                                                                                                                           Opinions of the United
2007 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


8-14-2007

Subramanian v. Frost
Precedential or Non-Precedential: Non-Precedential

Docket No. 06-3294




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                                                               NOT PRECEDENTIAL

                      UNITED STATES COURT OF APPEALS
                           FOR THE THIRD CIRCUIT


                                     No. 06-3294


                           IN RE: RAVI SUBRAMANIAN;
                           RAJALAKSHMI SUBRAMANIAN,
                                              Appellants

                    BARRY W. FROST; CHAPTER 7 TRUSTEE,
                      and HSBC BANK, NA, as successor by
                      merger to HSBC BANK USA, for itself
                         and as collateral agent for BANK
                                  OF BARODA

                                          v.

                            RAVI SUBRAMANIAN;
                         RAJALAKSHMI SUBRAMANIAN


                     Appeal from the United States District Court
                              for the District of New Jersey
                              (D.C. Civil No. 05-cv-05098)
                     District Judge: Honorable Mary Little Cooper


                                Argued July 10, 2007
                   Before: RENDELL and AMBRO, Circuit Judges,
                           and SHAPIRO, * District Judge.

                               (Filed: August 14, 2007 )

__________________

    *Honorable Norma L. Shapiro, Senior Judge of the United States District Court for
the Eastern District of Pennsylvania, sitting by designation.
John F. Bracaglia, Jr. [ARGUED]
Cohn, Bracaglia & Gropper
275 East Main Street
P.O. Box 1094
Somerville, NJ 08876
  Counsel for Appellants

Barry W. Frost
Teich, Groh, Frost & Zindler
691 State Highway 33
Trenton, NJ 08619

John R. Altieri [ARGUED]
25 Salem Street
P.O. Box 279
Hackensack, NJ 07601
   Counsel for Appellees


                               OPINION OF THE COURT


RENDELL, Circuit Judge.

       Debtors Ravi and Rajalakshmi Subramanian appeal the District Court’s order

affirming the Bankruptcy Court’s order denying debtors’ motion to vacate the default

judgment entered against them in the bankruptcy adversary proceeding initiated by the

Chapter 7 Bankruptcy Trustee and creditor HSBC. For the reasons set forth below, we

will affirm.

                                           I.

       In November 2002, judgment was entered in the United States District Court for

the Southern District of New York in favor of creditor HSBC against debtor Ravi

Subramanian, and several of the companies of which Subramanian was a principal and an

                                           2
insider: Silverline Technologies, Inc. (STI), Silverline Technologies Limited (STL), and

Seranova, Inc. (“Seranova”). Judgment was entered against Subramanian pursuant to his

guaranty of STI’s obligations to HSBC. STL is the India-based parent company of STI

and is purportedly insolvent. Both STI and Seranova filed for bankruptcy in 2003.

       Debtors filed a Chapter 7 bankruptcy petition in the United States Bankruptcy

Court for the District of New Jersey on January 6, 2004. Thereafter, Barry W. Frost was

appointed Chapter 7 Trustee of the Estate. In September 2004, Frost and HSBC filed a

complaint seeking denial of debtors’ bankruptcy discharge pursuant to 11 U.S.C. §

727(a)(2)(A)-(B), (3), (4)(a), (5), (6) and (7), and § 523(a)(2)(B) and (a)(6). The

complaint sets forth, in 199 paragraphs, the facts supporting plaintiffs’ claims that debtors

should be denied a discharge. On October 1, 2004, the complaint was served on debtors

by U.S. mail to their counsel pursuant to Fed. R. Bankr. P. 7004(b)(9).

       Debtors failed to file a timely answer to the complaint. The answer was hand

delivered to the courthouse by debtors’ counsel on November 3, three days after the

answer deadline and, according to the time stamps from the Clerk’s Office, 40 minutes

after plaintiffs filed a request for entry of a default. The answer asserted a general denial

as to every allegation in the complaint. The Clerk’s Office granted the request for a

default on November 4 and debtors did not thereafter move to vacate the default. On

December 6, 2004, plaintiffs moved for entry of judgment by default. Debtors did not

respond to this motion. The Bankruptcy Court granted the motion for judgment by

default on January 11, 2005, and ordered that the debtors were barred from receiving a

                                              3
discharge pursuant to 11 U.S.C. § 727(a)(6)(A) and (a)(3).

