In re Markus

• Decision Date: 03 August 2020
• Docket Number: Case No. 19-10096 (MG)
• Citation: 619 B.R. 552
• Parties: IN RE: Larisa MARKUS, Debtor in a Foreign Proceeding.
• Court: U.S. Bankruptcy Court — Southern District of New York

619 B.R. 552

IN RE: Larisa MARKUS, Debtor in a Foreign Proceeding.

Case No. 19-10096 (MG)

United States Bankruptcy Court, S.D. New York.

Signed August 3, 2020

619 B.R. 555

LAW OFFICES OF VICTOR A. WORMS, Attorneys for Foreign Debtor Larisa Markus, 48 Wall Street, Suite 1100, New York, NY 10005, By: Victor A. Worms, Esq.

MARKS & SOKOLOV, LLC, Attorneys for Yuri Vladimirovich Rozhkov in his Capacity as Trustee and Foreign Representative for the Foreign Debtor Larisa Markus, 1835 Market Street, 17th Floor, Philadelphia, PA 19103, By: Bruce S. Marks, Esq., Nina Farzana Khan, Esq. -and- ARCHER & GREINER, P.C., 630 Third Avenue, New York, NY 10017, By: Gerard DiConza, Esq., Lance A. Schildkraut, Esq.

MEMORANDUM OPINION AND ORDER IMPOSING SANCTIONS ON VICTOR A. WORMS, ESQ. ON REMAND BASED ON CIVIL CONTEMPT

MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE

Before the Court are two issues on remand from the District Court's decision on appeal in the case of Markus v. Rozhkov , 615 B.R. 679 (S.D.N.Y. 2020) [hereinafter, " Appeal Decision "]. On April 13, 2020, the Court entered an order setting the schedule for remand briefing. (ECF Doc. # 266.) On April 24, 2020, the Markus Foreign Representative ("FR") filed his brief. ("FR Remand Brief," ECF Doc. # 270.) On May 15, 2020, Victor A. Worms, Esq. ("Worms"), counsel to Chapter 15 debtor Larisa Markus ("Markus"), filed his brief. ("Worms Remand Brief," ECF Doc. # 273.) The Court concludes that a decision on remand can be rendered without the necessity of oral argument.

For the reasons discussed below, the Court FINDS and CONCLUDES as follows:

(1) Sanctions should be imposed on Worms in the amount of $55,000 for 55 days of noncompliance with the Discovery Order (defined below) from October 3, 2019 until his contempt was purged on November 27, 2019 by virtue of the Bykov Communication (defined below);

(2) The Fees Order was properly issued pursuant to the Court's inherent authority and the FR is entitled an award of attorneys’ fees in the reduced amount of $36,600;¹ and

(3) Additional compensatory sanctions should be awarded to the FR against Worms in the amount of $63,500 for attorneys’ fees that would not have been incurred by the FR after October 3, 2019 "but for" Worms’ willful bad faith conduct.

I. BACKGROUND

A. The Sanctions Order and Fees Order

On October 8, 2019, the Court entered an Order imposing sanctions on Worms, counsel of record for the foreign debtor Markus, following a hearing on October 3, 2019 at which the Court explained that an Order imposing sanctions against Worms would be entered because of his knowing and willful failure to provide discovery required by a subpoena served on Worms on

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behalf of Markus on June 25, 2019. ("Sanctions Order," ECF Doc. # 157.) The Sanctions Order resulted from granting the FR's Motion for Sanctions against Worms and Markus. ("Sanctions Motion," ECF Doc. # 136.) The FR argued that sanctions should be awarded against Worms and Markus pursuant to Fed. R. Civ. P. 37(b)(2)(A)(vii) and (b)(2)(C). The FR also requested that the Court hold Worms in contempt for failure to comply with the subpoena.

Worms opposed the FR's motion and filed a cross-motion against the FR and his attorney, Bruce S. Marks, Esq., seeking sanctions under Rule 11 for frivolous conduct and unlawful discovery. ("Worms Sanctions Opposition," ECF Doc. # 138-4.) (The Court denied Worms’ cross-motion during the October 3, 2019 hearing on the grounds that the cross-motion was frivolous.)

The FR filed a reply, arguing that the Recognition Order and subsequent orders by this Court require Worms to comply with the subpoena. ("Sanctions Reply," ECF Doc. # 139 at 6–7.) The Court denied Worms’ Motion to Quash Subpoena on July 30, 2019; the order denying Worms’ motion also required Worms to "immediately communicate with Markus and her agents, including attorneys, to obtain and produce responsive documents ... to the extent the documents are in Markus’ possession, custody, or control." (See "Discovery Order," ECF Doc. # 107.)

On October 16, 2019, the Court issued the Sanctions Opinion, elaborating on the findings of fact and conclusions of law in the Sanctions Order, finding that Worms’ misconduct in violating the discovery orders was knowing, willful and intentional. (ECF Doc. # 164; In re Markus , 607 B.R. 379 (Bankr. S.D.N.Y. 2019) [hereinafter, " Sanctions Opinion "].) The Sanctions Order imposed monetary sanctions (the "Per Diem Sanctions") on Worms in the amount of $1,000 per day from September 5, 2019 until Worms complies with the Court's discovery orders. On October 16, 2019, Worms filed a notice of appeal from the Sanctions Order. (ECF Doc. # 165.)

