Commercial Litigation and Arbitration

Rule 37(b) Sanctions — Striking Personal Jurisdiction Defense for Failure to Provide Jurisdictional Discovery in Violation of Court Orders — Seeking Foreign Court Order Barring Discovery = Evidence of Bad Faith

Chevron Corp. v. Donziger, 2016 U.S. App. LEXIS 14552 (2d Cir. Aug. 8, 2016):

Defendants-appellants Steven Donziger, Donziger & Associates, PLLC, and the Law Offices of Steven R. Donziger (collectively the "Donziger Firm" or "Firm"), and defendants-appellants Hugo Gerardo Camacho Naranjo ("Camacho") and Javier Piaguaje Payaguaje ("Piaguaje"), appeal from a judgment of the United States District Court for the Southern District of New York, Lewis A. Kaplan, Judge, granting certain relief against them in favor of plaintiff-appellee Chevron Corporation ("Chevron"), in connection [*6]  with an $8.646 billion judgment obtained against Chevron in Ecuador ("Ecuadorian Judgment"), by several dozen named plaintiffs from Ecuador's Lago Agrio area (the "Lago Agrio Plaintiffs" or "LAPs") represented by the Donziger Firm, for environmental damage in connection with 1960s-1990s oil exploration activities in Ecuador by Texaco, Inc. ("Texaco"), whose stock was later acquired by Chevron. The district court's judgment, entered after a bench trial, principally (1) enjoins defendants-appellants from seeking to enforce the Ecuadorian Judgment in any court in the United States, and (2) imposes a constructive trust for Chevron's benefit on any property defendants-appellants have received or may receive anywhere in the world that is traceable to the Ecuadorian Judgment or its enforcement, based on the court's findings that the Ecuadorian Judgment was procured through, inter alia, defendants' bribery, coercion, and fraud, warranting relief against Steven Donziger ("Donziger") and his Firm under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968, and against all defendants-appellants under New York common law. See Chevron v. Donziger, 974 F.Supp.2d 362 (S.D.N.Y. 2014) ("Donziger"). Without challenging the sufficiency of the [*7]  evidence to support any of those factual findings, defendants-appellants challenge the district court's judgment, arguing principally that the action should have been dismissed on the ground that Chevron lacks Article III standing, and/or that the judgment should be reversed on the grounds, inter alia, that it violates principles of international comity and judicial estoppel, exceeds any legal authorization for equitable relief, and was entered without personal jurisdiction over defendants other than Donziger and his Firm. For the reasons that follow, including the absence of challenges to the district court's factual findings, the express disclaimers by the Ecuadorian appellate courts of their own jurisdiction to "hear and resolve" the above charges of corruption, "preserving the parties' rights" to pursue those charges in actions in the United States (Ecuadorian intermediate appellate court clarification order dated January 13, 2012, at 4; see also Opinion of Ecuadorian National Court of Justice at 120 ("preserving the rights and actions of the parties" in "acknowledge[ment of] the lack o[f] jurisdiction to decide whether or not there has been procedural fraud")), and the district court's [*8]  confinement of its injunction to a grant of in personam relief against the three defendants-appellants without disturbing the Ecuadorian judgment, we find no basis for dismissal or reversal, and we affirm the judgment of the district court.


1. Personal Jurisdiction

The district court rejected the LAP Representatives' personal jurisdiction defenses on two grounds. First, following noncompliance by the LAP Representatives with discovery orders to produce documents related to their contention that personal jurisdiction was lacking, the court, pursuant to Fed. R. Civ. P. 37(b)(2)(A), sanctioned them by striking the personal jurisdiction defenses. See Chevron Corp. v. Donziger, 296 F.R.D. 168, 220-21 (S.D.N.Y. 2013). Second, catering to the possibility that that sanction could be overturned on appeal, the court stated that it would nonetheless receive evidence at trial on the personal jurisdiction issue and make findings on that issue, see id. at 221; following the trial, the court ruled that it would have jurisdiction over the LAP Representatives under New York's long-arm statute, N.Y. C.P.L.R. § 302(a)(1), see Donziger, 974 F.Supp.2d at 617-28. The LAP Representatives contest both decisions. Finding no abuse of discretion in the district court's imposition of the sanction, we affirm the striking of the personal jurisdiction defenses, without the need to address the court's [*182]  posttrial ruling.

In the district court, Camacho and Piaguaje had moved to dismiss the action against them for lack of personal jurisdiction, arguing that their retention of New York attorneys and their participation in litigations against Chevron in New York were insufficient to provide jurisdiction over them under the New York long-arm statutes. The district court determined that the motion involved arguments and facts that went beyond the allegations in Chevron's complaint and that discovery was needed in order to assess the defenses. The court denied the motion to dismiss, without prejudice to renewal following the completion of discovery. See generally Chevron Corp. v. Donziger, 296 F.R.D. at 199-200.

