Diggs v. Ditech Financial LLC

Filing 13

REPORT AND RECOMMENDATIONS re 11 Motion for Judgment on the Pleadings filed by Varnel L. Diggs, 8 Motion for Judgment on the Pleadings filed by Varnel L. Diggs, 4 Motion for New Trial filed by Ditech Financial, LLC, 5 Motion for Sanctions filed by Varnel L. Diggs. Signed by Judge Andrew W. Austin. (td)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
AUSTIN DIVISION
VARNELL L. DIGGS

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V.
DITECH FINANCIAL, LLC

NO. A-16-CV-828 LY

ORDER AND REPORT AND RECOMMENDATION
OF THE UNITED STATES MAGISTRATE JUDGE
TO:

THE HONORABLE LEE YEAKEL
UNITED STATES DISTRICT JUDGE
Before the Court are Defendant Ditech Financial, LLC’s Supplement to its Motion for New

Trial, Dkt. No. 4; Plaintiff Varnell L. Diggs’s pleading that “Defendant Motion for New Trail is to
be Strickened” [sic], Dkt. No. 5-1, and attached Motion for Sanctions, Dkt. No. 5; Defendant’s
Responses to Plaintiff’s pleadings, Dkt. Nos. 6 and 7; Plaintiff’s Motion on the Pleadings, Dkt. No.
8; Defendant’s Response to Plaintiff’s Motion on the Pleadings, Dkt. No. 10; and Plaintiff’s Second
Motion on the Pleadings, Dkt. No. 11. The District Court referred this case to the undersigned for
rulings on non-dispositive motions, and for report and recommendation on dispositive motions,
pursuant to 28 U.S.C. § 636(b)(1)(A) & (B), Federal Rule of Civil Procedure 72, and Rule 1(d) of
Appendix C of the Local Rules.
I. BACKGROUND
Plaintiff Varnel L. Diggs, proceeding pro se, originally filed this action in Travis County
District Court asserting a quiet title claim against Ditech Financial, LLC (“Ditech”). Dkt. No. 1-1
at 52. Diggs filed a declaration of service by “regular U.S. mail” to “Ditech Financial, LLC, P.O.
Box 6176, Rapid City, SD 57709" on April 4, 2016, which is the address provided on letters from
Ditech’s complaint department. Dkt. No. 1-1 at 8. Ditech failed to answer or appear in court, and

Diggs moved for default judgment. Id. at 48. A Travis County District Judge granted the default
judgment on May 19, 2016. Id. at 61.
Upon receiving notice of the default judgment, Ditech moved for a new trial, and, shortly
after, removed the action to federal court. Ditech alleges that the default judgment is void under
Federal Rule of Civil Procedure 60(b)(4) for lack of personal jurisdiction because Diggs failed to
properly serve Ditech. Diggs responds in multiple motions.
II. ANALYSIS
A.

Void Judgment
Rule 60(b) states that the “court may relieve a party or its legal representative from a final

judgment, order, or proceeding” when “the judgment is void.” FED. R. CIV. P. 60(b). A judgment
is void and must be set aside when “a district court lacks jurisdiction over the defendant because of
lack of service of process.” Bludworth Bond Shipyard, Inc. v. M/V Caribbean Wind, 841 F.2d 646,
649 (5th Cir. 1988). Courts agree that where a state district court lacked personal jurisdiction for
insufficient service of process, a federal court, upon a motion for new trial, must vacate the default
judgment.1 Thus, the federal court may determine if plaintiff properly served the defendant, and if
it finds that the defendant was improperly served, it must vacate the default judgment.

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See, e.g., Thompson v. Deutsche Bank National Trust Co., 775 F.3d 298, 303 (5th Cir. 2014)
(allowing removal of a state court default judgment); Westlake Legal Group v. Yelp, Inc., 599
Fed.Appx. 481, 483 (4th Cir. 2015) (holding that the Rooker-Feldman doctrine did not bar removal);
Price v. Wyeth Holdings Corp., 505 F.3d 624, 631 (7th Cir. 2007) (allowing removal of a state court
default judgment); Munsey v. Testworth Labs., 227 F.2d 902, 903 (6th Cir. 1955) (finding that “the
federal court takes it as though everything done in the state court had in fact been done in the federal
court”); Gray v. Permanent Mission of People’s Republic of Congo to United Nations, 443 F. Supp.
816, 821-22 (S.D.N.Y.), aff’d 580F.2d 1044 (2d Cir. 1978) (“The existence of a default judgment
entered by the state court prior to removal should not impede this inquiry. . . .”).
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1.

