Opinion
Case No. 05 B 27545.
June 30, 2006
MEMORANDUM OPINION on "Motion to Reconsider Court's Order of May 25, 2006 or in the Alternative to Stay the Contempt Fine Pending an Appeal"
On May 25, 2006, this Court entered a "MEMORANDUM OPINION and ORDER on 'Motion of System Division, Inc. for an Order of Contempt Against Debtor and Sheila Hamilton Pursuant to 11 U.S.C. § 105, Fed.R.Bankr.P. 9020 and 9014,'" granting in part and denying in part creditor SDI's motion. It granted the motion to the extent that the Court held Sheila Hamilton in civil contempt for failing to turn over certain customer and vendor codes. In the matter presently in front of the Court — Hamilton's "Motion to Reconsider Court's Order of May 25, 2006 or in the Alternative to Stay the Contempt Fine Pending an Appeal" — she raises the various legal issues addressed below.
A motion filed within 10 days of the entry of an order alleging error will be construed as a "Motion to Alter or Amend Judgment" within the purview of Bankruptcy Rule 9023 and, by incorporation, Federal Rule of Civil Procedure 59(e). The grounds for granting a Rule 59 motion for reconsideration and amendment of an order or judgment are similar to those required for amending factual and legal findings under Federal Rule 52(b) (and Bankruptcy Rule 7052). Those grounds include (1) an intervening change in the law, (2) newly discovered evidence that in all fairness could not have been presented or could not have been anticipated as being relevant at the time of trial, (3) any manifest error of fact or law, and (4) lack of notice. See Cosgrove v. Bartolotta, 150 F.3d 729, 732 (7th Cir. 1998); Matter of Prince, 85 F.3d 314, 324-25 (7th Cir. 1996); Publishers Resource, Inc. v. Walker-Davis Publications, 762 F.2d 557, 561 (7th Cir. 1985); Spirk v. Sullivan, 2003 WL 22048077, at *7 (N.D. Ill. 2003); In re Brogden, 274 B.R. 287, 293-94 (Bankr. M.D. Tenn. 2001); cf. Fontenot v. Mesa Petroleum Co., 791 F.2d 1207, 1219 (5th Cir. 1986) (same for Rule 52(b) motion to amend factual findings). If the ground asserted is that the judgment was based on a manifest error of fact or law, the alleged error must relate to evidence and legal arguments that were already part of the record and pleadings leading to the disputed order or judgment. See Prince, 85 F.3d at 324; Fontenot, 791 F.2d at 1219-20. The movant cannot present new legal theories (other than ones based on an intervening change of law) or new evidence (other than evidence that could not have been discovered in time for trial). See Walker-Davis, 762 F.2d at 559, 561; Fontenot, 791 F.2d at 1219-20; Spirk, 2003 WL 22048077, at *7.
Any motion that draws into question the correctness of the judgment is functionally a motion under Rule 9023, whatever its label. Thus a motion to 'reconsider,' 'for clarification,' to 'vacate,' to 'set aside' or to 'reargue' is a motion under Rule 9023, and under Bankruptcy Rule 8002(b) will postpone the time for appeal if the motion was timely made. It has also been held that a motion for reconsideration is to be treated as a motion under Rule 9023, rather than, for example, a motion under Rule 9024 . . ., since it draws into issue the correctness of the trial court's decision.
