                                                                                                                           Opinions of the United
2006 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


3-14-2006

Nationwide Mutl Ins v. Starlight Ballroom
Precedential or Non-Precedential: Non-Precedential

Docket No. 05-1031




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                                                                NOT PRECEDENTIAL

                      UNITED STATES COURT OF APPEALS
                           FOR THE THIRD CIRCUIT


                                     No. 05-1031


                NATIONWIDE MUTUAL INSURANCE COMPANY

                                           v.

          STARLIGHT BALLROOM DANCE CLUB, INC.; PHILIP CHAN,

                                                      Appellants


                      Appeal from the United States District Court
                        for the Eastern District of Pennsylvania
                         (D.C. Civil Action No. 04-cv-03393)
                      District Judge: Honorable Berle M. Schiller


                      Submitted Under Third Circuit LAR 34.1(a)
                                   March 8, 2006

                  Before: AMBRO and STAPLETON, Circuit Judges,
                             STAGG,* District Judge

                            (Opinion filed March 14, 2006)


                                      OPINION


AMBRO, Circuit Judge



      *
       Honorable Tom Stagg, Senior District Judge for the Western District of
Louisiana, sitting by designation.
       Starlight Ballroom Dance Club, Inc. waited three months to respond to a

declaratory judgment suit filed by its insurer, Nationwide Mutual Insurance Company. In

the interim, Nationwide moved for and was granted a default judgment. The District

Court denied Starlight’s motion to open the default judgment. Because Starlight cannot

show that it would have a meritorious defense and because the default was the result of its

culpable conduct, we affirm.

                      I. Factual Background and Procedural History

       We are writing here solely for the parties, so we provide only a brief summary of

the relevant facts.

       Starlight (owned by Philip Chan, the other appellant) operated a ballroom dance

school that also functioned as a night club available for rent by private parties.

Nationwide insured Starlight under a comprehensive general liability policy, but that

policy was based on the assumption that Starlight was simply a ballroom dance school

and did not serve alcohol on the premises. Starlight’s insurance policy was obtained

through Zhal Deng Lee, an insurance broker. He had been told that Starlight served beer

and wine and rented out the facility for private dance parties, but he never conveyed this

information to Nationwide.

       In September 2003, Randy Dover tripped on a bottle during a private dance party,

fell, broke his right hip, and was unable for an extended period to perform his job as a

mail carrier. In May 2004, Nationwide sent Starlight a letter warning that it might not



                                              2
defend the claim. Although the letter stated that Nationwide “will provide a defense

under the captioned policy, subject to a full and complete reservation of rights,” it also

stated that “Nationwide is not admitting that any legal duty to defend or indemnify exists

or ever existed with respect to this claim and the captioned policy. . . . At this time, based

on the information to date, it appears that there may be no coverage for all or part of the

claim due to the facts of the claim and the provisions in the captioned insurance policy.”

(emphasis in original). The letter further suggested that Starlight might retain its own

counsel.

       Two months later, Nationwide sued for a declaratory judgment that it had no

obligation under the policy to defend Starlight. Because Starlight had responded to

neither the warning letter nor the declaratory judgment suit, Nationwide moved for an

entry of default in August 2004. The District Court granted this motion.

       Still without any response from Starlight, in September 2004 Nationwide moved

for a default judgment,1 which was granted on September 27. Starlight finally appeared

in October 2004, moving to open the default judgment (Dover also moved to intervene).

The District Court denied both motions, and Starlight moved for reconsideration, which

was also denied.




       1
        “Prior to obtaining a default judgment under either Rule 55(b)(1) or Rule
55(b)(2), there must be an entry of default as provided by Rule 55(a).” 10A Charles Alan
Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 2682, at
13 (3d ed. 1998).

                                              3
       Starlight now appeals to our Court.

                        II. Jurisdiction and Standard of Review

       The District Court had diversity jurisdiction over this case pursuant to 28 U.S.C.

§ 1332. We have appellate jurisdiction under 28 U.S.C. § 1291.

