DISCUSSION

We have jurisdiction over this appeal pursuant to 28 U.S.C. § 158(a)(1). Acting as an
appellate court in bankruptcy proceedings, we accept the bankruptcy court’s findings of fact
unless they are “clearly erroneous” but we must review the bankruptcy court’s conclusions of law
de novo. See In re Smith, 286 F.3d 461, 464-65 (7th Cir. 2002); Fed. R. Bankr. P. 8013. This
appeal essentially raises only one issue - whether the lower court erred in not entering a default
judgment against Smith following the prove-up held on February 9, 2001. Because a decision to
vacate an entry of default is within the sound discretion of the bankruptcy court, we will review
Judge Schmetterer’s ruling under the abuse of discretion standard of review. See Pretzel &
Stouffer v. Imperial Adjusters, Inc., 28 F.3d 42, 45 (7th Cir. 1994). A lower court “will be found
to have abused its discretion only if we conclude that ‘no reasonable person’ could agree with its
judgment.” Jd. (citing Harold Washington Party v. Cook Co., Ill. Democratic Party, 984 F.2d
875 (7th Cir. 1993)).

At the outset, it is important to note that we are analyzing Judge Schmetterer’s decision to
vacate the entry of default pursuant to Federal Rule of Civil Procedure 55(c) (and its Bankruptcy
Code equivalent) as opposed to Rule 60(b). While the standard of review is the same under both
Rule 55(c) and Rule 60(b), the “test is more liberally applied in the Rule 55(c) context.” Id. In
order to vacate an entry of default pursuant to Rule 55(c), the moving party must show: 1) good
cause for default; 2) quick action to correct it; and 3) a meritorious defense to plaintiff's
complaint. See id. In this case, Judge Schmetterer found that the defendant satisfied each of
these three elements during the course of the hearings held on February 9 and 27, 2001. Further,

as a consequence of its decision to vacate the entry of default, the court denied Chapman’s


this case, the entry of default was docketed on January 29, 2001. Within a week of that taking
place, the defendant retained new counsel who immediately filed a motion to vacate the entry of
default. The motion to vacate the default was partially addressed during the February 9, 2001
prove-up hearing. Given this short time frame, we find that Judge Schmetterer did not abuse his
discretion in finding that Smith did indeed take quick action to correct the situation leading to the
entry of a default against her.

In sum, we find that Judge Schmetterer did not abuse his discretion in vacating the
January 29, 2001 entry of default against Smith. The record of proceedings in this case is clear
that the bankruptcy court was aware of the applicable legal standard for vacating a default order
and that it carefully considered the unusual facts of this case when the final ruling was made to
vacate the order. Once the decision to vacate the default was made, the bankruptcy court was
obliged to deny the plaintiff's motion for default judgment.

CONCLUSION

For the foregoing reasons, the decision of the bankruptcy court to grant the defendant’s

motion to vacate entry of the default and deny the plaintiff's motion for default judgment is

affirmed. This case is terminated. This is a final and appealable order.

WJ. (Cb

/ Wayne R. Andersen
United States District Judge

It is so ordered.

Dated: ao 43


2001, Chapman filed a motion for entry of default and for default judgment pursuant to Federal
Rule of Bankruptcy Procedure 7055 against the defendant, which was heard on January 29, 2001.
On that date, the court granted Chapman’s motion for entry of default and for default judgment
and set the case for prove-up on February 9, 2001. When the date for the prove-up came, Judge
Schmetterer first amended his January 29 order nunc pro tunc by entering a default but vacating
the default judgment. On February 9, 2001, the bankruptcy court also allowed new counsel for
Smith to enter his appearance. During this hearing, defense counsel promised to file a responsive
pleading on behalf of the defendant on or about February 23 and he presented Smith’s motion to
vacate the entry of default. The court also proceeded with the prove-up on Chapman’s motion
for a default judgment. At the conclusion of the three hour hearing, Judge Schmetterer continued
both Chapman’s motion for default judgment and Smith’s motion to vacate the entry of default
until February 27, 2001.

