DiOrio v. Griffin (In re Vision Adventures, LLC)

• Decision Date: 25 January 2016
• Docket Number: A.P. No. 15–01006,BK No: 13–10660
• Citation: 544 B.R. 277
• Parties: In re: Vision Adventures, LLC, Debtor Joseph M. DiOrio, Chapter 7 Trustee of Vision Adventures, LLC, Plaintiff v. Linda K. Davis Griffin and Shirley Davis, Defendants
• Court: U.S. Bankruptcy Court — District of Rhode Island

544 B.R. 277

In re: Vision Adventures, LLC, DebtorJoseph M. DiOrio, Chapter 7 Trustee of Vision Adventures, LLC, Plaintiff

v.Linda K. Davis Griffin and Shirley Davis, Defendants

BK No: 13–10660

A.P. No. 15–01006

United States Bankruptcy Court, D. Rhode Island.

Signed January 25, 2016

Joseph M. DiOrio, Law Office of Joseph M. DiOrio, Inc., Kristen Leigh Forbes, Law Offices of Joseph M. DiOrio, Providence, RI, for Plaintiff.

Linda Katrina Davis Griffin, pro se.

Shirley Davis, pro se.

DECISION AND ORDER ON DEFENDANTS' MOTION TO VACATE DEFAULT AND PLAINTIFF'S MOTION FOR DEFAULT JUDGMENT

(this relates to Doc. ## 9, 10, 15, 16, 17, 18, 21)

Diane Finkle, U.S. Bankruptcy Judge

Plaintiff Joseph M. DiOrio, the Chapter 7 trustee ("Trustee"), seeks entry of a default judgment against Defendants Linda K. Davis Griffin ("Ms.Griffin") and Shirley Davis ("Ms.Davis") (collectively the "Defendants") after entry of default against them (Doc. # 12)¹ for failure to file an answer, or other responsive pleading to the complaint commencing this adversary proceeding ("Complaint"). Essentially, the Defendants seek to vacate the default and object to the entry of a default judgment against them, justifying their failure to respond to the Complaint by relying on a blanket assertion of their Fifth Amendment privilege against self-incrimination because of a criminal case they allege is pending before the "United States District Court" relating to transactions similar to those alleged in the Complaint.²

This Decision and Order constitutes my findings of fact and conclusions of law. After careful review of the record and the various related filings by the parties, I conclude that the Defendants have shown just cause to warrant vacating the default entered against them, although their reliance on a blanket invocation of the privilege to avoid responding to the Complaint is misplaced. In light of their pro se status and what I believe is their sincere but mistaken belief that merely citing to this privilege would relieve them of the requirement to file a formal answer to the Complaint, I will afford the Defendants one last chance to properly do so consistent with the discussion below.

I. Jurisdiction

The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a)³ and 1334, and DRI LR Gen 109(a). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O).

II. Procedural History

On March 3, 2015, the Trustee filed the Complaint asserting two state law claims, alleging that the Defendants (1) fraudulently transferred to themselves assets of the corporate debtor Vision Adventures, LLC⁴ ("Debtor") in violation of the Rhode Island Uniform Fraudulent Transfer Act, specifically referencing Rhode Island General Laws §§ 6–16–4(a)(1), (a)(2), and 6–16–5(a), as well as relying upon the so-called "strong-arm avoidance" provisions of Bankruptcy Code §§ 544 and 550 ; and (2) breached their fiduciary duties owed to the Debtor arising under Rhode Island law. He seeks judgment against the Defendants jointly and severally in an aggregate amount of not less than $600,000. The Trustee properly served the summons and Complaint upon the Defendants and they failed to file an answer or other responsive pleading as permitted by Rule 7012(b) of the Federal Bankruptcy Rules of Procedure,⁵ (hereinafter for convenience referred to as the "Answer"). The Trustee requested entry of a default against the Defendants and also filed a Motion for Entry of Default Judgment ("Motion for Default Judgment") (Doc. ## 8, 9). The Clerk entered a default on June 22, 2015. Seven days later, the Defendants filed an objection to the Entry of Default (Doc. # 15), which I treated as a motion to vacate the entry of default ("Motion to Vacate Default").⁶ As grounds for their objection and failure to Answer the Complaint, the Defendants asserted "the right guaranteed us under the United States Constitution to remain silent" because "the Defendants were subject to a federal criminal investigation centered upon the same fact pattern" addressed in the Complaint. Motion to Vacate Default, at ¶ 1. They asked the Court to (1) deny the Motion for Default Judgment or (2) to stay the adversary proceeding pending the outcome of the alleged on-going federal criminal proceeding, and then upon denial or completion of the criminal proceeding to grant them more time to respond to the "original [m]otion."⁷ The Motion to Vacate Default bore the signature of only Ms. Griffin although it was purportedly filed also on Ms. Davis' behalf. Initially, I entered an Order deeming the Motion to Vacate Default as being filed only by Ms. Griffin and not Ms. Davis who had not signed the motion, because Ms. Griffin is not an attorney and cannot purport to file it also on Ms. Davis' behalf. I gave Ms. Davis the opportunity to file her own separate motion to set aside the default, but she has not done so.

