In Jingdong Logistics United States Company v. Ready Acquisition, Inc, Case No. 5:22-cv-01018-ODW (SHKx), Central District of California, plaintiff alleged that Ready Acquisition was the alter ego of its two owners. The owners alleged that the allegations were baseless and sought Rule 11 sanctions. The court denied sanctions by reasoning that there was an adequate factual and legal basis for the alter ego claim.

Here, the Court finds that the alter ego allegations in Jingdong’s Complaint were neither factually nor legally baseless “at the time that the position [was] adopted,” that is, at the time Jingdong filed its Complaint. Golden Eagle Distrib. Corp. v. Burroughs Corp., 801 F.2d 1531, 1538 (9th Cir. 1986). In reaching this conclusion, the Court “avoid[s] using the wisdom of hindsight,” limiting its inquiry to whether a reasonable basis for alter ego allegations existed at the time the Complaint was filed, regardless of what Jingdong learned or discovered after it filed the Complaint. Id. at 1537 (quoting Fed. R. Civ. P. 11 advisory committee’s note to 1983 amendment).

Prior to filing the Complaint, Jingdong’s attorneys investigated Ready Acquisition by sending a field agent to Ready Acquisition’s registered principal office address and to Lawrance’s personal address. (See Decl. Sijiu Ren ISO Opp’n (“Ren Decl.”) ¶¶ 3-5, ECF No. 22-1.) In so doing, Jingdong discovered that (1) Ready Acquisition’s office was occupied by new tenants, and that (2) packages addressed to Ready Acquisition were located on the front porch of Lawrance’s residence. (Id.; Decl. Greg Lawrance ISO Reply (“Lawrance Decl.”) ¶¶ 6-7, ECF No. 28.) Jingdong’s attorneys conducted additional research and determined that Ready Acquisition’s business status in the State of New Hampshire was “Not In Good Standing.” (Ren Decl. Ex. A (“Business Information Inquiry”), ECF No. 22-2; Ren Decl. ¶ 6.) These discoveries provided Jingdong’s counsel with a reasonable factual basis for including alter ego allegations against Lawrance and Gunter in Jingdong’s Complaint.

Lawrance and Gunter argue otherwise, pointing to facts and developments that occurred after Jingdong filed its Complaint, (Mot. 6-8), but these facts are not relevant to whether the Court should sanction Jingdong for allegations made in the Complaint. Fed. R. Civ. P. 11(b); Golden Eagle, 801 F.2d at 1538.

Lawrance and Gunter further argue that Jingdong is withholding $400,000 of Ready Acquisition’s inventory and thus contributing to the very insolvency Jingdong alleges supports alter ego liability. (Reply 5.) This argument is not well taken because there is no actual evidence of a causal link between Jingdong’s withholding of inventory and Ready Acquisition’s purported insolvency; and in any case, this attack on one component of Jingdong’s alter ego theory, even if successful, would not render the alter ego theory factually or legally baseless.

The court also held that the legal theory did not merit sanctions either.

Comment: Plaintiff did an extensive investigation of the facts before it brought the alter ego claim. That investigation and the facts that were discovered was a sufficient basis to bring an alter ego claim.

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A district court in Florida has utilized Rule 37 to enter judgment in favor of an insurance company against a defendant accused of engaging in wrongful billing practices. Government Employees Insurance Co. v. DeJesus, No. 20-21558 (S.D. Florida 2022). The defendant’s refusal to appear for his deposition was the deciding factor in the grant of the Rule 37 sanctions motion. The court explained in part that:

“The Defendants initially agreed to appear for a deposition on October 14, 2021. However, on October 8, 2021, Defendants’ counsel, Christian Carrazana, Esq., informed Plaintiffs of his intent to file a motion to withdraw as counsel for Defendants. Plaintiffs indicated that they would consent, but informed Mr. Carrazana that they intended to proceed with the Defendants’ depositions on October 14, 2021, should the motion to withdraw not be decided by then. Mr. Carrazana did not move to withdraw until November 30, 2021, and the Defendants did not appear at their October 14, 2021, depositions. Thereafter, Plaintiffs requested a discovery hearing seeking Rule 37 sanctions and an order compelling Defendants to appear for their depositions. See [D.E. 164 and 165].

