In re Markus

MEMORANDUM OPINION EXPLAINING IMPOSITION OF SANCTIONS ON VICTOR A. WORMS, ESQ., COUNSEL FOR FOREIGN DEBTOR LARISA MARKUS   On October 8, 2019, the Court entered an Order imposing sanctions on Victor A. Worms, Esq. (“Worms”), counsel of record for the foreign debtor Larisa Markus (“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 behalf of Markus on June 25, 2019. (“Sanctions Order,” ECF Doc. # 157.) The Sanctions Order resulted from the granting of the Markus Foreign Representative’s Motion for Sanctions Against Victor A. Worms and Larisa Markus. (“Sanctions Motion,” ECF Doc. # 136.) The Foreign Representative 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 Foreign Representative seeks an award of $40,000 in attorneys’ fees and costs in connection with seeking discovery from Markus and preparing the Rule 37 Motion. (Id. at 6.) The Foreign Representative also requests that the Court hold Worms in contempt for failure to comply with the subpoena. (Id. at 17-18.) Worms opposed the Foreign Representative’s motion and filed a cross-motion against the Foreign Representative 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) Worms did not comply with the Local Rules regarding notice for scheduling his cross-motion for hearing, but the Court nevertheless considered the cross-motion at the hearing on October 3, 2019. (The Court denied Worms’ cross-motion during the October 3, 2019 hearing. The cross-motion was frivolous.) The Foreign Representative 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 “July 30, 2019 Discovery Order,” ECF Doc. # 107.) The Court finds that Worms’ misconduct in violating the discovery orders was knowing, willful and intentional. The Sanctions Order imposed monetary sanctions on Worms in the amount of $1,000 per day from September 5, 2019 until Worms complies with the Court’s discovery orders. This Opinion further explains the Court’s findings of fact and conclusions of law supporting the sanctions award. I. BACKGROUND The background of this chapter 15 case (“Markus Case,” Case No. 19-10096 (MG)), and in the related chapter 15 case of Foreign Economic Industrial Bank, Ltd. (“Bank Case,” Case No. 16-13534 (MG)), has been described in numerous prior opinions and orders entered by Judge Vyskocil, who originally presided over these cases, and by me since the cases were transferred to me on June 24, 2019. On April 1, 2019, in the Markus Case, Judge Vyskocil granted the Foreign Representative’s motion for recognition of a foreign main proceeding and authorized the Foreign Representative, pursuant to section 1521(a)(4) of the Bankruptcy Code, to “examine witnesses, take evidence concerning the debtor’s assets, affairs, rights, obligations or liabilities….” (“Recognition Order,” ECF Doc. # 29 at 9.¹) On May 28, 2019, Worms appeared as counsel for Markus in this case. (“Notice of Appearance,” ECF Doc. # 55.) On June 18, 2019, Worms filed Motions to Vacate Recognition in the Markus Case and the Bank Case. (Markus Case, ECF Doc. # 70; Bank Case, ECF Doc. # 106.) The most recent opinion by me, denying the motions to vacate the recognition orders entered by Judge Vyskocil, was entered on October 8, 2019.² (Memorandum Opinion and Order Denying Motions to Vacate Recognition as Foreign Main Proceedings (hereinafter, “October 8 Opinion,” ECF Doc. # 158).) Worms’ client in this case, the foreign debtor Larisa Markus, is currently serving a long jail sentence in Russia after pleading guilty to embezzling over $2 billion. Despite Worms’ stonewalling of discovery, the Foreign Representative has so far documented that Markus transferred — at a minimum — millions of dollars of her assets to the United States. The Foreign Representative continues to try to discover the evidence trail of Markus’ missing fortune. While Markus is in jail in Russia, limiting her ability to personally assist in complying with her discovery obligations in this case,³ she has agents and attorneys in multiple countries where she is known to have had property, including in the U.S., U.K., France, Latvia and Russia. The fact that Worms’ client is in a Russian jail does not relieve Worms of his professional obligations to respond to legitimate discovery in this case. Worms may not bury his head in the sand, as he has knowingly and intentionally done in this case. Worms knows who Markus’ agents and attorneys are in the U.S. and other countries; Worms knows that, acting through her agents and attorneys, Markus engaged in numerous transactions around the world transferring assets that she has so far shielded from efforts of the Foreign Representative to recover as part of the Russian bankruptcy estate; Worms has failed to demonstrate that he has made reasonable efforts to gather responsive documents from Markus’ agents and attorneys. As explained below, FED. R. CIV. P. 34, applicable in this chapter 15 case, requires a party to produce all responsive documents in the party’s “possession, custody or control,” which includes documents held by her agents and attorneys in this country or elsewhere. Worms’ discovery misconduct began during the time that Judge Vyskocil was presiding over these cases and has continued since the cases were transferred to me. (See, e.g., May 29, 2019 Hr’g Tr. at 24, 29 (ECF Doc. # 59) (Judge Vyskocil finding that “there is clearly a pattern of [the LM Entities] not complying with [their] discovery obligations and of stonewalling that has to come to an end” and noting the Court was “getting tired of the games here”).) Worms is being paid for his work in this case by the LM Trust,⁴ a revocable trust governed by New York law, for which Markus was the settlor, and by Ilya Bykov, a New York resident whom Markus provided a power of attorney.