IN RE:
UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
CORBIN
IN RE:
PASCUAL
RAYMOND WHITE, SR
SARA FLORENCE WHITE CASE NO. 97-61262
JAMES R.
WESTENHOEFER
Trustee
for the bankruptcy estate
of Pascual White and Sara White
J.L. WHITE
PASCUAL WHITE, SR.
SARA FLORENCE WHITE DEFENDANTS
MEMORANDUM OPINION
SUMMARY
The issue presented by the Defendants’ motion to set aside the default judgment (the “Motion”) is whether the Defendants’conduct amounts to “excusable neglect”, for the purpose of Fed.R.Civ.P. 60(b). Subject to the prior reimbursements hereinafter described, the court holds that the Defendants’ failure to respond to the Plaintiff’s complaint and motion for default judgment does not amount to willful or reckless indifference toward a judicial proceeding; rather, the conduct is “excusable neglect.” Therefore, upon the Defendant’s reimbursement of the Plaintiff for his costs and attorney’s fees as described hereinafter, the court will sustain the Defendants’ Motion under Rule 60(b).
BACKGROUND
On February 1, 1999 James R. Westenhoefer (“Westenhoefer”), the Chapter 7 Trustee for the bankruptcy estate of Pascual and Sara White (“the Debtors”), initiated an adversary proceeding against the Defendants Pascual White, Sara White, and J.L. White (collectively “the Whites”). Westenhoefer’s complaint alleges that the Debtors transferred property to J.L. White, and that the transfer should be voided because it was made fraudulently without valuable consideration. See K.R.S. 378 and 11 U.S.C. 544.
Despite proper service of process, the Whites failed to make a timely response to Westenhoefer’s complaint and on March 22, 1999, Westenhoefer filed for default judgment against the Whites. Again, the Whites failed to respond, and on April 1, 1999, this court entered a default judgment against the Whites which voided the Debtors’ real estate transfer to J.L. White. On May 22, 1999 the Whites filed this Motion, which is now at issue.
JURISDICTION & STANDARD OF REVIEW
Pursuant to Fed.R.Civ.P. 55(c) and 60(b)(1) which apply to this case through Fed.R.Bankr.P. 7055 and 9024 respectively, the Whites have filed the Motion. The decision to set aside a default judgment is left to the discretion of the trial judge. Meganck v. Couts (In re Couts) 188 B.R. 949, 951 (Bankr.E.D.Mich. 1995).
ANALYSIS
1. Fed.R.Civ.P. 60(b)(1)
The motion hinges on the application of Fed.R.Civ.P. 60(b)(1) as it calls for the judgment to be set aside on the grounds of “mistake, inadvertance, or excusable neglect” (p.2 of Whites’ “Verified Motion to Re-Open Case and Set Aside Default Judgment” (sic)). Rule 60(b)(1) states as follows:
(b) Mistakes; Inadvertance; Excusable Neglect; Newly Discovered Evidence; Fraud; etc. 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, inadvertance, surprise, or excusable neglect;
The Motion does not allege any type of circumstance involving a mistake or inadvertance such as bad service of process, nor does it indicate any type of surprise. Instead, the circumstances described in the motion involve the deteriorating health of the Whites’ counsel during the early portion of this adversary proceeding which inhibited the Whites from responding to Westenhoefer’s complaint and motion for default judgment. This court finds “excusable neglect” to be applicable to the facts in this case.
2. The United Coin Test
The application of Rule 60(b)(1) is a commonly litigated issue. In 1983, the Sixth Circuit developed a three factor test to deal with this popular issue. See United Coin Meter Co. v. Seaboard Coastline R.R., 705 F.2d 839 (6th Cir. 1983). This test is consistent with the Supreme Court’s test for deciding Rule 60(b) issues. See Pioneer Inv. Sevrs. Co. v. Brunswick Assocs. Limited Partnership, 507 U.S. 380, 113 S.Ct 1489, 123 L.Ed.2d. 74 (1993). Therefore, this court finds it appropriate to apply the United Coin test in this case.
Using the United Coin test, this court will examine three factors: (1) the culpability of the Whites’ conduct; (2) whether Westenhoefer will be prejudiced if the judgment is set aside; and (3) whether the Whites have a meritorious defense against Westenhoefer’s complaint. Id.
