Heyman v. ML Marketing Company ( 1997 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
GLENN R. HEYMAN, as Trustee for
the Estate of Unis International
Corporation, an Illinois corporation,
Plaintiff-Appellant,
and
UNIS INTERNATIONAL CORPORATION, an
No. 95-2929
Illinois corporation,
Plaintiff,
v.
M. L. MARKETING COMPANY, a
Maryland corporation,
Defendant-Appellee.
Appeal from the United States District Court
for the District of Maryland, at Greenbelt.
Deborah K. Chasanow, District Judge.
(CA-93-1508-DKC)
Argued: March 6, 1997
Decided: June 16, 1997
Before MICHAEL and MOTZ, Circuit Judges, and
GOODWIN, United States District Judge for the
Southern District of West Virginia, sitting by designation.
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Affirmed by published opinion. Judge Goodwin wrote the opinion, in
which Judge Michael and Judge Motz joined.
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COUNSEL
ARGUED: James Paul Oetken, JENNER & BLOCK, Washington,
D.C., for Appellant. Robert Michael Marino, REED, SMITH, SHAW
& MCCLAY, Washington, D.C., for Appellee. ON BRIEF: Carl S.
Nadler, JENNER & BLOCK, Washington, D.C., for Appellant.
George R. Clark, REED, SMITH, SHAW & MCCLAY, Washington,
D.C., for Appellee.
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OPINION
GOODWIN, District Judge:
Glenn Heyman, bankruptcy trustee for Unis International Corpora-
tion (Unis), appeals a district court order denying his motion to vacate
an order dismissing Unis's claims against M.L. Marketing Co. (Mar-
keting) for failure to obtain counsel. We find no abuse of discretion
and affirm the district court's denial of Mr. Heyman's motion.
I.
This case began on May 21, 1993 when Unis filed its Complaint.
The case proceeded as usual until November 1, 1994 when two of
Unis's three lawyers withdrew. Unis's only remaining attorney, Wil-
liam A. Hylton, Jr., filed a motion to withdraw on December 21,
1994. Pursuant to the Local Rules of the District of Maryland,1 Mr.
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1 Local Rule 101.3(b) states in pertinent part:
In the case of any party other than an individual, including
corporations, partnerships, unincorporated associations and gov-
ernment entities, appearance of counsel may be withdrawn only
with leave of Court and if . . . withdrawing counsel files a certifi-
cate stating (a) the name and last known address of the client,
and (b) that the written notice has been mailed to or otherwise
served upon the client at least five days previously advising the
client of counsel's proposed withdrawal and notifying it that it
must have new counsel enter an appearance or be subject to the
dismissal of its claims and/or default judgment on claims against
2
Hylton notified his client, Unis, that it must have new counsel enter
an appearance within thirty days of counsel's withdrawal or be sub-
ject to dismissal of its Complaint. On March 9, 1995, the district court
granted Mr. Hylton's motion, leaving Unis without counsel and giv-
ing it thirty days to obtain new counsel and to have counsel make an
appearance.
On April 4, 1995, a few days before the deadline, Unis filed for
bankruptcy under Chapter 7 of the Bankruptcy Code, and Mr. Hey-
man was appointed trustee.2 As trustee, Mr. Heyman stepped into the
shoes of Unis in its action against Marketing. Section 108 of the
Bankruptcy Code gives trustees a sixty-day extension from the date
of filing to comply with the Local Rule. Therefore, Mr. Heyman had
until June 3, 1995 to have counsel enter an appearance and thereby
avoid dismissal. Mr. Heyman did nothing. The district court, unaware
of the bankruptcy and the extension, dismissed Unis's Complaint on
April 28, 1995.
Mr. Heyman did not examine the litigation file before April 28,
1995. If he had, he would have discovered that the Complaint was
subject to dismissal for failure to have counsel appear. If he had
examined the case file before June 3, 1995, he would have discovered
that the Complaint had been dismissed, but that he was entitled to
relief because of the sixty-day extension provided by 11 U.S.C. § 108.
