In re Speaks

United States Bankruptcy Court, E.D. VirginiaJun 7, 1996
Case No. 94-14835-AB, Adversary Proceeding No. 95-1087 (Bankr. E.D. Va. Jun. 7, 1996)

Case No. 94-14835-AB, Adversary Proceeding No. 95-1087

June 7, 1996

Sam J. Alberts, Akin, Gump, Strauss, Hauer Feld, L.L.P., Washington, D.C., of Counsel for the plaintiff

Arthur Lander, Arlington, Virginia, of Counsel for the debtor-defendant


MEMORANDUM OPINION


This matter is before the court on the plaintiff's motion for summary judgment as a sanction for the defendant's failure to provide discovery. Because the court believes that summary judgment is proper in light of the sanctions imposed for the debtor's failure to provide discovery and the affidavit previously submitted by the plaintiff in opposition to the defendant's summary judgment motion, the court will grant the motion for summary judgment to the extent of declaring the defendant's liability to indemnify the plaintiff, his former wife, from certain credit card debt nondischargeable. The court will deny, however, the plaintiff's motion for entry of a money judgment against defendant for the stipulated amount of such debt since she has not yet actually paid or been required to pay those sums.

Procedural Background and Facts

The history of this case is set forth in some detail in the court's prior memorandum opinion denying the defendant's motion for summary judgment and will not be repeated. Subsequent to that ruling, the plaintiff served discovery requests, including interrogatories and a notice of deposition, on the defendant in order to inquire into the issue of the parties' intent at the time the property settlement agreement was negotiated and signed, as well as the defendant's current financial situation as it bore on his potential affirmative defenses under § 523(a)(15). The debtor, however, failed to communicate with his attorney and has essentially disappeared without notifying either his attorney or this court of his current address. The attorney "doing the best he could on behalf of his missing client" supplied certain documents that he had in his possession responsive to a request for production of documents served by the plaintiff and also answered certain interrogatories based on his (the attorney's) knowledge. The defendant himself, however, did not sign and swear to any interrogatory responses nor did the defendant appear at a discovery deposition properly noticed by the plaintiff. The plaintiff then moved for sanctions, including the entry of summary judgment, for the defendant's failure to respond to the interrogatories and to appear at the deposition. At a hearing held on May 7, 1996, the court determined that the defendant should be required to furnish sworn responses to certain of the discovery requests that went to the heart of the plaintiffs case and to submit to the taking of a renoticed deposition. Accordingly, the court by order dated May 7, 1996, directed the defendant to answer certain of the interrogatories as specified in the order and to appear for a renoticed deposition to be held on May 24, 1996. The defendant did neither. At a status hearing that the court set for June 4, 1996, to monitor the defendant's compliance with the order, the debtor himself was not present, and his counsel was unable to offer any excuse or justification for his client's failure to comply with the court's order compelling discovery.

King v. Speaks, 193 B.R. 436 (Bankr. E.D. Va. 1995).

The debtor did not expressly plead either of the two affirmative defenses set forth in § 523(a)(15)(A)and(B).

The court also awarded the plaintiff monetary sanctions against the debtor in the amount of $430.00 for the expenses incurred in connection with the deposition at which the debtor did not appear and in connection with bringing the motion for sanctions. A copy of the court's order was mailed by the clerk by certified mail on May 14, 1996, to the debtor's address as shown on the records of the court, in addition to the usual mailing to counsel.

Conclusions of Law and Discussion

This court has jurisdiction of this controversy under 28 U.S.C. § 1334 and 157(a) and the general order of reference entered by the United States District Court for the Eastern District of Virginia on August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I). Venue is proper in this District under 28 U.S.C. § 1409(a).

A.

Under Fed.R.Civ.P. 37(d), made applicable to adversary proceedings in bankruptcy cases by F.R.Bankr.P. 7037, if a party fails to appear for a deposition after being served with proper notice, or fails to answer interrogatories after proper service, the court may, in addition to, or in lieu of, requiring the payment of reasonable expenses, including attorneys fees, occasioned by the failure to appear or respond, impose any of the following sanctions:

(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;

(B) An order refusing to allow the disobedient party to support or oppose designated claims or defenses, or prohibiting that party from introducing designated matters in evidence;

(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.

