United States Trustee v. Blumenthal

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re: 	JOANNE BLUMENTHAL, 	7-04-17143 ML
Debtor.
___________________________________________________________________________
UNITED STATES TRUSTEE,
Plaintiff,
v. 	Adversary No. 05-1295 M
JOANNE BLUMENTHAL,
Defendant.
ORDER GRANTING DEBTOR’S MOTION TO SET ASIDE DEFAULT JUDGMENT
REVOKING DEBTOR’S DISCHARGE UNDER 11 U.S.C. § 727
THIS MATTER is before the Court on the Motion to Set Aside Default Judgment
(“Motion”) filed by the Defendant, Joanne Blumenthal, pro se. The Court held a final hearing on
the Motion on June 6, 2006 and took the matter under advisement. 	The Motion requests the
Court to set aside the Default Judgment Revoking the Debtor’s Discharge Under 11 U.S.C. § 727
(“Default Judgment”) entered March 24, 2006 pursuant to Rule 55, Fed.R.Civ.P. and Rule 60(b),
Fed.R.Civ.P. After review of the record of this proceeding, and being otherwise sufficiently
informed, the Court finds that the Motion should be granted and the Default Judgment set aside.
In reaching this determination the Court FINDS:
1. Defendant filed a voluntary petition under Chapter 7 of the Bankruptcy Code on
September 29, 2004 as Case No. 7-04-17143. She received her discharge on January 31, 2005.
2. On December 30, 2005, the United States Trustee filed a Complaint Seeking
Revocation of Debtor’s Discharge Under 11 U.S.C. § 727 (“Complaint”).
3. The Complaint alleges that Defendant failed to disclose certain assets and transfers in
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her statements and schedules filed in her bankruptcy proceeding, and that she fraudulently
concealed assets and made false statements in her schedules and at her § 341 meeting of
creditors and requests that the discharge be revoked pursuant to 11 U.S.C. § 727(d)(1) and 11
U.S.C. § 727(e)(1).
4. Defendant and her former bankruptcy counsel of record were served by mail on
January 4, 2006 with a copy of the Complaint and the Summons and Notice of Scheduling
Conference. The Summons and Notice of Scheduling Conference states on its face that a
response to the Complaint must be filed with the Court and served on the Plaintiff within 30 days
of the date of issuance of the Summons and Notice of Scheduling Conference.
5. Defendant failed to timely file an answer or other response to the Complaint.
6. Plaintiff filed a Motion for Default Judgment on Complaint Requesting Revocation of
The Debtor’s Discharge Under 11 U.S.C. § 727 (“Motion for Default Judgment”) on February
17, 2006, and sent a copy of the Motion to Defendant and to Defendant’s bankruptcy counsel of
record by mail on the same day.
7. A final hearing on the Motion for Default Judgment was scheduled for March 22,
2006. Notice of the final hearing on the Motion for Default Judgment was sent to Defendant and
to Defendant’s bankruptcy counsel of record on February 21, 2006.
8. Defendant failed to appear at the final hearing on the Motion for Default Judgment,
and a Default Judgment Revoking the Debtor’s Discharge Under 11 U.S.C. § 727 (“Default
Judgment”) was entered on March 24, 2006.
9. On March 31, 2006, Defendant filed an Answer to the Complaint pro se, a request to
allow Defendant to amend her bankruptcy schedules, and the Motion seeking to set aside the
Default Judgment.
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10. Defendant’s Motion asserts that the Default Judgment should be set aside due to
excusable neglect, that her bankruptcy counsel refused to assist her or file any papers on her
behalf in the adversary proceeding, that mental health issues prevented her at times from leaving
her home, that she is unemployable and now receives social security disability income, and that
she was not dishonest in her bankruptcy proceeding, had no intent to defraud, and did not
knowingly or willingly conceal assets, nor did she make false statements in her schedules or at
her creditors’ meeting.
11. At the final hearing on the Motion, Defendant appeared and stated that her failure to
file a timely answer to the Complaint was due to her illness, that she lives in the mountains and
must drive to pick up her mail, that during the time that the Complaint was served she was
unable to keep up with her mail due to her illness, and that by the time she received the papers,
the time for filing a response had already expired.
12. Rule 55(c), Fed.R.Civ.P., made applicable to adversary proceedings by Rule 7055,
Fed.R.Bankr.P., provides:
For good cause shown the court may set aside an entry of 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.
13. Rule 60(b), Fed.R.Civ.P., made applicable to bankruptcy proceedings by Rule 9024,
Fed.R.Bankr.P. establishes the standards for obtaining relief from final judgments and orders,
and provides, in relevant part:
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; . . . or (6) any other reason justifying relief from the operation of the judgment.
