MARK S. WALLACE, Bankruptcy Judge.
Following the failure of the first pretrial conference on March 28, 2018 by reason of the material noncompliance of defendants Kelly Scott Johnson and Shannon Marie Magness ("Defendants") with the requirements of a Court order filed and entered under the authority of Federal Rule of Bankruptcy Procedure 7016 and Federal Rule of Civil Procedure 16(b), this adversary proceeding came on for a second, continued pretrial conference on May 2, 2018. Defendants failed to appear when the matter was called and failed for a second time to either join with plaintiff William G. Joiner Trust Dated 2/6/02 ("Plaintiff") in filing with the Court a joint proposed pretrial order or stipulation or, alternatively, file a unilateral proposed pretrial order or stipulation, all as specifically required by the Court's scheduling order issued under the authority of Federal Rule of Civil Procedure 16(b) (which order incorporated by reference requirements of Local Bankruptcy Rule 7016-1(d), (g)).
Based upon Defendants' repeated and material failure to comply with Federal Rule of Bankruptcy Procedure 7016 (incorporating by reference Federal Rule of Civil Procedure 16) at both the first and the second pretrial conference held in this adversary proceeding and their failure to appear at the second pretrial conference when the matter was called, and for other reasons hereinafter set forth, the Court strikes Defendants' answer and enters their default as a sanction for willfully and materially violating the aforementioned rules and ignoring numerous oral and written warnings given to them by this Court with respect to the necessity and importance of complying with such rules.
Defendants are serial bankruptcy filers. Shannon Marie Magness ("S. Magness") filed a chapter 7 petition in this Court on September 10, 2014. The case was dismissed on November 25, 2014. S. Magness filed for bankruptcy again on December 2, 2014. Plaintiff filed a motion for relief from stay in that proceeding for the purpose of foreclosing on Defendants' Laguna Hills, California real property. The Court granted relief from stay pursuant to 11 U.S.C. § 362(d)(4) by order filed and entered February 13, 2015 and expressly found that the filing of S. Magness's bankruptcy petition was part of a scheme to hinder, delay or defraud creditors and that S. Magness was involved in such scheme. This case was closed without a discharge on September 29, 2015 (S. Magness had failed to file a Financial Management Course Certificate). Defendants filed a chapter 13 petition on October 14, 2016. Plaintiff commenced this adversary proceeding against Defendants on May 15, 2017, alleging that Defendants' indebtedness and liability to Plaintiff is excepted from discharge pursuant to 11 U.S.C. §§ 523(a)(2), 523(a)(6).
Following the commencement of the adversary proceeding, there was served on Defendants by Plaintiff a document entitled "Early meeting of Counsel and Status Conference Instructions," Docket No. 2, filed May 15, 2017. This document (the "First Warning") warned Defendants in boldface type as follows:
The Court held a status conference on August 2, 2017 and orally warned Plaintiff and Defendants (the "Second Warning") that the Court strictly applies the Local Bankruptcy Rules relating to pretrial conferences and expected the parties to comply with those rules:
Transcript of Status Conference Hearing Re: Complaint For Exception to Discharge Under 11 U.S.C. Section 523, August 2, 2017 at 3, lines 20-25, 4, lines 1-11.
Pursuant to Federal Rule of Bankruptcy Procedure 7016 and Federal Rule of Civil Procedure 16(b), the Court issued a Scheduling Order, Docket No. 6, filed and entered August 3, 2017 (the "Scheduling Order and Third Warning"), that set the pretrial conference for March 28, 2018 at 9:00 a.m. and stated as follows in bold face type:
The Court held the first pretrial conference in this adversary proceeding as scheduled on March 28, 2018. The pretrial conference was a failure because Defendants had failed to reach agreement with Plaintiff as to the contents of a joint proposed pretrial stipulation and also had failed to file a unilateral proposed pretrial stipulation as required by the order issued under Rule 16(b) (incorporating by reference Local Bankruptcy Rule 7016-1), namely the Scheduling Order and Third Warning. Following the failure of the first pretrial conference on March 28, 2018, the Court entered its Order Continuing Pre-Trial Conference Hearing, Docket No. 14, filed and entered March 29, 2018 (the "Continuance Order and Fourth Warning") under the authority of Federal Rule of Civil Procedure 16(b) that provided in relevant part as follows:
Defendants repeatedly ignored these very explicit multiple warnings and failed to comply, not merely once, but on three separate occasions:
Federal Rules of Bankruptcy Procedure 7016 and 7037 incorporate by reference (and make applicable to adversary proceedings) Federal Rules of Civil Procedure 16 and 37. Federal Rule of Civil Procedure 16(f) provides in relevant part as follows:
Federal Rule of Civil Procedure 37(b)(2)(A)(ii)-(vii) include among permissible sanctions "striking pleadings in whole or in part," Rule 37(b)(2)(A)(iii), and "rendering a default judgment against the disobedient party," Rule 37(b)(2)(A)(vi).
