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08/25/95 JOSEPH ROONEY AND MEDICOR v. SOUTHERN

August 25, 1995

JOSEPH ROONEY AND MEDICOR, INC.
v.
SOUTHERN DEPENDACARE, INC., AND JACK HILTON; IMAGING MANAGEMENT ASSOCIATES, INC., AND LEONARD VERNON V. SOUTHERN DEPENDACARE, INC., AND JACK HILTON



Appeals from Franklin Circuit Court. (CV-94-048). John D. Jolly, TRIAL JUDGE.

Hornsby, Chief Justice. Almon, Shores, Houston, and Cook, JJ., concur. Maddox, J., concurs in part and Dissents in part.

The opinion of the court was delivered by: Hornsby

HORNSBY, CHIEF JUSTICE.

The defendants, Imaging Management Associates, Inc. ("IMA"), Leonard Vernon, Medicor, Inc., and Joseph Rooney appeal from a default judgment in favor of the plaintiffs, Southern Dependacare, Inc. ("Dependacare"), and Jack Hilton in the amount of $4,240,500 in compensatory damages and $1,000,000 in punitive damages. The issue is whether the trial court abused its discretion in denying the defendants' motions to set aside the default judgment.

I. Facts

IMA develops and establishes medical diagnostic centers. In the summer of 1993, IMA began negotiating with Dependacare, intending to purchase the stock or assets of Dependacare. Vernon was the president of IMA, and Rooney was an officer and director of IMA. All parties ultimately agreed that, because of federal Medicare requirements, the sale would not be possible. After ending negotiations with IMA, Rooney, the sole owner of Medicor, began negotiating with Dependacare for Medicor to purchase the Dependacare stock or assets. Although the record is not clear as to exactly why those negotiations ended, the parties never reached a formal agreement. There is much factual dispute as to how extensive the negotiations became before they failed. The record also contains contradictory testimony as to where negotiations took place, what exchanges were made during the period of the negotiations, and what employees were involved in the negotiations. On March 2, 1994, Dependacare and Jack Hilton sued IMA, Vernon, Medicor, and Rooney, alleging breach of contract and fraud. They alleged in their complaint that the defendants had fraudulently made misrepresentations during the negotiations and that the defendants' actions had created an enforceable contract. The plaintiffs further alleged that, as a result of the defendants' actions, Dependacare had suffered financially and Hilton, the president of Dependacare, had personally suffered financially. The plaintiffs claimed $10,000,000 damages for the alleged breach of contract and claimed compensatory and punitive damages in "such an amount as the jury may determine" for the defendants' allegedly fraudulent conduct. The defendants never answered. There is evidence that the defendants were aware that the plaintiffs had filed this action against them, but the defendants alleged, and continue to maintain, that the plaintiffs failed to properly serve the defendants. The summons and the complaint intended for IMA, Vernon, and Medicor were sent by certified mail to 5143 West Woodmills Drive, Wilmington, Delaware. The certified mail receipt shows that the documents were received by an IMA employee, Lisa M. Vincent, on March 7, 1994. The summons and the complaint intended for Rooney was also sent by certified mail to the same address, but the certified mail receipt shows the signataure of Heather Rooney, who was Rooney's daughter and also an employee of IMA.

On April 12, 1994, the plaintiffs obtained an entry of default against IMA, Vernon, and Medicor. The trial court held a hearing on April 22, 1994, to assess damages, and on that date rendered a judgment for $4,240,500 in compensatory damages and $1,000,000 in punitive damages. On May 23, 1994, the plaintiffs obtained an entry of default against Rooney, and the trial court entered a default judgment against Rooney on June 2, 1994, for the same amount of damages -- the four defendant were liable jointly. This damages amount was based on the general testimony of Dependacare's accountant as to losses Dependacare allegedly had suffered. The damages assessed for breach of contract were as follows: 1) $2,000,000 in accounts receivable that were allegedly assigned to the defendants; 2) $1,341,000 of income that was allegedly lost because six clinics owned by the plaintiffs were closed "at the request of the defendants"; 3) $327,000 allegedly advanced by Hilton to "fund personal corporations"; 4) $210,000 allegedly "collected by the defendants from [Dependacare's] accounts receivable"; 5) $150,000 claimed for allegedly "loss of bank financing"; 6) $75,000 allegedly lost by Hilton because of the sale of his house, office building, and automobile; 7) $75,000 worth of computer equipment held by the defendants; and 8) $68,500 for the value of the defendants' use of an airplane owned by Dependacare. The trial court awarded $1,000,000 in punitive damages upon the request of the plaintiffs' attorney.

The defendants were not present for the hearing that had preceded the entry of the judgment, and the defendants maintain that they did not receive notice of that hearing. Although the plaintiffs allege that a certified copy of the entry of default was mailed to the defendants in order to notify them of the damages hearing, there is no evidence of this mailing in the record. On July 15, 1994, IMA and Vernon filed a motion to set aside the default judgment against them, and on August 5, 1994, Medicor and Rooney filed a motion to set aside the default judgments against them. The court held a hearing on August 26, 1994, and denied the motions on November 3, 1994. The defendants appealed.

II. Discussion

Initially, we note that the trial court has broad discretion when determining whether to grant a defendant's motion to set aside a default judgment. However, this discretion is not boundless. Kirtland v. Fort Morgan Auth. Sewer Serv., Inc., 524 So. 2d 600 (Ala. 1988). The trial court must balance two competing policy interests associated with default judgments -- judicial economy and the litigant's right to defend on the merits. Kirtland, 524 So. 2d at 604. For the trial court to effectively balance those interests, this Court established a two-step process to be undertaken by the trial court.

First, a trial Judge must presume that cases "should be decided on the merits whenever practicable." Kirtland, 524 So. 2d at 604, citing Hritz v. Woma Corp. 732 F.2d 1178, 1181 (3d Cir. 1984). This Court has held that "preserving a litigant's right to a trial on the merits is paramount and, therefore, outweighs the interest of promoting judicial economy." Kirtland, 524 So. 2d at 604. To that end, this Court explained:

" trial court, in determining whether to grant or to deny a motion to set aside a default judgment, should exercise its broad discretionary powers with liberality and should balance the equities of the case with a strong bias toward allowing the defendant to have his day in court."

Id., at 605.

Second, with that underlying presumption established, this Court in Kirtland also provided a guideline for the trial courts to follow in exercising their discretionary authority, by adopting a three-factor analysis. Therefore, when determining whether to set aside a default judgment, the trial court must consider the following three factors: "1) whether the defendant has a meritorious defense; 2) whether the plaintiff will be unfairly prejudiced if the default judgment is set ...


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