Key Bank of ME v. Tablecloth Textile

USCA1 Opinion











UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
____________________

No. 94-2044

KEY BANK OF MAINE,

Plaintiff - Appellee,

v.

TABLECLOTH TEXTILE COMPANY
CORPORATION, ET AL.,

Defendants - Appellants.

____________________

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MAINE

[Hon. Morton A. Brody, U.S. District Judge] ___________________

____________________

Before

Torruella, Chief Judge, ___________
Lynch, Circuit Judge, _____________
and Stearns,* District Judge. ______________

_____________________

Eric A. Deutsch, with whom Testa, Hurwitz & Thibeault, _________________ ____________________________
Peter G. Cary and Mittel, Asen, Eggert, Hunter & Altshuler were _____________ _________________________________________
on brief for appellants.
Thomas A. Cox, with whom Jennifer S. Begel and Friedman & ______________ _________________ __________
Babcock were on brief for appellee. _______

____________________

January 30, 1996
____________________




____________________

* Of the District of Massachusetts, sitting by designation.












TORRUELLA, Chief Judge. Defendants-Appellants TORRUELLA, Chief Judge. ______________

Tablecloth Textile Company Corp., ("Tablecloth"), Post & Sherman

Textile Company, Inc. ("P&S") and Stuart Sherman ("Sherman")

(collectively referred to as the "Appellants") appeal the denial

of their motion to set aside a default judgment and for leave to

file a late responsive pleading. We reverse, holding that

because the notice requirement of Rule 55(b)(2) of the Federal

Rules of Civil Procedure was not observed, and because Appellants

provided strong evidence that the damage award was erroneously

calculated, the default judgment must be set aside and the case

remanded for further proceedings consistent with this opinion.

I. BACKGROUND I. BACKGROUND __________

The record in the present action reveals the following.

The dispute underlying this appeal arose out of the sale of

assets, particularly the licenses and inventory of a Maine

corporation which was in default on its obligations to Plaintiff-

Appellee Key Bank of Maine ("Key Bank" or the "Appellee"). O n

December 27, 1993, Key Bank commenced an action against the

Appellants by filing a complaint in the U.S. District Court for

the District of Maine, alleging that Tablecloth breached its

obligations to Key Bank under various contracts and promissory

notes and that Sherman and P&S were jointly and severally liable

along with Tablecloth pursuant to an executed guaranty dated

January 13, 1992. On December 30, 1993, service was made on the

Appellants. The answer to the complaint was due on January 19,




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1994, a date which came and passed with Appellants filing neither

an answer nor a formal appearance.

On January 10, 1994, Key Bank's Maine counsel, Laurie

B. Perzley, received a telephone call from Appellants' then-

counsel in New York, Stephen Brown, indicating that Appellants

wanted to pursue settlement negotiations. Perzley received a

similar telephone call on January 20, 1994, from Sherman's

brother, Tom Sherman, Esq. Stuart Sherman was subsequently

informed by his brother that Appellants were already in default,

at which point Sherman transferred the matter to the attention of

corporate counsel for P&S and Tablecloth in New York, Ronit

Fischer. Sherman implored Fisher to contact Key Bank's counsel

and Vice President, Michael Lugli, to request additional time to

respond to the complaint and to see if the parties could

negotiate a settlement. During the last week of January 1994,

Fischer and Lugli spoke by telephone. The substance of their

conversation was memorialized in Fischer's letter to Lugli dated

February 1, 1994 (the "February 1 letter"). The February 1

letter evidences Appellants' understanding (i) that it served to

commence settlement negotiations; (ii) that Key Bank would not

request a default judgment unless and until it was determined

that settlement negotiations had failed; (iii) that prior to

seeking a default judgment, Key Bank would notify Fischer so that

Appellants could seek Maine counsel and file the appropriate

pleadings; and (iv) that, if negotiations failed, the letter's

settlement offer would not prejudice either party's position in


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litigation. The February 1 letter also discussed "behind the

scenes"circumstances thatprovided groundsfor Appellants'defenses.

In response, Lugli penned a letter dated February 4,

1994 (the "February 4 letter"), indicating Appellee's willingness

to enter into negotiations, if they "could be accomplished

quickly." The letter requested financial information, enclosed

Key Bank forms to be used, provided a February 16, 1994 deadline,

and stated that Lugli would "instruct counsel to continue with

the legal proceeding" were the deadline not met. Appellants did

not submit the financial information by the deadline. Fischer

maintains that although she received the financial questionnaire

meant to be completed and submitted by Sherman, she "do[es] not

recall" whether the package contained "a demand letter from Key

Bank" dated February 4, 1994, indicating that a default would be

sought unless all requested information was presented to Key Bank

by February 16, 1994.

