Seitz v. DiPinto et al

UNITED S TATES B ANKRUPTCY COURT
FOR T HE E ASTERN DISTRICT O F PENNSYLVANIA
In re 	: 	Chapter 7
:
RAYMOND CHARLES MOHR, 	: 	Bankruptcy No. 02-10551DWS
:
Debtor. 	:
:
GARY F. SEITZ, Chapter 7 Trustee, 	: 	Adversary No. 04–0043
:
Plaintiff, 	:
:
v. 	:
:
JOSEPH DIPINTO, JR., 	:
WALTER MEHL, PAULINE MEHL, 	:
DIPINTO-MEHL FUNERAL HOME, 	:
THE ESTATE OF MARIE FEGLEY, Deceased, :
THE ESTATE OF JOHN JAMES RAGO, 	:
:
Defendants. 	:
MEMORANDUM OPINION
BY: 	DIANE WEISS SIGMUND, Chief Bankruptcy Judge
Before the Court is the Motion of Joseph DiPinto, Jr. (“DiPinto”) to Set Aside Default
Judgment (the “Motion”) in connection with the Complaint filed by Gary Seitz, the Chapter 7
trustee of the estate of Raymond C. Mohr (the “Trustee”), against DiPinto, Walter Mehl
(“W. Mehl”), Pauline Mehl, DiPinto-Mehl Funeral Home (the “Home”), the Estate of
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1 In his memorandum, the Trustee recites certain facts which are not part of the record of
this contested matter. As the Trustee did not testify, the only facts before me are found from the
testimony of DiPinto and documents as to which I may take judicial notice.
I shall take judicial notice of the docket entries in this case. Fed.R.Evid. 201, incorporated
in these proceedings by Fed.R.Bankr.P. 9017. See Maritime Elec. Co., Inc. v. United Jersey Bank,
959 F.2d 1194, 1200 n.3 (3d Cir. 1991); Levine v. Egidi, 1993 WL 69146, at *2 (N.D. Ill. 1993);
In re Paolino, 1991 WL 284107, at *12 n. 19 (Bankr. E.D. Pa. 1991); see generally In re Indian
Palms Associates, Ltd., 61 F.3d 197 (3d Cir. 1995). While a court may not take judicial notice
sua sponte of facts contained in the debtor’s file that are disputed, In re Augenbaugh, 125 F.2d 887
(3d Cir. 1942), it may take judicial notice of adjudicative facts “not subject to reasonable dispute ...
[and] so long as it is not unfair to a party to do so and does not undermine the trial court’s
factfinding authority.” 	In re Indian Palms Assoc., 61 F.3d 197, 205 (3d Cir. 1995) (citing
Fed.R.Evid. 201(f) advisory committee note (1972 proposed rules). Moreover, “factual assertions
in pleadings, which have not been superceded by amended pleadings, are judicial admissions against
the party that made them. Larson v. Gross Bank, 204 B.R. 500, 502 (W.D. Tex. 1996) (statements
in schedules). See also In re Musgrove, 187 B.R. 808 (Bankr. N.D. Ga. 1995) (same); In re Leonard,
151 B.R. 639 (Bankr. N.D.N.Y. 1992) (same).
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Marie Fegley and the Estate of John James Rago (together the “Defendants”). 	For the
reasons that follow, the Motion is granted on the terms and conditions set forth below.
