REVISED DECEMBER 18, 2008
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
December 9, 2008
No. 08-30055 Charles R. Fulbruge III
Clerk
In the Matter of: OCA, INC.; OCA OUTSOURCE, INC.
Debtors
---------------------------------------------------
BRIAN A. BEITEL, D.D.S.
Appellant
v.
OCA, INC.; OCA OUTSOURCE, INC.
Appellees
Appeal from the United States District Court
for the Eastern District of Louisiana
Before KING, HIGGINBOTHAM, and WIENER, Circuit Judges.
JACQUES L. WIENER, JR., Circuit Judge:
Appellant Dr. Brian Beitel appeals the district court’s order affirming the
bankruptcy court’s denial of his motion to set aside or to vacate the default
judgment against him. Concluding that the bankruptcy court erred by
employing the incorrect burden of proof, we vacate both the bankruptcy court’s
denial of Dr. Beitel’s motion to set aside or to vacate the default judgment and
No. 08-30055
the district court’s order, and remand to the bankruptcy court to conduct a de
novo evidentiary hearing.
I. FACTS AND PROCEEDINGS
This appeal arises from an adversary proceeding in the Chapter 11
bankruptcy of appellee OCA, Inc. and its subsidiaries, including appellee OCA
Outsource, Inc. (collectively, “OCA”). In 2004, Dr. Beitel, a solo pediatric dental
practitioner, entered into an “outsource agreement” with OCA. In this
agreement, OCA agreed to provide specified business and administrative
services to Dr. Beitel’s practice in exchange for a monthly service fee. On the
same day that he signed the outsource agreement, Dr. Beitel signed two
promissory notes payable to OCA which permitted him to obtain loans
aggregating up to $500,000. By late 2005, Dr. Beitel had stopped paying OCA
the monthly service fees as they became due and had defaulted on the
promissory notes.
Having previously filed a petition voluntarily commencing Chapter 11
bankruptcy proceedings, OCA initiated the instant adversary proceeding on
August 28, 2006 by filing a complaint against Dr. Beitel. In it, OCA sought to
recover for, inter alia, Dr. Beitel’s breach of the outsource agreement and default
on the promissory notes.
On August 30, 2006, OCA served Dr. Beitel with copies of the summons
and complaint via first-class U.S. mail, as permitted by Federal Rule of
Bankruptcy Procedure 7004, addressed to both his home and office. Dr. Beitel
denies receiving either of these mailings.
On February 27, 2007, the bankruptcy court consolidated this adversary
proceeding with approximately one hundred other OCA adversary proceedings.
The court specified that these proceedings would be tried in blocks and
permitted OCA to schedule which adversary proceedings would be tried in which
blocks. OCA included its proceeding against Dr. Beitel in its Proposed June
2
No. 08-30055
Trial Schedule as one of ten cases for the second round of trials scheduled for
June 12–29, 2007. OCA mailed this schedule to Dr. Beitel, and he admits
receiving it,1 but insists that this was the first time that he had received notice
of any action against him by OCA.
Dr. Beitel then contacted his attorney, Clement Cartron, who on May 23,
2007, spoke with OCA’s counsel, Marguerite Kingsmill. Cartron asserts that
Kingsmill told him that the adversary proceeding against Dr. Beitel would not
be called until the last week of the June round of trials. Cartron also asked to
be sent a copy of the summons and complaint. One week later, on May 30, 2007,
OCA e-mailed copies of the summons and complaint to Cartron.
As Cartron is a general practitioner without significant bankruptcy
experience, he encouraged Dr. Beitel to seek special bankruptcy counsel. In
response, Dr. Beitel contacted Michael Lee, a bankruptcy practitioner, to discuss
representation. On June 11 or 12, 2007, Lee contacted a different OCA attorney,
Drew Ballina. Lee recalls that Ballina told him specifically that no default
would be taken against Dr. Beitel and that the merits would be addressed after
Dr. Beitel filed an answer. Ballina claims, however, that he told Lee that trial
would occur according to the Proposed June Trial Schedule. Ballina also claims
that Lee told him that Dr. Beitel had not yet officially retained him as counsel.
On June 13, 2007, OCA filed a proposed pretrial order in which the instant
adversary proceeding was “scheduled to commence on June 18, 2007”; however,
the bankruptcy judge called the adversary proceeding against Dr. Beitel for trial
on the same day that the proposed schedule was filed, June 13, 2007. Neither
Dr. Beitel nor his counsel appeared. When the bankruptcy judge inquired
whether Dr. Beitel had filed an answer, OCA’s counsel responded that none had
been filed; he did not, however, volunteer the fact that Lee had just contacted
1
The schedule was mis-addressed: The mailing address displayed on the envelope was
one digit off from Dr. Beitel’s actual mailing address.