1. Was the Whites’ Conduct Culpable?
This court finds that the Whites’ failure to submit responses to Westenhoefer’s pleadings does not constitute culpable conduct in this case. All parties agree that the relevant conduct at issue is the Whites’ failure to respond to Westenhoefer’s complaint and the Motion. However, the parties disagree on how to characterize the Whites’ conduct. Therefore, the issue to be resolved is whether the White’s behavior should be characterized as culpable or excusable neglect.
Westenhoefer characterizes the Whites’ behavior as culpable. He argues that the Whites chose not to communicate with counsel and made no effort to follow his case (emphasis added). To support his argument, he cites two Bankruptcy cases. (“Trustee’s Reply to Affidavits in Support of Motion to Set Aside Default Judgment” p.3). However, this court finds that neither case cited by Westenhoefer can be used to establish culpability in the Whites’ case.
The first case cited by Westenhoefer is In re Nutri*Bevco, Inc., 117 B.R. 771 (Bankr. S.D.N.Y. 1990). Although Nutri*Bevco is not a Sixth Circuit case, the case is instructive because its facts are similar to the facts in this case. However, a crucial difference between Nutri*Bevco and this case exists. In Nutri*Bevco, the movants never claim that a miscommunication existed between the lawyers and themselves. But in this case the Whites claim to have been under the impression that the necessary pleadings to prevent a default judgment had been filed and were unaware that their attorney had not done so because of his health. The second case cited is Matter of Frankina, 29 B.R. 983 (Bankr. E.D.Mich. 1983). In Matter of Frankina, the facts involve “excusable neglect” within the context of former Bankruptcy Rule 906(b)(2) rather than Rule 60(b)(1). Bankruptcy Rule 906(b)(2) is not at issue in the Whites’ case. This court finds neither Nutri*Bevco nor Matter of Frankina apply to this case, and consequently holds that the Whites’ behavior did not exceed the scope of excusable neglect.
Instead, this court finds that the correct characterization of the Whites’ conduct is excusable neglect. The Sixth Circuit generally defines culpable conduct as conduct which displays “an intent to thwart judicial proceedings or a reckless disregard for the effect of its conduct on those proceedings.” INVST Financial Group v. Chem Nuclear Systems, 815 F.2d 391, 399 (6th Cir. 1987) (alteration in original) (quoting Shepard Claims, 796 F.2d at 194). Furthermore, in Rule 60(b) cases, the Sixth Circuit standard for culpable conduct is even more stringent. See, e.g., Manufacturers’ Indus. Relations Ass’n v. East Akron Casting Co., 58 F.3d 204, 209 (6th Cir. 1995) (involving a defendant who took no action for eleven months after the default judgment was entered and offered no explanation for his inaction).
While the Whites may not be the most diligent Defendants ever in an adversary proceeding, to hold that their conduct was culpable and intended to thwart a judicial proceeding is a bit of a reach. They got their act together within two months of the entry of the default judgment, compared to the eleven months taken by the defendant in East Akron Casting. In addition, the Whites’ initial attorney had been suffering with deteriorating health during some or all of the early portion of this proceeding. The Whites have since retained new counsel. Under these circumstances, this court finds that the Whites’ conduct amounts to excusable neglect.
2. Will Westenhoefer be Prejudiced if the Default Judgment is Set Aside?
This court finds that Westenhoefer will not be prejudiced if the default judgment is set aside. The burden of proving such prejudice lies with Westenhoefer. In re Baskett, 219 B.R. 754, 760 (6th Cir. BAP 1998). Westenhoefer does not address the issue of prejudice in his pleadings. Consequently, this court concludes that no prejudice will result by setting aside the default judgment against the Whites.
3. Have the Whites Raised a Meritorious Defense?
This court finds that the Whites’ verified motion raises potentially meritorious defenses. Westenhoefer’s complaint alleges that the Debtors’s real estate transfer to J.L. White was fraudulent and without consideration. As a defense, the Whites respond by saying that J.L. White paid them $20,000 for the real property at issue. As proof of their defense, the Whites offer copies of a promissory note and two deposit slips of $10,000 a piece made around the time of the sale. In addition, the Whites each offer an affidavit of their own testimony which substantiates their version of the facts and refutes Westenhoefer’s claim. While the court withholds comment on whether the Whites’ defense will succeed in trial, this court will hold that the Whites’ defense is sufficiently meritorious for the purposes offered here.
