Coronavirus, collections and court rules

Jacob Kahn

From food service to airlines to manufacturing, COVID-19 has turned every industry in the world on its head. There is talk of cinema chains and airlines going bankrupt, small businesses being erased, and university enrollment dropping. Some have even predicted that COVID-19 will bankrupt more people than it kills. Each industry must grapple with this crisis and find a “new normal” for the time being.

One question for the legal field will be whether the COVID-19 emergency will be widely accepted by the courts as good cause for failure to respond to a summons and complaint, and what that will mean for default judgments entered during the crisis.

The Michigan Court Rules provide two main vehicles for the setting aside of default judgments properly entered upon a defendant’s failure to timely answer a complaint.

Those motions fall under MCR 2.603(D)(1), and MCR 2.612(C). Turning first to MCR 2.603(D)(1), the rule states, “A motion to set aside a default or a default judgment ... shall be granted only if good cause is shown and a statement of facts showing a meritorious defense...”

This rule serves to establish the two-tier standard which ostensibly must be met in order for a court to set aside a properly entered default judgment; viz., the defendant must offer good cause for their failure to answer, and they must also provide the court with a meritorious defense to plaintiff’s claim.

Numerous cases have expounded on what qualifies as “good cause,” and furthermore, whether a court may set aside a default judgment on a strong showing of only one of the proscribed tiers, to prevent “manifest injustice.” The leading authority in this matter is the staple case, Alken-Ziegler, Inc. v. Waterbury Headers Corp., 461 Mich. 219, 600 N.W.2d 638 (1999). In Alken- Ziegler, the Supreme Court held that “good cause” should be construed to mean a substantial irregularity or defect in the proceedings, or, a reasonable excuse for failure to comply (answer timely).

The court further held that an argument of “manifest injustice” alone is insufficient to overcome the two-tier requirement laid out in MCR 2.603. However, as a caveat, the court did offer that a strong showing of a meritorious defense can lower the burden on a defendant to show good cause.

This then begs the question, do the circumstances surrounding COVID-19 constitute a substantial irregularity or defect in the proceedings, or a reasonable excuse for failure to comply? The answer of course, is that it depends. The main considerations are (in no particular order) what specific circumstances the defendant faced during the pandemic, and the courtroom in which they find themselves.

Different state court judges across Michigan tend to apply varying levels of rigor to the two-tiered requirements of MCR 2.603. Often a court is content to set aside a properly entered default judgment on a showing of only one standard. Without accounting for judges, and all other things being equal, what remains is for the court to conduct an analysis of the circumstances which the defendant alleges as a substantial procedural irregularity, and/or as a reasonable excuse for failure to comply.

Across the state, a number of district courts have all but shut down. Obviously, a court that is not accepting pleadings must count those circumstances as a substantial procedural irregularity and find that good cause has been met as defined by MCR 2.603. However, the question is somewhat more involved when it comes to courts which are accepting filings via fax and regular mail.

A competent defendant will argue that they do not own a fax machine, and they could not leave their house to obtain stationary or mail an envelope, out of regard for the governor’s orders, or out of fear of contracting the virus. It remains to be seen how receptive courts will be to such broad arguments, especially when one considers the myriad ways by which a fax may now be sent digitally, or postage may be obtained remotely.

However, in the case of defendants who actually took ill, or had an immediate family member potentially fighting for their life, the combination of factors added to the aforementioned difficulties may very well be sufficient to sway the judgment of the court in favor of the defendant’s motion to set aside default.

Moreover, given the limited degree of testing in Michigan, and the fact that many people with severe symptoms are being told to wait it out at home, it may prove difficult for courts to sort out who has a legitimate claim of good cause, as opposed to someone who intends to take advantage of the emergency.

Finally, it is worth noting that the second court rule regarding the setting aside or dismissal of defaults, MCR 2.612(C)(1) lists a number of other rationales under which a court may grant a defendant relief.
Specifically, “...The court may relieve a party or the legal representative of a party from a final judgment ... on the following grounds: (a) ... excusable neglect. (f) Any other reason justifying relief from the operation of the judgment.”

As written, the Michigan Court Rules provide judges with a wide latitude of discretion to overturn default judgments. Certainly, an argument could be made that the various stressors of the current situation amount to “excusable neglect.”

Understanding now what the courts could do in response to this crisis, let us consider what the courts should do. The court in Alken-Ziegler, citing five prior opinions again reiterated, “The policy of this state is generally against setting aside defaults and default judgments that have been properly entered.” Id. At 229. The purpose of this policy is not to deny a defendant their due process, or to serve the interest of judgment creditors. The purpose of the policy is to further the interest of judicial economy.

If the defendant cannot swear to even an inkling of a meritorious defense, there is simply no benefit, to any party, to set aside a default in order for the parties to reach the same conclusion through litigation. It is a safe bet that at the point when things return to a state of relative normalcy for the judiciary, and the motions to set aside default begin flooding the dockets, judicial economy will be at a premium.

The courts will have to initiate their own form of triage to deal with the inevitable backlog created as a result of trimming operations for many weeks, and further as a result of the abundant legal disputes which will no doubt arise as a result of this crisis. The arbitrary setting aside of default judgments absent a strong showing of a meritorious defense, merely on the basis that COVID-19 was a tough situation, will serve neither the long-term interests of any party, nor the court’s functionality and efficiency itself.

Where judges may wish to inject an additional element of compassion into the legal process following this devastating health and financial crisis, the best way forward for all parties is for the courts to uphold the same exacting standards regarding the setting aside of defaults that the Supreme Court has established and reiterated time and again, for the efficient and equitable disposition of claims.

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Jacob Kahn is a rising 2L at Wayne State University Law School. He has worked as a law clerk at Law Office of Anthony Wayne Kahn for four years, and will spend his summer as an extern in the U.S. Bankruptcy Court for the Eastern District of Michigan.