The Court held a discovery hearing on December 2, 2021, and entered an Order compelling Defendants to appear for depositions to be held on December 20, 2021. [D.E 186]. The Order also warned Defendants that additional violations of the Court’s directives could subject them more severe sanctions:

Defendants’ failure to comply with this Order may result in further sanctions under Rule 37(b) of the Federal Rules, which can include further monetary sanctions, fines, or even entry of default judgment against Defendants on all claims and for all damages sought in the pending complaint. Defendants’ failure to comply may also result in their being found in contempt of court, which finding may result in the entry of any Order necessary for the enforcement of the Court’s jurisdiction to coerce compliance.

Id. at ¶ 5. The Court also granted Mr. Carrazana’s motion to withdraw that same day, ordering Defendants to retain new counsel by December 16, 2021,^[2] and explaining that “[f]ailure to retain substitute counsel for the corporate entity Defendant, or failure to file the notice of intention to defend the case on a pro se basis by the individual Defendant, may be deemed a waiver of the right to defend the action and result in entry of default judgment(s).” [D.E. 187].

Contrary to the Court’s Orders, Defendants never retained new counsel, and Mr. Collazo never informed the Court of his intention to proceed with his defense on a pro se basis. Further, as prescribed by the December 2, 2021, Order, Plaintiff’s’ counsel shared with Mr. Carranza the link to Defendants’ virtual depositions taking place on December 20, 2021, but Defendants did not appear, nor did they provide any justification to Plaintiff for their absence. [D.E. 195-1, ¶¶ 5-7].

Defendants’ willful and unjustified disregard for this Court’s Orders makes the sanction of default judgment appropriate here. Not only have Defendants failed to pursue their defense in this action, but they have also failed to comply with this Court’s instructions on repeated occasions and without any explanation.”

In NPF Franchising, LLC v. Sy Dawgs, LLC 37 F.4th 369 (6th Cir. 2022), the Sixth Circuit affirmed a Rule 37 sanctions award against the lawyers for NPF Franchising. The fees were awarded against NPF and the individual lawyers because the lawyers failed to comply with discovery obligations in the case, a dispute between an franchisor and a franchisee. I have quoted from the relevant portions of the opinion below.

“This case began in February 2018 with NPF’s complaint against SY Dawgs for breach of their franchise agreement and non-competition and non-disclosure agreement. About a week later, NPF amended its complaint. After the district court denied NPF’s motion for a preliminary injunction, NPF amended the complaint for a second time. SY Dawgs then moved for attorneys’ fees, costs, and expenses, pursuant to a contractual fee-shifting provision.^[1] SY Dawgs argued that it was entitled to monetary compensation because NPF was the “unsuccessful party” on its claim for injunctive relief. The district court denied the motion without prejudice as premature.

374*374 Around this time, in August 2018, NPF failed to appear at a status conference. At that conference, the district court noted that despite SY Dawgs having issued multiple subpoenas and responded to NPF’s discovery requests, NPF had thus far refused to respond to SY Dawgs’s discovery requests, with the discovery deadline two months away. SY Dawgs again moved for costs and fees, this time over NPF’s non-attendance at the status conference. At the next status conference, on September 4, 2018, new counsel, the Buchalter Law Firm, appeared for NPF and vowed to produce all outstanding discovery. The district court granted motions to appear pro hac vice on behalf of NPF filed by Buchalter Law Firm attorneys Tracy Warren and Kathryn Fox around this time.

Later in September, SY Dawgs again moved to compel discovery and for sanctions. It stated that NPF had provided no interrogatory answers or documents in response to the requests that it served on June 20, 2018. SY Dawgs also noted that NPF refused to designate a representative for corporate representative depositions. The parties then had a status conference in early October, where NPF represented to the district court that it had turned over all the requested discovery. Relying on this representation, the district court denied SY Dawgs’s motion for costs and fees but also expressed willingness to revisit the issue later. The district court also granted SY Dawgs’s motion to compel discovery “inasmuch as [NPF]’s counsel has represented to Court and counsel that all requested information has been disclosed.”

