THD Partners LLC v. JAG Resources, Inc. et al

Filing 51

REPORT AND RECOMMENDATIONS re 34 Motion for Entry of Default, Motion for Default Judgment filed by JAG Resources, Inc., 33 Motion for Entry of Default,, Motion for Default Judgment, filed by JAG Resources, Inc., 42 Motion to Set Aside, filed by THD Partners LLC. Signed by Judge Andrew W. Austin. (td)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
AUSTIN DIVISION
THD PARTNERS, LLC
v.
JAG RESOURCES, INC. and NX
UTILITIES, LLC

§
§
§
§
§
§

A-16-CV-849-LY

REPORT AND RECOMMENDATION
OF THE UNITED STATES MAGISTRATE JUDGE
TO:

THE HONORABLE LEE YEAKEL
UNITED STATES DISTRICT JUDGE
Before the Court are Defendant and Third-Party Plaintiff JAG Resources, Inc.’s Requests for

Entry of Default and Requests for Entry of Default Judgment (Dkt. No. 33 and 34). Also before the
Court is Plaintiff THD Partners, LLC, Third Party Defendant Aron Lofton, and Third Party Defendant
THD Construction Services, LLC’s Motion to Set Aside Entry of Default Judgment (Dkt. No. 42) and
JAG Resources’ Response (Dkt. No. 45). The District Court referred the above motion to the
undersigned Magistrate Judge for report and recommendation pursuant to 28 U.S.C. §636(b)(1)(A),
FED. R. CIV. P. 72, and Rule 1(c) of Appendix C of the Local Rules.
I. GENERAL BACKGROUND
This is a breach of contract suit, involving a contract to install underground cable and facilities
in the San Antonio and Austin area. The case involves numerous parties, counter-claims and crossclaims. The case was originally filed in Travis County state court by plaintiff THD Partners, LLC.
THD originally sued JAG Resources, Inc., and NX Utilities, LLC for breach of contract and quantum
meruit, alleging it is owed money for work performed pursuant to a Master Services Agreement, the
contract at issue in this case. NXU then brought a cross-claim against JAG, asserting it was not a party
to the Master Services Agreement between THD and JAG, and asserting separate breach of contract

and other claims against JAG involving the contract between JAG and NXU. NXU removed the case
to federal court. (Dkt. No. 1).
On August 17, 2017, JAG brought counterclaims against THD, alleging, among other things,
THD is liable to JAG for defaulting on a December 9, 2015 Promissory Note. JAG also brought
crossclaims against NXU for breach of contract for failure to properly and timely pay pursuant to the
August 12, 2015 Subcontractor Agreement. (Dkt. No. 16). Subsequently, JAG brought a Third-Party
Complaint against THD Construction for its malfeasance, alleging that THD Construction and not
THD Partners was the actual signatory to the relevant contract, and thus added it to its breach of
contract suit. (Dkt. No. 19). JAG also asserted a breach of contract claim against Third-Party
Defendant Aron G. Lofton claiming that Lofton provided a written guarantee for a $25,000 loan from
JAG to THD. JAG argues that THD defaulted on its obligation to repay the loan, and Mr. Lofton
defaulted on his guarantee obligation. JAG seeks to recover for this additional breach. (Dkt. No. 19).
JAG returned the executed summons on THD and Aron Lofton on October 30, 2017. (Dkt.
Nos.27 & 28). THD and Lofton failed to Answer. On February 14, 2018, JAG moved the clerk to
enter a default judgment against THD and Lofton pursuant to Rule 55. (Dkt. No. 33). On the same
date, JAG moved the clerk to enter a default judgment against THD pursuant to Rule 55, for failing
to answer JAG Resources’ counterclaims. (Dkt. No. 34). The Clerk entered a default against THD
Construction, Lofton, and THD Partners on February 15, 2018. (Dkt. Nos. 37 & 38). On March 29,
2018, this Court entered a show cause order ordering THD Construction, Lofton, and THD Partners
to show cause why the Court should not enter default judgment on behalf of JAG. (Dkt. No. 41). On
April 6, 2018, THD Partners, THD Construction, and Lofton filed their motion to set aside any default
judgment. (Dkt. No. 42).

