Opinion
NOT FOR PUBLICATION
Submitted Without Oral Argument: September 25, 2009
By Order entered on September 1, 2009, the Panel approved the stipulation of the parties that this appeal be decided on the briefs and record without oral argument. 9th Cir BAP Rule 8012-1.
Appeal from the United States Bankruptcy Court for the Central District of California. Bk. No. LA 04-10052-TD. Hon. Thomas Donovan, United States Bankruptcy Judge, Presiding.
Before: PAPPAS, MARKELL and HOLLOWELL, Bankruptcy Judges.
This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013-1.
Chapter 7 debtor Stephen Law (" Debtor") appeals an order entered by the bankruptcy court surcharging his entire homestead exemption of $75,000. Debtor also appeals an order compelling his attendance at a deposition and imposing a sanction of $3,520 payable to the trustee for failure to comply timely with discovery requests. We AFFIRM both orders.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1330, as enacted and promulgated prior to the effective date (October 17, 2005) of the relevant provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. 109-8, April 20, 2005, 119 Stat. 23, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. The Federal Rules of Civil Procedure are referred to as " Civil Rules."
The many disputes involving Debtor arising in his bankruptcy case have resulted in over a dozen appeals to the Panel and several to the Court of Appeals. In its many decisions issued over the years, the Panel has provided in great detail the facts surrounding Debtor's bankruptcy filings, and his numerous contests with the chapter 7 trustee concerning the administration of the bankruptcy estate. See, e.g., Law v. Siegel (In re Law), BAP nos. CC-05-1303/1344 (9th Cir. BAP December 29, 2006), aff'd 308 F.App'x 161 (9th Cir. 2009); Lin v. Siegel (In re Law), BAP nos. CC-06-1427/1379 (9th Cir. BAP July 10, 2007), aff'd 308 F.App'x 152 (9th Cir. 2009); Law v. Siegel (In re Law), BAP no. CC- 07-1127 (9th Cir. BAP October 5, 2007). Those BAP decisions are available through PACER or via the Panel's public website, available at http://www.bap09.uscourts.gov. Because the facts are well known to the parties to this appeal, and to avoid unnecessary repetition in the record, we recount here only those facts relevant to the instant appeal.
On January 5, 2004, Debtor filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code. Alfred H. Siegel was appointed to serve as chapter 7 trustee (" Trustee"). Debtor's residence in Hacienda Heights, California (the " Property") was the sole asset of the bankruptcy estate.
Debtor claimed a $75,000 homestead exemption in the Property. Debtor's schedules indicated the Property had a value of $363,348 and that it was subject to two voluntary liens at the time of the bankruptcy filing. The first priority lien was a note and deed of trust in favor of Washington Mutual Bank in the amount of $147,156.52; the second priority lien was, allegedly, a note and deed of trust for $156,929.04 in favor of " Lin's Mortgage & Associates."
The First Surcharge Motion
On January 5, 2006, Trustee moved to sell the Property. At the same time, Trustee filed a motion to surcharge Debtor's homestead exemption (" First Surcharge Motion") contending that Debtor had engaged in fraudulent conduct, exhibited bad faith by pursuing frivolous litigation, and failed to comply with the bankruptcy court's orders regarding Trustee's administration of the Property. In particular, Trustee alleged that Debtor had lied about the existence and bona fides of the alleged second mortgage on the Property held by the creditor known as Lili Lin.
The bankruptcy court conducted a hearing on the sale motion on February 1, 2006, at which Trustee was represented by counsel and Debtor appeared pro se. The court approved the sale motion by order entered February 14, 2006; escrow closed and the Property was sold on March 9, 2006. The sale proceeds totaled $208,777.91 after payment of all costs of sale and satisfaction of the first mortgage. The sale proceeds are held by Trustee. Debtor objected to the sale and appealed the sale order to the Panel on February 6, 2006. Debtor's motions to obtain a stay pending appeal were denied by both the Panel and the Ninth Circuit and Debtor's appeal was dismissed as moot on December 29, 2006. Law v. Siegel (In re Law), BAP no. CC- 05-1344 (9th Cir. BAP December 29, 2006).
Debtor responded to the First Surcharge Motion, denied that he had engaged in any fraudulent conduct, declared that he had borrowed a total of $168,000 from Lili " Lin of China" and that he had secured the loan with the second deed of trust on the Property. Attached to Debtor's declaration was another declaration, purportedly executed by Lili Lin of China in Guangzou, China, stating that she had indeed lent that sum to Debtor and held the second deed of trust on the Property to secure the loan.
