Opinion
Case No. 01-61406-T, Chapter 7; Adv. Proc. No. 01-6044-T
May 21, 2002
MEMORANDUM OPINION AND ORDER
Hearing was held February 27, 2002, on plaintiff's motion for default judgment on its complaint and on debtor's motion to dismiss or in the alternative to set aside default and grant leave to file late answer. After hearing argument the court took the matter under advisement.
For reasons stated below, the court will deny the default motion.
Facts and Procedural History.
Debtor defendant filed this chapter 7 bankruptcy case on August 16, 2001. In his filing he was represented by attorney William E. Seals. At the time of filing his petition, debtor was the owner and operator of an automobile dealership, trading as Columbia Auto Outlet, Inc. On November 13, 2001, plaintiff initiated this adversary proceeding by filing its complaint to determine dischargeability of debt pursuant to 11 U.S.C. § 523(a)(2), (4) and (6). The clerk erroneously entered the filing date as November 14, 2001.
In making this determination, the court relies on a date stamped copy of the complaint showing a filing date of February 13, 2002, that was supplied by plaintiff at hearing on February 27, 2002.
On November 26, 2001, the clerk of court issued a summons and notice of the proceeding, which was duly served on debtor by counsel for plaintiff. The summons required debtor to file a motion or answer within thirty days of November 26 and also scheduled a pretrial conference for January 16, 2002.
Neither debtor nor his counsel appeared at the pretrial conference on January 16. At the time of the pretrial conference debtor had not filed any response to the complaint. The court continued the pretrial conference to February 27, 2002, and directed plaintiff's counsel to follow the procedures for default judgment on the complaint which was also set for hearing on February 27.
On February 4, 2002, plaintiff filed a motion for entry of default judgment pursuant to Fed.R.Civ.Proc. 55 based upon debtor's failure to file a motion or answer to the complaint and also due to debtor's failure to respond to discovery requests. An amended motion and amended supporting affidavit were filed on February 15.
On February 19, 2002, the clerk entered default due to debtor's failure "to plead or otherwise defend in this case as required by law."
On February 24, 2002, debtor by counsel filed a motion to dismiss, to set aside default and to file late answer along with an opposition to plaintiff's motion for default judgment. He also filed an answer with the motion. Although debtor's counsel's notice of hearing for these pleadings stated an incorrect date, debtor's counsel appeared at hearing on February 27, and plaintiff's counsel agreed for the court to hear all matters that had been pled.
Debtor's motion asserts that the complaint should be dismissed because it was time barred, having been filed on November 14, 2001, one day after the filing deadline of November 13. As an alternative, the motion requests the court to set aside the entry of default and allow the proceeding to continue on the merits. Debtor states that he has a defense to the complaint and that his failure to respond to the complaint was due to his inability to afford counsel. Debtor also filed an answer with his motion.
On March 12, 2002, this court issued a Memorandum Opinion and Order granting debtor fifteen days from entry of the order to file an amended answer. On March 27, debtor's counsel mistakenly filed an amended answer in the bankruptcy case. On March 28, upon being alerted of the error, debtor's counsel filed an amended verified answer to complaint, memorandum in support of verified answer and motion to extend time in the adversary proceeding. Because debtor technically filed his answer timely, albeit in the incorrect file, the court considers the answer timely under the court's order of March 12, 2002.
The order also directed the clerk to correct the docket to reflect that the adversary proceeding was filed on November 13, 2001.
On same day, debtor also filed an amended motion to extend time. The amended motion adds a notice provision pursuant to Local Rule 9013-2, which states that "unless a written response to this motion and supporting memorandum are filed . . . within ten days of the service of this notice objecting to the relief requested, the court may deem any opposition waived, treat the motion as conceded, and issue an order granting the requested relief without further notice of hearing."
Plaintiff's Complaint.
In its complaint plaintiff alleges that debtor owes Maryland Motor Vehicle Administration (MVA) excise taxes and fees in the amount of $28,393.60 in connection with his business.
This amount is comprised of $4,004.40 in outstanding excise taxes on untitled vehicles owned by the business and $24,389.20 for twenty-six checks that debtor sent to MVA that were returned for insufficient funds.
Plaintiff issued a surety bond to debtor for the benefit of MVA. Plaintiff is subrogated to the rights of MVA because MVA exercised its rights for payment under the bond. As a result of the bond, plaintiff was required to pay the claim filed by MVA in the amount of $28,393.60. Plaintiff alleges that debtor is personally liable under the bond as an indemnitor.
On May 1, 2001, plaintiff obtained a default judgment against debtor in the amount of $29,886.10 in the Circuit Court of Montgomery, Maryland.
Consisting of $29,803.60 in judgment and $82.50 in costs.
Plaintiff alleges that the judgment is excepted from debtor's discharge pursuant to 11 U.S.C. § 523(a)(2), (4) and (6).
