In re: Tina Chi Houng

FILED OCT 24 2011 SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 1 2 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP Nos. CC-11-1088-AlPaMk ) CC-10-1425-AlPaMk 6 TINA CHI HOUNG, ) (Consolidated) ) 7 Debtor. ) Bk. No. LA 07-21354-BR ) 8 ) Adv. No. LA 09-02717-BR NICK A. ALDEN, ) 9 ) Appellant, ) 10 ) v. ) MEMORANDUM1 11 ) EDWARD M. WOLKOWITZ, ) 12 Chapter 7 Trustee, ) ) 13 Appellee. ) ) 14 Argued and Submitted on July 22, 2011 15 at Pasadena, California 16 Filed - October 24, 2011 17 Appeal from the United States Bankruptcy Court for the Central District of California 18 Honorable Barry Russell, Bankruptcy Judge, Presiding 19 20 Appearances: Appellant Nick Alden appeared pro se. Irv Gross, of Levene, Neale, Bender, Yoo & Brill LLP, appeared for 21 Appellee Edward Wolkowitz, Chapter 7 Trustee. 22 23 24 1 This disposition is not appropriate for publication. Although 25 it may be cited for whatever persuasive value it may have (see Fed.R.App.P. 32.1), it has no precedential value. See 9th Cir. BAP 26 Rule 8013-1. 1 1 Before: Alley2, Pappas and Markell, Bankruptcy Judges. 2 3 Appellant appeals the bankruptcy court’s order denying his 4 motion to set aside an order finding Appellant in default and the 5 subsequent entry of a default judgment. We AFFIRM the entry of the 6 order of default. We VACATE the default judgment and REMAND for 7 further proceedings related thereto. 8 I FACTS 9 10 Appellant Nick Alden is an attorney admitted to practice law in 11 the State of California since 1982, who practices civil litigation 12 exclusively in state court. 13 Appellant’s son Guy Alden is a real estate salesman who was 14 hired in 2006 to handle the sale of Debtor Tina Houng’s personal 15 residence. At some point, Debtor asked Guy for a referral to an 16 attorney with civil litigation experience. Guy suggested she talk 17 to his father Nick Alden and, several days after the initial 18 interview, the Debtor hired Appellant to represent her in a civil 19 action. Appellant thereafter represented Debtor in three other 20 civil cases and it was agreed, according to Appellant, that he would 21 be paid his attorney fees and costs through escrow from the sale of 22 Debtor’s personal residence. 23 The sale of the property closed on October 26, 2006, and a 24 total of $250,000 was transferred from escrow to Appellant. Other 25 2 Hon. Frank. R. Alley, III, Chief Bankruptcy Judge for the 26 District of Oregon, sitting by designation. 2 1 amounts were transferred to other parties. In a complicated set of 2 transactions engineered to refinance the property, the Debtor 3 obtained a short-term loan from another party prior to the sale and 4 provided a deed to that party. After the sale on October 26, the 5 other party was paid from the proceeds and the property was then 6 deeded back to Debtor’s wholly-owned corporation, Unique Holding 7 Corp. Appellant states that Houng did not hire him to advise her in 8 connection with the sale of the property and she never sought his 9 advice on the issue. Appellant alleges that $100,000 of the amount 10 transferred was earmarked for the payment of attorney fees and costs 11 and the remaining $150,000 was to be held in trust by Appellant to 12 secure Debtor’s mortgage payments, in case a payment was missed. By 13 March 2007, according to Appellant, there had been no missed 14 mortgage payments and, pursuant to Debtor’s instructions, Appellant 15 wired to Debtor’s corporation on March 5, 2007 the amount of 16 $150,000. 17 Debtor filed bankruptcy under chapter 73 on December 5, 2007. 18 The chapter 7 trustee, Edward Wolkowitz, Appellee herein, filed an 19 adversary proceeding against Appellant, Appellant’s son Guy Alden, 20 and against a Kenneth Lu on November 24, 2009. The Summons and 21 Complaint were served by mail on the Defendants which required that 22 answers be filed by December 28, 2009. The complaint included a 23 24 3 Unless otherwise indicated, all statutory references are to the Bankruptcy Code, 11 U.S.C. §§ 101 to 1532, and all “Rule” 25 references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. All “Civil Rule” references are to the Federal 26 Rules of Civil Procedure. 3 1 claim against all defendants for conspiracy to defraud creditors, 2 and claims against the Appellant for avoidance of a preferential 3 transfer under 11 U.S.C. § 547, and avoidance of a fraudulent 4 transfer under §§ 548 and 544. Appellant failed to file an answer 5 and the Appellee filed a motion for an order of default, which order 6 was entered by the bankruptcy court on January 27, 2010. On 7 January 28, 2010, Appellant filed a motion to strike the complaint 8 which was characterized by the court as a motion to dismiss. 