Opinion
Case No. 6:23-bk-1137-TPG Adversary No. 6:23-ap-67-TPG
2024-03-21
IN RE: Justin M. CARO, Debtor. HG Wellness, LLC, and Peninsula International, LLC, Plaintiffs, v. Justin M. Caro, Debtor.
John J. Bennett, Nardella & Nardella, PLLC, Orlando, FL, for Plaintiffs. William Strawcutter, Strawcutter Law, P.A., Lake Mary, FL, for Defendant.
John J. Bennett, Nardella & Nardella, PLLC, Orlando, FL, for Plaintiffs. William Strawcutter, Strawcutter Law, P.A., Lake Mary, FL, for Defendant. AMENDED ORDER DENYING MOTION TO SET ASIDE CLERK'S DEFAULT Tiffany P. Geyer, United States Bankruptcy Judge
Amended to include the undersigned's signature.
THIS PROCEEDING came on for hearing on December 13, 2023, upon the Debtor-Defendant's "Motion to Set Aside Clerk's Default Judgment[] and Motion to File Answer Out of Time" (the "Motion") (Doc. No. 21) and upon the "Amended Response in Opposition" (the "Response") (Doc. No. 26) filed by HG Wellness, LLC ("HG") and Peninsula International, LLC ("Peninsula") (HG and Peninsula, collectively the "Plaintiffs"). After considering the Motion and the Response, the arguments of counsel and the law, and reviewing the Debtor's filings in this adversary proceeding and the Debtor's instant case and prior Chapter 7 case before this Court, the Motion is denied. The Debtor failed to demonstrate good cause to set aside the Clerk's default.
The Debtor's reference to a default judgment is erroneous. The Court has not entered a default judgment. Rather, a Clerk's default was entered on November 27, 2023. (Doc. No. 19, amended by Doc. No. 22.)
A court may take judicial notice of its own records, ITT Rayonier Inc. v. United States, 651 F.2d 343, 345 n.2 (5th Cir. Unit B 1981). (The decisions of the United States Court of Appeals for the Fifth Circuit issued on or before September 30, 1981, are binding precedent in the Eleventh Circuit. Bonner v. City of Prichard, Ala., 661 F.2d 1206, 1207 (11th Cir. 1981)). Judicial notice includes notice of the "factual circumstances from a previous case." Pinson v. JPMorgan Chase Bank, Nat'l Ass'n, 942 F.3d 1200, 1210 n.7 (11th Cir. 2019) (taking judicial notice of the circumstances of the party's mortgage in a prior case). See also Brown v. Glob. Emp. Sols., Inc., 236 F. Supp. 3d 1299, 1301 n.2 (N.D. Ga. 2017) (noting, "This court may take judicial notice of the contents of its own records in other cases[,]" in recounting the basis for prior litigation between the parties).
I. Background
A. The Debtor's First Orlando Case
The Debtor filed two Chapter 7 cases in the Orlando Division of the Middle District of Florida. On November 15, 2017, he filed a Chapter 7 case bearing Case No. 6:17-bk-07232-CCJ (the "First Orlando Case"). The Debtor filed the instant Chapter 7 case on March 28, 2023 (the "Second Orlando Case"). (No. 6:23-bk-01137-TPG, Doc. No. 1.) He did not disclose the First Orlando Case when filing the Second Orlando Case as required. (Id. at 3, Part 2 § 9.) Standing in isolation, this could be construed as an oversight. But, as discussed below, the Debtor's approach to his disclosure and other obligations before this Court is problematic.
The Debtor also previously filed a Chapter 7 case in Maryland on May 26, 1998.
"Debtors are required to be utterly transparent in their financial disclosures." Park Ave. Ins. Agency v. Burzee (In re Burzee), 402 B.R. 8, 18 (Bankr. M.D. Fla. 2008). " 'A debtor has a paramount duty to consider all questions posed on a statement or schedule carefully and see that the questions are answered completely in all respects.' " Id. (quoting In re Sofro, 110 B.R. 989, 991 (Bankr. S.D. Fla. 1990)). A debtor is not permitted to decide for him or herself whether a question is relevant or material. Id. (citing Haught v. United States, 242 B.R. 522, 526-27 (M.D. Fla. 1999)).
