HERBERT A. ROSS, U.S. Bankruptcy Judge.
INTRODUCTION
Certain defendants in adversary proceedings to avoid fraudulent transfers have refused to grant discovery related to the issue of "good faith." Despite repeated extensions, these defendants waited until the last day for compliance with discovery without sanctions and, instead, retained an attorney who filed a motion for an extension, not necessarily to comply, but to assess their situation.
See, the attached Table of "The Wooten Group" of Defendants Seeking Extension to Respond to Discovery.
Motion for an Enlargement of Time to Comply With This Court's Discovery Sanction Order to Produce Specific Discovery to Trustee and/or to File Other Appropriate Pleadings, Docket Entry 871, filed April 30, 1999.
The trustee seeks a preclusion order, which will establish that defendants did not receive the transfers in good faith. A motion for the preclusion sanction was filed in each of the adversary proceedings involved. Should the extension be granted, or should the preclusion-establishment order be entered?
See, e.g. Adv. Proc. No. F95-00897-508 (Bancap No. 96-4635),Larry Compton v. Ken Wooten, et al , Motion for Sanctions for Failure to Make Discovery , Docket Entry 22, filed January 25, 1999.
An extension should not be granted because of the extensive time already granted these defendants, who have not promised compliance but only assessment of their situation. It will be ordered that the transfers were not received in good faith.
BACKGROUND
The Bankruptcy Case Consolidation and the Bonham Recovery Actions — The bankruptcy case was filed on December 19, 1995. The trustee moved to substantively consolidate the individual case of RaeJean Bonham with the estates of two non-debtor corporations, World Plus, Inc. (WPI) and Atlantic Pacific Funding Corp. (APFC). The court granted the motion on April 30, 1998, in the main case. The trustee filed a number of adversary proceedings to avoid alleged fraudulent transfer. Because of the number of adversary proceedings, approximately 650, the court determined it should treat the situation as a mega case. Although each adversary proceeding retains its own identity, many of the proceedings involving common issues should take place in the Bonham Recovery Actions ( BRA), a lead adversary proceeding to address these issues.
Order Granting Trustee's Motion for Substantive Consolidation of World Plus, Inc. and Atlantic Pacific Funding Corporation With Debtor, Docket Entry 1545, filed in In re Rae Jean Bonham, et al, Main Case No. F95-00897-HAR on April 30, 1998.
The court's ruling that the case of RaeJean Bonham could be substantively consolidated with the estates of the non-debtor corporations, WPI and APFC, has been challenged and is on appeal to the 9th Circuit. This is a matter in the main case, but it overlapped in the BRA adversary proceedings since many defendants argued that the trustee had no authority to seek to avoid transfers by WPI or APFC to the defendants.
In re RaeJean Bonham, et al, Case No. F95-00897-HAR.
This overlapping theme has been referred to as the "standing" or "jurisdictional" issue. Many of the complaints of the defendants involved in the present motion have been about the court's jurisdiction or standing to hear the adversary proceedings encompassed in the BRA and were resolved by the consolidation ruling.
Global Issues; Global Motions to Dismiss; Wooten Group's Motion to Dismiss — In various status conferences held in the BRA, the court established procedures agreed to by most of the adversary defendants to handle certain issues as global matters. One was the jurisdiction of the court (the "standing" issue mentioned in section 2.1 of this Memorandum). Others were matters such as usury, the efficacy of using AS 34.40 in connection with the trustee's strong-arm powers, etc.
11 U.S.C. § 544(b).
The jurisdiction issue overlapped in the main case and the BRA. When the court entered an order in the main case directing substantive consolidation, it also entered an order in the BRA denying defendants' motions to dismiss on jurisdictional issues. In the order in the BRA, the court noted that the motions to dismiss on the jurisdictional issue left undecided other motions to dismiss.
See, Footnote 4.
Order Denying Defendants' Motions to Dismiss Re: Standing to Assert Avoidance Claims, Docket Entry 409, filed April 30, 1998, ¶ 1.
Id, at ¶ 4.
This latter reference is to motions to dismiss because of insufficiencies in the complaints or matters concerning the viability of claims based on usury, AS 34.40, etc. None of these other grounds were raised by any of the defendants listed in the table (referred to in this Memorandum as "the Wooten Group").
Rather, they filed a common form, scatter-gun motion to dismiss in each individual case. The motion to dismiss filed in the adversary proceeding against Ken and Donna Wooten is similar in content to those filed by the other defendants in the Wooten Group.
