Associated Bank Minnesota, N.A., Respondent, vs. Oakwood Builders, Inc., et al., Appellants.

This opinion will be unpublished and

may not be cited except as provided by

Minn. Stat. § 480 A. 08, subd. 3 (2002).

 

STATE OF MINNESOTA

IN COURT OF APPEALS

A03-82

 

Associated Bank Minnesota, N.A.,
Respondent,
 
vs.
 
Oakwood Builders, Inc., et al.,
Appellants.

 

Filed September 16, 2003

Reversed and remanded

Minge, Judge

 

Hennepin County District Court

File No. DJ 02-016454

 

Sarah M. Anderson, Gurstel Law Firm, P.A., 401 North Third Street, Suite 590, Minneapolis, MN 55401 (for respondent)

 

Norman P. Bjornnes, Patricia Docherty, Mulligan & Bjornnes, PLLP, 401 Groveland Avenue, Minneapolis, MN 55403 (for appellants)

 

            Considered and decided by Klaphake, Presiding Judge, Peterson, Judge, and Minge, Judge.

U N P U B L I S H E D  O P I N I O N

 

MINGE, Judge

 

Appellant surety challenges an order denying its motion to vacate a default judgment, claiming that its failure to answer the complaint was excusable.  Appellant also argues that the default judgment should have been vacated for lack of jurisdiction, due to lack of proper service.  Because we conclude the district court abused its discretion in determining that appellant did not establish an adequate excuse for its failure to answer and because the record on appeal is an inadequate basis to review the challenge to service,  we reverse and remand this case for trial. 

FACTS 

In October 2001, appellant Oakwood Builders, Inc. and Peak Mechanical, Inc. entered into a contract for Peak to furnish labor, services, materials, and equipment for a project.  Appellant American Casualty Company of Reading, Pennsylvania (ACC), a surety company, issued a payment bond on behalf of Oakwood.  Peak worked on the project from October 2001 through January 2002.  Peak claims that Oakwood owes it $191,677.92.  Peak assigned its accounts receivables to respondent Associated Bank Minnesota, and Associated Bank Minnesota filed a notice of claim against the payment bond on May 23, 2002. 

Associated Bank commenced suit against Oakwood and ACC on the payment bond on August 29, 2002.  The summons and complaint were served on Randall Cunningham and Donald Givens.  Cunningham is the general manager of Oakwood.  Givens works for ACC, and his name appears on the payment bond as the Minnesota contact person.   

On September 18, 2002, Mark McKibbin of ACC spoke with Cunningham about the complaint.  McKibbin believed that Oakwood would submit an answer on behalf of ACC because of Oakwood's general duty to indemnify ACC for claims made against ACC.  Cunningham, although aware of Oakwood's duty to indemnify ACC, did not know that ACC expected Oakwood to submit an answer on behalf of ACC.  Cunningham and McKibbin did not specifically address the issue in their conversation.  On September 25, 2002, counsel for Oakwood served an answer on Oakwood's behalf; no answer was served on ACC's behalf. 

On October 11, 2002, the district court entered default judgment against ACC.  ACC asserts that it first received notice of the default judgment on October 25, 2002 and that it immediately contacted Oakwood and Oakwood's counsel.  Counsel for Oakwood then contacted Associated Bank and requested an agreement to voluntarily vacate the default judgment.  On October 28, 2002, Associated Bank refused to stipulate to vacate the default judgment.  On November 12, 2002, Oakwood and ACC moved to vacate the default judgment.  The district court refused to vacate the default judgment, and this appeal followed.       

D E C I S I O N

I.

 

Rule 60.02 allows a court to relieve a party of a final judgment on the basis of mistake, inadvertence, surprise, excusable neglect, or "any other reason justifying relief from the operation of the judgment."  Minn. R. Civ. P. 60.02.  But, the right to be relieved of final judgment is not absolute.  Lund v. Pan Am. Mach. Sales, 405 N.W.2d 550, 552 (Minn. App. 1987).  A party seeking relief under rule 60.02 must demonstrate that relief is appropriate under the so-called Finden factors.  These factors are

(1) a reasonable case on the merits, (2) a reasonable excuse for the failure to act, (3) that [the moving party] acted with due diligence after notice of the entry of judgment, and (4) that there would be no substantial prejudice to the opposing party if the motion to vacate is granted.

 

Imperial Premium Fin., Inc. v. G.K. Cab Co., Inc., 603 N.W.2d 853, 857 (Minn. App. 2000) (citing Finden v. Klaas,268 Minn. 268, 271-72, 128 N.W.2d 748, 750-51 (1964)).  All four of the Finden factors must be satisfied to justify relief under the rule.  Charson v. Temple Israel, 419 N.W.2d 488, 491-92 (Minn. 1988); Nelson v. Siebert, 428 N.W.2d 394, 395 (Minn. 1988).  However, "the relative weakness of one factor should be balanced against a strong showing on the other three."  Valley View, Inc. v. Schutte, 399 N.W.2d 182, 185 (Minn. App. 1987) (citation omitted).  Courts favor a liberal application of these factors to further the policy of resolving cases on their merits.  Kemmerer v. State Farm Ins. Cos., 513 N.W.2d 838, 841 (Minn. App. 1994), review denied (Minn. June 2, 1994).

