FILED DEC 03 2015 1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK 2 U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. EC-14-1204-JuFD ) 6 RONALD DAVID SUTTON and ) Bk. No. 12-35623 KIMBERLY ANN SUTTON, ) 7 ) Adv. No. 12-02590 Debtors. ) 8 ______________________________) ) 9 ANDREW KOSTECKI; ALLOY STEEL ) NORTH AMERICA, INC., ) 10 ) Appellants, ) 11 ) v. ) M E M O R A N D U M* 12 ) RONALD DAVID SUTTON, ) 13 ) Appellee. ) 14 ______________________________) 15 Argued and Submitted on November 19, 2015 at Sacramento, California 16 Filed - December 3, 2015 17 Appeal from the United States Bankruptcy Court 18 for the Eastern District of California 19 Honorable David E. Russell, Bankruptcy Judge, Presiding** _________________________ 20 Appearances: Michael W. Thomas of Thomas & Associates argued 21 for appellants Andrew Kostecki and Alloy Steel North America, Inc.; Brian Crone of Berry & Block 22 argued for appellee Ronald David Sutton. ____________________________ 23 24 * This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may 25 have (see Fed. R. App. P. 32.1), it has no precedential value. 26 See 9th Cir. BAP Rule 8024-1. ** 27 The Honorable Michael S. McManus was assigned to the underlying bankruptcy case and heard all pretrial matters in this 28 adversary. Judge Russell entered the order on appeal.
-1- 1 Before: JURY, FARIS, and DUNN, Bankruptcy Judges. 2 Appellants Andrew Kostecki (Kostecki) and Alloy Steel North 3 America, Inc. (Alloy Steel) (collectively, Plaintiffs) filed an 4 adversary proceeding against chapter 71 debtor, Ronald David 5 Sutton (Debtor), seeking to have their unliquidated prepetition 6 debts declared nondischargeable under § 523(a)(2)(A). Prior to 7 trial, Debtor filed a motion in limine (MIL) seeking to strike 8 Plaintiffs’ alternate direct testimony (ADT) declarations and 9 exhibits at trial because they were not timely served, in 10 violation of Local Bankruptcy Rule (LBR) 9017-1. 11 The bankruptcy court commenced the trial by first hearing 12 Debtor’s MIL. The court granted the motion, finding that 13 Plaintiffs’ untimely served ADT declarations and exhibits in 14 violation of LBR 9017-1 caused extreme prejudice to Debtor and 15 the court. The court then invited Plaintiffs’ counsel to 16 proceed with the trial. Counsel did not do so, contending that 17 he had nothing to proceed with in light of the court’s ruling on 18 the MIL. The bankruptcy court subsequently entered judgment in 19 Debtor’s favor on the ground that Plaintiffs had presented no 20 evidence to support their fraud claims against Debtor. This 21 appeal followed. 22 For the reasons stated below, we REVERSE the bankruptcy 23 court’s order granting Debtor’s MIL, VACATE the judgment and 24 REMAND this matter to the bankruptcy court for further 25 1 26 Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532. 27 “Rule” references are to the Federal Rules of Bankruptcy Procedure and “Civil Rule” references are to the Federal Rules of 28 Civil Procedure.
-2- 1 proceedings not inconsistent with this memorandum disposition. 2 I. FACTS 3 A. Prepetition Events 4 Debtor and his company, Ron Sutton’s Winners Circle, Inc. 5 (RSWC), operated a race car driver development program in 6 Roseville, California. The program trained young drivers for a 7 professional career in stock car racing, including races 8 sanctioned by the National Association of Stock Car Auto Racing 9 (NASCAR). 10 Kostecki’s minor son, Brodie, was an accomplished midget 11 race car driver in Australia. Kostecki learned about Debtor and 12 RSWC through RSWC’s website. There, Debtor used the NASCAR 13 trademark, stating that he was a Top NASCAR Talent Scout and 14 operated an annual NASCAR Talent Search Shootout. The website 15 also contained photographs of NASCAR Team Drivers. Debtor 16 further represented that RSWC had received a $210,000 cash 17 sponsorship from K&N Filters (K&N)2 in 2011. 18 Kostecki, an Australian citizen living in Australia at the 19 time, met with Debtor, who allegedly told Kostecki that he would 20 send emails to NASCAR sanctioned Sprint Cup Teams to discuss 21 where to place Brodie. Kostecki eventually enrolled Brodie in 22 the program and they moved from Australia to Roseville, 23 California. Kostecki sought and received a sponsorship for 24 Brodie’s racing from Alloy Steel.3 25 26 2 K&N Filters is sometimes interchangeably referred to in 27 the record as K&N Engineering. 28 3 Kostecki apparently was an employee of Alloy Steel.
