If the bankruptcy court imposes discovery sanctions before withdrawal of the reference, the sanctioned party is entitled to neither de novo review nor to an evidentiary hearing in district court, according to a district court opinion from St. Paul, Minn.
The discovery dispute arose in the aftermath of the Ponzi scheme orchestrated by Thomas Petters, who swindled billions of dollars from investors between 1994 and 2008. After the fraud surfaced, a receiver was appointed who filed a chapter 11 petition. The receiver was tapped to serve as the chapter 11 trustee. In that role, the receiver confirmed a liquidating chapter 11 plan.
The plan created a litigation trust that sued the bank Petters had used. Filed in bankruptcy court, the suit alleged that the bank was complicit in the fraud by failing to respond to irregularities as required by banking regulations. The complaint asserted claims including breach of fiduciary duties and aiding and abetting fraud.
The bankruptcy court denied the bank’s motion for summary judgment. After fact discovery closed, the bankruptcy court imposed discovery sanctions on the bank for intentionally destroying and failing to preserve email backup tapes. The bankruptcy court found that the bank acted in bad faith and with intent to deprive the trustee of evidence.
The bankruptcy court imposed three remedial sanctions: (1) requiring an adverse inference instruction telling the jury that the bank intentionally destroyed evidence that the bank knew to be harmful; (2) allowing the trustee to present evidence to the jury about the bank’s destruction of evidence; and (3) preventing the bank from objecting to the admission of certain documents into evidence.
The day after imposing the sanctions, the bankruptcy court transferred the suit to district court for a jury trial.
In district court, the bank implored District Judge Wilhelmina M. Wright to hold an evidentiary hearing and review the sanctions de novo. The bank reasoned that the inability of the bankruptcy judge to hold a trial only permitted the bankruptcy court to recommend sanctions.
Judge Wright disagreed in an opinion on June 1. She rebutted the bank’s contentions with several analogies.
Federal courts have authority to issue sanctions under Federal Rule 37. On appeal, sanctions are reviewed for abuse of discretion both as to the sanctions and the underlying fact-finding.
In bankruptcy cases, Judge Wright said that a district court “typically sits as an appellate court,” reviewing conclusions of law de novo and fact findings for clear error. Likewise, she said, discovery sanctions imposed in bankruptcy court “typically are reviewed for an abuse of discretion.”
Further by analogy, Judge Wright said that bankruptcy judges and magistrate judges alike “often lack authority to issue final judgments or conduct jury trials . . . . Nonetheless, bankruptcy judges and magistrate judges routinely are authorized to oversee discovery and other pretrial matters.”
Judge Wright said that magistrate judges have authority in “deciding whether to impose discovery sanctions that might impact trial.”
“In addition,” Judge Wright said,
bankruptcy judges and magistrate judges typically are afforded substantial deference as to discovery-related decisions — including imposition of discovery sanctions — because those judges are most familiar with the pretrial proceedings and the pretrial conduct of counsel.
“Notably,” Judge Wright said, “an adverse inference instruction is a non-dispositive sanction.” She added that the bank found no legal authority “suggesting that a discovery sanction is dispositive or otherwise subject to de novo review merely because it will impact trial.”
To the contrary, Judge Wright held that “bankruptcy judges, like magistrate judges, have authority to impose non-dispositive discovery sanctions that might impact trial even if those judges lack the authority to conduct the trial.” She also held that the bankruptcy court’s rulings on sanctions “are reviewed for abuse of discretion.”
In a subsequent order and opinion on July 18, Judge Wright found no abuse of discretion and dismissed the bank’s appeal from the sanctions.
If the bankruptcy court imposes discovery sanctions before withdrawal of the reference, the sanctioned party is entitled to neither de novo review nor to an evidentiary hearing in district court, according to a district court opinion from St. Paul, Minn.
The discovery dispute arose in the aftermath of the Ponzi scheme orchestrated by Thomas Petters, who swindled billions of dollars from investors between 1994 and 2008. After the fraud surfaced, a receiver was appointed who filed a chapter 11 petition. The receiver was tapped to serve as the chapter 11 trustee. In that role, the receiver confirmed a liquidating chapter 11 plan.
The plan created a litigation trust that sued the bank Petters had used. Filed in bankruptcy court, the suit alleged that the bank was complicit in the fraud by failing to respond to irregularities as required by banking regulations. The complaint asserted claims including breach of fiduciary duties and aiding and abetting fraud.