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Michigan Supreme Court Lansing, Michigan

Opinion
LAWRENCE M. CLARKE, INC., Plaintiff-Appellee, v RICHCO CONSTRUCTION, INC., and RONALD J. RICHARDS, JR., Defendants-Appellants.

Chief Justice:

Justices:

Robert P. Young, Jr. Michael F. Cavanagh Marilyn Kelly Stephen J. Markman Diane M. Hathaway Mary Beth Kelly Brian K. Zahra

FILED JUNE 30, 2011 STATE OF MICHIGAN SUPREME COURT

No. 140683

BEFORE THE ENTIRE BENCH CAVANAGH, J. The issue in this case is whether the trial court abused its discretion when it concluded that defendants were personally notified of the default judgment against them and denied defendants' motion to set aside the judgment. We hold that the trial court abused its discretion and that defendants are entitled to relief from the judgment under MCR 2.612(B) because (1) personal jurisdiction over defendants was necessary and

apparently acquired,1 (2) defendants had no knowledge of the action pending against them, (3) defendants entered an appearance within one year after the final judgment, (4) defendants have presented facts and arguments showing meritorious defenses to plaintiff's breach of contract and fraud claims, and (5) granting defendants relief from the judgment will not prejudice any innocent third persons. Accordingly, we reverse and remand the case to the trial court for further proceedings consistent with this opinion. I. FACTS AND PROCEEDINGS The lawsuit at issue in this case arose out of a contractual relationship between plaintiff and defendant Richco Construction, Inc. In 2003 and 2004, plaintiff was

working on a residential subdivision construction project in Monroe County. In the summer of 2003, plaintiff hired Richco as a subcontractor to work on the sewer system for the project. There was no written contract. It is undisputed that Richco's corporate filings with the state of Michigan's Department of Labor and Economic Growth (DLEG) (now the Department of Licensing and Regulatory Affairs) indicated that defendant Ronald Richards, Jr., was the corporation's president and treasurer and that Thomas Richards2 was the corporation's

Although defendants contest the trial court's personal jurisdiction over them, we will assume arguendo that the trial court acquired personal jurisdiction for purposes of applying MCR 2.612(B) in this opinion for the reasons discussed in part III(A) of this opinion. After this Court heard oral arguments on defendants' application for leave to appeal, plaintiff and Thomas agreed to a settlement, and Thomas withdrew his application for leave to appeal. Thus, Thomas is no longer a party to this case, and this opinion has no effect between plaintiff and Thomas.
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secretary and vice president. Further, the corporate filings identified Ronald as Richco's resident agent and the corporation's registered office address as 27734 Ecorse Road in Romulus, Michigan. Finally, the address shown for Ronald and Thomas as corporate officers was also 27734 Ecorse Road in Romulus. Richco's work on the sewer system did not satisfy the governing municipality, and after Richco's efforts to repair the work were not satisfactory, plaintiff contracted with another party to finish the work, delaying the project according to plaintiff. Defendants claim that Richco was never fully paid and, at some point, Richco recorded a construction lien, which plaintiff claims caused further problems. Plaintiff filed a breach of contract and fraud complaint on July 19, 2006, in the Monroe Circuit Court, but plaintiff was not able to serve any of the defendants. Plaintiff's process server attempted to serve the complaint at Richco's business address on file with DLEG, but no one was at that address. The process server discovered that Richco had vacated the listed address and had not left a forwarding address. A motor

home was parked in the parking lot at the Ecorse Road address, and another tenant in the area told the process server that it might belong to one of the individual defendants. Plaintiff's counsel used the license plate on the motor home to obtain a phone number, but the person who answered denied that the motor home was connected to either individual defendant. In October 2006, the process server investigated a lead about a Ronald Richards in Waterford, Michigan, but that person was not the defendant in this case. Plaintiff's complaint was dismissed without prejudice on October 30, 2006,

because plaintiff could not effect service.

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After the complaint was dismissed, plaintiff continued its efforts to locate defendants by contacting the Secretary of State and again searching DLEG's files. These efforts were unsuccessful, however, and plaintiff refiled the same complaint on January 7, 2007, along with a motion to allow alternative service. Plaintiff explained its previous efforts to locate defendants and noted that service was attempted at Richco's registered office without success. The trial court allowed alternative service by (1) posting the documents at Richco's registered address, (2) mailing the documents to the registered address for Thomas, (3) mailing the documents to the registered address for Ronald, and (4) publishing a copy of the order in a Monroe County newspaper pursuant to MCR 2.106. After there was no response to the notice, the court clerk entered a default against all three defendants on April 5, 2007. Notice of the default was sent by regular and certified mail to Richco, Thomas, and Ronald at the Ecorse Road address and was published in a Monroe County newspaper. On September 28, 2007, plaintiff moved for entry of a default judgment, claiming approximately $244,000 in damages, plus the cost of a bond, "contractual interest," $8,000 in attorney fees, and more than $15,000 in prejudgment interest. After a hearing on October 10, 2007, the trial court granted plaintiff's motion and signed a default judgment ordering that Richco, Ronald, and Thomas were jointly liable for a total of $371,598.37. Plaintiff located defendants after the default judgment was entered and, on April 12, 2008, Ronald's and Thomas's personal vehicles were seized from their homes in Wayne County. According to defendants, this was how they first became aware of plaintiff's complaint and the default judgment. 4

