LARISA IVANOVNA MARKUS, Appellant, -v- YURI VLADIMIROVICH ROZHKOV, Appellee.
19-cv-10781 (LJL), 19-cv-09611 (LJL)
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT
4/3/2020
LEWIS J. LIMAN, United States District Judge
OPINION & ORDER
LEWIS J. LIMAN, United States District Judge:
Victor A. Worms (“Worms“), as counsel for debtor Larisa Ivanovna Markus (“Markus“) in a
I. FACTUAL BACKGROUND
Larisa Ivanovna Markus is a Russian
In 2017, following a criminal conviction and appeal in Russian courts, Markus received an eight-and-a-half year prison sentence for large-scale fraud. BK-ECF 5-4, 5-5. According to the judgment of conviction, Markus “creat[ed] an organized criminal group from the Bank‘s employees and other persons,” with the intent to “steal a significant amount of funds from the Bank.” BK-ECF 5-4 at 29. Her role in the enterprise was, inter alia, “to find trusted persons and promote them to executive positions in the governing bodies of the Bank; . . . to plan the obtaining and further distribution of criminal proceeds, including outside of the Russian Federation; [and] to take action aimed at fostering the trust of the individuals who were the Bank‘s clients.” Id. at 3-4.
Approximately one month after the Moscow Arbitration Court declared Vneshprombank insolvent, one of Markus‘s creditors applied for commencement of a personal bankruptcy proceeding against Markus. BK-ECF 6 at 2. That application was granted. Id. The Moscow Arbitration Court appointed Yuri Vladimirovich Rozhkov as Markus‘s financial administrator. Id. In May 2017, the Moscow Arbitration Court initiated a procedure to liquidate Markus‘s assets and appointed Yuri Vladimirovich Rozhkov to preside over the liquidation. Id. Under Russian Bankruptcy Law, Yuri Vladimirovich Rozhkov is responsible for pursuing actions against persons or entities that contributed to Markus’ insolvency. Id.
On January 10, 2019, Yuri Vladimirovich Rozhkov, proceeding as Markus‘s Foreign Representative (hereinafter, “FR“), filed a Verified Petition Under Chapter 15 for Recognition of Foreign Main Proceeding in the United States Bankruptcy Court for the Southern District of New York (“Chapter 15 Petition“). BK-ECF 2. The FR‘s declaration in support of the
Discovery issues began almost immediately. See BK-ECF 45 at 65 (FR‘s counsel
The conference proceeded as scheduled on May 29, 2019. Soon after it began, Worms orally requested “an interim stay of the discovery issues” in light of the “extraordinary nature” of the proceedings. BK-ECF 59 at 13. The details of Worms‘s position on the recognition order are not at issue in this appeal; in brief, he asserted that the Bankruptcy Court lacked jurisdiction at the time it entered the recognition order and that Markus had suffered due process violations. Id. at 11. The Bankruptcy Court declined to entertain those arguments at that time, noting, “[W]e are now here for a discovery conference,” but the Bankruptcy Court assured Worms that it would take up those arguments if Worms brought “a proper motion.” Id. at 12–13.
The Bankruptcy Court then heard argument on various discovery issues. Summarizing the landscape, the Bankruptcy Court discerned “a little bit of exaggeration going on on both sides“; while the FR was inaccurate to complain that he had received “nothing,” there was “clearly, clearly a pattern of not complying with . . . discovery obligations” on the part of certain Markus-related entities. Id. at 29. Ultimately, the Bankruptcy Court ordered counsel for certain entities to make a production that day. Id. at 32. Worms objected, arguing that he needed to see “any production relating to” Markus. Id. The Bankruptcy Court refused to delay the production, despite Worms‘s protestation that he “only got involved in the case yesterday.” Id. On June 18, 2019, Worms filed a motion to vacate the recognition order. BK-ECF 70.
On June 24, 2019, the FR emailed Worms with a proposed subpoena and an invitation to meet and confer the following day. BK-ECF 79-3 at 2. Worms responded:
As we say in the Yiddish, you have real chutzpah sending me this proposed subpoena especially since I have maintained all along, and have documented, that this
Chapter 15 proceeding is completely illegitimate, and the Recognition Order entered by the Bankruptcy Court is null and void.Therefore, I will not be meeting and conferring with you concerning the proposed subpoena because it is my unshakable intention to move to quash the subpoena at the earliest possible moment, but in all events prior to the subpoena‘s return date of July 8, 2019.
You and your law firm were successfully able to bamboozle an inattentive judge in signing a recognition order and to permit blunderbuss discovery in this proceeding. However, the days of you and your firm running amok in this proceeding are over. I look forward to seeing you in court at the next court appearance.
BK-ECF 83-2 at 3.
The next day, the FR served the subpoena on “Larisa Markus, c/o Victor A.
The Subpoena made twenty-one requests for documents, including, for example:
- All engagement letters of Markus with counsel, including but not limited to:
- Counsel in the United States:
- the Law Offices of Victor A. Worms;
- Counsel in the United States:
- . . .
- All “Powers of Attorney” executed by Markus or concerning a Markus Asset.
- All communications between Markus and [Ilya] Bykov.
- . . .
- All documents—including, but not limited to bank statements, checks, accounting, account opening documents—evidencing bank accounts in which Markus has an interest (direct or indirect).
BK-ECF 79-2 at 1–2. The Subpoena‘s “Instructions” specified that the “Subpoena shall apply to all documents that you, or any of your present or former agents, attorneys, assigns, consultants, employees, and/or successors possess, control or can access in the ordinary course of business.” Id. at 9.
Between June 25, 2019 and July 9, 2019, Worms seems to have made no effort to obtain responsive documents. On July 9, 2019, Worms filed a motion to quash the Subpoena. BK-ECF 79-1. The motion argued that “[t]he subpoena should be quashed because it is predicated upon a Recognition Order which is null and void; the subpoena is procedurally deficient; it is impossible for the debtor to comply with the subpoena because she is presently incarcerated in a Russian prison and the subpoena is overly burdensome.” Id.
On July 10, 2019, the FR filed a Declaration from Sergey Sokolov, Russian legal counsel to the FR. BK-ECF 81 (the “First Sokolov Declaration“). It stated that Markus had “issued a power of attorney to Mr. Ilya Bykov and Ms. Elena Artemyeva to represent her before third parties, including Russian and foreign courts, with, inter alia, the right to represent Ms. Markus in bankruptcy proceedings.” Id. at 2. Attached to the First Sokolov Declaration was the Power of Attorney itself, on official letterhead. BK-ECF 81-2.
The next day, the FR requested a discovery conference on the motion to quash and noted that “Mr. Worms did not meet and confer on [the] motion before filing it.” BK-ECF 82 at 2.
Worms responded with a request for the Bankruptcy Court to refer the case to mediation, conditional on document production being stayed pending the mediation‘s outcome. BK-ECF 83 at 4. Worms called it “especially noteworthy” that the FR had accused Worms of not meeting and conferring before filing the motion, because that was “simply untrue.” But see BK-ECF 83-2 at 3 (Worms email to the FR stating, “I will not be meeting and conferring with you concerning the proposed subpoena because it is my unshakable intention to move to quash the subpoena at the earliest possible moment . . . .“) The Bankruptcy Court scheduled a case management conference for July 23, 2019. BK-ECF 84.
At the conference, Worms argued that the Bankruptcy Court could not address “the issue of the motion to quash or the subpoena separate from the motion to vacate the recognition order, because the
I‘m telling you now that you are not going to delay discovery by saying I have a motion pending to vacate recognition. That isn‘t happening.
Id. at 34.
I‘m telling you right now, I don‘t want to hear -- the scope of discovery is broader than the precise issues in the litigation or on recognition. Unless you have a good-faith basis to assert privilege, attorney-client privilege, you‘re going to produce the documents. I‘m telling you in the clearest terms, and I don‘t want to have to tell you again, after getting letters on this, that you‘re not producing the documents because you think they‘re overbroad or it‘s not specifically limited to the issues on the motion to vacate recognition.
Id. at 35–36.
THE COURT: You will produce all non-privileged documents that have been requested. Do you understand that, Mr. Worms?
MR. WORMS: Judge, I do understand.
Id. at 36.
THE COURT: And I‘m telling you that whether they‘re beyond the scope of the recognition issue, [unless] you have a good-faith basis to allege attorney-client privilege, you‘re going to produce them.
