Court Opinion

ID: 9949641
Source: CourtListenerOpinion
Date Created: 2024-03-12 14:00:40.559487+00
Date Added: 2024-06-11T14:25:51.023871
License: Public Domain

23-311-bk
In re Orion HealthCorp, Inc.

                 United States Court of Appeals
                    For the Second Circuit

                                   August Term 2023
                                Argued: January 10, 2024
                                Decided: March 12, 2024

                                        No. 23-311-bk

                         IN RE: ORION HEALTHCORP, INC.

                                            Debtors.

                               *************************************

                                   AQUILA ALPHA LLC,

                                           Appellant,

                                                v.

 HOWARD M. EHRENBERG, IN HIS CAPACITY AS LIQUIDATING TRUSTEE
 OF ORION HEALTHCORP, INC., ET AL., CHT HOLDCO, LLC, AND CC
                CAPITAL CHT HOLDCO LLC,

                                           Appellee,

                                                1
                         UNITED STATES TRUSTEE,

                                   Trustee.

              Appeal from the United States District Court
                 for the Eastern District of New York
                 No. 22-cv-2148 , Frederick Block, Judge.

Before:        CALABRESI, NATHAN, Circuit Judges, AND NAGALA,
               District Judge. ∗

       Appellant Aquila Alpha LLC (Aquila) appeals from a judgment
of the United States District Court for the Eastern District of New York
(Block, J.) affirming the bankruptcy court’s decision denying Aquila’s
motion to vacate a default judgment. We agree with the district court
that the bankruptcy court possessed personal jurisdiction over the
parties. We also agree with the district court that the bankruptcy
court properly applied the Rule 60(b) factors to deny Aquila’s motion
to vacate default. Accordingly, we AFFIRM the judgment of the
district court.

                                           ANTHONY        F.  GUILIANO,
                                           Giuliano Law P.C., Melville,
                                           NY, for Appellant.

                                           BRIGITTE R. ROSE (John P.
                                           Amato, Joseph Orbach, Mark T.

∗
 Judge Sarala V. Nagala, of the United States District Court for the District of
Connecticut, sitting by designation.

                                       2
                                       Power, on the brief), Thompson
                                       Coburn LLP, New York, NY, for
                                       Appellee.

PER CURIAM:
                           BACKGROUND

      Appellant Aquila Alpha LLC (Aquila) appeals from a judgment
of the United States District Court for the Eastern District of New York
(Block, J.) affirming the bankruptcy court’s decision denying Aquila’s
motion to vacate a default judgment. The default judgment had been
obtained by Howard M. Ehrenberg (Liquidating Trustee) in his
capacity as the liquidating trustee of Appellee debtors, including
CHT Holdco, LLC (CHT), Orion HealthCorp, Inc., and CC Capital
(collectively, Debtors).   It granted Debtors ownership of a $23.7
million mortgage (the Mortgage) purchased by Aquila for $3.8
million.
      For the reasons set forth below, we AFFIRM the judgment of
the district court.

                            DISCUSSION
      This Court conducts a plenary review of district court orders
issued in their capacity as appellate courts in bankruptcy cases. See
In re Duplan Corp., 212 F.3d 144, 151 (2d Cir. 2000). We review the
bankruptcy court’s conclusions of law de novo and its factual findings
for clear error. Id. An entry of a default judgment is reviewed for
abuse of discretion. See Enron Oil Corp. v. Diakuhara, 10 F.3d 90, 95 (2d
Cir. 1993). We leave the decision of whether to set aside a default “to

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 the sound discretion of [the] district court because it is in the best
 position to assess the individual circumstances of a given case and to
 evaluate the credibility and good faith of the parties.” Id.
       In this case, Aquila argues that the district court should have
 set aside the default judgment for two reasons: first, the judgment was
 void for lack of personal jurisdiction under Rule 60(b)(4); and second,
 in any event, the district court misapplied the relevant Rule 60(b)
 factors in declining to vacate the default judgment for good cause. For
 the reasons set forth below, we disagree and conclude that the district
 court did not abuse its discretion in declining to set aside the default
 judgment.

I.     Personal Jurisdiction
       Aquila argues that vacatur of the default judgment is
 appropriate under Rule 60(b) because the bankruptcy court lacked
 personal jurisdiction over it. A court may set aside entry of default
 judgment under Rule 60(b) for “mistake, inadvertence, surprise, or
 excusable neglect,” because “the judgment is void,” or for “any other
 reason that justifies relief.” Fed. R. Civ. P. 60(b)(1), (4), (6). “A
 judgment is void if the court that rendered it lacked jurisdiction of the
 parties.” “R” Best Produce, Inc. v. DiSapio, 540 F.3d 115, 123 (2d Cir.
 2008) (cleaned up).      Specifically, Aquila claims that personal
 jurisdiction was lacking here because (1) Aquila was improperly
 joined to the First Amended Complaint without leave from the
 bankruptcy court, and (2) Aquila was not properly served. Neither
 argument succeeds.

