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Docket Number

1352

Attorney(S)

Michael J. Giese, of Leatherwood, Walker, Todd Mann, Greenville, for appellant. Michael D. Glenn, Anderson, for respondent.

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Smart Summary

Case Summary: Norman Wham v. Shearson Lehman Brothers, Inc. (Ct. App. S.C., June 12, 1989)

Factual and Procedural Background

On February 29, 1988, Norman Wham commenced this action by serving a summons and complaint on Shearson Lehman Brothers, Inc.'s registered agent. Thirty-eight days later, after Shearson Lehman failed to answer or otherwise respond, Wham filed an affidavit of default and the clerk entered default the same day. Wham then moved to refer the case to the master for entry of final judgment. The master scheduled a default hearing and sent notice to Shearson Lehman. Upon receiving the notice, Shearson Lehman appeared and moved to quash the summons and to set aside the entry of default; alternatively, it moved to stay the proceedings and compel arbitration.

In support of its motion to set aside the default, Shearson Lehman submitted an affidavit from one of its attorneys attributing the failure to appear and defend to the attorney's or a legal assistant's failure to request an extension because of a "press of other business" and a "drastic increase" in incoming litigation following Shearson Lehman's merger with E.F. Hutton Company and the October 19–20, 1987 stock market crash.

The court's opinion addresses two principal questions: (1) the sufficiency of the summons, and (2) the proper standard for granting relief from an entry of default under S.C.R. Civ. P. 55(c). The master's order refusing to quash the summons was affirmed; the master's order denying the motion to set aside the entry of default was vacated and remanded for further consideration under the proper standard.

Legal Issues Presented

Whether the summons served on Shearson Lehman was sufficient under Rule 4(b) despite omitting the specific phrase that "judgment by default will be rendered against [the defendant]" if the defendant fails to appear and defend.
What is the appropriate standard for granting relief from an entry of default under S.C.R. Civ. P. 55(c): the "good cause" standard applicable under Rule 55(c) or the more rigorous "excusable neglect" standard associated with Rule 60(b)?
Whether the trial master erred in refusing to set aside the default entry by applying the wrong legal standard (i.e., whether the order should be vacated and remanded for reconsideration under the proper "good cause" standard).

Arguments of the Parties

Appellant (Shearson Lehman Brothers, Inc.) — Arguments and Factual Explanation

Shearson Lehman contended the summons was fatally defective because it omitted the Rule 4(b) phrase that explicitly notifies the defendant that "judgment by default will be rendered against [the defendant]" if the defendant fails to appear and defend.
Shearson Lehman sought relief from the entry of default, supporting that motion with an affidavit from its attorney blaming the failure to appear on a failure to request an extension of time to respond, caused by a "press of other business" and a large increase in litigation following the merger with E.F. Hutton and the October 1987 stock market crash.
As an alternative to quashing the summons or setting aside the default, Shearson Lehman moved to stay proceedings and compel arbitration.

Respondent (Norman Wham) — Arguments

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Ricks v. Weinrauch, 293 S.C. 372, 360 S.E.2d 535 (Ct. App. 1987)	States that the standard for granting relief from an entry of default under S.C.R. Civ. P. 55(c) is "good cause" and that the decision to grant relief is within the trial court's discretion; an order will be set aside if controlled by error of law or lacking evidentiary support.	The court relied on Ricks to hold that the "good cause" standard applies and to conclude the master erred as a matter of law by applying the Rule 60(b) "excusable neglect" standard when considering relief from entry of default.
Crawford v. Murphy, 260 S.C. 411, 196 S.E.2d 503 (1973)	Discusses the sufficiency/irregularity of summonses and references circumstances under which a summons may be sufficiently irregular to confuse the defendant.	The court cited Crawford (which discussed Brown v. Weathers) to contrast a summons that confused the defendant with the present summons, concluding the present omission did not confuse Shearson Lehman and was harmless absent prejudice.
Brown v. Weathers, 251 S.C. 67, 160 S.E.2d 133 (1968)	Underlying case referenced for the proposition that a sufficiently irregular summons that confuses the defendant may justify vacating a default judgment.	Used indirectly through Crawford to illustrate the type of summons irregularity that would require relief; the court found no similar confusion here.
Miller v. British America Assurance Co., 238 S.C. 94, 119 S.E.2d 527 (1961)	Addresses arbitration: an arbitration agreement set up in the answer is treated as a "special defense."	The court noted Miller in the context of Shearson Lehman's alternative request to stay and compel arbitration, but declined to decide the arbitration issue because it remanded the default-relief question for reconsideration.

Court's Reasoning and Analysis

The court's analysis proceeded in two primary parts corresponding to the issues presented:

Sufficiency of the Summons
The court compared the summons actually used to the language required by S.C.R. Civ. P. 4(b), which states the summons shall notify the defendant that "judgment by default will be rendered against him" in case of failure to appear and defend. The summons in this case omitted that exact phrasing but informed Shearson Lehman that a failure to answer would result in the plaintiff applying to the court for the relief demanded in the complaint. The court concluded that this language adequately conveyed the consequence of failing to defend (i.e., the entry of a default judgment).

