On appeal from the United States Bankruptcy Court for District of Illinois, Eastern Division, Case No. 99-A-536 Judge John A. Nordberg .
The opinion of the court was delivered by: John A. Nordberg Senior United States District Court Judge
MEMORANDUM OPINION AND ORDER
This is a bankruptcy appeal. Appellants Peter Cho and Simon Chong were officers and directors of the debtor -- John Dawson & Associates, Inc. ("JDA") -- which went out of business in October 1998. The Trustee who was appointed filed a complaint, alleging that appellants (I) converted 25 checks from JDA's account, (ii) manipulated put options in the company's account, and (iii) took office equipment, all in the year before the company closed. Believing that they would be indicted arising out of these same matters, which they later were, appellants invoked their Fifth Amendment privilege to the Trustee's discovery requests and deposition questions.
The Trustee nevertheless proceeded forward with a summary judgment motion against them. On July 18, 2003, the Bankruptcy Court granted the motion as to the 25 checks but denied it as to the two other allegations. In February 2004, after a number of status hearings, the Bankruptcy Court set a trial date for June 14, 2004. In the months leading up to the trial, the Trustee prepared the submissions required by the Final Pretrial Order. Appellants did not participate in this process. Therefore, a little over a week before the scheduled trial, the Trustee filed a motion for default. Appellants responded a few days later by filing a motion for a stay pending resolution of the criminal trial. The Bankruptcy Court denied the stay motion, finding that the request was made too late, and then granted the default motion after appellants indicated that there was then no point in going forward with the trial.
Appellants now challenge the summary judgment ruling relating to the 25 checks and the two rulings (the stay and default motions) on the remaining claims. The gist of their appeal is that they were unfairly penalized for invoking their Fifth Amendment privilege and that the Bankruptcy Court should have waited so that the criminal case could go first.
JDA was a company that purchased, sold, and traded securities, on its own behalf and on behalf of customers, through certain proprietary accounts. The company began operating in 1972. In October 1998, JDA went out of business when its clearing broker, Bear Stearns, froze its funds. On October 6, 1998, JDA informed the NASD and SEC that it was in violation of its net capital requirements.
In April 1999, JDA was ordered liquidated pursuant to the Securities Investor Protection Act of 1970 ("SIPA"), 15 U.S.C. §§ 78aaa et seq. The Bankruptcy Court appointed J. William Holland as Trustee who initiated this adversary proceeding against Cho, Chong, and other former JDA individuals.
In the second amended complaint, the Trustee alleged that Cho and Chong, in the year before the business closed, directed the company's CFO, Douglas Samuels, to write 25 checks from the company's bank account. These checks totaled $404,496.46. Some of them were written to Cho and Chong; some were written to cash and then cashed by Samuels who gave the money to Cho and Chong; and some were written to other JDA individuals not involved in this case. The Trustee also alleged that appellants manipulated the sale of certain put options in a way that allowed them to transfer an additional $149,960 from JDA's proprietary accounts to an account held by Chong's father. Finally, the Trustee alleged that appellants removed computers and other office equipment valued at $137,075 from JDA's offices.*fn1
During this general period, Cho and Chong learned that the U.S. Attorney's office was investigating possible criminal charges relating to the demise of JDA. Cho and Chong therefore decided to invoke their Fifth Amendment privilege to almost every request and question posed by the Trustee in both written and deposition discovery.
The Summary Judgment Motion
On November 15, 2002, the Trustee moved for summary judgment against appellants and the other JDA individuals. The Trustee attached copies of the 25 cancelled checks written on JDA's accounts, account statements, affidavits, and an expert report of Edward Chez. Appellants filed a response brief and a statement in response to the Trustee's statement of material facts. They relied heavily on the fact that they had invoked the Fifth Amendment and argued that they should not be penalized for doing so. They denied most of the Trustee's supporting facts with statements similar to this one: "Disputed as not supported by the evidence."