In June 2012, Chevron served a request on the LAP Representatives for the production of documents in the possession of their Ecuadorian lawyers and other associates, including documents relating to the LAP Representatives' personal jurisdiction defenses. The LAP Representatives objected, "lodg[ing] boilerplate objections" such as privilege and work product, but without providing the descriptions required by Fed. R. Civ. P. 26(b)(5)(A); they also "purported to invoke Ecuadorian law, on an 'and/or' basis, [but] they failed to identify any particular Ecuadorian law or [*183]  decisions said to preclude disclosure." Chevron Corp. v. Donziger, 296 F.R.D. at 187 nn.77, 79. The LAP Representatives did not object to the demand for "responsive documents in the physical possession of their Ecuadorian attorneys and allies on the ground that they lacked control over or practical ability to procure the documents from them." Id. at 187.

In August 2012, Chevron moved to compel production of the responsive documents. In response, the LAP Representatives made a specific argument, "for the first time," that Ecuadorian law prohibited their attorneys from releasing the documents, id.; they argued, on a group-privilege theory, that where an attorney represents a group of clients, he cannot provide to any individual client his or her own documents (or any documents belonging to the group) without the express permission of every member of the group. The LAP Representatives submitted a declaration from an Ecuadorian lawyer supporting their position; Chevron submitted a declaration from an Ecuadorian lawyer who opined that their argument was erroneous. The LAP Representatives did not produce any responsive documents in the possession, custody, or control of their Ecuadorian agents or attorneys. See id. at 187-88.

Chevron's motion to compel remained [*184]  pending until February 2013. In late January 2013, the LAP Representatives informed the district court that an Ecuadorian court had granted one of the LAPs who defaulted in the present case, Octavio Ismael Córdova Huanca ("Córdova"), an injunction against the LAPs' attorneys' production of documents. This was the first information the district court received that such an injunction action had been brought. Evidence subsequently submitted to the district court revealed that the Ecuadorian injunction action had been commenced in October 2012 at the request--made to Fajardo--of United States lawyers representing the LAP Representatives. In that action, Córdova was the plaintiff, Fajardo was a defendant, and Fajardo argued in support of Córdova's request for an injunction. See generally Chevron Corp. v. Donziger, 296 F.R.D. at 187-88.

By order dated February 11, 2013, the district court granted Chevron's motion to compel the production of documents held by the LAP Representatives' Ecuadorian attorneys and agents. With respect to all responsive documents as to which there was no claim of work product or privilege, the court ordered production by March 6, 2013. The order also instructed defendants to inform the court by February 20 whether [*185]  or not they would comply with the order. "The defendants responded that they would not." Id. at 188.

Chevron thereafter moved pursuant to Fed. R. Civ. P. 37 for sanctions, including contempt and default judgments, see, e.g., Fed. R. Civ. P. 37(b)(2)(A)(vi) (a "just order[] . . . . may include . . . rendering a default judgment against the disobedient party"). Following briefing and an evidentiary hearing, the district court "decline[d] to impose the harshest of these sanctions, notwithstanding defendants' obdurate and quite possibly contemptuous refusal to comply with their discovery obligations." Chevron Corp. v. Donziger, 296 F.R.D. at 220. It concluded that the less severe sanction of striking the LAP Representatives' personal jurisdiction defenses was appropriate, as it was commensurate with their noncompliance and would restore Chevron to the position it would presumably have enjoyed had the discovery orders been obeyed and the relevant documents been produced. See id. at 220-21. The court's ruling, issued on October 10, 2013, stated that the personal jurisdiction defenses asserted by the LAP Representatives would be stricken unless they produced the required documents by October 24, 2013. They did not do so; their personal jurisdiction defenses were thus stricken.

Rule 37(b)(2)(A) of the Federal Rules of Civil Procedure allows the court in which an action [*186]  is pending to impose on a party who has failed to obey a discovery order a "just" sanction, which may include

   (i) directing that the matters embraced in the order or other designated facts be taken as established for purposes of the action, as the prevailing party claims;

(ii) prohibiting the disobedient party from supporting or opposing designated claims or defenses, or from introducing designated matters in evidence; [or]

(iii) striking pleadings in whole or in part . . . .

Fed. R. Civ. P. 37(b)(2)(A)(i)-(iii). "Severe sanctions" may be "justified . . . when the failure to comply with a court order is due to willfulness or bad faith, or is otherwise culpable." Daval Steel Products v. M/V Fakredine, 951 F.2d 1357, 1367 (2d Cir. 1991) (affirming the district court's granting of the plaintiff's claim and precluding a defendant from presenting evidence in opposition to it, in light of that defendant's "willful violation of the court's discovery order and prior obstruction of discovery").