3
No. 08-30055
Ballina. Unaware of the negotiations between opposing counsel, the bankruptcy
court proceeded to hear the case. OCA called one witness, its chief restructuring
officer, who testified regarding the pertinent contracts and the amounts due
under these agreements. The bankruptcy court granted OCA a default judgment
in the amount sought and requested that OCA prepare and submit a proposed
judgment.
A week later, Dr. Beitel filed his original answer to OCA’s complaint.
Although his answer is dated June 18, 2007, it was not filed until June 22. Dr.
Beitel filed an amended answer three days later. On that same day, June 25,
2007, the bankruptcy court entered OCA’s proposed default judgment against
Dr. Beitel in the amount of $668,153 plus costs and interest.
On July 3, 2007, Dr. Beitel filed a motion to set aside or to vacate the June
25 default judgment. Dr. Beitel asserted that: (1) he was never served with the
complaint pursuant to Federal Rule of Bankruptcy Procedure 7004; (2) he first
learned of the existence of an action against him by way of the Proposed June
Trial Schedule; (3) he was misled by OCA in telephone communications just
prior to trial regarding the status of his adversary proceeding; and (4) he had a
meritorious defense to OCA’s claim. OCA opposed Dr. Beitel’s motion to vacate.
On August 1, 2007, the bankruptcy court held a hearing on the motion and
ruled in OCA’s favor. Recognizing that OCA was entitled to a presumption of
valid service, the bankruptcy court ruled that Dr. Beitel had failed to rebut this
presumption by clear and convincing evidence. Specifically, the bankruptcy
court stated:
I’m convinced that Dr. Beitel simply ignored several — ignored the
service of the complaint and the summons and that you have not
carried — he has not carried the burden of overcoming the
presumption of valid service that attaches to the two Certificates of
Service, one of which shows that service was made at his home by
mailing on August 30 an envelope that was duly stamped and
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No. 08-30055
correctly addressed, and another that was mailed to his correct
office address also on August 30.
....
On the basis of [the] case law and on the basis of the two
certificates [of service] I hold that Dr. Beitel has not overcome the
presumption that proper service was made of both the complaint
and the summons. In addition, there is evidence, uncontroverted
evidence that many other things were mailed to these same two
addresses and that they were not returned and there’s no complaint
about there [sic] not having been received. To the contrary, you
admit that he received a number of things at these addresses. The
one instance in which something was misaddressed was
acknowledged to be received by him.
So, every presumption in this case shows that Dr. Beitel knew
of the complaint, knew of the summons, and knew of the trial date,
and that he simply failed to react in time and did not file the
pleadings or make an appearance at the trial until after the trial
was held on June 13, 2007, which resulted in the judgment against
him that I refuse to set aside. (emphasis added).
Dr. Beitel timely appealed the bankruptcy court’s denial of the motion to
vacate to the district court where, for the first time, he challenged the
bankruptcy court’s exercise of core jurisdiction. The district court affirmed the
bankruptcy court, holding that it had acted within its statutory authority in
entering the default judgment. The district court held that, even though this
adversary proceeding was non-core, Dr. Beitel had impliedly consented to the
bankruptcy court’s entry of final judgment by failing to object to its assumption
of core jurisdiction. The district court then reviewed the bankruptcy court’s
denial of the motion to vacate for abuse of discretion, concluding that there was
no “reason to disturb the bankruptcy court’s finding that Beitel received service
of OCA’s complaint and notice of the trial schedule for his adversary proceeding
and elected not [to] respond.” Describing Dr. Beitel’s inaction prior to the trial
date as “emblematic of the very behavior that the Fifth Circuit has found to
constitute willful default,” the district court concluded that the bankruptcy court
5
No. 08-30055
did not abuse its discretion in denying the motion to vacate. This timely appeal
followed.
II. ANALYSIS
A. Standards of Review
“This Court reviews the decision of a district court, sitting as an appellate
court, by applying the same standards of review to the bankruptcy court’s
findings of fact and conclusions of law as applied by the district court.”2 We thus
generally review factual findings for clear error and conclusions of law de novo.3
Subject-matter jurisdiction is a question of law which we review de novo.4
We review a determination that a “default should not be set aside . . . for abuse
of discretion.”5 “Because of the seriousness of a default judgment, . . . even a
slight abuse of discretion may justify reversal.”6 If “a district court’s findings
rest on an erroneous view of the law, they may be set aside on that basis.”7
Although we review a decision to set aside a default judgment for abuse of
2
Wooley v. Faulkner (In re SI Restructuring, Inc.), 542 F.3d 131, 134–35 (5th Cir.