9 Thereafter, the parties executed and filed a Stipulation to Vacate 10 Defaults which had been entered against both Appellant and his son. 11 The stipulation was premised on Appellant’s representation that he 12 was unfamiliar with bankruptcy practice and didn’t realize that he 13 had been properly served by mail. An Order Approving Stipulation to 14 Vacate was entered on February 26, 2010, giving each Defendant until 15 March 5, 2010 to file a response to the complaint. On March 22, 16 2010, an answer was filed by Appellant for his son Guy (whom he 17 represented in the matter), but the Appellant did not file an answer 18 for himself. 19 A hearing on Appellant’s motion to dismiss was held on April 7, 20 2010 and, on April 14, 2010, an order was entered denying the motion 21 to dismiss, without prejudice, with the bankruptcy court to consider 22 Appellant’s various defenses at the time of trial. Appellant 23 appealed the order denying his motion to dismiss to the Bankruptcy 24 Appellate Panel which, on July 6, 2010, entered an order dismissing 25 the appeal for lack of jurisdiction. The appeal had been filed on 26 May 5, 2010, twenty-one days after the entry of the order appealed. 4 1 The Panel stated that “[e]ven an appeal from an interlocutory order, 2 as in this case, must be filed within the time period provided by 3 Fed. R. Bankr. P. 8002.” 4 On June 30, 2010, Appellee filed a Request for Entry of 5 Default, and an order of default was entered by the bankruptcy court 6 on July 7, 2010. On July 14, 2010, the Appellant filed an answer in 7 the adversary proceeding4 and, on August 31, 2010, he filed a Motion 8 to Set Aside Default. The motion recites that Appellant was under 9 the mistaken belief that when he filed an answer for Defendant Guy 10 Alden, the answer was also filed for himself. 11 A hearing was held on October 5, 2010 to consider Appellant’s 12 motion to set aside the order of default. Appellant did not appear 13 at the hearing. The bankruptcy judge indicated to the Appellee’s 14 attorney that he felt that the Appellant was playing fast and loose 15 with the court and that he would deny the motion to vacate the 16 default. An order was entered on October 15, 2010 denying 17 Appellant’s motion to set aside the order of default. On 18 October 22, 2010, Appellant timely appealed the order denying his 19 motion to set aside default to the Bankruptcy Appellate Panel. 20 A prove-up hearing was set for February 1, 2011, for entry of a 21 default judgment, at which both the Appellant and counsel for 22 Appellee appeared. Appellant began by arguing that the order of 23 default should not have been entered against him because he had made 24 4 In response to Appellant’s filing of his answer, the Appellee, 25 through his attorney, wrote to Appellant demanding that he withdraw his answer on pain of Civil Rule 11 sanctions, as the answer had 26 been filed one week after default had been entered. 5 1 a general appearance and had filed a motion to dismiss - he had 2 filed an “Anti-SLAPP” motion (discussed more fully below). The 3 court interrupted the Appellant, informing him that the issue before 4 the court was whether the Plaintiff had presented sufficient 5 evidence to prove default given that the failure to file an answer 6 admitted everything in the complaint. 7 Appellee’s attorney stated that the declaration submitted by 8 Appellant in the materials for the hearing “purports to attach some 9 sort of a wire transfer in the amount of $150,000 to Unique Holding 10 Corporation.” In response, the court stated that “[o]n an 11 evidentiary basis, though, I don’t know if that’s a genuine document 12 or not, . . . [and] strictly as an evidence matter, I don’t see how 13 that can be admitted.” 