The court also treated the omission as harmless: it found the omission had nothing to do with Shearson Lehman's failure to appear or defend, and it neither confused nor misled Shearson Lehman. Because Shearson Lehman did not make a clear showing of prejudice from the omission, the master did not err in refusing to quash the summons.

In reaching this conclusion the court cited authority emphasizing that dismissal for defective process is appropriate when the error actually results in prejudice, and noted the trial court's discretion to allow amendments to process absent material prejudice to the defendant.
Standard for Relief from Entry of Default (Rule 55(c))
The court explained that S.C.R. Civ. P. 55(c), like its federal counterpart, requires "good cause" as the standard for relief from an entry of default. The decision whether to grant such relief is within the trial court's sound discretion, but an order will be vacated if it is controlled by an error of law or lacks evidentiary support.

The critical legal error identified was that the master applied the more stringent "excusable neglect" standard associated with Rule 60(b), rather than the "good cause" standard of Rule 55(c). Although the master recognized that "good cause" applied, he nevertheless used the "excusable neglect" framework. Because this was an error of law controlling the master's decision, the court vacated the master's order and remanded the matter for reconsideration under the proper standard.

On remand the court directed the master to exercise the broader, more liberal discretion appropriate under Rule 55(c) and to consider the following factors when determining whether to relieve Shearson Lehman from the entry of default: (1) the timing of Shearson Lehman's motion for relief; (2) whether Shearson Lehman has a meritorious defense; and (3) the degree of prejudice to Wham if relief is granted. These factors were taken from recognized practice authorities cited in the opinion.
Arbitration Motion
Shearson Lehman alternatively sought a stay and an order compelling arbitration. Because the court vacated the master's denial of relief from default and remanded that issue, the court expressly declined to address the master's denial of the alternative motion to stay and compel arbitration. The opinion referenced authorities on arbitration waiver and the treatment of arbitration agreements pleaded as defenses, but left the arbitration question unresolved pending the remand.

Holding and Implications

Holding: The court affirmed the master's order refusing to quash the summons, vacated the master's order denying Shearson Lehman's motion to set aside the entry of default, and remanded that issue to the master for reconsideration under the correct standard. The opinion concluded with the disposition: "Affirmed in part, vacated in part and remanded."

Implications:

The summons used by Wham was held to be sufficiently accurate and not fatally defective despite omitting the exact Rule 4(b) wording; the master's refusal to quash the summons was affirmed because Shearson Lehman failed to show prejudice from the omission.
The master's denial of relief from the entry of default was vacated because the master applied the wrong legal standard ("excusable neglect" under Rule 60(b)) instead of the "good cause" standard mandated by Rule 55(c). On remand the master must reconsider the motion under the Rule 55(c) "good cause" standard and evaluate the timing of the motion, whether a meritorious defense exists, and the degree of prejudice to the plaintiff.
The court did not decide the alternative arbitration issue; that question remains unresolved on remand. The opinion notes authorities about arbitration as a defense and waiver but does not set forth a ruling on arbitration here.
No broader rule beyond the application of the established "good cause" standard under Rule 55(c) and the harmlessness inquiry for defective process was announced; the decision’s immediate effect is to require reconsideration of the default-relief motion under applicable law and to leave the arbitration question for further proceedings.

Concurrence: Judges Gardner and Cureton concurred.

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Norman WHAM, Respondent v. SHEARSON LEHMAN BROTHERS, INC., Appellant.

Heard May 15, 1989.

Decided June 12, 1989.

GOOLSBY, Judge:

Shearson Lehman Brothers, Inc., is the appellant. Norman Wham is the respondent. We address only the questions relating to the sufficiency of the summons and to the standard for granting relief from an entry of default under Rule 55(c) of the South Carolina Rules of Civil Procedure. The master's order refusing to quash the summons is affirmed; however, the master's order denying the motion to set aside the entry of default is vacated and the issue raised by the motion is remanded for determination by the master.

Wham began this action on February 29, 1988, by serving a summons and complaint on Shearson Lehman's registered agent. Thirty-eight days later, after Shearson Lehman failed to answer the complaint or otherwise respond, Wham filed an affidavit of default. The clerk of court entered the default the same day.

Wham moved to refer the case to the master for the entry of final judgment. The master thereafter scheduled a default hearing and sent notice of the hearing to Shearson Lehman.

Upon receipt of the notice of hearing, Shearson Lehman appeared and moved to quash the summons and set aside the entry of default, or alternatively, to stay the proceedings and compel arbitration.

An affidavit submitted by a Shearson Lehman's attorney blamed its failure to appear and defend the action simply upon her or a legal assistant's failure to request an extension of time to respond to the complaint during a time where there was a "press of other business" and "a drastic increase" in "incoming litigation caseload" brought about by Shearson Lehman's merger with E.F. Hutton Company and the stock market crash on October 19 and 20, 1987.

