Month: March 2017

Discovery Abuses Merit A Default Judgment, Says New York District Court


In this case, the Magistrate and the District Judge found that the defendants’ refusal to participate in discovery amounted to intransigence and entered a default judgment against them.  The plaintiff were a union of bricklayers who sued a contruction firm. The opinion does not reveal what the case was about, but the plaintiffs needed the defendants’ records to determine whether or not they had claims. The court panned the conduct of the defendants and explained:

Over the course of a discovery period that was protracted unnecessarily because of Defendant’s intransigence, Defendant refused to make available the books and records needed to complete the audit required to assess Plaintiffs’ claims. As a result of Defendant’s obstruction, the March 2015 Opinion ordered Defendant to submit to an audit under the threat of being found in contempt and having sanctions imposed for failure to cooperate. (March 2015 Opinion.) After Defendant continued to defy clear and unambiguous court orders, the March 2016 Opinion granted Plaintiffs’ motion to hold Defendant in civil contempt of court and to impose sanctions for failing to comply with the directives of the March 2015 Opinion. (March 2016 Opinion.) Specifically, the Court ordered sanctions in the amount of $250.00 per day to be imposed on Defendant for each day after May 2, 2016, that Defendant failed to produce the requested records to Plaintiffs’ auditors. (March 2016 Opinion.)

After Defendant still failed to produce the records after May 2, 2016, the Court granted Plaintiffs leave to file a motion for default judgement, which was done on August 24, 2016. (Mot. for Default J. (“Plaintiffs’ Motion” or “Pls. Mot.”), Dkt. Entry No. 36.) The next day, on August 25, 2016, the Court referred the motion to the magistrate judge for the preparation of a report and recommendation. While the motion was pending, the Court ordered Defendant to show cause why the sanctions ordered in the March 2016 Opinion should not be imposed. At the conclusion of the order to show cause hearing held on October 19, 2016, before this Court and Magistrate Judge Tiscione, the Court imposed sanctions of $250.00 per day from May 2, 2016 to October 19, 2016.

On January 12, 2017, the magistrate judge issued the thorough and well reasoned R&R, recommending that this Court find default judgment appropriate under both Federal Rules of Civil Procedure 37 and 55. (R&R.) With respect to Rule 37, the magistrate judge weighed the pertinent factors and found that sanctions were appropriate, inter alia, because of “the willfulness of Defendant’s failure to comply with the Court’s discovery orders,” and the extent of its noncompliance. (R&R at 10-16.) The magistrate judge further held that, even if this were not a situation where Rule 37 sanctions were appropriate, Defendant had not met the “good cause” standard to defend against default judgment under Rule 55. (Id. at 16-20.) Ultimately, the magistrate judge recommended that the Court enter judgment awarding Plaintiffs $288,979.42, consisting of: (i) $130,386.48 in unpaid contributions; (ii) $79,121.47 in accrued interest as of the date of the R&R, plus $35.72 per day until the date judgment is entered; (iii) $79,121.47 in accrued interest as of the date of the R&R, plus $35.72 per day until the date judgment is entered, in lieu of liquidated damages; and (iv) $350 in costs and disbursements. (Id. at 27-28.) The magistrage judge further recommended that Plaintiffs not be awarded attorney’s fees. (Id. at 28

The District court entered judgment against the defendants and awarded damages to the plaintiffs.

Source: BRICKLAYERS INSURANCE AND WELFARE FUND v. PPL CONSTRUCTION SERVICES CORP., Dist. Court, ED New York 2017 – Google Scholar

Lawyer sanctioned for false pleadings in civil rights lawsuit.


Aldridge alleged in his complaint that while he was on the way to work he was assaulted by police officers and beaten. However, there was video evidence showing that no such thing actually happened. Instead of dropping the lawsuit, Aldridge resisted summary judgment and put the Defendants to significant expense. The defendants moved for sanctions and the district court awarded $12,000 against Aldridge’s counsel, with $10,000 to be paid to the defendants and $2,000 to be paid to the court.

