Terminating Sanctions Used Against Debtor In Adversary Proceeding Resulting In Revocation of His Discharge
The Bankruptcy Appellate Panel for the Ninth Circuit (“BAP”) affirmed the decision of the bankruptcy court for the Central District of California that entered a default judgment revoking the Debtor’s discharge after the Court had struck the Debtor’s answer as a terminating sanction. The Debtor had moved to vacate the judgment under F.R.C.P. Rule 60(b) and F.R. Bankr. P. Rule 9024, which the bankruptcy court denied.
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The facts are not complicated but demonstrate difficult litigation that began in 2015 when a closed chapter 7 case was reopened due to discovery of previously-undisclosed assets, and two chapter 7 trustees and a creditor moved to revoke the discharge of debtor, Frank Jakubaitis (“Debtor”), under Section 727.
Thereafter, over the next three years there were numerous disputes during the litigation, primarily over discovery issues, some of which involved the Debtor’s assertion that he was on medication that made it impossible for him to give meaningful testimony. Id at *1. These and other discovery disputes continued over the course of the next three years, with motions to compel and for sanctions by the plaintiffs, two motions for protective orders by the Debtor (both denied), three orders of sanctions against the Debtor (which remained unpaid through the time of the appeal in this case), and others. (Indeed, the Debtor appealed an order compelling him to attend and answer questions at his deposition.) Id. At *1-2.
In March 2019, apparently tiring of the shenanigans, the bankruptcy court issued a contempt order directed at the Debtor, his wife, and the plaintiffs, asking for specific responses as to specific issues. The court made it clear that the parties had to respond in writing, provide evidence responsive on the issues, and that “[i]f the court is not given satisfactory responses, sanctions including monetary sanctions or striking of pleadings as terminating sanctions, may issue.” Id. At *2. The contempt motion was set for hearing on May 9, 2019.
Plaintiffs responded and submitted evidence addressing the Contempt OSC; the Debtor did not. A few days before the scheduled hearing the bankruptcy court issued its tentative ruling in which it indicated its intention to strike the Debtor’s answer and hold a hearing on the entry of judgment vacating his discharge. The day before the hearing, the Debtor filed an application to continue the hearing; the court denied the application. At the hearing, the court adopted its tentative ruling and struck Debtor’s answer. Id. at *3. Thereafter, the court conducted a hearing on entry of a default judgment vacating Debtor’s discharge and the Debtor was allowed to file a response. Plaintiffs submitted evidence that the Debtor had intentionally concealed an asset, a loan to WeCosign, and proof that the Debtor and his wife had received payments from WeCosign on that loan after the Debtor had made a statement under oath that the loan was forgiven and had no value. After Plaintiffs submitted its evidence, Debtor’s only substantive rebuttal response was that the Plaintiff’s evidence was “altered.” Debtor also offered no evidence regarding his failure to respond to discovery, produce documents, or to pay any of the three sanctions orders.
The court issued its tentative ruling to revoke the Debtor’s discharge and enter judgment. The Debtor moved to reconsider and vacate the judgment under F.R.C.P. Rule 60(b) and F.R.B.P. Rule 9024 (which motion he amended twice), for the first time arguing excusable neglect by his counsel. The bankruptcy court denied the motion for reconsideration and to vacate the judgment. The Debtor timely appealed to the BAP.
RESULTS AND REASONING
On appeal, the BAP discussed, at length, the applicable standard in the Ninth Circuit regarding the application of F.R.C.P. Rule 37(b)(2)(a), which provides in pertinent part that if a party “fails to obey an order to provide or permit discovery … the court where the action is pending may issue further just orders [including] … (iii) striking pleadings in whole or in part.” First, said the BAP, in order to impose a terminating sanction such as striking an answer and entering a default, the court must find that the violations were due to the ‘willfulness, bad faith, or fault’ of the party. Jorgensen v. Cassiday, 320 F.3d 906, 912 (9th Cir. 2003). The BAP then noted that the Ninth Circuit employs a five-part test to determine whether striking an answer in full – truly a case-dispositive action – is appropriate. See Conn. Gen. Life Ins. Co. v. New Images of Beverly Hills, 482 F.3d 1091, 1096 (9th Cir. 2007): “(1) the public’s interest in expeditious resolution of litigation; (2) the court’s need to manage its dockets; (3) the risk of prejudice to the party seeking sanctions; (4) the public policy favoring disposition of cases on their merits; and (5) the availability of less drastic sanctions.” Id. at *5-6.