10 Lawrence P. King et al., Collier On Bankruptcy ¶ 9023.04, at 9023-6 (15th ed. rev. 2004).
The Court must begin by reiterating a dispositive point: it has abundant legal authority to order the retrieval of information concerning a debtor and his estate from persons and entities who are not parties in a bankruptcy case, i.e., persons or entities who have neither filed a voluntary petition under 11 U.S.C. § 301 nor filed a proof of claim or interest under § 501. See 11 U.S.C. § 542(e); Fed.R.Bankr.Pro. 2004(a)-©) 9016; Fed.R.Civ.Pro. 45(a)-(b). This power includes authority to "require production of documents stored outside the territorial boundaries of the United States" provided that the federal court has personal jurisdiction over the person subject to compulsion to produce documents. Application to Enforce Administrative Subpoenas Duces Tecum of S.E.C. v. Knowles, 87 F.3d 413, 416 n. 3 (10th Cir. 1996); see also Societe Nationale Industrielle Aerospatiale v. U.S. Dist. Court for Southern Dist. of Iowa, 482 U.S. 522, 540-44 n. 29, 107 S.Ct. 2542, 2556 (1987) (stating that production of documents located in foreign countries may at times be compelled in the United States even when the discovery production violates a foreign blocking statute); In re Jee, 104 B.R. 289, 294-96 (Bankr. C.D. Cal. 1989); 9A Charles A. Wright et al., Federal Practice and Procedure § 2456 (2006). It must also be reemphasized that the law provides that with respect to the enforcement of subpoenas issued pursuant to the above authority, a person who is both named in a subpoena and disobedient thereto may be subject to a contempt-of-court proceeding without any intermediate or intervening proceedings or procedures necessary. Fed.R.Civ.Pro. 45(e). "Failure to obey a subpoena is punishable as a contempt of the issuing court." 10 Collier On Bankruptcy ¶ 9016.01, at 9016-2 (Alan N. Resnick Henry J. Sommer eds., 15th ed. rev. 2006). Thus, the law governing subpoenas is not necessarily identical to the procedural law governing discovery under Federal Rules 26 through 37. To the extent that a party may obtain evidence and information by either alternative, that party has the prerogative to choose which method will be utilized (similar to the common adage that a plaintiff is master of the complaint). Here, SDI chose to issue a subpoena to Hamilton, as was its prerogative, so Federal Rule 45 sets the stage for what the law requires, not Federal Rule 7037.
As the subpoena addressed Hamilton as the "Debtor's Representative," Hamilton contends in her post-contempt-finding motion to reconsider that the subpoena merely obligated her to turn over whatever documents and data she could produce while wearing the hat of the now-defunct Chapter 7 debtor; she claims that to the extent she has sufficient possession or control over documents or data in other capacities, including her personal capacity and her officer and equity-interest-holder posts in affiliated "Teknek" entities, she need not turn over such information in spite of the subpoena. Thus, the real issue is whether the title placed after Hamilton's name in the subpoena has some sort of legally limiting effect or whether a subpoena issued to and served upon a specified individual requires that the individual comply if physically capable of complying in any respect, the title placed after the witness's name being mere surplusage. In other words, we must determine whether a distinction exists between subpoenas issued to a person in an individual or personal capacity and subpoenas issued to a person in his or her official capacity with respect to a business entity.
By definition, a subpoena is deemed "[a] writ commanding a person to appear before a court or other tribunal, subject to a penalty for failing to comply," and more specifically, a subpoena duces tecum is "[a] subpoena ordering the witness to appear and to bring specified documents or records." Black's Law Dictionary 1440 (7th ed. 1999). Thus, by definition, subpoenas are directed to persons and witnesses regardless of whether they are parties to a particular court proceeding. Federal Rule of Civil Procedure 45 itself distinguishes between a "person," "a party," "an officer of a party," and "a non-party," using each one in different contexts throughout the different subsections. The broadest, most inclusive word used is "person." In terms of a subpoena's general operation and effect, a subpoena commands a "person" to testify, produce, or permit inspection, 45(a)(1) (©), and it must be personally served on such person, 45(b)(1). Thus, as a general matter, a person's duty to comply with a subpoena has nothing to do with his or her status as a party in bankruptcy or other litigation. Certain subparts of the rule do make certain distinctions among the categories listed above, and in one instance Hamilton relies on this distinction; that issue is addressed below. However, as a general proposition, subpoenas operate on the "person" to which they are directed. In contrast, the discovery rules (Federal Rules of Civil Procedure 26-37) are the operative rules when one party seeks evidence directly from another party, while the subpoena rule (Federal Rule of Civil Procedure 45) is the operative rule when a party seeks evidence from anyone, but, more importantly, from nonparties. In re Jee, 104 B.R. 289, 295-96 (Bankr. C.D. Cal. 1989). A party could also issue a subpoena to an opposing party; an opposing party is still a "person." Furthermore, because of its much broader legal effect, the obligations imposed by a subpoena directed to a particular person do not depend on the capacity in which such subpoena is issued to that "person." That is, the capacity of the person is irrelevant, and he or she must comply if, in the case of a subpoena duces tecum, physically capable of producing the specified documents or information.
In this case, by filing the voluntary Chapter 7 petition, 11 U.S.C. § 301, the debtor Teknek LLC imposed upon itself a legal obligation to disclose recorded historical data relating to property of the estate to the trustee, § 521(4), Fed.R.Bankr.Pro. 4002. The trustee does not need to subpoena this information, because by virtue of being the "party" who filed and commenced the bankruptcy "case," the debtor has a legal obligation to turn over the information in its custody and control even in the absence of a subpoena. "It is not necessary that the debtor be formally subpoenaed to a Rule 2004 examination; an order of examination is sufficient." 10 Collier On Bankruptcy ¶ 9016.01, at 9016-2 (Alan N. Resnick Henry J. Sommer eds., 15th ed. rev. 2006). Thus, the subpoena at issue here would have no purpose unless it obligated someone else who did not have a preexisting legal duty to turn over recorded historical data relating to property of the estate. The debtor already held this obligation. Thus, the mere fact that the document was a subpoena directed to her should have alerted Hamilton and her attorneys to the notion that SDI sought information discoverable in a bankruptcy case that was outside the regular scope of what is available to creditors directly from a corporate Chapter 7 debtor itself, e.g., information the debtor no longer possesses.