BACKGROUND
The following facts are of record.1 On January 6, 2004 the Trustee filed a complaint
against the Defendants for recovery of transfers pursuant to bankruptcy and state fraudulent
conveyance and preference laws (the “Complaint”). The Complaint was one of numerous
actions the Trustee commenced to recover transfers made by Raymond C. Mohr (“Debtor”)
in connection with a “Ponzi” scheme whereby Debtor had convinced investors to provide
funds with the promise of high returns on their capital. However, the funds were not invested
but rather were used by him, and as new investments were made, they were utilized to make
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2 In Counts I and II, the Trustee, using his strong arm powers under § 544(b), demands
judgment for $314,981.00 against the Defendants pursuant to Pennsylvania law governing actual
and constructive fraudulent conveyances. 	Count III demands judgment for $59,613 against
Defendants pursuant to federal bankruptcy law governing fraudulent transfers. 	The bankruptcy
statute has a one year reach back which presumably accounts for the difference in the amount of the
demands made. 	Compare 11 U.S.C. § 548(a)(1) with 12 Pa.C.S.A. § 5109. 	Finally Count IV
demands judgment for $27,716.00 against Defendants pursuant to § 547 governing preferential
transfers. 	Again the shorter reach back period of 90 days presumably accounts for the lesser
number. The Complaint does not itemize the individual transfers which, as noted below, opens the
door to DiPinto’s Motion.
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payments to the earlier investors to legitimatize the scheme. 	While the earlier investors
were paid, the later ones experienced losses. According to the Trustee, of the 91 investors,
49 were “net gainers in that they received a return of their investment plus a profit, including
the Defendants herein. DiPinto acknowledges an investment of $19,000 and the receipt of
a substantial return which the Trustee quantified at $192,000. 	The Trustee undertook a
program to equalize the return among the entire group of investors, utilizing the fraudulent
conveyance and preference law as his theory of recovery.2
In December 2003 the Trustee’s counsel sent DiPinto a certified letter which DiPinto
signed as received but did not open. 	The Trustee contends this letter was one of many
demand letters he sent preliminary to filing the above described lawsuits. DiPinto explains
that he had received many letters in connection with the Mohr bankruptcy case and that after
the first few months, he stopped opening them and discarded them because he did not
think they pertained to him. Moreover, such correspondence purportedly reminded him of
the Mohr “Ponzi” scheme which he found upsetting since he had discovered that his
positive “investment” experience had been used to lure other investors who lost money.
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3 According to the Trustee’s brief, they were customers of the Home who had deposited
“pre-need” funds with the other defendants. 	Whether these funds are included in the $314,000
judgment obtained is unknown and is the precise issue raised by DiPinto to support the Motion.
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Finally DiPinto advises that he has been treated for depression since 1995, culminating in a
mental breakdown in 2003. 	He is currently under the care of a family practitioner for
depression and receiving medication. 	He also claims his lack of responsiveness to the
lawsuit was attributable to the death of his father in December 2003.
On January 23, 2004 DiPinto was served with the summons issued in connection
with the Complaint. 	When no answer was filed, the Trustee requested entry of default
on April 5, 2004, and that relief was granted on April 8, 2004. On May 6, 2004 the court
sua sponte entered an order directing the plaintiff to take action under Fed.R.Civ.P. 7055 or
the adversary case would be dismissed for lack of prosecution. On July 7, 2004, the Trustee
filed a motion for default judgment against DiPinto, W. Mehl and the Home which was
scheduled for hearing on July 27, 2004 on notice to DiPinto who neither answered nor
appeared. Judgment in the amount of $314,981.00 was entered against the three defendants
named in the motion. Based on post-filing discovery, the Trustee concluded that the other
three defendants were not culpable.3 DiPinto claimed to be unaware of the Complaint, the
motion, the hearing, and the judgment because he had not opened any of the mail he received
from either the bankruptcy court or the Trustee’s counsel.
In December 2004 his bank began dishonoring his checks. Upon inquiry, he learned
that the Trustee had attached his account to satisfy the judgment. 	He took no action for
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4 The judgment also got the attention of W. Mehl who made a settlement with the Trustee
who then agreed to open the judgment.
5 DiPinto relies on Fed.R.Civ.P. 60(b) which provides that “on motion and upon such terms
as are just, the court may relieve a party ... from a final judgment... for the following reasons:
(1) mistake, inadvertence, surprise or excusable neglect.” A motion under Rule 60(b)(1) must be
made within one year of entry of the judgment.
