In re: Ronald David Sutton and Kimberly Ann Sutton ( 2015 )

  •                                                                   FILED
                                                                       DEC 03 2015
     1                         NOT FOR PUBLICATION
                                                                 SUSAN M. SPRAUL, CLERK
     2                                                               U.S. BKCY. APP. PANEL
                                                                     OF THE NINTH CIRCUIT
     4                            OF THE NINTH CIRCUIT
     5   In re:                        )        BAP No.   EC-14-1204-JuFD
     6   RONALD DAVID SUTTON and       )        Bk. No.   12-35623
         KIMBERLY ANN SUTTON,          )
     7                                 )        Adv. No. 12-02590
                        Debtors.       )
     8   ______________________________)
         NORTH AMERICA, INC.,          )
    10                                 )
                        Appellants,    )
    11                                 )
         v.                            )        M E M O R A N D U M*
    12                                 )
         RONALD DAVID SUTTON,          )
    13                                 )
                        Appellee.      )
    14   ______________________________)
    15              Argued and Submitted on November 19, 2015
                            at Sacramento, California
                                Filed - December 3, 2015
                  Appeal from the United States Bankruptcy Court
    18                for the Eastern District of California
    19       Honorable David E. Russell, Bankruptcy Judge, Presiding**
         Appearances:     Michael W. Thomas of Thomas & Associates argued
    21                    for appellants Andrew Kostecki and Alloy Steel
                          North America, Inc.; Brian Crone of Berry & Block
    22                    argued for appellee Ronald David Sutton.
    24       *
              This disposition is not appropriate for publication.
       Although it may be cited for whatever persuasive value it may
    25 have (see Fed. R. App. P. 32.1), it has no precedential value.
    26 See 9th Cir. BAP Rule 8024-1.
    27        The Honorable Michael S. McManus was assigned to the
       underlying bankruptcy case and heard all pretrial matters in this
    28 adversary. Judge Russell entered the order on appeal.
     1   Before:     JURY, FARIS, and DUNN, Bankruptcy Judges.
     2           Appellants Andrew Kostecki (Kostecki) and Alloy Steel North
     3   America, Inc. (Alloy Steel) (collectively, Plaintiffs) filed an
     4   adversary proceeding against chapter 71 debtor, Ronald David
     5   Sutton (Debtor), seeking to have their unliquidated prepetition
     6   debts declared nondischargeable under § 523(a)(2)(A).     Prior to
     7   trial, Debtor filed a motion in limine (MIL) seeking to strike
     8   Plaintiffs’ alternate direct testimony (ADT) declarations and
     9   exhibits at trial because they were not timely served, in
    10   violation of Local Bankruptcy Rule (LBR) 9017-1.
    11           The bankruptcy court commenced the trial by first hearing
    12   Debtor’s MIL.     The court granted the motion, finding that
    13   Plaintiffs’ untimely served ADT declarations and exhibits in
    14   violation of LBR 9017-1 caused extreme prejudice to Debtor and
    15   the court.     The court then invited Plaintiffs’ counsel to
    16   proceed with the trial.     Counsel did not do so, contending that
    17   he had nothing to proceed with in light of the court’s ruling on
    18   the MIL.     The bankruptcy court subsequently entered judgment in
    19   Debtor’s favor on the ground that Plaintiffs had presented no
    20   evidence to support their fraud claims against Debtor.     This
    21   appeal followed.
    22           For the reasons stated below, we REVERSE the bankruptcy
    23   court’s order granting Debtor’s MIL, VACATE the judgment and
    24   REMAND this matter to the bankruptcy court for further
    26        Unless otherwise indicated, all chapter and section
       references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.
    27 “Rule” references are to the Federal Rules of Bankruptcy
       Procedure and “Civil Rule” references are to the Federal Rules of
    28 Civil Procedure.
     1   proceedings not inconsistent with this memorandum disposition.
     2                                    I.    FACTS
     3   A.       Prepetition Events
     4            Debtor and his company, Ron Sutton’s Winners Circle, Inc.
     5   (RSWC), operated a race car driver development program in
     6   Roseville, California.        The program trained young drivers for a
     7   professional career in stock car racing, including races
     8   sanctioned by the National Association of Stock Car Auto Racing
     9   (NASCAR).
    10            Kostecki’s minor son, Brodie, was an accomplished midget
    11   race car driver in Australia.          Kostecki learned about Debtor and
    12   RSWC through RSWC’s website.          There, Debtor used the NASCAR
    13   trademark, stating that he was a Top NASCAR Talent Scout and
    14   operated an annual NASCAR Talent Search Shootout.          The website
    15   also contained photographs of NASCAR Team Drivers.          Debtor
    16   further represented that RSWC had received a $210,000 cash
    17   sponsorship from K&N Filters (K&N)2 in 2011.
    18            Kostecki, an Australian citizen living in Australia at the
    19   time, met with Debtor, who allegedly told Kostecki that he would
    20   send emails to NASCAR sanctioned Sprint Cup Teams to discuss
    21   where to place Brodie.        Kostecki eventually enrolled Brodie in
    22   the program and they moved from Australia to Roseville,
    23   California.      Kostecki sought and received a sponsorship for
    24   Brodie’s racing from Alloy Steel.3
    26        2
              K&N Filters is sometimes interchangeably referred to in
    27 the record as K&N Engineering.
    28        3
                  Kostecki apparently was an employee of Alloy Steel.
     1            A dispute subsequently arose between the parties and Debtor
     2   pertaining to Debtor’s and RSWC’s affiliation or association
     3   with NASCAR.      Thereafter, Debtor terminated Kostecki’s son from
     4   the program.      Sometime in 2011, Plaintiffs filed a state court
     5   lawsuit against Debtor and RSWC alleging, among other things,
     6   that Debtor misrepresented in advertising and other promotional
     7   materials that he and RSWC had an affiliation or association
     8   with NASCAR and had obtained a $210,000 cash sponsorship from
     9   K&N.4
    10   B.       Bankruptcy Events
    11            Debtor filed his chapter 7 petition on August 27, 2012.    In
