Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_15-cv-01989/USCOURTS-caed-2_15-cv-01989-5/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:1334 Bankruptcy Appeal

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

----oo0oo----

In re WILLIAM MATTHEW DUGO,

Debtor.

CIV. NO. 2:15-1989 WBS

BANKR. ADVERSARY NO. 14-02152

BANKR. NO. 14-22435

OPINION

BANK OF STOCKTON,

Appellant,

v.

WILLIAM MATTHEW DUGO,

Appellee.

----oo0oo----

Appellant Bank of Stockton (the “Bank”), a secured 

creditor, brought an adversary proceeding against appellee and 

debtor William Matthew Dugo, seeking a determination that the 

obligation Dugo owes it is nondischargeable. Presently before 

the court is the Bank’s appeal from the bankruptcy court’s 

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judgment and award of attorney fees in favor of Dugo.1 (Docket 

No. 21.) 

I. Factual and Procedural Background

The Bank issued Dugo a loan and line of credit secured 

by Dugo’s livestock. (Bank’s Br. at 7 (Docket No. 21).) Dugo 

defaulted and the Bank unsuccessfully attempted to collect the

livestock collateral to pay down the line of credit. (Id.) On 

March 11, 2014, Dugo filed a voluntary Chapter 7 bankruptcy 

petition in the Eastern District of California bankruptcy court. 

(Excerpts of Record (“ER”) at 17, Adversary Compl. ¶ 7.) The 

Bank then filed an adversary proceeding alleging willful and 

malicious injury, 11 U.S.C. § 523(a)(6), and extension, renewal, 

or refinancing of credit obtained by use of a false statement in 

writing, id. § 523(a)(2)(B), and requested a determination that 

the debts owed by Dugo were nondischargeable. (ER at 19, 29-39, 

Adversary Compl. ¶¶ 9, 105-19, 120-27.) The parties conducted 

discovery, including production of documents and depositions. 

On June 17, 2015, the bankruptcy court issued an order 

setting trial for September 10, 2015 and stating that the 

“Alternate Direct Testimony Procedure” under Eastern District of 

California Bankruptcy Court Local Rule 9017-1 would apply to the 

proceeding. (ER at 81-82, Order Setting Trial.) The purpose of 

this procedure is “to streamline the adducement of direct 

testimony in trials . . . so as to reduce trial time without 

sacrificing due process and a fair trial.” E.D. Cal. Bankr. L.R. 

 

1 On April 29, 2016, this court ordered the Bank’s 

appeals in civil case numbers 2:15-2539 and 2:15-1989 

consolidated. (Docket No. 20.) 

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9017-1(a)(1). It requires the plaintiff to submit to opposing 

counsel a declaration of the direct testimony of each witness, 

executed under penalty of perjury, and the exhibits compromising 

the plaintiff’s case in chief fourteen days before trial. Id.

L.R. 9017-1(b)(1). The defendant must submit its declarations 

and exhibits seven days before trial. Id. L.R. 9017-1(b)(2). If

a party fails to comply, “the court may issue appropriate 

sanctions,” including “exclusion of Direct Testimony Statement(s) 

and the live direct testimony of the witness(es) giving such 

statements, exhibits, or other evidence presented which were not 

timely exchanged or presented, or such lesser sanction as 

appropriate and reasonable.” Id. L.R. 9017-1(d). 

After the Bank took Dugo’s deposition on July 16, 2015, 

the parties agreed to stipulate to a joint list of exhibits 

before trial in order to avoid submitting foundational testimony 

at trial. (Bank’s Br. at 9; Dugo’s Br. at 4 (Docket No. 22).) 

Dugo alleges, however, that the Bank’s attorney promised to get 

it a list of witnesses and exhibits well in advance of trial but 

that no formal agreement was reached. (Dugo’s Br. at 4.)

Rather than submitting a proposed list of witnesses and 

exhibits early, the Bank’s counsel emailed Dugo on August 27, 

2015--the day the declarations and exhibits were due under 

Bankruptcy Rule 9017-1--indicating that he was attaching the 

declarations but that they were “presently unsigned, as we 

reserve the right to make changes as necessary.” (Id.; Dugo’s 

App. at 3 (Docket No. 22-1).) The next day, Dugo informed the 

Bank that it had failed to properly attach the declarations and 

the Bank therefore sent a second email attaching the stillCase 2:15-cv-01989-WBS Document 25 Filed 08/03/16 Page 3 of 14
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unsigned declarations. (Dugo’s Br. at 5.) The Bank alleges that 

the declarations identified the exhibits the Bank intended to 

rely on at trial, nearly all of which were documents produced 

during discovery and to which Dugo had had access for months. 