14 The court then asked the Appellant about his motion to set 15 aside the order of default and his failure to appear at the earlier 16 hearing. The Appellant stated that he was embarrassed to admit that 17 he is 72 years old and sometimes has a loss of memory. He woke up 18 that morning, got dressed to come to court, and started working on 19 something else and forgot the hearing. The court then asked some 20 substantive questions that the judge had intended on asking the 21 Appellant at the earlier hearing. Appellant explained that he 22 initially failed to timely file an answer because, while he had 23 received the complaint in the mail, he believed he could only be 24 properly served in person, as he doesn’t practice bankruptcy and 25 under state law personal service is required. He believed that it 26 was the Plaintiff’s obligation to tell him that service by mail is 6 1 allowed under the federal rules. The court then asked Appellant 2 whether he knew that, after the original default had been vacated 3 and he had filed his motion to dismiss, he was not required to file 4 an answer until that motion had been resolved. He said he did not 5 know that as he only practices in state court. He filed an answer 6 for his son Guy Alden and was later under the impression that he had 7 filed it for himself. The court examined the answer filed for Guy 8 Alden with the Appellant, who admitted that it was not his answer, 9 but his son’s. The Appellant said he could not explain it, but he 10 just later thought that he had also filed the answer on his own 11 behalf. 12 As to the sufficiency of the complaint, the Appellant had the 13 following comments at the hearing: 14 1. The complaint indicates that Appellant received the $250,000 15 in October 2006, fourteen months prior to the Debtor’s bankruptcy 16 filing, which would take the transfer out of the statute of 17 limitations. (Appellant did not indicate to which statute of 18 limitation he was referring.) 19 2. The Complaint alleges that Appellant paid $150,000 of the 20 total back to the Debtor about a year after the sale of the 21 property, but the Plaintiff is ignoring the allegation of fact in 22 the complaint and seeking a judgment for the entire $250,000. 23 Appellant told the Court that he had explained at his deposition 24 that the bank had made a mistake and put the entire $250,000 into a 25 single account, rather than open a separate trust account for the 26 $150,000 as requested by the Appellant. 7 1 The Appellee’s attorney responded that he did not know to which 2 statute of limitation the Appellant was referring, but that the 3 lawsuit was instituted within the two-year limitation period under 4 the Bankruptcy Code to bring a fraudulent transfer claim. Second, 5 the allegation in the complaint that $150,000 was paid back by the 6 Appellant was made only on information and belief. Moreover, ¶ 50 of 7 the complaint talks about a fraudulent transfer of $250,000 and the 8 Trustee is permitted to plead alternative theories. 9 The transcription of the hearing ends as follows: 10 “THE COURT: Yeah, I’m going to rule (portion of proceedings not 11 available.) 12 (Proceedings concluded.)” 13 An order was entered by the court on February 14, 2011, 14 granting the trustee’s motion for entry of the default judgment. The 15 order did not contain any findings of fact or conclusions of law 16 other than entry of judgment in the amount of $250,000 against the 17 Appellant. 18 The Appellant’s appeal of the bankruptcy court’s denial of his 19 motion to set aside the order of default was still pending with the 20 Bankruptcy Appellate Panel when Appellant filed an appeal of the 21 bankruptcy court’s entry of default judgment. Both appeals were 22 consolidated and are the subject of the matter currently before the 23 Panel. 24 II JURISDICTION 25 26 The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 8 1 and 157(b)(2)(H). We have jurisdiction under 28 U.S.C. § 158. 2 III ISSUES ON APPEAL 3 4 1) Whether the bankruptcy court erred in entering its order 5 denying Appellant’s motion to set aside the court’s order of 6 default. 7 2) Whether the bankruptcy court erred in entering its default 8 judgment against Appellant. 9 IV STANDARD OF REVIEW 10 11 Pursuant to Fed. R. Civ. P. 55(a) and (b)5, a bankruptcy court 12 may enter an order of default and default judgment against a party 13 and may set aside the default and default judgment under subsection 14 (c). The bankruptcy court’s denial of a Civil Rule 55(c) motion is 15 reviewed for abuse of discretion. United States v. Signed Personal 16 Check No. 730 of Yubran S. Mesle, 615 F.3d 1085, 1091 (9th Cir. 17 2010). The bankruptcy court’s decision to enter a default judgment 18 is also reviewed for abuse of discretion. Speiser, Krause & Madole 19 P.C. v. Ortiz, 271 F.3d 884, 886 (9th Cir. 2001). 