-3- 1 A dispute subsequently arose between the parties and Debtor 2 pertaining to Debtor’s and RSWC’s affiliation or association 3 with NASCAR. Thereafter, Debtor terminated Kostecki’s son from 4 the program. Sometime in 2011, Plaintiffs filed a state court 5 lawsuit against Debtor and RSWC alleging, among other things, 6 that Debtor misrepresented in advertising and other promotional 7 materials that he and RSWC had an affiliation or association 8 with NASCAR and had obtained a $210,000 cash sponsorship from 9 K&N.4 10 B. Bankruptcy Events 11 Debtor filed his chapter 7 petition on August 27, 2012. In 12 Schedule F, he listed Plaintiffs as creditors with unsecured 13 claims arising out of a 2011 state court lawsuit against Debtor 14 and RSWC in an unknown amount. 15 On October 1, 2012, Plaintiffs filed this adversary 16 proceeding against Debtor seeking to have their unliquidated 17 debts declared nondischargeable under § 523(a)(2)(A). 18 Plaintiffs alleged, among other things, that Debtor had made 19 misrepresentations about his affiliation and association with 20 NASCAR and a $210,000 cash sponsorship obtained from K&N. 21 Debtor filed a motion for summary judgment (MSJ). 22 Plaintiffs opposed and submitted six declarations in support of 23 their opposition. Those declarations included Kostecki’s and 24 the declaration of Plaintiffs’ attorney, Michael Thomas 25 (Thomas). 26 4 27 K&N Engineering is a manufacturer of washable performance air filters and air intake systems. K&N has a racing contingency 28 program that affiliates with NASCAR and other similar entities.
-4- 1 Kostecki testified as to how he learned about RSWC and that 2 he enrolled his son in the RSWC program based on the 3 representations on RSWC’s website and from Debtor that his 4 driver development program was affiliated with NASCAR and that 5 he had obtained a $210,000 cash sponsorship from K&N. 6 Attached to Kostecki’s declaration was an email from Debtor 7 about Brodie’s selection to participate in the 2010 NASCAR 8 Talent Search Shootout and a follow-up email stating that Brodie 9 was a finalist for a spot in the NASCAR focused driver career 10 development program. Attached to the follow-up email were full 11 season budgets that Debtor had prepared. There, Debtor stated 12 that he had worked out two full season race plans, with costs, 13 and worked in $10,000 of K&N sponsorship funds. Also attached 14 to Kostecki’s declaration was a flyer for the NASCAR Racing 15 Career Development Program which stated that the program 16 included, among other things, connections to NASCAR Cup Teams. 17 Attached to Thomas’ declaration were relevant portions of 18 Debtor’s and Kostecki’s deposition transcripts and various 19 exhibits. Also attached was the deposition of Anthony Yorkman, 20 who was an employee and Sports Marketing Director of K&N 21 Engineering. Yorkman testified, among other things, that K&N 22 did not award $210,000 in sponsorships to selected drivers in 23 connection with the 2010 Talent Search Shootout and gave no more 24 than $9,246.60 in products to Debtor in 2011. 25 Also included in opposition to the MSJ was the declaration 26 of Jason Houghtaling, an employee of RSWC. Houghtaling declared 27 that Debtor had discussed the status of the litigation between 28 him and Kostecki, and that at one point in 2011, Debtor had him
-5- 1 and other employees cover up or remove any and all references to 2 NASCAR. He further declared that although Debtor and RSWC 3 advertised as a NASCAR Driver Development Program and as a Top 4 NASCAR Talent Scout, he was not aware of any driver enrolled in 5 Debtor’s program ever having been placed on a NASCAR 6 professional team. 7 In addition, Plaintiffs included the declarations of Danny 8 Cristiani and Michael Thompson, both of whom had enrolled their 9 sons in Debtor’s program based on their belief that Debtor and 10 RSWC were affiliated with NASCAR. Eventually, both fathers 11 withdrew their sons from the program. 12 Finally, Plaintiffs submitted the declaration of Rosalie 13 Nestore, a paralegal in the legal department of NASCAR. 14 Attached to her declaration was a letter dated April 27, 2011, 15 sent by NASCAR to Debtor and RSWC telling them to stop using 16 NASCAR’s intellectual property rights. In response, Debtor 17 sought guidance from NASCAR seeking approval to use the phrase 18 “NASCAR focused Driver Career Development Program” in their 19 advertising material. (Emphasis added.) In a May 6, 2011, 20 letter to Debtor, NASCAR requested that Debtor cease and desist 21 its use of the NASCAR trademark as part of its advertising. 22 The bankruptcy court denied Debtor’s MSJ, finding that 23 material facts were in dispute. 24 On May 13, 2013, the bankruptcy court scheduled a trial to 25 commence on September 25-26, 2013, before Judge David R. 26 Russell. 27 On August 21, 2013, the bankruptcy court issued an Order 28 Setting Trial, which stated that the proceeding was governed by
-6- 1 LBR 9017-1. Under that rule, Plaintiffs were required to submit 2 their ADT declarations and related exhibits fourteen days before 3 trial.5 4 On August 30, 2013, Plaintiffs filed a motion seeking a 5 continuance of the trial because Kostecki’s father had been 6 diagnosed with cancer (Continuance Motion). A few days later, 7 Plaintiffs filed a motion seeking to shorten time for a hearing 8 on the Continuance Motion. The bankruptcy court issued an order 9 shortening time, and the hearing on the Continuance Motion, 10 originally scheduled for October 7, 2013, was scheduled for 11 12 5 LBR 9017-1 provides in relevant part: 13 (a)(1) Purpose. The purpose of this procedure is to 14 streamline the adducement of direct testimony in trials 15 and contested matters requiring an evidentiary hearing, so as to reduce trial time without sacrificing due 16 process and a fair trial. This procedure shall be known as the Alternate Direct Testimony Procedure. 17 (2) Applicability. If ordered by the Court, the 18 Alternate Direct Testimony Procedure shall be used 19 in a trial or contested matter requiring an evidentiary hearing. . . . 20 . . . 21 (b) Submission of Alternate Direct Testimony 22 Declarations, Exhibits, and Objections. Unless 23 otherwise ordered by the Court, copies of all alternate direct testimony declarations by witnesses and exhibits 24 that are intended to be presented at trial or hearing shall be furnished to opposing counsel as follows: 25 26 (1) Plaintiff’s Declarations and Exhibits. The plaintiff shall submit to opposing counsel all 27 such declarations and exhibits comprising the plaintiff’s case in chief fourteen (14) days before 28 trial.
