McCraney v. High Desert Neurology, Inc.

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re
DAVID PATRICK McCRANEY
and KIMBERLY McCRANEY,
Debtors. 	No. 13-09-15667-S
DAVID PATRICK McCRANEY,
Plaintiff,
v. 	Adv. No. 10-1006-S
HIGH DESERT NEUROLOGY, INC.
Defendant.
MEMORANDUM OPINION ON MOTION
TO SET ASIDE DEFAULT JUDGMENT
This matter is before the Court in a case removed from the
Fourth Judicial District Court, San Miguel County, New Mexico
(“State Court” or “Court”) on Plaintiff’s Motion to Set Aside
Default Judgment (doc 17) and the Objection thereto by Defendant
High Desert Neurology, Inc. (“High Desert”). 	David Patrick
McCraney (“Plaintiff”) appears through his attorney William F.
Davis & Assoc., P.C. (William F. Davis and Anne D. Goodman).
High Desert appears through its attorney Clifford C. Gramer. 	For
the reasons stated below, the Court finds that Plaintiff’s Motion
is well taken and should be granted.
CORE OR NON-CORE PROCEEDING
Plaintiff’s Notice of Removal states that this adversary
proceeding is both a “related to” case, Doc 1 ¶ 8, and a “core
proceeding”, Id. ¶ 10. 	Whichever the case, Plaintiff consents to
entry of final orders or judgments by the Bankruptcy Judge. 	Id.
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Page -2-
¶ 11. 	High Desert filed a Statement Pursuant to Bankruptcy Rule
9027(e) admitting that this action is a core proceeding. 	Doc 11.
Bankruptcy Court jurisdiction is established by 28 U.S.C. §
1334, which lists four types of matters over which the district
court has bankruptcy jurisdiction: 1) cases “under” title 11
(which are the bankruptcy cases themselves, initiated by the
filing of a Chapter 7, Chapter 11, etc. petition), 2) proceedings
“arising under” title 11 (such as a preference recovery action
under §547), 3) proceedings “arising in” a case under title 11
(such as plan confirmation), and 4) proceedings “related to” a
case under title 11 (such as a collection action against a third
party for a pre-petition debt). 	Wood v. Wood (In re Wood), 825
F.2d 90, 92 (5 th Cir. 1987). 	In the District of New Mexico, all
four types have been referred to the bankruptcy court. 	See 28
U.S.C. § 157(a); Administrative Order, Misc. No. 84-0324 (D. N.M.
March 19, 1992).
Jurisdiction is then further broken down by 28 U.S.C. § 157,
which grants full judicial power to bankruptcy courts not only
over cases “under” title 11 but also over “core” proceedings,
§157(b)(1), but grants only limited judicial power over “related”
or “non-core” proceedings, §157(c)(1). 	Wood, 825 F.2d at 91;
Personette v. Kennedy (In re Midgard Corporation), 204 B.R. 764,
771 (10 th Cir. B.A.P. 1997). 	This core/non-core distinction is
important, because it defines the extent of the Bankruptcy
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Court’s jurisdiction and the standard by which the District Court
(or Bankruptcy Appellate Panel) reviews the factual findings.
Halper v. Halper, 164 F.3d 830, 836 (3 rd Cir. 1999).
Core proceedings
“Core” proceedings are matters “arising under” and “arising
in” cases under title 11. 	Wood, 825 F.2d at 96; Midgard, 204
B.R. at 771. 	Matters “arise under” title 11 if they involve a
cause of action created or determined by a statutory provision of
title 11. 	Wood, 825 F.2d at 96; Midgard, 204 B.R. at 771.
Matters “arise in” a bankruptcy if they concern the
administration of the bankruptcy case and have no existence
outside of the bankruptcy. 	Wood, 825 F.2d at 97; Midgard, 204
B.R. at 771. 	Bankruptcy judges may hear and determine core
proceedings and enter final orders and judgments. 	28 U.S.C. §
157(b)(1). 	28 U.S.C. § 157(b)(2) contains a nonexclusive list of
16 types of core proceedings.
Non-core proceedings
“Non-core” proceedings are those that do not depend on the
bankruptcy laws for their existence and that could proceed in
another court even in the absence of bankruptcy. 	Wood, 825 F.2d
at 96; Midgard, 204 B.R. at 771. 	“Proceedings ‘related to’ the
bankruptcy include (1) causes of action owned by the debtor which
become property of the estate pursuant to 11 U.S.C. § 541, and
(2) suits between third parties which have an effect on the
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1 743 F.2d 984, 994 (3rd Cir. 1984)
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bankruptcy estate.” 	Celotex Corporation v. Edwards, 514 U.S.
300, 307 n.5 (1995). 	The Tenth Circuit has adopted the widely
used Pacor, Inc. v. Higgins 1 test to determine if a proceeding is
related: "the proceeding is related to the bankruptcy if the
outcome could alter the debtor's rights, liabilities, options, or
freedom of action in any way, thereby impacting on the handling
and administration of the bankruptcy case." 	Gardner v. United
States (In re Gardner), 913 F.2d 1515, 1518 (10th Cir. 1990).
Bankruptcy courts have jurisdiction over non-core
proceedings if they are at least “related to” a case under title
11. 	28 U.S.C. § 157(c)(1)(“A bankruptcy judge may hear a
proceeding that is not a core proceeding but that is otherwise
related to a case under title 11.”) 	However, unless all parties
consent otherwise, 28 U.S.C. § 157(c)(2), bankruptcy judges do
not enter final orders or judgments in non-core proceedings.
Rather, they submit proposed findings of fact and conclusions of
law to the district court, which enters final orders and
judgments after de novo review. 	28 U.S.C. § 157(c)(1); Federal
Bankruptcy Rule 9033. 	See also Orion Pictures Corporation v.
Showtime Networks, Inc. (In re Orion Pictures Corporation), 4
F.3d 1095, 1100-01 (2 nd Cir. 1993)(discussing Section 157's
classification scheme).
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28 U.S.C. § 157(b)(2) gives a nonexclusive list of 16 “core
proceedings.” 	The fact that a matter is listed among the “core
proceedings” of 28 U.S.C. § 157(b)(2) cannot end the inquiry,
however. 	In Northern Pipeline Construction Co. v. Marathon Pipe
Line Company, 458 U.S. 50, 76 (1982), the United States Supreme
Court ruled that Article III of the Constitution “bars Congress
from establishing legislative courts to exercise jurisdiction
over all matters related to those arising under the bankruptcy
laws.” 	In Marathon, the debtor sought damages for alleged
breaches of contract and warranty, misrepresentation, coercion,
and duress. 	Id. at 56. 	The Supreme Court distinguished this
adjudication of “state-created private rights” from the
“restructuring of debtor-creditor relations, which is at the core
of the federal bankruptcy power.” 	Id. at 71. 	The Court found
that the broad grant of jurisdiction to the bankruptcy courts
found in 28 U.S.C. § 1471 (1976 ed., Supp.IV) was
unconstitutional because it “impermissibly removed most, if not
all, of the ‘essential attributes of the judicial power’ from the
Art. III district court” and vested those attributes in the
bankruptcy court. 	Id. at 87. 	Congress responded with the
current jurisdictional scheme which categorizes matters as either
core or non-core. 	Any determination by the Bankruptcy Court of
the core status of a matter should be done with the dictates of
Marathon in mind. 	See Adams v. Grand Traverse Band of Ottawa and
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Chippewa Indians Economic Development Authority (In re Adams),
133 B.R. 191, 196 (Bankr. W.D. Mich. 1991)(“[Section]
157(b)(2)(A) [matters concerning the administration of the
estate] was not meant to confer core status on all proceedings
having some effect on the estate. 	If that was the intent behind
§ 157(b)(2)(A), then there would be no distinction between
‘related to’ and ‘core’ proceedings.”)
