Commercial Litigation and Arbitration

Sanctions — Due Process Satisfied Despite Lack of Notice Where Sanctioned Party, in Briefing Amount of Penalty, Argued Merits to Newly-Assigned Judge and Sought Reconsideration — Irrelevance No Defense to Noncompliance with Valid Discovery Order


McLaughlin v. Phelan Hallinan & Schmieg, LLP, 2014 U.S. App. LEXIS 12028 (3d Cir. June 26, 2014):

Timothy McLaughlin had a mortgage. As a result of an error, the mortgage company believed that he was in default and referred the matter to the law firm Phelan Hallinan & Shmieg, LLP, whose lawyers include Lawrence T. Phelan, Francis S. Hallinan, Daniel G. Schmieg, and Rosemarie Diamond (collectively "PHS"). PHS sent McLaughlin a letter about the debt that he claims violated the Fair Debt Collection Practices Act ("FDCPA"), 15 U.S.C. § 1692 et seq. The District Court dismissed certain claims because McLaughlin did not ask PHS to validate the debt before he filed suit. Because we conclude that he is not required to do so, we will reverse. We  [*2] will, however, affirm the District Court's imposition of sanctions against PHS for its failure to produce certain documents during discovery.


One claim survived dismissal, namely McLaughlin's claim that PHS violated the FDCPA by creating the false impression that attorneys were involved in the debt collection activity in violation of § 1692e(3). Discovery proceeded on this claim. Before the motion had been decided, McLaughlin had served a document demand upon PHS seeking "'[a]ll invoices for professional services rendered by [PHS] in relation to the loan of Timothy McLaughlin.'" App. 186 (alterations in original). PHS objected, claiming that the  [*6] information was not likely to lead to the discovery of admissible evidence. In response, McLaughlin filed a motion to strike this objection and a motion to compel, arguing that the invoices were "clearly relevant" to his claim "that Defendants sought attorney's fees and costs from him that had not been incurred and were not authorized by the underlying loan documents." Pl.'s Mot. to Strike Objections & Compel Disc. at 10, McLaughlin v. Phelan Hallinan & Schmieg, LLP, No. 10-1406 (W.D. Pa. Nov. 9, 2011), ECF. No. 66. The District Court orally granted McLaughlin's motion. Despite this order, PHS did not produce the invoices during discovery. Instead, they withheld them until they attached them to their summary judgment reply brief.

The District Court found that these invoices "contain[ed] . . . material facts" showing that PHS had in fact misstated the attorney's fees and costs of suit. App. 161. Specifically, the District Court noted that the invoices showed that PHS had incurred only $440 in total costs and $625  [*7] in fees, and not the $550 and $650, respectively, set forth in the Letter. As a result, the District Court invited McLaughlin to file a motion seeking relief from its orders dismissing his § 1692e(2) claim.

McLaughlin thereafter moved for reconsideration of the District Court's dismissal order, but the motion was denied. The District Court did not say that the Letter was accurate but rather held that it contained "reasonable estimates" of the itemized costs, and therefore did not violate the FDCPA. App. 182-84.

The District Court, however, did find that PHS's failure to produce the invoices during discovery was sanctionable under Fed. R. Civ. P. 37(b)(2)(A) and sua sponte ordered PHS to pay all expenses, including attorney's fees, that McLaughlin had incurred in connection with his motion for reconsideration, reasoning that PHS's action prevented full and timely investigation of the facts and led to additional briefing on the summary judgment motion.

The parties thereafter submitted briefs concerning the amount of the award. PHS argued that the District Court raised the issue of sanctions sua sponte, and hence did not provide PHS with notice that sanctions were being contemplated, and  [*8] asked the District Court7 to "reevaluat[e] . . . the imposition of sanctions" in light of its view that the invoices were irrelevant to the lack of attorney involvement claim under § 1692e(3), which was the only claim pending at the time discovery occurred, and to find that its noncompliance with the discovery order was therefore neither in bad faith nor willful. Mem. of Law in Opp'n to Pl.'s Appl. for Att'ys Fees & Expenses at 1-2, Apr. 8, 2013, ECF No. 111 ["ECF No. 111"]. The District Court considered this request, found that PHS had ample opportunity to address the sanctions issue, adopted the finding that the conduct was sanctionable, and ordered sanctions in the amount of $15,050.50. PHS appeals the sanctions order.

7   Because of Chief Judge Gary Lancaster's passing, the case was reassigned to Judge Cathy Bissoon, who considered and resolved the parties' arguments regarding the sanctions.