2008).
3
Id. at 135.
4
Edge Petrol. Operating Co. v. GPR Holdings, L.L.C. (In re TXNB Internal Case), 483
F.3d 292, 298 (5th Cir. 2007).
5
Dierschke v. O’Cheskey (In re Dierschke), 975 F.2d 181, 184 (5th Cir. 1992).
6
Lacy v. Sitel Corp., 227 F.3d 290, 292 (5th Cir. 2000) (citation omitted); see United
States v. One Parcel of Real Property, 763 F.2d 181, 183 (5th Cir. 1985) (“[B]ecause modern
federal procedure favors trials on the merits, an abuse of discretion need not be glaring to
justify reversal.” (citation and internal quotation marks omitted)).
7
Pullman-Standard v. Swint, 456 U.S. 273, 287 (1982); see Steering Comm. v. Exxon
Mobil Corp., 461 F.3d 598, 601 (5th Cir. 2006) (“Because, however, a court by definition abuses
its discretion when it applies an incorrect legal standard, we review such errors de novo.”).
6
No. 08-30055
discretion, whether a defendant’s failure to answer was willful is a factual
determination that we review for clear error.8
B. Bankruptcy Court’s Adjudicative Authority
As a threshold matter, we consider Dr. Beitel’s assertion — one that he
made for the first time on appeal to the district court — that the bankruptcy
court was without power to enter the default judgment against him. We must
determine, in a two-step inquiry, (1) whether the bankruptcy court had subject-
matter jurisdiction, and, if we find that it did, (2) the extent of that court’s
judicial power. Bankruptcy courts have jurisdiction over, inter alia, civil cases
“related to” Chapter 11 bankruptcy cases.9 A proceeding is related to the main
case if “‘the outcome of that proceeding could conceivably have any effect on the
estate being administered in bankruptcy.’”10 The instant case obviously could
have an affect on the bankruptcy estate because a judgment against Dr. Beitel
could increase the estate. The bankruptcy court thus had subject-matter
jurisdiction over the instant adversary proceeding.
8
CJC Holdings, Inc. v. Wright & Lato, Inc., 979 F.2d 60, 64 (5th Cir. 1992); see In re
Dierschke, 975 F.2d at 184.
9
Ins. Co. of N. Am. v. NGC Settlement Trust & Asbestos Claims Mgmt. Corp. (In re
Nat’l Gypsum Co.), 118 F.3d 1056, 1062 n.12 (5th Cir. 1997) (quoting 28 U.S.C. § 1334(b)).
10
Wood v. Wood (In re Wood), 825 F.2d 90, 93 (5th Cir. 1987) (quoting Pacor, Inc. v.
Higgins, 743 F.2d 984, 994 (3d Cir. 1984)) (emphasis in original); see Feld v. Zale Corp. (In re
Zale Corp.), 62 F.3d 746, 752 (5th Cir. 1995) (“[W]hen we define ‘related to’ jurisdiction, we
should avoid the inefficiencies of piecemeal adjudication and promote judicial economy by
aiding in the efficient and expeditious resolution of all matters connected to the debtor’s
estate.” (citation and internal quotation marks omitted)). This standard applies as long as the
bankruptcy case continues; after confirmation of a reorganization plan, a stricter post-
confirmation standard applies. See Bank of La. v. Craig’s Stores of Tex., Inc. (In re Craig’s
Stores of Tex., Inc.), 266 F.3d 388, 390–91 (5th Cir. 2001) (explaining this distinction). Yet,
once the bankruptcy court has jurisdiction, confirmation does not divest the court of its
jurisdiction. Newby v. Enron Corp. (In re Enron Corp. Secs.), 535 F.3d 325, 335 (5th Cir. 2008).
In the instant case, OCA instituted its adversary proceeding against Dr. Beitel several months
before the bankruptcy court’s January 2007 confirmation of OCA’s reorganization plan. The
“related to” standard thus applies.
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No. 08-30055
A bankruptcy court’s adjudicative authority is constrained, however, if the
proceeding is non-core. Bankruptcy courts have full adjudicative power over core
proceedings; in non-core proceedings they are restricted to issuing proposed
findings of fact and conclusions of law, which the district court may adopt or
reject.11 A non-exhaustive list of “core proceedings” appears in 28 U.S.C.
§ 157(b)(2). In In re Wood, “Judge Wisdom distilled the formula for [core
proceedings] thus: ‘We hold . . . that a proceeding is core under section 157 if it
invokes the substantive right provided by title 11 or if it is a proceeding that, by
its nature, could arise only in the context of a bankruptcy case.’”12 We agree with
both Dr. Beitel and the district court that this proceeding is non-core. As in In
re Wood, the instant claim is “not based on any right created by the federal
bankruptcy law,” but instead is “simply a state contract action that, had there
been no bankruptcy, could have proceeded in state court.”13 OCA’s attempts to
classify its adversary proceeding as specific to bankruptcy fail.
