Maintaining Your LLCs Articles and Resources

Mom’s Mistake Is No Excuse!

Do you have your registered agent service properly in place?

A recent Ohio case illustrated the significant pitfalls of lax procedures.

Your registered agent’s job is to accept service process, meaning notice of a lawsuit. If you don’t receive that notice the persons suing you can get a default judgment – meaning, since you didn’t respond to the charge in time, they win by default. You’ve just lost a case you had no idea was even brought against you!

The new case is John W. Judge Co. v. USA Freight, L.L.C, 2018-Ohio-2658 (Ohio App., July 6, 2018). The facts are that Judge alleged USA Freight owed them $4,405.05. They served their complaint by certified mail upon the registered agent and service was accepted by the mother of USA Freight’s owner. The mother didn’t speak much English, didn’t know the U.S. legal system and didn’t give the lawsuit papers to anyone.

By not responding to the lawsuit USA Freight had a default judgment entered against them. This is when they first learn of Mom’s mistake. They immediately tried to vacate (set aside) the judgment on the basis of “excusable neglect.”

But the Court concluded that when a company is required by law to maintain a statutory agent for service of process, and when certified mail service is successful at the statutory agent’s address that is on record with the Ohio Secretary of State, then the subsequent mishandling of the served documents by the person who signed for and received the documents at the statutory agent’s listed address did not amount to “excusable neglect.”

A full discussion of the case follows. Know that the lesson here is that you want a professional resident agent service to accept important notices for you. Excuses for not responding – even an excuse involving dear ol’ Mom – will not pass muster in the courts.

The Facts of Judge

Judge filed a complaint against USA Freight for money damages arising from alleged unpaid engineering services in the amount of $4,405.05. Judge requested that the complaint and summons be served upon USA Freight via certified mail at the address of USA Freight’s registered statutory agent, Mukhabbat Vasfieva. The trial court received the certified mail receipt, showing that the complaint and summons had been delivered and signed for by “Mukhabbat Koch” on March 24, 2016. USA Freight failed to file a response to Judge’s complaint; accordingly, Judge moved the trial court to enter a default judgment in its favor. The trial court granted Judge’s motion and entered a default judgment against USA Freight for the amount requested plus interest and costs.

After obtaining a certificate of judgment, Judge obtained a writ of execution ordering the court bailiff to levy on the goods and chattels owned by USA Freight.

Three weeks after the writ of execution was filed, USA Freight filed a Rule 60(B) motion to vacate the default judgment on grounds that it never received the complaint and summons, and was otherwise unaware of who signed for the certified mail service. USA Freight attached a supporting affidavit from Baris Koch, who averred that he was the General Manager of USA Freight and that his father was the owner. Koch also averred that he did not receive notice of Judge’s complaint until the court’s bailiff contacted him regarding the writ of execution. Koch further averred that he spoke with the members and employees of USA Freight to ascertain if anyone affiliated with the company had signed for service of the complaint and that he was unaware of anyone who had. Lastly, Koch averred that USA Freight had meritorious defenses to Judge’s lawsuit, which included a claim that USA Freight had paid Judge in full for its services and that any unpaid amounts were owed by Garrett Day, LLC, and/or Mike Heitz. In addition to the affidavit, USA Freight attached several invoices from Judge and copies of checks that USA Freight made payable to Judge. USA Freight also attached a written description and map of the property on which Judge provided its engineering services, indication that Garrett Day, LLC owned part of the property on which Judge’s services were rendered.

Judge filed a response opposing the motion to vacate on grounds that USA Freight failed to establish the necessary elements for such relief under Rule 60(B). The trial court then held an evidentiary hearing on the motion to vacate. At the hearing, the parties submitted no additional evidence, but simply gave oral arguments.