       A. Federal Rule of Civil Procedure 15(a)

                                    4
       First, we agree with the district court that Aquila was properly
added to the First Amended Complaint as of right pursuant to Rule
15(a). See Fed. R. Civ. P. 15(a)(1) (allowing a party to “amend its
pleading once as a matter of course”). Aquila argues, however, that
the addition of parties to a complaint should be governed solely by
Rule 21 and always requires leave of court. See Fed. R. Civ. P. 21
(permitting a court to “add or drop a party” from a suit “[o]n motion
or on its own”). But this Court has previously relied exclusively on
Rule 15(a) to hold that a district court should have permitted a
plaintiff to amend his complaint to add parties, implicitly holding that
such use of Rule 15(a) is proper. See Washington v. New York City Bd.
of Estimate, 709 F.2d 792, 795 (2d Cir. 1983). 1 And although the Court
has since stated otherwise in a nonprecedential summary order, see
Renard v. Dillman, No. 97-9080, 1998 WL 642474, at *2 (2d Cir. Apr. 6,
1998), our decision in Washington controls.
       We thus conclude that Rule 15(a) does apply to amendments
seeking to add parties. If a plaintiff seeks to add a party to the
complaint no later than twenty-one days after service of the complaint
or after service of a responsive pleading, the plaintiff may do so once
as of right under Rule 15(a) without seeking permission of the court
under either Rule 15 or Rule 21. See Fed. R. Civ. P. 15(a)(1). We

1A majority of other circuits to have addressed the issue have similarly held that
Rule 15(a) permits parties to be added as a matter of right. See Galustian v. Peter,
591 F.3d 724, 730 (4th Cir. 2010) (citing Washington, 709 F.2d at 795); United States
ex rel. Precision Co. v. Koch Indus., Inc., 31 F.3d 1015, 1018–19 (10th Cir. 1994);
McLellan v. Miss. Power & Light Co., 526 F.2d 870, 872–73 (5th Cir. 1976), vacated in
part on other grounds, 545 F.2d 919 (5th Cir. 1977) (en banc). But see Ed Miniat, Inc.
v. Globe Life Ins. Grp., Inc., 805 F.2d 732, 736 (7th Cir. 1986).

                                          5
therefore agree with the district court’s conclusion that Aquila’s
personal jurisdiction argument based on Rule 21 is foreclosed by
Circuit precedent.

       B. Service

       We next conclude that Aquila was properly served. The First
Amended Complaint, the Second Amended Complaint, and the
default motion were served upon Aquila via delivery by U.S. mail to
two addresses: the Dover Address (Aquila Alpha LLC c/o National
Registered Agents, Inc., 160 Greentree Drive Suite 101, Dover DE
19904) and the Hazlet Address (Aquila Alpha LLC, 3400 Route 35
South, Suite 9, Hazlet NJ 07730). Aquila maintains that service to
these addresses was improper. We disagree.
       First, Aquila was properly served with the First Amended
Complaint. The Bankruptcy Rules permit service “to the attention of
an . . . agent authorized by appointment or by law to receive service
of process and . . . by also mailing a copy to the defendant.” Fed. R.
Bankr. P. 7004(b)(3). Appellee Liquidating Trustee did exactly that,
and Aquila’s claim that service addressed to “Aquila Alpha LLC c/o
National Registered Agents, Inc.” is not service “to the attention of an
. . . agent,” see id., is baseless.
       Aquila also contends that the bankruptcy court relied on
inadmissible evidence to determine that the Hazlet Address was the
proper address for service on Appellant.       The bankruptcy court
referred to exhibits attached to an affidavit submitted by Frank
Lazzara, an accountant hired by the Liquidating Trustee. Aquila
raises objections to two types of admitted documents attached to