Adv. Proc. No. F95-00897-508 (Bancap No. 96-4635), Larry Compton v. Ken Wooten, et al , Docket Entry 4, filed January 17, 1997.
The court never granted a stay of discovery with respect to the Wooten Group's common motion to dismiss, nor was one formally requested.
The Avoidance Actions and Discovery — The trustee filed about 650 adversary proceedings to recover payments made by the debtors pursuant to debtors' Ponzi scheme. The trustee's principal legal theories of recovery were preference under 11 U.S.C. § 547(b), and fraudulent conveyances under the actual intent to defraud provisions of 11 U.S.C. § 548(a)(1); and Alaska's fraudulent conveyance law.
See, Order Granting Trustee's Motion for Substantive Consolidation of World Plus, Inc. and Atlantic Pacific Funding Corporation with Debtor, Docket Entry 1545, filed April 30, 1998, inBonham, Case No. F95-00897-HAR.
Central to the trustee's state and federal fraudulent conveyance actions is the issue of whether the defendants received the debtors' payments in good faith, within the meanings of 11 U.S.C. § 548(c) and corresponding provisions of state law which provide affirmative defenses to fraudulent conveyance transferees. The trustee sought to explore the facts regarding good faith in discovery to BRA defendants.
In 1997, the trustee propounded a Trustee's First Discovery Request to Defendants, which sought basic information that was within defendants' exclusive control and which went generally to the issue of their good faith. The discovery request sought, among other things, tax returns, loan applications, financial statements, information about the defendants' employment and educational background, whether defendants subscribed to investment-oriented publications, how the defendants learned about the debtors' investment program, and whether defendants received certain letters from the debtors.
Defendants in other of the BRA adversary proceedings regarded the discovery request as over broad and sought a protective order. In response, the trustee also filed a motion to compel discovery against a group, including those on the attached table. On November 28, 1997, this court entered its Order Regarding Certain Defendants' Motion for Protective Order and Trustee's Cross Motion for Order Compelling Discovery, which narrowed both the scope of the request and set a December 15, 1997, deadline to respond. This protection applied to the Wooten Group, too.
Opposition to Motion for Protective Order and Motion to Compel Responses to Requests for Admission, Docket Entry 258, filed October 9, 1997.
Docket Entry 297, filed November 28, 1997.
As to the Wooten Group and other defendants, who had not responded at all to the discovery request, the trustee filed a separate motion to compel. The court entered its Order Compelling Discovery and Giving Notice of Potential Imposition of Sanctions with respect to these defendants, requiring them to respond to the First Discovery Request by December 15, 1997, and gave notice that failure to do so could result in the imposition of specific sanctions, including an order precluding defendants from presenting any evidence of their good faith.
Motion to Compel Responses to Trustee's First Discovery Request Against Defendants That Have Not Responded, Docket Entry 265, filed October 24, 1997.
Docket Entry 298, filed November 28, 1997.
Order Regarding Certain Defendants' Motion for Protective Order and Trustee's Cross Motion for Order Compelling Discovery, Docket Entry 297.
Subsequent to the orders compelling discovery, in a series of monthly status orders, the instant defendants were reminded that the deadline had passed and that sanctions were contemplated. Those orders contained the following language:
On November 28, 1997, the court ordered that all defendants that had not responded to the
Trustee's First Discovery Request were required to respond before December 15, 1997, or face possible sanctions for failure to comply. A number of defendants have failed to respond or obtain an extension of time, and the trustee has given notice of his intent to file a motion under FRCP 37 to impose sanctions on those defendants, and recover attorney fees associated with the motion to compel.
This language appeared in:
•
Fifteenth Order Regarding Status Conference and Related Matters, Docket Entry 334, Section 4.3;
•
Sixteenth Order Regarding Status Conference and Related Matters, Docket Entry 384, Section 4.3;
•
Seventeenth Order Regarding Status Conference and Related Matters, Docket Entry 405, Section 4.2;
•
Eighteenth Order Regarding Status Conference and Related Matters, Docket Entry 536, Section 4.3;
•
Nineteenth Order Regarding Status Conference and Related Matters, Docket Entry 618, Section 5.
The Wooten Group of defendants, and others joining in various pleadings filed by defendant Ken Wooten, filed Motions to Dismiss for Lack of Jurisdiction which argued that the trustee lacked standing to pursue the instant adversary action. Ken Wooten, putatively on behalf of himself and a number of other pro se defendants, objected to the discovery request in light of his pending motion to dismiss.