    12   Schedule F, he listed Plaintiffs as creditors with unsecured
    13   claims arising out of a 2011 state court lawsuit against Debtor
    14   and RSWC in an unknown amount.
    15            On October 1, 2012, Plaintiffs filed this adversary
    16   proceeding against Debtor seeking to have their unliquidated
    17   debts declared nondischargeable under § 523(a)(2)(A).
    18   Plaintiffs alleged, among other things, that Debtor had made
    19   misrepresentations about his affiliation and association with
    20   NASCAR and a $210,000 cash sponsorship obtained from K&N.
    21            Debtor filed a motion for summary judgment (MSJ).
    22   Plaintiffs opposed and submitted six declarations in support of
    23   their opposition.      Those declarations included Kostecki’s and
    24   the declaration of Plaintiffs’ attorney, Michael Thomas
    25   (Thomas).
    27        K&N Engineering is a manufacturer of washable performance
       air filters and air intake systems. K&N has a racing contingency
    28 program that affiliates with NASCAR and other similar entities.
     1        Kostecki testified as to how he learned about RSWC and that
     2   he enrolled his son in the RSWC program based on the
     3   representations on RSWC’s website and from Debtor that his
     4   driver development program was affiliated with NASCAR and that
     5   he had obtained a $210,000 cash sponsorship from K&N.
     6   Attached to Kostecki’s declaration was an email from Debtor
     7   about Brodie’s selection to participate in the 2010 NASCAR
     8   Talent Search Shootout and a follow-up email stating that Brodie
     9   was a finalist for a spot in the NASCAR focused driver career
    10   development program.   Attached to the follow-up email were full
    11   season budgets that Debtor had prepared.   There, Debtor stated
    12   that he had worked out two full season race plans, with costs,
    13   and worked in $10,000 of K&N sponsorship funds.   Also attached
    14   to Kostecki’s declaration was a flyer for the NASCAR Racing
    15   Career Development Program which stated that the program
    16   included, among other things, connections to NASCAR Cup Teams.
    17        Attached to Thomas’ declaration were relevant portions of
    18   Debtor’s and Kostecki’s deposition transcripts and various
    19   exhibits.   Also attached was the deposition of Anthony Yorkman,
    20   who was an employee and Sports Marketing Director of K&N
    21   Engineering.   Yorkman testified, among other things, that K&N
    22   did not award $210,000 in sponsorships to selected drivers in
    23   connection with the 2010 Talent Search Shootout and gave no more
    24   than $9,246.60 in products to Debtor in 2011.
    25        Also included in opposition to the MSJ was the declaration
    26   of Jason Houghtaling, an employee of RSWC.   Houghtaling declared
    27   that Debtor had discussed the status of the litigation between
    28   him and Kostecki, and that at one point in 2011, Debtor had him
     1   and other employees cover up or remove any and all references to
     2   NASCAR.    He further declared that although Debtor and RSWC
     3   advertised as a NASCAR Driver Development Program and as a Top
     4   NASCAR Talent Scout, he was not aware of any driver enrolled in
     5   Debtor’s program ever having been placed on a NASCAR
     6   professional team.
     7        In addition, Plaintiffs included the declarations of Danny
     8   Cristiani and Michael Thompson, both of whom had enrolled their
     9   sons in Debtor’s program based on their belief that Debtor and
    10   RSWC were affiliated with NASCAR.     Eventually, both fathers
    11   withdrew their sons from the program.
    12        Finally, Plaintiffs submitted the declaration of Rosalie
    13   Nestore, a paralegal in the legal department of NASCAR.
    14   Attached to her declaration was a letter dated April 27, 2011,
    15   sent by NASCAR to Debtor and RSWC telling them to stop using
    16   NASCAR’s intellectual property rights.     In response, Debtor
    17   sought guidance from NASCAR seeking approval to use the phrase
    18   “NASCAR focused Driver Career Development Program” in their
    19   advertising material.    (Emphasis added.)   In a May 6, 2011,
    20   letter to Debtor, NASCAR requested that Debtor cease and desist
    21   its use of the NASCAR trademark as part of its advertising.
    22        The bankruptcy court denied Debtor’s MSJ, finding that
    23   material facts were in dispute.
    24        On May 13, 2013, the bankruptcy court scheduled a trial to
    25   commence on September 25-26, 2013, before Judge David R.
    26   Russell.
    27        On August 21, 2013, the bankruptcy court issued an Order
    28   Setting Trial, which stated that the proceeding was governed by
     1   LBR 9017-1.     Under that rule, Plaintiffs were required to submit
     2   their ADT declarations and related exhibits fourteen days before
     3   trial.5
     4           On August 30, 2013, Plaintiffs filed a motion seeking a
     5   continuance of the trial because Kostecki’s father had been
     6   diagnosed with cancer (Continuance Motion).     A few days later,
     7   Plaintiffs filed a motion seeking to shorten time for a hearing
     8   on the Continuance Motion.     The bankruptcy court issued an order
     9   shortening time, and the hearing on the Continuance Motion,
    10   originally scheduled for October 7, 2013, was scheduled for
                 LBR 9017-1 provides in relevant part:
             (a)(1) Purpose. The purpose of this procedure is to
    14       streamline the adducement of direct testimony in trials
    15       and contested matters requiring an evidentiary hearing,
             so as to reduce trial time without sacrificing due
    16       process and a fair trial. This procedure shall be
             known as the Alternate Direct Testimony Procedure.
             (2) Applicability. If ordered by the Court, the
    18       Alternate Direct Testimony Procedure shall be used
    19       in a trial or contested matter requiring an evidentiary
             hearing. . . .
             . . .
             (b) Submission of Alternate Direct Testimony
             Declarations, Exhibits, and Objections. Unless
    23       otherwise ordered by the Court, copies of all alternate
             direct testimony declarations by witnesses and exhibits
    24       that are intended to be presented at trial or hearing
             shall be furnished to opposing counsel as follows:
    26       (1) Plaintiff’s Declarations and Exhibits. The
             plaintiff shall submit to opposing counsel all
    27       such declarations and exhibits comprising the
             plaintiff’s case in chief fourteen (14) days before
    28       trial.
     1   September 16, 2013.   Based on the September 25th trial date,