(Bank’s Br. at 9.) On September 3, 2015, in compliance with

Bankruptcy Rule 9017-1, Dugo provided signed declarations of 

witnesses and exhibits to the Bank. (Dugo’s Br. at 5.) 

On September 4, 2015, the Bank sent Dugo a proposed 

stipulation of trial exhibits. (Id.) The Bank alleges that it 

attempted to send this exhibit list on August 27, 2015 but it was 

not sent due to “an apparent internal error.” (Bank’s Br. at 

10.) Dugo did not agree to the stipulated list because it was 

submitted after the Alternate Dispute Procedure deadline and the 

exhibits were not attached to the list. (Dugo’s Br. at 5.) 

On September 8, 2015, Dugo filed objections to the use 

of the three unsigned declarations and the admission of the 

Bank’s exhibits. (Id.) That same day, Dugo received a disc from 

the Bank with its seventy-six exhibits, consisting of 

approximately 2,464 pages, and the three declarations signed 

under penalty of perjury. (Id. at 6.) 

At the September 10, 2015 trial, the bankruptcy court 

granted Dugo’s motion to deny the introduction of the Bank’s 

exhibits and declarations. (ER at 240-41, Tr. of Sept. 10, 2015 

Proceedings.) The bankruptcy court found that the Bank failed to 

comply with Bankruptcy Rule 9017-1 despite having ample time to 

submit signed declarations and exhibits and Dugo was prejudiced 

by receiving such a “huge number of exhibits” only two days 

before trial, preventing him from preparing his defense. (Id. at 

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235-39.) The bankruptcy court explained that the purpose of 

Bankruptcy Rule 9017-1 is for a plaintiff to present its case “to 

the other side so they have an opportunity to prepare their case 

for the Court.” (Id. at 239.) The bankruptcy court judge

further reasoned that because he is a part-time judge, he needs 

to proceed with his cases and does not have time for 

continuances. (Id. at 240.) The bankruptcy court denied the 

Bank’s request for a continuance or any other lesser sanction. 

(Id. at 241.) As a result, the Bank did not have any evidence or 

testimony to present and the parties did not proceed to trial. 

(Id.) The bankruptcy court entered judgment in favor of Dugo,

(id. at 241-42), and the Bank filed a timely appeal, (id. at 245, 

Notice of Appeal). 

Dugo then filed a motion for attorney’s fees of 

$19,340, and the Bank moved for a stay pending its appeal. 

(Dugo’s Br. at 7; ER at 248-258, 288.) The bankruptcy court

denied the Bank’s motion for a stay and awarded Dugo’s attorney, 

Douglas Jacob, $15,000 as “partial reimbursement for the total 

[attorney’s] fees incurred.” (ER at 355, Tr. of November 10, 

2015 Hearing.) The bankruptcy court explained that it was not 

making a “final order” because “[a]t the conclusion of the 

litigation in this matter the Court will make a final 

determination upon motion of the parties for the final resolution 

of attorney’s fees.” (Id. at 354-56.) The bank filed a timely 

appeal of this fee award. (Id. at 359.) On February 9, 2016, 

this court granted the Bank’s motion for a stay of the attorney’s 

fees award pending appeal. (Feb. 9, 2016 Order at 6 (Docket No. 

12).) 

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Presently before the court is the Bank’s appeal of both 

the bankruptcy court’s exclusion of its Alternate Direct 

Testimony declarations and exhibits, which led to final judgment 

in favor of Dugo, and its award of attorney’s fees. 

II. Discussion

This court has jurisdiction to hear the Bank’s appeal 

pursuant to 28 U.S.C. § 158(a)(1). See 28 U.S.C. § 158(a)(1)

(“The district courts of the United States shall have 

jurisdiction to hear appeals . . . from final judgments, orders, 

and decrees . . . of bankruptcy judges entered in cases and 

proceedings referred to the bankruptcy judges under section 

157.”). Both the bankruptcy court’s sanction excluding the 

Bank’s evidence and award of attorney’s fees are reviewed for an 

abuse of discretion. In re Reimers, Civ. No. 12-7848 ABC, 2013 

WL 9994337, at *2 (C.D. Cal. Feb. 12, 2013) (“A court’s 

imposition of sanctions is reviewed for an abuse of discretion, 

which means that it should not be reversed ‘absent a definite and 

firm conviction that the district court made a clear error of 

judgment.’”) (citation omitted); see also City of Long Beach v. 