MR. WORMS: Okay, Judge.
Id. at 36. Counsel conferred, as ordered, after the conference. BK-ECF 96, 99. But the dispute persisted. On July 26, 2019, Worms submitted a letter advising as follows:
In respect to the Markus subpoena, I agree to provide documents reflecting requests No. 1(a)(ii) and No. 3 to the extent any such power of attorney directly affects my authorization to represent Ms. Markus in this action.4
As to the remaining documents requested in the subpoena, I do not have any documents responsive to these requests. Importantly, it is my understanding that most, if not all, of the documents which are being requested have already been provided to the Foreign Representative pursuant to subpoenas that have been served upon other parties.
Therefore, the Following [sic] Representative is in a position to trace the assets of the debtor ahead of any mediation that may take place in these cases. In line with the meet and confer telephone call, it was agreed that I would provide copies of the documents agreed to by August 2, 2019.
BK-ECF 96. The FR filed a response letter characterizing the position that Worms‘s letter had taken as refusing to produce documents “because [Worms] does not personally have responsive documents.” BK-ECF 99. The FR‘s letter emphasized
Worms rejected the FR‘s characterization of his position, responding as follows in a letter also dated July 26, 2019:
[The FR] asserted that I stated that I would not produce any documents because I personally do not have responsive documents. This is a complete and total falsehood because I never made any such assertion.
BK-ECF 101. On July 30, 2019, the Bankruptcy Court intervened. In an order titled, “Order for the Production of Documents by Larisa Markus and Victor A. Worms, Esquire,” the Bankruptcy Court expressly referenced the Subpoena (BK-ECF 79-2) and ordered as follows:
- The Motio[n] to Quash the Subpoen[a] (. . . Markus Case, ECF No. 79) [is] DENIED;
- Worms shall immediately communicate with Markus and her agents, including attorneys, to obtain and produce responsive documents by the dates indicated below to [the] extent the documents are in Markus’ possession, custody, or control;
- Markus and Worms shall produce all documents responsive to the Subpoenas to the extent the documents are in their possession, custody, or control:
- Worms shall produce by 5 p.m. on Friday, August 2, 2019, the documents responsive to . . . the subpoena in the Markus Case (Markus Case, ECF No. 79-Ex. A) Request Nos. 1(a)(i) and 3, as per his prior agreement with the Foreign Representatives;
- Worms and Markus shall produce all remaining responsive documents by 5 p.m. on Thursday, August 15, 2019.
- Markus and Worms shall provide by 5 p.m. on Thursday, August 15, 2019, a log of documents withheld on privilege grounds.
BK-ECF 107 (the “July 30 Order“) (emphasis removed).
On August 5, 2019, Worms submitted a letter to the Bankruptcy Court acknowledging that “the Court, in its order of July 30, 2019, directed . . . Worms [to] immediately communicate with Markus and her agents, including attorneys, to obtain and produce responsive documents by the dates indicated below to [the] extent the documents are in Markus’ possession, custody, or control.” BK-ECF 109. Worms‘s August 5, 2019 letter also recognized that the July 30 Order had “directed, in reference to the subpoena that was served upon Ms. Markus, . . . Markus [to] produce all remaining responsive documents by 5 p.m. on Thursday, August 15, 2019.” Id.
Worms‘s August 5, 2019 letter further explained:
To comply with the Court‘s order directing communication with Ms. Markus in respect to the production of the documents which may be responsive to the subpoena, the entire subpoena, including the pro forma portions, will have to be translated into Russian and that translated subpoena will have to be reviewed by Ms. Markus.
. . .
This would have been an entirely different situation if Ms. Markus was incarcerated in a prison in the United States because in such a circumstance, the August 15, 2019 date would not be problematic,
and her participation in responding to the subpoena could be obtained by August 15, 2019. Accordingly, I am writing to request that the Court extend the August 15, 2019 compliance date . . . to September 4, 2019 . . .
I suspect that [the FR] will not object to this relatively short extension . . . because I am sure that he would like to have Ms. Markus participate in responding to the subpoena as much as is practicable under the circumstances.
Id. On August 7, 2019, the FR submitted a letter consenting to Worms‘s request for an extension from August 15 to September 4, with the exception of documents related to the motion to vacate. BK-ECF 114. The FR‘s letter stated that Worms had “apparently done nothing to obtain responsive documents – not translating the subpoena or communicating with Ms. Markus.” Id.
In response, Worms filed a letter reiterating his request for an extension until September 4, 2019 “[d]ue to the logistics of translating the subpoena and having it reviewed by Ms. Markus.” BK-ECF 115.
On the same day as the letter exchange—August 7, 2019—the Bankruptcy Court held a conference. The Bankruptcy Court asked Worms whether the Subpoena had yet been translated into Russian. BK-ECF 129 at 7. Worms replied that it had “been sent to a service for that purpose” but that they were “still waiting for the completion of that translation.” Id. The Bankruptcy Court ordered Worms, by the end of that day, to file “a letter with the details of who sent the subpoena for translation, when was it sent for translation, . . . [and] when is it expected that the translation will be completed . . . [and] delivered to Ms. Markus.” Id. at 7–8.
“And I don‘t want weasel words,” the Bankruptcy Court emphasized. “I want direct answers, and you will be held responsible for the direct answers . . . [I]f you didn‘t send it, you better get very affirmative representations about who sent it, when it was sent, and when the response is expected, when it will be delivered to Ms. Markus.” Id. The Bankruptcy Court further ordered:
You‘ve requested in your August 7th letter that the deadline for compliance be extended from August 15th, 2019 to September 4, 2019. That request is granted. No further extensions will be granted. So you better be sure that the subpoena is translated promptly and delivered to Ms. Markus.
Id. Towards the end of the conference, the Bankruptcy Court addressed discovery practice more generally:
You all are going to change the way you have behaved in this case. Okay? I am not going to get flooded, and my courtroom deputy is not going to get flooded with emails, and copies of correspondence, okay? I‘m going to start imposing sanctions if you disregard what I‘m saying now. You better tell any of your other colleagues who are not on the phone today. Okay? I‘m serious about it.
. . .
[A]s I said, Mr. Worms, by the end of the day today, what I‘m not going to put up with is you put in a letter saying, oh, we‘ve got to translate it into Russian. But you‘re not the one who‘s handling the request. Okay? There better not be another request. You better communicate to whatever counsel is dealing with it they better be able to demonstrate they‘ve done -- when you put in a letter that says the request was made, I want to know who the translator is, when the request was made, when the response is going to be provided.
. . .
We‘re moving forward with this case. Okay? And the first thing that‘s going to happen is complete compliance with discovery and stopping of the letter-writing wars.
Id. at 16–17. As ordered, that same day, Worms submitted a letter updating the Bankruptcy Court on the status of the translation. BK-ECF 116. The letter stated that the translation was expected to be complete on August 9, 2019 and transmitted for review by Markus on or about that day. Worms‘s letter concluded: “[I]t is anticipated that the review by her will be completed prior to the compliance date of September 4, 2019.” Id.
On September 4, 2019, Worms submitted a response to the Subpoena. BK-ECF 136-2. The response lodged an objection to Request No. 1 “as exceeding the limited scope of discovery provided for under
Four days later, the FR submitted another Declaration from Sergey Sokolov. BK-ECF 133-4 (the “Second Sokolov Declaration“). The Second Sokolov Declaration stated that, “according to Russian law Markus’ Russian bankruptcy estate includes all her assets, including property located abroad and property put into trust such as the Larisa Markus Revocable Trust.” Id. It also explained that, “under Russian Bankruptcy law[,] . . . once the debtor is declared bankrupt the financial administrator exercises all rights with respect to the property making up the bankruptcy estate and is entitled to collect and dispose of such property for the benefit of creditors.” Id. It declared further that, because “[t]he Russian Federation does not have any treaties with the United States applicable to the sale of property of insolvent debtors, . . . any eventual liquidation of Ms. Markus’ assets located in the United States would be governed by the procedural laws of the United States.” Id.
The Bankruptcy Court held a hearing on September 9, 2019. BK-ECF 146. At that time, the Bankruptcy Court explained that ”
The FR stated that he had not received “a single document regarding Ms. Markus‘s assets.” Id. at 19. He relayed that Worms had told the FR that the Subpoena was translated and sent to Russian attorneys who went to visit Markus in jail, and that Markus conveyed she “didn‘t have any documents because she‘s in jail.” Id. The FR added that he had asked Worms whether Worms had spoken to Markus‘s attorneys in London, France, or Latvia, and that Worms had responded to him, “[N]o, but I don‘t have to tell you what I discussed with them if I had.” Id. at 19–20.