On October 23, 2019, the FR moved for an award of attorneys’ fees for the fees incurred in making the Sanctions Motion. ("FR's Declaration in Support of Fees," ECF Doc. # 176.) Worms opposed the FR's request for fees. ("Worms Opposition to Fees," ECF Doc. # 190.) On November 7, 2019, the Court granted the FR's motion for fees, awarding $60,000 in attorneys’ fees against Worms in connection with the Sanctions Order. ("Fees Order," ECF Doc. # 200.) Worms also appealed the Fees Order. (ECF Doc. # 204.)

B. The Bykov Communication

The Court's Discovery Order unambiguously required Worms to contact Markus’ agents to obtain documents within Markus’ "possession, custody and control" that were responsive to the subpoena served on Worms on behalf of Markus on June 25, 2019 (the "Markus Subpoena"). ("FR's Stay Opposition," Case No. 19-cv-09611 (LJL) [hereinafter, "District Court"] ECF Doc. # 5 at 5.)

However, on October 17, 2019, the Court held a hearing (the "October 17 Hearing") during which the FR proposed that Ilya Bykov ("Bykov") contact the attorneys and agents he instructed on behalf of Markus, pursuant to the power of attorney issued by Markus to Bykov, and request that the attorneys and agents produce any documents in their possession, custody, or control that are responsive to the Markus Subpoena. (Oct. 17, 2019 Hr'g Tr., ECF Doc. # 171 at 88:4–12.) At the October 17 Hearing, Daniel A. Singer, Esq. ("Singer"), counsel of record for Bykov, the LM Entities, and the Protax Entities, represented

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that he had an agreement from Bykov to send a letter, pursuant to the power of attorney issued by Markus, requesting production of documents proposed by the FR. (Id. at 88–89.)

On November 21, 2019, based upon representations made by the FR and Singer at the October 17 Hearing, the Court entered an order directing Bykov to communicate (the "Bykov Communication") with Markus’ known agents and request all documents, information, and communications concerning Markus’ assets that are responsive to the Markus Subpoena that are in the possession, custody or control of such agents. ("Bykov Communication Order," ECF Doc. # 214 ¶ 2.) The Bykov Communication Order directed the Bykov Communication be sent within seven (7) days of November 21, 2019. (Id. ¶ 4.)

II. ISSUES ON REMAND

Issue 1 : The Sanctions Order was affirmed by the District Court to the extent that this Court exercised its inherent authority to sanction Worms for noncompliance with discovery orders and remanded for this Court to determine the amount of sanctions, calculated at $1,000 per day, that should be imposed on Worms. ( Appeal Decision at 714–15.) "[T]he portion of the Sanctions Order imposing lump-sum retroactive sanctions in the amount of $34,000 [was] improperly criminal in nature and [was] therefore vacated" by the District Court. ( Id. at 715.)

Issue 2 : The Fees Order was vacated by the District Court and remanded for this Court to assess and ensure that, in light of the Appeal Decision , the Fees Order was issued pursuant to proper authority—i.e. , whether the Fees Order was issued pursuant to Rule 37 of the Federal Rules of Civil Procedure or the Court's inherent authority. ( Id. at 717.)

Issue 3 : The FR also requests that the Court impose $115,000 in additional compensatory sanctions against Worms for attorneys’ fees that the FR argues would not have been incurred after October 3, 2019 "but for" Worms’ bad faith conduct. (FR Remand Brief at 5.)

III. APPEAL DECISION

As previously stated, Worms appealed the Sanctions Order and the Fees Order. The appeals were combined, and jointly addressed by Judge Liman in the Appeal Decision , the relevant and applicable findings of which are summarized below.

A. Common Issues on Appeal – Rule 37 Could Not Be Used to Hold Worms in Contempt

As to common issues presented in the Sanctions appeal and the Fees appeal, Judge Liman found that Rule 37 sanctions are available in Chapter 15 proceedings but could not be used to hold Worms in contempt because Markus was not a "party" to the FR's Sanctions Motion under Rule 37. ( Appeal Decision at 701–04.)

First, Worms argued that the Sanctions Order was invalid because it was predicated on Rule 37, which Worms interpreted as not ever applying to Chapter 15 proceedings. ( Id. at 698.) The FR countered that Rule 37 sanctions are available in Chapter 15 proceedings. ( Id. ) Judge Liman rejected Worms’ argument and held that Rule 37 applies to Chapter 15 contested matters when a party in interest moves for an order of contempt, as is the situation here. ( Id. at 700.)

Second, Worms argued that, even if Rule 37 applies in a Chapter 15 proceeding, he cannot be sanctioned because he (as an attorney) is not a party. ( Id. ) The FR countered that numerous courts have sanctioned attorneys under Rule 37. ( Id. ) Judge Liman rejected Worms’ argument

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and held that the Bankruptcy Court properly read Rule 37 to cover attorneys advising parties as well as the parties themselves. ( Id. at 701.)

Third, Worms argued that he could not be sanctioned under Rule 37 because the Subpoena was not directed to his client, Markus, as a "party" to the Chapter 15 proceeding, but rather was served on her as a non-party pursuant to Rule 45. ( Id. ) The FR acknowledged that Rule 37 does not normally apply to Rule 45...