       Debtors then moved on January 27, 2005 to vacate the default judgment. The

motion was not accompanied by a memorandum of law. Debtors’ counsel attested that he

did not receive a mailed copy of the motion for default judgment. He did not, however,

dispute that he was aware that a default had been entered by the Clerk’s Office. After a

hearing on March 7, 2005, the Bankruptcy Court entered an order on April 13, 2005

denying the motion to vacate the default judgment without prejudice and sua sponte

relieving debtors’ counsel. Debtors retained new counsel and again moved on May 25,

2005 pursuant to Rule 60(b) to vacate the default judgment. The motion was

accompanied by a memorandum of law and a certification from Mr. Subramanian that

addressed some of the allegations in the complaint. Debtors also sought leave to file an

amended answer and informed the Court that they would file an amended petition to

address any unresolved discrepancies in their initial filing.

       On September 13, 2005, the Bankruptcy Court denied debtors’ second motion to

vacate the default judgment. In re Subramanian, No. 04-2685, slip op. at 2 (D.N.J.

Bankr. Sept. 13, 2005). The Court concluded that debtors could seek relief from the

default judgment under Rule 60(b)(1) based on the “excusable neglect” of their counsel,

but could not seek relief under Rule 60(b)(6) based on “exceptional circumstances”

because they were not without blame for the entry of the default. Id. at 6-7. The Court

set forth the three factors that must be considered when determining whether to vacate a

default judgment pursuant to Rule 60(b)(1): (1) whether the plaintiff will be prejudiced;

                                              4
(2) whether the defendants have a meritorious defense; and (3) whether the default was

the result of the defendants’ culpable conduct. Id. at 7 (citing Gold Kist, Inc. v.

Laurinburg Oil Co., 756 F.2d 14, 19 (3d Cir. 1985)). As to the second factor, whether the

defendants have a meritorious defense, the Bankruptcy Court concluded that debtors

failed to answer, in whole or in part, Counts 5, 7, 12, 13, 16, 22, 23, 23[a],1 and 26 of the

Complaint, and the unanswered allegations in those counts were therefore treated as

having been confessed against debtors. Id. at 9. The Court did not address the other two

Gold Kist factors because debtors did not satisfy the threshold requirement of setting forth

a meritorious defense, and thus could not prevail on their motion to vacate the default

judgment. Id. at 11.

       Debtors appealed. The District Court affirmed the order of the Bankruptcy Court,

and noted that debtors failed to respond at all to the allegations in Counts 5, 12, 13, and

16 of the Complaint and only responded in part to several of the allegations in the other

counts in the Complaint, including those in Counts 7, 22, 23[a], and 26. In re

Subramanian, No. 05-5098, slip op. at 2 (D.N.J. June 14, 2006).

       Debtors then appealed the order of the District Court, and filed a motion for a stay

in that Court. As part of their motion for a stay, debtors submitted a supplemental

certification, which provided more detailed responses to particular allegations in the

complaint. Since this certification was not before either the Bankruptcy Court or the


       1
      The Complaint is misnumbered so that there are two separate claims labeled
“Twenty-Third Claim for Relief.”

                                              5
District Court, we will not consider it on appeal.2 See In re Application of Adan, 437 F.3d

381, 388 n.3 (3d Cir. 2006) (“[W]e will not consider new evidence on appeal absent

extraordinary circumstances, such as those that render the case moot or alter the

appropriateness of injunctive relief, a change in pertinent law, or facts of which a court

may take judicial notice.”).

                                              II.

         The District Court had jurisdiction over this appeal pursuant to 28 U.S.C. §

158(a)(1). We have jurisdiction pursuant to 28 U.S.C. § 158(d). Our review of the

District Court’s decision effectively amounts to review of the Bankruptcy Court’s opinion

in the first instance, In re Hechinger Inv. Co. of Delaware, 298 F.3d 219, 224 (3d Cir.

2002), because our standard of review is “the same as that exercised by the District Court

over the decision of the Bankruptcy Court,” In re Schick, 418 F.3d 321, 323 (3d Cir.

2005).