This removed case is a non-core proceeding. 	It is an action
based only on state law that was commenced prepetition. 	It is
not a “case” under title 11. 	It does not “arise under” title 11
because it does not involve a cause of action created or
determined by a statutory provision of title 11. 	It does not
“arise in” a title 11 case because it does not concern the
administration of the bankruptcy case and it has an existence
outside of and predating the bankruptcy. 	It is, however, related
to a title 11 case because it “could alter the debtor's rights,
liabilities, options, or freedom of action.” 	Therefore, the
Bankruptcy Court has jurisdiction. 	28 U.S.C. § 157(c)(1).
Bankruptcy Courts can enter final orders and judgments in
non-core proceedings with the parties’ consent. 	28 U.S.C. §
157(c)(2). 	In this case, the parties have consented. 	Therefore,
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2Mandatory abstention does not apply. 	Mandatory abstention
is set out in 28 U.S.C. § 1334(c)(2). 	Mandatory abstention
requires a timely motion to abstain. 	Street v. The End of the
Road Trust, 386 B.R. 539, 547 (D. Del. 2008)(citing Stoe v.
Flaherty, 436 F.3d 209, 213 (3 rd Cir. 2006). 	See also Owens-
Illinois, Inc. v. Rapid American Corp. (In re Celotex Corp.), 124
F.3d 619, 627 (4 th Cir. 1997)(A party waives mandatory abstention
by failing to file an appropriate motion.); Mourad v. Farrell (In
re V & M Management, Inc.), 321 F.3d 6, 8 (1 st Cir. 2003)(Same.);
Personette v. Kennedy (In re Midgard Corp.), 204 B.R. 764, 776
(10 th Cir. BAP 1997)(Same.) 	Mandatory abstention is also not
jurisdictional. 	Lawrence P. King, Jurisdiction and Procedure
under the Bankruptcy Amendments of 1984, 38 Vand. L. Rev. 675,
700 (1985).
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this is a non-core proceeding in which the Bankruptcy Court may
enter final orders and judgments. 2
HISTORY OF CASE
On August 7, 2007, Plaintiff filed a complaint for breach of
contract and wrongful discharge (“Complaint”) in the Fourth
Judicial District Court, San Miguel County, New Mexico against
High Desert and Jerry Williams (“Defendants”). 	Doc 4-1, p 50.
On September 11, 2007, Defendants answered. 	Doc 4-1, p 42. 	Also
on September 11, 2007, Defendants served their First set of
interrogatories and request for production of documents. 	Doc 4-
1, p 40.
On September 25, 2007, Plaintiff served a Subpoena duces
tecum requesting that Plaintiff’s personnel file be produced by
October 5. 	Doc 4-1, p 38. 	Defendants objected to production on
October 1, 2007, citing an improperly short deadline under state
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3 These notes are not a verbatim transcript of the
proceedings, but rather the notes of the person managing the FTR
(digital court recording) system summarizing the proceedings.
Page -8-
rules. 	Defendants also sought attorney fees as a sanction for
violating the state rule. 	Doc 4-1, p 33.
On October 3, 2007, Defendant filed a motion to dismiss for
failure to state a claim and requested a hearing. 	Doc 4-1, pp 25
and 31.
On October 23, 2007, Defendants filed a Motion to Compel a
response to their First set of discovery. 	Doc 4-1, p 19.
Exhibit A to the Motion to Compel is the discovery set. 	Doc 4-1,
p 22. 	On the same date they requested a hearing. 	Doc 4-1, p 17.
The court set a hearing for December 11, 2007. 	Doc 4-1, p 16.
On November 7, 2007 Plaintiff filed an Answer to the Motion to
Compel. 	Doc 4-1, p 15. 	The Answer states:
1) 	Plaintiff received the interrogatories sent by the
Defendant and is currently compiling the discovery
requested.
2) 	Due to difficulty in gathering the requested
discovery, Plaintiff was not able to produce the
discovery.
3) 	Plaintiff anticipates that he can fulfill the
requests by November 16, 2007.
WHEREFORE, Plaintiff prays the Court extend his time to
reply to the Defendants' interrogatories.
The State Court conducted the hearing on December 11, 2007.
See FTR Reporter notes 3, doc 4-1, p 12. 	Attorney Schwarz
(Defendant’s counsel in the state case) announced that Attorney
Silva (Plaintiff’s counsel in the state case) had agreed to
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dismiss the wrongful discharge claim. 	The Court granted the
portion of the Motion to Dismiss that concerned punitive damages,
leaving only the breach of contract claim and directed Attorney
Schwarz to prepare the order. 	Id., p 13. 	The Court also granted
the Motion to Compel, ordering production by December 17, 2007,
as well as payment of $404.53 in attorney fees as a sanction.
See Order dated December 19, 2007, doc 4-1, p 10. 	On December
17, 2007, the State Court entered a Stipulated Order that
dismissed the wrongful termination and punitive damage claims.
Doc 4-1, p 8.
On December 28, 2007, Defendants filed a Verified Motion for
an Order to Show Cause (“OSC”) for a failure to comply with the
Order dated December 19, 2007. 	Doc 4-1, p 1. 	Attorney Schwarz
stated in the OSC that Defendants had not received the discovery
or the attorney fees ordered. 	He requested:
WHEREFORE, Defendants pray that this Court issue an
order to show cause upon the Plaintiff David McCraney,
for:
A. Why he should not be held in contempt of court,
fined, or imprisoned;
B. Payment of additional attorney fees for this entire
matter to be paid within 10 (ten) days;
C. A dismissal of all claims brought by Plaintiff with
prejudice but allowing Defendant High Desert to pursue
whatever claims it may have against Dr McCraney in a
separate action should it so decide to pursue; and
D. Such further relief the Court deems just and proper.
The State Court set the hearing on the OSC for February 7, 2008.
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4Apparently no Certificate of Service of this discovery
request was filed by the Defendants. 	Later in the file the Court
finds a reference date of December 31, 2007.