On February 25, 1994, Key Bank filed a response to the

court's order to show cause why the action should not be

dismissed for lack of prosecution along with an application to

the district court clerk for entry of the default. Although Key

Bank was aware that Appellants were represented by counsel who

had requested notice before Key Bank sought to have default

entered, it chose not to serve Appellants with those papers. On

February 28, 1994, the clerk entered a default in favor of Key

Bank under Fed. R. Civ. P. 55(a) because of Tablecloth's failure

to file a responsive pleading. On April 1, 1994, Appellee filed


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a motion for a default judgment, once again choosing not to serve

Appellants. On April 8, 1994, the district court entered the

default judgment ex-parte in the amount of $693,871.44, based on

the affidavits and the unanswered request for admissions

submitted by Key Bank.

During oral argument counsel for Key Bank admitted that

Key Bank never sent Appellants notice of, or copies of any

pleadings filed in connection with, these court actions. Key

Bank further conceded that Appellants only learned of the entry

of the default and of the default judgment in July 1994, when Key

Bank's counsel, David Burke, contacted Fischer (who no longer was

involved in the matter) to discuss execution of the judgment.

Burke was referred to John Stahl, the controller for Post &

Sherman, and they conducted settlement discussions through the

remainder of July. Burke rejected a settlement offer on July 12,

1994, and informed Stahl that if a satisfactory settlement was

not reached by August 1, 1994, Appellee would enforce the

judgment. On July 25, 1994, Lugli received the financial

information requested in February 1994 from Sherman.

The parties failed to reach a settlement by August 1,

1994. Accordingly, on August 15, 1994, Appellants filed a motion

to set aside the default judgment and a motion to allow a late

answer, along with supporting affidavits that detailed the

inaccuracies of the damages as established by the unanswered

request for admissions. On September 2, 1994, the district court

denied Tablecloth's motion to set aside the default judgment and


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for leave to file a late responsive pleading (the "motion"). The

district court stated that Appellants failed to meet their burden

under Fed. R. Civ. P. 60(b), because their conduct did not

constitute excusable neglect and they did not provide sufficient

elaboration permitting the district court to determine that they

had a meritorious defense (the "Order"). This appeal was filed

on September 29, 1994. We have jurisdiction pursuant to 28

U.S.C. 1291.

II. DISCUSSION II. DISCUSSION __________

Despite the additional issues raised, disposition of

this appeal begins and ends with the inquiry into whether the

district court erred when it denied Appellants' motion to set

aside the default judgment entered against them. We review the

denial of a motion to set aside a default judgment for an abuse

of discretion.1 Cotto v. United States, 993 F.2d 274, 277 (1st _____ _____________
____________________

1 Fed. R. Civ. P. 55(c) states:

For good cause shown, the court may set
aside an entry of default and, if
judgment by default has been entered,
likewise set it aside in accordance with
Rule 60(b).

Fed. R. Civ. P. 60(b) provides in part:

On motion and upon such terms as are
just, the court may relieve a party or
party's legal representative from a final
judgment, Order, or proceeding for the
following reasons: (1) mistake,
inadvertence, surprise, or excusable
neglect; . . . (3) fraud, . . .
misrepresentation, or other misconduct of
an adverse party; . . . or (6) any other
reason justifying relief from the
operation of the judgment. The motion

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Cir. 1993) (discussing motion for Rule 60(b) relief); LeShore v. _______

County of Worcester, 945 F.2d 471, 472 (1st Cir. 1991) _____________________

(explaining motion for Rule 55(c) relief); U.S. v. One Urban Lot ____ _____________

Located at 1 Street A-1, 885 F.2d 994 (1st Cir. 1989) (noting ________________________

that review of motions for relief under Rule 55(c) is less

demanding than that governing those seeking relief under Rule

60(b)); see also In Re Roxford Foods, Inc., 12 F.3d 875 (9th Cir. ________ _________________________

1993).

