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IN RE LITAS INTERNATIONAL

United States District Court, S.D. New York


June 29, 2004.

In re: LITAS INTERNATIONAL, INC., Debtor. WINOC BOGAERTS, Appellant,
v.
PNL ASSET MANAGEMENT, L.P., Appellee.

The opinion of the court was delivered by: GERARD E. LYNCH, District Judge

OPINION AND ORDER

Winoc Bogaerts appeals from a judgment of the United States Bankruptcy Court for the Southern District of New York (Drain, J.) dated October 16, 2003, denying his motion for relief from an order dismissing his claims for failure to comply with discovery. (Rubin Decl., Ex. B.) This Court shares the general judicial distaste for disposing of cases by defaults and sanctions rather than on the merits. Am. Alliance Ins. Co., Ltd. v. Eagle Ins. Co., 92 F.3d 57, 62 (2d Cir. 1996); Enron Oil Corp. v. Diakuhara, 10 F.3d 90, 96 (2d Cir. 1993); Traguth v. Zuck, 710 F.2d 90, 94 (2d Cir. 1983). But at times a party's complete disregard for court rules, judicial orders, and indeed, the prosecution of its own claims, requires a court to impose extreme sanctions, for discovery sanctions must remain a "credible deterrent rather than a `paper tiger.'" Update Art, Inc. v. Modiin Publ'g, Ltd., 843 F.2d 67, 71 (2d Cir. 1988); see also SEC v. McNulty, 137 F.3d 732, 738 (2d Cir. 1998); Bambu Sales, Inc. v. Ozak Trading, Inc., 58 F.3d 849, 853-54 (2d Cir. 1995).

  In this action, which involves a complex dispute over the relative priority of mortgages on an Ulster County property, Bogaerts has managed to delay the resolution of his own claims in the bankruptcy court for nearly five years through a pattern of deliberate disregard of judicial orders and discovery rules. Indeed, it is symptomatic of the difficulties of conducting this litigation that the issue now before the Court essentially relates to events in 1999 and 2000. On August 7, 2000, the bankruptcy court entered a supplemental order conditionally dismissing Bogaerts's claims for his failure to comply with appellee PNL Asset Management, L.P.'s ("PNL") document demands, to appear for his deposition, and to pay monetary sanctions imposed by that court by a similar written order issued about one month earlier. (Rubin Aff., Ex. A-1.) After a futile series of appeals and a simultaneous motion to reopen, which the bankruptcy court dismissed for want of jurisdiction in light of the pending appeal, the Second Circuit ultimately held that the bankruptcy court's conditional order of dismissal, which purported to mature into a final judgment should Bogaerts fail to comply with its conditions, did not constitute a final judgment triggering Bogaerts's time to appeal. In re Litas Int'l, Inc., 316 F.3d 113 (2d Cir. 2003). The Court of Appeals therefore remanded the case back to the bankruptcy court for that court to enter a separate final judgment, which it did on August 13, 2003. Bogaerts then moved for relief from that judgment, which the bankruptcy court denied by order dated October 16, 2003. Bogaerts now appeals from that denial. The bankruptcy court's order will be affirmed. BACKGROUND

  This is not a case, as Bogaerts would have it, in which a poor or ignorant, unrepresented layman misses a few discovery deadlines, suffers the unduly harsh sanction of a default judgment as a consequence, and then appears in court asserting a meritorious excuse or justification for his previous derelictions and seeking to litigate his claims on the merits. (Appellant's Br. 4-7.) Nor does the record bear out Bogaerts's accusation that "PNL has been using discovery as a means to harass a frail man and to unfairly take advantage of him at a time when he was acting pro se." (Id. 8-9.) Bogaerts purports to hold a mortgage for $1.3 million on a valuable piece of real estate (Bogaerts Aff. ¶ 5); he has been intermittently represented by four different attorneys (Bogaerts Aff. ¶¶ 7, 24; Rubin Decl. ¶¶ 13, 25, 46, 48), and moreover, ably represented himself on appeal to the Second Circuit (Appellant's Reply Br., Ex. A); and before the bankruptcy court dismissed his claims, Bogaerts received several warnings and lesser sanctions for his refusal to comply with his discovery obligations and his utter disregard of that court's orders. See Bogaerts v. Shapiro, No. 00 Civ. 7798, 2002 WL 100636, at *1-*2 (S.D.N.Y. Jan. 25, 2002) (adopting Report and Recommendation of Magistrate Judge Theodore H. Katz (Rubin Decl., Ex. A-2)), rev'd on other grounds, In re Litas, 316 F.3d 113.