Ditech may remove after entry of default judgment

Diggs argues that Ditech does not have standing because this Court lacks subject matter
jurisdiction over the dispute. Though the argument is less than clear, the Court assumes Diggs is
challenging Ditech’s removal after entry of default judgment, as well as the merits of Ditech’s
motion for new trial.
Generally, a Rule 60(b)(4) motion does not have a timeliness requirement. Bludworth Bond
Shipyard, 841 F.2d at 649. However, a defendant must still satisfy the requirements for removal.
Under the removal statute, a defendant must file the notice of removal within thirty days of service.
28 U.S.C. § 1446(b)(1). This requirement begins to “run[] from the date on which [the defendant]
is formally served with process,” and “an unserved defendant retains the right to remove an action
once it learns of the litigation.” Thompson, 775 F.3d at 303. The record is silent on the precise day
that Ditech learned of the default judgment, but the state court record reflects that the state court
clerk mailed Ditech a postcard notifying it of the entry of an order in the case (the default judgment).
The postcard is postmarked June 3, 2016. The notice of removal was filed in this Court on June 30,
2016, less than 30 days after the clerk mailed the postcard to Ditech. The removal was thus timely.
Diggs further argues that this court loses its plenary power seventy-five days after the entry
of judgment. Under the Texas Rules, a defendant must file a motion for new trial within thirty days
of the judgment, and if the court does not issue a judgment within seventy-five days, the motion is
deemed overruled. TEX. R. CIV. P. 329b(a), (c). The court then has another thirty days in which to
vacate, modify, correct, or reform the judgment. Id. at 329b(e). The Texas Rules do not bar the
Court from considering Ditech’s motion. First, once a case is removed, the federal, not state, rules
apply. Bush v. Allstate, 425 F.2d 393, 395 (5th Cir. 1970). Therefore, the plenary power of this
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court to vacate the default judgment is governed by FED. R. CIV. P. 60. Second, though a defendant
is bound by Rule 60(b) to file the motion for new trial in a timely manner, six months has been held
to be timely. See Recreational Props., Inc.v. Sw. Mortg. Serv. Corp., 804 F.2d 311, 314 (5th Cir.
1986). Ditech has clearly complied with Rule 60.2
2.