For example, in the Debtor's First Orlando Case, the Debtor failed to disclose in his schedules filed with the petition his interests in valuable non-exempt personal property consisting of "Justin Caro, LLC" and "Carpenter Caro Poodles" (collectively, the "Poodle Business"), which the appointed Chapter 7 Trustee discovered and ultimately sold back to the Debtor for $60,000. (No. 6:17-bk-07232-CCJ, Doc. No. 34.) The Notice of Completion of Sale in the First Orlando Case was filed on December 31, 2018 (id.), about five years and four months before the petition date in the Second Orlando Case.
The Chapter 7 Trustee in the Debtor's First Orlando Case held and continued the Debtor's Section 341 meeting three times to permit further examination of the Debtor. It appears that the Chapter 7 Trustee discovered the Debtor's interests in the Poodle Business during the first two meetings as the Debtor subsequently amended his schedules on February 12, 2018, to disclose three AKC registered dogs (five dogs total, valuing his interest in the dogs at $3,150). (No. 6:17-bk-07232-CCJ, Doc. No. 10 at 4-5, Part 3 § 13.) The Debtor also listed two previously undisclosed Wells Fargo Accounts owned by his undisclosed business, Justin Caro, LLC. (Id. at 5, Part 4 § 17).
Presumably based upon the Debtor's non-disclosure, and perhaps for additional reasons, the attorney for the United States Trustee ("UST") in the First Orlando Case was preparing to file a complaint objecting to the Debtor's discharge pursuant to 11 U.S.C. § 727. (No. 6:17-bk-07232-CCJ, Doc. No. 19 ¶¶ 2, 6.) Rather than litigate with the UST, the Debtor decided to seek waiver of his discharge pursuant to 11 U.S.C. § 727(a)(10). (No. 6:17-bk-07232-CCJ, Doc. No. 18.) On March 12, 2018, the UST filed a motion to approve the waiver, noting that "good cause exists for the Debtor to waive his discharge in this case." (No. 6:17-bk-07232-CCJ, Doc. No. 19 ¶¶ 2, 6.) On May 30, 2018, the Court entered an order denying the Debtor's discharge pursuant to 11 U.S.C. § 727(a)(10). (No. 6:17-bk-07232-CCJ, Doc. No. 27 ¶ 3.) The First Orlando Case was closed on July 26, 2019. (No. 6:17-bk-07232-CCJ, Doc. No. 49.)
A waiver of discharge can moot adversary proceedings seeking denial of discharge. In re Akbarian, 505 B.R. 326, 330 (Bankr. D. Utah 2014).
B. The Debtor's Second Orlando Case and Plaintiffs' Adversary Proceeding
In the Second Orlando Case, the Debtor or his attorney failed to appear for the Debtor's scheduled Section 341 meeting of creditors on May 2, 2023, and the same was true at the rescheduled meeting on May 16, 2023, forcing the Chapter 7 Trustee to continue the meeting yet again to May 30, 2023. (No. 6:23-bk-01137-TPG.) The case thereafter proceeded in a normal course until July 7, 2023, when the Court entered an "Order Withholding Entry of Discharge" (No. 6:23-bk-01137-TPG, Doc. No. 13), because the Debtor failed to file the required financial management certificate, despite notification that such is a prerequisite to receiving a discharge (No. 6:23-bk-01137-TPG, Doc. No. 11).
Federal Rule of Bankruptcy Procedure 1007(b)(7)(A) requires a debtor to file a certificate of completion of a personal financial management course from an approved provider. A bankruptcy court may not grant a discharge to a debtor who has not filed the certificate. 11 U.S.C. § 727(a)(11).
