IN RE: Stephen Anthony NEARY (2021)

ORDER GRANTING MOTION TO SET ASIDE CLERK'S ENTRY OF DEFAULT

Plaintiffs Patrick Harrington, Kari Harrington, Jessica Larson, Shane Larson, Tima Efendic-Ortiz and Arturo Ortiz (collectively “Plaintiffs”) filed an adversary proceeding against Debtor Stephen Anthony Neary (“Defendant”) to deny his discharge for fraudulent transfers and false oaths, and for a non-dischargeable debt for fraud and breach fiduciary duty, on August 20, 2020 (Doc. 1). Plaintiffs obtained a clerk's entry of default against Defendant on November 4, 2020 (Doc. 9), but never moved for entry of default judgment. Defendant submitted a motion to set aside the clerk's entry of default on September 24, 2021 (Doc. 11) and Plaintiffs filed an opposition on October 8, 2021 (Doc. 13). The Court heard argument on the matter on November 18, 2021.

Default judgments are not favored in the Tenth Circuit because public policy prefers trying civil cases on their merits. Katzson Bros., Inc., v. E.P.A., 839 F.2d 1396, 1399 (10th Cir. 1988); Gomes v. Williams, 420 F.2d 1364, 1366 (10th Cir. 1970). This policy provides parties with their day in court, resolves disputes based upon the applicable facts and law, and promotes public confidence in the federal judiciary. Here, the Court must strike the balance between honoring clerk's entries of default when parties have previously failed to defend and trying cases on their merits to reach the just result. In this case, the application of the Court's discretion finds the balance is in favor of granting the motion to set aside the clerk's entry of default and reaching the merits of the dispute, especially here, where the claims for relief include denial of discharge.

BACKGROUND

Defendant was the principal of Builtrite Builders, LLC (“Builtrite”), a residential homebuilder in El Paso County, Colorado. Builtrite filed a Chapter 11 bankruptcy case in this District on February 11, 2019, Case No. 19-10938-JGR. The Chapter 11 reorganization case was converted to a Chapter 7 liquidation case on December 20, 2019 and is in the final stages of completion.

Defendant filed his Chapter 7 bankruptcy case on January 13, 2020. Plaintiffs initiated this adversary proceeding against Defendant for denial of discharge for fraudulent transfers under 11 U.S.C. § 727(a)(2)(A), false oaths under 11 U.S.C. § 727(a)(4)(A), and fraudulent transfers and false oaths in connection with another bankruptcy case by an insider under 11 U.S.C. § 727(a)(7) (Doc. 1). Plaintiffs also assert claims for non-dischargeable debts for fraud under 11 U.S.C. § 523(a)(2)(A) and breach of fiduciary duty under 11 U.S.C. § 523(a)(4) on August 20, 2020 (Doc. 1). They served the summons and complaint on September 24, 2020 (Doc. 4). They filed and properly served an amended motion for clerk's entry of default on November 2, 2020 (Doc. 8). The Court entered a clerk's entry of default on November 4, 2020 (Doc. 9). Plaintiffs never filed a motion for default judgment. Defendant filed his motion to set aside clerk's entry of default on September 24, 2021 (Doc. 11)—almost 11 months after the clerk's default entered—and the Plaintiffs objected (Doc. 13).

ANALYSIS

The Court may vacate a clerk's entry of default for good cause under Fed.R.Civ.P. 55(c), made applicable herein by Fed.R.Bankr.P. 7055. The factors weighed by the courts in evaluating the good cause standard are: (1) whether the default was willful, (2) whether setting it aside would prejudice the other party, and (3) whether there is a meritorious defense. Pinson v. Equifax Credit Info. Serv., Inc., et al., 316 Fed Appx. 744, 750 (10th Cir. 2009). The burden is on the moving party to demonstrate good cause. See 10-55 Moore's Federal Practice – Civil, ¶¶ 55-70. The good cause standard is to be construed liberally and the court may consider each of the above factors, not consider any one of the factors, or consider other factors. Guttman v. Silverberg, 167 Fed. Appx. 1, 4 (10th Cir. 2005).