  On July 12, 2000, after Bogaerts failed to respond to PNL's motion to compel discovery or to appear at the court hearing on that motion, the bankruptcy court imposed $2500 in sanctions and ordered that unless Bogaerts complied with his discovery obligations by certain fixed dates, his claims would be "dismissed with prejudice without any further order of the Court." (Rubin Decl., Ex. A-32.) Bogaerts did nothing. On August 7, 2000, rather than dismiss his claims, the bankruptcy court issued a supplemental order that extended the deadlines established by the prior order and thereby "gave him another chance to fulfill the required conditions." Bogaerts, 2002 WL 100636, at *1. Again, the bankruptcy court order warned that absent compliance, Bogaerts's claims would "be deemed dismissed with prejudice without further order of the Court" (Rubin Decl., Ex. A-1), and again, Bogaerts did nothing to cure his default. Id. at *2.

  In his application to reopen, Bogaerts argues that his defaults should be excused because (1) during the relevant period, he lacked representation, and (2) due to a dispute with his landlord that caused interruptions in his mail service, he did not receive actual notice of the bankruptcy court's commands. (Bogaerts Aff. ¶¶ 12-23.) Notably, Bogaerts made these exact same claims on his prior appeal, and Magistrate Judge Katz rejected them in a thorough report and recommendation, which, in turn, was adopted by this Court (Casey, J.). (Rubin Decl., Exs. A-2, A-3.) These findings were based on the indisputable facts that Bogaerts himself corresponded with lawyers for PNL during the relevant period, expressly acknowledged his awareness of one of the court's rulings, and consulted with counsel as to another. Bogaerts, 2002 WL 100636, at *3. (See also Rubin Decl, Ex. A-2 at 14 & n. 3, 17 n. 5; id., Exs. 32-38.) In any event, even if Bogaerts did not receive a copy of one or more of the court's orders, that fact, as Judge Casey emphasized, would not, as a matter of law, excuse him from his obligation to monitor the docket and keep himself informed of developments in the litigation. See id. at *3, citing In re Sweet Transfer & Storage, Inc., 896 F.2d 1189, 1193 (9th Cir. 1990). (Rubin Decl., Ex. A-2 at 13 (collecting cases).) It would have been a simple matter for Bogaerts to check the court docket or retain a lawyer to do so on his behalf.

  Bogaerts's argument that his default resulted from stress brought on by harassment by a powerful adversary's oppressive discovery demands is belied by the record. The record does not reflect excessive or burdensome discovery demands by PNL; to the contrary, it reflects a failure on the part of Bogaerts to complete a single deposition, to reply to notices and correspondence, to appear at court conferences, and to comply with court orders compelling disclosure. Virtually every judicial officer who has had responsibility for managing this action, or who has reviewed the record, has found Bogaerts's excuses to be meritless, if not sanctionable.*fn1 Magistrate Judge Katz concluded that Bogaerts "not only failed to monitor his case; he actually absented himself from the litigation and defaulted on his discovery obligations, thereby giving rise to his ignorance of developments in the case. Indeed, the bankruptcy court gave [Bogaerts] greater latitude than was required in its July 12, 2000 Amended Order, and set new deadlines for [his] compliance and the dismissal of his claims if he failed to comply." (Rubin Decl., Ex. A-2 at 14.) A district court reviewing the exercise of discretion by courts confronted with such behavior must pay due regard to the factual findings of those who have had first-hand responsibility for monitoring and developing a detailed knowledge of the dynamics of the litigation. See In re Casse, 198 F.3d 327, 341 (2d Cir. 1999) (emphasizing that because the bankruptcy court is "able to view firsthand the actions and statements of the parties, and . . . to view the conduct of those parties over an extended period of time, the reviewing court will not substitute its judgment for that of the bankruptcy court in the absence of a finding of abuse of discretion") (internal quotation marks and brackets omitted).

