In re GL Master Inc.
In re GL Master Inc.
2021 WL 2521093 (Bankr. C.D. Cal. 2021)
January 27, 2021
Bason, Neil W., United States Bankruptcy Judge
Summary
The court found that the Debtor Parties and ChaoLaw had willfully and in bad faith failed to comply with the 2004 Orders, including the production of ESI. The court imposed compensatory, coercive, and potentially other sanctions, and reserved the right to seek punitive damages. The court also noted that the Debtor Parties had failed to comply with discovery requests for ESI.
Additional Decisions
In re: GL Master Inc., Debtor
Case No.: 2:18-bk-24302-NB
United States Bankruptcy Court, C.D. California
Date:
January 27, 2021
Signed January 27, 2021
Counsel
Juliet Y. Oh, Los Angeles, CA, for Trustee.Thomas J. Polis, Polis & Associates, APLC, Irvine, CA, for Debtor.
Thomas J. Polis, Polis & Associates, APLC, Irvine, CA, for Respondent Shawn Wang.
Bason, Neil W., United States Bankruptcy Judge
MEMORANDUM DECISION RE: ALLEGED EMPLOYEES’ MOTION FOR CONTEMPT AND SANCTIONS
*1 Some alleged employees of the above-captioned Debtor (the “Alleged Employees”) assert claims for unpaid overtime and other alleged violations of labor laws. Since the inception of this case, over two years ago, they have sought discovery from Debtor and its attorneys, The Law Offices Of Lynn Chao, APC (“ChaoLaw”).
Debtor's Chapter 7 Trustee,[1] Edward M. Wolkowitz, Esq. (“Trustee”), has waived the prepetition attorney-client privilege. Debtor itself has expressly waived its postpetition attorney-client privilege as to certain communications.
Yet, despite those waivers, multiple rounds of attempted discovery, prior findings of contempt and the imposition of sanctions, Debtor and its agents have stonewalled. Their witnesses claim to know essentially nothing, and their document productions have enormous gaps.
Clear and convincing evidence establishes that the violation of this Court's discovery orders by Debtor, ChaoLaw, and the witnesses are flagrant, willful, and in bad faith. Compensatory and coercive sanctions will be imposed, pursuant to § 105(a), Rule 45, and this Bankruptcy Court's inherent power. In addition, this Bankruptcy Court will retain jurisdiction over this matter regarding any additional monetary and non-monetary sanctions, and any recommendation to the District Court to impose punitive sanctions.
1. FINDINGS OF FACT[2]
GL Master Inc. (“Debtor”) filed this voluntary chapter 7 case on December 7, 2018 with the assistance of ChaoLaw. On or around December 19, 2018, the Trustee was appointed and continues to serve in that capacity. Dkt. 5. On July 1, 2019, Debtor filed a substitution of attorney substituting in Thomas J. Polis, Esq. (“Mr. Polis”) of Polis & Associates, APLC (“PolisLaw”), as bankruptcy counsel. Dkt. 17.
a. Initial attempts to obtain discovery from Debtor
On May 9, 2019, Debtor and Alleged Employee Wei Dong filed a “Stipulation Authorizing 2004 Exam of Debtor GL Master, Inc. With Production of Documents.” Dkt. 11. This Court issued an order (dkt. 12, the “Debtor 2004 Order”) approving that stipulation. (Much later Debtor asserted that Rule 2004 was the wrong mechanism for the requested discovery, but this Court ruled that any such arguments had been waived and forfeited. Dkt. 101 at PDF pp.6-7.)
On June 13, 2019, Debtor's first designated “person most knowledgeable” (“PMK”), Guanju (“David”) Li, appeared for examination. But he but expressed near total ignorance about Debtor's assets and operations so the examination was halted. Dkt. 20, Ex. D, pp: 7:6-10:25, 24-34:10, 38:16-39:17; dkt. 38, p. 8:1-9.
*2 The Alleged Employees attempted to coordinate with Mr. Polis to schedule a new date for Debtor to designate an appropriate PMK. But Debtor was unwilling to cooperate. Dkt. 20, Ex. E, at PDF p. 59 & Ex. K; and dkt. 38, p. 8:16-20.
b. Attempted discovery from ChaoLaw
In response to Debtor's refusal to cooperate with its stipulated document production and examination, the Alleged Employees sought to obtain relevant information and documents from ChaoLaw because it had prepared and filed Debtor's bankruptcy petition and schedules. On September 3, 2019, the Alleged Employees filed a motion for an examination of ChaoLaw's PMK. Dkt. 20, 22 (the “ChaoLaw 2004 Motion”). Contemporaneously, the Trustee filed his declaration waiving the Debtor's right to assert the attorney-client privilege. Dkt. 21, 23.
On September 9, 2019, Debtor filed a statement indicating its intent to oppose ChaoLaw 2004 Motion (dkt. 24), but no opposition was filed, and this Bankruptcy Court entered an order granting the ChaoLaw 2004 Motion. Dkt. 25, 40 (the “ChaoLaw 2004 Order”). On October 4, 2019, this Bankruptcy Court conducted a telephonic hearing on Debtor's oral motion to quash the ChaoLaw 2004 Order pursuant to this Bankruptcy Court's Posted Procedures (the “Procedures”) (available at www.cacb.uscourts.gov).[3] After consideration of oral arguments, this Bankruptcy Court denied the motion to quash and directed ChaoLaw to comply with the ChaoLaw 2004 Order. Dkt. 33.
c. First contempt order
*3 Despite this Court's denial of the motion to quash, ChaoLaw's untimely document production fell far short of its obligations under the ChaoLaw 2004 Order (see dkt. 38, pp.8:21-12:11), thereby forcing the Alleged Employees to incur additional fees arguing back and forth with Mr. Polis over the insufficient production, and to take the scheduled examination of ChaoLaw off calendar until the document production was sufficient. Dkt. 38, Ex. 22. Meanwhile, Debtor had not made any additional effort to comply with its obligations under the Debtor 2004 Order.
On October 25, 2019, the Alleged Employees filed a motion seeking sanctions against Debtor and ChaoLaw for their failure to comply with the Debtor 2004 Order and the ChaoLaw 2004 Order (together, the “2004 Orders”). Dkt. 38 (the “First Motion for OSC”). Debtor filed a declaration from ChaoLaw's principal, Lynn Chao (“Ms. Chao”), in opposition. Dkt. 42. On November 4, 2019, this Bankruptcy Court issued an order to show cause why Debtor and ChaoLaw should not be held in contempt for the reasons stated in the First Motion for OSC. Dkt. 43 (the “First OSC”).
On December 10, 2019 at 2:00 p.m., this Bankruptcy Court orally granted the First Motion for OSC in part (later memorialized in writing, dkt. 72). This Court found and concluded that Debtor and ChaoLaw were in contempt of the 2004 Orders, and granted compensatory sanctions and directed ChaoLaw to designate a more knowledgeable PMK for a continued Rule 2004 examination.
d. ChaoLaw's continued failure to comply; compensatory sanctions
On December 12, 2019, the Alleged Employees filed a “Notice of Resetting of Rule 2004 Examination” of ChaoLaw's PMK. Dkt. 64. On December 28, 2020, Ms. Chao appeared for examination as the designated PMK for ChaoLaw; but again she appeared unprepared and was unable to confirm that ChaoLaw had produced all responsive documents within its possession, custody or control. See dkt. 95, 128.
After a hearing on January 7, 2020 and consideration of the parties’ supplemental papers (dkt. 81, 87, 90, 92, 93, 94), this Bankruptcy Court entered an order awarding the Alleged Employees $6,455.00 in compensatory sanctions against Debtor and $10,450.00 in compensatory sanctions against ChaoLaw. Dkt. 100 (the “Compensatory Sanctions Order”).
e. Debtor's ongoing failure to comply
At the hearing on January 7, 2020, this Bankruptcy Court directed Debtor to produce a second PMK for a continued 2004 examination. On January 30, 2020, Ms. Fang “Freda” Wang (“Freda Wang”) appeared for examination as Debtor's second PMK.