One week before the Court entered the Order Withholding Entry of Discharge (No. 6:23-bk-01137-TPG, Doc. No. 13), on June 30, 2023, Plaintiffs filed this adversary proceeding ("AP") (AP Doc. Nos. 1, 2, 4), seeking a determination that certain debts they claim the Debtor owes them are nondischargeable under 11 U.S.C. § 523(a)(2)(A), (a)(4) and (a)(6), and that the Debtor should be denied a discharge pursuant to 11 U.S.C. § 727(a)(2) and (a)(4) (AP Doc. No. 4). With respect to the counts of the Complaint arising under Section 523 (exception of debt from discharge), Plaintiffs allege that the Debtor took advantage of his second cousin, Elvia Goldberg, whose corporation owns the Plaintiffs, following the sudden death of her husband. (AP Doc. No. 4 ¶¶ 6, 9, 11.) Plaintiffs contend the Debtor misappropriated $118,550.37, including by using the companies' credit cards for personal expenses (id. ¶¶ 49, 50, 53), and that the Debtor owes them $335,678.27 under Florida's Civil Remedies for Criminal Practices Act (id. ¶¶ 52, 53), which permits treble damages upon clear and convincing evidence that the victim was injured by theft, plus reasonable attorney's fees and court costs, under Florida Statute section 772.11(1). Plaintiffs argue this (presently unliquidated) debt should be excepted from discharge as having been obtained by, or resulting from: false pretenses, a false representation, or actual fraud (11 U.S.C. § 523(a)(2)(A)); fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny (11 U.S.C. § 523(a)(4)); a willful and malicious injury (11 U.S.C. § 523(a)(6)).
With respect to the Section 727 counts in the Complaint (denial of discharge), Plaintiffs allege that the Debtor still operates the same, or a similar, business as the Poodle Business he bought back from the Chapter 7 Trustee in his First Orlando Case, and that the Debtor once again failed to disclose this asset which, Plaintiffs allege, was operational and generating revenue as of June 23, 2023 (post-petition). (Id. ¶¶ 55 - 57, 59, 60.) In addition, Plaintiffs allege the Debtor vastly underestimated the value of his personal property on his schedules (id. ¶¶ 61, 62) and underreported his income, having scheduled just $48,500 for 2021 (No. 6:23-bk-01137-TPG, Doc. No. 1 at 35), when HG alone paid him at least $83,600 that year as reported on the Debtor's 1099, and reporting no income for 2022 when HG paid him $52,225.23 (AP Doc. No. 4 ¶¶ 64, 65). Lastly, Plaintiffs allege the Debtor failed to disclose a lawsuit he filed on January 2, 2023, for breach of an insurance contract pending as Case No. 2023-CC-000002 in the Eighteenth Judicial Circuit, Seminole County, Florida. (Id. ¶ 66.) Based on these allegations, Plaintiffs ask the Court to deny the Debtor a discharge for making a false oath (11 U.S.C. § 727(a)(4)); and concealing assets (11 U.S.C. § 727(a)(2)).
C. The Motion to Dismiss
In response to the Complaint, on August 15, 2023, the Debtor filed a motion to dismiss (the "Motion to Dismiss") (AP Doc. No. 11), arguing that his failure to file the required certificate evidencing completion of a course in personal financial management mooted the relief Plaintiffs sought in their discharge action since the Court was already withholding his discharge. (No. 6:23-bk-01137-TPG, Doc. No. 13.) Yet, as noted in Plaintiffs' Response (AP Doc. No. 16), on September 26, 2023, the Debtor cured this deficiency and filed his financial management certificate (No. 6:23-bk-01137-TPG, Doc. No. 17), making him eligible for a discharge.
Suffice it to say, and as Plaintiffs correctly note, among other things, that the Clerk's withholding a discharge due to a curable deficiency is not equivalent to a judgment excepting a debt from discharge or a judgment denying a discharge altogether. (AP Doc. No. 16.)
The parties ultimately reached an agreement on what should happen next in the adversary proceeding and submitted an agreed order which the Court entered on September 27, 2023, denying the Debtor's Motion to Dismiss and supplying the Debtor with an additional month, until October 27, 2023, to respond to the Complaint. (AP Doc. No. 17 at 2.) But the Debtor failed to respond by the new agreed deadline. So, one week after the deadline expired, on November 3, 2023, Plaintiffs filed a Motion for Entry of Default (AP Doc. No. 18), and the Clerk entered a default on November 20, 2023 (AP Doc No. 19, subsequently amended by Doc. No. 22).