In fashioning an appropriate Rule 37 sanction, the court may permissibly "presume from a party's willful failure to answer a discovery request relating to a particular issue that the facts of that issue are established against the noncompliant party." Southern New England Telephone Co. v. Global NAPs Inc., 624 F.3d 123, 147 (2d Cir. 2010). A defendant who has failed to obey a district court's order to produce [*187]  information relating to his defense of lack of personal jurisdiction may properly be sanctioned by the striking of his personal jurisdiction defense. See Insurance Corp. of Ireland v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 705 (1982).

A district court's decision to impose a sanction, and the court's selection among permissible sanctions, are reviewed for abuse of discretion. See, e.g., National Hockey League v. Metropolitan Hockey Club, Inc., 427 U.S. 639, 642 (1976). Such an abuse may consist of an error of law, a clearly erroneous finding of fact, or a decision that cannot be located within the range of permissible decisions. See, e.g., SEC v. Razmilovic, 738 F.3d 14, 25 (2d Cir. 2013), cert. denied, 134 S. Ct. 1564 (2014).

The district court made detailed findings as to why the imposition of sanctions on the LAP Representatives in this case was appropriate, see Chevron Corp. v. Donziger, 296 F.R.D. at 207-20, including the following:

   "[T]he LAP Representatives' U.S. counsel--while continuously telling this Court that they had asked Fajardo for the LAPs' documents--at the same time secretly suggested to him that he initiate a lawsuit in Ecuador in an effort to foreclose that very possibility." Id. at 215.

In that secret lawsuit, Fajardo stated to the Ecuadorian court, "we have discussed this matter and decided to turn over the information Chevron is demanding," id. at 216 (quoting Córdova decision (quoting Fajardo representation) (first emphasis ours, second emphasis in Donziger [*188] )), while contemporaneously in the present case, the LAP Representatives' United States lawyer represented to the district court, "'I have asked [Ecuadorian counsel] in person for the documents, and the [Ecuadorian] lawyer has said, I can't give them to you,'" Chevron Corp. v. Donziger, 296 F.R.D. at 214 (quoting Oct. 18, 2012 hearing transcript (emphasis ours)).

Although "[t]he LAP Representatives opposed Chevron's motion on the ground that [an] alleged Ecuadorian 'group secrecy' law prevented Fajardo from turning over the LAPs' documents without the express permission of all his clients," Chevron Corp. v. Donziger, 296 F.R.D. at 214, in fact "Fajardo h[eld] a broad power of attorney on behalf of all of the LAPs. . . . He thus was in a position to facilitate all of the U.S. discovery on behalf of all of them, not to mention himself, had he wished to do so. He likewise was in a position to have resisted the Córdova suit, both individually and on behalf of the other LAPs, had he so desired," id. at 215 n.284 (emphases added).

Although the LAP Representatives claimed they had no control over the documents, the Fajardo Retainer Agreement stated that "The Plaintiffs' files shall be and remain the property of the Plaintiffs"; nonetheless, the LAP Representatives did not "threaten to sue or fire Fajardo [*189]  for his refusal to provide them with the documents so they could comply with th[e District] Court's order." Id. at 217-18 & n.297 (internal quotation marks omitted).

The LAP Representatives "did not inform Chevron or the Court about the [Córdova] lawsuit until they were told Fajardo had received his desired result and the injunction had been granted. . . . Even assuming that Ecuadorian law did not require notice to or joinder of Chevron on an indispensable party or other basis, the LAPs' concealment of the action, especially given the ongoing litigation in this Court concerning the production of the Ecuadorian documents, was done in bad faith." Id. at 215-16 (emphases added).

The LAP Representatives' claim that they had no control over the documents and were enjoined from producing them was finally belied as a practical matter by the fact that shortly before the start of trial, their list of planned trial exhibits included previously unproduced documents from Ecuador that "clearly were responsive to Chevron's document requests," and "likely would fall within the definition of materials the production of which was barred by" the Córdova order. Id. at 218-19 (emphasis added).

In challenging the order striking their personal [*190]  jurisdiction defenses, Camacho and Piaguaje argue principally (1) that they were improperly "punished . . . for their Ecuadorian lawyers' failure to respond to Chevron's discovery demands" (LAP Representatives' brief on appeal at 73); (2) that they "were not in a position to direct . . . Ecuadorian counsel[] to comply with discovery demands of which they were ignorant, and the significance of which they could not understand" (id. at 76-77); and (3) that the information requested "was already fully discoverable from Mr. Donziger" (id. at 77).