Freda Wang had been Debtor's Chief Financial Officer (“CFO”) but, like Debtor's first PMK, Freda Wang admitted that she had not prepared for the examination and was unprepared to discuss most of the Alleged Employees’ topics of discussion. See dkt. 95, 128. For example, when asked, “Are you familiar with [Debtor's] investments and assets since 2014” – one of the topics covered by the Debtor 2004 Order – she answered “No.” When asked, “Did you try to get yourself prepared to discuss that topic?” she again answered “No.” See Tr. 9/17/20 (dkt. 219) pp.21:20-23:24 (re-confirming those answers).[4] Freda Wang's examination was continued.
f. Alleged Employees’ second motion for contempt and sanctions
*4 Following the non-responsiveness of Ms. Chao and Freda Wang, the Alleged Employees filed a second motion for issuance of an order to show cause against Debtor, ChaoLaw, and Mr. Polis for their continued failure to comply with the 2004 Orders. Dkt. 95 (“Second Motion for OSC”). Debtor, ChaoLaw and Mr. Polis opposed that motion (dkt. 106, 107, 108, 109) and the Alleged Employees filed reply papers. Dkt. 110, 111.
On June 8, 2020, this Bankruptcy Court issued an order setting the Second Motion for OSC for hearing for July 7, 2020 at 2:00 p.m. and a further briefing schedule. Dkt. 128 (“Order on Second Motion for OSC”). After consideration of the parties’ supplemental papers (dkt. 131, 132, 133, 136, 137, 138, 139, 140) and oral arguments, this Bankruptcy Court granted the Second Motion for OSC and directed Debtor, Freda Wang, Mr. Polis, Ms. Chao and ChaoLaw (the “Debtor Parties”) to appear at a hearing on August 19, 2020 at 9:00 a.m. to address why this Bankruptcy Court should not find them in contempt and impose sanctions. Dkt. 173 (the “Second OSC”); see also dkt. 183 (trial procedures).
g. Continued discovery, and setting evidentiary hearing on Second OSC
On July 24, 2020, this Bankruptcy Court issued an order setting continued Rule 2004 examinations of Debtor and ChaoLaw (dkt. 172). Following entry of that order and the Second OSC, ChaoLaw produced a handful of additional documents on July 31, 2020. Tr. 8/19/20 (dkt. 211), pp.58:11-14. Freda Wang, Mr. Xiao (“Shawn”) Wang, Esq. of ChaoLaw, and Ms. Chao also appeared for further 2004 examinations and evidentiary hearings (i.e., a trial) on August 3, 19, and September 9, 17, 2020.
Based on the Debtor and ChaoLaw parties’ continued efforts to stonewall discovery, even after having been found in contempt and sanctioned, this Bankruptcy Court made the highly unusual step of sitting in on the examinations (via ZoomGov) so that any discovery disputes could be addressed without delay. See footnote 3 above. This Court observed the witnesses’ demeanor and heard their testimony at some of those examinations and all of the trial.
h. The continued examination and trial testimony of Debtor's purported PMK, Freda Wang
At her continued examination and at the trial on the Second OSC, Freda Wang still professed ignorance of almost anything to do with Debtor. For example, despite being Debtor's CFO and despite her signature appearing on reams of Debtor's checks (dkt. 95, Ex. 7), Freda Wang asserted a complete lack of knowledge of Debtor's finances. She alleges that her signature stamp was used by others, with her permission but without her knowledge of what checks were being issued. Tr. 8/3/20 (C-Ex45), pp. 35:16-26-14.
As for more recent events, Freda Wang alleges that she resigned as Debtor's CFO several years prior to Debtor's bankruptcy filing. Tr. 9/17/20 (dkt. 219), pp. 21:23-22:1. But the Alleged Employees produced evidence of a backdated resignation letter (dkt. 95, Ex.4) and email chains demonstrating that Freda Wang continued to be in touch with Debtor's president and CEO – Zhanhai or Jianying (“Romer”) Zhang – and that she gathered information from Debtor's bookkeepers or others to assist Debtor in the preparation of its bankruptcy petition and schedules. C-Ex18, C-Ex35; see also Tr. 8/19/20 (dkt. 211), pp. 29:15-30:1.
In addition, Freda Wang's own testimony demonstrates that she continued performing services for Debtor following her alleged resignation and in the months leading up to Debtor's bankruptcy filing. Tr. 1/30/20 (C-Ex13), pp.9:12-18, 16:8-17:3; Tr. 8/3/20 (C-Ex45), p.25:16-22. For example, she testified that she communicated directly with Romer Zhang and Debtor's bookkeeper to obtain relevant financial information that she passed on to ChaoLaw so that it could prepare Debtor's bankruptcy petition and schedules.
*5 Freda Wang alleged that she only permitted herself to be designated as Debtor's PMK because all of Debtor's other employees have departed to parts unknown, and her efforts to reach those former employees were in vain. Tr. 9/17/20 (dkt. 219) pp.22:223:10. For example, she alleged that she and Debtor cannot produce Debtor's 2015 bank records because she allegedly has lost contact with individual(s) who could obtain those records. Tr. 8/3/20 (C-Ex45), pp.24:9-25:1, 26:9-27:5, 27:11-29:1, 29:14-21.
That is nonsense. This Court finds that testimony to be completely lacking in credibility.
First, on cross examination she initially claimed not to know where bookkeeper or accounting manager Rena Wang is, and had “no idea what she is doing,” but later Freda Wang admitted that she worked for the same company as Rena Wang throughout 2019 – a company that appears to have many connections with Debtor, including funding a buyout of the Wu's equity, having Romer Zhang as its chairman, and hiring some of Debtor's employees. Then, after attempting to evade the issue by noting that she worked at home so “I'm not sure like how she work there,” she admitted that “yeah, she [Rena Wang] was there.” Tr. 9/17/20 (dkt. 219) pp. 13:5-15:8, 15:20-18:4, and 18:5-17. In other words, Freda Wang knew exactly how to find Rena Wang, and probably many other former employees, officers, principals, and equity owners of Debtor as well. Freda Wang's true attitude is reflected in her testimony that, “I have no responsibility to locate where she is.” Id.
Second, Freda Wang's claims to have made efforts to reach former employees, and that her inability to locate them made it impossible for her or Debtor to produce 2015 bank records, are not backed up by any evidence that one would expect to reflect such efforts. Where is the evidence of telephone calls, texts, emails, and letters from Freda Wang to Debtor's former bookkeepers, other former employees, accountants, officers, principals, and equity owners? Where is the evidence of similar requests and demands to Debtor's banks to provide copies of 2015 bank statements? See, e.g., Tr. 9/17/20 (dkt. 219) p. 71:14-22 (“Q: Did [Debtor] try to at least get copies of the CPA [Ping Dugdale]’s records? A: No.” “Q: Did you ever ha[ve] any communication with Mr. Dugdale? A: No.”).
Freda Wang was completely evasive about what efforts she actually made. For example, in her continued examination she testified as follows:
Q ... When we met on January 30, 2020, ... at that time, were you familiar with GL Master's investments and assets since 2014?
A ... I was not there, so I have no idea from 2014 to July 2015. If there are any assets, any investment, it's totally out of my knowledge.
Q Okay. Did you try to get familiar with those assets?
A No, I have no source.
Q “No source”?
A Yes.
Q Okay. Well, you knew where Mr. Zhang worked, right?
A Who?
Q Mr. Zhang, the prior president of the Debtor?
A Yes.
Q Didn't you know where he worked in January 30, 2020?
A In January 2020, this year, where is he? That's your question?
Q Yeah. My question is, when you and I met in January 30, 2020, did you know where Mr. Zhang worked?
A I only know he resigned. He got some family issue.
Q Okay. So you had no idea where he was?
A Not now.
Q Okay. What about January of 2020?
A If he left before the Chinese, like, you know, the close of the border, so I do not know like where he is now -- then. I didn't ask.
Q Okay. But I guess the point is, you didn't make any effort to educate yourself about the Debtor's investments and assets since 2014, right?
*6 A I do not agree your comment on that. How can I get educated if I do not have any resources?
Q The question is, did you make any effort to get educated about the Debtor's investments?
A Yes, I made effort. I tried to ask people like if, any of they know anything about 2000, that like the assets and investments (indiscernible) July 2016, but nobody even like -- most of them like take care of the issues after like that period. Like I have no access to [Debtor's former equity owners] Wu, and like Guangsheng Wu and his [equity owner] son. And they set up the company. I do not have contact with them. [Tr. 9/17/20 (dkt. 219) pp.21:20-23:24 (emphasis added)]
In response to her new assertions that she “tried to ask people” and made an effort to prepare, she was confronted with her prior testimony about not having prepared for her examination. See footnote 4 (above). At that point Freda Wang claimed not to have understood the repeated questions about whether she had prepared. Tr. 9/17/20 (dkt. 219), pp.23:25-24:16. Then she asserted again that she did attempt to prepare, although she provided only vague descriptions of her alleged preparation. Tr. 9/17/20 (dkt. 219), pp.23:2-10, 24:25-25:9, 49:20-50:21, 51:14-21, 51:25-52:8, 70:1-25, 74:2-3. None of that testimony is remotely believable.