         We review the Bankruptcy Court’s findings of fact for clear error and exercise

plenary review over questions of law. In re Fruehauf Trailer Corp., 444 F.3d 203, 209-

10 (3d Cir. 2006). “Absent legal error, we review the court’s refusal to set aside a default

judgment under Rule 60(b) only for abuse of discretion.” See In re The Home

Restaurants, Inc., 285 F.3d 111, 113 (1st Cir. 2002). “A bankruptcy court abuses its



         2
        The supplemental certification in support of debtors’ motion for a stay was
submitted to the District Court in September 2006, after the District Court had already
entered an order on June 14, 2006 affirming the judgment of the Bankruptcy Court.

                                              6
discretion when its ruling is founded on an error of law or a misapplication of law to the

facts.” In re O'Brien Environmental Energy, Inc., 188 F.3d 116, 122 (3d Cir. 1999).

       Bankruptcy Rule 9024, concerning “relief from judgment or order,” incorporates

Federal Rule of Civil Procedure 60.3 Rule 60(b) provides, in relevant part:

       On motion and upon such terms as are just, the court may relieve a party or
       a party's legal representative from a final judgment, order, or proceeding for
       the following reasons: (1) mistake, inadvertence, surprise, or excusable
       neglect; ... or (6) any other reason justifying relief from the operation of the
       judgment. The motion shall be made within a reasonable time, and for
       reasons (1), (2), and (3) not more than one year after the judgment, order, or
       proceeding was entered or taken. A motion under this subdivision (b) does
       not affect the finality of a judgment or suspend its operation.


Debtors sought to vacate the default judgment pursuant to Rule 60(b)(1) or, in the

alternative, pursuant to Rule 60(b)(6).

       A. Rule 60(b)(1): Excusable Neglect

       Debtors argued that the default judgment should be vacated under Rule 60(b)(1)

based on the “excusable neglect” of their counsel. A court ruling on a motion to set aside

a default judgment under Rule 60(b)(1), “must consider the following three factors: (1)

whether the plaintiff will be prejudiced; (2) whether the defendant has a meritorious



       3
         Rule 9024 provides: “Rule 60 F.R.Civ.P. applies in cases under the Code except
that (1) a motion to reopen a case under the Code or for the reconsideration of an order
allowing or disallowing a claim against the estate entered without a contest is not subject
to the one year limitation prescribed in Rule 60(b), (2) a complaint to revoke a discharge
in a chapter 7 liquidation case may be filed only within the time allowed by § 727(e) of
the Code, and (3) a complaint to revoke an order confirming a plan may be filed only
within the time allowed by § 1144, § 1230, or § 1330.”

                                              7
defense; and (3) whether the default was the result of the defendant's culpable conduct.”

Gold Kist, 756 F.2d at 19.

       The threshold question is whether the defendant has a meritorious defense.

Resolution Trust Corp. v. Forest Grove, 33 F.3d 284, 288 (3d Cir. 1994). “[A] defendant

does not have the right to have a default judgment set aside automatically upon alleging a

defense. Rather, we imposed a more stringent standard which requires that a defendant

seeking to set aside a default judgment set forth with some specificity the grounds for his

defense. The court must then evaluate that defense to determine whether it is

meritorious.” Harad v. Aetna Cas. & Sur. Co., 839 F.2d 979, 982 (3d Cir. 1988). As we

noted in United States v. $55,518.05 in U.S. Currency, 728 F.2d 192 (3d Cir. 1984), “[i]f

we allow the setting aside of a default judgment on the mere recitation of the relevant

statutory language or a phrase in the Federal Rules of Civil Procedure, then we will be

establishing a new right to automatically set aside any default judgment if counsel is

diligent enough to quote the applicable statute or rule of civil procedure.” Id. at 196. It is

sufficient that the proffered defense is not “facially unmeritorious.” Emcasco Ins. Co. v.

Sambrick, 834 F.2d 71, 74 (3d Cir. 1987).

       Debtors argue that the Bankruptcy Court erred in concluding that they failed to

assert a meritorious defense to the allegations in the complaint. Debtors contend that they

responded to every “category of allegation” with four defenses. First, they asserted that

the alleged apparent inconsistencies in their deposition testimony could be explained by

the fact that “a deponent responding to questions involving $70,285,406.00 of debt,

                                              8
numerous companies, countries, and individuals, cannot reasonably be expected to not

only remember every detail of every transaction, but more importantly, to give the answer

in precisely the same fashion at each and every deposition.” Appellants’ Br. 16. Second,

the alleged inconsistencies between their petition and their testimony could be explained

by the fact that their prior counsel spent only about one hour with debtors preparing the

bankruptcy petition. Third, debtors sought leave to file an amended answer to properly

respond to each of the allegations in the complaint. Fourth, debtors intended to file an

amended bankruptcy petition to address the discrepancies raised by plaintiffs.