B. Sanctions

We next address the order imposing sanctions against PHS. We review the District Court's imposition of sanctions under Rule 37 for abuse of discretion. Grider v. Keystone Health Plan Cent., Inc., 580 F.3d 119, 134 (3d Cir. 2009).  [*20] A district court abuses its discretion if it "bases its ruling on an erroneous view of the law or on a clearly erroneous assessment of the evidence." Id. (internal quotation marks and alterations omitted).14 We exercise plenary review of PHS's assertion that it was not provided due process before the District Court imposed sanctions. Martin v. Brown, 63 F.3d 1252, 1262 (3d Cir. 1995).

14   PHS argues that the factors listed in Poulis v. State Farm Fire and Casualty Co., 747 F.2d 863, 868-70 (3d Cir. 1984), should be considered when reviewing a trial court's imposition of sanctions. Poulis, however, addressed "the extreme sanction of dismissal." Poulis, 747 F.2d at 868 (internal quotation marks omitted). Because a monetary sanction was imposed here, Poulis is inapposite.

PHS asserts that the sanction order should be reversed because it did not engage in sanctionable conduct and it did not receive notice that sanctions were being contemplated before they were imposed. We will address each contention in turn.

Rule 37 provides, in relevant part, that a party's failure "to obey an order to provide or permit discovery" allows "the court . . . [to] issue further just orders." Fed. R. Civ. P. 37(b)(2)(A).  [*21] Rule 37 requires "the court [to] order the disobedient party, the attorney advising that party, or both to pay the reasonable expenses, including attorney's fees, caused by the failure, unless the failure was substantially justified or other circumstances make an award of expenses unjust." Fed. R. Civ. P. 37(b)(2)(C).

Here, there was a clear violation of the District Court's discovery order. The District Court ordered PHS to produce documents responsive to McLaughlin's demand for invoices for any services provided relating to the debt. PHS did not do so. The District Court explained that McLaughlin's document request plainly encompassed the invoices PHS withheld and it rejected PHS's argument that the invoices it withheld were not requested. The District Court further explained that PHS's noncompliance impacted the parties' investigation of the facts and caused additional briefing. As a result, it properly found PHS violated the discovery order.

PHS argues that it should not have been sanctioned for this noncompliance because the invoices McLaughlin requested were irrelevant in light of the District Court's December 20, 2011 order stating that McLaughlin's only remaining claim at that  [*22] time was his § 1692e(3) claim concerning PHS's alleged misrepresentations regarding the involvement of attorneys. Appellee Br. 41. This does not excuse PHS's failure to comply with a discovery order that had been issued the previous day and remained extant. Moreover, contrary to PHS's argument, the invoices relating to PHS's work on McLaughlin's debt were relevant under Fed. R. Civ. P. 26(b)(1) to McLaughlin's then-pending § 1692e(3) claim that no attorney worked on or reviewed the Letter. PHS in fact acknowledged the relevancy of these documents by using them to support its motion for summary judgment. Thus, the District Court's conclusion that PHS's noncompliance with its discovery order was sanctionable was correct.

PHS argues that it was entitled to notice and an opportunity to respond before the District Court imposed sanctions. Due process requires that the party against whom sanctions might be imposed receive notice that sanctions are being considered. See, e.g., In re Tutu Wells Contamination Litig., 120 F.3d 368, 379 (3d Cir. 1997) ("The party against whom sanctions are being considered is entitled to notice of the legal rule on which the sanctions would be based, the reasons  [*23] for the sanctions, and the form of the potential sanctions."); Martin, 63 F.3d at 1262-63 ("With regard to sanctions, particularized notice of the grounds for the sanction under consideration is generally required."). The "mere existence" of a rule or statute concerning sanctions is insufficient to put a party on notice that sanctions are being contemplated. Jones v. Pittsburgh Nat'l Corp., 899 F.2d 1350, 1357 (3d Cir. 1990).

It is true that PHS did not receive notice that sanctions were being considered before the District Court initially imposed them and hence did not immediately have an opportunity to argue that its failure was substantially justified. PHS, however, eventually provided arguments why it believed its conduct was not sanctionable. More specifically, in connection with the briefing on the magnitude of sanctions, PHS explicitly laid out its arguments why its conduct was substantially justified and neither in bad faith nor willful and asked the newly assigned District Court Judge to "reevaluat[e] . . . the imposition of sanctions." ECF No. 111. The District Court considered these arguments, reaffirmed the relevance of the discovery sought and the impact of the tardy production, and, for those reasons "and for all of the reasons previously stated in" her predecessor's decision, ordered sanctions in the form of attorney's fees. Thus, PHS had notice of the conduct that the District Court found to be sanctionable, had an opportunity to be heard, and received review and a ruling from a different judge concerning their conduct. Accordingly, we conclude PHS received due process and we will affirm the sanctions order.


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