5 	The Health Insurance Portability and
Accountability Act (HIPAA) imposes procedures
on health care workers concerning the
disclosure of medical information. 	See,
e.g., 42 U.S.C. § 1320d-2(d)(2)(The Secretary
of Health and Human Services (HHS) shall
adopt security standards and safeguards to
insure confidentiality and protect against
unauthorized disclosures). 	Consistent with
this statutory mandate, HHS promulgated rules
and regulations governing the release and
transmittal of “individually identifiable
health information” by health care providers.
See 45 C.F.R. 160.101 et seq.
Harris v. Whittington, 2007 WL 164031 at *2 (D. Kan. 2007).
Page -10-
On January 16, 2008, Plaintiff filed an Objection to
Defendant’s Second request for production of documents. 4 	Doc 5-
2, p 38. 	It states, in full:
COMES NOW, Plaintiff, by and through his attorney,
David Silva, of the Silva & Grano Law Finn and responds
[to] Defendant's Second Set of Interrogatories as
follows:
1. 	Plaintiff will produce requested documents.
2.Plaintiff will produce requested documents with the
exception of “Whom you charged" Plaintiff objects to answering
due to HIPAA 5 and confidentiality issues.
3. 	Plaintiff objects to requested information it is
not relevant to the issues.
4. 	Plaintiff objects to requested information it is
not relevant to the issues.
5. 	Plaintiff will produce requested documents.
On January 22, 2008 Defendants filed a Verified Amended
Motion for an OSC for Plaintiff’s failure to comply with the
Order of December 19, 2007. 	Doc 5-2, p 18. 	As exhibits, it
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6This copy includes page 8. 	Subsequent copies in the record
omit page 8.
7The Second set was mailed December 31, 2007.
Page -11-
contains a letter to Attorney Silva from December 27, 2007 (Doc
5-2, p 24; stating nonreceipt and asking Attorney Silva to accept
service of an OSC), a letter to Attorney Silva from January 10,
2008 (Doc 5-2, p 27; acknowledging receipt by fax of First
discovery responses and noting missing documents and incomplete
answers) and the faxed copies of the responses (Doc 5-2, p 32.)
The court set the Amended OSC for hearing on March 11, 2008. 	Doc
5-2, p 16.
On January 29, 2008, Defendants filed a Motion to file a
compulsory counterclaim. 	Doc 5-1, p 30. 	Exhibit A is the
proposed counterclaim. 	Doc 5-2, p 1. 	Exhibit 1 to the proposed
counterclaim is the Employment Agreement 6. 	Doc 5-2, p 4. 	On
this same date Defendants requested a hearing. 	Doc 5-1, p 28.
On February 4, 2008, Defendants filed a Second Motion to
Compel responses to the Second discovery request 7. 	Doc 5-1, p
20. 	Exhibit A is the Second discovery request. 	Doc 5-1, p 24.
Exhibit B is Plaintiff’s objection. 	Doc 5-1, p 24 (same as doc
5-2, p 38). 	Defendants sought a hearing. 	Doc 5-2, p 18.
The court set a hearing on the motion to file counterclaim
and the second motion to compel for March 11, 2008. 	Doc 5-2, p
17.
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On February 11, 2008, Defendant Williams filed a Motion for
Summary Judgment and request for hearing. 	Doc 5-1, p 1 and Doc
6-1, p 61.
On February 18, 2008, Plaintiff answered the counterclaim.
Doc 6-1, p 59.
On February 26, 2008, Defendants filed their Third Motion to
Compel and request for hearing. 	Doc 6-1, pp 41 and 56. 	Exhibit
A is the Second set of discovery. 	Doc 6-1, p 46 (same as Doc 5-
1, p 24). 	Exhibit B is the Plaintiff’s Objection to the Second
set of discovery. 	Doc 6-1, p 50 (same as Doc 5-2, p 38).
Exhibit C is a copy of the Plaintiff’s responses to the second
set of discovery. 	Doc 6-1 p. 51. 	In Exhibit C, Plaintiff
responded to interrogatory 1. 	The responses to interrogatories 2
through 5 is set out:
2. If you performed any work or rendered any
professional services during the period of 12 April
2007 through 11 July 2007, please state what you did,
whether you charged tor it, how much you charged, whom
you charged, and when you performed these services or
work.
Answer: Taking into account our objection to privileged
health information ,this question has been asked and
answered twice.
3. Plaintiff objects to answering this interrogatory.
4. Plaintiff objects to answering this interrogatory.
5. A copy of the lease will be sent by mail. 	Also
attached is a copy of an e-mail showing that Dr.
McCraney credentialled himself with Comphealth.
The State Court conducted a hearing on March 11, 2008. 	Doc
6-1, p 39. 	From the FTR Reporter’s Notes it is clear that the
Court admonished Plaintiff’s attorney, telling him never to
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respond to a discovery request by stating it is not relevant;
rather, the choice is either to produce or file a motion for
protective order. 	The Court granted the Second motion to compel.
Attorney Silva made no reference to the “Objection” he filed to
the Second discovery. 	The Court warned that if the discovery
were not produced, the lawsuit would go away. 	He also awarded
$500 plus taxes as a sanction.
Also on March 1, 2008, the parties submitted a stipulated
order dismissing Defendant Jerry Williams with prejudice. 	Doc 6-
1, p 38.
On March 27, 2008, the Court issued two orders. 	First, an
Order granting the Second motion to compel. 	Doc 6-1, p 36.
Second, an Order granting the motion to allow counterclaim. 	Doc
6-1, p 35.
Defendant filed a counterclaim on March 27, 2008, and an
amended counterclaim on April 3, 2008. 	Doc 6-1, pp 32 and 17.
On April 4, 2008, Defendant filed a Motion to Dismiss all of
Plaintiff’s remaining claims and to grant default on Defendant’s
counterclaim. 	The reasons cited were Plaintiff’s failure to
produce anything, including the lease promised to be mailed. 	Doc
6-1, p 14. 	Defendant requested a hearing. 	Doc 6-1, p 12. 	No
response was filed to the Motion to Dismiss, and the Court
entered an Order Granting the Motion to Dismiss on May 13, 2008.
Doc 6-1, p 10.
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Page -14-
The state court file is then strangely silent until December
5, 2008, when Defendant filed a Response to the State Court’s
letter regarding a settlement facilitator. 	Doc 6-1, p 7. 	That
letter is not in the file. 	Defendant agreed that a settlement
facilitator would be a good idea.
On January 21, 2009, the State Court issued a Notice of
Status Conference for February 3, 2009. 	Doc 6-1, p 5. 	The Court
conducted the status conference on February 3, 2009. 	See FTR
Reporter’s Notes, doc 6-1, p 3. 	Attorney Silva stated that
although he had sent the Notice of Status Conference to his
client, he had not heard back. 	The next day the Court issued a
Notice of Bench Trial for April 23, 2009. 	Doc 6-1, p 1.
On April 23, 2009, the day of the scheduled bench trial,
Plaintiff filed a motion to set aside the dismissal and default.