-7- 1 September 16, 2013. Based on the September 25th trial date, 2 under LBR 9017-1, Plaintiffs were to provide all ADT 3 declarations and trial exhibits to Debtor’s counsel by 4 September 11, 2013, which they did not do. The bankruptcy court 5 granted Plaintiffs’ Continuance Motion on September 16, 2013. 6 On November 21, 2013, the bankruptcy court scheduled a new 7 trial date for March 10-11, 2014, before Judge Russell. 8 On December 18, 2013, the bankruptcy court issued its 9 formal order scheduling the trial date for March 10-11, 2014, 10 which again stated that LBR 9017-1 applied to the proceeding. 11 Plaintiffs were thus required to submit all ADT declarations and 12 trial exhibits no later than February 24, 2014 (i.e., 14 days 13 before trial). They failed to do so. Debtor timely filed his 14 ADT declarations and exhibits. 15 On February 25 and 26, 2014, Plaintiffs and Debtor 16 submitted deposition testimony each respective side intended to 17 use at trial under the parties’ Stipulation and Order for Use of 18 Deposition Transcripts in Lieu of Live Testimony. 19 Plaintiffs complied with LBR 9017-1 - albeit late - by 20 submitting the ADT declarations and exhibits they intended to 21 use in their case to Debtor’s counsel on March 3, 2014 - seven 22 days before trial. 23 On March 3, 2014, Debtor filed the MIL seeking to strike 24 any ADT declarations and exhibits that Plaintiffs intended to 25 use at trial as a sanction for failing to obey the bankruptcy 26 court’s scheduling order and LBR 9017-1. To support his motion, 27 Debtor cited numerous cases that stand for the proposition that 28 courts have discretion to strike untimely filings. Debtor also
-8- 1 maintained that the late-filed declarations prejudiced his case 2 because he was not afforded adequate time to determine which 3 witnesses to subject to cross-examination and prepare for that 4 cross-examination. Debtor further requested that the court 5 reject Plaintiffs’ request to submit the substance of any 6 proposed declaration via live witnesses. 7 Plaintiffs opposed, asserting that they failed to comply 8 with LBR 9017-1 because they had difficulty obtaining the signed 9 declarations from the declarants for various reasons. 10 Plaintiffs’ excuse for not submitting the timely declaration of 11 Kostecki was that he lived in North Carolina and was traveling 12 in his capacity as Vice-President for Alloy Steel, such that it 13 was difficult to track him down and get documents to him for 14 review and signature. As for Mr. Thompson, Plaintiffs 15 maintained that he lived in the Bay Area and due to his work 16 schedule, there was a delay in getting his signature. Finally, 17 as to Mr. Cristiani, Plaintiffs stated that he lived in Ukiah, 18 California, and had recently acquired a new email address which 19 caused a delay in getting his declaration to him and the signed 20 declaration back. 21 Plaintiffs also argued that there was no prejudice to 22 Debtor or surprise since the ADT declarations were substantially 23 the same as those filed in opposition to Debtor’s MSJ. 24 Plaintiffs further asserted that all of the exhibits submitted 25 were either previously produced by Debtor or by third parties at 26 depositions. 27 The MIL was set to be heard on March 10, 2014, the day of 28 the trial.