     2   under LBR 9017-1, Plaintiffs were to provide all ADT
     3   declarations and trial exhibits to Debtor’s counsel by
     4   September 11, 2013, which they did not do.   The bankruptcy court
     5   granted Plaintiffs’ Continuance Motion on September 16, 2013.
     6        On November 21, 2013, the bankruptcy court scheduled a new
     7   trial date for March 10-11, 2014, before Judge Russell.
     8        On December 18, 2013, the bankruptcy court issued its
     9   formal order scheduling the trial date for March 10-11, 2014,
    10   which again stated that LBR 9017-1 applied to the proceeding.
    11   Plaintiffs were thus required to submit all ADT declarations and
    12   trial exhibits no later than February 24, 2014 (i.e., 14 days
    13   before trial).   They failed to do so.   Debtor timely filed his
    14   ADT declarations and exhibits.
    15        On February 25 and 26, 2014, Plaintiffs and Debtor
    16   submitted deposition testimony each respective side intended to
    17   use at trial under the parties’ Stipulation and Order for Use of
    18   Deposition Transcripts in Lieu of Live Testimony.
    19        Plaintiffs complied with LBR 9017-1 - albeit late - by
    20   submitting the ADT declarations and exhibits they intended to
    21   use in their case to Debtor’s counsel on March 3, 2014 - seven
    22   days before trial.
    23        On March 3, 2014, Debtor filed the MIL seeking to strike
    24   any ADT declarations and exhibits that Plaintiffs intended to
    25   use at trial as a sanction for failing to obey the bankruptcy
    26   court’s scheduling order and LBR 9017-1.   To support his motion,
    27   Debtor cited numerous cases that stand for the proposition that
    28   courts have discretion to strike untimely filings.   Debtor also
     1   maintained that the late-filed declarations prejudiced his case
     2   because he was not afforded adequate time to determine which
     3   witnesses to subject to cross-examination and prepare for that
     4   cross-examination.   Debtor further requested that the court
     5   reject Plaintiffs’ request to submit the substance of any
     6   proposed declaration via live witnesses.
     7        Plaintiffs opposed, asserting that they failed to comply
     8   with LBR 9017-1 because they had difficulty obtaining the signed
     9   declarations from the declarants for various reasons.
    10   Plaintiffs’ excuse for not submitting the timely declaration of
    11   Kostecki was that he lived in North Carolina and was traveling
    12   in his capacity as Vice-President for Alloy Steel, such that it
    13   was difficult to track him down and get documents to him for
    14   review and signature.   As for Mr. Thompson, Plaintiffs
    15   maintained that he lived in the Bay Area and due to his work
    16   schedule, there was a delay in getting his signature.     Finally,
    17   as to Mr. Cristiani, Plaintiffs stated that he lived in Ukiah,
    18   California, and had recently acquired a new email address which
    19   caused a delay in getting his declaration to him and the signed
    20   declaration back.
    21        Plaintiffs also argued that there was no prejudice to
    22   Debtor or surprise since the ADT declarations were substantially
    23   the same as those filed in opposition to Debtor’s MSJ.
    24   Plaintiffs further asserted that all of the exhibits submitted
    25   were either previously produced by Debtor or by third parties at
    26   depositions.
    27        The MIL was set to be heard on March 10, 2014, the day of
    28   the trial.
     1        On March 10, 2014, the bankruptcy court commenced the trial
     2   by first hearing Debtor’s MIL.    After concluding that
     3   Plaintiffs’ failure to comply with LBR 9017 caused extreme
     4   prejudice to Debtor in his trial preparation, the court granted
     5   the motion.   As a result, Plaintiffs could not use the ADT
     6   declarations or exhibits at trial to show that Debtor had made
     7   misrepresentations to Kostecki about his race car driver
     8   development program and affiliation with NASCAR or that Debtor
     9   had never received a $210,000 cash sponsorship from K&N.
    10        After granting the MIL, the bankruptcy court invited
    11   Plaintiffs’ counsel to proceed with the trial.    Counsel
    12   responded by saying that he had nothing to proceed with.    The
    13   bankruptcy court stated:   “So if you do not wish to proceed then
    14   I will grant judgment for the defendant.”
    15        The bankruptcy court entered the order granting Debtor’s
    16   MIL on March 20, 2014.   Plaintiffs filed a notice of appeal from
    17   the order on March 31, 2014.
    18        The bankruptcy court issued a judgment in Debtor’s favor on
    19   March 20, 2014, which stated:    “Findings of fact and/or
    20   conclusions of law having been stated orally on the record and
    21   good cause appearing, IT IS ORDERED that the judgment is for the
    22   defendant.”
    23        The bankruptcy court issued an amended judgment on
    24   November 12, 2014, which states:    “IT IS ORDERED, that Judgment
    25   for the Debtor Defendant against both Plaintiffs Andrew Kostecki
    26   and Allow[sic] Steel North America, Inc. for failure to present
    27   evidence or examine the Debtor[s].”
     1                             II.    JURISDICTION
     2        The bankruptcy court had jurisdiction under 28 U.S.C.
     3   §§ 1334 and 157(b)(2)(A).       The order granting Debtor’s MIL was
     4   an interlocutory order that merged into the final judgment.
     5   United States v. Real Prop. Located at 475 Martin Lane, Beverly
     6   Hills, Cal., 
    545 F.3d 1134
    , 1141 (9th Cir. 2008) (under the
     7   merger rule interlocutory orders entered prior to the judgment
     8   merge into the judgment and may be challenged on appeal).
     9   Therefore, we have jurisdiction over both the order denying the
    10   MIL and the amended judgment under 28 U.S.C. § 158.
    11                                III.    ISSUES
    12        Was the bankruptcy court’s decision to strike the ADT
    13   declarations and exhibits akin to a sanction?
    14        If the bankruptcy court’s decision was akin to a sanction,
    15   what authority did the bankruptcy court rely upon to exercise
    16   its discretion and issue the sanction?
    17        Did the bankruptcy court abuse its discretion by striking
    18   the late-filed ADT declarations and exhibits?
    19                       IV.     STANDARDS OF REVIEW
    20        The standard of review for the bankruptcy court’s exclusion
    21   of evidence is the same under the court’s inherent powers, the
    22   Local Rules of Court, and the Civil Rules.      We first engage in
    23   de novo review of the legal issue of whether the bankruptcy
