UNITED
STATES BANKRUPTCY COURT FOR
EASTERN
DISTRICT OF KENTUCKY
LEXINGTON
DIVISION
IN RE:
ANTONY ALLEN KING and
KATHY LYNN
RYKER-KING CASE NO. 03-52449
DEBTORS
LUCINDA
MASTERTON, TRUSTEE
PLAINTIFF
VS.
ADV.
NO. 04-5465
EMPIRE FUNDING CORP. and HOME-
COMINGS FINANCIAL
NETWORK, INC. DEFENDANT
MEMORANDUM OPINION
Homecomings Financial Network,
Inc. (“Homecomings”) is before the court on the Motion to Set Aside Default
Judgment, and Motion for an Extension of Time that it filed in this adversary
proceeding on June 11, 2004. Having considered the motion and the supplement
thereto and the arguments of counsel, the court has determined that the motion
must be overruled.
On April 26, 2004 Lucinda
Masterton (the “Trustee”), as trustee of the estate of Antony Allen King and
Kathy Lynn Ryker-King (the “Debtors”), filed the complaint initiating this
proceeding, which sought to avoid the mortgage of Homecomings on certain real
property of the Debtors on account of an allegedly defective acknowledgment of
the Debtors’ signatures.[1]
A summons was issued on April 27, 2004, and process was served on Homecomings
on May 4, 2004 by mailing the summons and a copy of the complaint to its registered
agent for service of process. No answer was timely filed or served so, on May
28, 2004, the Trustee filed a motion for a default judgment, serving a copy
of the motion on the registered agent. There was no response to the motion,
and the court granted the motion on June 1, 2004.
As indicated above, the motion
presently before the court was filed on June 11, 2004. The court conducted
hearings on the motion on July 15 and August 26, 2004. Homecomings supplemented
its motion on August 3, 2004, setting forth argument in support of its
contention that it has a meritorious defense.
Homecomings seeks relief from the
default judgment under Rule 59 of the Federal Rules of Civil Procedure, made
applicable in bankruptcy cases by Rule 9023 of the Federal Rules of Bankruptcy
Procedure, on the grounds that “the Judgment is based upon errors of law and
fact” and that relief from the judgment is “necessary to prevent injustice.”
Regarding the former ground, Homecomings contends that it has a meritorious
defense to the Trustee’s claim. However, the judgment was not based on the
merits of the Trustee’s position but, rather, on the failure by Homecomings
timely to respond to the complaint. The court’s findings and conclusions in
this regard are not clearly erroneous. See, e.g., Javetz v.
Bd. of Control, Grand Valley State Univ., 903 F. Supp. 1181, 1190-91
(W.D. Mich. 1995).
Relief from default judgments is
normally sought under Rule 60(b)(1), rather than 59(e), of the Federal Rules
of Civil Procedure.[2]
Accordingly, it is appropriate to review the considerations taken into account
in connection with Rule 60(b)(1) motions for relief from default judgments in
determining whether vacating the judgment in this case is necessary to prevent
manifest injustice, see In re Jones, 111 B.R. 674, 679-80 (Bankr. E.D.
Tenn. 1990); In re Dinh, 90 B.R. 743, 745-46 (Bankr. E.D. Pa. 1988),
which is a ground for relief under Rule 59(e), e.g., Javetz, 903
F. Supp. at 1190-91.
Under Rule 60(b), the burden of
proof is on the movant: “A party seeking relief from judgment under Rule 60(b)
must show that its case comes within the provisions of the Rule.” Lewis v.
Alexander, 987 F.2d 392, 396 (6th Cir. 1993) (citing Miller v.
Owsianowski (In re Salem Mortgage Co.), 791 F.2d 456, 459 (6th Cir. 1986)).
Whether neglect is “excusable” depends on the equities of the case, “taking
account of all relevant circumstances surrounding the party’s omission,” including
“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.” Pioneer Inv. Servs. Co. v.
Brunswick Assocs. Ltd. P’ship, 507 U.S. 380, 395 (1993). In the Sixth
Circuit, the issues that must be addressed in determining whether to grant
relief from an order or judgment under Rule 60(b) are “(1) Whether
culpable conduct of the defendant led to the default, (2) Whether the
defendant has a meritorious defense, and (3) Whether the plaintiff will be prejudiced.”
Waifersong, Ltd. v. Classic Music Vending, 976 F.2d 290, 292 (6th Cir.
1992) (citing United Coin Meter Co. v. Seaboard Coastline R.R., 705 F.2d
839, 845 (6th Cir. 1983)). These are not factors to be weighed: “It is only
when the [movant] can carry this burden [of demonstrating that the order was
the result of mistake, inadvertence, surprise, or excusable neglect] that he
will be permitted to demonstrate that he can also satisfy the other two factors:
the existence of a meritorious defense and the absence of a substantial
prejudice to the plaintiff should relief be granted.” Id. Homecomings
has failed to satisfy this threshold requirement, so the court need not
evaluate whether Homecomings had a meritorious defense or whether granting the
motion would prejudice the Trustee.