The Sixth Circuit affirmed the grant of sanctions with this explanation:

Finally, the district court’s imposition of Rule 11 sanctions against Aldridge’s counsel was proper, for the reasons already well and carefully stated by that court. As the court stated:

By the time the motion for summary judgment was filed, no reasonable person would (1) believe that [Aldridge] was on his way to work, (2) believe that the 9-1[-1] audio did not describe [Aldridge], (3) disbelieve the third-party witnesses who testified that they did not see [Aldridge] beaten, or (4) believe that [Aldridge] was beaten after having seen the video of him being handcuffed and then sitting in the rear of the police vehicle.On appeal, Aldridge contends that sanctions should be granted only to deter rather than to compensate. But indeed the court made clear in its ruling that the principal objective of the sanctions was “to deter the abuse of the legal process,” and specifically capped the defendants’ recovery at $10,000, even though defense counsel billed more to defend this suit. Nor has Aldridge pointed to anything in the record or any case that might suggest that the court’s award was out of step with Rule 11 or its deterrent purpose. Furthermore, despite Aldridge’s claim that allowing the sanctions to stand will chill future civil-rights litigation, just as serious a concern is the corrosive effect that frivolous suits like his have on the prosecution of genuine civil-rights cases. For, as already explained, once the backseat video came to light, it became patently clear that the allegations set forth in Aldridge’s complaint could not be true as stated. In light of that fact, Aldridge’s counsel had a duty to reconsider their case pursuant to Rule 11. See Runfola & Assocs. v. Spectrum Reporting II, Inc., 88 F.3d 368, 373-74 (6th Cir. 1996). For these reasons and others already given by the district court, the imposition of sanctions was not an abuse of discretion.

Source: Aldridge v. City of Warren, Court of Appeals, 6th Circuit 2017 – Google Scholar

11th Circuit Shows Mercy to Lawyers and Vacates Sanction For Diversity Jurisdiction Error 


LLCs can cause problems for any lawyer attempting to determine if there is diversity jurisdiction. The LLC is a citizen of each state in which one of its members is a citizen. If one LLC owns another LLC, citizenship must be verified through both layers of the LLC.

If there is no diversity, there is no subject matter jurisdiction, and the proceedings in federal court are essentially null and void.

In the Bluestern case, the problem did not become apparent until the case had been pending in federal court for some time, almost two years. Bluestern, the defendant, was sued in Georgia State Court in December 2011. Bluestern, believing that there was diversity jurisdiction, promptly removed the case to federal court. Later, discovery requests were served, but the parties did not notice the problem. Only in late 2012, did the parties and the court fully comprehend the problem. The case was remanded back to state court.

The Court explained the problem in this way:

This case demonstrates the difficulty of applying established diversity jurisdiction principles to 21st-century business organizations. When determining citizenship of the parties for diversity jurisdiction purposes, a limited liability company (LLC) is a citizen of every state that any member is a citizen of. And it is common for an LLC to be a member of another LLC. Consequently, citizenship of LLCs often ends up looking like a factor tree that exponentially expands every time a member turns out to be another LLC, thereby restarting the process of identifying the members of that LLC. The simplest misstep has the potential to derail years of litigation and result in a massive financial sanction, as happened here. It is in everyone’s best interest, both the litigants’ and the courts’, to verify that diversity jurisdictionexists before proceeding with the case. Everyone involved in this case trusted that diversity jurisdiction existed, but no one verified it. The law firms involved trusted their clients. The clients trusted their lawyers. The law firms trusted each other, and the district court trusted them. But there was no verification.

Pursuant to its inherent authority, the district court sanctioned one of the parties in the amount of $550,000 in legal fees. The Eleventh Circuit reversed on the ground that the sanction an abuse of discretion because the party that made the jurisdictional mistake did not abuse the legal process. The court explained that the sanction was a misapplication of the doctrine of the inherent power of the court. Again, a thoughtful explanation from the court:

If a district court is unsure whether to sanction a party under its inherent powers, it should look to the guidance of the Supreme Court in Chambers. The purpose of the inherent power is both to vindicate judicial authority without resorting to contempt of court sanctions and to make the non-violating party whole. See Chambers, 501 U.S. at 45-46, 111 S. Ct. at 2133. The inherent power must be exercised with restraint and discretion. This power is not a remedy for protracted litigation; it is for rectifying disobedience, regardless of whether such disobedience interfered with the conduct of the trial. See id. at 44, 111 S. Ct. at 2132. Courts considering whether to impose sanctions under their inherent power should look for disobedience and be guided by the purpose of vindicating judicial authority. None of these concerns are present here.