3. Costs and Attorney’s Fees
While the Whites were not culpable under 60(b), they nonetheless sat idly on their hands as Westenhoefer, acting reasonably, filed for and obtained the default judgment; in addition, he contested the Motion. Essentially, the Whites have forced Westenhoefer to be like a hamster in the wheel during this proceeding, working hard and expending much time and energy only to end up right back where he started. This is an inequitable situation for Westenhoefer, and this court feels it must be remedied.
In granting a motion to vacate a default judgment, a court may impose reasonable conditions upon the granting of the motion. In re Ireco Industries, Inc., 2 B.R. 76 (Bankr. D.Or. 1979). The most typical of these conditions is the reimbursement of attorney’s fees and costs to the party who obtained the default judgment. See, e.g., In re BNI Telecommunications, Inc., 236 B.R. 238 (Bankr. N.D.Ohio, 1999); Thorpe v. Thorpe, 364 F.2d 692 (D.C.Cir. 1999). Therefore, while this court will continue to follow the United Coin test with regards to the Motion, it does so only after the Whites have reimbursed Westenhoefer for the attorney’s fees and costs which he incurred in filing for and obtaining the default judgment, and contesting the Whites’ motion to set aside the default judgment (the “Expenses”).
To determine the amount of the Expenses, Westenhoefer shall file and serve an affidavit describing the Expenses, within fifteen days of the entry hereof. The Whites shall then have fifteen days to pay the Expenses. If the Whites object to any part of the Expenses, and such objection is not sustained by the court in full, then the Whites shall further reimburse Westenhoefer his attorney’s fees and costs with regard to any such objection within fifteen days of the entry of the order ruling on the Whites’ objection. Westenhoefer shall file a pleading herein acknowledging the Whites’ payment of the expenses. Upon the filing thereof, this court will enter its order sustaining the Motion, and the Whites shall file their answers within thirty days after such payment. However, if the Expenses are not fully paid in accordance with the terms hereof, the Whites’ motion will be overruled.
Dated this ______ day of September.
By the court –
JOSEPH M. SCOTT, JR.
U.S. BANKRUPTCY JUDGE
Copies
to:
Ann E.
Samani, Esq.
Robert
M. Pfeifer, Esq.
John
T. Hamilton, Esq.
U.S. Trustee
UNITED STAES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
CORBIN
IN
RE:
PASCUAL
RAYMOND WHITE, SR
SARA FLORENCE WHITE
CASE NO. 97-61262
DEBTOR(S)
CHAPTER 7
JAMES
R. WESTENHOEFER
Trustee
for the bankruptcy estate
of
Pascual White and Sara White
6. ADV. NO. 99-6007
J.L. WHITE
PASCUAL WHITE, SR.
SARA FLORENCE WHITE DEFENDANTS
ORDER
In accordance with the memorandum opinion entered simultaneously herewith, the Plaintiff, James R. Westenhoefer (“Westenhoefer”), is hereby ordered to file and serve within fifteen days of the entry hereof an affidavit (the “Affidavit”) describing the attorney’s fees and costs which he incurred in filing for and obtaining the default judgment (Doc. #6), and contesting J. L. White, Pascual White, Sr., and Sara Florence White’s (collectively the “Whites”) motion to set aside the default judgment (Docs. # 10 & 19) (the “Expenses”).
Upon the filing of the Affidavit, the Whites shall pay the Expenses within fifteen days from the date of service of the Affidavit. If the Whites object to any part of the Expenses, and such objection is not sustained by this court in full, then this court will enter an order for the Whites to further reimburse Westenhoefer his attorney’s fees and costs with regard to any such objection within fifteen days of the entry of the order ruling on the Whites’ objection.
Upon payment of the Expenses, Westenhoefer is further ordered to file a pleading acknowledging the Whites’ payment of the expenses.
Dated this ______ day of September.
By the court –
JOSEPH M. SCOTT, JR.
U.S. BANKRUPTCY JUDGE
Copies to:
Ann E. Samani, Esq.
Robert M. Pfeiffer, Esq.
John T. Hamilton, Esq.
U.S. Trustee