Doc 7-1, p 56. 	This was also the day that Defendant filed its
Requested Findings of Fact and Conclusions of Law. 	Doc 7-1, p
51. 	The FTR Reporter’s Notes for this hearing were filed May 14,
2009. 	Doc 7-1, p 48. 	The State Court did not conduct the bench
trial on damages. 	Instead, the Notes indicate the Court heard
and granted the Motion to set aside the default on the
counterclaim, but denied the motion to set aside dismissal of the
complaint. 	He also required Plaintiff to pay all Defendant’s
costs and ordered production of all documents within 30 days. 	If
the payments were not made or the discovery nor produced, the
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Page -15-
default would be reinstated. 	At this point, Attorney Silva
argued that Plaintiff could not produce patient names because of
HIPAA. 	The Court responded simply that he had to produce.
On April 30, 2009 Plaintiff filed an Application for Fees
and Costs. 	Doc 7-1, p 37.
On May 1, 2009, Plaintiff filed both a Certificate of
Compliance, doc 7-1, p 31, and a Motion to Extend Time to
Disclose Certain Documents, doc 7-1, p 32.
On May 4, 2009 Plaintiff objected to the amounts of fees and
costs requested. 	Doc 7-1, p 29. 	On the same date he also
objected (for the second time) to Discovery Request 2 because of
HIPAA regulations. 	Doc 7-1, p 27.
On May 11, 2009 Defendant replied to Plaintiff’s objection
to fees and costs. 	Doc 7-1, p 24.
On May 13, 2009, the Court entered its order granting in
part and denying in part Plaintiff’s Motion to Set Aside. 	Doc 7-
1, p 22.
On May 15, 2009 Defendant filed a response to Plaintiff’s
Certificate of Compliance and Motion for an Extension, arguing
that they were incompatible. 	Doc 7-1, p 20.
On June 19, 2009 Defendant filed its Motion to Reinstate
Sanctions for Failure to Make Discovery. 	Doc 7-1, p 15. 	The
grounds set forth in the Motion were that Plaintiff has failed to
obey court orders regarding production, that answers were
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8“In reviewing his bank account statements, they show very
large cash transfers of $28,795 and $11,678 from an undisclosed
account. 	This undisclosed account must be revealed in accordance
with Discovery Request 2(b) of the First Set of Interrogatories
and Requests for Production of Documents... Here, there is
obviously another account which McCraney has the ability to
withdraw funds [sic] and he failed to provide it.” 	Doc 7-1, p 8.
9 High Desert claimed in its counterclaim that these alleged
behaviors constitute violations of the employment contract
between the parties.
Page -16-
incomplete, the answers were handwritten, that Plaintiff had
failed to disclose financial accounts 8 and that “McCraney
continues to assert HIPAA even though that claim was previously
rejected by this Court on the Second Motion to Compel, and Third
Motion to Compel and by this Court's 13 May order.” 	Id., p 7.
Exhibit A to the Motion is a notarized statement from Plaintiff
that he has not had sexual relations with any employee of High
Desert nor has he induced any employee to leave that company. 9
Doc 7-1, p 10. 	Defendant argued that this was not the question
asked. 	Exhibit B is a copy of bank statements produced by
Plaintiff. 	Doc 7-1, p 12. 	Defendant argued that the bank
statements showed two transfers from undisclosed financial
accounts. 	Defendant also asked for a hearing on both the
attorney fee request and the Motion to Reinstate. 	Doc 7-1, p 1.
Plaintiff did not respond to this Motion.
The Court set August 31, 2009 to hear both the attorney fee
issue and the Motion to Reinstate. 	Doc 8-1, p 47. 	And it
conducted the hearing on that date. 	See FTR Reporter’s Notes,
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10 The counterclaim asked for damages to be proved at trial.
Page -17-
doc 8-1, p 43. 	It is not entirely clear from these Notes what
exactly was said. 	Attorney Schwarz made references to transfers
from undisclosed bank accounts. 	Attorney Silva stated that he
was unaware of those accounts because he had not spoken to his
client. 	Schwarz also referred to the failure to provide patient
information and represented that the issue had been dealt with in
previous orders. 	The Court then granted Defendant’s request for
attorney fees and costs and reinstated the discovery sanctions
(that is, struck Plaintiff’s answer to the counterclcaim).
On September 9, 2009 the Court entered two orders: one
allowing interim attorney fees for Defendant, doc 8-1, p 41; and
one Reinstating Sanctions and Judgment, doc 8-1, p 39. 	Attorney
Silva never asked for a reconsideration of either order.
On October 15, 2009, the Court then set a bench trial for
February 10, 2010 10 . 	Doc 8-1, p 34. 	Several pleadings follow in
the state case, but are not of particular relevance. 	Plaintiff
filed a case under Title 11 on December 10, 2009.
On January 13, 2010, Plaintiff removed the case to the
United States Bankruptcy Court. 	The Miguel County Court Manager
for the District Court certified the record of the state case and
it was filed for record in this adversary proceeding on January
13, 2010. 	The Bankruptcy Court conducted a status conference on
February 3, 2010. 	Plaintiff stated his intention to file a
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11 Plaintiff is only seeking to set aside the September 9,
2009 order that, among other things, declared that Defendant was
entitled to a default judgment on its counterclaim against
Plaintiff. 	It does not seek to disturb the May 13, 2008 order
that dismissed all of Plaintiff’s claims with prejudice.
Page -18-
motion to set aside the default, and this Court set briefing
deadlines. 	Plaintiff filed the Motion to Set Aside 11 on March
10, 2010, and Defendant responded on April 9, 2010.
Plaintiff’s argument is that the State Court reinstated the
default based on incorrect allegations that he had failed to
disclose bank accounts and other grounds that do not support the
extreme remedy of default. 	Doc 17, p 2.
Attached to Plaintiff’s motion to set aside is an Affidavit
of David McCraney. 	He states under oath that he responded to
discovery requests in reliance on his attorney’s advice and with
the understanding that they were sufficient, including the
handwritten responses to the first set, the answers to the second
set, the bank statements, and other documents provided and the
affidavit he signed. 	He further states that Attorney Silva did
not provide him with copies of pleadings other than the original
complaint and counterclaim. 	He received a copy of the notice of
hearing on the Motion to Reinstate Sanctions which was set for
August 31, but he never was given a copy of the Motion itself.
McCraney called Attorney Silva after receiving the notice. 	Silva
told him that the hearing was only to make him pay for High
Desert’s expenses leading up to the April 23, 2009 damages trial.
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Page -19-
McCraney was already scheduled to be on vacation at the time of
the August 31 hearing and Silva told him there was no point in
his attending the hearing because there was no way to dispute the
sanctions. 	Silva did not tell him that the Court would consider
reinstating the default judgment.
After the hearing, Silva told McCraney that High Desert had
informed the judge that he had undisclosed bank accounts.
McCraney now understands that Defendant represented to the Court
that he had made transfers of $28,795 and $11,678 from
undisclosed accounts. 	These representations were false. 	First,
the transfers were only for $8,032.53 and $3,000.00, neither from
an undisclosed account. 	The first was a transfer from his
business account which had been disclosed, and the second was a
simple deposit of a distribution from a business venture. 	The
higher amounts represented to the Court were the balances in the
account after the transfers.
