Reid v. Michael Wolf, Scott Wolf, Peter Wolf, Zig-Zag, Corp. (In re Wolf)

• Decision Date: 24 May 2018
• Docket Number: Adversary No. 16 A 00066,Case No. 14 B 27066
• Parties: In re: Michael A. Wolf, Debtor. N. Neville Reid, not individually but solely in his capacity as Chapter 7 Trustee for bankruptcy estate of Michael A. Wolf Plaintiff, v. Michael Wolf, Scott Wolf, Peter Wolf, Zig-Zag, Corp., ZZC, Inc. (IL), ZZC, Inc. (DE), MMQB, Inc., Hound Ventures, Inc., SHBM, Inc. MaCherie LLC, Melissa Skolnick and Four Legs, Inc. Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

In re: Michael A. Wolf, Debtor.

N. Neville Reid, not individually but solely in his capacity as Chapter 7Trustee for bankruptcy estate of Michael A. Wolf Plaintiff, v. Michael Wolf, Scott Wolf, Peter Wolf, Zig-Zag, Corp., ZZC, Inc. (IL),

ZZC, Inc. (DE), MMQB, Inc., Hound Ventures, Inc., SHBM, Inc. MaCherie LLC, Melissa Skolnick and

Four Legs, Inc. Defendants.

Case No. 14 B 27066

Adversary No. 16 A 00066

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

May 24, 2018

Chapter 7

Hon. Deborah L. Thorne

Opinion

Introduction

This matter comes before the court upon the trustee's motion for sanctions against Scott Wolf ("Scott Wolf" or "Scott").¹ Scott Wolf has claimed that his personal noncompliance with this court's March 2, 2018 order is excused by virtue of the Fifth Amendment to the United States Constitution, since to comply with the order, he claims, would require him to testifyagainst himself in an incriminating manner. The court concludes, in its discretion, that Scott Wolf has effectively waived his privilege as to the Cloud Server² since he agreed to an earlier order commanding him to provide such access and also failed to raise the privilege objection in response to the trustee's pertinent request for production.³ Since he has waived the privilege, Scott Wolf is not excused from personally complying with this court's March 2, 2018 order, which ordered him to provide access to the Cloud Server, and he is, therefore, held in default with an entry of default judgment to follow pending the court's receipt of evidence on which to base an assessment as to the proper amount of the judgment. Further, Scott Wolf is ordered to pay the amount of the sanction imposed in the March 2, 2018 order for non-compliance with that order. Because compliance with that order is no longer possible after the entry of this order holding Scott Wolf in default for non-compliance with that order, the $500 per day sanction imposed by the March 2, 2018 order will no longer run.

Background

In January of 2016, the trustee commenced this adversary proceeding (among others, some commenced later, which have generally been consolidated for discovery purposes) to recover property or its value from various third parties, including Scott Wolf, for the benefit of Michael Wolf's bankruptcy estate. The transfers made were allegedly of those parts of a family business, an online furniture trade publication known as the "Monday Morning Quarterback," that allegedly belonged to Michael Wolf in the run-up to his bankruptcy filing.⁴

Beginning in late 2016 and culminating in April of 2017, the trustee served several discovery requests on Scott Wolf, one of which included a request to produce "[a]ll computers used to publish the MMQB Contract Furniture News in all 'formats' referenced on the website www.mmqb.com." See Trustee's Mot. Compel, Docket No. 461, Exh. A, at 74.⁵ In September of 2017, the trustee filed a motion to compel with this court, arguing that the requests had not been complied with. See Trustee's Mot. Compel, Docket No. 461.

The parties worked out a resolution to the motion to compel whereby they agreed, among other things, that the trustee's independent computer expert would be given access to the Amazon Cloud Server account that housed much of the relevant financial information relating to the online publication, with an earlier-entered protective order safeguarding any private, non-relevant information. Compare Trustee's Mot. Sanctions, Docket No. 479, Exh. E, at 7-8, with Order Granting Mot. Compel, Docket No. 475, at 1-2; see also Transcript of Proceedings Held May 03, 2018 (hereinafter "Tr."), at 3, lns. 10-12 (noting that Scott Wolf agreed to the form of the order). No objection based on the Fifth Amendment was ever raised.

Following the entry of that order, Scott Wolf did not comply with its terms. See Trustee's Mot. Sanctions, Docket No. 479, Exh. B, at 2, Exh. C, at 2, Exh. F, at 2. The trustee brought a motion for sanctions in mid-November of 2017, and Scott Wolf defended largely by citing logistical difficulties with providing access.⁶ See Trustee's Mot. Sanctions, Docket No. 479;Scott Wolf's Response, Docket No. 486, at 5, ¶ 8. Again, Scott Wolf did not object based on the applicability of any Fifth Amendment privilege. Based largely on a motion made by another defendant, in which Scott Wolf joined, the court orally stayed the discovery in all of the adversary proceedings for a completely unrelated reason,⁷ namely a recent divorce ruling that, at the time, had an unknown impact on the ability of the trustee to recover certain business assets for the benefit of Michael Wolf's bankruptcy estate.⁸

No such motions were ever filed, however. In mid-February of 2018, three months after the trustee's motion for sanctions was first heard, the court lifted the stay on discovery. See Docket No. 532. In early March, the trustee's motion for sanctions from November was again heard. No objections were raised based on the Fifth Amendment.⁹ The motion was granted. See Order Granting Mot. Sanctions, Docket No. 542. Scott Wolf was again ordered to turn over access to the Cloud Server at the price of $500 a day if he chose not to comply following March 15, 2018. Id. at 2, ¶ 6. That date came and went; the trustee then brought another motion now seeking to have Scott Wolf held in default pending a proposed default judgment order from thetrustee based on a valuation expert's estimate of the value of the business components that were alleged to have been transferred by Michael Wolf. See Trustee's Mot. Sanctions, Docket No. 551.

