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Valley Food Svcs., LLC v. Schoenhofer: BANKRUPTCY - default judgment not set aside; movant ignored rules & proceedings

1 The Honorable Jerry W. Venters, Chief Judge, United States Bankruptcy
Court for Western District of Missouri.
United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
______
No. 07-6009WM
______
In re: *
*
Valley Food Services, LLC, *
*
Debtor. *
*
Valley Food Services, LLC, *
*
PlaintiffAppellee, * Appeal from the United States
* Bankruptcy Court for the Western
v. * District of Missouri
*
Peggy J. Schoenhofer *
*
DefendantAppellant. *
______
Submitted: September 12, 2007
Filed: October 11, 2007
______
Before KRESSEL, Chief Judge, MAHONEY and McDONALD, Bankruptcy Judges.
______
McDONALD, Bankruptcy Judge.
Peggy Schoenhofer (Schoenhofer) appeals from the bankruptcy courts1 order
denying her motion to set aside a default judgment entered against her. We affirm.
2 The case was converted to a proceeding under Chapter 7 sometime after
Valley Food filed the Adversary Complaint, and Maureen Scully, the Chapter 7
Trustee, was substituted as the Plaintiff.
-2-
I.
Schoenhofer owned and operated a Kentucky Fried Chicken franchise in
Wichita, Kansas. Debtor, Valley Food Services, LLC (Valley Food), entered into
a distribution agreement with Schoenhofer whereby Valley Food agreed to provide
Schoenhofer with food products for her Kentucky Fried Chicken restaurant (the
Distribution Agreement).
Valley Food filed a petition for relief under Chapter 11 of the Bankruptcy Code
on February 14, 2006. Valley Food, as the debtor-in-possession, filed an adversary
complaint on April 25, 2006, against Schoenhofer (the Adversary Complaint).2
Valley Food properly served Schoenhofer with the Adversary Complaint.
Valley Food asserted three counts in the Adversary Complaint. Count I is an
action for an open account in which Valley Foods claims that Schoenhofer owes it
,782.44 for goods it delivered to her under the Distribution Agreement. Valley
Food maintained in Count II that Schoenhofer would be unjustly enriched if she were
allowed to retain the benefit of the goods without paying for them. Valley Food argued
in Count III that the ,782.44 that Schoenhofer owes it under the Distribution
Agreement is property of the bankruptcy estate, and therefore Schoenhofer was
obligated to turnover that amount under 11 U.S.C. 542(a).
Valley Food served the Adversary Complaint by mail on Schoenhofer on May
4, 2006. Schoenhofer did not timely file an answer to the Adversary Complaint.
Schoenhofer, however, did provide a copy of the Adversary Complaint to her attorney,
Michael Jones.
3 Fed. R. Civ. P. 55 is made applicable to this proceeding by
Fed.R. Bankr. P. 7055.
-3-
Jones contacted Valley Foods attorney in a letter dated June 1, 2006. Jones
stated in the June 1 letter that Valley Food had placed Schoenhofer on a cash only basis
in the fall of 2005, and therefore there was no possibility that Schoenhofer owed
Valley Food for any product it had already delivered to her. Jones also requested in
the June 1 letter that Valley Food provide him additional time to file an answer to the
Adversary Complaint. Valley Foods attorney consented to Jones request for
additional time and gave him 20 additional days to file an answer.
Jones, however, failed to file an answer on behalf of Schoenhofer within the 20
day extension or at any time thereafter. Additionally, neither Schoenhofer nor Jones
appeared at a August 8, 2006 pre-trial conference set by the bankruptcy court. Valley
Food filed a motion on September 20, 2006 for a default judgment against Schoenhofer
under Fed. R. Civ. P. 55(b)(2).3
The bankruptcy court granted Valley Foods motion for a default in an order
dated October 5, 2006 and entered judgment in favor of Valley Food (the Default
Judgment). In the Default Judgment, the bankruptcy court awarded Valley Food
,782.44 plus interest at 18% per annum, ,600.00 in attorneys fees, and 4.64
in costs.
Valley Food provided a copy of the Default Judgment to Jones. Jones responded
to the Default Judgment by submitting a letter to Valley Food dated October 14, 2006.
In the October 14 letter Jones once again recited that Valley Food had placed
Schoenhofer on a cash only basis and that Schoenhofer owed Valley Food nothing.
Jones also remarked that if the parties could not amicably resolve the dispute, he was
prepared to file a motion to set aside the Default Judgment.
4 Fed. R. Civ. P. 60 is made applicable to the proceeding by Fed.
R. Bankr. P. 9024.
-4-
Valley Food and Schoenhofer did not resolve the dispute and Schoenhofer, on
January 10, 2007, filed a motion to set aside the Default Judgment under either Fed.
R. Civ. P. 55(c) or 60(b).4 Schoenhofer premised her motion to set aside on two
theories. Schoenhofer first argued that because the bankruptcy court lacked subject
matter jurisdiction over the claims contained in the Adversary Complaint, the Default
Judgment was a void judgment under Rule 60(b)(4). Schoenhofer also asserted that
she had demonstrated either good cause under Rule 55(c) or excusable neglect under
Rule 60(b)(1) for her failure to file an answer to the Adversary Complaint.