With regard to the patient information disclosures, McCraney
thought that if he produced this information it would become part
of the public record and its disclosure would violate federal
HIPAA law and expose him to civil liability, actions against his
license, and even criminal charges. 	If Attorney Silva had ever
discussed this issue with Attorney Schwarz, that fact had never
been communicated to him. 	Consequently, he was awaiting a ruling
from the judge on the objection to disclosure that he knew his
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Page -20-
attorney filed, believing the judge would seal the record or
allow appropriate redaction or declare that he could produce it
without liability. 	McCraney has the patient information on hand
and is prepared to release it as soon as he obtains a ruling.
McCraney could and would have explained all of this to the judge
on August 31, 2009, if he had been present.
OTHER FINDINGS
This Court has further observations about Attorney Silva’s
representation of Plaintiff. 	His complaint alleged breach of
contract and wrongful discharge and sought actual and punitive
damages, attorney’s fees and costs. 	It named both High Desert
and Jerry Williams the owner of High Desert. 	The Complaint does
not distinguish between the Defendants and does not specify who
the contract was with or which Defendant did what action. 	He
failed to attach a copy of the contract at issue. 	He then filed
a subpoena for Plaintiff’s personnel file that did not allow
sufficient time under the rule to respond. 	Defendant objected
and did not produce. 	There is no indication he ever renewed his
request, sought a ruling or obtained the file. 	Defendants’
Motion to Dismiss points out that under the American Rule,
Plaintiff was not entitled to attorney fees. 	It also correctly
argued that a plaintiff must allege and prove wilful, wanton,
malicious, reckless, oppressive or fraudulent behavior to obtain
punitive damages. 	The complaint alleged none. 	Defendant also
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Page -21-
argued that to state a claim for wrongful discharge a plaintiff
must allege a protected activity and because of the employee’s
participation in that activity his employment was terminated.
The complaint alleged no protected activity. 	Silva never
responded to the Motion to Dismiss.
Silva’s response to the Motion to Compel was that Plaintiff
“is currently compiling” the discovery, it was difficult, and
Plaintiff anticipated he could produce it. 	This is not a proper
response. 	If his client could not timely respond to the
discovery he should have alerted counsel, sought an agreed upon
extension, or filed a motion for extension or protective order
before the deadline to respond.
Before the first hearing, Silva agreed to withdraw the
wrongful discharge claim. 	At the first hearing, the Court struck
the punitive damage request almost without discussion, ordered
compliance with discovery and assessed a fine.
The Defendants’ Motion to File Counterclaim alleges that
Silva did not respond when asked for concurrence in the motion.
Then Silva answered the counterclaim before any order was filed
allowing it to be filed.
Silva never filed a response to the Motion for Summary
Judgment.
Plaintiff’s January 16, 2008 objection to Defendants’ Second
set of discovery is simply a listing of what would and would not
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12 Perhaps, based on McCraney’s affidavit this should say
“Plaintiff should have been warned.”
Page -22-
be produced. 	Some items would be, some would not because they
were “irrelevant” and some because of HIPAA. 	There is no relief
requested in the objection. 	Specifically, it does not ask for a
protective order.
At the next hearing, the State Court pointed out that he
could not determine if an interrogatory was relevant unless
either it was answered or dealt with through a motion for a
protective order. 	The Court ordered production, and Silva did
not raise HIPAA restrictions.
In the March 20, 2008 order, the Court ordered: “Plaintiff
is cautioned by this Court to his failure to comply fully and
completely with discovery may result in dismissal of his lawsuit
with prejudice.” 	So, not only was Plaintiff warned 12 , Silva was
definitely warned that things had better shape up.
The sole remaining Defendant High Desert filed the motion to
dismiss and for default on April 4, 2008. 	Silva never responded.
In the Order granting this motion, the Court stated “The Court
has reviewed the motion and there being no response in opposition
thereto finds the motion well taken.”
Silva did not respond (in the record) to the Court’s letter
regarding a settlement facilitator. 	When the Court then set a
status conference, Silva stated that he has not had contact with
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Page -23-
his client. 	He did not state, however, that he made any attempt
to reach his client.
Defendant filed its Motion to Reinstate Sanctions for
Failure to Make Discovery on June 19, 2009. 	The matter came on
for hearing on August 31, 2009. 	The allegations of hidden bank
accounts should have been very troubling to Silva and sometime
between June 19, 2009 and August 31, 2009, he should have made
sure that he knew whether there were such accounts and why they
had not been disclosed. 	Instead, at the hearing he only stated
he was unaware of them.
Finally, after not filing a protective order based on HIPAA,
Silva never again brought the issue squarely before the Court.
It was only after the Court ruled that he made indirect comments
about privacy laws.
This Court finds that Attorney Silva was the root of the
problem in this case. 	Not only did he keep the client
uninformed, he affirmatively lead him to believe that everything
was going smoothly. 	There is nothing in the extensive state
court record that suggests Plaintiff intentionally lied or
misrepresented anything or failed to disclose anything purposely.
This Court finds that Plaintiff did not default willfully. 	He
has his attorney’s behavior as a valid excuse for the defaults.
The Court also finds that Defendant has not demonstrated any
prejudice if the default judgment were set aside, other than
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Page -24-
attorney fees and a time delay. 	The Court can easily remedy that
by conditioning any relief on the payment of Defendant’s fees.
THE LAW
Removal of a case to Bankruptcy Court is governed by Federal
Rule of Bankruptcy Procedure 9027.
A notice of removal shall be filed with the clerk for
the district and division within which is located the
state or federal court where the civil action is
pending. 	The notice shall be signed pursuant to Rule
9011 and contain a short and plain statement of the
facts which entitle the party filing the notice to
remove, contain a statement that upon removal of the
claim or cause of action the proceeding is core or
non-core and, if non-core, that the party filing the
notice does or does not consent to entry of final
orders or judgment by the bankruptcy judge, and be
accompanied by a copy of all process and pleadings.
Fed.R.Bankr.P. 9027(a)(1). 	“Promptly after filing the notice of
removal, the party filing the notice shall serve a copy of it on
all parties to the removed claim or cause of action.” 	Id., §(b).
Promptly after filing the notice of removal, the party
filing the notice shall file a copy of it with the
clerk of the court from which the claim or cause of
action is removed. 	Removal of the claim or cause of
action is effected on such filing of a copy of the
notice of removal. 	The parties shall proceed no
further in that court unless and until the claim or
cause of action is remanded.
Id., §(c). 	“All injunctions issued, orders entered and other
proceedings had prior to removal shall remain in full force and
effect until dissolved or modified by the court.” 	Id., §(i).
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13 The doctrine takes its name from two Supreme Court cases,
Rooker v. Fidelity Trust Co., 263 U.S. 413 (1923), and District
of Columbia Court of Appeals v. Feldman, 460 U.S. 462 (1983).