Later in the hearing, the Bankruptcy Court asked, “Mr. Worms, why haven‘t you produced documents?” BK-ECF 146 at 76. Worms replied:
Judge, I don‘t -- to hear [the FR] tell it, Your Honor, after the subpoena, I was supposed to fly to Russia, meet with the Russian attorneys and whomever else is in Russia, fly to Paris or France, I mean --
Id. at 77. The Bankruptcy Court responded:
Mr. Worms, you understand that Ms. Markus is required to produce documents
in her possession, custody, or control. She‘s in jail and I‘m assuming she doesn‘t have boxes of documents or electronic data with her in jail. She has agents. Agents include her attorneys . . . . [Y]ou were required to produce documents in her possession, custody, or control. Have you produced any?
Id. Worms answered that he had not produced any documents because there were “no documents to produce.” Id. at 78. He then asserted that it was his “understanding” that “the scope of discovery under
When the Bankruptcy Court asked Worms whether he had made that argument in response to prior conferences and orders, Worms replied, “I thought that was very well understood by all parties, Judge.” Id.
When asked whether Worms had appealed the July 30 Order, Worms responded, “I didn‘t appeal the Court‘s order . . . because I understood [it to be] directed specifically at Ms. Markus, . . . that she was to respond to the subpoena. Not that I would then, in turn go on planes to Russia.” Id. at 79. The Bankruptcy Court continued:
What you didn‘t answer to me, is whether her attorneys in London or her attorneys in Moscow have any documents that are responsive to the subpoena. Do you know one way or the other whether they do?
Id. at 80. Worms answered, “I do not, Your Honor.” Id. at 81. The Bankruptcy Court clarified:
THE COURT: In response to a July 30 order, did you produce any documents from Ms. Markus?
MR. WORMS: I did not produce any documents because there weren‘t documents to be produced, Judge.
Id. After that, the Bankruptcy Court invited the FR to “[b]ring a motion for contempt.” Id. Soon thereafter, Worms asked if the Bankruptcy Court would “indulge [him] for one moment.” Id. at 82. Worms insisted that he “misunderstood the Court‘s order” and that, “at no point was it in [his] consciousness” that he was supposed to look outside the United States. Id. The Bankruptcy Court responded that Worms‘s obligations were “crystal clear from prior hearings.” Id. at 84.
In closing, the Bankruptcy Court set a briefing schedule for the contempt motion and ordered Worms to “affirmatively indicate whether any of Markus’ attorneys or agents in the United States or elsewhere have in their possession or custody, document responsive to the subpoena.” Id. at 93–94. The Bankruptcy Court asked Worms, “Am I clear about that?” and Worms responded, “Yes, Judge.” Id. at 94. The record does not reflect that Worms ever made such affirmative indication about Markus’ attorneys or agents.
Two days after the hearing, the FR moved for sanctions. BK-ECF 136. Worms opposed the motion and cross-moved for sanctions against the FR. BK-ECF 138. The FR replied. BK-ECF 139.
On October 3, 2019, the Bankruptcy Court held a hearing. The FR drew the Bankruptcy Court‘s attention to cases discussing “an obligation to produce documents no matter where they are.” BK-ECF 160 at 49. The FR insisted, “There was no misunderstanding. It was deliberate. He didn‘t make reasonable efforts. He didn‘t contact lawyers.” Id. Moreover, the FR emphasized, “even [if] Mr. Worms believed . . . that this didn‘t apply to documents outside of the United States, . . . [there are] ten agents of Ms. Markus that are here in the United States.” Id. at 50.
At that point, the FR directed the Bankruptcy Court‘s attention to a chart he had
The Bankruptcy Court asked Worms whether he had yet provided the FR with any documents from any of Markus‘s attorneys in England, France, or Latvia. Id. at 51. Worms responded, “I wrote to them, Judge, and they told me, literally, we‘re not giving you anything . . . we have no obligation.” Id. at 50–51. When the Bankruptcy Court asked whether Worms had filed anything to that effect, Worms responded, “I know I made my filing under a very rushed timetable . . . [I]f the Court would like me to supplement the record . . . I‘d be happy to do that.” Id. at 52. The Bankruptcy Court declined the offer. Id.
Next, Worms contested the validity of the July 30 Order on the grounds that the Bankruptcy Court had “no personal jurisdiction” over Markus. Id. The Bankruptcy Court rejected that argument and found the following:
You have engaged in a knowing, intentional, persistent course of conduct in these cases, obstructing the [FR‘s] efforts to obtain discovery of relevant and material evidence.
. . .
Here, the Sokolov declarations state that Russian law allows for . . . the discovery requested here. You have provided no evidence to rebut this assertion. Thus you have been required, consistently, to comply with the subpoena seeking information from outside the United States.
Id. at 55–58. Worms protested that the Subpoena “was issued to Ms. Markus” and insisted that the person subpoenaed (Markus), not he as the attorney, had “to have custody and control and possession.” Id. at 58. The Bankruptcy Court did not disagree. Id. at 58–62. But, the Bankruptcy Court then asked Worms, “Is it your view that Ms. Markus can‘t direct her attorneys in England, France, and Latvia to produce documents?” to which Worms responded, “The answer is I don‘t know, because it‘s a factual issue that would require an evidentiary hearing and the burden of proof to be satisfied by [FR].” Id. at 62–63.
“Enough,” said the Bankruptcy Court. Id. at 66. “Here, Mr. Worms has demonstrated throughout willful disregard of this Court‘s two discovery orders issued nearly two months ago, and this Court‘s warning to Mr. Worms that sanctions might be levied against him for failure to comply with this Court‘s orders.” Id. at 68. “Consequently, the Court will enter an order imposing monetary sanctions on Mr. Worms for failure to provide documents . . . on or after September 4th.” Id.
Five days later, the Bankruptcy Court issued a written order summarizing the sanctions it had imposed orally on October 3. BK-ECF 157 (“Sanctions Order“). The Sanctions Order stated that the Bankruptcy Court was imposing sanctions “based on Mr. Worms’ failure to comply with discovery orders issued by this Court” but did not identify the precise authority under
[W]ithin fourteen (14) days from the date of this Order, as a sanction based on Mr. Worms’ failure to comply with discovery orders issued by this Court, Mr. Worms is directed to pay to the Clerk of the United States Bankruptcy Court for the Southern District of New York $1,000 per day or a total of $34,000 since his non-compliance on September 4, 2019; and
Mr. Worms is further ordered to pay $1,000 per day going forward for each day that he fails to comply with this Court‘s discovery orders.
Id. at 2. The Sanctions Order also promised a “separate memorandum opinion . . . elaborating on the findings of fact and conclusions of law that support this sanctions award,” which the Bankruptcy Court issued on October 16, 2019. Id.; BK-ECF 164 (“Sanctions Opinion“).
The Sanctions Opinion characterized the FR‘s motion for sanctions as having been made “pursuant to
On October 23, 2019, the FR moved for an award of attorneys’ fees. BK-ECF 176. The FR‘s motion cited
On November 7, 2019, the Bankruptcy Court granted the FR‘s motion, awarding $60,000 in attorneys’ fees against Worms in connection with the Sanctions Order. BK-ECF at 200 (“Fees Order“). The Fees Order explained that, in the Sanctions Opinion, “the Court found that ‘Worms’ willful disregard of this Court‘s two discovery orders issued nearly two months ago and this Court‘s warnings to Worms that sanctions might be levied against him for failure to comply with this Court‘s orders weighs heavily in favor of imposing sanctions.‘” Id. at 2 (quoting BK-ECF 164 at 23–24). The Fees Order specified that the
II. MATTERS BEFORE THE COURT
Pending before the Court are Worms‘s appeals of the Sanctions Order and the Fees Order. Worms has also moved to stay both orders pending their appeal. See Sanctions ECF 3; Fees ECF 4. On March 9, 2020, the Court heard oral argument on all matters. The same day, the Court requested supplemental briefing on three matters: (1) whether Rule 37 sanctions are appropriate for failure to obey a Rule 45 subpoena; (2) authority addressed to whether and when Rule 45 applies in bankruptcy proceedings; and (3) whether the Court may affirm all or part of either order on the alternative ground of Rule 45(g). Sanctions ECF 22; Fees ECF 17. Both sides timely filed supplemental letter-briefs. Sanctions ECF 23, 24; Fees ECF 18, 19.
