Should Default Judgment Have Been Set Aside?

Appeals court panel divided over whether defendant's motion for new trial should have been granted. Justice Fowler dissents

Hornell Brewing Co., Inc. v. Lara (Tex.App.- Houston [14th Dist.] Feb. 5, 2008)(Yates) (default judgment, failure to file answer, motion for new trial, defective product liability, personal injury)
AFFIRMED: Opinion by Justice Brock YatesBefore Justices Brock Yates, Fowler and Guzman14-06-00602-CV Hornell Brewing Co., Inc. (a/k/a Arizona) v. Modesto Tony LaraAppeal from 280th District Court of Harris County (Judge Tony Lindsay)
Justice Fowler dissented in Hornell Brewing Co., Inc. (a/k/a Arizona) v. Modesto Tony Lara

NOTE: The Texas Supreme Court last month issued an opinion in a case involving a similar scenario. See Levine v. Shackelford, No. 06-0553 (Tex. Jan. 11, 2008)(per curiam) (trial procedure, defaulting defendant, default judgments, motion to set aside default judgment, Craddock test elements)

M A J O R I T Y O P I N I O N BY JUSITCE LESLIE BROCK YATES

The trial court entered a default judgment in favor of appellee Modesto Tony Lara against appellant Hornell Brewing Co., Inc. (a/k/a Arizona). Hornell filed a motion for new trial seeking to set aside the default judgment, which the trial court denied. On appeal, Hornell asserts the trial court erred in failing to grant its motion for new trial. We affirm.

Lara alleged he was injured after ingesting broken glass while drinking a bottle of Arizona Tea. After settlement negotiations failed to resolve the dispute, Lara sued Hornell for negligence, products liability, and breach of warranty. Hornell failed to answer, and Lara obtained a default judgment for $50,000.

After receiving notice of the default judgment, Hornell filed a motion for new trial requesting that the default judgment be set aside. We review a trial court’s ruling on a motion for new trial for abuse of discretion. Director, State Employees’ Workers’ Comp. Div. v. Evans, 889 S.W.2d 266, 268 (Tex. 1994). When moving for new trial to set aside a default judgment, the defendant must (1) prove its failure to answer was not intentional or the result of conscious indifference but due to accident or mistake, (2) assert a meritorious defense, and (3) show that granting a new trial would not cause delay or otherwise injure the plaintiff. See Craddock v. Sunshine Bus Lines, 133 S.W.2d 124, 126 (Tex. 1939). If a defendant meets all three Craddock elements, the trial court abuses its discretion in failing to order a new trial. Evans, 889 S.W.2d at 268.

Hornell explained in affidavits and its motion that it never received notice of Lara’s suit. Hornell’s process for receipt of service involves many steps. After suit documents are served on its registered agent, the documents must pass through two more sets of hands at different corporate entities before finally reaching Hornell’s general counsel. Hornell’s evidence showed that the process broke down after the second step, although it was not sure exactly where or how because the suit documents were never located.

The new trial briefing and hearing focused on the first and third Craddock elements - whether the failure to answer was intentional or the result of conscious indifference and whether a new trial would cause delay or injure Lara. The trial court judge disapproved of Hornell’s method of receiving service, as she explained in the new trial hearing:

I do agree to a certain extent with plaintiff. I believe that the defendants have deliberately set up a process for receiving service that is so complicated, so cumbersome, so convoluted that it is designed to allow them to claim that they never got something because it didn’t go properly through the four or five steps that it had to go through, and in addition to that, none of their agents keep any records and they seem to be proud of it because they put in their affidavits that they don’t keep any records of all this stuff. I presume that that is designed to make it so that nobody can prove that they ever got anything.

The trial judge concluded that even though this conduct amounted to gross negligence and she suspected that Hornell deliberately failed to answer, she stopped short of actually finding that the failure to answer was intentional or the result of conscious indifference. The trial judge concluded that Hornell was nevertheless not entitled to a new trial based on prejudice to Lara because Hornell would not pay Lara’s expenses in obtaining the default judgment.

On appeal, Hornell argues the trial court erred in refusing to grant a new trial based solely on its refusal to pay Lara’s expenses in obtaining the default judgment. In challenging a default judgment, if the defendant alleges that granting a new trial will cause no injury or delay, the burden shifts to the plaintiff to disprove this. Evans, 889 S.W.2d at 270. This is an equitable determination that should be made on a case by case basis after considering the entire record. See id. at 270; State & County Mut. Life Ins. Co. v. Williams, 924 S.W.2d 746, 749 (Tex. App.- Texarkana 1996, no writ). Although an offer to pay expenses is not an absolute precondition to granting a new trial, it is an important factor to consider. Evans, 889 S.W.2d at 270 n.3

Lara put on evidence that he incurred approximately $2000 in expenses to obtain the default judgment, and not only did Hornell not offer to pay, but it refused to pay, arguing that Lara could have avoided the expense of a default judgment by personally inquiring whether Hornell intended to answer. Despite implementing a complicated system for receiving service that the trial court found Hornell designed deliberately to make service more difficult, Hornell refused to pay for the expenses this system caused Lara and instead attempted to impose a duty on Lara to remind it to answer. In these circumstances, we cannot say the trial court abused it discretion in taking these factors into consideration and determining that Hornell is not entitled to a new trial because it refused to pay Lara’s expenses in this case.

For the first time in its appellate brief, Hornell has offered to pay Lara’s "reasonable attorney’s fees and costs incurred in taking the default judgment." However, as Lara points out, he has had to incur significant additional expenses in defending the default judgment, and Hornell has not offered to reimburse those. Further, although some courts consider offers to pay default judgment expenses made for the first time on appeal, we hold that the better practice is to assess whether the trial court abused its discretion based on the information available to the trial court at the time of the ruling. See Zonker v. Sullivan, 650 S.W.2d 189, 190-91 (Tex. App.-El Paso 1983, writ ref’d n.r.e.) (holding offer to pay expenses on appeal too late, noting that for trial court to properly exercise discretion, all elements of Craddock test must be presented to trial court); Mitchell v. Webb, 591 S.W.2d 547, 550 (Tex. App.-Fort Worth 1979, no writ) ("[Defendants] did not offer to reimburse [plaintiff] for any costs incurred in obtaining his default judgment until they filed their brief on appeal. This is clearly too late."); see also In re A.W.P., 200 S.W.3d 242, 245 (Tex. App.-Dallas 2006, no pet.) (reviewing trial court’s decision based on evidence before it at the time, noting appellant had not shown trial court’s decision was incorrect when made); In re Harvest Cmtys. of Houston, Inc., 88 S.W.3d 343, 349 (Tex. App.-San Antonio 2002, no pet.) (stating that we "can only consider the record that was before the trial court at the time of the hearing" in determining whether the trial court’s ruling was correct). But see Dallas Heating Co. v. Pardee, 561 S.W.2d 16, 22 (Tex. App.- Dallas 1977, writ ref’d n.r.e.) (reversing default judgment, in part based on defendant’s new offer on appeal to pay expenses). Therefore, we conclude that Hornell’s belated offer to pay Lara’s trial level expenses does not entitle it to a new trial.

We affirm the trial court’s judgment.

/s/ Leslie B. Yates
Justice

Judgment rendered and Majority and Dissenting Opinions filed February 5, 2008.
Panel consists of Justices Yates, Fowler, and Guzman (Fowler, J., dissenting).