The quotation marks around " Lin of China" are also found in Debtor's declaration. Dkt. no. 100.
On March 22, 2006, the bankruptcy court granted the First Surcharge Motion. In deciding to surcharge Debtor's homestead, the bankruptcy court observed,
[I]t seems to me that all things considered, it is basically Mr. Law's conduct that has been the direct cause of the expenses that have been incurred by the Trustee. . . . I would have to surmise that substantial additional expenses are going to be incurred by the estate in defending Mr. Law's appeals.
This is a quotation taken from the Panel's decision in In re Law, BAP nos. CC-05-1303/1334, at 7-8, and is attributed therein to the bankruptcy court's concluding remarks at the March 22, 2006 hearing. A transcript of that hearing is not included in the current record on appeal. We cite to the various unpublished memoranda involving Debtor under the doctrine of law of the case.
Debtor appealed the bankruptcy court's order granting the First Surcharge Motion to this Panel. On December 29, 2006, the Panel reversed the bankruptcy court's order. The Panel acknowledged that Debtor had exhibited " misconduct, obstinance, blatant ignorance of court orders and directives, animosity toward the court and the trustee, and efforts to thwart administration of the case. . . ." In re Law, BAP nos. CC-05-1303/1334, Memorandum at 17. Even so, the Panel reasoned that:
Regardless of the debtor's tactics, it is apparent that the debtor was not abusing his exemptions and that the trustee was not seeking to remedy such abuse. Rather, the intent of the trustee was to punish the debtor for his tactics. The sort of extraordinary circumstances that would be a prerequisite to surcharge have not been demonstrated.
Similarly, it is apparent that the court was merely shifting litigation expenses to the debtor in a fashion designed to punish the debtor for his litigation activity.
Id . Significantly, while reversing the surcharge order, the Panel expressed " no opinion whether specific instances of mischief by the debtor in the past might support [a future] surcharge against his exemption. . . . Any such relief to the trustee should be supported by specific findings of fact and appropriate conclusions of law regarding the debtor's conduct[.]" Id .
Trustee appealed the Panel's decision to the Ninth Circuit, which affirmed the Panel's decision. In re Law, 308 F.App'x 161.
In the meantime, on February 5, 2007, Debtor filed a motion for an order directing Trustee to pay him his claimed homestead exemption from the proceeds of the sale of the Property, and to sanction Trustee for his alleged bad faith in refusing to comply with the Panel's decision reversing the order approving the First Surcharge Motion. The bankruptcy court denied Debtor's motion at a hearing on February 28, 2007, on the grounds that it lacked jurisdiction to rule on distribution of the exemption proceeds while the order granting the First Surcharge Motion was on appeal to the court of appeals. Debtor, in turn, appealed this denial to the Panel, and the Panel reversed the bankruptcy court's decision on October 5, 2007.
The Panel held that, though an appeal to the court of appeals was pending, the bankruptcy court retained the authority to enforce a final judgment that had not been stayed or superseded. When Trustee did not timely oppose Debtor's homestead exemption claim, the exemption became final, and the bankruptcy court therefore had jurisdiction to authorize payment of the exemption, regardless of appeals on other matters. In re Law, BAP no. 07-1127, Memorandum at 10-11.
Nevertheless, in its decision the Panel again made it clear that, while it was ruling solely on the right of Debtor to an unopposed homestead exemption, such exemption might still be:
subject to surcharge, based upon an appropriately supported motion filed by the trustee. Although a surcharge cannot be used to punish a debtor, Onubah v. Zamora (In re Onubah), 375 B.R. 549, 2007 WL 2701336 at *6 (9th Cir. BAP 2007), it may be used to prevent fraud, caused by the debtor's misconduct, upon the court and estate creditors, Latman v. Burdette, 366 F.3d 774, 785 (9th Cir. 2004). . . . The trustee may renew his motion to surcharge the debtor's claimed homeowner's exemption, as long as appropriate factual and legal bases exist to justify such a surcharge under the standards set out in Latman and Onubah.
Id . at 11-12.