       We review the District Court’s “refusal to set aside the default judgment under an

abuse of discretion standard.” Harad v. Aetna Cas. & Sur. Co., 839 F.2d 979, 981 (3d

Cir. 1988). Our Court’s policy is one “disfavoring default judgments and encouraging

decisions on the merits.” Id. at 982. But we leave the “decision to vacate a default

judgment . . . to the sound discretion of the trial court.” Id.; see also Hritz v. Woma

Corp., 732 F.2d 1178, 1180 (3d Cir. 1984).

                                      III. Discussion

       We have set out three factors that a district court must consider when deciding

whether to vacate a default judgment. We must determine whether (1) the plaintiff will

be thereby prejudiced, (2) the defendant has a meritorious defense, and (3) the default was

the result of the defendant’s culpable conduct. Harad, 839 F.2d at 982.

                                             A.

       Though listed second above, we consider the meritorious-defense factor the

“threshold issue in opening a default judgment.” Hritz, 732 F.2d at 1181. Defendants do

not “have the right to have a default judgment set aside automatically upon alleging a

defense.” Harad, 839 F.2d at 982. Our standard is more stringent; it requires a defendant



                                              4
to “set forth with some specificity the grounds for his defense.” Id. We then look at the

substance of that defense to determine whether it is meritorious. Id. That being said,

however, we “need not decide the legal issue” at this stage of review. EMCASCO Ins.

Co. v. Sambrick, 834 F.2d 71, 74 (3d Cir. 1987).

       Starlight argues that it has a meritorious defense. It points to the Nationwide

insurance policy, claims that none of the exclusions facially apply, and argues that the

incident was not alcohol related.2 But Nationwide responds that it would not have issued

the insurance policy had it known that Starlight was hosting private parties and operating

as a night club. According to an affidavit from the underwriter of Nationwide’s policy,

Starlight’s application stated only that its business was a dance school used to conduct a

ballroom program. The underwriter was unaware that Starlight was renting the premises

for private parties and serving alcohol. Had the underwriter been aware of this, according

to the affidavit, it would not have underwritten the policy.

       Under Pennsylvania law,3 “[w]hen an insured secures an insurance policy by

means of fraudulent misrepresentations, the insurer may avoid that policy.” Rohm &

Haas Co. v. Cont’l Cas. Co., 781 A.2d 1172, 1179 (Pa. 2001). Nationwide has the


       2
         Starlight also claims that Randy Dover was an indispensable party who should
have been joined. This is irrelevant to our scrutiny of the default judgment. Dover did
not appeal the denial of his motion to intervene, and Starlight cannot handle Dover’s
appeal for him. Cf. Torres v. Oakland Scavenger Co., 487 U.S. 312 (1988) (holding that
federal appellate courts do not have jurisdiction over parties whose names do not appear
on the notice of appeal), superseded by rule on other grounds; Fed. R. App. P. 3(c)(1)(A).
       3
           The parties apparently agree that Pennsylvania law applies.

                                              5
burden of proving fraud by a clear and convincing standard, but fraud may be inferred

from the circumstances. Id. There are three elements that Nationwide must establish:

“(1) that the representation was false; (2) that the insured knew that the representation

was false when made or made it in bad faith; and (3) that the representation was material

to the risk being insured.” N.Y. Life Ins. Co. v. Johnson, 923 F.2d 279, 281 (3d Cir.

1991).

         Starlight freely admits that it rented its facilities for private parties and operated as

a night club. But its application for insurance disclosed only that it was a ballroom dance

school. This satisfies the first and second elements of the fraud test: the representation

that Starlight was only a dance school is false, and Starlight knew that to be false at the

time. “A misrepresented fact is material if being disclosed to the insurer it would have

caused it to refuse the risk altogether or to demand a higher premium.” Id. The

underwriter’s affidavit shows that it would have refused to underwrite this policy had it

known of Starlight’s extended uses of the building. Thus, Nationwide can satisfy all three

elements of the Pennsylvania test. With its insurance policy void, Starlight cannot

establish a meritorious defense.4



         4
         Starlight attempts to characterize its insurance broker as Nationwide’s agent (to
impute to Nationwide knowledge of its true business), but Pennsylvania law stands firmly
in its way. See Taylor v. Crowe, 282 A.2d 682, 683 (Pa. 1971) (“Where a person desiring
to have his property insured applies not to any particular company or its known agent, but
to an insurance broker, permitting him to choose which company shall become the
insurer, a long line of decisions has declared the broker to be the agent of the insured; not
of the insurer.” (internal quotation marks omitted)).