20 The appellate court may review the record independently to 21 determine if the bankruptcy court has abused its discretion. Ferdik 22 v. Bonzelet, 963 F.2d 1258, 1261 (9th Cir. 1992), cert. denied, 23 506 U.S. 915; O’Rourke v. Seaboard Surety Co. (In re E.R. Fegert), 24 887 F.2d 955, 957-58 (9th Cir. 1989). An abuse of discretion occurs 25 26 5 Made applicable to bankruptcy by Fed. R. Bankr. P. 7055. 9 1 where “there is a definite and firm conviction that the court below 2 committed clear error of judgment in the conclusion it reached upon 3 a weighing of relevant factors.” Nealey v. Transportacion Maritima 4 Mexicana, S.A., 662 F.2d 1275, 1278 (9th Cir. 1980)(citations 5 omitted). In reviewing the record, findings of fact are reviewed for 6 clear error and conclusions of law are reviewed de novo. Liberty 7 Tool & Mfg. v. Vortex Fishing Sys., Inc. (In re Vortex Fishing Sys, 8 Inc.), 277 F.3d 1057, 1064 (9th Cir. 2002). 9 V DISCUSSION 10 11 A. Record Available for Review 12 The bankruptcy court reopened the record with respect to the 13 order of default when it interrogated the Appellant at the prove-up 14 hearing about the circumstances leading to the default order being 15 entered and Appellant’s failure to appear at the hearing on his 16 motion to set aside default. Besides the transcript of the hearing 17 on Appellant’s motion to set aside the default, Appellant’s actual 18 motion to set aside default is part of the record as well as his 19 answer filed July 14, 2010 (attached as Exhibit A to Appellant’s 20 motion). Appellant also filed, prior to the prove-up hearing, a 21 memorandum in opposition to the Trustee’s motion for a default 22 judgment, with an attached declaration containing a copy of a wire 23 transfer in the amount of $150,000 to Unique Holding Corp., Debtor’s 24 wholly-owned corporation. 25 The bankruptcy court made no findings with respect to the order 26 denying Appellant’s motion to set aside the default, and we have no 10 1 way of knowing whether findings were made, or what they may be, 2 regarding the court’s granting of the Trustee’s motion for default 3 judgment, due to the apparent failure of the electronic recording 4 system. However, “[e]ven when a bankruptcy court does not make 5 formal findings, . . . the BAP may conduct appellate review ‘if a 6 complete understanding of the issues may be obtained from the record 7 as a whole or if there can be no genuine dispute about omitted 8 findings.’ . . . After such a review, however, when the record does 9 not contain a clear basis for the court’s ruling, we must vacate the 10 court’s order and remand for further proceedings.” Veal v. Am. Home 11 Mortg. Serv., Inc. (In re Veal), 450 B.R. 897, 919-20 (9th Cir. BAP 12 2011)(citations omitted). 13 When a bankruptcy court elects to use electronic audio 14 recording in place of a court reporter, the resulting audio record 15 constitutes the official record of the proceeding for appeal 16 purposes. Fed. R. Bankr. P. 8009(b) requires that an appellant to 17 the Bankruptcy Appellate Panel file as an appendix to his brief 18 excerpts of the record, including a transcript of the opinion, 19 findings of fact, or conclusions of law delivered orally by the 20 court. An appellant has the burden of filing an adequate record to 21 allow review of the order or judgment appealed from. Drysdale v. 22 Educ. Credit Management Corp. (In re Drysdale), 248 B.R. 386, 388 23 (9th Cir. BAP 2000), aff’d, 2 Fed.Appx 776 (9th Cir. 2001). 24 Appellant, however, failed to provide a complete transcript of the 25 official record of the court’s ruling with regard to the hearing on 26 February 1, 2011. The official record of the hearing which was 11 1 filed is incomplete due to the apparent failure of the court’s 2 electronic recording device. 3 Part VIII of the Federal Rules of Bankruptcy Procedure are 4 silent as to an appellant’s responsibility when the official record 5 is incomplete, as are the Local Rules of the Ninth Circuit 6 Bankruptcy Appellate Panel. When that is the case, 9th Cir. BAP 7 R. 8018(b)-1 provides that “a Panel may apply the Rules of the 8 United States Court of Appeals for the Ninth Circuit and the Federal 9 Rules of Appellate Procedure.” Fed. R. App. P. 10(c), followed by 10 the Courts of Appeal, provides as follows: 11 (c) Statement of the Evidence When the Proceedings Were Not Recorded or When a Transcript is Unavailable. If the 12 transcript of a hearing or trial is unavailable, the appellant may prepare a statement of the evidence or 13 proceedings from the best available means, including the appellant’s recollection. The statement must be served on 14 the appellee, who may serve objections or proposed amendments within 14 days after being served. The 15 statement and any objections or proposed amendments must then be submitted to the district court for settlement and 16 approval. As settled and approved, the statement must be included by the district clerk in the record on appeal. 