687 F.

2d 761

Andrew N. FARNESE, Appellee,

v.
Alberto M. BAGNASCO and Laila Covre, a.k.a. Laila
Bagnasco.
Appeal of Alberto M. BAGNASCO, Appellant.
Nos. 81-3130, 82-1029.

United States Court of Appeals,

Third Circuit.
Argued July 7, 1982.
Decided Aug. 31, 1982.

Nancy Akbari (argued), Jenkintown, Pa., for Bagnasco.

Edwin P. Rome, Norman E. Greenspan (argued), Blank, Rome, Comisky
& McCauley, Philadelphia, Pa., for Farnese.
Before SEITZ, Chief Judge, and VAN DUSEN and SLOVITER, Circuit
Judges.
OPINION OF THE COURT
SEITZ, Chief Judge.

Alberto Bagnasco appeals from the entry of a final judgment against him. This
court has jurisdiction under 28 U.S.C. 1291 (1976).

On January 9, 1981, Andrew Farnese filed a complaint in the United States

District Court for the Eastern District of Pennsylvania, naming Bagnasco as
defendant. The complaint alleged the following facts. Plaintiff, a resident of
Philadelphia, and defendant, an Italian citizen, agreed in 1972 to form a joint
venture, operating under the name Farnese & Bagnasco, for the purpose of
aiding Italian governmental entities in obtaining financing for public works
projects. Profits from the joint venture were to be split equally between the two.
The joint venture earned $1,725,000 by the end of 1973. At defendant's

direction, the profits were placed in the Swiss bank account of Farnese &
Bagnasco, Law Office. In 1976, at a meeting in Philadelphia, the two agreed
that defendant would invest the assets of the joint venture in gold. In January
1980, plaintiff asked defendant for an accounting and distribution of the joint
venture's assets. Defendant refused.
3

A year later this complaint was filed, alleging that defendant had fraudulently
concealed the joint venture's assets, and that he would continue to do so. The
complaint sought an injunction against depletion or concealment of the joint
venture's assets, an accounting, and one-half of the assets. On the basis of the
verified complaint and plaintiff's accompanying affidavit, the district court
issued a temporary restraining order (TRO), which was to continue until
January 19, at which date a hearing on the preliminary injunction was
scheduled. On January 19, the original defense counsel entered an appearance
on behalf of defendant. The original defense counsel and counsel for plaintiff
stipulated to the extension of the TRO until February 2, postponing the hearing
on the preliminary injunction. Counsel later agreed to extend the TRO
indefinitely.

On January 30, 1981, plaintiff filed an amended complaint. It differed from the
original complaint only in that it also named defendant's wife as a defendant.
She later successfully moved for dismissal of the complaint against her, and is
no longer involved in this litigation.

The Federal Rules of Civil Procedure require a defendant to "serve his answer
within 20 days after the service of the summons and complaint upon him."
Fed.R.Civ.P. 12(a). Plaintiff's amended complaint extended the time limit,
however. "A party shall plead in response to an amended pleading within the
time remaining for response to the original pleading or within 10 days after
service of the amended pleading, whichever period may be the longer."
Fed.R.Civ.P. 15(a). Defendant thus had until February 9 to file an answer. He
did not do so. On March 3, plaintiff moved for entry of judgment by default
under Rule 55(b) of the Federal Rules of Civil Procedure. The clerk of the
district court immediately entered defendant's default under Rule 55(a), which
allows the clerk to enter a default "(w)hen a party against whom a judgment for
affirmative relief is sought has failed to plead or otherwise defend as provided
by these rules." Fed.R.Civ.P. 55(a).

Meanwhile, the original defense counsel had moved on March 2 to withdraw as

defendant's counsel, a request the district court granted two days later. On
March 3, the same day the clerk entered defendant's default, there was a pretrial conference at which counsel for plaintiff was introduced to defendant's

new counsel. Bernard Chanin. There was no court reporter present at this
conference, and thus there is no record evidence of what occurred at it. Chanin
apparently claimed that plaintiff and defendant had executed a letter agreement
in 1972 that controlled their business relationship. A photocopy of this letter
agreement was submitted to the district court in August 1981, and thus we
know that the letter agreement purported to provide that any disputes arising
from the venture were to be submitted to Swiss courts, and that, until further
agreement, plaintiff was not to share in any earnings of the venture.
7

In open court on March 6, in a proceeding at which it appears that no court

reporter was present, there was a colloquy between the court and counsel for
the parties. What happened at this proceeding is not clear because of the
absence of a record and because the only finding ever made in regard to this
proceeding was simply that defendant "fail(ed) to produce a document, the
authenticity of which plaintiff wished to test, after defendant agreed to do so."

