Sanctions — Entry of a Default Judgment under Rule 37 for Discovery Violations — Factors — $36 Million Jury Verdict on Damages Upheld

Stooksbury v. Ross, 2013 U.S. App. LEXIS 12132 (6th Cir. June 13, 2013):

Defendants Michael L. Ross, the estate of his late brother, and their associates and business entities, (collectively "Ross Defendants"), appeal from the district court's denial of their motions for a directed verdict and new trial after a jury awarded Plaintiff Robert Stooksbury, Jr., over $36 million in damages on his federal claims under the Racketeer Influenced and Corrupt Organization Act ("RICO"), 18 U.S.C. § 1962, and his state claims of fraud and breach of fiduciary duty under Tennessee law. The Ross Defendants challenge the district court's entry of default judgment against them as a discovery sanction, its failure to grant their pre-trial motions to dismiss on standing grounds, and its failure to grant their post-trial motions for judgment of acquittal and a new trial similarly on standing grounds. Intervening Defendant, Athena of SC, LLC ("Athena"), appeals from the district court's subsequent judgments in which the court granted Plaintiff's motions for preliminary injunction, enjoining Athena from foreclosing on its security interest in some of the Ross Defendants' real property.

For the following reasons, we AFFIRM the district court's orders denying the motions for judgment as a matter of law or a new trial and enjoining Athena from foreclosing on the real property. ***

The Ross Defendants violated a June 2011 discovery order by failing to respond to Plaintiff's discovery requests and interrogatories from the previous year. Plaintiff moved for sanctions, and after a hearing on Plaintiff's motion in September 2011, the magistrate judge recommended the entry of default judgment. The magistrate judge found that the Ross Defendants had a "total lack of forthrightness" in refusing to comply with the discovery order, respond to the district court's inquiries, or provide an explanation for their admitted noncompliance. (R. 185, Report & Recommendation, PID# 2679-82.) Additionally, the near 40,000-page discovery submission was an unresponsive "document dump" that also failed to include Bates stamp numbers as required. (Id. at PID# 2680.) The magistrate judge concluded that the Ross Defendants' conduct "amount[ed] to bad faith and a willful decision not to cooperate in discovery." (Id.)

In November 2011, over Defendants' objections and claims that they were not informed by counsel of the discovery failures, the district court adopted the magistrate judge's findings as to the lack of forthrightness and bad faith, but declined to enter a default judgment. Instead, the district court imposed sanctions for attorneys' fees and costs and granted the Ross Defendants an additional ten days to comply with the June 2011 discovery order. The district court warned the Ross Defendants that "failure to so comply may result in the imposition of further sanctions, including entry of default." ***

Notwithstanding these warnings, the Ross Defendants filed supplemental responses that were still unresponsive; they included boilerplate objections and failed to provide basic accounting documents or Bates stamp references for the earlier document dump. Plaintiff renewed his motion for default judgment. The district court, on January 30, 2012, entered a default judgment against Defendants on all claims after going through the relevant factors established in Bank One of Cleveland, N.A. v. Abbe, 916 F.2d 1067 (6th Cir. 1990), to find that: 1) Defendants acted willfully in failing to comply with the discovery orders; 2) Plaintiff was prejudiced thereby; 3) Defendants were fairly warned of the possibility of a default judgment; and 4) less drastic sanctions, like the fees previously imposed, would be unavailing. The district court denied the Ross Defendants' later motions to set aside the default judgment on the basis that Defendants could not prove that their discovery abuses resulted from excusable neglect.

