Corporate Registered Agent’s Inaction Not Binding On Corporation: Court Vacates One-Year Old Default Judgment

West Bend Mut. Ins. Co. v. 3RC Mechanical and Contracting, Inc., 2014 IL App (1st) 123213, presents a recent and detailed illustration of the prevailing Section 2-1401 (735 ILCS 5/2-1401) standards to vacate judgments that are between 30 days and two years old.

The plaintiff (as subrogee of its insured) filed suit against a mechanical contractor – an Illinois LLC – for breach of an oral construction contract.  But before plaintiff filed suit, and without plaintiff’s knowledge, the contractor filed for bankruptcy protection.  When plaintiff learned of the contractor’s bankruptcy, it got permission from the bankruptcy court to continue the breach of contract suit against the contractor in state court.

Over the next several months, the contractor was a no-show at several (breach of contract suit) court hearings.   The plaintiff sent two motions for default and a default order to the contractor’s former registered agent and to the contractor’s former business address – an address from which the contractor moved before the lawsuit was filed.  The registered agent never notified the contractor’s managing partner of the state court case’s status and never sent the managing partner court orders or motions even though the partner’s identity and address was listed in the corporate bankruptcy filings.  The trial court entered an approximately $80,000 default judgment against the contractor.   About five months later, when the contractor learned of the default, it filed a Section 2-1401 petition to vacate the default judgment.  The contractor’s petition to vacate was granted and the plaintiff appealed.

Held: Affirmed.

Rules/Reasoning:

Code Section 2-1401 provides a mechanism for someone to vacate a judgment more than 30 days old.  The party moving to vacate a 30-plus days’ old judgment must support the petition with an affidavit and show (1) a meritorious defense; (2) due diligence in raising the defense in the underlying case; and (3) due diligence in filing the section 2-1401 petition for relief from the judgment.  3RC, ¶ 11.

Due diligence in bringing the 2-1401 motion is established as long as it’s filed within two years of the judgment.  2-1401(c), (¶ 12).  A meritorious defense is one that raises a question of law that deserves to be factually investigated.  As for the second element – due diligence in raising a defense – the court looks to whether the 2-1401 petitioner had a reasonable excuse for failing to timely act as opposed to simple oversight or negligence.  The petitioner must show that his failure to defend the suit was an “excusable mistake” and that he acted reasonably in initially failing to defend the suit. (¶ 14).

Here, the contractor defendant established due diligence in filing the petition since it brought the petition to vacate some five months after the judgment entered – well within the two-year statutory cut-off.  The contractor also established a meritorious defense: it asserted that there was no written or verbal contract between it and the plaintiff and filed a supporting, sworn affidavit.

On the due diligence in presenting a defense element, the court noted that plaintiff repeatedly sent court papers to the corporation’s former registered agent and to the wrong address – the corporation’s former place of business that had been closed for more than a year.  The corporation’s ex-registered agent failed to notify the corporate managing partner of the lawsuit and the default order.

The Court also noted that plaintiff failed to send court orders directly to the corporate managing partner, even though the managing partners’ address was prominently listed in various corporate bankruptcy filings.  Because of this, the Court agreed with the trial court and found that defendant demonstrated a reasonable excuse for not appearing in and defending the underlying case.  (¶¶ 14-16).

Take-aways: This case presents a good snapshot of Section 2-1401 motion practice including the required showings necessary to vacate a dated judgment (between 31-730 days old).  It also shows the perils of not properly serving default orders on a corporate defendant.

When dealing with a defunct or financially foundering corporation that’s not represented by counsel, I always try to serve the corporation at its registered office or, failing that, I serve a corporate officer.  If necessary, I hire a process server to skiptrace the corporate principals so I can show the court I did all I could to notify the corporate defendant of a default order or judgment.

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PaulP

Litigation attorney at Bielski Chapman, Ltd. representing businesses and individuals in business litigation, post-judgment enforcement, collections and real estate litigation.