Four days later, on April 16, 2008, defendants filed an emergency motion to set aside the default judgment, and defense counsel made a special appearance. The motion was not accompanied by an affidavit, but defense counsel attempted to provide signed affidavits from Thomas and Ronald at the hearing on the motion held on April 22, 2008. The trial court refused to consider the affidavits and denied defendants' motion to set aside the default judgment, noting that defendants had not filed an affidavit of factual and meritorious defense as required by MCR 2.603(D)(1). Defendants moved for

reconsideration and included more detailed supporting affidavits from Thomas and Ronald, but the trial court denied reconsideration without a hearing. The Court of Appeals denied defendants' application for leave to appeal, but this Court remanded for consideration as on leave granted. Lawrence M Clarke, Inc v Richco Constr, Inc, 481 Mich 939 (2008). On remand, the Court of Appeals affirmed the trial court's decision to deny the motion to set aside the default judgment. Lawrence M Clarke, Inc v Richco Constr, Inc, unpublished opinion per curiam of the Court of Appeals, issued November 17, 2009 (Docket No. 285567). The Court of Appeals

reasoned that defendants' motion to set aside the default judgment was properly denied because defendants had failed to file a timely affidavit in support of their motion. Defendants sought leave to appeal in this Court, and this Court ordered oral argument on whether to grant the application or take other peremptory action. Lawrence M Clarke, Inc v Richco Constr, Inc, 486 Mich 1071 (2010). II. STANDARD OF REVIEW A trial court's decision regarding a motion to set aside a default judgment is reviewed for an abuse of discretion. Alken-Ziegler, Inc v Waterbury Headers Corp, 461 5

Mich 219, 227; 600 NW2d 638 (1999). When construing a court rule, this Court employs the legal principles governing the application and construction of statutes. Grievance Administrator v Underwood, 462 Mich 188, 193-194; 612 NW2d 116 (2000). III. ANALYSIS A trial court may grant relief from a judgment if the defendant was not personally notified of an action pending against the defendant and several additional requirements are satisfied. Specifically, MCR 2.612(B) states: A defendant over whom personal jurisdiction was necessary and acquired, but who did not in fact have knowledge of the pendency of the action, may enter an appearance within 1 year after final judgment, and if the defendant shows reason justifying relief from the judgment and innocent third persons will not be prejudiced, the court may relieve the defendant from the judgment, order, or proceedings for which personal jurisdiction was necessary, on payment of costs or on conditions the court deems just. Thus, defendants may be entitled to relief from the default judgment if (1) personal jurisdiction over defendants was necessary and acquired, (2) defendants in fact had no knowledge of the action pending against them, (3) defendants entered an appearance within one year after the final judgment, (4) defendants show a reason justifying relief from the judgment, and (5) granting defendants relief from the judgment will not prejudice innocent third persons. As a preliminary matter, we acknowledge that defendants did not offer their affidavits of meritorious defense simultaneously with their motion to set aside the default judgment and that this arguable misstep was the foundation of the lower courts' decisions. The lower courts, however, applied MCR 2.603(D)(1) in reaching their

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decisions. That rule permits a court to grant relief from a default judgment when, along with the fulfillment of other requirements, "an affidavit of facts showing a meritorious defense is filed." We conclude that the lower courts' reasoning is inapplicable to our analysis of MCR 2.612(B) because, unlike MCR 2.603(D)(1), MCR 2.612(B) does not expressly state that a defendant must provide an affidavit of meritorious defense. Therefore, we conclude that defendants may seek relief under MCR 2.612(B), and we do not opine about whether MCR 2.603(D)(1) requires that an affidavit of meritorious defense be filed simultaneously with a motion to set aside a default judgment.3 A. PERSONAL JURISDICTION A court "cannot adjudicate [an in personam] controversy without first having obtained jurisdiction [over the] defendant by service of process . . . ." Eisner v Williams, 298 Mich 215, 220; 298 NW 507 (1941). A court must obtain personal jurisdiction over a defendant in order to "satisfy the due process requirement that a defendant be informed of an action by the best means available under the circumstances." MCR 2.105(J)(1). "The fundamental requisite of due process of law is the opportunity to be heard. . . . This right to be heard has little reality or worth unless one is informed that the matter is pending . . . ." Mullane v Central Hanover Bank & Trust Co, 339 US 306, 314; 70 S Ct

To the extent that defendants' failure to offer their affidavits simultaneously with their motion creates any doubt that defendants are entitled to relief from the default judgment, our holding is consistent not only with the plain language of MCR 2.612(B), but also with the general principle that "[d]efaults are not favored and doubts generally should be resolved in favor of the defaulting party." Wood v DAIIE, 413 Mich 573, 586; 321 NW2d 653 (1982).

