IN RE RUBIN

• Citation: 37 BR 232
• Decision Date: 29 February 1984
• Docket Number: BAP No. CC 82-1299-VHG.,Bankruptcy No. LA 81-01874-JM
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit
• Parties: In re Tom RUBIN, dba Tom Rubin & Associates, Debtor. Tom RUBIN, dba Tom Rubin & Associates, Appellant, v. BELO BROADCASTING CORPORATION, dba WFAA TV; Cox Broadcasting Corporation, dba WSB TV; WIIC TV, Inc., a wholly owned subsidiary of Cox Broadcasting Corporation; King Broadcasting Company, dba King AM; Miami Broadcasting Corporation, dba KTVU; Gaylord Broadcasting, dba KSTW; Fisher Broadcasting, Inc., dba KOMO TV; Hubbard Broadcasting, Inc., dba KSTP; Teleco Indiana, Inc., dba WTTV Television; Gaylord Broadcasting Company of Ohio, dba WUAB TV, Appellees.

37 B.R. 232 (1984)

In re Tom RUBIN, dba Tom Rubin & Associates, Debtor.

Tom RUBIN, dba Tom Rubin & Associates, Appellant, v. BELO BROADCASTING CORPORATION, dba WFAA TV; Cox Broadcasting Corporation, dba WSB TV; WIIC TV, Inc., a wholly owned subsidiary of Cox Broadcasting Corporation; King Broadcasting Company, dba King AM; Miami Broadcasting Corporation, dba KTVU; Gaylord Broadcasting, dba KSTW; Fisher Broadcasting, Inc., dba KOMO TV; Hubbard Broadcasting, Inc., dba KSTP; Teleco Indiana, Inc., dba WTTV Television; Gaylord Broadcasting Company of Ohio, dba WUAB TV, Appellees.

Bankruptcy No. LA 81-01874-JM, BAP No. CC 82-1299-VHG.

United States Bankruptcy Appellate Panels of the Ninth Circuit.

February 29, 1984.

Herbert Wolas, Stephen D. Drushal, Robinson, Wolas & Diamant, Los Angeles, Cal., for appellant.

Daniel H. Slate, Gendel, Roskoff, Shapiro & Quittner, Los Angeles, Cal., for appellees.

Before VOLINN, HUGHES and GEORGE, Bankruptcy Judges.

OPINION

VOLINN, Bankruptcy Judge.

This is an appeal by the alleged debtor in an involuntary bankruptcy case from an order for relief entered as a result of the court having struck the debtor's answer as a sanction for abuse of the discovery process. We AFFIRM.

I. INTRODUCTORY

The debtor, Tom Rubin & Associates, is a media consulting and purchasing firm operated by Tom Rubin as a sole proprietor. The debtor served advertiser clients, planning the use of media, purchasing broadcast time on radio and TV for advertising campaigns.

On February 9, 1981, an involuntary petition pursuant to 11 U.S.C. § 303 was filed against the debtor. Petitioning creditors included ten broadcasting companies owning TV and radio stations throughout the United States. The petition alleged, basically, that an order for relief was warranted on the grounds that the debtor was not generally paying his debts as they became due, as provided for by 11 U.S.C. § 303(h)(1). The debtor's answer denied the allegations of the involuntary petition contending that it had been filed in bad faith and, as an affirmative defense, alleged the petition had been filed for the purpose of

"extorting payment from Rubin on claims for services which have not been performed. In this regard, Rubin alleges further that the claims of each of the petitioning creditors are contingent; that petitioning creditors failed to perform the services which were required of them and as a result of said failure to perform, Rubin has no liability to any of them whatsoever."

The foregoing language created an issue as to whether petitioning creditors had claims at all. Subsequently, similar contentions were made as to many of the debtor's accounts payable. These contentions brought into focus issues as to the nature and extent of claims and debts necessary to show that the debtor was not generally paying his debts, an essential element in determining whether an order for relief may be entered in an involuntary proceeding. Cases dealing with definition of the nature and extent of disputed debts demonstrate that examination of the grounds for dispute is necessary for a determination of the ultimate issue. See In re Dill, 30 B.R. 546 (Bkrtcy.App. 9th Cir., 1983) distinguishing contingent from disputed claims; In re Covey, 650 F.2d 877 (7th Cir.1981) holding that a debt which is entirely disputed may, under certain circumstances, be excluded from the not generally paying debts test; and In re B.D. International Discount Corp., 701 F.2d 1071, 1077 (2nd Cir.1983) which, with reservations, followed Covey.

The debtor's position made it inevitable that extensive discovery would ensue.

II. DISCOVERY LITIGATION

Because of the imposition of the severe sanction of default for discovery abuse, our discussion will treat of the facts at greater length than would be ordinarily warranted.

