When your business gets sued, if you do not file a timely answer, the plaintiff can take a default judgment against you. If the damages are liquidated, like invoices on a sworn account, the court does not generally hold a hearing, but takes the total amount sworn to in the petition and an affidavit from the attorney for the amount of their fees, then grants a default judgment without a hearing. The clerk must send you notice that a final judgment has been rendered, but does not have to include a copy of the default judgment. Of course, that notice is mailed to the address that the plaintiff submitted as your last known address. That is where a problem can arise.
The Business Address and Default Judgments
Cowles Thompson has handled hundreds of default judgments taken against clients involving a variety of scenarios and succeeded in the vast majority of them. One particular scenario is preventable — the scenario in which the client changes locations but fails to change its registered agent’s address with the Texas Secretary of State. Business entities are required to provide the Secretary of State with an address for a registered agent for service of process.
Imagine the hypothetical client that starts a new business and provides the Secretary of State with the name and address of a registered agent. For a small business, that person might be the president of the company and the company’s address. As the business grows, bigger space is needed, or the business needs a better lease, so it moves. What is frequently overlooked is the need to update the name and address of the registered agent with the Secretary of State.
Jump forward a couple of years later and imagine that the company is sued as a result of an accident caused by an employee. The plaintiff’s attorney would order service of the petition on the company at the original registered address—the address that never got updated with the Secretary of State’s office. After unsuccessful efforts to have the petition served on the corporate president at the company’s old address, the plaintiff’s attorney serves the corporation through the Secretary of State, which is a long-established option under the Texas Civil Practice & Remedies Code section 17.044. The Secretary of State then mails notice of service on the business to the only known address—the outdated address on file. The forwarding address that had been provided to the post office might have long since expired, so the company might never receive timely actual notice that it has been sued. The right to serve through the Secretary of State is important, and this scenario illustrates how dangerous that option can be for a defendant company that has forgotten to update its address with the Secretary of State.
When the defendant company fails to answer, all of the factual allegations in the petition are taken as true. To prove up damages, the plaintiff simply schedules a hearing with the judge and testifies without cross-examination to his or her medical expenses and “soft damages” like pain and suffering and mental anguish. The judge is likely to sign off on a sizeable monetary judgment against the company, and leave it to the plaintiff’s lawyer to figure out how to keep the judgment once the defendant finally learns of it and hires a lawyer.
Three Ways to Set Aside a Default Judgment
There are three ways to have a default judgment set aside and start over in the trial court for a suit on the merits.
- The easiest method is available if you find out about the judgment within 30 days of its signature. You file a motion for new trial, give a basic explanation for your failure to answer, which can even include your own negligence. Then you set up a basic meritorious defense, which just means that if everything you claim is true, there might have been a different result if the case went to trial. However, if you were not served with notice of the suit being filed, that is all you have to prove. That accident or mistake in not answering and a meritorious defense do now have to be shown. Almost all default judgments challenged in this manner with 30days are set aside.
- If you find out more than 20 days, but fewer than 90 days after the judgment is signed, the time to file the motion for new trial runs for 30 days after you learn of it. If you find out more than 90 days, but fewer than six months after the judgment is signed, you can file a restricted appeal, which means you can obtain a reversal if you can show “error on the face of the record.” However, the court of appeals can look only at what was in the record at the time the judge ruled. If you need to introduce evidence to explain why you did not answer or that you have a meritorious defense, you cannot do so in a restricted appeal. Although it is often possible to find some discrepancy between the pleadings and the judgment or some misapplication of the law to the facts, an appeal is likely to take up to two years from start to finish.
- If you do not find out about the default judgment until after six months has passed, the only option left is to file a petition for bill of review in the same trial court that granted the judgment. The trial judge has very broad discretion to grant or deny it.
A clever Plaintiff’s lawyer might wait until after the six-month deadline for restricted appeal has passed before starting to collect on the default judgment and making the judgment finally known to the defendant company. No doubt by that time, the plaintiff will have figured out where the defendant’s true location is as he proceeds to seize the company’s property to satisfy the judgment.
By this time even when there are errors on the face of the record, the restricted appeal deadline has passed leaving the company with the sole option of a bill of review and asking the trial judge for forgiveness. With luck, there may still be some compelling facts to support setting aside the default judgment. But a defendant company might not be so lucky and may find itself with very limited options, wishing in hindsight that it had just notified the Secretary of State of the change of address. You can see the importance of maintaining your current address on file with the Secretary of State and making sure to properly send an update when it changes. When a business relocates, it is routine to change stationery and provide a forwarding address to the post office. Providing a change of address of the company’s registered agent should be as routine as these other move-related activities. Keeping an up-to-date address with the Secretary of State may prevent a lot of headaches down the road and potentially save the company from a sizable judgment.