The motion shall be made within a reasonable time, and for reasons (1), (2), and (3) not
more than one year after the judgment, order or proceeding was entered or taken.
Rule 60(b), Fed.R.Civ.P.
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14. “The Court has broad discretion in determining whether or not relief from a default
judgment should be granted.” In re MAPS Int’l, Inc., 152 B.R. 989, 991 (Bankr.N.D.Okla. 1993)
(citing Thomas v. Kerr McGee Refining Corp., 660 F.2d 1380 (10th Cir.1981), cert. denied, 455
U.S. 1019, 102 S.Ct. 1716, 72 L.Ed.2d 137 (1982)).
15. The party seeking relief from a default judgment must demonstrate sufficient grounds
for relief in accordance with the standards of Rule 60(b), Fed.R.Civ.P. 	In re Wallace, 298 B.R.
435, 440 (10 th Cir. BAP 2003), aff’d, 99 Fed.Appx. 870 (2004) (citing Nikwei v. Ross School of
Aviation, Inc., 822 F.2d 939, 941 (10 th Cir.1987)).
16. Justification for relief from a default judgment requires a showing of the following:
“(1) the moving party’s culpable conduct did not cause the default; (2) the moving party has a
meritorious defense; and (3) the non-moving party will not be prejudiced by setting aside the
judgment.” United States v. Timbers Preserve, 999 F.2d 452, 454 (10 th Cir. 1993) (citations
omitted). See also, Olson v. Stone (In re Stone), 588 F.2d 1316, 1319 (10 th Cir. 1978) (“A 60(b)
motion thus comprehends two distinct aspects – justification for relief and a meritorious
defense.”).
17. Default judgments are disfavored inasmuch as there exists a strong policy in favor of
resolving disputes on the merits. Cessna Fin. Corp. v. Bielenberg Masonry Contracting, Inc.,
715 F.2d 1442, 1444 (10 th Cir. 1983) (noting that “[a]dditional circumstances come into play
when the 60(b) motion concerns a default judgment . . . . ‘strong policies favor resolution of
disputes on their merits’) (quoting Jackson v. Beech, 636 F.2d 831, 836 (D.C.Cir. 1980)); MAPS
Int’l, 152 B.R. at 991 (“It is well settled that default judgments are not favored inasmuch as the
preferred disposition of any case is upon its merits.”). “We do not favor default judgments
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because the court's power is used to enter and enforce judgments regardless of the merits of the
case, purely as a penalty for delays in filing or other procedural error.” Cessna, 715 F.2d at 1444
(citation omitted). 	On the other hand, a defendant is required to abide by the rules of procedure,
and a plaintiff should not be faced with continued delay and uncertainty due to the defendant’s
unresponsiveness. Id. (citations omitted).
18. The Motion was timely filed in accordance with Rule 60(b), Fed.R.Civ.P.
19. Excusable neglect within the meaning of Rule 60(b)(1) “‘is understood to encompass
situations in which the failure to comply with a filing deadline is attributable to negligence.’” In
re Iowa Oil Co., 299 B.R. 555, 561 (Bankr.N.D.Iowa 2003) (quoting Pioneer Inv. Servs. v.
Brunswick Assocs. Ltd. P’ship, 507 U.S. 380, 394, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993)). It
includes “‘both simple, faultless omissions and omissions caused by carelessness.’” Id. (quoting
In re Payless Cashways, Inc., 230 B.R. 120, 138 (8th Cir. BAP 1999) (citations omitted), aff’d
203 F.3d 1081 (8th Cir. 2000)). 	The burden of proving excusable neglect under Rule 60(b)(1) is
on the party seeking to have the judgment set aside. In re Bushman, 311 B.R. 91, 95
(Bankr.D.Utah 2004) (citing Pelican Production Corp. v. Marino, 893 F.2d 1143, 1146 (10 th
Cir. 1990)). 	In making the equitable determination of whether movant has sufficiently
demonstrated excusable neglect, the Court is guided by such factors as the length of the delay
and its effect on the proceedings, whether the cause for the delay was within the reasonable
control of the movant, whether the movant acted in good faith, and the degree of prejudice the
party seeking default will suffer if the judgment is set aside. Iowa Oil, 299 B.R. at 561 (quoting
Payless Cashways, 230 B.R. at 138); In re Suprema Specialties, Inc., 330 B.R. 40, 51 (S.D.N.Y.
2005) (regarding prejudice to non-moving party) (quoting In re Pecarsky v. Galaxiworld.com
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Ltd., 249 F.3d 167, 171 (2nd Cir. 2001)).