SY Dawgs moved for discovery sanctions yet again on October 25, 2018. It stated that NPF had failed to appear for a properly noticed deposition or produce any documents related to a subpoena. SY Dawgs also accused NPF of misrepresenting to the district court that it had produced all documents, given that it had later produced several hundred more documents. The district court then granted a motion by NPF to extend discovery, held another status conference at which it noted that SY Dawgs’s motion for sanctions was fully briefed, and asked the parties to confer and prepare a list of documents still needed. Soon after, it extended discovery again, this time until March 1, 2019.

The new discovery deadline brought yet another motion from SY Dawgs to compel discovery, filed at the end of December. In addition to alleging that NPF had provided insufficient or incomplete responses to several of SY Dawgs’s requests, SY Dawgs argued that NPF had provided no documents responsive to the 45 other requests. That same day, Buchalter Law Firm attorneys Rick Waltman and J. Patrick Allen were admitted pro hac vice to represent NPF. And NPF made its own motion to compel discovery and sanction SY Dawgs. It alleged that SY Dawgs had failed to supplement its prior discovery responses and that doing so was a “willful and concerted effort to avoid the discovery process.” The district court denied both parties’ motions for discovery sanctions, but it left the sanctions issue open for revisitation after litigation concluded. And, yet again, the court granted SY Dawgs’s motion to compel discovery. It also instructed NPF to respond to the discovery requests within 14 days or, in the alternative, certify to the district court that there is nothing responsive left to produce.

The 14-day deadline passed with no such certification from NPF. In February 2019, SY Dawgs renewed its motion for sanctions. It stated that “NPF and its pro hac vice-admitted counsel” had a “pattern of ignoring discovery obligations” and “flagrantly” ignoring both court orders compelling discovery. Def.’s Renewed Mot. for Sanctions, R. 161, PageID 3606. The district 375*375 court granted the motion, ordering NPF to file an affidavit certifying that it had fully complied with the discovery request and also ordering NPF’s counsel to file a “similar certification of compliance by counsel.” The district court warned that “[f]ailure to comply with this Order will result in sanctions, up to and including dismissal of Plaintiff’s action.” And it warned yet again that “any monetary sanctions for Plaintiff’s repeated discovery intransigence will be addressed at the conclusion of this action.”

Despite that admonition, NPF never complied. So, SY Dawgs moved for the ultimate sanction—to dismiss the case under Federal Rule of Civil Procedure 37. In the meantime, NPF moved for an interlocutory appeal of the sanctions order before our court. But NPF later voluntarily dismissed the appeal, and SY Dawgs renewed its motion to dismiss. NPF also sought a writ of mandamus from our circuit, stating that it would be “irreparably harmed” by “fully respond[ing] to all of Respondents’ discovery requests.” Pet. for Writ of Mandamus, R. 180, PageID 4054.^[2] Yet no protective order regarding these documents was sought by NPF from the district court, nor did the franchisor ever produce a privilege log. We denied the petition for mandamus. Finally, NPF moved for default judgment, stating that SY Dawgs was misrepresenting its efforts to cooperate with the court’s orders and communicate.

After this last flurry of motions, NPF moved to voluntarily dismiss the case with prejudice in July 2019. The district court granted its request. But just before the dismissal, SY Dawgs moved again for attorneys’ fees and costs.”

The District Court sanctioned four individual lawyers, their law firm and the client.

Because Rule 37 does not allow sanctions against a law firm, that portion of the sanctions award was reversed. However, the sanctions were upheld against the individual lawyers.

The lawyers argued on appeal that they had not received sufficient notice of the sanctions and had not had an opportunity to respond. The Sixth Circuit rejected both arguments. The lawyers argued that their position was “substantially justified” but the court did not accept that argument either.

Comment: In my opinion, this is a case where emotions got the better of the lawyers for NPF. No matter how you may feel about a case or the position of the other side, you must comply with court orders to answer discovery requests. If you work for a firm that appears to be headed down this path, consult ethics counsel before engaging in this behavior. It is unfortunate that the junior lawyers did not engage counsel to defend themselves. Their defense might have been different than the defense offered by their more senior colleagues.

