
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,                                         -2-          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                                         -3-          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                                         -4-          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                                         -5-          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                                         -6-          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)).          _________                                         -7-          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.                                         -8-          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).                                         -9-          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                                         -10-          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).                               ____                                         -11-          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.                                           -12-          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.                                          -13-          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.                                         -14-          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                                         -15-                      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                                         -16-          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.                                         -17-                                   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.                                         -18-