The Second Surcharge Motion
On April 24, 2008, Trustee filed another Motion to Surcharge Debtor's Homestead Exemption (the " Second Surcharge Motion"). The Second Surcharge Motion alleged, among other issues, that (1) the second deed of trust on the Property was fictitious and fraudulent, intended by Debtor to falsely encumber the Property so as to discourage its sale as part of a scheme by Debtor to defraud his creditors; (2) Debtor had perjured himself twice, once by listing the second deed of trust in his schedules, and again in knowingly attaching a fraudulent promissory note to his motion to reconsider the order approving sale of the Property; and (3) Debtor created a " Lili Lin of China" who either did not exist or, if she did exist, had no interest in the Property, in furtherance of his efforts to frustrate Trustee's administration of the Property and to otherwise exhaust the assets of the estate.
Debtor responded to the Second Surcharge Motion on May 7, 2008, generally denying its allegations and, alternatively, arguing that the BAP's decision on the First Surcharge Motion was res judicata, barring consideration of the Second Surcharge Motion by the bankruptcy court.
On May 28, 2008, Trustee served a Notice of Deposition and Request for Production of Documents on Debtor regarding the Second Surcharge Motion. There followed an extensive discovery dispute between the parties, with Debtor generally refusing to cooperate with Trustee. Trustee and Debtor submitted a summary of the dispute to the bankruptcy court in a stipulation dated July 3-8, 2008. Trustee argued that he had the right to depose Debtor and to demand that he produce documents in a contested matter pursuant to Rules 7028-7037. Debtor countered that Trustee could have conducted the deposition years before and was only now deposing him for purposes of harassment. Additionally, Debtor argued that the requested production of documents would cost in excess of $3,000, and Debtor demanded that Trustee pay this in advance.
On July 8, 2008, Trustee submitted a Motion to Compel Debtor's Attendance at Deposition and Production of Documents and requested sanctions against Debtor of $3,520, payable to Trustee. On July 20, 2008, Debtor advised Trustee that he would agree to be deposed on July 28, 2008. However, Trustee informed Debtor that his consent had come too late, insofar as Trustee had filed the Motion to Compel. However, Trustee agreed to allow the deposition to go forward if Debtor compensated Trustee for the costs of bringing the Motion to Compel. In an apparent rejection of Trustee's offer, Debtor filed an opposition to the Motion to Compel on August 5, 2008, arguing that Trustee was harassing Debtor and acting in bad faith.
The bankruptcy court scheduled a hearing on the Motion to Compel on August 20, 2008, but indicated in a tentative ruling that appearances were not required. The tentative ruling provided that the court was inclined to grant Trustee's motion and to impose sanctions upon Debtor. There were no appearances at the hearing and, on August 28, 2008, the bankruptcy court entered its order directing Debtor to appear at a deposition and provide access to Trustee to the required documents. The order imposed monetary sanctions of $3,520 on Debtor.
On November 5, 2008, the bankruptcy court conducted a hearing on the Second Surcharge Motion. Trustee was represented by counsel and Debtor appeared pro se. At the conclusion of this hearing, the bankruptcy court announced its oral ruling in favor of Trustee. Hr'g Tr. 17:18-37:5 (November 5, 2008). The court later memorialized its decision in a Memorandum Decision entered on February 20, 2009. In granting the Second Surcharge Motion, the bankruptcy court found that Debtor had attempted to perpetrate a fiction and fraud on the court:
This utter absence of credible, persuasive evidence, taken in the context of (1) Debtor's demonstrated willingness to deceive this court by filing a false document - that is, the " birth date" promissory note; (2) the myriad suspicious circumstances surrounding the disputed second deed of trust and Lili Lin of China's pleadings; (3) the inconsistencies in Debtor's statements regarding the loan proceeds; and (4) the Lili Lin of Artesia " foreclosure" episode, leads me to conclude that no person named Lili Lin ever made a loan to Debtor in exchange for the disputed deed of trust on Debtor's residence. The preponderance of the evidence clearly shows that the loan was a fiction, meant to preserve Debtor's equity in his residence beyond what he was entitled to exempt as a homeowner, and a fraud on his creditors and the court.
The bankruptcy court found that Debtor had prepared two almost identical promissory notes in June 1999, in an attempt to document the alleged loan of $168,000 secured by the second deed of trust on the Property. One note included a birth date of Lili Lin of November 22, 1947, while the other had no birth date. The court found that Debtor could not explain why he prepared and notarized two inconsistent documents.
