Reed

Filing 15

ORDER Vacating Default Judgment and Remanding for Further Proceedings. Signed by District Judge Matthew F. Leitman. (HMon)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
GREGORY J. REED,
Case No. 16-cv-11777
Hon. Matthew F. Leitman

Appellant,
v.
VERLADIA BLOUNT,
Appellee.
_______________________________/

ORDER VACATING DEFAULT JUDGMENT
AND REMANDING FOR FURTHER PROCEEDINGS
On August 28, 2014, Debtor/Appellant Gregory Reed (“Reed”) filed for
bankruptcy under Chapter 7 of the Bankruptcy Code. (See Bankruptcy Case No. 1453838.) Thereafter, Appellee Verladia Blount (“Blount”), Reed’s ex-wife, filed a
claim in Reed’s bankruptcy proceedings (the “Claim”). In the Claim, Blount sought
a total of $230,000 that she had been awarded against Reed under a Final Judgment
of Divorce entered by the Wayne County Circuit Court.
In addition to filing the Claim, Blount also initiated a related adversary
proceeding against Reed in the Bankruptcy Court (the “Adversary Proceeding”).
Blount’s First Amended Complaint in the Adversary Proceeding alleged that the
$230,000 debt underlying the Claim was nondischargeable under 11 U.S.C. §
727(a)(2), (3), (4), and (5). (See Adversary Proceeding Dkt. #17.) After Reed’s
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repeated failures to comply with his discovery obligations, the Bankruptcy Court
entered a judgment of default against Reed and ordered that Reed be denied
discharge. (See Adversary Proceeding Dkt. #39.)
On February 26, 2016. Reed filed a motion to set aside the default judgment
and dismiss the adversary proceeding (the “Motion to Set Aside Default Judgment
and Dismiss”). (See Adversary Proceeding Dkt. #40.) Reed asserted that the
Bankruptcy Court lacked subject matter jurisdiction in the Adversary Proceeding
because of the absence of a “case or controversy” as required by Article III, Section
2, of the United States Constitution. (See Adversary Proceeding Dkt. #40-2 at 2-5.)
According to Reed, the $230,000 debt underlying the Claim was non-dischargeable
by operation of law under two self-effectuating sections of the Bankruptcy Code, 11
U.S.C. §§ 523(a)(5) and 523(a)(15). (Id at 3.) Thus, Reed contended, Blount would
“gain nothing for herself by blocking Defendant’s discharge under 11 U.S.C. §727,”
and the Adversary Proceeding accordingly did not present a live case or controversy.
(Id.) The Bankruptcy Court denied Reed’s Motion to Set Aside Default Judgment
and Dismiss and also denied Reed’s subsequent motion for reconsideration. (See
Adversary Proceeding Dkt. # 44, 46.) Reed timely appealed both of the Bankruptcy
Court’s orders.
At the hearing before this Court on October 20, 2016, Blount’s counsel
candidly acknowledged to the Court that the Bankruptcy Court lacked (and that this
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Court also lacks) Article III jurisdiction over the Adversary Proceeding for the
reasons stated in Reed’s Motion to Set Aside Default Judgement and Dismiss. Given
that acknowledgment, the Court will vacate the default judgment.
Blount’s counsel has a plan to remedy the lack of Article III jurisdiction. She
explained that she will seek permission to file a Second Amended Complaint in the
Adversary Proceeding, and in that Second Amended Complaint, she will seek to
avoid the discharge of amounts that are not already nondischargeable by operation
of law. Whether to permit the proposed amendment is a matter that should be first
addressed by the Bankruptcy Court on remand. Likewise, the Bankruptcy Court
should have the first opportunity to rule on any challenges by Reed to the merits of
the proposed amendment.
Accordingly, IT IS HEREBY ORDERED that the Bankruptcy Court’s
Order Denying Defendant’s Motion to Set Aside Default Judgment is VACATED.
The Case is REMANDED to allow Blount to move to file a Second Amended
Complaint and for any other proceedings that are consistent with this order.

s/Matthew F. Leitman
MATTHEW F. LEITMAN
UNITED STATES DISTRICT JUDGE
Dated: October 25, 2016

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I hereby certify that a copy of the foregoing document was served upon the
parties and/or counsel of record on October 25, 2016, by electronic means and/or
ordinary mail.
s/Holly A. Monda
Case Manager
[phone]

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