Pacificsource Health Plans v. Atlantic Specialty Insurance Company ( 2023 )

NOT FOR PUBLICATION FILED
UNITED STATES COURT OF APPEALS AUG 3 2023
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
PACIFICSOURCE HEALTH PLANS, No. 22-35666
Plaintiff-Appellee, D.C. No. 2:21-cv-00064-BMM
v.
MEMORANDUM*
ATLANTIC SPECIALTY INSURANCE
COMPANY,
Defendant-Appellant.
Appeal from the United States District Court
for the District of Montana
Brian M. Morris, District Judge, Presiding
Argued and Submitted July 14, 2023
Seattle, Washington
Before: GRABER, GOULD, and PAEZ, Circuit Judges.
Atlantic Specialty Insurance Company (“ASIC”) appeals the district court’s
order denying its motion to set aside a default judgment entered in favor of
PacificSource Health Plans (“PacificSource”). We reverse and remand for further
proceedings.
*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
We have jurisdiction under 28 U.S.C. § 1291. We review for abuse of
discretion a denial of a motion to set aside a default judgment under Federal Rule
of Civil Procedure 60(b)(1), but we review de novo whether the district applied the
correct legal rule. Brandt v. Am. Bankers Ins. Co., 653 F.3d 1108, 1110 (9th Cir.
2011). Although the standard is abuse of discretion, we have “admonished that, as
a general matter, Rule 60(b) is ‘remedial in nature and . . . must be liberally
applied.’” TCI Grp. Life Ins. Plan v. Knoebber, 244 F.3d 691, 695–96 (9th Cir.
2001) (quoting Falk v. Allen, 739 F.2d 461, 463 (9th Cir. 1984) (per curiam)).
When considering whether to set aside a default judgment for “excusable
neglect,” see Fed. R. Civ. P. 60(b)(1), the three “Falk factors” inform the district
court’s discretion, see Brandt, 653 F.3d at 1111 (citing Falk, 739 F.2d at 463). The
Falk factors are: (1) “whether the plaintiff will be prejudiced”; (2) “whether the
defendant has a meritorious defense”; and (3) “whether culpable conduct of the
defendant led to the default.” Falk, 739 F.2d at 463. The district court can deny
relief on the basis of any factor, Brandt, 653 F.3d at 1111, but must consider that
the excusable neglect inquiry is “‘at bottom an equitable one, taking account of all
relevant circumstances surrounding the party’s omission,’” id. (quoting Pioneer
Inv. Servs. v. Brunswick Assocs. Ltd., 507 U.S. 380, 395 (1993)).
1. Prejudice. The district court did not abuse its discretion in finding that
setting aside the default judgment would not prejudice PacificSource. See TCI
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Grp., 244 F.3d at 701 (“[M]erely being forced to litigate on the merits cannot be
considered prejudicial for purposes of lifting a default judgment.”).
2. Meritorious Defense. To satisfy the meritorious defense requirement, a
party must simply “allege sufficient facts that, if true, would constitute a defense.”
United States v. Aguilar, 782 F.3d 1101, 1107 (9th Cir. 2015) (citation omitted).
“[T]he burden on a party seeking to vacate a default judgment is not
extraordinarily heavy.” TCI Grp., 244 F.3d at 700. ASIC argues that its defense is
meritorious because the costs of giving notice to class members are not covered
under the plain text of the Policy.
The Policy covers “Damages,” defined as “any settlements, judgments, pre-
judgment interest, post-judgment interest, claimant’s attorney’s fees . . . , or other
amounts . . . which you are legally obligated to pay as a result of a Claim.”
Coverage for “Damages,” however, expressly excludes “any non-monetary or
equitable relief or redress, including but not limited to any cost or expense of
complying with any injunctive, declaratory, or administrative relief . . . .”
(emphases added). The Policy also covers “Claim Expenses,” defined as “the
reasonable and necessary legal and expert fees and expenses incurred in the
investigation, adjustment, defense or appeal of any Claim.”
In the underlying state-court class action (“Gardner” or “the Gardner
action”), the trial court ordered PacificSource to pay the class notice costs as part
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of the injunctive relief that would be entered against PacificSource.1 See Hunt v.
Imperial Merch. Servs., Inc., 560 F.3d 1137, 1143–44 (9th Cir. 2009) (explaining
that plaintiffs usually bear the burden of notice costs, but courts can shift the costs
to the defendant after determining liability). ASIC argues that, because the notice
costs were court-ordered, they were not “incurred in the investigation [or] defense”
of the Gardner action (and therefore were not Claim Expenses), but rather
constituted a “settlement[], judgment[], . . . or other amount[] . . . which
[PacificSource was] legally obligated to pay as a result of a Claim.” Thus,
according to ASIC, these costs fall into the Policy’s “Damages” category—but
because the definition of “Damages” excludes “any cost or expense of complying
with any injunctive . . . relief,” the costs are not covered.
