Common Discovery Abuse Games: Who Said Lawyers Don’t Like to Have Fun?

Many cases are won or lost on discovery. Ironically, this key aspect of litigation is typically subject to minimal judicial control, and lawyers are instead often left to comport themselves in the discovery process with civility, honor and integrity. Unfortunately, it appears that lawyers are increasingly encountering discovery abuse in civil litigation, resulting in more and more judges imposing sanctions—including the ultimate sanction of default judgment in the nonoffending party’s favor—for such abuse. This article will discuss the most frequently encountered discovery abuses, as well as the sanctions that have been imposed by the courts as a result of the same.

When Civility Vanishes: Frequently Encountered Abuses
In 2004, University of Georgia researchers surveyed approximately 4,500 Georgia lawyers in an attempt to discover the type and prevalence of discovery abuses encountered by the lawyers. [1] The researchers compiled the following list of the most frequently reported discovery abuses encountered by the responding lawyers: (1) asserting undifferentiated, boilerplate objections in response to discovery requests; (2) making overly broad and burdensome requests of marginal relevance to the needs of the case; (3) failing to produce documents or redacting documents on “relevance” grounds; (4) making “speaking objections” to coach deponents during depositions; (5) delaying the production of critical documents (or producing in waves) to impede use of documents at depositions or trials; (6) asserting privileges (work product or attorney-client), without a proper basis to justify nonproduction of documents; and (7) parsing document requests so narrowly so as to avoid production of documents that are fairly comprehended by a request. [2]

Perhaps not surprisingly, the most frequently reported encountered abuses occurred relative to document production. “Document production” abuses are especially frustrating, given that it is often difficult, if not impossible, for an opponent to discover that relevant documents are being withheld. Notably, of the seven “most common” reported discovery abuses, only one abuse involved anything other than written discovery and document production, namely, the “speaking objection” abuse. [3] Fortunately, a lawyer is not left without an avenue of relief if he or she is faced with an opponent’s discovery violation, and courts are increasingly affording relief to “victims” of discovery abuse.

Discovery Abuse in Action
Under Federal Rule of Civil Procedure 37, which is applicable to bankruptcy adversary proceedings pursuant to Federal Rule of Bankruptcy Procedure 7037, “if a party…fails to obey an order to provide or permit discovery,” the district court may issue orders “striking pleadings in whole or in part,” “dismissing the action or proceeding in whole or in part” and “rendering a default judgment against the disobedient party.” [4] The following cases illustrate both the types of discovery violations, as well as the types of sanctions courts have entered as a result of the same.

For example, in Pension Committee of University of Montreal Pension Fund v. Banc of Am. Secs. LLC, [5]a group of investors brought an action under federal and state securities laws to recover $550 million arising out of the liquidation of two hedge funds. The court evaluated the acts or omissions of certain of the plaintiffs with respect to their duty to preserve, collect, and produce relevant information in discovery. After finding, among other things, that one of the plaintiffs took no action to collect or preserve documents, did not produce documents throughout the litigation, then dumped thousands of documents on defendants only on threat of sanctions, the court sanctioned the offending plaintiff by giving an “adverse inference” jury instruction relative to that plaintiff. [6]

More recently, one of the more remarkable instances of unremitting discovery abuse resulting in the imposition of sanctions was detailed in Harmon v. Lighthouse Capital Funding, Inc. [7] In Harmon, the debtors entered into a mortgage refinance loan agreement with lender Lighthouse Capital Funding Inc. in early 2008. The loan was for a one-year period in the amount of $1,268,598.87, at a 14 percent interest rate, and was secured by a deed of trust on the debtors’ homestead. Under the terms of the loan, Lighthouse was obligated to place $177,715.83 in escrow in a federally insured account in the name of the holder of the loan to make the interest payments due during the loan period. [8]

In short, the debtors failed to make their monthly interest payment in December 2008, and they did not make any payment thereafter. Accordingly, Lighthouse posted the debtors’ homestead for foreclosure. In response, the debtors filed suit against Lighthouse in state court, primarily aimed at staving off Lighthouse’s foreclosure efforts. [9]

In May 2010, the debtors filed a chapter 11 petition, and removed the state court action against Lighthouse to the bankruptcy court. Pursuant to Lighthouse’s request, the matter was set for expedited discovery and trial. The discovery deadline was set for Aug. 2, 2010, and the trial for eight days later. The day of trial, multiple issues arose concerning Lighthouse’s incomplete document production and disregard for the discovery process.

