A Default Judgment Was Entered Against My Company. Can It Be Undone?

How a company ends up with a default judgment

A default judgment is entered when a defendant is served with a lawsuit and does not file an answer by the deadline. In Texas state court the answer is due by 10:00 a.m. on the Monday following the expiration of 20 days after service. Once that date passes without an answer, Texas Rule of Civil Procedure 239 allows the plaintiff to take a default judgment, and if the damages are not fixed by a written instrument the court holds a short hearing on the amount under Rule 243. The defendant is not notified of the hearing. Under Rule 239a the clerk mails notice that a default judgment was signed to the last known address the plaintiff certifies, but failure of that notice does not affect the judgment's finality.

Companies usually learn of the judgment late, and usually for one of a few reasons: the registered agent's address on file with the Secretary of State was out of date; the papers were served on the Secretary of State as a substitute and forwarded to an old address; a receptionist signed for the citation and set it aside; or the owner assumed the matter would go away. The cause matters, because the remedy depends partly on why no one answered.

If the company has been served and the deadline has not yet passed, there is no default to undo. What happens after you are served with a lawsuit in Texas covers that situation.

First question: was service proper?

A default judgment is only as good as the service that preceded it. Texas requires strict compliance with the service rules before a default can stand, and the record must show that compliance; presumptions that help a plaintiff in other contexts do not apply. Points to check immediately:

• Who was served, and were they authorized? An entity is served through its registered agent, president or vice president; a receptionist or a manager without authority is not enough.
• Was the registered agent's address the one on file, and was the return of service completed and signed as Rule 107 requires, including the officer's or process server's identification?
• Under Rule 107 the return must be on file with the clerk for ten days, excluding the day of filing and the day of judgment, before a default may be taken.
• If the plaintiff served the Secretary of State as a substitute under Section 5.251 of the Business Organizations Code, did the record show that the registered agent could not be found at the registered office with reasonable diligence? A single failed attempt often does not.

A defect in service is the strongest ground at every stage, because a judgment entered without valid service is not merely erroneous but void, and a void judgment can be set aside without proving a defense on the merits.

Within 30 days: motion for new trial

Under Rule 329b a motion for new trial must be filed within 30 days after the judgment is signed. For a no-answer default, Texas courts apply a three-part test that the Supreme Court of Texas set out in 1939 and has applied since. The default must be set aside if the defendant shows that:

1. the failure to answer was not intentional or the result of conscious indifference, but was due to a mistake or an accident;
2. the motion sets up a meritorious defense, meaning it alleges facts which, if true, would constitute a defense, supported by an affidavit or other evidence; and
3. granting a new trial will cause no delay or other injury to the plaintiff.

The first element is where most motions are decided. Conscious indifference means knowing the suit was pending and doing nothing; a misunderstanding, a misdirected citation, an employee who failed to pass the papers along, or a reasonable belief that insurance counsel had answered will usually qualify as mistake. The defendant's explanation is taken as true if the plaintiff does not controvert it. On the third element, defendants typically offer to reimburse the plaintiff's costs of obtaining the default and state that they are ready for trial. If the defendant was never served at all, the first element is satisfied automatically and courts do not require proof of a meritorious defense.

Timing in this window is unforgiving. If the court does not rule, the motion is overruled by operation of law 75 days after the judgment was signed, and the court's plenary power ends 30 days after that. A timely motion for new trial also extends the deadline for an ordinary appeal from 30 to 90 days, which preserves a second route if the motion is denied.

Within six months: restricted appeal

If the 30 days have passed, Texas Rule of Appellate Procedure 30 allows a restricted appeal to the court of appeals within six months after the judgment is signed by a party who was a party to the suit, did not participate in the hearing that resulted in the judgment, and did not timely file a post-judgment motion or request for findings. The appellant must show error apparent on the face of the record. No new evidence is taken; the court of appeals reads the clerk's record. Defective service is the classic ground: a return that does not match the citation, service on an unauthorized person, a missing ten-day interval, or a substitute-service affidavit that does not show diligence. A damages award without the evidence Rule 243 requires is another.

Within four years: bill of review

A bill of review is a separate lawsuit, filed in the court that rendered the judgment, asking that court to set the judgment aside after the time for other remedies has passed. It is governed by the four-year residual limitations period in Section 16.051 of the Civil Practice and Remedies Code. The petitioner must ordinarily plead and prove a meritorious defense, that it was prevented from making that defense by the fraud, accident or wrongful act of the opposing party or by official mistake, and that its own negligence played no part. A defendant that was never served, however, is excused from proving a meritorious defense and from showing diligence, because a judgment without service violates due process. Bills of review are hard to win on any other ground; they exist for the case where the defendant truly had no chance to be heard.

Federal court

In the Northern District of Texas and other federal courts, the sequence is different. The clerk first enters a default under Fed. R. Civ. P. 55(a), and the court or clerk then enters a default judgment under Rule 55(b). An entry of default may be set aside for good cause under Rule 55(c). A default judgment is set aside under Rule 60(b): for mistake, inadvertence, surprise or excusable neglect, the motion must be filed within one year; a judgment that is void for lack of service may be attacked within a reasonable time. Federal courts weigh whether the default was willful, whether setting it aside would prejudice the plaintiff and whether the defendant has a meritorious defense, and they state a preference for deciding cases on the merits.

Meanwhile, the judgment is being enforced

A default judgment is a judgment. Under Rule 627 the plaintiff may obtain a writ of execution 30 days after the judgment is signed, or, if a timely motion for new trial is filed, 30 days after it is overruled. Before that the plaintiff can abstract the judgment, creating a lien on the company's real property in any county where the abstract is recorded, and after it can garnish bank accounts and levy on assets. How a judgment is collected in Texas shows what the plaintiff can do.

A timely motion for new trial delays execution but does not stop an abstract or a garnishment already in motion. To suspend enforcement while a motion or appeal is pending, the defendant can post security under Rule 24 of the appellate rules. Companies that discover a default through a frozen bank account are often dealing with a garnishment that was filed the day execution became available, which is one reason to move within days rather than weeks. Appealing a business case in Texas explains the bond.

What to do today

1. Get the judgment and the entire court file, including the citation, the return of service and any substitute-service affidavit. Note the date the judgment was signed.
2. Find out exactly how the papers were delivered and to whom, and preserve every document and email about it. The explanation for the failure to answer must be truthful and specific.
3. Check the company's registered agent and registered office on file with the Secretary of State, and correct them.
4. Identify the defense to the underlying claim, with the documents that support it, so the motion can set up a meritorious defense with evidence.
5. Have a litigator file the motion for new trial, restricted appeal or bill of review that the calendar allows, and decide whether to post security against enforcement.

Example

Suppose a Dallas HVAC contractor learns from its bank that an account has been garnished to satisfy a judgment it never heard of. The file shows a supplier sued for an unpaid invoice, served the Secretary of State after one attempt at a registered office the contractor vacated two years earlier, and took a default 45 days ago. The 30-day window for a motion for new trial has closed, but the six-month window for a restricted appeal is open, and the substitute-service affidavit on its face shows a single attempt, which courts have held insufficient to show reasonable diligence. The contractor also has a defense on the merits: part of the invoice covers goods it returned. The restricted appeal attacks the service; the defense is held for the trial that follows a reversal.

Tina Wysk represents Dallas businesses in setting aside default judgments and in defending the underlying claims once the judgment is vacated. Contact details are here.