The Trustee filed a response (the "Response") to the Motion to Vacate Default on July 6, 2015, challenging it as improper, untimely filed, and little more than a continued abusive stall tactic engaged in by the Defendants in the main bankruptcy case (Doc. # 16).⁸

In fairness to the Trustee, I afforded him the opportunity to file a supplemental memorandum in response to the Motion to Vacate Default and also to address the issue of the Court's constitutional authority to enter a final judgment of default against the Defendants in light of the United States Supreme Court's ruling in Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). See also Wellness Int'l Network Ltd. v. Sharif, –––U.S. ––––, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015). The Trustee filed his supplemental memorandum ("Supplemental Memo") (Doc. # 21), and the Defendants were initially given until September 8, 2015, by which to file a response.

Instead of filing their response, the Defendants filed three consecutive motions to extend the time for their response (Doc. ## 22, 25, 28) (collectively, the "Extension Motions"), reiterating in each extension request that they required more time because of the alleged pending criminal proceeding and the jeopardy to their Fifth Amendment privilege against self-incrimination if required to respond. Both Ms. Griffin and Ms. Davis signed all of these motions. After granting two extensions to October 22, 2015, I denied their third request and directed that if they wished to file a response, then they would have to do so by October 30, 2015 (Doc. # 29).⁹

Just to complete this somewhat convoluted procedural history, the Defendants appealed my denial of their Third Motion to Extend to the United States Bankruptcy Appellate Panel for the First Circuit ("BAP"). The BAP determined that the appeal was interlocutory and did not warrant discretionary review. It issued its mandate on December 18, 2015, returning the matter to this Court. That brings us full circle now for me to rule on the Motion to Vacate Default and the Trustee's Motion for Default Judgment, which I took under advisement on that date.

III. Trustee's Opposition

Applying three principal factors to determine if good cause exists for vacating the entry of default, the Trustee first contends that the Defendants' assertion of the Fifth Amendment privilege does not bar or excuse them from filing an Answer to the Complaint, and thus their failure to do so was willful "as opposed to merely negligent."¹⁰ Supplemental Memo, ¶ 16. Second, the Trustee maintains that he will be prejudiced by further delay if the default is vacated because there is nothing to prevent the Defendants from depleting the assets he alleges were fraudulently transferred from the Debtor. Third, he posits that the Defendants lack a meritorious defense because they did not articulate any facts that would constitute such a defense in the Motion to Vacate Default or during a deposition he conducted of Ms. Griffin under Bankruptcy Rule 2004. He further raises the fact that this Court has already entered a default judgment against Ms. Griffin in another adversary proceeding in the bankruptcy case he brought to recover over $41,000 in unauthorized post-petition transfers Ms. Griffin made to herself from the Debtor's funds. See Bk. No. 14–ap–01012.

IV. Applicable Law

A. Vacating Entry of Default

Rule 55(c) of the Federal Rules of Civil Procedure, applicable to bankruptcy proceedings pursuant to Bankruptcy Rule 7055, grants the court discretion to set aside an entry of default "[f]or good cause shown."¹¹ See Coon v. Grenier, 867 F.2d 73, 75 n. 5 (1st Cir.1989). The United States Court of Appeals for the First Circuit has articulated seven considerations in making this case-specific determination:

(1) [W]hether the default was willful; (2) whether setting it aside would prejudice the adversary[;] (3) whether a meritorious defense is presented; (4) the nature of the defendant's explanation for the default; (5) the good faith of the parties; (6) the amount of money involved; and (7) the timing of the motion.

McKinnon v. Kwong Wah Rest., 83 F.3d 498, 503 (1st Cir.1996) (the " McKinnon factors"); see In re Pena, 397 B.R. 566, 574 (1st Cir. BAP 2008), see also Edes v. Fredson, 344 F.Supp.2d 209, 212 (D.Me.2004) (citing KPS & Assocs. v. Designs by FMC, Inc., 318 F.3d 1, 12–13 (1st Cir.2003) ) ("The First Circuit has been careful to emphasize that removal of default is discretionary and that none of the factors is determinative.").

These factors must be examined "in a practical, commonsense manner, without the rigid adherence to, or undue reliance upon, a mechanical formula." In re Pena, 397 B.R. at 575 ; see McKinnon, 83 F.3d at 503 ("No precise formula is suggested, for each case necessarily turns on its own unique facts."). Significantly, the standards for setting aside an entry of default are "lower and more easily overcome" than those applied to determine if a default judgment should be vacated. In re Pena, 397 B.R. at 574 n. 10 (citing Coon, 867 F.2d at 76 ); see also Meehan v. Snow, 652 F.2d...