United Markets Intern., Inc., Matter of

• Decision Date: 28 April 1994
• Docket Number: No. 93-2613,93-2613
• Citation: 24 F.3d 650
• Parties: 31 Collier Bankr.Cas.2d 731 In the Matter of UNITED MARKETS INTERNATIONAL, INC., Debtor. W. Steve SMITH, Trustee, Appellee, v. R. David LEGG, Appellant. Fifth Circuit
• Court: U.S. Court of Appeals — Fifth Circuit

Page 650

24 F.3d 650

31 Collier Bankr.Cas.2d 731

In the Matter of UNITED MARKETS INTERNATIONAL, INC., Debtor.

W. Steve SMITH, Trustee, Appellee, v. R. David LEGG, Appellant.

No. 93-2613

Summary Calendar.

United States Court of Appeals,

Fifth Circuit.

April 28, 1994.

Sherri Narro, Houston, TX, for appellant.

R. David Legg, pro se.

W. Steve Smith, pro se.

Appeal from the United States District Court for the Southern District of Texas.

Before GARWOOD, SMITH and DeMOSS, Circuit Judges.

PER CURIAM:

This is an appeal of a "death penalty" sanction imposed by the district court on appellant R. David Legg. The district court struck Legg's pleadings and stayed him from filing further pleadings in the action until he pays the more than $60,000 in sanctions previously entered against him. We AFFIRM.

Facts and Procedural History

This consolidated case arose from the 1985 bankruptcy of United Markets International, Inc. ("UMI")--of which Legg is the former president and sole shareholder--and from numerous related lawsuits and adversary proceedings involving Legg. ¹ The appellee in this case is W. Steve Smith, Trustee for the UMI bankruptcy estate. ²

After several orders to consolidate and withdraw the reference ³, three bankruptcy adversary proceedings in the UMI bankruptcy were combined into one district court case, H-92-2141 in the Southern District of Texas, from which Legg now appeals. Case H-92-2141 includes adversary proceedings 85-0375, 85-0932 and 87-0866, as well as a district court sanction in CA-88-1958. ⁴ Because an understanding of these and other underlying lawsuits is necessary to a disposition of this appeal, the relevant cases are summarized below:

(1) Adversary Proceeding 85-0375, Smith v. Legg: In this proceeding, Smith, the bankruptcy trustee, sued Legg on behalf of the UMI estate to recover $300,000 that Legg had transferred from UMI to himself and used to purchase a high-rise condominium. The bankruptcy court:

(a) found that Legg had breached his fiduciary duty by converting UMI's assets when UMI was insolvent with the actual intent to hinder, delay and defraud UMI's creditors;

(b) imposed a constructive trust on the condo in favor of the UMI estate;

(c) rendered judgment against Legg in favor of the UMI estate for more than $300,000;

(d) ordered Legg to turn over the condo and contents to trustee;

(e) ordered Legg to provide an accounting to the trustee for all UMI funds used by him; and

(f) found that Legg's homestead claim on the condo was subject to the estate's constructive trust.

Legg appealed, but the bankruptcy court's decision in 85-0375 was affirmed by the district court on January 31, 1992 and affirmed by this court on April 19, 1993, 992 F.2d 323. The reference was withdrawn in 1992 and what remained of 85-0375--basically the conclusion of the appeals and the enforcement of the judgment and order to account--was consolidated into H-92-2141 (the district court case now on appeal) ⁵.

(2) Adversary Proceeding 85-0932, Legg v. Obaid, et al. (This case was originally filed by Legg in district court but was removed to bankruptcy court as an adversary proceeding): In this proceeding, Legg sued seven creditors of UMI, attempting to challenge the validity of the creditors' $2 million in claims against the UMI estate, and thus attempted to challenge the validity of the March 28, 1985 Order of Relief granted in the main bankruptcy case. ⁶ The bankruptcy court in 85-0932 dismissed Legg's suit against the creditors and (a) held that Legg was without standing to bring such claims because they belong to the UMI estate; (b) found that Legg knew full well when he filed the claims that they were improper and unauthorized; (c) noted that all Legg's claims "appear to be wholly without merit based on evidence previously presented to this court"; and (d) sanctioned Legg more than $63,000 under Federal Rule of Civil Procedure 11 for the creditors' incurred costs and fees because the lawsuit was "interposed for the unlawful purpose of harassing [the UMI creditors], causing delay and unnecessarily increasing the costs of litigation." Legg appealed, but the bankruptcy court's decision in 85-0932 was affirmed by the district court on March 12, 1990 and affirmed by this court on June 20, 1991, 936 F.2d 569. On June 25, 1993, the reference was withdrawn and what remained of the case--the enforcement of the sanctions--was consolidated into H-92-2141 (the case now on appeal). ⁷

