In re Raejean S. Bonham dba World Plus
Bankruptcy No. F95-00897
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Bankruptcy Judge Herbert A. Ross ruled January 13, 1999 that the bankruptcy trustee could not recover from BRA Defendants under a theory of usury. Some of the BRA Defendants had already had default judgments entered against them on grounds that included usury. This decision addresses those default judgments.

HERBERT A. ROSS
U.S. Bankruptcy Judge

In re RAEJEAN BONHAM, aka Jean Bonham, aka Jeannie Bonham, dba World Plus; WORLD PLUS, INC., an Alaska corporation; and ATLANTIC PACIFIC FUNDING CORP., a Nevada corporation, Debtor(s)

Case No. F95-00897-HAR In Chapter 7

In re BONHAM RECOVERY ACTIONS, a proceeding to jointly administer certain pre-trial issues in numerous related adversary proceedings.

ADV PROC NO F95-00897-168-HAR (BANCAP No. 96-4281) MEMORANDUM REGARDING THE SETTING ASIDE OF DEFAULT JUDGMENTS WITH RESPECT TO USURY

1. INTRODUCTION-  A number of default judgments allowing the trustee's claim for double damages for usury have been entered by the clerk, pursuant to FRCP 55(b)(1).⁽¹⁾ The court subsequently made a global ruling applicable to all individual adversary proceedings in the Bonham Recovery Actions (the BRA) that the usury claims should be dismissed.⁽²⁾ Should the court vacate the usury portions of the default judgments entered by the clerk? Since the default judgments pertaining to usury were not susceptible to a "sum certain" determination in the BRA due to the pending global motion to dismiss the usury count, any default judgment required the signature of the court pursuant to FRCP 55(b)(2). Thus, those signed by the clerk should be set aside, even though the defendants have not raised individual affirmative defenses.

The court has identified twenty adversary proceedings in which the clerk entered default judgments allowing usury damages. Those proceedings are identified on the table that appears at the end of this memorandum.

2. BACKGROUND- In many of the complaints filed by the trustee in approximately 660 adversary proceedings seeking recovery on the grounds of preference or fraudulent transfer, the trustee has requested double damages under the usury statute, AS 45.45.030.

A number of BRA defendants (not those who were defaulted, of course) have raised an issue about whether such damages are appropriate. The idea of the mega case approach being taken by the BRA was to determine global issues in the BRA, and not in each of the 660 adversaries separately.

The court granted defendants' motions to disallow usury damages, since the debtors engaged in securities fraud and the trustee, who stands in the debtors' shoes in regards to the usury claim, was barred by an Alaska securities statute, AS 45.55.930(g), which prevents someone who enters a contract in violation of the Alaska securities laws from suing on the contract.⁽³⁾

Well before the ruling on the viability of the trustee's usury claims, but after the usury issue was raised as a global issue, the trustee moved to default the defendants listed on the attached table, and judgments were entered by the clerk in these cases between February and May, 1997. As shown on the last page of the attached table, the usury damages awarded by default exceed $300,000 of total damages of about $875,000.

At a hearing on February 16, 1999, in Compton v. Robben Franklin,⁽⁴⁾ the court set aside a default judgment because it was entered by the clerk as opposed to the court.⁽⁵⁾ In that case, the defendants had entered an appearance and the court held that a default judgment for failure to file an answer (after having filed an appearance) must be entered by the court under FRCP 55(b)(2), and not the clerk.

This led the court to investigate whether this may have happened in previous adversary proceedings and, thus, the court staff developed a list of cases as shown on the table.

3. LEGAL ANALYSIS-  The affirmative defense that usury damages are not applicable due to the plaintiff's violation of the Alaska securities laws would normally have to be raised by a defendant's answer since the defense is in the nature of estoppel or illegality.⁽⁶⁾ When undertaking the management of the numerous fraudulent transfer claims under the lead BRA adversary,⁽⁷⁾ however, it was implicit, if not explicitly stated, that the rulings on certain global issues would inure to the benefit of all defendants. Thus, the court's ruling that the trustee's usury claim should be dismissed should apply to the defendants listed on the attached table, even if they did not individually raise the defense.

