Opinion
Case No. 08-31881-svk, Adversary No. 09-2336-svk.
June 16, 2010
FINDINGS OF FACT AND CONCLUSIONS OF LAW ON DEFENDANT'S MOTION TO RECONSIDER ENTRY OF JUDGMENT
Findings of Fact
1. George A. Steinberger and Kimberly A. Steinberger (the "Debtors") filed a chapter 7 bankruptcy petition in this Court on October 29, 2008.
2. Bruce A. Lanser (the "Trustee") is the duly appointed and acting Chapter 7 trustee for the Debtors' case.
3. On July 28, 2009 the Trustee filed an application to employ Michael F. Dubis ("Attorney Dubis") as attorney for the Trustee, and on August 18, 2009 the Court entered an Order authorizing the Trustee to employ Attorney Dubis as his attorney.
4. Defendant Candace Gibbs ("Ms. Gibbs") is an adult residing at 315 Riverview Drive, Neosho, WI 53049, and is the sister of the Debtor, George A. Steinberger.
5. On September 14, 2009, the Trustee, by Attorney Dubis, filed a Complaint against Ms. Gibbs, seeking to recover an alleged preferential transfer under Section 547 of the Bankruptcy Code.
6. In the Complaint, the Trustee alleged that upon information and belief, the Debtors transferred $11,507.75 to Ms. Gibbs within 360 days prior to the Debtors' Chapter 7 petition. There was no evidence attached to the Complaint in support of the allegations.
7. Ms. Gibbs, by her attorney, W. Timothy Steinle, ("Attorney Steinle"), filed an Answer to the Complaint on October 14, 2009, and denied the alleged preference.
8. A Preliminary Pretrial Conference was held on November 11, 2009. Both Attorneys Dubis and Steinle were present at the conference via telephone. Ms. Gibbs was not present at the conference.
9. At the Pretrial Conference, Attorney Steinle informed the Court that Ms. Gibbs believed the Debtors had significantly more assets than they had disclosed in their Schedules. Attorney Steinle stated that these assets, if liquidated by the Trustee, could result in full payment of all of the Debtors' creditors, providing an absolute defense to the preference Complaint. Both parties agreed to continue the Pretrial Conference for 60 days to allow Attorney Steinle and Ms. Gibbs to provide further information to the Trustee.
10. The Court held the adjourned Pretrial Conference on January 25, 2010. Again, Attorneys Dubis and Steinle were present via telephone, but Ms. Gibbs was not present.
11. At the adjourned Pretrial Conference, Attorney Steinle informed the Court that he had agreed to stipulate to entry of judgment against Ms. Gibbs in the full amount sought in the Complaint.
12. On January 27, 2010, Attorney Dubis filed a proposed Order for Judgment. No Stipulation was filed with the proposed Order, and the Order for Judgment did not include Ms. Gibbs's signature. Instead, the Order stated that it was based on the oral Stipulation of the "counsels [sic] of record" at the adjourned Pretrial Conference. The Court entered the Judgment in favor of the Trustee and against Ms. Gibbs in the amount of $11,507.75 plus costs in the amount of $250.00. Ms. Gibbs was served with a Notice of Entry of Judgment on January 29, 2009.
13. On February 1, 2009, Ms. Gibbs filed a letter to the Court declaring it was "wrong what's happen [sic] to me." Ms. Gibbs's correspondence stated that she found evidence of the Debtors' undisclosed assets, and brought it to the attention of the Trustee. Ms. Gibbs also alleged that the Debtors used her credit card for a wedding and related expenses, and "they paided [sic] for everything." Ms. Gibbs represented that she was disabled, but took the Debtors into her home because George is her younger brother. At the end of her document Ms. Gibbs reiterated her need for help and repeated that she had evidence to prove what she was saying.
14. Ms. Gibbs filed a second letter on April 9, 2010. This correspondence again indicated that she did not understand what had happened. Ms. Gibbs informed the Court that the Debtors had given her money to put in her checking account so that the Debtors could pay for their wedding and pay their bills through Ms. Gibbs's account. Ms. Gibbs again asked for help, and requested that her case be reopened. Ms. Gibbs also expressed her desire to proceed without Attorney Steinle as her attorney.