17 18 As noted above, Appellant failed to follow the requirement that 19 he augment the official record to provide for appellate review the 20 court’s findings of fact and conclusions of law for the ruling from 21 which he appeals. That failure would entitle us to dismiss this 22 appeal. McCarthy v. Prince, 230 B.R. 414, 417 (9th Cir. BAP 23 1999)(citing Syncom Capital Corp. v. Wade, 924 F.2d 167, 169 (9th 24 Cir. 1999)). “If we do not dismiss, we are entitled to presume that 25 the appellant does not regard the court’s findings of fact and 26 conclusions of law as helpful to his appeal.” Id. (citing Gionis v. 12 1 Wayne (In re Gionis), 170 B.R. 675, 680-81 (9th Cir. BAP 1994), 2 aff’d mem., 92 F.3d 1192 (9th Cir. 1996)). The Panel may, in its 3 discretion, consider an appeal notwithstanding appellant’s failure 4 to comply with applicable rules. In determining whether to do so in 5 the context of a default judgment, we consider the same factors a 6 trial court considers in determining whether to enter a default 7 judgment, including the size of the judgment, and the strong policy 8 of federal courts favoring decisions on the merits. Eitel v. 9 McCool, 782 F.2d 1470, 1471-72 (9th Cir. 1986). Accordingly, as did 10 the Panel in McCarthy v. Prince, we exercise our discretion to 11 examine the record that was provided. “In doing so, we look for any 12 plausible basis upon which the bankruptcy court might have exercised 13 its discretion to do what it did. If we find any such basis, then 14 we must affirm.” McCarthy v. Prince at 417. 15 B. Fed. R. Bankr. P. 7055 16 Rule 7055 incorporates Rule 55 of the Federal Rules of Civil 17 Procedure, which provides that a default may be entered by the Clerk 18 when a party fails to plead or otherwise defend an action. Fed. R. 19 Civ. P. 55(a). Civil Rule 55(b)(1) allows for entry of a default 20 judgment by the Clerk only when the amount demanded is for a sum 21 certain, “or a sum that can be made certain by computation.” 22 Otherwise, entry of a default judgment must be by the court, 23 pursuant to Rule 55(b)(2): 24 (2) By the Court. In all other cases, the party must apply to the court for a default judgment. . . . The court may 25 conduct hearings or make referrals - preserving any federal statutory right to a jury trial - when, to enter 26 or effectuate a judgment, it needs to: 13 1 (A) conduct an accounting; (B) determine the amount of damages; 2 (C) establish the truth of any allegation by evidence; or 3 (D) investigate any other matter. 4 Courts have wide discretion in deciding whether to enter a 5 default judgment. Wells Fargo Bank v. Beltran (In re Beltran), 6 182 B.R. 820, 823 (9th Cir. BAP 1995). Factors a court may consider 7 in exercising its discretion include: 8 (1) the possibility of prejudice to the plaintiff, (2) the merits of plaintiff’s substantive claim, (3) the 9 sufficiency of the complaint, (4) the sum of money at stake in the action, (5) the possibility of a dispute 10 concerning material facts, (6) whether the default was due to excusable neglect, and (7) the strong policy underlying 11 the Federal Rules of Civil Procedure favoring decisions on the merits. 12 13 Eitel v. McCool, 782 F.2d at 1471-72. 14 Where a default has been entered, the court should accept as 15 true all allegations in the complaint, except those relating to 16 damages. Televideo Sys., Inc. v. Heiddenthal, 826 F.2d 915, 917 17 (9th Cir. 1987); Geddes v. United Fin. Grp, 559 F.2d 557, 560 (9th 18 Cir. 1977). As noted by the Geddes court, the proposition that 19 damages are not deemed established by the default order is supported 20 by Fed. R. Civ. P. 8, which provides that “[a]verments in a pleading 21 to which a responsive pleading is required, other than those as to 22 the amount of damages, are admitted when not denied in the 23 responsive pleading.” Id. at 560. 24 Civil Rule 55(c) provides that a “court may set aside an entry 25 of default for good cause, and it may set aside a default judgment 26 under [Civil] Rule 60(b).” 