For example, the debtors informed the court that Lighthouse failed to produce bank statements from the escrow account, despite the debtors’ requests for all documents relating to their loan. The bankruptcy court and the parties then engaged in the following discussion concerning this production:

The Court: Let me see your request for production. Did you send one?

Debtors' Counsel: I certainly did, your Honor. This is the original subpoena, your Honor, Harmon Exhibit 46 and this is the second subpoena that was issued, Harmon Exhibit 48. I believe that the account statements would have been covered under Item Number 1. There was no objection to the subpoena duces tecum.

The Court: Why aren't they covered by Number 1?

Lighthouse's Counsel: Your Honor, they requested documents related to the loan. This is a separate escrow and arranged — it's entitled "Escrow Arrangement and Agreement" —

The Court: So it's not related to the loan?

Lighthouse's Counsel: — related to an escrow account.

The Court: It's not related to the loan?

Lighthouse's Counsel: Well, we take the position that that specific request is not covered by the subpoena. They've known about the escrow account and could simply have asked for documents for the escrow account and chose not to.

The Court: It's not related to the loan?

Lighthouse's Counsel: The escrow account is the interest reserve.

The Court: It's not related to the loan? Is that what you're telling me or it is related to the loan?

Lighthouse's Counsel: Well, we take the position that under the subpoena, it's not covered, not related the loan, no.

The Court: That's not my question. You know my question.

Lighthouse's Counsel: That's correct, Judge. It's not related to the loan.

The Court: The escrow is not related to the loan?

Lighthouse's Counsel: Well, it's related to the loan in the respect that it is an escrow arrangement and agreement. The escrow arrangement and agreement document was produced. What was not produced were the—

The Court: Is the escrow account related to the loan? It's not a hard question.

Lighthouse's Counsel: All right. It's related to the interest reserve account. Yes, your Honor, it is. In that respect, it is.

The Court: Okay. Well, then you needed to produce the documents. Why didn't you?

Lighthouse's Counsel: Your Honor, when we got the request at the deposition, we attempted to go offsite for their 2008 records. We were asked for those documents on Wednesday at Mr. Leshgold's deposition. We talked about it. We tried to go offsite and get them and couldn't get them under such short notice. What we were able to produce is what they had in their computer which are the QuickBooks ledger and the documents that we've submitted.

The Court: What relief do you want, [Harmons’ Counsel]?

Debtors' Counsel: Your Honor, I want you to carry this along because I think there are other discovery abuses that have occurred in this case that I'm not prepared to discuss at this particular time. [10]

And as predicted by the debtors’ counsel, further and other discovery violations came to light. Specifically, Lighthouse’s president, Gary Leshgold, ignored the debtors’ request for production not only as it related to the escrow account, but also as to all documents requested in the subpoena. Indeed, although Lighthouse initially maintained that it had produced all relevant, nonprivileged documents in its possession, when questioned by the debtors’ counsel at trial, Leshgold admitted that Lighthouse made no efforts to make a comprehensive production, and did not even review its initial production to see if it had complied with the subpoena duces tecum issued by the debtors. [11] It was also discovered that Lighthouse retained documents under the guise of privilege but failed to produce any privilege log. The court ultimately continued the trial to another day and ordered Lighthouse to produce the missing escrow account statements, produce all relevant documents not yet produced, and submit a privilege log for any documented withheld on the basis of privilege. [12]

Lighthouse did not produce any additional documents until late September. Notably, its production led to the discovery that Lighthouse previously failed to search its own internal email records for discoverable information, and failed to produce information that should have been produced before the Aug. 10, 2010, trial date. Even more startling, the late production did not include any documents or bank statements related to the escrow account. Instead, Lighthouse waited until Nov. 11, 2010, to produce escrow account statements.

Once the escrow account documents were produced, it was discovered that rather than hold the funds in the escrow account as required under the loan agreement, all $177,715.83 in escrow account funds had been transferred from the escrow account into another account one day after the loan closed, purportedly as an interest pre-payment to Lighthouse. Accordingly, based on the escrow account documents, it appeared that Lighthouse failed to deposit and apply the escrow funds, in violation of the escrow arrangement and agreement between the parties, and delayed production of the documents related to the escrow accounts in an effort to conceal its actions.

As it related to Lighthouse’s failure to timely produce the escrow account statements, the most troubling testimony came during an exchange that occurred in a hearing on one of several motions for sanctions filed by the debtors, when one of Lighthouse’s attorneys was called to the stand to testify; click here to read the testimony. [13]

Based on all of the above, the court found that Lighthouse made, and subsequently executed, a decision not to participate in the discovery process in any meaningful way, then repeatedly failed to take responsibility for its conduct, which distorted the facts of the case and thwarted the spirit of discovery espoused in the Federal Rules.