In the end, the court concluded that no party engaged in any bad faith conduct. Instead, the court noted that the case was a colossal waste of time and money. The Eleventh Circuit chose to be merciful to the lawyers involved in the case, reasoning that the wasted legal fees and embarrassment were enough punishment.

 

Source: PURCHASING POWER, LLC v. BLUESTEM BRANDS, INC., Court of Appeals, 11th Circuit 2017 – Google Scholar

Adventures in Diversity Jurisdiction – Seventh Circuit Requires Lawyers to Try the Case For Free


This case was decided in 2003. However, it is worth posting again as these issues seem to come up all the time. The citizenship of an LLC is determined by the citizenship of each member. If you have a member from Illinois, the LLC is an Illinois citizen. If the defendant is from Illinois, there is no diversity of citizenship and no subject matter jurisdiction federal court. 28 USC 1332.

As I have indicated before, the diversity jurisdiction issues relating to LLCs can be more complicated than they seem. In this case, the diversity error was not uncovered until the case had been tried and was on appeal before the Seventh Circuit. The Seventh Circuit did not take kindly to the error. It explained:

Counsel and the magistrate judge assumed that a limited liability company is treated like a corporation and thus is a citizen of its state of organization and its principal place of business. That is not right. Unincorporated enterprises are analogized to partnerships, which take the citizenship of every general and limited partner. See Carden v. Arkoma Associates, 494 U.S. 185, 110 S.Ct. 1015, 108 L.Ed.2d 157 (1990). In common with other courts of appeals, we have held that limited liability companies are citizens of every state of which any member is a citizen. See Cosgrove v. Bartolotta, 150 F.3d 729 (7th Cir.1998). So who are Champaign Market Place LLC’s members, and of what states are they citizens? Our effort to explore jurisdiction before oral argument led to an unexpected discovery: Belleville Catering, the corporate plaintiff, appeared to be incorporated in Illinois rather than Missouri!

At oral argument we directed the parties to file supplemental memoranda addressing jurisdictional details. Plaintiffs’ response concedes that Belleville Catering is (and always has been) incorporated in Illinois. Counsel tells us that, because the lease between Belleville Catering and Champaign Market Place refers to Belleville Catering as “a Missouri corporation,” he assumed that it must be one. That confesses a violation of Fed. 693*693 R.Civ.P. 11. People do not draft leases with the requirements of § 1332 in mind — perhaps the lease meant only that Belleville Catering did business in Missouri — and counsel must secure jurisdictional details from original sources before making formal allegations. That would have been easy to do; the client’s files doubtless contain the certificate of incorporation. Or counsel could have done what the court did: use the Internet. Both Illinois and Missouri make databases of incorporations readily available. Counsel for the defendant should have done the same, instead of agreeing with the complaint’s unfounded allegation.

…..

One more subject before we conclude. The costs of a doomed foray into federal court should fall on the lawyers who failed to do their homework, not on the hapless clients. Although we lack jurisdiction to resolve the merits, we have ample authority to govern the practice of counsel in the litigation. See, e.g., Willy v. Coastal Corp., 503 U.S. 131, 112 S.Ct. 1076, 117 L.Ed.2d 280 (1992); Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 393-98, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990); Szabo Food Service, Inc. v. Canteen Corp., 823 F.2d 1073 (7th Cir.1987). The best way for counsel to make the litigants whole is to perform, without additional fees, any further services that are necessary to bring this suit to a conclusion in state court, or via settlement. That way the clients will pay just once for the litigation. This is intended not as a sanction, but simply to ensure that clients need not pay for lawyers’ time that has been wasted for reasons beyond the clients’ control.

The judgment of the district court is vacated, and the proceeding is remanded with instructions to dismiss the complaint for want of subject-matter jurisdiction.

Comment: Ouch!