This opinion first addresses issues common to both appeals, then those unique to the Sanctions Order, and finally those relating to the Fees Order.
III. STANDARD OF REVIEW
Generally, a district court reviews a “Bankruptcy Court‘s findings of fact for clear error [and] its conclusions of law de novo.” In re Bayshore Wire Prods. Corp., 209 F.3d 100, 103 (2d Cir. 2000). “In reviewing a decision of a bankruptcy court, the district court ‘may affirm on any ground that finds support in the record, and need not limit its review to the bases raised or relied upon in the decisions below.‘” Sec. Inv‘r Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 598 B.R. 102, 111 (S.D.N.Y. 2019) (quoting Freeman v. Journal Register Co., 452 B.R. 367, 369 (S.D.N.Y. 2010)). “The district court may not consider evidence outside the record.” Id.
IV. ISSUES PRESENTED IN BOTH APPEALS
A. Whether This Court Lacks Jurisdiction Over Both Appeals Because Named Appellant Markus Has No Standing
Both notices of appeal were filed by “Larisa Markus (the ‘Debtor‘), by and through her attorney, Law Offices of Victor A. Worms.” BK-ECF 165; BK-ECF 204. The FR argues that this Court now lacks jurisdiction over both appeals because Markus, the named appellant, lacks standing.
Generally, “in order to have standing to appeal from a bankruptcy court ruling, an appellant must be a person aggrieved—a person directly and adversely affected pecuniarily by the challenged order of the bankruptcy court.” In re Barnet, 737 F.3d 238, 242 (2d Cir. 2013) (quoting DISH Network Corp. v. DBSD N. Am., Inc. (In re DBSD N. Am., Inc.), 634 F.3d 79, 89 (2d Cir. 2011) (internal quotation marks omitted)).6 The FR asserts that Worms is the proper appellant because the Sanctions and Fees Orders aggrieved him, not Markus.
Under
acknowledges that
This precise question has arisen before. See In re Johns-Manville Corp., 319 F. Supp. 3d 633 (S.D.N.Y. 2018), rev‘d on other grounds by In re Johns-Manville Corp., 2020 WL 815776, at *3 (2d Cir. Feb. 19, 2020). In re Johns-Manville Corp. took up appeals arising from the “long-running bankruptcy” of the Johns-Manville Corporation, “once the largest supplier of raw asbestos in the United States.” Id. at 635. In 2009, Salvador J. Parra, Jr., a former insulator who developed asbestosis, retained The Bogdan Law Firm (the “Bogdan Firm“) to sue certain Manville-related entities. Id. at 638. In 2010, the Bogdan Firm filed a response to one of the entities’ motions “on behalf of ‘The Bogdan Law Firm as Counsel for Salvador Parra, J.‘” Id. at 638. Litigation ensued. Eight years later, for the first time, the Manville-related entity argued that the Bogdan Firm lacked standing to pursue an appeal. Id. at 639.
The district court disagreed. “While formalistically appealing,” the court explained, “[the entity‘s] argument ignores the reality that, throughout this suit, every single relevant actor - the Parra estate, the district court in the initial appeal, the bankruptcy court, and [the entity] itself - understood that Parra was the party doing the litigating, regardless of how the caption read.” Id. The district court acknowledged that
On appeal, the Second Circuit blessed that approach. In re Johns-Manville Corp., 2020 WL 815776, at *1 (“Like the district court, we decline to dismiss the appeal for what can be, on this record, characterized as a captioning error.“).
The holding and reasoning of In re Johns-Manville Corp. apply here. Worms appealed from orders titled “Order Issuing Sanctions Against Debtor‘s Attorney, Victor A. Worms, for Failure to Comply with Discovery Orders,” Sanctions ECF 1; BK-ECF 165, and “Order Awarding $60,000 in Attorneys’ Fees Against Victor A. Worms, Esq. in Connection [with] the Foreign Representative‘s Sanctions Motion.” Fees ECF 1; BK-ECF 204 (emphasis added).
The Sanctions Order imposed, on “Mr. Worms,” $34,000 in sanctions on “based on Mr. Worms’ failure to comply with discovery orders.” BK-ECF 157 at 2 (emphasis added). It further ordered “Mr. Worms” to pay $1,000 per day going forward so long
The Fees Order specified that the Bankruptcy Court was “awarding fees against Worms personally” and directed that the sum was “payable by Worms personally to the Foreign Representative.” BK-ECF 200 at 2.
There can be no dispute that the effect of the orders was to impose pecuniary harm on Worms. Absent any ambiguity in the underlying orders, the orders put the FR on notice that Worms, not Markus, was the aggrieved party who intended to file this appeal. Jurisdiction lies here despite any “captioning error.” In re Johns-Manville Corp., 2020 WL 815776, at *1.
B. Whether This Court Lacks Jurisdiction Over Challenges to the Discovery Order
In both appeals, Worms raises various challenges to the propriety of the July 30 Order. Most prominently, he insists that a subpoena issued pursuant to
“Under traditional finality principles, a district court‘s decision to compel compliance with a subpoena or to deny a motion to quash a subpoena is generally not a ‘final decision’ and therefore is not immediately appealable.” In re Air Crash at Belle Harbor, New York on Nov. 12, 2001, 490 F.3d 99, 104 (2d Cir. 2007) (citation omitted). “To obtain appellate review, the subpoenaed person ordinarily ‘must defy the district court‘s enforcement order, be held in contempt, and then appeal the contempt order.‘” Id. (quoting United States v. Constr. Prods. Research, Inc., 73 F.3d 464, 468 (2d Cir. 1996)). But “[t]his rule has an exception for discovery orders issued pursuant to
28 U.S.C. § 1782(a) , which provides for discovery ‘for use in a proceeding in a foreign or international tribunal.‘” Barnet, 737 F.3d at 244 (citing28 U.S.C. § 1782(a) ). “Because such an order is the final adjudication of the§ 1782 application, it is immediately appealable . . . regardless of the fact that the suit in another tribunal, to which it relates, remains unadjudicated.” Chevron Corp. v. Berlinger, 629 F.3d 297, 306 (2d Cir. 2011).
In Barnet, the Second Circuit determined that “[t]he same reasoning applies in [the
Worms contends that the Barnet rule does not apply because the Bankruptcy Court improperly permitted discovery pursuant to
That the July 30 Order was appealable at the time it was issued does not answer the question, however, of what portion—if any—of Worms‘s appeal is untimely. To that question, resort must be made to
But not every “question” presented by Worms‘s appeals of the Sanctions Order and Fees Order concerns the correctness of the underlying July 30 Order. In addressing the following issues over which the Court has jurisdiction, the Court will assume the propriety of the July 30 Order and consider only the questions whether the Bankruptcy Court erred in imposing sanctions and awarding fees.
C. Whether the Sanctions Order is Invalid Because It Was Predicated on Rule 37
Worms argues that the Sanctions Order is invalid because it was predicated on
Worms‘s argument is essentially two-fold. First, he asserts that he cannot have been held liable under
But, Worms argues, that universe of contested matters cannot include any contested matters arising in
Therefore, Worms is incorrect that
As outlined above, Worms‘s argument that
On the former, courts frequently recognize that
And on the latter, Worms‘s position would lead to the absurd result that bankruptcy courts handling
D. Whether Worms Can Be Sanctioned Under Rule 37 as an Attorney
Worms argues that, even if
In this case, the Bankruptcy Court issued sanctions pursuant to
(d) Party‘s Failure to Attend Its Own Deposition, Serve Answers to Interrogatories, or Respond to a Request for Inspection.
(1) In General.
(A) Motion; Grounds for Sanctions. The court where the action is pending may, on motion, order sanctions if:
. . .
(ii) a party, after being properly served with interrogatories under
Rule 33 or arequest for inspection under Rule 34 , fails to serve its answers, objections, or written response.. . .
(3) Types of Sanctions. Sanctions may include any of the orders listed in
Rule 37(b)(2)(A)(i) -(vi). Instead of or in addition to these sanctions, the court must require the party failing to act, the attorney advising that party, or both to pay the reasonable expenses, including attorney‘s fees, caused by the failure, unless the failure was substantially justified or other circumstances make an award of expenses unjust.