On March 18, plaintiff filed a "notice for application for default judgment,"
accompanied by a lengthy memorandum. Two days later, defendant,
represented by new counsel, moved pursuant to Rule 55(c) to set aside the
entry of default. The district court denied defendant's motion in July. Defendant
moved to reconsider his motion to set aside the default, which the district court
denied in October. The district court later took evidence on plaintiff's
application for damages, and entered a judgment of $3.7 million against
defendant, who then moved for a new trial on damages under Rule 59 of the
Federal Rules of Civil Procedure. Defendant appealed from the order entering
the default judgment (No. 81-3130). The district court subsequently denied the
Rule 59 motion. The defendant then appealed from various orders including
those refusing to reopen the default and denying reconsideration of such order
(No. 82-1029).

The first notice of appeal was premature, and thus has no effect. See
Fed.R.App.P. 4(a)(4). We will dismiss that appeal.

10

The primary issue in the second appeal which is properly before us is whether
the district court abused its discretion in denying the motion to set aside the
default entered after defendant failed to respond to plaintiff's complaint in a
timely fashion. The district court's decision is governed by Rule 55(c) of the
Federal Rules of Civil Procedure, which provides that, "For good cause shown
the court may set aside an entry of default...."

11

This court has required the district court to consider two factors in exercising its

discretion under Rule 55(c) after entry of a default: (1) whether setting aside
the default would prejudice the plaintiff, and (2) whether defendant has asserted
a meritorious defense. See Medunic v. Lederer, 533 F.2d 891, 893 (3d Cir.
1976). Although we have not squarely held that defendant's culpability in
allowing the default is also a relevant consideration, we believe that it is. See
Keegel v. Key West & Caribbean Trading Co., 627 F.2d 372, 373
(D.C.Cir.1980). Cf. Livingston Powdered Metal, Inc. v. NLRB, 669 F.2d 133,
136 (3d Cir. 1982) (citing Keegel with approval in a discussion of the standards
for challenging a default judgment under Federal Rule of Civil Procedure
60(b)).
12

We commence our analysis by pointing out that this court has often emphasized
that it does not favor defaults, and that in a close case doubts should be
resolved in favor of setting aside the default and obtaining a decision on the
merits. E.g., Medunic, 533 F.2d at 894; Hutton v. Fisher, 359 F.2d 913, 916 (3d
Cir. 1966).

13

First, we find no evidence in the record, nor does plaintiff point to any, that
plaintiff will be prejudiced by setting aside the default. At oral argument,
counsel for plaintiff asserted that his client would be prejudiced because testing
the authenticity of the 1972 letter agreement becomes more difficult with the
passage of time. We express no view on the merits of this argument, because
there are no facts in the record that support it, and plaintiff does not appear to
have presented it to the district court. Consequently, the district court could not
have relied on this argument in exercising its discretion.

14

Second, defendant has proffered at least one meritorious defense. If the letter
agreement is authentic, then the District Court for the Eastern District of
Pennsylvania is not the proper forum for resolution of their dispute, and in any
event plaintiff has no claim on the assets of Farnese & Bagnasco. The letter
agreement, if proved, would be the basis of a meritorious defense. See, e.g.,
Keegel, 627 F.2d at 374; Hutton, 359 F.2d at 916. Cf. Tozer v. Charles A.
Krause Milling Co., 189 F.2d 242, 244 (3d Cir. 1951) (in seeking relief under
Rule 60(b) from a default judgment, the issue is whether allegations, if
established, would make out meritorious defense).

15

Third, we consider whether defendant's culpability may have led to the default.
Plaintiff does not point to, and we find no evidence of record to support a
finding that defendant's conduct in allowing the default was willful or in bad
faith. Nor did the district court so find. Indeed, the record tends to indicate no
more than that defendant or his counsel was neglectful.