This Bankruptcy Court finds, by clear and convincing evidence, that Ms. Wang willfully and in bad faith was unprepared, evasive, and untruthful. Her testimony is completely incredible.
i. The continued examination and trial testimony of ChaoLaw's witnesses, Ms. Chao and Mr. Shawn Wang
The continued examination of ChaoLaw and the trial on the Second OSC involved both its principal Ms. Chao and its employee Xiao (“Shawn”) Wang, Esq. They vehemently and repeatedly asserted that, acting for Debtor and for ChaoLaw, they have either produced or listed on a privilege log “all” responsive documents. They complain that they are being placed in the impossible position of having to prove a negative: that they have no more documents.
In support of that position they testified that Ms. Chao delegated to Shawn Wang to search for and assemble all responsive documents; Shawn Wang in turn asked Johnny Ling, Esq. – the attorney at ChaoLaw who has been defending two State Court lawsuits by the Alleged Employees against Debtor – for any responsive documents; and Ms. Chao repeatedly verified with Shawn Wang that he had undertaken a thorough review of the firm's documents. Tr. 8/19/20 (dkt. 211), pp.63:7-65:12, 68:3-12, 70:3-71:5, 149:3-21. Ms. Chao testified that she personally reviewed the documents that Shawn Wang had assembled, and she reviewed ChaoLaw's privilege log. Tr. 8/19/20 (dkt. 211), pp.149:3-21; 150:7-10.
In her declaration filed on November 1, 2019, Ms. Chao swore that on “no less than two occasions (October 16th and 22nd, 2019) [her] office ha[d] turned over the documents covered by the Court's Rule 2004 Examination Order.” Dkt. 42, p.2:11-12. Later she asserted that “on October 17, 2019 and again on December 18, 2019,” her office “forwarded approximately 1,500 pages of responsive Rule 2004 documents ... to the Alleged Employees’ counsel ....” Dkt. 188, p.8:23-27.
*7 These assertions (although not entirely consistent about the dates of production) appear at first glance to reflect genuine efforts to be responsive. But on closer examination they fall apart.
j. Documents that were found after “all” documents allegedly were produced
More documents were found after vehement assertions that “all” documents had been produced. For example, in her declaration filed on February 27, 2020, Ms. Chao again swore that her office had “produced all documents reasonably within [ChaoLaw's] possession,” (dkt. 108, pdf p.1:24) and Shawn Wang even more confidently swore in his declaration that his “law office has turned over all documents requested by [the Alleged Employees].” Dkt. 108, pdf. p.3:15 (emphasis in original). But then on July 31, 2020, Shawn Wang produced additional documents. Tr. 8/19/20 (dkt. 211), pp.58:11-14 (“Q: All right. Mr. Wang, about three weeks ago on July 31 [2020] ... you provided some additional documents to my office, right? A: Yes.”); Tr. 9/9/20 (dkt. 212), p.31:20-21, 24-25 (“Q: Do you know what is comprised of these additional documents that were turned over on July 31st? A: Those documents attached to the e-mails I previously, you know, overlooked”) (emphasis added).
Despite this incontrovertible evidence that his prior statements about having produced all documents were incorrect, Shawn Wang continued to assert that his declaration about producing all documents was accurate, apparently on the basis that he felt he had tried to comply in good faith:
Q The second line of paragraph four of Exhibit 36 [Shawn Wang's declaration] says, “my law office has” underscored, “turned over all,” end underscore, “document requested by Movants.” Do you see that?
A Yes.
Q Is that accurate?
A Yes.
Q As you sit there today, you still think that statement in February of 2020 was accurate?
A Yes, but except those we just found, you know, we provide additional, because at that time I didn't find those documents or e-mails.
Q Okay.
A So at that time it's accurate. Yes.
Q Well -- all right. Well let's -- it was either is accurate -- let me rephrase that. It was either an accurate statement in February of this year, or it was an inaccurate statement in February of this year?
A It is accurate.
Q So your testimony today is that as of February of 2020, you told the truth when you said your office had turned over all documents requested by my office?
A Yes.
Q Okay. And even though you located additional documents that you turned over on July 31 of this year, five months later, you still say that it -- as of February of this year you had turned over all documents that we requested?
A That's all the documents I had found. So that's the main -- I said that accurate.
[Tr. 9/9/20 (dkt. 212), pp.7:18-8:22.]
This Court finds that Shawn Wang's refusal to concede the obviously falsity of his earlier statements was not based on any misunderstanding of the question, but rather based on his impulse to “stick to the party line” and evade any admission of non-compliance with this Court's order. To be clear, this Court recognizes that in theory Shawn Wang could have been confused by a lack of thorough understanding of English, or he could have been nervous, or could have had other reasons why, theoretically, he could have misunderstood the question. But this Court finds, by clear and convincing evidence, that this is not what happened.
*8 First, neither Shawn Wang nor the Debtor Parties’ counsel ever argued that he misunderstood the question, nor did they offer any other excuse for his blatantly false testimony. Second, this Court finds that he fully understood, and simply chose to lie. That finding is based on (i) his extensive education, including a law degree and a master's degree in business administration (Tr. 8/19/20 (dkt. 211), p.41:10-17), (ii) this Court's observation of him during his testimony, including his ability to understand and respond to many other questions in English, and (iii) the following additional evidence of his lack of candor or efforts to comply with the ChaoLaw 2004 Order.
k. Shawn Wang's failure to search for missing emails
Shawn Wang admitted to an office policy of permitting the use of personal email accounts for work, and to having belatedly produced some responsive emails from his personal account. Tr. 8/19/20 (dkt. 211), pp.61:7-20. But even thereafter he admitted that he failed to ask others at ChaoLaw if they had similarly overlooked documents in their personal email accounts. Tr. 8/19/20 (dkt. 211), pp.61:7-65:12, 68-3-12, 70:6-71:5, 72:13-19, 74:18-23.
He offered no excuse for failing to follow up. If, as he asserts, it was reasonable for him to have overlooked some of his own personal emails, then in carrying out any genuine effort to produce all responsive documents he would have to ask Mr. Ling about any similar personal email account. But Shawn Wang admitted that he made no such inquiry:
Q: ... We [the Alleged Employees, in response to the document production requested under the Rule 2004,] received zero communications from Mr. Ling, who was representing the Debtor between July of 2016 and December of 2018 in a class action litigation matter [confirmed at Tr. 8/19/20 (dkt. 211) p.114:8-10], and we're puzzled by that. Did you check with Mr. Ling to see if he had any written communications with the client?
A: I only checked my part.
Q: All right. Do you know whether Ms. Chao checked with Mr. Ling?
A: That I don't know.
Q: Okay. Do you have any sense at all that Mr. Ling had been communicating in writing with the Debtor during the time he represented it during a state court class action matter?
A: I don't know that part. Sorry. [Tr. 8/19/20 (dkt. 211), p.25:11-24]
Q Did you look for it?
A No.
Q Do you know if Ms. Chao looked for it?
A I don't know.
Q Now Mr. Ling was copied on some communications from Freda Wang, wasn't he?
A I think so.
Q Okay. In fact, if you look at Exhibit 25, page five, you could see he's copied.
* * *
A: Yes. [Tr. 8/19/20 (dkt. 211), pp.26:4-12 & 27:9]
Shawn Wang also admitted that ChaoLaw did not produce a single communication between Debtor and Mr. Ling, even though for over two years Mr. Ling had been defending two State Court lawsuits by the Alleged Employees against Debtor. Tr. 8/19/20 (dkt. 211), p.74:18-23. Nor is there a single such communication or other document related to that litigation listed in the privilege log. See C-Ex3, at Bates Stamp 100-102.
Shawn Wang's excuse is that, when asked, Mr. Ling said he had no responsive documents. Tr. 8/19/20 (dkt. 211), pp.70:6-71:5. In other words, despite over two years of handling Debtor's litigation with the Alleged Employees, Mr. Ling and ChaoLaw allegedly had (i) no retainer letter (despite having been so concerned about not having a retainer letter for the bankruptcy engagement that they scrambled to prepare and backdate such a letter[5]), (ii) no monthly billing statements,[6] (iii) no communications to verify or dispute factual issues in all the litigation in two State Court lawsuits,[7] (iv) no emails sending the client drafts of any documents (as ChaoLaw did with Debtor's bankruptcy petition) – nothing.