Upon finding a violation of
(b) Failure to Comply with a Court Order.
. . .
(2) Sanctions Sought in the District Where the Action Is Pending.
(A) For Not Obeying a Discovery Order. If a party or a party‘s officer, director, or managing agent—or a witness designated under
Rule 30(b)(6) or31(a)(4) —fails to obey an order to provide or permit discovery, including an order underRule 26(f) ,35 , or37(a) , the court where the action is pending may issue further just orders. They may include the following:. . .
(vii) treating as contempt of court the failure to obey any order except an order to submit to a physical or mental examination.
. . .
(C) Payment of Expenses. Instead of or in addition to the orders above, the court must order the disobedient party, the attorney advising that party, or both to pay the reasonable expenses, including attorney‘s fees, caused by the failure, unless the failure was substantially justified or other circumstances make an award of expenses unjust.
Thus, in language identical in all respects to that which the Apex court found permitted the imposition of sanctions against attorneys under
Accordingly, Worms is incorrect that these rules only apply to parties in an action and not their attorneys. The Bankruptcy Court properly read them to cover “attorney[s] advising . . . parti[es]” as well.
E. Whether Worms Can Be Sanctioned Under Rule 37 as an Attorney for a Person Who Received a Rule 45 Subpoena
Worms also argues that he cannot be sanctioned under
The court for the district where compliance is required—and also, after a motion is transferred, the issuing court—may hold in contempt a person who, having been served, fails without adequate excuse to obey the subpoena or an order related to it.
Thus, ordinarily and outside the bankruptcy process, a court cannot impose
Black‘s Law Dictionary defines a “party” as “[o]ne by or against whom a lawsuit is brought; anyone who both is directly interested in a lawsuit and has a right to control the proceedings, make a defense, or appeal from an adverse judgment.” Black‘s Law Dictionary (11th ed. 2019). To determine whether Markus was a “party” whose attorney was punishable under
In contested matters, “there are (at least) two parties who are opposing each other with respect to relief sought by one of them.” 10 Collier on Bankruptcy 9014.01 (16th ed. 2020). It is clear that, by the time the Bankruptcy Court entertained the FR‘s motion for sanctions, a contested matter had developed. The FR was one party to that contested matter; Worms was the other. See In re Texaco Inc., 182 B.R. 937, 945 (Bankr. S.D.N.Y. 1995) (“A contempt proceeding constitutes a contested matter[.]“) (quoting Collier Bankruptcy Practice Guide 40.06 at 40-18); In re St. Johnsbury Trucking Co., Inc., 1994 WL 832007, at *1 (Bankr. D. Vt. Nov. 1, 1994)
At first glance, the definition of a contested matter makes it sound as though any person involved in one is a “party” (at least to that contested matter) as contemplated by
When the subpoenaed person is not a party to the action, the threat of contempt is the only remedy, whether the disobedience is of the subpoena itself or of a court order entered somewhere further along the way directing the nonparty to do something. With a party there may be a variety of other sanctions available as well—in the case of a party, more often for the disobedience of a court order than of a subpoena—up to and including the declaration of a default, see
Rule 37(b)(2) , but these are threats that impact on the party‘s interests in the action and they therefore hold no terror for a nonparty. Hence the special role that contempt plays in enforcing subpoenas against nonparty witnesses.
The Court is not persuaded by the two other arguments from the FR in support of its position that Markus is a party: (1) Markus admitted she was a party and (2) the July 30 Order was an unambiguous discovery order that was followed up with several contempt warnings. First, Markus does not have authority to adjudicate her own status. Second, the July 30 Order was issued to enforce a
The Court has been given no reason to believe that Markus, as the debtor in a
V. SANCTIONS ORDER
A. Standard of Review
“[T]he decision to impose sanctions is uniquely within the province of a bankruptcy court.” In re Highgate Equities, Ltd., 279 F.3d 148, 152 (2d Cir. 2002). Indeed, as the Second Circuit has recognized, “[t]he [bankruptcy] court is better situated than [a] court of appeals to marshal the pertinent facts and apply the fact-dependent legal standard that informs its determination as to whether sanctions are warranted.” Id. (quoting Sussman v. Bank of Israel, 56 F.3d 450, 456 (2d Cir. 1995)). Still, appellate review must “ensure that any such decision is made with restraint and discretion.” Id. Accordingly, “[t]he abuse of discretion standard governs the review of the bankruptcy court‘s imposition of sanctions.” Matter of Ngan Gung Rest., Inc., 195 B.R. 593, 596 (S.D.N.Y. 1996) (Koeltl, J.). “[A bankruptcy] court would necessarily abuse its discretion if it based its ruling on an erroneous view of the law or on a clearly erroneous assessment of the evidence.” In re Highgate Equities, Ltd., 279 F.3d at 152 (quoting Sussman, 56 F.3d at 456).
The Court first addresses the Bankruptcy Court‘s factual assessment of the record and then turns to the question whether the Bankruptcy Court committed legal error.
1. Whether Worms Failed to Comply with Discovery
Although Worms has offered variations on the theme that the Bankruptcy Court
2. Whether Worms Could Not Comply with Discovery
Worms argues that the Bankruptcy Court erred in sanctioning him because the FR did not satisfy its burden of demonstrating that the documents requested in the Subpoena were within Markus‘s possession, custody, or control.
Under
In this case, the Subpoena stated:
The Subpoena shall apply to all documents that you, or any of your present or former agents, attorneys, assigns, consultants, employees, and/or successors possess, control or can access in the ordinary course of business.
BK-ECF 79-2. Similarly, the Bankruptcy Court‘s July 30 Order directed that “Markus and Worms shall produce all documents responsive to the Subpoenas to the extent the documents are in their possession, custody, or control.” BK-ECF 107.
The Bankruptcy Court properly found that at least some of the requested documents were under Markus‘s “control,” as that term is defined in the caselaw. In the Second Circuit,
[A] party is not obliged to produce, at the risk of sanctions, documents that it does not possess or cannot obtain . . . However, if a party has access and the practical ability to possess documents not available to the party seeking them, production may be required.
Shcherbakovskiy v. Pa Capo Al Fine, Ltd., 490 F.3d 130, 138 (2d Cir. 2007).
“‘Control’ has been construed broadly by the courts as the legal right, authority, or practical ability to obtain the materials sought upon demand.” Dietrich v. Bauer, 2000 WL 1171132, at *3 (S.D.N.Y. Aug. 16, 2000), on reconsideration in part, 198 F.R.D. 397 (S.D.N.Y. 2001). “Documents in the possession of a party‘s attorney may be considered to be within the control of the party.” Chevron Corp. v. Donziger, 296 F.R.D. 168, 190 (S.D.N.Y. 2013) (Kaplan, J.) (quoting 7 Moore‘s Federal Practice § 34.14[2][c], at 34-80). “The . . . application of the concept [of ‘control‘] is often highly fact-specific.” 8A Charles Alan Wright, Arthur R. Miller & Richard L. Marcus, Federal Practice and Procedure § 2210 (2d ed. 1994).
At the October 3, 2019 hearing and again in the Sanctions Order, the Bankruptcy Court cited its own comprehensive In re Lozano opinion to support the determination that the “control” test was satisfied here. Lozano, 392 B.R. 48 (Bankr. S.D.N.Y. 2008). As Lozano explained, “In Shcherbakovskiy, the Second Circuit appears to have adopted . . . the view that a party may be required to produce documents that it has the practical ability to obtain.” Id. at 55 (citing 490 F.3d at 138).12
Lozano also illustrates the fact-specific application of the “control” test. The Bankruptcy Court there explained:
[I]n the context of a case such as this one, if the assignee of the original mortgagee, or the current loan servicer, can by custom or practice in the mortgage business informally request and obtain the original loan file, and any related documents, including a payment history, I would conclude that such documents are within the control of the party to whom the discovery request is directed.
Id. at 56. “But,” the Bankruptcy Court continued, “the Court has no basis in the record to conclude that contract, agency or custom and practice in the business supports imposing th[e] production obligation [at issue].” Id. at 56-57. That “obligation” was for current mortgage handlers (a servicer and bank) to produce the loan originator‘s “loan manuals and information regarding its use of mortgage brokers in general and [one mortgage broker] in particular.” Id. at 56.