       We agree with the District Court that the Bankruptcy Court did not abuse its

discretion in denying debtors’ motion to vacate the default judgment pursuant to Rule

60(b)(1) because debtors failed to assert a meritorious defense as to all of the allegations

in the complaint.

       Debtors failed to assert any defense to the claim in Count 7 of the Complaint that

they should be denied a discharge pursuant to § 727(a)(4)(A) of the Bankruptcy Code

because they knowingly and fraudulently made false statements concerning Mrs.

Subramanian’s employment at Ecomserver, as evidenced by the fact that several checks

were written to Mrs. Subramanian for amounts greater than her salary and one check for

“House Rent - Feb.” App. 526. When asked at his deposition why a check from

Ecomserver to Mrs. Subramanian would say that it was for “house rent” in the memo line,

Mr. Subramanian replied “I don’t know.” App. 465.

       Debtors also failed to assert a defense to the claim in Count 22 of the Complaint

                                              9
that they should be denied a discharge pursuant to § 727(a)(7) of the Bankruptcy Code

because they, during the bankruptcy case or within one year before the date of the filing

of the petition, transferred the property of an insider, Silverline Holding Corp., with the

intent to hinder, delay, or defraud the Silverline Holding creditors. Specifically, plaintiffs

allege that debtors transferred a BMW owned by Silverline Holding Corp. to Mrs.

Subramanian in exchange for very little money, even though the car was valued at

$15,000 by debtors.

       In addition, debtors failed to assert a defense to the claim in Count 23 of the

Complaint that they should be denied a discharge pursuant to § 727(a)(4)(A), (a)(5), and

(a)(7) of the Bankruptcy Code because they knowingly made false statements, concealed

property of an insider and failed to adequately explain an insider’s loss of assets.

Specifically, the complaint alleges that Mr. Subramanian lied on STI’s bankruptcy

schedules by failing to include the interests of a subsidiary of STI, a company called Expo

24-7. Debtors also failed to assert a defense to the claim in Count 23[a] of the Complaint

that debtors should be denied a discharge because they knowingly made false statements

concerning Unified Herbal, and willfully and maliciously injured creditor HSBC by

making false statements concerning Unified Herbal. Specifically, the complaint alleges

that Mr. Subramanian made false statements to HSBC with regard to STI’s rights to

collect the Unified Herbal receivables.

       Finally, debtors failed to assert a defense to the claim in Count 26 of the Complaint

that they should be denied a discharge because Mr. Subramanian knowingly made a false

                                             10
statement in writing concerning the financial condition of an insider, upon which HSBC

relied, that Mr. Subramanian failed to adequately explain the loss of an insider’s assets,

and that Mr. Subramanian willfully and maliciously injured creditor HSBC. Specifically,

the complaint alleges that Mr. Subramanian signed borrowing base certifications for STI

in March and April 2002 showing gross receivables for STI of $70-71 million. Then, in a

June 12, 2002 affidavit, Mr. Subramanian stated that STI had gross receivables of $36

million as of March 31, 2002. He stated in a June 26, 2002 affidavit that STI had gross

receivables of $25 million as of June 26, 2002. Mr. Subramanian failed to explain the

discrepancies in the amounts he provided as compared to the actual amounts, or, if these

were true representations, failed to explain the drastic loss in value of the STI receivables.

       We find no error in the Bankruptcy Court’s finding that debtors failed to assert a

meritorious defense to these allegations in Counts 7, 22, 23, 23[a], and 26 of the

Complaint, and therefore conclude that the Court did not abuse its discretion in denying

debtors’ motion to vacate the default judgment.

       B. Rule 60(b)(6): Exceptional Circumstances

       Debtors argue in the alternative that, even if they are not entitled to relief under

Rule 60(b)(1), they are entitled to relief from the judgment pursuant to Rule 60(b)(6) due

to “exceptional circumstances,” namely, the gross negligence of their counsel. Relief

under 60(b)(6) is only available where the other subsections of Rule 60(b) do not apply.

