faith.

Letters

between the parties suggest that defendant belatedly retained
out of state counsel on or just before November 9th, the day an
answer was due.

(ECF No. 20-1, 1).

A further delay resulted

from counsel’s incorrectly filed motion to appear pro hac vice.
(ECF No. 12).

By the time counsel properly obtained pro hac

vice admission, the deadline to answer had passed and default
entered.
This series of events, while demonstrating negligence on the
part of defendant, does not reflect “bad faith” or “complete
disregard for the mandates of procedure.”

As such, the Court

finds that this factor weighs slightly in favor of defendant.
4. Prejudice and History of Dilatory Actions
The final two factors can be dealt with together.

The

Court finds that the plaintiff has not experienced significant
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prejudice as a result of defendant’s failure to reply.

While

plaintiff emphasizes that it expended resources in order to
obtain an entry of default, this alone is not sufficient
prejudice to preserve a default in the face of a motion to
vacate.
The Complaint demonstrates that the defendant was lent over
$2,000,000.00 and that the loan was not repaid.

The plaintiff

as putative assignee is owed a prompt adjudication of its
rights.

But this situation with its delay does not yet amount

to prejudice of the kind that would compel a denial of the
pleading motion to vacate.

This factor weighs slightly in favor

of defendant.
As to a history of dilatory actions, the case is closer.
Plaintiff makes several excellent points, demonstrating the
lackadaisical attitude of the defendant and/or its counsel.
First, the defense counsel wrote on the last date to answer the
complaint, advising plaintiff’s counsel that he “will be seeking
an extension of time to file our appearance, responsive pleading
and/or answer, along with any affirmative defenses to the
complaint at bar.”

(ECF No. 26-1)

Second, Mr. Sharp’s motion

for admission pro hac vice (ECF No. 10) was defective.

The

Clerk’s Office notified him of the defect on November 14 and
terminated the motion (ECF no. 12).
11 

Third, Mr. Sharp did not

file a corrected motion to appear pro hac vice for two weeks –
November 28.

Nor did Mr. Brian McDaniel, who stated in the

original motion that he would “serve as co-counsel in these
proceedings,” file a motion for extension of time to file an
appearance.

On November 28, Mr. McDaniel did file a Motion to

Vacate Order of Default and for Leave to File an Answer (ECF No.
15); however, that motion was defective, as well, as it was not
accompanied by a “memorandum setting forth the reasoning and
authorities in support of it.” Local Rule 105.1.

While not

demonstrably intentional, these failures have delayed the
litigation of this case and further failure to abide
scrupulously with the rules and deadlines will not be tolerated.
This factor thus favors plaintiff.
On balance, the factors favor the granting of the motion to
vacate.
III. Conclusion
For the reasons set forth above, the undersigned recommends
that Defendant’s Motion to Vacate Order of Default and for Leave
to File Answer (ECF No. 15) and defendant’s Motion for Leave of
Court to File Memorandum of Law in Support of Defendant’s Motion
to Vacate Order of Default (ECF No. 23) be GRANTED, and that
plaintiff’s Motion for Entry of Default Judgment by Clerk (ECF
No. 18) be DENIED.
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Date:

6/12/13______

/s/
Susan K. Gauvey
United States Magistrate Judge

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