The district court rejected this argument, noting that the Policy’s definition
of “Claim Expenses” does not expressly exclude court-ordered costs. The Policy,
however, must be read as a whole. See Newbury v. State Farm Fire & Cas. Ins.
Co., 184 P.3d 1021, 1025 (Mont. 2008). According to ASIC, “Damages” covers
costs that PacificSource is “legally obligated to pay” (such as by court order) after
a finding of liability, and “Claim Expenses” covers costs incurred “in the defense”
1
The fact that PacificSource and the Gardner plaintiffs later entered into a
stipulated order concerning class notice procedures does not alter our analysis.
The order was entered into “pursuant” to the Gardner court’s class certification
order and was described as a settlement.
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of the claim, meaning prior to any determination of fault. If PacificSource could
simply reframe the relief it was ordered to pay as a “Claim Expense” to escape the
Policy’s exclusion of “any cost or expense of complying with any injunctive . . .
relief,” the Damages exclusion would be rendered meaningless, violating
principles of contract interpretation. See id.We need not and do not decide the merits of the underlying coverage
dispute. But ASIC has suggested a plausible reading of the Policy that would
exclude coverage of the notice costs. By failing to consider the Policy in its
entirety, the district court abused its discretion when it concluded that ASIC failed
to meet its minimal burden to demonstrate a meritorious defense.
3. Culpability. “In this circuit, ‘a defendant’s conduct [is] culpable for
purposes of the Falk factors where there is no explanation of the default
inconsistent with a devious, deliberate, willful, or bad faith failure to respond.’”
Emp. Painters’ Tr. v. Ethan Enters., Inc., 480 F.3d 993, 1000 (9th Cir. 2007)
(quoting TCI Grp., 244 F.3d at 698); see also TCI Grp., 244 F.3d at 697. To
conclude that ASIC was culpable, the district court relied on ASIC’s admission of
fault, the Montana Insurance Code, and out-of-Circuit cases finding no excusable
neglect where a default was caused by the movant’s failure to establish minimum
procedural safeguards for responding to complaints.
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ASIC admitted that it mishandled the complaints, but it did not admit—and
no facts have been alleged—that it acted intentionally or in bad faith.
PacificSource argues that the Montana Insurance Code establishes ASIC’s bad
faith, and in its culpability assessment, the district court also noted that ASIC failed
to comply with its obligations to respond to service under the Code. See Mont.
Code Ann. § 33-1-605(9). But state law does not limit a federal court’s discretion
to set aside a default judgment under Rule 60, a procedural inquiry. See generally
Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1102–03 (9th Cir. 2003) (citing
Erie R.R. v. Tompkins, 304 U.S. 64 (1938)). It was error for the district court to
rely on the Montana Insurance Code to find that ASIC acted in bad faith.
Negligent clerical errors, without more, do not establish culpability.
Generally, conduct is culpable and inexcusable only when the defendant’s active
misconduct led to the default. Compare Emp. Painters’ Tr., 480 F.3d at 1000;
Franchise Holding II, LLC. v. Huntington Rests. Grp., Inc., 375 F.3d 922, 924–25
(9th Cir. 2004) with TCI Grp., 244 F.3d at 697; Falk, 739 F.2d at 464; Bateman v.
U.S. Postal Serv., 231 F.3d 1220, 1225 (9th Cir. 2000). ASIC made clerical
mistakes, but “there is no suggestion that [ASIC] deliberately tried to manipulate
the legal system.” TCI Grp., 244 F.3d at 699. The day after it learned of the
default judgment, ASIC filed a motion to set it aside. See id. (explaining that a
defaulting defendant’s “diligence in seeking to set aside the default judgment
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reveals no disrespect for the courts”). Moreover, PacificSource presented no
evidence that ASIC is categorically negligent in failing to respond to lawsuits.
Thus, even if reliance on out-of-Circuit cases emphasizing the failure to establish
procedural safeguards was proper, those cases do not apply here.
The district court abused its discretion in finding ASIC culpable and, to the
extent it relied on Montana law in its assessment, committed an error of law. For
all the above reasons, the district court abused its discretion in denying ASIC’s
motion to set aside the default judgment.
REVERSED and REMANDED for further proceedings.
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