74 F.

3d 349

KEY BANK OF MAINE, Plaintiff-Appellee,

v.
TABLECLOTH TEXTILE COMPANY CORPORATION, et
al., Defendants-Appellants.
No. 94-2044.

United States Court of Appeals,

First Circuit.
Heard Sept. 12, 1995.
Decided Jan. 30, 1996.

Eric A. Deutsch, with whom Testa, Hurwitz & Thibeault, Boston, MA,
Peter G. Cary and Mittel, Asen, Eggert, Hunter & Altshuler, Portland,
ME, were on brief, for appellants.
Thomas A. Cox, with whom Jennifer S. Begel and Friedman & Babcock,
Portland, ME, were on brief, for appellee.
Before TORRUELLA, Chief Judge, LYNCH, Circuit Judge, and
STEARNS,* District Judge.
TORRUELLA, Chief Judge.

Defendants-Appellants Tablecloth Textile Company Corp., ("Tablecloth"), Post

& Sherman Textile Company, Inc. ("P & S") and Stuart Sherman ("Sherman")
(collectively referred to as the "Appellants") appeal the denial of their motion to
set aside a default judgment and for leave to file a late responsive pleading. We
reverse, holding that because the notice requirement of Rule 55(b)(2) of the
Federal Rules of Civil Procedure was not observed, and because Appellants
provided strong evidence that the damage award was erroneously calculated,
the default judgment must be set aside and the case remanded for further
proceedings consistent with this opinion.

I. BACKGROUND
2

The record in the present action reveals the following. The dispute underlying

this appeal arose out of the sale of assets, particularly the licenses and inventory
of a Maine corporation which was in default on its obligations to PlaintiffAppellee Key Bank of Maine ("Key Bank" or the "Appellee"). On December
27, 1993, Key Bank commenced an action against the Appellants by filing a
complaint in the U.S. District Court for the District of Maine, alleging that
Tablecloth breached its obligations to Key Bank under various contracts and
promissory notes and that Sherman and P & S were jointly and severally liable
along with Tablecloth pursuant to an executed guaranty dated January 13, 1992.
On December 30, 1993, service was made on the Appellants. The answer to the
complaint was due on January 19, 1994, a date which came and passed with
Appellants filing neither an answer nor a formal appearance.

On January 10, 1994, Key Bank's Maine counsel, Laurie B. Perzley, received a
telephone call from Appellants' then-counsel in New York, Stephen Brown,
indicating that Appellants wanted to pursue settlement negotiations. Perzley
received a similar telephone call on January 20, 1994, from Sherman's brother,
Tom Sherman, Esq. Stuart Sherman was subsequently informed by his brother
that Appellants were already in default, at which point Sherman transferred the
matter to the attention of corporate counsel for P & S and Tablecloth in New
York, Ronit Fischer. Sherman implored Fisher to contact Key Bank's counsel
and Vice President, Michael Lugli, to request additional time to respond to the
complaint and to see if the parties could negotiate a settlement.

During the last week of January 1994, Fischer and Lugli spoke by telephone.
The substance of their conversation was memorialized in Fischer's letter to
Lugli dated February 1, 1994 (the "February 1 letter"). The February 1 letter
evidences Appellants' understanding (i) that it served to commence settlement
negotiations; (ii) that Key Bank would not request a default judgment unless
and until it was determined that settlement negotiations had failed; (iii) that
prior to seeking a default judgment, Key Bank would notify Fischer so that
Appellants could seek Maine counsel and file the appropriate pleadings; and
(iv) that, if negotiations failed, the letter's settlement offer would not prejudice
either party's position in litigation. The February 1 letter also discussed "behind
the scenes" circumstances that provided grounds for Appellants' defenses.

