There’s A Lot of Green To Be Lost Via Default Judgments

A recent case out of the Illinois First District Court of Appeals provides a strong reminder on the need for corporations and companies to have strong procedures in place for responding to potential services of court summons. Austin v. A-1 Food Services, Inc., 2014 IL App (1st) 132384 (December 10, 2014) Cook Co., 3d Div. (HYMAN) Affirmed.

In the Austin case, A-1 Food Services (“A-1 Food”), during the pendency of a suit filed against it by Charles Austin Limited (“CAL”) to recover on a debt, sold all of its assets to Forever Green Food Group, Inc. (“Forever Green”). When it learned of the transfer, plaintiff CAL asserted the transaction was a fraudulent transfer seeking only to avoid A-1 Food’s debt to CAL. As such, CAL added Forever Green to the lawsuit as a defendant. However, Forever Green did not appear in the case and CAL obtained a default judgment in the amount of $186,688.72.

Forever Green then sought to vacate the judgment three months later, only when its bank account was frozen following from a citation proceeding. Forever Green filed for relief from the judgment under section 2-1401 of the Illinois Code of Civil Procedure (735 ILCS 5/2-1401 (2012)). Forest Green attacked the service on the grounds that its registered agent did not recollect receiving a copy of the summons or complaint from the Cook County sheriff. Forever Green further argued that it: (i) had a meritorious defense to the underlying lawsuit because, generally, a successor corporation is not liable for the debts of the transferor corporation, (ii) was diligent in defending itself in the original lawsuit, and (iii) was diligent in filing the section 2-1401 petition. The trial court denied Forever Green's petition, rejecting all of its arguments and determining that its affidavits were untruthful to the point of appearing "almost embarrassing."

In reviewing the trial court’s order, the First District Appellate Court noted the following chronology: On January 10, 2013, after no appearance by Forest Green within the 30-day deadline to respond to service of a complaint, CAL orally moved for default and prove-up of damages against Forever Green. The trial court then entered and continued the motion until February 22, 2013. On February 15, 2013, CAL mailed to Forever Green’s registered agent a copy of the January 10 order, a notice of the motion for default judgment, and a copy of the written motion. Although the exact date was disputed, between January 10 and February 15, 2013, Forever Green changed its registered agent. On February 22, 2013, the trial court entered a default judgment against Forever Green.

Following service of the citation to discovery of Forever Green’s assets in the connected collection action, Forever Green moved to vacate the default judgment. The motion included the affidavits of both Forever Green's original registered agent and his replacement. Both asserted that they did not recall ever receiving a copy of the Amended Complaint, and asserted that had they received service, they would have referred the claim to counsel for an appearance and defense of the claim. In reviewing the affidavit of the original registered agent, the Appellate Court held that the affidavit was “woefully deficient” and could not impeach sheriff's return of service. As such the court agreed that the trial court had personal jurisdiction over Forever Green.

Instructive, is how the appellate court distinguished the cases cited by Forever Green: Ellman v. De Ruiter, 412 Ill. 285 (1952), and Schnable v. Tuma, 351 Ill. App. 486 (1953), two cases were defendants were successful in defeating claimed service. First, the court noted that in Ellman, the Illinois Supreme Court vacated a default judgment on the basis of the court's equitable powers to prevent an injustice. However, in that case, there was evidence that the plaintiff's attorney's representations misled the defendant on status, which caused the defendant to refrain from filing a timely motion to vacate. Ellman, 412 Ill. at 293-94. Likewise, in Schnable, the defendant established no proper service of process through clear and convincing evidence. Schnable, 351 Ill. App. at 488-89, 491. Indeed, examination of the Sheriff’s deputy brought out the admission the deputy could not remember making the contested service and only filled and the managers of the involved pharmacy documented they were not present on the day of the alleged service. Id. The court, conversely, noted there was no evidence Forever Green had been misled. Likewise, there was no evidence presented by Forever Green that directly contradicted the Sheriff’s affidavit of service.

As support for rejecting Forever Green’s efforts to vacate the judgment based, mainly, on the allegation of the registered agent only that they did not remember being served, the appellate court cited to Pineschi v. Rock River Water Reclamation District, 346 Ill. App. 3d 719 (2004), noting it to be “a case quite similar to this one.” In Pineschi, a deputy sheriff served a copy of the complaint and summons on the defendant. Pineschi, 346 Ill. App. 3d at 721. The defendant failed to answer or appear. Id. The trial court awarded the plaintiff a default judgment, and 22 days later, the plaintiff mailed a copy of the judgment to the defendant. Id. The defendant then filed a motion to vacate the default judgment arguing the trial court lacked jurisdiction to enter the judgment because it had not been properly served. Id. Alternatively, the defendant sought discretionary relief under section 2-1401, attaching an affidavit from its registered agent in support. Id. The registered agent in an affidavit stated that she "did not recall receiving a summons or complaint," and, if she had, she would have followed normal business procedures to ensure the complaint would have been forwarded to the defendant's claims company. Id. The trial court denied the defendant's motion to vacate the default judgment. Id. at 722.