*9 This Bankruptcy Court finds that Shawn Wang's failure to ask Mr. Ling or Ms. Chao about their personal email accounts – despite his own experience of having overlooked responsive documents in his personal email account, and despite the extreme implausibility of Mr. Ling not having any responsive documents in over two years of representing Debtor in two State Court actions – was a willful and bad faith act to prevent discovery. His excuses lack any credibility.
l. Shawn Wang's failure to search for missing drafts of the bankruptcy petition papers
Shawn Wang initially claimed there were only two versions of Debtor's bankruptcy petition papers. Tr. 9/9/20 (dkt. 212), pp.22:4-23:5. Later, when shown his own email production, he admitted that at least three different versions of the bankruptcy petition papers had been circulated between Freda Wang and ChaoLaw. Tr. 9/9/20 (dkt. 212), p. 29:9-19.
This Bankruptcy Court takes judicial notice that bankruptcy petition papers are forms designed to provide a comprehensive picture of a debtor's finances, creditors, and key transactions in recent years such as potentially fraudulent or preferential transfers. In fact, during the Alleged Employees’ examination of the witnesses the bankruptcy petition papers were used to ask specific questions about Debtor's finances and why changes had been made to the petition papers. In other words, the bankruptcy petition papers have the potential to be critically important. Yet, despite his protestations of having produced “all” responsive documents, Shawn Wang had no explanation why he had not turned over all three versions of the bankruptcy petition papers to the Alleged Employees. Tr. 9/9/20 (dkt. 212) pp.26:4-22, 28:24-30:11 & Ex. 37. (Later, Ms. Chao attempted to assert that all three sets of bankruptcy petition papers were the same document, even though they had different names; but she was shown that the two copies that were produced were different documents. She had no further explanation. Id. pp. 59:2-12 and 60:3-21.)
In sum, this Bankruptcy Court finds by clear and convincing evidence that Shawn Wang was acting willfully and in bad faith to do everything he could to avoid providing responsive documents, and in his testimony he was doing everything he could to avoid conceding anything, even the obvious. His testimony was completely incredible.
m. Ms. Chao's attempts to explain away ChaoLaw's failure to produce responsive documents
Ms. Chao, part of whose testimony was after Mr. Wang, offered several explanations why there were no communications between Debtor and ChaoLaw regarding the State Court litigation that ChaoLaw had handled for over two years. Her explanations, like Shawn Wang's, are not credible.
First, Ms. Chao claimed that there was a language barrier – that Mr. Ling and Debtor's representative are not conversant in the same languages – and in support of that allegation she testified that sometimes she had to translate for Mr. Ling. Tr. 8/19/20 (dkt. 211), pp.170-14-172:16. But that excuse fails to explain why she herself would not have been the point person to receive all the usual written communications one would expect to or from Debtor in over two years of two separate actions in State Court. Alternatively, if Mr. Ling was the point person who received written communications, there is no explanation why Ms. Chao could not have translated those documents, just as she did for oral communications.
Second, Ms. Chao asserted that, as a Chinese cultural matter, communications tended to be oral. Tr. 8/19/20 (dkt. 211), pp.170:23-172:16. But on cross examination she admitted that it is common to communicate in writing – using WeChat texts, for example. See Tr. 8/19/20 (dkt. 211), p.175:8-21. Moreover, as illustrated by ChaoLaw's multiple communications involving Freda Wang, many issues cannot be addressed orally and in fact were not addressed orally. See C-Ex37 (email chains between Freda Wang and ChaoLaw with different versions of bankruptcy forms attached and back and forth discussion about reviewing and changing information in the forms prior to filing).
*10 Third, Ms. Chao suggested that Debtor was not the principal defendant in the Alleged Employees’ two State Court actions, and she implied that whatever written communications might exist could have been solely with the other defendant. Tr. 8/19/20 (dkt. 211), pp.169:3-8 & 25, 170:3-172:16. But it defies belief that legal counsel, representing two separate legal entities, would consistently communicate with one of them but not the other during a period of over two years. That would expose counsel to claims of malpractice if the client who had been ignored claimed ignorance of any important communications. Moreover, if ChaoLaw were to take the position that communication with the other defendant served to communicate with Debtor, then such communications were responsive to the request for all communications with Debtor, so they should have been produced.
In other words, ChaoLaw could not evade its duty to produce communications with Debtor by asserting that all such communications were routed through a co-defendant who was presumed to be passing along those communications to Debtor. That would only reinforce that the documents at issue were responsive and should have been produced.
This Court recognizes that failure to keep written records is not uncommon, especially with businesses that wind up in bankruptcy – this Court deals with such cases every day. But for litigation counsel not to have any written communications at all, in a period of over two years of litigating two actions, is not remotely credible.
n. The testimony of Ms. Chao and Shawn Wang was not credible
For all of the foregoing reasons, and based on this Bankruptcy Court's observation of the demeanor of Ms. Chao and Shawn Wang, as well as their testimony and other evidence introduced at trial, this Court finds, by clear and convincing evidence, that Ms. Chao and Shawn Wang willfully and in bad faith failed to comply with the ChaoLaw 2004 Order. They were willfully unprepared, evasive, and untruthful. Their testimony is completely incredible.
o. In concert with Freda Wang, Ms. Chao, and Shawn Wang, Debtor and ChaoLaw have willfully and in bad faith attempted to evade their discovery obligations
This Bankruptcy Court finds, by clear and convincing evidence, that Debtor and ChaoLaw have acted willfully and in bad faith in evading the 2004 Orders. They have not satisfied their duty to designate PMKs, or produce all responsive documents within their possession custody or control. Debtor, ChaoLaw, Freda Wang, Ms. Chao, and Shawn Wang have acted in unison to stonewall discovery.
The foregoing factual findings do not depend at all on the witnesses’ motives for failing to obey this Court's 2004 Orders. The evidence clearly and convincingly shows that they have acted willfully and in bad faith regardless of their motives. But there is evidence of their motives that strongly reinforces all of the foregoing factual findings.
Litigation is expensive. Someone is paying substantial attorney fees to Mr. Polis to fight the Alleged Employees’ discovery requests tooth and nail, despite frequent protestations on behalf of Debtor and each of the witnesses that this Rule 2004 discovery is expensive, and that neither Debtor nor Freda Wang can afford it. Tr. 8/3/20 (C-Ex45), pp.49:21-50:6, 56:15-24.
On cross-examination of Ms. Chao, it turned out that those legal fees are being paid by Debtor's equity owner and its alleged successor or alter ego, Young Young Food, LLC, and/or its affiliate SH.E Young Young Food, Inc. (collectively, “YYFs”) (this Court is not entirely confident, at least without further review, that the testimony always distinguished accurately between those two entities). Tr. 8/19/20 (dkt. 211), p. 215:5-8. When asked why YYFs would pay Mr. Polis’ legal fees, Ms. Chao answered:
A Okay. Each of our clients -- because that's all about Chinese community. ... I forward [the legal bills] to Freda [Wang], and Freda forward to Young Young Food, and Young Young Food wire the money to my trust account. Once I receive that, I pay it. I cut a check from my trust account.
*11 Q Now Freda herself is connected with YY Food, LLC, right?
A I think so, yes. [Tr. 8/19/20 (dkt. 211), p.215:23-216:11 (emphasis added).]
This testimony by Ms. Chao undermines Freda Wang's testimony that she has not had contact with anyone from YYFs for a long time. Tr. 8/3/20 (C-Ex45), p.44:3-9. It is yet more evidence of the utter falsity of Freda Wang's testimony about having “no source” for information, and not having been in communication with anyone who could assist in responding to the Alleged Employees’ discovery requests.
In sum, it is clear that there are powerful community ties and financial reasons for the witnesses to stonewall discovery. Those things are yet more evidence to reinforce this Bankruptcy Court's findings that Debtor, ChaoLaw, Freda Wang, Ms. Chao, and Shawn Wang, acting both individually and jointly, have acted willfully and in bad faith in failing and refusing to comply with the 2004 Orders.
