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Seventh Circuit Affirms $413 Million Dollar Default Judgment for Discovery Abuses
Practical Law Legal Update 7-556-8885 (Approx. 3 pages)
Seventh Circuit Affirms $413 Million Dollar Default Judgment for Discovery Abuses
by Practical Law Litigation
| Published on 11 Feb 2014 • USA (National/Federal) |
In Domanus v. Lewicki, the US Court of Appeals for the Seventh Circuit held that the district court did not abuse its discretion in ordering heightened sanctions and a $413 million dollar default judgment against defendants for their discovery violations.
On February 4, 2014, the US Court of Appeals for the Seventh Circuit held in Domanus v. Lewicki that the district court did not abuse its discretion in ordering heightened sanctions and a $413 million dollar default judgment against the defendants as a result of their discovery violations (No. 13-2435, (7th Cir. Feb. 4, 2014)).
Background
Shareholders of Krakow Business Park (KBP), a Polish entity, sued Adam Swiech, Richard Swiech and Derek Lewicki, former and current shareholders of KBP, alleging a fraudulent scheme to loot the company. The Polish authorities also separately prosecuted the defendants.
The case was referred to a magistrate judge for discovery. As a result of defendants' abuse of the discovery process, the magistrate issued several sanctions rulings including potential adverse jury instructions for defendants' noncompliance. The plaintiffs objected to the district court that these sanctions were overly lenient in light of defendants' extensive discovery abuses. The district judge agreed with the plaintiffs, finding the sanctions too light, imposing more onerous ones and ultimately granting the plaintiffs' motion for default judgment. The defendants appealed, arguing the district judge abused her discretion in issuing harsher sanctions and overruling the magistrate judge.
Outcome
The Seventh Circuit affirmed the district court and held that the court was within its discretion to impose harsher sanctions and grant default judgment. In its analysis, the Seventh Circuit reiterated the standards of review between the judges and courts:
- The district judge reviews the magistrate judge's discovery decisions for clear error.
- The circuit court reviews the district judge’s discovery-related sanctions for abuse of discretion.
The Seventh Circuit reviewed the magistrate judge's determinations and the discovery-related sanctions imposed by the district court, including the district court's:
- Sanction against defendant Adam Swiech for failure to turn over bank account records. Despite the magistrate judge’s order compelling production of bank records, the defendant did not comply and exhibited inadequate efforts to obtain the records. The magistrate judge sanctioned the defendant with a potential adverse jury instruction should the defendant fail to produce the records by the close of discovery. The district judge found the sanction unreasonably lenient in light of the repeated discovery violations and held the defendant in contempt.
- Sanctions against defendant Lewicki for failure to turn over bank account records. Although the defendant owned the account in question, he only produced a transaction log for the account, failed to provide details for relevant wire transfers and made halfhearted attempts to contact the bank. However, the magistrate judge declined to impose sanctions or find the defendant in contempt. The district court, on the other hand, did not find the defendant credible and held him in contempt based on a history of discovery violations and dishonesty.
- Bad faith finding for destroying evidence. Because the defendants admitted they destroyed a hard drive with relevant information, the magistrate judge found that the defendants violated their duty to preserve evidence. However, she concluded that they acted with gross negligence rather than in bad faith and, as a result, limited sanctions to a jury instruction on spoliation. The district court found the defendants had in fact acted in bad faith and issued an order forbidding the defendants' use of any documents taken from the hard drive and ordering them to obtain e-mails from their e-mail service providers.
- Finding of deposition-related abuses. The defendants continued their string of abuses with their delay in scheduling depositions based on unpersuasive excuses. The defendants also used documents during affirmative depositions that had not been previously produced.
The Seventh Circuit concluded that this "drumbeat of discovery abuse" led the district court to properly sanction and default the defendants. The circuit court found that the district judge did not abuse her discretion by finding that the magistrate erred in issuing more lenient sanctions, particularly given the defendants' overtly noncompliant behavior, discredited excuses and history of discovery violations. The circuit court also upheld the district court's rejection of the defendants' argument that it was impossible to comply with the discovery orders because the defendants' efforts were neither extensive nor in good faith.
In light of the overall record of discovery misconduct, the circuit court found that the district judge did not abuse her discretion in granting harsher sanctions.
Practical Implications
Practitioners should be mindful of continuous discovery abuses. Where a magistrate has imposed somewhat lenient sanctions, objection to the district court may result in heightened sanctions, including a default judgment, where the magistrate has clearly erred and more onerous sanctions are reasonably supported. Appellate courts, in turn, apply a great degree of deference to the district court and affirm unless the defaulting party can demonstrate abuse of discretion.