Cheney v. McRaeCheney v. McRae
On February 20, 2025, Matthew W. Cheney, Acting United States Trustee for Region Four (the “UST“) filed a Complaint against Frederick Sims McRae (the “Debtor“), seeking a denial of his discharge pursuant to
This matter came before the Court on June 3, 2025, for an evidentiary hearing on the UST‘s motion for entry of default judgment against the Debtor filed on April 2, 2025 (the “Motion for Default Judgment“), pursuant to
Following the hearing, the Court permitted the parties to file post-hearing briefs in support of their respective arguments. After consideration of the evidence, pleadings, briefs, and arguments made at the hearing, this matter is ripe for determination. This Memorandum Opinion constitutes the Court‘s findings of fact and conclusions of law pursuant to
I. Factual and Procedural History
The Debtor filed a chapter 7 bankruptcy case, pro se, on September 11, 2024, designated as Case No. 24-71950-FJS. On his voluntary petition, the Debtor listed his place of residence as 1729 Princeton Ave., Norfolk, VA 23523 (the “Princeton Address“) and did not designate any other address as his mailing address. Pet. at 2, ECF No. 1, Case No. 24-71950-FJS. The Debtor did not enroll in the Debtor Electronic Bankruptcy Noticing program whereby debtors may elect to receive court-issued notices and orders by email rather than first class mail.
The day after the Debtor filed his petition, the Clerk issued the Order to Debtor, which provided, among other things, that the Debtor must preserve and provide upon request all personal financial and business records, cooperate with the chapter 7 trustee, and provide the chapter 7 trustee with certain personal and financial information prior to the
The Debtor filed all required schedules and statements two weeks prior to the § 341 meeting of creditors, which was originally scheduled for October 8, 2024. ECF No. 17. The chapter
By motion filed on January 21, 2025, the UST requested the entry of an order directing the Debtor to submit to an oral examination and produce documents pursuant to
After concluding the examination, the UST initiated the instant adversary proceeding on February 20, 2025, with the filing of a Complaint seeking the denial of the Debtor‘s discharge (the “Complaint“). AP No. 1. The Complaint sets forth four counts. Count I seeks relief under
The Clerk issued a summons and initial scheduling order on February 21, 2025. AP No. 2. The summons set a deadline of March 24, 2025, to file an answer to the Complaint or other motion and scheduled a pretrial conference for April 8, 2025. Id. The Certificate of Service filed on February 24, 2025, states that the UST served the Debtor with the summons, initial scheduling order, and a copy of the Complaint at the Princeton Address via regular, first class United States mail, postage prepaid. AP No. 3.
The Debtor did not file an answer to the Complaint or other motion by the applicable deadline. On March 25, 2025, the UST moved for entry of default by the Clerk pursuant to
The Court convened the pretrial conference as scheduled on April 8, 2025. Counsel for the UST appeared but the Debtor did not. The Court continued the pretrial conference to be reconvened contemporaneously with the hearing on the Motion for Default Judgment, which was rescheduled to May 20, 2025. On May 2, 2025, the Bankruptcy Noticing Center provided the Debtor with notice of the rescheduled hearing via first class mail to the Princeton Address. Cert. of Notice, AP No. 12. The Debtor did not respond to the Motion for Default Judgment or appear at the hearing held on May 20, 2025. Notwithstanding the Debtor‘s failure to appear, the Court continued the pretrial conference and the hearing on the Motion for Default Judgment to be reconvened contemporaneously with the hearing on the Debtor‘s motion to dismiss his chapter 7 bankruptcy case, which was scheduled for June 3, 2025 (the “Motion to Dismiss“).1
The Debtor appeared on June 3, 2025, on his Motion to Dismiss, which the Court denied.2 The Debtor also opposed the entry of default judgment. He asserted that he did not receive the summons, initial scheduling order, and a copy of the Complaint by mail at the Princeton Address and, in fact, could not recall receiving any mailed notices related to his bankruptcy case apart from mail to creditors that was returned to him. See June 3, 2025 Hr‘g Tr. (hereinafter “Tr.“) 40:11-14,
II. Finding of Fact and Conclusions of Law
“Obtaining default judgment is a two-step process.” Clemson Grande Lakefront Condos., LLC v. First Fin. Equities Com., LLC (In re Clemson Grande Lakefront Condos., LLC), 472 B.R. 703, 704 (Bankr. D.S.C. 2012). The entry of default is a prerequisite for the subsequent entry of default judgment. Royal v. Lee, No. 1:17-cv-261-TSE/TCB, 2018 WL 10772683, at *1 (E.D. Va. Nov. 6, 2018) (citing Husain v. Casino Control Comm‘n, 265 F. App‘x 130, 133 (3d Cir. 2008); Danielson v. Human, No. 3:12-cv-840-FDW-DSC, 2013 WL 12218467, at *1 (W.D.N.C. Oct. 21, 2013)); see also LBR 7055-1(B)(2)(b)(iv). Accordingly, first, upon proper motion by the plaintiff, the clerk must enter default against any defendant who fails to serve an answer or motion within the thirty days after issuance of the summons.