In response, Lugli penned a letter dated February 4, 1994 (the "February 4

letter"), indicating Appellee's willingness to enter into negotiations, if they
"could be accomplished quickly." The letter requested financial information,
enclosed Key Bank forms to be used, provided a February 16, 1994 deadline,
and stated that Lugli would "instruct counsel to continue with the legal
proceeding" were the deadline not met. Appellants did not submit the financial
information by the deadline. Fischer maintains that although she received the

financial questionnaire meant to be completed and submitted by Sherman, she

"do[es] not recall" whether the package contained "a demand letter from Key
Bank" dated February 4, 1994, indicating that a default would be sought unless
all requested information was presented to Key Bank by February 16, 1994.
6

On February 25, 1994, Key Bank filed a response to the court's order to show
cause why the action should not be dismissed for lack of prosecution along
with an application to the district court clerk for entry of the default. Although
Key Bank was aware that Appellants were represented by counsel who had
requested notice before Key Bank sought to have default entered, it chose not to
serve Appellants with those papers. On February 28, 1994, the clerk entered a
default in favor of Key Bank under Fed.R.Civ.P. 55(a) because of Tablecloth's
failure to file a responsive pleading. On April 1, 1994, Appellee filed a motion
for a default judgment, once again choosing not to serve Appellants. On April
8, 1994, the district court entered the default judgment ex-parte in the amount
of $693,871.44, based on the affidavits and the unanswered request for
admissions submitted by Key Bank.

During oral argument counsel for Key Bank admitted that Key Bank never sent
Appellants notice of, or copies of any pleadings filed in connection with, these
court actions. Key Bank further conceded that Appellants only learned of the
entry of the default and of the default judgment in July 1994, when Key Bank's
counsel, David Burke, contacted Fischer (who no longer was involved in the
matter) to discuss execution of the judgment. Burke was referred to John Stahl,
the controller for Post & Sherman, and they conducted settlement discussions
through the remainder of July. Burke rejected a settlement offer on July 12,
1994, and informed Stahl that if a satisfactory settlement was not reached by
August 1, 1994, Appellee would enforce the judgment. On July 25, 1994, Lugli
received the financial information requested in February 1994 from Sherman.

The parties failed to reach a settlement by August 1, 1994. Accordingly, on

August 15, 1994, Appellants filed a motion to set aside the default judgment
and a motion to allow a late answer, along with supporting affidavits that
detailed the inaccuracies of the damages as established by the unanswered
request for admissions. On September 2, 1994, the district court denied
Tablecloth's motion to set aside the default judgment and for leave to file a late
responsive pleading (the "motion"). The district court stated that Appellants
failed to meet their burden under Fed.R.Civ.P. 60(b), because their conduct did
not constitute excusable neglect and they did not provide sufficient elaboration
permitting the district court to determine that they had a meritorious defense
(the "Order"). This appeal was filed on September 29, 1994. We have
jurisdiction pursuant to 28 U.S.C. Sec. 1291.

II. DISCUSSION
9

Despite the additional issues raised, disposition of this appeal begins and ends
with the inquiry into whether the district court erred when it denied Appellants'
motion to set aside the default judgment entered against them. We review the
denial of a motion to set aside a default judgment for an abuse of discretion.1
Cotto v. United States, 993 F.2d 274, 277 (1st Cir.1993) (discussing motion for
Rule 60(b) relief); Leshore v. County of Worcester, 945 F.2d 471, 472 (1st
Cir.1991) (explaining motion for Rule 55(c) relief); U.S. v. One Urban Lot
Located at 1 Street A-1, 885 F.2d 994 (1st Cir.1989) (noting that review of
motions for relief under Rule 55(c) is less demanding than that governing those
seeking relief under Rule 60(b)); see also In re Roxford Foods, Inc., 12 F.3d
875 (9th Cir.1993).

10

In their appeal of the denial of their motion to set aside default judgment,
Appellants argue that they "appeared" in the action below for purposes of Rule
55(b)(2)2 and, thus, were entitled to written notice3 three days prior to the entry
of the default judgment. Appellants contend that because Appellee failed to
satisfy the notice requirement of Rule 55(b)(2), the district court abused its
discretion when it denied their motion, because, in so doing, it implicitly held
that Appellee was not required to provide them with notice.4 Predictably,
Appellee disputes that Appellants appeared below and maintains that, under
Rule 5(a), it was not required to provide Appellants with notice of the default
pleadings.5