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awhile and then called the Trustee’s counsel for advice. 	He understandably declined to
give any. Finally on January 21, 2005 his newly retained counsel filed a motion to set aside
the judgment relying on DiPinto’s contention that he had never been served with the
Complaint. 	However, he was compelled to withdraw it when a search of the record
confirmed that service had been made. 	A second, and the present, motion to set aside
judgment was filed on February 9, 2005. After an evidentiary hearing on April 11, 2005,
I allowed a generous amount of time for the filing of 	briefs as requested by DiPinto’s
counsel on the representation that he would engage in good faith negotiations with the
Trustee’s counsel. 4 This is the last adversary proceeding pending in this bankruptcy case
filed in 2002, and the only impediment to completing the administration of the estate and
making distribution to creditors injured by the Ponzi scheme.
DISCUSSION
A motion to set aside a default judgment is committed to the discretion of the trial
judge.5 Hritz v. Woma Corp., 732 F. 2d 1178, 1181 (3d Cir. 1984). 	In exercising that
discretion, the court must consider three factors: (1) whether the defendant has a meritorious
defense; (2) whether the plaintiff will be prejudiced if the default is lifted; and (3) whether
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the default was the result of the defendant’s culpable conduct. Id. Given the preference that
cases be disposed of on the merits whenever practicable, close cases should be resolved in
favor of opening the default judgment. Feliciano v. Reliant Tooling Company Ltd., 691 F.2d
653, 656 (3d Cir. 1982).
Meritorious defense
A meritorious defense is presumptively established when the “allegations of the
defendant’s answer, if established on trial would constitute a complete defense to the action.”
Hritz, 732 F.2d at 1181 (quoting Tozer v. Charles A. Krause Milling Co., 189 F.2d 242, 244
(3d Cir. 1951)). As DiPinto did not file an answer, I must refer to the Motion to evaluate the
defense he lodges to the Complaint.
First, DiPinto states that the judgment amount is incorrect because the Complaint
does not identify the transfers made to each of the six defendants and when they were made.
With this information, he claims he would be able to determine if any of the payments were
outside the statute of limitations or made to other of the defendants. Notably DiPinto does
not aver that any of the payments he received from Debtor were not fraudulent transfers or
preferences but only that he is not liable for all the transfers notwithstanding Plaintiff’s
averment that all the Defendants were acting in concert, and as such are jointly and severally
liable for all the recoveries sought in the Complaint.
I agree with DiPinto that there is nothing in this Complaint as pled that would support
recovery of $314,981.00 from DiPinto. 	He testified that he received $192,000 on an
investment of $19,000. That testimony, if presented at the trial of this action, would be a
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complete defense to the demand for the larger sum absent some other facts proven by the
Trustee which would support his joint and several liability theory. 	The Trustee has
aggregated a series of transfers, failing to identify them as to amount and payee, and then
taken judgment only against DiPinto, W. Mehl and the Home. His counsel explained that
the decision not to proceed against the other defendants arose from further discovery that
absolved them from liability. However, it is not clear whether transfers to them were still
counted against DiPinto. Nor are there any facts pled that support joint and several liability.
In short, I believe that DiPinto may have a defense to the amount of damages awarded
to the extent that transfers were not received by him or on his behalf. On the other hand,
there is no defense to liability asserted, meritorious or otherwise. Indeed DiPinto appears to
acknowledge his responsibility. This prong of the test requires a complete defense which
DiPinto has failed to assert.
Prejudice to Plaintiff
The Trustee contends that setting aside the judgment would prejudice the creditors of
the estate that he is administering and on whose behalf he has sought to recover the payments
made to the “net gainers.” First, he notes that the bankruptcy case is fully administered but
for this matter which holds up the distribution to creditors, all victims of the Ponzi scheme.
