727 F.3d 751 (7th Cir. 2013), 12-1349, Wellness Int'l Network, Ltd. v. Sharif
|Citation:||727 F.3d 751|
|Opinion Judge:||Tinder, Circuit Judge.|
|Party Name:||WELLNESS INTERNATIONAL NETWORK, LIMITED, RALPH OATS AND CATHY OATS, Plaintiffs-Appellees, v. RICHARD SHARIF, Defendant-Appellant|
|Attorney:||In the Matter of: RICHARD SHARIF, Debtor - Appellant: William J. Stevens, Attorney, Bridgman, MI. For WELLNESS INTERNATIONAL NETWORK, LIMITED, RALPH OATS, CATHY OATS, Appellees: Gina M. Krol, Attorney, COHEN & KROL, Chicago, IL; Michael J. Lang, Attorney, GRUBER HURST JOHANSEN HAIL SHANK LLP, Dal...|
|Judge Panel:||Before FLAUM, SYKES, and TINDER, Circuit Judges.|
|Case Date:||August 21, 2013|
|Court:||United States Courts of Appeals, Court of Appeals for the Seventh Circuit|
Argued September 18, 2012.
[Copyrighted Material Omitted]
Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 1:10-cv-05303 -- Harry D. Leinenweber, Judge.
This appeal is the most recent chapter in a decade-long saga spanning two circuits involving the debtor, Richard Sharif, and his judgment creditors, Wellness International Network, Ltd., Ralph Oats, and Cathy Oats (collectively, " WIN" ). After being slapped with a judgment in excess of $650,000 in the Northern District of Texas as a sanction for his failure to engage in discovery, Sharif filed for Chapter 7 bankruptcy in the Northern District of Illinois. WIN filed a five-count adversary complaint in the bankruptcy court. Counts I through IV sought to prevent discharge of Sharif's debts under 11 U.S.C. § 727, and Count V sought a declaratory judgment that a trust of which Sharif was trustee was in fact Sharif's alter ego. Sharif continued his evasive and dilatory tactics, failing to respond to WIN's and the bankruptcy trustee's discovery requests. The bankruptcy court ordered Sharif to comply with the discovery requests and warned him that failure to do so would result in a default judgment. Sharif tendered some discovery but his responses fell far short of full compliance. After a hearing, the bankruptcy judge issued an opinion and order entering
default judgment in WIN's favor and subsequently awarded attorney's fees to WIN. Sharif appealed to the district court. See 28 U.S.C. § 158(a)(1).
After the bankruptcy judge's entry of judgment but before briefing on the appeal in the district court, the Supreme Court decided Stern v. Marshall, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), in which it held that a bankruptcy court lacked constitutional authority to enter final judgment on a debtor's state-law counterclaim against a creditor, even though Congress had granted the bankruptcy court statutory authority to do so. A few months after Stern was decided, Sharif filed his opening brief in the district court, but he did not challenge the bankruptcy judge's authority to enter final judgment on the adversary complaint. In December 2011, Sharif's sister filed a motion in the district court to withdraw the reference on the basis of Stern. Later that month, our court decided Ortiz v. Aurora Health Care, Inc. ( In re Ortiz ), 665 F.3d 906 (7th Cir. 2011), in which we dismissed a direct appeal from a bankruptcy court on the ground that there was no final judgment because the bankruptcy judge had lacked constitutional authority to enter one under Stern. Shortly thereafter, Sharif filed a motion for supplemental briefing in the district court so that he could advance a Stern argument. The district judge denied both motions as untimely, holding that a Stern objection to a bankruptcy judge's authority to enter final judgment is waivable and that Sharif's failure to raise it earlier constituted waiver, and affirmed the bankruptcy court's entry of default judgment. Sharif's sister did not appeal the denial of her motion to withdraw the reference, but Sharif appealed the balance of the district court's decision to this court.
We hold that a constitutional objection based on Stern is not waivable because it implicates separation-of-powers principles. We also hold that the bankruptcy judge lacked constitutional authority to enter a final judgment on the alter-ego claim. In contrast, we hold that the bankruptcy judge had constitutional authority to enter final judgment on the first four counts of the adversary complaint, each of which were objections to the discharge of Sharif's debts. Finally, we hold that the entry of default judgment and awarding of fees were proper sanctions under the circumstances, though we remand for a recalculation of fees.
