Carolina First Bank v. Hanley

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
KEVIN O. HANLEY,
Debtor.
____________________________
CAROLINA FIRST BANK,
Plaintiff,
v.
KEVIN O. HANLEY,
Defendant.
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Case No. 08-00123
(Chapter 13)
Adversary Proceeding No.
08-10014
Not for Publication in
West’s Bankruptcy Reporter
MEMORANDUM DECISION AND ORDER
GRANTING MOTION TO VACATE DEFAULT JUDGMENT
The answer in this adversary proceeding was required to be
filed by June 16, 2008. 	A scheduling conference was set for July
16, 2008. 	As of June 18, 2008, the plaintiff’s attorneys had not
been contacted by the defendant or his attorney, and they filed a
motion for default judgment. 	Because the defendant had made no
appearance, even by way of informal contact with the plaintiff’s
attorney, it was appropriate for the plaintiff to seek entry of
default judgment without opportunity for a response by the
he Memorandum Decision and Order below is hereby
signed. Dated: July 14, 2008.
_____________________________
S. Martin Teel, Jr.
United States Bankruptcy Judge
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defendant. 	By an order entered on June 23, 2008, the court
granted the motion for default judgment. 	On June 27, 2008, the
defendant filed his motion to vacate the default judgment.
Having considered the defendant’s motion and the opposition to
the motion, the court will grant the motion with conditions.
I
As stated in Thorpe v. Thorpe, 364 F.2d 692, 694 (D.C. Cir.
1966):
The philosophy of modern federal procedure favors
trials on the merits, and default judgments should
generally be set aside where the moving party acts with
reasonable promptness, alleges a meritorious defense to
the action, and where the default has not been willful.
[Footnote omitted.]
The plaintiff opposes the defendant’s motion on the basis
that the motion fails to set out a meritorious defense. 	In
relevant part, the complaint sought a determination that the debt
that the debtor owes the plaintiff is nondischargeable under 11
U.S.C. § 523(a)(2)(A) and (B). 	In paragraphs 20 through 28 of
the complaint, the plaintiff identifies nine alleged
misrepresentations made by the defendant in connection with his
obtaining a loan from the plaintiff for the purchase of certain
real property in a development known as Village of Penland.
Specifically, the defendant allegedly did not actually provide
the $25,000 deposit that was reflected on the closing statement
regarding the purchase of the real property; did not intend to
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maintain an ownership interest in the property; did not consider
himself to be the owner of the property; never intended to make
any payments to the plaintiff or to repay the loan from the
plaintiff; and failed to disclose that:
• 	he had entered into an agreement with a third party
whereby that third party was to have all rights of
ownership in the property;
• 	the third party had agreed to pay the defendant a fee
for acquiring financing from the plaintiff;
• 	his application for a loan was submitted to various
banks at the same time;
• 	he had contracted to purchase other property in North
Carolina, and he had incurred or was about to incur
additional liabilities relating to the purchase of the
undisclosed real property; and
• 	based upon his true finances, he was unable to repay
the loan.
The defendant’s verified answer to the complaint is attached to
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1 	Through apparent inadvertence, paragraphs 23 and 24 of
the answer deny, respectively, the allegations contained in
paragraphs 24 and 25 (instead of paragraphs 23 and 24) of the
complaint, but paragraphs 23 and 24 of the answer evidence that
they were intended to constitute denials of paragraphs 23 and 24
of the complaint because they allege by way of explanation that
Judy Schneider was aware of the agreements between Penland and
its investors, and the structure of the transactions, prior to
defendant’s settlement. 	The defendant, however, should file an
amended answer that corrects the apparent inadvertent mistake.
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his motion, and denies these allegations of misrepresentations. 1
In an affidavit accompanying the motion, the defendant
acknowledges that the loan payments were to be made by Peerless
Real Estate Services instead of by him, and states:
I deny that the financial statement I submitted to [the
plaintiff] was inaccurate or misleading and deny that I
ever represented to [the plaintiff] that I would
personally be making the down payment, or that I would
be making the mortgage payments from my funds. 	Judy
Schneider [a representative of the plaintiff] advised
me on more than one occasion that she was aware of the
details of the Village of Penland investments, how they
were structured and the source of the loan payments.
Affidavit, at par. 3. 	The defendant’s answer further denies that
he intended to deceive the plaintiff, and denies that the
plaintiff relied upon his representations.
The defendant’s motion does not specifically discuss the
defendant’s alleged failure to disclose that almost
simultaneously he was receiving a loan from another bank with
respect to a contract to purchase another real estate property,
but the defendant’s answer denies the allegations of the
complaint in that regard. 	Moreover, the defendant’s answer
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pleads an adequate defense, at a minimum, by denying that he
intended to deceive, and that is an issue upon which the
defendant is entitled to a trial on the merits even if there was
a failure to disclose the other loan transaction. 	As in Thorpe
v. Thorpe, 364 F.2d at 694 n.4, this is not “a case where the
movant alleges a defense but the court concludes that the defense
is lacking in substance in view of facts as to which there is no
genuine issue. 	Compare Rule 56, Fed.R.Civ.P.”
The plaintiff challenges the defendant’s credibility by
pointing to false statements on his schedules and his statement
of financial affairs. 	But credibility issues are for trial.
II
Because no scheduling conference has been held, the
plaintiff has incurred costs and attorney’s fees only with
respect to the issue of default. 	Under Thorpe v. Thorpe, 364
F.2d at 694, the court may impose reasonable conditions on
vacating a default judgment, including requiring that the
defendant reimburse the plaintiff for attorney’s fees and costs
incurred because of the default. 	The court will require the
defendant to reimburse the plaintiff for his reasonable
attorney’s fees and costs incurred in preparing the motion for
default judgment and for responding to the motion to vacate.
Part of the opposition to the motion to vacate, specifically
the effort to cast the defendant’s credibility in a bad light,
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was not germane to responding to the motion to vacate, and
appears to have been an effort to “poison the well” against the
defendant in any future trial in this adversary proceeding. 	The
plaintiff’s attorney’s fees in opposing the motion to vacate
ought to be adjusted accordingly.
The court will attempt to fix the amount of attorney’s fees
and costs at the scheduling conference by way of discussion with
counsel, and if that proves not feasible, by way of a further
order for a submission of a statement of fees and costs, with an
opportunity for the defendant to challenge the same.
III
Pursuant to the foregoing, it is
ORDERED that the Judgment Declaring Debt Owed to Plaintiff
Nondischargeable, entered on June 23, 2008, is VACATED. 	It is
further
ORDERED that the defendant is granted leave by July 24,
2008, to file his Verified Answer to Complaint to Determine
Nondischargeability of Debt that was lodged with the motion to
vacate (or, more precisely, an amended version of that Answer
correcting the mistakes in paragraphs 23 and 24 of the same). 	It
is further
ORDERED that the granting of the motion to vacate is
conditioned on the defendant (or his attorney) paying the
reasonable attorney’s fees and costs of the plaintiff arising
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7	O:\TEEL\Carolina First Bank versus Hanley - Decision re Motion to Vacate Judgment_v2.wpd
from the defendant allowing a default judgment to be entered. 	It
is further
ORDERED that the scheduling conference in this adversary
proceeding shall be held as previously scheduled on July 16, 2008
at 9:30 a.m.
[Signed and dated above.]
Copies to: All counsel of record; Office of United States
Trustee.
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