Prior to the hearings on the motions to compel, the court had orally announced its decision to deny the global motions to dismiss (usury issue, AS 34.40, etc.). Ken Wooten and a number of other pro se defendants filed Motions for Clarification of Order; For Stay of Execution of Order Pending Clarification; and for Time to Seek Appellate Review if Necessary. That motion sought, among other things, a clarification of the defendants' discovery obligations.
See, Eighth Status Order [29, 1997 Hearing], Docket Entry 213, for list of motions.
On April 30, 1998, the court entered its written Order Denying Defendants' Motions to Dismiss Re: Standing to Assert Avoidance Claims denying all motions challenging the trustee's standing to assert the avoidance actions.
Docket Entry 409, filed April 30, 1998.
As part of that Order, the court also denied the Motion for Clarification in light of its decision on the motions to dismiss for lack of standing. Additionally, as part of that motion, this court stated:
Wootens' Opposition on Behalf of Defendants Will Not be Treated as a Valid Opposition in Those Defendants' Adversary Proceedings — The court will not treat the Wootens' attempt to represent other defendants as a
de facto joinder in the motion to clarify by those 40 other defendants (i.e., those defendants are treated as if they had not objected). The Wootens are not authorized to represent them. I have previously entered an order to Ken Wooten that he was not authorized to represent defendants. This is not to say that he cannot discuss and give them common forms that various defendants are using. If the defendants want to use a common form, all they have to do is sign them themselves and file them. Ken Wooten cannot, however, sign on their behalf. If he continues to do so, these defendants may miss a critical deadline. The answer is simple, and not draconian — have them sign their pleadings.
On January 25, 1999, the trustee filed a Motion for Sanctions for Failure to Make Discovery based upon defendants' failure to respond to the First Discovery Request. The trustee sought to impose a $250 monetary sanction against defendants for failure to provide discovery, and to give defendants an additional 35 days by which they were required to file their discovery responses. The trustee sought an order precluding defendants from presenting any evidence of their good faith should defendant fail to provide a response within that additional time.
On March 23, 1999, the court entered its Order Granting Plaintiff's Motion to Impose Sanctions if Defendants Fail to Make Discovery [Friday, April 30, 1999] in each of the Wooten Group adversaries, ordering defendants to file complete responses to the Trustee's First Discovery Request Applicable to All Bonham Recovery Action Defendants (First Discovery request) by April 30, 1999, and file a certificate that such responses had been provided.
See, e.g., Adv. Proc. No. F95-00897-508 (Bancap No. 96-4635),Larry Compton v. Ken Wooten, et al , Docket Entry 26, filed March 23, 1999.
In the Order, the court notified defendants that failure to provide the discovery, and file the required certificate, would result in entry of an order precluding defendants from presenting any evidence of his or her good faith in receiving payments from the debtors.
Defendants failed to provide any discovery response to the trustee by the April 30, 1999, deadline. Instead, attorney Pamela Scott filed a Motion for an Enlargement of Time to Comply with this Court's Discovery Sanction Order to Produce Specific Discovery to Trustee and/or to File Other Appropriate Pleadings, requesting additional time to file discovery responses.
Docket Entry 871, filed April 30, 1999.
On May 4, 1999, the trustee served a Notice of Hearing on Entry of Preclusion Order giving notice of a hearing to be held May 12, 1999, at 9:00 a.m. in Anchorage, to determine whether sanctions would be entered against defendants. The trustee also opposed the Motion for Enlargement of Time. The court held a hearing on the Motion for Enlargement of Time, and on the sanctions issue on May 12, 1999, at which time the court denied the request for additional time. An order will be entered denying the Wooten Group's motion for an extension of time.
Since the Wooten Group did not suggest a deadline for compliance, the court pressed them for clarification. The newly retained attorney for the Wooten Group did not offer a time certain to comply with discovery, but only a time to either comply or object. For the first time, it was indicated that some defendants might seek to avoid discovery on the grounds that compliance might subject them to self-incrimination.
ANALYSIS
A Rule 12(b) Motion Does Not Automatically Stay Discovery — A defendant is not relieved from complying with the planning, disclosure and discovery process merely because the defendant has filed a dismissal motion under FRCP 12(b).
The Advisory Committee Notes to FRCP 26(f) state:
The obligation to participate in the planning process is imposed on all parties that have appeared in the case, including defendants who, because of a pending Rule 12 motion, may not have yet filed an answer in the case. Each such party should attend the meeting, either through one of its attorneys or in person if unrepresented. If more parties are joined or appear after the initial meeting, an additional meeting may be desirable.
Advisory Committee Notes for the 1993 amendments to FRCP 26(f), which is incorporated by FRBP 7026.
