MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF MOTION FOR RELIEF FROM DEFAULT JUDGMENT
INTRODUCTION
Debtor-defendant John White moves for relief from the default judgment entered against him, and in favor of plaintiffs Acme, Inc., and Jean Brown, in the above entitled adversary proceeding under Bankruptcy Rule 9024 and F.R.C.P. 60(b). This motion is supported by the following Memorandum of Points and Authorities, the attached Answer of Debtor-defendant and Affidavit of John White, and the records and pleadings filed herein and in debtor-defendant's Chapter 7 bankruptcy case No. 12345.
Debtor-defendant seeks relief under F.R.C.P. 60(b)(1) on the grounds that the default judgment was entered because of his mistake, inadvertence, surprise, or excusable neglect. In the alternative, debtor-defendant seeks relief under F.R.C.P. 60(b)(6) on the grounds (1) that the default judgment was entered in an adversary proceeding that should have been dismissed simultaneously with the debtor-defendant's Chapter 7 bankruptcy, and (2) that no determination of good cause to continue the adversary proceeding was made.
STATEMENT OF FACTS
Debtor-defendant filed a voluntary petition under Chapter 7 of the Bankruptcy Code on February 10, 2000 (case No. 12345). Plaintiffs filed a Complaint to Determine Dischargeability of Debt initiating this adversary proceeding on May 12, 2000 (case No. 5678). Summons and Complaint were served on debtor-defendant on May 19, 2000. This court issued its Order Dismissing Bankruptcy Case on June 11, 2000, in case No. 12345). In case No. 5678, plaintiffs filed a Request for Entry of Default on September 16, 2000, and the clerk entered a default as to debtor-defendant on September 29, 2000. Plaintiffs moved for default judgment by affidavit on January 20, 2001, and the court entered judgment for plaintiffs on January 27, 2001. A Writ of Execution was issued on April 15, 2001. A Notice of Judgment Lien was filed with the California Secretary of State on July 22, 2001, and attached to bank accounts of debtor-defendant.
ARGUMENT
1. Basis for relief
Bankruptcy Rule 9024 provides that F.R.C.P. 60 applies to cases under the Bankruptcy Code in determining whether relief from a judgment or order may be granted. Under F.R.C.P. 60(b),
On motion and upon such terms as are just, the court may relieve a party or a party's legal representative from a final judgment, order, or proceeding for the following reasons: (1) mistake, inadvertence, surprise, or excusable neglect;. . . . or (6) any other reason justifying relief from the operation of the judgment.A. Mistake
The default judgment was entered against debtor-defendant because of his mistake. To obtain relief on the grounds of mistake, "the movant must justify its actions or show that the mistake was unexpected and unavoidable rather than careless." In Re Staff Inv. Co., 146 B.R. 256, 263 (Bkrtcy.E.D.Cal. 1992). In this case, debtor-defendant mistakenly believed that the dismissal of his Chapter 7 bankruptcy petition, which occurred before the due date for filing his answer, mooted the issue of dischargeability of any debt owed to plaintiffs, and that this adversary proceeding was effectively dismissed. This mistake was "an ordinary and reasonable inference that was justified and that cannot be chalked off to carelessness." In Re Staff Inv. Co., supra. In fact, as recently as 1992 courts have applied the "general rule" that on dismissal of a bankruptcy petition the court loses jurisdiction over any related adversary proceedings. In Re Carraher, 971 F.2d 327, 328 (9th Cir. 1992). Accordingly, debtor-defendant's mistake was completely reasonable.
B. Excusable neglect
The default judgment was entered against debtor-defendant because of his excusable neglect. In Pioneer Inv. Services v. Brunswick Associates, 507 U.S. 390, 394, 113 S.Ct. 1489, 1497 (1993) the U.S. Supreme Court discussed the term "excusable neglect" as used in a variety of statutes and rules, including F.R.C.P. 60(b). It stated that, "for purposes of Rule 60(b), 'excusable neglect' is understood to encompass situations in which the failure to comply with a filing deadline is attributable to negligence." The Ninth Circuit specifically adopted the Pioneer framework for determining whether there has been excusable neglect for purposes of F.R.C.P. 60(b) in Briones v. Riviera Hotel & Casino, 116 F.3d 379 (9th Cir. 1997):
Because Congress has provided no other guideposts for determining what sorts of neglect will be considered "excusable," we conclude that the determination is at bottom an equitable one, taking account of all relevant circumstances surrounding the party's omission. These include, as the Court of Appeals found, the danger of prejudice to the debtor, the length of the delay and its potential impact on the 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 381.
In this case, the danger of prejudice to the debtor lies in denying relief, since he is faced with a money judgment and determination of dischargeability he has had no opportunity to defend. There is no danger of prejudice to the plaintiffs because there has been no loss of evidence or increased difficulty in prosecuting their claim against debtor-defendant caused by the passage of time.
The length of debtor-defendant's delay in bringing this motion is minimal. Although his Chapter 7 bankruptcy was dismissed in June 2000 and his answer to the complaint in this adversary proceeding was due in June 2000, the plaintiffs did not move for entry of default and default judgment until September 2000. The default judgment was thereafter entered in January 2001. Debtor-defendant first became aware of the default judgment when plaintiffs filed a judgment lien and seized debtor-defendant's assets on July 22, 2001. Debtor-defendant filed this motion for relief as soon after learning of the default judgment as possible. The delay, caused mostly by plaintiffs' delay in seeking and executing on the default judgment, will have little or no effect on these judicial proceedings.