At the hearing, the bankruptcy court heard testimony from a woman named Lili Lin of Artesia. She stated she was an acquaintance of Debtor but had never loaned money to Debtor. Lin of Artesia testified that Debtor gave her a copy of the second deed of trust and promissory note, asking that she accept a check from him for $168,000 in " payment" of the loan, and then to return the money to him. Lin of Artesia refused. In February 2000, Los Angeles County Records Research received a letter purportedly from Lin of Artesia, although she says she never sent it. The letter sought to initiate foreclosure proceedings against the Property. At the same time, Lin of Artesia received documents from Debtor, including an assignment of the promissory note to Connie Chang, the debtor's ex-wife.
The bankruptcy court determined that, had Debtor not invented the second deed of trust and persisted in his misrepresentations to the court, ample funds would have been available in the bankruptcy case to pay Debtor's creditors and Trustee's costs, pay Debtor his full homestead exemption, and to return surplus funds to Debtor. However, as a result of the disputes over the fictitious second deed of trust, the court found that Trustee and the estate had incurred $456,112.50 in legal fees, an amount considerably in excess of Debtor's $75,000 homestead exemption, all of which were the direct result of Debtor's active misrepresentations to Trustee and to the court. Based upon its findings, the bankruptcy court concluded that:
were Debtor to receive his homestead exemption, the financial consequences of Debtor's misconduct would fall most heavily upon Debtor's creditors, including Trustee and his attorneys. A surcharge must be levied to avoid this outcome. Because the actual costs to the estate far exceed $75,000 (the exemption to which Debtor would otherwise be entitled), I find that Debtor's homestead must be surcharged in its entirety.
On February 20, 2009, the bankruptcy court entered its order granting the Second Surcharge Motion and surcharging Debtor's homestead in its entirety of $75,000. Debtor filed a timely appeal of the bankruptcy court's surcharge order and discovery sanction order on March 2, 2009.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. § § 1334 and 157(b)(2)(A), (B) and (O). We have jurisdiction under 28 U.S.C. § 158.
ISSUES
1. Did the bankruptcy court abuse its discretion in imposing a surcharge on Debtor's homestead exemption?
2. Did the bankruptcy court abuse its discretion in compelling Debtor to attend a deposition and imposing discovery sanctions on him?
STANDARDS OF REVIEW
A bankruptcy court's decision to invoke the equitable remedy of surcharge of a debtor's homestead exemption is reviewed for abuse of discretion. Onubah v. Zamora (In re Onubah), 375 B.R. 549, 553 (9th Cir. BAP 2007). The findings of fact upon which a surcharge is based are reviewed for clear error, while the bankruptcy court's conclusions of law are reviewed de novo. Kelley v. Locke (In re Kelley), 300 B.R. 11, 16 (9th Cir. BAP 2003).
The imposition of discovery sanctions is reviewed for abuse of discretion. Freeman v. San Diego Ass'n of Realtors, 322 F.3d 1133, 1156 (9th Cir. 2003).
A trial court abuses its discretion if it bases its decision on an erroneous view of the law or clearly erroneous factual findings. Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990). To reverse for abuse of discretion we must have a definite and firm conviction that the bankruptcy court committed a clear error of judgment in the conclusion it reached. Stasz v. Gonzalez (In re Stasz), 387 B.R. 271, 274 (9th Cir. BAP 2008).
DISCUSSION
I.
The bankruptcy court did not abuse its discretion in surcharging Debtor's homestead exemption.
The Bankruptcy Code does not expressly authorize surcharges against a debtor's exemptions. However, the Ninth Circuit has held that a bankruptcy court may equitably surcharge a debtor's statutory exemptions when reasonably necessary to protect the integrity of the bankruptcy process and to ensure that a debtor receives as exempt property an amount no more than what is permitted by the Bankruptcy Code. Latman v. Burdette, 366 F.3d 774, 786 (9th Cir. 2004).
In Latman, the bankruptcy court authorized a surcharge as a form of offset. The debtors had acted fraudulently in their bankruptcy case by intentionally failing to disclose certain assets, and the sale of those assets, in their schedules. When the trustee became aware of the assets and their sale, he sought an accounting from the debtors of the sale proceeds. When they refused to provide the accounting and turn over the sale proceeds, the trustee moved to surcharge the debtors' exemptions. Latman, 366 F.3d at 779. In affirming the decision to impose a surcharge, the Ninth Circuit held that the bankruptcy court did not act to " punish" the debtors by denying them the value of their exemption. Rather, under the facts, the surcharge remedy fashioned by the bankruptcy court was intended to prevent what would otherwise have been a fraud on the bankruptcy court and the Latmans' creditors. Id . at 787.