The Pineschi appellate court affirmed, initially noting, "[i]f service was satisfactory, then there is no reason to conclude that defendant was diligent in handling plaintiff's lawsuit." Id. at 723. The court concluded that the agent's assertion that she could not recall receiving the complaint or summons did not meet the clear and convincing evidence standard to overcome the presumption of service. Id. at 724. Thus, service was proper, and "defendant did not show that its failure to appear or answer resulted from anything other than a lack of due diligence." Id. The appellate court noted that Forever Green’s registered agent’s affidavit was very similar to that in Pineschi, and could not overcome the Sheriff’s affidavit.

The appellate court then rejected Forever Green’s claim that the trial court should have vacated the default judgment as it had a meritorious defense to CAL’s claim. Reviewing the particular facts of the transfer (not discussed in this note), the appellate court agreed that CAL had a plausible claim that the transfer was a fraudulent transfer occurring after the filing of suit, seeking to avoid collection efforts.

The appellate court then reviewed Forest Green’s diligence presenting its defense in the original action, noting that a party relying on section 2-1401 must have a reasonable excuse for failing to act within the appropriate time. Smith v. Airoom, Inc., 114 Ill. 2d 209, 222 (1986). The court also noted that Section 2-1401 does not relieve a party of the consequences of its own mistakes or negligence and a party relying on section 2-1401 must show that its "failure to defend against the lawsuit was the result of an excusable mistake and that under the circumstances [it] acted reasonably, and not negligently, when [it] failed to initially resist the judgment." Id.

From this, the appellate court rejected Forever Green’s claims that CAL failed to provide sufficient notice of the motion for default. Specifically, Forever Green claimed that CAL's notice of motion for default, filed on February 15, 2013, went their first registered agent who, at that time, was no longer Forever Green's registered agent. Forever Green also alleged that "common sense and professional courtesy" obliged CAL to inform the new registered agent or Forever Green's counsel who had responded to an earlier document subpoena regarding the default.

In so doing, the appellate court noted that the Airoom case rejects Forever Green's argument. In Airoom, plaintiffs sued Airoom for breach of contract, and Airoom's sales manager was served with summons and a copy of the complaint at its place of business. Airoom, 114 Ill. 2d at 215. Airoom failed to answer or appear within 30 days. Id. Without providing notice to Airoom, the trial court entered plaintiffs' motion for a default judgment and continued the case for a hearing on damages. Id. Plaintiffs did not give Airoom notice of the hearing on damages, and the judgment was entered against Airoom. Id. at 216.

Plaintiffs then initiated non-wage-garnishment proceedings against Airoom's bank to satisfy the judgment, after which Airoom filed a section 2-1401 petition. The trial court denied the petition on the basis that Airoom had not shown diligence. Id. at 220. The Illinois Supreme Court affirmed. Id. at 231.

The Supreme Court reasoned that Airoom had ample opportunity to avoid the default judgment by filing an answer or appearance, but, instead, relied on out-of-court negotiations with plaintiffs to settle the dispute which "did not establish any acceptable excuse for [Airoom's] failure to appear in court after summons was duly served on its agent." Id. at 224-25. The court further noted that, because Airoom never filed an appearance, plaintiffs were not required to provide notice of their intention to seek a default or of the default judgment. Id. at 226.

As to the alleged breach of professional courtesy by failing to provide notice, the court determined such conduct "does not justify this court's easing the due-diligence requirement." Id. Once a court acquires jurisdiction over a party, the litigant has a duty to track the progress of his or her case. Id. at 227. The court finally noted that, although plaintiffs were silent about the entry of the default judgment, no evidence existed that the attorney fraudulently concealed the entry of the judgment or otherwise prevented Airoom from knowing of it by "trick or contrivance." Id. at 228.

In the end, the decision means that Forest Green is stuck and will have to pay the default judgment. Clearly, the trial court and appellate court decisions against Forest Green appear to be “tinged” by skepticism that Forest Green’s registered agents were being honest in asserting that they did not remember being served.

But what about companies that honestly cannot document that service occurred – but are faced with a Sheriff’s affidavit documenting service and a default judgment? What can they do? Clearly, an inability to come forward with effective evidence documenting that service could not have occurred as attested to by the deputy will clearly be fatal to any effort to overcome the deputy’s affidavit. As such, before such a situation occurs, it is important to have documented procedures in place on how the company will accept and respond to service efforts.

Indeed, affidavits from those charged with greeting visitors or accepting mail – or those who would be present at the business or the location of the registered agent when a Sheriff’s deputy would arrive, can possibly provide evidence contesting a claim of service. In this respect, the employees may be able to document that nothing occurred to trigger the documented process of how to respond.

Likewise, efforts should be made to directly challenge the deputy’s affidavit by examination of activity logs or other available data documenting the deputy’s actions on the date of the alleged service, as well as comparing the affidavit’s description of the person allegedly accepting the summons to those present on the claimed day of service are also recommended. This, in addition to the affidavits of the registered agent that service did not occur, will go much further in setting forth a strong claim in support of vacating a default judgment.

Of course, defendants in such a position are in the position of “proving a negative.” That said, without proactive steps now, companies are most likely to end up in Forest Green’s unfortunate position.

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Terrence Guolee, a shareholder in our Chicago office, has successfully represented defendants, plaintiffs and insurance carriers in dozens of complex, multi-million dollar claims covering a wide area of facts and law, in state and federal courts across the country. Terry regularly writes and speaks on various aspects of Illinois law and litigation practice. If you have any questions regarding this article, please contact Terry via This email address is being protected from spambots. You need JavaScript enabled to view it. or 312-725-0889.

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