The reason for debtor-defendant's delay was his lack of knowledge that the adversary proceeding was still pending after dismissal of his Chapter 7 bankruptcy proceeding. He acted in good faith in relying on his belief that all matters related to his bankruptcy had been dismissed. His lack of knowledge was compounded by the plaintiffs' delay in seeking a default. In September 2000, when plaintiffs filed and served their Case Management Conference Statement on debtor-defendant, the address used for service was no longer valid. If the plaintiffs had moved for a default judgment immediately after the dismissal of the Chapter 7 proceeding when they were first entitled to do so, the address debtor-defendant had given in that proceeding would still have been valid and he would have received notice of the application for default judgment and been able to defend the matter at that earlier date. Given plaintiffs' lack of due diligence in prosecuting this matter and providing debtor-defendant with notice of the judgment against him, debtor-defendant's concomitant delay cannot be said to have been in bad faith.
Taking into account all of the relevant circumstances surrounding this proceeding and debtor-defendant's Chapter 7 bankruptcy, debtor-defendant's failure to file and answer and defend against this adversary proceeding was clearly caused by excusable neglect.
2. Meritorious defense
A party seeking relief from a default judgment must also show he has a meritorious defense. In Re Raynard, 171 B.R. 699, 701 (Bkrtcy.N.D.Ga. 1994). "[T]he test of such a defense is measured [ ] by . . . whether the evidence submitted, if proven at trial, would constitute a complete defense." In Re Reilly, 213 B.R. 50, 52 (Bkrtcy.D.Conn. 2000). In this case, the debtor-defendant has a meritorious defense to plaintiffs' dischargeability complaint. The attached Answer and Affidavit of Charles White present evidence that, if proved at a trial on the merits, constitutes a complete defense to the claims of breach of fiduciary duty and fraud, negate the debt's existence and amount, and constitute a complete defense to the claim of non-dischargeability.
3. Application of equitable principles
In the exercise of its discretion whether to grant debtor-defendant's F.R.C.P. 60(b) motion, this court must apply the competing equitable principles of "finality, decisions on the merits, and avoiding injustice." In Re Staff Inv. Co., supra, 146 B.R. at 263. Although the principle of finality of judgments weighs against setting aside the default judgment, it is outweighed in this case by the principle that decisions on the merits are preferred. The issues decided by the default judgment include a determination of the existence of a debt based on fraud and breach of fiduciary duty, its amount (which is speculative in nature), and its non-dischargeability. Under the principle of avoiding injustice, there are no intervening equities that would weigh against granting relief. There is no potential hardship to third parties, nor have plaintiffs changed their position in good faith reliance on the finality of the default judgment. Further, plaintiffs will not be prejudiced by the granting of relief in the sense that there will be no "loss of evidence," "increased difficulties of discovery," or "greater opportunity for fraud or collusion" by debtor-defendant. In Re Reilly, 213 B.R. 50, 53 (Bkrtcy.D.Conn. 2000).
4. Other reason justifying relief
Under F.R.C.P. 60(b)(6), another reason justifies the granting of relief from the default judgment: it was entered in an adversary proceeding that should have been dismissed simultaneously with the debtor-defendant's Chapter 7 bankruptcy, and no determination of good cause to continue the adversary proceeding was made. Although the court is not automatically divested of jurisdiction over a related adversary proceeding when the underlying bankruptcy case is dismissed or otherwise concluded, it should make a reasoned decision whether to continue the adversary proceeding. In Re Carraher, 971 F.2d 327 (9th Cir. 1992); In Re Morris, 950 F.2d 1531 (11th Cir. 1992). The court should consider the following factors in making this decision: "(1) judicial economy; (2) fairness and convenience to the litigants; and (3) the degree of difficulty of the related legal issues involved." Id., at 1535.
In this case, the court did not make a reasoned decision whether to continue the adversary proceeding. Rather, it was continued by reason of the failure of any party to expressly seek dismissal of the proceeding (as was done in another related adversary proceeding, case No. 768910). If it had considered the Morris factors, the court would have been led to the conclusion that this adversary proceeding should have been dismissed. First, judicial economy weighs in favor of dismissal. Continuance of this adversary proceeding would have taken up precious bankruptcy court time and resources for a matter in which no bankruptcy remained pending. Second, fairness and the litigants' convenience weigh in favor of dismissal. It would be unfair to debtor-defendant to litigate before a bankruptcy judge rather than a jury the issue of the existence and amount of debt owed. Additionally, there would be no unfairness or inconvenience to any parties because there has been no substantial investment of time or resources in this adversary proceeding. Third, the degree of difficulty of the related legal issues weighs in favor of dismissal. This case involves the complex issues of the existence and breach of fiduciary duty by a corporate officer and shareholder and the valuation of a dissolved business enterprise. These are issues of state law and are better determined in state court.
CONCLUSION
The court should grant debtor-defendant's motion for relief from default judgment under F.R.C.P. 60(b)(1) since the judgment was entered because of debtor-defendant's mistaken belief that the adversary proceeding had been effectively dismissed by the dismissal of his Chapter 7 bankruptcy proceeding. This mistake led to his excusable neglect of his duty to file an answer in and defend this matter. His mistake was compounded by plaintiffs' delay in seeking a default judgment and further delay in executing that judgment. Debtor-defendant has a meritorious defense to the claims asserted in this proceeding, and principles of equity weigh in favor of granting relief.
In the alternative, the court should grant debtor-defendant's motion for relief from default judgment under F.R.C.P. 60(b)(6) because another reason justifies relief. The default judgment was entered in an adversary proceeding that should have been dismissed along with the dismissal of the underlying Chapter 7 bankruptcy. It would have been dismissed if the court had considered the factors relevant to the continued exercise of jurisdiction and made a specific determination whether to retain jurisdiction or dismiss this adversary proceeding.
Dated:
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Attorney for Debtor-Defendant