Visioneering Const., Matter of

• Decision Date: 09 November 1981
• Docket Number: No. 80-5038,80-5038
• Citation: 661 F.2d 119
• Parties: In the Matter of VISIONEERING CONSTRUCTION, et al., Bankrupts. VISIONEERING CONSTRUCTION AND DEVELOPMENT COMPANY, a Delaware Corporation; an Arizona Corporation; a Colorado Corporation; an Illinois Corporation; an Indiana Corporation; Visioneering Building Corporation, an Arizona Corporation, Appellants, v. UNITED STATES FIDELITY & GUARANTY, et al., Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 119

661 F.2d 119

8 Bankr.Ct.Dec. 593

In the Matter of VISIONEERING CONSTRUCTION, et al., Bankrupts.

VISIONEERING CONSTRUCTION AND DEVELOPMENT COMPANY, a

Delaware Corporation; an Arizona Corporation; a Colorado

Corporation; an Illinois Corporation; an Indiana

Corporation; Visioneering Building Corporation, an Arizona

Corporation, Appellants, v. UNITED STATES FIDELITY & GUARANTY, et al., Appellees.

No. 80-5038.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted July 14, 1981.

Decided Nov. 9, 1981.

Ronald W. Warnicke, Treon, Warnicke, Dann & Rousch, Phoenix, Ariz., for appellants.

Donald W. Hart, Moore, Jennings, Kepner, Schefing & Hart, Phoenix, Ariz., for appellees.

Appeal from the United States District Court for the District of Arizona.

Before ELY, CHOY and ANDERSON, Circuit Judges.

ELY, Circuit Judge:

Visioneering Construction and Development Co. (VCDC) ¹ appeals from an order of the bankruptcy court dated May 22, 1979 striking the answer of VCDC, entering its default, and thereupon adjudicating it a bankrupt. We affirm.

FACTS

The involuntary bankruptcy proceedings were initiated by three petitioning creditors under Section 59(b) of the Bankruptcy Act, 11 U.S.C. § 95(b). ² The involuntary petition alleged, inter alia, that all seven of the named corporations were essentially one entity and should be so treated. ³ The underlying basis of the allegations was that the entire enterprise was the alter ego of one Everson, the sole shareholder, director, officer, and managing agent of the several Visioneering variants.

VCDC denied that the entities were one enterprise, that the petitioners were creditors of the same entity, and therefore challenged the jurisdiction of the bankruptcy court to consider the petition. It moved for dismissal under section 59(b) of the Bankruptcy Act, 11 U.S.C. § 95(b), arguing that the three petitioning creditors were not qualified creditors of VCDC.

VCDC's motion to dismiss was denied and discovery was directed towards resolving the jurisdictional issue, i. e., whether the several entities should be treated as one enterprise under the bankruptcy laws. The bankruptcy court correctly determined that it had jurisdiction to resolve the jurisdictional issue (discussed infra ).

Petitioners-appellees, who admittedly have the burden to prove the jurisdictional and other averments of the petition before adjudication, repeatedly sought to discover evidence directed towards the jurisdictional question. The involuntary petition was filed on September 27, 1978. The following eight months were consumed with motions, substantial efforts at discovery by the creditors, and constant obstructionist tactics by VCDC, as described in the trial court's findings of fact and conclusions of law filed with the adjudication on May 22, 1979. There was a litany of willful discovery abuses, including failure to attend a noticed deposition of VCDC's sole shareholder, director, officer and managing agent, one Everson, without first filing a motion for a protective order; not responding to document requests; filing evasive and incomplete answers to interrogatories directed towards jurisdictional issues; not producing Everson for deposition even after VCDC's motion for a protective order had been granted, etc. VCDC's contumacious conduct substantially impeded the court's ability to decide the jurisdictional issue on the merits.

In April of 1979 petitioning creditors filed a motion to enter default pursuant to the sanction provisions of Fed.R.Civ.P. 37 for VCDC's willful and bad faith failure to abide by the discovery rules. On May 22, 1979, after a hearing, the Bankruptcy Judge granted the motion, the effect of The Bankruptcy Judge in his findings of fact and conclusions of law entered with his Order and Adjudication clearly stated that he was not making a finding regarding the truth of the jurisdictional allegations, ⁴ but was relying upon the default mechanism to deem the creditors' factual allegations admitted. Adjudication of VCDC and its constituent corporations as bankrupts followed. Thus, subject matter jurisdiction was based on facts alleged in the petition that were deemed admitted, no answer being before the court. On appeal, the District Court affirmed, noting that the allegations in the petition were sufficient to confer subject matter jurisdiction if true and that the truth of those allegations had been deemed admitted by the striking of VCDC's answer. The District Court found no abuse of discretion in the use of default procedures in this case, nor do we.

which was to strike VCDC's answer and deem as admitted the properly pleaded allegations of the creditors' petition. The "one-integrated enterprise" allegation, stating a necessary jurisdictional fact, was thus deemed admitted.

