Rule 37 Sanctions — Directing Facts Be Taken As Established Doesn’t Require Willfulness or Bad Faith — Examples of Sufficient Circumstantial Evidence of Willful Discovery Failures

Coquina Investments v. TD Bank, N.A., 2014 U.S. App. LEXIS 14388 (11th Cir. July 29, 2014):

D. Post-trial discovery sanctions

Multiple problems with TD Bank's discovery came to light during and after the trial. For example:

1) TD Bank's Federal Rule of Civil Procedure 30(b)(6) designee testified before trial that there were no anti-money laundering ("AML") alerts for Rothstein's bank accounts until late September 2009 and less than five thereafter. But weeks before trial, TD Bank produced around 150 pages of AML alerts for  [*11] Rothstein's accounts; TD Bank then produced more AML alerts, including alerts spanning 2008 to 2009, after trial commenced.

2) Two TD Bank employees submitted affidavits during trial denying the existence of a document entitled the "Standard Investigative Protocol" ("SIP"), which outlined investigatory steps that employees must take whenever an account alerts. TD Bank confirmed post-trial that this protocol in fact exists. Moreover, the two employees who submitted the affidavits could have found the protocol by searching the relevant shared drive on their computers or, in the case of one employee, by reviewing his e-mails.

3) One of the documents TD Bank produced during discovery was a Customer Due Diligence ("CDD") form for RRA's bank accounts. The original CDD contained a red banner running across the top of the page with the words "HIGH RISK" in white, capital letters. The form produced to Coquina, however, did not contain a discernible "HIGH RISK" banner.

4) Two e-mail chains between TD Bank employees containing information relevant to whether Spinosa had signed and issued the "lock letters" described earlier were never produced to Coquina.

5) A consultant's report on Rothstein's accounts,  [*12] which was created for an unrelated matter after discovery in this case had closed, was never produced to Coquina or to TD Bank's former outside counsel, Greenberg Traurig LLP.

Coquina moved post-trial for sanctions against TD Bank and Greenberg Traurig based on these alleged discovery violations, which the district court granted. The court noted that TD Bank had made most of the documents at issue available to Greenberg Traurig, which failed to properly produce them to Coquina. But the court also found, inter alia, that TD Bank willfully failed to correct Greenberg Traurig's mistakes as to the production of the CDD, that TD Bank willfully concealed documents from Greenberg Traurig, that TD Bank's employees failed to adequately search for the SIP before signing affidavits denying the protocol's existence, and that TD Bank's Rule 30(b)(6) witness was, at best, unprepared. Based on these findings, the court concluded that Greenberg Traurig acted negligently and that TD Bank acted willfully in failing to comply with discovery orders. Accordingly, the court entered an order under Federal Rule of Civil Procedure 37(b)(2)(A)(i) that two facts--that TD Bank's monitoring and alert systems were  [*13] unreasonable and that TD Bank had actual knowledge of Rothstein's fraud--would be taken as established for purposes of this action. The court also ordered TD Bank and Greenberg Traurig to pay Coquina's attorney's fees associated with litigating the sanctions and other related motions.

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Finally, TD Bank contends that the sanction ordered by the district court was based on clearly erroneous findings of fact and violated due process. As explained above, the district court ordered two facts--that TD Bank's monitoring and alert systems were unreasonable and that TD Bank had actual knowledge of Rothstein's fraud--be taken as established for purposes of this action.

Federal Rule of Civil Procedure 37(b) provides that a district court may impose sanctions upon a party for failure to comply with a discovery order, including "directing that . . . designated facts  [*46] be taken as established for purposes of the action." Fed. R. Civ. P. 37(b)(2)(A)(i). "Our caselaw is clear that only in a case where the court imposes the most severe sanction--default or dismissal--is a finding of willfulness or bad faith failure to comply necessary." BankAtlantic v. Blythe Eastman Paine Webber, Inc., 12 F.3d 1045, 1049 (11th Cir. 1994). In this case, the district court found that TD Bank's discovery violations were willful, but this finding was not necessary to the sanction that the court chose to impose. TD Bank nevertheless maintains that the district court's finding of willfulness was clearly erroneous and that but for this finding, the court would have selected a less severe sanction.