2. JURISDICTION, AUTHORITY, AND VENUE
This Bankruptcy Court has jurisdiction, and venue is proper, under 28 U.S.C. §§ 1334 and 1408. This Bankruptcy Court has the authority to enter a final judgment or order under 28 U.S.C. § 157(b)(2)(A), (B), and (O). See generally Stern v. Marshall, 131 S. Ct. 2594 (2011); In re AWTR Liquidation, Inc., 547 B.R. 831 (Bankr. C.D. Cal. 2016) (discussing Stern); In re Deitz, 469 B.R. 11 (9th Cir. BAP 2012) (same). Alternatively, the parties have implicitly consented to this Bankruptcy Court's entry of a final judgment or order. See Wellness Intern. Network, Ltd. v. Sharif, 135 S.Ct. 1932 (2015); and see In re Pringle, 495 B.R. 447 (9th Cir. BAP 2013). See also Rules 7008 & 7012(b); LBR 9013-1(c)(5)&(f)(3).
3. DISCUSSION
For the reasons set forth in the Second Motion for OSC (dkt. 95), the order thereon (dkt. 128), the Second OSC (dkt. 173), and the Alleged Employees post-trial papers (dkt. 229, 235),[8] all of which are incorporated by reference, and the additional reasons set forth herein, this Bankruptcy Court will hold Debtor, Freda Wang, ChaoLaw, and Lynn Chao in contempt and impose sanctions as set forth below.
a. This Bankruptcy Court has civil contempt authority
Rule 2004(c) states that all entities may be compelled to attend the examination by the manner provided in Rule 9016 for the attendance of witnesses at a hearing or trial. 9 Collier on Bankruptcy ¶ 2004.02 (16th Edition 2020). Rule 9016 incorporates Rule 45 (Fed. R. Civ. P.) which allows issuance of a subpoena for witnesses or document production and provides that the 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.” Rule 45(g) (emphasis added).
*12 In addition, this Court has civil contempt powers under § 105(a) and under all bankruptcy courts’ inherent sanctioning authority. In re Dyer, 322 F.3d 1178, 1189-90 (9th Cir. 2003). Additionally and alternatively, the Debtor Parties did not contest this Bankruptcy Court's authority to issue contempt sanctions, so any argument to the contrary has been waived and forfeited. See In re Hamer, 138 S.Ct. 13, 17, n.1 (2017) (distinguishing waiver and forfeiture).
b. Standards for holding parties in civil contempt
“The standard for finding a party in civil contempt is well settled: The moving party has the burden of showing by clear and convincing evidence that the contemnors violated a specific and definite order of the court.” Dyer, 322 F.3d at 1191 (emphasis added). See also U.S. v. Rylander, 460 U.S. 752, 757 (1983) (“[T]he movant must produce clear and convincing evidence that shows the ‘non-compliant party’ violated a definite and specific order of the court requiring him to perform or refrain from performing a particular act or acts with knowledge of the court's order ....”). “The burden then shifts to the contemnors to demonstrate why they were unable to comply.” F.T.C. v. Affordable Media, 179 F.3d 1228, 1239 (9th Cir. 1999). “A person fails to act as ordered by the court when he fails to take all the reasonable steps within his power to ensure compliance with the court's order.” In re Wallace, 490 B.R. 898, 905 (9th Cir. BAP 2013) (emphasis added).
Under Taggart v. Lorenzen, 139 S.Ct. 1795, 1804 (2019), a court “may hold a creditor in civil contempt” where there is, on an objective basis, “not a fair ground of doubt as to whether the [alleged contemnor's] conduct might be lawful.” (citation and internal quotation marks omitted). “Under the fair ground of doubt standard, civil contempt ... may be appropriate when [the alleged contemnor] violates a [court] order based on an objectively unreasonable understanding of [a court] order or the statutes that govern its scope.” Id. at 1802 (emphasis added). See also id. (“a party's subjective belief that she was complying with an order will not insulate her from civil contempt if that belief was objectively unreasonable”).
c. Standards under inherent sanction authority
Bankruptcy courts also have inherent sanction authority to deter and provide compensation for a broad range of improper litigation tactics. Dyer, 322 F.3d 1178, 1196; see also In re DeVille, 280 B.R. 483, 495 (9th Cir. BAP 2002) (string citation omitted); aff'd, 361 F.3d 559 (9th Cir. 2004) (“[A] court may sanction pursuant to its inherent authority even when the same conduct may also be punished under another sanctioning statute or rule”). “Before imposing sanctions under its inherent sanctioning authority, a court must make an explicit finding of bad faith or willful misconduct,” which “consists of something more egregious than mere negligence or recklessness.” Id. (citations omitted, emphasis added). This has been stated more broadly as requiring either bad faith, conduct tantamount to bad faith, or recklessness with an “additional factor such as frivolousness, harassment, or an improper purpose.” Fink v. Gomez, 239 F.3d 989, 994 (9th Cir. 2001).
d. Relevant discovery standards
(i) Rule 2004 permits a broad range of discovery
Rule 2004 allows broad examination relating to “the acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any matter which may affect the administration of the debtor's estate, or to the debtor's right to a discharge.” Rule 2004(b). “As the Rule's text makes clear, the scope of a Rule 2004 examination is unfettered and broad; the rule essentially permits a fishing expedition.” In re Mastro, 585 B.R. 587, 597 (9th Cir. BAP 2018) (internal quotations and citations omitted). Rule 2004 examinations are not limited to examinations of debtors, they may “extend to third parties who have had dealings with the debtor.” Id.
(ii) Organizations must designate sufficiently knowledgeable deponent(s)
*13 This Court previously has ruled that Rule 2004 implicitly incorporates a requirement for any organization to designate a sufficiently knowledgeable PMK, under the same standards as Rule 30(b)(6) (Fed. R. Civ. P.). See Dkt. 128, p.3:14-16 (citing Alleged Employees’ brief setting forth authority for same). In the alternative, this Court has already ruled that it would use its discretion to apply Rule 30(b)(6) to examinations under Rule 2004, pursuant to Rules 7030 and 9014(c). See id., p.3:16-18.
Rule 30(b)(6) requires a corporation to designate a deponent sufficiently knowledgeable to testify on the corporation's behalf “about information known or reasonably available to the organization.” Moriarty v. Am Gen. Life Ins. Co., 2019 U.S. Dist. LEXIS 62041, at *8 (S.D. Cal. April 10, 2019). “When choosing a deponent, companies have a duty to make a conscientious, good faith effort to designate knowledgeable persons for Rule 30(b)(6) depositions and to prepare them to fully and unevasively answer questions about the designated subject matter.” Id. (Internal citations and quotations omitted). “[T]he purpose underlying Rule 30(b)(6) would be frustrated if a corporate party produces a witness who is unable or unwilling to provide the necessary factual information on the entity's behalf.” Id. (Internal citations and quotations omitted). “Thus, if an organization designates a witness it believes in good faith would be able to provide knowledgeable responsive testimony and it becomes apparent during the deposition that the designee produced is unable to respond to relevant areas of inquiry, the responding party has a duty to designate an additional knowledgeable deponent.” Id. (Internal citations and quotations omitted).
The Debtor Parties have never expressed any lack of understanding of the foregoing duties. They have only ever asserted – not credibly – that they are incapable of complying with those duties because, as Freda Wang put it, she allegedly had “no source” for responsive information or documents such as the 2015 bank statements.
(iii) Deponent(s) must review corporate records and sufficiently prepare for questioning
An individual designated under Rule 30(b)(6) “must be prepared to testify about information known or reasonably known to the entity regarding the topics noticed.” QC Labs v. Green Leaf Lab, LLC, 2019 U.S. Dist. LEXIS 217419, at *4 (C.D. Cal. July 19, 2019). “Courts have generally interpreted this to mean that the designee(s) must review the corporation's records and any previous deposition materials.” Id. (citations omitted). The designee “must conduct a robust internal investigation of the topics contained in the notice to prepare for the deposition.” Id. (Internal citations and quotations omitted). “Even if the documents are voluminous and the review of those documents would be burdensome, the deponents are still required to review them in order to prepare themselves to be deposed.” Id. (Internal citations and quotations omitted).
The Debtor parties were well aware of these obligations. The Alleged Employees pointed them out in an email dated January 31, 2020. See Second Motion for OSC, Ex. 14 (dkt. 95-14), p. 3 of 4.