Even though this is a non-core proceeding, we nevertheless conclude that
the bankruptcy court exercised its adjudicative power appropriately because Dr.
Beitel impliedly consented to the bankruptcy court’s entry of final orders and
judgments. In a non-core proceeding, the parties may consent to have a
bankruptcy court “enter appropriate orders and judgments.”14 Such consent may
be express or implied.15 Failure to object in the bankruptcy court may constitute
11
In re Wood, 825 F.2d at 95.
12
Southmark Corp. v. Coopers & Lybrand (In re Southmark Corp.), 163 F.3d 925, 930
(5th Cir. 1999) (quoting In re Wood, 825 F.2d at 97).
13
In re Wood, 825 F.2d at 97. We are mindful, however, of the fact that the mere
presence of a suit “based on state created rights” is not, alone, dispositive. See id. at 97 & n.34
(citing 28 U.S.C. § 157 (b)(3)).
14
28 U.S.C. § 157(c)(2).
15
M.A. Baheth & Co. v. Schott (In re M.A. Baheth Constr. Co.), 118 F.3d 1082, 1084
(5th Cir. 1997).
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No. 08-30055
implied consent.16 Even if we ignore any opportunity that Dr. Beitel might have
had to challenge the bankruptcy court’s adjudicative authority prior to its entry
of default judgment, his post-default conduct was entirely inconsistent with
raising such a challenge. When Dr. Beitel sought to set aside the default
judgment in the bankruptcy court, he never once raised the core/non-core issue,
and even filed an answer admitting to the complaint’s allegation that “[t]his
matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2).”
Dr. Beitel mounts a two-pronged challenge regarding his implied consent.
First, he contends that only the bankruptcy court, not the district court sitting
as an appellate court, may determine consent, a fact issue. The case cited by Dr.
Beitel for this proposition, however, does not go that far, stating only that
“consent to . . . jurisdiction is not lightly to be inferred” and requires a “clear
manifestation by the adverse party.”17 This language does not lend support to
Dr. Beitel’s contention: It neither indicates that only the bankruptcy court may
make determinations as to consent nor causes us to question whether Dr. Beitel
consented in this case.
Dr. Beitel contends alternatively that his post-default conduct is
irrelevant.18 On this point, Dr. Beitel misinterprets our precedent: A defendant
may lose the opportunity to object after a relevant hearing, but a defendant does
not possess free license not to object after a hearing.19 This is particularly true
in the default-judgment context, in which a defendant may not have had an
opportunity to object previously. To hold otherwise would only create needless
16
McFarland v. Leyh (In re Tex. Gen. Petrol. Corp.), 52 F.3d 1330, 1337 (5th Cir. 1995).
17
Gill v. Phillips, 337 F.2d 258, 262–63 (5th Cir. 1964).
18
See In re Tex. Gen. Petrol., 52 F.3d at 1337 (finding implied consent where defendant
failed to object to the bankruptcy-court’s jurisdiction before or during a relevant hearing).
19
See id. (“By failing to object in the bankruptcy court, [the defendant] consented
impliedly to the court’s assumption of core jurisdiction.”).
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No. 08-30055
appellate litigation by encouraging defendants like Dr. Beitel to wait until
appeal to object to the bankruptcy court’s jurisdiction.
We agree with the district court’s observation that Dr. Beitel’s objection
to the bankruptcy court’s jurisdiction at this stage of the proceeding “more
closely resembles an afterthought than a bona fide objection.”20 The bankruptcy
court had both subject-matter jurisdiction over the instant case and authority
to enter final orders and judgments.
C. Setting Aside the Default Judgment
1. Legal Standard
Federal Rule of Civil Procedure 55 applies in adversary proceedings.21 The
former version of Rule 55(c), which applies here, states that “[f]or good cause
shown the court may set aside an entry of default and, if a judgment by default
has been entered, may likewise set it aside in accordance with Rule 60(b).”22
Because the bankruptcy court entered a judgment on Dr. Beitel’s default,23 Rule
20
Id. at 1337 (citation omitted).
21
FED. R. BANKR. P. 7055.
