Opinion
NOT FOR PUBLICATION
ORDER ON MOTION TO VACATE DEFAULT JUDGMENT
Peter W. Bowie, Chief Judge, United States Bankruptcy Court
This is a motion by Wells Fargo Home Mortgage, Inc. ("WFHM") to vacate the Default Judgment entered against it as a result of it's failure to respond to a Complaint.
The Court has subject matter jurisdiction over this proceeding pursuant to 2 8 U.S.C. § 1334 and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (H), (O).
WFHM made a loan to David Winick on September 27, 2003, secured by a first trust deed on Mr. Winick's condominium. An equity line second deed of trust in favor of Wells Fargo Bank, N.A. ("Wells Fargo") was later placed on the condo. WFHM recorded a Notice of Default in March 2008, and the property sold at a Trustee's Sale to a third party with WFHM receiving a full payoff in September 2008.
David Winick was a principal of Debtor, which filed for Chapter 11 relief on September 10, 2007, shortly after the WFHM loan went into default. The case was converted to a Chapter 7 proceeding in October 2008. Trustee filed this action, claiming that Debtor made the payments on the WFHM loan, rather than Mr. Winick, and seeking damages under fraudulent transfer theories.
This act ion was filed on October 9, 2 009, and WFHM was served by mail on October 14, 2009. WFHM did not respond to the Complaint, and as a result, Default Judgment was entered on May 10, 2010.
A similar action was filed by Trustee against Wells Fargo, also on October 9, 2009, concerning the second deed of trust on the Winick condo. Wells Fargo was served by mail and answered the Complaint on May 14, 2 010.
On September 24, 2010, outside counsel for Wells Fargo was made aware, by counsel for the Trustee, of the Default Judgment which had been entered against WFHM.
It is uncontested that WFHM was, in fact, served on October 14, 2009. The Summons and Complaint were routed to the correct department on October 19, 2009, however no action was taken. The Notice of Default was received in the correct department on February 12, 2 010, but no action was taken until WFHM received notice of the Default Judgment in September 2010.
On October 8, 2 010, counsel for WFHM informed counsel for Trustee that WFHM's failure to respond to the Complaint was an oversight, and requested that the entry of Default and Default Judgment be set aside. Counsel for Trustee suggested combining the WFHM issues into the mediation occurring between the Trustee and Wells Fargo. Counsel for WFHM again requested that the Default Judgment be set aside, but agreed to participate in joint mediation. On April 11, 2011, counsel for WFHM requested that counsel for Trustee stipulate to extend the time for WFHM to bring a motion to set aside the default while settlement discussions continued. The Trustee refused. WFHM moved for the Default Judgment to be vacated based on excusable neglect.
This Court has the discretion to set aside a Default Judgment under Federal Rules of Civil Procedure 55 and 60. Rule 60(b) states that the Court may relieve a party from a final judgment based on "mistake, inadvertence, surprise, or excusable neglect." Fed.R.Civ.P. 60(b)(1). While the Court has discretion in vacating a default judgment, cases should, whenever possible, be decided on the merits. TCI Group Life Ins. Plan v. Knoebber, 244 F.3d 691, 696 (9th Cir. 2001) (quoting Falk v. Allen, 739 F.2d 461, 463 (9th Cir. 1984)). Where a party seeks timely relief and has a meritorious defense, any doubt should be resolved in favor of the motion to set aside the Default Judgment. In re Hammer, 940 F.2d 524, 525 (9th Cir. 1991) .
There are three factors to be considered when vacating a Default Judgment for reasons of excusable neglect: whether there is a meritorious defense, whether vacating the Default Judgment will prejudice the nonmoving party, and whether culpable conduct led to the default. TCI Group Life Ins. Plan, 244 F.3d at 696.
Generally, a liberal standard of excusable neglect is preferred. Pioneer Ins. Servs. Co. V. Brunswick Assocs.. 507 U.S. 380, 383 (1993). Neglect should be given its ordinary meaning ("to give little attention or respect"; "to leave undone or unattended to especially through carelessness"). Doing so allows the theory of excusable neglect to "encompass both simple, faultless omissions to act and, more commonly, omissions caused by carelessness." Id. at 388.
Along with the factors to be considered under the Federal Rules of Civil Procedure, the conduct or neglect must be considered excusable. The Pioneer Court set out a standard for determining just that, analyzing such additional factors as the reason for the delay, the length of the delay in filing and its potential impact on judicial proceedings, and whether the movant acted in good faith. Id. at 395.
For a Default Judgment to be vacated, the moving party must present specific facts which would constitute a defense. This burden is not especially high, and a party must only demonstrate facts or law showing that "a sufficient defense is assertable." In re Stone, 588 F.2d 1316, 1319 n.2 (10th Cir. 1978). Here, WFHM has a potential defense under 11 U.S.C. § 550(b), as the transfers received allegedly were not directly from the debtor.