During that time, USA Freight explained that the certified mail receipt was signed by the mother of USA Freight’s owner. USA Freight explained that the owner’s mother was not part of the company or involved in its day-to-day operations, but that she happened to be present when the complaint was served and did not provide it to any of the members of the family who were involved in the business. USA Freight further explained that the owner’s mother understood and spoke very little English, and had very little knowledge of the legal system. USA Freight therefore claimed it was entitled to relief under Rule 60 (B)(1) for excusable neglect.

At the close of the hearing, the trial court invited the parties to submit post-hearing memoranda in support of their position. After receiving the parties’ memoranda, the trial court issued a decision and entry granting USA Freight’s motion to vacate. In granting the motion, the trial court found “excusable neglect,” noting that USA Freight’s conduct was not willful and that it did not exhibit a disregard for the judicial system. The trial court further found that USA Freight had demonstrated that it had a meritorious defense to Judge’s claim for money damages. Judge appealed from the trial court’s decision granting USA Freight’s motion to vacate.

The Decision in Judge

On appeal, Judge argues that the trial court erred in granting USA Freight’s motion to vacate the default judgment under Rule 60(B), because USA Freight failed to establish that it was entitled to relief under Rule 60(B). More specifically, Judge claimed that USA Freight failed to establish that it did not respond to Judge’s complaint due to excusable neglect.

After reviewing the necessary requirements for USA Freight to obtain relief from a final judgment under Rule 60(B), the Ohio Court of Appeals noted that, because Judge did not dispute the existence of a meritorious defense or that USA Freight filed its motion to vacate within a reasonable time, the only issue before the Court was whether it was an abuse of discretion for the trial court to conclude that USA Freight was entitled to relief under Rule 60(B)(1) on grounds of “excusable neglect.” The Court noted that, in considering whether neglect is excusable under Rule 60(B)(1), a court must consider all the surrounding facts and circumstances. The Court pointed out that the phrase, “excusable neglect” in Rule 60(B)(1) is an elusive concept which has been difficult to define and to apply.

The Court observed that the Ohio Supreme Court had determined that neglect is inexcusable when the movant’s inaction revealed a complete disregard for the judicial system and the right of the appellee. The Court also observed that the Ohio Supreme Court had held that “excusable neglect” in the context of a Rule 60(B)(1) motion generally means the failure to take the proper steps at the proper time, not in consequence of the part’s own carelessness, inattention, or willful disregard of the processes of the court, but in consequence of some unavoidable or unexpected hindrance or accident, or reliance on the care and vigilance of his counsel or no promises made by the adverse party. The Court explained that courts generally find “excusable neglect” in those instances where there are unusual or special circumstances that justify the neglect of a party or the party’s attorney. That said, the Court cautioned that the concept of “excusable neglect” must be construed in keeping with the proposition that Rule 60(B)(1) is a remedial rule to be liberally construed, while bearing in mind that Rule 60(B) constitutes an attempt to strike a proper balance between the conflicting principles that litigation must be brought to an end and justice should be done.

After discussing the conflicting principles that must be borne in mind in ruling upon a Rule 60(B) motion, the Court pointed out that the supporting affidavit signed by USA Freight’s General Manager, Baris Koch, averred that he first learned of Judge’s lawsuit against USA Freight when he trial court’s bailiff notified him that a writ of execution had been filed against the company. The Court noted that the record indicated that the bailiff was ordered to levy execution against USA Freight, and that USA Freight filed its motion to vacate approximately three weeks later. The Court further noted that Koch has averred in his affidavit that he was unaware of any member or employee of USA Freight who had signed for or received service of the complaint; and that, as of the date he signed the affidavit, Koch claimed he did not know who signed for the complaint; and that it was not until the hearing on the motion to vacate that USA Freight explained, through counsel, that service of the complaint and summons was signed for by the mother of the owner of USA Freight. USA Freight explained that the owner’s mother had no role within the company and that she happened to be present when the complaint was delivered by certified mail. USA Freight further explained that the owner’s mother understood and spoke very little English, and that she did not provide the complaint to any of the family member who were involved in USA Freight’s business operations. Although no testimony or affidavits were submitted to verify this information, the trial court found USA Freight’s explanation credible and that it constituted “excusable neglect” under Rule 60(B)(1).