D. The Motion to Set Aside Clerk's Default
The Debtor's attorney, William Strawcutter, sought to set aside the default arguing that the failure to respond to the Complaint arose due to a good faith misunderstanding and "failure in the communication process," detailing these issues in the Motion (AP Doc. No. 21 ¶ 7) and at the hearing on the Motion (which the Debtor did not attend) (AP Doc. No. 28). The Motion sets forth communication issues between Strawcutter and the Debtor leading to purported confusion about whether Strawcutter was representing the Debtor in the AP and whether the Debtor desired to defend the AP; Strawcutter "made several attempts to communicate with the Defendant via multiple voicemails and a text message" and received no response. (AP Doc. No. 21 ¶¶ 2, 3.) Only after the default was entered did Strawcutter receive a response from the Debtor claiming not to have received any of Strawcutter's prior communications. (Id.) Strawcutter supported the Motion with his sworn statement (id. at 4-5), but the Debtor provided nothing. In addition, Strawcutter claims the Debtor has a meritorious defense as set forth in the proposed Answer attached to the Motion and that Plaintiffs will not be prejudiced if the default is set aside. (Id. ¶¶ 8, 9.)
In short, Plaintiffs disagree with all these contentions and argue that the Debtor failed to show good cause to set aside the default, failed to assert a meritorious defense, and that they will be prejudiced by continued delay if the default is set aside. (AP Doc. No. 26 at 4-6.)
II. Legal Standard
Federal Rule of Civil Procedure 55(c), made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7055, provides that the Court "may set aside an entry of default for good cause." Perez v. Wells Fargo N.A., 774 F.3d 1329, 1337 (11th Cir. 2014) (Rule 55(c) provides the applicable standard to review a motion to set aside a clerk's default). "Good cause is a mutable standard, varying from situation to situation." Compania Interamericana Exp.-Imp., S.A. v. Compania Dominicana de Aviacion, 88 F.3d 948, 951 (11th Cir. 1996) (internal quotations and citations omitted). As such, the standard is liberal with no precise formula, although guidelines have developed. Perez, 774 F.3d at 1337, n.7. Generally, a court will consider whether: (1) the defendant's failure to respond was culpable or willful, (2) the defendant acted promptly to vacate the default, (3) the defendant has meritorious defenses, (4) the plaintiff will be prejudiced if the default is set aside, (5) the public interest is implicated, and (6) whether there was significant financial loss to the defaulting party. Id. "[N]o talismanic significance is accorded any of these factors; the overarching question is whether circumstances exist that warrant a finding of good cause to set aside the default." Am. Fam. Home Ins. Co. v. Hillery, No. CIV.A. 08-0547-WS-C, 2009 WL 197970, at *1 (S.D. Ala. Jan. 23, 2009); Compania Interamericana, 88 F.3d at 951-52.
The defaulting party bears the burden to establish good cause to set aside a Clerk's default. Nat'l Indem. Co. of the S. v. H &C Fla. Trucking, Inc., No. 6:22-CV-74-PGB-LHP, 2023 WL 1824564, at *1 (M.D. Fla. Jan. 31, 2023) (quoting Insituform Techs., Inc. v. AMerik Supplies, Inc., 588 F. Supp. 2d 1349, 1352 (N.D. Ga. 2008)). Good cause does not exist if a party has demonstrated "an intentional or willful disregard" of court proceedings. Perez, 774 F.3d at 1337 n.7. In such cases, "the court need make no other findings in denying relief." Compania Interamericana, 88 F.3d at 951-52; Savoia-McHugh v. Glass, No. 22-13303, 95 F.4th 1337, 1342-44 (11th Cir. Mar. 13, 2024) (willful default negated a finding of good cause to set aside default).
III. Analysis
The Debtor has not demonstrated good cause to set aside the Clerk's default. The Debtor was properly served with the Complaint (AP Doc. No. 9 at 1) initiating this AP and the Court notes the Debtor is not a stranger to litigation; he was named as a defendant in two civil actions commenced pre-petition (No. 6:23-bk-01137-TPG, Doc. No. 1 at 26 Part 4) (plus potentially one other suit Plaintiffs allege he failed to disclose (AP Doc. No. 4 ¶ 66)), and would thus be generally aware of the obligation to respond to a lawsuit. He also weaponized his delay in filing the certificate evidencing he completed a financial management course to manufacture grounds to seek dismissal of the Complaint as moot. This action resulted in an agreed order supplying the Debtor with another month to respond to the Complaint, but the deadline came and went with no response.
