Alberts, Trustee for the DCHC Liquidating Trust v. NUCOAT, INC.

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
GREATER SOUTHEAST COMMUNITY
HOSPITAL CORP., I, et al.,
Debtors.
____________________________
SAM J. ALBERTS, TRUSTEE FOR
THE DCHC LIQUIDATING TRUST,
Plaintiff,
v.
NUCOAT, INC.,
Defendant.
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Case No. 02-02250
(Chapter 11)
(Jointly Administered)
Adversary Proceeding No.
05-10040
DECISION REGARDING MOTION FOR DEFAULT JUDGMENT
Sam J. Alberts, trustee for the DCHC Liquidating Trust and
the plaintiff in this adversary proceeding, requests default
judgment in the amount of $5,876.42 plus pre- and post-judgment
interest. 	Having carefully reviewed Alberts’s motion as well as
his response to this court’s Order to Supplement Motion for
Default Judgment (D.E. No. 19, entered August 15, 2006), the
court concludes that default judgment in the full amount
The decision below is hereby signed. Dated:
September 12, 2006.
_____________________________
S. Martin Teel, Jr.
United States Bankruptcy Judge
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requested by Alberts is appropriate at this time.
I.
Alberts initiated this adversary proceeding on June 16,
2005, by filing a three-count complaint to recover certain pre-
petition amounts totaling $8,626.42 that allegedly were
transferred to the defendant NuCoat, Inc. (“NuCoat”) in violation
of 11 U.S.C. §§ 547, 548, and 550 (D.E. No. 1). 	NuCoat never
filed an answer or responsive motion to Alberts’s complaint.
Instead, NuCoat apparently entered into a “Settlement Agreement
and Mutual Release” with Alberts whereby NuCoat pledged to pay
Alberts $5,500.00 in exchange for the release and waiver of all
of Alberts’s “claims, causes of action, rights and remedies” held
against NuCoat (Mot. Ex. B ¶¶ 1-2). 	This release was “subject
and conditioned on receipt” of the money promised by NuCoat,
making the parties’ settlement agreement an executory contract.
The parties also consented to this court’s jurisdiction over the
interpretation and enforcement of the parties’ settlement
agreement.
To date, NuCoat has paid only half ($2,750.00) of the amount
promised in the settlement agreement between the parties.
Alberts demanded payment of the remaining $2,750.00 by June 29,
2006 (Mot. at Ex. C). 	NuCoat did not respond to this letter, so
on July 6, 2006, Alberts requested an entry of default from the
clerk of the court (D.E. No. 15). 	Following the entry of
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default, Alberts moved for default judgment on the amount pled in
his complaint less the $2,750.00 paid by NuCoat (D.E. No. 17,
filed July 10, 2006).
The court ordered Alberts to supplement his motion to
address the court’s concerns regarding both the principal and
interest sought by Alberts in light of the settlement agreement
entered into by Alberts and NuCoat. 	Alberts duly supplemented
his motion on September 8, 2006 (D.E. No. 22).
II.
“‘When an application is made to the court under Rule
55(b)(2) for the entry of a judgment by default, the [trial]
judge is required to exercise sound judicial discretion in
determining whether the judgment should be entered.’” 	Savage v.
Scales, 310 F. Supp. 2d 122, 127 (D.D.C. 2004) (quoting 10A
Wright, Miller & Kane, Fed. Prac. and Proc. § 2685 (3d ed.
1998)). 	“Judicial policy strongly favors deciding cases on their
merits rather than by default judgments; therefore, default
judgments are usually reserved for totally unresponsive parties.”
Id. (emphasis added). 	“This line of reasoning rhymes with the
Federal Rules of Civil Procedure, which generally embody an
effort to ensure that courts decide cases based on the strength
of the adversaries’ arguments rather than on the skillful use of
technicalities.” 	Canady v. Erbe Elektromedizin GMBH, 307 F.
Supp. 2d 2, 9 (D.D.C. 2004).
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1 	Alberts also argues that NuCoat “should be estopped from
asserting that [Alberts], having relied on the representation of
NuCoat, is limited to the damages in the [a]greement that NuCoat
breached” (Response at 2). 	Of course, NuCoat has not
“assert[ed]” anything at all--if it had, Alberts would not be
moving for default judgment--so it can hardly be “estopped” from
relying on its settlement agreement with Alberts. 	Even if the
court were prepared to accept such an argument, it would not do
so here where Alberts has demonstrated no detrimental reliance on
the promises of NuCoat other than delay in obtaining final
judgment, a harm that is mitigated by the award of pre-judgment
interest.
