The Sixth Circuit Bankruptcy Appellate Panel barred a debtor from using voluntary dismissal under Rule 41(a)(2) to avoid the consequences of discovery abuses. More specifically, the factual findings made to remedy discovery shortcomings were incorporated into dismissal with prejudice.
The debtor was an attorney in chapter 7. He filed a complaint against the Internal Revenue Service seeking a declaration that several years of taxes were dischargeable debts.
The IRS answered, served discovery requests and moved to compel answers. Eventually, the IRS sought discovery sanctions.
As a sanction, the bankruptcy court ruled that the debtor would be presumed to have had sufficient income to pay his taxes but consciously chose not to pay.
As sanctions for later discovery abuses, the bankruptcy court made three more factual findings.
When the adversary proceeding was scheduled for trial, the debtor filed a motion for voluntary dismissal with prejudice under Rule 41(a)(2), made applicable by Bankruptcy Rule 7041. Because the IRS had answered, a court order was required for dismissal. Dismissal with prejudice would mean that the tax debts were nondischargeable.
In pertinent part, Rule 41(a)(2) says that “an action may be dismissed at the plaintiff's request only by court order, on terms that the court considers proper.”
Before entering dismissal with prejudice, Bankruptcy Judge Jennie D. Latta of Memphis, Tenn., told the debtor that she would include factual findings in the dismissal order that were identical to the findings made in the discovery sanctions. Twice, Judge Latta gave the debtor the option of going to trial to avoid having the factual findings in the dismissal with prejudice.
The debtor decided to proceed with dismissal, and Judge Latta entered a dismissal order with the factual findings made in the discovery sanctions.
The debtor appealed, contending that the bankruptcy court had no authority to attach conditions to dismissal with prejudice. Alongside appealing the dismissal order, the debtor did not appeal the prior discovery sanctions that were interlocutory until the adversary proceeding itself was dismissed.
For the BAP, Bankruptcy Judge Scott W. Dales upheld the bankruptcy court in an opinion on December 28.
Citing the language of Rule 41 (“on terms that the court considers proper”), Judge Dales held that the bankruptcy court “has the authority, the duty, and the discretion to address the misbehavior of parties appearing before it, and may do so simply by expressing opprobrium, as it evidently did here.”
Judge Dales found support for his conclusion in Rule 37(b)(2)(A)(i). As a sanction for failure to abide by a discovery order, the rule says that “matters embraced in the order or other designated facts be taken as established for purposes of the action, as the prevailing party claims.”
Reading Rules 41 and 37 together, Judge Dales said they “provide authority for a court to make factual findings as a sanction for discovery abuse and to include those findings in a dismissal order, as the Bankruptcy Court did in this instance.” He quoted a district judge from Cleveland for saying that “Rule 41 was not intended as an escape clause, allowing parties to avoid the repercussions of discovery abuses.” NPF Franchising LLC v. Sy Dawgs, LLC, No. 1:18 CV 277, 2021 WL 2345367, at *13 (N.D. Ohio May 7, 2021).
Judge Dales decided that the bankruptcy judge had not abused her discretion “by simply restating earlier and unchallenged factual findings for purposes of the proceeding.” Having found “textual support in the rules for setting terms for the voluntary dismissal of an adversary proceeding — even a dismissal with prejudice,” he affirmed the bankruptcy court.
Observation
In consumer bankruptcy, an unresolved question is whether the court may attach conditions when a chapter 13 debtor files a motion to dismiss as of right under Section 1307(b). For an ABI story on the question, click here.
The BAP opinion gives credence to the notion that a voluntary chapter 13 dismissal, in proper circumstances, may include conditions such as a bar to refiling within a specified time or dismissal with prejudice.
The Sixth Circuit Bankruptcy Appellate Panel barred a debtor from using voluntary dismissal under Rule 41(a)(2) to avoid the consequences of discovery abuses. More specifically, the factual findings made to remedy discovery shortcomings were incorporated into dismissal with prejudice.
The debtor was an attorney in chapter 7. He filed a complaint against the Internal Revenue Service seeking a declaration that several years of taxes were dischargeable debts.
The IRS answered, served discovery requests and moved to compel answers. Eventually, the IRS sought discovery sanctions.
As a sanction, the bankruptcy court ruled that the debtor would be presumed to have had sufficient income to pay his taxes but consciously chose not to pay.
As sanctions for later discovery abuses, the bankruptcy court made three more factual findings.
When the adversary proceeding was scheduled for trial, the debtor filed a motion for voluntary dismissal with prejudice under Rule 41(a)(2), made applicable by Bankruptcy Rule 7041. Because the IRS had answered, a court order was required for dismissal. Dismissal with prejudice would mean that the tax debts were nondischargeable.