    24   court possessed the power to exclude Plaintiffs’ evidence.      If
    25   the power existed, the bankruptcy court’s exercise of that power
    26   will only be reversed for an abuse of discretion.      Halaco Eng’g
    27   Co. v. Costle, 
    843 F.2d 376
    , 379 (9th Cir. 1988).      “Where the
    28   drastic sanctions of dismissal or default are imposed, however,
     1   the range of discretion is narrowed and the losing party’s
     2   non-compliance must be due to willfulness, fault, or bad faith.”
     3   Fjelstad v. Am. Honda Motor Co., Inc., 
    762 F.2d 1334
    , 1337 (9th
     4   Cir. 1985).
     5        To determine whether the bankruptcy court abused its
     6   discretion, we conduct a two-step inquiry: (1) we review de novo
     7   whether the bankruptcy court “identified the correct legal rule
     8   to apply to the relief requested” and (2) if it did, whether the
     9   bankruptcy court's application of the legal standard was
    10   illogical, implausible or “without support in inferences that
    11   may be drawn from the facts in the record.”   United States v.
    12   Hinkson, 
    585 F.3d 1247
    , 1261-62 (9th Cir. 2009) (en banc).
    13        Underlying findings of fact are reviewed for clear error.
    14   Halaco Eng’g Co., 843 F.2d at 379.
    15        We must inquire de novo whether judgment was properly
    16   entered in favor of Debtor once Plaintiffs’ ADT declarations and
    17   exhibits had been excluded.    Fireman’s Fund Ins. Cos. v. Grover
    18   (In re Woodson Co.), 
    813 F.2d 266
    , 270 (9th Cir. 1987)
    19   (bankruptcy court’s conclusions of law are reviewed de novo).
    20                             V.   DISCUSSION
    21        The underlying basis of this appeal appears to be the
    22   considerable effect the bankruptcy court’s ruling had on
    23   Plaintiffs’ case.   Plaintiffs characterize the court’s ruling as
    24   a case-terminating sanction akin to dismissal, while Debtor
    25   contends that the ruling was merely an evidentiary ruling which
    26   did not amount to the dismissal of Plaintiffs’ case as there was
    27   other evidence that they could have used to prove their case.
    28   Therefore, Debtor asserts that the case law cited by Plaintiffs
     1   that addresses the standards for imposing case-terminating
     2   sanctions under the Civil Rules is inapplicable.       However,
     3   according to Debtor, even if those standards apply, they have
     4   been met in this case.
     5           Under similar facts, the district court in In re Reimers
     6   concluded that the bankruptcy court’s granting of a motion in
     7   limine which resulted in the exclusion of declarations at trial
     8   was tantamount to a sanction.       
    2013 WL 9994337
     (C.D. Cal.
     9   Feb. 12, 2013).     We agree with the reasoning set forth in
    10   Reimers and adopt its analysis and conclusion for purposes of
    11   this threshold issue.       Similar to the Reimers court, in our
    12   view, the bankruptcy court’s ruling here was “tantamount to a
    13   sanction.”     Id. at *1.    The MIL sought to strike Plaintiffs’
    14   ADT declarations and exhibits because they were untimely filed
    15   in violation of LBR 9017-1.6      Such an exclusion is analogous to
    16   sanctions under Civil Rule 37(c)(1).       As explained in Reimers:
    17           Under Rule 37(c)(1), a party who fails to disclose
                 discovery materials may not use those materials as
    18           evidence at trial. The Ninth Circuit has repeatedly
                 referred to this consequence as a sanction. See,
    19           e.g., Hoffman v. Constr. Protective Services, Inc.,
    541 F.3d 1175
    , 1180 (9th Cir. 2008) (referring to
    20           Rule 37(c)(1) as “a self-executing, automatic sanction
                 ...”); see also R & R Sails, Inc. v. Ins. Co. of
    21           Pennsylvania, 
    673 F.3d 1240
    , 1247 (9th Cir. 2012)
                 (noting that “evidence preclusion is, or at least can
    22           be, a harsh sanction,” and finding that because the
                 evidentiary sanction “dealt a fatal blow” to the
    23           claim, “in practical terms, the sanction amounted to
              Generally, the proper purpose of an in limine motion is
    25 not to accuse opposing counsel of engaging in sanctionable
    26 conduct, but “to aid the trial process by enabling the Court to
       rule in advance of trial on the relevance of certain forecasted
    27 evidence, as to issues that are definitely set for trial, without
       lengthy argument at, or interruption of, the trial.” Palmieri v.
    28 Defaria, 
    88 F.3d 136
    , 141 (2d Cir. 1996).
     1        dismissal of a claim.”). And, as happened in this
              case, exclusion under Rule 37 of undisclosed materials
     2        is generally sought via a motion in limine. See
              Hoffman, 541 F.3d at 1180 (Rule 37(c)(1) exclusion
     3        sanction requested in a motion in limine). Thus, that
              Appellees here sought exclusion through a motion in
     4        limine does not mean that the result was a mere
              evidentiary ruling as opposed to a sanction. Ninth
     5        Circuit case law clearly treats such rulings as
    2013 WL 9994337
    , at *2-3.
     8        In addition, like Reimers, we conclude that the bankruptcy
     9   court’s ruling amounted to the dismissal of Plaintiffs’ fraud
    10   claims based upon their failure to comply with the local rule.
    11   See Thompson v. Hous. Auth. of City of L.A., 
    782 F.2d 829
    , 831
    12   (9th Cir. 1986) (describing court’s inherent authority to issue
    13   sanctions for non-compliance with procedures and orders).
    14        Without the excluded evidence, it would be extremely
    15   difficult, if not impossible, for Plaintiffs to prove their
    16   case.   To establish nondischargeability as a result of fraud
    17   under § 523(a)(2)(A), courts in the Ninth Circuit employ the
    18   following five-part test:   (1) misrepresentation, fraudulent
    19   omission or deceptive conduct by the debtor; (2) knowledge of
    20   the falsity or deceptiveness of his statement or conduct; (3) an
    21   intent to deceive; (4) justifiable reliance by the creditor on
    22   the debtor’s statement or conduct; and (5) damage to the
    23   creditor proximately caused by its reliance on the debtor's
    24   statement or conduct.   Harmon v. Kobrin (In re Harmon), 
    250 F.3d 25
       1240, 1246 (9th Cir. 2001).
    26        Here, the record shows that the underlying issues were
    27   complex because there were multiple alleged misrepresentations
    28   made by Debtor orally and in RSWC promotional materials.
     1   Further, the intent to deceive is a factual question and largely
     2   depends upon the credibility of witnesses and the weight to be