The court further found that, although there were other discovery violations, Lighthouse’s most egregious and inexcusable conduct concerned the repeated nonproduction of the escrow account bank statements and that it was appropriate therefore, to direct the sanction towards facts related to the escrow account.

Interestingly, rather than grant the debtors’ request that it sanction Lighthouse by striking all its pleadings and entering judgment in the debtors’ favor on their claims against Lighthouse, the court instead imposed an evidentiary sanction against Lighthouse. Specifically, the court found that Lighthouse never established the escrow account as required by § 1639(g) of the Truth in Lending Act (TILA). [14] As a result, the court found that Lighthouse had in fact violated the TILA, and that as a result its lien on the debtors’ homestead was invalid. Additionally, Lighthouse was required to pay the debtors’ bankruptcy estate $179,413.91 in statutory damages, as well as attorneys’ fees and costs. [15]

 Finally, in Chrysler Financial Services Americas LLC v. Hecker, [16] faced with a similar situation, a Minnesota bankruptcy judge awarded the most severe sanction possible for discovery violations: a default judgment to the tune of $83 million dollars. In Hecker, Chrysler Financial provided financing to a number of auto dealerships, rental operations and other businesses owned and operated by Hecker. When Hecker and his entities defaulted on their obligations, Chrysler Financial brought suit and obtained a $477 million judgment against him. Shortly thereafter, Hecker filed for chapter 7 and Chrysler Financial filed an adversary proceeding against Hecker under 11 U.S.C. § 523(a) seeking to have $83 million of its previous judgment determined to be nondischargeable on the basis that the money was obtained through, inter alia, the use of false pretenses and false representations. [17]

In his bankruptcy schedules, and throughout the bankruptcy case, Hecker asserted that law enforcement officials had seized records from his office essential to a full and accurate completing of the schedules, and that such records were no longer in his possession. Hecker also provided only boilerplate objections to discovery responses, claimed that the requests were impossible to understand and sought a protective order. The court denied this request, and the parties agreed to exchange documents by a date certain. When Hecker failed to produce on that date, Chrysler Financial brought a motion to compel discovery. Hecker again asserted that relevant documents had been confiscated by government authorities, and that to the extent that such documents were in his possession, they had already been produced. [18] The court granted Chrysler Financial’s motion to compel, and ordered Hecker to provide full, complete and unequivocal answers to written discovery and not to assert boilerplate objections. The court also ordered Hecker to produce a privilege log for documents withheld from production, and barred Hecker from pursuing any offensive discovery activities until he complied with the order. Finally, the order specifically provided that failure to comply could result in sanctions under Rule 37(b)(2)(A). [19]

On the deadline for complying with the court’s order, Hecker provided supplemental, albeit deficient responses. At Chrysler Financial’s request, Hecker provided a “search warrant inventory” with his supplemental production, therein listing the items seized by the government during its raids on his businesses. The search warrant inventory revealed that contrary to his previous assertions, Hecker’s computers had not been seized. Rather, images found on those hard drives had merely been copied, resulting in the inescapable conclusion that Hecker retained possession and control during the entire course of his bankruptcy of the documentation he claimed had been seized. As a result, Chrysler Financial moved for sanctions under Rule 37(b)(2)(A), in response to which, Hecker’s counsel for the first time admitted that Hecker had computers containing literally hundreds of thousand of emails from the Hecker offices, and invited Chrysler Financial’s counsel to come to his office to view them. Then, the day before the hearing on the motion for sanctions, Hecker produced an external hard drive that contained approximately 1.1 million files and folders, in a form so scrambled, that neither the author, recipient or date of any of the emails could be determined. [20]

The court concluded that Hecker acted in bad faith and willfully abused the discovery process. After considering the range of potential sanctions available, the court concluded that because it was certain that no order would secure Hecker’s cooperation in the proceeding, default judgment was the most appropriate sanction. Accordingly, it rendered the $83 million dollar judgment non-dischargeable in bankruptcy.

Moving Forward in the Wake of Discovery Abuses
These cases offer only a glimpse at the ocean of discovery abuses—the most frequent of which relate to document production— that unfortunately appear to be an ongoing, regular occurrence in civil litigation. As the stakes continue to escalate in ligation and the competition for clients becomes more fierce, attorneys will be tempted not to adhere, and thus must be especially vigilant to ensure that they do adhere to their discovery obligations. While in a perfect world such abuses would not occur, lawyers should find some sense of ease knowing that when discovery abuses do occur, avenues of relief and remedies are available through the court that will ensure that a party attempting to avoid its discovery obligations is held accountable.