Significantly, TD Bank is not arguing that the district court erred in imposing sanctions at all. Nor would such an argument be tenable. The district court's order granting the motions for sanctions provides numerous examples of troubling--perhaps even willful--discovery violations by TD Bank and its employees. For example, two TD Bank employees apparently failed to reasonably search for a document in the relevant shared drive before signing affidavits denying the document's existence[*47] As another example, TD Bank's Rule 30(b)(6) designee was, at best, woefully unprepared: he testified that there were no AML alerts for Rothstein's bank accounts until late September 2009 and less than five thereafter, when in fact, there were at least 150 pages of alerts spanning 2008 to 2009.

TD Bank instead argues that the district court erred in imposing this particular sanction--that is, deeming as established TD Bank's actual knowledge of the fraud and the unreasonableness of its account-monitoring systems. This is not, however, an issue that we have to decide. Wholly aside from the sanction, both facts are in any event established by ample evidence in the record. Therefore, there is no need for those facts to be established as a sanction. In light of our earlier conclusion that the evidence in the record overwhelmingly supports the conclusion that TD Bank, through Spinosa, knew of Rothstein's Ponzi scheme, see supra Part II.B.1, any error in the district court's decision to impose the sanction that it chose, or in its predicate finding of willfulness, is harmless.17

17   TD Bank in fact states on appeal that the "'reasonableness' of [its] monitoring systems was legally irrelevant to  [*48] Coquina's claims at trial . . . [and thus that part of the sanction] did not even directly relate to . . . issues properly in dispute at trial." Appellant's Br. at 62 (emphasis in original). A sanction establishing an "irrelevant" fact as conclusively proven, even if erroneously ordered, is doubtlessly harmless.

We note that TD Bank does not contend that it was impeded by the sanctions order from effectively arguing that the evidence in the record was insufficient to support a conclusion that Spinosa, and therefore TD Bank, knew about and assisted Rothstein's Ponzi scheme. Moreover, even if this argument had been raised, we would conclude that it has no merit under the circumstances of this case. TD Bank challenged the sanctions order and thus could have made arguments on appeal, conditioned on our reversal of the sanctions order, challenging the facts that the sanctions order deemed established. Of course, such a challenge would have been futile in light of the overwhelming evidence that Spinosa, and thus TD Bank, had knowledge of the Ponzi scheme.

Although we need not, and do not, address the correctness vel non of the district court's findings with respect to the sanctions issue,  [*49] we do believe that the district court clearly erred in at least one subsidiary finding: that "TD Bank acted willfully in failing to rectify Greenberg Traurig's error [as to the production of the CDD] or allowing it to endure." The CDD was one of thousands of documents TD Bank produced in this litigation. Unlike the district court, we see nothing incredible or implausible in the explanation that neither TD Bank's in-house lawyers nor its representatives who were present at trial knew what the CDD was supposed to look like. Therefore, we cannot conclude on this record that the TD Bank representatives present at trial would necessarily have had reason to notice that the copy of the CDD introduced at trial was missing important details. In our judgment, however, for the reasons already stated, this error and any other deficiencies in the district court's findings do not warrant reversing the sanction imposed in this case.18

18   We summarily reject TD Bank's argument that the sanction imposed by the district court violated due process because the sanction was not specifically related to the alleged discovery violations. The documents that were improperly produced in this case could have been  [*50] used by Coquina to show that TD Bank willfully ignored the AML alerts and other risk indicators generated for Rothstein's accounts. A jury could have inferred from those documents both that TD Bank had knowledge of Rothstein's fraud and that it had unreasonable systems in place to prevent fraud.

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