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Maryland Court of Appeals Holds That Defaulting Party Who Does Not File Motion to Vacate Cannot File a Rule 2-534 Motion to Alter or Amend Judgment to Contest Liability
Franklin Credit Mgmt. v. Nefflen
In Franklin Credit Mgmt. v. Nefflen, the Court of Appeals of Maryland was asked to consider whether a defendant who fails to respond to a complaint and against whom an order of default is entered and fails to move to vacate the order of default, after which judgment of default is entered may, thereafter, contest liability either by moving, under Maryland Rule 2-534 to alter or amend a judgment or directly on appeal. Writing for the Court, Judge Lynne A. Battaglia answered this question in the negative.
The dispute arose out of a suit alleging the breach of a settlement agreement terminating litigation in the Circuit Court for Frederick County that earlier ensued between Franklin Credit Management Corporation (“Franklin”), and Fred Nefflen (“Mr. Nefflen”). The original litigation arose when Franklin was assigned the servicing rights to Mr. Nefflen’s mortgage on a piece of property located in Frederick, Maryland. According to Mr. Nefflen’s Complaint, Franklin attempted to collect more than was due on the loan as well as notified credit reporting agencies that Mr. Nefflen’s payments were past due. Mr. Nefflen, thereafter, sued Franklin, and the settlement terms, as reflected in an agreement signed between Franklin and Mr. Nefflen, provided in relevant part:
According to the Complaint, Franklin violated those provisions; Mr. Nefflen alleged breach of contract, defamation, as well as violations of the Maryland Consumer Debt Collection Act and the Maryland Consumer Protection Act. Approximately five (5) months after the Complaint was served on Franklin, Mr. Nefflen moved for an entry of an order of default, pursuant to Rule 2-613(b), asserting that Franklin had failed to respond to the complaint in any way. Thus, on October 6, 2010, an order of default was entered against Franklin in the Circuit Court for Frederick County, Maryland. Franklin was notified by the clerk of the court of its default, but Franklin still failed to respond. The clerk, thereafter, sent a “Notice of Hearing/Trial” to Franklin, notifying it that a default hearing was scheduled for March 8, 2011, which was postponed upon motion by Mr. Nefflen; the hearing was rescheduled for April 7, 2011, and a notice of the change of date also was sent to Franklin.
On April 7, 2011, Judge Julie S. Solt of the Frederick County Circuit Court held a hearing on the issue of Mr. Nefflen’s damages, but Franklin failed to appear. Mr. Nefflen presented copies of his credit reports obtained from Equifax and Transunion, which reflected that the adverse credit information with respect to the Franklin loan continued to appear on the report six (6) months after the parties entered into the settlement agreement; mortgage statements reflecting escrow payments; and letters from Franklin to Mr. Nefflen demanding that he obtain flood insurance. Mr. Nefflen also testified at the hearing and expounded on the damages he suffered, including his alleged inability to purchase a car because of the negative credit reporting and the emotional and physical effects of Franklin’s actions on him and his family, such as “a lot of sleepless nights,” stomach problems, and that his “nerves [were] practically shot.” At the conclusion of the hearing, Judge Solt made findings of fact and ruled that Franklin was in breach of the settlement agreement, and Judge Solt awarded Mr. Nefflen damages on his claims for defamation and violations of the Maryland Consumer Debt Collection Act and the Maryland Consumer Protection Act. Judge Solt, thereafter, issued a default judgment in the amount of $203,301.84, a copy of which was sent to Franklin.
Franklin, then, filed a “Motion for a New Trial or to Alter or Amend Judgment, ”pursuant to Rule 2-534, requesting that the default judgments be set aside because, according to Franklin, the claims were legally deficient, and, in its view, “[w]hile the facts in the complaint may be deemed admitted due to default, the Court must still make a determination as to liability and there must be satisfactory proof of damages.” Mr. Nefflen filed an opposition to the motion to alter or amend the judgment, refuting the contention that his claims were legally deficient. Judge Solt denied the motion for a new trial or to alter or amend the judgment, and Franklin filed a timely notice of appeal to the Court of Special Appeals.