The question is whether these defendants should be relieved of the default judgment entered by the clerk, as opposed to the court. FRCP 55(b) provides:

(b) Judgment. Judgment by default may be entered as follows:

(1) By the Clerk. When the plaintiff's claim against a defendant is for a sum certain or for a sum which can by computation be made certain, the clerk upon request of the plaintiff and upon affidavit of the amount due shall enter judgment for that amount and costs against the defendant, if the defendant has been defaulted for failure to appear and if he is not an infant or incompetent person.

(2) By the Court. In all other cases the party entitled to a judgment by default shall apply to the court therefor; but no judgment by default shall be entered against an infant or incompetent person unless represented in the action by a general guardian, committee, conservator, or other such representative who has appeared therein. If the party against whom judgment by default is sought has appeared in the action, the party (or, if appearing by representative, the party's representative) shall be served with written notice of the application for judgment at least 3 days prior to the hearing on such application. If, in order to enable the court to enter judgment or to carry it into effect, it is necessary to take an account or to determine the amount of damages or to establish the truth of any averment by evidence or to make an investigation of any other matter, the court may conduct such hearings or order such references as it deems necessary and proper and shall accord a right of trial by jury to the parties when and as required by any statute of the United States.

Judge Kleinfeld recently held in Kingvision Pay-Per-View Ltd. v. Lake Alice Bar⁽⁸⁾ that a federal judge in the 9th Circuit may modify the amount of the default judgment sua sponte or on oral motion based on the court's mistake or inadvertence under FRCP 60(b)(1). FRCP 60(b)(1)⁽⁹⁾ is limited to judgments entered not more than one year before the motion. All of the default judgments in the adversary proceedings shown on the table were entered almost two years ago.

These adversary proceedings, however, have an additional feature that requires setting the judgments aside even though they were entered more than a year ago.

FRCP 55(b)(1) only allows the clerk to enter judgments where there has been no appearance by the defendant, and the complaint is for a sum certain. There are few⁽¹⁰⁾ cases interpreting the "sum certain" aspect of the rule, and the dividing line between what is a simple computation and what is more complicated, requiring the court to be the one that enters the default judgment, is not clear.

First, with respect to three of the adversaries, Compton v. Dale Franklin,⁽¹¹⁾ Compton v. Merle Franklin,⁽¹²⁾ and Compton v. Parkan,⁽¹³⁾ the defendants participated sufficiently to have "appeared." In those cases, it was improper for the default judgment to be entered by the clerk.

Secondly, with respect to these three adversaries and the balance of those listed on the table, the computation of a usury recovery required more than a simple calculation. It required a determination whether there is a legal basis for the judgment since that issue had been raised in the BRA with respect to all the individual BRA adversary proceedings.

In some situations, it is easier to determine that the judgment being sought is not for a "sum certain." For example, in a wrongful discharge case seeking punitive damages, a default cannot be entered under FRCP 55(b)(1), because such a claim is not the type that is susceptible to a simple calculation even though a sum certain, $5 million, was requested.⁽¹⁴⁾

Where a default judgment, which should have been signed by the court, was improperly signed by the clerk, it should be well within the power of the court to set those judgments aside under FRCP 60(b)(6), the catchall provision, for "any other reason justifying relief from judgment."

In In re Pacific Far East Lines, Inc.,⁽¹⁵⁾ the 9^th Circuit held that FRCP 60(b)(6) provided grounds to set aside a judgment entered 18 months earlier where the trustee had paid a tax under a statute which was amended to apply retroactively within weeks after the payment. By analogy, this court's ruling on the usury issue should apply retroactively given the extraordinary circumstance of the mega case procedures adopted in the BRA.

In addition, in Meyer v. Lenox⁽¹⁶⁾ the 9^th Circuit held that the court's powers under 11 USC ß 105(a) can justify a court, sua sponte, in reviewing a previous order, in addition to the court's powers under FRBP 60(b).⁽¹⁷⁾

Before setting aside a default judgment on the court's own motion, however, notice should be given to the judgment creditor.⁽¹⁸⁾

4. CONCLUSION- By separate order, the court will give notice of its intent to set aside the usury damages awarded in the default judgments, but not the defaults, of those judgment creditors listed in the attached table.

