Montoya v. Auto Depot, Inc.

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
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06/10/06
Philip J. Montoya v. Auto Depot, Inc.
05-01219
Order, To Set Aside [6-1] Default Judgment .
Received on: 2006-01-24 15:52:46.000
2006-01-24 00:00:00.000
2006-01-24 00:00:00.000
Patti Hennessy
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UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re: DANA BAUDER, No. 7-05-11422 MA
Debtor.
____________________________________________________________________________
PHILIP MONTOYA, Trustee,
Plaintiff,
v. Adversary No. 05-1219 M
AUTO DEPOT, INC., a
New Mexico corporation,
Defendant.
ORDER SETTING ASIDE DEFAULT JUDGMENT
THIS MATTER is before the Court on the Motion to Open Default Judgment Against Auto
Depot and the Supplemental Motion to Set Aside Default Judgment (together, “Motion”) filed by
Defendant Auto Depot, Inc. (“Auto Depot”). The Motion seeks to set aside the Order Granting
Plaintiff’s Motion for Default Judgment Against Auto Depot, Inc. (“ Default Judgment”), entered
November 17, 2005. The Court held a final hearing on the Motion on January 20, 2005 and took the
matter under advisement. Upon review of the record of this adversary proceeding and after
consideration of the arguments of counsel, and being otherwise sufficiently informed, the Court finds
that there is sufficient cause to set aside the Default Judgment. Accordingly, the Court will grant the
Motion. In reaching this determination, the Court FINDS:
1. Plaintiff Philip Montoya is the Chapter 7 trustee appointed in the Dana Bauder bankruptcy
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1Rule 55(c), Fed.R.Civ.P. provides:
(c) Setting Aside Default. For good cause shown the court may set aside an entry of
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proceeding, Case No. 7-05-11422 MA.
2. On September 29, 2005, Plaintiff Philip Montoya filed a Complaint to Recover Fraudulent
Transfers, to Recover Unauthorized Transfers, and for Turnover and Accounting of Property of the
Estate (“Complaint”) against Auto Depot.
3. A Summons and Notice of Scheduling Conference was issued on October 5, 2005 which
required that a response to the Complaint be filed within thirty days of the date of issuance of the
summons, and provided further that a scheduling conference was set for November 18, 2005 at
9:15am. (See Docket # 2).
4. Service of the Complaint was made on the president and registered agent of Defendant
Auto Depot, Douglas Bauder, and upon Ronald E. Holmes, counsel for the Debtor, Dana Bauder. (See
Docket # 3).
5. Auto Depot did not file an answer to the Complaint or other responsive pleading within
thirty days of the date of issuance of the Summons and Notice of Scheduling Conference.
6. Douglas Bauder appeared at the date and time specified for the scheduling conference.
7. Defendant filed its Motion to Open the Default Judgment Against Auto Depot on November
25, 2005, eight days after the entry of the Default Judgment on November 17, 2005.
8. Under Rule 55(c), Fed.R.Civ.P., made applicable to bankruptcy proceedings by Rule
7055, Fed.R.Bankr.P., the Court may set aside a default judgment upon a showing of good cause, in
accordance with Rule 60(b), Fed.R.Civ.P.1 Under Rule 60(b), Fed.R.Civ.P., made applicable to
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default, and, if a judgment by default has been entered, may likewise set it aside in accordance with
Rule 60(b).
Rule 55(c), Fed.R.Civ.P.
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bankruptcy proceedings by Rule 9024, Fed.R.Bankr.P., the Court may relieve a party from a final
judgment on several grounds, including “mistake, inadvertence, surprise, or excusable neglect”, or “any
other reason justifying relief from the operation of the judgment.” Rule 60(b)(1) and (6), Fed.R.Civ.P.
9. “[D]efault judgments are not favored inasmuch as the preferred disposition of any case is
upon its merits.” Taylor v. Riley (In re MAPS Int’l, Inc.), 152 B.R. 989, 991 (Bankr.N.D.Okla.
1993).
10. “The defaulting party has the burden of proving that the default judgment should be set
aside.” In re Wallace, 298 B.R. 435, 440 (10th Cir. BAP 2003) (citations omitted).
11. In order for a default judgment to be set aside in accordance with the standards
enumerated under Rule 60(b), Fed.R.Civ.P., the movant must demonstrate that the default was not
caused by his or her own culpable conduct, that the movant has a meritorious defense, and that the
plaintiff will not be prejudiced by setting aside the default judgment. Id. (citing United States v.
Timbers Preserve, 999 F.2d 452, 454-455 (10th Cir. 1993)). See also, Olympia Holding Corp. v.
Gaynor Electric Co., Inc. (In re Olympia Holding Corp.), 226 B.R. 705, 707 (Bankr.M.D.Fla.
1998) (mistake, inadvertence or excusable neglect requires a showing that the defaulting party “‘had a
meritorious defense that might have affected the outcome; (2) granting the motion would not result in
prejudice to the non-defaulting party; and (3) a good reason existed for failing to reply to the
complaint.’”) (quoting Florida Physician’s Insurance Co. v. Ehlers, 8 F.3d 780, 783 (11th Cir.
