Chowdhury et al v. Seaver
MEMORANDUM AND OPINION AND ORDER REVERSING THE BANKRUPTCY COURT ORDER: It is hereby Ordered that the Court REVERSES AND REMANDS the January 10, 2017, order of the Bankruptcy Court.(Written Opinion) Signed by Chief Judge John R. Tunheim on 11/8/2017. (JMK)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
BKY No. 16-4124
In re: PAUL HANSMEIER
BOOTH SWEET, LLP,
Civil No. 17-723 (JRT)
AND ORDER REVERSING
RANDALL L. SEAVER, Trustee of the
Bankruptcy Estate of Paul Hansmeier
Paul A. Godfread, GODFREAD LAW FIRM, P.C., 6043 Hudson Road,
Suite 305, Woodbury, MN 55125, for appellant;
Matthew D. Swanson, FULLER, SEAVER, SWANSON & KELSCH,
P.A., 12400 Portland Avenue South, Suite 132, Burnsville, MN 55337, for
In 2013, Appellants Sandipan Chowdhury and Booth Sweet, LLP, obtained a
judgment against Debtor Paul Hansmeier in the United States District Court for the
District of Massachusetts. The judgment was attached as a lien against Hansmeier’s
Subsequently, Hansmeier filed for bankruptcy.
condominium was sold and the Chapter 7 Trustee (“Trustee”) approved payment of the
In 2016, the First Circuit vacated Chowdhury and Booth Sweet’s judgment and
remanded the case to the United States District Court. The Trustee brought an adversary
proceeding in Bankruptcy Court against Chowdhury and Booth Sweet seeking recovery
of the amount paid on the judgment. After Chowdhury and Booth Sweet did not respond
to the complaint, the Trustee filed for default judgment without first filing for an entry of
The Bankruptcy Court entered default judgment and, ultimately, denied
Chowdhury and Booth Sweet’s motion to vacate. Because the Bankruptcy Court did not
follow the proper two-step procedure required by Federal Rule of Civil Procedure 55, this
Court will construe the Bankruptcy Court’s default judgment as an entry of default and
will reverse and remand the case to the Bankruptcy Court for further proceedings
consistent with this opinion.
AF HOLDINGS, LLC V. CHOWDHURY
On November 13, 2012, AF Holdings brought a copyright-infringement action in
the United States District Court for the District of Massachusetts against Chowdhury
alleging that Chowdhury knowingly and illegally reproduced and distributed a
copyrighted video allegedly owned by AF Holdings. Complaint ¶ 1, AF Holdings, LLC
v. Sandipan Chowdhury, No. 12-cv-12105-JLT (D. Mass Nov. 13, 2012). Prenda Law,
Inc., represented AF Holdings in the copyright action.
counterclaims against AF Holdings including unfair or deceptive conduct in violation of
Massachusetts law. Answer ¶¶ 49-59, Chowdhury, No. 12-cv-12105-JLT. Booth Sweet
While AF Holdings’ action against Chowdhury was pending, the United States
District Court for the Central District of California concluded that AF Holdings and
Prenda Law were the alter egos of Hansmeier and his partners, who collectively forged
the signature of Alan Cooper, the groundskeeper of one of Hansmeier’s partners, on the
copyright assignment of a different video. See Ingenuity 13 LLC v. Doe, No. 2:12-cv8333-ODW(JCx), 2013 U.S. Dist. LEXIS 64564, at *6-9 (C.D. Cal. May 6, 2013). In
light of these revelations, Chowdhury moved for default judgment, alleging that AF
Holdings fraudulently signed Cooper’s name on the copyright assignment of the video
Chowdhury allegedly distributed. Mem. Supp. Def.’s Mot. Default J. at 2-3, Chowdhury,
No. 12-cv-12105-JLT. The United States District Court for the District of Massachusetts
granted Chowdhury’s motion and awarded Chowdhury $64,180.80 with interest. Final
Judgment (“Chowdhury Judgment”), Chowdhury, No. 12-cv-12105-JLT. On October 17,
2014, the Chowdhury Judgment was attached as a lien against Hansmeier’s Minnesota
AF Holdings appealed the Chowdhury Judgment to the United States Court of
Appeals for the First Circuit.