In a reported opinion, the Court of Special Appeals affirmed the trial court’s decision, concluding that the judge did not abuse her discretion when she entered the default judgments, reasoning that, in Maryland there is no “prerequisite to the entry of a default judgment, in the absence of any pleadings from the defaulting party, . . . that the trial court make a determination as to liability.” Franklin Credit Mgmt. Corp. v. Nefflen, 208 Md. App.712, 728, 57 A.3d 1015, 1024 (2012). With respect to the decision to deny the Rule 2-534 motion to alter or amend the judgment, the intermediate appellate court opined that “[i]t is clear that Franklin cannot revisit the issue of liability,” reasoning that Rule 2-613(g), which limits the court’s “revisory power under Rule 2-535(a) . . . to the relief  granted,” was equally applicable to Rule 2-534 based on the intermediate appellate court’s prior decisions in Wells v. Wells, 168 Md. App. 382, 896 A.2d 1082 (2006) and Das v. Das, 133 Md. App. 1, 754 A.2d 441 (2000), and its interpretation of Rule 2-613(g)’s purpose, which, it opined, is to prevent a defaulting defendant from having two opportunities to set aside the order of default. Franklin Credit Mgmt. Corp., 208 Md. App. at 732-33, 57 A.3d at 1027-28. Because Rule 2-534 did not permit a revisiting of liability once a default judgment was entered, the Court of Special Appeals reasoned the trial court properly denied the motion. Id. at 733-34, 57 A.3d at 1028. Franklin, then, petitioned the Court of Appeals for certiorari, which it granted.
After a lengthy discussion of the legislative history of default judgments in Maryland, the appellate court emphasized its ultimate adoption of a two (2)-step framework, whereby, under Maryland Rule 2-613(b), “the entry of an order of default [is] the initial step towards entry of default judgment.” O’Connor v. Moten, 307 Md. 644, 647 n.2, 516 A.2d 593, 594 n.2 (1986), abrogated by Bienkowski v. Brooks on other grounds, 386 Md. 516, 873 A.2d 1122 (2005). “This order [of default] is a determination of liability . . . .” Id.; see also Montgomery Cnty. v. Post, 166 Md. App. 381, 389, 888 A.2d 1224, 1229 (2005) (“If an order of default is entered, pursuant to Rule 2-613(b), the defaulting party has the right to move to vacate pursuant to subsection (d), and if the order of default remains, it is dispositive only as to liability.”); Wells, 168 Md. App. at 393, 896 A.2d at 1089 (“[T]he order of default [is], in effect, . . . an adverse finding on liability.”). The determination of liability in the order, however, may be vacated upon motion of a defendant who has been provided notice and files such within the 20 thirty-day window, if the defendant can demonstrate an equitable reason for failure to plead and that there is an actual controversy on the merits. Rule 2-613(d)-(e). If the defendant fails to vacate the order of default or if the motion to vacate is denied, a court may proceed with the assessment of damages and the entry of a default judgment under Rule 2-613(f), which “includes a determination as to liability and all relief sought.”
The appellate court disagreed with Franklin as to the ability of a defendant to file a Rule 2-534 motion to alter or amend an order of default in order to contest liability. According to the Court of Appeals, the plain terms of Rule 2-534 are applicable to a “judgment,” which has been defined as “any order of court final in its nature entered pursuant to [the Maryland Rules].” MD. R. 1-202(o). An order is not final in nature unless “the court intends for it to be ‘an unqualified, final disposition of the matter in controversy,’” Frase v. Barnhart, 379 Md. 100, 115, 840 A.2d 114, 122 (2003), quoting Rohrbeck v. Rohrbeck, 318 Md. 28, 41, 566 A.2d 767, 773 (1989), which the appellate court interpreted to mean that the order “must be so final as to determine and conclude the rights involved, or deny the appellant the means of further prosecuting or defending his rights and interests in the subject matter of the proceeding.” Schuele v. Case Handyman & Remodeling Servs., LLC, 412 Md. 555, 571, 989 A.2d 210, 219 (2010) (citations and quotations omitted).
Here, the appellate court noted that Franklin never moved to vacate the order of default so as to preserve any issues regarding liability on appeal. Were a defaulting party to be able to appeal the liability determination after not having filed a motion to vacate, the two-(2) step default judgment process under Rule 2-613 would be obviated. The appellate court opined that permitting a defaulting party to lie in wait, after having failed to respond timely to a complaint and also to move to vacate a default order, would allow the default procedure under Rule 2-613 to be nullified. As a result, the Court of Appeals did not need to reach the merits of the dispute. Therefore, the Court of Appeals affirmed the intermediate appellate court’s ruling against Franklin.
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