This Panel has also endorsed use of an exemption surcharge. In In re Onubah, the Panel applied the holding in Latman in an appeal from a surcharge of a homeowner's exemption. 375 B.R. at 553-58. In Onubah, the debtor claimed a $75,000 homestead exemption. The trustee arranged for a sale of the residence, which would generate $96,000 for the bankruptcy estate. While the debtor did not oppose the sale, he later attempted to block the sale by refusing to vacate the residence. The trustee was then forced to prosecute a motion for turnover. On the day the turnover motion was to be heard by the bankruptcy court, the debtor caused the case to be converted from chapter 7 to chapter 11. When the debtor was unable to explain to the bankruptcy court any legitimate purpose for the conversion, the trustee was able to obtain an order reconverting the case to chapter 7 and granting the turnover motion. But when the U.S. Marshal attempted to enforce the turnover order, the debtor informed him that an involuntary bankruptcy had been filed against him in another bankruptcy court, staying the sale. The trustee was thus forced to seek reassignment of the involuntary case to the bankruptcy judge presiding over the chapter 7 voluntary case so the sale could proceed. Ultimately, the bankruptcy court determined that the debtor had colluded with the involuntary petitioners in an effort to prevent the sale and to obstruct the trustee's administration of the estate.
In Onubah, the debtor's obstructionist and fraudulent conduct caused the trustee to expend over $50,000 of estate funds. The trustee filed a motion to surcharge the debtor's homestead exemption to recover the expense. The bankruptcy court granted the motion.
On appeal, the Panel affirmed, agreeing that the debtor's inequitable conduct was not undertaken in good faith. In re Onubah, 375 B.R. at 554. The Panel explained that while Latman involved a case where the debtors had concealed assets, the surcharge remedy may be applied in other exceptional circumstances, too. For example, surcharge can be utilized where a debtor " abused the processes of the bankruptcy court" or where the debtor's " efforts at obstruction were not litigation tactics undertaken in good faith." Id . at 554. Citing a prior decision, the Panel observed that a debtor's conduct resulting in " prejudice to the estate or to the creditors causing actual economic loss may be the basis for the disallowance of an exemption, or conditioning its allowance on the debtor purging the effect of his prejudicial conduct." Id . at 555-56 (citing Arnold v. Gill (In re Arnold), 252 B.R. 778, 788-89 (9th Cir. BAP 2000)). Noting that while a " surcharge may not be used to shift costs to a debtor who has unsuccessfully, but in good faith, opposed a trustee's effort to liquidate [assets] or who has otherwise challenged the trustee's administration of the estate [. .., ]" it is proper to impose a surcharge where required " to compensate the estate for the actual damage inflicted by [a debtor's] misconduct." Id . at 556.
Taken together, Latman and Onubah stand for the proposition that a surcharge of a debtor's exemptions is appropriate only in " exceptional circumstances." Latman, 366 F.3d at 786. However, those exceptional circumstances justifying a surcharge exist when a debtor engages in inequitable or fraudulent conduct that, when left unchallenged, denies creditors access to property in excess of that which is properly exempted under the Bankruptcy Code. Latman, 366 F.3d at 786; In re Onubah, 376 B.R. at 554.
Our concurring colleague, while acknowledging it applies under these facts, opines that the Ninth Circuit's decision in Latman is no longer " good policy" and describes the court's holding as an " outlier." Admittedly, the Tenth Circuit declined to follow Latman in Scrivner v. Mashburn (In re Scrivner), 535 F.3d 1258 (10th Cir. 2008). Notably, it reversed that circuit's BAP in doing so, which expressly endorsed the merits of Latman's approach. See Scrivner v. Mashburn (In re Scrivner), 370 B.R. 346, 352-354 (10th Cir. BAP 2007). Latman teaches that exemption surcharges should not be employed to punish debtors who vigorously, but unsuccessfully, litigate their interests in bankruptcy cases, restricting the use of the bankruptcy court's § 105(a) equitable powers in this context to " exceptional circumstances" where debtors have attempted to abuse or manipulate the bankruptcy system at their creditors' expense. Given these parameters, we disagree with the Tenth Circuit's conclusion that § 105(a) powers are unavailable to compensate for debtor fraud. Moreover, the advent of Rule 4003(b)(2) does not change this analysis. That rule provides a procedure, and establishes a time limit, for challenging the validity of a debtor's exemptions; it does not address situations where an exemption is claimed and allowed, but due to a debtor's bad conduct during the case, ought to be surcharged. Read fairly, the rule does not limit the scope of a bankruptcy court's powers when confronted with debtor fraud. In short, we believe Latman is not only binding here, but that it was correctly decided.