The dispositive factual distinction between the production obligation in Lozano and the one here is that, there, the current mortgage handlers “disclaim[ed] having any agency or servicing relationship with [the loan originator] relating to the specific mortgages at issue,” id. at 50, whereas here, the subpoenaed party (Markus) never disclaimed having any agency relationship with the third parties from whom the Subpoena sought documents. To the contrary, there is record evidence here supporting the existence of an agency relationship between Markus and the third parties. For example, Request No. 4 asked for “[a]ll communications between Markus and Ilya Bykov.” BK-ECF 79-2. The First Sokolov Declaration states that Markus had “issued a power of attorney to Mr. Ilya Bykov . . . to represent her before third parties, including Russian and foreign courts, with, inter alia, the right to represent Ms. Markus in bankruptcy proceedings.”13 BK-ECF 81.14
In sum, Worms forfeited his right to challenge the sufficiency of the FR‘s showing that documents requested by the Subpoena were within Markus‘s “control.” Even if he had not, the Bankruptcy Court was well within its discretion to conclude that the Subpoena properly compelled production of documents from third parties with agency relationships to Markus. The Bankruptcy Court‘s factual findings are not clearly erroneous. Worms failed to comply with the Subpoena or the July 30 Order without justification.
3. Legal Authority for Sanctions
“[A bankruptcy] court would necessarily abuse its discretion if it based its ruling on an erroneous view of the law.” In re Highgate Equities, Ltd., 279 F.3d at 152 (quoting Sussman, 56 F.3d at 456). The FR cited three sources of authority for sanctions against Worms:
Although it is often the case that an appellate court may “affirm on any basis for which there is a record sufficient to permit conclusions of law, including grounds upon which the [previous] court did not rely,” Bertin v. United States, 478 F.3d 489, 491 (2d Cir. 2007) (quoting Cromwell Assocs. v. Oliver Cromwell Owners, Inc., 941 F.2d 107, 111 (2d Cir. 1991)), the Second Circuit has said that the “Bankruptcy Court‘s discretion to award sanctions may be exercised only on the basis of the specific authority invoked by that court.” In re Kalikow, 602 F.3d 82, 96 (2d Cir. 2010). Therefore, the Court must determine whether sanctions are justified on either of the “specific authorit[ies]” the Bankruptcy Court invoked. Id.
Relatedly, “[d]ue process requires that courts provide notice and opportunity to be heard before imposing any kind of sanctions.” In re 60 E. 80th St. Equities, Inc., 218 F.3d 109, 117 (2d Cir. 2000) (quoting Ted Lapidus, S.A. v. Vann, 112 F.3d 91, 96 (2d Cir. 1997) (emphasis omitted)). “More specifically . . . [an] attorney whom the court proposes to sanction
For the reasons discussed above, supra IV(E), Worms‘s noncompliance with the Bankruptcy Court‘s orders did not warrant
a) Notice
At oral argument, Worms insisted that had not received adequate notice that the Bankruptcy Court was issuing sanctions pursuant to its inherent authority. See Sanctions ECF 25 at 13 (“The due-process requirements require that the person to be sanctioned be put on notice as to why he is being sanctioned and the rule under which he is being sanctioned . . . And I will tell you, Judge, . . . you will see that [the Bankruptcy Court] doesn‘t explicitly rely upon his inherent authority.“); id. at 14 (“[I]t is clear from his own order that he was relying upon
is ultimately incorrect that the Bankruptcy Court failed to give him adequate notice of the authority under which he would be sanctioned.
It is true that the FR‘s motion for sanctions primarily relied on the Bankruptcy Court‘s authority under
The purpose of the notice requirement is to give the person liable for sanctions an opportunity to respond. See In re 60 E. 80th St. Equities, Inc., 218 F.3d at 117 (“[T]he notice requirement mandates that the subject of a sanctions motion be informed . . . so that the subject of the sanctions motion can prepare a defense.“) (emphasis added). Because Worms understood that the FR was moving for sanctions
Worms‘s suggestion that he did not know or have an opportunity to respond to the threat of being sanctioned pursuant to the Bankruptcy Court‘s inherent authority is rejected.
b) Propriety of Inherent Authority Sanctions
Early into oral argument before this Court, Worms stated: “There is no dispute, your Honor, that a Court has inherent jurisdiction to impose sanctions.” Sanctions ECF 25 at 7. “I don‘t dispute that, Judge,” he continued. Id. “I have never disputed a Court‘s inherent authority to enforce its order.” Id. Later in the argument, Worms repeated: “I don‘t dispute that [the Bankruptcy Court] would have inherent authority.” Id. at 11. Worms explained further that if the Bankruptcy Court had been relying on its inherent authority, “we would have a totally different discussion about the sanctions that were imposed . . . because there would be no dispute about that inherent authority.” Id. The Court asked Worms, “Do you agree with me, sir, that if the Court ordered you to contact, for example, Ms. Markus’ representatives, and you didn‘t make any effort to contact Ms. Markus’ representatives, that the Court would have the inherent power to sanction you for that?” Id. at 12. Worms replied, “To the extent that I deliberately and intentionally violated the court order and to the extent that the Court is imposing a discovery violation on me, then the Court could sanction me for that violation.” Id.
Despite Worms‘s position at oral argument, his supplemental briefing to the Court now argues that the “Bankruptcy Court‘[s] inherent authority . . . cannot provide a legal basis to sanction Mr. Worms.” Sanctions ECF 24 at 3. To support his position, Worms cites
“The majority of cases conclude that all courts, whether created pursuant to Article I or Article III of the Constitution, have inherent civil contempt power to enforce compliance with their lawful judicial orders, and no specific statute is required to invest a court with civil contempt power.” 2 Collier on Bankruptcy P. 105.02 (16th ed. 2020). The Second Circuit definitively joined this majority position when it decided In re Sanchez, 941 F.3d 625 (2d Cir. 2019). In Sanchez, the Second Circuit explained that “inherent sanctioning powers are not contingent on Article III, but rather are, as their name suggests, inherent in the nature of federal courts as institutions charged with judicial functions.” Id. at 627. “We therefore hold that bankruptcy courts, like Article III courts, possess inherent sanctioning powers.” Id. Worms‘s argument that the “inherent authority of a bankruptcy court is far more restricted that a district court because that inherent authority is defined by statute” ignores binding circuit authority. Sanctions ECF 24 at 3. The Bankruptcy Court had “inherent sanctioning powers.” Sanchez, 941 at 627.
4. Whether the Bankruptcy Court‘s Factual Findings Were Proper
“A contempt order” issued pursuant to a court‘s inherent authority “is warranted only where the moving party establishes by clear and convincing evidence that the alleged contemnor violated the district court‘s edict.” King v. Allied Vision, Ltd., 65 F.3d 1051, 1058 (2d Cir. 1995). “More specifically, a movant must establish that (1) the order the contemnor failed to comply with is clear and unambiguous, (2) the proof of noncompliance is clear and convincing, and (3) the contemnor has not diligently attempted to comply in a reasonable manner.” Id. When reviewing courts assess the imposition of sanctions, they ordinarily consider: (1) the willfulness of the conduct, (2) the efficacy of lesser sanctions, (3) the duration of the non-compliance, and (4) whether the litigant was warned of the consequences of non-compliance. See Agiwal v. Mid Island Mort. Corp., 555 F.3d 298, 302-03 (2d Cir. 2009).
The Bankruptcy Court made factual findings with respect to each of these elements—all of which are well supported by the record.
a) Clear and Unambiguous Order
The Bankruptcy Court properly concluded that the orders Worms disobeyed were “clear and unambiguous.” King, 65 F.3d at 1058. The text of the July 30 Order need not be reprinted here; its terms were plain. Similarly, the Bankruptcy Court‘s instructions at subsequent hearings were unmistakable. This requirement is satisfied.
b) Clear and Convincing Proof of Noncompliance
The Bankruptcy Court also properly found that “the evidence of Worms’ noncompliance [was] clear and convincing.” BK-ECF 164 at 23; see King, 65 F.3d at 1058. In the July 30 Order, Worms was directed to “immediately communicate with Markus and her agents, including attorneys, to obtain and produce responsive documents” and to “produce all documents responsive to the Subpoenas to the extent the documents are in their possession, custody, or control.” BK-ECF 107. Even if
c) No Diligent Attempt to Comply in a Reasonable Manner
Worms, from the outset, refused to comply with his discovery obligations. The Bankruptcy Court offered him numerous opportunities to be heard and to cure his noncompliance. Worms flouted the Bankruptcy Court‘s authority. Indeed, Worms put on a seemingly inexhaustible parade of excuses. None prevailed and many were plainly non-meritorious. See Shcherbakovskiy v. Seitz, 2010 WL 3155169, at *12 (S.D.N.Y. July 30, 2010), aff‘d, 450 F. App‘x 87 (2d Cir. 2011) (finding the “ever-changing nature of Plaintiff‘s objections to Defendants’ requests for . . . documents and the lateness of his reliance on [a ‘possession, custody, or control’ argument] to strongly suggest Plaintiff‘s objections were manufactured for the purpose of avoiding his production obligations“).