Judge argued that the trial court’s decision was an abuse of discretion because USA Freight failed to provide any evidence establishing that the person who received and signed for the complaint was the non-English speaking mother of USA Freight’s owner. The Court noted that the owner’s mother did not appear at the hearing; that her name was never disclosed on the record; and that USA Freight also never disclosed what the owner’s mother did with the complaint after she received it. In an effort to establish that the person who signed for the complaint was not the owner’s mother, Judge provided the trial court with two prior certified mail receipts with signatures that matched the signature on the receipt at issue. Judge pointed out that one of the prior receipts indicated that the signatory was an “Agent” of USA Freight.

Judge further argued that it was USA Freight’s responsibility to maintain a valid statutory agent who is designated to receive service of process at the agent’s listed address; that it was indeed neglectful for USA Freight to use an address where certified mail could be received and mishandled by a non-English-speaking individual who was not affiliated with USA Freight’s business; and that such conduct did not constitute “excusable neglect.” In support of this claim, Judge cited the following three unpublished decision, providing that insufficient or negligent internal procedures in an organization may not comprise “excusable neglect” and that, therefore, may not support vacation of a default judgment: (1) Middleton v. Luna’s Resturant & Deli, L.L.C., 201-Ohio-4388, 2011 WL 3847184 (Ohio App., Aug. 29, 2011) (unpublished decision); (2) LaKing Trucking, Inc. v. Coastal Tank Lines, Inc., 1984 WL 6241 (Ohio App., Feb. 9, 1984) (unpublished decision) (summons received in a corporate mail room but lost before being brought to the attention of the proper office does not rise to excusable neglect); and (3) Miller v. Sybert, 1975 WL 7351 (July 25. 1985) (unpublished decision)(ordinary mail delivered to defendant when mail is accessible to other persons and where it was never picked up by defendant’s friends while he was out of the state does not constitute “excusable neglect”). The Ohio Court of Appeals noted that the above-cited three unpublished decisions were in accord with the following two decisions: (1) Andrew Bihl Sons, Inc. v. Trembly, 67 Ohio App.3d 664, 667, 588 N.E2d 172 (Ohio App. 1990) (ignoring mail for more than three months due to illness and failing to delegate a competent agent to handle business affairs does not constitute “excusable neglect”); and (2) Meyer v. GMAC mtge., 2007-Ohio-5009, 2007 WL 2773653 (Ohio App., Sept. 25, 2007) (unpublished decision) (employee’s failure to forward the complaint to the appropriate corporate department does not constitute “excusable neglect”).

Finally, Judge argued that the mother’s ignorance of the legal process did not amount to “excusable neglect.”

The Rationale of Judge

Having reviewed the record, the Ohio Court of Appeals found that Judge had presented strong arguments in support of its position that the trial court had abused its discretion in finding “excusable neglect,” especially with regard to USA Freight’s responsibility to maintain a valid statutory agent. The Court cited the Ohio Revised Code for the proposition that “[e]ach limited liability company [such as USA Freight] shall maintain continuously in this state an agent for service of process on the company.” See, R.C. 1705.06(A). The Court pointed out that a limited liability company is required to provide the Ohio Secretary of State with a written appointment of its statutory agent that sets forth the name of the agent and the agent’s address in this state. See, R.C. 1705.06(B)(1)(a), (C); and that the Ohio Secretary of State then kept a record of the statutory agent’s name and address. See, R.C. 1705.06(C). The Court noted that Rule 4.2(g) of the Ohio Rules of Civil Procedure provided that, to serve a limited liability company, a plaintiff may direct service of process to “ the agent authorized by appointment or by law to receive service of process”’ that [c]ertified mail service upon such an agent is effective upon delivery, if evidenced by a signed return receipt”; and that Rule 4.1 (A)(1)(a) provided that “[s]ervice is valid if ‘any person’ at the address signs for the certified mail, whether or not the recipient is the defendant’s agent.”