Diggs failed to effectuate proper service on Ditech

A judgment is void under Rule 60(b)(4) when the rendering court lacked personal
jurisdiction over the defendant for improper service of process. Recreational Props., 804 F.2d at
314. “Failure to give notice violates ‘the most rudimentary demands of due process of law.’”
Peralta v. Heights Medical Center, Inc., 485 U.S. 80, 84 (1988) (quoting Armstrong v. Manzo, 380
U.S. 545, 550 (1965)). Sufficiency of process is evaluated under state law– in this case, Texas. City
of Clarksdale v. BellSouth Telecomms., Inc., 428 F.3d 206, 210 (5th Cir. 2005). Texas case law
provides that “[t]here are no presumptions in favor of a valid issuance, service, and return of citation
in the face of a [direct] attack on a default judgment.” Uvalde Country Club v. Martin Linen Supply
Co., 690 S.W.2d 884, 885 (Tex. 1985).
Unless the record affirmatively shows, at the time the default judgment is entered,
either an appearance by the defendant, proper service of citation on the defendant, or
a written memorandum of waiver, the trial court does not have in personam
jurisdiction to enter a default judgment against the defendant.
Autozone, Inc. V. Duenes, 108 S.W.3d 917, 920 (Tex. App.–Corpus Christi 2003, no pet.).
Therefore, “failure to affirmatively show strict compliance with the Rules of Civil Procedure renders
the attempted service of process invalid and of no effect.” Uvalde, 690 S.W.2d at 885. Even where
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Even if the Texas Rules applied to this question, Diggs’ argument fails. Under TEX. R. CIV.
P. 329b(a), a motion for new trial must be filed within thirty days “after the judgment or other order
complained of is signed.” The default judgment was signed on May 19, 2016, and Ditech’s motion
for new trial was filed June 17, 2016. Dkt. No. 1-1 at 61, 64.
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a defendant has “actual knowledge” of the suit, a default judgment must still be set aside if the
defendant was not properly served. Wilson v. Dunn, 800 S.W.2d 833, 837 (Tex. 1990).
To effectuate proper service, plaintiffs must serve the citation by “delivering to the defendant,
in person, a true copy of the citation” or by “mailing to the defendant by registered or certified mail,
return receipt requested, a true copy of the citation.” TEX. R. CIV. P. 106(a). The clerk, “when
requested shall forthwith issue a citation and deliver the citation as directed.” TEX. R. CIV. P. 99(a).
Then, the plaintiff “shall be responsible for obtaining service of the citation and a copy of the
petition.” Id. Service of a citation by mail cannot be made by a party to the suit, but must “be made
by the clerk of the court.” TEX. R. CIV. P. 103. Furthermore, proper service on an LLC, such as
Ditech, must be made on either a “manager of a manager-managed” LLC, a “member of a membermanaged” LLC, or its registered agent. TEX. BUS. ORGS. CODE ANN. §§ 5.201, 5.255.
Ditech argues that service was improper for three reasons: (1) Diggs failed to serve the
citation on Ditech, (2) Diggs failed to serve the citation and petition on any of Ditech’s agents, and
(3) Diggs mailed the petition himself in violation of Rule 103. This Court agrees that Diggs failed
to properly serve Ditech.
In this case, the record indicates that the citation was not included with the petition.
Generally, a party may assume that the clerk will issue and deliver the citation promptly. Harrell
v. Alvarez, 46 S.W.3d 483, 486 (Tex.App.–El Paso 2001, no pet.). Without proof, “it will not be
presumed that the plaintiff did anything to delay the issuance of a citation.” Jackson v. J. R.
Neatherlin Corp., 557 S.W.2d 327, 328 (Tex.App.–Houston [1st Distr.] 1977, writ ref., n.r.e.).
However, “[i]n the absence of proof that the necessary fees were paid, the presumptions could not
apply.” Id. Diggs, in his motion to strike, states that “no citation was processed to be served” at the
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time that he mailed the petition, Dkt. No. 5-1 at 2, and the record indicates that he mailed the petition
on the same day as he filed suit, April 4. Dkt. No.1-1 at 58, 85. However, the clerk did not issue
the citation until April 7, three days after the petition was mailed, and the same day the petition was
delivered to the P.O. Box. Id. at 85, 88. Moreover, the citation itself does not show return service
or a paid service fee. Id. Without evidence that the service fee was paid or return service provided
on the citation, there is no presumption that the citation was delivered by the clerk. Furthermore,
Diggs has admitted that he did not serve the citation with the petition.
However, even if the citation was delivered, the service of process was still improper.
Service on an LLC, under Texas law, must be made on its registered agent, one of the managers, or
one of the members. As provided to the Texas Secretary of State, Ditech’s registered agent for
receipt of process in Texas is the CT Corporation System, located at 1999 Bryan St., Suite 900,
Dallas, Texas 75201-3136. Diggs admits that he mailed the petition to a P.O. Box in South Dakota
registered to Ditech—the same address used on the letters Diggs received from the complaint
department. This is insufficient under Texas law. Simply because Diggs “didn’t have a full
understanding of Process of Service” does not absolve him of the duty to properly serve the
defendant. Dkt. No. 5-1 at 2; see Avdeef v. Royal Bank of Scotland, 616 Fed. App’x 665, 672 (5th
Cir. 2015) (noting that “[t]here is no exception for pro se litigants” in proper service). Texas law
requires strict compliance with the rules, so service upon the complaint department—even if it gave
actual notice to Ditech—was insufficient to provide personal jurisdiction over Ditech. See Uvalde,
690 S.W.2d at 885; Wilson, 800 S.W.2d at 837.
Finally, Diggs mailed the petition himself, in plain contravention of the Texas rules. As
noted earlier, if service of process is accomplished by mail, it must be done by the clerk, and may
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not be done by a party. TEX. R. CIV. P. 103. Diggs’ own filing concedes that he mailed the petition.
Dkt. No. 1-1 at 58.
3.

Ditech need not prove a meritorious defense

Diggs further argues that even if he failed to properly serve Ditech, it cannot “capitalize on
a procedural defect” without showing a meritorious defense. Dkt. No. 5 at 2. Diggs relies on
Craddock v. Sunshine Bus Lines, 133 S.W.2d 124 (Tex. 1939), which sets out three elements that
a defendant must prove to vacate a default judgment; a defendant must show: (1) the failure to
answer was an unintentional mistake, (2) defendant has a meritorious defense, and (3) the plaintiff
would not suffer an injury. However, Diggs’s reliance on this case is misplaced. Courts have
consistently held that when a motion for new trial is based on a void judgment for improper service
of process, a defendant need not prove a meritorious defense. See Armstrong, 380 U.S. at 552;
Peralta, 485 U.S. at 87. Instead, “[w]here a person has been deprived of property in a manner
contrary to the most basic tenets of due process, ‘it is no answer to say that in his particular case due
process of law would have led to the same result because he had no adequate defense upon the
merits.’” Peralta, 485 U.S. at 86-87 (quoting Coe v. Armour Fertilizer Works, 237 U.S. 413, 424
(1915)). Thus, Ditech is not required to show a meritorious defense to vacate the default judgment.
B.

Diggs’s other objections are baseless
Diggs offers several other objections to Ditech’s motion, including an argument that the case

is “time-barred,” a request for a judgment on the pleadings, and a request for sanctions against
Ditech.