On August 4, 2016, the First Circuit vacated the
Chowdhury Judgment as to Hansmeier on jurisdictional grounds and remanded the matter
to the United States District Court for the District of Massachusetts. AF Holdings, LLC v.
Chowdhury, No. 13-2535 (1st Cir. Aug. 4, 2016).
On July 13, 2015, Hansmeier filed a voluntary Chapter 13 bankruptcy petition.
(App. at 19, U.S. Trustee’s Mot. to Convert Case to Chapter 7 (“Mot. to Convert”) ¶ 18,
June 1, 2017, Docket No. 15.) In September or October 2015, Hansmeier listed his
condominium for sale without notifying the Chapter 13 trustee. (Id. at 18-19, Mot. to
Convert ¶ 16.) In November 2015, Hansmeier accepted an offer to sell the condominium
for $1,200,000 and moved for approval to sell the condominium. (Id.; App. at 35, Mot.
to Sell Free & Clear.)
On December 3, 2015, the Bankruptcy Court converted Hansmeier’s case to a
Chapter 7 case and approved the sale of the condominium but ordered that the proceeds
“shall be used at closing only to satisfy the underlying first mortgage on the property,
judgment lien, realtor fees, and all other usual and customary closing costs such as deed
recording fees paid to the county.” (App. at 68-69, Order at 1-2.) On December 15,
2015, the condominium was sold and the Chowdhury Judgment was included among the
(App. at 70, ALTA Settlement Statement.)
The Chapter 7 Trustee
approved the terms of the sale and payment of the Chowdhury Judgment.
Following the First Circuit’s vacatur of the Chowdhury Judgment on August 4,
2016, the Chapter 7 Trustee demanded recovery of the amount paid to satisfy the
judgment. (App. at 268-69, Letter from Matthew D. Swanson to Edward P. Sheu (Oct.
25, 2016).) Chowdhury and Booth Sweet objected to repayment of the judgment. (App.
at 276-77, Letter from Jason Sweet to Matthew Swanson (Oct. 26, 2016).)
The Trustee began an adversary proceeding against Chowdhury and Booth Sweet
on November 18, 2016, seeking to recover the payment of the Chowdhury Judgment.
(App. at 89-96, Compl. at 1-8.) Neither Chowdhury nor Booth Sweet returned the
summons or answered the complaint within thirty days of service. (App. at 217, Appl.
Default J. ¶¶ 7-14; App. at 225, Aff. of Default ¶ 2.)
On January 3, 2017, Chowdhury and Booth Sweet sent the Trustee a settlement
offer. (App. at 294, Letter from Jason Sweet to Matthew Swanson (Jan. 3, 2017).) The
Trustee declined the offer the next day and stated it was “not moving forward with any
meaningful settlement negotiation.” (Appellant’s App. at 304, Email from Matthew
Swanson to Jason Sweet (Jan. 4, 2017).)
On January 5, 2017, Jason Sweet, attorney for Booth Sweet, underwent emergency
surgery. (App. at 259, Decl. of Jason E. Sweet ¶ 7.) After being discharged from the
hospital, Sweet left Minnesota to attend his grandmother’s funeral on January 9, 2017.
(Id. at 260, Aff. of Jason E. Sweet ¶ 8-10.) Sweet remained on prescription medications
that made him “cloudy” and confused. (Id.)
On January 10, 2017, the Chapter 7 Trustee moved for default judgment.
(Appellant’s App. at 216, Appl. Default J.) The Bankruptcy Court found that Chowdhury
and Booth Sweet did not return the summons and did not file an answer or response to
the complaint within the time period allotted by the rules and that any response would
now be untimely. (Id. at 235, Default J. Order at 2.) The Bankruptcy Court, therefore,
entered default judgment against Chowdhury and Booth Sweet in the amount of
$71,620.90. (Id. at 237, Default J. Order at 5; Appellant’s App. at 239, J.)