11

Although appearance in an action typically involves some presentation or

submission to the court--a feature missing here--we have held that a defaulting
party "has appeared" for Rule 55 purposes if it has "indicated to the moving
party a clear purpose to defend the suit." Muniz v. Vidal, 739 F.2d 699, 700
(1st Cir.1984) (quoting H.F. Livermore Corp. v. Aktiengesellschaft Gebruder
Loepfe, 432 F.2d 689, 691 (D.C.Cir.1970)). Our review of both the case law
we cited in Muniz and the decisions since Muniz reveals there is ample support
for our finding that Appellants' "informal contacts" with Key Bank
demonstrated a clear intent to defend, and thus that they "appeared" in the
action below.6

12

Here, Appellants "indications" of their intent are primarily evidenced by the

February 1 letter from Fischer to Lugli. The letter, supplemented by affidavits
on record, demonstrates that Fischer explained to Lugli that, because both P &
S and Sherman had limited access to funds and were considering bankruptcy,
available funds were better spent on the business, repaying Key Bank, and
negotiating a settlement, than on litigating the matter. More importantly, the

February 1 letter made clear Appellants' understanding that (i) the letter served
to commence settlement negotiations; (ii) during the negotiations Key Bank
"will forbear from filing a default motion based on [P & S's] failure to answer
[in the action below]"; (iii) if "at any time [Key Bank] determines that the
negotiations are not proceeding to a positive conclusion," it would notify
Appellants so that they could retain Maine counsel to enter "the appropriate
pleadings" (emphasis original); and (iv) reiterated that Appellants' "settlement
offer was made without prejudice to each party's respective positions in
litigation should the parties be unable to reach an amicable solution." The
February 1 letter, in its review of the facts involved and the bases for
Appellants' settlement offer, also detailed Appellants' defenses and
counterclaims in the event settlement negotiations failed.
13

Contrary to Appellee's assertions, once Appellants "appeared" for Rule 55

purposes they were entitled to notice of the application for default judgment
under Rule 55(b)(2). We disagree with Appellee's argument that they were not
required to provide notice under Rule 55(b)(2) because their February 4 letter
effectively cancelled the intent to defend demonstrated in Appellants' February
1 letter. Specifically, Appellee argues that when the February 4 letter is
considered together with Appellants' failure to respond by the February 16,
1994 deadline, it becomes clear that Appellee was not itself "on notice" in
February 1994 that Appellants had a clear intent to defend. Appellants' failure
to meet the deadline, Appellee maintains, was but another example of their
"history of non-responsiveness."

14

We find Appellee's argument thoroughly unpersuasive, if not disingenuous.

Appellants only two weeks before communicated a clear intent to defend.7
Appellee also knew that Appellants were represented by counsel. Moreover,
Appellee was well aware of Appellants' need to retain Maine counsel and of
Appellants' understanding that notice would precede Appellee's seeking entry
of default. It was Appellee's duty when seeking entry of default and judgment
by default to apprise the district court of Appellants' February 1 letter and to
give notice as contemplated under Rule 55(b)(2).

15

In addition, we are unpersuaded by Appellee's attempt to distinguish this case

from Muniz. Appellee argues that, unlike in Muniz, the February 4 letter
specifically put Appellants on notice that "if [Lugli] does not receive this
[financial] information prior to [February 16, 1994], [Lugli] will instruct
counsel to continue with the legal proceeding." Appellee relies on a case we
distinguished in Muniz, Wilson v. Moore & Associates, Inc., 564 F.2d 366, 369
(9th Cir.1977) (finding defendant's "informal contacts" insufficient to constitute
an appearance because "plaintiff's 'informal contacts' provided actual,

unqualified notice that delay would result in default"). Even assuming receipt of
Key Bank's February 4 letter,8 we do not find that Appellee's February 4 letter,
which referred to "instruct[ing] counsel to continue with the legal proceeding,"
to amount to "actual, unqualified, notice that delay would result in default." As
we noted in Muniz, in Wilson the defendant there neither filed a paper in court
nor contacted opposing counsel. Muniz, 739 F.2d at 701; see Charlton L. Davis
& Co., P.C. v. Fedder Data Center, Inc., 556 F.2d 308, 309 (5th Cir.1977)
(noting that cases where actual notice of impending default judgment was given
do not provide guiding precedent for situations in which no notice of any sort
was given). While Appellants here did not file any court documents, because of
the agreement to pursue settlement negotiations and the need to retain Maine
counsel, they did contact opposing counsel, explicitly communicated their
intent to defend and their understanding that Appellee would provide notice
prior to seeking default so that they could retain Maine counsel.
16