A defaulting party may seek relief from the consequences of their inaction before the entry of default judgment by requesting to set aside the entry of default. “[W]hen a party is in default, but default judgment has not yet been entered, the governing legal standard is one of ‘good cause’ . . . .” Wards Corner Beauty Acad. v. Nat‘l Accrediting Comm‘n of Career Arts & Scis., No. 2:16cv639, 2017 WL 11509751, at *1 (E.D. Va. Sept. 19, 2017) (citations omitted). This standard is “more forgiving” than the “excusable neglect” standard applicable to requests for relief from default judgment because an entry of default “does not implicate any interest in finality.” Colleton Preparatory Acad., 616 F.3d at 420.
A. Has the Debtor Demonstrated Good Cause to Set Aside the Entry of Default?
The Court must determine whether the Debtor has articulated good cause to grant his oral motion to set aside the Entry of Default. If the Court finds that good cause exists and sets aside the Entry of Default, the UST necessarily cannot prevail on the Motion for Default Judgment. If the Debtor cannot demonstrate good cause to set aside the Entry of Default, then the allegations in the
The determination regarding whether good cause exists to set aside an entry of default is within the broad discretion of the trial court. A court analyzes the existence of “good cause” by weighing the following factors articulated by the Fourth Circuit in Payne ex rel. Estate of Calzada v. Brake, 439 F.3d 198, 204-05 (4th Cir. 2006): “whether the moving party has a meritorious defense, whether it acts with reasonable promptness, the personal responsibility of the defaulting party, the prejudice to the [non-defaulting] party, whether there is a history of dilatory action, and the availability of sanctions less drastic.” Id. (citations omitted). These factors must be liberally construed in favor of the defaulting party “in order to provide relief from the onerous consequences of defaults and default judgments.” Lolatchy v. Arthur Murray, Inc., 816 F.2d 951, 954 (4th Cir. 1987) (quoting Tolson v. Hodge, 411 F.2d 123, 130 (4th Cir. 1969)). The Court addresses each factor below.
1. Reasonable Promptness
Whether the Debtor acted with “reasonable promptness” to set aside the entry of default is determined in light of the relevant facts and circumstances. See United States v. Moradi, 673 F.2d 725, 727 (4th Cir. 1982). Within the Fourth Circuit, courts “have found that a defendant acted reasonably promptly when waiting seventeen, twenty-one, and thirty-two days after default was entered before attempting to set it aside.” Parks v. Disc. Box & Pallet, Inc., No. 5:12CV081, 2013 WL 662951, at *6 (W.D. Va. Feb. 22, 2013) (citing United States v. $10,000,000 in United States Currency, 2002 WL 1009734, at *3 (M.D.N.C. Jan. 29, 2002); Esteppe v. Patapsco & Back Rivers R.R. Co., 2001 WL 604186, at *4 (D. Md. May 31, 2001); Wainwright‘s Vacations v. Pan Am. Airways Corp., 130 F. Supp. 2d 712, 718 (D. Md. 2001)) (finding that the a defendant that filed a
In this case, the Debtor did not seek to set aside the Entry of Default until June 3, 2025, when he appeared at the continued hearing on the Motion for Default Judgment and denied having received the summons, initial scheduling order, and Complaint, which the Court has construed as an oral motion to set aside the Entry of Default. At that point, the adversary proceeding had been pending for three and a half months. His appearance coincided with his appearance on his own Motion to Dismiss. The only explanation offered for the Debtor‘s inaction was that he did not receive the pleadings mailed to the Princeton Address and was unaware of the pending adversary proceeding. Tr. 40:11-14, 44:3-19, 99:14-25.
