Lattner v. Smith (In re Smith)

In re: Jamila Smith, Debtor.

Christina Lattner, Plaintiff. v. Jamila Smith, Defendant.

Bankruptcy No. 20-11452

Adversary No. 20-00328

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

February 9, 2021

Chapter 7

Honorable Judge Jack B. Schmetterer

OPINION ON REQUEST FOR ENTRY OF DEFAULT BY CLERK [DKT. NO. 8]

This Adversary Proceeding relates to the bankruptcy case of Jamila Smith (the "Defendant"), Christina Lattner (the "Plaintiff") brought this adversary action to dismiss the Defendant's case under 11 U.S.C. §707(a) and 707(b).¹ For the reasons articulated below, the Plaintiffs' Request for Entry of Default by Clerk (the "Motion") will be DENIED by separate order to be entered concurrently herewith.

BACKGROUND

The Defendant filed for chapter 7 bankruptcy on May 26, 2020. [Bankr. No. 20-11452, Dkt. No. 1]. The Defendant listed three total liabilities; two student loans totaling $3,196 and, at issue here, a debt to the Plaintiff of $4,270.06 (the "Debt"). Id. at p. 24. The Plaintiff filed the present action on August 31, 2020, (the "Complaint") [Dkt. No. 1], with the Plaintiff mailing the Defendant a summons and copy of the complaint on September 4, 2020. [Dkt. No. 5]. On October 6, 2020, the court ordered the Defendant to file an answer to the Complaint by November 1, 2020. [Dkt. No. 6]. No answer was filed and the Plaintiff filed the present Motion on November 9, 2020. [Dkt. No. 8].

Based upon the Plaintiff's filings, the Defendant's debt to the Plaintiff stems from an April 2019 automobile accident, for which the Defendant was apparently liable but lacked insurance.[Dkt. No. 1, ¶10].² The Plaintiff began litigation in Cook County, Illinois against the Defendant (Case No. 2019-M1-014039) and received a judgment for $4,408.36 on November 14, 2019. Id. at ¶¶13, 16. At the Defendant's request, the two parties apparently agreed to a payment plan where the Defendant paid the Plaintiff $300 per month until the debt was repaid; with payments beginning on April 15, 2020. Id. at ¶18. The Plaintiff alleges the Defendant only ever made one such $300 payment which came a month late on May 15, 2020. Id. at ¶20. Eleven days later, the Defendant filed for bankruptcy. Supra.

The Plaintiff, through her Complaint, seeks to prevent the discharge of the Debt owed her pursuant to 11 U.S.C. § 707(a)(1) and 707(b)(3). The Complaint's main argument is that the Defendant filed for bankruptcy solely to avoid the Debt and did so in bad faith. The Plaintiff points to, inter alia, the allegation that the Defendant entered into the agreement for the $300 installment payments solely to have her license reinstated and with no intent to actually make all of the payments as evidence of bad faith. [Dkt. No. 1, Ex. B, G]. The Plaintiff's Motion now seeks a default against the Defendant for failing to respond. [Dkt. 8, ¶10]. The Defendant has not appeared in the present adversary proceeding and appears to lack counsel for the proceeding based upon her counsel's scope of representation letter from the main bankruptcy case. [Bankr. No. 20-11452, Dkt. No. 1, p. 55].

JURISDICTION AND VENUE

Subject matter jurisdiction lies under 28 U.S.C. § 1334. The district court may refer cases arising under title 11 to a bankruptcy judge under 28 U.S.C. § 157, and this matter is referred here by District Court Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. Venue lies under 28 U.S.C. § 1409. This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), (I), (J), and (O).

DISCUSSION

The Plaintiff moves under Fed. R. Civ. P. 55 ("Rule 55"), made applicable to bankruptcy proceedings by Fed. R. Bankr. P. 7055, seeking a default against the Defendant for failing to plead in the present action. While the Motion merely seeks an entry of default, it is clear from Plaintiff's oral statements to the Court on November 10, 2020 that what Plaintiff is really seeking is an entryof default judgment.³ A Rule 55 default consists of two parts: first, the clerk must enter a default, second, the court may enter a default judgment.⁴ See Arwa Chiropractic, P.C. v. Med-Care Diabetic & Medical Supplies, Inc., 961 F.3d 942, 947, 948 (7th Cir. 2020). While the Defendant has defaulted by failing to respond in time, the more difficult question concerns default judgment. For the following reasons, the Plaintiff has failed to establish sufficient grounds for the entry of a default judgment.⁵

A. Standard for Default Judgment

"Entry of default does not entitle the non-defaulting party to a default judgment as a matter of right." In re Villegas, 132 B.R. 742, 746 (9th Cir. B.A.P. 1991); see also AT&T Universal Card Services, Corp. v. Sziel (In re Sziel), 206 B.R. 490, 493 (Bankr. N.D. Ill 1997) (noting courts' concerns with rubber stamping default judgments in bankruptcy). Granting a motion for default judgment "lies within the sound discretion of the trial court." Merrill Lynch Mortg. Corp. v. Narayan., 908 F.2d 246, 254 (7th Cir. 1990). That discretion is "wide." Villegas, 132 B.R. at 746.