The summons issued with the involuntary petition set March 11, 1981, as the last day for answer. The debtor's answer was filed on that date. The following day, March 12, 1981, the debtor gave notice of an application for an order shortening time for a hearing to be held that day, March 12, 1981. At the hearing, various documents were handed to petitioning creditors' counsel, including a motion for an indemnity bond, a motion to abstain or dismiss, and 21 notices of deposition and request for production of documents for depositions. These notices directed the depositions of officers of Rubin's creditors, various radio and TV stations and networks. The depositions were scheduled for every business day from March 16, 1981 through April 10, 1981. The depositions were to be held in Pittsburgh, Atlanta, San Francisco, Los Angeles, New York, Indianapolis, and Dallas. Counsel for the petitioning creditors had no knowledge that the depositions would be sought and were given no opportunity for consultation as to the need for these depositions, or scheduling thereof, See In Re Rubin, 693 F.2d 73 (9th Cir.1982).

The purpose of adverting to the foregoing is to indicate the calculated institution of the use of discovery, offensively, and later, defensively, by the debtor in order to cause the petitioning creditors the greatest difficulty and cost in establishing the central issue in the case: that the debtor was not generally paying its debts as they became due.

Counsel for the petitioners, realizing that this issue could result in a number of trials because of the debtor's disputing various accounts payable (as it turned out the debtor at one time, in response to interrogatories, denied he was obligated as to 43 of his accounts payable), instituted their own discovery procedures, particularly interrogatories and efforts to inspect or examine debtor's records.¹ On this front, the debtor waged a prolonged and uncompromising struggle to resist providing meaningful information as to the status of his accounts payable and the specific nature of or reason for any alleged dispute. Following is a discussion of major discovery failures.

A. Sullivan Deposition

The creditors attempted at the outset to take the deposition of the debtor's custodian of records, notice having been served on March 16, 1981. Thereafter some delay occurred because of the confusion caused by the intensive discovery schedule imposed on all counsel by the debtor, as indicated above. Creditors' counsel, however, persisted in their effort to voluntarily obtain the debtor's permission for inspection of records, a number of communications having been exchanged during March, 1981. Consent not having been granted, a subpoena duces tecum was served on one Tom Sullivan as custodian of the debtor's records, requiring record production on March 30, 1981. The subpoena was ignored. During the month of April there were numerous communications by letter and telephone with the result that on April 21, 1981, creditors' counsel filed an application for an order directing the debtor to make discovery.

As a result of the application for the order directing debtor to make discovery filed April 21, 1981, Sullivan, on May 1, 1981, appeared for a deposition, producing approximately 30 boxes of documents, stating that box 19 contained "the entire content of our files with regard to unpaid media." The accountant retained by creditors to examine the records, did so and found that box 19 contained

". . . a large number of loose documents. There appeared to be no order to the documents; there was no way of ascertaining the total of accounts payable. There was no way that I could tell solely by inspecting the documents the amounts of the accounts payable."

The accountant observed that documents presented appeared to include paid invoices, duplicates of other documents in the box, as well as a large number of invoices which appeared to be unpaid. As a result of debtor's failure to produce, an order was entered on May 7, 1981. The court found therein that the debtor had wilfully failed to make discovery and expressly reserved imposing sanctions for this wilful failure. (ER 226-227).

Sullivan was served again with a subpoena duces tecum on June 30, 1981, wherein he was directed to appear for deposition on July 9, 1981. Previously a similar subpoena had been served on the debtor, Rubin. The debtor refused to produce Sullivan or any records until his own deposition had been concluded. However, the debtor did not make himself available, thereby requiring creditors to file a motion to compel Sullivan's attendance. An order was entered on October 9, 1981, compelling Sullivan's attendance at a deposition which was then noticed for February 19, 1982. Even then, there were delays, resulting in another order, entered March 1, 1982, requiring Sullivan to appear for deposition on March 3, 4 and 5 at the debtor's offices. The debtor did not comply with this order, debtor's counsel simply advising creditors' counsel that Sullivan would not appear. Thereafter, the debtor served a motion for reconsideration of the order of March 1. This was calendared for March 29. Among the grounds urged for reconsideration was that Sullivan was not the custodian of the records despite a previous representation having been made that he was the custodian. On March 29, 1982, the motion to reconsider was denied and an order was entered on April 8, 1982, requiring Sullivan to appear for deposition on April 21, 22 and 23, the debtor's motion for a protective order in connection therewith having been denied. Sullivan was ordered, on May 1, 1982, to produce all of the documents set forth in the subpoena. This order, inter alia, stated:

". . . after argument, the court finding the debtor has wilfully failed to make discovery, and good cause appearing therefor . . .

It is further ordered that the awarding of sanctions for wilful failure to make discovery is expressly reserved, and further order may be made at a later date . . . "

The order was not complied with. At the time of the denial of the motion to reconsider and for a protective order, the status conference...