In this case, based upon an ample record, the bankruptcy court found Debtor had engaged in inequitable conduct, bad faith, and fraud on a truly egregious scale. As in Onubah, Debtor attempted to derail Trustee's sale of his house and the proper distribution of the sale proceeds. The bankruptcy court found that the Lili Lin of China second deed of trust was a fiction invented by Debtor, and that Debtor submitted a false document to the bankruptcy court, a promissory note that materially differed from the note filed with the Los Angeles County Recorder's Office, in an attempt to facilitate payment of the fictitious debt. Based on his many dealings with Debtor, the bankruptcy judge did not find credible Debtor's assertions that his submission of this document was accidental. This Panel gives special deference to credibility determinations made by the bankruptcy court. Rule 8013; Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985).
As in his other appeals, Debtor's position here is premised on the existence of a second deed of trust, supposedly granted to and owned by Lili Lin. Of course, had the second deed of trust existed, the total secured liens on the Property would have extinguished any equity in the Property, and Trustee would have had no reason to pursue the sale of the house.
The bankruptcy court heard testimony from Lili Lin of Artesia and Debtor concerning Debtor's attempts to construct a fraudulent second deed of trust to protect his equity from a judgment creditor, and then his attempt to recover the protected equity by a sham transfer from Lin of Artesia to his ex-wife. Lin of Artesia outlined Debtor's scheme, and the bankruptcy court found her testimony credible and Debtor's testimony not credible. Again, we give deference to these credibility findings.
Debtor argues that the " real" Lili Lin was the Lili Lin of China. The Panel, in its decision reversing the First Surcharge Motion, indicated that the Lili Lin of China claim had to be addressed by Trustee and the bankruptcy court. The bankruptcy court did so directly, and dismissed out of hand the notion that such a creditor or claim existed.
Lili Lin of China has never filed a proof of claim in this case. Any pleading that she has filed in this case has proved to be a forgery, fictitious, nor worthy of consideration. And although I've given Lili Lin of China every opportunity that I'm capable of according to her, . . . no lawyer speaking on behalf of the purported Lili Lin of China has come forth with plausible evidence, credible evidence, useful evidence, persuasive evidence. The claim of Lili Lin of China simply does not exist.
Hr'g Tr. 33:4-19 (November 5, 2008). The bankruptcy court succinctly summarized its findings regarding Lili Lin of China in its Memorandum Decision:
No person named Lili Lin ever made a loan to Debtor in exchange for the disputed deed of trust on Debtor's residence. The preponderance of the evidence clearly shows that the loan was a fiction, meant to preserve Debtor's equity in his residence beyond what he was entitled to exempt as a homeowner, and a fraud on his creditors and the court.
Although Debtor has not argued that the court erred in this regard, we note that the bankruptcy court correctly identified and applied the burden of proof concerning Trustee's surcharge motion. As in all exemption disputes, Trustee had the burden of proving that Debtor was not entitled to a portion of a claimed exemption. Rule 4003(c) (" the objecting party has the burden of proving that the exemptions are not properly claimed."). This burden may be satisfied by a preponderance of the evidence. See Gillman v. Ford (In re Ford), 492 F.3d 1148, 1155 (10th Cir. 2007)(" If the trustee fails to carry the burden of proving by a preponderance of the evidence that the exemption should be disallowed, the exemption will stand.")(quoting In re Ciotta, 222 B.R. 626, 629 (Bankr. C.D. Cal. 1998).
Given this record, the bankruptcy court did not clearly err in finding that the second trust deed loan was a fiction intended by Debtor as a fraud on the court. Based upon the evidence and testimony, the court found that Debtor submitted a false document to support the Lin of China secured claim; there were numerous, suspicious circumstances surrounding the second deed of trust; there were inconsistencies in Debtor's statements about the loan proceeds; and Debtor attempted to create a sham transaction through Lin of Artesia.
