Holly Hall Publications, Inc. v. County Banking and Trust Co.

²⁵⁴ JAMES R. EYLER, J. The question presented by this appeal is whether the Circuit Court for Cecil County abused its discretion in refusing to vacate an order of default entered against Holly Hall Publications, Inc. and Bonnie Cruikshank-Wallace, defendants and appellants, in favor of County Banking and Trust Company, plaintiff and appellee. We shall answer that question in the affirmative. Factual Background On February 24, 2000, appellee filed a complaint in the Circuit Court for Cecil County against appellants and Thomas-Neuberger, trustee of the Wallace Family Trust. By way of brief background, appellee had made various secured loans to Great Christian Books, Inc., a now defunct company, and Hibbard and Hibbard, a Delaware general partnership.

The loans to Hibbard and Hibbard were guaranteed by Great Christian Books, Inc., and the loans to Great Christian Books, Inc. and Hibbard and Hibbard were guaranteed by William Wallace, husband of Bonnie Cruikshank-Wallace. Following a default on the obligations, in two proceedings filed in the Circuit Court for Cecil County, appellee obtained confessed judgments against Great Christian Books, Inc. and William Wallace. William F. Riddle appeared as counsel for Great Christian Books, Inc. and William Wallace in the confessed judgment actions and also appeared as counsel for appellants in the action before us. In the complaint filed in the action before us, appellee alleged that Great Christian Books, Inc. and William Wallace fraudulently conveyed assets, subject to appellee’s lien, to the named defendants.

See Md.Code Ann. (2000 Repl.Vol.), Com. Law II, §§ 15-204 to 15-207. Appellee also alleged that William Wallace transferred assets to Bonnie Cruikshank-Wallace that were prejudicial to the creditors of William Wallace, in violation of section 4-301(d)(2) of the Family Law Article. Md.Code Ann. (1987,1999 Repl.Vol.), Fam.

Law § 4-301(d)(2). ²⁵⁵ In its complaint, appellee requested an order setting aside the fraudulent and unlawful conveyances, or in the alternative, a monetary judgment in an amount equal to the greater of the value of the property transferred or the consideration received. In two of the counts, appellee requested a declaratory judgment, declaring that (1) appellee had a perfected security interest in the assets of Great Christian Books, Inc. transferred to Holly Hall Publications, Inc., and assets traceable to or derived from those assets, and (2) appellee could enforce and collect a certain indebtedness owed by Holly Hall Publications, Inc. to Great Christian Books, Inc. On April 3, 2000, a responsive pleading was due on behalf of appellants. 1 None was filed, and on April 5, 2000, appellee filed a request for order of default. On that same day, an order of default was entered by the court. On April 7, the clerk of the court mailed a notice of the order of default to Holly Hall Publications, Inc., and on April 10, the clerk mailed a similar notice to Bonnie Cruikshank-Wallace.

On April 13, 2000, appellants filed a motion to strike the order of default. The motion stated: 1. The plaintiff had contacted counsel for plaintiff and requested that counsel for defendants accept service on behalf of defendants. Plaintiff mailed the complaint and summons for the defendants to counsel for defendants on February 28, 2000. 2.

That counsel for plaintiffs and counsel for defendants spoke about the above captioned matter in hopes of settling all open cases between the parties after the deposition of Bonnie Cruikshank-Wallace on March 31,2000.[ 2 ] ²⁵⁶ 3. Undersigned counsel prepared an answer and discovery and then inadvertently failed to file it with the court. This mistake was not discovered until receipt of the court’s order of default. 4. That a copy of the request for default filed by plaintiff was not forwarded to counsel for defendants even though plaintiff had knowledge that the undersigned was representing defendants. 5.

The defendants contest liability and damages in this case. Defendants assert that Great Christian Books did not make transfers of assets and property to defendants without fair consideration. In addition any transfers were not fraudulent. At no time was the stock of Holly Hall owned by Great Christian Books or William Wallace, Jr. and then transferred to the Wallace Family Trust.

The tax return received by the Wallace Family was for the benefit of the ■ Wallace family and was spent on necessities. Plaintiff at no time took any action to seize the refund from the IRS nor was plaintiff entitled to any of the monies from the tax return. 6. That this case is meant to harass defendants and is not likely to succeed on its merits. 7. That defendants have prepared a motion to dismiss to be filed in the above captioned matter. 8.