  Because of Bogaerts's behavior, the bankruptcy court issued two virtually identical orders cautioning that his claims would be dismissed unless he (1) complied with outstanding document discovery, (2) appeared for the completion of his deposition, (3) paid PNL $2500 as a sanction for his refusal to comply with discovery and the costs this imposed on PNL, (4) delivered to the court an affidavit affirming that he paid that sanction, and (5) certified in writing to the court that he complied with the order. (Rubin Decl., Exs. A-32, A-1.) This appeal does not challenge that order or the consequent default entered some three years later; it challenges only Judge Drain's decision, after full briefing and argument, to deny Bogaerts's motion to reopen. (Id., Exs. B, C.)

  DISCUSSION

  Bogaerts appeals only from the denial of his motion to reopen the case pursuant to F.R.Bankr.P. 9024 (Appellant's Br. 1), which, subject to enumerated exceptions, incorporates the standard for relief from judgment set forth in Fed.R.Civ.P. 60. Federal district courts review the denial of such motions for abuse of discretion, Key Mech. Inc. v. BDC 56 LLC, No. 01 Civ. 10173, 2002 WL 467664, at *2 (S.D.N.Y. Mar. 26, 2002), and findings of fact may be set aside only if clearly erroneous. F.R.Bankr.P. 8013; see In re Manville Forest Prods. Corp., 896 F.2d 1384, 1388 (2d Cir. 1990).

  To find an abuse of discretion, the Court must be persuaded that the bankruptcy court "acted in an arbitrary and irrational fashion," Tesser v. Bd. of Educ., 370 F.3d 314, 318 (2d Cir. 2004) (internal quotation marks omitted), either because it erred as a matter of law or reached a clearly erroneous finding of fact, or because its judgment "cannot be located within the range of permissible decisions." Mony Group, Inc. v. Highfields Capital Mgmt., L.P., 368 F.3d 138, 143-44 (2d Cir. 2004) (internal quotation marks omitted); see also In re Casse, 198 F.3d at 327. Here, the bankruptcy court's decision cannot plausibly be characterized as an abuse of discretion; to the contrary, the record makes clear that it was not only "permissible," but correct. Because a motion for relief from judgment seeks "extraordinary judicial relief," it will be granted only where the movant "meets its burden of demonstrating `exceptional circumstances.'" Paddington Partners v. Bouchard, 34 F.3d 1132, 1142 (2d Cir. 1994), quoting Nemaizer v. Baker, 793 F.2d 58, 61 (2d Cir. 1986); see also Jedrejcic v. Croatian Olympic Comm., 190 F.R.D. 60, 76-77 (E.D.N.Y. 1999). In the context of a default judgment, a court's decision whether to permit relief from judgment should be based on three criteria: "(1) whether the default was willful; (2) whether setting aside the default would prejudice the adversary; and (3) whether a meritorious defense is presented." Diakuhara, 10 F.3d at 96; see also In re Reilly, 213 B.R. 50, 52 (D. Conn. 1997) (enunciating and applying these criteria in bankruptcy proceeding). Judge Drain correctly identified and applied this standard. (Rubin Decl., Ex. C at 35-40.)

  First, Judge Drain, like Magistrate Judge Katz before him, found that Bogaerts willfully disregarded the court's orders. Specifically, he stated:

I believe that he has shown a willful disregard of the orders of the court and the procedures of the court in this adversary proceeding. This is not a simple matter of Mr. Bogaerts being left in the lurch by his counsel and being given inadequate time to find new counsel. . . . Rather, I find that there has indeed been roughly a year and a half's worth of disregard of the procedures for the conduct of this adversary proceeding, culminating in a period of disregard where Judge Bohanon was first made aware of the issue of a potential default in May of 2000. And over the course of the period between May and August, [he] issued two rulings to give Mr. Bogaerts the chance to comply with the legitimate discovery requests of PNL, which he did not do.
(Id. at 35-36; compare Rubin Decl., Ex. A-2 at 13-14.) Contrary to Bogaerts's argument, Judge Drain's finding that Bogaerts wilfully disregarded judicial orders and the discovery process is not "a matter of law" that "[t]his Court must review . . . de novo." (Appellant's Br. 6.) It is a finding of fact about Bogaerts's state of mind made by a court with great familiarity with the record.

