Judgment Enforcement Case Five

The firm obtained vacatur of a default in the United States District Court for the Eastern District of Michigan based on the imperfection of service of process where the Plaintiff served state court summons rather than federal court summons following removal from state court to federal court.

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION‍

BSD MANAGEMENT, LLC,

Plaintiff,

F. Kay Behm

United States District Judge

Case No. 22-11763

OPINION AND ORDER DENYING MOTION FOR DEFAULT JUDGMENTS AND GRANTING MOTION TO SET ASIDE ENTRIES OF DEFAULT (ECF Nos. 29 and 33)

I. INTRODUCTION AND PROCEDURAL HISTORY

‍ removed this action from Oakland County Circuit Court based on diversity jurisdiction on July 29, 2022. (ECF No. 1). Plaintiff, BSD Management, LLC, asserts claims of conversion, fraud, unjust enrichment, breach of implied contract, promissory estoppel, and breach of fiduciary duty. BSD filed an amended complaint on October 6, 2022. (ECF No. 18). BSD served by alternate means, with permission of the court. (ECF Nos. 12, 13, 17). In response to an order to show cause, BSD requested clerk’s entries of default against these Defendants, which were entered. (ECF Nos. 21, 22, 24, 25, 26). The Clerk of the Court denied BSD’s “sending a summons and a copy of the complaint,” by registered mail, subsection (4) is only available as a method of service when a corporation “has failed to appoint and maintain a resident agent or file a certificate of that appointment,” “has failed to keep up its organization by appointment of officers or otherwise,” or “the corporation’s term of existence has expired.” Lu, at *5 (quoting Mich. Ct. R. 2.105(D)(4)). In Lu, where the corporation did not suffer from any of the defects identified in subsection (D)(4), the court found service of process deficient because the summons and complaint were mailed to the corporation’s resident agent and personal service did not accompany that mailing. Lu, at *5. In Lu, the defects were two‐fold. First, the summons and complaint were mailed to the resident agent, while subsection (D)(4) required the mailing to go to the corporation itself or an appropriate corporate officer, and the Michigan Bureau of Commercial Services. Id. Second, the option in (D)(4) is only available where the corporation also satisfied one of the criteria found in subsection (D)(4)(a)‐(c). Id. Similarly, it appears that BSD served registered agent’s address, not its corporate address, and there is no evidence that any of the criteria in (D)(4)(a)‐(c) are satisfied. See note 2, supra. Accordingly, service on Inc. does not comply with Michigan law. Under such circumstances, the default must be set aside. See Lu, at *5 (Where service of process was insufficient, the “district court’s decision to set aside the entry of default … was not only proper, it was required.”).

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B. Service on
Defendants argue, among other things, that BSD failed to properly serve defendants because BSD served the state court summons, not a federal summons. They cite Dean Mktg., Inc. v. AOC Int'l (U.S.A.) Ltd., 610 F. Supp. 149 (E.D. Mich. 1985) in support of their argument. In Dean, the court held that after removal to federal court, “service of process must be accomplished according to federal procedure.” Id. at 152 (citing 28 U.S.C. §§ 1446, 1448). This requires the service of a federal summons with the complaint. See Wright & Miller, 4A Fed. Prac. & Proc. Civ. § 1082, Service in Removed Actions (4th ed.) (Where a defendant was not served prior to removal, “there is no process to ‘complete’ and new process must be issued pursuant to Rule 4.”). Accordingly, where the plaintiff attempted to perfect service of process after removal by mailing a state court summons rather than a summons issued by federal court, service was ineffective. Dean, 610 F. Supp. at 152. The same is true here. Even assuming that BSD otherwise complied with the order allowing alternate service, the use of the state court summonses renders service defective, and the defaults must be set aside.

BSD argues, however, that any defects in service should be ignored because Defendants’ counsel was aware of the lawsuit. This argument is unavailing. The Sixth Circuit has made clear that “[a]ctual knowledge and lack of prejudice cannot take the place of legally sufficient service.” LSJ Investment Company, Inc. v. O.L.D., Inc., 167 F.3d 320, 324 (6th Cir. 1999); see also Nieves v. Kiekert AG, No. 20‐11467, 2020 WL 6335993, at *1 (E.D. Mich. Oct. 29, 2020) (“Actual knowledge of a lawsuit does not cure a technically defective service of process.”). The court, therefore, rejects BSD’s contention that actual knowledge of a lawsuit can override defective service of process.

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C. Good Cause Under Federal Rule of Civil Procedure 55
In the alternative, Defendants also argue that they have established good
cause to justify setting aside the entries of default, including the assertion of several meritorious defenses. Rule 55 provides that “[t]he court may set aside an entry of default for good cause, and it may set aside a default judgment under Rule 60(b).” Fed. R. Civ. P. 55(c). A showing of “good cause” requires the court to consider three factors: (1) whether the defendant's culpable conduct led to the default; (2) whether the defendant can offer a meritorious defense; and (3) whether the plaintiff will suffer prejudice from setting aside the default. Woolery v. Hardin Cnty. Gen. Hosp., 2015 WL 2384359, at *1 (W.D. Tenn. May 19, 2015) (citing United States v. $22,050.00 in U.S. Currency, 595 F.3d 318, 324 (6th Cir. 2010)). However, where service of process is defective, the court “need not weigh the three factors,” but must instead set aside the entry of default. Id. (citing O.J. Distrib., Inc. v. Hornell Brewing Co., 340 F.3d 345, 355 (6th Cir. 2003), abrogated on other grounds, Morgan v. Sundance, Inc., 142 S. Ct. 1708 (2022)). Given that the court is required to set aside the entries of default based on the defective service of process, as outlined above, it need not address whether Defendants have established good cause under Rule 55. Notably, even though the court need not address these factors, the decision outlined above is also consistent with the strong preference for trials on the merits in the federal court system. See Clark, 413 F. App’x at 819 (“In regard to the setting aside of defendants’ default, the federal courts have a strong preference for trials on the merits.”).

D. Motion for Default Judgment
Given that the court has set aside the entries of default, BSD’s motion for entry of default judgment must be DENIED as moot. See e.g., OneMD‐Louisville PLLC, LLC v. Digital Med, LLC, 2020 WL 2461885, at *9 (W.D. Ky. May 12, 2020)
(Where entry of default set aside, motion for default judgment denied as moot.).