22
FED. R. CIV. P. 55(c) (amended 2007). We give amendments to the Federal Rules of
Civil Procedure “retroactive application to the maximum extent possible.” Long v. Simmons,
77 F.3d 878, 879 (5th Cir. 1996) (citation and internal quotation marks omitted); see Reeves
v. Collins, 27 F.3d 174, 177 (5th Cir. 1994) (per curiam) (noting that we “will apply
retroactively the new [procedural] rules when it is just to do so”). We conclude in this case,
however, that the amendment cannot be applied retroactively. Dr. Beitel filed his motion to
vacate the default judgment on July 3, 2007, the bankruptcy court denied that motion on
August 1, 2007, and the amended Rule 55(c) did not become effective until December 1, 2007.
It would thus be unjust — and would defy logic — to evaluate the bankruptcy court’s decision
and district court’s review for abuse of discretion under a rule setting forth the applicable legal
standard that was not in effect at the time Dr. Beitel initially sought relief.
Although we did not specifically reference Rule 55(c) in our recent opinion in Jenkens
& Gilchrist v. Groia & Co., 542 F.3d 114 (5th Cir. 2008), our decision there issued under
similar circumstances: the defendants originally sought to vacate the default judgment in
February 2007, before the amended Rule 55(c) took effect.
23
The bankruptcy court characterized its ruling as one of default judgment and
considered Dr. Beitel’s motion as one to vacate or set aside a default judgment. Additionally,
the bankruptcy court entered judgment on the merits in the absence of Dr. Beitel or his
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No. 08-30055
60(b) applies. This rule allows a court to grant relief from a final judgment
under any of six provisions, including “mistake, inadvertence, surprise, or
excusable neglect[.]”24 In assessing a motion to vacate a default judgment, we
have interpreted Rule 60(b)(1) as incorporating the Rule 55 “good-cause”
standard applicable to entries of default:
In determining whether good cause exists to set aside a default
judgment under Rule 60(b)(1) we examine the following factors:
whether the default was willful, whether setting it aside would
prejudice the adversary, and whether a meritorious defense is
presented. Courts may also consider whether the public interest
was implicated, whether there was significant financial loss to the
defendant, and whether the defendant acted expeditiously to correct
the default. The district court need not consider all of the above
factors in ruling on a defendant’s 60(b)(1) motion; the imperative is
that they be regarded simply as a means of identifying
circumstances which warrant the finding of “good cause.”25
This inquiry follows a recognition in our previous holdings that “courts apply
essentially the same standard to motions to set aside a default and a judgment
by default.”26 Yet, we have also stated that “the former is more readily granted
than a motion to set aside a default judgment.”27 On multiple occasions, we have
declined to decide whether the “good-cause standard is equivalent to the
standard applied to relief from default judgment under Rule 60(b).”28 Although
counsel. We thus consider Dr. Beitel as seeking relief from default judgment, not from an entry
of default.
24
FED. R. CIV. P. 60(b)(1).
25
Jenkens & Gilchrist, 542 F.3d at 119 (emphasis added) (internal citations and
quotation marks omitted).
26
Dierschke v. O’Cheskey (In re Dierschke), 975 F.2d 181, 184 (5th Cir. 1992) (emphasis
added).
27
Id.
28
Id. at 184–85 n.16 (citing Fed. Sav. & Loan Ins. Corp. v. Kroenke, 858 F.2d 1067,
1069 (5th Cir. 1988)). We have noted, however that other courts have reached seemingly
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No. 08-30055
the recent revision to Rule 55(c) may one day cause us to reassess the
relationship between the Rule 55(c) good-cause standard and Rule 60(b)(1),29 we
have no occasion to do so in the instant case and instead conduct our inquiry in
accordance with our recent decision in Jenkens & Gilchrist.30 In any event,
conflation of the applicable standards in this case would be harmless because we
have held that willful default, the key factor in the instant case, “would certainly
not constitute excusable neglect,” one of the Rule 60(b)(1) factors.31
Of the relevant factors, two have particular significance here, viz., (1) the
defendant’s default was willful;32 or (2) the defendant failed “to present a
meritorious defense sufficient to support a finding on the merits for the
defaulting party.”33 If a district court (or a bankruptcy court) makes either
contrary conclusions. For example, in Kroenke, we noted that the Sixth Circuit had held that
the “good-cause” standard applies to motions to set aside default judgments, which we found
to be a “reasonable interpretation” of Rule 55(c). 858 F.2d at 1069. We also recognized that
several courts, including the Second Circuit, had held that the “good-cause” standard for
entry-of-default cases is more liberal than the standard in default-judgment cases. Id.
29
The version of Rule 55(c) effective from August 1, 1987 until December 1, 2007 —
and in the instant case — stated: “For good cause shown the court may set aside an entry of
default and, if a judgment by default has been entered, may likewise set it aside in accordance
with Rule 60(b).” (emphasis added). In dicta, we stated that the word “likewise” made it
“certainly reasonable” to interpret “good cause” as applying to the Rule 60(b) default-judgment
context. Kroenke, 858 F.2d at 1069.