-9- 1 On March 10, 2014, the bankruptcy court commenced the trial 2 by first hearing Debtor’s MIL. After concluding that 3 Plaintiffs’ failure to comply with LBR 9017 caused extreme 4 prejudice to Debtor in his trial preparation, the court granted 5 the motion. As a result, Plaintiffs could not use the ADT 6 declarations or exhibits at trial to show that Debtor had made 7 misrepresentations to Kostecki about his race car driver 8 development program and affiliation with NASCAR or that Debtor 9 had never received a $210,000 cash sponsorship from K&N. 10 After granting the MIL, the bankruptcy court invited 11 Plaintiffs’ counsel to proceed with the trial. Counsel 12 responded by saying that he had nothing to proceed with. The 13 bankruptcy court stated: “So if you do not wish to proceed then 14 I will grant judgment for the defendant.” 15 The bankruptcy court entered the order granting Debtor’s 16 MIL on March 20, 2014. Plaintiffs filed a notice of appeal from 17 the order on March 31, 2014. 18 The bankruptcy court issued a judgment in Debtor’s favor on 19 March 20, 2014, which stated: “Findings of fact and/or 20 conclusions of law having been stated orally on the record and 21 good cause appearing, IT IS ORDERED that the judgment is for the 22 defendant.” 23 The bankruptcy court issued an amended judgment on 24 November 12, 2014, which states: “IT IS ORDERED, that Judgment 25 for the Debtor Defendant against both Plaintiffs Andrew Kostecki 26 and Allow[sic] Steel North America, Inc. for failure to present 27 evidence or examine the Debtor[s].” 28
-10- 1 II. JURISDICTION 2 The bankruptcy court had jurisdiction under 28 U.S.C. 3 §§ 1334 and 157(b)(2)(A). The order granting Debtor’s MIL was 4 an interlocutory order that merged into the final judgment. 5 United States v. Real Prop. Located at 475 Martin Lane, Beverly 6 Hills, Cal., 545 F.3d 1134, 1141 (9th Cir. 2008) (under the 7 merger rule interlocutory orders entered prior to the judgment 8 merge into the judgment and may be challenged on appeal). 9 Therefore, we have jurisdiction over both the order denying the 10 MIL and the amended judgment under 28 U.S.C. § 158. 11 III. ISSUES 12 Was the bankruptcy court’s decision to strike the ADT 13 declarations and exhibits akin to a sanction? 14 If the bankruptcy court’s decision was akin to a sanction, 15 what authority did the bankruptcy court rely upon to exercise 16 its discretion and issue the sanction? 17 Did the bankruptcy court abuse its discretion by striking 18 the late-filed ADT declarations and exhibits? 19 IV. STANDARDS OF REVIEW 20 The standard of review for the bankruptcy court’s exclusion 21 of evidence is the same under the court’s inherent powers, the 22 Local Rules of Court, and the Civil Rules. We first engage in 23 de novo review of the legal issue of whether the bankruptcy 24 court possessed the power to exclude Plaintiffs’ evidence. If 25 the power existed, the bankruptcy court’s exercise of that power 26 will only be reversed for an abuse of discretion. Halaco Eng’g 27 Co. v. Costle, 843 F.2d 376, 379 (9th Cir. 1988). “Where the 28 drastic sanctions of dismissal or default are imposed, however,
-11- 1 the range of discretion is narrowed and the losing party’s 2 non-compliance must be due to willfulness, fault, or bad faith.” 3 Fjelstad v. Am. Honda Motor Co., Inc., 762 F.2d 1334, 1337 (9th 4 Cir. 1985). 5 To determine whether the bankruptcy court abused its 6 discretion, we conduct a two-step inquiry: (1) we review de novo 7 whether the bankruptcy court “identified the correct legal rule 8 to apply to the relief requested” and (2) if it did, whether the 9 bankruptcy court's application of the legal standard was 10 illogical, implausible or “without support in inferences that 11 may be drawn from the facts in the record.” United States v. 12 Hinkson, 585 F.3d 1247, 1261-62 (9th Cir. 2009) (en banc). 13 Underlying findings of fact are reviewed for clear error. 14 Halaco Eng’g Co., 843 F.2d at 379. 15 We must inquire de novo whether judgment was properly 16 entered in favor of Debtor once Plaintiffs’ ADT declarations and 17 exhibits had been excluded. Fireman’s Fund Ins. Cos. v. Grover 18 (In re Woodson Co.), 813 F.2d 266, 270 (9th Cir. 1987) 19 (bankruptcy court’s conclusions of law are reviewed de novo). 20 V. DISCUSSION 21 The underlying basis of this appeal appears to be the 22 considerable effect the bankruptcy court’s ruling had on 23 Plaintiffs’ case. Plaintiffs characterize the court’s ruling as 24 a case-terminating sanction akin to dismissal, while Debtor 25 contends that the ruling was merely an evidentiary ruling which 26 did not amount to the dismissal of Plaintiffs’ case as there was 27 other evidence that they could have used to prove their case. 28 Therefore, Debtor asserts that the case law cited by Plaintiffs
-12- 1 that addresses the standards for imposing case-terminating 2 sanctions under the Civil Rules is inapplicable. However, 3 according to Debtor, even if those standards apply, they have 4 been met in this case. 5 Under similar facts, the district court in In re Reimers 6 concluded that the bankruptcy court’s granting of a motion in 7 limine which resulted in the exclusion of declarations at trial 8 was tantamount to a sanction. 2013 WL 9994337 (C.D. Cal. 9 Feb. 12, 2013). We agree with the reasoning set forth in 10 Reimers and adopt its analysis and conclusion for purposes of 11 this threshold issue. Similar to the Reimers court, in our 12 view, the bankruptcy court’s ruling here was “tantamount to a 13 sanction.” Id. at *1. The MIL sought to strike Plaintiffs’ 14 ADT declarations and exhibits because they were untimely filed 15 in violation of LBR 9017-1.6 Such an exclusion is analogous to 16 sanctions under Civil Rule 37(c)(1). As explained in Reimers: 17 Under Rule 37(c)(1), a party who fails to disclose discovery materials may not use those materials as 18 evidence at trial. The Ninth Circuit has repeatedly referred to this consequence as a sanction. See, 19 e.g., Hoffman v. Constr. Protective Services, Inc., 541 F.3d 1175, 1180 (9th Cir. 2008) (referring to 20 Rule 37(c)(1) as “a self-executing, automatic sanction ...”); see also R & R Sails, Inc. v. Ins. Co. of 21 Pennsylvania, 673 F.3d 1240, 1247 (9th Cir. 2012) (noting that “evidence preclusion is, or at least can 22 be, a harsh sanction,” and finding that because the evidentiary sanction “dealt a fatal blow” to the 23 claim, “in practical terms, the sanction amounted to 24 6 Generally, the proper purpose of an in limine motion is 25 not to accuse opposing counsel of engaging in sanctionable 26 conduct, but “to aid the trial process by enabling the Court to rule in advance of trial on the relevance of certain forecasted 27 evidence, as to issues that are definitely set for trial, without lengthy argument at, or interruption of, the trial.” Palmieri v. 28 Defaria, 88 F.3d 136, 141 (2d Cir. 1996).
