In Mechling v. Asbestos Defendants (No. A150132, filed 12/11/18), a California appeals court affirmed the trial court’s grant of an insurer’s motion to set aside default judgments entered against its defunct insured pursuant to the trial court’s inherent, equitable power to set aside defaults on the ground of extrinsic mistake, thereby allowing the insurer to intervene and defend its own interests in the case.
In Mechling, Fireman’s Fund insured Associated Insulation of California, which was named as a defendant in asbestos litigation filed in 2009. Associated had ceased operating in 1974, but was somehow successfully served with the complaint and defaulted, leading to default judgments of several million dollars. Notice of the judgments was served on Associated but not Fireman’s Fund.
After entry of the default judgments, Fireman’s Fund located insurance policies it thought might cover Associated. Fireman’s Fund moved to set aside the defaults and default judgments on equitable grounds, arguing that the litigation presented a classic case of “extrinsic mistake” because service of the complaint on Associated did not provide notice to Fireman’s Fund, “resulting in a default judgment to a fault free party.” According to Fireman’s Fund, Associated was a suspended corporation and “could not and did not defend itself” and, as a result, Fireman’s Fund “never had the opportunity to participate in [the] lawsuit.”
Although the plaintiffs had given notice to Fireman’s Fund for two of the four lawsuits, they ignored the fact that Fireman’s Fund had responded by writing that it could not locate any policies covering Associated. Instead, the plaintiffs argued that Fireman’s Fund could not claim ignorance and seek equitable relief without any showing of extrinsic mistake or diligence.
The trial court granted Fireman’s Fund’s motion to set aside, and the appeals court agreed. The court said that a trial court has inherent power to vacate a default judgment on equitable grounds, including extrinsic mistake—which is when circumstances extrinsic to the litigation have unfairly cost a party a hearing on the merits. The court stated that:
“To qualify for equitable relief based on extrinsic mistake, the defendant must demonstrate: (1) a meritorious case; (2) a satisfactory excuse for not presenting a defense to the original action; and (3) diligence in seeking to set aside the default once the fraud or mistake had been discovered.” (Citing In re Marriage of Stevenot (1984) 154 Cal.App.3d 1051.)
The Mechling court said that a meritorious case does not require showing certainty of success, but only “facts indicating a sufficiently meritorious claim to entitle it to a fair adversary hearing.” And the court found that it was a reasonable inference from the facts that the plaintiffs’ damages award would have been impacted had Fireman’s Fund presented a defense and challenged plaintiffs’ proof of causation and damages.
The court rejected an argument that showing a meritorious case required attaching a proposed pleading in intervention or a declaration with “evidence” showing a meritorious defense. The court accepted Fireman’s Fund’s arguments as sufficient and stated that Fireman’s Fund would obviously file a responsive pleading if granted a set aside.
The Mechling court also found that Fireman’s Fund had articulated a satisfactory excuse for not presenting a defense to the lawsuits. It was not a named party and was not served with the complaints or other relevant pleadings. Although it had received notice, it had notified the plaintiffs that it had “searched all available records” and had “not located any reference or policies of insurance issued to Associated.” Fireman’s Fund had invited the plaintiffs to provide information showing Fireman’s Fund issued insurance policies to Associated, but they did not respond. The court found that Fireman’s Fund’s letter to the plaintiffs supported the conclusion that Fireman’s Fund had a satisfactory excuse for not defending the lawsuits: “It did not believe Associated was its insured.”
Thus, the court affirmed the order setting aside the default judgments, stating that: “In our view, this case presents exceptional circumstances warranting equitable relief. Fireman’s Fund was denied an opportunity to present its case in court because it was not served with any of the relevant pleadings, did not have notice of two of the lawsuits, and did not believe it had a duty to defend Associated. We conclude the trial court did not abuse its discretion by granting Fireman’s Fund’s motion for equitable relief.”
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