Fed.R.Civ.P. 37(b)(2). The Fourth Circuit has held that Fed.R.Civ.P. 37(d) gives trial courts wide discretion to impose sanctions for a party's failure to comply with its discovery orders. Mutual Fed. Savings Loan Assn. v. Richards Assocs., Inc., 872 F.2d 88, 92 (4th Cir. 1989). Where, however, the sanction imposed is judgment by default, a trial court enjoys less discretion because "such a decision eclipses a party's right to a trial by jury and a fair day in court." Nichols Assocs. Tryon Properties, Inc. v. United Capitol Ins. Co. (In re: Nichols Assocs. Tryon Properties, Inc., 36 F.3d 1093, 1994 WL 502026 (4th Cir. 1994) (unpublished). The Fourth Circuit has set forth a four-part test ("the Wilson factors") that a trial court must apply before a default judgment may be entered as a sanction for failure to make discovery:

(1) whether the noncomplying party acted in bad faith; (2) the amount of prejudice his noncompliance caused his adversary, which necessarily includes an inquiry into the materiality of the evidence he failed to produce; (3) the need for deterrence of the particular sort of noncompliance; and (4) the effectiveness of less drastic sanctions.

Mutual Fed. Savings Loan Assn. v. Richards Assocs., Inc., supra, 872 F.2d at 92, citing Wilson v. Volkswagen of America, Inc., 561 F.2d 494, 503-4 (4th Cir. 1977), cert. denied, 434 U.S. 1020, 98 S.Ct. 744, 54 L.Ed.2d 768 (1978). Furthermore, the Fourth Circuit has "emphasized the significance of warning a defendant about the possibility of default before entering such a harsh sanction." Hathcockv. Navistar Int'l Transportation Corp. (In re Hathcock), 53 F.3d 36, 40-1 (4th Cir. 1995) (reversing default judgment as abuse of discretion where court "did not even issue a specific order to compel the discovery of materials").

In the present case, the court declined at the hearing on May 7, 1996, to enter a default judgment as a sanction and instead, in addition to imposing a monetary sanction for the costs occasioned by the noncompliance, gave the defendant a further opportunity to comply and ordered compliance. The order, moreover, expressly warned the defendant of the possible consequences of failing to comply. At the hearing on May 7, 1996, debtor's counsel, although objecting to default judgment as a sanction, conceded that in view of the failure to respond to discovery, he would be precluded from offering any evidence at the trial and would be reduced, in effect, to challenging the plaintiff's evidence.

"4. If the defendant fails to comply with the order to answer interrogatories or to appear for deposition as required by this order, the court will, unless adequate justification is shown for the failure to comply, enter summary judgment in favor of the plaintiffs [sic] determining that the unpaid debts charged to the joint credit cards after the date of the settlement agreement are nondischargeable." Order 5/7/96 at p. 2.

B.

Having carefully considered the Wilson factors in the context of the facts of this particular case, the court concludes that the appropriate sanction, in addition to costs in the amount of $150.00 occasioned by his non-appearance at the renoticed deposition, is a ruling precluding the defendant from supporting or opposing designated claims or defenses. Specifically, the court determines that the defendant, as a sanction for his failure to provide the ordered discovery, should be precluded from opposing the plaintiff's claim that the parties agreed, as part of the property settlement agreement, to make no further charges to the joint credit cards after they were paid off. The court also determines that the defendant should be precluded from offering evidence in support of either of the two potential affirmative defenses to the § 523(a)(15) exception from discharge.

The reason why such sanctions are appropriate is that the discovery ordered by the court goes to the very heart of the plaintiffs case with respect to those issues. Without the discovery ordered by the court, the plaintiff cannot reasonably prepare to meet any potential evidence by the debtor regarding the circumstances surrounding the property settlement agreement and the parties' intent with respect to the agreement for the payment of the joint credit card debt. Similarly, without the discovery ordered by the court, the plaintiff cannot reasonably prepare to meet any potential evidence by the debtor with respect to the debtor's ability to pay or balance of hardships in discharging or not discharging the debt (assuming the debt were determined not to be in the nature of support but an "other" obligation incurred in connection with a divorce decree or settlement). The debtor's failure to respond is unexplained and appears to be willful. The debtor, having failed to answer the interrogatories and to appear for the taking of his deposition, was specifically ordered by the court to do so and was warned by the court that a possible sanction for his failure to do so was the entry of summary judgment in the plaintiff's favor. Finally, the court has already employed less drastic sanctions without effect.

C.

That said, however, the sanctions that the court has determined to impose leave the defendant, as a practical matter, with no means of opposing the plaintiff's claims. The court has before it the plaintiff's affidavit dated August 24, 1995, with supporting exhibits, filed in response to the defendant's motion for summary judgment. In light of the defendant's inability "whether as a legal matter arising from the sanctions imposed by the court, or as a practical matter because of his likely absence from any trial that might be held" to oppose the assertions in the affidavit, it is clear that the plaintiff is entitled to summary judgment in her favor.