Application to Enforce Administrative Subpoenas Duces Tecum of S.E.C. v. Knowles, 87 F.3d 413 (10th Cir. 1996), is consistent with this view of the subpoena rule. In Knowles, a Bahamian company was the subject of an S.E.C. investigation of whether it had bribed U.S. brokers to buy certain stock, and accordingly the S.E.C. issued an administrative subpoena duces tecum. Knowles, 87 F.3d at 414-15. The S.E.C. issued this subpoena to the corporation's former president residing in the Bahamas, demanding that he produce both personal documents as well as bank records of the company under investigation. Id. at 415. Because the subpoena made no explicit reference to his former capacity as president of the company, id. at 418, the appellant contended that he had no obligation to turn over the bank documents of the company, because he was an entity distinct from the company, id. at 416 n. 3. Incidentally, he also argued that the U.S. federal courts had no personal jurisdiction over him, because his only contacts with the United States were contacts he had made in his official capacity as president of the company, meaning that the contacts could supposedly count just once as being the same minimum contacts subjecting the company to personal jurisdiction, id. at 416 n. 3, 418. Citing Calder v. Jones, 465 U.S. 783, 790, 104 S.Ct. 1482, 1487 (1984), the Tenth Circuit held that a foreign corporate officer's official business contacts with the United States also count as minimum contacts subjecting him to the personal jurisdiction of a subpoena where this corporate officer was the "primary participant" in the corporate activities being investigated in the underlying civil action. Id. at 418-19. More important for the capacity distinction we are discussing, though, was the court's actual ruling in that case. In spite of both Knowles' reliance on the capacity distinction and the subpoena's failure to explicitly demand that he produce documents by virtue of his position as the company president, id. at 415, 416 n. 3, 418, the Tenth Circuit Court of Appeals held that Knowles had a legal duty to respond to the subpoena in all respects, in effect reaching the same conclusion this Court reached above using the language of Federal Rule 45 and the nature of a subpoena.
This conclusion is that as long as a subpoena is addressed to a specific person who would have sufficient control and power to physically produce specified documents in the event that such person desired to do so, the person must comply with the subpoena; there is no capacity defense to a subpoena that requires the party serving it to speculate as to which hat the compelled person must garnish in order to conjure up the ability and power to produce certain documents and information. (Of course there are various other ways to either quash or limit the effect of a subpoena.) By comparison, if a subpoena ad testificandum issued to a nonparty lay witness to testify at a deposition or trial, that witness would be required to answer questions concerning matters within his or her personal knowledge regardless of what particular hat he or she was wearing at that moment. The lawyers would not question (or initially subpoena) the witness in phases; one phase for the witness's affiliation with a party company, another phase for a witness's affiliation with some other related nonparty company, and yet another phase for the witness's life outside of the work environment. Instead, the witness is subpoenaed to testify in any or all capacities that could be relevant to the case. Similarly, when a subpoena compels a person to produce documents or other information, that person must produce the same if he or she is physically capable of producing in a hypothetical situation where he or she desired to do so, just as the same person would be required to answer any questions he or she was capable of answering. The person does not get to play a shell game using the different hats he or she wears at different times.
"Such objections may include lack of proper service, inability to appear or to produce the requested documents, failure to identify the documents requested and the burden of compliance, including advancement of costs." 10 Collier On Bankruptcy ¶ 9016.01, at 9016-2 to -3 (Alan N. Resnick Henry J. Sommer eds., 15th ed. rev. 2006); see also 9A Charles A. Wright et al., Federal Practice and Procedure § 2465 (2006).
Even if it is the case that the subpoena at issue facially subjected Hamilton to a legal duty to produce all of the specified documents she could physically produce regardless of the hat she was wearing at a particular time, Hamilton and her attorneys also contend that the Court overlooked an exemption to which she is entitled in the subpoena rule:
(e) Contempt. Failure by any person without adequate excuse to obey a subpoena served upon that person may be deemed a contempt of the court from which the subpoena issued. An adequate cause for failure to obey exists when a subpoena purports to require a non-party to attend or produce at a place not within the limits provided by clause (ii) of subparagraph (c)(3)(A). ©) Protection of Persons Subject to Subpoenas.