Second, he states that he has relied on the judgment in taking numerous steps to execute
thereon, spending estate funds to do so. Finally, he observes that DiPinto seeks to open the
judgment to raise a statute of limitations defense sixteen months after the filing of the
Complaint and after the Trustee spent considerable time and money in prosecuting the action.
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Mere delay in satisfying a claim rarely establishes the degree of prejudice necessary
to prevent the opening of a judgment entered at an early stage of the litigation. Feliciano,
691 F.2d at 656. 	As the Trustee recognizes in his memorandum, “prejudice arises when
plaintiff’s claim would be materially impaired because of the loss of evidence, an increased
potential for fraud or collusion, substantial reliance on the entry of default or other
substantial factors.” Trustee’s Brief in Opposition to Motion at 8 (quoting Dizzley v. Friends
Rehab. Program, 202 F.R.D. 146,147-48 (E.D. Pa. 2000)).
The Trustee has not asserted that his ability to pursue the claim has been hindered
since the entry of judgment nor that there has been a loss of available evidence or increased
potential for fraud. He has asserted and the Motion confirms that DiPinto seeks to raise a
statute of limitations defense which could be prejudicial although he does not state in
what way. The Trustee has contended that his reliance on the judgment was responsible for
actions that were costly to the estate. However, as he has presented no evidence of these
costs, I cannot ascertain whether they are sufficient to find prejudice.
The absence of evidence on this latter point is not significant because it is apparent
that the Trustee’s efforts have been in aid of execution, the result of which has been his
discovery that DiPinto has but one asset, his home which has available equity to satisfy a
judgment in whole or in part. This discovery has been useful since it is the foundation for
understanding DiPinto’s position. It is DiPinto’s resistance to the loss of his home, which
also houses the Home which is his business, that compels him to continue this litigation with
the Trustee as opposed to reaching a settlement as the other “net gainers” have done.
DiPinto’s testimony of his anguish that he was used by Debtor as a “dupe” to seduce other
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investors who lost substantial sums of money is qualified by his self interest in not wanting
to disgorge his unlawful profits. Since DiPinto will ultimately be liable for the return of his
“windfall,” the discovery in aid of execution will not have wasted time or money.
While delay in and of itself is not generally a reason to refuse to set aside a judgment,
it may be found to be so where the court finds that the setting aside of the judgment is for the
sole purpose of delay. DiPinto does not contest liability but rather amount. The Trustee has
given DiPinto’s counsel the itemization of transfers that DiPinto correctly claimed was
absent in the Complaint. Presumably on that basis a settlement could have been reached at
a number that represented what DiPinto thought had been the transfers he received, and at
the request of DiPinto’s attorney, I allowed the parties time to accomplish that. However,
rather than a resolution being reported, I received briefs. 	DiPinto’s counsel candidly
acknowledged that the Trustee’s insistence on looking to the value of the real estate was
the impediment to settlement. He contends that DiPinto does not have funds to pay and does
not want to lose his house. Meanwhile the other beneficiaries have paid into the pot and
creditors who were victimized await a recovery of some part of their investment from
a bankruptcy liquidation that began in January 2002.
Culpable conduct
DiPinto’s explanation for not responding to the certified demand letter and the
Complaint served upon him is that he simply ceased opening his mail. 	The explanations
he offers for failing to do so are not credible. 	He states that he did not think these
communications had anything to do with him, but were merely relating to the bankruptcy
case generally. 	However, the service of a complaint and a certified demand letter are
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unlikely to be confused with routine notices from the bankruptcy court, especially since they
were sent by the Trustee’s counsel. 	He also states that he did not open the bankruptcy
communications because they reminded him of the Ponzi scheme and how he had been used
as a “dupe” to the detriment of many people. Since he was not opening any mail other than
communications from a lawyer who was sending him funeral business, his feelings about the
Ponzi scheme seem irrelevant to his decision not to open his mail. I am also not persuaded
that the death of DiPinto’s father the month before the Complaint was filed can provide
an excuse for not answering the Complaint and the motion for default judgment.
