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In re Scheline

United States District Court, D. Idaho

May 13, 2019

In re SHERRY LYNN SCHELINE, Debtor,
v.
SHERRY LYNN SCHELINE, Defendant and Appellee. McCall Weddings, LLC an Idaho limited liability company; STEVE BERRY; and SHANNON BERRY, Plaintiffs and Appellants,

          MEMORANDUM DECISION

          B. LYNN WINMILL U.S. DISTRICT COURT JUDGE.

         INTRODUCTION

         Before the Court is Appellants McCall Weddings and Steve and Shannon Berry's appeal from the bankruptcy court's September 18, 2018 default judgment. The judgment awarded the Berrys $3, 000 on one of the seven claims contained in Appellants' adversary complaint. The bankruptcy court dismissed the remaining claims. For the reasons explained below, the Court will affirm.

         BACKGROUND

         In August 2017, Sherry Scheline filed a bankruptcy petition. Shortly after, McCall Weddings and the Berrys filed an adversary complaint against her. Scheline did not respond, prompting the bankruptcy court to enter her default.

         In May 2018, the bankruptcy court conducted an evidentiary hearing on McCall Weddings'[1] motion for a default judgment. At the hearing, both sides presented evidence on a wide range of issues, including the merits of McCall Weddings' claims. The adversary complaint contained seven claims; the one most relevant to this appeal is McCall Weddings' claim that Scheline defamed it by telling others that McCall Weddings had hacked her email account. (Scheline's allegedly defamatory communications are discussed in more detail below.)

         After considering the evidence presented at the hearing, the bankruptcy court entered a $3, 000 non-dischargeable judgment in the Berrys' favor on the seventh claim for relief. That claim was brought under § 523(a)(6) of the Bankruptcy Code; it asked the bankruptcy court for a “Determination that Debt Owed to Plaintiffs for Defendant's Slander Per Se is Excepted from Discharge Pursuant to 11 U.S.C. § 523(a)(6).” Adversary Compl., at 20. The bankruptcy court dismissed the remaining claims. McCall Weddings now appeals.

         On appeal, McCall Weddings argues that the bankruptcy court abused its discretion in ruling on the motion for a default judgment. Additionally, McCall Weddings says the bankruptcy court failed to apply governing federal law in deciding whether Scheline made defamatory statements.

         JURISDICTION

         This Court has jurisdiction to entertain an appeal from the bankruptcy court under 28 U.S.C. § 158(a), which provides: “The district courts of the United States shall have jurisdiction to hear appeals . . . from final judgments, orders, and decrees” of bankruptcy judges.

         STANDARD OF REVIEW

         The Court reviews the bankruptcy court's entry or denial of a default judgment under Rule 55(b) for an abuse of discretion. Eitel v. McCool, 782 F.2d 1470 (9th Cir. 1986). An abuse of discretion occurs when a court makes an error of law, rests its decision on clearly erroneous findings of fact, or when the reviewing court is left with a definite and firm conviction that the bankruptcy court committed a clear error of judgment. United States v. Hinkson, 585 F.3d 1247, 1260 (9th Cir. 2009).

         As for McCall Weddings' contention that the bankruptcy court wrongly concluded that certain of Scheline's statements were statements of opinion, and thus not defamatory, the Court reviews these conclusions of law de novo. See Gardner v. Martino, 563 F.3d 981, 986 (9th Cir. 2009) (“Whether an allegedly defamatory statement is one of opinion or fact is a question of law.”).

         ANALYSIS

         McCall Weddings identifies three issues on appeal. The first two relate to the extent of a bankruptcy court's discretion in ruling on a motion for default judgment. The third relates to Scheline's alleged defamation of McCall Weddings. See Opening Br., Dkt. 8, at 7.

         1. The Default Judgment

         McCall Weddings contends that the bankruptcy court abused its discretion in two related ways when it ruled on its motion for a default judgment. First, McCall Weddings says the bankruptcy court “failed to deem the complaint's factual allegations admitted as a matter of law.” Id. at 12. Second, McCall Weddings says the bankruptcy court “erroneously considered defendant's [Scheline's] testimony” in deciding whether to enter a default judgment. Id. at 21.

         McCall Weddings misunderstands the breadth of a bankruptcy court's discretion when faced with a motion for default judgment. While it is generally true that “upon default the factual allegations of the complaint, except those relating to the amount of damages, will be taken as true, ” Geddes v. United Fin. Group, 559 F.2d 557, 560 (9th Cir. 1977) (citations omitted), this is not always so. Rather, a court entertaining a motion for default judgment may decide to conduct hearings and consider evidence offered at those hearings. See Fed. R. Civ. P. 55(b)(2).[2]

         Federal Rule of Civil Procedure 55(b)(2) clarifies the point. It grants the court broad discretion in deciding whether to enter a default judgment and in deciding whether to conduct any hearings. It states that that “[t]he court may conduct hearings or make referrals . . . when, to enter or effectuate judgment, it needs to:

(A) conduct an accounting;
(B) determine the amount of damages;
(C) establish the truth of any allegation by evidence; or
(D) investigate any other matter.

Fed. R. Civ. P. 55(b)(2) (emphasis added).

         If the bankruptcy court were duty bound to accept all well-pleaded factual allegations as true - which is what McCall Weddings is arguing - then Rule 55 could not grant trial courts authority to conduct hearings to “establish the truth of any allegation by evidence.” R. 55(b)(2). In other words, this Court need not go beyond language of the rule to resolve the first two issues on appeal.

         But Ninth Circuit authority reinforces the conclusion. Eitel v. McCool, 782 F.2d 1470, 1471 (9th Cir. 1986) held that deciding whether to enter a default judgment is committed to the sound discretion of the lower court. Eitel identified seven factors trial courts may consider in exercising that discretion:

(1) the possibility of prejudice to the plaintiff;
(2) the merits of plaintiff's ...

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