This is not a case, like Lozano, where a party objected to particular requests with legal reasoning that was defensible or at least non-frivolous. Worms, from the beginning, wholesale refused to comply with the Subpoena and with the Bankruptcy Court‘s orders. The Bankruptcy Court suitably described his behavior as “stonewalling” and “bury[ing] his head in the sand.” BK-ECF 164 at 4. This finding, too, is supported by the record.
d) Willfulness
For the same reasons above, the Bankruptcy Court‘s finding of “willful disregard” in this case is supported by the record. BK-ECF 164 at 17.
e) Efficacy
Financial sanctions, as a category, are relatively mild. See Cine Forty-Second St. Theatre Corp., 602 F.2d at 1066. Here, the Bankruptcy Court appropriately escalated its efforts to procure compliance from Worms—from warnings to written orders to, ultimately, financial sanctions. As a category, then, the efficacy of financial sanctions counsels affirmance. However, Worms presents the question whether the Bankruptcy Court here improperly imposed criminal, rather than civil, financial sanctions. That will be discussed below.
f) Duration
By the time the Bankruptcy Court issued its Sanctions Opinion, Worms had been in contravention of the extended deadline from the July 30 Order for nearly two months. That duration of time supports sanctions, as the Bankruptcy Court concluded. BK-ECF 164 at 17 (citing Funk v. Belneftekhim, 861 F.3d 354 (2d Cir. 2017) (one or two months is sanctionable)).
g) Warnings
As the Bankruptcy Court found, Worms received ample warning that his noncompliance would result in sanctions. See, e.g., BK-ECF 129 at 9 (Bankruptcy Court statement at August 7, 2019 hearing: “If you don‘t comply with orders I‘ve entered, you do so at your own risk. And that risk is the risk of imposing sanctions. I don‘t like to do that, but I expect my orders to be followed.“); BK-ECF 146 at 84 (Bankruptcy Court permitting the FR, at September 9, 2019 hearing, to file a motion for contempt).
For the foregoing reasons, the Court finds no basis to disturb the Bankruptcy Court‘s exercise of its inherent authority to sanction Worms.
5. Criminal Versus Civil Sanctions
There is a remaining objection to the Sanctions Order, relating to the type of
NOW, THEREFORE, within fourteen (14) days from the date of this Order, as a sanction based on Mr. Worms’ failure to comply with discovery orders issued by this Court, Mr. Worms is directed to pay to the Clerk of the United States Bankruptcy Court for the Southern District of New York $1,000 per day or a total of $34,000 since his non-compliance on September 4, 2019 . . . .
BK-ECF 157 at 2. “The question whether bankruptcy judges possess criminal contempt power is an unsettled and divisive question among the lower courts.” John A. E. Pottow & Jason S. Levin, Rethinking Criminal Contempt in the Bankruptcy Courts, 91 Am. Bankr. L.J. 311, 313 (2017); see also 10 Collier on Bankruptcy P. 9020.01 (16th 2019) (“There may be a split developing among the circuits as to whether a bankruptcy court can punish criminal contempt.“); In re Ragar, 3 F.3d 1174, 1177 (8th Cir. 1993) (noting that the question has “divided the Circuits“).
Even if bankruptcy courts have authority to impose criminal sanctions, the Bankruptcy Court here could not properly have done so because it applied a “clear and convincing” evidence standard, rather than finding Worms guilty of contempt “beyond a reasonable doubt.” BK-ECF 164 at 23. See Matter of Ngan Gung Rest., Inc., 195 B.R. at 597 (“In this case, the Bankruptcy Court found the debtor guilty of contempt only by ‘clear and convincing evidence,’ and not ‘beyond a reasonable doubt,’ which would be required for a finding of criminal liability.“). Having determined that the Bankruptcy Court could not have properly issued criminal sanctions here, the question remains whether the sanctions it imposed were criminal or civil in nature.
“Although the procedural contours of the two forms of contempt are well established, the distinguishing characteristics of civil versus criminal contempts are somewhat less clear.” Bagwell, 512 U.S. at 827. “Criminal contempt is a crime in the ordinary sense.” Id. (quoting Bloom v. Illinois, 391 U.S. 194, 201 (1968)). “[C]ivil contempt sanctions, or those penalties designed to compel future compliance with a court order, are considered to be coercive and avoidable through obedience, and thus may be imposed in an ordinary civil proceeding upon notice and an opportunity to be heard.” Id.
a) Stated character and purpose
“[W]hether a contempt is civil or criminal turns on the ‘character and purpose’ of the sanction involved. Thus, a contempt sanction is considered civil if it ‘is remedial, and for the benefit of the complainant. But if it is for criminal contempt the [sanction] is punitive, to vindicate the authority of the court.‘” Id. at 827-28 (citing Gompers v. Bucks Stove & Range Co., 221 U.S. 418, 444 (1911)).
The Bankruptcy Court expressly and repeatedly labeled its sanctions as civil. See, e.g., ECF 164 at 19 (discussing the “power to impose civil contempt sanctions“); id. at 20 (describing the “standards for imposing civil contempt“). Moreover, the Bankruptcy Court‘s stated purpose for imposing sanctions was to coerce Worms into compliance. For example, the concluding sentence of the Sanctions Opinion reads, “Monetary sanctions will continue to accrue until Worms complies with the Subpoena by producing responsive documents in the possession of Markus’ agents and
“As Gompers recognized, however, the stated purposes of a contempt sanction alone cannot be determinative.” Bagwell, 512 U.S. at 829. The Court must address the nature of the fine imposed.
b) Nature of the fine
“[W]hether a sanction should be treated as criminal or civil in nature turns on several factors, including whether the sanction is intended to be compensatory or punitive; whether it is payable to the court or to the injured party; whether it is based on past wrongful conduct or is intended to coerce future compliance; and whether any opportunity to purge the sanction is provided.” Mackler Prods., Inc. v. Cohen, 225 F.3d 136, 142 (2d Cir. 2000). A sanction “is considered civil and remedial if it either coerces the defendant into compliance with the court‘s order, or . . . compensates the complainant for losses sustained. Where a fine is not compensatory, it is civil only if the contemnor is afforded an opportunity to purge.” Bagwell, 512 U.S. at 829.
The Bankruptcy Court ordered Worms to pay two different fines:
- Worms was ordered “to pay to the Clerk of the United States Bankruptcy Court for the Southern District of New York $1,000 per day or a total of $34,000 since his non-compliance on September 4, 2019“; and
- Worms was “further ordered to pay $1,000 per day going forward for each day that he fails to comply with [the Bankruptcy] Court‘s discovery orders.”
BK-ECF 157 at 2.
The monetary sanctions of $1,000 per day until Worms complied with the discovery orders “afforded [him] an opportunity to purge.” Bagwell, 512 U.S. at 829; see id. (explaining that “a per diem fine imposed for each day a contemnor fails to comply with an affirmative court order . . . exert[s] a constant coercive pressure” such that “once the jural command is obeyed, the future, indefinite, daily fines are purged“); see also CBS Broad. Inc. v. FilmOn.com, Inc., 814 F.3d 91, 102 (2d Cir. 2016) (highlighting the “coercive purpose of prospective fee schedules“). They are plainly civil.
The $34,000 payable to the Clerk of Court for noncompliance since September 4, 2019 is a trickier question for two reasons—first, Worms‘s inability to avoid or diminish the fine, and second, the fact that the fine was payable to the Clerk of Court rather than to the FR.
