562 B.R. 202
E.D.N.Y2016Background
- Debtor borrowed five loans from Citizens Bank to attend St. Christopher’s College of Medicine based on a Bank loan application that listed a federal school code and gave the impression the school was eligible for federal student aid; St. Christopher’s was not licensed, accredited, or on the Federal School Codes List.
- Debtor filed Chapter 7 and listed the Bank as a creditor; after discharge she filed an adversary complaint seeking a determination that the student loans were dischargeable under 11 U.S.C. § 523(a)(8).
- The Debtor served the Bank by first-class mail to a Bank officer; the Bank did not answer, and the Clerk entered default. The Debtor then moved for default judgment.
- At the default-judgment hearing the Bank appeared by counsel, disputed the sufficiency of service (arguing Bankruptcy Rule 7004(h) required certified mail to an officer), and was given 14 days to respond; the Bank filed an objection but did not assert a substantive defense.
- The Bankruptcy Court denied the Bank’s request to set aside the default and granted default judgment, concluding the allegations showed the loans were dischargeable because the school was not an eligible educational institution under § 523(a)(8). The District Court reversed, holding defective service by first-class mail of an insured depository institution was good cause to set aside the Clerk’s entry of default as a matter of law, vacating the default judgment and remanding.
Issues
| Issue | Plaintiff's Argument (de Cena) | Defendant's Argument (Citizens Bank) | Held |
|---|---|---|---|
| Was entry of default proper despite service by first-class mail? | Service by first-class mail was sufficient because Bank’s counsel appeared and had actual notice. | Service on an insured depository institution required certified mail to an officer under Rule 7004(h); first-class mail was ineffective. | Held for Bank: defective service under Rule 7004(h) was good cause to set aside the Clerk’s entry of default; default was void. |
| Does a defendant’s actual notice or appearance at a hearing cure defective service? | Actual notice and counsel’s appearance at the hearing cure defective service and make default relief proper. | Actual notice does not substitute for the strict service required by Rule 7004(h); service must be proper to trigger duty to plead. | Held for Bank: actual knowledge or counsel’s appearance does not retroactively validate defective service. |
| Was the Bankruptcy Court’s acceptance of the amended complaint as uncontested proper after default? | Once default was entered, allegations are taken as true and establish dischargeability. | Because default was void for defective service, allegations cannot be treated as uncontested. | Held for Bank: because default was void, the court erred in accepting allegations as uncontested; substantive merits need not be reached on appeal. |
| Was the Bankruptcy Court’s refusal to set aside default an abuse of discretion? | Denial was justified given the Bank received notice and failed to timely answer substantive allegations. | Denial was an abuse because Rule 7004(h) requires certified mail and defective service voids default. | Held for Bank: District Court found legal error — setting aside default was required as a matter of law. |
Key Cases Cited
- City of New York v. Mickalis Pawn Shop, LLC, 645 F.3d 114 (2d Cir. 2011) (default-judgment procedure and two-step Rule 55 analysis)
- Vt. Teddy Bear Co. v. 1-800 Beargram Co., 373 F.3d 241 (2d Cir. 2004) (Rule 55 default procedure overview)
- In re Men’s Sportswear, Inc., 834 F.2d 1134 (2d Cir. 1987) (deference to bankruptcy court’s default-judgment decisions)
- In re Mersmann, 505 F.3d 1033 (10th Cir. 2007) (defendant’s obligation to answer is triggered only by duly served complaint)
- Bogle-Assegai v. Connecticut, 470 F.3d 498 (2d Cir. 2006) (actual notice does not substitute for proper service)