LaFrance Architect v. Point Five Development South Burlington, LLC

¶ 1. Defendant appeals the trial court’s refusal to vacate a default judgment against defendant. We hold that the trial court improperly declined to consider the strength of defendant’s proffered defenses to the underlying action in reviewing defendant’s motion to vacate the default judgment, but that defendant’s Rule 60(b) motion did not establish a prima facie case to support a meritorious defense. We therefore affirm the trial court.

¶ 2. This dispute arose from a 2009 contract between plaintiff LaFrance Architect, d/b/a Lake Architectural, and defendant Point Five Development South Burlington, LLC. Under this contract, plaintiff was to provide defendant architectural services for the construction of a Walgreens in South Burlington. On January 31, 2011, plaintiff sent an invoice to defendant for services rendered under the contract. On March 4, two days after the invoice was payable and three days after the store opened, defendant sent plaintiff a letter indicating that defendant was terminating plaintiff’s services due to an unspecified failure to fulfill the contract and unspecified “significant design errors that caused addition.1 costs.” Plaintiff responded by filing notice of a mechanic’s lien against defendant in the South Burlington Land Records. On March 30, defendant secured a bond to discharge the mechanic’s lien, but failed to send a copy of the bond to plaintiff.

¶ 3. On June 16, plaintiff commenced action to perfect its mechanic’s lien by filing in superior court a verified complaint with a request for attachment as well as a claim for damages. Because the parties’ contract contained mandatory mediation and arbitra*547tion provisions, plaintiff also filed a motion for stay, requesting that the court consider its motion for attachment but then stay proceedings pending mediation and arbitration as required by the contract.

¶ 4. On June 27, the Chittenden County sheriff’s office personally served defendant corporation’s registered agent with the summons, complaint, motion for writ of attachment and related filings, the order setting an attachment hearing on August 10, and a motion for stay. Defendant’s registered agent was away, but his law partner accepted service.1 The return of service was filed with the court on July 1.

¶ 5. The registered agent’s law partner promptly forwarded a copy of the complaint to defendant’s New York attorney with a note flagging the August 10 attachment hearing and a request to let her know if defendant needed assistance with the matter. Without reading the attachment, defendant’s New York attorney, in turn, forwarded the message to an agent of defendant. The agent apparen.1y inferred that the email related to the mechanic’s lien for which defendant was bonding, and did not actually open the email attachments.2 Neither the New York attorney nor the agent read the pleadings nor took any action to respond or follow up.

¶ 6. On August 9 — the day before the scheduled attachment hearing — plaintiff moved for default judgment, continuance of the attachment hearing, and consolidation of the attachment hearing with the damages hearing. Plaintiff did not at that time request that the court respond to its motion for a stay.

¶ 7. Because defendant never answered or entered an appearance in the case, defendant received no notice of plaintiff’s request for default judgment, the trial court’s August 10 order entering default, or the hearing scheduled to take evidence on damages. After a hearing on the attachment and damages on September 22, 2011, the trial court issued an order of approval for an attachment in the amount of $69,024.90. On September 30, the court issued a fin.1 judgment order awarding plaintiff a judgment of $69,024.90 against defendant, in addition to interest and costs. Defendant did *548not participate in the hearing or receive notice of the attachment and judgment order.

¶ 8. Only after plaintiff commenced an action in New York to domesticate the Vermont judgment did defendant respond by filing a motion in the trial court here. On March 9, 2012, defendant moved for relief from judgment pursuant to Vermont Rules of Civil Procedure 55 and 60. Defendant requested relief “on the grounds of mistake, inadvertence, excusable neglect and the Plaintiffs failure to follow the compulsory Mediation and Arbitration provisions of the contract.” The court denied this motion, con.1uding that this type of “law office error” does not qualify as an excusable “mistake” under Rule 60(b), and explicitly refused to consider any of the defenses on the merits offered by defendant. Defendant appeals.

I.