Applying these principles to the facts and circumstances of Judge, the Ohio Court of Appeals noted that Judge had served its complaint on USA Freight’s statutory agent via certified mail at the address on record with the Ohio Secretary of State and that the certified mail was received at the address of USA Freight’s statutory agent and signed for by the mother of the owner of USA Freight. Under these circumstances, the Court concluded that service of the complaint, because the mother of USA Freight’s owner mishandled the complaint, this type of scenario had not been found to constitute “excusable neglect.”

In support of its conclusion, the Court cited the following decision of the United States District Court for the Northern District of Ohio: Chicago Sweetners, Inc. v. Kantner Group, Inc., 2009 WL 1707927 (N.D. Ohio, June 17, 2009) (unpublished decision) (finding no “excusable neglect” where a defendant company was properly served with a complaint via certified mail to its statutory agent’s address, the certified mail was received and signed for by an administrative assistant of the defendant company, who was also the mother of the defendant company’s president, and the mother thereafter mishandled the complaint so that the defendant company never received the notice of it).

In reaching its decision, the Ohio Court of Appeals agree with Judge, that insufficient or negligent internal procedures in an organization may not compromise excusable neglect and that, therefore, they may not support the vacation of a default judgment,” citing, Middleton, supra, and Denittis v. Aaron Costr., Inc., 2012-Ohio-6213, 2012 WL 6738472 (Ohio App., Dec. 31, 2012) (unpublished decision). In so agreeing, the Court stressed that USA Freight was, by law, responsible for maintaining a valid statutory agent that was calculated to receive service of process at the agent’s listed address; that USA Freight has chosen a statutory agent address where it was possible for a non-English-speaking person who was unaffiliated with the company to receive important documentation that was served at the address; and that, due to USA Freight’s negligence in choosing its statutory agent and/or failure to implement internal procedures to ensure that documentation served at the statutory agent’s address was directed to the appropriate person, the complaint at issue was mishandled by the owner’s mother.

The Court emphasized that “excusable neglect” does not result from the party’s own carelessness, inattention, or willful disregard of the processes of the court, but in consequence of some unavoidable or unexpected hindrance or accident; and that, had USA Freight chosen a better statutory agent, or had better procedures in place for receiving service of process at the statutory agent’s address, then the mishandling of the complaint would likely have been avoided.

Accordingly, the Ohio Court of Appeals concluded that the circumstances in Judge did not constitute an unavoidable or unexpected hindrance or accident. In addition, the Court pointed out that, while abuse of discretion was an extremely high standard of review that required the Court to find the trial court’s “excusable neglect” decision unreasonable, the Court, nevertheless, had reached that conclusion. The Court reiterated that the trial court’s decision was unreasonable, because the mishandling of the complaint was the result of USA Freight’s own negligence, and stated that, a company should be adequately prepared to receive service of process at the statutory agent’s address.

Although the Court recognized that Rule 60(B) motions are to be liberally construed in favor of the movant, the Court, nevertheless, found that USA Freight’s negligence in choosing its statutory agent and its procedures for receiving service of process was in willful disregard of the processes of the Court. Therefore, the Court narrowly held that, when a company is required by law to maintain a statutory agent to receive service of process, and when there is successful service of process via certified mail at the statutory agent’s address that is on record with the Ohio Secretary of State, the subsequent mishandling of served documents by the person who signed for and received the documents at the statutory agent’s listed address does not amount to “excusable neglect.”

Conclusion

The Ohio Court of Appeals decision in Judge should serve as a warning to companies and LLCs to check their statutory agent procedures in order to ensure that documents served at their statutory agent’s address are directed to the appropriate person(s); otherwise, they may by subject to enforceable default judgments against them in lawsuits of which they were entirely unaware.

Don’t let this happen to you!