Neither the motion nor the
supplement thereto explains why Homecomings failed to respond to the Trustee’s
complaint, and it has offered no affidavits or other evidence in that regard.
At the initial hearing on the motion, counsel for Homecomings explained the
reason for the failure to respond as follows: “The complaint was properly
served, but by the time it got to the person within the corporation that should
have had it, it was too late.” In this regard, this case is indistinguishable
from Vaughan v. Mortgage Lenders Network (In re Bradbury), No. 03-8070
(B.A.P. 6th Cir. Apr. 14, 2004). There, a trustee filed a complaint against
Mortgage Lenders Network seeking to avoid its mortgage on account of a technical
defect under state law. Mortgage Lenders failed to respond, and a default
judgment was entered. Mortgage Lenders later sought relief from the judgment
under Rule 60(b)(1), contending that it did not respond to the complaint because,
“while process was received by its registered agent, the complaint did not
come to the attention of appropriate individuals within Mortgage Lenders’
organization for some unknown reason.” Id., slip op. at 9. The
Bankruptcy Appellate Panel affirmed the bankruptcy court’s denial of the motion
for relief from the judgment:
The maintenance of
reasonable procedures to assure that answers to complaints are timely filed may
demonstrate a lack of culpability even in instances in which the procedures
failed in some unknown way. Isolated human error, despite well established
minimum procedural safeguards, may be excusable under the facts of the case.
However, in this case, Mortgage Lenders introduced no evidence of the system,
if any, it had established for the purpose of making sure that legal process
“reache[s] the persons responsible for responding to legal actions for Mortgage
Lenders Network.” If it had done so, a single unexplained failure of the system
might have demonstrated excusable neglect. Having introduced no such evidence,
Mortgage Lenders did not show a lack of culpability for its default. Thus, the
bankruptcy court did not abuse its discretion in finding that Mortgage Lenders
failed to carry its burden of proving that its neglect was excusable . . . .
Id. (citing See
Owens-Ill., Inc. v. T & N Ltd., 191 F.R.D. 522, 528 (E.D. Tex. 2000)).
Likewise, here, Homecomings submitted no evidence that it had a system in place
for making sure that process reaches “the person within the corporation that
should have had it.”
Accordingly, Homecomings would not
be entitled to relief under Rule 60(b)(1) of the Federal Rules of Civil
Procedure. It follows that Homecomings has not shown that relief from the
judgment is necessary to prevent manifest injustice. For the foregoing reasons
and because the interests of finality and the conservation of scare resources
require that such extraordinary relief be granted sparingly, e.g., Parrish
v. Sollecito, 253 F. Supp. 2d 713, 715 (S.D.N.Y. 2003); Pa. Ins. Guar.
Ass’n v. Trabosh, 812 F. Supp. 522, 524 (E.D. Pa. 1992), the court will
exercise its discretion to deny relief from the default judgment under Rules
59(e) and 9023. See, e.g., Patterson Dental Supply, Inc. v.
Hochhauser (In re Hochhauser), No. 03-8024, slip op. at 3 (B.A.P. 6th Cir.
Dec. 30, 2003) (citations omitted). Because one requesting an extension of a
deadline that has already expired must show excusable neglect, Fed. R. Bankr.
P. 9006(b)(1), the court will also deny the request by Homecomings for an
extension of the deadline for responding to the Trustee’s complaint.
The court will enter a separate
order overruling the Motion to Set Aside Default Judgment, and Motion for an
Extension of Time filed by Homecomings.
Copies to:
Benjamin K. Phillips, Esq.
J. D. Kermode, Esq.
John M. Simms, Esq.
Steven A. Wides, Esq.
[1]Although the record is unclear, it appears that the
mortgage was a second mortgage, granted in favor of Empire Funding Corp., and
that Homecomings is the current assignee thereof.
[2]Indeed, at least one court has held that one may not
employ Rule 59(e) to try to obtain relief from a default judgment, because that
would be “seeking to avoid the more stringent standards of 60(b), which set
forth specific conditions under which a court may set aside a default
judgment.” Plogger v. IMC Mortgage Co. (In re Plogger), 240 B.R. 243,
244-45 (Bankr. W.D. Va. 1999) (treating Rule 59(e) motion as Rule 60(b)
motion). This court is reluctant to adopt this holding due to the statement by
the Sixth Circuit to the effect that a Rule 59(e) motion may properly ask the
court to vacate or even reverse its prior holding. Smith v. Hudson, 600
F.2d 60, 62-63 (6th Cir. 1979).