. . . .
(3)(A) On timely motion, the court by which a subpoena was issued shall quash or modify the subpoena if it. . . .
(ii) requires a person who is not a party or an officer of a party to travel to a place more than 100 miles from the place where that person resides, is employed or regularly transacts business in person, . . .
Federal Rule of Civil Procedure Rule 45©) (e). Because the Court treated Hamilton in her personal capacity in holding her in contempt of court, she claims she is entitled to the exemption in subsection (e) for non-parties who must meet a production request more than 100 miles away from the place where they reside or work, as set forth "within the limits provided by clause (ii) of subparagraph (c)(3)(A)." The "limits provided by clause (ii) of subparagraph (c)(3)(A)," include the qualification that the person receiving the benefit of the clause be "a person who is not a party or an officer of a party." Federal Rule of Civil Procedure Rule 45©) (emphasis added). It is undisputed, however, that Hamilton is an officer of a party. Because the subpoena at issue requires Hamilton to produce in a manner that does not offend clause (ii) of subparagraph (c)(3)(A), she is not qualified to take advantage of the exemption, and her argument must be rejected. Indeed, the second part of the phrase ("person who is not . . . an officer of a party") would be superfluous if it did not refer to situations in which an officer of a corporate-party entity was being personally or individually ordered to testify or to produce. If a corporate officer were never more than an extension or a component of a corporate party, we wouldn't need the second clause at all, because an officer representing a corporate party in an official capacity is the corporation itself, and that situation is covered by the part of the phrase intended to protect "a person who is not a party." Although Hamilton correctly describes that the opinion finds her in contempt of court in her nondebtor, nonparty, personal capacity, she would also be required to show that she is "not . . . an officer of a party," which she cannot do, in order to receive the exemption in the rule.
Neither does Hamilton's resort to Federal Rule of Bankruptcy Procedure 9001 to relieve her of her duty to comply with the subpoena by somehow limiting this Court to treating her in a representative capacity with respect to the debtor. This rule provides:
(5) "Debtor." When any act is required by these rules to be performed by a debtor or when it is necessary to compel attendance of a debtor for examination and the debtor is not a natural person: (A) if the debtor is a corporation, "debtor" includes, if designated by the court, any or all of its officers, members of its board of directors or trustees or of a similar controlling body, a controlling stockholder or member, or any other person in control. . . .
Federal Rules of Bankruptcy Procedure, Rule 9001(5). What this rule does is permit a bankruptcy court, in situations where it is not dealing with a debtor of flesh and blood, to designate a natural person whom such court may hold responsible for court orders pertaining to the non-natural debtor by virtue of that person's ability to exert a certain amount of control over such debtor. To this purpose a natural person is equated with the business-entity debtor. Since the rule is not one of limitation or prohibition, nothing in it indicates that the same controlling officer or shareholder could not be treated in some other capacity much less subjected to a subpoena, the whole point of which is to reach outside the party-line boundaries for evidence and information, as explained above.
Hamilton also points out the part of the opinion declining to permit SDI to utilize a legal maneuver similar to veil piercing and recognized by the U.S. Supreme Court; this maneuver allows consolidation of affiliated corporations into a single entity or enterprise. N.L.R.B.v. Deena Artware, 361 U.S. 398, 402-04, 80 S.Ct. 441, 443-44 (1960). This Court's Memorandum Opinion of May 25, 2006, stated that a more formal procedure was necessary if SDI wanted to collapse the walls of the members of the Teknek empire; it could not simply assert that since Teknek Manufacturing or Teknek Holdings possessed the customer and vendor codes at issue, the debtor Teknek LLC has possession and control of the same data. This does not mean, of course, that other substantive or procedural laws do not impose legal duties and potential liabilities directly on those members, shareholders, or officers who control a business entity. See, e.g., 805 Ill. Comp. Stat, 180/25-30 -35 (2004). As discussed above, subpoenas impose obligations to produce or testify directly on individual persons regardless of capacity, so when federal cases resolve issues of corporate officer and director contempt-of-court liability for failing to comply with a subpoena issued in a case in which the corporate entity is a party, such cases have nothing to do with veil piereing or other modifications of intercorporate liability. See, e.g., Penfield Co. of Cal. v. Securities and Exchange Commission, 330 U.S. 585, 67 S.Ct. 918, 919-20 923 (1947).