Page -25-
The Rooker-Feldman 13 doctrine is not an issue in removal.
The Rooker-Feldman doctrine ... provides that only the
[United States] Supreme Court has jurisdiction to hear
appeals from final state court judgments. 	Bear v.
Patton, 451 F.3d 639, 641 (10th Cir. 2006). 	Proper
removal does not constitute an appeal, de facto or
otherwise, of the state court proceedings but a
continuation of them. See Freeman v. Bee Mach. Co., 319
U.S. 448, 452, 63 S.Ct. 1146, 87 L.Ed. 1509 (1943)
(“The jurisdiction exercised on removal is original not
appellate.”). 	Thus, the Rooker -Feldman doctrine has
no application to a properly removed case where, as
here, there is no attack on a separate and final
state-court judgment.
Jenkins v. MTGLQ Investors, 218 Fed.Appx. 719, 723-24 (10 th Cir.
2007)(Unpublished.)
The federal court takes a removed case “as it finds it on
removal.” 	Butner v. Neustadter, 324 F.2d 783, 785 (9 th Cir.
1963). 	Therefore, if a default judgment is entered before
removal, it is treated as a validly rendered default judgment in
a federal proceeding. 	Id. at 785-86. 	After removal, federal law
rather than state law governs the future course of the
proceedings, notwithstanding any orders or judgments issued prior
to removal. 	Granny Goose Foods, Inc. v. Brotherhood of Teamsters
& Auto Truck Drivers Local No. 70 of Alameda County, 415 U.S.
423, 437 (1974). 	Therefore, it is proper for a movant in a
removed case to file a motion to set aside a default in the
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14 This rule is made applicable to bankruptcy by
Fed.R.Bankr.P. 9024.
Page -26-
federal case under Fed.R.Civ.P. 60(b) 14 . 	Butner, 324 F.2d at
786. 	Indeed, the federal court can perform any act that it could
have as if the case originated in federal court. 	See Maseda v.
Honda Motor Co., Ltd., 861 F.2d 1248, 1252 (11 th Cir. 1988)(A
federal court may dissolve or modify injunctions, orders, and all
other proceedings which have taken place in state court prior to
removal. 	A state court summary judgment did not foreclose
modification of the judgment in federal court.); Preaseau v.
Prudential Ins. Co. of America, 591 F.2d 74, 79 (9 th Cir. 1979)
(Court compares removal to the situation where a case is
reassigned to a successor judge after denial of a motion to
dismiss or a motion for summary judgment. 	There would be no
abuse of discretion in overruling the prior judge. 	The practice
reflects the rule that interlocutory rulings are subject to
reconsideration by the court at any time.)(Citations omitted.);
Hawes v. Cart Products, Inc., 386 F.Supp.2d 681, 686 and 689 (D.
S.C. 2005)(The weight of authority allows a defendant to remove a
case to federal court after entry of a default judgment. 	It is
well established that a federal district court has jurisdiction
to consider a motion for relief from an order of default entered
in state court.)(Citations omitted.); Laney v. Schneider Nat’l
Carriers, Inc., 259 F.R.D. 562, 564 (N.D. Okla. 2009)(A federal
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Page -27-
court is free to reconsider a state court order and to treat the
order as it would any interlocutory order it might itself have
entered.)(Citations omitted.)
This Court will therefore look to federal cases and their
interpretations of the Federal Rules of Civil Procedure to
determine whether Plaintiff’s motion to set aside should be
granted. 	Fed.R.Civ.P. 55(c) states “Setting Aside a Default or a
Default Judgment. 	The court may set aside an entry of default
for good cause, and it may set aside a default judgment under
Rule 60(b).” 	Fed.R.Civ.P. 60(b) states:
(b) Grounds for Relief from a Final Judgment, Order, or
Proceeding. 	On motion and just terms, the court may
relieve a party or its legal representative from a
final judgment, order, or proceeding for the following
reasons:
(1) mistake, inadvertence, surprise, or excusable
neglect;
(2) newly discovered evidence that, with reasonable
diligence, could not have been discovered in time to
move for a new trial under Rule 59(b);
(3) fraud (whether previously called intrinsic or
extrinsic), misrepresentation, or misconduct by an
opposing party;
(4) the judgment is void;
(5) the judgment has been satisfied, released or
discharged; it is based on an earlier judgment that has
been reversed or vacated; or applying it prospectively
is no longer equitable; or
(6) any other reason that justifies relief.
The Tenth Circuit has stated that Rule 60(b) should be liberally
construed when substantial justice will be served. 	Jennings v.
Rivers, 394 F.3d 850, 856 (10 th Cir. 2005).
Rule 60(b)(1) provides that “[o]n motion and upon such
terms as are just, the court may relieve a party or a
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Page -28-
party's legal representative from a final judgment ....
for the following reasons: (1) mistake, inadvertence,
surprise, or excusable neglect....” It “is an
extraordinary procedure” which “ ‘seeks to strike a
delicate balance between two countervailing impulses:
the desire to preserve the finality of judgments and
the incessant command of the court's conscience that
justice be done in light of all the facts.’ ” 	Cessna
Fin. Corp.[v. Bielenberg Masonry Contracting, Inc.],
715 F.2d [1442] at 1444 [10 th Cir. 1983)](quoting Seven
Elves, Inc. v. Eskenazi, 635 F.2d 396, 401 (5th
Cir.1981) (additional internal quotation marks
omitted)).
Id.
The Tenth Circuit set out some rules for dealing with Rule
60(b) motions:
Under Rule 60(b), which standards Rule 55(c) invokes
when a party is seeking relief from a default judgment,
a court may set aside a final judgment “[o]n motion and
upon such terms as are just.” 	Fed.R.Civ.P. 60(b). 	The
several reasons listed in the Rule include setting
aside for: “mistake, inadvertence, surprise, or
excusable neglect,” id. at (b)(1), or for: “fraud
(whether heretofore denominated intrinsic or
extrinsic), misrepresentation, or other misconduct of
an adverse party.” 	Id. at (b)(3). 	It is also
established that a movant must have a meritorious
defense as well as a good reason to set aside the
default. 	Greenwood Explorations, Ltd., 837 F.2d at
427; 	Cessna Fin. Corp. v. Bielenberg Masonry
Contracting, Inc., 715 F.2d 1442, 1445 (10th Cir.
1983); In re Stone, 588 F.2d 1316, 1319 (10th Cir.
1978).
United States v. Timbers Preserve, Routt County, Colorado, 999
F.2d 452, 454 (10 th Cir. 1993)(Footnote omitted).
Courts have established three requirements which must
be met when setting aside a default judgment under Rule
60(b): (1) the moving party's culpable conduct did not
cause the default; (2) the moving party has a
meritorious defense; and (3) the non-moving party will
not be prejudiced by setting aside the judgment. 	See
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Page -29-
Meadows, 817 F.2d at 521; INVST Fin. Group, Inc. v.