                                      6
Lazzara’s affidavit: (1) emails sent by Paul Parmar—the former CEO
and Chairman of the Board of debtor CHT and a defendant in the
proceeding—directing that Aquila’s bank account be opened and
setting the Hazlet Address as Aquila’s mailing address for the
account; and (2) bank records listing the Hazlet address as Aquila’s
mailing address.
      We agree with the district court’s determination that the
bankruptcy court did not abuse its discretion by admitting these
exhibits. Aquila first objects that these exhibits were not properly
authenticated. Under Federal Rule of Evidence 901(a), the burden
rests on the proponent of documentary evidence to provide “evidence
sufficient to support a finding that the item is what the proponent
claims it is.” We have said that “[t]he bar for authentication of
evidence is not particularly high,” United States v. Gagliardi, 506 F.3d
140, 151 (2d Cir. 2007), and “may be cleared by circumstantial
evidence,” United States v. Tin Yat Chin, 371 F.3d 31, 37 (2d Cir. 2004)
(quotation marks omitted). Here, Lazzara’s personal knowledge and
testimony provided sufficient circumstantial evidence to authenticate
the records. See App’x 100 (testifying that he is “personally familiar
with CHT’s books and records and the historical communications that
were committed to e-mail”). We thus conclude that the district court
did not abuse its discretion in ruling that the exhibits were properly
authenticated.
      Nor do these exhibits constitute inadmissible hearsay. Rather,
the bankruptcy and district courts rightly concluded that the
documents were admissible under the business records exception.
See Fed. R. Evid. 803(6) (business records exception); see also United

                                   7
States v. Kaiser, 609 F.3d 556, 574 (2d Cir. 2010) (“Rule 803(6) favors the
admission of evidence rather than its exclusion if it has any probative
value at all.” (quotation marks omitted)). Lazzara testified as to his
familiarity with how the records were obtained and stored as part of
CHT’s business activities, supporting the district court’s conclusion
that creating and maintaining such records would be a routine
practice of Aquila’s. See App’x at 100-04, 257-58. We cannot say,
therefore, that the district court’s admission of these exhibits was an
abuse of discretion. 2
       Our resolution of Aquila’s challenge to service of the First
Amended Complaint helps resolve the challenges to service of the
Second Amended Complaint and default motion. The district court
agreed with the bankruptcy court that service of the Second Amended
Complaint was unnecessary because, at the time the Second
Amended Complaint was filed, Aquila was in default and the Second
Amended Complaint asserted no new claims against Aquila. See
App’x at 228-29. Aquila therefore was not entitled to service under
Rule 5(a)(2) which provides that “[n]o service is required on a party
who is in default for failing to appear.” Fed. R. Civ. P. 5(a)(2). On
appeal, Aquila objects that the district court’s determination was

2 In addition to arguing that the exhibits are unauthenticated and hearsay, Aquila
also claims that the Hazlet Address is the address of a different New Jersey entity
with the same name as Aquila. The first time this argument is raised is in Aquila’s
reply brief. As such, the issue is not properly before us, because we deem it
waived. See Fed. R. App. P. 28(a)(5); Cioffi v. Averill Park Central Sch. Dist. Bd. of
Educ., 444 F.3d 158, 169 (2d Cir. 2006) (refusing to consider argument raised for the
first time in reply brief). Appellee’s motion to strike that part of Aquila’s reply
brief is therefore granted.

                                          8
      “based on the erroneous conclusion that Appellant was made a party
      to the First Amended Complaint [and] was properly served” in the
      first place. Appellant’s Br. at 32. But, as we have said, that conclusion
      was not erroneous. Given that Aquila was properly joined to and
      served the First Amended Complaint, Aquila was not entitled to
      service of the Second Amended Complaint. 3
             Finally, Aquila contends that the default motion was
      improperly served as well. Under Rule 7055-1 of the relevant Local
      Bankruptcy Rules, a default motion must be served on the defaulting
      party or its attorney. See E.D.N.Y. LBR 7055-1. Service of motions by
      “mailing it to the person’s last known address” is permitted. Fed. R.
      Civ. P. 5(b)(2)(C).       And as the bankruptcy and district courts
      observed, the default motion was served on the Hazlet Address,
      Aquila’s last known address at the time. See App’x at 238-39, 260. We
      have already rejected Aquila’s objections to service at the Hazlet
      Address.
             Accordingly, we agree with the district court’s determination
      that service was proper.

II.          Rule 60(b) Factors

             Even if the default judgment is not void for lack of personal
      jurisdiction, Aquila contends, the bankruptcy court abused its
      discretion in denying the vacatur motion based upon its application
      of the Rule 60(b) good cause factors. Here too, we disagree.

      3In any event, for the reasons stated by the bankruptcy and district courts, we also
      agree that service of the Second Amended Complaint on the Hazlet Address was
      proper.