(iv) Deponent(s) must answer all questions during a deposition, unless one of three limited exceptions applies
With limited exception, a deponent must answer all questions during a deposition without interruption from counsel. Hernandez v. Lynch, 2019 U.S. Dist. LEXIS 221180, at *9 (C.D. Cal. June 18, 2019). As the Hernandez court explains:
*14 Rule 30 identifies only three exceptions to the general rule that a deponent must answer all questions during a deposition: A person may instruct a deponent not to answer only when necessary to preserve a privilege, to enforce a limitation ordered by the court, or to present a motion under Rule 30(d)(3) [suspension of deposition “for the time necessary to obtain an order” on a motion to terminate or limit deposition “on the ground that it is being conducted in bad faith or in a manner that unreasonably annoys, embarrasses, or oppresses the deponent or a party”]. It is well established that the relevancy of a question or line of questioning is not a recognized exception to this rule and is not a sufficient basis for instructing a witness not to answer. This is because a deposition is meant to be a question-and-answer conversation between the deposing lawyer and his witness such that there is no proper need for the witness's own lawyer to act as an intermediary, interpreting question, deciding which questions the witness should answer, and helping the witness to formulate answers. Instructions not to answer a question can be even more disruptive to the deposition than objections. [Id. at *9-10 (internal citations and quotations omitted, emphasis in original)].
e. The requested discovery is pertinent to the administration of Debtor's estate
The Debtor Parties have objected repeatedly that this Bankruptcy Court is permitting discovery to go forward even though there is similar discovery taking place in connection with pending State Court litigation. But, as this Bankruptcy Court previously has ruled, the Debtor Parties have waived and forfeited that issue by stipulating to discovery and by not raising the issue until well into the discovery litigation. See, e.g., Second OSC (dkt. 173), Ex., labeled p. 31 of 33 (PDF p. 12). In addition, discovery is appropriate because it is very much relevant to bankruptcy-specific issues that could not be asserted in State Court. See id.
For example, the discovery is relevant to assessing whether there are grounds to bring a motion for substantive consolidation of Debtor and the persons or organizations to which Debtor allegedly transferred funds or other assets. The discovery is also relevant to assessing whether there are grounds to pursue avoidance actions that might only be available in this bankruptcy case (the filing of which may have preserved actions that were available as of the commencement of this case, and as to which applicable statutes of limitation could apply but for statutory or equitable tolling principles). The discovery is also relevant precisely because the scope of discovery under Rule 2004 is intentionally very broad, because when a debtor in bankruptcy asserts that it lacks the ability to pay its creditors, it is appropriate to conduct a broad reaching examination of its “acts, conduct or property” and its “liabilities and financial condition” and any other “matter which may affect the administration of the debtor's estate ....” Rule 2004(b).
In any event, the propriety of discovery is a red herring. Regardless whether this Court should have issued the 2004 Orders, parties are not free to disobey court orders simply because they believe those orders should not have been issued.
f. Freda Wang and Ms. Chao are subject to sanctions
The prayer for relief in the Second Motion for OSC did not expressly request sanctions against Freda Wang or Ms. Chao (dkt. 95, p. 23), but the motion is replete with accusations against them (id. at, e.g., pp. 8:2-16:17 and 17:23-18:7), they did not object to being included within the Second OSC and the trial, and this Court's initial order on the Second Motion for OSC (dkt. 173) and the Second OSC set forth in detail the acts and omissions on which they are ordered to show cause why they should not be sanctioned. Therefore, this Court rules that their contempt of the 2004 Orders was “tried by the parties’ express or implied consent” and therefore “must be treated in all respects” as if raised in the prayer for relief in the Second Motion for OSC. Rule 15(b)(2) (Fed. R. Civ. P.) (incorporated by Rule 7015, Fed. R. Bankr. P.). See also In re Acequia, Inc., 34 F.3d 800, 814 (9th Cir. 1994) (to establish implied consent, the plaintiff must demonstrate that the defendant “understood evidence had been introduced” to prove the issue, and that it had been “directly addressed”). See also In re Yadidi, 274 B.R. 843, 851 (9th Cir. BAP 2002) (“Civil Rule 15(b) is designed to be automatic and is not waived by omission to make a timely motion”).
*15 Alternatively, even if not tried by consent, this Court had authority to issue the Second OSC on its own motion (§ 105(a)) regardless of any consent, and both Freda Wang and Ms. Chao had more than adequate notice of their conduct that was alleged to be contemptuous of this Court's 2004 Orders. On all of these grounds, Freda Wang and Ms. Chao are subject to sanctions.
g. The Debtor Parties are in contempt, except Mr. Polis
The Alleged Employees have demonstrated by clear and convincing evidence that Debtor, Freda Wang, ChaoLaw and Ms. Chao were aware of the 2004 Orders and have willfully and in bad faith violated those orders. None of those persons has alleged or proven any “fair ground of doubt” about the meaning of those orders or whether their non-compliance with it might be lawful (Taggart, 139 S.Ct. 1795, 1804) and all of them have failed to “take all the reasonable steps within [their] power to ensure compliance with the court's order.” Wallace, 490 B.R. 898, 905.
(i) Polis & Associates and Thomas Polis, Esq.
The Alleged Employees have demonstrated that Mr. Polis made several frivolous objections during Freda Wang's depositions, based on previously waived claims of privilege (e.g., Tr. 7/7/20 (dkt. 184), p.6:4-13) and without articulating a proper basis to object under Rule 30 (e.g., Tr. 7/7/20 (dkt. 184), p.7:4-19). The Alleged Employees have also established that Freda Wang was woefully unprepared for her examinations, as discussed in detail above and below. But while Mr. Polis’ conduct was misinformed and overly zealous, this Bankruptcy Court is not persuaded that it was objectively unreasonable under Taggart.
Mr. Polis is cautioned that he has now been made aware of the applicable discovery standards (as understood by this Court). If he continues to conduct himself in a similar manner in future, this Court might be persuaded to find that the same conduct could rise to the level of contempt warranting sanctions.
(ii) Debtor and its PMK, Freda Wang
The Alleged Employees argue that Debtor and Freda Wang continually failed to comply with the Debtor 2004 Order (dkt. 12) which directed Debtor to designate a PMK to answer questions relating to the list of topics for examination (dkt. 11, Ex.A) and produce the requested documents. Dkt. 11, Ex.B.
The Debtor 2004 Order is not ambiguous as to what is required of Debtor and Freda Wang (as its designated PMK). It is specific and definite. The order provides, in relevant part:
5. GL Master, Inc.’s designee(s) shall be prepared to testify on June 13, 2019 ... on the topics listed in Exhibit A of the Motion;
6. GL Master, Inc., is directed to make available to Employees all responsive documents listed in Exhibit B of the Motion in debtor's possession, custody or control seven (7) days prior to the examination, subject to any documents withheld under a claim of privilege ...
7. If ... GL Master, Inc., withholds production of any documents based upon a claim of privilege, such witness is directed to provide counsel for the Employee with a privilege log containing the information required under Bankruptcy Rule 7026(a)(5) no later than the date production is due .... [dkt. 12, p.3, para. “(5),” “(6),” and “(7)”].
Debtor and Freda Wang have not alleged or proven any “fair ground of doubt” about the meaning of the Debtor 2004 Order or whether their non-compliance with it might be excused for some other legal reason. Taggart, 139 S.C.t 1795, 1804. They have waived and forfeited any such arguments. Hamer, 138 S.Ct. 13, 17, n.1 (2017).
*16 More generally, Debtor and Freda Wang have offered almost no excuses for their lack of preparation and failure and refusal to respond to almost all discovery. As set forth in this Court's findings of fact (above), Freda Wang's vague assertions that she had “tried to ask people” for information and had “no source” for information or documents is completely incredible.
She was obligated to show “categorically and in detail” how further compliance was “impossible.” FTC v. Affordable Media, 179 F.3d 1228, 1241 (9th Cir. 1999). But she provided no details and no evidence whatsoever of any attempts to ask anyone for information – no emails, texts, letters, or evidence of other communications with Debtor's bookkeepers, other former employees, accountants, officers, principals, equity owners, or banks. Her vague and belated assertions, during the Alleged Employees’ second attempt to examine her, that she did not understand the questions (see Tr. 9/17/20 (dkt. 219), pp.25:1-9, 26:20-27:10), are not remotely credible or persuasive. Her evasive testimony only underscores her and Debtor's complete failure to attempt to comply with the Debtor 2004 Order.
Debtor and Freda Wang were obligated to take all reasonable steps within their power to comply with the Debtor 2004 Order. They did the opposite. They are in contempt of court. See Reno Air Racing Assn., Inc. v. McCord, 452 F.3d 1126, 1130 (9th Cir. 2006) (“failure to take all reasonable steps within the party's power to comply” is sanctionable); United States v. Asay, 614 F.2d 655, 660 (9th Cir. 1980) (A “self-induced inability [to comply with the court's order] is not a defense”).
