## Facts

- Shepard Claims Service, Inc., a Michigan independent claims adjuster, sued William Darrah & Associates, a South Carolina insurance broker, in a diversity contract action for nonpayment for services.
- After initial service difficulties, Darrah was personally served on February 7, 1985.
- On February 22, 1985, Darrah’s counsel (through counsel’s secretary) obtained a telephone extension to answer; a confirmation letter stated Darrah had “45 days from February 22, 1985, to answer.”
- Darrah did not file an answer by April 10, 1985, and Shepard requested and obtained a clerk’s entry of default.
- After the entry of default, Darrah filed a notice of retention (April 19), an answer (April 26), and additional defensive and discovery filings including affirmative defenses and a counterclaim (April 29).
- On May 1, 1985, Darrah moved to set aside the entry of default under Federal Rule of Civil Procedure 55(c), submitting affidavits from counsel and the secretary asserting they understood the extension to be 45 days added to the normal response period, making the answer due after April 10.
- The district court denied Rule 55(c) relief, finding counsel’s conduct “culpable,” emphasizing counsel’s delegation to a secretary and lack of review.
- Darrah took an interlocutory appeal challenging only the entry of default and refusal to set it aside, not the contract merits.

## Issues

1. Whether the district court abused its discretion by denying a motion to set aside an entry of default under Rule 55(c) where the plaintiff showed no prejudice, the defendant asserted a meritorious defense, and the late filing stemmed from a misunderstanding about an agreed extension.

## Decision

- The Sixth Circuit vacated the order denying Darrah’s Rule 55(c) motion and remanded for proceedings on the merits.
- The court held the district court abused its discretion in refusing to set aside the clerk’s entry of default.
- The court found no meaningful prejudice to Shepard from setting aside the default.
- The court held Darrah showed a meritorious defense by asserting substantive defenses in its answer.
- The court concluded the failure to answer before default reflected, at most, negligence and not the level of culpability required to deny Rule 55(c) relief.

## Legal Principles

- An entry of default may be set aside for “good cause” under Rule 55(c), a standard more lenient than the standard for vacating a default judgment under Rule 60(b).
- In assessing “good cause” to set aside an entry of default, courts consider: (1) prejudice to the plaintiff, (2) whether the defendant has a meritorious defense, and (3) whether the defendant’s conduct was culpable.
- “Culpable conduct” in this context requires intent to frustrate judicial proceedings or reckless disregard for the effect of the conduct on those proceedings; mere negligence does not necessarily bar relief.
- When lack of prejudice and a meritorious defense strongly favor relief, denying a Rule 55(c) motion based solely on attorney fault is improper absent willful or recklessly indifferent conduct.
- Federal procedure favors resolution on the merits, and default should not operate primarily as an attorney-sanction mechanism that deprives a party of adjudication on the merits.

## Conclusion

The Sixth Circuit required the entry of default to be set aside because Shepard identified no concrete prejudice, Darrah presented a colorable defense, and the missed deadline resulted from a mistaken understanding of an extension rather than willful or recklessly indifferent conduct.


Shepard Claims Serv., Inc. v. William Darrah & Assocs., 796 F.2d 190 (6th Cir. 1986)