DISCUSSION

VCDC argues on appeal (1) that the bankruptcy court did not have jurisdiction by which to enter a default under Fed.R.Civ.P. 37 (Rule 37) without a palpable showing of jurisdiction on the merits i. e., that jurisdiction cannot be deemed admitted; (2) that the default provisions of Rule 37 do not apply in bankruptcy; (3) that even if the default provisions apply, the use of default procedures here was an abuse of discretion; and (4) that a limited remand is appropriate to allow the bankruptcy court an opportunity to entertain a Fed.R.Civ.P. 60 motion.

I. Jurisdiction

The bankruptcy court clearly has the power in the first instance to determine whether it has jurisdiction to proceed. Chicot Co. Drainage Dist. v. Baxter State Bank, 308 U.S. 371, 376-77, 60 S.Ct. 317, 319-20, 84 L.Ed. 329 (1940); United States v. United Mine Workers, 330 U.S. 258, 292 n. 57, 67 S.Ct. 677, 695 n. 57, 91 L.Ed. 884 (1947); Monte Vista Lodge v. Guardian Life Ins. Co. of America, 384 F.2d 126, 129 (9th Cir.), cert. denied, 390 U.S. 950, 88 S.Ct. 1041, 19 L.Ed.2d 1142 (1967); In re Dolly Madison Industries, Inc., 326 F.Supp. 441 (E.D.Pa.1971). In Chicot, the Court stated that "lower federal courts are all courts of limited jurisdiction .... But none the less they are courts with authority ... to determine whether or not they have jurisdiction to entertain the cause and for this purpose to construe and apply the statute under which they are asked to act." 308 U.S. at 376, 60 S.Ct. at 319. In United Mine Workers, the Court similarly stated that federal courts have jurisdiction to determine jurisdiction and "may either have to determine the facts ... or the law, as whether the case alleged arises under a law of the United States." 330 U.S. at 292-93 n. 57, 67 S.Ct. at 695 n. 57. And it is equally clear that a court may allow or order discovery to aid in determining whether it has jurisdiction. Wells Fargo & Co. v. Wells Fargo Exp. Co., 556 F.2d 406, 430 n. 24 (9th Cir. 1977) (citing cases).

Thus, VCDC's argument that the court lacked jurisdiction to enter default is without merit. The Bankruptcy Judge properly construed and applied the bankruptcy statute and rules in determining the contested jurisdictional issue. Bankruptcy Rule 115(a) requires that a court "shall determine the issues of a contested petition at the earliest practicable time and adjudicate the debtor a bankrupt, dismiss the case, or enter such other order as may be appropriate." Under this rule and the reasoning of the prior authorities, the bankruptcy court was the proper forum to determine the jurisdictional objections lodged as an affirmative defense to the involuntary petition.

II. Rule 37 Default Sanctions

VCDC deliberately and obstinately refused to cooperate with discovery requests and court orders relevant to the jurisdictional issue. The bankruptcy court, faced with an obstreperous alleged bankrupt, unequivocally had the power to apply Fed.R.Civ.P. 37 sanctions for obstruction of discovery. Bankruptcy Rule 121 provides, inter alia, that Bankruptcy Rule 737 applies to contested petitions and makes clear that references in the Federal Rules of Civil Procedure to complaints shall be read as references to a petition. Rule 737 incorporates Rule 37 of the Federal Rules of Civil Procedure.

Rule 37 ⁵ provides for, inter alia, the entering of a judgment by default for the failure of a party to attend a properly noticed deposition or serve answers to interrogatories or respond to requests for inspection of documents.

The imposition of Fed.R.Civ.P. 37 sanctions was thus allowable and should not be reversed unless there has been an abuse of discretion. National Hockey League v. Metropolitan Hockey Club, Inc., 427 U.S. 639, 642, 96 S.Ct. 2778, 2780, 49 L.Ed.2d 747 (1976) "The question, of course, is not whether this Court, or whether the (District Court), would as an original matter have dismissed the action; it is whether the (Bankruptcy Court) abused its discretion in so doing." Id. See also Denton v. Mr. Swiss of Missouri, Inc., 564 F.2d 236, 239 (8th Cir. 1977); Pioche Mines Consolidated, Inc. v. Dolman, 333 F.2d 257, 269 (9th Cir. 1964).

We certainly cannot say there was an abuse of discretion here. The record is replete with instances of VCDC's obstructionist and delaying tactics. The bankruptcy court repeatedly accommodated VCDC with respect to continuances, hearings on discovery motions and protective orders to facilitate Mr. Everson's deposition free from fear of service of an Arizona state bench warrant. The Bankruptcy Judge bent over backward, including his setting over hearings on the motion to enter default to give VCDC another chance to comply with discovery orders. VCDC's conduct appears willful and in bad faith. Our Court has stated that "(w)here ... counsel or a party has acted willfully or in bad faith in failing to comply with rules of discovery or with court orders enforcing the rules or in flagrant disregard of those rules or orders, it is within the discretion of the trial court to dismiss the action or to render judgment by default against the party responsible for noncompliance." G-K Properties v. Redevelopment...