First, as to the exception to discharge under § 523(a)(5), Bankruptcy Code, for debts that are in the nature of alimony or support, the plaintiff's affidavit, which on the present record is unrebutted, expressly states that she and the debtor intended the payment of the joint credit card debt to provide her further financial support by eliminating a possible financial liability and by ensuring that she would be able to obtain future credit if needed. The plaintiffs assertion as to the reason for paying off the joint charges is plausible and entirely consistent with the specific language of the property settlement agreement that "[a]ll mutual debts and obligations have either been paid or resolved by allotment to each of the parties. . . . " It is also corroborated by the findings of the May 6, 1994 order of the divorce court directing the debtor to transfer the card balances to accounts solely in his name. Accordingly, summary judgment that the debtor's obligation to indemnify the plaintiff for the post-divorce charges to the joint credit cards constitutes a nondischargeable support obligation under § 523(a)(5) is appropriate.

The legal issues involved are discussed in more detail in the court's prior opinion. 193 B.R. at 441-2.

But even if the court is wrong on this point, it is clear that the plaintiff has established an unrebutted case for nondischargeability under § 523(a)(15), Bankruptcy Code. The plaintiffs affidavit demonstrates that the property settlement agreement of January 7, 1988 was understood and intended by the parties to preclude any further charges on the joint credit cards after they were paid off. The agreement was entered into in connection with the divorce of the parties and was expressly incorporated in the Decree of Divorce A Vinculo Matrimonii dated September 12, 1988, entered by the Circuit Court of Prince William County, Virginia. The joint credit cards were paid off but were not cancelled, and at some subsequent point the debtor, without the knowledge or consent of his former wife, began using the cards again. After the plaintiff learned of the charges, she returned to the Circuit Court of Prince William County, which on May 6, 1994, entered an order in the divorce case that "in addition to finding certain arrears in court ordered spousal support and a failure to provide health insurance as required by the property settlement agreement and divorce decree" also expressly found that the defendant "used credit cards which obligate the complainant to repay sums incurred by the defendant since the date of the final decree of divorce" and that his failure to pay the charges "have appeared on the complainant's credit report, thereby causing hardship to her in that credit has been denied because of the Husband's separate debt and his failure to pay his separate debt." The order directed the defendant to "assume responsibility for all debt" to NationsBank, Bank of New York, and Independent Bank of Manassas. The evidence amply establishes a legal obligation "incurred by the debtor in the course of a divorce . . . or in connection with a separation agreement, divorce decree or other order of a court of record." There is no evidence before the court to support the potential affirmative defenses that the debtor does not have the ability to pay those debts or that discharging the debt would result in a benefit to the debtor that outweighs the detrimental consequences to his former wife. Accordingly, summary judgment of nondischargeability under § 523(a)(15), Bankruptcy Code, is appropriate.

"A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt —
* * *

(15) not of the kind described in paragraph (5) that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record . . . unless —

(A) the debtor does not have the ability to pay such debt from income or property of the debtor not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor and, if the debtor is engaged in a business, for the payment of expenditures necessary for the continuation, preservation, and operation of such business; or

(B) discharging such debt would result in a benefit to the debtor that outweighs the detrimental consequences to a spouse, former spouse, or child of the debtor.

D.

As a final matter, the court must determine whether, in addition to determining that the debtor's duty to indemnify his former wife is nondischargeable, the court may also enter a money judgment against the debtor for the amount of the unpaid joint credit card charges, which the parties stipulated on the record at the hearing on June 4, 1996, to $11,099.91. Certainly, there can be little doubt that a bankruptcy court, in determining a debt that has not previously been reduced to judgment is non-dischargeable, may also at the same time enter a money judgment in favor of the creditor. Harris v. U.S. Fire Ins. Co., 162 B.R. 466 (E.D.Va. 1994) (Cacheris, C.J.). The plaintiff, in her amended complaint, specifically asked for a money judgment. The question, which the court raised on its own motion at the hearing on June 4, 1996, is whether a money judgment is proper where, although there is a duty to indemnify, the plaintiff has not paid any portion of the debt.

Under Virginia law it seems clear that a cause of action for indemnity accrues "when the indemnitee has paid or discharged the obligation." § 8.01-249(5), Code of Va. (1950), as amended. American Nat'l Bank of Portsmouth v. Ames, 169 Va. 711, 748, 194 S.E. 784, 797 (1938) ("It is uniformly held that there can be no recovery on an indemnity obligation where there has been no actual loss or damage"); City of Richmond v. Branch, 205 Va. 424, 430, 137 S.E.2d 882, 886 (1964) ("The right to indemnification arises only where there has been actual loss or damage. Here, the City had not suffered any loss or damage at the time it filed its cross-claim. It was not subject to actual loss or damage, unless and until the plaintiff recovered and collected from it."); A/8 J. Ludwig Mowinckles Rederi v. Tidewater Constr. Co., 559 F.2d 928, 933, n. 8 (4th Cir. 1977) (noting but not deciding issue). This principle was applied most recently by the Supreme Court of Virginia in Allied Productions, Inc. v. Duesterdick, 217 Va. 763, 232 S.E.2d 774 (1977), a legal malpractice action where the plaintiff had suffered a default judgment of $210,000 as a result of the defendant attorney's alleged negligence in failing to defend a suit. It was undisputed that the plaintiff had not paid any portion of the judgment. The trial court had sustained a demurrer to the motion for judgment, and the Supreme Court of Virginia, affirming, stated

