In Re: DeGennaro

Background

Charles DeGennaro, III filed for Chapter 7 bankruptcy. Crescent Electric Supply Company brought a related lawsuit in Bankruptcy Court, alleging that DeGennaro and Innovative Electrical Services, LLC improperly used construction-project funds and that the resulting debt could not be discharged.

Crescent served 53 requests for documents, including financial records of Innovative and DeGennaro and DeGennaro’s personal tax returns. After DeGennaro did not respond within the required period, the Bankruptcy Court directed him at a July 30, 2019 hearing to provide the documents within seven days. The hearing was not transcribed. DeGennaro’s attorney reportedly said he could comply, but DeGennaro later argued that he lacked access to Innovative’s records and that his personal financial information was irrelevant.

At an August 27 hearing, the Bankruptcy Court granted Crescent’s motion to compel, awarded attorney’s fees, and imposed a $250-per-day sanction for each day DeGennaro failed to produce the documents. A September 2019 written order directed him to produce all responsive documents in his possession, custody, or control, or to state formally that none existed.

DeGennaro sought reconsideration and appealed. The Bankruptcy Court eventually denied reconsideration as to the discovery order, reduced the attorney-fee award, and capped the daily sanctions at 90 days, for a total of $22,500. The Bankruptcy Court’s September 4, 2020 order granted in part and denied in part DeGennaro’s reconsideration motion. On appeal to the District Court, the parties addressed only whether the remaining sanctions were proper; the challenge to the discovery order was treated as abandoned.

Issue and standard of review

The District Court reviewed the Bankruptcy Court’s reconsideration ruling and sanctions decision for abuse of discretion. That standard asks whether the lower court relied on an incorrect legal rule or clearly misjudged the evidence.

The Bankruptcy Court had relied on Federal Rule of Civil Procedure 37, which permits sanctions for failing to obey a discovery order. The District Court explained that a contempt sanction generally requires a clear and definite order, clear and convincing proof of noncompliance, and a failure to make a reasonable effort to comply. In evaluating Rule 37 sanctions, courts may also consider the reason for noncompliance, whether lesser sanctions would have worked, the length of noncompliance, and whether the party was warned about the consequences.

Ruling

Chief Judge Colleen McMahon held that the original $250-per-day sanction was an abuse of discretion. The July 30 oral order was not recorded, so the District Court could not determine whether its terms were clear. The August 27 hearing also contained conflicting directions about which documents had to be produced. The first written order that clearly described the required production was entered on the same day the sanctions were imposed, meaning the sanctions could not properly punish a violation of that written order.

The District Court also found that the Bankruptcy Court had not adequately considered DeGennaro’s efforts to obtain Innovative’s records, his claim that a former business partner had blocked his access, the short period between the alleged violation and the sanctions, or whether lesser sanctions would have been sufficient. In addition, the record did not show that DeGennaro had been warned that he faced an open-ended daily fine or given a meaningful opportunity to oppose that specific sanction.

The District Court further held that modifying the sanctions on reconsideration did not cure the original error. Because any sanction imposed under the circumstances shown was improper, the appropriate remedy was to vacate the sanctions rather than merely reduce or cap them. The September 4, 2020 Bankruptcy Court order was vacated, and the matter was remanded for further proceedings consistent with the District Court’s decision. The Clerk was directed to close the District Court matter.

What the ruling did not decide

The decision did not determine whether DeGennaro ultimately had access to Innovative’s records or whether sanctions could be appropriate after a proper hearing and adequate notice. It also did not disturb the Bankruptcy Court’s conclusion that DeGennaro’s personal financial records were relevant, because that issue was not the subject of the appeal addressed in the parties’ briefs.