The 2007 amendment to Rule 55(c), which the Advisory Committee “intended to be
stylistic only,” see FED. R. CIV. P. 55 (Supp. Note), may alter this analysis. The revision says:
“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. 55(c). By deleting the word “likewise,” the current
version may confirm that the “good-cause” standard applicable to entries of default does not
apply to default-judgment cases.
30
Today, we must apply the prior version of Rule 55(c).
31
See CJC Holdings, Inc. v. Wright & Lato, Inc., 979 F.2d 60, 64 (5th Cir. 1992).
32
A willful default is an “intentional failure” to respond to litigation. Lacy v. Sitel
Corp., 227 F.3d 290, 292 (5th Cir. 2000) (quoting In re Dierschke, 975 F.2d at 184).
33
Jenkens & Gilchrist, 542 F.3d at 119–20 (citation and internal quotation marks
omitted).
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No. 08-30055
finding, we may hold that it was within its discretion in refusing to grant relief
from a default judgment.34 Still, “Rule 60(b) is applied most liberally to
judgments of default, since trial on the merits is to be favored over such a
truncated proceeding. Unless it appears that no injustice results from the
default, relief should be granted.”35 In light of the general disfavor of default
judgments, “where there are no intervening equities any doubt should, as a
general proposition, be resolved in favor of the movant to the end of securing a
trial upon the merits.”36
2. Rulings of the Bankruptcy Court
In the bankruptcy court, Dr. Beitel urged that (1) OCA never effected
service and (2) his default was not willful, but was caused both by OCA’s
misrepresentations to him and by its purposeful non-disclosure to the
bankruptcy court of key information regarding recent communications between
Dr. Beitel’s counsel and counsel for OCA.
The bankruptcy court determined that Dr. Beitel had submitted no
evidence that would overcome the presumption of valid service. On this point,
Dr. Beitel had a heavy burden: “Mail that is properly addressed, stamped and
deposited into the mails is presumed to be received by the addressee. The
presumption can only be overcome by clear and convincing evidence that the
mailing was not, in fact, accomplished.”37 The bankruptcy court correctly applied
34
Id.
35
Azzopardi v. Ocean Drilling & Exploration Co., 742 F.2d 890, 895 (5th Cir. 1984)
(internal citation omitted); see also Ruiz v. Quarterman, 504 F.3d 523, 532 (5th Cir. 2007)
(“[T]his lesser standard of review has been applied most liberally to motions to re-open default
judgments[.]”).
36
Lacy, 227 F.3d at 292 (citation omitted).
37
United States v. Levoy, (In re Levoy), 182 B.R. 827, 834–35 (B.A.P. 9th Cir. 1995)
(citing Moody v. Bucknum (In re Bucknum), 951 F.2d 204, 207 (9th Cir. 1991)) (emphasis
added); see also Ruch v. Cerrone & Assocs., Inc. (In re Cerrone & Assocs.), Inc., 72 F.3d 126
(table), 1995 WL 747586, at *1 (4th Cir. 1995) (per curiam) (unpublished) (setting forth the
13
No. 08-30055
the clear-and-convincing-evidence standard, and Dr. Beitel offers no competent
evidence that causes us to question the court’s conclusion.38
The bankruptcy court’s determination of willfulness, however, is
problematic. Just before the court issued its ruling, the following exchange
occurred:
[Dr. Beitel’s Counsel]:
Well, then why did not [OCA counsel] say to me
that [Dr. Beitel] would be up second, or third up, or
fourth, or why didn’t [other OCA counsel] tell [Dr.
Beitel’s counsel] that [Dr. Beitel] would be second up or
third up?39
The Court: I don’t know that. That’s again . . . weighing he said,
she said, and that’s not sufficient to overcome the
presumption of valid service or to show by clear and
convincing evidence. If the Court has to weigh two
conflicting statements, that’s not clear and convincing
evidence.
This exchange unquestionably addressed whether Dr. Beitel’s default was
willful, not whether the presumption of valid service was overcome. The
bankruptcy court then immediately announced its ruling:
I’m convinced that Dr. Beitel simply ignored several — ignored the
service of the complaint and the summons and that you have not
carried — he has not carried the burden of overcoming the
presumption of valid service . . . [and] every presumption in this case
shows that Dr. Beitel knew of the complaint, knew of the summons,
and knew of the trial date, and that he simply failed to react in time
same presumption that may only be overcome by clear and convincing evidence); Mulder v.
C.I.R., 855 F.2d 208, 212 (5th Cir. 1988) (“[I]t is presumed that a properly-addressed piece of
mail placed in the care of the Postal Service has been delivered[.]”).