¶ 9. “A motion for relief from judgment brought under [Rule] 60(b)(2) is addressed to the sound discretion of the trial court, and its ruling will not ordinarily be disturbed unless it clearly appears from the record that such discretion was withheld or abused.” Desjarlais v. Gilman, 143 Vt. 154, 157, 463 A.2d 234, 236 (1983).3 In evaluating motions for relief from judgment in the context of default judgments, we have recognized that “[a] judgment by default effectively deprives a defendant of an opportunity to have the merits . . . determined through the normal adversary judicial process.” Id. Therefore, we noted the general presumption in favor of “resolving litigation on the merits, to the end that fairness and justice are served.” Id. at 158-59, 463 A.2d at 237. On the other side of the scale, however, are the justice system’s interests in efficiency and finality of judgments, interests which motivate the rigidity of Rule 60(b). See John A. Russell Corp. v. Bohlig, 170 Vt. 12, 24, 739 A.2d 1212, 1222 (1999) (“[Rule 60] is not an open invitation to reconsider matters con.1uded at trial, but should be applied only in extraordinary circumstances.” (quotation omitted)); Kennerly v. Aro, Inc., 447 F. Supp. 1083, 1087 (E.D. Tenn. 1977) (“[I]t is not the purpose of this Court ... to subvert the plain provisions of [the analogous federal Rule 60] by such *549liberality and contributing to its becoming meaningless; it is to be construed ... ‘to secure the just, speedy, and inexpensive determination of every action.’ ” (quoting F.R.C.P. 1)).

¶ 10. Beyond preserving efficiency and finality, Rule 60(b) respects the discretion of the trial court and the need for flexibility to manage its own docket. See Silivanch v. Celebrity Cruises, Inc., 333 F.3d 355, 368 (2d Cir. 2003) (“[T]he legal system would groan under the weight of a regimen of uncertainty in which time limitations were not rigorously enforced — where every missed deadline was the occasion for the embarkation on extensive trial and appellate litigation to determine the equities of enforcing the [time], bar.”). This consideration is especially compelling in civil cases with sophisticated parties represented by knowledgeable counsel, such as the case here. See In re Town of Killington, 2003 VT 87A, ¶¶ 17, 19, 176 Vt. 60, 838 A.2d 98 (taking an “appropriately hard line when it comes to determining when neglect that stems from factors totally within the control of a party or its attorney is ‘excusable,’ ” where neglect stemmed from an “internal [law] office procedure breakdown” (quotation omitted)); see also United States v. Hooper, 43 F.3d 26, 28-29 (2d Cir. 1994) (affirming denial of a filing exténsion where delay resulted from legal assistant’s ignorance of the rules); cf. Courtyard Partners v. Tanner, 157 Vt. 638, 639, 595 A.2d 287, 288 (1991) (mem.) (lifting a default judgment where defendants’ position on the merits was strong and defendants were unrepresented).

¶ 11. In Desjarlais, we urged the trial court to consider the following factors when conducting the Rule 60(b) analysis: “whether the failure to answer was the result of mistake or inadvertence, whether the neglect was excusable under the circumstances, and whether the defendant has demonstrated any good or meritorious defense to the plaintiffs claims.” 143 Vt. at 157, 463 A.2d at 237. With respect to the “excusable neglect” factor, courts should be particularly circumspect “when the initial fault, at least, appears to be that of a defendant’s attorney.” Id. Concerning the “meritorious defenses” factor, the trial court should give substantial weight to a meritorious defense when determining whether to vacate a default judgment. See Courtyard Partners, 157 Vt. at 639, 595 A.2d at 288 (“Although the trial court should first consider the degree of defendants’ negligence in failing to appear, even a willful default may be excused if *550defendants’ position on the merits is so strong that it would be unjust to affirm the judgment.”).

¶ 12. In Courtyard Partners, we reversed the trial court’s denial of a tenant’s motion to set aside a default-like judgment in favor of a landlord because “defendants’ defenses, as presented to this Court, appear to be strong, defendants’ negligence was not culpable, defendants were unrepresented, and the motion was made promptly, within the appeal period.” Id. In Desjarlais, we affirmed the trial court’s denial of a motion to set aside a default judgment where defense counsel had failed to file an answer. Defendants themselves argued that they were chargeable with neglect for failing to follow up on the status of their case for many months, and that their claims of meritorious defenses consisted of mere conclusory allegations. 143 Vt. at 158, 463 A.2d at 237.