-13- 1 dismissal of a claim.”). And, as happened in this case, exclusion under Rule 37 of undisclosed materials 2 is generally sought via a motion in limine. See Hoffman, 541 F.3d at 1180 (Rule 37(c)(1) exclusion 3 sanction requested in a motion in limine). Thus, that Appellees here sought exclusion through a motion in 4 limine does not mean that the result was a mere evidentiary ruling as opposed to a sanction. Ninth 5 Circuit case law clearly treats such rulings as sanctions. 6 7 2013 WL 9994337, at *2-3. 8 In addition, like Reimers, we conclude that the bankruptcy 9 court’s ruling amounted to the dismissal of Plaintiffs’ fraud 10 claims based upon their failure to comply with the local rule. 11 See Thompson v. Hous. Auth. of City of L.A., 782 F.2d 829, 831 12 (9th Cir. 1986) (describing court’s inherent authority to issue 13 sanctions for non-compliance with procedures and orders). 14 Without the excluded evidence, it would be extremely 15 difficult, if not impossible, for Plaintiffs to prove their 16 case. To establish nondischargeability as a result of fraud 17 under § 523(a)(2)(A), courts in the Ninth Circuit employ the 18 following five-part test: (1) misrepresentation, fraudulent 19 omission or deceptive conduct by the debtor; (2) knowledge of 20 the falsity or deceptiveness of his statement or conduct; (3) an 21 intent to deceive; (4) justifiable reliance by the creditor on 22 the debtor’s statement or conduct; and (5) damage to the 23 creditor proximately caused by its reliance on the debtor's 24 statement or conduct. Harmon v. Kobrin (In re Harmon), 250 F.3d 25 1240, 1246 (9th Cir. 2001). 26 Here, the record shows that the underlying issues were 27 complex because there were multiple alleged misrepresentations 28 made by Debtor orally and in RSWC promotional materials.
-14- 1 Further, the intent to deceive is a factual question and largely 2 depends upon the credibility of witnesses and the weight to be 3 given to their testimony. See generally Lazaron v. Lucas 4 (In re Lucas), 386 B.R. 332 (Bankr. D.N.M. 2008) (“Rarely is it 5 appropriate to grant summary judgment on a claim for 6 nondischargeability based on 11 U.S.C. § 523(a)(2)(A) because 7 intent to defraud often depends on the credibility of 8 witnesses.”). It was the bankruptcy court’s role to make the 9 necessary credibility determinations. However, because the 10 bankruptcy court excluded Plaintiffs’ late-filed declarations 11 and exhibits, they had no opportunity to establish their 12 credibility in either the first instance or through cross- 13 examination. 14 We also give little credence to Debtor’s suggestion that 15 Plaintiffs could have sought leave of court to put on live 16 testimony. Debtor specifically requested in the MIL that the 17 bankruptcy court deny any request from Plaintiffs to present 18 live testimony and the bankruptcy court’s comments in its ruling 19 essentially foreclosed that possibility. 20 In any event, even if the exclusion of evidence in this 21 case does not amount to a case-terminating sanction, preclusion 22 of evidence is a “drastic measure.” Taylor v. Illinois, 23 484 U.S. 400, 417 n.23 (1988); see also R & R Sails, Inc., 24 673 F.3d at 1247 (noting that “evidence preclusion is, or at 25 least can be, a harsh sanction”). Accordingly, we next consider 26 the underlying authority for the bankruptcy court’s action de 27 novo and whether its imposition of sanctions under that 28 authority was an abuse of discretion. Halaco, 843 F.2d at 379;
-15- 1 see also Zambrano v. City of Tustin, 885 F.2d 1473, 1476 (9th 2 Cir. 1989) (“In determining the validity of any judicial 3 sanction, we must first consider the underlying authority for 4 the court’s action.”). “‘For a sanction to be validly imposed, 5 the conduct in question must be sanctionable under the authority 6 relied on.’” Cunningham v. Cnty. of L.A., 879 F.2d 481, 490 7 (9th Cir. 1988); United States v. Stoneberger, 805 F.2d 1391, 8 1392 (9th Cir. 1986). 9 The bankruptcy court’s power to sanction derives from 10 several sources: its inherent power, Local Rules of Court, and 11 Federal statute. Here, we can only speculate as to what 12 authority the bankruptcy court relied upon since the authority 13 was neither briefed in the MIL nor mentioned in the court’s 14 ruling. Ultimately we conclude that regardless of the authority 15 relied upon, the bankruptcy court’s decision to exclude 16 Plaintiffs’ late-filed declarations and exhibits at trial was an 17 abuse of discretion. 18 Inherent Powers. A bankruptcy court’s inherent powers are 19 “governed not by rule or statute but by the control necessarily 20 vested in courts to manage their own affairs so as to achieve 21 the orderly and expeditious disposition of cases.” Chambers v. 22 NASCO, Inc., 501 U.S. 32, 43 (1991). In appropriate cases, a 23 court may select from the menu of sanctions available under its 24 inherent powers the draconian sanction of dismissal to “the 25 ‘less severe sanction’ of an assessment of attorney’s fees,” 26 Chambers, 501 U.S. at 44-45, to an intermediate sanction of the 27 exclusion of some evidence or testimony, see Dillon v. Nissan 28 Motor Co., 986 F.2d 263, 266-69 (8th Cir. 1993).