Upon arriving in court on February 27, 2001, defense counsel informed the bankruptcy
court that he had filed the required answer to Chapman’s adversary complaint. The remainder of
the hearing on this date was spent arguing Smith’s motion to vacate the entry of default. At the
conclusion of the hearing, Judge Schmetterer made findings of fact and conclusions of law on the
motion and he ruled that the default order should be vacated. On August 1, 2001, Judge
Schmetterer entered a minute order indicating that, for the reasons stated in open court on
February 9 and February 27, 2001, Chapman’s motion for default judgment was denied. It is this

order that is the subject of the instant appeal.



motion for a default judgment on August 1, 2001. We will now address whether Judge
Schmetterer’s decision to vacate the entry of default (and, thus, deny the motion for default
judgment) was an abuse of discretion.
I Good Cause for Defaulting and Meritorious Defense

The first and third elements of the test a court must use to vacate an entry of default are a
showing of good cause for the default and a meritorious defense to the plaintiff's complaint. In
this case, Judge Schmetterer ruled that both of these elements were satisfied “‘on the merits.”
(2/27/01 Transcript at 51.) While proceeding in this fashion may be unorthodox, it is certainly
neither clear error nor an abuse of discretion. The source for Judge Schmetterer’s merits ruling
comes from testimony elicited from Chapman during the February 9, 2001 prove-up. During the
prove-up, a question regarding two particular checks was raised. One of the checks was issued
by the Stuart Title Company, following a refinancing of Smith’s residence, to Fawn Landscape &
Nursery as payee in the amount of $9,350. The other check was issued by the Stuart Title
Company to the Internal Revenue Service in the amount of $68,510. While it is unclear whether
Chapman had authority to alter the face of the checks, he nevertheless did so by inserting the
phrase “Lamar C. Chapman II, for the benefit of Robert E. Smith and Beverly C. Smith” in the
payee section of the checks. After making these alterations to the checks, Chapman then
deposited them in his account with Charles Schwab & Company. The net result of these
transactions, according to the bankruptcy court, was that Chapman took money that had been
loaned to Smith as part of a mortgage refinancing and deposited it into a bank account in his
name.

After this information came out during the February 9, 2001 prove-up, counsel for the



Minute Orgee Form (06197),

He

United States District Court, Northern District of Illinois

t
Name of Assigned Jud Sitting Judge if Oth
ever Magistrate Judge Wayne R. Andersen than Assigned Judge
CASE NUMBER 2C 1792 DATE 7/2/2003
CASE Lamar Chapman III vs. Beverly C. Smith
TITLE
[In the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
MOTION: of the motion being presented.
DOCKET ENTRY:
(0) im} Filed motion of [ use listing in “Motion” box above.]
(2) a Brief in support of motion due
3) Oo Answer brief to motion due. . Reply to answer brief due .
(4) a Ruling/Hearing on set for at
(5) im) Status hearing[held/continued to] [set for/re-set for] on set for at
(6) oO Pretrial conference[held/continued to] [set for/re-set for] on set for at :
(7) oO Trial{set for/re-set for] on at
(8) Oo (Bench/Jury trial] [Hearing] held/continued to at
(9) oO This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]
OFRCP4(m) ClLocal Rule 41.1 OFRCP41(a(1) O FRCP41(a)(2).
qo) if {Other docket entry] Enter MEMORANDUM, OPINION AND ORDER: The decision of the
bankruptcy court to grant the defendant’s motion to vacate entry of the default and deny the
plaintiffs motion for default judgment is affirmed. This case is terminated. This is a final and
appealable order.
ai) @ [For further detail see order attached to the original minute order.]
No notices required, advised in open court.
No notices required. somber of motes
Notices mailed by judge's staff,
Notified counsel by telephone. JUL 3 2003
vo | Docketing to mail notices.
7_| Mat 60.450 form. iQ? Lunes soqyisid sn lean tin
Copy to judge/magistrate judge. eA
2:8 Wy €- Tr eu ue made ster
courtroom
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defendant drafted an answer to Chapman’s adversary complaint in which an affirmative defense
was asserted that the monies Chapman deposited in his account should constitute a set-off against
the amounts Chapman sought as damages from the defendant. In other words, any possible claim
that Chapman may have had for the value of the time and services he rendered to Smith was
certainly less than the amount of money that went into his account after he altered and deposited
the proceed checks from the mortgage refinancing. We agree with Judge Schmetterer that this
set-off argument, if ultimately proven, would serve as a meritorious defense to Chapman’s
adversary complaint against Smith.