Based upon these factual findings, the bankruptcy court did not abuse its discretion in deciding to impose an equitable surcharge on Debtor's homestead exemption. Had it not done so, Debtor's scheme may have succeeded in frustrating Trustee's efforts to generate funds from the sale of the Property for the benefit of Debtor's creditors. To protect the integrity of the bankruptcy system, and to prevent Debtor from reaping a benefit from his actions to the prejudice of his creditors, the bankruptcy court was justified in deciding that Debtor not receive his homestead exemption under these facts.
Even so, Debtor argues that, based upon the Panel's decisions in his prior appeals, res judicata precluded relitigation of whether Debtor's homestead exemption could be surcharged in the Second Surcharge Motion. While preclusion prevents relitigating the issues of fact or law necessary to support a judgment, preclusive effect should be denied to judgments and orders that are, by their terms, tentative. RESTATEMENT (SECOND) OF JUDGMENTS § 13; Christopher Klein, Lawrence Ponoroff & Sarah Borrey, Principles of Preclusion and Estoppel in Bankruptcy Cases, 79 AM. BANKR. L.J. 839, 854 (2005). Here, the Panel twice stated in its prior decisions the tentative nature of its rulings regarding whether Debtor's homestead exemption could, upon a proper factual showing, be surcharged. In reversing the First Surcharge Motion, the Panel observed that the Trustee " could seek further monetary sanctions, including a surcharge against exemptions." Then, in its decision reversing the bankruptcy court's order denying Debtor's motion for an order directing Trustee to pay Debtor's homestead exemption, the Panel noted that, even though Debtor " is entitled to his claimed homestead exemption, it still might be subject to surcharge, based on an appropriately supported motion filed by the trustee." Law v. Siegel, BAP no. CC- 07-1127, Memorandum at 11-12.
We conclude that the previous decisions of the Panel reversing the bankruptcy court's order on the First Surcharge Motion and the order denying Debtor's motion to pay the claimed homestead exemption were tentative as to the question whether the exemption might be subject to surcharge such that Trustee was not precluded from seeking a surcharge exemption in the Second Surcharge Motion.
II.
The bankruptcy court did not abuse its discretion in compelling Debtor to attend a deposition and imposing discovery sanctions.
Debtor also appeals the bankruptcy court's order compelling him to attend a deposition in connection with the Second Surcharge Motion, and imposing monetary sanctions against him for failure to cooperate in discovery, on several grounds. Debtor first argues that Trustee had ample opportunity to take his deposition years earlier, such that he should not have been ordered to submit to deposition later. Second, Debtor insists that Trustee's demand that he appear at a deposition and produce documents was intended to harass Debtor. Finally, Debtor contends that production of the documents requested by Trustee would cost $3,000, and Debtor should not be required to provide the documents unless Trustee paid this sum in advance. None of these contentions has merit.
In addressing Debtor's second issue on appeal, we acknowledge the objection of Trustee that an order concerning discovery is, usually, interlocutory and not appealable. Church of Scientology v. United States, 506 U.S. 9, 121 L.Ed.2d 313, 113 S.Ct. 447, 452 n.11 (1992). The discovery order at issue here, though, and the monetary sanctions imposed on Debtor, were directly related to the Second Surcharge Motion. The bankruptcy court's order granting the Second Surcharge Motion was a final judgment disposing of the dispute between Trustee and Debtor concerning the surcharge of the homestead exemption. An interlocutory order, such as this discovery and sanctions order entered as part of the surcharge motion dispute, merges with the final judgment and may be challenged in an appeal of that judgment. Baldwin v. Redwood City, 540 F.2d 1360, 1364 (9th Cir. 1976).
Under the Rules, the Second Surcharge Motion was a contested matter. Rule 9014(a). Rule 9014(c) provides that, unless the bankruptcy court orders otherwise, the discovery procedures set forth in Rules 7028-7037, which effectively incorporate Civil Rules 28-37, are available to the parties in a contested matter. Depositions of parties may be taken without leave of court under Rule 7030 and Civil Rule 30, and the production of documents may be sought under Rule 7034 and Civil Rule 34. See In re Sunridge Assocs., 202 B.R. 761 (E.D. Cal. 1996)(production of documents in connection with a contested matter can be compelled under Rule 7034).
Nothing in the record supports the notion that Trustee, in seeking discovery from Debtor, was motivated by any desire to harass him. Indeed, the Panel's decision regarding the First Surcharge Motion made clear that Trustee would be expected to support any subsequent request for a surcharge of Debtor's exemptions with appropriate and adequate facts and evidence. It appears that Trustee was endeavoring to discover facts relevant to the Second Surcharge Motion.