A. Texas Litigation
The parties' relationship began when Sharif entered into distributorship contracts with WIN for the sale of health and wellness products. In January 2003, Sharif and others sued WIN in the Northern District of Illinois claiming that WIN was running a pyramid scheme. Sharif v. Wellness Int'l Network, Ltd., 376 F.3d 720, 722 (7th Cir. 2004). In 2004, our court reversed the district court's denial of WIN's motion to compel arbitration on some of the claims. Id. at 726-27. On remand, the district court dismissed without prejudice the claims that were not subject to arbitration pursuant to forum-selection clauses in the contracts requiring suit to be filed in the Northern District of Texas, and this court affirmed. Muzumdar v. Wellness Int'l Network, Ltd., 438 F.3d 759 (7th Cir. 2006).
Sharif and his co-plaintiffs refiled their suit in the Northern District of Texas. See In re Sharif, 447 B.R. 853, 854 (Bankr. N.D.Ill. 2011). They ignored WIN's discovery requests, resulting in the material facts being deemed admitted against them. The district court subsequently granted summary judgment for WIN, and the
Fifth Circuit affirmed, observing as follows:
A review of the record on appeal demonstrates that Appellants' untimely performance in this court mirrors a lengthy history in the district court of dilatoriness and hollow posturing interspersed with periods of non-performance or insubstantial performance and compliance by Appellants and their counsel, leaving the unmistakable impression that they have no purpose other than to prolong this contumacious litigation for purposes of harassment or delay, or both. The time is long overdue to terminate Appellants' feckless litigation at the obvious cost of time and money to the Defendants by affirming all rulings of the district court but remanding the case to that court for the reinstatement of its consideration of Appellees' motion for attorney's fees. In so doing, we caution Appellants that any further efforts to prolong or continue proceedings in this court, including the filing of petitions for rehearing, will potentially expose them to the full panoply of penalties, sanctions, damages, and double costs pursuant to FRAP 38 at our disposal.
Sharif v. Wellness Int'l Network, Ltd., 273 F.App'x 316, 317 (5th Cir.), cert. denied, 555 U.S. 1085, 129 S.Ct. 767, 172 L.Ed.2d 756 (2008). On remand, the district court awarded $655,596.13 in attorney's fees to WIN as a sanction against Sharif and his co-plaintiffs. No. 3:05-CV-01367-B, 2008 WL 2885186 (N.D. Tex. July 22, 2008).
Thereafter, WIN served Sharif with post-judgment discovery requests to discover Sharif's assets, but Sharif ignored them. In November 2008, the Texas district court granted WIN's motion to compel discovery and ordered Sharif to respond to WIN's outstanding discovery requests; Sharif ignored the court's order and failed to appear for his deposition. WIN followed-up with a motion for civil contempt. In February 2009, Sharif was arrested and held in civil contempt for discovery violations, but the Texas district court released him on his own recognizance after he promised to respond to the post-judgment discovery requests and to reimburse WIN for fees and other costs associated with the motion to compel and the motion for civil contempt. See 447 B.R. at 855; Wellness Int'l Network v. J.P. Morgan Chase Bank, N.A., 407 B.R. 316, 318 (Bankr. N.D.Ill. 2009). Sharif again ignored the district court's orders.
B. Sharif Files for Bankruptcy
Two weeks later, on February 24, 2009, Sharif filed for bankruptcy under Chapter 7 in the Northern District of Illinois. The bankruptcy petition listed WIN as a creditor, along with various members of Sharif's family to whom he allegedly owed $271,000 in undocumented loans. WIN was the only creditor to file a proof of claim.
At some point, WIN obtained a June 14, 2002, loan application that Sharif had submitted to the now-defunct Washington Mutual on which he claimed to have owned the following assets: (1) three businesses worth $2,400,000; (2) three parcels of real property worth $1,400,000; (3) a retirement account worth $1,400,000; and (4) three bank accounts containing $180,000 in cash (" Loan Assets" ). Thus, in 2002 Sharif had represented to a financial institution that he had assets worth $5,380,000, and Washington Mutual had approved a loan based on those representations. WIN had requested documents related to these assets during the Texas litigation, but Sharif had never tendered them.
On March 25, 2009, the bankruptcy trustee, Horace Fox, Jr., held the initial creditors' meeting, see 11 U.S.C. § 341, and at this meeting both WIN and Fox requested
that Sharif provide documents related to the Loan Assets; Fox continued the meeting until April so that Sharif could gather the documents. On April 21, the § 341 creditors' meeting resumed but Sharif failed to provide the requested documentation. Instead, Sharif informed WIN and Fox that he had lied on the loan application and that he never had owned the Loan Assets; rather, those assets were owned by the Soad Wattar Trust, of which Sharif was trustee. WIN then requested that Sharif produce documentation evidencing the formation and funding of the Soad Wattar Trust...
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