Citing Misconduct “As Deep as it is Wide,” Court Imposes Sanctions on Defendants and Counsel

Arrowhead Capital Fin., Ltd. v. Seven Arts Entm’t, Inc., No. 14 Civ. 6512 (KPF), 2016 WL 4991623 (S.D.N.Y. Sept. 16, 2016)

For Defendants’ egregious discovery conduct, including obstructing depositions and failing to preserve and produce relevant documents, among other things, the Court imposed sanctions, including precluding them from litigating the issue of personal jurisdiction; imposing a “spoliation instruction, as appropriate, on any claims that are ultimately submitted to the jury”; ordering payment of Plaintiff’s attorneys fees related to the misconduct; and ordering the retention of a second outside counsel to review their files for additional discoverable materials and to represent them in future discovery-related proceedings.  Defendants’ manager and sometimes CEO was also found in contempt for his behavior throughout discovery, including attempting to minimize his own responsibility for the discovery deficiencies by claiming limited involvement and blaming others.  Finally, for acting in bad faith in a manner that improperly lengthened the proceedings and for making objections in bad faith, the Court also imposed “modest” sanctions against defense counsel.

After Plaintiff reported discovery misconduct on the part of Defendants and their counsel, the Court held a conference and ultimately ordered production of relevant documents. At a follow up hearing, the Court determined that Defendants’ manger “seemed to be directing defense counsel not to produce responsive documents” and scheduled a contempt hearing to determine whether Defendants had violated the Court’s orders.  At that hearing, it was revealed that potentially relevant information may have been lost as the result of Defendants’ repeated failure to pay a third party for storing Defendants’ data on its server, despite the ongoing litigation.  Specifically, access to the relevant server was cut off and Defendants’ manager “just [didn’t] know” if there were any documents that Defendants did not have.  Also at that hearing, Defendants’ manger “readily and reflexively blamed his staff” for the failure to produce relevant documents and, despite being (as the Court characterized him) “the sun around whom all Seven Arts entities revolved,” asserted that he had not reviewed all productions, essentially to avoid blame if information was not produced.  When Defendants persisted in failing to produce Court-ordered discovery following the hearing, Plaintiff renewed its prior request for sanctions.

As “one of several sanctions for Defendants’ misconduct,” the Court first indicated that Defendants would be precluded from contesting the issue of personal jurisdiction where the Court determined that their discovery violations had “prevented Plaintiff from obtaining evidence that could be used to prove its jurisdictional allegations.” The Court also indicated that a spoliation instruction, “as appropriate,” would provide Plaintiff a fair opportunity to present its case.

Turning to a discussion of additional sanctions, the Court concluded that Defendants were “deliberately making misrepresentations to the Court, cancelling depositions, and violating Court orders to prevent Plaintiff from gathering discoverable information.”  As to the loss of access to information on the third-party server, the Court concluded that “Defendants were not making reasonable efforts to preserve information,” and that their conduct with regard to the third-party server “transcended recklessness.”  The Court also noted its “distinct impression” that Defendants’ manger was making up his explanations as he went along to “conceal his true motive: shielding assets, and the information relating to those assets, from Defendants’ creditors” including Plaintiff.  Thus, for the “willful efforts to derail the discovery process,” the Court determined that additional sanctions were warranted.  In so concluding, the Court paid “special attention” to the “words and actions” of Defendants’ manager, who had claimed he was not involved in discovery, but clearly was, and whose testimony was “inconsistent to the point of incredible.” Specifically, the Court ordered payment of Plaintiff’s attorneys fees related to the misconduct and, notably, also ordered Defendants to retain a second outside counsel to review their files for additional discoverable information and to represent them for any future discovery-related proceedings. As for Defendants’ manager, the Court found him in contempt of Court for (i) “willfully” impeding the discovery process, (ii) improperly attempting to minimize the “obvious deficiencies” in the process, and (iii) deliberately taking steps to make his testimony “less useful to the Court in its review of those deficiencies.”

“Modest” sanctions we are also imposed against Defendants’ counsel for improperly lengthening the proceedings on at least two occasions and for acting in bad faith when raising certain evidentiary objections.  Specifically, the Court indicated it would order him to pay “some portion of the costs Plaintiff incurred in preparing the reply brief to its summary judgment motion” and ordered Plaintiff’s counsel to submit a proposed fee schedule and to explain the degree to which the drafting of the reply brief was “complicated” by counsel’s behavior.

A full copy of the Court’s opinion and order is available here.

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