Standard Oil Co. of Cal., 46 F.3d 929, 936 (9th Cir. 1995) (“A 

trial court’s evidentiary rulings are reviewed for an abuse of 

discretion.”); Labotest, Inc. v. Bonta, 297 F.3d 892, 894 (9th 

Cir. 2002) (stating that attorney’s fee awards are reviewed for 

an abuse of discretion). 

Under the two-part “abuse of discretion” or “clearly 

erroneous” test, the reviewing court must first “determine de 

novo whether the trial court identified the correct legal rule to 

apply to the relief requested.” United States v. Hinkson, 585 

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F.3d 1247, 1261-62 (9th Cir. 2009). If it did not, the reviewing 

court must conclude the trial court abused its discretion. Id.

at 1262. If the trial court identified the correct legal rule, 

the reviewing court must determine “whether the trial court’s 

application of the correct legal standard was (1) illogical, (2) 

implausible, or (3) without support in inferences that may be 

drawn from the facts in the record.” Id. (citation and internal 

quotation marks omitted). “If any of these three apply,” the 

trial court “abused its discretion by making a clearly erroneous 

finding of fact.” Id. The reviewing court cannot look to what 

it would have done had it been in the trial court’s place but 

rather must determine “whether the trial court reached a decision 

that falls within any of the permissible choices the court could 

have made.” Id. at 1261.

The Bank argues that the bankruptcy court’s exclusion 

of the declarations and exhibits was tantamount to a terminating 

sanction for a discovery violation and that the bankruptcy court

failed to consider important factors for imposing such a severe 

sanction.

For example, Federal Rule of Civil Procedure 37(c)(1)

permits the court to enter sanctions against parties who fail to 

make required disclosures or to cooperate during discovery. “If 

a party fails to provide information or identify a witness as 

required by Rule 26(a) or (e), the party is not allowed to use 

that information or witness to supply evidence on a motion, at a 

hearing, or at a trial, unless the failure was substantially 

justified or is harmless.” Fed. R. Civ. P. 37(c)(1). 

Alternatively, “instead of this sanction, the court, on motion 

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and after giving an opportunity to be heard” may order payment of 

reasonable expenses caused by the failure, inform the jury of the 

party’s failure, or “impose other appropriate sanctions.” Id. 

This is a “‘a self-executing, automatic sanction to provide a 

strong inducement for disclosure of material.’” Hoffman v. 

Constr. Protective Servs., 541 F.3d 1175, 1180 (9th Cir. 2008). 

“Under this circuit’s law,” however, if “the sanction amounted to 

dismissal of a claim, the district court was required to consider 

whether the claimed noncompliance involved willfulness, fault, or 

bad faith, and also to consider the availability of lesser 

sanctions.” R & R Sails, Inc. v. Ins. Co. of Pa., 673 F.3d 1240, 

1247 (9th Cir. 2012); see also Henry v. Gill Indus., Inc., 983 

F.2d 943, 946 (9th Cir. 1993) (“Where the drastic sanctions of 

dismissal or default are imposed, however, the range of 

discretion is narrowed and the losing party’s non-compliance must 

be due to willfulness, fault, or bad faith.” (citation omitted)). 

Similarly, the Ninth Circuit has found that before 

imposing the “severe remedy” of dismissal with prejudice for 

violations of other pre-trial procedures mandated by local rules 

and court orders, the district court must find “willfulness, bad 

faith, and fault.” Conn. Gen. Life Ins. Co. v. New Images of 

Beverly Hills, 482 F.3d 1091, 1096 (9th Cir. 2007). The Ninth 

Circuit has defined “willfulness, bad faith, or fault” as meaning 

“disobedient conduct not shown to be outside the control of the 

litigant.” Fjelstad v. Am. Honda Motor Co., Inc., 762 F.2d 1334, 

1341 (9th Cir. 1985). In addition to finding bad faith or 

willfulness, the court must also weigh: “(1) the public’s 

interest in expeditious resolution of litigation; (2) the court’s 

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need to manage its docket; (3) the risk of prejudice to the 

[party seeking sanctions]; (4) the public policy favoring 

disposition of cases on their merits and (5) the availability of 

less drastic sanctions.” Thompson v. Housing Auth. of City of 

Los Angeles, 782 F.2d 829, 831 (9th Cir. 1986). “The sub-parts 

of the fifth factor are whether the court has considered lesser 

sanctions, whether it tried them, and whether it warned the 

recalcitrant party about the possibility of case-dispositive 

sanctions.” Conn. Gen. Life Ins. Co., 482 F.3d at 1096. What is 

most critical for case-terminating sanctions is determining 

“whether the discovery violations threaten to interfere with the 

rightful decision of the case.” Id. at 1097 (citation and 

internal quotation marks omitted); see also Zambrano v. City of 

Tustin, 885 F.2d 1473, 1480 (9th Cir. 1989) (finding that before 

imposing monetary sanctions on an attorney for violation of a 

local rule, the trial court must find that the attorney’s 

flouting of court rules was reckless, grossly negligent, 

repeated, or willful and must “consider the usefulness of more 

moderate penalties”). 

