Client’s Bad Behavior Imputed to Counsel – Both Get Sanctioned
December 22, 2016
In Arrowhead Capital Fin. Ltd. v. Seven Arts Entertainment, Inc. 2016 U.S. Dist. LEXIS 126545 (S.D.N.Y. Sept. 16, 2016), District Judge Katherine Polk Failla imposed significant sanctions upon both the Chief Executive Officer (“CEO”) and the lawyer for defendant Seven Arts Entertainment Inc. (“SAE”).
Arrowhead Capital Finance, Ltd. (“Arrowhead”) sued SAE in 2014 seeking to enforce a judgment it had little ability to enforce because all of the assets held by the debtor had been sold to SAE. SAE filed a motion to dismiss, arguing the Court lacked personal jurisdiction. The Court denied the motion pending discovery.
In a letter dated September 21, 2015, Plaintiff claimed SAE and its counsel had engaged in various misconduct during discovery. The violations alleged to have been undertaken to slow down discovery included:
- SAE inflated their document productions with nonresponsive documents;
- SAE refused to produce critical responsive documents;
- SAE’s discovery responses were incomplete and replete with improper objections; and
- SAE refused to produce key witnesses for deposition.
The Court held a conference to address Arrowhead’s complaints. During that conference, SAE’s counsel acknowledged he had not reviewed the discovery responses interposed by his client and merely forwarded to his attorney the materials he received from SAE’s CEO.
As a result of this admission, the Court stated it had no confidence SAE would meet its discovery obligations and ordered SAE’s CEO to personally appear to testify concerning the alleged misconduct. The Court also ordered SAE to produce the responsive documents Arrowhead requested but never received.
Notwithstanding the Court’s various orders, SAE refused to produce witnesses for deposition or produce the required documents.
Because the Court deemed SAE’s CEO to be directing counsel not to comply with the Court’s orders, Arrowhead moved for sanctions. In response, the CEO testified his offices were “paperless” and the third-party server upon which documents were maintained was destroyed as a result of SAE’s failure to pay its bills (which he claimed was unintentional). The CEO also cast blame on various staff people to whom he had purportedly delegated the task of complying with the Court’s orders.
The Court concluded SAE was willfully making misrepresentations to the Court and showed “flagrant disregard for” Court orders for the purpose of withholding information from Arrowhead. As a result, the Court held SAE forfeited its jurisdictional arguments due to non-compliance with Court orders. The Court further determined a spoliation instruction would be provided in connection with any claims ultimately submitted to the jury. Defendants’ CEO also was ordered to pay Arrowhead’s costs in association with bringing its various motions and was ordered to retain separate legal counsel to conduct a thorough review of SAE’s files to assess whether additional responsive information remained to be produced. Defendants’ counsel, who was deemed complicit in the violations, was ordered to pay a portion of Plaintiff’s costs.
This decision reinforces that counsel may not turn a blind eye to a client’s behavior nor may counsel simply follow the instructions of clients. Rather, counsel has a duty to ensure that good faith efforts are taken to comply with discovery obligations. This case also reminds us that the amended Rule 37(e) does not lessen punishments for willful or intentional e-discovery misconduct. Rather, bad faith behavior will be met with sanctions, not only for the party, but for counsel as well.