Opinion
Case No. 98-16622-SSM, Adversary Proceeding No. 99-1028
August 18, 1999
David N. Goldberg, Esquire, Rathbun Goldberg, PC, Fairfax, VA, of Counsel for the plaintiff
Mr. George O'Neal, McLean, VA, for Defendant pro se
Mrs. Patricia O'Neal, Vienna, VA, Defendant pro se
MEMORANDUM OPINION AND ORDER
A hearing was held in open court on August 17, 1999, on (a) the motion filed by the plaintiff on July 6, 1999, for entry of default judgment as to defendant George G. O'Neal with respect to Counts I ("Fraud"), III ("Conversion") and IV ("Embezzlement"), and with respect to both defendants as to Count VIII(objection to discharge). The plaintiff was present by counsel. Neither defendant was present. After hearing argument from plaintiff's counsel, the court ruled from the bench that default judgment would be entered with respect to those counts to which responsive pleadings had not been filed; that sanctions in the form of summary judgment on the issue of liability and compensatory damages would be entered against defendant George G. O'Neal on Counts I, HI, and IV; and that an evidentiary hearing would be set on the issue of punitive damages. Because of concern over the state of the pleadings, however, the court declined to sign orders in the form presented by the plaintiff and took under advisement the form of order to be entered. Having further reviewed the file, it is apparent that a ruling granting default judgment against defendant George G. O'Neal on Counts I and VIII is not appropriate. The court will, however, enter a default judgment against defendant George G. O'Neal on Counts in and IV for failure to file responsive pleadings, and will enter summary judgment against defendant George G. O'Neal on Count I for failure to comply with the orders previously entered compelling discovery.
The complaint contained two Counts IV. The second Count IV ("Violation of the Federal Securities Laws") has been previously dismissed.
Counsel for the defendants was permitted to withdraw by order dated May 11, 1999, and at this point both defendants are pro se.
Background
George G. O'Neal and Patricia N O'Neal, husband and wife, filed a joint voluntary petition under chapter 7 of the Bankruptcy Code in this court on September 9, 1998, and have not yet received a discharge. The present adversary proceeding was filed by Dr. Kin-Sing Au, an investor in one of Mr. O'Neal's business ventures, on February 3, 1999. The pleaded causes of action involve $190,000 which the plaintiff alleges he invested in one of O'Neal's companies, Kelley Development Corporation, to be used, according to Mr. O'Neal, for the purpose of developing three shopping centers that were never built. As originally framed, the complaint sought a wide variety of relief, not only against Mr. and Mrs. O'Neal, but also against the bankruptcy trustee.
Summonses were issued on February 4, 1999, and were served on Mr. and Mrs. O'Neal personally on February 17, 1999. The deadline for filing an answer, motion for more definite statement, or motion to dismiss was March 12, 1999. On March 2, 1999, Mr. O'Neal, who at that point was still represented by an attorney, filed a "response" with respect to Counts I and VIII and a motion to dismiss as to all the remaining counts. That same date Mrs. O'Neal, who was represented by the same attorney, filed a separate motion to dismiss as to all counts.
While there is an internal inconsistency in that the "response" refers to the latter count both as Count VII and as Count VIII, the identification of the count as being the "last" count in the complaint leads to the conclusion that Count VIII — which is indeed the last count — was the one intended.
On May 11, 1999, a hearing was held on the motions to dismiss. Not a little confusion was engendered by the fact that the complaint, as a result of a drafting blunder, included two Counts IV and two Counts V. The court's rulings, as set forth in an order of the same date, may be summarized as follows:
The defendants' pleadings referred to this as Count IV(a), to distinguish it from the second Count IV, which they referred to as Count IV(b). The defendants likewise referred to the two Counts V as Count V(a) and Count V(b).