-16- 1 Because “inherent powers are shielded from direct 2 democratic controls, they must be exercised with restraint and 3 discretion.” Roadway Express Inc. v. Peper, 447 U.S. 752, 764 4 (1980). There, the Supreme Court stated: 5 Similarly, the trial court did not make a specific finding as to whether counsel’s conduct in this case 6 constituted or was tantamount to bad faith, a finding that would have to precede any sanction under the 7 court’s inherent powers. 8 Id. at 764. To insure that restraint is properly exercised, the 9 Ninth Circuit has routinely insisted upon a finding of bad faith 10 before sanctions may be imposed under the court’s inherent 11 power. For example, in Stoneberger the district court imposed 12 sanctions on a chronically late attorney. Reversing the 13 imposition of sanctions, the Ninth Circuit held that mere 14 tardiness does not demonstrate the improper purpose or intent 15 required for inherent power sanctions. 805 F.2d at 1393. 16 Rather, “[a] specific finding of bad faith . . . must ‘precede 17 any sanction under the court’s inherent powers.’” Id. (quoting 18 Roadway, 447 U.S. at 767). The Ninth Circuit again reversed 19 sanctions due to a lack of intent in Zambrano, 885 F.2d 1473. 20 There, the plaintiff’s counsel negligently failed to comply with 21 local court rules that required admission to the district court 22 bar. The Ninth Circuit vacated the sanctions, holding that the 23 district court may not sanction mere “inadvertent” conduct. Id. 24 at 1485; see also id. at 1483 (“Nothing in the record indicates 25 that their failure to request admission to the district bar was 26 anything more than an oversight or ordinary negligence on their 27 part.”); id. at 1484 (“Willful or reckless disregard of court 28 rules justifies punitive action.”). Similarly, in Yagman v.
-17- 1 Republic Insurance, 987 F.2d 622, 628 (9th Cir. 1993), the Ninth 2 Circuit vacated the imposition of sanctions where there was no 3 evidence that the attorney had “acted in bad faith or intended 4 to mislead the court.” 5 Accordingly, to the extent the bankruptcy court’s decision 6 to exclude Plaintiffs’ late-filed declarations and exhibits was 7 based on its inherent powers, we must reverse. The record does 8 not show that Debtor satisfied the high burden necessary for the 9 preclusion of evidence under the bankruptcy court’s inherent 10 power, and there is no finding of bad faith. 11 Local Rules. Although a bankruptcy court may sanction an 12 attorney for violating local rules, Miranda v. S. Pac. Transp. 13 Co., 710 F.2d 516, 519 (9th Cir. 1983), the Ninth Circuit has 14 required sanctions under local rules to meet strict criteria. 15 Zambrano, 885 F.2d at 1477. In addition to being consistent 16 with the Federal rules, other statutes, and principles of “right 17 and justice,” the sanctions order must be 18 necessary for the court to ‘carry out the conduct of its business.’ There must be a close connection 19 between the sanctionable conduct and the need to preserve the integrity of the court docket or the 20 sanctity of the federal rules. Finally, any sanction imposed must be proportionate to the offense and 21 commensurate with principles of restraint and dignity inherent in judicial power. This last principle 22 includes a responsibility to consider the usefulness of more moderate penalties before imposing a monetary 23 sanction. 24 Id. at 1480 (emphasis added). Finally, there must be a finding 25 of recklessness, repeated disregard of court rules, gross 26 negligence, or willful misconduct. Id.; see also Wehrli v. 27 Pagliotti, 1991 WL 143815, at *2 (9th Cir. Aug. 1, 1991) (“The 28 district court’s authority to impose sanctions for violation of
-18- 1 local rules should be reserved for ‘serious breaches,’ not 2 thoughtless conduct.”); In re Colville Confederated Tribes, 3 980 F.2d 736 (9th Cir. 1992) (Table) (noting that sanctions for 4 violation of local rules are subject to the limits upon the 5 court’s inherent power and statutory authority, and that 6 “[t]hese limits require at a minimum that the sanctions order be 7 supported with an explicit finding of an attorney’s bad faith, 8 and that the misconduct amount to more than a negligent 9 transgression of the local rules.”). 