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Searchtoppers.com, L.L.C. v. TrustCash LLC - 12/20/2012

Arizona Court of Appeals Division One Creates a Split with Division Two in Holding That a Party Who Has Been Defaulted in a Liquidated Damages Case for Failure to Appear Is Not Entitled to Notice and an Opportunity to Be Heard on Damages Under Arizona Rule of Civil Procedure 55(b)(2).


Searchtoppers.com, L.L.C., sued TrustCash LLC, for breach of contract.  The contract at issue required TrustCash to pay $2500 per month for internet marketing services.  Searchtoppers alleged that it provided the services from 2006 through 2009 and that TrustCash failed to make thirty-eight payments.  Searchtoppers thus sought $95,000 plus interest and an unspecified amount of attorneys’ fees and costs.

When TrustCash did not file an answer or otherwise appear within twenty days after service on its statutory agent, Searchtoppers filed an application for entry of default under Rule 55(a) and served a copy on TrustCash’s statutory agent.  When TrustCash did not appear within ten days of the filing of the application, the entry of default became effective under Rule 55(a)(2), (3).  Six days after the entry of default became effective, TrustCash filed an untimely answer (which was later struck) and a notice of appearance.  Searchtoppers then filed a motion for entry of default judgment without a hearing because its damages were liquidated, which the court granted.  The court denied TrustCash’s motion to vacate default judgment.

The Court of Appeals affirmed, rejecting TrustCash’s arguments that it was entitled to an evidentiary hearing before the court entered default judgment and that it had demonstrated good cause to vacate the default judgment under Rule 60(c).

First, the Court noted that TrustCash did not challenge the entry of default or that the default became effective ten days after Searchtoppers filed its application.  Therefore, the narrow issue before the Court was whether Searchtoppers was entitled to seek default judgment pursuant to motion under Rule 55(b)(1), rather than by hearing pursuant to Rule 55(b)(2).

The language of Rule 55(b)(1) allows default judgment by motion when two requirements are met:  (1) the damages are liquidated (that is, a sum certain or a sum that can be made certain by computation), and (2) the defendant “has been defaulted for failure to appear.”  Under Rule 55(b)(2), “[i]n all other cases,” the plaintiff must apply for a default judgment and give notice of the hearing on the application to the defendant.

Division Two recently held that, under Rule 55(b)(2), a defendant who has appeared in an action is entitled to notice and a hearing before default judgment may be entered, regardless of whether the damages are liquidated or unliquidated.  BYS Inc. v. Smoudi, 228 Ariz. 573, 578 ¶ 20, 269 P.3d 1197, 1202 (App. 2012).  A majority of the Division One panel disagreed.  The Court noted that the language of Rule 55(b) was amended in 1975.  Before the amendment, the rule required “in all cases” that a defendant who appeared in an action receive notice before default judgment could be entered.  After the amendment, the rule allows a party seeking liquidated damages to obtain a default judgment on motion and without notice to the defendant.  No evidentiary hearing is needed to calculate damages in a case involving liquidated damages.  Thus, no notice is required.

Regarding TrustCash’s claim that there was good cause to set aside the judgment under Rule 60(c), the Court noted that after TrustCash’s statutory agent received the complaint, it mailed it to TrustCash’s president the next day, who neglected to forwarded it to counsel.  The statutory agent also mailed the application for entry of default to TrustCash’s president, who forwarded it to counsel a few days before entry of default became effective.  TrustCash filed an untimely answer after the entry of default became effective.  The Court concluded that, on these facts, TrustCash had not established that its untimely appearance was excusable.

Judge Orozco dissented, agreeing with the conclusion reached by Division Two that a party who appears in a case has a right to notice and a hearing, regardless of whether damages in the case are liquidated or unliquidated.  Under her reading of the rule, a plaintiff may apply for default judgment by motion only if the damages are liquidated and the defendant has not appeared.  Thus, Judge Orozco would have held that TrustCash’s notice of appearance filed after the entry of default became effective rendered notice and a hearing necessary before default judgment could be entered.  She would have concluded that the language in Rule 55(b)(2) “in all other cases” includes cases in which a party has been defaulted for “failing to plead or otherwise defend.”  Because TrustCash filed a notice of appearance, but did not plead or otherwise defend, this case would fall under Rule 55(b)(2).  Pointing to Rule 55(b)(1) and the comment to the rule, Judge Orozco noted also that TrustCash should at least have had notice and an opportunity to be heard on the issue of attorneys’ fees.

Judge Hall authored the opinion, with which Judge Gemmil concurred; Judge Orozco dissented.

 Posted by: Kathy O'Meara

Posted On: 1/3/2013