Source: Belleville Catering v. Champaign Market Place, 350 F. 3d 691 – Court of Appeals, 7th Circuit 2003 – Google Scholar

Adventures in Diversity Jurisdiction – Another LLC Membership Error Destroys Diversity


One of the more simple yet frustrating requirements for establishing diversity jurisdiction is to prove that the parties are from different states. Here, a case was filed in federal court and summary judgment was granted to the defendant. Only then, when it reached the 11th Circuit, did that court determine that the parties were from the same state – Florida. How did this happen?

It happened because Thermoset, a Florida corporation, sued RGSO, an LLC. Most people don’t know this, but an LLC’s citizenship is determined by the citizenship of its members. In this case, RGSO had a Florida member. Therefore, citizens of Florida were on both sides of the litigation and there was no diversity of citizenship.

So, if you sue an LLC, make sure you know the citizenship of each member of the LLC. One way to avoid problems is to write a letter to the LLC and request that the LLC inform you of the citizenship of each member.

LLCs cause painful diversity jurisdiction issues all the time, sometimes leading to sanctions against the lawyers who fail to figure out citizenship. This is a danger area for every lawyer who practices in federal court. It is a trap for the unwary and can lead to embarrassment and sometimes worse.

Source: THERMOSET CORPORATION v. BUILDING MATERIALS CORP OF AMERICA, Court of Appeals, 11th Circuit 2017 – Google Scholar

California District Court Dismisses Lawsuit As A Sanction For Repeated Discovery Violations


This case is unusual because the court dismissed a lawsuit with prejudice and revoked the pro hac vice admission of plaintiff’s counsel. Dismissal is the most extreme sanction, of course, but the Court provides a detailed discussion of the reasons for the dismissal.

The case appears to be a trade secrets/unfair competition case. The court summarized the lack of cooperation among the parties:

From the beginning, this case has been marked by a level of dysfunction and inability to work together that is unprecedented in the Court’s experience. See, e.g., Dkt. Nos. 96 & 98 (parties filed separate case management statements in contravention of Local Rule 16-9); Dkt. No. 101 (inability to conduct Rule 26(f) Meet and Confer); Dkt. No. 157 at 47-57 (Plaintiff’s counsel blocked emails from Defendants, choosing to accept only faxes, letters, and phone calls from opposing counsel, because receiving emails from Defendants was too “intrusive”); Dkt. No. 288 (Defendants requested a discovery referee because Plaintiff allegedly “refuses to discuss any items beyond Loop’s own agenda” during meet-and-confer meetings). Magistrate Judge Donna M. Ryu attempted to “impose a workable structure on the parties’ discovery dispute resolution process,” Dkt. No. 271 at 2, and the docket highlights the Court’s many, many attempts to advance this litigation in a productive way.[1] Over the course of the last two years, the Court has tried numerous approaches, such as ordering court-supervised discovery management conferences, Dkt. No. 136 at 2; ordering the parties to audio record meet and confer sessions, Dkt. No. 156 at 2; instituting standing meetings each week to encourage substantive and meaningful meet-and-confer sessions, Dkt. No. 271 at 2; and eventually requiring the parties to provide dial-in information and agendas for the weekly meet-and-confer teleconferences, so that the Court could monitor the parties’ conduct by joining the calls, Dkt. No. 415 at 2.

As described more fully below, Plaintiff’s insubordination, through its counsel Valeria C. Healy, was and continues to be particularly egregious, posing a significant obstacle to the progress of this case. The Court has given Plaintiff many chances to litigate in a professional and productive manner, and has been consistently confronted with counsel’s utter disregard for the Court’s authority and her persistent refusal to comply with the Court’s orders and the Federal Rules. The following section details the key discovery orders serving as the basis of this order.

The court listed many issues, including the refusal to produce documents and the refusal to answer interrogatories. However, the deposition misconduct is unusual and worth quoting at some length.

Witness coaching happens all the time in depositions. It is rare for a court to find that the lawyer exceeded the bounds of permissible conduct.

As early as December 2015, Judge Ryu gave specific warnings with respect to the issue of privilege during depositions: “there can be no instructions to not answer except for privilege. . . . And it has to be clearly privilege. Because if it’s not, again there will be sanctions.” Dkt. No. 335 at 46.