10 Although it is undisputed that Plaintiffs violated 11 LBR 9017-1 by filing their ADT declarations and exhibits late, 12 the rule itself does not expressly authorize the imposition of 13 sanctions. In fact, it does not give warning of the possible 14 consequence if the rules are not strictly followed. We look 15 instead to LBR 1001-1(g) which authorizes the bankruptcy court 16 to impose sanctions for noncompliance with the local rules: 17 Failure of counsel or of a party to comply with these Rules, with the Federal Rules of Civil Procedure or 18 the Federal Rules of Bankruptcy Procedure, or with any order of the Court may be grounds for imposition of 19 any and all sanctions authorized by statute or rule or within the inherent power of the Court, including, 20 without limitation, dismissal of any action, entry of default, finding of contempt, imposition of monetary 21 sanctions or attorneys’ fees and costs, and other lesser sanctions. 22 23 This rule gives fair warning to an attorney or party that a 24 violation of the local rules will subject him or her to a 25 variety of sanctions, including dismissal of any action and 26 “other lesser sanctions.” 27 However, contrary to the strict requirements set forth in 28 Zambrano, the record does not indicate that the bankruptcy court
-19- 1 considered a more moderate penalty before imposing what was 2 essentially a case-terminating sanction. For example, the court 3 could have granted a continuance to allow Debtor’s attorney more 4 time to prepare and impose a monetary sanction to compensate 5 Debtor’s attorney for the wasted appearance. A continuance is 6 the preferred sanction. See United States v. Golyansky, 7 291 F.3d 1245, 1249 (10th Cir. 2002) (“It would be a rare case 8 where, absent bad faith, a district court should exclude 9 evidence rather than continue the proceedings.”). Here, the 10 bankruptcy court discussed no alternatives. 11 The bankruptcy court also did not explicitly find that 12 Plaintiffs’ late filing was reckless or willful, or involved 13 repeated disregard of court rules or gross negligence. Although 14 Debtor complains that Plaintiffs did not comply with LBR 9017-1 15 in connection with the first trial date, their failure to do so 16 does not demonstrate repeated disregard of court rules when 17 their Continuance Motion was pending prior to the time their 18 declarations were due. There is also nothing in the record that 19 shows Plaintiffs’ conduct was reckless or willful. While their 20 conduct shows a lack of diligence, that does not make it 21 sanctionable under Ninth Circuit case law cited above. 22 Accordingly, to the extent the bankruptcy court’s decision 23 to exclude Plaintiffs’ late-filed declarations and exhibits was 24 based on its sanction power under LBR 1001-1(g), we must 25 reverse; the requirements under Zambrano were not met. 26 Civil Rules. Although the bankruptcy court’s decision to 27 exclude the late-filed declarations and exhibits is analogous to 28 Civil Rule 37(c)(1), that rule is inapplicable by its very
-20- 1 terms. Civil Rule 37(c)(1) provides: 2 (1) Failure to Disclose or Supplement. If a party fails to provide information or identify a witness as 3 required by Rule 26(a) or (e), the party is not allowed to use that information or witness to supply 4 evidence on a motion, at a hearing, or at a trial, unless the failure was substantially justified or is 5 harmless. In addition to or instead of this sanction, the court, on motion and after giving an opportunity 6 to be heard: 7 (A) may order payment of the reasonable expenses, including attorney's fees, caused by the failure; 8 (B) may inform the jury of the party's failure; and 9 (C) may impose other appropriate sanctions, including 10 any of the orders listed in Rule 37(b)(2)(A)(i)-(vi). 11 Civil Rule 37 does not appear implicated in this case because 12 there was no discovery or disclosure violation. 13 Generally, the Ninth Circuit has limited application of 14 Civil Rule 37 to its literal scope. Halaco, 843 F.2d at 380 15 n.1. Since there was no discovery-related misconduct, 16 Plaintiffs’ conduct does not fall within the literal language of 17 Civil Rule 37(c)(1), or for that matter any other part of the 18 rule. The bankruptcy court thus did not possess the power to 19 exclude Plaintiffs’ late-filed declarations and exhibits as a 20 sanction under Civil Rule 37. 21 Even if the Civil Rule was applicable, under Ninth Circuit 22 law, the court must weigh five factors in determining whether it 23 is appropriate to exclude evidence as a sanction: (1) the 24 public’s interest in expeditious resolution of litigation; 25 (2) the court’s need to manage its docket; (3) the risk of 26 prejudice to the defendants; (4) the public policy favoring 27 disposition of cases on their merits; and (5) the availability 28 of less drastic sanctions. Thompson, 782 F.2d at 831; Malone v.