20. Under the circumstances of this case, Defendant’s explanation for her failure to
timely file an answer to the Complaint is sufficient to meet the requirements to set aside the
Default Judgment under Rule 60(b)(1), Fed.R.Civ.P. 	Defendant represented to the Court that
she did not check her post office box because of mental illness which prevented her from leaving
her home, and that when she received her mail the deadline for filing a timely answer had
already passed. The delay was therefore, not willful, inasmuch as Defendant was unable to leave
her home and was unaware that the Complaint had been filed until after the deadline had already
passed. Setting aside the default judgment will not cause Plaintiff undue prejudice in that the
Complaint seeks to revoke the Defendant’s discharge, not recover assets which could be further
dissipated. See Suprema Specialties, 330 B.R. at 53 (noting that prejudice to the party seeking
default is present when the “delay will result in the loss of evidence, create increased difficulties
of discovery, or provide opportunities for fraud and collusion.”) (citation omitted).
21. 	Defendant’s Answer sufficiently raises a defense to the Complaint. Revocation of a
debtor’s discharge pursuant to 11 U.S.C. § 727(d)(1) requires proof that (1) the debtor obtained
his or her discharge through fraud; and (2) that the party seeking revocation of the discharge did
not know of the fraud until after the discharge was granted. 11 U.S.C. § 727(d)(1). 	To satisfy
the first element, Plaintiff must show by a preponderance of the evidence that Defendant “acted
with a knowing intent to defraud.” In re Spears, 291 B.R. 825, 828 (Bankr.C.D.Ill. 2003)
(citing In re Yonikus, 974 F.2d 901, 905 (7th Cir. 1992)). See also, Mazer v. Jones (In re Jones),
178 B.R. 1, 3 (Bankr.D.N.M. 1995) (revocation of discharge under 11 U.S.C. § 727(d)(1) must
be proved by a preponderance of the evidence) (citing Grogan v. Garner, 498 U.S. 279, 111
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S.Ct. 654, 112 L.Ed.2d 755 (1991)). The Answer affirmatively states that in completing her
statements and schedules Defendant did not intend to defraud creditors, and though she does not
address or provide a detailed explanation for each of the Plaintiff’s allegations contained in the
Complaint, the Answer responds to the Complaint. Because intent is a necessary element, albeit
one which can be established by inference based on the surrounding facts and circumstances,
Defendant’s Answer satisfies the meritorious defense criterion for setting aside the Default
Judgment. See Suprema Specialties, 330 B.R. at 53 (Noting that the requirement for a
meritorious defense “‘need not be ultimately persuasive at this stage. ‘A defense is meritorious if
it is good at law so as to give the factfinder some determination to make.’”) (quoting Am.
Alliance Ins. Co. v. Eagle Ins. Co., 92 F.3d 57, 61 (2nd Cir. 1996) (quoting Anilina Fabrique de
Colorants v. Aakash Chems. and Dyestuffs, Inc., 856 F.2d 873, 879 (7th Cir. 1988)). See also,
Wallace, 298 B.R. at 441 (citing Fidelity State Bank v. Oles, 130 B.R. 578, 586 (D.Kan. 1991)
for the statement that to satisfy the requirement of a meritorious defense the movant need only
allege facts which, if accepted as true, would constitute a defense).
Based on the foregoing, the Court finds that in the interests of justice, this matter should
not be disposed of by default judgment. See Cessna, 715 F.2d at 1444 (“Rule 60(b) ‘should be
liberally construed when substantial justice will thus be served.’”) (quoting Thompson v. Kerr-
McGee, 660 F.2d at 1385 (citing Pierce v. Cook & Co., 518 F.2d 720, 722 (10 th Cir. 1975) (en
banc)).
WHEREFORE, IT IS HEREBY ORDERED, that the Motion is GRANTED. The
Default Judgment entered March 24, 2006 is hereby set aside.
ORDERED FURTHER, that a status conference will be conducted on Friday, August 25,
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2006 at 10:00am in the above matter by Chris Wilson, Courtroom Deputy Clerk to Judge McFeeley, in
his office on the thirteenth floor of the Dennis Chavez Federal Building and United States Courthouse,
500 Gold Avenue SW, Albuquerque, New Mexico. Note: Counsel and/or parties, including in-town
counsel and/or parties, may appear via telephone if such request is made of chambers of Judge
McFeeley (505-348-2545), at least one business day prior to the date set.
___________________________________
MARK B. McFEELEY
United States Bankruptcy Judge
Copy to:
Alice Nystel Page
Attorney for Plaintiff
PO Box 608
Albuquerque, NM 87103
Joanne Blumenthal
Defendant, pro se
41 Trimble Lane
Cloudcroft, NM 88317
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