Opinion ID: 64232
Heading Depth: 2
Heading Rank: 3

Heading: Setting Aside the Default Judgment

Text: Federal Rule of Civil Procedure 55 applies in adversary proceedings. [21] The former version of Rule 55(c), which applies here, states that [f]or 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). [22] Because the bankruptcy court entered a judgment on Dr. Beitel's default, [23] Rule 60(b) applies. This rule allows a court to grant relief from a final judgment under any of six provisions, including mistake, inadvertence, surprise, or excusable neglect[.] [24] In assessing a motion to vacate a default judgment, we have interpreted Rule 60(b)(1) as incorporating the Rule 55 good-cause standard applicable to entries of default: In determining whether good cause exists to set aside a default judgment under Rule 60(b)(1) we examine the following factors: whether the default was willful, whether setting it aside would prejudice the adversary, and whether a meritorious defense is presented. Courts may also consider whether the public interest was implicated, whether there was significant financial loss to the defendant, and whether the defendant acted expeditiously to correct the default. The district court need not consider all of the above factors in ruling on a defendant's 60(b)(1) motion; the imperative is that they be regarded simply as a means of identifying circumstances which warrant the finding of good cause. [25] This inquiry follows a recognition in our previous holdings that courts apply essentially the same standard to motions to set aside a default and a judgment by default.  [26] Yet, we have also stated that the former is more readily granted than a motion to set aside a default judgment. [27] On multiple occasions, we have declined to decide whether the good-cause standard is equivalent to the standard applied to relief from default judgment under Rule 60(b). [28] Although the recent revision to Rule 55(c) may one day cause us to reassess the relationship between the Rule 55(c) good-cause standard and Rule 60(b)(1), [29] we have no occasion to do so in the instant case and instead conduct our inquiry in accordance with our recent decision in Jenkens & Gilchrist. [30] In any event, conflation of the applicable standards in this case would be harmless because we have held that willful default, the key factor in the instant case, would certainly not constitute excusable neglect, one of the Rule 60(b)(1) factors. [31] Of the relevant factors, two have particular significance here, viz., (1) the defendant's default was willful ; [32] or (2) the defendant failed to present a meritorious defense sufficient to support a finding on the merits for the defaulting party. [33] If a district court (or a bankruptcy court) makes either finding, we may hold that it was within its discretion in refusing to grant relief from a default judgment. [34] Still, Rule 60(b) is applied most liberally to judgments of default, since trial on the merits is to be favored over such a truncated proceeding. Unless it appears that no injustice results from the default, relief should be granted. [35] In light of the general disfavor of default judgments, where there are no intervening equities any doubt should, as a general proposition, be resolved in favor of the movant to the end of securing a trial upon the merits. [36]
In the bankruptcy court, Dr. Beitel urged that (1) OCA never effected service and (2) his default was not willful, but was caused both by OCA's misrepresentations to him and by its purposeful non-disclosure to the bankruptcy court of key information regarding recent communications between Dr. Beitel's counsel and counsel for OCA. The bankruptcy court determined that Dr. Beitel had submitted no evidence that would overcome the presumption of valid service. On this point, Dr. Beitel had a heavy burden: Mail that is properly addressed, stamped and deposited into the mails is presumed to be received by the addressee. The presumption can only be overcome by clear and convincing evidence that the mailing was not, in fact, accomplished. [37] The bankruptcy court correctly applied the clear-and-convincing-evidence standard, and Dr. Beitel offers no competent evidence that causes us to question the court's conclusion. [38] The bankruptcy court's determination of willfulness, however, is problematic. Just before the court issued its ruling, the following exchange occurred: [Dr. Beitel's Counsel]: Well, then why did not [OCA counsel] say to me that [Dr. Beitel] would be up second, or third up, or fourth, or why didn't [other OCA counsel] tell [Dr. Beitel's counsel] that [Dr. Beitel] would be second up or third up? [39] The Court: I don't know that. That's again ... weighing he said, she said, and that's not sufficient to overcome the presumption of valid service or to show by clear and convincing evidence. If the Court has to weigh two conflicting statements, that's not clear and convincing evidence. This exchange unquestionably addressed whether Dr. Beitel's default was willful, not whether the presumption of valid service was overcome. The bankruptcy court then immediately announced its ruling: I'm convinced that Dr. Beitel simply ignored several  ignored the service of the complaint and the summons and that you have not carried  he has not carried the burden of overcoming the presumption of valid service ... [and] every presumption in this case shows that Dr. Beitel knew of the complaint, knew of the summons, and knew of the trial date, and that he simply failed to react in time and did not file the pleadings or make an appearance at the trial until after the trial was held on June 13, 2007, which resulted in the judgment against him that I refuse to set aside. (emphasis added). The bankruptcy court's refusal to weigh what it called he said, she said evidence and its subsequent