Ohio Security Insurance Company v. K R Enterprises, Inc. et al

Filing 151

MEMORANDUM OPINION AND ORDER denying plaintiff's 139 RENEWED MOTION for Default Judgment Against K R Enterprises, Inc. and granting defendant K R Enterprises, Inc.'s 145 MOTION to Set Aside the Clerk's Entry of Default. Signed by Senior Judge David A. Faber on 1/10/2019. (cc: counsel of record and any unrepresented party) (arb)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF WEST VIRGINIA
BLUEFIELD
OHIO SECURITY INSURANCE COMPANY,
Plaintiff,
v.

CIVIL ACTION NO. 1:15-16264

K R ENTERPRISES, INC., et al.,
Defendants.
MEMORANDUM OPINION AND ORDER
Pending before the court is: (1) plaintiff’s renewed motion
for default judgment against K R Enterprises and (2) K R
Enterprises’ motion to set aside the Clerk’s entry of default.
(ECF Nos. 139 and 145).

For the reasons discussed below, the

renewed motion for default judgment is DENIED and the motion to
set aside the Clerk’s entry of default is GRANTED.
The background of this case is detailed in the court’s
earlier orders.

ECF Nos. 54 and 111.

Renewed motion for default judgment
In denying Ohio Security’s first motion for a default
judgment against K R Enterprises, the court noted:
Because K R Enterprises did not answer the Second
Amended Complaint, Ohio Security moved for the entry of
default and a default judgment as to K R Enterprises.
However, K R Enterprises has appeared in this lawsuit,
answering both the original and first amended
complaints. Between the filing of the First and Second
Amended Complaints, counsel for K R Enterprises was
permitted to withdraw as counsel of record due to
nonpayment of fees.

In a series of cases, Judge Goodwin has made a
rather compelling argument about why a court should be
reluctant to enter a default judgment in a declaratory
judgment action.
As a general principle, this court is wary of
entering default judgment in a suit for
declaratory relief. By nature, a declaratory
judgment action is jurisdictionally unique.
I am uncomfortable with the idea of providing
declaratory relief where the merits of a case
have not been fully litigated. See
Restatement 2d Judgment § 33 (stating that a
court “should not make a declaration upon
default on the basis of the pleadings alone
but should require the plaintiff to present
enough evidence to warrant the granting of
declaratory relief”).
My concern about entering declaratory
judgment by default is particularly
pronounced in insurance disputes. When a
declaratory judgment action is brought by an
insurance carrier, the suit may influence the
way courts later interpret other identical
policies. I do not believe that an
individual insured's failure to respond in a
given action is sufficient justification for
a declaration that may later affect non-party
policy holders. For this reason, I generally
decline to enter default judgment in such
cases when a party has appeared to oppose the
default judgment. In such cases, I believe
that less drastic sanctions are the more
appropriate remedy.
Teachers Ins. Co. v. Prather, Civil Action No. 2:11-cv00397, 2012 WL 90095, at *2 (S.D.W. Va. Jan. 11, 2012);
see also State Auto Property and Cas. Ins. Co. v. Fas
Chek Enterprises, Inc., Civil Action No. 2:15-cv-00809,
2015 W: 1894011, *2 (S.D.W. Va. Apr. 27, 2015)
(“Generally, I decline to enter default judgment in
such cases when the nonmoving party has demonstrated
opposition to it in some manner.”).
The instant situation presents an even more
compelling reason why this court should decline to
enter a default judgment against K R Enterprises. K R
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Enterprises’ failure to answer the second amended
complaint is a result of its failure to pay its
attorneys’ fees. It is unable to pay its attorneys’
fees because its insurance carrier has stated that it
has no duty to defend.
ECF No. 111 at 9-10.
The court has seen nothing in the parties’ further briefs on
this issue to convince it that entry of a default judgment
against K R Enterprises is appropriate.

K R Enterprises’ failure

to answer the second amended complaint is a direct result of Ohio
Security’s denial of coverage.
Motion to set aside entry of default
Federal Rule of Civil Procedure 55(c) states that “[t]he
court may set aside an entry of default for good cause. . . .”
Factors the district court should consider in deciding whether to
set aside an entry of default are: (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.

Colleton Preparatory Academy, Inc. v. Hoover

Universal, Inc., 616 F.3d 413, 417 (4th Cir. 2010) (quoting Payne
ex rel. Estate of Calzada v. Brake, 439 F.3d 198, 204-05 (4th
Cir. 2006)).