38
Likewise, the district court, acting in its appellate capacity, did “not find any reason
to disturb the . . . finding that Beitel received service of OCA’s complaint . . . .”
39
In other words, Dr. Beitel’s counsel was asking the bankruptcy court, “How could Dr.
Beitel have willfully defaulted if he maintained contact with OCA and had no indication that
the instant proceeding would be called for trial?”
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No. 08-30055
and did not file the pleadings or make an appearance at the trial
until after the trial was held on June 13, 2007, which resulted in the
judgment against him that I refuse to set aside. (emphasis added).
The bankruptcy court’s refusal to weigh what it called “he said, she said”
evidence and its subsequent conclusions demonstrate that the court applied the
incorrect burden of proof — clear and convincing evidence — to create a
presumption of willfulness; yet, the presumption properly applies only to the
valid-service component of a court’s inquiry. If courts were to require clear and
convincing evidence to overcome a putative willfulness presumption, the
instruction to apply Rule 60(b) “most liberally” when considering whether to
vacate a default judgment would be rendered meaningless.40 Instead, trial
courts must apply only the preponderance-of-the-evidence standard when
assessing willfulness.41 Under this less demanding burden of proof, the
bankruptcy court had no choice but to inject itself into a murky “he said, she
said” dispute before making its factual determination that Dr. Beitel “simply
ignored” the complaint and summons, i.e., that he willfully did so. Such
credibility determinations are often the very essence of making a finding by a
preponderance of the evidence.42
40
See Peter Scalamandre & Sons, Inc. v. Kaufman, 113 F.3d 556, 564 (5th Cir. 1997)
(classifying “clear and convincing evidence” as a “difficult burden.”); see also United States v.
Valenzuela-Puentes, 479 F.3d 1220, 1228 (10th Cir. 2007) (“[T]he Supreme Court has made
clear that [a party] establishes a fact by clear and convincing evidence only if the evidence
‘place[s] in the ultimate factfinder an abiding conviction that the truth of its factual
contentions are ‘highly probable.’”) (first and second modifications added) (quoting Colorado
v. New Mexico, 467 U.S. 310, 316 (1984)).
41
See, e.g., EPA v. Sequa Corp. (In re Bell Petrol. Servs., Inc.), 3 F.3d 889, 909–10 &
n.2 (5th Cir. 1993) (Parker, D.J., sitting by designation, concurring in part and dissenting in
part) (referring to the preponderance-of-the-evidence standard as the “fundamental civil case
standard” and defining it as “[e]vidence by ‘fifty-one percent,’ or to the extent of ‘more likely
than not’”).
42
Although not necessary to our decision today, we note that it is doubtful, even under
the clear-and-convincing-evidence standard, that courts have the luxury of ignoring all issues
that turn on “he said, she said” evidence. It is conceivable that this type of evidence could be
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No. 08-30055
The bankruptcy court was required to make a factual determination
regarding what contact was made between Dr. Beitel and OCA prior to the entry
of the default judgment and what, if any, assurances OCA’s counsel had given.
If the court had determined that OCA represented to Dr. Beitel that no default
would be taken against him and that he would be permitted to file an answer
and have his case decided on the merits, then a willfulness finding would likely
be clearly erroneous. If, on the other hand, the court had determined that OCA
never made any such representations, a finding of willfulness would likely have
withstood our deferential review. But, in the absence of a factual finding by the
bankruptcy court after applying the correct burden of proof, we owe the
bankruptcy court’s conclusion no deference.
The district court sitting in an appellate capacity was in no better position
than are we to affirm a willfulness finding by the bankruptcy court based on the
erroneous burden of proof.43 We cannot defer to the district court’s conclusion
that “the bankruptcy court did not abuse its discretion in concluding that Beitel’s
failure to respond was intentional” because the decision was based on deference
to the bankruptcy court’s holding, a deference that it was not due.
We thus must disregard the bankruptcy court’s willfulness finding,
apparently the only one (other than Dr. Beitel’s failure to overcome the
presumption of proof of service) that the bankruptcy court made in support of its
holding. This conclusion, however, does not end our inquiry. Before we may
highly relevant to whether a party meets the stricter evidentiary burden.
43
See 28 U.S.C. § 158(c)(2) (indicating that in bankruptcy cases district courts hear
appeals “in the same manner as appeals in civil proceedings generally taken to the courts of
appeals from the district courts”).