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1.

“Time-Barred”

Diggs first argues that the Court does not have jurisdiction over this case as the debt is “timebarred.” Dkt. No. 5-1 at 6. He claims that “specific performance of a contract for the conveyance
of real property” has a four-year statute of limitations. TEX. CIV. PRAC. & REM. CODE ANN.
§ 16.004. However, Diggs incorrectly relies on this statute. A claim that the statute of limitations
has run on a claim is an affirmative defense, and prevents a party from filing suit after the statute has
run. Diggs is the plaintiff in this case, so his statute of limitations argument has no relevance to
Ditech’s ability to challenge the default judgment he obtained in state court. Diggs’s limitations
argument—if indeed it did apply to any claim or defense Ditech might bring—is not before the court
at this time.
2.

Judgment on the Pleadings

Diggs also moves for a judgment on the pleadings under Rule 12(c) of the Federal Rules of
Civil Procedure. Rule 12(c) states that a party may move for judgment on the pleadings “[a]fter the
pleadings are closed—but early enough not to delay trial.” FED. R. CIV. P. 12(c). Pleadings include:
a complaint, answer, answer to a counterclaim, answer to a cross-claim, third party complaint,
answer to third party complaint, and reply to an answer. Id. 7(a). To grant a judgment on the
pleadings, “the undisputed facts appearing in the pleadings, supplemented by any facts of which the
court will take judicial notice” must “show that no relief can be granted.” J. M. Blythe Motor Lines
Corp. v. Blalock, 310F.2d 77, 78-79 (5th Cir. 1962). Ditech has not filed an answer yet, so the
pleadings are not closed, and the motion is premature.

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3.

Sanctions

Finally, Diggs asks for sanctions against Ditech in the amount of $2,000 as well as attorney’s
fees. Diggs claims that Ditech is “clearly operating in bad faith, as in harassment, and tying up court
docket” because “Ditech Representatives have not presented any evidence in their motion to prove
they have a meritorious defense.” Dkt. No. 5 at 5. Diggs relies on Texas Civil Practice and
Remedies Code § 10.004(b). However, the correct rule is FED. R. CIV. P. 11, which states that a
court may grant sanctions when a party files a motion for improper purposes, that is frivolous, or is
not supported by evidence. FED. R. CIV. P. 11. To obtain sanctions under Rule 11, a party must
serve the non-moving party with the proposed motion for sanctions twenty-one days before filing
with the court and give the party the opportunity to withdraw the offending pleading. FED. R. CIV.
P. 11(c)(2). Diggs has failed to demonstrate that he complied with this rule. More the point, even
if he had complied, the motion for a new trial is not frivolous; indeed, the Court is recommending
that the motion be granted. There is no basis for an award of sanctions.
III. RECOMMENDATION
Based upon the foregoing, the undersigned RECOMMENDS that the district judge GRANT
Ditech’s Motion for New Trial (Dkt. No. 4), and SET ASIDE the Default Judgment entered by the
state court in this matter on May 19, 2016, and ORDER that Ditech file a responsive pleading within
21 days of the district judge’s order. IT IS FURTHER RECOMMENDED that the district judge
DENY Diggs’s Motion to Strike Defendant’s Motion for New Trial (Dkt. No. 5-1), Diggs’s Motion
on the Pleadings (Dkt. No. 8), and Diggs’s Second Motion on the Pleadings (Dkt. No. 11).
FINALLY, Diggs’s Motion for Sanctions (Dkt. No. 5) is DENIED.

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IV. WARNINGS
The parties may file objections to the Recommendations contained above. A party filing
objections must specifically identify those findings or recommendations to which objections are
being made. The District Court need not consider frivolous, conclusive, or general objections. See
Battle v. United States Parole Comm’n, 834 F.2d 419, 421 (5th Cir. 1987).
A party's failure to file written objections to the proposed findings and recommendations
contained in this Report within fourteen (14) days after the party is served with a copy of the Report
shall bar that party from de novo review by the District Court of the proposed findings and
recommendations in the Report and, except upon grounds of plain error, shall bar the party from
appellate review of unobjected-to proposed factual findings and legal conclusions accepted by the
District Court. See 28 U.S.C. § 636(b)(1)(C); Thomas v. Arn, 474 U.S. 140, 150-53, 106 S. Ct. 466,
472-74 (1985); Douglass v. United Servs. Auto. Ass’n, 79 F.3d 1415, 1428-29 (5th Cir. 1996) (en
banc).
SIGNED this 17th day of October, 2016.

_____________________________________
ANDREW W. AUSTIN
UNITED STATES MAGISTRATE JUDGE

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