An item that is properly addressed, stamped, and mailed gives rise to a presumption that the item was received. See In re Burton-Alston, No. 97-16333, 2006 WL 12904, at *2 (Bankr. M.D.N.C. Jan. 3, 2006); In re Parandeh, No. 14-12578-BFK, 2015 WL 430383, at *5 (Bankr. E.D. Va. Jan. 28, 2015) (citing In re Weiss, 111 F.3d 1159, 1172-73 (4th Cir. 1997); Fed. Deposit Ins. Corp. v. Schaffer, 731 F.2d 1134, 1137 n.6 (4th Cir. 1984)). To determine whether the presumption arises, “courts may consider whether the notice was correctly addressed, whether proper postage was affixed, whether it was properly mailed, and whether a proper certificate of service was filed.” In re Perkins, No. 10-03041-JW, 2011 WL 3163294, at *2 (Bankr. D.S.C. Feb. 8, 2011) (quoting Greyhound Lines, Inc. v. Rogers (In re Eagle Bus Mfg., Inc.), 62 F.3d 730, 736 (5th Cir. 1995)). The Princeton Address is the Debtor‘s address of record in this case. Pet. at 2,
The Debtor denied that he saw the Complaint or any mail pertaining to his bankruptcy case delivered to the Princeton Address apart from returned mail sent to creditors. Tr. 40:11-14, 44:3-19, 99:14-25. To explain why he did not receive his case-related mail, he offered only that mail is delivered to the ground or stairs outside the Princeton Address. Id. 40:7-8. The Debtor admitted, however, that he has received other mail at the Princeton Address. Id. 40:4-10. To accept the Debtor‘s explanation as credible would demand an inference that somehow only his bankruptcy-related mailings disappeared or were damaged beyond recognition following their delivery to the exterior of the Debtor‘s residence. The Court declines to draw this inference and finds that the Debtor has failed to rebut the presumption of receipt.
2. Personal Responsibility
A defaulting party‘s personal responsibility is determined by examining whether the default occurred due to circumstances beyond the party‘s control. “Courts have discretion to deny setting aside entry of default when the party‘s default was intentional or the result of negligence.” Pinpoint IT Servs., L.L.C. v. Atlas IT Exp. Corp., 812 F. Supp. 2d 710, 726 (E.D. Va. 2011) (citing 10 James Wm. Moore et al., Moore‘s Federal Practice ¶ 55.70 (3d ed. 2011)). The Court has already rejected the Debtor‘s attempt to assign blame for his default to the mail service to the Princeton Address and incorporates its findings set forth above. The Debtor has offered no other explanation for his default. Accordingly, the Court finds that the responsibility for the Debtor‘s failure to file an answer or motion is his alone. This factor weighs against setting aside the Entry of Default.
3. Meritorious Defense
To establish the existence of a meritorious defense, a defendant is not required to convince the court that he is likely to successfully defend against the plaintiff‘s claims at trial. Rather, “[t]he underlying concern is . . . whether there is some possibility that the outcome . . . after a full trial will be contrary to the result achieved by the default.” Augusta Fiberglass Coatings, Inc. v. Fodor Contracting Corp., 843 F.2d 808, 812 (4th Cir. 1988) (emphasis added) (quoting 10 C. Wright, A. Miller & M. Kane, Federal Practice and Procedure § 2697, p. 531 (2d ed. 1983)); see also Am. All. Ins. Co. v. Eagle Ins. Co., 92 F.3d 57, 61 (2d Cir. 1996) (“To satisfy the criterion of a ‘meritorious defense,’ the defense need not be ultimately persuasive at this stage.“). Indeed, at this stage, the defense offered may even be tenuous. See Rasmussen v. Am. Nat. Red Cross, 155 F.R.D. 549, 552 (S.D.W. Va. 1994) (finding the defendant‘s defense to be “tenuous” but “recogniz[ing] the general policy of deciding cases on their merits“). While the establishment of a meritorious defense does not impose a demanding burden upon a defendant, the defendant‘s argument must be based upon more than bare allegations, conclusory assertions, or general denials of the plaintiff‘s claims. See Consol. Masonry & Fireproofing, Inc. v. Wagman Const. Corp., 383 F.2d 249, 251-52 (4th Cir. 1967); Mayrant v. Norfolk Redevelopment & Hous. Auth., Civ. No. 2:24cv715, 2025 WL 2738859, at *7 (E.D. Va. Sept. 23, 2025).
