So you just learned that a federal court in Texas has entered a default judgment against your company. As a result, your company is now liable to the plaintiff for thousands of dollars even though the plaintiff’s claims against your company are weak. You didn’t even know a lawsuit had been filed.
What do you do?
First, it is important that you promptly hire a qualified attorney. There are procedural arguments that can be raised to challenge the default judgment, but you’ll need to show the court you moved quickly after learning of the lawsuit and youwill want the expertise of a legal professional to navigate the process. Also, in federal court, a corporate defendant cannot represent itself in the lawsuit, but must appear through a licensed attorney.
Once you’ve hired an attorney, you’ll of course want to follow his or her specific guidance tailored to your case. Generally, though, what he or she will do is make an appearance in the lawsuit on your company’s behalf and immediately file a motion to set aside the default judgment. The Federal Rules of Civil Procedure specifically provide for such a motion.
There are several grounds upon which a district court may set aside a final default judgment, although the ultimate decision is to a certain degree within the discretion of the district court:
The most common basis for setting aside a default judgment is “mistake, inadvertence, surprise, or excusable neglect.” Usually, when a company defaults on a lawsuit (especially a larger company that is sued relatively often), it is not because the company is willfully ignoring the lawsuit. Rather, it is because the summons was misplaced or otherwise allowed to slip through the cracks in route to the responsible company employee.
A company that finds itself in this position can present evidence to the district court explaining what happened and can ask the court to set aside the default judgment so that the case can proceed on its merits. If possible, the company will want to prove facts showing that the default was due to a mere oversight, the company acted diligently upon learning of the default, and that the plaintiff will not be harmed by an order setting aside the default judgment (aside from having to now prove its case).
Other grounds for setting aside a default judgment include the discovery of newly discovered evidence, as well as fraud, misrepresentation, and misconduct by an opposing party, although these grounds are much harder to prove. Obviously, if the company believes it never received service of the summons, it should make this point as well.
If the plaintiff’s complaint is short on factual allegations, another argument that may be raised is that the plaintiff’s complaint is insufficiently pleaded to support the default judgment. Although the district clerk can enter a party’s default simply as a result of the party’s failure to answer, the district court cannot enter a judgment based on that default unless the plaintiff’s pleadings are sufficient to support the requested judgment.
This list not exhaustive. The court, upon motion the defaulting party, can set aside a default judgment for “any other reason that justifies relief.”
If the district court refuses to set aside the default judgment, you may wish to challenge this decision on appeal. Whether this is a good idea, of course, will depend on the amount of liability at stake and on whether the district court actually committed any reversible error under the circumstances.
It can be difficult to escape a default judgment after it has been entered, and the best course is always to respond to the lawsuit before the court’s deadline to answer. But if you first learn you have been sued only after the court has entered a default judgment, your best chance of avoiding the default judgment is to act quickly by hiring a qualified attorney to advise you on your options and, if appropriate, present your case for setting the default judgment aside to the court.
Derek Carson is an attorney in the commercial, appellate, and construction litigation sections at Cantey Hanger LLP. He may be reached at (817) 877-2850 or dcarson@staging.poised-team.flywheelsites.com.