The statute ("When cause of action shall be deemed to accrue in certain personal actions") does, however, contain an exception allowing a third-party claim to "be asserted before such cause of action is deemed to accrue hereunder[.]"

Insofar as the client in the present case claims damages on account of the default judgment it is in the nature of a claim for indemnity in which the client seeks to have the attorney save him harmless from the debt owed to the judgment-creditor. But until the client has made a payment on that debt he has suffered no actual loss or damage.

Accordingly, we hold that when a client has suffered a judgment for money damages as the proximate result of his lawyer's negligence, such judgment constitutes actual damages recoverable in a suit for legal malpractice only to the extent such judgment has been paid.

217 Va. at 766, 232 S.E.2d at 776 (emphasis added).

Although an unpublished decision, and therefore not entitled to precedential effect, a recent Court of Appeals of Virginia decision is instructive, as it reaches a similar conclusion in a factual context closer to that presently before the court. Kinsley v. Kinsley, No. 2507-9-4, 1995 WL 605553 (Va.App. Oct. 17, 1995). In that case, the husband had brought a contempt action against his former wife for failing to pay a promissory note, as previously ordered by the court. Because the former wife failed to pay the loan, the lower court awarded the husband damages of $11,414.58, "the amount due on the bank judgment against the parties as of the date of the hearing." Slip. Op. at 1. The appellate court, however, reversed the award of damages, stating:

The relief ordered by the circuit court goes considerably beyond indemnification. The record does not show that appellee has sustained damages in the amount awarded. It permits the appellee to recover from the appellant speculative future damages.

Slip. Op. at 2.

Virginia does recognize certain exceptions to this rule. If a contract, such as a standard policy of automobile liability insurance, evidences an undertaking to indemnify, not merely against loss, but against liability for a claim, the party entitled to indemnity may sue on the obligation (here the insurance policy) as soon as the amount of the claim is fixed and without first paying the judgment. Indemnity Ins. Co. of North America v. Davis' Adm'r., 150 Va. 778, 143 S.E. 328 (1928). Additionally, where a party has by contract expressly agreed to assume a particular debt, the original obligor, after successfully being sued on the obligation, may bring a corresponding suit for indemnity without first paying the debt. Linbrook Realty Corp. v. Rogers, 158 Va. 181, 163 S.E. 346 (1932) (deed of trust assumed in connection with sale of real estate). Here, however, the property settlement agreement did not contain specific language under which the parties agreed to indemnify each other for liability, nor did the agreement include a provision for a particular debt to be assumed by one of the parties.

There is certainly a strong argument to be made that the plaintiff, although she has not paid any part of the joint credit card debt run up by her former husband, has nevertheless in a very real sense suffered actual damage by virtue of the resulting stain on her credit report, which she states in her affidavit has resulted in her being denied credit. Since the debtor's own liability to the card issuers has now been discharged in bankruptcy, the card issuers have only her to look to for payment, thereby eliminating the possibility that should the debtor pay the plaintiff, she might simply retain the funds (rather than using it to pay the card issuers), placing the debtor in jeopardy of having to pay the same sum a second time when sued by the card carrier. And there can be no question that granting the plaintiff a money judgment against the debtor would afford her real relief, since (assuming, of course, she could actually collect the judgment) she would then have the funds to pay the accounts off herself. In view, however, of the explicit language of § 8.01-249, Code of Va., and in the absence of any Virginia case law that would sanction the award of damages (except in the specific context of a third-party motion for judgment) in a common-law indemnity action before the indemnitee has paid the liability, the court, albeit reluctantly, concludes that entry of a money judgment is not proper until the plaintiff suffers actual damage in the form of paying the debt. The court will, of course, enter a judgment declaring that the debtor's liability to indemnify the plaintiff is nondischargeable, but a separate action will have to be brought in a court of appropriate jurisdiction for an award of money damages after the right to such damages accrues.

She also states that one of the credit card companies has commenced legal proceedings to collect the debt.

Under the specific exception in § 8.01-249(5), Code of Va., if the plaintiff were sued by one or more of the card issuers, she would be entitled to assert a third-party claim for indemnity against the debtor in the context of that suit.

E.

A separate judgment will be entered consistent with this opinion.