He did neither. Not until sometime between July 7 and August 2,
1995 -- that is, between thirty-four and sixty days after the sixty-day
extension -- did Mr. Heyman learn that the Complaint had been dis-
missed. By then, the time to appeal the dismissal had run, and Rule
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it. In the event that within thirty days of the filing of the motion
to withdraw, new counsel has not entered an appearance, the
Court may take such action, if any, that it deems appropriate,
including granting the motion to withdraw and dismissing any
affirmative claim for relief asserted by the party and/or directing
the party to show cause why a default should not be entered on
claims asserted against it.
2 The bankruptcy filing listed Unis's action against Marketing as a
$244,000 account receivable and noted that a collection action was pend-
ing in the United States District Court of Maryland.
3
60(b) provided the only possibility of reinstating the action. Mr. Hey-
man had his lawyers file a Rule 60(b) motion on August 15, 1995.
II.
Under Rule 60(b) of the Federal Rules of Civil Procedure, the court
may relieve a party or a party's legal representative from a final order
for the following reasons: (1) excusable neglect; (2) newly discovered
evidence; (3) fraud; (4) the judgment is void; (5) the judgment has
been satisfied, released, or discharged; or (6) any other reason justify-
ing relief. FED. R. CIV. P. 60(b). Mr. Heyman asserted in his Rule
60(b) motion that the dismissal order resulted from his "excusable
neglect" or from some "other reason justifying relief." See FED. R.
CIV. P. 60(b)(1), (6).3 The district court denied Mr. Heyman's motion
and he appealed. We review denials of Rule 60(b) motions for an
abuse of discretion. See National Credit Union Admin. Bd. v. Gray,
1 F.3d 262, 265 (4th Cir. 1993).
In Augusta Fiberglass Coatings, Inc. v. Fodor Contracting Corp.,
843 F.2d 808 (4th Cir. 1988), we recognized that default judgments
pit the court's strong preference for deciding cases on the merits
against countervailing interests in finality and in preserving the
court's ability to control its docket. We established two analytical
approaches under Rule 60(b) in cases of default: (1) those that involve
a blameless party and a blameworthy attorney, and (2) those that
involve a blameworthy party.
We stated that "when [a] party is blameless and the attorney is at
fault, the [court's interest in reaching the merits] control[s] and a
default judgment should ordinarily be set aside." Augusta, 843 F.2d
at 811. That is, "when the party is blameless, his attorney's negli-
gence qualifies as a ``mistake' or as ``excusable neglect' under Rule
60(b)(1)." Id.; see also United States v. Moradi, 673 F.2d 725 (4th
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3 As a threshold matter, Mr. Heyman must show: (1) that the Rule
60(b) motion is timely; (2) that Marketing will not suffer unfair prejudice
if the default judgment is set aside; and (3) that the claim is meritorious.
See National Credit Union Admin. Bd. v. Gray, 1 F.3d 262, 264 (4th Cir.
1993) (noting threshold considerations for Rule 60(b) relief). Mr. Hey-
man has met these threshold considerations.
4
Cir. 1982); Lolatchy v. Arthur Murray, Inc., 816 F.2d 951 (4th Cir.
1987). However, when dismissal is caused by the negligence of a
party, vacatur is not granted as freely. See Augusta, 843 F.2d at 810-
12. As we noted in Augusta, the stricter analysis of Park Corp. v. Lex-
ington Insurance Co., 812 F.2d 894 (4th Cir. 1986), then applies:
"When the party is at fault, the [court's interest in finality and effi-
ciency] dominate[s] and the party must adequately defend its conduct
in order to show excusable neglect." Augusta , 843 F.2d at 811 (citing
Park, 812 F.2d at 897).
Mr. Heyman contends that a bankruptcy trustee's relationship to
the estate's creditors is similar to an attorney-client relationship
because creditors are the real parties in interest and are vulnerable to
injury caused by a bankruptcy trustee's neglect. Therefore, he argues
that this case should be analyzed under Augusta 's liberal approach to
default cases in which there is a blameless party.
A.