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No. 08-30055
reverse the bankruptcy court’s entry of default judgment, we must also “ask
whether the record could support a finding in [Dr. Beitel’s] favor.”44
3. Support for Setting Aside the Default Judgment
In ruling on a Rule 60(b) motion, courts are not required to state findings
or conclusions.45 Therefore, in the absence of such an optional statement, a
remand for specific findings “is not necessary if ‘the record would not support’ a
finding in the appellant’s favor, and if such a finding would be deemed clearly
erroneous had it been made.”46
We first address whether Dr. Beitel has presented a meritorious defense,
as a refusal to set aside a default judgment is proper in the absence of such a
defense.47 In determining whether a meritorious defense exists, “‘[t]he
underlying concern is . . . whether there is some possibility that the outcome of
the suit after a full trial will be contrary to the result achieved by the default.’”48
On careful review, we cannot say that the record could not support a finding that
Dr. Beitel has a meritorious defense. Dr. Beitel submitted an affidavit that he
borrowed only $290,000 from OCA — not the more than $600,000 that OCA
alleges — and his office manager submitted an affidavit with similar assertions.
44
Jenkens & Gilchrist v. Groia & Co., 542 F.3d 114, 119 (5th Cir. 2008) (emphasis
added).
45
Id. at 118 (citing FED. R. CIV. P. 52(a)(3)).
46
Id. at 119 (citing Kratzer v. Capital Marine Supply, Inc., 645 F.2d 477, 483 (5th Cir.
1981)). Of course, an erroneous finding or conclusion is distinct from an omitted finding or
conclusion. Nevertheless, before we order the parties to embark on yet another round of
litigation, we find it preferable to ascertain first whether the record, as a matter of law, would
not support a finding in Dr. Beitel’s favor
47
See id. at 119–20.
48
Id. at 122 (quoting 10A CHARLES ALAN WRIGHT, ARTHUR R. MILLER & MARY KAY
KANE, FEDERAL PRACTICE & PROCEDURE § 2697 (1998)); see Stephenson v. El-Batrawi, 524
F.3d 907, 914 (8th Cir. 2008) (quoting Augusta Fiberglass Coatings, Inc. v. Fodor Contracting
Corp., 843 F.2d 808, 812 (4th Cir. 1988) (per curiam) (same)).
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No. 08-30055
Dr. Beitel also contends that the promissory notes functioned as “open lines of
credit” that he had not drawn down to the extent OCA alleges. On the discrete
facts of this case, this factual basis is sufficient in theory to support a conclusion
that there is a possibility that the outcome after trial would not mirror the
default judgment.
We must also determine whether the record precludes a finding in Dr.
Beitel’s favor on the issue of willfulness.49 Our discussion of willfulness confirms
that this is an issue that turns largely on testimony that the bankruptcy court
labeled “he said, she said” evidence. Weighing each party’s statement, a function
peculiarly within the trial court’s domain, is likely determinative on the
willfulness issue. Thus, we cannot say that the record precludes a finding in
favor of Dr. Beitel on this issue.
The other relevant, but not singularly determinative, factors — (1)
prejudice to OCA, (2) the effect, if any on the public interest, (3) whether there
was significant financial loss to Dr. Beitel, and (4) whether Dr. Beitel acted
expeditiously to correct the default — are not so heavily weighted against Dr.
Beitel that they alone would support our affirming the default judgment against
him.50 At least two of these factors likely weigh in Dr. Beitel’s favor: (1) Dr.
Beitel’s loss — several hundred thousand dollars — is likely significant to him,
and (2) Dr. Beitel appears to have acted expeditiously following entry of the
default judgment by immediately thereafter filing an amended answer and then
actively attempting to set aside that judgment. The public-policy factor may cut
both ways because there is a value both in allowing trial of cases on the merits
and in adhering to procedural rules. And, only one factor likely weighs in OCA’s
49
Jenkens & Gilchrist, 542 F.3d at 122.
50
See, e.g., id. at 122–24 (finding that a number of the relevant factors appeared to
weigh in defendant’s favor and remanding to the district court for further proceedings, or at
a minimum, for a more detailed ruling).
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No. 08-30055
favor: It would likely experience some harm, perhaps minimal, in having to
re-prove its liability and damages.
We conclude that the record does not offer sufficient support for the
district court — nor this court — to make an independent determination that the
bankruptcy court’s decision was within its discretion.
III. CONCLUSION
We vacate both the bankruptcy court’s denial of Dr. Beitel’s motion to set
aside or to vacate the default judgment against him and the district court’s order
affirming the bankruptcy court. We remand this matter to the bankruptcy court
for it to re-consider the willfulness element of Dr. Beitel’s motion under the
correct burden of proof, preponderance of the evidence, with instructions that the
bankruptcy court’s review include, at a minimum, an evidentiary hearing on the
willfulness question. VACATED and REMANDED with instructions.
19