Of the strong preference for deciding cases on

their merits rather than by a procedural default, our appeals
court has noted:

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We have repeatedly expressed a strong preference
that, as a general matter, defaults be avoided and that
claims and defenses be disposed of on their merits.
E.g., Tazco, Inc. v. Director, Office of Workers
Compensation Program, U.S. Dep’t of Labor, 895 F.2d
949, 950 (4th Cir. 1990) (“The law disfavors default
judgments as a general matter.”); Consolidated Masonry
& Fireproofing, 383 F.2d at 251 (“Generally a default
judgment should be set aside where the moving party
acts with reasonable promptness and alleges a
meritorious defense.”). This imperative arises in
myriad procedural contexts, but its primacy is never
doubted.
Id.

A court’s decision whether to set aside an entry of default

is reviewed for an abuse of discretion.

See id.

Upon consideration of the Colleton factors, the court is
persuaded that good cause exists for setting aside the Clerk’s
entry of default against K R Enterprises.

Regarding the first

factor, K R Enterprises has satisfied its burden of coming
forward with a meritorious defense.

“All that is necessary to

establish the existence of a meritorious defense is a
presentation or proffer of evidence which, if believed, would
permit the court to find for the defaulting party.”

Armor v.

Michelin Tire Corp., 113 F.3d 1231, at *2 (4th Cir. 1997)
(unpublished).

A defendant moving to set aside default is “not

required to present any particular kind of a defense, or persuade
the Court of the ultimate validity of the defenses presented, in
order to have a meritorious defense for purposes of setting aside
default.”

Capital Concepts, Inc. v. CDI Media Group Corp., No.

3:14-cv-00014, 2014 WL 3748249, *6 (W.D. Va. July 29, 2014).

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The

simple question presented by this case is whether Ohio Security
has a duty to defend and indemnify its insured, K R Enterprises,
under the facts and circumstances of this case.

Based upon the

record, including the two answers previously filed by K R
Enterprises, K R Enterprises has satisfied this court that it
might possibly prevail, thereby satisfying its minimal burden to
proffer a meritorious defense.

See id. (noting that a defendant

seeking to set aside a default has a “low bar for presenting a
meritorious defense”).
The second and third factors also weigh in favor of setting
aside the entry of default against K R Enterprises.

While K R

Enterprises is ultimately responsible for failing to answer the
second amended complaint in a timely manner, the record is clear
that at that time K R Enterprises was without counsel.

And, has

as already been noted, it was without counsel because of its
inability to pay legal fees which K R Enterprises contends is
because of plaintiff’s refusal to provide a defense.

Therefore,

this is not a case where a defendant has simply sat on its hands
and done nothing but, rather, attempted to defend the action
until financial concerns made it impossible to do so.
Furthermore, once K R Enterprises retained its current counsel it
acted with reasonable promptness in defending itself in this
court.

Counsel noted their appearance six days after Ohio

Security moved to return this case to the active docket.

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As to the prejudice factor, Ohio Security argues that it
will be prejudiced because, while K R Enterprises was in default,
it negotiated settlements with the other defendants.

However, K

R Enterprises will certainly be prejudiced if not permitted the
opportunity to defend this case on the merits.

Furthermore, this

court has already stated its preference for deciding declaratory
judgment actions on the merits.

For all these reasons, the court

concludes that the prejudice to K R Enterprises by refusing to
set aside the entry of default outweighs any prejudice to Ohio
Security in doing so.
Nor can the court conclude that there is a history of
dilatory action on the part of K R Enterprises in this
litigation.
had counsel.

K R Enterprises actively defended itself while it
Only after counsel was permitted to withdraw did K

R Enterprises fail to answer the second amended complaint.
Finally, with respect to the sixth factor and Ohio Security’s
requests for costs and fees, the court does not find that such a
sanction is warranted.
For the foregoing reasons, the renewed motion for default
judgment is DENIED and the motion to set aside the Clerk’s entry
of default is GRANTED.

K R Enterprises is directed to file a

responsive pleading within fourteen (14) days of entry of this
Memorandum Opinion and Order.

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The Clerk is directed to send copies of this Order to
counsel of record and to any unrepresented parties.
IT IS SO ORDERED this 10th day of January, 2019.
ENTER:

David A. Faber
Senior United States District Judge

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