(BK) Burkart v. Chandra, No. 2:2013cv02296 - Document 1 (E.D. Cal. 2013)
Court Description: FINDINGS AND RECOMMENDATIONS signed by Bankruptcy Judge Robert S. Bardwil on 11/4/2013 RECOMMENDING that default judgment be entered in favor of plaintiff, with damages in the amount of $14,500.00. Referred to District Judge John A. Mendez. (Donati, J)
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(BK) Burkart v. Chandra Doc. 1 It FILED 1 NOV - 42013 Nov 04, 2013 2 CLERK, U.S. DISTRICT COURT EASTERN DISTRICT OF CALIFORNIA UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF CALIFORNIA 3 4 UNITED STATES BANKRUPTCY COURT 5 EASTERN DISTRICT OF CALIFORNIA 6 Case No. 10-42050-D-7 7 Inre: 8 VINCENT THAKUR SINGH and MELANIE GAY SINGH, 9 CAED Case # 2:13-cv-2296 JAM Debtors. 10 11 MICHAEL F. BURKART, Chapter 7 Trustee, 12 Adv. No. 12-2497 Docket Control No. CDH-001 Plaintiff, V. 13 RONALD CHANDRA, 14 Defendant DATE: July 24, 2013 TIME: 10:00 a.m. DEPT: D 15 16 RECOMMENDATION TO THE DISTRICT COURT WITH FINDINGS OF FACT AND CONCLUSIONS OF LAW 17 18 Chapter 7 trustee Michael Burkart ("plaintiff") has filed a motion 19 for entry of default judgment against defendant Ronald Chandra 20 ("defendant"). The motion was noticed under LBR 9014-1(f) (1) and is 21 unopposed. The court submits to the district court the following 22 findings of fact and conclusions of law, pursuant to 28 U.S.C. § 23 157 (c) (1). 24 25 BANKRUPTCY COURT AUTHORITY Following the Ninth Circuit's decision in Exec. Benefits Ins. Agency 26 v. Arkison (In re Bellingham Ins. Agency, Inc.), 702 F.3d 553 (9th Cir. 27 2012), cert. granted, 2013 WL 3155257 (June 24, 2013), bankruptcy courts 28 do not have constitutional authority to enter final judgments on Dockets.Justia.com 1 fraudulent transfer claims against non-creditors. 702 F.3d at 565. The 2 Bellingham court, however, also held that a defendant's right to a 3 hearing in an Article III court is waivable. Id. at 566. "[A] 4 litigant's actions may suffice to establish consent" to adjudication by a 5 non-Article III court. Id. at 569. Here, defendant is neither a 6 creditor in the underlying bankruptcy case, nor was defendant 7 sufficiently active in the case to give rise to a finding of a waiver of 8 defendant's right to an Article III adjudication. Accordingly, the court 9 does not have authority to enter a final judgment on the fraudulent 10 transfer claim asserted against defendant. Thus, the court submits the 11 following as its findings of fact and conclusions of law, together with 12 its recommendation, to the district court. 13 ANALYSIS 14 A summons and complaint were served on defendant, who failed to 7012 (a) . On May 15 answer within the time provided under 16 17, 2013, the clerk of the court entered an order of default against 17 defendant. There are no other defendants in this matter. Accordingly, 18 the well-pleaded allegations in plaintiff's complaint, except for 19 allegations regarding the amount of damages, are deemed admitted. 20 Civ. P. 8(b) (6) FED. R. BANKR. P. FED. R. 21 22 23 24 25 26 27 28 In sum, § 157(b) (1) provides bankruptcy courts the power to hear fraudulent [transfer] cases and to submit reports and recommendations to the district courts. Such cases remain in the core, and the § 157(b) (1) power to 'hear and determine' them authorizes the bankruptcy courts to issue proposed findings of fact and conclusions of law. Only the power to enter final judgment is abrogated. Exec. Benefits Ins. Agency v. Arkison (In reBellingham Ins. Agency, Inc.), 702 F.3d 553, 565-66 (9th Cir. 2012), cert. granted, 2013 WL 3155257 (June 24, 2013) - 2 - 1 Obtaining a default judgment is a two-step process. See Eitel v. 2 McCool, 782 F.2d 1470, 1471 (9th Cir. 1986) . First, the clerk of the 3 court enters the default of the party who has failed to plead or 4 otherwise defend; the clerk or the court, depending on the nature of the 5 plaintiff's claim, then enters a default judgment. FED. R. 6 and (b), incorporated herein by FED. R. BANKR. P. 7055. In this case, the 7 clerk, at the request of plaintiff, entered the default of defendant on 8 May 17, 2013. Plaintiff's motion is for entry of default judgment 9 against defendant, pursuant to FED. R. CIV. P. 55(b). Factors the court CIV. P. 55(a) 10 must consider include the following: (1) the possibility of prejudice to 11 the plaintiff; (2) the merits of plaintiff's substantive claim; (3) the 12 sufficiency of the complaint; (4) the sum of money at stake in the 13 action; (5) the possibility of a dispute concerning material facts; (6) 14 whether the default was due to excusable neglect; and (7) the strong 15 policy underlying the Federal Rules of Civil Procedure favoring decisions 16 on the merits. Eitel, 782 F.2d at 1471-72. Resolution of disputes on 17 their merits is generally favored over default judgments. See id. at 18 1472. 