As demonstrated by Strawcutter's sworn statement, the Debtor failed to communicate with Strawcutter about the AP until after the Clerk entered a default. The Debtor also made no effort to explain his lack of communication; he did not supply an affidavit, nor did he attend the hearing on the Motion. The Debtor simply offered nothing that might aid this Court in concluding his lack of responsiveness was due to circumstances beyond his control or any other justification that might permit this Court to find good cause exists to set aside the Clerk's default. The Court concludes that the Debtor willfully or intentionally disregarded this proceeding, obviating any need to further consider whether good cause exists to set aside the default. Compania Interamericana, 88 F.3d at 951-52.
Regardless, because public policy strongly favors an evaluation of cases on the merits, Florida Physician's Insurance Co. v. Ehlers, 8 F.3d 780, 783 (11th Cir. 1993), the Court did review the Debtor's responses and affirmative defenses set forth in the proposed Answer to evaluate potential merit in the event such might nevertheless still sway the Court (AP Doc. No. 21 at 6-9). At a post-default stage, the Debtor's burden of demonstrating a meritorious defense is higher than it would have been if he timely filed an answer. Am. Express Travel Related Servs. v. Jawish (In re Jawish), 260 B.R. 564, 567-68 (Bankr. M.D. Ga. 2000). Now, he can no longer rely on "general denials and conclusory statements" as he may have in a timely filed answer. Id. Instead, he "must allege some evidence of a factual basis for a meritorious defense" that could justify setting aside the default. Id. (internal citations omitted).
In Count I, Plaintiffs object to the Debtor's discharge pursuant to 11 U.S.C. § 727(a)(4), contending that the Debtor knowingly and fraudulently, in or in connection with the Second Orlando Case, made a false oath or account. (AP Doc. No 4 ¶ 72.) Count I occupies paragraphs 68 through 76 of the Complaint, and paragraph 68 reincorporates and realleges the factual allegations in paragraphs 1 through 67. (Id. ¶¶ 68-76.) In the proposed Answer, the Debtor denies all allegations (AP Doc. No 21, at 7, ¶¶ 5, 6) and asserts no affirmative defenses. Similarly, with respect to Count II in which Plaintiffs object to the Debtor's discharge pursuant to 11 U.S.C. § 727(a)(2), contending that the Debtor concealed property of the estate with the intent to hinder, delay, or defraud a creditor or an officer of the estate (AP Doc. No 4 at 12 ¶¶ 76-79), the Debtor also denies all allegations (AP Doc. No 21, at 7, ¶ 6) and asserts no affirmative defenses.
Plaintiffs erroneously included two paragraphs 76 in the Complaint.
Although in paragraphs 5 and 6 of the proposed Answer the Debtor denied without qualification all allegations in paragraphs 1 through 79 of the Complaint, he also denied all, or nearly all, factual allegations specific to the Section 727 counts claiming he lacks sufficient knowledge, information, or proof (id. ¶ 4) of these allegations. Certain of his denials based on a lack of sufficient knowledge, information, or proof are highly implausible. For example, in paragraph 59 of the Complaint, Plaintiffs allege the Debtor "has again failed to disclose Justin Caro LLC or his dog-breeding company in his Schedules." (AP Doc. No 4 ¶ 59.) Here, the Debtor would certainly know if he still owned the limited liability company bearing his name which he purchased from the Chapter 7 Trustee in his First Orlando Case. If the Debtor sold or dissolved the company, he could have and should have affirmatively alleged such, but he did not. In paragraph 60, Plaintiffs allege the Debtor "has numerous dogs listed for sale at the time of this filing" as reflected on a Facebook site. (Id. ¶ 60.) This too should be something within the Debtor's knowledge; he either did, or did not, have dogs listed for sale when the Complaint was filed, yet he professes to lack sufficient knowledge, information, or proof of this allegation. (AP Doc. No. 21 at 6, ¶ 4.) In paragraph 64 of the Complaint, Plaintiffs allege HG paid him "at least $83,600 during the 2021 period" and that this income was reported on the Debtor's 1099. (AP Doc. No. 4 ¶ 64.) Again, the facts underlying these allegations would be within the Debtor's knowledge, so the Debtor's response that he lacks sufficient knowledge, information, or proof is disingenuous. In paragraph 66, Plaintiffs allege the Debtor failed to disclose a lawsuit he filed on January 2, 2023, for breach of an insurance contract pending as Case No. 2023-CC-000002 in the Eighteenth Judicial Circuit, Seminole County, Florida. (Id. ¶ 66.) Surely the Debtor has sufficient information to know whether he filed such a lawsuit.