In their appeal of the denial of their motion to set

aside default judgment, Appellants argue that they "appeared" in

the action below for purposes of Rule 55(b)(2)2 and, thus, were

entitled to written notice3 three days prior to the entry of the

default judgment. Appellants contend that because Appellee

failed to satisfy the notice requirement of Rule 55(b)(2), the
____________________

shall be made within a reasonable time,
and for reasons (1), (2), and (3) not
more than one year after the judgment,
Order, or proceeding was entered or
taken.

2 Fed. R. Civ. P. 55(b)(2) reads, in pertinent part:

If the party against whom judgment by
default is sought has appeared in the
action, the party (or, if appearing by
representative, the party's represen-
tative) shall be served with written
notice of the application for judgment at
least 3 days prior to the hearing on such
application.

3 We note that although written notice is contemplated under the
Rule, it need not necessarily be in any particular form. "The
major consideration is that the party is made aware that a
default judgment may be entered against him." Wilson, 564 F.2d ______
at 369 (quoting 10 C. Wright & A. Miller, Federal Practice and ____________________
Procedure 2687 (1973)). _________

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district court abused its discretion when it denied their motion,

because, in so doing, it implicitly held that Appellee was not

required to provide them with notice.4 Predictably, Appellee

disputes that Appellants appeared below and maintains that, under

Rule 5(a), it was not required to provide Appellants with notice

of the default pleadings.5

Although appearance in an action typically involves

some presentation or submission to the court -- a feature missing

here -- we have held that a defaulting party "has appeared" for

Rule 55 purposes if it has "indicated to the moving party a clear

purpose to defend the suit." Mu iz v. Vidal, 739 F.2d 699, 700 _____ _____

(1st Cir. 1984) (quoting H.F. Livermore Corp. v. ________________________

Aktiengesellschaft Gebruder Loepfe, 432 F.2d 689, 691 (D.C. Cir. __________________________________

1970)). Our review of both the case law we cited in Mu iz and _____

the decisions since Mu iz reveals there is ample support for our _____

finding that Appellants' "informal contacts" with Key Bank

____________________

4 We note that the district court's Order does not include a
discussion of why Appellants failed to satisfy the requisite
showing of excusable neglect and meritorious defenses for relief
under Rule 60(b). Although absence of record indication that
proper standards were applied in refusing to set aside a default
has been held sufficient by itself to justify reversal, we need
not decide this case on that limited basis. Keegal v. Key West & ______ __________
Caribbean Trading Co., Inc., 627 F.2d 372, 374 (D.C. Cir. 1980) ___________________________
(citing Medunic v. Lederer, 533 F.2d 891 (3d Cir. 1976)). _______ _______

5 Rule 5(a) provides that:

No service need be made on parties in
default for failure to appear except that
pleadings asserting new or additional
claims for relief against them shall be
served upon them in the method provided
for service of summons in Rule 4.

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demonstrated a clear intent to defend, and thus that they

"appeared" in the action below.6

Here, Appellants "indications" of their intent are

primarily evidenced by the February 1 letter from Fischer to

Lugli. The letter, supplemented by affidavits on record,

demonstrates that Fischer explained to Lugli that, because both

P&S and Sherman had limited access to funds and were considering

bankruptcy, available funds were better spent on the business,

repaying Key Bank, and negotiating a settlement, than on

litigating the matter. More importantly, the February 1 letter

made clear Appellants' understanding that (i) the letter served

to commence settlement negotiations; (ii) during the negotiations

Key Bank "will forbear from filing a default motion based on

[P&S's] failure to answer [in the action below]"; (iii) if "at
____________________

6 See, e.g., Lutomski v. Panther Valley Corn Exchange, 653 F.2d ___ ____ ________ ____________________________
270, 271 (6th Cir. 1981) (finding appearance where defendants
contacted plaintiffs and made clear that the damages sought were
excessive); H.F. Livermore, 432 F.2d at 691 (finding appearance _______________
where exchanges between parties were normal effort to see if
dispute could be settled and neither party doubted that suit
would be contested if efforts failed); Dalminter v. Jesse _________ _____
Edwards, 27 F.R.D. 491, 493 (S.D. Tex. 1961) (finding appearance _______
where defendant contacted plaintiff's counsel by letter); see ___
also Keegal v. Key West & Caribbean Trading Co., Inc., 627 F.2d ____ ______ _______________________________________
373, 374 (D.C. Cir. 1980) (finding, inter alia, that assurances __________
upon which defendants relied were part of, and grew out of,
settlement negotiations which courts seek to encourage); Liberty _______
National Bank and Trust Co. v. Yackovich, 99 F.R.D. 58 (W.D.Penn. ___________________________ _________
1982) (setting aside default judgment because failure to answer
was based upon reliance on agreement with plaintiff's counsel
that notice would be provided prior to seeking default judgment).
Cf. J. Slotnick Co. v. Clemco Industries, 127 F.R.D. 435, 438-39 ___ _______________ _________________
(D.Mass. 1989) (finding defendant did not appear where defendant
was served with copy of plaintiff's motion for default, received
notice from court clerk of entry of default, failed to respond to
either plaintiff's motion or clerk's notice, and never displayed
a clear purpose to defend).