                                               9
       When a district court decides a motion to vacate a default
judgment under Rule 60(b), the court’s determination is guided by
three principal factors: “(1) whether the default was willful, (2)
whether the defendant demonstrates the existence of a meritorious
defense, and (3) whether, and to what extent, vacating the default will
cause the nondefaulting party prejudice.” SEC v. McNulty, 137 F.3d
732, 738 (2d Cir. 1998). Of these factors, willfulness carries the most
weight. See Action S.A. v. Marc Rich & Co., Inc., 951 F.2d 504, 507 (2d
Cir. 1991). 4 Moreover, a district court has discretion to deny a motion
to vacate “if it is persuaded that the default was willful and is
unpersuaded that the defaulting party has a meritorious defense.”
SEC, 137 F.3d at 738. In such cases, any absence of prejudice to the
non-defaulting party is not dispositive. Id.
       We agree first with the bankruptcy court’s and district court’s
determinations that Aquila’s default was willful. This Court has
“interpreted ‘willfulness,’ in the context of a default, to refer to
conduct that is more than merely negligent or careless.” McNulty, 137
F.3d at 738. Here, default judgment was entered after Aquila failed
to file an answer or otherwise respond to the claims made against it
in this matter, “despite having received proper service of process of
the First Amended Complaint and associated summons at two

4 Although our Court has previously said that “[a] default should not be set aside
when it is found to be willful,” we do not read that statement to mean that the Rule
60(b) analysis must end once a court has made that finding. Action S.A., 951 F.2d
at 507. Rather, it suggests that willfulness is the most significant factor. Indeed,
even in Action S.A., after finding that default was willful, the Court proceeded to
find that the defaulting party could neither establish a meritorious defense nor
rebut the opposing party’s claim of prejudice. Id. at 507-08.

                                         10
locations, despite having been served with the Second Amended
Complaint and associated summons at its place of business, and
despite having been served with the Default Motion and substantial
supporting documents at its place of business.” App’x at 241. The
bankruptcy court also found that John Petrozza, Aquila’s purported
owner, had been aware of the proceeding since at least July 2020,
when he filed papers in an adversary proceeding bearing the caption
of the case. In reaching that conclusion, the bankruptcy court found
Petrozza’s claims of ignorance not credible—a determination which
was not clearly erroneous. See id. We find no error in these willful
default findings.
         Nor can we say that the district court erred in its finding that
vacating the default would cause prejudice to the nondefaulting
party.      The court correctly affirmed the bankruptcy court’s
determination that vacating the default would prejudice the
liquidating trustee because of the accrual of outstanding unpaid
property taxes, the potential for commencement of a tax lien
foreclosure, and the statute of limitations issues that arise due to the
passage of time. See App’x at 243-44, 267.
         Finally, the potential defenses Aquila might have raised at trial
are not dispositive. At the outset, we find that two of Aquila’s three
defenses are clearly meritless. Whether a defense is meritorious “is
measured not by whether there is a likelihood that it will carry the
day, but whether the evidence submitted, if proven at trial, would
constitute a complete defense.” Enron Oil Corp., 10 F.3d at 98. Aquila
first contends that the Second Amended Complaint was time-barred
by the statute of limitations set forth in Section 546(a) of the

                                     11
Bankruptcy Code because it cannot relate back to the First Amended
Complaint, to which Aquila was never properly added. But here
again, Aquila’s argument hinges on the personal jurisdiction
arguments we have rejected. Aquila’s second defense is that Appellee
failed to establish that the $3.8 million used to purchase the Mortgage
was property of the Debtors. The record indicates, however, that the
$3.8 million at issue originated from a bank account in the name of
Debtor CHT at M&T Bank, see App’x at 94, and Aquila has failed to
put forward any evidence to suggest otherwise.
      Aquila’s final defense is that the relief sought in the Second
Amended Complaint—transfer of the Mortgage to Debtors—is not
cognizable under the Bankruptcy Code because the Mortgage was
never in the Debtors’ property. Bankruptcy Code Section 550(a)
permits the Debtors to recover “the property transferred, or . . . the
value of such property.” 11 U.S.C. § 550(a). Here, Aquila argues,
transfer of the Mortgage is not a cognizable remedy because the value
of the Mortgage is far more than the $3.8 million diverted from CHT.
The district court, on the other hand, rejected this defense as meritless
on grounds that the Mortgage constitutes the “value derived” from
the initial transferred property. See App’x at 265. Whether the
Mortgage transfer is a cognizable remedy under Section 550(a) may
present a closer question, particularly given the lack of binding
precedent. But we need not solve that problem today. Where, as here,
default was egregiously willful and vacatur would cause prejudice to
the nondefaulting party, a district court does not abuse its discretion
in denying the motion to vacate the default.
      We therefore hold that the district court did not abuse its

                                   12
discretion in denying Aquila’s motion to vacate the entry of default.

                          CONCLUSION

      Accordingly, the judgment of the United States District Court
for the Eastern District of New York is AFFIRMED.

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