SMITH V. DEVINE
- Summarized by Caleb Chaplain , U.S. Bankruptcy Court, Western District of Virginia
- 1 year 1 month ago
- Case Type:
- Business
- Case Status:
- Affirmed
- Citation:
- 24-1335 (4th Circuit, Jan 17,2025) Published
- Tag(s):
-
- Ruling:
- The Fourth Circuit affirmed the district court’s order upholding the bankruptcy court’s entry of default judgment against multiple defendants as a discovery sanction, which awarded the chapter 11 trustee approximately $31 million plus costs and attorneys’ fees. The Fourth Circuit found that the bankruptcy court did not abuse its discretion in imposing the sanction given the defendants’ egregious pattern of discovery violations and obstruction.
- Procedural context:
- The chapter 11 trustee for BK Racing initiated an adversary proceeding against Ronald and Brenda Devine and their various corporate entities and family trusts. After repeated failures by the defendants to comply with discovery obligations and court orders, the bankruptcy court entered default judgment as a sanction. The district court affirmed, and defendants appealed to the Fourth Circuit.
- Facts:
- BK Racing, LLC operated a NASCAR Cup Series race team from 2012 to 2018, with the Devines serving as indirect majority owners through Virginia Racers Group, LLC. After filing a chapter 11 petition in 2018, BK Racing (under the Devines’ control) failed to file required bankruptcy schedules, concealing millions in prepetition transfers. The chapter 11 trustee was appointed and initiated discovery to investigate these transfers.
Despite multiple court orders compelling discovery, the defendants engaged in a pattern of obstruction, including: failing to properly verify discovery responses; missing discovery deadlines; providing incomplete and inadequate responses; producing few or no documents; heavily redacting documents that were produced; concealing the existence of a trust used to pay personal expenses; and refusing to produce tax returns, bank records, corporate records, and other essential documentation
The bankruptcy court ultimately imposed entry of default judgment as a sanction after finding that the defendants acted in bad faith, their noncompliance significantly prejudiced the trustee, there was a strong need to deter such misconduct, and a less severe sanctions would be ineffective.
The judgment amount of $31,094,099.89 was based on approximately $6.4 million in fraudulent transfers (trebled under North Carolina law) plus $11.9 million in improper debt assumption transactions. The bankruptcy court also pierced the corporate veil to hold all defendants jointly and severally liable, finding they operated as alter egos of the Devines.
- Judge(s):
- Wilkinson, Benjamin, Alston
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