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any time [Key Bank] determines that the negotiations are not ________

proceeding to a positive conclusion," it would notify Appellants

so that they could retain Maine counsel to enter "the appropriate

pleadings" (emphasis original); and (iv) reiterated that

Appellants' "settlement offer was made without prejudice to each

party's respective positions in litigation should the parties be

unable to reach an amicable solution." The February 1 letter, in

its review of the facts involved and the bases for Appellants'

settlement offer, also detailed Appellants' defenses and

counterclaims in the event settlement negotiations failed.

Contrary to Appellee's assertions, once Appellants

"appeared" for Rule 55 purposes they were entitled to notice of

the application for default judgment under Rule 55(b)(2). We

disagree with Appellee's argument that they were not required to

provide notice under Rule 55(b)(2) because their February 4

letter effectively cancelled the intent to defend demonstrated in

Appellants' February 1 letter. Specifically, Appellee argues

that when the February 4 letter is considered together with

Appellants' failure to respond by the February 16, 1994 deadline,

it becomes clear that Appellee was not itself "on notice" in

February 1994 that Appellants had a clear intent to defend.

Appellants' failure to meet the deadline, Appellee maintains, was

but another example of their "history of non-responsiveness."

We find Appellee's argument thoroughly unpersuasive, if

not disingenuous. Appellants only two weeks before communicated




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a clear intent to defend.7 Appellee also knew that Appellants ____

were represented by counsel. Moreover, Appellee was well aware

of Appellants' need to retain Maine counsel and of Appellants'

understanding that notice would precede Appellee's seeking entry

of default. It was Appellee's duty when seeking entry of default

and judgment by default to apprise the district court of

Appellants' February 1 letter and to give notice as contemplated

under Rule 55(b)(2).

In addition, we are unpersuaded by Appellee's attempt

to distinguish this case from Mu iz. Appellee argues that, _____

unlike in Mu iz, the February 4 letter specifically put _____

Appellants on notice that "if [Lugli] does not receive this

[financial] information prior to [February 16, 1994], [Lugli]

will instruct counsel to continue with the legal proceeding."

Appellee relies on a case we distinguished in Mu iz, Wilson v. _____ ______

Moore & Associates, Inc., 564 F.2d 366, 369 (9th Cir. 1977) __________________________

(finding defendant's "informal contacts" insufficient to

constitute an appearance because "plaintiff's 'informal contacts'

provided actual, unqualified notice that delay would result in

default"). Even assuming receipt of Key Bank's February 4

letter,8 we do not find that Appellee's February 4 letter, which

____________________

7 We note that during oral argument, counsel for Appellee
conceded that the February 1 letter, viewed on its own,
demonstrated Appellants' intent to defend.

8 We resolve the factual question as to Fischer's receipt of the
February 4 letter in favor of Appellants because of the strong
policy favoring resolving disputes on the merits. LeShore, 945 _______
F.2d at 472 (quoting Coon, 867 F.2d at 76). ____

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referred to "instruct[ing] counsel to continue with the legal

proceeding," to amount to "actual, unqualified, notice that delay

would result in default." As we noted in Mu iz, in Wilson the _____ ______

defendant there neither filed a paper in court nor contacted

opposing counsel. Mu iz, 739 F.2d at 701; see Charlton L. Davis _____ ___ _________________

& Co., P.C. v. Fedder Data Center, Inc., 556 F.2d 308, 309 (5th ___________ ________________________

Cir. 1977) (noting that cases where actual notice of impending

default judgment was given do not provide guiding precedent for

situations in which no notice of any sort was given). While

Appellants here did not file any court documents, because of the

agreement to pursue settlement negotiations and the need to

retain Maine counsel, they did contact opposing counsel,

explicitly communicated their intent to defend and their

understanding that Appellee would provide notice prior to seeking

default so that they could retain Maine counsel.