     3   given to their testimony.   See generally Lazaron v. Lucas
     4   (In re Lucas), 
    386 B.R. 332
     (Bankr. D.N.M. 2008) (“Rarely is it
     5   appropriate to grant summary judgment on a claim for
     6   nondischargeability based on 11 U.S.C. § 523(a)(2)(A) because
     7   intent to defraud often depends on the credibility of
     8   witnesses.”).   It was the bankruptcy court’s role to make the
     9   necessary credibility determinations.    However, because the
    10   bankruptcy court excluded Plaintiffs’ late-filed declarations
    11   and exhibits, they had no opportunity to establish their
    12   credibility in either the first instance or through cross-
    13   examination.
    14        We also give little credence to Debtor’s suggestion that
    15   Plaintiffs could have sought leave of court to put on live
    16   testimony.   Debtor specifically requested in the MIL that the
    17   bankruptcy court deny any request from Plaintiffs to present
    18   live testimony and the bankruptcy court’s comments in its ruling
    19   essentially foreclosed that possibility.
    20        In any event, even if the exclusion of evidence in this
    21   case does not amount to a case-terminating sanction, preclusion
    22   of evidence is a “drastic measure.”    Taylor v. Illinois,
    484 U.S. 400
    , 417 n.23 (1988); see also R & R Sails, Inc.,
    24   673 F.3d at 1247 (noting that “evidence preclusion is, or at
    25   least can be, a harsh sanction”).     Accordingly, we next consider
    26   the underlying authority for the bankruptcy court’s action de
    27   novo and whether its imposition of sanctions under that
    28   authority was an abuse of discretion.    Halaco, 843 F.2d at 379;
     1   see also Zambrano v. City of Tustin, 
    885 F.2d 1473
    , 1476 (9th
     2   Cir. 1989) (“In determining the validity of any judicial
     3   sanction, we must first consider the underlying authority for
     4   the court’s action.”).   “‘For a sanction to be validly imposed,
     5   the conduct in question must be sanctionable under the authority
     6   relied on.’”   Cunningham v. Cnty. of L.A., 
    879 F.2d 481
    , 490
     7   (9th Cir. 1988); United States v. Stoneberger, 
    805 F.2d 1391
     8   1392 (9th Cir. 1986).
     9        The bankruptcy court’s power to sanction derives from
    10   several sources:   its inherent power, Local Rules of Court, and
    11   Federal statute.   Here, we can only speculate as to what
    12   authority the bankruptcy court relied upon since the authority
    13   was neither briefed in the MIL nor mentioned in the court’s
    14   ruling.   Ultimately we conclude that regardless of the authority
    15   relied upon, the bankruptcy court’s decision to exclude
    16   Plaintiffs’ late-filed declarations and exhibits at trial was an
    17   abuse of discretion.
    18        Inherent Powers.    A bankruptcy court’s inherent powers are
    19   “governed not by rule or statute but by the control necessarily
    20   vested in courts to manage their own affairs so as to achieve
    21   the orderly and expeditious disposition of cases.”   Chambers v.
    22   NASCO, Inc., 
    501 U.S. 32
    , 43 (1991).   In appropriate cases, a
    23   court may select from the menu of sanctions available under its
    24   inherent powers the draconian sanction of dismissal to “the
    25   ‘less severe sanction’ of an assessment of attorney’s fees,”
    26   Chambers, 501 U.S. at 44-45, to an intermediate sanction of the
    27   exclusion of some evidence or testimony, see Dillon v. Nissan
    28   Motor Co., 
    986 F.2d 263
    , 266-69 (8th Cir. 1993).
     1          Because “inherent powers are shielded from direct
     2   democratic controls, they must be exercised with restraint and
     3   discretion.”    Roadway Express Inc. v. Peper, 
    447 U.S. 752
    , 764
     4   (1980).    There, the Supreme Court stated:
     5          Similarly, the trial court did not make a specific
                finding as to whether counsel’s conduct in this case
     6          constituted or was tantamount to bad faith, a finding
                that would have to precede any sanction under the
     7          court’s inherent powers.
     8   Id. at 764.    To insure that restraint is properly exercised, the
     9   Ninth Circuit has routinely insisted upon a finding of bad faith
    10   before sanctions may be imposed under the court’s inherent
    11   power.    For example, in Stoneberger the district court imposed
    12   sanctions on a chronically late attorney.     Reversing the
    13   imposition of sanctions, the Ninth Circuit held that mere
    14   tardiness does not demonstrate the improper purpose or intent
    15   required for inherent power sanctions.    805 F.2d at 1393.
    16   Rather, “[a] specific finding of bad faith . . . must ‘precede
    17   any sanction under the court’s inherent powers.’”     Id. (quoting
    18   Roadway, 447 U.S. at 767).    The Ninth Circuit again reversed
    19   sanctions due to a lack of intent in Zambrano, 
    885 F.2d 1473
    20   There, the plaintiff’s counsel negligently failed to comply with
    21   local court rules that required admission to the district court
    22   bar.    The Ninth Circuit vacated the sanctions, holding that the
    23   district court may not sanction mere “inadvertent” conduct.      Id.
    24   at 1485; see also id. at 1483 (“Nothing in the record indicates
    25   that their failure to request admission to the district bar was
    26   anything more than an oversight or ordinary negligence on their
    27   part.”); id. at 1484 (“Willful or reckless disregard of court
    28   rules justifies punitive action.”).    Similarly, in Yagman v.
     1   Republic Insurance, 
    987 F.2d 622
    , 628 (9th Cir. 1993), the Ninth
     2   Circuit vacated the imposition of sanctions where there was no
     3   evidence that the attorney had “acted in bad faith or intended
     4   to mislead the court.”
     5        Accordingly, to the extent the bankruptcy court’s decision
     6   to exclude Plaintiffs’ late-filed declarations and exhibits was
     7   based on its inherent powers, we must reverse.     The record does
     8   not show that Debtor satisfied the high burden necessary for the
     9   preclusion of evidence under the bankruptcy court’s inherent
    10   power, and there is no finding of bad faith.
    11        Local Rules.   Although a bankruptcy court may sanction an
    12   attorney for violating local rules, Miranda v. S. Pac. Transp.
    13   Co., 
    710 F.2d 516
    , 519 (9th Cir. 1983), the Ninth Circuit has
    14   required sanctions under local rules to meet strict criteria.
    15   Zambrano, 885 F.2d at 1477.   In addition to being consistent
    16   with the Federal rules, other statutes, and principles of “right
    17   and justice,” the sanctions order must be