Sanctions for failing to timely submit declarations and 

exhibits under Bankruptcy Rule 9017-1 are analogous to discovery 

sanctions for failure to disclose documents or comply with pretrial orders. As with the case or claim-terminating sanctions 

discussed above, it follows that a bankruptcy court must consider 

whether the claimed noncompliance involved willfulness, fault, or 

bad faith and the availability of less severe sanctions before 

imposing sanctions for violations of Bankruptcy Rule 9017-1 that 

effectively terminate the adversary proceeding. 

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For example, in In re Sutton, BAP No. EC-14-1204, 2015 

WL 7776658, at *1 (B.A.P. 9th Cir. Dec. 3, 2015), an adversary 

case involving the same bankruptcy judge, the plaintiffs violated 

Bankruptcy Rule 9017-1 by submitting their Alternate Direct 

Testimony declarations and exhibits only seven days prior to 

trial. Id. at *2-4. The plaintiffs claimed they had difficulty

obtaining the signed declarations from the declarants because 

they lived far away or were traveling and hard to track down. 

Id. at *4. The bankruptcy court concluded that the plaintiffs’ 

failure to comply with Bankruptcy Rule 9017-1 caused extreme 

prejudice to the debtor in his trial preparation, granted the 

debtor’s motion in limine to exclude the evidence, and entered 

judgment in favor of the debtor. Id. at *4-5. On appeal, the 

Bankruptcy Appellate Panel of the Ninth Circuit (“B.A.P.”) found 

that the bankruptcy court’s exclusion of the plaintiffs’

declarations and exhibits was “analogous to sanctions under Civil 

Rule 37(c)(1)” and “amounted to the dismissal of Plaintiffs’ 

fraud claims based upon their failure to comply with” Bankruptcy 

Rule 9017-1. Id. at *6. 

B.A.P. concluded that the bankruptcy court’s caseterminating sanction was an abuse of discretion because the court 

failed to make a finding of bad faith, willfulness, or fault and 

did not consider a more moderate penalty, such as continuing the 

trial to allow the debtor’s attorney more time to prepare or a 

monetary sanction to compensate the debtor’s attorney for an 

unnecessary appearance. Id. at *7-9. The bankruptcy court also 

did not consider the “strong public policy favoring disposition 

of cases on their merits.” Id. at *10. Lastly, B.A.P. concluded 

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that the delay did not cause significant prejudice to the debtor 

because the Alternative Direct Testimony exhibits and 

declarations were substantially similar in substance to the 

plaintiffs’ summary judgment declarations and the debtor

therefore “had a good understanding as to what the ADT testimony 

was regarding” months prior to the trial. Id. The debtor also 

had the declarations and exhibits a full seven days before trial. 

Id. While this court is not bound by a B.A.P. decision, it finds 

the reasoning of In re Sutton on point and persuasive. See In re 

Silverman, 616 F.3d 1001, 1005 (9th Cir. 2010) (“[W]e treat the 

BAP’s decisions as persuasive authority given its special 

expertise in bankruptcy issues and to promote uniformity of 

bankruptcy law throughout the Ninth Circuit.”). 

Similarly, in In re Reimers, Civ. No. 12-7847 ABC, 2013 

WL 9994337 (C.D. Cal. Feb. 12, 2013), the bankruptcy court 

excluded the plaintiff’s testimony because she failed to comply 

with the local rule requiring her to submit testimony through 

declarations and to present contested exhibits through the 

declarations by a certain deadline. Id. at *1. As a result, the 

plaintiff had no evidence to present at trial and the bankruptcy 

court entered judgment in favor of the debtors. Id. The Central 

District of California found that this exclusion was tantamount 

to a terminating sanction and that the bankruptcy court abused 

its discretion by considering only the public’s interest in 

expeditious resolution of litigation and the court’s need to 

manage its docket without considering that the plaintiff made a 

good faith mistake or the possibility of less drastic measures. 