When a defendant seeks to set aside an entry of default with respect to a complaint that includes multiple, independent claims for relief, courts have held that the defendant need only establish a meritorious defense to at least one of the plaintiff‘s claims. See, e.g., Wildflower + Co. v. Mood Apparel, Ltd., 338 F.R.D. 192, 198 (S.D.N.Y. 2021) (“As long as the defendant has a meritorious defense for one of the plaintiff‘s claims, and that claim is independent of any other
The Court must consider whether the Debtor has established a meritorious defense to any of the counts of the Complaint. Although the Debtor did not file a written motion to set aside or propose a late answer, he offered testimony at the hearing held on June 3, 2025, which the Court finds raises the existence of a meritorious defense to more than one of the UST‘s claims.
Intent is an element of Counts I, III, and IV of the Complaint. To deny the Debtor‘s discharge under Count I of the Complaint, which arises under
The Debtor did not deny that he failed to properly disclose the financial accounts or his interest in F Mac Capital & Holdings, Inc. Instead, he testified that he did not realize he still had an open account with Navy Federal Credit Union and failed to appreciate that non-traditional digital payment methods and accounts required disclosure, including those with de minimis balances, and that he believed he had made disclosures by providing account statements to the UST post-petition. Tr. 3:8-18, 38:1-15. He further testified that F Mac Capital & Holdings, Inc. is not operational. Id. 58:24-59:8. The Debtor‘s testimony was more than merely conclusory in that he offered explanations for his conduct that shed light on his state of mind. If offered at trial and accepted as credible, this testimony suggests that the Debtor may be able to present sufficient circumstantial evidence to undermine a finding of intent to hinder, delay, or defraud creditors, which is an essential element of the UST‘s claim for relief under
Count III of the Complaint, which arises under
The UST alleges the Debtor knowingly and fraudulently made multiple false statements in his bankruptcy schedules, statements, and filing fee waiver application and during his Section 341 meeting of creditors and Rule 2004 examination. In his testimony, the Debtor offered explanations
Finally, Count IV of the Complaint seeks denial of the Debtor‘s discharge under
In Count II of the Complaint, the UST seeks relief under
In his testimony, the Debtor claimed that he had provided a number of the financial records identified by the UST and provided specific explanations for his failure to produce others. For example, in his testimony, the Debtor stated that he earned income from barbering and other side jobs for which no formal documentation existed. Tr. 23:20-25:23, 27:4-10. He also testified that he had not obtained W-2s or filed income tax returns in the years immediately preceding the filing of his bankruptcy case but had provided his last-filed tax returns to the UST despite the allegations to the contrary. Id. 51:3-21, 54:1-20. The Debtor denied having an Apple Cash account—believing that to be distinct from Apple Pay, see id. 4:12, 38:7-11—and claimed that he had not provided the totality of his Cash App statements because he did not have sufficient time to print all his records, id. 53:1-4. He also denied that any documentation of the limousine service business venture exists because the venture was only a tentative, informal arrangement with his girlfriend and son. See id. 80:20-81:12. The Debtor‘s testimony suggests that if the UST established that his
The existence of meritorious defenses to the Complaint weighs in favor of setting aside the Entry of Default.
4. Prejudice to the UST
To assess whether the non-defaulting party has been prejudiced, courts consider—
whether the delay [caused by the default]: (1) made it impossible for the non-defaulting party to present some of its evidence; (2) made it more difficult for the non-defaulting party to proceed with trial; (3) hampered the non-defaulting party‘s ability to complete discovery; and (4) was used by the defaulting party to collude or commit a fraud.