19 Similar, albeit differently articulated, considerations are involved 20 in the context of a court's exercise of discretion to set aside a default 21 judgment: 22 23 24 25 26 27 28 These considerations, are usually listed as (1) whether the default was willful or culpable; (2) whether granting relief from the default would prejudice the opposing party; and (3) whether the defaulting party has a meritorious defense. Such considerations are, therefore, also appropriate considerations when deciding whether to render a default judgment. This is logical. When faced with the decision concerning whether to render a default judgment in the first place, a court logically should consider whether factors are present that would later oblige the court to set that default judgment aside. 10 MOoRE'S FEDERAL PRACTICE § 55.31[2] (Matthew Bender 3d. ed. 2012). - 3 - 1 Pursuant to the Fourth Claim for Relief of the First Amended 2 Complaint, plaintiff alleges a fraudulent transfer claim under 11 U.S.C. 3 § 548 (a) (1) (A) . In particular, plaintiff alleges that debtor, Vincent 4 Singh ("Singh"), made three payments to defendant totaling $14,500.00. 5 The payments consisted of cash, checks, or other forms of transfer 6 directly from Singh or indirectly from one or more accounts in Singh's 7 name, Malanie Singh, Perfect Financial Group, Inc., AAMCO Stockton, Inc., 8 AAMCO Orangevale, Inc., OM L. Singh, John A. Singh, Usha D. Singh, and/or 9 third parties to or for the benefit of defendant. The payments were made 10 as part of a Ponzi scheme perpetrated by Singh. Defendant had invested 11 funds with Singh and received payments in connection with the amounts 12 invested. Although Singh represented that he was making "hard money" 13 loans that would produce funds to be paid back to investors (including 14 defendant), the actual source of the payments from Singh was funds 15 invested by other investors. Pursuant to the Fifth Claim for Relief, 16 plaintiff alleges that, under 11 U.S.C. § 550, he is entitled to recover 17 from defendant any property transferred from Singh by means of an 18 avoidable transfer. 19 A. Propriety of Entering Default Judgment (Eitel Factors) 20 1. 21 Plaintiff will be prejudiced if default judgment is not granted. Possibility of Preiudice to Plaintiff 22 Plaintiff, as trustee of a bankruptcy estate being administered in part 23 for the benefit of Ponzi scheme victims, is required to marshal a series 24 of transfers to numerous investors so' that each investor can receive his 25 or her aliquot share of investment funds misappropriated by the 26 perpetrator of a Ponzi scheme. Although it seems counterintuitive to 27 claw back funds redistributed to the victims by Singh, it is necessary in 28 I ensuring the equality of treatment of similarly situated creditors. - 4 - ii Defendant's failure to respond in this action presents a delay that 21 reverberates through the bankruptcy case: plaintiff is prevented from 3 marshaling and accounting for investment funds that are to be distributed 4 on a pro rata basis. Accordingly, plaintiff will be prejudiced. 5 2. 6 The following facts are taken as true given defendant's lack of The Merits of Plaintiff's Claims 7 response. As stated earlier, plaintiff's complaint alleges, inter alia, 8 a claim under 11 U.S.C. § 548(a) (1) (A) that the transfers to defendant 9 were made by Singh with an actual intent to hinder, delay, or defraud 10 defendant and other similarly situated creditors. The court agrees with 11 plaintiff that singh's conduct amounted to a Ponzi scheme, which is 12 sufficient to establish actual intent to defraud creditors within the 13 meaning of 11 U.S.C. § 548(a) (1) (A). The "existence of a Ponzi scheme is 14 sufficient to establish actual intent under § 548(a) (1) ." AFI Holding, 15 Inc. v. Mackenzie (In re AFI Holdings, Inc.), 525 F.3d 700, 704 (9th cir. 16 2008) (internal quotation marks omitted) 17 Plaintiff's complaint adequately alleges that Singh engaged in a 18 Ponzi scheme. In furtherance of this scheme, Singh accepted investment 19 funds from defendant and other similarly situated investors. From time 20 to time, Singh, whether directly or indirectly, distributed payments to 21 the investors as an illusory return on investment. These illusory 22 returns constitute transfers, of an interest in property of the debtor 23 within the meaning of 11 U.S.C. § 101(54) (D) . The well-pleaded facts 24 show that these transfers were made with an actual intent to hinder, 25 delay, or defraud defendant on or within 2 years before the date of the 26 filing of the petition. Therefore, plaintiff's fourth claim for relief 27 I is meritorious. 