The bankruptcy court denied the motion to set aside the Default Judgment in an
order dated January 29, 2007. The bankruptcy court stated in its order that it denied
Schoenhofers motion to set aside because she willfully disregarded the entire
proceeding. Schoenhofer filed a timely notice of appeal of the bankruptcy courts
order denying her motion to set aside and this appeal follows.
II.
We review the bankruptcy courts order denying the motion to set aside the
default judgment for excusable neglect under Rule 60(b)(1) for an abuse of discretion.
Minnesota Supply Co. v. Raymond Co., 472 F.3d 524, 534 (8th Cir. 2006). The
determination of whether the Default Judgment is void under Rule 60(b)(4) because
the bankruptcy court lacked subject matter jurisdiction over the claims in the
Adversary Complaint is a question of law that the we review de novo. Burrell v.
Henderson, 434 F.3d 826, 831 (6th Cir. 2006).
5 The Court notes that a default is simply a notation entered by the clerk of
the court that a defendant has failed to file an answer. Fed. R. Civ. P. 55(a).
-5-
III.
A. Only Rule 60(b) applies to Schoenhofers request for relief from the Default
Judgment.
Schoenhofer argues that she may seek relief from the Default Judgment under
either Fed. R. Civ. P. 55(c) or 60(b). The relevant provision of Rule 55(c), however,
provides that a default may be set aside [f]or good cause shown...and, if judgment by
default has been entered, may likewise set it aside in accordance with Rule 60(b).
Thus, once the trial court enters judgment on the default,5 the defendant may rely only
on Rule 60(b) in seeking relief from the default judgment. Watkins v. Lindell, 169 F.3d
540, 543-44 (8th Cir. 1999).
Here, the bankruptcy court entered the Default Judgment on October 5, 2006 and
Schoenhofer did not file her motion to set aside the Default Judgment until January 10,
2007. Thus, the Default Judgment was a final judgment at the time Schoenhofer
sought relief from it. Schoenhofer may, therefore, only rely upon the provisions of
Rule 60(b) for relief from the Default Judgment.
B. The Default Judgment is not a void judgment under Rule 60(b)(4).
Schoenhofer first argues that she is entitled to relief from the Default
Judgment because the bankruptcy court did not have subject matter jurisdiction over
the claims in the Adversary Complaint. Rule 60(b)(4) provides that a party is entitled
to relief from a judgment that is void. This provision does allow a party to obtain relief
from a judgment in a case where the trial court lacks subject matter jurisdiction over
the claim.
-6-
The party seeking relief under Rule 60(b)(4), however, must demonstrate more
than that the trial court simply erred in asserting subject matter jurisdiction over the
claim. Rather, the party must establish under Rule 60(b)(4) that the trial court
exercising jurisdiction over the claim amounted to a plain usurpation of judicial
power. Hunter v. Underwood, 362 F.3d 468, 475 (8th Cir. 2006). Thus, a party is
only entitled to relief under Rule 60(b)(4) for want of subject matter jurisdiction if it
appears from the face of the complaint that the trial court lacked subject matter
jurisdiction over the claims in the complaint. Id.
Here, Schoenhofer argues that because there is a good faith dispute as to whether
she owes Valley Food anything under the Distribution Agreement, the Adversary
Complaint is simply a non-core breach of contract action that should be tried in state
court. Schoenhofer contends, therefore, that the bankruptcy court lacked subject matter
jurisdiction over the claims in the Adversary Complaint. We reject this argument for
two reasons.
First, Schoenhofers argument that the claims in the Adversary Complaint are
non-core proceedings is not relevant to whether the Default Judgment is void for
purposes of Rule 60(b)(4). The bankruptcy court has subject matter jurisdiction over
any claim that is related to a case under title 11. 28 U.S.C. 1334(b). A claim is
related to a bankruptcy case under 1334(b) if the outcome of the claim could have
any conceivable affect upon the bankruptcy estate. Natl Union Fire Ins. Co. v. Titan
Energy, Inc. (In re Titan Energy, Inc.), 837 F.2d 325, 329-30 (8th Cir. 1988).
Here, even assuming the veracity of Schoenhofers contention that there is a
legitimate dispute as to her liability to Valley Food, the resolution of that dispute will
directly affect the value of Valley Foods bankruptcy estate. Thus, the claims
contained in the Adversary Complaint, therefore, are related to Valley Foods
bankruptcy case and the bankruptcy court had subject matter jurisdiction over those
claims under 28 U.S.C. 1334(b).
6 We do note, however, that Schoenhofers argument here confuses the
question of whether a court has subject matter jurisdiction over a claim with the
question of whether the court should abstain from exercising that jurisdiction. See
Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 711 (1996).
-7-
Schoenhofer argues for the first time in her reply brief that even assuming that
the bankruptcy court had related to jurisdiction over the claims in the Adversary
Complaint, it still lacked jurisdiction over those claims because it should have
exercised its discretion to abstain from hearing those claims as provided by 28 U.S.C.