Position of the Parties.
In seeking to have plaintiff's complaint dismissed, debtor asserts the following defenses in his answer: 1) the complaint fails to state a claim upon which relief can be granted, 2) that it was always his intent to pay all valid debts of his business, including the excise taxes and title fees owed to MVA, 3) that many of the checks returned insufficient funds were made good, 4) that debtor was not served with process pertaining to any lawsuit in Maryland and was not aware of any judgment obtained against him in Maryland, 5) that debtor had no intent to defraud nor to make false representations to MVA, and 6) that debtor made no materially false representations to MVA. Debtor also asserts that plaintiff has failed to produce evidence to justify a default judgment because it did not prove the Maryland law elements of larceny, deceit, or false representations made with intent to deceive.
In its response to debtor's amended verified answer, plaintiff asserts that: 1) debtor has not offered a meritorious defense in order to set aside the default judgment, 2) the correct applicable law to determine dischargeability of debt is federal law, and 3) a court with proper jurisdiction entered a default judgment in the state of Maryland against debtor after hearing evidence and reviewing sufficiency of service.
Conclusions of Law.
Plaintiff timely filed its complaint on November 13, 2001, and its motion for default judgment on February 4, 2002. The clerk entered default on February 19. Debtor filed his motion to set aside default and for leave to file answer on February 24, 2002, over sixty days after answer or response to the complaint was due.
Debtor moves the court to vacate the entry of default pursuant to Bankruptcy Rule 7055 and Fed.R.Civ.P. 55(c) which provide that "[f]or good cause shown the court may set aside an entry of default and, if a judgment by default has been entered, may likewise set it aside in accordance with Rule 60(b)." Fed.R.Civ.P. 55(c).
The decision on a default judgment rests in the discretion of the court. The rules for setting aside defaults are to be liberally construed to provide relief to the defaulting party, and doubt on the issue should be resolved in favor of allowing a case to proceed on the merits. Tolson v. Hodge, 411 F.2d 123, 130(4th Cir. 1969) (citing Hutton v. Fisher, 359 F.2d 913, 916 (3d Cir. 1966); see also Lolatchy v. Arthur Murray, Inc., 816 F.2d 951, 954 (4th Cir. 1987).
Good cause for setting aside a default "is shown where the moving party (i) acts with reasonable alacrity to set aside the entry of default, and (ii) alleges a meritorious defense." Town and Country Kids, Inc. v. Protected Venture Inv. Trust #1, Inc., 178 F.R.D. 453, 454 (E.D.Va. 1998) (citing Consolidated Masonry Fireproofing, Inc. v. Wagman Constr. Corp., 383 F.2d 249, 251 (4th Cir. 1967)). A meritorious defense may be shown when the party proffers evidence "which would permit a finding for the defaulting party. . . ." Id. See also Merrill Lynch Mortgage Corp. v. Narayan, 908 F.2d 246, 252 (7th Cir. 1990) (requiring "(1)good cause for their default; (2)quick action to correct it; and (3)a meritorious defense to the plaintiff's complaint.").
In addition to a meritorious defense, other factors considered by courts include: 1)whether plaintiff will be prejudiced by the setting aside of default and 2)whether "culpable conduct" by defendant led to the default. Shepard Claims Serv., Inc. v. William Darrah Assoc., 796 F.2d 190, 192 (6th Cir. 1986).
The complaint alleges that debtor remitted numerous bad checks in payment of Maryland excise taxes and fees and that as a result plaintiff recovered a monetary judgment in state court.
Plaintiff does not allege that the judgment constitutes collateral estoppel on the pertinent dischargeability issues in bankruptcy. Debtor's amended answer asserts in substance that the complaint fails to allege facts that would except the judgment from debtor's discharge under 11 U.S.C. § 523(a)(2), (4) [larceny] and (6). This defense thus raises the question of whether debtor's remitting bad checks to pay taxes and fees constituted fraud, larceny, or willful and malicious injury.
The court considers that debtor's answer raises a meritorious defense in that it raises difficult dischargebility issues that should be decided on the merits rather than by default. The motion for default judgment will therefore be denied so that the case may continue on the docket. This ruling will not prejudice plaintiff as the case may still proceed expeditiously.
The defendant's delay in responding to the complaint, while inadvisable, cannot be considered "culpable conduct." Accordingly,
IT IS ORDERED that debtor's motion to dismiss is denied.
IT IS FURTHER ORDERED that plaintiff's motion for default judgment is denied.
IT IS FURTHER ORDERED that the Entry of Default against debtor entered on February 19, 2002, is vacated. Debtor's motion for leave to file late answer is granted.
IT IS FURTHER ORDERED that both parties' requests for attorney fees incurred in pursuing this adversary proceeding are DENIED.