14 1 ‘The first step of our abuse of discretion test [in reviewing denial of a Rule 55(c) motion] is to determine 2 de novo whether the trial court identified the correct legal rule to apply to the relief requested.’ . . . ‘[T]he 3 second step . . . is to determine whether the trial court’s application of the correct legal standard was 4 (1)’illogical,’ (2) ‘implausible,’ or (3) without ‘support in inferences that may be drawn from the facts in the 5 record.’ Due to the policy of favoring judgments on the merits, a glaring abuse of discretion is not required for 6 reversal of a court’s refusal to relieve a party of the harsh sanction of default. 7 8 Signed Personal Check No. 730, 615 F.3d at 1091 (citations omitted). 9 To determine “good cause” under this Rule, a court “must 10 ‘consider [ ]three factors: (1) whether [the party seeking to set 11 aside the default] engaged in culpable conduct that led to the 12 default; (2) whether [it] had [no] meritorious defense; or 13 (3) whether reopening the default judgment would prejudice’ the 14 other party.” Id.(citing Franchise Holding II v. Huntington Rests. 15 Group, Inc., 375 F.3d 922, 925-26 (9th Cir. 2004), cert. denied 16 544 U.S. 949 (2005)). This test is disjunctive, such that a finding 17 that any one of the factors is true is sufficient for the court to 18 refuse to set aside the default. It is the same test used to 19 determine whether a default judgment should be set aside under Civil 20 Rule 60(b). Id. While a court has the discretion to refuse to set 21 aside a default judgment for excusable neglect under Fed. R. Civ. 22 P. 60(b) if it finds one of the enumerated factors present, it is 23 not mandatory that it do so. See Brandt v. Am. Bankers Ins. Co. of 24 Fla., 653 F.3d 1108 (9th Cir. 2011). “Crucially, however, ‘judgment 25 by default is a drastic step appropriate only in extreme 26 circumstances; a case should, whenever possible, be decided on the 15 1 merits.’” Signed Personal Check No. 730 at 1091 (citing Falk v. 2 Allen, 739 F.2d 461, 463 (9th Cir. 1984)). 3 The record before us provides a plausible basis upon which the 4 bankruptcy court could have exercised its discretion to enter the 5 order of default. The record does not, however, support findings 6 that the bankruptcy court considered and applied the Eitel factors 7 with respect to entry of the default judgment or, alternatively, the 8 factors applicable under Fed. R. Civ. P. 55 for setting aside a 9 default judgment. 10 1. Culpable Conduct 11 “[A] defendant’s conduct is culpable if he has received actual 12 or constructive notice of the filing of the action and intentionally 13 failed to answer.” TCI Group Life Ins. Plan v. Knoebber, 244 F.3d 14 691, 697 (9th Cir. 2001)(italics in original)(citation omitted). 15 “In this context the term ‘intentionally’ means that a movant cannot 16 be treated as culpable simply for having made a conscious choice not 17 to answer; rather, to treat a failure to answer as culpable, the 18 movant must have acted with bad faith, such as an ‘intention to take 19 advantage of the opposing party, interfere with judicial 20 decisionmaking, or otherwise manipulate the legal process.’” Signed 21 Personal Check No. 730, 615 F.3d at 1092 (citing TCI Group, 244 F.3d 22 at 697). “We have ‘typically held that a defendant’s conduct was 23 culpable for purposes of the [good cause] factors where there is no 24 explanation of the default inconsistent with a devious, deliberate, 25 willful, or bad faith failure to respond.” Signed Personal Check 26 No. 730 at 1092 (citing TCI Group at 698). 16 1 The transcript of the February 1, 2011, hearing to consider 2 entry of the default judgment and the record as a whole provide us 3 with evidence from which we could find a plausible basis for the 4 bankruptcy court exercising its discretion to deny the Appellant’s 5 motion to set aside the order of default on the basis of bad faith: 6 (1) the bankruptcy court did not find Appellant’s assertion credible 7 that he had believed the answer filed for his son had also been 8 filed for himself; (2) Appellant’s erroneous belief that personal 9 service was required in a bankruptcy adversary proceeding was not 10 excused under the circumstances of the case; (3) Appellant failed to 11 timely file an answer on two occasions in the same adversary 12 proceeding, the first order of default having been vacated by 13 stipulation of the trustee; (4)Appellant failed to attend the 14 hearing on his motion to set aside the order of default; and (5) the 15 bankruptcy court generally concluded that the Appellant was “playing 16 fast and loose with the court.” 