On January 25, 2016, Almawave first deposed Plaintiff’s co-founder and CEO Gianmauro Calafiore. Dkt. No. 884 at 1 (“Order 884”). After reviewing the deposition transcript, Judge Ryu issued an order regarding Healy’s conduct during the deposition. Dkt. No. 436 (“Order 436”).

[The deposition transcript] is replete with examples of inappropriate behavior by Plaintiff’s counsel, Valeria Calafiore Healy. Ms. Healy made speaking objections, instructed the deponent not to answer questions for reasons other than the invocation of privilege, and repeatedly objected without stating a basis for the objection. The deponent, Gianmauro Calafiore, was often argumentative and uncooperative in providing testimony, thereby delaying the deposition process. Ms. Healy and Mr. Calafiore’s obstructionist conduct repeatedly stymied Alma[w]ave USA’s attempts to obtain discovery through this key deposition.Id. at 1. Judge Ryu sanctioned the Plaintiff, ordering five additional hours of deposition and requiring Plaintiff to bear the cost. Id. The order again provided specific instructions:

In the future, Ms. Healy, and indeed, all attorneys defending depositions in this litigation (1) shall state the basis for an objection, and no more (e.g., “relevance,” “compound,” “asked and answered”); (2) shall not engage in speaking objections or otherwise attempt to coach deponents; and (3) shall not direct a deponent to refuse to answer a question unless the question seeks privileged information.Id. at 2. Judge Ryu further warned that “[g]iven Ms. Healy’s repeated inappropriate conduct in her defense of the Calafiore deposition, any further breach” would result in sanctions. Id.

On August 25, 2016, Judge Ryu issued an order regarding Healy’s continued conduct during the deposition of Calafiore, as well as Loop AI’s other executives Bart Peintner and Patrick Ehlen. Dkt. No. 884. Leading up to this order, Judge Ryu had already twice directed Plaintiff to produce Peintner and Ehlen for depositions as they “appeared to be percipient witnesses.” See Dkt. No. 465 (March 10, 2016); Dkt. No. 526 (March 25, 2016). Judge Ryu’s March 25 order included specific dates, ordering that Ehlen and Peintner appear on March 29 and March 30, and that Calafiore and any of Plaintiff’s 30(b)(6) witnesses appear either on March 31 or April 1. Dkt. No. 526. This Court denied Plaintiff’s motion for relief from Judge Ryu’s nondispositive order regarding the deposition dates. Dkt. No. 533. Plaintiff nonetheless failed to follow Judge Ryu’s orders. See Dkt. No. 555 (Almawave’s letter brief indicating that “Loop and its witnesses refused to appear for deposition as ordered”). On April 4, 2016, Judge Ryu again ordered Plaintiff to make witnesses Calafiore, Ehlen, and Plaintiff’s corporate representative available. Dkt. No. 564.

Order 884 is based on Judge Ryu’s review of the deposition transcripts of these witnesses. Judge Ryu found that “[i]n direct contravention of the court’s February 29, 2016 order, Healy instructed witnesses to refuse to answer questions on grounds other than privilege.” Order 884 at 4 (noting, for example, that Healy “instructed Plaintiff’s 30(b)(6) designee (Calafiore) not to answer certain questions, unilaterally deciding that the questions were outside the scope of the noticed Rule 30(b)(6) topics”); id. at 5 (“[W]hen Almawave asked Ehlen, `Can you tell us how your particular algorithms work?’, Healy instructed him not to answer on the basis of relevance, again unilaterally taking the topic off the table.”). Judge Ryu cited Healy’s “numerous improper speaking objections, in direct contravention of this court’s order that counsel confine objections to a statement of their basis, (e.g., `compound,’ or `asked and answered’), and not engage in speaking objections or otherwise attempt to coach the witness.” Id. at 5. Order 884 found “Healy’s coaching was so effective that the witnesses occasionally repeated her objections, sometimes verbatim, to the examining attorney,” and that “[o]n other occasions, Healy actually attempted to answer the question for the witness.” Id. at 6-7.Order 884 held that Healy improperly asserted attorney-client privilege to prevent witnesses from answering, noting that Healy “inexplicably refused to allow the witnesses to respond to questions about their own discussions with other Loop employees or third parties,” and “refused to allow Plaintiff’s witnesses to answer questions about their document collection and production in this litigation” on the basis of attorney-client privilege. Id. at 7-8. Judge Ryu concluded that Healy’s conduct, “including instructions not to answer questions and speaking objections and coaching, was both improper and in direct violation of the court’s February 29, 2016 order regarding the conduct of depositions” and “[a]ccordingly, it is sanctionable.” Id. at 9. Judge Ryu deferred to this Court as to what sanction should be imposed. Id.