Moreover, nothing in Rule 7034 requires Debtor to provide the documents demanded by Trustee at Debtor's expense. Instead, the Rule requires only that the documents be produced by Debtor; it was Trustee's responsibility, if he chose to do so, to reproduce copies of the documents at the expense of the estate.
" A party may serve on any other party a request within the scope of Rule 26(b): (1) to produce and permit the requesting party to inspect, copy, test or sample . . . items in the responding party's possession, custody or control[.]." Civil Rule 34(a)(1), incorporated in Rule 7034 (emphasis added); Ares-Serono, Inc. v. Organon Int'l, 151 F.R.D. 215, 220 (S.D.N.Y. 1993)(party seeking documents under Civil Rule 34 is responsible for expense of copying).
Lastly, Debtor argues that sanctions should not have been imposed upon him by the bankruptcy court because he agreed in good faith to participate in the deposition. Trustee correctly notes that Civil Rule 37(a)(5)(A), incorporated in Rule 7037, states that if the motion to compel is granted (which occurred here) or if the requested discovery is only provided after the motion to compel is filed (which occurred here) " the court must, after giving an opportunity to be heard, require the party or deponent whose conduct necessitated the motion, the party or attorney advising that conduct, or both to pay the movant's reasonable expenses incurred in making the motion, including attorney's fees." (Emphasis added.) The record indicates that Trustee complied with the requirements of this rule in that he attempted in good faith to obtain the discovery without judicial intervention. The bankruptcy court provided Debtor an opportunity to be heard on the sanctions motion but Debtor did not attend the hearing.
The sanction imposed by the bankruptcy court of $3,520 was supported and adequately documented by Trustee's declaration of expenses related to the motion to compel. We conclude that the bankruptcy court did not abuse its discretion in compelling Debtor to attend the deposition and produce documents, and imposing compensatory monetary sanctions for Debtor's failure to comply.
CONCLUSION
We AFFIRM the orders of the bankruptcy court.
MARKELL, Bankruptcy Judge, concurring:
I concur. While there is nothing wrong with the panel's application of Latman v. Burdette, 366 F.3d 774 (9th Cir. 2004), I question whether Latman remains good policy. As an initial matter, since Latman was decided, no other federal appellate court has adopted it. See Scrivner v. Mashburn (In re Scrivner), 535 F.3d 1258, 1263-65 (10th Cir. 2008); Mazon v. Tardif (In re Mazon), 395 B.R. 742, 748-50 (M.D. Fla. 2008) (following Scrivner). A leading treatise has also noted Latman's outlier status. 2 COLLIER ON BANKRUPTCY ¶ 105.02[5][b] at n.130 (Henry J. Sommer & Alan Resnick, eds., 16th ed. 2009).
Further, in 2008, after Latman and Onubah v. Zamora (In re Onubah), 375 B.R. 549 (9th Cir. BAP 2007) were decided, the Federal Rules of Bankruptcy Procedure were amended to address fraudulently asserted exemptions. Rule 4003(b)(2) now allows the bankruptcy trustee to challenge fraudulently asserted exemptions for up to one year after a debtor's case is closed. Fed.R.Bankr.P. 4003(b)(2). As this addition specifically addresses the consequences of fraudulently asserted exemptions, I question whether Latman's reliance on Section 105(a)'s residual equitable powers can continue to justify imposing a surcharge in the absence of any specific statutory authority.
But Latman still binds. I thus concur in the panel's application of Latman to these facts.
The second deed of trust was recorded on June 28, 1999. Attached to the filed copy was the promissory note without the birth date. Los Angeles County Recorder's Office No. 9901179298. On February 19, 2006, Debtor and " Lili Lin of China" filed an opposition to the sale of the Property. Attached to Debtor's opposition as Exhibit F was a copy of the promissory note that Debtor asserted had been filed with the Los Angeles County Recorder's Office. However, this promissory note contained the birth date, which was that of the person Debtor represented to the bankruptcy court as Lili Lin of China.
In this regard, the bankruptcy court concluded that Debtor had submitted false evidence to the court.
The bankruptcy court also heard testimony from Debtor. The court made a determination that Lin of Artesia was more credible. Based upon the evidence, the bankruptcy court concluded that Debtor concocted the second deed of trust in order to protect his equity from a judgment creditor, and then attempted to recover the protected equity by a sham transfer to his ex-wife.