    18        necessary for the court to ‘carry out the conduct of
              its business.’ There must be a close connection
    19        between the sanctionable conduct and the need to
              preserve the integrity of the court docket or the
    20        sanctity of the federal rules. Finally, any sanction
              imposed must be proportionate to the offense and
    21        commensurate with principles of restraint and dignity
              inherent in judicial power. This last principle
    22        includes a responsibility to consider the usefulness
              of more moderate penalties before imposing a monetary
    23        sanction.
    24   Id. at 1480 (emphasis added).   Finally, there must be a finding
    25   of recklessness, repeated disregard of court rules, gross
    26   negligence, or willful misconduct.     Id.; see also Wehrli v.
    27   Pagliotti, 
    1991 WL 143815
    , at *2 (9th Cir. Aug. 1, 1991) (“The
    28   district court’s authority to impose sanctions for violation of
     1   local rules should be reserved for ‘serious breaches,’ not
     2   thoughtless conduct.”); In re Colville Confederated Tribes,
    980 F.2d 736
     (9th Cir. 1992) (Table) (noting that sanctions for
     4   violation of local rules are subject to the limits upon the
     5   court’s inherent power and statutory authority, and that
     6   “[t]hese limits require at a minimum that the sanctions order be
     7   supported with an explicit finding of an attorney’s bad faith,
     8   and that the misconduct amount to more than a negligent
     9   transgression of the local rules.”).
    10        Although it is undisputed that Plaintiffs violated
    11   LBR 9017-1 by filing their ADT declarations and exhibits late,
    12   the rule itself does not expressly authorize the imposition of
    13   sanctions.   In fact, it does not give warning of the possible
    14   consequence if the rules are not strictly followed.   We look
    15   instead to LBR 1001-1(g) which authorizes the bankruptcy court
    16   to impose sanctions for noncompliance with the local rules:
    17        Failure of counsel or of a party to comply with these
              Rules, with the Federal Rules of Civil Procedure or
    18        the Federal Rules of Bankruptcy Procedure, or with any
              order of the Court may be grounds for imposition of
    19        any and all sanctions authorized by statute or rule or
              within the inherent power of the Court, including,
    20        without limitation, dismissal of any action, entry of
              default, finding of contempt, imposition of monetary
    21        sanctions or attorneys’ fees and costs, and other
              lesser sanctions.
    23   This rule gives fair warning to an attorney or party that a
    24   violation of the local rules will subject him or her to a
    25   variety of sanctions, including dismissal of any action and
    26   “other lesser sanctions.”
    27        However, contrary to the strict requirements set forth in
    28   Zambrano, the record does not indicate that the bankruptcy court
     1   considered a more moderate penalty before imposing what was
     2   essentially a case-terminating sanction.   For example, the court
     3   could have granted a continuance to allow Debtor’s attorney more
     4   time to prepare and impose a monetary sanction to compensate
     5   Debtor’s attorney for the wasted appearance.   A continuance is
     6   the preferred sanction.   See United States v. Golyansky,
    291 F.3d 1245
    , 1249 (10th Cir. 2002) (“It would be a rare case
     8   where, absent bad faith, a district court should exclude
     9   evidence rather than continue the proceedings.”).    Here, the
    10   bankruptcy court discussed no alternatives.
    11        The bankruptcy court also did not explicitly find that
    12   Plaintiffs’ late filing was reckless or willful, or involved
    13   repeated disregard of court rules or gross negligence.    Although
    14   Debtor complains that Plaintiffs did not comply with LBR 9017-1
    15   in connection with the first trial date, their failure to do so
    16   does not demonstrate repeated disregard of court rules when
    17   their Continuance Motion was pending prior to the time their
    18   declarations were due.    There is also nothing in the record that
    19   shows Plaintiffs’ conduct was reckless or willful.    While their
    20   conduct shows a lack of diligence, that does not make it
    21   sanctionable under Ninth Circuit case law cited above.
    22        Accordingly, to the extent the bankruptcy court’s decision
    23   to exclude Plaintiffs’ late-filed declarations and exhibits was
    24   based on its sanction power under LBR 1001-1(g), we must
    25   reverse; the requirements under Zambrano were not met.
    26        Civil Rules.   Although the bankruptcy court’s decision to
    27   exclude the late-filed declarations and exhibits is analogous to
    28   Civil Rule 37(c)(1), that rule is inapplicable by its very
     1   terms.    Civil Rule 37(c)(1) provides:
     2          (1) Failure to Disclose or Supplement. If a party
                fails to provide information or identify a witness as
     3          required by Rule 26(a) or (e), the party is not
                allowed to use that information or witness to supply
     4          evidence on a motion, at a hearing, or at a trial,
                unless the failure was substantially justified or is
     5          harmless. In addition to or instead of this sanction,
                the court, on motion and after giving an opportunity
     6          to be heard:
     7          (A) may order payment of the reasonable expenses,
                including attorney's fees, caused by the failure;
                (B) may inform the jury of the party's failure; and
                (C) may impose other appropriate sanctions, including
    10          any of the orders listed in Rule 37(b)(2)(A)(i)-(vi).
    11   Civil Rule 37 does not appear implicated in this case because
    12   there was no discovery or disclosure violation.
    13          Generally, the Ninth Circuit has limited application of
    14   Civil Rule 37 to its literal scope.    Halaco, 843 F.2d at 380
    15   n.1.    Since there was no discovery-related misconduct,
    16   Plaintiffs’ conduct does not fall within the literal language of
    17   Civil Rule 37(c)(1), or for that matter any other part of the
    18   rule.    The bankruptcy court thus did not possess the power to
    19   exclude Plaintiffs’ late-filed declarations and exhibits as a
    20   sanction under Civil Rule 37.
    21          Even if the Civil Rule was applicable, under Ninth Circuit
    22   law, the court must weigh five factors in determining whether it
    23   is appropriate to exclude evidence as a sanction: (1) the