1334(c)(1). An appellate court may not review an issue that the appellant first raises
in a reply brief unless the appellant offers a valid reason for failing to raise the issue
in its initial brief.6 Nebraska Plastics, Inc. v. Holland Colors Am., Inc., 408 F.3d 410,
421 n.5 (8th Cir. 2005).
Schoenhofer offered no reason in either her reply brief or at oral argument why
she failed to include her permissive abstention argument under 28 U.S.C. 1334(c)(1)
in her initial brief. This Court, therefore, will not review that claim on appeal.
A second reason why we reject Schoenhofers claim that the Default Judgment
is void is that the allegations contained in Count III of the Adversary Complaint
properly invoked the subject mater of the bankruptcy court under 28 U.S.C. 1334(b)
as a case arising under title 11. Valley Foods allegations contained in Count III of
the Adversary Complaint clearly recite that the amount that Schoenhofer owed it under
the Distribution Agreement was property of the bankruptcy estate so that Schoenhofer
was obligated to turnover that amount to Valley Food under 11 U.S.C. 542(a). Thus,
the bankruptcy courts exercise of subject matter jurisdiction over the Adversary
Complaint is not facially deficient and not a plain usurpation of judicial power for
purposes of Rule 60(b)(4). Accordingly, the Default Judgment is not a void judgment
and Schoenhofer is not entitled to relief from it under Rule 60(b)(4).
-8-
C. Schoenhofer is not entitled to relief under Rule 60(b)(1).
Schoenhofer also maintains on appeal that the bankruptcy court erred in
refusing to set aside the Default Judgment because she demonstrated good cause for
doing so. Schoenhofer fails to identify what specific provision of Rule 60(b) entitles
her to relief from the Default Judgment on this point. It appears, however, that she is
arguing that she is entitled to relief under the excusable neglect standard contained in
Rule 60(b)(1). The bankruptcy court rejected this argument because it found that
Schoenhofer willfully disregarded the entire proceeding. The record amply supports
the bankruptcy courts conclusion.
Rule 60(b)(1) states that a district court may relieve a party from a judgment for
mistake, inadvertence, surprise, or excusable neglect. The court should examine the
following factors when considering whether to relieve a party from a default judgment
under the excusable neglect prong of Rule 60(b)(1):
(1) danger of prejudice to non-moving party; (2) length of delay and its potential
impact on judicial proceedings; (3) reason for delay, including whether it was within
movant's control; (4) whether movant acted in good faith, and (5) whether the
defendant has a meritorious defense. Freeny v. AT&E, 472 F.3d 560, 562-63 (8th Cir.
2006).
The analysis under the excusable neglect standard is inherently equitable so that
no one factor is dispositive. Id. at 563. A willful flouting of the time requirements
contained in the rules of civil procedure or established by a court order, however,
weighs strongly against a finding of excusable neglect. Id. Thus, a party generally is
not entitled to relief under Rule 60(b)(1) for excusable neglect when it was aware of
a deadline but willfully disregards it. Warfield v. Byron, 436 F.3d 551, 556 (5th Cir.
2006); S.E.C. v. McNulty, 137 F.3d 732, 738-39 (2d Cir. 1998); Calumet Lumber, Inc.
v. Mid-American Indus., Inc., 103 F.3d 612, 614-15 (7th Cir. 1997).
-9-
Here, Schoenhofer concedes that she was properly served with the Adversary
Complaint in May 2006. She provided both the summons and a copy of the Adversary
Complaint to her counsel. Her counsel contacted Valley Foods counsel in July 2006
and requested 20 additional days to file an answer, and Valley Food consented to that
request. Despite this additional time to file an answer, Schoenhofer chose to simply
ignore the requirement to file an answer and the August 8, 2006 pre-trial conference
set by the bankruptcy court. Further, there is nothing in the record that explains why
Schoenhofer failed to file an answer or appear at the pre-trial conference apart from the
fact that she and her counsel simply chose not to do so.
This record establishes that Schoenhofer was aware of the proceeding and its
gravity but willfully ignored the requirement to file an answer and to obey the
bankruptcy courts pre-trial conference without any excuse. Given this record, we find
that the bankruptcy court acted well within its discretion in finding that Schoenhofer
was not entitled to relief from the Default Judgment under the excusable neglect prong
of Rule 60(b)(1).
IV.
The Adversary Complaint sufficiently invoked the subject matter jurisdiction of
the bankruptcy court. Thus, the Default Judgment is not a void judgment under Rule
60(b)(4). Also, the record establishes that Schoenhofer willfully disregarded the time
requirement to file an answer to the Adversary Complaint and the bankruptcy courts
order that set the pre-trial conference. Accordingly, the bankruptcy court did not abuse
its discretion in denying Schoenhofers motion for relief from the Default Judgment
under the excusable neglect provision of Rule 60(b)(1). We, therefore, affirm the order
of the bankruptcy court denying Schoenhofers motion to set aside the Default
Judgment.
 

 
 
 

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