Companies often have procedures in place to handle incoming deliveries of court papers, including service of a summons and complaint where the company is named as a defendant in a lawsuit. But despite best efforts to manage litigation risks, occasionally a company finds itself on the receiving end of a default judgment.
This may occur when, despite receiving the summons and complaint, the company fails to mount any defense in court due to an internal error. For example, an employee might have received delivery of the court papers without ensuring that they were given to management or the legal department. (Note that a plaintiff might obtain default judgment by asserting that the delivery of court papers was proper service of process, regardless of whether it would withstand scrutiny if the defendant appeared in court to contest it.) In the worst-case scenario, the company’s management and legal department have no awareness that the company is being sued until after a default judgment is entered against it and execution of the judgment, such as levying the company’s assets, is imminent.
What can be done when a company learns that a default judgment has been entered against it?
Time is of the essence. In federal court, a defendant can make a motion to vacate a judgment, within one year of the judgment being entered, for a range of reasons including mistake, excusable neglect, newly discovered evidence, and fraud. However, after a year has passed, grounds for vacating the judgment are very limited. The defendant may prevail if it can show that the judgment is “void”—such as if the court lacked subject matter jurisdiction over the case or personal jurisdiction over the defendant—or if it can show that the judgment has been satisfied. But if the default arose from the defendant’s neglect (actual or perceived), the judgment may be upheld even if the defendant would have had a defense on the merits. While Federal Rule of Civil Procedure 60(b)(6) states that a judgment can be vacated after a year for any “reason that justifies relief,” most courts have interpreted this to require “extraordinary circumstances” outside of the defendant’s control. For example, the COVID-19 pandemic arguably gave rise to “extraordinary circumstances,” such as when businesses were ordered to close and employees had no access to business premises. At least one court has found that the plaintiff’s failure to follow local court rules related to notifying defendant of the default judgment motion contributed to “extraordinary circumstances.” A significant change in law or a conflicting court decision can also be “extraordinary circumstances.” But these are narrow pathways, subject to the discretion of the court. In addition, before vacating a judgment under Rule 60(b)(6), the court will also look at the timeliness of the motion to vacate, so a defendant should act urgently as soon as it becomes aware of the default judgment against it, even if a year has passed. Ultimately, the court has significant flexibility in deciding these motions.
In New York, a similar one-year cutoff applies. See CPLR §§ 317, 5015. “Excusable default,” or in some instances lack of notice of the summons, can be grounds to vacate a judgment if the motion to vacate is made within one year. Otherwise, the defendant must show newly discovered evidence, fraud, misrepresentation, misconduct, lack of jurisdiction, or reversal of an order underlying the judgment.
Depending on the grounds for vacating the judgment, the defendant may need to persuade the court that it has a meritorious defense—that is, that reopening the case will not be a waste of time. While it is not necessary for the defendant to prove its defense, it may need to present evidence of facts that, if proven, would constitute a complete defense.
Finally, if you are the plaintiff seeking default judgment, pay close attention to court requirements, including local rules. For example, the plaintiff may be required to mail copies of the default judgment motion to the defendant, despite the fact that the defendant has never appeared in the case. If you do not, you may be giving the defendant an easier path to getting a default judgment vacated.
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