14. The Court construed Ms. Gibbs's correspondence as a Motion to reopen the Adversary Proceeding and vacate the Judgment, and scheduled a hearing on notice to Ms. Gibbs, Attorney Dubis, Attorney Steinle, the Debtors and their attorney.
15. Attorneys Dubis and Ms. Gibbs appeared in person at the hearing. There were no other appearances.
16. At the hearing Ms. Gibbs informed the Court that Attorney Steinle was no longer representing her and that she did not believe Attorney Steinle knew what he was doing regarding her case. Ms. Gibbs represented that the Debtors put money into her bank account and paid bills from the account, using her as a conduit. Another attorney she consulted told her that this arrangement did not constitute a preference. Ms. Gibbs also said that she was told by the Trustee that if she could prove the Debtors had additional undisclosed assets that could pay the creditors, the case against her would be dropped. Ms. Gibbs asserted that she had evidence of a car and storage units full of machinery that belonged to the Debtors. The Court asked Ms. Gibbs if she had explained all of this to Attorney Steinle, and Ms. Gibbs responded that she had. When asked by the Court if Attorney Steinle had explained to her why settling the case for a judgment in the full amount would be the best option, Ms. Gibbs responded that Attorney Steinle never had explained it to her. Attorney Dubis stated that Attorney Steinle never contacted him or the Trustee to produce any evidence that there were undisclosed assets for creditors. He argued that the Judgment should not be vacated in the absence of newly discovered evidence, and that while perhaps Ms. Gibbs had a malpractice action against Attorney Steinle, Ms. Gibbs had not met the burden to carry a Motion to reconsider under Federal Rule 60.
17. After considering Ms. Gibbs's arguments, including that proof that she was a mere conduit for the Debtors' transfers would be a total defense to a preference claim, and based on her allegation that Attorney Steinle had not advised her why the settlement for the full amount was in her best interest, the Court granted Ms. Gibbs's Motion to reopen the Adversary Proceeding and to vacate the Judgment. The Court advised Ms. Gibbs to employ new counsel, and that reopening the case did not necessarily mean that Ms. Gibbs would prevail, only that she would have her day in court to present her defenses. Attorney Dubis noted his opposition, and requested that the Court issue written Findings of Fact and Conclusions of Law supporting the Order to Reopen and Vacate the Judgment.
Conclusions of Law
A. Fed.R.Civ.P. Rule 60(b)(1), applicable here pursuant to Bankruptcy Rule 9024, provides that "on a motion and just terms, the court may relieve a party or its legal representative from a final judgment, order or proceeding for . . . mistake, inadvertence, surprise, or excusable neglect." Rule 60(c)(1) provides the timing element of a 60(b)(1) motion and states that "a motion under Rule 60(b) must be made within a reasonable time — and for reasons (1), (2), or (3) no more than a year after the entry of the judgment . . ."
B. In this case, Ms. Gibbs's first correspondence could arguably be construed as a Rule 60(b) motion. While Ms. Gibbs did not specifically ask in her first letter to vacate the Judgment entered against her, it is clear that she was seeking relief from the Judgment. The first correspondence certainly meets Rule 60(c)(1)'s timing element as it was filed in this Court just three days after she had received notice of the Judgment. Even if Ms. Gibbs's first correspondence is not viewed as a Rule 60(b) Motion, her second letter filed with the Court just over two months after the Judgment was entered leaves little doubt. In her second correspondence, Ms. Gibbs specifically asked the Court to reopen her case. The second correspondence also meets the deadline of Rule 60(c)(1).
C. The Supreme Court addressed the concept of "excusable neglect" in Pioneer Inv. Servs. Co. v. Brunswick Assocs., 507 U.S. 380 (1993). Rejecting a line of cases that had limited the excusable neglect doctrine to cases that did not involve attorney negligence, the Court stated that the proper focus "is upon whether the neglect of respondents and their counsel was excusable." Id. at 397 (emphasis in original). See Robb v. Norfolk Western Ry., 122 F.3d 354 (7th Cir. 1997) (explaining the excusable neglect standard with respect to attorney error pre- Pioneer and post- Pioneer). In determining whether excusable neglect applies, courts look at "the danger of prejudice to the debtor, the length of the delay and its potential impact on judicial proceedings, the reason for the delay, including whether it was within the reasonable control of the movant, and whether the movant acted in good faith." Id. at 395. In Pioneer, the Court held that an attorney's inadvertent failure to file a timely proof of claim could constitute excusable neglect. Here, a stipulated Judgment was entered against Ms. Gibbs without her fully informed consent. She did not attend the Pretrial Conference where Attorney Steinle agreed to the Judgment, and she did not sign any Stipulation or other agreement acknowledging her acquiescence in the Judgment. The Trustee's attorney argues that the Judgment should stand, and that Ms. Gibbs can pursue her former attorney for malpractice (although he was quick to question whether any malpractice occurred here). Under this argument, the Pioneer creditor would have been relegated to a claim against its attorney for failure to file the proof of claim.