Courts sometimes grant a motion to stay disclosure or discovery pending the resolution of an FRCP 12(b) motion, but the matter is generally within the discretion of the court. FRCP 26(c) has a provision for seeking such a stay, but none was sought in their adversary proceedings by the Wooten Group.
Rae v. Union Bank , 725 F.2d 478, 481 (9th Cir 1984).
It is unlikely that a motion by the Wooten Group to stay discovery would have been granted since the court often stated that the discovery on the good faith issue was not onerous on its face and was a reasonable request for information by the trustee. The subject of deferring the good faith discovery often was raised informally by other defendants' attorneys, but uniformly rejected by the court.
Although a Federal Court Should Be Sensitive to dthe Plight of a Pro Se Litigant, the Litigant Has to Play by the Rules, Including Compliance With Discovery Requests, or Face Sanctions — The 9 th Circuit Court of Appeals has said that a federal trial court should treat the pleadings of a pro se litigant liberally, but that the litigants are nonetheless bound by the rules of procedure. The court has treated the Wooten Group and other pro se defendants with tolerance. It has not required strict adherence with legal nuances which did not effect the substantial rights of the trustee. But, the Wooten Group has stonewalled the trustee's discovery in an important aspect of his case and, despite liberal extensions, these defendants have not complied.
Ghazali v. Moran , 46 F.3d 52, 53 (9th Cir 1995), cert den 516 U.S. 838 (1995).
The trustee was undoubtedly frustrated with the court for not moving faster to sanction the noncompliant Wooten Group defendants, but the court required extra notice and time be given to them to make sure these defendants understood the gravity of their position. There must be an end to such tolerance, however. The Wooten Group waited to the ninth hour to seek to have more time to delay despite the several years that the discovery has been outstanding.
The court may impose sanctions for failure to comply with discovery. Included in the possible sanctions, the court may, where appropriate, establish the facts for the moving party and/or preclude a disobedient party from supporting a defense or introducing evidence regarding the facts. Such drastic remedies should only be granted in the event of bad faith, willfulness, or fault by the disobedient party. The Wooten Group was granted numerous opportunities to comply. The court responded to motions to clarify to reiterate to the defendants that they were not free to ignore the proceedings, including their discovery obligations. They chose to disregard these warnings.
FRCP 37(d), incorporated by FRBP 7037.
FRCP 37(b)(A), (B).
Payne v. Exxon Corp. , 121 F.2d 503, 507 (9th Cir 1997) (sanction was dismissal under FRCP 37(b)(2)(C)).
Other than the Wooten Group, almost all other adversary defendants eventually complied with the trustee's good faith discovery. Given the number of extensions, and careful explanation of the need for the discovery by the trustee, the court concludes that the thwarting of the trustee's legitimate discovery requests by the Wooten Group has been willful and in bad faith.
The court has weighed the five factors deemed relevant to imposing severe discovery sanctions: (1) the public's interest in expeditious resolution of litigation; (2) the court's need to manage its docket; (3) the risk of prejudice to the moving party; (4) the public policy favoring disposition of cases on their merits; and (5) the availability of less drastic sanctions. The court concludes under the facts surrounding the Wooten Group's disregard of the trustee's discovery requests, a preclusion-establishment order is appropriate.
Malone v. United States Postal Service , 833 F.3d 128, 130 (9th Cir 1987), cert den 488 U.S. 819 (1988); Payne v Exxon Corp. , 121 F.3d at 508.
The information sought is critical. As time goes by, the claim that it is not available or within the records or memory of defendants is a distinct possibility. The defendants allude not to speedy production, but a new line of defense which should have been raised long ago. They should be forestalled from raising it now. Less drastic remedies seem unlikely to succeed given the general intransigence of the Wooten Group and its demonstrated antipathy for the trustee.
CONCLUSION
A preclusion-establishment order, precluding the Wooten Group defendants from denying lack of good faith in their receipt of transfers from the debtors, and establishing the facts in favor of the trustee will be entered. A copy of the order will be concurrently filed in each of the Wooten Group adversary proceedings shown in the attached table.
The order will also deny the Wooten Group's motion for an extension of time and a stay of the sanction order.
The trustee may lodge proposed judgments in each Wooten Group adversary proceeding based on the fraudulent transfers where all the other elements of proof have been established by prior orders, including the court's ruling that the debtors were engaged in a Ponzi scheme at the time of the transfers.
If the judgment does not include all defendants or all claims, it will not be a final judgment, but this is without prejudice to the trustee filing FRCP 54(b) motions in the individual adversary proceedings.