by Notwithstanding actual knowledge of the adversary complaint, where the debtor failed to serve the “insured depository institution” by certified mail, the Bank was not obliged to respond, and the bankruptcy court erred in granting default judgment. Citizens Bank v. Decena, No. 16-1918 (E.D. N.Y. Nov. 29, 2016).
Lorelei Decena attended St. Christopher’s College of Medicine for three years. She funded her education from St. Christopher’s through five separate student loans from Citizens Bank. After completing her studies, she sought to sit for the medical boards in the United States and was told that she was not eligible because St. Christopher’s was not an accredited medical school.
Ms. Decena filed for chapter 7 bankruptcy listing over $161,000.00 in student loan debt. Three months later she received her discharge. She then filed an adversary proceeding seeking to have the student loans declared discharged. She served the Bank with the complaint and all subsequent filings through first class mail rather than the certified mail service required by Bankruptcy Rule 7004(h) for insured depository institutions. The Bank did not respond despite having received actual notice of the filings. The clerk of courts entered a notice of default and Ms. Decena moved for default judgment. The Bank made its first appearance at the default hearing where it argued that because Ms. Decena failed to comply with the service requirements in Rule 7004(h), the court did not have personal jurisdiction over it. Finding that the Bank had adequate notice and time to respond the bankruptcy court rejected this argument and held that the loans did not implicate the nondischargeability provisions of section 523(a)(8). It entered default judgment against the Bank.
On appeal, the Bank argued that because it was never properly served with the complaint, it did not have an obligation to answer and the clerk of courts should not have entered default. Therefore, “good cause” existed under Bankruptcy Rule 7055(c) to set aside the default judgment.
The district court found that, as a matter of law, a judgment obtained by means of defective service is void for lack of personal jurisdiction. The court turned to Ms. Decena’s argument that Rule 7004(h)(1)’s exception to the certified service requirement applied. That exception states that when counsel for the insured depository institution makes an appearance, that institution may then be served by first class mail addressed to counsel. Ms. Decena pointed to the Bank’s appearance at the default hearing as triggering this provision. The court disagreed, finding that the attorney’s appearance late in a proceeding did not trigger the first class mail provision with respect to filings made before that appearance. Rather, the concerns the certified mail requirement was designed to combat, i.e. legal papers being lost in a barrage of bank mail and/or being sent to a person unqualified to take action, could not be addressed retroactively.
The district court also disagreed with the bankruptcy court’s finding that actual notice of the complaint and subsequent filings made up for Ms. Decena’s failure to properly serve the Bank. As a matter of law, service by first class mail did not trigger the Bank’s obligation to respond and in the absence of any obligation to respond, the clerk of courts had no basis upon which to enter default. Therefore, the bankruptcy court erred in entering default judgment. The court did not address the substantive issue of whether the nondischargeability provision in section 523(a)(8) applied to the loans in this case.