28 - 5 - 1 Although an exception to liability exists in 11 U.S.C. § 548(c) for 2 a defendant who takes in good faith and gives new value, "the defendants' 3 good faith is an affirmative defense under Section 548(c) which must be 4 pleaded in the first instance as a defense by the defendants. It is not 5 incumbent on the plaintiff to plead lack of good faith on the defendants' 6 part because lack of good faith is not an element of a plaintiff's claim 7 under Section 548(a) (1) ." Bayou Superfund, LLC v. WAM Long/Short Fund 8 II, L.P. (In re Bayou Grp., LLc), 362 B.R. 624, 639 (Bankr. S.D.N.Y. 9 2007) . As defendant has not filed a response in this action, defendant 10 has not met the burden of proof required to successfully assert a "good 11 faith" defense to plaintiff's fraudulent transfer claim. 12 Lastly, plaintiff's complaint adequately alleges that plaintiff is 13 entitled to recover the transfers made to defendant. "[T]o the extent 14 that a transfer is avoided under section . . . 548, . . . the trustee may 15 recover, for the benefit of the estate, the property transferred . 16 from— (1) the initial transferee of such transfer or the entity for whose 17 benefit such transfer was made." 11 U.S.C. § 550(a) (1). 18 plaintiff's fifth claim for relief is meritorious. Therefore, 19 3. 20 The court finds that plaintiff's complaint is well-pleaded and sets Sufficiency of Plaintiff's Complaint 21 forth plausible facts—not just parroted statutory or boilerplate 22 language—that show that plaintiff is entitled to the relief sought in the 23 fourth and fifth claims for relief. The complaint sufficiently alleges 24 with particularity facts that show Singh engaged in an extensive Ponzi 25 scheme of which defendant was a victim. Pursuant to the scheme, 26 defendant invested funds and also received certain transfers from Singh. 27 The court is satisfied that plaintiff has pleaded the circumstances of 28 the Ponzi scheme constituting actual fraud with particularity. See - 6 - FED. 1 R. BANKR. P. 2 party who alleges fraud to plead such fraud with particularity) 3 Moreover, plaintiff has pleaded facts that satisfy the elements of a 4 fraudulent transfer claim sounding in actual fraud. 7009, which incorporates FED. R. Civ. P. 9(b) (requiring a 5 4. 6 Defendant is liable to plaintiff for a sum of money received via at The Amount at Stake 7 least three transfers from Singh. The total amount of avoidable 8 transfers alleged is $14,500.00, subject to change if and when plaintiff 9 discovers other transfers made to defendant. The amount at stake is not 10 a grossly large number, nor is it a nominal amount. Plaintiff has 11 presented evidence showing that Singh made at least three payments to 12 defendant in the amount alleged. This factor weighs in favor of a 13 default judgment. 14 5. 15 Upon entry of default, all well-pleaded facts in the complaint are Possibility of Dispute as to Material Facts 16 taken as true, except allegations relating to damages. Defendant has not 17 advanced any arguments showing material facts in dispute. Given the 18 sufficiency of the complaint and defendant's default, there is no genuine 19 I dispute of material fact that would preclude a default judgment. 20 6. 21 Defendant was properly served with the summons and complaint Excusable Neglect 22 pursuant to 23 defendant's failure to respond to the complaint was due to excusable 24 I FED. R. BANER. P. 7004. It is therefore unlikely that neglect. 25 7. 26 "Cases should be decided upon their merits whenever reasonably Policy in Favor of Deciding on the Merits 27 possible." Eitel, 782 F.2d at 1472. As compelling a factor as this may 28 be, a decision on the merits is not reasonable in light of defendant's -7-- 1 complete inaction. Defendant's lack of a response renders a decision on 2 the merits practically impossible. Thus, the ordinary preference to 3 decide cases on the merits must yield to the granting of a default 4 judgment. 5 B. 6 Damages The entry of a default judgment establishes the liability of the 7 defaulting party but the moving party still must establish the amount of 8 damages. Geddes v. United Fin. Grp., 559 F.2d 557, 560 (9th Cir. 1977). 9 "A court does not abuse its discretion by failing to hold a hearing [on 10 damages] when the amount of damages is liquidated or can be made certain 11 by computation based on the pleadings or information in the existing 12 record." 10 13 award of damages here, the court relies on the copies of checks submitted 14 as evidence by plaintiff. The total amount of transfers, according to 15 this evidence, is $14,500.00. 16 MooRE's FEDERAL PRACTICE § 55.32[2] [b] . In recommending an For the reasons stated, the court recommends entry of a default 17 judgment in favor of plaintiff, with damages in the amount requested in 18 the complaint. 19 Dated: 20 NOV - 4 2013 ROBERT S. BARDWIL United States Bankruptcy Judge 21 22 23 24 25 26 27 28 - 8 -
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