(3) Adversary Proceeding 87-0866, Smith v. Legg: In this proceeding, the trustee Smith sought recovery from Legg of additional fraudulent transfers. Legg raised a statute of limitations defense to Smith's claims. Legg also asserted a counterclaim against Smith as trustee, seeking, inter alia, an accounting and claiming that the trustee appointment was void. Legg also asserted a cross-claim against Obaid, OBALCO and OTS (UMI creditors who were also defendants in Adversary 85-0932), claiming breach of a 1983 contract between OBALCO and UMI, tortious interference, emotional distress and "bad faith filing of their original involuntary [bankruptcy] petition [against UMI]." On March 30, 1989, Legg was ordered by the bankruptcy court to pay Smith $400 as a sanction for failure to comply with discovery requests. In 1992, before any of the issues in the case were resolved, the reference for Adversary 87-0866 was withdrawn and the case was consolidated into the district court case docketed H-92-2141 (the consolidated case now on appeal).

In a hearing before the district court on June 25, 1993, Legg's original answer, counterclaim and cross-claims were struck by the district court as a sanction, and the court entered a written order to that effect on July 1, 1993. It is from that order that Legg now appeals.

Events Surrounding the Striking of Legg's Pleadings

At the hearing on June 25, 1993, the trial court heard arguments from both Smith and Legg regarding Smith's "Motion For Enforcement of Court Orders." ⁸ After hearing arguments from both parties, the district court stated that Legg's arguments were unsupported by the record, adding that, "I certainly don't find Mr. Legg to be credible." The court granted Smith's motion to enforce the court orders, and made the following statements to Legg:

"It's not Mr. Smith that's making unsubstantiated allegations, it's you. I think you're living in a dream world. I don't think you've got any personal claim against these people. Any claim against these people belong[s] to UMI, and that's UMI sitting right over there, the trustee. You don't have any claim against Mr. Smith. Mr. Smith is trying to do his job despite the way you have handled everything in this case."

The court denied Legg's motion for leave to file an amended counterclaim, and continued:

"I am striking your pleadings in this case, Mr. Legg, for failing to abide by the Court's sanctions. That is, this Court, the Bankruptcy Court and the Court of Appeals."

Six days later, on July 1, 1993, the court entered a written order confirming its decision: "Mr. Legg's pleadings in this matter are hereby STRICKEN for failure to pay the sanctions assessed against him. ... Mr. Legg is STAYED from filing further pleadings in this matter until all sanctions assessed against him have been paid." ⁹

The main consequence of the trial court's decision to strike Legg's pleadings was an involuntary dismissal of Legg's counterclaim against Smith and his cross-claims against the UMI creditors. Legg's answer was also struck by the district court, and Legg complains on appeal that he has been denied "the right to defend himself in an action initiated against him," meaning trustee Smith's allegations from bankruptcy adversary proceeding 87-0866 that Legg had made additional fraudulent transfers of UMI assets to himself. ¹⁰ However, our examination of the record in this appeal satisfies us that the "fraudulent transfer" claim brought by Smith against Legg in 87-0866 (which was later consolidated into H-92-2141) was waived by Smith in open court on June 25, 1993.

Therefore, the affirmative relief awarded to trustee Smith in H-92-2141, which Legg appeals and which we affirm in this opinion, consists of:

(a) a final order enforcing the sanctions previously entered against Legg; (b) the striking of Legg's pleadings (resulting in the involuntary dismissal, or "death penalty sanction," of Legg's counterclaim against Smith and cross-claims against the UMI creditors); and (c) an order staying Legg from filing further pleadings in this action until all the sanctions against him are paid. We will review these orders for abuse of discretion.

A federal district court has both specific and inherent power to control its docket, and this includes the power to dismiss a case (or here, a counterclaim and cross-claim) as a sanction for a party's failure to obey court orders. ¹¹ Striking a defendant's answer and denying a request to replead is equally as harsh a sanction as dismissal of a plaintiff's case with prejudice, and the two sanctions are reviewed by the same standard. ¹² We will uphold a district court's involuntary dismissal of a lawsuit unless the district court abused its discretion. ¹³ The Fifth Circuit has confined such sanctions under the district court's inherent power to instances of "bad faith or willful abuse of the judicial process." ¹⁴ We hold that Legg's behavior meets this standard.

Despite being told by court after court that his allegations were meritless and frivolous, and despite being sanctioned more than $68,000 due to his frivolous claims and appeals, Legg continued to abuse the judicial process by pursuing claims that he knew belonged to the UMI estate, claims that he has repeatedly failed to document, and/or claims that have been previously litigated, have been adjudged against him, and have been upheld on appeal. Legg's counterclaim and cross-claims that were struck by the trial court below fit into these categories. We note that the...