In re Usn Communications, Inc.

• Citation: 288 B.R. 391
• Decision Date: 17 January 2003
• Docket Number: Bankruptcy No. 99-384.,Bankruptcy No. 99-383.,Adversary No. 00-1882.,Bankruptcy No. 99-390.,Bankruptcy No. 99-385.,Bankruptcy No. 99-386.,Bankruptcy No. 99-389.,Bankruptcy No. 99-391.,Bankruptcy No. 99-392.,Bankruptcy No. 99-395(PJW).,Bankruptcy No. 99-387.,Bankruptcy No. 99-394.,Bankruptcy No. 99-388.,Bankruptcy No. 99-393.
• Parties: In re USN COMMUNICATIONS, INC., et al., Debtors. Scott Peltz, as Liquidating Trustee for the USN Communications Liquidating Trust, Plaintiff, v. Com Services, Inc., Defendant.
• Court: U.S. Bankruptcy Court — District of Delaware

288 B.R. 391

In re USN COMMUNICATIONS, INC., et al., Debtors Scott Peltz, as Liquidating Trustee for the USN Communications Liquidating Trust, Plaintiff, v. Com Services, Inc., Defendant.

Bankruptcy No. 99-383.

Bankruptcy No. 99-384.

Bankruptcy No. 99-385.

Bankruptcy No. 99-386.

Bankruptcy No. 99-387.

Bankruptcy No. 99-388.

Bankruptcy No. 99-389.

Bankruptcy No. 99-390.

Bankruptcy No. 99-391.

Bankruptcy No. 99-392.

Bankruptcy No. 99-393.

Bankruptcy No. 99-394.

Bankruptcy No. 99-395(PJW).

Adversary No. 00-1882.

United States Bankruptcy Court, D. Delaware.

January 17, 2003.

COPYRIGHT MATERIAL OMITTED

Ian Connor Bifferato, Megan N. Harper, Bifferato, Bifferato & Gentilotti, Wilmington, DE, Thomas Pietrantonio, Thomas Pietrantonio, P.C., Port Washington, NY, for Defendant.

Mark Minuti, Tara L. Lattomus, Saul Ewing, LLP, Wilmington, DE, David B. Goroff, Frank W. DiCastri, Foley & Lardner, Chicago, IL, for Scott Peltz, as Trustee of the USN Communications, Inc. Liquidating Trust.

MEMORANDUM OPINION

PETER J. WALSH, Chief Judge.

This opinion relates to Defendant's Motion to Vacate Default Judgment (Doc. # 8). Defendant seeks relief for the default under Federal Rule of Civil Procedure 60(b), which is made applicable to adversary proceedings in bankruptcy by Federal Rule of Bankruptcy Procedure 9024.¹ For the reasons set forth below, the Court will deny Defendant's motion to vacate the default judgment, but will grant leave to reconsider.

BACKGROUND

On February 18, 1999, USN Communications, Inc. and certain of its subsidiaries filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101 et seq. (the "Bankruptcy Code"). The First Amended Joint Consolidation Plan of Reorganization of USN Communications, Inc. et al., approved on March 15, 2000, created the USN Communications Liquidating Trust. Mr. Scott Peltz was appointed Trustee (the "Trustee") and granted the exclusive power to prosecute all avoidance and preference actions.

Defendant was incorporated on August 4, 1997 and was a New York Corporation with its principal place of business in Port Washington, New York. Defendant provided the following address on its Certificate of Incorporation for accepting service of process: Com Services, Inc., c/o The Corporation Company, Registered Agent, 74 Highland Avenue, Port Washington, N.Y. 11050. In March 1999, after its only client filed for bankruptcy protection, Defendant ceased operations.

On December 15, 2000, the Trustee filed its complaint to recover avoidable transfers. In the complaint, the Trustee alleged that Defendant received $113,274.75 during the 90-day preference period and that these payments were subject to avoidance under Bankruptcy Code § 547(b). The Trustee sent a copy of the complaint and summons to Defendant at the registered address by first-class United States mail on December 22, 2000. Defendant was required to respond by January 15, 2001. On March 22, 2001, after Defendant failed to respond, the Trustee filed its motion for default judgment (Doc. # 5). The Court granted the motion and entered a default judgment on April 12, 2001 (Doc. # 6).

Subsequently, the Trustee discovered that Mr. Matthew Bonfitto was the former president and one of several former shareholders of Defendant. The Trustee informed Mr. Bonfitto of the default judgment by letter dated May 29, 2001. Mr. Bonfitto did not receive the summons and complaint or any other notice of the adversary proceeding prior to May 29, 2001. Defendant's registered address was a personal residence used by Mr. Bonfitto until he moved on February 17, 1998. Mr. Bonfitto claims his negligence in failing to keep the New York Department of State apprised of his address was based on improper advice from Defendant's incorporating attorney.