The order required Mr. O'Neal to file and serve an answer to Counts I, III, and IV, and that both Mr. and Mrs. O'Neal file and serve an answer to Count VIII, within 20 days. That portion of the order, to the extent it did not focus on the fact that Mr. O'Neal had already filed a "response" to Counts I and VIII, was in error. In any event, answers would have been due from Mr. O'Neal with respect to Counts III and IV, and from Mrs. O'Neal with respect to Count VIII, not later than June 1, 1999.
No answers (other than the original "response" to Counts I and VIII by Mr. O'Neal) have ever been filed. In the interim, the plaintiff filed a motion to compel Mr. O'Neal to respond to interrogatories and requests for documents that had been served on him. That motion was heard on May 26, 1999, and was granted by an order of the same date requiring Mr. O'Neal to respond to the discovery requests within ten days of the entry of that order. When the discovery responses were not forthcoming, the plaintiff filed a motion for sanctions, as well as a motion for default judgment with respect to those counts to which the defendants had not pleaded. Those motions were heard on July 27, 1999. Mr. O'Neal appeared, but Mrs. O'Neal did not. Mr. O'Neal explained that he was overwhelmed trying to respond to the numerous adversary proceedings that had been filed against him and that he was attempting to locate new counsel to represent him. The court declined to enter either a default judgment or an order granting sanctions at that time and instead entered an order giving the defendants through August 11, 1999, to file an answer "to Counts III, IV, and VIII of the complaint" and to serve complete responses to all outstanding discovery responses. The court then continued the motion for default judgment and the motion for sanctions to August 17, 1999. At the hearing on August 17, 1999, neither defendant appeared. A review of the file reflects that no answers have been filed by Mr. O'Neal to Counts III and IV or by Mrs. O'Neal to Count VIII. Counsel for the plaintiff represented that no discovery responses have been served.
The court has been advised that Mr. and Mrs. O'Neal are now separated.
A total of five adversary proceedings — including one by the chapter 7 trustee — have been filed against Mr. and Mrs. O'Neal, and two against Mr. O'Neal only, seeking either a determination of nondischargeability or objecting to discharge or both. This is in addition to a separate adversary proceeding by the trustee to recover property that the debtors allegedly conveyed to their minor daughter shortly before the bankruptcy filing. Additionally, the United States Trustee brought a motion to dismiss the debtors' bankruptcy case with prejudice based on the debtors' failure to correct their schedules to list omitted assets that the trustee and creditors had discovered. The court denied that motion, not on the merits, but on the basis that the relief requested was more properly the subject of an adversary proceeding.
Discussion A. Default Judgment
Under Federal Rule of Bankruptcy Procedure 7012(a), an answer to a complaint in an adversary proceeding is due within 30 days after issuance of the summons, unless within that time a motion to dismiss is filed. If the motion to dismiss is denied, an answer is ordinarily due within ten days of the denial of the motion, but that time may be enlarged by the court. In the present case, Mr. O'Neal filed a timely answer to Counts I and VIII and a timely motion to dismiss as to the remaining counts. Mrs. O'Neal filed a timely motion to dismiss as to all counts. The court granted those motions in part and denied them in part and gave the defendants 20 days in which to file answers. Two and a half months have elapsed since the date answers were due, and no answers have been filed in response to the court's order. While the court is keenly aware that the defendants are without counsel and that representing themselves in an action such as this is not a trivial undertaking, nevertheless the plaintiff should not be held hostage to a complete failure on the part of the defendants to properly plead to the complaint. Accordingly, default will be entered against Mr. O'Neal on Count III ("Conversion") and Count IV ("Embezzlement"). The affidavit filed by the plaintiff in support of his motion reflects that his claim for compensatory damages is liquidated in the amount of $190,000. Accordingly, default judgment will be entered against Mr. O'Neal for compensatory damages in that amount. A separate evidentiary hearing will be set on the plaintiff's unliquidated claim for punitive damages. Default judgment will be entered against Mrs. O'Neal on Count VIII (objection to discharge) and she will be denied a discharge. The motion for default judgment against Mr. O'Neal on Counts I and VIII will be denied, since his timely "response" does at least minimally constitute an answer.