17 2. Meritorious Defense 18 “A defendant seeking to vacate a default judgment must present 19 specific facts that would constitute a defense. But the burden on 20 the party seeking to vacate a default judgment is not 21 extraordinarily heavy.” TCI Group, 244 F.3d at 700 (citations 22 omitted). “All that is necessary to satisfy the ‘meritorious 23 defense’ requirement is to allege sufficient facts that, if true, 24 would constitute a defense: ‘the question whether the factual 25 allegation [i]s true’ is not to be determined by the court when it 26 decides the motion to set aside the default.” Signed Personal Check 17 1 No. 730, 615 F.3d at 1094 (citing TCI Group at 700). “Rather, that 2 question ‘would be the subject of the later litigation.’” Id. 3 Appellant argues that $150,000 of the money alleged to be the 4 subject of a fraudulent transfer to him from Debtor was returned to 5 the Debtor prior to bankruptcy. He made this allegation in his 6 memorandum to set aside the default and he made it at oral argument 7 at the prove-up hearing, and provided a copy of the $150,000 wire 8 transfer as part of his memorandum in opposition to the Trustee’s 9 motion to enter a default judgment. His explanation was that the 10 Debtor requested he hold the $150,000 received from escrow until she 11 instructed him to return it to her, and that that is what he did. 12 He also alleges that he did not advise his client with respect to 13 the real property sale and that $100,000 of the money transferred to 14 him was in payment of attorney fees for representing the Debtor in 15 various court cases. This would constitute a meritorious defense to 16 the fraudulent transfer claim if proven true. The bankruptcy court, 17 however, appeared to base its ruling, at least in part, on whether 18 the copy of the wire transfer attached to Appellant’s declaration 19 would be admissible in court. That is not the test in an action to 20 set aside a default or a default judgment. Signed Personal Check 21 No. 730, 615 F.3d at 1094. Rather, the question as to the truth of 22 the factual allegations, or the admissibility of evidence, is to be 23 made at trial. 24 While it appears that the $250,000 default judgment is based 25 entirely on the fraudulent transfer claim, the complaint also 26 contained a claim for a $100,000 preferential transfer in which 18 1 Appellant is alleged to be an insider. The rationale for the 2 Trustee considering Appellant an insider is that he had complete 3 dominion and control over the bank account in which the $250,000 4 transfer was placed. As the $250,000 transfer from escrow to 5 Appellant occurred on October 26, 2006, more than twelve months 6 prior to the Debtor filing bankruptcy, the preferential transfer 7 claim must fail. See 11 U.S.C. § 547(b)(4)(B)(preferential transfer 8 to an insider may be avoided for transfer occurring up to one year 9 before the date of the filing of the bankruptcy petition). 10 3. Prejudice 11 “To be prejudicial, the setting aside of a judgment must result 12 in greater harm than simply delaying resolution of the case. 13 Rather, ‘the standard is whether [plaintiff’s] ability to pursue his 14 claim will be hindered.’” TCI Group, 244 F.3d at 701 (citing Falk, 15 739 F.2d at 463). “To be considered prejudicial, ‘the delay must 16 result in tangible harm such as loss of evidence, increased 17 difficulties of discovery, or greater opportunity for fraud or 18 collusion.’” Id. (citing Thompson v. Am. Home Assur. Co., 95 F.3d 19 429, 433-34 (6th Cir. 1996)). 20 There is nothing in the record to indicate that the Appellee 21 would be prejudiced if the order of default and the default judgment 22 were set aside and it does not appear that Appellee has advanced 23 that argument. Nor is there a record of the bankruptcy court making 24 a finding of prejudice. 25 4. Extreme Circumstances 26 In Signed Personal Check No. 730, the Court stated that the 19 1 trial court must consider the requirement that judgment by default 2 be granted in only “extreme circumstances.”6 Failure to do so, the 3 court stated, is no minor omission, but “fundamentally alter[s] the 4 standard.” 615 F.3d at 1091-92. There is nothing in the record from 5 which we can find that the bankruptcy court considered this element. 