            Onreview, this court views the record in the light most favorable to the district court's decision.  Bentonize, Inc. v. Green, 431 N.W.2d 579, 583 (Minn. App. 1988).  Absent clear abuse of discretion, this court upholds the district court's decision.  Lund, 405 N.W.2d at 552.  Here the district court did not apply the Finden factors, so we apply the factors de novo to determine whether the district court abused its discretion by refusing to vacate the default judgment.  See Charson, 419 N.W.2d at 491-92.       

A.  Reasonable Case on the Merits

A reasonable defense on the merits must "ordinarily be demonstrated by more than conclusory allegations in moving papers."  Charson, 419 N.W.2d at 491.  The existence of a meritorious defense may be established in an affidavit or by other proof.  Grunke v. Kloskin, 355 N.W.2d 207, 209 (Minn. 1984).

Because appellant's involvement in this matter is as a surety, whether appellant possesses a reasonable defense on the merits depends on whether Oakwood possesses a reasonable defense on the merits.  The record indicates that Oakwood terminated Peak's contract for nonperformance and that, accordingly, there are issues of fact as to whether Oakwood owes Peak any money.  Oakwood asserts that it had to assume some debts of Peak and finish the mechanical work when Peak defaulted under the subcontract.  If Oakwood did have to assume debts of Peak, and if Oakwood lost money as a result of Peak's nonperformance, appellant may not owe Peak any money.  Many construction projects are complex, and it is certainly plausible that Oakwood could not determine the cost of curing Peak's default until the construction project was complete.  Appellant has established a reasonable defense on the merits.           

B.  Reasonable Excuse for Failure to Act

Appellant claims that it has a reasonable excuse for failing to answer the complaint because the failure was due to a misunderstanding between appellant and Oakwood.  It is undisputed that appellant never directed Oakwood to prepare an answer on appellant's behalf.  The issue then becomes whether it was reasonable for appellant to assume that Oakwood would prepare an answer for appellant, absent an actual request by appellant. 

Oakwood is in the construction business and therefore must have some understanding of its duty to indemnify its surety.  Appellant asserts that because of the nature of Oakwood's business, it was not unreasonable for appellant to expect Oakwood to submit a joint answer, even in the absence of a direct request.  Appellant's explanation is thin, but we are mindful of the policy of resolving cases on their merits.  On balance we conclude that appellant has established an understandable excuse for its failure to answer the complaint.  See Kemmerer, 513 N.W.2d at 841 (noting that courts favor a liberal application of the Finden factors to further the policy of resolving cases on their merits). 

C.  Due Diligence

A motion to vacate must be made within a reasonable time, and not more than one year after the judgment or order.  Minn. R. Civ. P. 60.02.  What constitutes due diligence depends on all the facts and circumstances involved in the individual case.  Simons v. Schiek's, Inc., 275 Minn. 132, 138, 145 N.W.2d 548, 552 (1966). 

The default judgment in this case was entered on October 11, 2002.  Appellant asserts that it learned of the default judgment on October 25, 2002, and contacted respondent that day to request a voluntary dismissal of the default judgment.  On October 28, 2002, respondent contacted appellant and refused to voluntarily dismiss the default judgment.  Two weeks later, on November 13, 2002, appellant moved the court to vacate the judgment.  Appellant acted with due diligence.   

D. Absence of Prejudice to Non-moving Party

The party seeking to vacate a judgment has the burden of establishing that no substantial prejudice will result to the other party.  Nelson, 428 N.W.2d at 395.  In the context of Rule 60.02, the delay and expense of litigation, without more, do not create sufficient prejudice to defeat a motion to vacate.  Charson, 419 N.W.2d at 491. 

Here, appellant asserts that vacating the default judgment will not substantially prejudice respondent.  Respondent has presented no evidence to the contrary.  Given the diligence with which appellant acted, the only prejudice is the loss of the advantage of a default judgment.  However, to treat this as prejudicial begs the question.  Accordingly, we conclude that appellant has met its burden. 

Because the four Finden factors weigh in favor of vacating the default judgment, the district court abused its discretion by refusing to vacate the judgment.  We reverse the district court and remand the case for a trial on the merits.   

II.

Appellant argues that the default judgment was void for lack of jurisdiction because appellant was never properly served.  Whether service of process is proper is a question of law, which this court reviews de novo.  Turek v. A.S.P. of Moorhead, Inc., 618 N.W.2d 609, 611 (Minn. App. 2000), review denied (Minn. Jan. 26, 2001).  If attempted service was ineffective, a resulting default judgment should be set aside as void for lack of jurisdiction.  Hengel v. Hyatt, 312 Minn. 317, 318, 252 N.W.2d 105, 108 (1977).  Actual notice of a lawsuit does not overcome ineffective service.  Tullis v. Federated Mut. Ins. Co., 570 N.W.2d 309, 311 (Minn. 1997).

Minnesota Rules of Civil Procedure mandate that service on a corporation be made on "[a]n officer or managing agent, or to any other agent authorized expressly or impliedly or designated by statute to receive service of summons."  Minn. R. Civ. P. 4.03(c).  Here the parties dispute whether Givens, the person who was served, is either a managing agent or an agent with implied authority to accept service.  Whether Givens is a managing agent or an agent with implied authority to accept service depends on Givens' duties.  See Tullis, 570 N.W.2d at 311 (describing duties of managing agents and agents with implied authority).  

            The district court did not address this issue, and we have no factual basis in the record for determining Givens' duties.  Accordingly, we do not reach this issue.  We do note, however, that the face of the bond lists Givens as the person to whom claims on the bond are to be submitted.  If Givens had authority to accept claims on the bond, it appears he had implied authority to accept service of process for a lawsuit on the bond.   

Reversed and remanded.