Furthermore, Appellants presented strong evidence that

the figures upon which the default judgment is premised are

erroneous.9 While Appellants' evidence does not indicate they

possess an "ironclad claim or defense which will guarantee

success at trial," Teamsters, 953 F.2d 17, 21, the evidence _________

regarding the damages "does establish that [Appellants] possess a
____________________

9 We note that the fact that P&S and Sherman have sought and
received protection under the United States Bankruptcy Code does
not affect our consideration of the issue of damages. Even
though all actions in this appeal are stayed as respect to P&S
and Sherman pursuant to 11 U.S.C. 362 (1994); see ___
Commerzanstalt v. Telewide Systems, Inc., 790 F.2d 206, 207 (2d ______________ _______________________
Cir. 1986); Association of St. Croix Condominium Owners v. St. ____________________________________________ ___
Croix Hotel, 682 F.2d 446, 449 (3d Cir. 1982), they are not ___________
stayed as respect to Tablecloth.

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potentially meritorious claim or defense which, if proven, will

bring success in its wake," at least as to the amount of damages.

Id. The amount of damages involved is substantial, and the __

record suggests that the damage award is possibly erroneous by as

much as $611,870. Thus, Appellants have given us good reason to

believe that setting aside the judgment will not be a futile

gesture. Id. at 20 (stating that a litigant, as a precondition __

to relief under Rule 60(b), must give the trial court reason to

believe that vacating the judgment will not be an empty

exercise); Swink v. City of Pagedale, 810 F.2d 791, 792 n.2 (8th _____ ________________

Cir. 1987) ("There is a strong public policy, supported by

concepts of fundamental fairness in favor of trial on the merits,

particularly when the monetary damages sought are substantial.");

Lutomski, 653 F.2d at 271 (remanding case for a damages hearing ________

where defendants conceded liability yet presented strong

arguments that damages awarded were excessive).

Finally, contrary to Appellee's claim, there is nothing

in the record to suggest that Appellants would not defend the

suit once settlement negotiations failed.10 We also note that

Appellants' motion to set aside the default judgment (dated

August 15, 1994) was reasonably timely, considering that they



____________________

10 We note that in addition to the February 1 letter, which
discussed the grounds for Appellants' defenses, Key Bank was
aware of potential defenses and counterclaims as early as
December 1992 when it received a letter sent by Fischer, dated
December 11, 1992, discussing why P&S was not in default on the
notes.

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only learned of the default and the default judgment in July 1994

and that negotiations continued until August 1, 1994.

In sum, because we find that Appellants presented

sufficient evidence of their intent to defend, they "appeared" in

the action below, such that they were entitled to notice under

Rule 55(b)(2) of Appellee's application seeking the default

judgment.11 We consider Appellee's failure to provide the

requisite notice a grave error, we hold that the lack of notice,

coupled with Appellants' showing of the existence of a

potentially meritorious defense (at least as to the amount of

damages), requires that the default judgment be set aside.12

See Rule 60(b)(4), (6) (permitting judgment to be set aside where ___

judgment is shown to be "void" or for "any other reason

justifying relief"). The district court abused its discretion
____________________

11 By thus holding, we do not suggest that district courts
should be compelled to vacate default judgments whenever a
defendant communicates with the plaintiff after service of the
complaint. See Wilson, 564 F.2d 370-71 (Wright, J., dissenting) ___ ______
("I do not share the majority's fear that reversal here would
compel district court's to vacate default judgments whenever a
defendant communicates with the plaintiff after service of the
complaint."). Instead, we simply re-affirm our rule that
defendants who "appear" through informal contacts demonstrating a
clear intent to defend are entitled to notice under Rule
55(b)(2). Cf. Taylor v. Boston and Taunton Transportation Co., ___ ______ ______________________________________
720 F.2d 731, 733 (1st Cir. 1983) (discussing that not every act
addressed to the court or related to the litigation will be
deemed an appearance); North Central Illinois Laborers' District __________________________________________
Council v. S.J. Groves & Sons Co., Inc., 842 F.2d 164, 168-70 _______ _____________________________
(noting that Rule 55(b)(2)'s plain language, "has appeared in the
action," evidences intent to impose a notice requirement only in
limited circumstances).