Finally DiPinto’s testimony of depression, which presumably could have a paralyzing effect,
does not have appeared to have disabled him from opening the mail that could benefit him
and did not disable him from securing counsel and fighting the judgment at this time
notwithstanding the continuation of his condition to this date. Absent medical evidence or
other corroboration of diminished capacity, I cannot conclude that DiPinto’s chronic
condition justifies his conduct.
In Hritz v. Woma, supra, the Third Circuit found that “reckless disregard for repeated
communications from plaintiffs and the court, combined with failure to investigate the
source of a serious injury, can satisfy the culpable conduct standard.” 	732 F.2d at 1183.
Thus, while the culpable conduct standard requires that more than negligence be established,
it need not necessarily rise to the level of bad faith. I reject DiPinto’s contention that his
failure to open the demand letter, answer the Complaint and motion for default judgment, and
take no action until after his bank account was attached can be considered excusable neglect.
His actions in deliberately ignoring repeated communications by not opening the mail were
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6 Rooks v. American Brass Co., 263 F.2d 166 (6th Cir. 1959), while cited by DiPinto, bears
no resemblance to the facts here. In Rooks, the judgment debtor was hospitalized with meningitis
during the relevant period and was unable to handle any business. Service of process made at his
residence was intercepted by his wife because of his dangerous condition. She turned the papers
over to a third party who was under a mistaken impression as to their significance. Rooks had no
way to learn of the suit; DiPinto just had to open his mail.
-11-
reckless. 6 He knew that he had received a “windfall” from the Debtor’s Ponzi scheme, and
he was not justified in ignoring attempts by the Trustee to hold him accountable.
Effectiveness of Alternative Sanctions
Rule 60(b) provides that the court may relieve a party of a judgment on “such terms
as are just.” This language allows courts to impose terms and conditions upon opening a
judgment in order to ameliorate the prejudice suffered by the non-defaulting party. Feliciano,
691 F.2d at 657. Trial courts are encouraged to consider whether any sanction short of the
default judgment would be ineffective. Hritz, 732 F.2d at 1182. Indeed one panel of the
Third Circuit Court of Appeals described the effectiveness of alternative sanctions as a fourth
factor to weigh when presented with a motion to set aside a default judgment. 	Emcasco
Insurance Co. v. Sambrick, 834 F.2d 71, 73 (3d Cir. 1987) (finding that neglect was not
excusable but when evaluated with other relevant factors and the repeated admonition that
dismissal should be a last, not first resort, refusal to open judgment was reversed). For the
reasons that follow, I believe that I can temper the harshness of a default judgment in an
amount which appears to be excessive by opening the judgment on very narrow terms.
I have determined that DiPinto does not have a meritorious defense to liability for the
judgment but rather has a partial defense as to damages. 	In Atlas Communications v.
Waddill, 1997 WL 700492, at *4 (E. D. Pa. October 31, 1997), the court recognized the
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reluctance of courts in this circuit to deny a motion to set aside a default solely on the
grounds that no meritorious defense exists. 	Rather the court set up a procedure whereby
the default would stand but no default judgment would be entered until an evidentiary
hearing was held to establish the amount of the judgment. Such a procedure seems
appropriate in this case as well.
I have also determined that the prejudice that the Trustee has identified is DiPinto’s
use of this litigation to obstruct a resolution of his obligation to the estate and the
concomitant injury to creditors whose recoveries have been held hostage to this litigation.
Moreover additional prejudice could accrue if DiPinto is at this late date allowed to plead
a statute of limitations defense. 	The latter prejudice can be prevented by conditioning
the opening of the judgment on DiPinto’s waiver of the statute of limitations defense. Id. at
1182 n.3. The former can be addressed by conditioning the opened judgment on a trial of
the issue of damages only and setting procedures by which the claim will be liquidated
quickly. Given DiPinto’s culpability, this approach strikes a more than fair and equitable
accommodation between the parties.