Furthermore, Appellants presented strong evidence that the figures upon which
the default judgment is premised are erroneous.9 While Appellants' evidence
does not indicate they possess an "ironclad claim or defense which will
guarantee success at trial," Teamsters, 953 F.2d 17, 21, the evidence regarding
the damages "does establish that [Appellants] possess a potentially meritorious
claim or defense which, if proven, will bring success in its wake," at least as to
the amount of damages. Id. The amount of damages involved is substantial, and
the record suggests that the damage award is possibly erroneous by as much as
$611,870. Thus, Appellants have given us good reason to believe that setting
aside the judgment will not be a futile gesture. Id. at 20 (stating that a litigant,
as a precondition to relief under Rule 60(b), must give the trial court reason to
believe that vacating the judgment will not be an empty exercise); Swink v.
City of Pagedale, 810 F.2d 791, 792 n. 2 (8th Cir.1987) ("There is a strong
public policy, supported by concepts of fundamental fairness in favor of trial on
the merits, particularly when the monetary damages sought are substantial.");
Lutomski, 653 F.2d at 271 (remanding case for a damages hearing where
defendants conceded liability yet presented strong arguments that damages
awarded were excessive).

17

Finally, contrary to Appellee's claim, there is nothing in the record to suggest

that Appellants would not defend the suit once settlement negotiations failed.10
We also note that Appellants' motion to set aside the default judgment (dated
August 15, 1994) was reasonably timely, considering that they only learned of
the default and the default judgment in July 1994 and that negotiations
continued until August 1, 1994.
In sum, because we find that Appellants presented sufficient evidence of their

18

18

intent to defend, they "appeared" in the action below, such that they were
entitled to notice under Rule 55(b)(2) of Appellee's application seeking the
default judgment.11 We consider Appellee's failure to provide the requisite
notice a grave error, we hold that the lack of notice, coupled with Appellants'
showing of the existence of a potentially meritorious defense (at least as to the
amount of damages), requires that the default judgment be set aside.12 See Rule
60(b)(4), (6) (permitting judgment to be set aside where judgment is shown to
be "void" or for "any other reason justifying relief"). The district court abused
its discretion when it denied Appellants' motion to set aside the default
judgment. Not only did it fail to recognize Appellants' clear intent to defend
evidenced in the February 1 letter (or recognized it but decided, contrary to our
holding in Muniz, that notice was not required), it also failed to recognize
Appellants' meritorious claim that the damage award was erroneously
calculated.

19

Although our conclusion that Key Bank's failure to provide notice as required
by Rule 55(b)(2) necessitates that the default judgment be set aside, it is less
clear whether there exists a basis for setting aside the entry of default itself
under Fed.R.Civ.P. 55(c). We believe that, in the circumstances, it was
incumbent upon Key Bank to live up to its representation that it would notify
Appellants if it planned to seek entry of default. It is a separate question
whether there exists "good cause" for Appellants' default within the meaning of
Fed.R.Civ.P. 55(c). See Leshore, 945 F.2d at 472. While the district court had
occasion to consider this issue, its order indicates that it declined to do so. We,
however, are of the opinion that this issue is more appropriately resolved by the
district court in the first instance on remand.

20

Although nothing more need be said, we nonetheless add that it would have
been a simple matter for Appellee to have notified Appellants' counsel of the
default proceedings. We find the language of Charlton L. Davis particularly on
point:

21the plaintiff felt [the defendant] was guilty of dilatory tactics and had no real
If
defense, then notice under Rule 55 would have promptly resolved the matter.
Instead, plaintiff sought to reap tactical advantage from [defendant's] prior neglect
by acquiring by stealth a decision sheltered by the rules which protect final
judgments. Such practice is what Rule 55 is designed to prevent.
22

