Wellness International Network, Ltd. v. Shariff

Bankruptcy Ct. did not err in entering default judgment in favor of creditor as sanction in adversary action in instant Chapter 7 bankruptcy case, where creditor sought to prevent discharge of debtor’s debts that included $650,000 sanction arising out of debtor’s failure to engage in discovery in prior lawsuit between instant parties. Record showed that debtor had similarly failed to respond to at least 15 of creditor’s discovery requests in adversary action, and Dist. Ct. could properly enter default judgment, even though debtor had partially complied with other discovery requests, where plaintiff had been warned of possibility of entry of default judgment for non-compliance of creditor’s discovery requests. Dist. Ct., though, lacked constitutional authority to enter default judgment on creditor’s separate claim that certain trust of which debtor was trustee was in fact debtor’s alter ego. On remand, Dist. Ct. must determine whether alter ego claim is “core or non-core” proceeding, such that if it is determined that alter ego claim was non-core proceeding, it can treat said default judgment as recommended disposition to be reviewed de novo. Otherwise, if Dist. Ct. determines that alter ego claim was core proceeding, it must conduct fresh discovery proceedings on said claim.