The opinion of the court was delivered by: Conner, Senior D.J.
Bankruptcy Court Case No. 04 B 22783 (ASH)
Appellants Nicholas Tartaglione (the "Debtor"), Michael Tartaglione and Flooring N' More, Inc. appeal from an order of U.S. Bankruptcy Judge Adlai S. Hardin, Jr. striking the Debtor's answer in his Chapter 7 adversary proceeding and entering a default judgment against appellants, jointly and severally, in the amount of $118,939.81. Appellants argue that the Bankruptcy Court abused its discretion by imposing so severe a sanction in response to their failure to fulfill their discovery obligations. For the following reasons, the order is affirmed.
On May 17, 2004 ("the filing date"), the Debtor filed a voluntary petition in the United States Bankruptcy Court seeking relief under Chapter 7 of Title 11 of the United States Code. (5/15/06 Complt. ¶ 6.)*fn1 Appellee was appointed interim trustee (the "Trustee") of the Debtor's estate and became permanent trustee at the first meeting of creditors, which was held on June 22, 2004. (Id. ¶ 7.)
Appellee then began her investigation of the Debtor's finances. On the Schedules and Statement of Financial Affairs that the Debtor submitted as part of his filing, he stated that he had not had any business income or any interest in any business within two years of the filing date. (Id. ¶ 14.) However, three out of the four creditors listed by the Debtor were contracting companies holding commercial claims, one of which was a claim by Flooring Technologies, Inc. against Carpet N' More, a flooring business the Debtorran in 2002. (Id. ¶¶ 18, 23.)
Carpet N' More was located at 294 Main Street, Nyack, New York (the "Nyack premises"). (Id. ¶¶ 3-5.) In approximately 2002 -- the record is unclear as to when, exactly -- Carpet N' More ceased operations and a new business, known as Flooring N' More, began operating out of the Nyack premises. (2/9/05 Rule 2004 Exam. Tr. at 21-24.) Michael Tartaglione, the Debtor's son, was the owner and principal of Flooring N' More, which was engaged in the same kind of operations as Carpet N' More. (Id. at 21-22.) As of February 2005, the Nyack premises still displayed a sign bearing the name Carpet N' More. (Id. at 22-23.) This appeal arises out of appellee's action to impose a constructive trust on the business operating at the Nyack premises, or to avoid the transfer of that business from the Debtor to Michael Tartaglione as a fraudulent conveyance. (Appellee Br. at 7.)
Appellee claims that during her initial investigation of the Debtor's filing, Flooring Technologies' attorney told her that the Debtor was a principal and owner of Carpet N' More, and that Carpet N' More was still operating out of the Nyack premises. (4/18/06 Complt. ¶ 16.) Upon learning this, appellee requested additional information and documentation from the Debtor relating to Carpet N' More. The Debtor, through his attorney, "responded to the effect that there were no records or information pertaining to any business conducted by the Debtor." (Id. ¶ 17.)
Appellee then obtained a Bankruptcy Court order directing the Debtor to appear at an examination pursuant to FED. R. BANKR. P. 2004. The order also required him to produce various documents, including bank statements, cancelled checks, financial statements related to Carpet N' More, Carpet N' More's income tax returns, Carpet N' More's W-3 tax forms and Carpet N' More's customer records. The Debtor did not produce these or any other documents (id. ¶ 20), and at the examination he testified that he was not in possession of any of these documents. (2/9/05 Rule 2004 Exam. Tr. at 15.) He claimed to have no records at all from the business. (Id. at 16, 25.)
Appellee then commenced an adversary proceeding seeking to deny the Debtor's discharge on the grounds that he wrongfully withheld information relating to his business, made knowingly false statements on his Schedules and Statement of Financial Affairs and was engaged in a continuous plan and scheme to hide his assets and defraud his creditors. (4/18/06 Complt. ¶¶ 26, 33, 37.) The Debtor failed to appear or answer the complaint, and the Bankruptcy Court entered a default judgment denying his discharge.
When appellee commenced a second adversary proceeding against the Debtor, this time to impose a constructive trust on the business at the Nyack premises or avoid the transfer of that business to Michael Tartaglione, the Debtor again failed to respond to the complaint. (7/26/06 Hr'g Tr. at 3.) And at a July 6, 2006 hearing, the Bankruptcy ...