Mr. Heyman's argument that a bankruptcy trustee is more like an
attorney for the creditors than a successor to the management of the
debtor corporation is similar to the argument made by the respondents
in Commodity Futures Trading Commission v. Weintraub, 471 U.S.
343 (1985). In Weintraub, the United States Supreme Court addressed
"whether the trustee of a corporation in bankruptcy has the power to
waive the debtor corporation's attorney-client privilege with respect
to communications that took place before the filing of the petition in
bankruptcy." Id. at 345. The respondents argued that a Chapter 7
bankruptcy trustee should not succeed to management's control of the
privilege because "as a practical matter bankruptcy trustees represent
only creditors." Id. at 355. The Supreme Court was unpersuaded.
The Supreme Court began its analysis by "consider[ing] the roles
played by the various actors of a corporation in bankruptcy to deter-
mine which is most analogous to the role played by the management
of a solvent corporation." Id. at 351. The Court reasoned that the party
whose role was most analogous to the management of a solvent cor-
poration should control the attorney-client privilege of a corporation
in bankruptcy. Recognizing the extensive powers and duties which
the Bankruptcy Code gives the trustee, the Court concluded that "the
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trustee plays the role most closely analogous to that of a solvent cor-
poration's management." Id. at 353.
Mr. Heyman's argument is unpersuasive for reasons similar to
those that dictated the result in Weintraub. Unis's pending action
against Marketing passed to Mr. Heyman pursuant to 11 U.S.C.
§ 541. See 10 COLLIER ON BANKRUPTCY ¶ 7017.02, at 7017-2 (1996)
("[A]ctions are property of the estate which pass to a trustee pursuant
to section 541 of the Code."). Chapter 7 bankruptcy trustees have a
duty to "collect and reduce to money the property of the estate." See
11 U.S.C. § 704(1). As in Weintraub, Mr. Heyman played the role
most analogous to that of a solvent corporation's management.
Accordingly, we should treat post-petition neglect by Mr. Heyman in
the same manner as we would have treated pre-petition neglect by
Unis's management.
Support for this conclusion is also found in the language of Rule
60(b). Mr. Heyman assumed the role of Unis's management and
became the bankruptcy estate's "legal representative." FED. R. CIV. P.
60(b); see Casco Chem. Co. v. Superintendence Co., 335 F.2d 645,
651 (5th Cir. 1964) (finding that a bankruptcy trustee is a legal repre-
sentative for purposes of Rule 60(b)). This position gave him standing
to bring a Rule 60(b) motion. If Mr. Heyman was the estate's lawyer,
he would not have had standing to file a Rule 60(b) motion because
attorneys are not "legal representatives" for the purposes of Rule
60(b). See Andrews & Kurth, L.L.P. v. Wright Killen & Co., 37 F.3d
230, 234 (5th Cir. 1994) (finding that the former attorney of a bank-
ruptcy estate does not qualify as a party's legal representative because
legal representatives are "only those individuals who [are] in a posi-
tion tantamount to that of a party"); Western Steel Erection Co. v.
United States, 424 F.2d 737, 739 (10th Cir. 1970) (holding that an
attorney does not have standing to move under Rule 60(b) as a "legal
representative"); Ratner v. Bakery & Confectionery Workers Int'l
Union, 394 F.2d 780 (D.C. Cir. 1968). As trustee, Mr. Heyman is the
"party's legal representative." He is not the estate's lawyer or the
creditor's lawyer. His fault is tantamount to the fault of a party. See
Kem Mfg. Corp. v. Wilder, 817 F.2d 1517, 1520 (11th Cir. 1987)
(stating that "the term legal representative was intended to reach only
those individuals who were in a position tantamount to that of a
6
party"). Therefore, unlike Augusta, this is not a "blameless party"
case.
Mr. Heyman also argues that we should extend the liberal Augusta
approach to this case because innocent creditors of the bankrupt estate
were injured by the dismissal. Appellant would have us treat blame-
less and interested third parties in the same manner as we treat a
blameless party (or a party's legal representative). We refuse to do so.
Such a substitution would be contrary to the plain wording of the Rule
and our decided cases.