¶ 13. In this case, defendant asserted in its motion for relief from judgment that it “has good and meritorious defenses to the Plaintiff’s claim,” arising from a notice issue and the mediation clause. Defendant also referenced its proposed answer, affirmative defenses, and verified counterclaim, which in.1uded failure to state a claim upon which relief can be granted, set off, and plaintiff’s noncompliance with the arbitration and mediation provisions of the contract as affirmative defenses.

¶ 14. In light of its con.1usion that an intern.1 law office failure like that claimed here did not amount to excusable neglect, the trial court declined to exercise its discretion to consider defendant’s claimed defenses, stating: “Defendant may well have had defenses, in.1uding contract provisions requiring mediation, to the suit. These are lost when default is entered.” The court relied on a decision in which we con.1uded that an intern.1 law office breakdown did not constitute “excusable neglect” warranting extension of a hard and fast appeal deadline. See Town of Killington, 2003 VT 87A, ¶ 19. However, our opinion in Town of Killington, and the four-factor test articulated in that decision for evaluating a claim of excusable neglect in the context of a failure to timely appeal, did not address the specific circumstances of a default judgment. As noted above, we have held that our Rule 60(b) analysis in the context of a Rule 55(c) motion to set aside a default judgment requires consideration of a different set of factors than the ordinary Rule 60(b) analysis. Supra, ¶¶ 11-12. By *551expressly disregarding whether defendant had meritorious defenses, the trial court departed from the proper framework for evaluating motions to set aside default judgments and declined to consider a critical factor in the overall an.1ysis.

¶ 15. We take no issue with the trial court’s conclusion that the neglect alleged here does not rise to the level of “excusable neglect” that would ordinarily warrant setting aside a nondefault judgment. See Town of Killington, 2003 VT 87A, ¶¶ 16-17. The failure to open a critical email, whether by counsel or the client, is not the kind of neglect we have ever characterized as “excusable.” However, because the judgment in question here was a default judgment, the trial court should also have considered: (1) the degree of prejudice suffered by the plaintiff as a result of defendant’s delay in answering; (2) the presence of material issues of fact and prima facie evidence of meritorious defenses; (3) the significance of the interests at stake; and (4) the degree of defendant’s culpability. See, e.g., Courtyard Partners, 157 Vt. at 639, 595 A.2d at 288 (setting aside default judgment where tenant defendant’s negligence was not “culpable”); Parsons v. Consol. Gas Supply Corp., 256 S.E.2d 758, 762 (W. Va. 1979) (identifying first three of four factors listed above); Camping World, Inc. v. McCurdy, 111 So. 3d 738, 740-41 (Ala. Civ. App. 2012) (trial court’s discretionary authority to set aside default judgments should not be exercised without consideration of “1) whether the defendant has a meritorious defense; 2) whether the plaintiff will be unfairly prejudiced if the default judgment is set aside; and 3) whether the default judgment was a result of the defendant’s own culpable conduct”); cf. Desjarlais, 143 Vt. at 158, 463 A.2d at 237 (affirming refusal to set aside default judgment where defendants themselves were negligent in responding). Because the trial c.ourt failed to consider these factors, we con.1ude there was error.

II.

¶ 16. Although we con.1ude that the trial court erroneously failed to' consider potential meritorious defenses to plaintiffs claims, we need not remand this case for further proceedings if we con.1ude as a matter of law that defendant’s Rule 60 motion did not raise any meritorious defenses. Accordin.1y, we consider the two “meritorious defenses” urged by defendant.

*552A.

¶ 17. One of the “meritorious defenses” defendant raised in its verified counterclaim and again on appeal is based on alleged deficiencies in the services provided by plaintiff. We have not decided whether a counterclaim or set off constitutes a “meritorious defense” for the purpose of a motion to set aside a default judgment.