That defendants have prepared an answer to be filed in the above captioned matter. 9. That accordingly, there is a substantial factual and legal basis for a defense to the plaintiffs claim. 10. The defendant is filing a motion to dismiss, an answer, as well as discovery requests upon vacating of the order of default.1[ 3 ] On April 24, 2000, appellee filed a memorandum in opposition to the motion to strike the order of default. Pursuant to the two prongs set forth in Rule 2-613(d), appellee argued that (1) appellants failed to provide an adequate explanation ²⁵⁷ for the failure to timely respond, and (2) failed to set forth any substantial and sufficient basis for an actual controversy as to the merits.

With respect to the first prong, appellee asserted that appellants’ admission that the reason for their failure to timely plead was that their counsel simply “forgot” was insufficient to warrant vacating the order. With respect to the second prong, appellee asserted that the motion contained only vague and conclusory responses to the claims. Hearings were scheduled on the motion for June 20, 2000 and July 26, 2000, but were postponed by agreement of counsel because settlement discussions were taking place. Settlement was never consummated, however, and the motion was heard on May 15, 2001.

After the hearing, the court denied the motion. On May 17, 2001, appellee filed a request to dismiss its suit without prejudice against Thomas Neuberger. 4 The court granted it the same day. On May 24, 2001, appellants filed a motion to reconsider the denial of the motion to vacate the order of default. The motion was supported by a memorandum and exhibits.

The exhibits included affidavits by William Riddle, counsel for appellants, dated May 23, 2001; by Bonnie Cruikshank-Wallace, dated May 9, 2001; and by William Wallace, dated May 22, 2001. The exhibits also included draft settlement agreements, financial statements, the deposition of William Wallace, and correspondence between the parties. On June 24, 2001, appellee filed a request for entry of judgment for specific dollar amounts, the same amounts that were later entered as judgments. The request was supported by an affidavit by Raymond W. Hamm, Jr., executive vice president of appellee bank.

On September 10, 2001, the court denied appellants’ motion to reconsider and entered judgment on one count of the complaint against Bonnie Cruikshank-Wallace in the amount ²⁵⁸ of $19,984 and on another count against both appellants in the amount of $722,534. On September 19, 2001, appellants filed a motion for new trial and a motion to alter or amend the judgment. On September, 27, the court denied the motions. The default judgment entered by the court did not address the declaratory judgment counts.

After appellants filed a notice of appeal on October 9, 2001, we remanded the case to circuit court for entry of a judgment disposing of all counts. After final judgment was entered on May 15, 2002, appellants filed a second notice of appeal. 5 DISCUSSION Rule 2-613, which governs the issue in this case, provides in pertinent part: (b) Order of Default. If the time for pleading has expired and a defendant has failed to plead as provided by these rules, the court, on -written request of the plaintiff, shall ²⁵⁹ enter an order of default. The request shall state the last known address of the defendant.

(c) Notice. Promptly upon entry of an order of default, the clerk shall issue a notice informing the defendant that the order of default has been entered and that the defendant may move to vacate the order within 30 days after its entry. The notice shall be mailed to the defendant at the address stated in the request and to the defendant’s attorney of record, if any. The court may provide for additional notice to the defendant.

(d) Motion by the defendant. The defendant may move to vacate the order of default within 30 days after its entry. The motion shall state the reasons for the failure to plead and the legal and factual basis for the defense to the claim. (e) Disposition of motion.

If the court finds that there is a substantial and sufficient basis for an actual controversy as to the merits of the action and that it is equitable to excuse the failure to plead, the court shall vacate the order. (f) Entry of judgment. If a motion was not filed under section (d) of this Rule or was filed and denied, the court, upon request, may enter a judgment by default.... 6 Md. Rule 2-613. Appellants contend that both requirements of Rule 2-613(e) were met, and that the court abused its discretion in failing to vacate the order of default.

Appellants observe that appellee did not question the existence of a substantial and sufficient basis for an actual controversy as to the merits, one of the subsection (e) requirements, but only argued that it was not equitable to excuse the failure to plead. Appellee does not expressly concede the first point but does not argue it; rather it argues that the court did not abuse its discretion in refusing to vacate the order of default because ²⁶⁰ the only reason given for failure to plead on time was that counsel “forgot,” which appellee contends is an insufficient reason. SUBSTANTIAL AND SUFFICIENT BASIS FOR AN ACTUAL CONTROVERSY AS TO THE MERITS OF THE ACTION Before focusing on whether it was equitable to excuse the failure to plead, we shall briefly address the showing on the merits. A conclusory statement that merely tracks the language of the rule is insufficient.