Chem-Nuclear Systems, Inc., 815 F.2d 391, 398 (6th
Cir.), cert. denied, 484 U.S. 927, 108 S.Ct. 291, 98
L.Ed.2d 251 (1987); 6 Moore, supra, ¶ 55.10[1]. 	The
Second Circuit considers the first factor in terms of
whether the default was willful. 	Wagstaff-El v.
Carlton Press Co., 913 F.2d 56, 57 (2d Cir. 1990),
cert. denied, 499 U.S. 929, 111 S.Ct. 1332, 113 L.Ed.2d
263 (1991); Davis, 713 F.2d at 915. 	Generally a
party's conduct will be considered culpable only if the
party defaulted willfully or has no excuse for the
default. 	6 Moore, supra, ¶ 55.10[1]; see also Meadows,
817 F.2d at 521 (receiving actual notice and failing to
respond is culpable conduct).
Id.
The determination of whether neglect is excusable “is
at bottom an equitable one, taking account of all
relevant circumstances surrounding the party's
omission.” 	Pioneer Inv. Servs. Co., 507 U.S. at 395,
113 S.Ct. 1489 (discussing application of the excusable
neglect standard of Fed. R. Bankr.P. 9006(b)(1)).
Relevant factors include “the danger of prejudice to
the [opposing party], the length of the delay and its
potential impact on judicial proceedings, the reason
for the delay, including whether it was within the
reasonable control of the movant, and whether the
movant acted in good faith.” 	Id. 	“‘[F]ault in the
delay remains a very important factor-perhaps the most
important single factor-in determining whether neglect
is excusable.’” 	United States v. Torres, 372 F.3d
1159, 1163 (10th Cir. 2004) (quoting City of Chanute v.
Williams Natural Gas Co., 31 F.3d 1041, 1046 (10th Cir.
1994)).
Jennings, 394 F.3d at 856-57. 	The plain language of the rule
allows relief for attorney negligence. 	Id. at 856 n. 5.
Finally, the Tenth Circuit has ruled that default judgments are
“a harsh sanction” and that there is a strong policy favoring
resolution of disputes on their merits. 	Ruplinger v. Rains (In
re Rains), 946 F.2d 731, 732 (10 th Cir. 1991). 	Because it is
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Page -30-
such a harsh sanction, due process requires that the default be
the result of willfulness, bad faith, or fault. 	Id. at 733.
Default judgments deprive a litigant his or her day in court and
are appropriate only where a lesser sanction would not serve the
interest of justice. 	Id. (Citation omitted.) 	Accord Sun v.
Board of Trustees of the University of Illinois, 473 F.3d 799,
811-12 (7 th Cir.), cert. denied, 551 U.S. 1114 (2007)(A default
judgment is a “weapon of last resort” that is appropriate only
when a party willfully disregards pending litigation. 	Default
gives the other party a windfall; if there is a problem with
discovery caused by an attorney the preferred course is to assess
increasing penalties on the attorney before defaulting the
client.)
DISCUSSION
Under Timbers Preserve, Routt County, 999 F.2d at 454, the
Plaintiff must establish three conditions to set aside the
default judgment: (1) his culpable conduct did not cause the
default; (2) he has a meritorious defense; and (3) High Desert
will not be prejudiced by setting aside the judgment.
As to the first condition (culpability), this Court found
above that Plaintiff was not culpable. 	The default was actually
caused by both 1) attorney negligence or misconduct or failures,
and 2) misrepresentations made to the State Court that impacted
its decision. 	The Court finds that, fundamentally, Defendant’s
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Page -31-
attorney, in his zealousness, overstated the facts and
Plaintiff’s attorney underzealously did not bring to light
certain facts to either the State Court or his client.
Specifically, Defendant stated for a certainty that Plaintiff had
undisclosed accounts from which he transferred $28,705 and
$11,678. 	Silva did not defend his client by disagreeing; instead
he merely stated he knew nothing about them, which is very
different from an affirmative statement that there were no other
accounts. 	In fact, according to Plaintiff’s affidavit, those
were the ending balances in the account after a transfer of
$8,032.53 from a disclosed account and a deposit (not transfer)
from a Florida business (not Plaintiff’s business) of $3,000.
This Court is not finding that the misrepresentations were
intentional (it has insufficient information to make that
determination), but the misrepresentations did influence the
State Court.
Second, this Court finds that the State Court was mislead by
statements that suggested it had previously ruled on the merits
of a motion regarding HIPAA disclosure. 	“McCraney continues to
assert HIPPA even though that claim was previously rejected by
this Court on the Second Motion to Compel, and Third Motion to
Compel and by this Court's 13 May order.” 	Doc 7-1, p 7. 	First,
this Court finds that Attorney Silva never properly brought the
HIPAA motion before the State Court. 	This Court has reviewed the
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15 45 C.F.R. § 164.512 sets out standards for disclosures of
individually identifiable health information. 	Subsection (e)
states:
(e) Standard: Disclosures for judicial and administrative
proceedings.
(1) Permitted disclosures. A covered entity may disclose
protected health information in the course of any judicial or
administrative proceeding:
(i) In response to an order of a court or administrative
tribunal, provided that the covered entity discloses only the
protected health information expressly authorized by such order;
or
(continued...)
Page -32-
state file and finds no notice of a hearing on the motion.
Second, as no party has provided transcripts, the Court does not
know the content of the exact arguments made to the State Court,
but can assume certain things from the orders that resulted from
the hearings. 	There were few references to HIPAA in the FTR
Reporter’s Notes. 	Third, the Order regarding the Second Motion
to Compel, March 20, 2008, has no specific reference to HIPAA.
Doc 6-1, p 36. 	There is only a blanket order to answer each and
every interrogatory fully and completely in a non-evasive manner
and to produce all documents requested. 	Id. 	Fourth, “the May 13
order”, doc 7-1, p 22, has no specific reference to HIPAA. 	The
order states: “Plaintiff shall answer all discovery requests
within thirty (30) days of this order and the failure to comply
is grounds to reinstate the discovery sanction and enter a
default against Plaintiff and in favour of Defendant.” 	And,
finally, the state court record does not contain an order dealing
with HIPAA issues 15 . 	“There are three ways in which Defendant
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15 (...continued)
(ii) In response to a subpoena, discovery request, or other
lawful process, that is not accompanied by an order of a court or
administrative tribunal, if:
(A) The covered entity receives satisfactory assurance, as
described in paragraph (e)(1)(iii) of this section, from the
party seeking the information that reasonable efforts have been
made by such party to ensure that the individual who is the
subject of the protected health information that has been
requested has been given notice of the request; or
(B) The covered entity receives satisfactory assurance, as
described in paragraph (e)(1)(iv) of this section, from the party
seeking the information that reasonable efforts have been made by
such party to secure a qualified protective order that meets the
requirements of paragraph (e)(1)(v) of this section.