Here, it is clear beyond peradventure that Defendants' willful misconduct encompasses
In the face of multiple warnings by this Court, Defendants have engaged in a pattern of multiple willful and bad faith violations of this Court's Scheduling Order and Third Warning, Continuance Order and Fourth Warning, and Federal Rule of Bankruptcy Procedure 7016 (incorporating by reference Federal Rule of Civil Procedure 16) encompassing failure to appear, failure to make a good faith effort to participate in the preparation of a proposed pretrial stipulation, and failure to file a unilateral proposed pretrial stipulation.
The United States Court of Appeals for the Ninth Circuit (the "Ninth Circuit") requires that a party's sanctionable conduct be the result of "willfulness, bad faith or fault" before a court imposes a severe sanction such as striking an answer and entering a default. Jorgensen v. Cassiday, 320 F.3d 906, 912 (9th Cir. 2003). "Willfulness" for this purpose is "disobedient conduct not shown to be outside the control of the litigant." Henry v. Gill Indus., Inc., 983 F.2d 943, 948 (9th Cir. 1993).
Having reviewed the entire record in this case, the Court concludes and finds that Defendants' conduct was disobedient conduct with respect to the Court's Scheduling Order and Third Warning and Continuance Order and Fourth Warning that was not outside their control. Noncompliance with these Court orders occurred because of neglect, obstinacy and anger at the Plaintiff, not because they were physically or mentally incapacitated or for any other reason outside their control. Mr. Johnson's statement that "Mr. Joiner will be going to Jail and/or Hell or both. . . and we are still on track for that" is but one item of evidence for this proposition. The Court also finds that Defendants' disobedient conduct was in bad faith and was their fault.
Before imposing the severe sanction of striking an answer and entering a default, the Ninth Circuit requires consideration of the following five factors: (1) the public's interest in expeditious resolution of litigation; (2) the court's need to manage its own dockets; (3) the risk of prejudice to the party seeking sanctions; (4) the public policy favoring disposition of cases on their merits; and (5) the availability of less drastic sanctions. Malone v. U.S. Postal Serv., 833 F.2d 128, 130 (9th Cir. 1987). The subparts of the fifth factor are whether the court has considered lesser sanctions, whether it tried them and whether it warned the recalcitrant party about the possibility of case-dispositive sanctions.
It should be noted, however, that the United States Bankruptcy Appellate Panel of the Ninth Circuit (the "BAP") has virtually read the "prior warning" subpart of the fifth factor out of the law, at least where there are no prior instances of noncompliance. Based upon the BAP's reasoning, a litigant can ignore multiple warnings from a bankruptcy court and escape severe sanctions as long as the warnings were not given as a result of prior noncompliance. Abdul Habib Olomi v. Tukhi (In re Tukhi), 568 B.R. 107, 117 n. 4 (B.A.P. 9th Cir. 2017) (bankruptcy court gave plaintiff four separate oral and written warnings about the need to comply with Local Bankruptcy Rule relating to pretrial conference; plaintiff ignored all four warnings and went ahead and violated the Rule in a single instance of noncompliance; held, bankruptcy court erred in imposing severe sanction).
The BAP has also held that is error for a bankruptcy court, in crafting a particular sanction, to look beyond the case immediately before it and consider the effect of its decision regarding sanctions with respect to other counsel's behavior in other pending and future cases: ". . . the court's analysis incorrectly emphasized the perceived systemic impact of a more lenient approach to sanctions, instead of focusing on the potential of alternative lesser sanctions to secure future compliance from Olomi." 568 B.R. at 117.
Unless additional time to prepare for trial is requested by the parties or unless the Court's calendar is especially busy, the Court's practice generally is to set trial for two to three months following the completion of the pretrial conference. Had Defendants complied with the Scheduling Order and Third Warning, the pretrial conference would have been completed on March 28, 2018 and, as of this writing, the trial likely would have already been held and completed. Thus, it is clear that the public's interest in expeditious resolution of litigation has been thwarted by Defendants' willful and bad faith misconduct. Like one of the litigants in Pryor v. RW Inv. Co. (In re Pryor), BAP No. CC-10-1259-PaKiSa, 2011 Bankr. LEXIS 4332 (B.A.P. 9th Cir., Aug. 12, 2011), Defendants have an established track record of improper conduct in the bankruptcy court by reason of the Court's prior finding that their petition filing was part of a scheme to hinder, delay or defraud a creditor. Like that litigant in Pryor, Defendants have filed multiple bankruptcy cases.
As this Court has noted previously — and as this case proves once again — the Court has had a difficult time getting parties to comply with scheduling orders issued under the authority of Federal Rule of Bankruptcy Procedure 7016 and Federal Rule of Civil Procedure 16.