2

II. ANALYSIS
Under Rule 55, a default occurs when a defendant has failed to plead or otherwise respond to
the complaint within the time required by the Federal Rules of Civil Procedure. New York Life
Insurance Co. v. Brown, 84 F.3d 137, 141 (5th Cir. 1996). After defendant’s default has been entered
by the clerk of the court, the plaintiff may apply for a judgment based on such default. Id. However,
a party is not entitled to a default judgment as a matter of right, even where the defendant is technically
in default. Lewis v. Lynn, 236 F.3d 766, 767 (5th Cir. 2001). The entry of a default judgment is
therefore committed to the sound discretion of the district judge. Mason v. Lister, 562 F.2d 343, 345
(5th Cir. 1977). A district court’s decision to grant or deny default judgment is reviewed for abuse of
discretion. Lewis, 236 F.3d at 767.
Pursuant to Rule 55, “a district court ‘may set aside an entry of default for good cause.”
Moreno v. LG Eleccs, USA Inc., 800 F.3d 692, 698 (5th Cir. 2015). “The language of this rule is
discretionary.” Id. In exercising its discretion to determine whether good cause has been shown, a
district court generally examines three factors: “(1) whether the failure to act was willful; (2) whether
setting the default aside would prejudice the adversary; and (3) whether a meritorious claim has been
presented.” Effjohn Int'l Cruise Holdings, Inc. v. A&L Sales, Inc., 346 F.3d 552, 563 (5th Cir. 2003).
As “[t]hese factors are not exclusive,” “[o]ther factors may be considered, such as whether the party
acted expeditiously to correct the default.” Id.; see also Moreno, 800 F.3d at 698 (“[D]istrict courts
generally should grant motions to set aside a default unless the default was willful, the plaintiff will
be prejudiced, or the defendant has no meritorious defense).
THD Construction, Lofton, and THD Partners argue that the Clerk’s entry of default against
them should be set aside because their attorney erred in missing the response deadlines. The attorney,
Jerry Rios, maintains that he had set the e-mail notifications in this case to be forwarded to his legal
3

assistant, and forgot to re-set them when she left his employment in November. He also discovered
in April of 2018 that his PACER account was suspended for non-payment, and rectified this matter.
THD Construction, Lofton, and THD Partners assert that JAG will not suffer prejudice by setting aside
the Clerk’s entry of default as little time has passed since its entry. Additionally, the Defendants assert
that they have meritorious defenses to JAG’s claims. THD Partners asserts it is not a proper party to
the suit as it was not a party to the contract. THD Construction and Lofton argue that, while both owe
JAG money, the resolution of the other claims in the suit will make JAG whole. Additionally, THD
Construction, Lofton, and THD Partners maintain that the failure to respond was not willful, but
because of a mistake by their shared attorney.
JAG responds that a mistake by an attorney is insufficient to establish the “good cause”
required to set aside the entry of a default judgment. Additionally, JAG maintains that the default was
willful as THD Partners has failed to: (1) properly investigate its claims as THD Construction was the
real party to the contract it sued under; and (2) serve its Rule 26 Initial Disclosures; and (3) respond
to discovery requests. JAG further maintains that counsel for THD Construction and Lofton failed to
respond after agreeing to waive service, requiring JAG to obtain service via process server.
Additionally, counsel for all three entities failed to appear for the initial pretrial conference, and all
three entities failed to file answers to its claims and counterclaims. JAG asserts that it would be
prejudiced by setting aside the Clerk’s entry of default because such action by the court would cause
a loss of evidence. Lastly, JAG maintains that the three entities have not made out meritorious
defenses.
First the Court finds that the Defendants’ failure to file an answer or otherwise respond was
not willful. While counsel’s actions in this case in not responding were negligent, the actions do not
amount to intentional willful conduct. (As an aside, the Court notes that it is difficult to understand
4