16

Defendant filed an affidavit in support of his motion to set aside the default.
Plaintiff filed no contradictory material. Defendant explained why the default
occurred. He was in Europe on January 10, when he learned of the original
complaint. Defendant telexed an old friend at a large Philadelphia law firm, and
asked him to represent defendant. That lawyer could not do so because of a
conflict of interest, but gave defendant the name of the original defense
counsel. They spoke for the first time on January 18. They had communication
difficulties, and in a telephone conversation on February 25, they had a falling
out. Defendant averred that he "was totally unaware that during his period of
representation of me, (original defense counsel) had failed to take legal action
which would preclude a default in this matter, nor did I ever authorize or
instruct him not to take such proper action." Defendant was hospitalized for
two weeks (January 29 to February 13) because of a "nervous collapse coupled
with hysterical reaction." By this time he was in default. Defendant came to the
United States on February 26, hired new counsel on March 2. The Clerk
entered the default the next day.

17

In a motion to withdraw appearance, original defense counsel stated that he had

never discussed the merits of the case with defendant. There is no evidence in
the record, though, as to whether he ever warned defendant about the threat of
default, and the record is similarly silent as to why original defense counsel did
not at least move for an extension of time. We cannot tell why original defense
counsel did not request more time, but on this record the actions of original
defense counsel and defendant in allowing the default do not appear to amount
to more than neglect.

18

Although we conclude that there is no record basis from which the district court
could have concluded that defendant's conduct in allowing the default was
willful or in bad faith, that is not the end of the matter. Plaintiff argues that the
district court refused to set aside the default because of defendant's bad faith
conduct subsequent to the entry of the default. We think that as a general rule
material bad faith conduct by a defendant subsequent to the entry of default can,
if sufficiently egregious, provide the basis for refusing to set aside a default,
and thus we turn to plaintiff's argument.

19

Plaintiff draws our attention to the events surrounding defendant's post-default

refusal to turn over the original 1972 letter agreement as evidence of
defendant's bad faith and dilatory conduct. We are met with two problems
when we consider plaintiff's argument: there is an inadequate record on the
issue of bad faith, and the district court did not adequately explain its decision
not to set aside the default. Both problems impede our appellate function in this
case.

20

We emphasize at the outset that we are concerned with a vacation of a default.

There was no court order directing production of the letter agreement. Thus, we
are not dealing with Fed.R.Civ.P. 37, and we do not find cases such as National
Hockey League v. Metropolitan Hockey Club, 427 U.S. 639, 96 S.Ct. 2778, 49
L.Ed.2d 747 (1976) (per curiam), and Societe Internationale v. Rogers, 357
U.S. 197, 78 S.Ct. 1087, 2 L.Ed.2d 1255 (1958), directly applicable. As in a
review of Rule 37 sanctions, however, we limit our review here to the question
of whether there was an abuse of discretion.

21

In determining whether the district court has abused its discretion, a court of
appeals must limit its review to matters of record. Based on the record before
us, we cannot uphold the district court's decision that defendant acted in bad
faith. The record is, at best, ambiguous as to whether defendant acted in bad
faith with respect to production of the letter agreement. Findings that are not
based on evidence of record do not provide a proper basis for the district court
to exercise its discretion.

22

The record is mostly silent about the circumstances surrounding the failure to
produce the letter agreement. Defendant submitted an affidavit offering a
credible explanation for his failure to produce the document: he had been
advised by experts that the tests plaintiff proposed were of doubtful scientific
validity. The district court presumably rejected defendant's explanation. Yet,
there is no record evidence on which the district court could have relied that
contradicted defendant's explanation.

23

The lack of support in the record for a finding of bad faith is apparently the
consequence of a failure to make a record of the March 6 hearing that figures
prominently in plaintiff's argument. It is, of course, not novel for an appellate
court to express disquietude about the failure to have a court reporter present at
pre-trial conferences or hearings. See, e.g., Jaconski v. Avisun Corp., 359 F.2d
931, 936 n.12 (3rd Cir. 1966). But when the failure to have a court reporter
present results in a record on appeal that is insufficient for us to perform our
statutory duty of review, we have no choice but to remand.