Carter v. Harris, 312 Md. 371, 376-77 , 539 A.2d 1127 (1988) (explaining that “motions that fail to state the legal and factual basis for a defense on the merits, or that state no more than conclusory allegations concerning a defense, are inadequate, because they afford the court no real information upon which to make its finding”). In the case before us, the motion to vacate, quoted above, while not a model of clarity, contained more than a conclusory statement. Specifically, it denied that any transfers were made to appellants without fair consideration, and further asserted that no such transfers were fraudulent. In addition, the affidavits and other documents subsequently placed before the court were sufficient to establish a substantial and sufficient .basis for an actual controversy as to the merits.

With respect to Holly Hall Publications, Inc., William Wallace, in his affidavit, denied fraudulent transfers. As to Bonnie Cruikshank-Wallace, both she and William Wallace, in affidavits, denied that she received any unlawfully conveyed assets or took part in any such conveyance. See Berger v. Hi-Gear Tire & Auto Supply, 257 Md. 470, 475 , 263 A.2d 507 (1970) (holding that even if a grantor has a fraudulent intent, this will not vitiate or impair a conveyance unless the grantee participates in the fraudulent intent). Cruikshank-Wallace acknowledged a federal income tax refund in the amount of $19,984, pursuant to a joint return filed with her husband, William, but stated that it was deposited in her personal checking account gnd spent' on necessaries to support her family.

See Pearce v. Micka, 62 Md.App. 265 , 489 A.2d 48 ²⁶¹ (1985) (holding that “deposits of money used by [debtor] to support his family did not constitute fraudulent conveyances, because, within the meaning of the Uniform Act, there is ‘fair consideration’ for the payment of money by a debtor to satisfy his obligation to provide necessaries for his wife and children”). In light of the lack of argument with respect to this issue, it is not necessary to go into greater detail. We note, however, that the motion to vacate and subsequent affidavits presented facts and were not limited to conclusory statements. EQUITABLE TO EXCUSE THE FAILURE TO PLEAD The second part of Rule 2-613 requires that the court, in determining whether to vacate an order of default, consider whether “it is equitable to excuse the failure to plead.” Appellants’ essential position is that determining whether it was-equitable to excuse the failure to plead requires a consideration of all the relevant circumstances, and those circumstances require vacating the order of default.

Appellee asserts that the only reason given for not filing a pleading on time, at least initially, was that counsel inadvertently failed to file a responsive pleading within the time permitted. Relying primarily on Banegura v. Taylor, 312 Md. 609 , 541 A.2d 969 (1988), appellee contends that inadvertence of counsel is legally insufficient to require vacating the order of default. With respect to settlement discussions, which according to appellee, were not disclosed as a reason for untimely filing until the hearing on May 15, 2001, appellee points out that (1) the parties were actively litigating the related cases in March, 2001; thus there was no basis for an understanding that there was no need to answer in this case, (2) appellants admit counsel simply “forgot,” and (3) the reason is insufficient in any event. First, we note that what is before us is the failure to vacate an order of default, an interlocutory order subject to broad general discretion of the court.

Banegura, 312 Md. at 618-19 , 541 A.2d 969 (citing Henley v. Prince George’s County, 305 Md. 320, 328 , 503 A.2d 1333 (1986)). In Maryland, a ²⁶² default judgment is not punitive in nature but is akin to an admission of liability. Curry v. Hillcrest Clinic, Inc., 337 Md. 412, 434 , 653 A.2d 934 (1995). Chief Judge Frederic N. Smalkin of the United States District Court for the District of Maryland recently had occasion to review the relevant Maryland cases.

See Royal Ins. Co. of America v. Miles & Stockbridge, P.C., 133 F.Supp.2d 747 (D.Md.2001). We agree with Chief Judge Smalkin’s reading of those cases and quote liberally from his opinion, at pages 768-69. Under Maryland law, a default judgment is not meant to be a punitive measure that penalizes a party for