Court Opinion

ID: 822698
Source: CourtListenerOpinion
Date Created: 2013-02-28 16:02:33.392718+00
Date Added: 2024-06-11T13:06:14.581681
License: Public Domain

In the

United States Court of Appeals
               For the Seventh Circuit

No. 12-3239

IN THE M ATTER OF:

   C ANOPY F INANCIAL, INC.,
                                                                   Debtor.
A PPEAL OF:

   B UDDHA E NTERTAINMENT, LLC

             Appeal from the United States District Court
        for the Northern District of Illinois, Eastern Division.
              No. 12 C 5059—Suzanne B. Conlon, Judge.

   A RGUED F EBRUARY 11, 2013—D ECIDED F EBRUARY 28, 2013

   Before E ASTERBROOK, Chief Judge, and P OSNER and
T INDER, Circuit Judges.
  E ASTERBROOK, Chief Judge. Canopy Financial developed
and marketed software for banks and health-care payers
to handle health-related savings and spending accounts.
It also administered the health-care funds of almost
2,000 entities. When Canopy entered bankruptcy in
2009, it became clear that Anthony Banas and Jeremy
Blackburn had misappropriated more than $90 million
from both Canopy’s investors and the customers that
2                                            No. 12-3239

had placed money under its management. Banas and
Blackburn pleaded guilty to fraud, and each was sen-
tenced to more than a decade’s imprisonment. Blackburn
committed suicide the day before he was to report;
Banas is in prison.
   Gus Paloian, the Trustee for the benefit of Canopy’s
creditors, has recovered about $50 million by seizing
assets such as two 2010 Range Rover SUVs, a 2009 Bentley,
a 2008 Lamborghini, a 2010 Lamborghini, a 2009 Rolls
Royce Phantom, a 2009 Aston Martin DBS, a 2009
Bentley Continental, and a 2009 Ferrari 430, all of which
Blackburn had in the garage of his mansion (which
itself had been purchased with Canopy’s money).
Paloian is trying to recover more by clawing it back from
recipients of fraudulent conveyances—that is, transfers
made while Canopy was insolvent, and not in exchange
for reasonably equivalent value. See 11 U.S.C. §§ 544(b),
548, 550, and Illinois’s version of the Uniform Fraudu-
lent Transfer Act, 740 ILCS 160/1 to 160/12.
  Buddha Entertainment is among the businesses in
Paloian’s sights. Buddha operates nightclubs, including
TAO in Las Vegas’s Venetian Hotel and Casino.
According to the Trustee’s complaint, Banas and
Blackburn spent more than $80,000 of Canopy’s money
at TAO during several visits. The complaint maintains
that Canopy received no value in exchange.
  Buddha has a registered agent for service of process.
In October 2011 the Trustee served the complaint and
summons on that agent, located in Carson City, Nevada.
Buddha did not answer. In December 2011 the Trustee
No. 12-3239                                              3

filed a motion for default; that motion, too, though sent
to Buddha’s agent, did not lead to a response. Bankruptcy
Judge Wedoff declared Buddha to be in default and
entered a judgment requiring it to disgorge the amounts
it had received from Canopy. That judgment was sent
to Buddha’s registered agent.
  When Buddha neither paid nor appealed, the Trustee
began to collect from its assets in Nevada. That at last
provoked a response. Buddha filed a motion under
Fed. R. Bankr. P. 9024, which with three irrelevant
provisos incorporates Fed. R. Civ. P. 60(b). The motion
asked the bankruptcy judge to vacate the default
under Rule 60(b)(1), which permits relief from a judg-
ment that depends on “mistake, inadvertence, surprise,
or excusable neglect”. Counsel asserted that Buddha
had not received any of the Trustee’s filings and that
failure to respond was therefore “excusable neglect.” The
bankruptcy judge denied the motion, stating among
other things that a litigant is “responsible for the acts
of [its] registered agent.” A district judge affirmed. 2012
U.S. Dist. L EXIS 126884 (N.D. Ill. Aug. 31, 2012).
  Buddha’s principal argument on appeal is that the
bankruptcy judge made a legal error when stating: “the
Seventh Circuit has said that once a default judgment
is entered, good cause is not shown by the allegation
that a registered agent failed to submit the pleadings to
the defendant.” And Buddha is right that the seventh
circuit has never said this, though courts within the
circuit (bankruptcy and district judges) have so held.
Imprecise phrasing is common in oral statements of
4                                               No. 12-3239

reasons, such as the bankruptcy judge’s. This court
would not like to be bound by judges’ statements at
oral argument, as opposed to our written opinions.
  Buddha finds comfort in the holding of Robb v. Norfolk
& Western Ry., 122 F.3d 354 (7th Cir. 1997), that, in princi-
ple, an attorney’s negligence in meeting a filing dead-
line could be “excusable neglect” for the purpose of
Rule 60(b)(1). What is true for lawyers must be true
for other agents, Buddha maintains. Perhaps the bank-
ruptcy judge would have agreed, had Buddha brought
Robb to his attention. But it did not. It is hard to fault
the judge for failing to find the decision on his own.
The bankruptcy judge thought it dispositive that an
agent’s acts and omissions usually are attributed to the
principal. That’s a precept of unquestionable validity.
See, e.g., United States v. 7108 West Grand Avenue,
15 F.3d 632 (7th Cir. 1994).
  Robb was based on Pioneer Investment Services Co. v.
Brunswick Associates L.P., 507 U.S. 380 (1993), which
held that an attorney’s inadvertent failure to file a proof
of claim could be “excusable neglect” within the
meaning of Fed. R. Bankr. P. 9006(b)(1). The Supreme
Court held that a trial judge has discretion to excuse
some kinds of negligent errors while finding others
inexcusable, which implies that appellate review is defer-
ential. Buddha wants us to hold that the bankruptcy
judge abused his discretion in finding its agent’s errors
not excusable. Yet we do not know the circumstances
of those errors—indeed, we do not know that the agent
erred. The fault may lie entirely with Buddha. Pioneer
No. 12-3239                                              5

