In Re: Larisa Ivanovna Markus

Background

Larisa Ivanovna Markus was the debtor in a Chapter 15 bankruptcy proceeding. Yuri Vladimirovich Rozhkov, acting as Markus’s foreign representative, sought documents concerning Markus’s assets. Victor A. Worms appeared as Markus’s counsel.

Rozhkov served a subpoena under Federal Rule of Civil Procedure 45 requesting documents, including engagement letters, powers of attorney, communications, and records of bank accounts in which Markus had an interest. The bankruptcy court later denied Markus’s motion to quash the subpoena and ordered Worms to communicate with Markus and her agents, including attorneys, to obtain and produce responsive documents within Markus’s possession, custody, or control.

Worms did not produce documents. He argued, among other things, that the recognition order supporting the proceeding was invalid, that Markus was incarcerated in Russia, and that the discovery requests did not reach documents outside the United States. The bankruptcy court found that Worms knowingly and intentionally failed to comply with its discovery orders. It imposed sanctions of $1,000 per day, including a fixed total of $34,000 for earlier noncompliance, and later awarded Rozhkov $60,000 in attorneys’ fees connected with the sanctions motion.

Jurisdiction and the July 30 discovery order

The district court rejected the argument that Markus’s name on the notices of appeal deprived the court of jurisdiction. Because the sanctions and fees orders imposed financial harm on Worms personally, and the notices made clear that Worms intended to appeal, the court treated the naming issue as a captioning error rather than a reason to dismiss the appeals.

The court held that the July 30 discovery order was immediately appealable in a Chapter 15 proceeding. Worms had not timely appealed that order, however, so he could not use these later appeals to challenge the order’s correctness, including whether the bankruptcy court improperly used a Rule 45 subpoena instead of another bankruptcy discovery procedure. The district court therefore assumed that the discovery order was valid and considered only the sanctions and fees issues.

Rule 37 and inherent authority

The district court held that Federal Rule of Civil Procedure 37 can apply to contested matters in Chapter 15 proceedings. It also held that Rule 37 can, in some circumstances, authorize sanctions against an attorney advising a party.

But the court distinguished between discovery directed to a party and a subpoena directed to a nonparty. Because Markus was served as a person under Rule 45, rather than as a party under the ordinary party-discovery rules, the court held that Rule 37 could not be used to sanction Worms for noncompliance with this subpoena. The court explained that Rule 45 has its own enforcement provision, Rule 45(g), which permits contempt against a person who fails without adequate excuse to obey the subpoena or an order concerning it.

The court nevertheless held that the bankruptcy court had inherent authority to enforce its lawful orders through civil contempt sanctions. The district court concluded that Worms had adequate notice that Rozhkov was seeking sanctions based on that inherent authority and that Worms had an opportunity to respond. It also held that the bankruptcy court’s findings were supported by the record: the discovery orders were clear, Worms failed to comply, he did not make a diligent effort to comply, and he had received warnings about possible sanctions.

Sanctions order

The district court affirmed the bankruptcy court’s use of inherent authority to sanction Worms for noncompliance with the discovery orders. The court found no basis to disturb the decision to impose coercive daily sanctions that would continue until compliance and could be avoided by complying with the orders.

The court separately examined the fixed $34,000 amount payable to the bankruptcy-court clerk for past noncompliance. A civil contempt sanction generally must either compensate the injured party or give the person being sanctioned an opportunity to eliminate or reduce the sanction through compliance. The fixed amount was payable to the clerk, was not tied to compensation for Rozhkov or the judicial system, and could not be purged through later compliance. The court therefore held that this portion was criminal in nature and could not stand under the procedures used.

The sanctions order was affirmed in part, vacated in part, and remanded. The district court remanded the order entirely so the bankruptcy court could determine the proper amount of daily sanctions. It vacated the retroactive fixed sanctions. The opinion also noted uncertainty about whether sanctions should continue after the contempt had been purged, directly or indirectly.

Fees order

The district court upheld the bankruptcy court’s calculation of the $60,000 amount. Worms had not challenged the billing records and practices in the bankruptcy court, and the district court found that the record supported the conclusion that the time spent and hourly rates were reasonable.

The court held, however, that the fees order did not identify whether the bankruptcy court awarded fees under Rule 37 or under its inherent authority. Rule 37 may require a fee award in specified circumstances, but Worms could not be sanctioned under Rule 37 for this nonparty Rule 45 subpoena. An award under inherent authority would instead be discretionary. Because the district court could not determine which legal authority the bankruptcy court used, it affirmed in part and remanded the fees order for reconsideration in light of the opinion.

Final disposition

The sanctions order was affirmed in part, vacated in part, and remanded. The fees order was affirmed in part and remanded. The motions to stay both orders pending appeal were denied as moot.