¶ 18. We previously considered the res judicata effect of a default judgment where the defaulting party did not raise a compulsory counterclaim. We held that “courts have given default judgments full effect and ... a compulsory counterclaim omitted from an action that terminates in a default judgment will be barred from any subsequent suits.” Pomfret Farms Ltd. P’ship v. Pomfret Assocs., 174 Vt. 280, 286, 811 A.2d 655, 661 (2002) (quotation omitted); see also Letourneau v. Hickey, 174 Vt. 481, 483, 807 A.2d 437, 440 (2002) (mem.) (quotation omitted). Given that compulsory counterclaims are con.1usively adjudicated by a default judgment, we con.1ude that a counterclaim arising from the same transaction as the underlying complaint, such that a judgment in the action would be res judicata as to that counterclaim, can constitute a “meritorious defense.”

¶ 19. The question, then, is whether defendant’s verified counterclaim was compulsory. Rule 13(a) provides:

A pleading in an action . . . shall state as a counterclaim any claim which at the time of serving the pleading the pleader has against any opposing party, if it arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim . . . .4

In this case, defendant’s counterclaim — for deficiencies in performance of the contract — is logically related to plaintiff’s *553claim for nonpayment. See Stratton v. Steele, 144 Vt. 31, 35, 472 A.2d 1237, 1239 (1984) (stating that counterclaim has logical relationship to original claim if it arises from same aggregate of operative facts). Thus, we conclude that a counterclaim in the nature of defendant’s counterclaim here, asserting set off on the ground of plaintiff’s deficient performance, could constitute a meritorious counterclaim supporting a decision to set aside a default judgment.

¶20. The next question is whether defendant’s pleadings support its “meritorious defense” claim on this point. “It is incumbent upon a party seeking relief from a judgment not only to meet the requirements of [Rule] 60(b), but also to show, plead or present evidence of facts which, if established, would constitute a meritorious defense to the action. This policy recognizes that it would be an idle exercise and a waste of judicial resources for a court to set aside a judgment if, in fact, there is no genuine justiciable controversy.” Maynard v. Nguyen, 274 P.3d 589, 591 (Idaho 2011) (quotation omitted). Where facts are in issue, an evidentiary hearing should precede a decision on the motion, unless the court finds that the motion is totally lacking in merit. Manosh v. Manosh, 160 Vt. 634, 635, 648 A.2d 833, 835 (1993) (mem.). However, the grounds for the motion must be pled with sufficient particularity to warrant a hearing and potential relief. See Fed. Home Loan Mortg. Corp. v. De Souza, 85 So. 3d 1125, 1126 (Fla. Dist. Ct. App. 2012) (a defendant seeking relief from judgment based on fraud must raise a prima facie case of fraud, and “must specify the fraud with particularity”).

¶ 21. In this case, defendant’s Rule 60(b) motion does not include detailed allegations to support its general assertion of meritorious defenses and counterclaims based on plaintiff’s performance; instead, defendant cites to its contemporaneously filed answer and verified counterclaim in support of its “meritorious defenses” argument. That answer and counterclaim, in turn, assert without any specificity that plaintiff had made design errors and errors related to the demolition, site, roof and building for the project, causing defendant to incur significant addition.1 costs and expense. Defendant’s motion does not identify any specific errors, and does not recite any specific facts supporting its ultimate allegation that plaintiff made errors. Defendant’s counterclaim may be sufficien.1y specific to satisfy the broad requirements of *554notice pleading under Rule 8(a), but is not detailed enough to satisfy the more exacting standards of a motion to set aside a judgment under Rule 60(b). See V.R.C.R 8, Reporter’s Notes (“[T]he rules do not require a specific and detailed statement of the facts which constitute a cause of action, but simply a statement clear enough to give the defendant fair notice of what the plaintiff’s claim is and the grounds on which it rests.” (quotation and citations omitted)). Accordingly, we conclude that defendant’s Rule 60(b) motion did not plead a prima facie case of a meritorious defense arising from plaintiffs allegedly deficient performance with sufficient particularity to warrant remand for the trial court’s consideration.