Chowdhury and Booth Sweet moved to vacate the default judgment on January
19, 2017. (Appellant’s App. at 240, Mot. to Vacate Default J.) On February 22, 2017,
the Bankruptcy Court found that (1) the parties were not engaged in active settlement
negotiations, (2) neither Chowdhury nor Booth Sweet were able to explain their failure to
answer the complaint, and (3) Chowdhury and Booth Sweet’s affirmative defenses were
not likely to succeed on the merits. (App. at 368, Hr’g Tr. 25:3-19.) Applying the four
factors from Pioneer Ins. Servs. Co. v. Brunswick Assocs., 507 U.S. 380 (1993), the
Bankruptcy Court concluded that the Trustee was prejudiced by the expense of resources
needed to continue litigation of the adversarial proceeding and that Chowdhury and
Booth Sweet offered no reasonable explanation for the delay in filing an answer. (Id. at
370-71, Hr’g Tr. 27:1-28:25.) The Bankruptcy Court, therefore, denied the motion. (Id.
at 375, Hr’g Tr. 32:1-2.)
Chowdhury and Booth Sweet appeal.
STANDARD OF REVIEW
In bankruptcy proceedings the District Court sits as an appellate court and reviews
the Bankruptcy Court’s conclusions of law de novo and its findings of fact for clear error.
Reynolds v. Pa. Higher Educ. Assistance Agency, 425 F.3d 526, 531 (8th Cir. 2005). The
Court reviews the Bankruptcy Court’s decision to grant a default judgment for an abuse
of discretion, “with sensitivity to the perceptions of the judge on the scene, but also with
a recognition that defaults are disfavored.” In re Suprema Specialties, 330 B.R. 40, 45
(S.D.N.Y. 2005). “[W]hen the grant of a default judgment precludes consideration of the
merits of a case, even a slight abuse of discretion may justify reversal.” Johnson v.
Dayton Elec. Mfg. Co.¸ 140 F.3d 781, 785 (8th Cir. 1998).
THE DEFAULT JUDGMENT WAS PROCEDURALLY IMPROPER.
The Court must decide whether the Bankruptcy Court abused its discretion by
entering default judgment even though the Trustee had not yet obtained an entry of
default against Chowdhury and Booth Sweet.
Federal Rule of Civil Procedure 55 governs default in adversary proceedings in
bankruptcy court. Fed. R. Bankr. P. 7055. Under Rule 55, “[w]hen a party against whom
a judgment for affirmative relief is sought has failed to plead or otherwise defend, and
that failure is shown by affidavit or otherwise, the clerk must enter the party’s default.”
Fed. R. Civ. P. 55(a). “A judgment of default may, thereafter, be entered on application
to the Court.” Semler v. Klang, 603 F. Supp. 2d 1211, 1218 (D. Minn. 2009); see also
Fed. R. Civ. P. 55(b). “[E]ntry of default under Rule 55(a) must precede grant of a
default judgment under Rule 55(b).”
Johnson, 140 F.3d at 783.
“Only after an
application is made, and granted under Rule 55(a), can a [party] seek a [d]efault
[j]udgment.” Armstrong v. Astrue, 569 F. Supp. 2d 888, 895 n.6 (D. Minn. 2008). A
court’s grant of a default judgment before entry of default is a reversible error. See
Tollefson v. Pladson, 508 Fed. App’x. 593, 595 (8th Cir. 2013).
Neither the Trustee nor the Bankruptcy Court followed the two-step procedure in
this case. The Trustee filed an application for default judgment without first requesting
that the clerk enter Chowdhury and Booth Sweet’s default as required by Rule 55(a).
Without an entry of default by the clerk, the Bankruptcy Court entered a default judgment
on January 10, 2017, the same day the Trustee submitted his application to the court.
(App. at 367, Hr’g Tr. 24:7–13 (“[C]ounsel for the plaintiff filed an application for
default judgment and an order granting that application was entered later that day.”).)