Investment Services describes excusable neglect as an
“equitable” standard that requires the court to take
“account of all relevant circumstances surrounding the
party’s omission.” 507 U.S. at 395. Without knowing
those circumstances, a court cannot apply the standard.
  The affidavits filed in bankruptcy court were phrased
oddly. Although Buddha’s brief describes them as
saying that the business never received notice of the
proceeding, what the affidavits actually say is that two
particular managers do not have an “independent recol-
lection” of receiving the complaint and summons; the
affidavits are silent about the motion for default. For all
we know, then, Buddha received (and the managers
recall receiving) the motion for default—yet Buddha did
nothing. Such a neglect could not be excused.
  The affidavits’ use of “recollection” is not the only
curious matter. The most telling thing about this record
is its thinness. Neither in the bankruptcy court, nor
later, did Buddha provide evidence from the agent it
hired to accept service. At least eight things might have
happened to the complaint and other documents:
(a) they never reached the agent; (b) they reached the
agent but were not forwarded to Buddha; (c) the agent
sent them to Buddha but they were lost in transit; (d) the
documents reached Buddha but were not routed to the
people supposed to receive them; (e) the documents
reached the designated people at Buddha, but not the
persons who filed affidavits; (f) the documents reached
the affiants, who did nothing and forgot about them;
(g) the documents reached the affiants, who did nothing
6                                             No. 12-3239

and are not telling the truth about their memory.
Whether the neglect is “excusable” depends on which
of these things happened. Let’s put (g) aside—the affida-
vits must be accepted at face value in the absence of
a hearing—and think about the others. And let us
bypass the improbability that multiple deliveries all
would go awry. (Buddha concedes that the Trustee sent
the papers to the agent’s correct address.)
   a. If vital documents did not reach the agent, then
Buddha’s inaction is “excusable” and it is entitled to
relief. An affidavit from the agent could reveal whether
it received the documents; businesses that specialize in
receiving and transmitting legal process keep careful
records of incoming and outgoing documents. Yet
Buddha chose not to present any evidence about
whether the agent received these documents.
  b. If the agent received the documents but did not
send them on, whether the neglect was excusable
would depend at least in part on whether Buddha con-
tracted and paid for a competent service. If it was trying
to get by on the cheap, it must bear the consequences.
Since we have no evidence from either the agent or
Buddha about what kind of service Buddha signed
up for—let alone whether the agent relayed whatever
documents it received—it is impossible to resolve
these questions in Buddha’s favor.
  c. If documents were misaddressed by the agent, or
properly addressed but lost in transit between the agent
and Buddha, whether the neglect is excusable could
depend on what kind of service the agent promised
No. 12-3239                                              7

to provide. Did Buddha require the agent to use a
service with a tracking number, so that non-delivery
could be detected and a replacement copy sent? If
Buddha paid the agent only to send documents by ordi-
nary mail, and not to use a trackable shipment (or elec-
tronic delivery to an email account or web site of its
lawyers), it must accept responsibility. Amazon uses
trackable shipments for $10 movies; businesses such as
Buddha cannot do less in litigation and expect delivery
errors to be deemed “excusable neglect.”
  d. Suppose the documents reached Buddha’s mail-
room and were misrouted, despite Buddha’s use of ordi-
nary care in handling legal papers. That might establish
excusable neglect, see Cracco v. Vitran Express, Inc., 559
F.3d 625, 630–31 (7th Cir. 2009) (applying Fed. R. Civ.
P. 55(c))—but Buddha has never tried to show that this
is what happened. For all we know, here, as in CFTC v.
Lake Shore Asset Management Ltd., 646 F.3d 401, 406–07
(7th Cir. 2011), the litigant failed to tell the agent
who within its administrative office should receive the
papers, or supplied the agent with an incorrect name.
In Lake Shore we held that a bank that failed to notify
a receiver of the name of the person who needed legal
papers, causing responsible managers not to see them
in time, could not use Rule 60(b)(1) to get another chance.
  e. If the documents came to the designated recipients,
who filed them away without action, and then some-
one else supplied the affidavits, it would be easy to
understand why the affiants did not recall seeing the
complaint—but the affiants’ failure to receive the docu-
ments would not excuse Buddha’s failure to respond.
8                                              No. 12-3239

  f. Finally, if the affiants themselves received the docu-
ments and quickly sent them to the file room, retaining
no memory of the event—perhaps thinking an $80,000
dispute not worth the expense of hiring counsel—again
Buddha must accept the consequences.
  Whenever the judiciary adopts an “all the facts and
circumstances” approach, as Pioneer Investment Services
did, litigants need to supply those details. Buddha, as
the movant trying to upset a final judgment, had the
burdens of both production and persuasion. It did not
produce essential evidence and therefore could not
hope to carry its burden of persuasion. The judgment of
the district court is
                                                AFFIRMED .

                          2-28-13