The factual allegations in the complaint were accepted as true per the default judgment, and thus trial commenced on February 21, 2012, solely on the issue of damages. In the first phase of trial, concerning compensatory damages, the Ross Defendants called no witnesses and presented no evidence. The jury awarded Plaintiff over $3.5 million on the RICO violations and $11.3 million for the state-law claims, jointly and severally against the Ross Defendants. In the second phase of trial, the jury awarded punitive damages in varying amounts against several of the Ross Defendants, totaling $15 million. The district court thereafter trebled the compensatory RICO damages pursuant to 18 U.S.C. § 1964(c), thereby increasing that portion of the award to $10.64 million. ***

We review for an abuse of discretion the order of a default judgment pursuant to Federal Rule of Civil Procedure 37, Bank One, 916 F.2d at 1073, and the denial of a motion to set aside default pursuant to Rule 60(b), Burrell v. Henderson, 434 F.3d 826, 831 (6th Cir. 2006). While "[j]udgment by default is a drastic step which should be resorted to only in the most extreme cases," United Coin Meter Co. v. Seaboard Coastline R.R., 705 F.2d 839, 845 (6th Cir. 1983), the district court does not abuse its discretion in entering a default judgment where a "party has the ability to comply with a discovery order and does not," Bank One, 916 F.2d at 1073 (quoting Reg'l Refuse Sys. v. Inland Reclamation Co., 842 F.2d 150, 154 (6th Cir. 1988)). In reviewing the default judgment order, we consider: 1) whether the defaulting party's failure to cooperate with discovery was willful and in bad faith as opposed to an inability to cooperate; 2) whether the adversary was prejudiced; 3) whether the defaulting party was warned that his failure to cooperate could lead to a default judgment; and 4) whether less drastic sanctions were imposed or considered before the default judgment was ordered. Id. ***

In the instant case, the Ross Defendants assert first that they substantially complied with the discovery order as demonstrated by the near 40,000-page discovery submission, and second, that the district court should have imposed a less-severe sanction. The record demonstrates that both contentions lack merit. The magistrate judge and district court (as well as the state court) found that the discovery submission was merely a document dump of mostly unresponsive information and that the Ross Defendants failed to provide even the most basic accounting information, such as tax returns, financial statements, and bank records. Moreover, the Ross Defendants failed to comply with two discovery orders, i.e., the June and November 2011 orders, which required them to identify the documents produced by Bates stamp numbers and complete the discovery that was requested more than one year earlier. Further, their counsel admitted their noncompliance with respect to the June order before the magistrate judge. Thus, the contention that they substantially complied is simply belied by the record.

To their second point, we find that the district court properly established all of the Bank One factors to support the entry of default judgment. For the first factor, willful conduct and bad faith, the magistrate judge detailed how the Ross Defendants lacked forthrightness, failed to directly respond to the Court's inquiries about the discovery matters, offered no explanation for their lack of compliance, and demonstrated "bad faith and a willful decision not to cooperate in discovery." (R.185, at PID# 2680.) Further, this finding was bolstered by the Ross Defendants' continued failure to comply after the district court granted them a 10-day extension or respond to Plaintiff's renewed motion for default judgment.

Turning to the second factor, prejudice to Plaintiff, the district court noted that the discovery dispute had been ongoing for over a year despite the Plaintiff's efforts and the court's intervention, and that two continuances had already been granted, thus delaying the proceedings. The discovery abuses imposed excessive costs on Plaintiff, who had to sort through the document dump, and undermined Plaintiff's proof on the issue of liability. Indeed, the trial was less than a month away when the district court was forced to enter default judgment on Plaintiff's motion that the Ross Defendants failed to even contest.

Finally, turning to the third and fourth Bank One factors, whether the Ross Defendants were fairly warned and whether less-severe sanctions were considered, we find that both were established. The Ross Defendants' first warning arguably came from the magistrate judge whose recommendation of a default judgment for their discovery abuses was not accepted by the district court. If that was not a clear indication that a default judgment was possible, the district court, after entering a less-severe sanction for the violation of the June discovery order, specifically warned the Ross Defendants that a default judgment could result from continued noncompliance. Despite the fair warning and imposition of a less-severe sanction, the Ross Defendants failed to comply with the ten-day extension or explain why they did not comply. It appears that the Ross Defendants forced the district court's hand in ordering the default judgment; therefore, we find no abuse of discretion. See Bank One, 916 F.2d at 1078-79.

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