This is not so much a case where there is merely a risk of prejudice to Plaintiff — the party seeking sanctions — as one where such prejudice has already occurred and is substantial and continuing. Defendants' repeated, bad faith and willful failures to comply with this Court's Rule 16(b) scheduling orders have caused months of delay in the determination of this adversary proceeding, have wasted the time of Plaintiff's counsel and have run up Plaintiff's legal fees and costs in their futile efforts to get Defendants to finally comply with Court orders. As Plaintiff's counsel aptly points out, "[t]he ongoing disregard of Court orders is a pattern and practice that does not appear to stop regardless of how many times Mr. Johnson is ordered to comply — whether by this Court or the State Bar." Plaintiff's Reply to Defendants' Declarations Re Noncompliance With Order to Show Cause, Docket No. 34, filed May 29, 2018 at 4 of 6, lines 6-8. Chism v Nat'l Heritage Life Ins. Co., 637 F.2d 1328, 1331 (9th Cir. 1981) (defendant had been prejudiced by plaintiff's failure to comply with pretrial conference obligations).
This factor usually militates against the imposition of severe sanctions, such as a dismissal of the case or the entry of a default judgment. The BAP's position on this factor seems to be that even mild-to-moderate obstacles to merit determinations caused by a party's noncompliant conduct in the face of multiple bankruptcy court warnings do not suffice to turn this factor in favor of the party seeking terminating sanctions — the obstacles to merits determinations must be severe and they must occur over an extended period of time. Abdul Habib Olomi v. Tukhi (In re Tukhi), 568 B.R. 107, 116 (B.A.P. 9th Cir. 2017) (scuttling of pretrial conference as a result of plaintiff counsel's material noncompliance with pretrial procedures and failure to heed four prior bankruptcy court warnings was not a severe obstacle to merits determination). Out of an abundance of caution, the Court determines that this factor favors Defendants notwithstanding the obvious similarities between this case and an earlier unpublished BAP decision, namely, Pryor v. RW Inv. Co. (In re Pryor), BAP No. CC-10-1259-PaKiSa, 2011 Bankr. LEXIS 4332 (B.A.P. 9th Cir., Aug. 12, 2011).
The Court considered imposing a lesser sanction in this matter, namely, approving Plaintiff's proposed pretrial stipulation. Indeed, the Court's tentative ruling for the May 2, 2018 pretrial conference was precisely that — approve for entry an order adopting Plaintiff's proposed pretrial stipulation. However, when Defendants failed to appear for the May 2, 2018 pretrial conference, the Court determined that such a sanction would be insufficient and unjust in view of Defendants' bad faith and repeated and persistent willful noncompliance and their blatant disregard of the four prior warnings given by this Court.
The Court notes that in footnote 4 of Olomi v. Tukhi, supra, the BAP stated as follows:
The fourth and final warning given by this Court in the Continuance Order and Fourth Warning was made in response to Defendants' prior noncompliance with the Scheduling Order and Third Warning through their failure to properly prepare for the first pretrial conference held on March 28, 2018. This falls within the rule of Olomi v. Tukhi in footnote 4 stated above and satisfies the requirement of considering the availability of lesser sanctions.
The striking of Defendants' answer is not disproportionate in relationship to their conduct in this case. What occurred here, in a very brief summary, is the flouting and disregard of four separate and very explicit oral and written warnings given by the Court coupled with material noncompliance with the Court's Scheduling Order and Third Warning and Continuance Order and Fourth Warning over a period of about three months (March to May, 2018), leading to the collapse of two pretrial conferences with the resulting waste of the Court's time and Plaintiff's counsel's time. The striking of Defendants' answer and the entering of a default is proportionate to their repeated and serious violation of the Court orders referenced above which, as the Court finds, were willful and in bad faith and the fault of Defendants.
In summary, four of the five relevant factors under Malone v. U.S. Postal Serv., 833 F.2d 128 (9th Cir. 1987) favor Plaintiff and only one is in Defendants' favor. The balance sharply tilts in Plaintiff's favor. For these reasons, the Court strikes Defendants' answer and enters their default pursuant to Federal Rule of Civil Procedure 37(b)(2)(A)(iii), incorporated by reference by Federal Rule of Bankruptcy Procedure 7037. Additionally, pursuant to Federal Rule of Bankruptcy Procedure 7016 and Federal Rule of Civil Procedure 16(f)(2), the Court orders Defendant to pay Plaintiff's reasonable expenses (including but not limited to attorneys' fees) incurred because of Defendants' material failure to comply with Rule 16 and the Court orders issued under the authority of that rule.
Plaintiff shall file a motion for entry of default judgment on or before August 31, 2018 (which shall include an application for Plaintiff's reasonable expenses incurred as a result of Defendants' failure to comply with applicable rules, as referenced in the preceding sentence) and set the matter for hearing based upon available dates on the Court's calendar. Defendants are granted leave of Court to file an opposition to such motion and to appear at the hearing and make such arguments as may be appropriate.