D. Applying the excusable neglect factors, the Court finds that there is no allegation that Ms. Gibbs acted in bad faith in this litigation. She acted promptly in writing letters questioning the Stipulated Judgment as soon as she received the Judgment. She thought that the Trustee and his attorney had rejected her evidence of the Debtors' undisclosed assets, while Attorney Dubis said no information about the assets was ever produced by Attorney Steinle. As to prejudice to the Trustee and the bankruptcy estate, it appears that Attorney Dubis drafted a Complaint and appeared at two telephone Pretrial Conferences and one in-person hearing to consider the Motion to reconsider. Presumably he had some telephone conferences with Attorney Steinle and the Trustee, but this is not a case where a lengthy trial or mountains of discovery had occurred when the Motion to reconsider was filed. While the Trustee will now be required to prove his case against Ms. Gibbs, that burden, which he undertook when he filed the preference Complaint, does not constitute the type of prejudice or delay that would render the excusable neglect doctrine inapplicable. In Pratt v. Philbrook, 109 F.3d 18, 22 (1st Cir. 1997), three weeks after a settlement order of dismissal became final, the plaintiff sought to have the dismissal vacated and the case reopened. Regarding the issue of prejudice, the court stated: "From our vantage point it is difficult to see what cognizable prejudice, in the sense, for example, of lost evidence, would come to the defendant from reopening the case. Of course, it is always prejudicial for a party to have a case reopened after it has been closed advantageously by an opponent's default. But we do not think that is the sense in which the term `prejudice' is used in Pioneer."
E. While settlements should not be lightly vacated, upon a proper showing, even a consent judgment may be set aside under Rule 60(b). See Smith v. Widman Trucking Excavating, Inc., 627 F.2d 792, 796 (7th Cir. 1980) (collecting cases). Reopening a consent judgment starts with the proposition that the decision to settle a case rests with the client alone. United States v. Beebe, 180 U.S. 343, 350-53 (1901). Accordingly, an attorney is required to have the client's express or apparent authority to consent to a final disposition of the client's case. Bradford Exchange v. Trein's Exchange, 600 F.2d 99, 102 (7th Cir. 1979). See also United States v. Int'l Bhd. of Teamsters, 986 F.2d 15, 19 (2d Cir. 1993); Fennell v. TLB Kent Co., 865 F.2d 498 (2d Cir. 1989). In Bradford, the defendant moved under Rule 60(b) to modify a portion of the judgment to which his attorney had agreed, and alleged that the attorney had misunderstood his instructions with respect to an acceptable settlement. 600 F.2d at 101. This motion was filed less than month after a settlement had been reached. The defendant submitted an affidavit of its manager, which explained what the attorney's instructions had been, and also included an affidavit of the attorney, which explained his mistake in interpreting the instructions. The court found that "although an attorney of record is presumed to have his client's authority to compromise and settle litigation, a judgment entered upon an agreement by the attorney may be set aside on affirmative proof that the attorney had no right to consent to its entry." Id. at 102. The affidavits presented by the defendant were considered by the court to be affirmative evidence that their attorney did not have authority to consent to entry of the judgment against the defendant.
F. Similarly, Fennel is a case in which the plaintiff's attorney agreed to settle the case for $10,000 during a telephone conversation. 865 F.2d at 500. The settlement was reported to the court through a telephone conference call in which neither party was present, but both attorneys were present. The plaintiff expressed his dissatisfaction with the settlement in a letter to the district court, which was sent two months after the settlement had been entered. In that letter the defendant contended he had not approved of such a settlement, and claimed that on the day of the settlement he had told his attorney that a $10,000 settlement would not be satisfactory. Looking at the facts of the case, the court found that the plaintiff had given no indication to the defendants' attorney that the plaintiff's attorney was authorized to settle the case. Id. at 502. The court also found that, "a client does not create apparent authority for his attorney to settle a case merely by retaining the attorney." Id.