B.

¶ 22. Defendant also points to the mandatory mediation and arbitration clauses in the contract between the parties as a defense to the trial court’s judgment. Given defendant’s delay in asserting its arbitration rights, however, we hold that defendant’s conduct amounted to an implicit waiver and thus does not constitute a meritorious defense for purposes of Rule 60(b). Therefore, it is unnecessary to remand the case to the trial court, since defendant has no meritorious defenses and cannot prevail under Rule 60(b) as a matter of law.

¶ 23. The competing interests underlying Rule 60, supra, ¶¶ 9-10, are further complicated in this case by the general policy favoring arbitration, as articulated in the Vermont Arbitration Act, see 12 V.S.A. § 5652(a) (providing that a written arbitration agreement “creates a duty to arbitrate, and is valid, enforceable and irrevocable”), and in Vermont case law. Lamell Lumber Corp. v. Newstress Int’l, Inc., 2007 VT 83, ¶ 9, 182 Vt. 282, 938 A.2d 1215 (“Vermont law and public policy stron.1y favor arbitration as an alternative to litigation for the efficient resolution of disputes.” (quotation omitted)). The presumption in favor of arbitration, however, must be viewed within the context of its underlying purpose: to provide speedy, cost-effective resolution of disputes. Id. ¶ 9. To allow a party to “cr[y] arbitration” in order to undo the consequences of its own errors would turn the rationale of arbitration on its head. Menorah Ins. Co. v. INX Reins. Corp., 72 F.3d 218, 223 (1st Cir. 1995) (quotation omitted). In John Wiley & Sons, Inc. v. Livingston, the U.S. Supreme Court recognized the *555danger in allowing parties to use arbitration clauses as part of an elaborate feet-dragging exercise. 376 U.S. 543, 558 (1964). Although it ultimately upheld the arbitration requirement in that case, the Court declined to adopt a distinction between substantive and procedural issues for the purpose of determining arbitrability, because it would create “opportunities for deliberate delay and the possibility of well-intentioned but no less serious delay ... to the disadvantage of the parties.” Id.

¶ 24. Other courts have stringen.1y enforced the doctrine of waiver using reasoning similar to Wiley — to prevent parties from asserting arbitration as a cover for their own mistakes or tactical errors. See, e.g., Gen. Star Nat’l Ins. Co. v. Administratia Asigurarilor de Stat, 289 F.3d 434, 438 (6th Cir. 2002); Menorah, 72 F.3d at 223; Austin Energy, LLC v. Ecolumens, LLC, No. CV 11-5749, 2012 WL 3929956, at *1 (E.D.N.Y. Aug. 13, 2012). Further, we have recognized that the doctrine of waiver “ensure[s] that [arbitration] remains an effective ‘alternative dispute mechanism rather than another expensive and time consuming layer to the already complex litigation process.’ ” Union Sch. Dist. #45 v. Wright & Morrissey, Inc., 2007 VT 129, ¶ 9, 183 Vt. 555, 945 A.2d 348 (mem.) (quoting Joder Bldg. Corp. v. Lewis, 153 Vt. 115, 120, 569 A.2d 471, 473 (1989)).

¶ 25. Given the policy considerations behind Rule 60(b) and alternative dispute resolution, we hold that defendant has waived its right to arbitrate and thus cannot assert any meritorious defenses as a matter of law. For purposes of Rule 60(b), “[i]t is incumbent upon a party ... to show, plead or present evidence of facts” to show the meritorious defense, in this case, that defendant was entitled to arbitration. Maynard, 274 P.3d at 591 (quotation omitted). Although waiver is generally a factual issue for the trial court, an appellate court can nevertheless decide that, as a matter of law, it would be “a waste of judicial resources for a court to set aside [the] judgment” because “there is no genuine justiciable controversy.” Id.