If the trustee does not choose to challenge the legal basis of the court's intent to set aside the default judgments, it would be helpful if he would provide a recalculation of damages for each of the adversary cases. In those cases where the defendants have made an appearance, at least a three-day notice of any intended entry of a new default judgment must be given.⁽¹⁹⁾

Dated: February 23, 1999

______________________________ HERBERT A. ROSS U.S. Bankruptcy Judge

Serve:

RaeJean Bonham, Debtor

Cabot Christianson, Esq., for Trustee

Larry D. Compton, Trustee

John Burns/David G. Parry, Esqs., for Joint Defense Committee

Rebecca Copeland, Esq., for Joint Defense Committee

Janet Stafford, Adversary Proceeding Manager

Maia Weber, Deputy Clerk, Fairbanks

Danny & Susan Hall, Pro Se s

John Kirkley, Pro Se

Dale Franklin, Pro Se

Merle Franklin, Pro Se

Christopher C. Parkan, Pro Se

Richard & Bonni Woods, Pro Se s

Lynn Lirette, Pro Se

Ted Mickowski, Jr., Pro Se

Richard & Willie Peacock, Pro Se s

Dalpha Reid, Pro Se

Mary & Ralph Tittle, Pro Se s

Robert A. Wierenga, Pro Se s

Edward & Patricia Skingel, Pro Se s

Kerry LaBelle, Pro Se

Ailyne Law-As/Ed & Daisy Sheppler, Pro Se s

Barry Jackson, Esq., for Ailyne Law-As,

Gail McQuade/Lorraine Desacia, Pro Se s

Wayne & Carolyn Nelson, Pro Se s

Sue Winton, Pro Se

Sean Carlin, Pro Se

Phillip & Bridgit Loudon, Pro Se s

D3726

1. Incorporated by FRBP 7055.

2. Memorandum Decision Granting Motion to Dismiss (Treated as a Summary Judgment Motion) Claim for Double Damages Under AS 45.45.030, Docket Entry 809, filed January 21, 1999.

3. See, footnote 2.

4. Adv. No. F95-00897-112-HAR (BANCAP 96-4225), Larry D. Compton, Trustee, v Robben Franklin and Lori Franklin.

5. Order to Set Aside Default Judgment Only, filed in Adv. No. F95-00897-112-HAR at Docket Entry 18 on February 19, 1999.

6. FRCP 8(c), incorporated by FRBP 7008.

7. Adv. No. F95-00897-168-HAR (Bancap No. 96-4281).

8. F3d , 1999 Westlaw (9^th Cir 1999).

9. Incorporated by FRBP 7060.

10. Byrd v Keene Corporation, 104 FRD 10, 12 (ED Penn 1984).

11. Adv. No. F95-00897-091-HAR (BANCAP 96-4204), Larry D. Compton, Trustee v Dale D. Franklin, Entry of Appearance filed at Docket Entry 5 on December 2, 1996.

12. Adv. No. F95-00897-113-HAR (BANCAP 96-4226), Larry D. Compton, Trustee v Merle Franklin, Entry of Appearance filed at Docket Entry 3, on December 2, 1996.

13. Adv. No. F95-00897-216-HAR (BANCAP 96-4332), Larry D. Compton, Trustee v Christopher C. Parkan, Change of Address filed at Docket Entry 7 on June 9, 1997, and again at Docket Entry 8 on October 27, 1997.

14. Beck v Atlantic Contracting Company, Inc., 157 FRD 61, 65 (D Kan 1994).

15. 889 F2d 242, 249 (9^th Cir 1989).

16. 902 F2d 737, 740 (9^th Cir 1990).

17. Incorporated by FRBP 9024.

18. Kingvision Pay-Per-View Ltd. v Lake Alice Bar, see footnote 8.

19. FRCP 55(b)(2).

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