SUE E. MYERSCOUGH, District Judge.
This cause is before the Court on the Corrected Motion for Relief from Default Judgment (d/e 62) filed by Defendant KVB Electric LLC and the Motion for Leave to File an Amended Answer and Amended Affirmative Defenses (d/e 70) filed by Defendants Kevin M. Von Behren and Brenda K. Von Behren. Because KVB has shown good cause for its default, quick action to correct the default, and a meritorious defense, the Motion for Relief from Default Judgment is GRANTED. The Court also, in an exercise of its discretion, GRANTS the Von Behrens leave to file an amended answer and affirmative defenses.
On December 3, 2014, Plaintiff United States filed suit against Defendant Kevin M. Von Behren seeking a money judgment for unpaid federal income taxes and for the trust fund portion of federal income and Federal Insurance Contributions Act (FICA) taxes withheld from the wages of employees of KVB Electric LLC. Compl. (d/e 1). On April 23, 2015, Plaintiff filed an Amended Complaint (d/e 6) containing three counts. In Count I, Plaintiff sought a money judgment against Kevin and Brenda K. Von Behren, jointly and severally, for unpaid federal income taxes. In Count II, Plaintiff sought a money judgment against Kevin Von Behren for the unpaid trust fund portion of federal income and FICA taxes withheld from the wages of the employees of BDK Industries, Inc. In Count III, Plaintiff sought to enforce federal tax liens resulting from liabilities owed by Kevin and/or Brenda against property located at 2196 Cantrall Creek Road, Cantrall, County of Sangamon, Illinois, 62625 (the Cantrall property). Plaintiff also named as additional defendants entities that might have a claim or interest in the Cantrall property, including KVB Electric LLC, Williamsville State Bank & Trust, the Illinois Department of Revenue, Daimler Chrysler Financial, Capital One Bank, and County of Sangamon, Illinois.
The Amended Complaint alleges that the Cantrall property was transferred to Kevin and Brenda Von Behren as joint tenants in April 1991. Am. Compl. ¶ 10. In June 2005, the Cantrall property was conveyed to KVB by way of a Sheriff's Deed pursuant to the Judgment of Foreclosure and Sale entered in Sangamon County Case No. 2003 CH 238. Id. ¶ 13. Plaintiff alleges that KVB holds record title to the property as the alter ego of Kevin Von Behren, who is the true and equitable owner of the property. Id. ¶ 26.
Requests for Waiver of Service and Notice of Lawsuit were mailed to Kevin, Brenda, and KVB on May 28, 2015.
United States Magistrate Judge Tom Schanzle-Haskins granted Kevin's and Brenda's motions, but denied KVB's motion because corporations may not appear pro se in federal court.
The Von Behrens hired Mr. Reid, who they believed was also representing the interests of KVB.
In the Answer, Kevin and Brenda "allege[d] that the equitable owners of the subject property are Kevin M. Von Behren and Brenda K. Von Behren." Answer ¶ 26. They also "admit[ted] that the Plaintiff is entitled to enforce its liens against the Defendants."
On October 21, 2015, Plaintiff and the Von Behrens filed a Joint Report of Parties' Planning Meeting (d/e 28). The parties agreed that the Von Behrens were jointly liability for unpaid federal income tax liabilities, that Kevin was liable for the "Trust Fund Recovery Penalty," and that the United States' tax liens attach to all property and rights to property belonging to the Von Behrens, including their Cantrall, Illinois residence.
In November 2015, the Von Behrens sought and received an extension of time to submit a proposed stipulated judgment.
On March 11, 2016, Mr. Reid filed a motion to withdraw as counsel for the Von Behrens and KVB (d/e 43). Mr. Reid stated there was substantial disagreement between Mr. Reid and the defendants as to the proposed terms of the stipulation regarding entry of judgment.
On March 14, 2016, Mr. Reid filed an amended motion to withdraw (d/e 45), clarifying his original motion. In the amended motion, Mr. Reid sought to withdraw as counsel for the Von Behrens. Mr. Reid also sought to withdraw "from any representation of the Defendant, KVB Electric LLC." Mr. Reid explained that while he did not formally enter his appearance on behalf of KVB, he included KVB in certain pleadings and the proposed Stipulation of Judgment documents.
Judge Schanzle-Haskins granted the motion to withdraw as counsel as to all three defendants.
On May 11, 2016, Plaintiff filed a motion for entry of default against only KVB, who had not filed an answer (d/e 52). The next day, Judge Schanzle-Haskins granted the motion and entered an Order of Default (d/e 53).
On May 26, 2016, KVB filed a pro se Motion to Set Aside Default Judgment, claiming that KVB was diligently seeking counsel.
On June 9, 2016, this Court granted the Plaintiff's Motion for Default Judgment, finding that KVB "has no right, title, claim, lien or other interest in the real property at 2196 Cantrall Creek Road, Cantrall, Sangamon County, Illinois."
On June 14, 2016, KVB retained attorney Gordon W. Gates as counsel. Corrected Mem. at 3 (d/e 63). On June 17, 2016, Mr. Gates entered his appearance on behalf of KVB (d/e 58). That same day, Mr. Gates filed a Motion for Relief from Default Judgment (d/e 59), although that motion was later struck and a corrected motion was filed.
On July 1, 2016, Alexandra de Saint Phalle and James R. Potter of the law firm of Londrigan, Potter & Randle, P.C. entered their appearances on behalf of the Von Behrens. Entry of Appearance (d/e 66). On July 5, 2016, the Von Behrens filed a Motion for Leave to File An Amended Answer and Amended Affirmative Defenses (d/e 70). In support thereof, the Von Behrens claim that they did not see the Answer prepared by their former attorney, Mr. Reid, until it was explained to them by Mr. Gates on June 14, 2016.