⁵ To be clear, however, this Court’s order imposing sanctions on Worms is based solely on his misconduct in this case since it was transferred to me. On June 25, 2019, the Foreign Representative served “Larisa Markus, C/O Victor A. Worms” with a subpoena for the production of documents. (“Subpoena,” ECF Doc. # 79-2.) On July 9, 2019, Worms moved to quash the Subpoena. (“Motion to Quash Subpoena,” ECF Doc. #79.) At a hearing on July 23, 2019, the Court was very clear with Worms that he had to produce all non-privileged responsive documents to the Foreign Representative’s counsel.⁶ A written order denying the Motion to Quash Subpoena was entered on July 30, 2019. (July 30, 2019 Discovery Order, ECF Doc. # 107.) The July 30, 2019 Discovery Order also ordered 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.” (Id.) It also required Worms to produce documents responsive to the Subpoena by August 15, 2019. (Id.) Worms thereafter requested an extension of time to respond to the Subpoena until September 4, 2019 because, he said, he needed time to have the Subpoena translated into Russian for his client. (“Worms Letter,” ECF Doc. # 108.) The Court granted the extension but stated that: “No further extensions will be granted. So you better be sure that the subpoena is translated promptly and delivered to Ms. Markus.” (Aug. 7, 2019 Hr’g Tr. at 8:14-16 (ECF Doc. # 129).) The Court also indicated that failure to comply with the order would result in possible sanctions. (Id. at 9:11-16.) Despite the clear September 4, 2019 deadline for Worms to produce documents, Worms did not do so. At a September 9, 2019 hearing, Worms argued for the first time that he did not have a duty to produce documents in Markus’ possession, custody or control held by her agents outside the United States. (Sept. 9, 2019 Hr’g Tr. at 78, 82 (ECF Doc. # 146).) That objection had not been raised by Worms in any written objection or response to discovery previously filed with the Court. The Court was clear that Worms had to produce responsive documents in the possession of Markus’ agents and attorneys outside of the U.S.⁷ As explained below, Worms’ objection that he doesn’t have to produce documents in the possession of Markus’ attorneys and agents outside the U.S. is without merit; any competent attorney practicing in chapter 15 cases, as Worms does, would know this, or would have filed a request seeking clarification rather than simply ignoring the orders. Rather, Worms did what he has done throughout this case — stonewall. At the hearing on October 3, 2019, Worms confirmed that he still had not produced responsive documents. (Oct. 3, 2019 Hr’g Tr. at 51-52 (ECF Doc. # 160).) During the hearing, the Court denied Worm’s cross-motion for sanctions against the Foreign Representative and his counsel — the cross-motion was utterly frivolous. (Id. at 69.) At the conclusion of the October 3, 2019 hearing, the Court granted the Foreign Representative’s Sanctions Motion against Worms, ordering that monetary sanctions be paid to the Clerk of the U.S. Bankruptcy Court because Worms knowingly and intentionally violated multiple discovery orders entered by the Court. The Court briefly explained on the record the reasons for imposing the sanctions. (Id. at 67-70.) With respect to the Foreign Representative’s request for payment of attorneys’ fees for making of the motion for sanctions, the Court deferred ruling on the request until counsel for the Foreign Representative files detailed time records supporting the request for fees. (Id. at 70-71.) The Court finds as facts that Worms knowingly and intentionally — indeed brazenly — violated previous Court orders compelling compliance with discovery. Worms has engaged in a continuous pattern of misconduct, disregarding clear warnings from the Court that failure to comply with Court orders would lead to imposition of sanctions. The Order imposing sanctions was entered by the Court on October 8, 2019. (Sanctions Order, ECF Doc. # 157.) The issues arising from Worms’ continuous pattern of obstructing legitimate discovery have been raised in multiple filings and at numerous court hearings. On multiple occasions the Court ordered that Worms comply with discovery. On July 30, 2019, the Court entered a written order compelling Worms to produce non-privileged documents on or before August 15, 2019. (July 30, 2019 Discovery Order, ECF Doc. # 107.) At the September 9 hearing, Worms