6 C. Appellant’s Motion to Dismiss Adversary Proceeding 7 Appellant argues in his opening brief that the Bankruptcy 8 Appellate Panel should revisit the bankruptcy court’s denial of his 9 motion to dismiss (“motion to strike”) that he had earlier appealed 10 to the BAP. The Appellee argues that the order denying the motion 11 to dismiss, which was interlocutory in nature, did not merge with 12 the final judgment and is therefore not reviewable. To answer this, 13 we must examine the prior appeal and the nature of the motion to 14 dismiss. 15 1. The Prior Appeal 16 Appellant appealed the bankruptcy court’s denial of his motion 17 to strike the complaint to the Bankruptcy Appellate Panel. The 18 Panel dismissed the appeal, finding that it lacked jurisdiction due 19 to the untimeliness of the filing of the notice of appeal. 20 2. The Final Judgment Rule 21 Generally, “[a]n interlocutory order becomes appealable when 22 6 It should be noted that if this were to be considered as the 23 imposition of a $250,000 fine as a sanction against the Appellant for his failure to timely file an answer, it would most likely be 24 considered as inappropriate under the circumstances. See Dyer v. Lindblade (In re Dyer), 322 F.3d 1178, 1193 (9th Cir. 2003) 25 (Relatively mild non-compensatory fines may be necessary under some circumstances, but the language of § 105(a) does not allow for 26 serious punitive penalties). 20 1 final judgment is entered. . . . A necessary corollary to the final 2 judgment rule is that a party may appeal interlocutory orders after 3 entry of final judgment because those orders merge into that final 4 judgment.” Am. Ironworks & Erectors, Inc. v. N. Am. Const. Corp., 5 248 F.3d 892, 897 (9th Cir. 2001). 6 The fact that the Appellant had earlier appealed the 7 interlocutory order and it was dismissed on jurisdictional grounds 8 does not foreclose the ability of the Appellant to appeal the matter 9 once the final judgment is entered. See e.g. Victor Talking Mach. 10 Co. v. George, 105 F.2d 697 (3d Cir. 1939)(Appeal of order dismissed 11 on jurisdictional grounds and later heard after entry of final 12 decree). 13 3. The Motion to Strike Complaint (Motion to Dismiss) 14 The Appellant’s motion to strike the complaint is based on 15 alleged violations of Cal. Code Civ. Proc. § 425.16 (Anti-SLAPP 16 Statute), Cal. Civil Code § 47(b)(Litigation Privilege), and Cal. 17 Code of Civ. Proc. § 1714.10 (Conspiracy action against an 18 attorney). 19 Each of the three state-law provisions cited by Appellant in 20 his motion to dismiss (strike) may have some relevance in an 21 adversary proceeding in bankruptcy court. None, however, may be 22 applied to claims involving federal law, including bankruptcy law. 23 See Restaino v. Bah (In re Bah), 321 B.R.41, 44-45 (9th Cir. BAP 24 2005)(citing Globetrotter Software, Inc. v. Elan Computer Grp, Inc., 25 63 F.Supp.2d 1127, 1128 (N.D.Cal. 1999))(Anti-SLAPP statute); 26 In re Cedar Funding, Inc., 419 B.R. 807, 824 (9th Cir. BAP 2009); 21 1 Johnson v. JP Morgan Chase Bank, 536 F.Supp.2d 1207, 1213 (E.D.Cal. 2 2008)(citing Martinez v. California, 444 U.S. 277, 284 (1980)) 3 (Litigation Privilege); Spielbauer v. Brigham (In re Brigham), 4 2007 WL 7532287 (9th Cir. BAP, October 9, 2007)(Conspiracy action 5 against attorney). 6 Given that the judgment entered by the bankruptcy court and 7 appealed by Appellant is based on a claim under federal bankruptcy 8 law, none of the state law provisions cited above are applicable. 9 We therefore decline to delve any further into the court’s failure 10 to consider those provisions. 11 VI CONCLUSION 12 13 We find that there is a plausible basis upon which the 14 bankruptcy court might have exercised its discretion to deny 15 Appellant’s motion to set aside the order of default on the basis of 16 culpable conduct on the part of the Appellant. Accordingly, the 17 bankruptcy court’s denial of Appellant’s motion to set aside the 18 order of default is AFFIRMED. 19 We do not find in the record, however, a plausible basis upon 20 which the bankruptcy court could have entered the default judgment. 21 Appellant provided a plausible defense to the claims alleged against 22 him and the amounts claimed in the complaint. These issues are 23 subject to review in the prove-up hearing. Fed. R. Civ. P. 55(b)(2). 24 The bankruptcy court’s entry of the default judgment will therefore 25 be VACATED and the matter REMANDED for further proceedings under 26 Fed. R. Bankr. P. 7055. 22