Immediately following receipt of the May 29, 2001 letter, Mr. Bonfitto's attorney attempted to negotiate an agreement with the Trustee where the Trustee would voluntarily vacate the default judgment. These negotiations were unsuccessful. There was no further communication between the parties and in the fall of 2001, the Trustee sought to domesticate the default judgment in New York. The Trustee filed a motion for summary judgment in lieu of complaint with the Supreme Court of New York for Nassau County. The New York court granted the motion and entered a default judgment for $113,274.75 together with interest. On March 21, 2002, Mr. Bonfitto's attorney filed the motion here to vacate default judgment.

DISCUSSION

The issue is whether Defendant has provided sufficient grounds to justify vacating the default judgment. Generally, the courts of the Third Circuit have disfavored default judgments and have held that any doubt as to whether a default judgment should be vacated must be resolved in favor of the setting aside the default and reaching a decision on the merits. See Zawadski de Bueno v. Bueno Castro, 822 F.2d 416, 420 (3d Cir.1987); United States v. $55,518.05 in U.S. Currency, 728 F.2d 192, 194-95 (3d Cir.1984); Gross v. Stereo Component Sys., Inc., 700 F.2d 120, 122 (3d Cir.1983); Tozer v. Charles A. Krause Milling Co., 189 F.2d 242, 244 (3d Cir.1951).

According to Civil Procedure Rule 55(c), a bankruptcy court may set aside the entry of a default "for good cause shown."² If a judgment by default has been entered by the court, it may be set aside in accordance with Civil Procedure Rule 60(b).³ Civil Procedure Rule 60(b) controls in cases where both an entry of default and a default judgment exist. See Massaro v. Massaro (In re Massaro), 235 B.R. 757, 761 (Bankr.D.N.J.1999). A motion to vacate a default judgment based on excusable neglect must be filed within one year of the date the default was entered. Civil Procedure Rule 60(b).

In deciding a motion to vacate a default judgment, the Third Circuit has stated that lower courts must consider the following factors: (1) whether the plaintiff will be prejudiced if the judgment is vacated (2) whether the defendant has a meritorious defense to the underlying action; and (3) whether the default was the result of the defendant's culpable conduct. See $55,518.05 in U.S. Currency, 728 F.2d at 195; Gross, 700 F.2d at 122. These standards apply regardless of whether the motion to vacate is brought under Civil Procedure Rule 55(c) or Rule 60(b). See $55,518.05 in U.S. Currency, 728 F.2d at 195.

The Third Circuit has determined that the second factor, whether the defendant has a meritorious defense, is the threshold question for this analysis. Id. A meritorious defense "is the critical issue because without a meritorious defense [defendant] could not win at trial...[and] there would be no point in setting aside the default judgment...if [defendant] could not demonstrate the possibility of his winning." Id. In order to show that a meritorious defense exists, a defendant must allege specific facts that, if established at trial, would constitute a complete defense. Id. A meritorious defense cannot be shown by "conclusionary language" or "verbatim excerption[s] of the statutory language". Id. at 196.

The first and third factors articulated in $55,518.05 in U.S. Currency are similar to the excusable neglect requirement developed by the United States Supreme Court in Pioneer Investment Services Company v. Brunswick Associates Limited Partnership et al., 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993). In Pioneer, the Supreme Court concluded that the determination of whether excusable neglect existed was an equitable decision to be made after "taking account of all relevant circumstances surrounding the party's omission." Pioneer, 507 U.S. at 395, 113 S.Ct. 1489. In determining the existence of excusable neglect, courts are to address: (1) whether there is a danger of prejudice to the non-movant; (2) the length of the delay and its potential impact on judicial proceedings; (3) the reason for the delay, including whether it was within the reasonable control of the movant; and (4) whether the movant acted in good faith. See id.

I. Meritorious Defense

Defendant has not adequately demonstrated to this Court that a meritorious defense exists. Under Bankruptcy Code § 547(g), a defendant has the burden of proving the nonavoidability of a transfer. Specific facts must be pleaded in order to vacate a default judgment under Civil Procedure Rule 60(b). See $55,518.05 in U.S. Currency, 728 F.2d at 195. In short, Defendant's proposed answer must show that there is an inference of a meritorious defense.

Defendant alleges four affirmative defenses in its proposed answer to the Trustee's complaint. See Doc. 8, Ex. D. The Court will only address the first three defenses as the fourth defense merely reserves any other defense. First, Defendant alleges that the transfers cannot be avoided because "the transfers made to Defendant were a substantially contemporaneous exchange for new value in accordance with 11 U.S.C. § 547(c)(1)." Second, Defendant claims that the transfers cannot be avoided because they were based on "obligations incurred and made in the ordinary course of business between Plaintiff and Defendant and were made according to ordinary course of business terms, all in accordance with 11 U.S.C. § 547(c)(2)." Finally, Defendant states that the transfers cannot be avoided because "subsequent to the transfers, Defendant may have given new value to or for the benefit of the Plaintiff in accordance with 11 U.S.C. § 547(c)(4)."

Unfortunately, Defendant's statements do not rise to the level of specificity required for vacating a default judgment. The defenses do not contain any factual support and are merely statements of the statutory provisions. While the Court has discretion to vacate a default judgment, it cannot set aside the judgment based on conclusory statements or a recitation of the relevant statutory language.

II. Excusable Neglect

Although Defendant's failure to plead specific facts relating to a meritorious...