                                                 6
                                             B.

       For the defendant’s culpability, “more than mere negligence [must] be

demonstrated.” Hritz, 732 F.2d at 1183. “Reckless disregard for repeated

communications from plaintiffs and the court . . . can satisfy the culpable conduct

standard.” Id.; see also id. at 1184 (holding that “we do not believe that it is an abuse of

discretion for a trial judge to enter a default judgment to sanction a party who has

callously disregarded repeated notices of a judicial proceeding”).

       Our Court has found a lack of culpability in several cases, but those have typically

involved innocent mishaps or mere mistakes. See, e.g., EMCASCO, 834 F.2d at 75

(holding no culpability where the defendant was not notified of a court conference, he

was only given two days to give an answer, and his counsel was misinformed about what

was required); Zawadski de Bueno v. Bueno Castro, 822 F.2d 416, 421 (3d Cir. 1987)

(holding no culpability where two lawyers, one in Miami and one in St. Croix,

miscommunicated and one was distracted by personal legal problems); Gross v. Stereo

Component Sys., Inc., 700 F.2d 120, 124 (3d Cir. 1983) (holding no culpability where

lawyers in two different firms failed to communicate, partly due to one lawyer’s

vacation); Tozer v. Charles A. Krause Milling Co., 189 F.2d 242, 246 (3d Cir. 1951)

(holding no gross neglect where the defendant, a Wisconsin corporation, did not receive



       Starlight also makes much of whether the Dover incident was alcohol related and
whether the liquor liability exclusion applies, but these issues are immaterial when the
insurance policy is void.

                                              7
notice of the suit because it had failed to update the address of its Pennsylvania registered

office).

       Here, on the other hand, Starlight does not dispute that it received all key

correspondence in this case. It did not reply to Nationwide’s May 2004 letter. It also did

not, as the District Court found, “answer, appear, or plead in response to the July 20, 2004

summons and complaint; the August 11, 2004 motion for default; the August 12, 2004

entry of default; or the September 16, 2004 motion for default judgment. At no time

during this entire proceeding did [Starlight] contact either [the District] Court or

Nationwide.” Nationwide Mut. Ins. Co. v. Starlight Ballroom Dance Club, Inc., No.

04-3393, mem. op. at 6-7 (E.D. Pa. Nov. 16, 2004). Instead, Starlight simply gave all the

paperwork to its insurance broker. This is the kind of reckless disregard for repeated

communications regarding a suit that establishes a defendant’s culpability.

                                              C.

       The District Court determined that Nationwide had “presented only a modest

showing of prejudice.” Id., mem. op. at 7. Indeed, “[d]elay in realizing satisfaction on a

claim rarely serves to establish [a sufficient] degree of prejudice.” Feliciano v. Reliant

Tooling Co., 691 F.2d 653, 656–57 (3d Cir. 1982). Prejudice is established instead when

a plaintiff’s “ability to pursue the claim has been hindered . . . . [by, for example,] loss of

available evidence, increased potential for fraud or collusion, or substantial reliance upon

the judgment.” Id. at 657.



                                               8
       We conclude that the District Court properly exercised its discretion. Cases where

we have found an abuse of a district court’s discretion have typically been marked by a

holding that the defendant actually had a meritorious defense, see, e.g., Harad, 839 F.2d

at 985, or where the District Court did not apply the three-element analysis, see, e.g.,

EMCASCO, 834 F.2d at 74; Hritz, 732 F.2d at 1185. The defense here lacked merit and

the District Court in this case carefully analyzed all three factors before it made its

decision (with which we agree).

                                      IV. Conclusion

       Because Starlight cannot muster a meritorious defense under Pennsylvania law and

because it was culpable in its reckless disregard for the proceedings in the District Court,

that Court did not abuse its discretion by refusing to set aside the default judgment. We

therefore affirm.




                                               9