(iii) Law Offices of Lynn Chao and its PMK, Lynn Chao
The Alleged Employees argue that ChaoLaw and Ms. Chao continually failed to comply with the Debtor 2004 Order (dkt. 12) which directed ChaoLaw to designate a PMK to answer questions relating to the list of topics for examination (dkt. 20, Ex.A) and produce the requested documents. Dkt. 20, Ex.B.
The Chao 2004 Order is not ambiguous as to what is required of ChaoLaw and Ms. Chao (as its designated PMK). It is specific and definite. The order provides, in relevant part:
1. The Rule 2004 Motion is GRANTED in its entirety, except that the examinee (Law Offices of Lynn Chao, A.P.C.) is directed not to produce documents provided or other discovery responses prior to October 3, 2019, so that parties in interest who may seek to limit discovery may have an opportunity to seek such relief ...
5. The Law Offices of Lynn Chao, A.P.C.’s designee(s) shall be prepared to testify at a time, date and location specified by Employees, no earlier than twenty-one (21) days after notice of this Order, on the topics listed in Exhibit A of the Motion;
6. The Law Offices of Lynn Chao, A.P.C., is directed to make available to Employees all responsive documents listed in Exhibit B of the Motion ten (10) days prior to the examination, subject to any documents withheld under a claim of privilege, other than the attorney-client privilege which has been waived by the Trustee;
7. If the Witness withholds production of any documents based upon a claim of privilege other than the attorney-client privilege, such witness is directed to provide counsel for the Employees with a privilege log containing the information required under Bankruptcy Rule 7026(a)(5) no later than the date production is due .... [dkt. 25, pp.1-2, para. “(1),” “(5),” “(6),” and “(7)” (emphasis in original)].
*17 ChaoLaw and Ms. Chao have not alleged or proven any “fair ground of doubt” about the meaning of the ChaoLaw 2004 Order or whether their non-compliance with it might be excused for some other legal reason. Taggart, 139 S.C.t 1795, 1804. They have waived and forfeited any such arguments. Hamer, 138 S.Ct. 13, 17, n.1 (2017).
More generally, ChaoLaw and Ms. Chao have offered almost no excuses for their lack of preparation and failure and refusal to respond to almost all discovery. As set forth in this Court's findings of fact (above), Ms. Chao and Shawn Wang asserted vehemently and repeatedly that they had produced “all” responsive documents, but they subsequently discovered additional documents. In addition, although some of those documents were from Shawn Wang's personal email account (as permitted by ChaoLaw's email policies) he failed to ask Ms. Chao or Mr. Ling if they had checked their own personal email accounts. Both Ms. Chao and Shawn Wang also asserted that, despite representing Debtor in over two years of litigation in two separate actions in State Court, Mr. Ling and ChaoLaw had absolutely no documents relating to those actions: no retainer letter, no monthly billing statements, no communications to verify or dispute factual issues in that litigation, no emails sending the client drafts of any documents – nothing. In addition, despite repeated denials that there were multiple drafts of the bankruptcy petition papers, and despite being shown email correspondence showing that there were at least three separate drafts of the bankruptcy petition papers that had been sent to ChaoLaw, there was no explanation for only (eventually) producing two of those drafts.
ChaoLaw and Ms. Chao were obligated to take all reasonable steps within their power to comply with the Debtor 2004 Order. They did the opposite. They are in contempt of court.
(iv) Conclusion as to contempt
Debtor, Ms. Wang, ChaoLaw, and Ms. Chao (the “Contemnors”) continue to assert vehemently that they have done everything in their power to comply with this Court's discovery orders. That is patently false.
Their violations of this Court's 2004 Orders are obvious, coordinated, and continuing. Sanctions are necessary and appropriate.
h. Sanctions
(i) Compensatory Sanctions
For the reasons set forth above, compensatory sanctions are appropriate to reimburse the Alleged Employees for their attorneys’ fees and costs incurred to obtain compliance with the 2004 Orders. See e.g., Goodyear Tire & Rubber Co. v. Haegar, 137 S.Ct. 1178, 1186-87 (2017) (bankruptcy court's inherent sanction authority includes authority to instruct a party that has acted in bad faith to reimburse legal fees and costs incurred by the other side); In re Count Liberty, LLC, 370 B.R. 259, 274 (Bankr. C.D. Cal. 2007) (“A compensatory fine must be limited to the actual damages incurred as a result of the violation. Actual loss includes attorneys’ fees and costs incurred in securing compliance with the order”).
Further proceedings will be necessary to provide evidence of the Alleged Employees’ legal fees and expenses incurred as a result of the Contemnor's non-compliance with the 2004 Orders. At the hearing on January 26, 2021 this Court ordered the parties to mediation. If the parties do not reach a settlement, this Court will set a schedule for supplemental declaration(s) regarding the Alleged Employees’ attorney fees and expenses and any other requested compensatory sanctions, any response by the Contemnors, any reply by the Alleged Employees, and (if appropriate) a hearing on compensatory sanctions.
(ii) Coercive Sanctions
*18 In view of this Bankruptcy Court's determination that the Contemnors’ non-compliance with the 2004 Orders is willful and in bad faith, this Bankruptcy Court finds and concludes that coercive sanctions are necessary and appropriate to compel the Contemnors into compliance. Neither side briefed the appropriate amount of daily sanctions to compel compliance from each of the Contemnors or presented any evidence of the Contemnors’ respective financial ability to pay, although as noted above there is evidence that YYF is providing very substantial funds to stonewall discovery. In addition, this Court must also take into consideration the lengths to which the Contemnors have been willing to go to block discovery, in determining how best to coerce compliance.
If this matter is not settled, this Court anticipates ordering sanctions starting at $100 per day against each of the Contemnors, and periodically increasing thereafter. This Court also anticipates providing the Contemnors with an opportunity to seek to modify those dollar amounts.
This Court notes, however, that in view of the Contemnors’ complete lack of credibility it may be difficult for them to establish that they have fully complied with the 2004 Orders. It also might be difficult for them to establish any purported lack of financial resources, either from their own resources or from whomever is paying Mr. Polis’ legal fees.
Any coercive sanctions will continue, in whatever dollar amounts this Court sets, until there is full compliance with the respective 2004 Orders. The burden to establish full compliance in future will remain on the Contemnors.
Nothing in this Memorandum Decision is intended to serve as an exhaustive list of the type of evidence the Contemnors must present to establish full compliance with the 2004 Orders. Any evidence must establish absolute transparency and that the Contemnors are being thorough in their efforts. As is always the case with coercive sanctions, the Contemnors hold the keys in their own hands
(iii) All rights are reserved to seek, and oppose, other appropriate relief
The Second Motion for OSC also asks “for any further relief that the Court deems appropriate.” Dkt. 95, pp. 2:23, 6:21 & 23:18. Such relief might well be appropriate – this Bankruptcy Court has rarely if ever seen such blatant disregard of discovery obligations as the Contemnors have exhibited.
Nevertheless, this Bankruptcy Court is not persuaded that further relief is appropriate at this time, without further notice and briefing. That said, all rights are reserved for the Alleged Employees or the Trustee to seek, and the Contemnors and any other parties in interest to oppose, any other relief.
For example, the Contemnors’ conduct may warrant the imposition of punitive damages to the limited dollar amount that this Bankruptcy Court has the authority to impose. In addition, or in the alternative, the Contemnors’ behavior may warrant more serious punitive damages, pursuant to this Bankruptcy Court's authority to issue proposed findings of fact and conclusions of law for de novo review by the District Court.
Another example is that, although the Alleged Employees post-trial papers request an order directing Google to turn over relevant emails, any such relief does not appear to be sufficiently briefed. This Bankruptcy Court previously has denied the same request based on a lack of citation to applicable legal authority, and lack of service on Google. The Alleged Employees papers do not cure either issue so that request is denied, without prejudice, on the present record.
Another example is that the Alleged Employees have not, at this stage, requested evidentiary presumptions as a form of sanctions under Rule 37(b) (Fed. R. Civ. P.),[9] made applicable to this case pursuant to Rule 9014(c). All rights are reserved on any such issues.