The plaintiff argues that the "response" — which is simply a general denial of the allegations of Counts I and VIII — fails to meet the requirements of Rule 8(b), Fed.R.Civ.P., as incorporated by Fed.RBankr.P. 7008, which states that a defendant "shall admit or deny the averments upon which the adverse party relies." However, Rule 8 does not prohibit a general denial in those instances "when the pleader . . . intends [in good faith] to controvert all [the] averments" of a pleading, subject, however, to the obligations set forth in Rule 11, Fed.R.Civ.P. While Mr. O'Neal's good faith is certainly suspect, suspicion alone is not a basis for striking the answer as it pertains to Counts I and VIII.
B. Sanctions
Under Rule 37(b), Fed.R.Civ.P., which is incorporated by F.R.Bankr.P. 7037, a party who disobeys an order to provide discovery is subject to sanctions which may, among other things, include:
(A) An order that the matters regarding which the order was made or any other designated facts shall be taken to be established for the purposes of the action in accordance with the claim of the party obtaining the order; [or]
* * *
(C) An order striking out pleadings or parts thereof, or staying further proceedings until the order is obeyed, or dismissing the action or proceeding or any part thereof, or rendering a judgment by default against the disobedient party[.]
The Fourth Circuit has cautioned, however, that a judgment by default against the disobedient party is a severe sanction and that a court, before imposing it, should consider (1) whether the non-complying party acted in bad faith, (2) the extent of prejudice to the non-complying party's opponent, (3) the need for deterrence, and (4) the effectiveness of less drastic sanctions. Wilson v. Volkswagen of America, Inc., 561 F.2d 494, 503 (4th Cir. 1977). In this connection, the court can hardly avoid taking note that the debtors have consistently failed, not merely in this action, but in their underlying bankruptcy case, to provide information requested by the creditors and trustees. Indeed, their failure to amend their schedules even after admitting that the schedules were incorrect was the basis of a motion brought by the United States Trustee to dismiss their case with prejudice. The court is, of course, conscious that Mr. O'Neal is presently involved in a lot of litigation and is not represented by counsel. However this adversary proceeding has been pending six months, the discovery cutoff expired two months ago, and Mr. O'Neal has not provided any information, nor any excuse except that he is overwhelmed. The prejudice to the plaintiff is palpable, and the court concludes that less drastic sanctions would not be effective, particularly given what the court considers to have been a generous additional extension after Mr. O'Neal failed to obey the order of May 26, 1999. Accordingly, the court will, as a sanction for the failure to provide discovery, enter an order establishing certain facts that the plaintiff sought to determine and entering summary judgment against Mr. O'Neal with respect to Count I ("Fraud") in the amount of $190,000.00 as compensatory damages. A further hearing will be set on the issue of punitive damages.
ORDER
For the foregoing reasons, it is
ORDERED:
1. Judgment by default is entered against defendant George G. O'Neal on Counts III and IV with respect to liability and compensatory damages, which the court fixes at $190,000.00, and such debt is determined to be nondischargeable under 11 U.S.C. § 523(a)(4).
2. The following facts are taken as established for the purpose of this litigation: (1) defendant George G. O'Neal defrauded the plaintiff into investing $190,000 in a sham business to develop shopping centers; (2) defendant George G. O'Neal pocketed the plaintiff's entire investment and used the plaintiff's entire investment for his own personal use and gain; and (3) defendant George G. O'Neal never took any action to develop shopping centers.
3. Summary judgment is entered against defendant George G. O'Neal on Count I with respect to liability and compensatory damages, which the court fixes at $190,000, and such debt is determined to be nondischargeable under 11 U.S.C. § 523(a)(2).
4. A hearing will be held on October 4.1999. at 9:30 a.m. , solely for the purpose of fixing punitive damages with respect to Counts I, III, and IV.
5. Default judgment is entered against defendant Patricia N. O'Neal on Count VIII, and Patricia N. O'Neal is denied a discharge.
6. The clerk will mail a copy of this order to the parties listed below.