R. Michael Butner, Appellant, v. Ingrid Neustadter, Appellee, 324 F.2d 783 (9th Cir. 1963)

This is an appeal from an order of the United States District Court for the Southern District of California denying appellant's motion to set aside a default judgment. Jurisdiction of this court is based on 28 U.S.C. § 1291 (1958).

On June 22, 1962, appellant, a resident of Arkansas who was temporarily in Los Angeles on business, was personally served with process in Los Angeles in a suit before the Superior Court of the State of California in and for the County of Los Angeles brought by appellee as an assignee on a promissory note.¹  At 9:30 a. m. on July 3, the eleventh day after service, the default of appellant was entered and a default judgment taken against him in the principal sum of $20,000.00, together with $1,027.50 interest and $1,250.00 attorney fees. On July 10, 1962, appellant filed a petition to remove the action to the United States District Court for the Southern District of California pursuant to 28 U.S.C. § 1446 (1958).² 

On July 23, 1962, appellant filed in the district court a motion to set aside the default judgment theretofore entered in the state court, supported by affidavits and points and authorities.³  The affidavits asserted that appellant had sent the summons and complaint to his attorney in Little Rock, Arkansas, where he was a resident, and requested his attorney to arrange through one David Robbins in Los Angeles to have his "appearance entered in said action by Samuel Reisman's office in Los Angeles." They further asserted that on July 2, B. H. Ross, an attorney in Samuel Reisman's office, received a telephone call from "one David Robbins, a business associate of Samuel Reisman and of the defendant R. Michael Butner," in which he was advised that a lawsuit had been filed in the superior court against appellant, that the attorney for the plaintiff was Hugo DeCastro, and that "said David Robbins believed that it was necessary for the defendant to appear in said action on the next day" and requested Mr. Ross to obtain time for appellant to plead therein. Mr. Ross's affidavit further showed that he called Mr. DeCastro's office on two occasions on July 2 and was informed that Mr. DeCastro was not in, and that he left his telephone number with Mr. DeCastro's office so that he might be called.

Not being able to contact Mr. DeCastro, Mr. Ross mailed a letter on July 2 to Mr. DeCastro, a copy of which is set out in the margin.⁴ 

At approximately 2 p. m. on the afternoon of July 3 Mr. Ross received a telephone call from Mr. DeCastro in which Mr. DeCastro stated that he had been unable to answer Mr. Ross's phone calls of the previous day and that he had already on the morning of July 3, 1962, entered a default and default judgment against appellant. Upon being requested by Mr. Ross to set aside this default by stipulation, Mr. DeCastro refused to do so. The affidavits further showed that Mr. Ross met Mr. Butner for the first time on July 9, 1962, and at that time received a copy of the summons and complaint, together with various other papers. The affidavits further asserted that appellant had a good and meritorious defense to the action.

On July 27, 1962, appellee filed a notice of motion and motion to strike appellant's answer and to vacate the court's order allowing him to file a third party complaint for damages. A hearing was held on the various motions on August 6, 1962, and thereafter the district court on August 27, 1962, granted appellant's motion to set aside his default and the default judgment against him, and denied the appellee's motions to strike appellant's answer and to vacate the order allowing appellant to file a third party complaint for damages.

On August 31, 1962, appellee filed a motion for reconsideration which was heard on September 10, 1962. On October 1, 1962, the district court made an order reversing his order theretofore made on August 27, 1962, and reinstated the default judgment against appellant. From the district court's last order a timely appeal was taken by appellant.

The issues presented are: (1) Is defendant entitled to have the default judgment vacated as a matter of law upon removal to federal district court; and (2) if not, did the trial court abuse its discretion in not granting the motion to set aside?

Appellant contends that he is entitled to have the default judgment set aside as a matter of law upon removal to federal district court. His reasoning is as follows: section 1446(b) gives a defendant the right to remove within twenty days after service of process. Fed. R. Civ. P. 12 gives him twenty days within which to appear and plead. If a default judgment entered in a state court within ten days after service of process is allowed to take precedence over the removal statute which allows him twenty days to remove, then, he contends, the whole purpose of the removal statute is defeated. Appellee maintains, on the other hand, that although the removal after the default judgment is perfectly proper, it cannot be taken to supersede the default judgment which must be regarded as valid until set aside. We agree.