    24   public’s interest in expeditious resolution of litigation;
    25   (2) the court’s need to manage its docket; (3) the risk of
    26   prejudice to the defendants; (4) the public policy favoring
    27   disposition of cases on their merits; and (5) the availability
    28   of less drastic sanctions.    Thompson, 782 F.2d at 831; Malone v.
     1   U.S. Postal Serv., 
    833 F.2d 128
    , 130 (9th Cir. 1987).      And,
     2   where a sanction amounts to a case-terminating sanction, the
     3   court must also consider whether the noncompliance involved
     4   willfulness, fault, or bad faith.      See R & R Sails, Inc.,
     5   673 F.3d at 1247 (“sanction amounted to dismissal of a claim,
     6   [so] the district court was required to consider whether the
     7   claimed noncompliance involved willfulness, fault, or bad faith,
     8   . . . and also to consider the availability of lesser
     9   sanction”); Fjelstad, 762 F.2d at 1337.      If the bankruptcy court
    10   fails to make explicit findings for each of these factors, the
    11   appellate court must review the record independently to
    12   determine whether the dismissal was an abuse of discretion.
    13   Malone, 833 F.2d at 130.
    14        Here, Debtor argues that even if the court were obligated
    15   to apply these factors, the record amply supports the conclusion
    16   that the bankruptcy court did not abuse its discretion by
    17   excluding Plaintiffs’ evidence.   Without matching up the
    18   factors to his argument, Debtor maintains that (1) the court
    19   found “extreme prejudice” (factor three); (2) the court found
    20   that Plaintiffs’ failure to comply with LBR 9017-1 disrupted the
    21   proceedings (factor two); and (3) there was no need for the
    22   court to unilaterally consider continuing the trial in order to
    23   cure Plaintiffs’ failure to comply with LBR 9017-1 under these
    24   circumstances (factor five?).   Debtor also argues that it was
    25   Plaintiffs’ own fault for failing to timely submit the
    26   declarations and exhibits, as their explanation for the delay
    27   does not show circumstances beyond their control.      Therefore,
    28   according to Debtor, the requirement for a finding of
     1   willfulness, bad faith, or fault, under R & R Sails has been
     2   met.
     3          First, even if we were to conclude that the bankruptcy
     4   court implicitly found some factors that would support its
     5   ruling, it is not evident from the record that other factors
     6   were considered.    The court did not take into account whether
     7   less drastic sanctions could remedy the harm caused to Debtor’s
     8   ability to respond to and defend against Plaintiffs’ fraud
     9   claims.    Nor is there any indication in the record that the
    10   court considered the strong public policy favoring disposition
    11   of cases on their merits.    There was no egregious conduct in
    12   this case that would override that policy.    It is thus not
    13   apparent from the record before us that a proper weighing of the
    14   factors would necessarily result in the sanction of dismissal.
    15          Second, as noted above, the bankruptcy court made no
    16   findings of willfulness, bad faith, or fault.    We are not
    17   persuaded that the fault at issue here — really more like
    18   negligence or oversight — can support the “drastic measure” of
    19   excluding Plaintiffs’ evidence.    As noted before, while
    20   Plaintiffs’ conduct shows a lack of diligence and could be
    21   construed as negligence, mere negligence without more is an
    22   insufficient ground for imposing case-terminating sanctions.
    23   See Zambrano, 885 F.2d at 1480 (“Thus, while we believe that
    24   Congress authorized the federal courts to wield reasonable
    25   authority over attorneys appearing before them, we do not think
    26   that the imposition of financial sanctions for mere negligent
    27   violations of the local rules is consistent with the intent of
    28   Congress or with the restraint required of the federal courts in
     1   sanction cases.”).
     2        Finally, “[t]o support a finding of prejudice, the court
     3   must determine that the delay impacted the defendant’s ability
     4   to prepare or present its case.”    Golyansky, 291 F.3d at 1250.
     5   Although Debtor complained that the delay impacted his ability
     6   to determine which witnesses to cross-examine and prepare for
     7   that cross-examination, these complaints do not add up to
     8   extreme prejudice.   Granted, we do not have the late-filed
     9   declarations before us in the record.    However, Plaintiffs’
    10   counsel made an offer of proof before the bankruptcy court and
    11   on appeal that the ADT declarations were substantially similar
    12   in substance to Plaintiffs’ summary judgment declarations.
    13   Therefore, we have good reason to believe that months prior to
    14   the trial, Debtor had a good understanding as to what the ADT
    15   testimony was regarding the various misrepresentations.    Plus,
    16   Debtor had the ADT declarations and exhibits a full seven days
    17   before trial was to commence.   In short, although the
    18   declarations in connection with the summary judgment were in a
    19   different format and submitted for a different purpose, there is
    20   nothing specific in the record from Debtor that suggests there
    21   was any real surprise in the content of the late-filed
    22   declarations.
    23        Accordingly, while there may have been some prejudice to
    24   Debtor, the record does not support the bankruptcy court’s
    25   finding of “extreme prejudice.”    Assuming that there was some
    26   prejudice to Debtor, a short continuance of the trial could have
    27   remedied the prejudice that concerned Debtor.
    28        In sum, it appears that a lack of diligence on the part of
     1   Plaintiffs or their counsel may have disrupted the court’s
     2   docket.   Such conduct makes some sanction a realistic
     3   possibility.   However, to the extent the bankruptcy court had
     4   authority to impose the sanction under its inherent powers, the
     5   Local Court Rules, or the Civil Rules, the bankruptcy court
     6   abused its discretion by granting the MIL and excluding the
     7   evidence for the reasons discussed above.   Therefore, we must
     8   find the bankruptcy court erred in entering judgment in favor of
     9   Debtor.
    10                            VI.   CONCLUSION
    11        For the reasons stated, we REVERSE the bankruptcy court’s
    12   order granting Debtor’s MIL, VACATE the judgment and REMAND this
    13   matter to the bankruptcy court for further proceedings not
    14   inconsistent with this memorandum disposition.

