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Mere Fact That a Defendant is in Default Does Not Entitle the Plaintiff to a Default Judgment.

Fort v. Branch Banking & Tr. Co. (In re JAT, Inc.), Nos. 13-07552-HB, 15-80205-HB, 2016 Bankr. LEXIS 841 (U.S. Bankr. D.S.C. Mar. 16, 2016)

The Trustee brought the adversary proceeding to avoid and recover the transfer of $71,137.30 from Debtor JAT, Inc. to Defendant Branch Banking & Tr. Co(BB&T) that was allegedly property of the estate transferred during the two years preceding the petition date. The Trustee sought the recovery of alleged payments as fraudulent transfers pursuant to 11 U.S.C. § 548as they were allegedly made by JAT with actual intent to hinder, delay, or defraud existing and future creditors or as preferences under § 547 on account of an antecedent debt of JAT. BB&T failed to timely file an answer to the Trustee’s complaint and, as a result, the Trustee filed an affidavit of default. A clerk’s entry of default was entered the same day. The Trustee filed the request for entry of judgment in the amount of $71,137.30 for voided transfers pursuant to § 548(a)(1).

The Court concluded that an entry of default judgment under Fed. R. Civ. P. 55(b)(2) was not warranted and the Court clerk’s entry of default was vacated because the Defendant had a meritorious defense. The Defendant discovered the default and hired outside counsel to assist it in the matter within five days. The Court found that any prejudice to the Trustee as a result of the Defendant’s failure to file a timely answer was minimal, and a less drastic sanction in the form of attorneys’ fees and costs was available to the Trustee.

BB&T quickly filed the motion within seven days after the entry of default was entered. Such prompt action clearly demonstrated a timely effort to set aside the entry of default. Further, BB&T acknowledged the complaint immediately by contacting an attorney to begin dialogue and provide information. The Court found that although BB&T should bear some personal responsibility for its failure to timely respond to the complaint because it was aware of the action pending against it and the deadline to answer, BB&T did not act in bad faith, was discussing this matter with his attorney, and was in the process of providing requested documentation when the affidavit of default was filed. The Court concluded that all the six factors to be considered in exercising discretion prior to granting default judgment were satisfied – whether the party in default has a meritorious defense; (2) whether it acted with reasonable promptness; (3) the personal responsibility of the defaulting party; (4) prejudice to the party; (5) the history of dilatory action; and (6) the availability of less drastic sanctions. The Court denied the Trustee’s request for entry of judgment and motion to set aside entry of default.