(iii) For the purposes of paragraph (e)(1)(ii)(A) of this
section, a covered entity receives satisfactory assurances from a
party seeking protecting health information if the covered entity
receives from such party a written statement and accompanying
documentation demonstrating that:
(A) The party requesting such information has made a good faith
attempt to provide written notice to the individual (or, if the
individual's location is unknown, to mail a notice to the
individual's last known address);
(B) The notice included sufficient information about the
litigation or proceeding in which the protected health
information is requested to permit the individual to raise an
objection to the court or administrative tribunal; and
(C) The time for the individual to raise objections to the court
or administrative tribunal has elapsed, and:
(1) No objections were filed; or
(2) All objections filed by the individual have been resolved by
the court or the administrative tribunal and the disclosures
being sought are consistent with such resolution.
(iv) For the purposes of paragraph (e)(1)(ii)(B) of this section,
a covered entity receives satisfactory assurances from a party
seeking protected health information, if the covered entity
receives from such party a written statement and accompanying
documentation demonstrating that:
(A) The parties to the dispute giving rise to the request for
information have agreed to a qualified protective order and have
presented it to the court or administrative tribunal with
jurisdiction over the dispute; or
(B) The party seeking the protected health information has
(continued...)
Page -33-
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15 (...continued)
requested a qualified protective order from such court or
administrative tribunal.
(v) For purposes of paragraph (e)(1) of this section, a qualified
protective order means, with respect to protected health
information requested under paragraph (e)(1)(ii) of this section,
an order of a court or of an administrative tribunal or a
stipulation by the parties to the litigation or administrative
proceeding that:
(A) Prohibits the parties from using or disclosing the protected
health information for any purpose other than the litigation or
proceeding for which such information was requested; and
(B) Requires the return to the covered entity or destruction of
the protected health information (including all copies made) at
the end of the litigation or proceeding.
(vi) Nothwithstanding paragraph (e)(1)(ii) of this section, a
covered entity may disclose protected health information in
response to lawful process described in paragraph (e)(1)(ii) of
this section without receiving satisfactory assurance under
paragraph (e)(1)(ii)(A) or (B) of this section, if the covered
entity makes reasonable efforts to provide notice to the
individual sufficient to meet the requirements of paragraph
(e)(1)(iii) of this section or to seek a qualified protective
order sufficient to meet the requirements of paragraph (e)(1)(iv)
of this section.
(2) Other uses and disclosures under this section. The provisions
of this paragraph do not supersede other provisions of this
section that otherwise permit or restrict uses or disclosures of
protected health information. (Emphasis added.)
Page -34-
may comply with 45 C.F.R. § 164.512(e)(1): ‘[O]btaining a court
order,’ ‘sending a subpoena or discovery request where plaintiff
has been given notice of the request,’ or ‘sending a subpoena or
discovery request where reasonable effort has been made to obtain
a qualified protective order.’” 	Croskey v. BMW of North America,
2005 WL 4704767 at *2 (E.D. Mich. 2005). 	None of these three
methods was used in this case. 	Plaintiff therefore properly
worried about disclosing the information. 	HIPAA calls for
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16 Generally, clients are held responsible and accountable
for the acts and omissions of their attorneys. 	Pioneer Inv.
Services Co. v. Brunswick Assoc. Ltd., 507 U.S. 380, 396 (1993).
However, at least four circuit courts of appeals have adopted the
rule that a client is not responsible for an attorney’s gross
negligence. 	Community Dental Services v. Tani, 282 F.3d 1164,
1169 (9 th Cir. 2002)(Ninth circuit joins the Third, Sixth and
Federal Circuits allow Rule 60(b) relief for an attorney’s gross
negligence.) 	See also D’Angelo v. State Farm Fire & Cas. Co., 32
Fed.Appx. 604, 605 (2nd Cir. 2002)(Gross negligence of attorney
may be grounds for Rule 60(b)(6) relief if exceptional
circumstances are shown such as mental disorder or misconduct
such that there was a “constructive disappearance” or inability
to provide adequate representation.)
Page -35-
potentially severe penalties for its violation. 	See 42 U.S.C. §
1320d-5.
The two factors listed above easily implicate either Rule
60(b)(1) (mistake, inadvertence, surprise, or excusable neglect)
or Rule 60(b)(3) (misrepresentation). 	Alternatively, the quality
of the attorney’s representation may implicate Rule 60(b)(6) 16
(any other reason that justifies relief.) 	Therefore, condition 1
is satisfied. 	Compare Cashner v. Freedom Stores, Inc., 98 F.3d
572, 578 (10 th Cir. 1996)(Rule 60(b) relief is not available when
a party takes deliberate action upon advice of counsel and
misapprehends the consequences of the action.)(Citations
omitted.)
Condition 2 requires a meritorious defense. 	At the stage of
ruling on a Rule 60(b) motion, the movant is not required to show
that he will actually prevail on the merits if the judgment is
set aside. 	Brendle’s Inc. v. Dazey Corp. (In re Brendle’s Inc.),
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222 B.R. 770, 772 (Bankr. M.D. N.C. 1997). 	Rather, there must be
allegations under which, if true, the movant could prevail on
some or all of his claims. 	Id. at 773.
The counterclaim in this case appears at doc 6-1, p 32. 	It
is a bare bones complaint that alleges the existence of a
contract; a breach of the contract for four reasons: 1) failure
to act in good faith, 2) failure to carry out duties, 3)
Plaintiff’s spending the night with an employee and 4) the
employment of a High Desert employee; resulting loss; and a non-
competition agreement. 	The contract is the same contract that
Plaintiff sued on. 	Under Plaintiff’s version Defendant breached
the contract. 	Plaintiff claims that he gave written notice of
his intent to leave employment as allowed by paragraph 9(b), and
that Defendant fired him the next day in violation of paragraph
9(b) causing loss. 	The facts are not intensely complex or
disputed. 	The judgment will probably be based in major part on a
construction of the contract. 	The Court finds that Plaintiff’s
complaint itself shows a sufficient meritorious defense to the
counterclaim in this case. 	Condition 2 is met.
Condition 3 requires that High Desert not be prejudiced by
setting aside the judgment. 	As noted above, any financial
prejudice for attorney fees can be remedied by requiring
Plaintiff to pay Defendant’s fees and costs for dealing with the
Motion to Set Aside. 	There was some delay from Plaintiff’s and
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Plaintiff’s attorney’s conduct. 	Delay alone, however, is not
prejudice. 	SLC Turnberry, Ltd. v. The American Golfer, 240
F.R.D. 50, 55 (D. Ct. 2007).
CONCLUSION
For the reasons set forth above, the Court will issue an
Order Granting Plaintiff’s Motion to Set Aside Default Judgment
(doc 17) and set a pretrial conference.
Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: 	September 29, 2010
Copies to:
William F. Davis
6709 Academy NE, Suite A
Albuquerque, NM 87109
Clifford C Gramer, Jr
3733 Eubank Blvd NE
Albuquerque, NM 87111-3536
Case 10-01006-s Doc 24 Filed 09/29/10 Entered 09/29/10 14:34:08 Page 37 of 37