Park Corp. v. Lexington Insurance Co., 812 F.2d 894 (4th Cir.
1986), provides a useful example of the problems that would be cre-
ated by extending Augusta to permit relief when the party is blame-
worthy, but innocent third parties suffer injury as a consequence of
a default judgment. In Park, the defendant Lexington Insurance Com-
pany (Lexington) failed to answer after having been properly served.
A default judgment was entered against Lexington in the amount of
$429,066.95, and Lexington moved for relief under Rule 60(b). The
district court denied Lexington's Rule 60(b) motion. On appeal, we
found no abuse of discretion in the district court's refusal to find
excusable neglect. If we had applied Mr. Heyman's reasoning in
Park, we would have reversed the district court's denial of the Rule
60(b) motion as an abuse of discretion. Presumably, Lexington's
blameless shareholders suffered a devaluation of their stock when a
default was entered due to the neglect of Lexington's corporate officers.4
If we were to search for a blameless third party injured by the default,
Park and virtually every default case would be subject to reopening,
and the recognized interest in finality would be overwhelmed.
Litigation is often pursued by a party's legal representative.
Administrators and executors act on behalf of probate estates. Trust-
ees act on behalf of trusts. Guardians represent minors and persons
judged incompetent. When a legal representative stands in a position
tantamount to the party, the law generally provides safeguards to
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4 As noted in Weintraub, a trustee's fiduciary duty to a debtor corpora-
tion's creditors is similar to the fiduciary duty that corporations (solvent
or otherwise) owe their shareholders. Weintraub , 471 U.S. at 355.
7
ensure that the interest of the beneficial party is protected.5 If appel-
lant's view were adopted, collateral injury to third parties would
almost always provide legal representatives with a foolproof method
of avoiding default judgments.
District courts must be allowed sufficient disciplinary authority to
control their dockets. Without the ability to exact significant penalties
when parties ignore court orders, district courts would be left with
nothing but hollow threats of dismissal.
There is a natural tendency on the part of reviewing courts,
properly employing the benefit of hindsight, to be heavily
influenced by the severity of outright dismissal as a sanction
for failure to comply with a[n] . . . order . . . . But [dis-
missal] must be available to the District Court in appropriate
cases, not merely to penalize those whose conduct may be
deemed to warrant such a sanction, but to deter those who
might be tempted to such conduct in the absence of such a
deterrent.
National Hockey League v. Metropolitan Hockey Club, 427 U.S. 639,
642-43 (1976).
B.
Because Mr. Heyman does not qualify for Augusta 's liberal
approach to Rule 60(b) relief, he must proceed under Park's stricter
approach. That is, Mr. Heyman must show an acceptable reason for
his neglect. Mr. Heyman provides three excuses for his neglect.
Mr. Heyman's first excuse was that the circumstances of the case
were "anomalous." However, the dismissal was not caused by anoma-
lous circumstances. Rather, dismissal was caused by Mr. Heyman's
failure to make even a cursory review of the litigation file. Mr. Hey-
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5 For example, trustees in bankruptcy are required to post bond to pro-
tect the estate from potential negligence. Mr. Heyman was required to
post such a bond. Under 11 U.S.C. § 322, a creditor can make a claim
against the trustee's bond when the trustee's neglect results in injury to
the creditor.
8
man's second excuse was that the bankruptcy filing caused procedural
confusion. Bankruptcy filings often result in procedural confusion.
Congress anticipated this confusion and made allowances for it.
Among other provisions, 11 U.S.C. § 108(b) provides trustees with at
least sixty days to take control of a case and to make appropriate fil-
ings. Mr. Heyman failed to file within the extra time allotted by
§ 108. Finally, Mr. Heyman argues that he was overworked because
he was assigned as trustee in thirty-two actions. If Mr. Heyman could
not satisfactorily perform his obligations, he should not have accepted
the appointment. The district court's refusal to accept any of Mr. Hey-
man's excuses was not an abuse of discretion.
III.
Finding no abuse of discretion, the district court order appealed
from is accordingly
AFFIRMED.
9