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There is no question that Alberts is entitled to default
judgment given the total lack of response by NuCoat to his
complaint and motion for default judgment. 	The only question is
whether he should recover the amount originally sought in his
complaint ($8,626.42) less the $2,750.00 paid by NuCoat or the
other half of the payment promised by NuCoat in its settlement
agreement with Alberts. 	In response to the court’s request for
clarification on this point, Alberts asserts that he is entitled
to rescind his settlement agreement with NuCoat based on NuCoat’s
failure to perform under the agreement (Response at 3). 1
Ordinarily, the parties to a settlement agreement seek
approval from the presiding court so that the agreement can be
entered on the docket as a final judgment entitled to res
judicata and subject to vacatur under Fed. R. Civ. P. 60 (as
incorporated by Fed. R. Bankr. P. 9024). 	As the court’s findings
in support of a decision to vacate a judgment have preclusive
effect as well, the dual nature of a settlement agreement as a
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judgment and a contract rarely holds any practical significance
because the same reasons that would warrant an overturning of the
judgment (e.g., fraud) would dictate that the contract between
the parties be voided as well. 	See Bd. of Trustees of Trucking
Employees of North Jersey Welfare Fund, Inc.-Pension Fund v.
Centra, 983 F.3d 495, 505-06 (3d Cir. 1992) (order regarding
motion to vacate judgment entered on settlement agreement has
preclusive effect on overlapping issues in separate breach of
contract suit on the settlement agreement).
In this case, there is no final judgment for the court to
vacate, just a contract between the parties that limits Alberts’s
recovery on his preference and fraudulent conveyance claims.
Still, it is evident that had NuCoat responded to Alberts’s
motion for default judgment by raising the intervening defense of
its rights under the settlement agreement, Alberts could
successfully raise his own counter-defense of rescission based on
NuCoat’s material default. 	See In re Cooper, 273 B.R. 297, 304
(Bankr. D.D.C. 2002) (“breach . . . of an executory
contract . . . gives rise to three distinct and alternative
remedies: specific performance, rescission . . ., or recovery of
damages”); see also Village of Kaktovic v. Watt, 689 F.2d 222,
230 (D.C. Cir. 1982) (“An agreement to settle a legal dispute is
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2 	“Rescission is an equitable remedy, and a party seeking
rescission must restore the other party to that party’s position
at the time the contract was made.” 	Dean v. Garland, 779 A.2d
911, 915 (D.C. 2001); accord In re Cooper, 273 B.R. at 304.
Alberts has not restored NuCoat to its pre-contractual position
by returning the $2,750.00 paid to him pursuant to the settlement
agreement, but he need not do so because he is entitled to set
off that debt against the amounts owed to him on his underlying
suit. 	See generally Citizens Bank of Md. v. Strumpf, 516 U.S. 16
(1995) (setting forth the usual requirements for setoff).
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a contract.”). 2
In any event, NuCoat has not ventured to appear in this
case, much less raised an affirmative defense based on the
settlement agreement between the parties. 	Accordingly, the court
need not consider whether the settlement agreement is enforceable
because the possible defense of a governing contract is waived.
The situation is no different from that of a plaintiff who enters
into a settlement agreement with a defendant prior to the onset
of litigation, renounces the agreement when the defendant refuses
to perform, and then initiates a lawsuit that is never contested
by the defendant. 	In both cases, default judgment in favor of
the plaintiff is appropriate.
II.
The court queried Alberts separately regarding the proper
interest rate to be awarded and the date from which that interest
should accrue. 	The court agrees with Alberts that the proper
rate for pre-judgment interest is the prime rate for the reasons
set forth by this court in Webster v. Harris (In re NETtel), 327
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7	O:\Andrew Fausett Temp Docs\Decisions with Related Orders\Rockstone Capital, LLC v. Walker-Thomas Furniture Co, Inc\opinion_default judgment_Alberts v. NuCoat_v2.wpd
B.R. 8 (Bankr. D.D.C. 2005), but this court calculates that rate
annually rather than by deriving a monthly average. 	See id. at
13 n.8. 	The court also agrees that pre-judgment interest in this
case should accrue from the date on which Alberts commenced this
adversary proceeding. 	Sigmon v. Royal Cake Co., Inc. (In re
Cybermech, Inc.), 13 F.3d 818, 822 (4th Cir. 1994) (collecting
cases); 5 Collier on Bankruptcy ¶ 547.15 (15th ed. revised).
Post-judgment interest is, of course, set at the rate mandated by
28 U.S.C. § 1961.
III.
For the reasons set forth above, the court will award
default judgment in the principal amount of $5,876.42. 	The court
will award pre-judgment interest of 6.01% on the original
principal of $8,626.42 for the 179-day period preceding NuCoat’s
partial payment and on the unpaid balance for the 179-day period
between NuCoat’s partial payment and June 16, 2006, and will
award pre-judgment interest of 8.02% on the original principle
plus the interest accrued between June 16, 2005, and June 16,
2006, for the period between the latter date and the entry of
final judgment. 	The court will award post-judgment interest at
the statutory rate set forth in 28 U.S.C. § 1961.
A judgment follows.
[Signed and dated above.]
Copies to: All counsel of record.
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