"Upon default, the well-pled allegations of the complaint ... are taken as true." Wehrs v. Wells, 688 F.3d 886, 892 (7th Cir. 2012). Still, before entering a default judgment, the court must "ensure the sufficiency of the complaint." Klarchek v. RJK Investors (In re Klarchek), 509 B.R. 175, 188 (Bankr. N.D. Ill. 2014). Therefore, amongst other possibilities, the court should deny a motion for default judgment if "the complaint would not survive a motion to dismiss under [Fed. R. Civ. P.] 12(b)(6)." Id.; see also Mercantile Bank v. Canovas, 437 B.R. 423, 427 (Bankr. N.D. Ill. 1998) (default judgment "may be denied where there are insufficient facts to support a cause of action."); In re Sanchez, 277 B.R. 904, 907 (Bankr. N.D. Ill. 2002) (the issue before the court on a motion for default judgment is "whether [p]laintiff has shown at least prima facie facts" required for their claims).

The allegations contained in the Complaint are insufficient to support the relief requested and the Complaint would not survive a motion to dismiss if filed.

B. Sufficiency of the Complaint

The Complaint seeks relief under two counts, one pursuant to 11 U.S.C. §§ 707(a)(1) and the other pursuant to 707(b)(3).⁶ Section 707(a)(1) allows the court to dismiss a bankruptcy case for cause due to "unreasonable delay by the debtor that is prejudicial to the creditors." 11 U.S.C. § 707(a)(1). Section 707(b) allows the court to dismiss or convert cases if "the granting of relief would be an abuse of the provisions of this chapter." 11 U.S.C. § 707(b)(1). When determining that abuse, section 707(b)(3) requires the court to consider "whether the debtor filed ... in bad faith; or the totality of the circumstances ... of the debtor's financial situation demonstrates abuse." 11 U.S.C. § 707(b)(3).

I. Section 707(a)(1)

Section 707(a)'s "for cause" dismissal, compared to dismissal under section 707(b), is "a more open-ended inquiry." In re Schwartz, 799 F.3d 760, 763 (7th Cir. 2015). It is not limited to procedural defects in the bankruptcy petition. Id. Rather than ask for a more broad dismissal for cause generally, the Complaint specifically requests relief under section 707(a)(1), which "punishes unreasonable delay, by a debtor who has filed a bankruptcy petition, in taking steps necessary to the administration of the bankrupt estate." Id.; see also In re Lang, 5 B.R. 371 (Bankr. S.D. N.Y. 1980) (finding the precursor to section 707(a)(1) applied only to post-petition delay).

There is no evidence that the Defendant or the Defendant's bankruptcy counsel has taken any steps to delay the Defendant's bankruptcy case. The Complaint contains no allegations that the Defendant has been slowing the bankruptcy process, nor does the case's docket. The Defendant filed for bankruptcy in 2020 and the docket shows a routine Chapter 7 case up until the Plaintiff filed this adversary proceeding, on the final day for objections to the Defendant's discharge. The Complaint lacks any allegations for even a prima facie case under section 707(a)(1).

II. Section 707 (b)(3)

A. Primarily Consumer Debts

To begin, dismissal under section 707(b) requires a debtor to have "primarily consumer debts." 11 U.S.C. § 707 (b)(1); see also In re Terzo, 502 B.R. 553, 556, 557 (Bankr. N.D. Ill.2013). Courts have interpreted consumer debts, as defined in 11 U.S.C. § 101 (8),⁷ to generally not include "[d]ebts that arise from negligence." In re Zgonina, No. 19-90467, 2019 WL 6170776, *3 (Bankr. C.D. Ill. Nov. 19, 2019) (citing In re Peterson, 524 B.R. 808, 811-813 (Bankr. S.D. Ind. 2015)). More specifically consumer debts do not include "[d]ebt arising from the negligent operation of an automobile." Peterson, 524 B.R. at 812 (Bankr. S.D. Ind. 2015) (citing inter alia In re White, 49 B.R. 869 (Bankr. W.D. N.C. 1985)). The term "primarily" has typically "been construed as meaning at the very least a majority." In re Sekendur, 334 B.R. 609, 618 (Bankr. N.D. Ill. 2005).

From the beginning then, analyzing whether to dismiss the Defendant's case under section 707(b) runs into problems. The majority of the Defendant's debt is from the automobile accident involving the Plaintiff. This suggests then that the Defendant's debts are not primarily "consumer debts" and the court cannot dismiss the case under section 707(b). The Defendant however claimed her debts were primarily consumer in her bankruptcy petition. [Bankr. No. 20-11452, Dkt. No. 1, p. 6]. As neither party has contested whether the Defendant has primarily consumer debts, the court will perform the analysis required for a dismissal under 707(b)(3) regardless.⁸

B. Bad Faith Under Section 707(b)(3)

To determine "bad faith" under section 707(b)(3) the court applies "the statutory "totality of the circumstances test" based solely on ability to pay and without necessity to show proof of misconduct." In re Victor & Stacy Watts, 557 B.R. 640, 646 (N.D. Ill. 2016) (ci...