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1993)).
12. In considering whether the movant has met the requirement of a meritorious defense, “the
court examines the allegations contained in the moving papers to determine whether the movant’s
version of the factual circumstances surrounding the dispute, if true, would constitute a defense to the
action.” In re Stone, 588 F.2d 1316, 1319 (10th Cir. 1978).
13. Defendant has sufficiently shown that the Default Judgment should be set aside. The main
focus of Defendant’s defense is that because all of the debts of Dana Bauder were paid, there would be
no need to recover the alleged fraudulent transfers for the benefit of creditors. Plaintiff directs the
Court’s attention to Stalnaker v. DLC, Ltd., 376 F.3d 819 (8th Cir. 2004), which stands for the
proposition that a trustee’s adversary proceeding to recover fraudulent transfers for the benefit of the
estate was proper notwithstanding that the debtor had settled its claims with all unsecured creditors
prior to the trustee’s recovery. Thus, Plaintiff argues, Defendant lacks a meritorious defense sufficient
to set aside the Default Judgment. However, the affidavit of Douglas Bauder filed in support of the
Motion also states that the Debtor received valuable consideration in return for the transfers to Auto
Depot. See Affidavit of Douglas Bauder on behalf of Auto Depot, Inc., ¶ 21. This statement serves as
a defense to a claim for fraudulent transfer based on a lack of consideration, or failure to receive
reasonably equivalent value. “Likelihood of success is not the measure” in considering whether the
defaulting defendant has raised a meritorious defense. Baveley v. Powell (In re Baskett), 219 B.R.
754, 761 (6th Cir. BAP 1998) (quoting INVST Fin. Group, Inc. v. Chem-Nuclear Sys., Inc., 815
F.2d 391, 399 (6th Cir. 1998) (quoting Keegel v. Key West & Carribean Trading Co., 627 F.2d
372, 374 (D.C.Cir. 1980)). Rather, “[t]he key consideration is ‘to determine whether there is some
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2New Mexico Local Bankruptcy Rule 9010-2 requires that all corporations or partnerships
“must be represented by an attorney authorized to practice before this court for all purposes except
filing proofs of claim or participation in a meeting of creditors.” NM LBR 9010-2.
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possibility that the outcome of the suit after a full trial will be contrary to the result achieved by the
default.’” Id. (quoting INVST Fin. v. Chem-Nuclear, 815 F.2d at 399) (quoting 10 Charles Alan
Wright, Arthur R. Miller & Mary Kay Kane Federal Practice and Procedure §2697, at 531 (1983)).
14. Plaintiff will suffer no prejudice to if the Default Judgment is set aside. Defendant filed the
Motion only eight days after the entry of the Default Judgment, and supplemented it further two months
later. “‘Delay alone is not a sufficient basis for establishing prejudice.’” Baskett, 219 B.R. at 760
(quoting INVST Fin. v. Chem-Nuclear, 815 F.2d at 398). Plaintiff has made no other allegations of
any harm he would suffer if the Default Judgment were set aside.
15. Finally, Defendant explained that it failed to answer based on advice from counsel that if it
paid all of the Debtor’s unsecured debts, the suit would be satisfied and the adversary proceeding
would not go forward. Reliance on erroneous legal advice as justification for failing to file an answer is
generally insufficient to show excusable neglect. See Presidential Fin. v. Raynard (In re Raynard),
171 B.R. 699, 702 (Bankr.N.D.Ga. 1994) (decision not to file answer based on erroneous legal advice
was an intentional decision and did not constitute excusable neglect). However, in light of the fact that
Douglas Bauder took steps on behalf of Defendant which he believed would satisfy the suit, and
appeared at the date and time specified for the scheduling conference (albeit without an attorney as
required by local rule2) only to discover that the Default Judgment had already been entered, the Court
finds that Defendant’s failure to file an answer to the Complaint was not solely the result of its own
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culpable conduct.
Based on the foregoing, the Court concludes that Defendant has met its burden of showing
good cause exists to set aside the Default Judgment in accordance with Rule 55(c), Fed.R.Civ.P. and
Rule 60(b), Fed.R.Civ.P.
WHEREFORE, IT IS HEREBY ORDERED, that the Default Judgment, entered November
17, 2005 is hereby set aside.
ORDERED FURTHER, that within ten days of the date of entry of this Order, Defendant shall
file an Answer to the Complaint.
ORDERED FINALLY, that the final hearing on damages scheduled for February 2, 2006 at
9:00am is VACATED.
_________________________________________
MARK B. McFEELEY
United States Bankruptcy Judge
I certify that on the date shown on the attached document verification, a true and correct copy of
the foregoing was either electronically transmitted, faxed, delivered or mailed to the listed counsel
and/or parties.
George Moore
Bonnie Gandarilla
Attorneys for Plaintiff
PO Box 216
Albuquerque, NM 87103
Louis Puccini, Jr.
Attorney for Defendant
PO Box 30707
Albuquerque, NM 87190
________________________________
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