Medunic v. Lederer, 533 F.2d 891, 893 (3d Cir. 1976). Actions of counsel that constitute

“excusable neglect” are properly considered as a basis to set aside a judgment under Rule

                                              11
60(b)(1), while actions by counsel that constitute inexcusable “gross negligence” can be

“exceptional circumstances” justifying relief under Rule 60(b)(6). See Boughner v. Sec’y

of Health, Ed. & Welfare, 572 F.2d 976, 978-79 (3d Cir. 1978) (finding inexcusable gross

negligence of attorney in failing to respond to summary judgment motion was, in light of

“the absence of neglect by the parties,” an “exceptional circumstance” justifying relief

from judgment under Rule 60(b)(6)).

       Debtors argue that their attorney was grossly negligent in failing to file a timely

answer, that they were not to blame for their attorney’s gross negligence, and that they are

therefore entitled to relief from judgment. Since the record before us does not show that

the conduct of debtors’ counsel “indicates neglect so gross that it is inexcusable,” we find

no error in the conclusion that debtors failed to show “extraordinary circumstances” that

would entitle them to relief from judgment under Rule 60(b)(6). See Boughner, 572 F.2d

at 978 (finding “gross negligence” where counsel’s “egregious conduct amounted to

nothing short of leaving his clients unrepresented”). Here, debtors were well aware of the

progress of the proceedings in the District Court and of their counsel’s actions. Debtors

were sent a copy of the motion for entry of default and the motion for default judgment,

which were mailed to their residences in India and New Jersey. There is no evidence that

debtors made any inquiries to their counsel or the court following receipt of these

motions, nor have debtors argued that their counsel made any misrepresentations to them

concerning the status of their case. Accordingly, we find no error in the Bankruptcy

Court’s ruling that debtors failed to show their entitlement to relief from judgment under

                                             12
Rule 60(b)(6).

                                             III.

       Accordingly, for the reasons set forth, we will affirm the District Court’s order

affirming the Bankruptcy Court’s order denying debtors’ motion to vacate the default

judgment entered against them.



SHAPIRO, District Judge, Concurring.

       I agree with Judge Rendell’s well-reasoned opinion that appellants’ second motion

to vacate the default judgment failed to assert a meritorious defense to a number of

allegations of the adversary complaint and therefore the denial of the motion should be

affirmed.

       However, I write separately to note disapproval of the prolix adversary complaint,

consisting of 199 allegations in 52 pages and numerous pages of 32 evidentiary exhibits

(A-FF) in support of the allegations.

       Bankruptcy Rule 7008 provides that Fed. R. Civ. P. 8 applies in adversary

proceedings. Fed. R. Civ. P. 8(a)(2) requires, in pertinent part, that a pleading shall

contain:

              “A short and plain statement of the claim showing that
              the pleader is entitled to relief . . .” .

       Bankruptcy Rule 7009 provides that Fed. R. Civ. P. 9 applies in adversary

proceedings. Fed. R. Civ. P. 9(b) provides that:


                                             13
              “In all averments of fraud or mistake, the circumstances
              constituting fraud or mistake shall be stated with particularity.
              Malice, intent, knowledge, and other condition of mind of a
              person may be averred generally.”

       This complaint by the Chapter 7 Trustee and a creditor bank objects to discharge

of debtors and dischargeability to the bank on account of “an ongoing pattern of evasion

and deceit.” (Compl. ¶ 6). It states not only the requisite allegations as to the parties,

jurisdiction, and venue, but also 80 paragraphs of introduction, before alleging 26 claims

for relief in 113 additional paragraphs, each of which refers to some or all of the prior

“introductory” allegations.

       Stating with particularity circumstances constituting fraud does not require

unnecessarily repetitive statements. “Fact” pleading is discouraged by the Federal Rules

of Civil Procedure and a complaint, protracted by the inclusion of evidence, is an

imposition on the adverse party and the court.

       If the motion to vacate the default judgment were denied solely for failure to

answer the complaint timely, affirming might be a problem because of the nature and

structure of this complaint; but the Bankruptcy Judge allowed appellants to file a renewed

motion to vacate more than four months after the default judgment was entered.

As the opinion states, that motion failed to offer meritorious defenses to a number of the

claims for relief although there was adequate time to do so. The Bankruptcy Judge (A81)

and the District Judge (AA118) both found that proof of any one of those claims would

warrant denial of discharge. Therefore, I concur in the opinion and judgment to affirm.


                                              14