On July 18, 2003, in a 16-page opinion, the Bankruptcy Court granted in part and denied in part the Trustee's summary judgment motion. In concluding that appellants had fraudulently converted the 25 checks, the Bankruptcy Court relied on the fact that Samuels, the CFO, testified in affidavit that appellants asked him to write the checks; that the company was insolvent during this time based on the Chez expert report; and that appellants had offered no evidence (either through their testimony or otherwise) suggesting a valid business reason for these transfers. (Op. at 13-14.) The Court summarized:
The circumstances of making so many transfers to themselves during the Debtor's insolvency, combined with the adverse inference that may be drawn from Defendants' refusal to explain the purpose of the transfers, leads to only one conclusion -- that the Defendants intended to empty the coffers before their creditors were any the wiser.
Although the Bankruptcy Court granted summary judgment to the Trustee on claims relating to the 25 checks, it denied summary judgment on the claims against Cho and Chong relating to the put options and the office equipment, concluding that the Trustee had failed to meet his burden. (Id. at 15-16.)
Default Judgment On The Remaining Claims
Several months after the summary judgment ruling, in September 2003, the Bankruptcy Court held a status hearing to determine how to address the remaining claims relating to the put options and equipment. Over the next five months, the Trustee's and appellants' counsel met with the Court at several status hearings during which time they discussed whether the Trustee was going to try these claims. During this period, the Trustee seemed uncertain as to what he would do.
For example, on October 1, 2003, the Trustee's counsel said that he would move to enter the partial summary judgment ruling "into a final order so that it could be appealed or enforced" and that he hoped to make a motion in 10 or 14 days. (Tr. at 2-3.) But no motion was made. On November 18, 2003, the Trustee apparently changed his mind, indicating that he did plan to try the remaining claims. Appellants' counsel stated that he had been waiting to find out whether the Trustee was going to try those claims. And the Bankruptcy Court noted: "I didn't know whether you were going to go ahead after the partial summary judgment. We never really got any hint from you on that." (Tr. at 11.)
Then, on January 21, 2004 the Trustee's counsel stated that he "believed" that the Trustee had decided to dismiss the remaining claims. But on February 11, 2004, the Trustee indicated that he was going forward with the claim. Apparently deciding that it was time to bring the matter to a more definitive conclusion, the Bankruptcy Court stated at this hearing that it would enter a Final Pretrial Order setting a firm trial date and would do so "before the end of [the] month" so that parties would have at least four months to get ready for trial. (Tr. at 11-14.) Appellants' counsel also stated at this hearing:
And if [appellants] get indicted, we may well file motions to stay this proceeding. I don't know what we'll do. I recall at one time we were here on a status, you had indicated you weren't interested in trying the case before the criminal case was resolved. (Tr. 15.)
On February 12, 2004, a grand jury returned a 71-page, 29-count indictment against Cho, Chong, and other JDA individuals. The indictment alleges that these individuals participated "in a scheme to defraud [JDA] and its customers of money, property and their intangible right of honest service by means of materially false and fraudulent pretenses, representations, promises and omissions."
On February 20, 2004, the Bankruptcy Court issued the Final Pre-Trial Order setting the trial for June 14, 2004. (Appellee Ex. 7.) This Order required the parties to prepare a Pretrial Submission that included witnesses, exhibits, and stipulations and that they prepare findings of fact and conclusions of law. The parties were aware, based on a clear warning in all capitals in the first paragraph of this Order, that failure to comply with the requirements of the Order could result in sanctions, one of which was a default judgment.
In preparation for trial, and in compliance with the Final Pretrial Order, the Trustee attempted to work with appellants. However, counsel did not respond nor participate in the process. Specifically, on May 5, 2004 and again on May 17, 2004, the Trustee's counsel asked counsel for appellants whether they would be participating. The Trustee's counsel did not receive an answer. Later in May, the Trustee's counsel made phone calls and wrote letters in a further attempt to find out whether appellants were participating. Appellants' counsel again refused to give a clear answer, nor did counsel participate in the process. Therefore, on May 27, 2004, the Trustee prepared and filed his version of the Pretrial Submission along with his proposed Findings of Fact and Conclusions of Law. Appellants never submitted any separate findings or conclusions of law.
On June 6, 2004, the Trustee filed a motion for default judgment. This motion described in detail appellants' failure to abide by the Pretrial Order.
On June 7, 2004, appellants opposed that motion and filed a motion for stay of the trial pending resolution of the criminal case.
At a hearing on June 8th, the Bankruptcy Court denied the motion for a stay and granted the motion for ...