Although Fed. R. Civ. P. 81 (c) provides the time within which a defendant must answer in a removed action,⁵  it is obvious that it did not contemplate a situation in which the action had proceeded to a final judgment before removal. The federal rules apply after removal and "neither add to nor abrogate what has been done in the state court prior to removal." Talley v. American Bakeries Co., 15 F.R.D. 391, 392 (E.D. Tenn. 1954). The federal court takes the case as it finds it on removal⁶  and treats everything that occurred in the state court as if it had taken place in federal court.⁷  Therefore, this default judgment should be treated as though it had been validly rendered in the federal proceeding. Appellant's argument that state law cannot prevent removal or defeat its effects is quite correct.⁸  That does not mean that the default judgment must be vacated as a matter of law. Instead, a motion to set aside a default may be made in the district court under Fed. R. Civ. P. 60(b) because of mistake, inadvertence, surprise, or excusable neglect.

Appellant argues that the trial court abused its discretion in denying the motion to vacate. He relies on Brill v. Fox,⁹  in which the California Supreme Court said:

"The legal principles underlying the granting of motions to set aside defaults are comparatively simple, and have been frequently announced by this court. The question is primarily one within the discretion of the trial court, but this discretion is not capricious or arbitrary, but it is an impartial discretion guided and controlled in its exercise by fixed legal principles.

"`It is not a mental discretion, to be exercised ex gratia, but a legal discretion, to be exercised in conformity with the spirit of the law, and in a manner to subserve and not to impede or defeat the ends of substantial justice.' * * * It is also well settled that it is the policy of the law to bring about a trial on the merits wherever possible, so that any doubts which may exist should be resolved in favor of the application, to the end of securing a trial upon the merits. * * * Although it is true that courts of appeal have shown great reluctance in cases of this kind to disturb the order of the trial court, it is equally true that denials of such relief by the trial court are scanned more carefully than cases where the trial court has granted relief, to the end that wherever possible cases may be heard on their merits."

In Karlein v. Karlein,¹⁰  the district court of appeal said:

"An appellate court listens more readily to an appeal from an order denying relief under Section 473 of the Code of Civil Procedure. The law is remedial and any doubt as to the propriety of setting aside a default should be resolved in favor of the application, even in a case where the showing * * * is not strong. * * * Neither party should be deprived of a hearing except when guilty of inexcusable neglect, and doubts should be resolved in favor of an application to set aside a default judgment."

These statements are a good guide to action in this case. Appellant contends he has a good defense on the merits, namely that the note in question was obtained by means of fraud and that appellee is not a holder in due course. Whether or not this is true, if he is not guilty of inexcusable neglect, he should have a hearing on the merits.

Appellee maintains that appellant was guilty of inexcusable neglect in that he sent the summons and complaint to his attorney in Arkansas with directions to contact Mr. Reisman in Los Angeles, that he was acquainted with lawyers in Los Angeles, and that he was an astute businessman and should have simply contacted Mr. Reisman himself. Then the fact that Mr. Reisman was out of town would not have made any difference, for appellant would have been aware of that circumstance and could have made appropriate arrangements to get another attorney. While there may be some doubt as to the wisdom of appellant's actions in this case, there are several possible explanations of his conduct. Having been a resident of Little Rock for more than a year, he might quite naturally wish to send all his legal business to his Little Rock attorney, and merely in this one instance have sent the name of Mr. Reisman along as a convenience to the Little Rock attorney. He might do this as a matter of routine, being, as appellee asserts, an "astute businessman." In such a case, the fact that Mr. Reisman was out of town would of course delay any action taken, and the delay of sending the papers from California to Arkansas and back to California through the mails could, when added to Mr. Reisman's absence, account for the entire ten days. There is considerable doubt about appellant's reasons, and the Karlein case says that "doubts should be resolved in favor of an application to set aside a default judgment."¹¹ 

There is a possibility of a meritorious defense. An attempt was made to take action on the complaint within the allotted ten days but was frustrated by certain events. There is doubt as to whether the circumstances which frustrated the attempt could amount to inexcusable neglect. We have been cited to no case allowing a default judgment to stand under facts similar to those in this case. We hold that the order by the district court reversing his former judgment in favor of appellant was an abuse of discretion.

The judgment is reversed.