In sum, this case will draw coverage in the media and in legal publications which discuss discovery shenanigans.

Source: LOOP AI LABS INC. v. Gatti, Dist. Court, ND California 2017 – Google Scholar

After losing summary judgment motion, plaintiff files Rule 60 motion and is sanctioned


The plaintiff sued his employer for defamation and tortious interference with an economic expectancy. After the defendant obtained summary judgment on all claims, plaintiff moved to vacate the adverse ruling with a Rule 60 motion. The motion, which appears to have contained highly inflammatory assertions, drew a Rule 11 sanctions motion, which the Magistrate Judge granted. The explanation:

Plaintiff’s motion sought to set aside the judgment for fraud on the court. Out of the many assertions that Plaintiff made in support of his Motion to Set Aside the Judgment, only three of the contentions maintained that someone had taken an action that, if true, would possibly rise to the level of fraud on the court. These assertions are:

(1) Defendant’s counsel submitted documents to the Court that Defendant’s counsel knew to contain perjured statements;

(2) Defendant’s counsel submitted bogus documents to the Court;

(3) Defendant’s counsel made false statements to the Court.Plaintiff also, in a conclusory manner, stated that he had shown an unconscionable plan to improperly influence the Court’s decision on summary judgment. Out of these assertions and conclusory statement, only the first assertion—that Defendant’s counsel knowingly submitted perjured materials to the Court—was supported by substantial argument. Plaintiff did not identify any documents that he purported to be bogus, and the Court, in its summary judgment ruling, already resolved the issue—in Defendant’s favor—of asserted false statements made by Defendant’s counsel.

Though the assertion regarding knowing submission of perjury was supported with argument, the argument was insufficient. In essence, Plaintiff argued that there were statements in deposition testimony and in a declaration that could not be true because the deponent and declarant should have known other information or because the deponent knew little about proprietary information, and proprietary information was deponent’s stated motivation for contacting PSC. Plaintiff’s argument for fraud on the court lacked evidentiary support because there is no evidence that Defendant’s counsel knew the statements to be perjured and because the arguments that the statements must be perjured are logically flawed.

Plaintiff’s counsel signed the Rule 60(d)(3) Motion and presented it to the Court. Had Plaintiff’s counsel made a reasonable investigation of the facts and law necessary to support a motion to set aside judgment for fraud on the court, he would have found that Plaintiff’s Motion was not warranted by existing law. Plaintiff’s counsel made no non-frivolous argument for extending, modifying, or reversing existing law or for establishing new law. Pursuant to Rule 11(c), sanctions are warranted.

Defendant requests that it be awarded its reasonable costs and attorney fees incurred in responding to the Motion to Set Aside the Judgment and in bringing the instant Motion for Sanctions. The Court finds that these sanctions “suffice[ ] to deter repetition of the conduct or comparable conduct by others similarly situated,” Fed. R. Civ P. 11(c)(4), and grants the request. The sanction is imposed on Plaintiff’s counsel, John H. Davis, and not Plaintiff. See id. at 11(c)(5)(A) (“The court must not impose a monetary sanction . . . against a represented party for violating Rule 11(b)(2) . . . .”); see also id. at 11(c)(1) (“[T]he court may impose an appropriate sanction on any attorney . . . that violated the rule.”).

Comment: the lawyer who made those assertions can expect to receive an ethics inquiry from his state bar regulator.

Source: Kennedy v. SCHNEIDER ELECTRIC, Dist. Court, ND Indiana 2017 – Google Scholar