Appeals Court Affirms Decisions Granting Insurer’s Motions To Set Aside Millions In Default Judgments In Asbestos Cases

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A California appellate court has affirmed decisions setting aside millions of dollars of default judgments in asbestos cases on the basis of “extrinsic mistake.”

The Case

Beginning in 2009, William Mechling, James Greely, Omar Barstad, and Alexander Corns (collectively, the “plaintiffs”) filed personal injury complaints against numerous defendants – including Associated Insulation of California – for injuries arising out of the plaintiffs’ alleged asbestos exposure.

The plaintiffs served Associated with the complaints. Associated, which apparently ceased operating in 1974, did not respond, and the trial court entered Associated’s defaults.

The trial court entered one default judgment against Associated in 2013, and three additional default judgments in 2015. The default judgments ranged from $350,000 to $1,960,458.

The plaintiffs served notice of entry of the default judgments on Associated, but not on its insurer, Fireman’s Fund Insurance Company.

After entry of the default judgments, Fireman’s Fund located insurance policies appearing to provide coverage for Associated. In February 2016, Fireman’s Fund retained counsel; in July, it moved to set aside the defaults and default judgments on equitable grounds. Fireman’s Fund argued 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.”

Fireman’s Fund claimed it had a meritorious case because it “never had its day in court. It appears plaintiffs simply picked a default amount and had that amount reduced to judgment in the absence of any party protecting the interests of Fireman’s Fund or its insured Associated.”

Next, Fireman’s Fund contended it had a satisfactory excuse for not defending the action because of “mistakes regarding the insured notifying the insurer of the filing of suit, service of the complaint, and the intention to take a default.”

Third, Fireman’s Fund argued it acted diligently in moving to set aside the default judgments after learning of the lawsuits and hiring counsel.

Fireman’s Fund contended that setting aside the defaults and default judgments promoted the policy that “cases should be decided on the merits whenever possible.” In a supporting declaration, counsel averred that Fireman’s Fund “retained counsel to defend any asbestos claims made against Associated” in February 2016. Counsel also stated Associated’s corporate status had been suspended.

The trial court granted the motions and set aside the defaults and default judgments pursuant to its “inherent, equitable power to set aside defaults on the ground of extrinsic … mistake.”

The plaintiffs appealed.

The Appellate Court’s Decision

The appellate court affirmed.

In its decision, the appellate court explained that one ground for equitable relief was “extrinsic mistake” – a term “broadly applied when circumstances extrinsic to the litigation have unfairly cost a party a hearing on the merits.”

The appellate court added that extrinsic mistake existed when the ground of relief was “not so much the fraud or other misconduct of one of the parties” as it was “the excusable neglect of the defaulting party to appear and present a claim or defense.” If that neglect resulted in an unjust judgment without a fair adversary hearing, the appellate court said, the basis for equitable relief on the ground of extrinsic mistake was present.

According to the appellate court, to qualify for equitable relief based on extrinsic mistake, a 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.”

The appellate court then found that the trial court had not abused its discretion by granting the motions to set aside the default judgments.

First, it said, Fireman’s Fund established it had “a meritorious case,” which required only a “minimal showing.” The appellate court noted that the facts were that: (1) the plaintiffs’ alleged asbestos exposure occurred decades ago; (2) neither Associated nor Fireman’s Fund defended the lawsuits; and the plaintiffs obtained default judgments totaling several millions of dollars, without any showing of the nature and extent of the plaintiffs’ injuries, nor whether Associated had caused those injuries.

In the appellate court’s opinion, a reasonable inference from these facts was that the plaintiffs’ damages award would have been impacted had Fireman’s Fund presented a defense and challenged the plaintiffs’ proof of causation and damages.

Next, the appellate court decided that Fireman’s Fund had a satisfactory excuse for not defending the Mechling and Greely lawsuits: It did not believe that Associated was its insured. The appellate court also pointed out that Fireman’s Fund did not have notice of the Barstad and Corns lawsuits before entry of the default judgments.

Finally, the appellate court ruled that Fireman’s Fund had established diligence in seeking to set aside the defaults once they “had been discovered” given that it retained counsel to defend claims against Associated in February 2016 and moved to set aside the defaults and default judgments five months later.

The appellate court concluded that this case presented “exceptional circumstances warranting equitable relief” given that 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.

The case is Mechling v. Asbestos Defendants, Nos. A150132, A150134, A150135, A150138 (Cal. Ct. App. Dec. 11, 2018). Attorneys involved include: Brayton Purcell, Gary L. Brayton, Richard M. Grant for Plaintiffs and Appellants; Selman Breitman, Mark A. Love and Richard M. Lee for Intervener and Respondent.

Steven A. Meyerowitz, Esq., is the Director of FC&S Legal, the Editor-in-Chief of the Insurance Coverage Law Report, and the Founder and President of Meyerowitz Communications Inc. As FC&S Legal Director, Mr. Meyerowitz, a member of the team that conceptualized FC&S Legal, provides daily analysis and commentary on the most significant insurance coverage law decisions from courts across the country and news regarding legislative and regulatory developments. A graduate of Harvard Law School, Mr. Meyerowitz was an attorney at a prominent Wall Street law firm before founding Meyerowitz Communications Inc., a law firm marketing communications consulting company.