In re Oca, Inc.

Decision Date09 December 2008
Docket NumberNo. 08-30055.,08-30055.
Citation551 F.3d 359
PartiesIn the Matter of: OCA, INC.; OCA Outsource, Inc., Debtors. Brian A. Beitel, D.D.S., Appellant, v. OCA, Inc.; OCA Outsource, Inc., Appellees.
CourtU.S. Court of Appeals — Fifth Circuit

Riess, Drew Ryan Ballina (argued), William Hardy Patrick, III, Heller, Draper, Hayden, Patrick & Horn, New Orleans, LA, for Appellees.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before KING, HIGGINBOTHAM, and WIENER, Circuit Judges.

WIENER, Circuit Judge:

Appellant Dr. Brian Beitel appeals the district court's order affirming the bankruptcy court's denial of his motion to set aside or to vacate the default judgment against him. Concluding that the bankruptcy court erred by employing the incorrect burden of proof, we vacate both the bankruptcy court's denial of Dr. Beitel's motion to set aside or to vacate the default judgment and the district court's order, and remand to the bankruptcy court to conduct a de novo evidentiary hearing.

I. FACTS AND PROCEEDINGS

This appeal arises from an adversary proceeding in the Chapter 11 bankruptcy of appellee OCA, Inc. and its subsidiaries, including appellee OCA Outsource, Inc. (collectively, "OCA"). In 2004, Dr. Beitel, a solo pediatric dental practitioner, entered into an "outsource agreement" with OCA. In this agreement, OCA agreed to provide specified business and administrative services to Dr. Beitel's practice in exchange for a monthly service fee. On the same day that he signed the outsource agreement, Dr. Beitel signed two promissory notes payable to OCA which permitted him to obtain loans aggregating up to $500,000. By late 2005, Dr. Beitel had stopped paying OCA the monthly service fees as they became due and had defaulted on the promissory notes.

Having previously filed a petition voluntarily commencing Chapter 11 bankruptcy proceedings, OCA initiated the instant adversary proceeding on August 28, 2006 by filing a complaint against Dr. Beitel. In it, OCA sought to recover for, inter alia, Dr. Beitel's breach of the outsource agreement and default on the promissory notes.

On August 30, 2006, OCA served Dr. Beitel with copies of the summons and complaint via first-class U.S. mail, as permitted by Federal Rule of Bankruptcy Procedure 7004, addressed to both his home and office. Dr. Beitel denies receiving either of these mailings.

On February 27, 2007, the bankruptcy court consolidated this adversary proceeding with approximately one hundred other OCA adversary proceedings. The court specified that these proceedings would be tried in blocks and permitted OCA to schedule which adversary proceedings would be tried in which blocks. OCA included its proceeding against Dr. Beitel in its Proposed June Trial Schedule as one of ten cases for the second round of trials scheduled for June 12-29, 2007. OCA mailed this schedule to Dr. Beitel, and he admits receiving it,1 but insists that this was the first time that he had received notice of any action against him by OCA.

Dr. Beitel then contacted his attorney, Clement Cartron, who on May 23, 2007, spoke with OCA's counsel, Marguerite Kingsmill. Cartron asserts that Kingsmill told him that the adversary proceeding against Dr. Beitel would not be called until the last week of the June round of trials. Cartron also asked to be sent a copy of the summons and complaint. One week later on May 30, 2007, OCA e-mailed copies of the summons and complaint to Cartron.

As Cartron is a general practitioner without significant bankruptcy experience, he encouraged Dr. Beitel to seek special bankruptcy counsel. In response, Dr. Beitel contacted Michael Lee, a bankruptcy practitioner, to discuss representation. On June 11 or 12, 2007, Lee contacted a different OCA attorney, Drew Ballina. Lee recalls that Ballina told him specifically that no default would be taken against Dr. Beitel and that the merits would be addressed after Dr. Beitel filed an answer. Ballina claims, however, that he told Lee that trial would occur according to the Proposed June Trial Schedule. Ballina also claims that Lee told him that Dr. Beitel had not yet officially retained him as counsel.

