Waldher v. Federal Deposit Insurance

96-461

No. 96-461

IN THE SUPREME COURT OF THE STATE OF MONTANA

1997

KEVIN L. WALDHER,

Plaintiff and Respondent,

v.

FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver
for BANK OF COLUMBIA FALLS, JETTE RANCH, INC.,
SOGELEASE CORPORATION, 5 P's COLLECTIONS, INC.
d/b/a INTERMOUNTAIN COLLECTIONS, MICHAEL LEAHY,
and their assigns or successors in interest, and
all persons unknown who claim any right, title,
estate or interest in or lien or encumbrance upon
the real property described in the Complaint, or
any part thereof, adverse to Plaintiff's ownership
or any claim upon Plaintiff's title thereto, whether
such claim or possible claim be present or contingent,
including any claim or possible claim of elective
share, inchoate or accrued,

Defendants and Appellants.

APPEAL FROM: District Court of the Twentieth Judicial District,
In and for the County of Lake,
The Honorable C. B. McNeil, Judge presiding.

COUNSEL OF RECORD:

For Appellants:

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Ward E. Taleff; Alexander, Baucus,
Taleff & Paul; Great Falls, Montana

For Respondent:

Matthew H. O'Neil; French, Mercer,
Grainey & O'Neil; Polson, Montana

Submitted on Briefs: January 2, 1997

Decided: March 18, 1997
Filed:

__________________________________________
Clerk

Justice Terry N. Trieweiler delivered the Opinion of the Court.

Kevin L. Waldher's predecessor in interest filed a quiet title
action in the District Court for the Twentieth Judicial District in
Lake County, and served defendant Federal Deposit Insurance
Corporation (FDIC) with a summons and complaint. The District
Court entered FDIC's default based on FDIC's failure to file an
answer to the complaint. FDIC moved the District Court to set
aside the entry of default. The District Court denied FDIC's
motion. FDIC appeals the District Court's order which denied its
motion to set aside the default. We reverse the order of the
District Court and remand to that court for proceedings consistent
with this opinion.
On appeal, we address the issue of whether the District Court
abused its discretion when it denied FDIC's motion to set aside the
default judgment.
FACTUAL BACKGROUND
On October 12, 1993, Lonna Leahy filed a quiet title action in
the Twentieth Judicial District Court. Defendant FDIC was served
with a summons and complaint on December 14, 1993. In early
February, Leahy orally granted FDIC a thirty-day extension of time

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in which to file an answer to the complaint. After the informal
extension had expired, Leahy notified FDIC's attorney that FDIC was
in "technical default." At that time, however, Leahy did not move
the District Court for entry of a default, and the parties
continued to negotiate Leahy's quiet title claim. On October 6,
1994, FDIC's attorney appealed to Leahy for a response to the
negotiations "so that we can either dismiss the action or file an
answer."
On May 17, 1995, Leahy moved the District Court for an entry
of default against FDIC for its failure to file a timely answer.
The District Court granted Leahy's motion on May 24, 1995, and
entered default against FDIC. FDIC immediately retained local
counsel to continue negotiations with Leahy. On June 13, 1995,
after conferring with Leahy, FDIC's local counsel wrote to Leahy:
To confirm our discussion, I informed you of my
representation of FDIC. Rather than requiring me to move
to set aside the default of FDIC (if you feel you can't
stipulate to that result), we agreed to try to cooperate
in the next few weeks to see if there is a way to defeat
the Sogelease Corporation judgment lien . . . . If that
isn't acceptable, or if you would prefer that I take
steps now to set aside the default, please let me know
immediately.

On August 23, 1995, Kevin L. Waldher was substituted for Lonna
Leahy as party plaintiff in the quiet title action. When FDIC
sought to confirm its understanding about the negotiations with
Waldher's counsel, it was informed that Waldher would not agree to
set aside FDIC's default. Therefore, on February 28, 1996, FDIC
filed a motion with the District Court to set aside the default.
On July 12, 1996, the court summarily denied FDIC's motion.
DISCUSSION
The issue in this case is whether the District Court abused
its discretion when it denied FDIC's motion to set aside the
default judgment.
Rule 55(c), M.R.Civ.P., provides that "[f]or good cause shown
the court may set aside an entry of default." The policy of law
is to favor a trial on the merits. Therefore, no great abuse of
discretion need be shown to warrant a reversal of a district court
order denying a motion to set aside a default. In re Marriage of
Broere (1994), 263 Mont. 207, 209, 867 P.2d 1092, 1093; Hoyt v.
Eklund (1991), 249 Mont. 307, 311, 815 P.2d 1140, 1142. Our
standard of review of a district court's refusal to set aside a