Finally, Hamilton contends that this United States Bankruptcy Court has no personal jurisdiction over her in her individual capacity, at least not apart from the personal jurisdiction this Court already has over her company, the Chapter 7 debtor Teknek LLC, Federal courts do require a certain type of personal jurisdiction over a nonparty witness in order to enforce a subpoena against such a person. Application to Enforce Administrative Subpoenas Duces Tecum of S.E.C. v. Knowles, 87 F.3d 413, 416-19 (10th Cir. 1996); In re Jee, 104 B.R. 289, 293-94 (Bankr. C.D. Cal. 1989). In general, to analyze minimum contacts necessary for enforcing a subpoena against a foreigner, the court must ask whether the witness's contacts with the forum have a nexus to the activities being investigated in the underlying legal proceeding. Knowles, 87 F.3d at 417-19.
The Court has re-reviewed the "Motion of System Division, Inc. for an Order of Contempt Against Debtor and Sheila Hamilton Pursuant to 11 U.S.C. § 105, Fed.R.Bankr.P. 9020 and 9014" and the written response thereto. The Court finds that the motion very clearly requested contempt relief not just against the debtor but also against Hamilton. By way of comparison, a complaint commencing an adversary proceeding must allege the basis for subject matter jurisdiction but need not allege the basis for personal jurisdiction. Fed.R.Civ.Pro. 8(a); Purdue Research Foundation v. Sanofi-Synthelabo, S.A., 338 F.3d 773, 782 (7th Cir. 2003); In re Enron Corp., 316 B.R. 434, 439-40 (Bankr. S.D.N.Y. 2004). Only if the defendant actually challenges the court's personal jurisdiction must the plaintiff establish by affidavit or hearing that it has personal jurisdiction over the defendant. Purdue Research Foundation v. Sanofi-Synthelabo, S.A., 338 F.3d 773, 782 (7th Cir. 2003). Nevertheless, the debtor and Hamilton failed to clearly raise this personal jurisdiction issue in written or oral form in their efforts to oppose the relief sought in the motion, and no adequate reason for this omission is apparent. While the Court will address the analogous issue that they properly raised in the pending adversary proceeding (# 06-00412), it will not permit Hamilton to raise this issue for the first time on a motion to vacate or reconsider a ruling on an otherwise fully litigated contested motion. Cf. Fed.R.Civ.Pro. 12(g)-(h)(1). Contested matters resulting from motions for a rule to show cause brought pursuant to Federal Rules of Bankruptcy Procedure 9013, 9014, 9016, and 9020 generally need not meet any more stringent requirements than adversary proceedings, which are supposed to be the more formal of the two types of proceedings.
Similarly, the debtor and Hamilton have never argued that Hamilton herself would be entirely unable to produce the customer codes and lists at issue, and given that she is a shareholder and officer of the affiliated Teknek entity that withdrew the debtor's license for this information, the argument would appear implausible anyway. That is, one of Hamilton's own companies granted the license to use the data to the debtor and then took back the same. "Witnesses may be compelled to produce documents that they control even though they do not have possession of them." 9A Charles A. Wright et al., Federal Practice and Procedure § 2456 (2006). Hamilton's cry of "no evidence" is unconvincing here, and the nature of the factual issue did not demand that SDI belabor the point, as Hamilton's formal relationship to each of the Teknek entities has never been seriously disputed. But the point here is that Hamilton never contended previously that it would have been impossible for her turn over this data even if she desired to do so, though the motion at issue was directed toward her and further asserted that the customer and vendor codes had been wrongfully withheld in spite of a subpoena. The issue was indeed presented at a formal hearing, and Hamilton's choice not to develop it further based on the assumption she would prevail on other bases does not mean that she did not receive a formal hearing on the topic. The fact that other evidentiary issues related to matters on which SDI did not prevail consumed the bulk of the proceeding is not to be confused with the fact that this issue was before the Bankruptcy Court on a motion, and either side, to its benefit or peril, was free to develop it.
For the foregoing reasons, the Court will deny Hamilton's "Motion to Reconsider Court's Order of May 25, 2006 or in the Alternative to Stay the Contempt Fine Pending an Appeal" as well as further find that no adequate reason for a stay pending appeal exists in this matter. The Court recognizes that up to this point, the fact that the subpoena referred to Sheila Hamilton as the debtor Teknek LLC's representative, rather than simply naming her without reference to capacity may have created cause for confusion; the Court will modify the prior order only to delay activation of the $1000 per diem fine until July 11, 2006, provided that the information at issue is not turned over to the bankruptcy estate's representative by July 10, 2006. The language now having been deemed surplusage, no cause for delay or confusion exists, the subpoena must be obeyed.