how the loss of a legal assistant in November impinged on counsel’s ability to waive service and carry
out other actions prior to that date.) A mistake is enough to support a finding of good cause. See AAR
Supply Chain Inc. v. N & P Enterprises, LLC, 2017 WL 5626356. (N.D. Tex. November 22, 2017)
(Slip Copy). Additionally, THD Partners’ failure to file initial disclosures, or otherwise respond to
discovery does not show willfulness, as all parties agree THD Partners is improperly named in this
litigation and the proper party to the suit is THD Construction. Additionally, even though the Court
has not made a finding of willfulness in this case, district courts have applied Fifth Circuit law to set
aside a clerk’s entry of default even though default was found to be willful. See Hilseweck P’ship v.
Eastern Energy Resources, Inc., 2011 WL 3501719 at *2 (N.D. Tex. 2011); Parker v. Bill Melton
Trucking, Inc., 2016 WL 5704172, at *3 (N.D. Tex. Oct. 3, 2016).
As for prejudice, “mere delay does not alone constitute prejudice.” Lacy v. Sitel Corp., 227
F.3d 290, 293 (5th Cir. 2000). Additionally, pointing to “expected difficulties [the plaintiff] may face
if forced to proceed with further litigation” and “requiring a plaintiff to prove his case do[ ] not
constitute prejudice.” Jenkens & Gilchrist v. Groia & Co., 542 F.3d 114, 122 (5th Cir. 2008).
“Rather, the plaintiff must show that the delay will result in the loss of evidence, increased difficulties
in discovery, or greater opportunities for fraud and collusion.” Lacy, 227 F.3d at 293. JAG has failed
to establish the sorts of facts needed to show prejudice—the potential loss of evidence, increased
difficulties in discovery, or increased opportunity for fraud or collusion. This factor weighs in favor
of setting aside the clerk’s entry of default.
As to whether THD Construction Services, Lofton, and THD Partners can make out a
meritorious defense, the Courts find that, at a minimum, they have offered some defense, essentially
that they performed under the relevant contract, and that JAG has not suffered damages. This is
sufficient under the relevant inquiry.
5

The Fifth Circuit has noted that the Federal Rules of Civil Procedure disfavor default
judgments and that they should only be resorted to by courts in extreme situations. Lindsey, et al. v.
Prive Corp., et al., 161 F.3d. 886, 893 (5th Cir. 1998); Rogers v. Hartford Life & Accident Ins. Co.,
167 F.3d 933, 936 (5th Cir. 1999). In this case, the defaulting parties obtained counsel, and counsel
has been responsive since resolving his administrative issues. Thus, there is good cause to set aside
the Clerk’s entry of default. At the same time, the Defendants’ counsel’s behavior, and perhaps also
that of his clients, has not been a paradigm of excellence, and the Court wants all to be aware that
further transgressions of the Federal Rules will not be tolerated by the Court.
If a court finds good cause to set aside a Clerk’s entry of default, default judgment is
automatically without foundation and any motion for such must be denied. See Lewis v. Morehouse
Det. Ctr., Civ. A. No. 09-0332, 2010 WL 2360720, at *1 (W.D. La. Apr. 30, 2010) (“Having set aside
the Clerk’s entry of default against the individual defendants, plaintiff now lacks the requisite
foundation for a default judgment against them.”), rec. adopted, 2010 WL 2360669 (W.D. La. June
9, 2010).
III. RECOMMENDATIONS
In accordance with the foregoing discussion, the Court RECOMMENDS that the District
Court GRANT Plaintiff THD Partners, LLC, Third Party Defendant Aron Lofton, and Third Party
Defendant THD Construction Services, LLC’s Motion to Set Aside Entry of Default Judgment (Dkt.
No. 42) and DENY Third-Party Plaintiff JAG Resources, Inc.’s Request for Entry of Default and
Request for Entry of Default Judgment (Dkt. No. 33) and Defendant JAG Resources, Inc.’s Request
for Entry of Default and Request for Entry of Default Judgment (Dkt. No. 34).

6

IV. WARNINGS
The parties may file objections to this Report and Recommendation. 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 (1985); Douglass
v. United Servs. Auto. Ass’n, 79 F.3d 1415, 1428–29 (5th Cir. 1996) (en banc).
SIGNED this 15th day of September, 2017.

_____________________________________
ANDREW W. AUSTIN
UNITED STATES MAGISTRATE JUDGE

7