Default Judgment Set Aside for Tenant's 'Excusable Neglect'

Facts: A mall owner sued a tenant for allegedly breaching its lease, asking for more than $190,000 in accelerated rent and other fees. After the tenant didn’t respond to the litigation, a trial court entered a default judgment against it. The tenant later asked the court to set aside the default judgment.

Decision: A Pennsylvania district court ruled in favor of the tenant.

Reasoning: Two factors the district court had to consider to set aside a default judgment were whether the tenant has a meritorious defense and whether the default was the result of the tenant’s “culpable conduct.”

The district court found that the default judgment was entered not as a result of the tenant’s culpable conduct but because of “excusable neglect.” The tenant believed that its ongoing communication with the owner’s attorney was an appropriate response to the complaint. It testified that it believed that it was “taking care of the matter,” and as a result, it didn’t file a response to the initial lawsuit.

The owner acknowledged that its attorney communicated with the tenant, but asserted that the attorney never told the tenant that it wasn’t required to respond officially to the lawsuit. Accordingly, the owner argued that the tenant’s conduct was more than mere negligence since it failed to even consult an attorney. The district court disagreed.

The district court found that the tenant’s explanation for its failure to respond to the lawsuit was reasonable also because the tenant had several meritorious defenses, including the fact that it did pay rent for one of the months the owner claimed it had not and that the owner had told it that it could move out of the space early because a new tenant had been found. While the owner argued that this would have been a modification of the lease and would have had to have been in writing, the district court decided that the issue should be determined in further proceedings, given that the tenant’s defense was that it relied to its detriment on the owner’s representation that it was authorized to vacate the space. The district court stated that the tenant should have the opportunity to “challenge the merits of the owner’s allegations.”

• Liberty Place Retail Associates, L.P. v. Michel Perfume Shoppe, May 2014