If you have a question about ethics or discovery obligations and you do not know what to do, please call us. We can often help resolve messy situations if we have time to give advice.

Ed Clinton, Jr.

The Clinton Law Firm, LLC

Chicago, Illinois 60602

312.357.1515

This is a case where the plaintiff allegedly deleted some text messages from his phone that were relevant to this case. The Defendant moved for Rule 37(e) sanctions, but the motion was denied because the messages were obtained from other sources.

First, sanctions under Rule 37(e) are available “only where ESI has been `lost’ and `cannot be restored or replaced through additional discovery.'” Goldman v. Sol Goldman Invs. LLC, No. 20CV06727MKVSN, 2022 WL 2118199, at *3 (S.D.N.Y. June 11, 2022) (quoting Fed. R. Civ. P. 37(e)). Thus even if a party himself has deleted messages, there can be no sanctions if the messages are provided from another source, because they are not “lost.” Id. at *4 (holding sanctions are not available where Plaintiff deleted an email that was subsequently produced from another source: “The email was not lost because [the recipient] produced it at his deposition. Therefore, spoliation sanctions may not be awarded for Plaintiff’s failure to produce the May 28 email, and the Court need not inquire into Plaintiff’s state of mind.”); CBF Industria de Gusa S/A v. AMCI Holdings, Inc., No. 13CV2581PKCJLC, 2021 WL 4190628, at *11 (S.D.N.Y. Aug. 18, 2021) (noting that deleted messages that can be obtained from the other parties are not permanently lost or unrecoverable under Rule 37); Morgan Art Found. Ltd. v. McKenzie, No. 18CV4438ATBCM, 2020 WL 5836438, at *19 (S.D.N.Y. Sept. 30, 2020) (holding Rule 37 sanctions were not available because deleted messages which still exist in another account “are not permanently lost, and in fact they have already been produced”).

That is precisely the circumstance here; although Mr. Rosario deleted the text message chains from his own phone, they have been obtained from other participants: Plaintiff’s counsel and John Torres. Because Defendants have not and cannot establish that any relevant messages are “lost” and “cannot be restored or replaced through additional discovery,” their request for sanctions fails at the first step.^[2] See Watkins v. New York City Transit Auth., No. 16 CIV. 4161 (LGS), 2018 WL 895624, at *10 (S.D.N.Y. Feb. 13, 2018) (Defendants have “the burden of establishing the elements of a spoliation claim by a preponderance of the evidence.”).

Source: Rosario v. City of New York, S.D. N.Y. 18 civ 4023, July 27, 2022.

In Tucker v. BMW of North America, LLC, No. C20-5050 (Western District of Washington, Tacoma) the court granted plaintiff’s motion for rule 37 sanctions against BMW. The court held that BMW had unilaterally narrowed the scope of discovery and had not complied with orders to produce documents. This is a minor sanction as the Defendant lost no right to defend itself in the litigation.

“Rule 37(b) allows for sanctions for not obeying a discovery order. Fed. R. Civ. P. 37(b)(2). It is well established in the Ninth Circuit that this rule “provides a wide range of sanctions for a party’s failure to comply with court discovery orders.” United States v. Sumitomo Marine & Fire Ins. Co., 617 F.2d 1365, 1369 (9th Cir. 1980). While Defendant did engage in some discovery, it unilaterally narrowed the scope of discovery and the Court’s order. Defendant failed to comply with the Court’s November 1 order, which has resulted in Plaintiff having to move to extend the time to complete discovery twice, Dkts. 71, 84, the instant motion for sanctions, Dkt. 86, and a stipulated extension of the trial date, Dkt. 94. Sanctions are therefore warranted, though not to the extent of Plaintiff’s request.

Defendant is hereby ORDERED to pay the fees and costs Plaintiff’s counsel incurred in bringing the motions for extension of time and this motion for contempt and sanctions. If necessary, Plaintiff shall submit a motion for such fees within 14 days of this order. Alternatively, and preferably, the parties shall notify the Court that the sanction has been paid.”