To be prejudicial, the setting aside of a Default Judgment must "result in greater harm than simply delaying resolution of the case." TCI Group Life. Ins. Plan, 244 F.3d at 701. Rather, the delay must result in some form of tangible harm (e.g. loss of evidence, increased difficulty of discovery, greater opportunity for fraud, etc.). Thompson v. American Home Assurance, 95 F.3d 429, 433-44 (6th Cir. 1996) . A party being forced to litigate on the merits of the case is not considered prejudiced for the purposes of vacating a Default Judgment.
There would be no prejudice to the nonmoving party here. On October 21, 2010, counsel for the Trustee suggested combining WFHM issues into the mediation with Wells Fargo. This indicates that the nearly year-long delay in filing has not stopped the parties from engaging in settlement discussions. Rather, the only potential prejudice would be the litigation cost of deciding the matter on the merits. As previously stated, being forced to litigate on the merits is not prejudice to the nonmoving party.
Culpable conduct as a factor of Fed.R.Civ.P. 60(b)(1) and the reason for delay as a factor of excusable neglect must both be considered in the context of Pioneer's lenient standard of neglect, allowing simple, faultless omissions to act as well as omissions caused by carelessness. In this context, for conduct to be considered culpable it must be "willful, deliberate, or evidence of bad faith." TCI Group Life Ins. Plan, 244 F.3d at 696. A moving party's conduct, under the Pioneer standard, is considered culpable where there is no explanation for the Default Judgment inconsistent with a devious, deliberate, willful, or bad faith failure to respond. See, e.g., Kingvision Pay-Per-View Ltd. v. Lake Alice Bar, 168 F.3d 347, 350 (9th Cir. 1999) (defendant bar owners filed false affidavits claiming they had not been served); Pena v. Sequros La Comercial, 770 F.2d 811, 815 (9th Cir. 1985) (defendant insurer had an incorrect address, thereby precluding service of process); Benny v. Pipes, 799 F.2d 489, 494 (9th Cir. 1986) (defendants' failure to answer complaint was culpable when defendants had first filed motions to extend their time to answer, indicating an ability to deal with legal requirements).
WFHM's conduct may be considered culpable. Although the failure to respond to the Complaint was not willful or deliberate, as required by the lenient Pioneer standard of neglect, large companies are often held to a higher standard regarding the workings of their internal organizational structure. Bankruptcy law demands that companies must
have in place procedures to ensure that formal bankruptcy notices sent to an internally improper, but otherwise valid corporate address are forwarded in a prompt and timely manner to the correct person/department. As a consequence, [a] . . . defense that its . . . [actions] . . . were merely the result of a flaw in its internal organizational structure --the argument that the right hand does not know what the left hand is doing -- falls on deaf ears.
In re Baker, 321 B.R. 864, 868 (Bankr.N.D.Ohio 2004)(quoting In re Perviz, 302 B.R. 357 (N.D. Ohio 2003) ("A creditor's election to operate through a complex system of distant agents must be responsible for consequences of breakdowns in that system")). Large companies should not be permitted to use their size and complexity as a shield against litigation. In re Baker, 321 B.R. at 868.
Also to be considered is the length of delay in filing. FRCP 60(c)(1) requires that a motion to set aside a Default Judgment under Rule 60(b) must be made "within a reasonable time" and "no more than a year after the entry of the judgment." Fed.R.Civ.P. 60(c) (1). WFHM first learned of the Default Judgment entered against it in late September 2010, but no motion to set aside the Default Judgment was filed until April 2011. The standard for determining the timeliness of a motion requires a case-by-case analysis. In re Williams, 287 B.R. 787, 792 (B.A.P. 9th Cir. 2002).
While the filing of the present motion is nearing the one year deadline imposed by Rule 60(c)(1), WFHM informed counsel for the Trustee that their failure to respond was an oversight and requested that the Default Judgment be set aside as early as October 2010, less than a month after first learning of the entry of Default Judgment.
No evidence of bad faith in WFHM's conduct has been alleged or presented, nor does it seem that WFHM willfully or deliberately failed to answer the Complaint, or that WFHM would have failed to answer had they realized they were party to a second case. In an analogous case regarding the setting aside of an entry of default, counsel claimed that the second lawsuit was "erroneously believed to be just another copy of the first lawsuit." Hart v. Parks, 2001 U.S. Dist. LEXIS 24331 (CD. Cal. May 2001). While the court found defendants' counsel to be "sloppy" and "incompetent, " there was no evidence of bad faith and the entry of default was set aside. As in Hart, the failure here to answer the Complaint appears to have been an honest mistake, with no evidence of bad faith.
The lack of prejudice to the nonmoving party, lack of bad faith, existence of a possible meritorious defense, and the short time between the discovery of the Default Judgment and the notification to Trustee's counsel that the failure to respond was an oversight all weigh heavily towards vacating the Default Judgment against WFHM. While it is possible that WFHM's conduct could be considered culpable, the determination of what constitutes excusable neglect is an equitable one, "taking account of all relevant circumstances, " Pioneer Inv. Servs. Co., 507 U.S. at 395, rather than focusing on one determinative factor.
For the aforementioned reasons, the Default Judgment entered against Wells Fargo Home Mortgage, Inc. shall be, and hereby is vacated.
IT IS SO ORDERED.