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652; 94 L Ed 865 (1950) (quotation marks and citation omitted). Personal notice, however, is not necessary to satisfy due process requirements in all cases. Jacob v Roberts, 223 US 261, 265; 32 S Ct 303; 56 L Ed 429 (1912). Rather, under MCR 2.105(I)(1), "[o]n a showing that service of process cannot reasonably be made as provided by [MCR 2.105], the court may by order permit service of process to be made in any other manner reasonably calculated to give the defendant actual notice of the proceedings and an opportunity to be heard." As MCR 2.105(J)(1) explains, the

provisions of the court rules related to service of process are "intended to satisfy the due process requirement that a defendant be informed of an action by the best means available under the circumstances." See, also, Krueger v Williams, 410 Mich 144, 156; 300 NW2d 910 (1981) (explaining that "[s]ervice may be made personally on a defendant or, if this is not possible, constructive service is permitted"), and Mullane, 339 US at 314 (explaining that notice that is "reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections" is sufficient to satisfy due process). But while personal service is not always required, "[t]he requirement of notice so as to afford an opportunity to be heard is clearly the heart" of Michigan's substituted-service court rule. Krueger, 410 Mich at 158.4

In Krueger, we considered the predecessor of MCR 2.105(I), GCR 1963, 105.8, which was substantively similar to MCR 2.105(I)(1).

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Because defendants were parties to the action in this case, personal jurisdiction over them was required to satisfy due process. Defendants argue that the trial court failed to acquire personal jurisdiction over them because plaintiff's efforts to provide them with notice were so lacking that they were deprived of notice and an opportunity to be heard. Nevertheless, for the purpose of this appeal, we assume arguendo that the trial court acquired personal jurisdiction over defendants because we conclude that defendants are entitled to relief under MCR 2.612(B) and this Court does not decide cases on constitutional grounds when doing so can be avoided. People v Quider, 172 Mich 280, 288-289; 137 NW 546 (1912). B. DEFENDANTS' KNOWLEDGE OF THE ACTION As previously stated, defendants must also show that they did not "in fact have knowledge of the pendency of the action" in order to be entitled to relief under MCR 2.612(B). This Court has not considered what is required for a party to have knowledge in fact under MCR 2.612(B), but this Court has generally taken care to acknowledge that a difference in specificity exists between the phrase "actual knowledge" and mere "knowledge." See, e.g., Travis v Dreis & Krump Mfg Co, 453 Mich 149, 173; 551 NW2d 132 (1996) (opinion by BOYLE, J.) (explaining that when "the Legislature [is] careful to use the term `actual knowledge,' and not the less specific word `knowledge,' we determine that the Legislature meant that constructive, implied, or imputed knowledge is not enough"). But MCR 2.612(B) does not simply use the word "knowledge"; rather, it states that a defendant may be relieved of a judgment if the defendant "did not in fact have 9

knowledge of the pendency of the action . . . ." (Emphasis added.) "In fact" is defined as "[a]ctual or real; resulting from the acts of parties rather than by operation of law." Black's Law Dictionary (9th ed). This definition further distinguishes actual knowledge from constructive or implied knowledge of the pending action. Thus, we conclude that the plain language of MCR 2.612(B) permits a defendant to seek relief from a default judgment as long as the defendant did not have actual knowledge of the pending action. Our conclusion is supported by the available caselaw and supplemental authority. In Nat'l Car Rental v S & D Leasing, Inc, 89 Mich App 364, 368; 280 NW2d 529 (1979), the Court of Appeals concluded that lack of actual notice was sufficient to satisfy the knowledge-in-fact requirement.5 In support of its conclusion that knowledge in fact is synonymous with actual knowledge, the Court of Appeals in Nat'l Car cited 3 Honigman & Hawkins, Michigan Court Rules Annotated (2d ed), p 180, which explained that "[t]he intent of [GCR 1963, 528.2] is that failure to receive actual notice is itself sufficient ground for relief from default judgment . . . ." (Emphasis added.) Notably, more recent

In Nat'l Car, the Court of Appeals applied GCR 1963, 528.2, the predecessor of MCR 2.612(B). The language used in MCR 2.612(B) and GCR 1963, 528.2 is nearly identical. GCR 1963, 528.2 stated: Any defendant over whom personal jurisdiction was necessary and acquired but who did not in fact have knowledge of the pendency of the action may, at any time within 1 year after final judgment, enter his appearance, and if he shows reason justifying relief from the judgment and innocent third persons will not be prejudiced, the court may relieve him from the judgment, order, or proceedings as to which personal jurisdiction was necessary, on payment of such costs thereon or such creditors as the court deems just.

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supplemental authority also explains that failure to receive actual notice is sufficient to satisfy the knowledge-in-fact requirement of MCR 2.612(B). See 3 Longhofer, Michigan Court Rules Practice (5th ed),

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