12 Accordingly, we need not discuss the parties' remaining
arguments regarding the existence of excusable neglect or whether
the district court abused its discretion when it awarded damages
ex-parte based largely on the unanswered request for admissions.

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when it denied Appellants' motion to set aside the default

judgment. Not only did it fail to recognize Appellants' clear

intent to defend evidenced in the February 1 letter (or

recognized it but decided, contrary to our holding in Mu iz, that _____

notice was not required), it also failed to recognize Appellants'

meritorious claim that the damage award was erroneously

calculated.

Although our conclusion that Key Bank's failure to

provide notice as required by Rule 55(b)(2) necessitates that the

default judgment be set aside, it is less clear whether there

exists a basis for setting aside the entry of default itself

under Fed. R. Civ. P. 55(c). We believe that, in the

circumstances, it was incumbent upon Key Bank to live up to its

representation that it would notify Appellants if it planned to

seek entry of default. It is a separate question whether there

exists "good cause" for Appellants' default within the meaning of

Fed. R. Civ. P. 55(c). See LeShore, 945 F.2d at 472. While the ___ _______

district court had occasion to consider this issue, its order

indicates that it declined to do so. We, however, are of the

opinion that this issue is more appropriately resolved by the

district court in the first instance on remand.

Although nothing more need be said, we nonetheless add

that it would have been a simple matter for Appellee to have

notified Appellants' counsel of the default proceedings. We find

the language of Charlton L. Davis particularly on point: _________________

If the plaintiff felt [the defendant] was
guilty of dilatory tactics and had no

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real defense, then notice under Rule 55
would have promptly resolved the matter.
Instead, plaintiff sought to reap
tactical advantage from [defendant's]
prior neglect by acquiring by stealth a
decision sheltered by the rules which
protect final judgments. Such practice
is what Rule 55 is designed to prevent.

Charlton L. Davis, 556 F.2d at 309. We reiterate that this rule _________________

rests upon the view that the Federal Rules of Civil Procedure are

designed to be fair, that Rule 55(b)(2) was promulgated to

protect "parties who, although delaying in a formal sense by

failing to file pleadings within the twenty-one day period, have

otherwise indicated to the moving party a clear purpose to defend

the suit," H.F. Livermore, 432 F.2d at 691, and our traditional ______________

preference for resolution of cases on the merits while giving due

consideration to practical requirements of judicial

administration. See Cotto, 993 F.2d at 277-80; Teamsters, 953 ___ _____ _________

F.2d at 19-21; LeShore, 945 F.2d at 472-73; see also In Re _______ _________ ______

Roxford Foods, Inc., 12 F.3d 875, 879-81 (9th Cir. 1993). ___________________

Before closing, we respond to an assertion raised by

Appellee's counsel during oral argument to the effect that any

appearance we found would apply only to P&S, because the

February 1 letter only referred to P&S. We disagree. Admittedly

the February 1 letter states that Appellee will forbear from

filing a default motion based on P&S' failure to answer, and ___

makes no mention of the failure to answer by Sherman or

Tablecloth. Nevertheless, we do not find Appellee's argument

persuasive. The record reveals that (i) Fischer launched the

settlement negotiations at Sherman's request; (ii) the February 1

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letter refers to Sherman as well in its discussion; (iii) Sherman

is the president of both Tablecloth and P&S; and (iv) Appellee's

Complaint grounds joint and several liability on Sherman and P&S

as guarantors of the promissory notes executed by Tablecloth,

which are the basis for Appellee's collection action below.

Accordingly, we find it reasonable to read the February 1 letter

which "serve[d] to commence settlement negotiations with [Key

Bank] in the [action below]" as being intended to speak for all

of the named defendants.




































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III. CONCLUSION III. CONCLUSION __________

For the foregoing reasons, we reverse the district

court's Order, and vacate the default judgment. We leave to the

district court on remand to determine whether, in the

circumstances, there exists a basis for setting aside the entry

of default pursuant to Fed. R. Civ. P. 55(c), and whether

Appellants should accordingly be permitted to file a late

responsive pleading.13 While we disapprove of Appellee's

behavior, we note Appellants' apparent inattention to

negotiations and to the case below during the mid-February to

July hiatus in communications. Consequently, we decline to award

costs to Appellants.

Reversed and remanded. _____________________






















____________________

13 Should the district court on remand find no basis for
removing the default under Rule 55(c), a new proceeding as to the
proper amount of damages would then be in order.

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