  Judge Drain specifically rejected as "not . . . credible" Bogaerts's contention that he did not know about Judge Bohanon's orders. (Rubin Decl., Ex. C at 36.) In particular, he noted that Bogaerts had been advised to retain new counsel in 1999; "that he was aware that Judge Bohanon regularly scheduled conferences in the litigation and that there was ongoing discovery that needed to be completed," but nevertheless "made no request either of PNL or his counsel or the court with regard to the status of the ligation, with regard to his alleged problems in obtaining notice, and with regard to his alleged problems in obtaining an attorney"; and that Bogaerts "did receive, on occasion, letters from his opponent in the case to which he responded," but "again, he never advised anyone that he had a problem getting mail or that he might need an adjournment in the case." (Id. 36-37.) Judge Drain thus ultimately "agree[d] with Magistrate Judge Katz that for a lengthy period, notwithstanding several opportunities to take action to protect himself, Mr. Bogaerts absented himself from this litigation." (Id. 37.) Equally emphatically, Judge Drain rejected Bogaerts's argument that the bankruptcy court lacked a "meaningful basis to [issue] the discovery order in the first place." (Id. 40.) He found that Bogaerts's "actions prevented PNL from taking important and significant discovery going to the bona fides of the mortgage and the assignment that Mr. Bogaerts is relying on." (Id.) These findings, far from being clearly erroneous, enjoy ample support in the record.

  Second, Judge Drain found that the delays occasioned by Bogaerts's disregard of orders and discovery rules prejudiced PNL. (Id. 37-38.) Bogaerts concentrates his fire on this finding, arguing that the record discloses no evidence to support the finding that PNL has had to extend an appeal bond over a four year period. (Appellant's Br. 8.) That is incorrect. While PNL did not introduce specific evidence that such costs had actually been paid, it is a reasonable inference in the circumstances that the bond would not have been continued without additional premiums. In any event, Judge Drain specifically concluded that "the cost and expense incurred by PNL [as a consequence of Bogaerts's willful disregard of the court's orders] is a relevant factor, as is the accruing interest on Mr. Bogaerts'[s] mortgage, if in fact it turned out that he had a valid and senior mortgage, which would reduce the recovery that PNL would have on its junior mortgage under that scenario. So, I believe that there has been prejudice here." (Rubin Decl, Ex. C at 38.) Finally, it cannot be ignored that this is ultimately a dispute over real property, and in this context, delay in settling the question of mortgage priorities is inherently prejudicial.

  Third, while the parties vigorously dispute the merits of the underlying litigation, Judge Drain found that Bogaerts "may just barely satisfy this standard" (Rubin Decl., Ex. C at 39; emphasis added), but that "there's really a substantial doubt" about whether Bogaerts possesses a meritorious claim, particularly because "there's no underlying documentation as to the amount of his claim that is secured by the alleged mortgage." (Id.) Hence, he concluded, this factor "is at best only weakly satisfied by Mr. Bogaerts." (Id. 40.)

  No one of the three factors enunciated in Diakuhara is controlling; rather, a court "must balance the relative weight of each of these factors in an effort to arrive at an equitable result." In re Treco, No. 95-44326, 2001 WL 1566701, at *8 (Bankr. S.D.N.Y. Dec. 10, 2001). Here, Judge Drain's strong finding of willfulness, coupled with some evidence of prejudice and at best a very weak showing of a meritorious claim, fully supports his careful balancing of these factors and ultimate conclusion not to grant Bogaerts's motion for relief from the default judgment. The bankruptcy court's decision contains no errors of law or clearly erroneous findings of fact, nor is there anything "arbitrary and irrational," Tesser, 370 F.3d at 318, about the manner in which the court balanced the relevant factors and reached its decision. Because the bankruptcy court did not abuse its discretion, its decision must be affirmed.

  CONCLUSION

  For the reasons stated, the order of the bankruptcy court denying Bogaerts's motion to reopen the judgment against him is affirmed.

  SO ORDERED.


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