In response to this latest motion for sanctions, Scott Wolf has asserted his Fifth Amendment privilege against self-incrimination.¹⁰ He argues that to provide access to the Cloud Server as ordered would be a testimonial and incriminating act. The trustee has responded by asserting that Scott Wolf has waived the privilege and did not make any argument on the substantive merits of Scott Wolf's invocation of the privilege.

Discussion

I. Jurisdiction

Statutory subject matter jurisdiction is proper pursuant to 28 U.S.C. §§ 1334(b), 157(a), 157(b)(2)(H). Scott Wolf has not consented to the entry of final orders by this court in this proceeding. See Wellness Int'l Network, Ltd. v. Sharif, 135 S. Ct. 1932, 1949 (2015); Scott Wolf's Response, Docket No. 120, at 4, ¶¶ 12, 13; Scott Wolf's Statement, Docket No. 562, at 2. Scott Wolf has not filed a proof of claim against the estate. Nevertheless, the great bulk of the part of the trustee's complaint that implicates the conduct of Scott Wolf is comprised of fraudulent transfer claims. See Trustee's First Amended Complaint, Docket No. 95, at 22-48. This court has constitutional authority to enter final orders on fraudulent transfer claims. See In re Millennium Lab Holdings II, LLC, 575 B.R. 252, 269 (Bankr. D. Del. 2017); In re Kimball Hill, Inc., 480 B.R. 894, 906-08 (Bankr. N.D. Ill. 2012) ("State law fraudulent transfer claims, however, have bankruptcy law as their source."); see also Stern v. Marshall, 564 U.S. 462, 502(2011) ("We do not think the removal of counterclaims . . . from core bankruptcy jurisdiction meaningfully changes the division of labor in the current statute; we agree . . . that the question presented here is a 'narrow' one.") (emphasis added). Similarly, though Scott Wolf has revoked his consent to a jury trial being conducted by this court, no right to a jury trial exists on any issues presently before the court or on any issues that may later arise concerning the entry of a default judgment as a sanction under Fed. R. Civ. P. 37(b)(2). See, e.g., Sells v. Berry, 24 F. App'x 568, 571-72 (7th Cir. 2001); Artis v. Yellen, 309 F.R.D. 69, 75 (D.D.C. 2015) ("Discovery disputes, of course, are not issues for a jury."), aff'd, No. 15-5260, 2015 WL 10583057 (D.C. Cir. Dec. 21, 2015); Chemtall, Inc. v. Citi-Chem, Inc., 992 F. Supp. 1390, 1412 (S.D. Ga. 1998); Danielson v. United Seafood Workers Smoked Fish & Cannery Union, Local 359-AFL-CIO, 405 F. Supp. 396, 403 (S.D.N.Y. 1975).

II. Waiver of Fifth Amendment Privilege

Due to Scott Wolf's long failure to invoke the privilege, his having agreed to the text and form of an order commanding him to perform the very act he claims to now be privileged, and his contradictory statements regarding the Cloud Server's existence, the court finds that Scott Wolf has waived his Fifth Amendment privilege against self-incrimination with respect to the act of producing access to the Cloud Server.¹¹ For this reason, the court holds Scott Wolf in defaultwith a proposed default judgment order to be filed by the trustee at a later date. It further orders Scott Wolf to pay the trustee the amounts owed as a sanction for noncompliance with the court's first sanctions order.

The Fifth Amendment to the United States Constitution provides in pertinent part that "[n]o person . . . shall be compelled in any criminal case to be a witness against himself." U.S. CONST. amend. V. Though the text of the provision speaks of "criminal case[s]," the privilege created by the amendment has long been held to apply in civil matters as well. McCarthy v. Arndstein, 266 U.S. 34, 40 (1924); Nat'l Acceptance Co. of Am. v. Bathalter, 705 F.2d 924, 926 (7th Cir. 1983). The privilege may be invoked during the discovery phase of civil litigation. Bathalter, 705 F.2d at 927 (citing In re Folding Carton Antitrust Litig., 609 F.2d 867, 871 (7th Cir. 1979) (per curiam)).

Specifically, the Fifth Amendment privileges an individual "not to answer official questions put to him in any other proceeding, civil or criminal, formal or informal, where the answers might incriminate him in future criminal proceedings." Baxter v. Palmigiano, 425 U.S. 308, 316 (1976) (quoting Lefkowitz v. Turley, 414 U.S. 70, 77 (1973)); LaSalle Bank Lake View v. Seguban, 54 F.3d 387, 389 (7th Cir. 1995). In the realm of civil discovery, this means, among other things, that an...