24

We also note that the district court did not adequately explain its decision not to
set aside the default. If we are to carry out our appellate function in this case, it
is important that we know why the district court thought that failure to produce
documents amounted to bad faith and why the court imposed the harsh sanction
of refusing to set aside the default rather than considering some lesser sanction.
In the absence of a sufficient articulation of the reasons for its decision, our
review of the district court's decision is almost speculative.1

25

We will, therefore, vacate the orders of the district court dated July 14, 1981
and October 21, 1981, and remand to the district court for an evidentiary
hearing on the issue of material bad faith surrounding the failure to deliver the
so-called letter agreement to plaintiff's counsel to have its authenticity tested. If
such bad faith is found and the findings and reasons articulated, the district
court should then consider whether it was justified in refusing to lift the default
or whether compliance with reasonable conditions such as posting security and
payment of costs and reasonable counsel fees would constitute sufficient
sanctions.

26

The orders of the district court dated July 14, 1981 and October 21, 1981 will
be vacated and the matter remanded to the district court for further proceedings
consistent with this opinion. Appeal No. 81-3130 will be dismissed.
VAN DUSEN, Senior Circuit Judge, concurring:

27

While I join in the judgment of the court, I believe our decision is a very close
one, see, for example, National Hockey League v. Met. Hockey Club, 427 U.S.
639, 643, 96 S.Ct. 2778, 2781, 49 L.Ed.2d 747 (1976), and in view of the
remand order, as well as in fairness to the district court, it should be made clear
that there is evidence in the record indicating that there was no abuse of
discretion in the district court's refusal to vacate the default judgment in
October 1981.

28

The record contains, inter alia, these findings and temporary orders of the trial
judge:

29

1. On January 9, 1981, the district court granted a temporary restraining order

on the basis of a verified complaint and affidavit, using this wording, inter alia,
in making its findings and conclusions:

30 immediate and irreparable injury, loss, or damage will result to the plaintiff
"...
before notice can be served and a hearing had ..., in that defendant ... will conceal,
dissipate and fraudulently convey assets and therefore plaintiff will be unable to
locate these assets to which he has a lawful claim; ...
31

"It is ordered that the defendant Alberto M. Bagnasco and each of his agents,
successors, deputies, servants and employees, and all persons acting by, through
or under him or by or through his order, are hereby restrained ... from
transferring, dissipating, encumbering, or otherwise concealing or removing
from the jurisdiction of this Court:

32

(a) the assets and funds of the joint venture of Farnese & Bagnasco; and,

33

(b) the defendant's own personal assets and funds with the limited exception of
expenditures necessary for the maintenance and support of defendant and his
family."

34

(App. 008-009)

35

As a result of a stipulation of both counsel filed January 21, 1981, the above
order was extended in all its terms until February 2, 1981. Paragraphs 2 and 3
of this stipulation provided:

36

"2) It is hereby understood that the parties may request an additional extension
of time pursuant to which the Order Granting a Temporary Restraining Order
shall remain in effect;

37

"3) The defendant agrees to reimburse those reasonable expenses incurred in

obtaining the presence of a witness who appeared at the duly scheduled hearing
from Palm Beach, Florida."

38

On January 30, 1981, the order granting the January 9, 1981, TRO was
extended in all its terms until further order of the court (App. 011).

39

2. The record shows that defendant's present counsel conceded in November

1981 (App. 198) during a colloquy with the district court, as follows:

40

"THE COURT: Well, as far as I am concerned your client fully understands the
nature of these proceedings. He understands the importance of them. If he has
while in one week been so ill at his home that he could not receive
communications from you and on another occasion today you are reporting to
me that he is no longer at his home, it certainly does nothing to increase my
confidence in his believability,....

41

"MS. AKBARI: ... I realize that you had serious questions as to credibility."

42

(Emphasis supplied.)

43

3. At the same November 1981 hearing, the court made these statements at
App. 199:

44

"THE COURT: Has he communicated with you further since our last (pre-trial)
conference?

45

"MS. AKBARI: No, I have not been able to reach him. There has been no
answer at the phone numbers that I have. I have tried and there have been no
answers.

46

"THE COURT: My observations are that he has just completely ignored the
fact that this case is proceeding, as he has completely ignored the commitment
that he made to this Court.

47

(Emphasis supplied.)

48

The district judge has rejected applications to vacate the default judgment as
recently as October 21, 1981 (App. 177).

It is true that at the subsequent hearing to fix damages-long after it had refused
to reopen the default-the district court stated:
"THE COURT: My observations are that he (defendant) has just completely
ignored the fact that this case is proceeding, as he has completely ignored the
commitment that he made to this Court."
However, we cannot ascertain from this record what commitments may have
been made to the court and, therefore whether they fairly justified the action
taken.