conclusions demonstrate that the court applied the incorrect burden of proof  clear and convincing evidence  to create a presumption of willfulness ; yet, the presumption properly applies only to the valid-service component of a court's inquiry. If courts were to require clear and convincing evidence to overcome a putative willfulness presumption, the instruction to apply Rule 60(b) most liberally when considering whether to vacate a default judgment would be rendered meaningless. [40] Instead, trial courts must apply only the preponderance-of-the-evidence standard when assessing willfulness. [41] Under this less demanding burden of proof, the bankruptcy court had no choice but to inject itself into a murky he said, she said dispute before making its factual determination that Dr. Beitel simply ignored the complaint and summons, i.e., that he willfully did so. Such credibility determinations are often the very essence of making a finding by a preponderance of the evidence. [42] The bankruptcy court was required to make a factual determination regarding what contact was made between Dr. Beitel and OCA prior to the entry of the default judgment and what, if any, assurances OCA's counsel had given. If the court had determined that OCA represented to Dr. Beitel that no default would be taken against him and that he would be permitted to file an answer and have his case decided on the merits, then a willfulness finding would likely be clearly erroneous. If, on the other hand, the court had determined that OCA never made any such representations, a finding of willfulness would likely have withstood our deferential review. But, in the absence of a factual finding by the bankruptcy court after applying the correct burden of proof, we owe the bankruptcy court's conclusion no deference. The district court sitting in an appellate capacity was in no better position than are we to affirm a willfulness finding by the bankruptcy court based on the erroneous burden of proof. [43] We cannot defer to the district court's conclusion that the bankruptcy court did not abuse its discretion in concluding that Beitel's failure to respond was intentional because the decision was based on deference to the bankruptcy court's holding, a deference that it was not due. We thus must disregard the bankruptcy court's willfulness finding, apparently the only one (other than Dr. Beitel's failure to overcome the presumption of proof of service) that the bankruptcy court made in support of its holding. This conclusion, however, does not end our inquiry. Before we may reverse the bankruptcy court's entry of default judgment, we must also ask whether the record could support a finding in [Dr. Beitel's] favor. [44]
In ruling on a Rule 60(b) motion, courts are not required to state findings or conclusions. [45] Therefore, in the absence of such an optional statement, a remand for specific findings is not necessary if `the record would not support' a finding in the appellant's favor, and if such a finding would be deemed clearly erroneous had it been made. [46] We first address whether Dr. Beitel has presented a meritorious defense, as a refusal to set aside a default judgment is proper in the absence of such a defense. [47] In determining whether a meritorious defense exists, `[t]he underlying concern is ... whether there is some possibility that the outcome of the suit after a full trial will be contrary to the result achieved by the default.' [48] On careful review, we cannot say that the record could not support a finding that Dr. Beitel has a meritorious defense. Dr. Beitel submitted an affidavit that he borrowed only $290,000 from OCA  not the more than $600,000 that OCA alleges  and his office manager submitted an affidavit with similar assertions. Dr. Beitel also contends that the promissory notes functioned as open lines of credit that he had not drawn down to the extent OCA alleges. On the discrete facts of this case, this factual basis is sufficient in theory to support a conclusion that there is a possibility that the outcome after trial would not mirror the default judgment. We must also determine whether the record precludes a finding in Dr. Beitel's favor on the issue of willfulness. [49] Our discussion of willfulness confirms that this is an issue that turns largely on testimony that the bankruptcy court labeled he said, she said evidence. Weighing each party's statement, a function peculiarly within the trial court's domain, is likely determinative on the willfulness issue. Thus, we cannot say that the record precludes a finding in favor of Dr. Beitel on this issue. The other relevant, but not singularly determinative, factors  (1) prejudice to OCA, (2) the effect, if any on the public interest, (3) whether there was significant financial loss to Dr. Beitel, and (4) whether Dr. Beitel acted expeditiously to correct the default  are not so heavily weighted against Dr. Beitel that they alone would support our affirming the default judgment against him. [50] At least two of these factors likely weigh in Dr. Beitel's favor: (1) Dr. Beitel's loss  several hundred thousand dollars  is likely significant to him, and (2) Dr. Beitel appears to have acted expeditiously following entry of the default judgment by immediately thereafter filing an amended answer and then actively attempting to set aside that judgment. The public-policy factor may cut both ways because there is a value both in allowing trial of cases on the merits and in adhering to procedural rules. And, only one factor likely weighs in OCA's favor: It would likely experience some harm, perhaps minimal, in having to re-prove its liability and damages. We conclude that the record does not offer sufficient support for the district court  nor this court  to make an independent determination that the bankruptcy court's decision was within its discretion.