-21- 1 U.S. Postal Serv., 833 F.2d 128, 130 (9th Cir. 1987). And, 2 where a sanction amounts to a case-terminating sanction, the 3 court must also consider whether the noncompliance involved 4 willfulness, fault, or bad faith. See R & R Sails, Inc., 5 673 F.3d at 1247 (“sanction amounted to dismissal of a claim, 6 [so] the district court was required to consider whether the 7 claimed noncompliance involved willfulness, fault, or bad faith, 8 . . . and also to consider the availability of lesser 9 sanction”); Fjelstad, 762 F.2d at 1337. If the bankruptcy court 10 fails to make explicit findings for each of these factors, the 11 appellate court must review the record independently to 12 determine whether the dismissal was an abuse of discretion. 13 Malone, 833 F.2d at 130. 14 Here, Debtor argues that even if the court were obligated 15 to apply these factors, the record amply supports the conclusion 16 that the bankruptcy court did not abuse its discretion by 17 excluding Plaintiffs’ evidence. Without matching up the 18 factors to his argument, Debtor maintains that (1) the court 19 found “extreme prejudice” (factor three); (2) the court found 20 that Plaintiffs’ failure to comply with LBR 9017-1 disrupted the 21 proceedings (factor two); and (3) there was no need for the 22 court to unilaterally consider continuing the trial in order to 23 cure Plaintiffs’ failure to comply with LBR 9017-1 under these 24 circumstances (factor five?). Debtor also argues that it was 25 Plaintiffs’ own fault for failing to timely submit the 26 declarations and exhibits, as their explanation for the delay 27 does not show circumstances beyond their control. Therefore, 28 according to Debtor, the requirement for a finding of
-22- 1 willfulness, bad faith, or fault, under R & R Sails has been 2 met. 3 First, even if we were to conclude that the bankruptcy 4 court implicitly found some factors that would support its 5 ruling, it is not evident from the record that other factors 6 were considered. The court did not take into account whether 7 less drastic sanctions could remedy the harm caused to Debtor’s 8 ability to respond to and defend against Plaintiffs’ fraud 9 claims. Nor is there any indication in the record that the 10 court considered the strong public policy favoring disposition 11 of cases on their merits. There was no egregious conduct in 12 this case that would override that policy. It is thus not 13 apparent from the record before us that a proper weighing of the 14 factors would necessarily result in the sanction of dismissal. 15 Second, as noted above, the bankruptcy court made no 16 findings of willfulness, bad faith, or fault. We are not 17 persuaded that the fault at issue here — really more like 18 negligence or oversight — can support the “drastic measure” of 19 excluding Plaintiffs’ evidence. As noted before, while 20 Plaintiffs’ conduct shows a lack of diligence and could be 21 construed as negligence, mere negligence without more is an 22 insufficient ground for imposing case-terminating sanctions. 23 See Zambrano, 885 F.2d at 1480 (“Thus, while we believe that 24 Congress authorized the federal courts to wield reasonable 25 authority over attorneys appearing before them, we do not think 26 that the imposition of financial sanctions for mere negligent 27 violations of the local rules is consistent with the intent of 28 Congress or with the restraint required of the federal courts in
-23- 1 sanction cases.”). 2 Finally, “[t]o support a finding of prejudice, the court 3 must determine that the delay impacted the defendant’s ability 4 to prepare or present its case.” Golyansky, 291 F.3d at 1250. 5 Although Debtor complained that the delay impacted his ability 6 to determine which witnesses to cross-examine and prepare for 7 that cross-examination, these complaints do not add up to 8 extreme prejudice. Granted, we do not have the late-filed 9 declarations before us in the record. However, Plaintiffs’ 10 counsel made an offer of proof before the bankruptcy court and 11 on appeal that the ADT declarations were substantially similar 12 in substance to Plaintiffs’ summary judgment declarations. 13 Therefore, we have good reason to believe that months prior to 14 the trial, Debtor had a good understanding as to what the ADT 15 testimony was regarding the various misrepresentations. Plus, 16 Debtor had the ADT declarations and exhibits a full seven days 17 before trial was to commence. In short, although the 18 declarations in connection with the summary judgment were in a 19 different format and submitted for a different purpose, there is 20 nothing specific in the record from Debtor that suggests there 21 was any real surprise in the content of the late-filed 22 declarations. 23 Accordingly, while there may have been some prejudice to 24 Debtor, the record does not support the bankruptcy court’s 25 finding of “extreme prejudice.” Assuming that there was some 26 prejudice to Debtor, a short continuance of the trial could have 27 remedied the prejudice that concerned Debtor. 28 In sum, it appears that a lack of diligence on the part of
-24- 1 Plaintiffs or their counsel may have disrupted the court’s 2 docket. Such conduct makes some sanction a realistic 3 possibility. However, to the extent the bankruptcy court had 4 authority to impose the sanction under its inherent powers, the 5 Local Court Rules, or the Civil Rules, the bankruptcy court 6 abused its discretion by granting the MIL and excluding the 7 evidence for the reasons discussed above. Therefore, we must 8 find the bankruptcy court erred in entering judgment in favor of 9 Debtor. 10 VI. CONCLUSION 11 For the reasons stated, we REVERSE the bankruptcy court’s 12 order granting Debtor’s MIL, VACATE the judgment and REMAND this 13 matter to the bankruptcy court for further proceedings not 14 inconsistent with this memorandum disposition. 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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