Default judgment reversed in car dealership collections case

Default judgment against a former auto dealership executive has been set aside after the Indiana Court of Appeals found excusable neglect in an executive’s failure to adequately respond to a collections complaint.

In September 2013, Hamilton County-based NextGear Capital Inc. granted a loan to No Credit Check Auto Sales Inc., a California dealership that received a maximum of $450,000 in credit from NextGear. Jimmy Chung Fai Tam signed the promissory note as the dealership’s president, while Jun Li signed as vice president.

However, shortly after executing the note, Li stopped working with the dealership, giving Tam individual control. Li’s communication with NextGear also stopped when the business relationship ended.

Over time, the dealership failed to repay funds advanced by NextGear, leading the lender to declare that the entire amount due and owing under the note was due immediately. As of October 2018, that amount totaled more than $1.2 million, as NextGear had increased the maximum under the line of credit.

In November 2017, NextGear repossessed about 100 vehicles due to the default on the loan. Then in May 2018, NextGear filed a Hamilton County complaint against the dealership, Tam and Li, alleging multiple counts of breach of contract, as well as conversion.

The lender was only able to perfect service on Li, who did not appear in the lawsuit or file any pleadings. But Li called Tam after receiving service and later testified that Tam told him that his lawyer, Yasha Rahimzadeh, was negotiating with NextGear on Li’s behalf. However, Li did not personally retain Rahimzadeh in the litigation.

The dealership was later dismissed with prejudice from the lawsuit on NextGear’s motion, but the lender successfully sought default judgment against Tam and Li. The two subsequently moved to set aside default judgment after they retained another attorney.

The Hamilton Superior Court granted the motion as to Tam but denied it as to Li, saying Li “admitted receiving proper service of the complaint. The evidence presented did not establish excusable neglect to set aside the default judgment.”

Li appealed, and the Indiana Court of Appeals reversed in his favor Wednesday in Jun Li and Jimmy Chung Fai Tam v. NextGear Capital, Inc., 19A-CC-608.

Judge James Kirsch, writing for the appellate panel, likened Li’s situation to Whittaker v. Dail, 584 N.E.2d 1084 (Ind. 1992), and Flying J, Inc. v. Jeter, 720 N.E.2d, 1247 (Ind. Ct. App. 1999), where excusable neglect was found under Indiana Trial Rule 60(B)(1).

“Li testified that he asked Rahimzadeh to represent Li in the litigation, and Rahimzadeh responded that he represented Tam and Dealership and because he represented Dealership, the representation ‘should … include [Li],’” Kirsch wrote. “Rahimzadeh did not inform Li that there was anything more Li needed to do to protect his interests in the litigation, and Li believed that because Rahimzadeh was negotiating on his behalf, this was a sufficient response to NextGear’s complaint on the defendants’ collective behalf and that there was nothing more he needed to do.

“…Therefore, like the defendants in Whittaker and Flying J, Li understandably, albeit mistakenly, believed that all was being taken care of and nothing more was required of him,” Kirsch continued. “We conclude that the neglect by Li in failing to file an answer to NextGear’s complaint was excusable.”

Further, as required under Rule 60(B), the appellate panel said Li made a prima facie showing of a meritorious defense. Specifically, the court said NextGear was required under Indiana Code § 26-1-9.1-611 to provide the dealership, Tam and Li with notice of the disposition of the vehicles that were repossessed, but did not do so.

Thus, the trial court abused its discretion in denying Li’s motion to set aside default judgment, the COA said, and the case was remanded for further proceedings.

In a separate concurring opinion, Judge Margret Robb wrote to address the majority’s finding that Li’s case was more like Whittaker and Flying J than Smith v. Johnston, 711 N.E.2d 1259 (Ind. 1999).

“Smith is an instructive case with regard to an attorney’s obligations to the court and to the legal process and stands for a proposition greater than simply, ‘there was neglect, but it was not excusable neglect,’” Robb wrote, referencing the majority opinion. “With that observation, I concur in the majority opinion.”