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default is whether there was a slight abuse of discretion by the
court. Twenty-Seventh Street, Inc. v. Johnson (1986), 220 Mont.
469, 471, 716 P.2d 210, 211.
In Blume v. Metropolitan Life Insurance Co. (1990), 242 Mont.
465, 467, 791 P.2d 784, 786, this Court set forth the factors
necessary to establish good cause to set aside a default. We
stated that a defendant must show: (1) that he proceeded with
diligence; (2) that his neglect was excusable; (3) that the
judgment, if permitted to stand, will affect him injuriously; and
(4) that he has a defense to plaintiff's cause of action on the
merits. Blume, 242 Mont. at 467, 791 P.2d at 786. See also
Marriage of Broere, 263 Mont. at 209, 867 P.2d at 1094.
In this case, the evidence presented by FDIC demonstrates that
it proceeded with diligence to set aside the default entered
against it, even though its motion to do so was not filed
immediately. In support of its motion to the District Court, FDIC
submitted affidavits from two of its attorneys in which they stated
there had been an understanding between the parties that FDIC would
postpone an effort to set aside the court's entry of default
pending ongoing settlement negotiations. In addition, FDIC
submitted correspondence between the parties which illustrated its
good faith belief that it would not be prejudiced by a delay in
filing a motion to set aside the default. Both the correspondence
and the affidavits clearly establish that the parties were
attempting to reach a settlement and that FDIC believed that a
motion to set aside the default would not be required until its
attorneys were advised by the plaintiff's attorney that such action
was necessary. Furthermore, the record is clear that FDIC
proceeded with diligence and attempted to set aside the default as
soon as it became aware that plaintiff's new counsel did not share
FDIC's view of the parties' agreement and intended to enforce the
entry of default.
The evidence presented by FDIC further demonstrates that its
failure to file an answer was not due to inexcusable neglect or
disrespect for the court or judicial process. See Blume, 242 Mont.
at 469, 791 P.2d at 787. An affidavit filed by Leahy's attorney
confirms that Leahy orally consented to a thirty-day extension of
time in which FDIC could file an answer to her complaint. In
addition, FDIC's attorney affidavits and correspondence with Leahy
demonstrate that the parties continued to negotiate Leahy's quiet
title claim after the expiration of that thirty-day period with the
understanding that FDIC could postpone filing its answer. In fact,
in a letter dated October 6, 1994, FDIC's attorney appealed to

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Leahy for a response to the negotiations "so that we can either
dismiss the action or file an answer." (Emphasis added.) When
FDIC's attorney received Leahy's motion seeking entry of default in
May 1995, he was out of his office attending a seminar. The
hearing had already occurred by the time FDIC's attorney was made
aware of that motion. The affidavits and exhibits presented by
FDIC, which at the very least establish a misunderstanding between
the parties regarding the necessity of a timely answer by FDIC,
support FDIC's assertion that its failure to file an answer to
Leahy's complaint was due to excusable neglect.
In addition, at the time FDIC filed its motion to set aside
the default, it also filed a proposed answer to the plaintiff's
complaint. In the proposed answer, FDIC asserted two affirmative
defenses which, if true, would constitute meritorious defenses to
the complaint. It is well established that "[t]he proposed answer
does not have to demonstrate the truth of the allegation of the
answer, and it is not appropriate to discuss the merits of the
answer beyond finding a prima facie defense." Blume, 242 Mont. at
470, 791 P.2d at 787. We hold that FDIC's proposed answer
constitutes adequate documentation of its defenses to the quiet
title action.
Finally, it is clear that if the entry of default is allowed
to stand, FDIC will lose any ability to assert its interest in the
real property at issue. Such a loss will clearly affect FDIC
injuriously.
We hold that FDIC has established that it proceeded with
diligence under the circumstances, that its neglect was excusable,
that it has a defense to the quiet title action, and that the entry
of judgment, if permitted to stand, will affect it injuriously.
Therefore, in light of FDIC's showing of good cause to set aside
the entry of default, and in light of the clear policy which favors
adjudication on the merits, we hold that the District Court abused
its discretion when it denied FDIC's motion to set aside the entry
of default. We reverse the order of the District Court which
denied FDIC's motion and remand to that court for proceedings
consistent with this opinion.

/S/ TERRY N. TRIEWEILER

We Concur:

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/S/ WILLIAM E. HUNT, SR.
/S/ JAMES C. NELSON
/S/ W. WILLIAM LEAPHART
/S/ KARLA M. GRAY

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