It is true that the Debtor did not disclose these items in the Second Orlando Case.
If only parts of an allegation were true, the Debtor could have admitted those parts and denied the remaining ones. Federal Rule of Civil Procedure 8(b)(4), made applicable to adversary proceedings by Federal Rule of Bankruptcy Procedure 7008, permits a party to deny part of an allegation, stating, "A party that intends in good faith to deny only part of an allegation must admit the part that is true and deny the rest." See also Satco Prods., Inc. v. Seoul Semiconductor Co., 551 F. Supp. 3d 1329, 1335 (N.D. Ga. 2021) (deeming admitted defendant's wholesale denials of allegations because defendant argued the allegations partly contained statutory language, where defendant violated Rule 8(b)(4) by not admitting part of the allegations).
On the Section 727 counts, the Debtor's bare denials, and denials based upon a lack of knowledge, information, or proof in circumstances where it seems apparent that the Debtor should have personal knowledge, are not meritorious defenses. Sw. Ga. Farm Credit v. Justice (In re Justice), 330 B.R. 872, 875 (Bankr. M.D. Ga. 2005) (general denials of paragraphs in a complaint presented in an untimely answer were insufficient to permit the court to conclude the debtor/defendant presented a meritorious defense); In re Jawish, 260 B.R. at 567-68 (in untimely answer, where defendant responded only with general admissions, denials, and statements of insufficient knowledge, defendant failed to establish a meritorious defense and was deemed to admit well-pleaded factual allegations). Thus, in addition to failing to establish good cause to set aside the Clerk's default, he also failed to demonstrate meritorious defenses to the Section 727 counts in the Complaint.
For Counts III, IV, and V of the Complaint (the Section 523 exceptions to discharge counts), the Debtor made more of an effort and asserted affirmative defenses which he claims establish facts supporting a meritorious defense. In general, these defenses claim a misunderstanding between the Debtor and Goldberg insofar as the Debtor believed he had Goldberg's endorsement and permission to use Plaintiffs' monies either as he did, or as a loan which he would settle out in the future. (AP Doc. No. 21 at 7, ¶ 11(a)-(b), 8, ¶¶ 12-14). Although these defenses might be legally cognizable, they are of no consequence here since the Debtor supplied only mere denials without defenses to the Section 727 counts, which subsume the Section 523 counts, as the Section 727 counts would, if proven, deny the Debtor his discharge entirely, rather than except a single alleged debt from discharge.
Finally, in the Debtor's proposed Answer, the Debtor asks the Court to abstain from hearing the AP, describing the AP as involving "fundamentally a state law matter[,]" and asks this Court to "respect the jurisdiction of the state court in resolving this dispute[,]" noting that "continuation of this case in state court will likely have minimal impact on the bankruptcy estate." (Id. at 8-9, ¶¶ 15, 18.) In the Wherefore clause, the Debtor asks the Court to either dismiss the AP or his Chapter 7 case (it is unclear to the Court exactly what the Debtor is asking for), or alternatively to proceed to a trial on the AP. (Id. at 9). Given the lack of clarity in the Debtor's requests, the Court will schedule a hearing to consider how the Plaintiffs and the Debtor wish to proceed.
Accordingly, it is ORDERED:
1. The Motion (Doc. No. 21) is DENIED.
2. The Court will hold a further pretrial status conference in this matter on April 24, 2024, at 2:30 p.m., before the Honorable Tiffany P. Geyer, United States Bankruptcy Judge, at Courtroom 6A, Sixth Floor, of the United States Bankruptcy Court, 400 West Washington Street, Orlando, Florida 32801.