Default Judgment In Bankruptcy, Based on “Implied Consent” Under Wellness International

By: Donald L Swanson

“Sharif contends that to the extent litigants may validly consent to adjudication by a bankruptcy court, such consent must be express. We disagree.”

–U.S. Supreme Court in Wellness Int’l Network, Ltd. V. Sharif, 575 U.S. 665 (2015).

The Supreme Court’s Wellness opinion adds the following:

“The implied consent standard . . . supplies the appropriate rule for adjudications by bankruptcy courts . . . It bears emphasizing, however, that a litigant’s consent— whether express or implied—must still be knowing and voluntary.

Question

A major question that remains, following the U.S. Supreme Court’s Wellness opinion, is this:

• What qualifies as “implied consent” for adjudication by a bankruptcy court?

Default Judgment

We now know from Bankruptcy Judge Martin Glenn that a default judgment, properly entered by a bankruptcy court, qualifies as an adjudication by “implied consent” of the defaulted party.

His opinion is in Messer v Fyre Media Inc., Adv. Pro. No. 19-01340 (Bankry. S.D.N.Y., decided February 11, 2020). Plaintiff Messer is Chapter 7 Trustee of the Fyre Festival LLC bankruptcy estate (Case No. 17-11883).

Facts

Here’s what happened.

Under an involuntary petition against Fyre Festival LLC, the Bankruptcy Court enters an order for relief and appoints Messer as Chapter 7 Trustee.

Messer as Trustee files an adversary proceeding, seeking declarations that (i) certain funds are property of the bankruptcy estate, and (ii) avoiding transfers of various funds.

Then, Messer serves the summons and complaint upon both defendants, by first class mail to William McFarland at “FCI Otisville, Federal Correctional Institution,” where McFarland is incarcerated. In response, McFarland sends a letter to Messer acknowledging receipt of the Summons and Complaint, accepting responsibility for repaying “every dollar owed to investors and ticket holders,” and expressing a willingness to be helpful.

McFarland fails to file a formal response to the Complaint for either himself or his company. So, the Trustee seeks default judgment against both. Judge Glenn conducts a detailed analysis of the transactions in question, based upon information the Trustee provided, and enters default judgment for two separate amounts: for $10,993,267.51 and for $3,422,079.12.

Legal Standards

Entry of a default judgment requires a two-step process, writes Judge Glenn:

1. the first step is entry of a default—a judicial recognition that defendant has, through a failure to defend, admitted liability, and
2. the second step is entry of a default judgment—a conversion of the admitted liability into a final judgment.

Notably, allegations in the complaint on damages amounts are not deemed true by the law. So, a trial court must conduct an inquiry to ascertain the damages with reasonable certainty. Ascertaining damages involves two more steps:

1. determining the proper rule for calculating damages, and
2. assessing plaintiff’s evidence on damages.

Bankruptcy judges may enter default judgments, based on implied consent resulting from a defendant’s failure to respond to a summons and complaint. This rule is consistent with, (i) the U.S. Supreme Court’s “implied consent” ruling in Wellness, and (ii) opinions of other bankruptcy courts arising both before and after Wellness.

Judge Glenn’s Analysis

Judge Glenn rules that the Trustee is entitled to entry of a default judgment for the amounts of $10,993,267.51 and $3,422,079.12 because:

• the Complaint was properly served on Defendants, they failed to timely respond, and a default was entered;
• all well-pleaded allegations in the Complaint are admitted and deemed to be true;
• the moving papers clearly establish that certain funds were and are property of the Debtor’s estate;
• the Trustee has the exclusive right to seek to recover transferred funds as preferential or fraudulent transfers;
• the well-pleaded allegations establish defendants’ liability for actual fraud transfers and set forth the proper damages rule; and
• as to damages, the Trustee’s professionals, (i) reviewed Defendants’ financial records to determine the dates and amounts of fraudulent transfers the Defendants received, and (ii) have established by a preponderance of the evidence the amounts involved.

Conclusion

What qualifies as “implied consent” under the U.S. Supreme Court’s Wellness opinion is yet to be fully developed.

Fortunately, Judge Martin Glenn has provided insight on the matter by extending “implied consent” into the default judgment realm.

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