The BAP then applied these standards to the facts at hand. It found that the Debtor’s conduct – sanctioned three prior times by the bankruptcy court – was the direct result of willfulness, bad faith, or fault. It specifically found no excusable neglect on the part of the Debtor’s counsel and noted that the Debtor had offered no explanation why he failed to either pay the monetary sanctions ordered by the court or seek relief from those orders, and he offered no evidence to show that his failure to respond to the Contempt OSC was outside of his control. Id. At *6. It further found that the Debtor’s repeated failures to comply with court orders, including to produce documents and to respond to the Contempt OSC, with no evidence of explanation by the Debtor, was significant. In addition, the BAP specifically noted that the Debtor’s conduct, on its face, demonstrated that lesser sanctions would be meaningless, as the Debtor would likely continue to ignore them. Id. at *6-7.
After finding that F.R.C.P. Rule 37 terminating sanctions were appropriate under the facts of this case, the BAP then looked to whether the bankruptcy court abused its discretion in entering the default judgment revoking the Debtor’s discharge. The BAP specifically found that the bankruptcy court did not abuse its discretion in doing so, that a separate entry of default was not required under F.R.C.P. Rule 55(a), nor did the entry of the default judgment constitute an abuse of discretion. Id. at *8-9.
The BAP summarily disposed of the Debtor’s argument that he was entitled to judgment in his favor on the dismissed turnover cause of action (Id. at *9). Finally, the BAP determined that the bankruptcy court did not abuse its discretion in denying the Debtor’s F.R.C.P. Rule 60(b) motion, as the law in the Ninth Circuit is clear that since all of Debtor’s arguments for relief were previously raised by him in his motion for reconsideration of the order striking his answer, or in opposition to the motion for default judgment, that Rule 60(b) cannot be used to reargue points already made, or that could have been made, citing Branam v. Crowder (In re Branam), 226 B.R. 45, 55 (9th Cir. BAP 1998), aff’d, 205 F.3d 1350 (9th Cir. 1999).
This case is a good primer for anyone interested in seeing the many Ninth Circuit decisions that have come down construing Rule 37. I recently had an adversary proceeding where I represented the chapter 7 trustee as the plaintiff, and I had brought a motion for terminating sanctions for similar discovery abuses, disobedience of court orders, and failure to pay court-ordered sanctions. The judge on the case – not unlike the judge in this case – made it very clear that granting terminating sanctions was an extreme measure, not to be undertaken lightly. I believe that the BAP employed the correct standard, and arrived at the right result, in light of the facts as outlined in this decision.
Note: On May 13, 2021, the Debtor in this case filed a notice of appeal to the Ninth Circuit Court of Appeals. At the time of this article, that appeal is still being briefed, and no date has been set for argument.
 Plaintiffs included this Debtor’s chapter 7 trustee, Jeffrey Golden; the Debtor’s wife’s trustee, Richard Marshack; and a creditor, Carlos Padilla.
 The bankruptcy court denied the plaintiff’s request to enter judgment on the turnover claim on the basis that it could not find that a money judgment was warranted. On appeal the Debtor argued that, rather than a dismissal of that claim, the Debtor should have had judgment entered in his favor on that claim. Both the bankruptcy court and the BAP said “no.”
These materials were authored by Kathleen A. Cashman-Kramer, Of Counsel at Sullivan Hill Rez & Engel (Cashman-Kramer@Sullivanhill.com), with editorial contributions from ILC member Summer Shaw of Shaw & Hanover, PC (firstname.lastname@example.org).