These arguments are meritless. Addressing them in reverse order, we note that the supposed availability of documents from Donziger is squarely contradicted by the fact that Donziger himself also refused to comply with Chevron's discovery demands, see Chevron Corp. v. Donziger, 296 F.R.D. at 188-89. The second argument--ignorance and lack of understanding--is untenable in light of the fact that Camacho and Piaguaje were represented in the present litigation by counsel; any lack of knowledge of the discovery demands served on their United States lawyers and any failure to understand the significance of those demands is the responsibility of the LAP Representatives and the attorneys they chose to represent them. And [*191]  the argument that the LAP Representatives's failure to respond was a choice by the Ecuadorian lawyers, rather than the responsibility of the LAP Representatives themselves, is belied by the district court's findings that, inter alia, the LAP Representatives' own agents, their United States lawyers, while representing to the district court that they had asked the Ecuadorian attorneys to provide the documents, instead had in fact asked the Ecuadorian attorneys to get an injunction forbidding production. The LAP Representatives "did not attempt meaningfully to comply with Chevron's document requests or the Court's order compelling production," but "[i]nstead . . . sought a court order preventing the production," which "in and of itself is evidence of bad faith. 'Evidence that parties or targets have actively sought a prohibition against disclosure . . . may be regarded as evidence of bad faith and justification for sanctions in accordance with Subsection 2(b) [of § 442].'" Id. at 217 & n.292 (quoting Restatement (Third) of Foreign Relations Law § 442 comment h (1987)); see id. § 442(2)(b) (court may impose sanctions for deliberate concealment).

The LAP Representatives have not argued, or presented any basis for inferring, that any of the district court's factual findings is clearly [*192]  erroneous. As we see no error of law, nor any other basis for concluding that the striking of the personal jurisdiction defenses was an abuse of discretion, we affirm that sanction substantially for the reasons stated in the district court's decision, see 296 F.R.D. at 207-21.

2. Responsibility of the LAPs for the Misconduct of Their Attorneys

The LAP Representatives contend that any misdeeds by Donziger did not provide a basis for the district court to grant relief against them, arguing that they were unaware of any misconduct, "had absolutely no control over the[ir] so-called 'agents,'" and are simply "unsophisticated client-principals following the lawyers' lead" (LAP Representatives brief on appeal at 50, 71-73; reply brief on appeal at 9). We disagree.

As an initial matter, there is no authority suggesting that a party ignorant of its attorney's fraudulent actions may enforce a fraudulently procured judgment. To hold otherwise would run afoul of the Supreme Court's warning that fraud "is a wrong against the institutions set up to protect and safeguard the public, institutions in which fraud cannot complacently be tolerated consistently with the good order of society." Hazel-Atlas Glass Co. v. Hartford-Empire Co., 322 U.S. 238, 246 (1944). Even innocent clients may not benefit [*193]  from the fraud of their attorney.

As a general matter, a client-principal is "bound by the acts of his lawyer-agent." Link v. Wabash RR. Co., 370 U.S. 626, 634 (1962); see, e.g., Pioneer Investment Services Co. v. Brunswick Associates Limited Partnership, 507 U.S. 380, 396-97 (1993); United States v. Boyle, 469 U.S. 241, 251-52 (1985). This rule rests upon "well-settled principles of agency law," Maples v. Thomas, 132 S. Ct. 912, 922 (2012) (internal quotation marks omitted). It is well established that "[a] principal is subject to liability to a third party harmed by an agent's conduct when the agent's conduct is" either "within the scope of the agent's actual authority or ratified by the principal." Restatement (Third) of Agency § 7.04 (2006) (emphasis added). A principal ratifies his or her agent's act either by "manifesting assent that the act shall affect the person's legal relations" or through "conduct that justifies a reasonable assumption that the person so consents." Id. § 4.01(2).

The district court found the LAP Representatives liable on the basis that they (along with the other LAPs) retained Donziger as their attorney and gave Fajardo power of attorney. See Donziger, 974 F.Supp.2d at 477-78, 566 n.1304. This finding is amply supported by the record, as the LAPs in November 2010 granted Fajardo a new power of attorney that expressly ratified all of his prior acts, direct or indirect, in pursuit of their litigation interests. With the LAPs being defined as the "Principals," the document states, in part, [*194]  as follows:

   The Principals point out that this is an expansion of the scope of the power of attorney that has been granted to the same professional previously, for which reason the Principals ratify and approve each and every one of the actions undertaken by Attorney Pablo Fajardo Mendoza in [the Lago Agrio Litigation] as well as in any other legal actions in other courts of justice, whether national or foreign; all financial or administrative acts and acts which have been carried out directly or through other persons he legally authorizes for the defense of our interests.

(PX 390 (Fajardo Special Power of Attorney), at 4-5 (emphases added).)

Given the collaborative actions of Donziger and Fajardo described in Part I above to secure the Lago Agrio Judgment for the LAP Representatives and the other LAPs, there was no error in the district court's ruling that the LAP Representatives are responsible for injury to Chevron perpetrated by Donziger in his capacity as their attorney.

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