¶ 26. In determining whether there was waiver, several factors should be considered, including: the timing of the request, the extent that the party seeking arbitration has participated in litigation, and “whether the party opposing arbitration has suffered prejudice through the incursion of litigation time, costs, and expenses.” Lamell, 2007 VT 83, ¶ 11. This inquiry must take into *556account the “entire course of conduct” of the moving party. Menorah, 72 F.3d at 221.

¶ 27. Defendant argues that because its delay was inadvertent, it has not waived its arbitration rights. Although this inadvertence conclusively demonstrates that there was no explicit waiver, which requires that an offer to arbitrate be “expressly declined,” id., it does not foreclose a finding of implicit waiver. To the contrary, the existence of the multi-factor test articulated in Lamell implies that, even in the absence of a defendant’s participation in litigation, a delay in filing alone may constitute waiver if prejudice to the party not seeking arbitration can also be shown. 2007 VT 83, ¶ 11 (describing the factors involved in waiver); see also Gen. Star, 289 F.3d at 438 (“[A] party may waive [its] right [to arbitration] by delaying its assertion to such an extent that the opposing party incurs actual prejudice.”); cf. Morrissey, 2007 VT 129, ¶ 12 (rejecting waiver based on delay because there was no prejudice).

¶ 28. Here, there was both delay and prejudice. Defendant was given ample notice of plaintiffs interests and intent to sue in this case. Plaintiff filed a mechanic’s lien in the South Burlington Land Records on March 8, 2011, and a superseding Notice of Mechanic’s Lien on June 11, 2011. Defendant, in fact, secured a bond to discharge the mechanic’s lien, but never sent a copy of the bond to plaintiff.' In order to perfect its lien, plaintiff commenced the current action on June 16, 2011 in superior court. Defendant’s registered agent was person.1ly served with the summons, complaint, motion for writ of attachment and related filings, the order setting an attachment hearing on August 10, and a motion for stay. Because the registered agent was out of town, his law partner accepted service and promptly forwarded a copy of the pleadings to defendant’s New York attorney, who then forwarded the message and attachment to the Point Five attorney. The email had the subject line “Point Five law suit,” and stated the following: “[A]ttached is a copy of the pleadings served this afternoon. [Defendant’s registered agent] is away until next Wed so I took service. A hearing is set for August 2010. Let me know if your client needs assistance so we can plan accordingly.”

¶29. Defendant does not contest that it was properly served with the summons and complaint in this case. Yet, inexplicably, defendant did not open the attachment or respond in any way. *557Defendant continued to do nothing while the superior court held an evidentiary hearing on September 22, 2011 and issued a writ of attachment and fin.1 judgment on September 30, 2011. In fact, defendant did not respond at all until March 9, 2012, after plaintiff commenced an action to domesticate the judgment in New York. Despite the ongoing litigation, defendant waited more than nine months after being properly served before participating. Unlike in Courtyard Partners, where this Court found the rationale behind Rule 60(b) to be less compelling because the defendant was unrepresented, 157 Vt. at 639, 595 A.2d at 288, here defendant was amply represented: it received notice of the commencement of this action from a Vermont attorney, through its New York attorney, to its principal, yet another attorney.

¶ 30. As a result of this delay, plaintiff suffered prejudice in the form of “litigation time, costs, and expenses.” Lamell, 2007 VT 83, ¶ 11. Although there is no per se rule regarding the length of delay needed to show prejudice, a delay that forces the other party to conduct substantial litigation can contribute to a finding of prejudice. Menorah, 72 F.3d at 222 (finding implicit waiver where the defendant waited over a year to invoke arbitration, and the plaintiff incurred litigation expenses as direct result of defendant’s behavior); see also Gen. Star, 289 F.3d at 438 (finding waiver where the defendant did not assert its arbitration rights until after the plaintiff had incurred costs of pursuing default judgment). Here, plaintiff was forced to pursue default judgment and to commence action to domesticate the judgment in New York before defendant mustered a response.

II31. Given these considerations, we hold that defendant implicitly waived its right to arbitrate, and thus the arbitration clause does not constitute a meritorious defense.

Affirmed.