On June 13, 2007, OCA filed a proposed pretrial order in which the instant adversary proceeding was "scheduled to commence on June 18, 2007"; however, the bankruptcy judge called the adversary proceeding against Dr. Beitel for trial on the same day that the proposed schedule was filed, June 13, 2007. Neither Dr. Beitel nor his counsel appeared. When the bankruptcy judge inquired whether Dr. Beitel had filed an answer, OCA's counsel responded that none had been filed; he did not, however, volunteer the fact that Lee had just contacted Ballina. Unaware of the negotiations between opposing counsel, the bankruptcy court proceeded to hear the case. OCA called one witness, its chief restructuring officer, who testified regarding the pertinent contracts and the amounts due under these agreements. The bankruptcy court granted OCA a default judgment in the amount sought and requested that OCA prepare and submit a proposed judgment.

A week later, Dr. Beitel filed his original answer to OCA's complaint. Although his answer is dated June 18, 2007, it was not filed until June 22. Dr. Beitel filed an amended answer three days later. On that same day, June 25, 2007, the bankruptcy court entered OCA's proposed default judgment against Dr. Beitel in the amount of $668,153 plus costs and interest.

On July 3, 2007, Dr. Beitel filed a motion to set aside or to vacate the June 25 default judgment. Dr. Beitel asserted that: (1) he was never served with the complaint pursuant to Federal Rule of Bankruptcy Procedure 7004; (2) he first learned of the existence of an action against him by way of the Proposed June Trial Schedule; (3) he was misled by OCA in telephone communications just prior to trial regarding the status of his adversary proceeding; and (4) he had a meritorious defense to OCA's claim. OCA opposed Dr. Beitel's motion to vacate.

On August 1, 2007, the bankruptcy court held a hearing on the motion and ruled in OCA's favor. Recognizing that OCA was entitled to a presumption of valid service, the bankruptcy court ruled that Dr. Beitel had failed to rebut this presumption by clear and convincing evidence. Specifically, the bankruptcy court stated:

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 that attaches to the two Certificates of Service, one of which shows that service was made at his home by mailing on August 30 an envelope that was duly stamped and correctly addressed, and another that was mailed to his correct office address also on August 30.

. . . .

On the basis of [the] case law and on the basis of the two certificates [of service] I hold that Dr. Beitel has not overcome the presumption that proper service was made of both the complaint and the summons. In addition, there is evidence, uncontroverted evidence that many other things were mailed to these same two addresses and that they were not returned and there's no complaint about there [sic] not having been received. To the contrary, you admit that he received a number of things at these addresses. The one instance in which something was misaddressed was acknowledged to be received by him.

So, 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).

Dr. Beitel timely appealed the bankruptcy court's denial of the motion to vacate to the district court where, for the first time, he challenged the bankruptcy court's exercise of core jurisdiction. The district court affirmed the bankruptcy court, holding that it had acted within its statutory authority in entering the default judgment. The district court held that, even though this adversary proceeding was non-core, Dr. Beitel had impliedly consented to the bankruptcy court's entry of final judgment by failing to object to its assumption of core jurisdiction. The district court then reviewed the bankruptcy court's denial of the motion to vacate for abuse of discretion, concluding that there was no "reason to disturb the bankruptcy court's finding that Beitel received service of OCA's complaint and notice of the trial schedule for his adversary proceeding and elected not [to] respond." Describing Dr. Beitel's inaction prior to the trial date as "emblematic of the very behavior that the Fifth Circuit has found to constitute willful default," the district court concluded that the bankruptcy court did not abuse its discretion in denying the motion to vacate. This timely appeal followed.

II. ANALYSIS
A. Standards of Review

"This Court reviews the decision of a district court, sitting as an appellate court, by applying the same standards of review to the bankruptcy court's findings of fact and conclusions of law as applied by the district court."2 We thus generally review factual findings for clear error and conclusions of law de novo.3

Subject-matter jurisdiction is a question of law which we review de novo.4 We review a determination that a "default should not be set aside ... for abuse of discretion."5 "Because of the seriousness of a default judgment, ... even a slight abuse of discretion may justify reversal."6 If "a district court's findings rest on an erroneous view of the...

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