Document Info

DocketNumber: EC-14-1204-JuFD

Filed Date: 12/3/2015

Precedential Status: Non-Precedential

Modified Date: 12/3/2015

Authorities (20)

Roadway Express, Inc. v. Piper , 447 U.S. 752 ( 1980 )

Taylor v. Illinois , 484 U.S. 400 ( 1988 )

Chambers v. Nasco, Inc. , 501 U.S. 32 ( 1991 )

victor-miranda-v-southern-pacific-transportation-company-a-delaware , 710 F.2d 516 ( 1983 )

heather-fjelstad-a-minor-v-american-honda-motor-co-inc-and-honda , 762 F.2d 1334 ( 1985 )

Alphonso Thompson v. The Housing Authority of the City of ... , 782 F.2d 829 ( 1986 )

United States v. Ernest Stoneberger, and James L. Buchanan ... , 805 F.2d 1391 ( 1986 )

In Re: The Woodson Company, Debtor. Fireman's Fund ... , 813 F.2d 266 ( 1987 )

Ann J. Malone v. United States Postal Service, an Agency of ... , 833 F.2d 128 ( 1987 )

halaco-engineering-co-a-california-corporation-v-douglas-m-costle , 843 F.2d 376 ( 1988 )

Linda Marie Zambrano, and Jose E. Tafolla, Esq. Philip W. ... , 885 F.2d 1473 ( 1989 )

Vernon Ervin Dillon, Jr. Louise Dillon v. Nissan Motor Co., ... , 986 F.2d 263 ( 1993 )

Stephen Yagman v. Republic Insurance Cna Insurance Valley ... , 987 F.2d 622 ( 1993 )

R & R SAILS v. Insurance Co. of Pa. , 673 F.3d 1240 ( 2012 )

eddie-palmieri-v-john-defaria-rafael-padilla-randy-barlow-teddy-mulet-mike , 88 F.3d 136 ( 1996 )

United States v. Gregory Golyansky Leonid Golyansky Dmitriy ... , 291 F.3d 1245 ( 2002 )

United States v. Hinkson , 585 F.3d 1247 ( 2009 )

United States v. Real Property Located at 475 Martin Lane , 545 F.3d 1134 ( 2008 )

Hoffman v. Construction Protective Services, Inc. , 541 F.3d 1175 ( 2008 )

In Re Lucas , 386 B.R. 332 ( 2008 )

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