The summons attached to Wham's complaint reads in pertinent part:

[I]f you fail to answer the complaint within the time aforesaid, the plaintiff in this action will apply to the court for the relief demanded in the complaint.

This language, incidently, is almost the same as that suggested by Dean Lightsey and Professor Flanagan in their "summons" form. H. LIGHTSEY AND J. FLANAGAN, SOUTH CAROLINA CIVIL PROCEDURE, Appendix B, Form III at 7 (1985).

Rule 4(b) of the South Carolina Rules of Civil Procedure, like its Federal counterpart, F.R. CIV. P. 4(b), provides in part:

The summons . . . shall notify [the defendant] that in case of his failure to [appear and defend] judgment by default will be rendered against him for the relief demanded in the complaint. [Emphasis ours.]

The summons used by Wham failed to state that "judgment by default will be rendered against [Shearson Lehman]" in the event it did not appear and defend the action. Shearson Lehman contends the omission of this language renders the summons fatally defective and, therefore, the master should have quashed it.

We deem the summons sufficiently accurate to provide proper notice to Shearson Lehman. It tells Shearson Lehman that its failure to respond within the prescribed period will result in Wham's demanding from the court the relief sought in his complaint, which is another way of saying that judgment by default will be taken against Shearson Lehman should it fail to appear and defend the action. See H. LIGHTSEY AND J. FLANAGAN, supra at 76 (a major item for inclusion in a summons is a demand for relief in the event of default).

In any case, the omission of the language from the summons was harmless. The omission had nothing whatever to do with Shearson Lehman's failure to appear and defend the action and it neither confused nor misled Shearson Lehman. Absent a clear showing of prejudice by Shearson Lehman, the master properly refused to quash the summons. See 4A C. WRIGHT AND A. MILLER, FEDERAL PRACTICE AND PROCEDURE: CIVIL 2d § 1088 at 32 (1987) (the court may dismiss the complaint for lack of proper service of process when the error actually results in the defendant's prejudice); cf. S.C.R. CIV. P. 4(i) (the trial court has discretion to allow any process to be amended unless it clearly appears the defendant will be materially prejudiced by an amendment); Crawford v. Murphy, 260 S.C. 411, 414, 196 S.E.2d 503, 504 (1973) (stating that the summons at issue in Brown v. Weathers, 251 S.C. 67, 160 S.E.2d 133 (1968), wherein the Supreme Court affirmed the trial court's vacating of a default judgment, "was sufficiently irregular to confuse the defendant.").

II.

Under S.C.R. CIV. P. 55(c), as under F.R. CIV. P. 55(c), the standard for granting relief from an entry of default is "good cause." Ricks v. Weinrauch, 293 S.C. 372, 360 S.E.2d 535 (Ct.App. 1987); H. LIGHTSEY AND J. FLANAGAN, supra at 82. The decision of whether to grant relief from an entry of default is solely within the sound discretion of the trial court. Id. An order based on an exercise of that discretion, however, will be set aside if it is controlled by some error of law or lacks evidentiary support. Ricks v. Weinrauch, supra.

Here, the order refusing to grant Shearson Lehman relief from an entry of default is controlled by an error of law and therefore must be vacated.

In deciding the question of whether to grant the motion by Shearson Lehman for relief from the entry of default, the master did not employ the "good cause" standard. Instead, the master erroneously applied the more rigorous standard of "excusable neglect," a standard used under Rule 60(b). Id. He did this even though he recognized the "good cause" standard was applicable.

We therefore remand for redetermination by the master the issue of whether Shearson Lehman should be relieved from the entry of default. In determining this issue, the master, exercising a broader, more liberal discretion than he otherwise would under Rule 60(b), shall consider the following factors: (1) the timing of Shearson Lehman's motion for relief; (2) whether Shearson Lehman has a meritorious defense; and (3) the degree of prejudice to Wham if relief is granted. 10 C. WRIGHT, A. MILLER, AND M. KANE, FEDERAL PRACTICE AND PROCEDURE: CIVIL 2d § 2694 at 494 (1983); H. LIGHTSEY AND J. FLANAGAN, supra at 82.

III.

Shearson Lehman also questions the master's refusal to stay the proceedings and compel arbitration.

Because we vacate the order denying the motion by Shearson Lehman for relief from the entry of default and remand the issue raised by the motion, we need not address the master's denial of its alternative motion to stay the proceedings and compel arbitration. See, however, Miller v. British America Assurance Co., 238 S.C. 94, 119 S.E.2d 527 (1961) (referring to an arbitration agreement set up in the answer as a "special defense"); 5 Am. Jur.2d Arbitration and Award § 51 at 556-57 (1962) (one's right to arbitrate given by contract may be waived by failing to raise the right in an answer).

Affirmed in part, vacated in part and remanded.

GARDNER and CURETON, JJ., concur.

WHAM v. SHEARSON LEHMAN BROS., INC