Pinpoint IT Servs., L.L.C. v. Atlas IT Exp. Corp., 812 F. Supp. 2d 710, 727 (E.D. Va. 2011) (quoting Vick v. Wong, 263 F.R.D. 325, 330 (E.D. Va. 2009)). The majority of the weight is given to the first two factors. Burton v. The TJX Companies, Inc., No. 3:07-CV-760, 2008 WL 1944033, at *4 (E.D. Va. May 1, 2008) (citing Lolatchy, 816 F.2d at 952-53). Courts have generally found that the threat of prejudice is greater when no factual basis for a meritorious defense exists. Cielinski v. Kitchen (In re Tires & Terms of Columbus, Inc.), 262 B.R. 885, 889 (Bankr. M.D. Ga. 2000) (citations omitted).
Here, the Court has determined that the Debtor has satisfied his burden to establish the existence of a meritorious defense to the Complaint. The requirement that the UST advance its case on the merits is not prejudicial but rather “a burden inherent in prosecuting a lawsuit to conclusion.” Mangan v. Value Health Care Servs., LLC (In re Walnut Hill, Inc.), No. 16-20960 (JJT), 2017 WL 4653003, at *2 (Bankr. D. Conn. Oct. 13, 2017). As discussed above, the Debtor has admitted to much of the conduct alleged by the UST. The UST‘s ability to proceed with its claims will not be impaired if the Debtor is afforded the opportunity to present evidence regarding his state of mind and any justification he has for his failure to comply with his duties. Further, no discovery deadlines have been set in this matter and there is no indication the default was used by the Debtor to commit a fraud. Accordingly, this factor weighs in favor setting aside the Entry of Default.
5. History of Dilatory Action
The Debtor has no history of dilatory action in this matter apart from his failure to respond, which is the subject of this decision. Following the hearing, he complied with the Court‘s deadline for the submission of a post-trial brief. Accordingly, during his limited period of participation in this adversary proceeding, the Debtor has not engaged in any further dilatory behavior. This factor weighs in favor of setting aside the Entry of Default.
6. Availability of Other Sanctions
The final factor is whether alternative sanctions short of default are available. Courts often consider whether the default could be remedied through requiring the defaulting party to pay the plaintiff‘s attorneys fees or other monetary sanctions. See McKesson Med.-Surgical, Inc. v. Flower Orthopedics Corp., No. 3:17CV631, 2018 WL 944375, at *7 (E.D. Va. Feb. 16, 2018). Here, the Plaintiff is a governmental official who is not represented by private counsel, and the Debtor is insolvent. Accordingly, the Court finds that lesser sanctions are not available under the circumstances. This factor weighs against setting aside the Entry of Default.
III. Conclusion
The final step is the balancing of the Payne factors. An equal number of factors weigh in favor of and against setting aside the Entry of Default. However, the existence of meritorious defenses to the Complaint warrants special emphasis given the strong preference in this Circuit in favor of deciding cases on their merits. Furthermore, the consequences of default and default judgment are especially onerous for the Debtor as the denial of his discharge in this case would also render his debts nondischargeable in any future bankruptcy case whereas proceeding to trial would impose minimal prejudice on the UST. Therefore, on balance, and in view of the overarching policy considerations, the Court finds that good cause exists to set aside the Entry of Default so that the Debtor may present his defenses at a trial on the merits.
Accordingly, the Debtor‘s oral motion to set aside the Entry of Default is granted. Because the Entry of Default will be set aside, the UST‘s Motion for Default Judgment is denied. The Court will permit the Debtor to file a late answer to the Complaint so that this matter may proceed to trial.
A separate Order will be entered by the Court consistent with the findings and conclusions contained in this Memorandum Opinion.
The Clerk shall deliver copies of this Memorandum Opinion to Matthew W. Cheney, Acting United States Trustee for Region Four, and to the Debtor at his address of record.3
Entered this 20th day of February 2026, at Norfolk in the Eastern District of Virginia.
FRANK J. SANTORO
United States Bankruptcy Judge
Entered on Docket: Feb 20 2026