Charlton L. Davis, 556 F.2d at 309. We reiterate that this rule rests upon the
view that the Federal Rules of Civil Procedure are designed to be fair, that Rule
55(b)(2) was promulgated to protect "parties who, although delaying in a
formal sense by failing to file pleadings within the twenty-one day period, have

otherwise indicated to the moving party a clear purpose to defend the suit,"
H.F. Livermore, 432 F.2d at 691, and our traditional preference for resolution
of cases on the merits while giving due consideration to practical requirements
of judicial administration. See Cotto, 993 F.2d at 277-80; Teamsters, 953 F.2d
at 19-21; Leshore, 945 F.2d at 472-73; see also In re Roxford Foods, Inc., 12
F.3d 875, 879-81 (9th Cir.1993).
23

Before closing, we respond to an assertion raised by Appellee's counsel during

oral argument to the effect that any appearance we found would apply only to P
& S, because the February 1 letter only referred to P & S. We disagree.
Admittedly the February 1 letter states that Appellee will forbear from filing a
default motion based on P & S ' failure to answer, and makes no mention of the
failure to answer by Sherman or Tablecloth. Nevertheless, we do not find
Appellee's argument persuasive. The record reveals that (i) Fischer launched
the settlement negotiations at Sherman's request; (ii) the February 1 letter refers
to Sherman as well in its discussion; (iii) Sherman is the president of both
Tablecloth and P & S; and (iv) Appellee's Complaint grounds joint and several
liability on Sherman and P & S as guarantors of the promissory notes executed
by Tablecloth, which are the basis for Appellee's collection action below.
Accordingly, we find it reasonable to read the February 1 letter which "serve[d]
to commence settlement negotiations with [Key Bank] in the [action below]" as
being intended to speak for all of the named defendants.

III. CONCLUSION
24

For the foregoing reasons, we reverse the district court's Order, and vacate the
default judgment. We leave to the district court on remand to determine
whether, in the circumstances, there exists a basis for setting aside the entry of
default pursuant to Fed.R.Civ.P. 55(c), and whether Appellants should
accordingly be permitted to file a late responsive pleading.13 While we
disapprove of Appellee's behavior, we note Appellants' apparent inattention to
negotiations and to the case below during the mid-February to July hiatus in
communications. Consequently, we decline to award costs to Appellants.

25

Reversed and remanded.

Of the District of Massachusetts, sitting by designation

Fed.R.Civ.P. 55(c) states:

For good cause shown, the court may set aside an entry of default and, if

judgment by default has been entered, likewise set it aside in accordance with
Rule 60(b).
Fed.R.Civ.P. 60(b) provides in part:
On motion and upon such terms as are just, the court may relieve a party or
party's legal representative from a final judgment, Order, or proceeding for the
following reasons: (1) mistake, inadvertence, surprise, or excusable neglect; ...
(3) fraud, ... misrepresentation, or other misconduct of an adverse party; ... or
(6) any other reason justifying relief from the operation of the judgment. The
motion shall be made within a reasonable time, and for reasons (1), (2), and (3)
not more than one year after the judgment, Order, or proceeding was entered or
taken.
2

Fed.R.Civ.P. 55(b)(2) reads, in pertinent part:

If the party against whom judgment by default is sought has appeared in the
action, the party (or, if appearing by representative, the party's representative)
shall be served with written notice of the application for judgment at least 3
days prior to the hearing on such application.

We note that although written notice is contemplated under the Rule, it need not
necessarily be in any particular form. "The major consideration is that the party
is made aware that a default judgment may be entered against him." Wilson,
564 F.2d at 369 (quoting 10 C. Wright & A. Miller, Federal Practice and
Procedure Sec. 2687 (1973))

We note that the district court's Order does not include a discussion of why
Appellants failed to satisfy the requisite showing of excusable neglect and
meritorious defenses for relief under Rule 60(b). Although absence of record
indication that proper standards were applied in refusing to set aside a default
has been held sufficient by itself to justify reversal, we need not decide this
case on that limited basis. Keegel v. Key West & Caribbean Trading Co., Inc.,
627 F.2d 372, 374 (D.C.Cir.1980) (citing Medunic v. Lederer, 533 F.2d 891
(3d Cir.1976))

Rule 5(a) provides that:

No service need be made on parties in default for failure to appear except that
pleadings asserting new or additional claims for relief against them shall be
served upon them in the method provided for service of summons in Rule 4.