*19 This Bankruptcy Court is fully aware that there may be yet more types of relief available to the Alleged Employees. For example, although further monetary sanctions against Debtor might appear pointless or even counterproductive – given that Debtor is a non-operating bankrupt LLC and such sanctions might only reduce the funds available to creditors – there is also the possibility that any such sanctions against Debtor eventually will have to be paid by any persons who are discovered to have “pulled the strings” by causing the Debtor Parties to fail and refuse to comply with the 2004 Orders. All rights are reserved to assert whatever legal doctrines that might lead to any such liability – e.g., alter ego, substantive consolidation, or the like.
As this Court observed at the hearing on January 26, 2021, the Debtor Parties have flagrantly violated the 2004 Orders and have attempted to prevent discovery into what appears to be a shell game, with Debtor being left as the empty shell and the Alleged Employees being left without a remedy. But in this Court's experience such shell games eventually fail, if a determined litigant such as the Alleged Employees or the Trustee obtains coercive sanctions, and eventually one or more of the sanctioned parties “turns state's evidence,” leading to whoever is pulling the strings.
For now, however, the point is simple. All rights are reserved for the Alleged Employees, and Trustee, to seek to pursue more remedies, and of course for the Contemnors or other parties in interest to oppose such efforts.
4. CONCLUSION
For the reasons set forth above, this Bankruptcy Court finds and concludes that the Contemnors are in contempt of the 2004 Orders and are subject to compensatory, coercive, and potentially other sanctions. For now, however, this Court will refrain from entering any order implementing this Memorandum Decision, so that the parties can participate in mandatory mediation without having simultaneously to file any notices of appeal and litigate any appellate issues relating to this Memorandum Decision. This Court will address at a future status conference when to issue and enter any order(s) implementing this Memorandum Decision.
Footnotes
Unless the context suggests otherwise, a “chapter” or “section” (“§”) refers to the United States Bankruptcy Code, 11 U.S.C. § 101 et seq. (the “Code”), a “Rule” means the Federal Rules of Bankruptcy Procedure or other federal or local rule, and other terms have the meanings provided in the Code, Rules, and the parties’ filed papers.
Any conclusion of law inadvertently included in this findings of fact shall be treated as a conclusion of law, and likewise any findings of fact inadvertently included in conclusions of law shall be treated as a finding of fact.
The Procedures provide for discovery disputes to be addressed initially through oral motions, and only later through briefing if required, to save time and expense for all parties. That is particularly critical in bankruptcy cases, which typically involve scarce funds and urgent timelines. In addition, any party with “deep pockets” and who seeks delay may be able to gain an unfair advantage against an opponent with limited funds and time.
The Procedures state:
Discovery disputes. Do not file written motions to compel or quash discovery. First meet and confer (per Rule 7026-1(c)). Then call the judge's law clerk to arrange a telephonic conference and related procedures (e.g., the judge may permit or require a pre-conference summary of the dispute and/or copies of relevant documents, such as discovery requests or responses). At the telephonic conference the judge will determine whether to require written motions, briefs, or other documents, or alternatively the judge may rule on oral motions and oppositions without the need for any such papers. See, e.g., Tamari v. Bache & Co. (Lebanon) SAL, 729 F.2d 469, 472 (7th Cir. 1984) (written discovery motion not required when party receives adequate notice); Henry v. Sneiders, 490 F.2d 315, 318 (9th Cir. 1974) (oral discovery order equally effective as written order); Avionic Co. v. General Dynamics Corp., 957 F.2d 555, 558 (8th Cir. 1992) (same); 7-37 Moore's Federal Practice - Civil § 37.42[3] (2018) (same). See also LBR 1001-1(d), FRBP 9006 & 9013, and FRCP 16(b)(3)(B)(v), 26(b)(2)(C), 43(c)&(e) & 52(a) (incorporated by FRBP 7052, 9014(c) & 9017); and see generally In re Nicholson, 435 B.R. 622, 635-36 (9th Cir. BAP 2010) (discussing when evidentiary hearing is required). Any request for sanctions relating to a discovery dispute must be made by separate noticed motion.
Other examples include: “Q. ... Are you familiar with GL Master's investments and assets since 2014? A. No. Q. Did you try to get yourself prepared to discuss that topic? A. No. Q. Are you familiar with GL Master, Inc.’s interactions with other restaurants? A. No. Q. Did you do anything to try to get yourself prepared about that? A. No. Q. Do you know anything about in particular GL Master's transactions with XFY Houston, LLC? A. No. Q. Little Sheep Edison, LLC? A. No. Q. Little Sheep Flushing, LLC [one of restaurants that the Alleged Employees assert are part of Debtor's chain]? A. No. Q. And Hot Pot City, LLC, in San Francisco [same]? A. No.” Second Motion for OSC (dkt. 95), p. 9:9-26 (quoting deposition transcript, Ex. 8, pp. 30:24-31:19).
Further examples include: “Q. Do you have any understanding about GL Master's transactions with Young Young Holding, LLC? A. No. Q. How about GL Master's transactions with Guanyang International, LP? A. What? Q. Guanyang – A. Oh, Guanyang – yeah, I know. That's one of Guang Sheng [Wu]’s companies. Q. So that's one of Mr. Wu's companies? A. Yes. Q. And what sort of transactions did GL Master, Inc., have with Guanyang International, LP? A. I don't know. ... Q. What about GL Master's transactions with Guanyang International Investment, Inc.? A. I don't know. I never heard of that company. Q. How about GL Master's transactions with Little Sheep San Gabriel, LLC [another of Debtor's alleged chain stores]? A. No, I don't know. Q. You don't know of any transactions? A. Yeah. I don't involved [sic] in their operation. So when you say ‘transactions,’ I have no idea. Q. So you don't know about any management agreement that GL Master has with Little Sheep [S]an Gabriel? [Attorney wrangling.] A. If you say “transaction,” I have no idea. Q. What about GL Master's transactions with Little Sheep Irvine 1, LLC? A. Transactions, no. I don't know any transactions. That's my answer. Q. Do you know about any GL Master, Inc's transactions with Little Sheep Torrance, LLC? A. I don't know any transaction. Q. And what [sic] GL Master, Inc.’s transactions with Little Sheep Pasadena, LLC? A. I have no idea. Q. Did you try to inform yourself about that? Did you do any research to see if there was anything to learn in that area? A. No.” Id. pp. 10-11 (quoting deposition transcript, Ex. 8, pp. 33:17-36:1). The Second Motion for OSC goes on to list additional examples.
See Tr. 8/19/20 (dkt. 211), p. 33:1-3 & 16-20.
See dkt. 20, Ex.B, at PDF p.27, RFPD Nos. 35 & 36: (35) “All billings from attorneys or law firms for work performed on behalf of GL Master, Inc.;” (36) “All payments to attorneys or law firms for work performed on behalf of GL Master, Inc.”
See dkt. 20, Ex.B, at PDF p.27, RFPD Nos. 32, 33, 34: (32) “All COMMUNICATIONS GL Master, Inc., has had with Xiao Wang, including billings;” (33) “All COMMUNICATIONS GL Master, Inc., has had with the Law Offices of Lynn Chao, including billings;” (34) “All COMMUNICATIONS the Law Offices of Lynn Chao GL Master, Inc. has had with attorneys or law firms.” See also dkt. 20, Ex.B, at PDF p.26, RFPD No.1 “All GL Master, Inc. financial documents provided to counsel.”
The Debtor Parties raise a frivolous procedural issue. They argue that the Alleged Employees’ post-trial brief exceed the allotted 10-page limitation ordered by this Bankruptcy Court. Dkt. 234, p.2:9-10. That would only be true if this Court counted the caption, table of contents, table of authorities, and proof of service, all of which are not properly included. Dkt. 229, pp.1, 2, 3 & 14. Additionally, the Alleged Employees’ post-trial brief could have used single-spaced quotations to fit the entire brief into ten pages, which also would have been permissible. The Alleged Employees did not in any way violate either the letter or the spirit of this Court's page limitation. The Debtor Parties’ objection is meritless.
This Bankruptcy Court has already ruled that a number of civil discovery rules apply to this dispute. See Rules 7030, 7037, 9014, 9016. But if a reviewing court were to conclude that contempt findings should have arisen from an alternative civil discovery rule, this Bankruptcy Court would apply its findings of fact and conclusions of law in the same manner and fashion as set forth herein. See In re Pham, 2017 Bankr. LEXIS 3844, at *1, 2017 WL 5148452, at *1 (9th Cir, BAP Nov. 6, 2017) (finding reversible error based on imposition of sanctions under incorrect civil discovery rule).