Id. at *2. The court noted that the plaintiff had already 

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presented all of her evidence in her trial brief, deposition, and 

during discovery and the debtors would not have been prejudiced 

by a short continuance. Id. at *3. 

In the present case, just as in Sutton and Reimers, the 

bankruptcy court imposed what was essentially a case-terminating 

sanction by excluding the Bank’s exhibits and declarations and 

thereby preventing the Bank from presenting its case in chief. 

While the facts here are not identical to those in Sutton and 

Reimers, the present case is similar in that the record does not 

show that the bankruptcy court made findings as to the 

willfulness, fault, or bad faith of the Bank’s noncompliance or 

weighed the availability of lesser sanctions and other relevant 

factors before imposing such a sanction. 

For example, the bankruptcy court concluded that the 

Bank’s late-filing prejudiced Dugo because he had insufficient

time to review the “voluminous documents” submitted and to 

prepare his defense. (ER at 237-41.) The Bank, however, 

contends that Dugo was not significantly prejudiced because, 

while unsigned, the declarations it submitted to Dugo thirteen 

days prior to trial were identical in substance to the signed 

declarations submitted two days prior to trial and put Dugo on 

notice of the exhibits on which the witnesses planned to rely. 

(Bank’s Br. at 23.) Further, the Bank argues Dugo was not 

prejudiced because he received the majority of the exhibits 

months before trial during discovery and had the complete set of 

exhibits two days prior to trial. (Id. at 9.) It is not clear 

from the record that the bankruptcy court weighed or even 

considered those arguments. This court therefore cannot conclude 

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that the bankruptcy court’s finding of prejudice was supported by 

“inferences . . . drawn from the facts in the record.” Hinkson, 

585 F.3d at 1261-62. 

Furthermore, the record does not demonstrate that the 

bankruptcy court considered whether any possible prejudice could 

have been cured by a less severe sanction, such as a continuance 

and monetary compensation to Dugo for the delay. The bankruptcy 

court judge explained only that he is “a part-time judge . . . 

When I’m here, I want the case to proceed. I don’t want it 

continued . . . because I don’t have that much time.” (Id. at 

239-40.) While the efficient management of the court’s docket is 

a legitimate concern, this should not be the primary or sole 

consideration in denying a request for a lesser sanction. 

In addition, the bankruptcy court made no finding as to 

whether the Bank acted willfully, intentionally, or in bad faith. 

The Bank contends that it inadvertently submitted its 

declarations and exhibits late because of a misunderstanding 

about how the parties would submit a stipulated exhibit list, 

technological error, and inadequate staffing. (Bank’s Br. at 

22.) In contrast, Dugo argues that the Bank was well aware that 

Bankruptcy Rule 9017-1 required declarations to be signed under

penalty of perjury yet intentionally submitted unsigned 

declarations and did not provide its exhibits until shortly 

before trial. (Dugo’s Br. at 15.) There is no record that the 

bankruptcy court weighed these two versions of events and 

concluded that the Bank’s delay was more than mere negligence, as 

it was required to do. See In Re Sutton, 2015 WL 7776658, at *10 

(“[M]ere negligence without more is an insufficient ground for 

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imposing case-terminating sanctions.” (citing Zambrano, 885 F.2d 

at 1480)). 

The bankruptcy court therefore failed to consider, 

weigh, and make findings on the relevant factors for imposing a 

case-terminating sanction. Instead, the bankruptcy judge appears 

to have assumed that Dugo was prejudiced by the Bank’s noncompliance, failed to weigh lesser available sanctions, and made 

no finding on the Bank’s willfulness, bad faith, or fault. 

Rather than disposing of the case on the merits, the bankruptcy 

court elected to enter judgment in favor of Dugo on a procedural 

technicality. Accordingly, the court must find that the 

bankruptcy court abused its discretion and remand this matter to 

the bankruptcy court. 

Because the court is reversing the bankruptcy court’s 

order excluding the Bank’s declarations and exhibits and its 

judgment in favor of Dugo, the court must also vacate the 

bankruptcy court’s award of attorney’s fees to Dugo as the 

prevailing party. (See ER at 355-56, Tr. of November 10, 2015 

Hearing.) 

The judgment of the bankruptcy court in favor of Dugo 

is therefore REVERSED; the award of attorney’s fees is VACATED;

and this matter is REMANDED to the bankruptcy court for further 

proceedings consistent with this Order.

IT IS SO ORDERED. 

Dated: August 2, 2016

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