“Where a fine is not compensatory,” even “a ‘flat, unconditional fine’ totaling . . . as little as $50 announced after a finding of contempt is criminal if the contemnor has no subsequent opportunity to reduce or avoid the fine through compliance.” Bagwell, 512 U.S. at 829 (quoting Penfield Co. of Cal. v. Sec. & Exch. Comm‘n, 330 U.S. 585, 588 (1947)); see also FilmOn.com, Inc., 814 F.3d at 102 (“An opportunity to purge is essential.“). Here, the Sanctions Order indicates that the $34,000 is absolutely fixed. The question remains whether the fine is compensatory—as it must be to survive. Bagwell, 512 U.S. at 829.
Ordinarily, “[w]here compensation is intended, a fine is imposed, payable to the complainant.” United States v. United Mine Workers of America, 330 U.S. 258, 304 (1947) (emphasis added); see New York State Nat. Org. for Women v. Terry, 886 F.2d 1339, 1353 (2d Cir. 1989) (“Compensatory
The Bankruptcy Court‘s $34,000 fine did not attempt to make whole the party who unfairly incurred damages as a result of Worms‘s noncompliance. Nor did the fine compensate the judicial system for costs associated with the noncompliance. Rather, the fee was payable to the Clerk of Court for unspecified reasons. At the hearing on October 3, when the sanctions were first announced, the Bankruptcy Court did not offer a compensation-based explanation for the lump sum. Instead, the Bankruptcy Court declared, “The Court is entering an order imposing sanctions against Mr. Worms in the amount of 1,000 dollars per day for which he has failed to comply with Court orders. So far, that totals 29,000 dollars.” BK-ECF 160 at 68. The Bankruptcy Court further implied that the $29,000 was punitive in nature when it explained:
The sanctions that I am awarding today against Mr. Worms are for flagrant violations of Court orders. And that is an affront to the federal court, and for that reason, those sanctions are payable to the clerk of the United States District Court for the Southern District of New York.
BK-ECF 160 at 70. Such type of sanction is criminal and cannot survive.16
6. Scope of Remand
Briefing before this Court suggests that noncompliance with the July 30 Order may have ceased. Specifically, in response to Worms‘s motion to stay the Sanctions Order pending appeal, the FR describes “a change of circumstances” insofar as “counsel for Ilya Bykov (‘Bykov‘), who holds a power of attorney from Markus and instructs Worms, agreed that Bykov would send notices to Markus’ agents to obtain documents regarding Markus’ assets responsive
Accordingly, although the Court affirms the Bankruptcy Court‘s Sanctions Order to the extent it exercised inherent authority to sanction Worms for noncompliance with discovery orders, the Court remands the Sanctions Order entirely so that the Bankruptcy Court may determine the sum of $1,000 per diem sanctions that should be imposed. Furthermore, as discussed above, the portion of the Sanctions Order imposing lump-sum retroactive sanctions was improperly criminal in nature, and is therefore vacated.
VI. FEES ORDER
A. Standard of Review
“A bankruptcy court‘s decision to award attorney‘s fees is reviewed for abuse of discretion.” In re Tribeca Mkt., LLC, 516 B.R. 254, 269 (S.D.N.Y. 2014). Indeed, a “bankruptcy court‘s decision with regard to compensation for services performed during bankruptcy proceedings deserves great deference.” Howard v. High River Ltd. P‘ship, 369 B.R. 111, 114 (S.D.N.Y. 2007); see also In re JLM, Inc., 210 B.R. 19, 23 (2d Cir. BAP 1997) (“Bankruptcy courts enjoy wide discretion in determining reasonable fee awards, which discretion will not be disturbed by an appellate court absent a showing that it was abused.“). “A bankruptcy court exceeds its allowable discretion where its decision (1) rest[s] on an error of law (such as application of the wrong legal principle) or a clearly erroneous factual finding, or (2) cannot be located within the range of permissible decisions, even if it is not necessarily the product of a legal error or a clearly erroneous factual finding.” Schwartz v. Geltzer (In re Smith), 507 F.3d 64, 73 (2d Cir. 2007).
“It merits underscoring that ‘abuse of discretion‘—already one of the most deferential standards of review—takes on special significance when reviewing fee decisions.” In re Holocaust Victim Assets Litig., 424 F.3d 150, 157 (2d Cir. 2005) (quoting Goldberger v. Integrated Res., Inc., 209 F.3d 43, 47 (2d Cir. 2000) (internal quotation marks omitted)). The fee-awarding court, “intimately familiar with the nuances of the case, is in a far better position to make [such] decisions than is an appellate court, which must work from a cold record.” Id. (quoting In re Bolar Pharm. Co. Sec. Litig., 966 F.2d 731, 732 (2d Cir. 1992)) (internal quotation marks omitted).
B. Factual Findings Predicate Awarding $60,000 in Attorneys’ Fees
Before this Court, Worms argues that the FR‘s time entries evidenced duplicative and excessive billing practices.17 The FR‘s opposition defends the validity of its time entries, and urges that they support a $60,000 award. Courts awarding attorneys’ fees have been instructed to
“calculate a ‘presumptively reasonable fee’ by determining the appropriate billable hours expended and ‘setting a reasonable hourly rate, taking account of all case-specific variables.‘” Lilly v. City of New York, 934 F.3d 222, 229-30 (2d Cir. 2019) (citing Arbor Hill Concerned Citizens Neighborhood Ass‘n v. Cty. of Albany & Albany Cty. Bd. of Elections, 522 F.3d 182, 189-90 (2d Cir. 2008)). In this case, the Bankruptcy
In response to the FR‘s detailed motion to the Bankruptcy Court, Worms responded with a memorandum of law that primarily rehashed his legal arguments for the Sanctions Order‘s invalidity. The memorandum also argued, without citation to legal authority, that the Bankruptcy Court‘s finding of contempt required an evidentiary hearing. But see Schlaifer Nance & Co. v. Estate of Warhol, 194 F.3d 323, 335 (2d Cir. 1999) (“We have held that the opportunity to be heard does not necessarily entitle the subject of a motion for sanctions to an evidentiary hearing.“). Worms‘s response did not contest any of the billing practices or time entries described in the FR‘s motion.
The Bankruptcy Court ultimately decided to award fees against Worms in connection with the preparation of the sanctions motion. And, after concluding that “the time records submitted by the FR were appropriately detailed, the time spent by FR‘s counsel in preparing and arguing the Sanctions Motion was reasonable and appropriate, and the hourly rates charged for the work performed was reasonable (and, indeed, low by New York standards),” the Bankruptcy Court awarded $60,000. BK-ECF 200 at 2.
“Any arguments not raised in the bankruptcy court are considered waived; unless such a waiver results in manifest injustice, the new arguments will not be considered on appeal.” Sec. Inv‘r Prot. Corp. v. Bernard L. Madoff Inv. Sec. LLC, 598 B.R. 102, 111 (S.D.N.Y. 2019). Worms‘s challenges to the FR‘s billing practices and time entries are plainly waived. Even if they were not, they would fail. Worms protests that the award can only be supported by counting time billed prior to the September 9, 2019 hearing, but the FR has presented ample evidence from which the Bankruptcy Court could have concluded that the FR incurred $60,000 in costs in connection with the sanctions motion. There was no abuse of discretion in the Bankruptcy Court‘s calculation of the fee amount.
C. Whether the Bankruptcy Court Abused Its Discretion by Awarding $60,000 in Attorneys’ Fees in Connection with the FR‘s Sanctions Motion
Despite proper calculation of the fee amount, a “bankruptcy court exceeds its allowable discretion where its decision . . . rest[s] on an error of law (such as application of the wrong legal principle) . . . .” In re Smith, 507 F.3d at 73. In the FR‘s motion for fees, the FR emphasized that, “[i]f a [
By contrast to
The Fees Order does not specify which authority the Bankruptcy Court relied on when it imposed the attorneys’ fees award. See BK-ECF at 200 at 2 (Fees Order citing Sanctions Opinion). It is not clear whether the Bankruptcy Court properly exercised its discretion, pursuant to its inherent authority, or whether the Bankruptcy Court awarded fees in an effort to comply with
To assess whether, and ensure that, the Fees Order was issued pursuant to proper authority, it must be vacated and remanded for reconsideration in light of this Opinion.
VII. CONCLUSION
The Sanctions Order is AFFIRMED IN PART, VACATED IN PART, and REMANDED. The Fees Order is AFFIRMED IN PART and REMANDED for reconsideration in light of this Opinion. The motions to stay those orders pending appeal are both DENIED AS MOOT.
SO ORDERED.
Dated: April 3, 2020
New York, New York
LEWIS J. LIMAN
United States District Judge