A. KVB's Motion to Set Aside the Default Judgment is Granted
Defendant KVB seeks to set aside the default judgment entered on June 9, 2016. Federal Rule of Civil Procedure 55(c) provides that "[t]he court may set aside an entry of default for good cause, and it may set aside a final default judgment under Rule 60(b)." Fed. R. Civ. P. 55(c). The moving party must show (1) good cause for default; (2) quick action to correct the default; and (3) a meritorious defense to the complaint.
Though the same elements must be shown under Rule 55(c) and Rule 60(b), setting aside an entry of default under Rule 55(c) is less demanding than setting aside a final judgment under Rule 60(b).
The standard for granting relief from judgment under Rule 55(c) applies here. This Court entered a default judgment against KVB, one of many defendants in this case, but did not direct entry of a final judgment by expressly determining there was "no just reason for delay." Fed. R. Civ. P. 54(b). Therefore, the judgment was not a final judgment, and Rule 60(b) only applies to final judgments.
Applying the more liberal Rule 55(c) standard here, the Court finds that KVB has shown good cause for setting aside the default judgment.
First, KVB has shown good cause for failing to timely file an answer. The information submitted to the Court shows that KVB did not willfully ignore the pending litigation. KVB believed Mr. Reid was representing both KVB and the Von Behrens. Even Mr. Reid stated that he included KVB on pleadings and in proposed stipulation of judgment documents. Although Mr. Reid did not enter a formal entry of appearance for KVB, he was listed as counsel for KVB on the Court's docket. Mr. Reid filed an answer for the Von Behrens and attempted to resolve the case with Plaintiff seemingly on behalf of the Von Behrens
In addition, KVB acted in a timely manner after the default judgment was entered. KVB attempted to retain counsel after Mr. Reid withdrew as counsel for the Von Behrens. After the entry of default was entered in May 2016, KVB continued to attempt to retain counsel. On May 27, 2016, Brenda Von Behren filed a Motion to Set Aside Default Judgment on behalf of KVB.
Finally, KVB has articulated a meritorious defense. A meritorious defense is one that raises a "`serious question regarding the propriety of a default judgment and . . .[is] supported by a developed legal and factual basis.'"
In sum, the Court finds that KVB has shown good cause for failing to timely file an answer, quick action to correct the default, and a meritorious defense. Given the Seventh's Circuit preference for trial on the merits over default judgment, this Court finds that the most appropriate course of action is to allow this case to proceed on the merits.
B. The Von Behrens' Motion to Amend is Granted
The Von Behrens seek to amend their answer to deny the allegations that they own the Cantrall property, that KVB is Kevin's alter ego, and that the Plaintiff is entitled to enforce its liens against the Cantrall property. They also seek to assert the affirmative defense that KVB is the owner of the Cantrell property and, as such, the property is not subject to Kevin and Brenda's debts.
Plaintiff objects to the motion, arguing that Plaintiff will be prejudiced by the amendment. Plaintiff argues that the Von Behrens did not raise the affirmative defense initially and, in fact, waived it by agreeing in the status report submitted to the Court that they were jointly liable for the unpaid taxes and that the United States was entitled to sell the residence. In light of those admissions, Plaintiff agreed that no discovery was needed and a scheduling order was entered on June 7, 2016 setting an August 8, 2016 deadline for dispositive motions and a December 2016 trial.
Once the time has passed for amending a pleading once as a matter of course, a party may amend a pleading only with consent of the opposing party or with leave of court, which shall be freely given "when justice so requires." Fed. R. Civ. P. 15(a)(2). The court may deny leave, in its discretion, for reasons including undue delay, bad faith, or undue prejudice to the opposing party.
The Court, in an exercise of its discretion, grants the Von Behrens leave to amend. Clearly, the parties attempted to resolve this case early in the litigation, which explains why this case was filed in 2014 but has not proceeded very far since then. Following the withdrawal of Mr. Reid as counsel for the Von Behrens, the Von Behrens seek to defend the action on the merits. While Plaintiff will suffer some prejudice by the amendment, this prejudice can be alleviated by the entry of a new scheduling order providing for discovery and new dates for the filing of dispositive motions and for trial. Moreover, Plaintiff will likely have to address the Von Behren's affirmative defense anyway now that the Court has vacated the default judgment against KVB.
For the reasons stated, Defendant KVB Electric, LLC's Corrected Motion for Relief from Default Judgment (d/e 62) is GRANTED. KVB shall file its Answer on or before August 17, 2016. Defendants Kevin M. Von Behren and Brenda K. Von Behren's Motion for Leave to File an Amended Answer and Amended Affirmative Defenses (d/e 70) is GRANTED. The Amended Answer and Affirmative Defenses is filed at docket entry 76.
In addition, Plaintiff's Motion to Strike (d/e 72) the Motion to Set Aside Default Judgment or, in the Alternative, for Leave to File Sur-Reply (d/e 68) filed by the Von Behrens for lack of standing is DENIED AS MOOT. The only information in the Von Behren's filing that the Court considered was the affidavits of the Von Behren's attached thereto regarding their knowledge about the representation of KVB and their efforts to obtain counsel for KVB. Therefore, the Von Behren's Motion (d/e 68) is also DENIED AS MOOT.
This case is referred to Judge Schanzle-Haskins for the preparation of a new scheduling order. In light of this ruling and the anticipation of a new scheduling order, Plaintiff shall advise the Court, on or before August 19, 2016, whether Plaintiff intends to proceed on its recently filed Motion for Summary Judgment (d/e 77) or whether Plaintiff will withdraw that motion.