As for the good cause prong of the test, the analysis is a bit trickier. As a general
principle, it is inexcusable for a party to miss filing deadlines, especially when the Federal Rules
grant a party ample opportunity to request extensions of time. See Fed.R.Civ.P. 6(b). However,
this is an unusual situation. First, apparently because her first counsel was not performing up to
her expectations, Smith retained new counsel prior to the February 9, 2001 prove-up. Second,
and perhaps more important, a full recitation of the salient facts and legal issues was not truly
available until the prove-up hearing took place. It was at that time that new defense counsel was
first able to understand the exact nature of Chapman’s claims. Further, it was during the prove-
up that Chapman conceded on the record the facts that would ultimately serve as the basis for
Smith’s set-off affirmative defense. Because of these unusual circumstances, we agree with the
bankruptcy court that Smith demonstrated good cause for her initial default.

Il. Quick Corrective Action
The final requirement a court must consider before vacating an entry of default is whether

the defendant took “quick action to correct” the default. Pretzel & Stouffer, 28 F.3d at 45, In


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION DOCKETED

LAMAR CHAPMAN III, ) JUL 8 2009
) No. 02 C 1792
Plaintiff-Appellant, y
) Wayne R. Andersen
v. ) District Judge
)
BEVERLY C. SMITH, ) Bankruptcy Number 00 B 5538
) Adversary Number 00 A 0886
Defendant-Appellee. )
MEMORANDUM. OPINION AND ORDER

On March 11, 2002, appellant Lamar Chapman III filed a pro se motion for leave to
appeal the August 1, 2001 order of Bankruptcy Judge Jack Schmetterer denying his motion for
default judgment pursuant to Federal Rule of Bankruptcy Procedure 7055 (which incorporates by
reference Federal Rule of Civil Procedure 55). For the following reasons, the Bankruptcy
Court’s order is AFFIRMED.

BACKGROUND

As Judge Schmetterer accurately noted in one of his earlier opinions, this litigation has
taken a “long and tortuous path.” Jn re Chapman, 269 B.R. 201, 204 (Bankr. N.D. Il. 2001). It
all started when the appellant was retained by the defendant-appellee Beverly Smith as a
consultant “to compromise her outstanding debts, to assist [her] in the acquisition of a jumbo
mortgage, to help [her] acquire an automobile, to mitigate [her] consumer liability and to
negotiate an equitable settlement for [her] with the Internal Revenue Service.” (Appellant’s Brief
at 6.) As part of the agreement, Smith was to pay Chapman an initial retainer fee of $787.50 and
then subsequently pay Chapman for work performed each month at an hourly rate of $44.50.

During the eighteen months of the engagement, Chapman performed a variety of services


for the defendant. Specifically, he retained legal counsel on Smith’s behalf for representation in
alien action filed by Fawn Nursery for money owed for landscaping services, he forwarded
Smith approximately $7,000 for a down payment on a new car, and he represented Smith before
the Internal Revenue Service to settle tax debts accumulated over a period of fourteen years.
While Chapman argued both in court and in his papers that he was not paid for services rendered
to Smith, there is evidence in the record that Chapman altered two checks (one for $9,350 and
the other for $68,510) that were originally intended for Smith so that the payee of the checks was
“Lamar C. Chapman IL, for the benefit of Robert E. Smith and Beverly C. Smith.” Chapman
then deposited these altered checks into his financial services account at Charles Schwab &
Company. After discovering the altered checks, Schwab blocked Chapman’s access to these
funds until a determination was made as to the validity of the alterations made to the face of the
checks. Shortly thereafter, Chapman filed an adversary complaint in the bankruptcy court against
Schwab alleging that Schwab improperly converted or blocked funds that belonged to him. On
August 17, 2001, Judge Schmetterer granted summary judgment in favor of Schwab on all counts
of Chapman’s adversary complaint. See In re Chapman, 265 B.R. 796 (Banks. N.D. Ill. 2001).
Thankfully, an appeal of that decision is not before this Court.

‘What is before us is a review of Judge Schmetterer’s ruling on Chapman’s motion fora
default judgment against Smith. The history of that motion is as follows. On September 26,
2000, Chapman filed his three count adversary complaint against Smith. Smith was personally
served with a copy of the complaint on October 2, 2000. On October 31, 2000, the bankruptcy
court entered an order allowing the defendant twenty-eight days to answer or otherwise plead.

Smith failed to file any sort of responsive pleading by this deadline. Therefore, on January 5,