Opinion
Case No. 1-03-06401MDF.
December 23, 2004
OPINION
Procedural and Factual History
Before me is the objection of Dale E. and Jennifer Warner ("Debtors") to a proof of claim filed by the Internal Revenue Service ("IRS"). On October 29, 2003, Debtors filed the instant bankruptcy petition. They listed the IRS as a creditor holding an unsecured priority claim in the amount of $15,233.00 for taxes due in 2001 and $6,917.00 for taxes due in 2002. The deadline for the IRS to file a proof of claim was April 29, 2004. On December 12, 2003, the IRS filed a proof of claim in the estimated amount of $12,000.00. The claim was estimated because Debtors had not filed their tax returns for 2001 and 2002 .
On July 7, 2004, Debtors filed an objection to the IRS proof of claim in which they requested that the allowed claim of the IRS be limited to the amount of the estimated claim, $12,000.00. The basis for this request was that the attorney for Debtors had contacted the IRS to obtain an amended proof of claim, but no amendment had been filed. Debtors mailed their objection to the IRS on July 9, 2004. The notice that accompanied the objection gave the IRS thirty days in which to file a response. On July 19, 2004, the IRS amended its proof of claim to reflect a total claim of $30,273.59. However, the IRS did not file a response to the objection to its original proof of claim until August 11, 2004, three days beyond the deadline. On August 13, 2004, Debtors moved for default judgment on their objection to the original proof of claim. Default was requested on the grounds that the IRS had not responded timely to the Debtors' objection. The IRS filed a responsive pleading opposing Debtors' motion for default. A hearing was held on the matter and the IRS has filed a brief. The matter is ready for decision.
I have jurisdiction to hear this matter pursuant to 28 U.S.C. §§ 157 and 1334. This matter is core pursuant to 28 U.S.C. § 157(b)(2)(A), (B) and (O). This Opinion constitutes the findings of fact and conclusions of law made under Fed.R.Bankr.P. 7052.
Discussion
As a general principle, courts do not favor default judgments and "in a close case, doubts should be resolved in favor of . . . reaching the merits." Zawadski de Bueno v. Bueno Castro, 822 F.2d 416, 420 (3d Cir. 1987), citing, Gross v. Stereo Component Systems, Inc., 700 F.2d 120, 122 (3d Cir. 1983); Farnese v. Bagnasco, 687 F.2d 761, 764 (3d Cir. 1982). See also, Chase Manhattan Bank v. Iridium Africa Corp., 2004 WL 323173, *2 (D.Del.); Continental Cas. Co. v. Diversified Industries, Inc., 884 F.Supp. 937, 963 (E.D.Pa. 1995) ("strong policy disfavoring default judgments and encouraging decisions on the merits") ( citing, Harad v. Aetna Casualty Surety Company, 839 F.2d 979, 982 (3d Cir. 1988)). Default judgments are highly disfavored because the "interests of justice are best served by reaching a decision on the merits." Dick Corp. v. W. Golden Const., Inc., 2003 WL 23019189, *3 (W.D.Pa.); Natasha C. v. Visionquest, Ltd., 2003 WL 21999591, *1 (E.D.Pa.) (citations omitted). "A court's discretion to enter default judgment should be sparingly used. . . ." Continental Cas., 884 F.Supp. at 963, citing, Horner Equipment International, Inc. v. Seascape Pool Center, Inc., 884 F.2d 89, 93 (3d Cir. 1989). "That discretion should be sparingly used unless the party who suffers it has had an opportunity to cure the default and failed to do so." Horner Equipment, 884 F.2d at 93.
The facts of the instant case clearly do not demand entry of default in preference to a decision on the merits. Debtors seek a default judgment against the IRS because of a delay of three days in filing a response to Debtors' objection to its claim. It is ironic that Debtors complain about the tardy response of the IRS when its claim is based in part on the Debtors' delinquency of a year or more filing their tax returns. Further, it was Debtors' tardiness in filing their returns that forced the IRS to file an estimated proof of claim. Most important, a default would enable Debtors to satisfy a debt they acknowledged in the schedules to be $22,150.00 by paying only $12,000, the amount included on the estimated proof of claim. Debtors do not claim to have been surprised by the amount of the amended proof of claim, or that the IRS figure is excessive. Debtors did not file a substantive objection to the amounts listed on the amended proof of claim. Debtors simply seek to assert a procedural defect in the claim process and obtain a windfall.
"It is well settled that, absent contrary equitable considerations or prejudice to the opposing party, amendments to proofs of claim should be freely permitted." In re Old Electralloy Corp., 167 B.R. 786, 796 (Bankr. W.D. Pa. 1994) (citations omitted.) This liberal treatment extends even to amendments filed beyond the bar date for filing proofs of claims. In re Tanaka Bros. Farms, Inc., 36 F.3d 996, 998 (10th Cir. 1994); In re Commonwealth Corp., 617 F.2d 415, 420 (5th Cir. 1980); In re International Horizons, Inc., 751 F.2d 1213, 1217 (11th Cir. 1985); Old Electralloy Corp., 167 B.R. at 796; In re W.T. Grant Co., 53 B.R. 417, 420 (Bankr. S.D.N.Y. 1985); In re Hanscom Retail Foods, Inc., 96 B.R. 33, 35 (Bankr. E.D. Pa. 1988); In re Ungar, 70 B.R. 519, 521 (Bankr. E.D. Pa. 1987). In the instant case, there clearly is no reason to disallow the instant amendment under these facts. Moreover, the notice that accompanied the objection to claim specifically stated that the IRS could file an amended proof of claim, and the amended proof of claim was filed within the time period for answering the objection to claim.
For all of these reasons, the motion for default will be denied and an order will be entered allowing the claim of the IRS as asserted in the amended proof of claim.