G. United States v. Int'l Bhd. of Teamsters, is the flipside of Bradford and Fennell, in that it involves a situation where the attorney's settlement authority was upheld, and the defendants' Rule 60(b) motion was denied. 986 F.2d 15. There, the defendants entered into a settlement in which both parties and their attorneys were present. Two weeks later the attorney for the defendants informed the other party that his clients would prefer resigning their positions rather than finish the remaining terms of the settlement. The defendants waited sixteen months after the settlement had been reached before they began to deny that their attorney had authority to settle. Further, the court found it persuasive that the same attorney that the defendants were arguing lacked authority to settle, was the attorney the defendants insisted propose that they would rather resign than follow the terms of the settlement. The court found it odd that the attorney allegedly lacked authority to settle, but gained authority to continue negotiations just two weeks later. The defendants' conduct indicated to the court that the defendants' attorney did indeed have authority to settle their case, and thus lower court's decision to deny the defendants' 60(b) motion was affirmed.
H. The facts in this case are similar to Bradford and Fennel. Bradford held that an attorney must have express authority to consent to a final disposition of a client's case, and if affirmative evidence can be presented that the attorney lacked express authority, then a consent judgment may be set aside. Here, affirmative evidence exists that Attorney Steinle did not have Ms. Gibbs's express authority to settle her case. First, Ms. Gibbs was not present at the January 25 Pretrial Conference, and had no opportunity to understand and object to the stipulation agreed to by Attorney Steinle. Second, Ms. Gibbs protested immediately after receiving notice of the Judgment entered against her. In her response Ms. Gibbs displayed confusion and dismay with what had transpired. Ms. Gibbs's correspondence did not reflect someone who had authorized her attorney to consent to a final disposition of her case by agreeing to a Judgment in the full amount sought in the Complaint. Third, the letters make clear that Ms. Gibbs believed she had valid defenses to the Trustee's Complaint. It is highly unlikely that Ms. Gibbs, armed with evidence of complete defenses, would authorize Attorney Steinle to stipulate to a judgment for the full $11,507.25 against her. Finally, Ms. Gibbs told the Court at the May 26 hearing that Attorney Steinle never explained to her why stipulating to the Judgment was her best option, and Attorney Steinle did not appear to contradict her claims. How could Ms. Gibbs have given Attorney Steinle express authority to stipulate when Ms. Gibbs did not fully understand what that stipulation would entail?
I. Similar to Fennel, the settlement reached in this case was reported to the Court through a conference call in which Ms. Gibbs was not present. It bears repeating that there was no written Stipulation signed by Ms. Gibbs or her attorney in this Adversary Proceeding. Like the defendant in Fennel, Ms. Gibbs displayed her dissatisfaction and confusion with the settlement almost immediately through correspondence to the Court. The content of both letters submitted by Ms. Gibbs shows that Ms. Gibbs never wanted to stipulate to a Judgment of $11,507.75 against her. Ms. Gibbs was confident in her belief that she could produce evidence to defend against the Trustee's Complaint, and stated as much in both of her letters to the Court, as well as in her appearance in this Court at the May 26 hearing.
J. Unlike Int'l Bhd., Ms. Gibbs did not wait an unreasonable amount of time to show dissatisfaction with Attorney Steinle's consent to the Judgment. Moreover, the prejudice to the Trustee and his attorney in having to prove the case against Ms. Gibbs does not outweigh the interests of justice and the policy of allowing cases to be determined on the merits. Ms. Gibbs should have her day in court to prove her defenses. However, as the Court advised Ms. Gibbs at the hearing, the reopening of the Adversary Proceeding and vacating of the consent Judgment does not mean that she will prevail at the trial. It simply means that she has shown to the satisfaction of the Court that the excusable neglect standard has been met, and that she should have an opportunity to defend herself.
Summary and Conclusion
In summary, Ms. Gibbs's correspondence and statements in open court provide affirmative evidence that Ms. Gibbs did not give Attorney Steinle express authority to stipulate to the Judgment entered against her. Under applicable Supreme Court and Seventh Circuit authority, Ms. Gibbs's Rule 60(b)(1) Motion was properly granted based on excusable neglect. A separate Order vacating the Judgment will be entered.