See, e.g., Lutomski v. Panther Valley Coin Exchange, 653 F.2d 270, 271 (6th
Cir.1981) (finding appearance where defendants contacted plaintiffs and made

clear that the damages sought were excessive); H.F. Livermore, 432 F.2d at 691
(finding appearance where exchanges between parties were normal effort to see
if dispute could be settled and neither party doubted that suit would be
contested if efforts failed); Dalminter, Inc. v. Jessie Edwards, Inc., 27 F.R.D.
491, 493 (S.D.Tex.1961) (finding appearance where defendant contacted
plaintiff's counsel by letter); see also Keegel v. Key West & Caribbean Trading
Co., Inc., 627 F.2d 372, 374 (D.C.Cir.1980) (finding, inter alia, that assurances
upon which defendants relied were part of, and grew out of, settlement
negotiations which courts seek to encourage); Liberty National Bank and Trust
Co. v. Yackovich, 99 F.R.D. 518 (W.D.Penn.1982) (setting aside default
judgment because failure to answer was based upon reliance on agreement with
plaintiff's counsel that notice would be provided prior to seeking default
judgment). Cf. J. Slotnik Co. v. Clemco Industries, 127 F.R.D. 435, 438-39
(D.Mass.1989) (finding defendant did not appear where defendant was served
with copy of plaintiff's motion for default, received notice from court clerk of
entry of default, failed to respond to either plaintiff's motion or clerk's notice,
and never displayed a clear purpose to defend)
7

We note that during oral argument, counsel for Appellee conceded that the
February 1 letter, viewed on its own, demonstrated Appellants' intent to defend

We resolve the factual question as to Fischer's receipt of the February 4 letter in

favor of Appellants because of the strong policy favoring resolving disputes on
the merits. Leshore, 945 F.2d at 472 (quoting Coon, 867 F.2d at 76)

We note that the fact that P & S and Sherman have sought and received
protection under the United States Bankruptcy Code does not affect our
consideration of the issue of damages. Even though all actions in this appeal are
stayed as respect to P & S and Sherman pursuant to 11 U.S.C. Sec. 362 (1994);
see Commerzanstalt v. Telewide Systems, Inc., 790 F.2d 206, 207 (2d
Cir.1986); Association of St. Croix Condominium Owners v. St. Croix Hotel,
682 F.2d 446, 449 (3d Cir.1982), they are not stayed as respect to Tablecloth

10

We note that in addition to the February 1 letter, which discussed the grounds
for Appellants' defenses, Key Bank was aware of potential defenses and
counterclaims as early as December 1992 when it received a letter sent by
Fischer, dated December 11, 1992, discussing why P & S was not in default on
the notes

11

By thus holding, we do not suggest that district courts should be compelled to

vacate default judgments whenever a defendant communicates with the plaintiff
after service of the complaint. See Wilson, 564 F.2d at 370-71 (Wright, J.,
dissenting) ("I do not share the majority's fear that reversal here would compel

district court's to vacate default judgments whenever a defendant communicates

with the plaintiff after service of the complaint."). Instead, we simply re-affirm
our rule that defendants who "appear" through informal contacts demonstrating
a clear intent to defend are entitled to notice under Rule 55(b)(2). Cf. Taylor v.
Boston and Taunton Transportation Co., 720 F.2d 731, 733 (1st Cir.1983)
(discussing that not every act addressed to the court or related to the litigation
will be deemed an appearance); North Central Illinois Laborers' District
Council v. S.J. Groves & Sons Co., Inc., 842 F.2d 164, 168-70 (noting that Rule
55(b)(2)'s plain language, "has appeared in the action," evidences intent to
impose a notice requirement only in limited circumstances)
12

Accordingly, we need not discuss the parties' remaining arguments regarding

the existence of excusable neglect or whether the district court abused its
discretion when it awarded damages ex-parte based largely on the unanswered
request for admissions

13

Should the district court on remand find no basis for removing the default under
Rule 55(c), a new proceeding as to the proper amount of damages would then
be in order