An Order consistent with the foregoing Memorandum Opinion shall be entered.
DIANE WEISS SIGMUND
Chief U.S. Bankruptcy Judge
Dated: 	June 6, 2005
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UNITED S TATES B ANKRUPTCY COURT
FOR T HE E ASTERN DISTRICT O F PENNSYLVANIA
In re 	: 	Chapter 7
:
RAYMOND CHARLES MOHR, 	: 	Bankruptcy No. 02-10551DWS
:
Debtor. 	:
:
GARY F. SEITZ, Chapter 7 Trustee, 	: 	Adversary No. 04–0043
:
Plaintiff, 	:
:
v. 	:
:
JOSEPH DIPINTO, JR., 	:
WALTER MEHL, PAULINE MEHL, 	:
DIPINTO-MEHL FUNERAL HOME, 	:
THE ESTATE OF MARIE FEGLEY, Deceased, :
THE ESTATE OF JOHN JAMES RAGO, 	:
:
Defendants. 	:
ORDER
AND NOW, this 6th day of June 2005, upon consideration of the Motion of Joseph
DiPinto, Jr. to Set Aside Default Judgment (the “Motion”) in connection with the Complaint
filed by Gary Seitz, the Chapter 7 trustee of the estate of Raymond C. Mohr, against, inter
alia, Joseph DiPinto, Jr. after notice and hearing, and the memoranda filed by the parties and
for the reasons stated in the accompanying Memorandum Opinion;
It is hereby ORDERED that the Motion is GRANTED and the judgment in the
amount of $314,981.00 is set aside as to amount only on the following terms and conditions:
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Adversary No. 04-0043
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1. Liability is established and DiPinto may only contest the amount of the transfers
that he has not received. Any statute of limitations defense is waived.
2. 	On or before June 14, 2005 the Trustee will serve DiPinto with requests for
admissions which list each of the transfers that are included in the $314,981.00 and ask
whether DiPinto admits having received such transfers. DiPinto will provide answers by
June 21, 2005 or the matters will be deemed admitted.
3. Any motion for summary judgment shall be filed on or before June 28, 2005 which
DiPinto shall answer within 7 days of service thereof.
4. Trial of this matter shall be held on July 19, 2005 at 2:00 p.m. in the Robert N.C.
Nix, Sr. Federal Courthouse, 2nd floor, 900 Market Street, Courtroom #3, Philadelphia, PA
unless disposed of by summary judgment or settlement.
5. Plaintiff’s counsel shall file the appropriate pleading to dismiss the Complaint as
to defendants Pauline Mehl, the Estate of Marie Fegley and the Estate of John James Rago
given the acknowledgment that after discovery, the Trustee has concluded that they are not
liable to the estate.
DIANE WEISS SIGMUND
Chief U.S. Bankruptcy Judge
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Adversary No. 04-0043
-3-
Copies to:
Bradley T. Beckman, Esquire
BECKMAN & ASSOCIATES
Two Penn Center Plaza, Suite 910
Philadelphia, PA 19102
Eric L. Frank, Esquire
DIDONATO & WINTERHALTER
1818 Market Street, Suite 3520
Philadelphia, PA 19103
Alan S. Carpel, Esquire
1129 Spruce Street
Philadelphia, PA 19107
John H. Filice, Esquire
RUBIN, GLICKMAN AND STEINBERG
2605 North Broad Street
P.O. Box 1277
Lansdale, PA 19446
Gary Francis Seitz, Esquire
The Bayard Firm
222 Delaware Avenue, Suite 900
Wilmington, DE 19899
Richard T. Brown, Jr.
Two Penn Center
1528 JFK Blvd., Suite 1204
Philadelphia, PA 19102
Dave P. Adams, Esquire
Office of the U.S. Trustee
833 Chestnut Street, Suite 500
Philadelphia, PA 19107
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