The two-step procedure required by the Rule 55 was not followed in this case. See
Armstrong, 569 F. Supp. 2d at 895 n.6.
Nevertheless, the Trustee argues that he followed the local rules for the United
States Bankruptcy Court for the District of Minnesota. The United States Bankruptcy
Court for the District of Minnesota has enacted Local Rule 7055-1, which states in full:
A party seeking default judgment shall serve on any
party in default and file: 1) an application for default
judgment; 2) an affidavit of default stating that no defense or
other response of any kind has been received or, if one has
been received, detailing the defense or other response
received; 3) an affidavit of identification of the defaulting
party including address and military or infancy or competence
status; 4) an affidavit on the merits and the amount due
including costs and disbursements by a person with personal
knowledge; and 5) proposed findings of fact, conclusions of
law and order for judgment. If the summons and complaint
were served by mail and then returned by the postal service,
the party seeking judgment shall disclose that to the court by
affidavit. If the application for default judgment was served
by mail and then returned by the postal service, the party
seeking judgment shall disclose that to the court. The court
may, in its discretion, hold a hearing before entry of default
Local rules of procedure must be “consistent with . . . [the Federal Rules of Bankruptcy
Fed. R. Bankr. P. 9029(a)(1).
Because Local Rule 7055-1 must be
consistent with Federal Rule of Bankruptcy Procedure 7055 (and, therefore, with Federal
Rule of Civil Procedure 55), an entry of default must precede a default judgment. See
Fed. R. Civ. P. 55; Johnson, 140 F.3d at 783. Moreover, Local Rule 7055-1 presupposes
entry of default and merely sets the procedure to be used for entering default judgment.
Again, the clerk never entered Chowdhury and Booth Sweet’s default.
Because the Court will conclude that the Bankruptcy Court erred by failing to
follow the proper two-step procedure before entering default judgment, the Court will
construe the Bankruptcy Court’s default judgment as an entry of default under Rule
55(a). 1 See Johnson, 140 F.3d at 783 (holding that a district court properly construed its
default judgment as an entry of default where it had failed to previously enter the party’s
As a result of the Bankruptcy Court’s failure to follow the proper default
procedures, Chowdhury and Booth Sweet were wrongly held to a higher standard for
purposes of their motion to vacate the default judgment. A court may set aside an entry
of default for “good cause.” Fed. R. Civ. P 55(c). A court may set aside a default
judgment pursuant to Rule 60(b), which requires a showing of “mistake, inadvertence,
surprise, or excusable neglect.” Fed. R. Civ. P. 55(c), 60(b). Relief from a default
judgment requires a stronger showing of excuse than relief from a mere entry of default.
Johnson, 140 F.3d at 783-84. The Bankruptcy Court applied the standard from Pioneer
Ins. Servs. Co. v. Brunswick Assocs., 507 U.S. 380 (1993), which concerned the “more
stringent standard in Rule 60(b)(1).” Johnson, 140 F.3d at 784. Chowdhury and Booth
Sweet were entitled to the more lenient “good cause” standard in considering the denial
of their motion to vacate the default judgment. Id. Whether Chowdhury and Booth
Sweet can show good cause and cure the entry of default is a question for remand.
The Court will reverse the Bankruptcy Court’s judgment and remand the case for
further proceedings consistent with this opinion.
Chowdhury and Booth Sweet also appeal the denial of Rule 55(c) relief.
Because the Court will conclude that the Bankruptcy Court erred in granting default
judgment in the first instance, the Court need not reach the denial of Rule 55(c) relief.
See Tollefson, 508 Fed. App’x. at 594 n.1.
Based on the foregoing, and all the files, records, and proceedings herein, IT IS
HEREBY ORDERED that the Court REVERSES AND REMANDS the January 10,
2017, order of the Bankruptcy Court.
LET JUDGMENT BE ENTERED ACCORDINGLY.
DATED: November 8, 2017
at Minneapolis, Minnesota.
_______s/John R. Tunheim_____
JOHN R. TUNHEIM
United States District Court
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