The Court has previously granted a motion to vacate a default judgment to allow an adversary proceeding for fraud to be resolved on the merits in the case of In re Milos, United States Bankruptcy Court for the District of Colorado, Case No. 17-1138-JGR, August 28, 2017 (Doc. 18). In Milos, the defendants moved to vacate the clerk's entry of default within one month of its entry by the Court after they received a motion for default judgment within two weeks after the clerk's entry of default. The Court found the default was not willful, there would be no prejudice in setting it aside, and there was a potential meritorious defense.

In this case, Defendant argues factors two and three weigh heavily in favor of granting his motion to set aside the clerk's entry of default and the Court agrees.

The first factor is whether the default was willful. While Defendant admits the default was willful, he states he was preoccupied with assisting his wife in defending an adversary proceeding brought by his Chapter 7 trustee against her, assisting his wife in a new business venture, and he did not receive any motion for a default judgment.

In Security Nat'l Mortg. Co. v. Head, 2014 WL 4627483 (D. Colo. 2014), the District Court found the failure to respond to a motion for clerk's entry of default was willful and culpable because the defendants (who were sophisticated lawyers) “were aware of federal law, informed of the legal consequences of failing to respond, and ‘sufficiently sophisticated and experienced in the requirements of federal law to protect [their] interests, based on involvement in other actions in the United States courts.’ ”). Id. at *2 (quoting Meadows v. Dominican Republic, 817 F.2d 517, 521-22 (9th Cir. 1987)). Thus, the Court agrees the default was willful and this factor weighs in favor of not vacating the clerk's entry of default.

The second factor is prejudice to the adversary if the court vacates the entry of default. There will always be prejudice to an adversary if a court vacates a clerk's entry of default. The cases hold that there must be identifiable prejudice to the plaintiff's ability to pursue its claim in a concrete way such as loss of evidence, increased difficulties of collection, and/or fraud or collusion. Indigo Am., Inc., v. Big Impressions, 597 F.3d 1, 4 (1st Cir. 2010); Security National at *3. Plaintiffs have neither alleged nor established such concrete prejudice. Plaintiffs have not explained the nearly eleven-month delay in not filing a motion for a default judgment. This factor weighs in favor of vacating the clerk's entry of default.

The third factor is whether Defendant has a meritorious defense to the claims because if there is no meritorious defense, it makes little sense to set aside the entry of default. Indigo, 597 F.3d at 4. The Court must evaluate the facts set forth in the motion to set aside, and opposition, to determine if such facts, if they are true, would constitute a defense. Security National at *3. The movants do not have to establish likelihood of success on the merits. Id. Since a review of the pleadings indicates there are genuine issues of material fact, this factor also weighs in favor of vacating the clerk's entry of default.

The Plaintiffs are former residential customers of Builtrite. The Complaint is 17 pages (86 paragraphs) and contains 7 claims for relief. The Complaint is not verified, and no exhibits are attached. The facts alleged by the Complaint are wide-ranging covering numerous other entities, transfers, and civil actions. Most of the claims relate to the Defendant's actions in operating Builtrite.

The Defendant claims he did not commit fraud, he is entitled to defend claims seeking to bar his discharge, and that the claims all require a finding of fraudulent intent. The Court notes the Chapter 7 Trustee in the Builtrite case did not file any actions against the Defendant for fraudulent misconduct in connection with the Builtrite bankruptcy case.

The Court finds the Defendant has raised a potentially meritorious defense and this factor weighs in favor of vacating the clerk's entry of default.

CONCLUSION

The balance of the equities favors exercising judicial discretion and vacating the clerk's entry of default.

Therefore, Defendant's Motion to Set Aside Clerk's Entry of Default and Leave to File Answer to Complaint (Doc. 11) is GRANTED, and Defendant shall file an answer or otherwise respond to the Complaint on or before December 17, 2021.

Joseph G. Rosania, Jr., United States Bankruptcy Judge