Requirements for Case-Ending Sanctions (Seventh Circuit) — Finding of Bad Faith May Be Implicit — No Need for Lesser Sanctions First — Meaning of “Abuse of Discretion” — Failure to Develop Argument on Appeal Waives It

Wellness Int’l Network, Ltd. v. Sharif, 2013 U.S. App. LEXIS 17553 (7th Cir. Aug. 21, 2013):

Sharif challenges the district court's affirmance of both the default judgment and the award of attorney's fees to WIN as discovery sanctions, see Fed. R. Civ. P. 37(b); see also Fed. R. Bankr. P. 7037 (rendering Fed. R. Civ. P. 37 applicable in adversary proceedings), though he focuses almost exclusively on the default judgment. A court's imposition of sanctions under Rule 37 is reviewed for an abuse of discretion, Nat'l Hockey League v. Metro. Hockey Club, Inc., 427 U.S. 639, 642, 96 S. Ct. 2778, 49 L. Ed. 2d 747 (1976) (per curiam); In re Thomas Consol. Indus., Inc., 456 F.3d 719, 724 (7th Cir. 2006), which requires the appealing party to demonstrate clearly "that no reasonable person would agree [with] the trial court's assessment of what sanctions are appropriate," Marrocco v. Gen. Motors Corp., 966 F.2d 220, 223 (7th Cir. 1992). When reviewing a district court's affirmance of a bankruptcy court's ruling we apply the same standards as the district court, In re Snyder, 152 F.3d 596, 599 (7th Cir. 1998), reviewing factual findings for clear error and legal conclusions de novo, In re UNR Indus., Inc., 986 F.2d 207, 208 (7th Cir. 1993).

A. Default Judgment

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The sanctions of dismissal and entry of default judgment are strong medicine, so before a court imposes such a sanction it must find by clear and convincing evidence that the party against whom the sanction is imposed displayed willfulness, bad faith, or fault. Maynard v. Nygren, 332 F.3d 462, 467-68 (7th Cir. 2003). Although courts are strongly encouraged to make such a finding explicitly, on appeal it may be inferred from the sanction order. In re Golant, 239 F.3d at 936. Another necessity flowing from the severity of the sanction is that a court must give at least the party's attorney notice and an opportunity to respond before entering a default judgment (or dismissing the case), but there need not be repeated warnings formalized in writing. See, e.g., Ball v. City of Chicago, 2 F.3d 752, 755 (7th Cir. 1993) ("'Due warning' need not be repeated warnings and need not be formalized in a rule to show cause. A judge is not obliged to treat lawyers like children. But there should be an explicit warning in every case."); Halas v. Consumer Servs., Inc., 16 F.3d 161, 164 (7th Cir. 1994) ("a formal, written order to comply with discovery is not required under Rule 37(b); an oral directive from the district court provides a sufficient basis ... if it unequivocally directs the party to provide the requested discovery"). Moreover, despite the severity of the sanction, a court is not required to issue less severe sanctions before deciding to enter default judgment (or to dismiss the case). See Patterson v. Coca-Cola Bottling Co., 852 F.2d 280, 284 (7th Cir. 1988) ("a district court is not required to fire a warning shot").***

We also conclude that the bankruptcy court's implied finding of willfulness, bad faith, or fault was not clearly erroneous and that it did not abuse its discretion in imposing the severe sanction of default. Sharif does not dispute that the discovery responses tendered on April 27 were deficient — he admitted most of those insufficiencies at his deposition. Yet he appears to claim that the supplemental discovery he tendered on May 20 and the materials he submitted in his June 22 motion for summary judgment placed him in substantial compliance. We decline to consider the materials he presented after the bankruptcy court's deadline of April 28 passed. We also note that when he made the same argument before the bankruptcy court he failed to specify the documents produced after the deadline, the information contained therein, whether they were responsive to WIN's requests, and why they had not been produced sooner. His failure to develop his argument below waives it on appeal. See, e.g., Williams v. Dieball, No. 12-3348, 2013 U.S. App. LEXIS 15878, 2013 WL 3942932, at *3-4 (7th Cir. Aug. 1, 2013). Considering only the discovery that Sharif tendered before the April 28 deadline, there is clear and convincing evidence that Sharif's noncompliance with the discovery order was willful and in bad faith. The evidence of bad faith becomes overwhelming once Sharif's history of dilatory and feckless tactics is taken into account. Cf. Smith v. Smith, 145 F.3d 335, 344 (5th Cir. 1998) ("In making its 'bad faith' determination, the district court was entitled to rely on its complete understanding of the parties' motivations. Defendants present no authority for the proposition that the district court is prevented from considering a party's actions in a related case in making its bad faith determination under Fed. R. Civ. P. 37. Moreover, the dilatory and obstructive conduct of the defendants has been well-documented and the extreme sanction of default judgment was warranted by their actions." (internal citations omitted)).

In many respects this case is similar to Golant, in which we upheld a bankruptcy court's entry of default judgment as a discovery sanction, where the court had repeatedly ordered Golant to comply with discovery requests and he had failed to do so; Golant had admitted failing to produce numerous documents; and Golant had produced a fair number of documents in response to the discovery requests but had failed to produce "many important documents." In re Golant, 239 F.3d at 936-37. Entry of default judgment, we concluded, was the only adequate sanction, reasoning that "[w]here a debtor in bankruptcy refuses to be completely forthright with information regarding his financial dealings and resources--information that is of paramount importance to an efficient and fair bankruptcy proceeding--the bankruptcy court is left with little recourse but to enter default judgment against the debtor," id. at 937. As in Golant, the bankruptcy court here did not abuse its discretion in imposing the sanction of default judgment. See also In re Kilgus, 811 F.2d at 1118 ("Judges must be able to enforce deadlines. Doing so means the use of sanctions, even severe ones such as default, when parties ignore the ongoing proceedings and demand the right to set their own deadlines. The entry of defaults may be especially important in bankruptcy cases, which may involve hundreds or thousands of parties.").

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