Practical Insights for Business Owners
Client Q&A: I just found out that a default judgment was entered against me in a lawsuit. What do I do?
I just found out that a default judgment was entered against me in a lawsuit. What do I do?
In general, courts resolve disputes on the merits. However, when a defendant receives proper notice of a lawsuit and fails to appear to defend the action within the prescribed time limit, the court may enter a default judgment. The entry of a default judgment can have very serious consequences for the defendant: unless there is a basis to lift the default, the defendant will lose the opportunity to defend the case on the merits—no matter how strong its defenses may be. Having won the case by default, the plaintiff may proceed to enforce the judgment, including by seizing the defendant’s bank accounts and other assets.
What to Do?
The best way to avoid this mess is to act promptly upon receiving notice of a lawsuit by hiring competent counsel to defend the case. In some cases, however, a defendant may not find out about a lawsuit until it is too late, and a default judgment has already been entered. Fortunately, as discussed below, there are ways to obtain a court order lifting or "vacating" a default judgment, if certain criteria are met.
Improper Service of Summons and Complaint
One way to get a court to vacate a default judgment is to show that the plaintiff failed to give the defendant proper notice of the lawsuit. In New York, a lawsuit is commenced by filing a summons and complaint in Court. In order for the Court to exercise jurisdiction over the defendant, however, the plaintiff must deliver the summons and complaint to the defendant through one of several methods permitted by statute, known as “service of process.” The defendant has no obligation to respond to the complaint, and therefore no default can be entered, until the summons and complaint are properly served.
An individual defendant can be served by "personal service," in which a process server hands the summons and complaint to the defendant in person. Where that is not possible, a process server can perform "substitute service" by personally delivering the summons and complaint to a person of "suitable age and discretion" at the defendant’s residence or place of business, and also mailing a copy of the papers to the defendant's last known residence or actual place of business. In certain cases, where personal service or traditional substitute service cannot be accomplished, a method of service called "nail and mail" may be permitted in which the summons and complaint are affixed to the door of the defendant’s residence or place of business and subsequently mailed.
Different rules apply for performing service of process on business entities. For example, a corporation may be served by personal service on an officer, director, or "managing agent," and a general partnership may be served by personal service on any of the partners. Business entities may also be served through the secretary of state in the state of incorporation. Finally, special rules apply to serving foreign defendants, whether individuals or corporate entities.
Vacating the Default Judgment for Improper Service
The courts require strict compliance with the rules for performing service. Defects in the method of service may be a basis to vacate a default judgment. In some cases, such defects may be readily apparent from the affidavit of service—a document completed by the process server, detailing how service was accomplished. For example, in a case of substitute service, the process server might have served the summons and complaint at the wrong address. Or perhaps the process server neglected to mail summons and complaint, or failed to do the mailing with the 20-day period required by the statute. In the case of a corporate defendant, the summons and complaint may have been served on an individual who was not an officer, director or managing agent, but only a low-level employee not authorized to accept service.
In other cases, the affidavit of service may appear proper on its face, but the defendant may dispute the facts alleged by the process server. For example, the process server may claim to have personally served the defendant, but the defendant may deny that ever occurred. In such a case, the court may hold a fact-finding hearing, known as a “traverse hearing,” to resolve the disputed facts.
The Traverse Hearing
A traverse hearing is, in effect, a mini-trial before a judge, or more commonly a court-appointed hearing officer, limited to the question of whether service was properly performed. The parties present witnesses—typically, the process server and the party that was allegedly served—for direct and cross-examination. They may also introduce relevant documents for the Court to consider.
In general, the party contesting service will need something more than a blanket denial of having received the summons and complaint to overcome the process server's testimony. For example, the defendant might be able show that he was out of town when the process server claims to have served him at home.
There might also be other ways to cast doubt on the process server's credibility. Professional process servers are required to be licensed and records may be available of any complaints made against them for improper practices in other cases. Process servers are also required to maintain a contemporaneous log book of their work, which could reveal discrepancies in the affidavit of service. Moreover, the process server's failure to produce the log for the hearing may bear on his or her credibility, and according to some cases, may be sufficient to find a lack of proper service.
In general, courts are reluctant to resolve cases on default. Therefore, even if service was properly performed, it may still be possible to have a default judgment vacated where the defendant can show a reasonable excuse for its failure to timely answer the complaint. Courts have accepted a variety of excuses, ranging from clerical errors, like accidentally misplacing the complaint, to mistakes by the defendant's attorney. Whatever the excuse, it is critical for the defendant to show that any delay was inadvertent, and not a deliberate tactical move to prolong the case. Thus, acting promptly upon learning of the default judgment is critical. A motion based on excusable default must be brought within one year after the defendant is served with a copy of the default judgment, but a defendant would be ill-advised to wait that long. Finally, the defendant will also need to show that it has a meritorious defense to the claims.
A motion to vacate for excusable default is ultimately left to the court’s discretion, so no one can bank on prevailing automatically. It goes without saying that it is better to avoid a default in the first place by ensuring a timely answer to the complaint.
We have successfully assisted clients in obtaining court orders vacating improperly entered default judgments. If you discover that you or your business is subject to a default judgment, we would be happy to help you in devising a legal strategy.