attempted to explain away his failure to comply with the July 30, 2019 Discovery Order (Sept. 9, 2019 Hr’g Tr. at 78, 82 (ECF Doc. # 146)), and with the August 7, 2019 oral order (Aug. 7, 2019 Hr’g Tr. at 9 (ECF Doc. # 129)) compelling production by September 4, 2019 of all non-privileged documents responsive to the Subpoena. (Subpoena, ECF Doc. # 79-2.) Worms asserted that he “misunderstood” the Court because he “believed” Markus had no duty to produce documents in her “possession, custody or control” through her agents outside the United States. (Sept. 9, 2019 Hr’g Tr. at 82 (ECF Doc. # 146).) Black letter law is to the contrary. No reasonable attorney could believe otherwise. Worms’ “misunderstanding” is the latest in a string of excuses to justify non-compliance with orders. II. LEGAL STANDARD Section 1521(a) outlines the discretionary relief a court may order upon recognition. 11 U.S.C. §1521(a). The discretion that is granted is “exceedingly broad,” since a court may grant “any appropriate relief” that would further the purposes of chapter 15 and protect the debtor’s assets and the interests of creditors. 8 COLLIER ON BANKRUPTCY 1521.01 (16th ed. 2019). “Subsection 1521(a)(4) enables discovery” and “[s]ubsection 1521(a)(5) permits the delivery of assets located in the United States to a foreign representative or another person for administration or realization but stops short of allowing repatriation or distribution.” 8 COLLIER ON BANKRUPTCY 1521.02 (16th ed. 2019). Discovery under section 1521(a)(4) “enables a Foreign Representative to take broad discovery concerning the property and affairs of a [foreign] debtor.” In re Millennium Glob. Emerging Credit Master Fund Ltd., 471 B.R. 342, 346 (Bankr. S.D.N.Y. 2012). Where discovery is sought, the protective conditions of section 1522 apply. “Section 1521(a)(7) authorizes the court to grant to the foreign representative the sort of relief that might be available to a trustee appointed in a full bankruptcy case,” including the turnover of property belonging to the debtor. In re Inversora Eléctrica de Buenos Aires S.A., 560 B.R. 650, 655 (Bankr. S.D.N.Y. 2016) (internal citation omitted). Section 1521(b) permits the court, at the request of the foreign representative, to “entrust the distribution of all or part of the debtor’s assets located in the United States to the foreign representative…provided that the court is satisfied that the interests of the creditors in the United States will be sufficiently protected.” 11 U.S.C. §1521(b). For example, in In re Tri- Continental Exch. Ltd., 349 B.R. 627 (Bankr. E.D. Cal. 2006), the court permitted the turnover of funds to foreign representatives for administration where the funds would be maintained in a deposit account within the jurisdiction of the court but could be used to fund efforts to realize additional assets. A. Discovery in a Chapter 15 Case Is Not Limited to Documents in the United States Contrary to Worms’ contention, discovery in a chapter 15 case is not limited to documents in the United States. Permissible discovery also extends to documents in the possession, custody or control of a party, including documents held by a party’s attorneys or agents. Any argument by Worms that he is not required to produce documents in Markus’ “possession, custody or control” by agents outside the United States lacks merit. The court may order the production of documents from outside the United States. Rule 45′s subpoena power is not limited to the production of documents located within the United States. See Sergeeva v. Tripleton Int’l Ltd., 834 F.3d 1194, 1200 (11th Cir. 2016) (“The only geographical limitation provided by Rule 45 concerns the location for the act of production-not the location of the documents or information to be produced.”); Tiffany (NJ) LLC v. Qi Andrew, 276 F.R.D. 143, 147-48 (S.D.N.Y. 2011), aff’d sub nom. Tiffany (NJ) LLC v. Andrew, No. 10 CIV. 9471 WHP, 2011 WL 11562419 (S.D.N.Y. Nov. 14, 2011) (“If the party subpoenaed has the practical ability to obtain the documents, the actual physical location of the documents — even if overseas — is immaterial.”). Discovery in chapter 15 cases does not change this result. Where parties have argued that the requested discovery lacks a sufficient nexus to the United States because it does not involve the recovery of property in the United States, courts have held that “[r]equests for discovery in chapter 15 need not concern assets in the U.S. to be permissible under §1521(a)(4).” In re Millennium Glob. Emerging Credit Master Fund Ltd., 471 B.R. at 347. Further, where disputes have arisen regarding whether the law in the foreign proceeding’s jurisdiction would permit the requested discovery, courts have deferred to declarations provided by lawyers in that country regarding the scope of discovery in the foreign jurisdiction. See In re Platinum Partners Value Arbitrage Fund L.P., 583 B.R. 803, 814 (Bankr. S.D.N.Y. 2018). Here, the Sokolov Declarations state that Russian law allows for the discovery requested here. (“Sokolov Decl.,” ECF Doc. # 133-4,