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Obtaining Relief from a Default Final Judgment in Bankruptcy
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Obtaining Relief from a Default Final Judgment in Bankruptcy

November 27, 2013 Banking & Financial Services Industry Legal Blog

Reading Time: 3 minutes

What do you do when a client comes to you stating that a default final judgment was entered against them and they want out of it?  The answer is you move to set it aside for cause, which is a viable plan of action under state law as well as federal bankruptcy law.  Entry of a final judgment after default is not necessarily the end of the road for your client.  In certain circumstances, it may just be the beginning.

Rule 55(c), F. R. Civ. P., states that a court may set aside an entry of default for good cause in accordance with Rule 60(b).  Rule 60(b)(1), F. R. Civ. P., states that the court may relieve a party from a final judgment for mistake, inadvertence, surprise, or excusable neglect and section (b)(6) allows for any other reason that justifies relief.

To establish mistake, inadvertence, or excusable neglect under Rule 60(b)(1), a defaulting party must show that: “(1) it had a meritorious defense that might have affected the outcome; (2) granting the motion would not result in prejudice to the non-defaulting party; and (3) a good reason existed for failing to reply to the complaint.”  In re Worldwide Web Systems, Inc. d.b.a. Teleware Global Corp., 328 F.3d 1291, 1295 (11th Cir. 2003) (citing E.E.O.C. v. Mike Smith Pontiac GMC, Inc., 896 F.2d 524, 528 (11th Cir. 1990)).  “There is a strong policy of determining cases on their merits and we therefore view defaults with disfavor.”  Id. (emphasis added). Unless it appears that no injustice results from the default, relief from a judgment of default should be granted. See Fed. Rules Bankr. Proc. 7055, 9024; Fed. Rules Civ. Proc. 55(c), 60(b); In re OCA, Inc., 551 F.3d 359 (5th Cir. 2008).

In United States v. Varmado, No. 08-13402, 2009 WL 1845583, at *2 (11th Cir. June 29, 2009), Appellant was seeking relief from an order of the lower court denying her motion to set aside default judgment.  Appellant argued that, not only did she have the meritorious defenses of payment and the government would not be prejudiced because it was already receiving payment, but that she had a good reason for failing to timely respond to the complaint.  Id. at *3.  Appellant argued that distractions in her personal life and slow mail was excusable neglect and that the court should allow her additional time to respond since it was her first request for time and the government had already requested and been granted multiple extensions of time.  Id. at *4.  The Court stated that the entry of judgment by default is a drastic remedy and should be resorted to only in extreme situations.  Id.  Appellant was pro se, delay was slight, there was no evidence of willful misconduct and she was able to establish a meritorious defense.  Id.  In light of the facts, the Court held that denial of her request to set aside the default judgment was an abuse of discretion.  Id.

In light of the above-referenced rules and bankruptcy case holdings, it is clear that there is a mechanism for setting aside default final judgments in bankruptcy.  While courts are reluctant to step backwards in a matter, under the right set of circumstances a party may be relieved of the judgment and allowed an opportunity for meaningful participation in the action.

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