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570 F.2d 1370, 24
Fed.R.Serv.2d 1139 United States Court of
Appeals, Tenth Circuit. STATE OF OHIO,
Plaintiff-Appellee, v. ARTHUR ANDERSEN & CO., Defendant-Appellant. ARTHUR ANDERSEN
& CO., Petitioner, v. Honorable Sherman G. FINESILVER, Respondent. Nos. 77-1571 and
77-1591. Argued and Submitted
Nov. 17, 1977. Decided Feb. 9, 1978. Rehearing Denied March
22, 1978. SUBSEQUENT HISTORY: State of Ohio v.
Crofters, Inc., 75 F.R.D. 12, 23 Fed.R.Serv.2d 876, Fed. Sec. L. Rep. P 96,082
(D.Colo. May 23, 1977) (No. CIV. A. C-4628, MDL-79-1) Order Affirmed by: State of Ohio v. Arthur Andersen &
Co., 570 F.2d 1370, 24 Fed.R.Serv.2d 1139 (10th Cir.(Colo.) Feb. 9, 1978) (No.
77-1571, 77-1591) Certiorari denied by: Arthur Andersen & Co. v. Ohio, 439
U.S. 833, 99 S.Ct. 114, 58 L.Ed.2d 129 (U.S.Colo. Oct. 2, 1978) (No. 77 1782) Negative Citing References: Rejected by: Yamaner v.
Orkin, 310 Md. 321, 529 A.2d 361 (Md. Aug. 5, 1987) (No. 11 Sept. Term 1987) Criticized by: Powers v. Chicago Transit Authority, 846 F.2d
1139, 46 Fair Empl.Prac.Cas. (BNA) 1603, 46 Empl. Prac. Dec. P 38,008 (7th
Cir.(Ill.) May 24, 1988) (No. 88-1512) Declined to follow by: In re Underwriters at
Lloyd’s, 666 F.2d 55, 32 Fed.R.Serv.2d 1405 (4th Cir.(Md.) Dec. 9,
1981) (Nos. 81-1372(L), 81-1395, 81-1516) Refused to follow by: Pflocks, Inc. v. Firestone Tire &
Rubber Co., 634 F.2d 1215, 30 Fed.R.Serv.2d 1256 (9th Cir.(Cal.) Dec. 29, 1980)
(No. 80-4347) Eastern Maico Distributors, Inc. v. Maico-Fahrzeugfabrik,
G.m.b.H., 658 F.2d 944, 32 Fed.R.Serv.2d 584 (3rd Cir.(Pa.) Sep. 11, 1981) (Nos.
81-1118, 81-1119, 81-1120) [*1371] COUNSEL: H. Thomas
Coghill, Denver, Colo. (Paul E. Goodspeed and Jay Horowitz of Coghill,
Goodspeed & Horowitz, Denver, Colo., and Charles W. Boand of Wilson &
McIlvaine, Chicago, Ill., were with him on the brief), for Arthur Andersen
& Co., defendant-appellant in No. 77-1571 and petitioner in No. 77- 1591. Miles M. Gersh, Denver, Colo. (Harry L. Hobson, Luke J. Danielson
and Holland & Hart, Denver, Colo., were with him on the brief), for
plaintiff-appellee in No. 77-1571 and respondent in No. 77-1591. JUDGES: Before McWILLIAMS, BREITENSTEIN and
DOYLE, Circuit Judges. BREITENSTEIN, Circuit Judge. Defendant-appellant Arthur Andersen & Co. seeks relief from
preclusionary and monetary sanctions imposed under Rule 37(b)(2), F.R.Civ.P.,
for noncompliance with discovery orders. In Arthur Andersen & Co. v.
Finesilver, 10 Cir., 546 F.2d 338, cert. denied, 429 U.S. 1096, 97 S.Ct.
1113, 51 L.Ed.2d 543, we upheld the validity of the discovery orders. The basic
facts are outlined in that opinion and will not be repeated here. Motions by
plaintiff-appellee, the State of Ohio, for imposition of sanctions were held in
abeyance pursuant to our stay order. 546 F.2d at 340. After denial of
certiorari to review our decision, the district court held a hearing on the
imposition of sanctions and entered a comprehensive order finding specific
facts. This order is reported as State of Ohio v. Crofters, Inc.,
D.C.Colo., 75 F.R.D. 12. The facts there found will be discussed here only
insofar as is necessary to an understanding of this opinion. The district court
said, Ibid. at 24-25: “It is inescapable that Andersen has followed a willful,
deliberate and flagrant scheme of delay and resistance in discovery matters. In
light of the opportunities [*1372] to provide discovery
of relevant documents, Andersen’s opposition can only be characterized
as contumacious and unjustified.” The court ordered, 75 F.R.D. at 25-26, that Andersen reimburse
Ohio $59,949 for costs and expenses incurred in securing production and that
Andersen was precluded from opposing Ohio’s claims on two specified
matters. Our number 77-1571 is Andersen’s direct appeal from the
order imposing sanctions. No. 77-1591 is its petition for mandamus which
attacks the order as usurpation of judicial power. When the matter was first
here, Andersen asserted that compliance was not required because it would
violate the law of Switzerland. After reference to Societe Internationale v.
Rogers, 357 U.S. 197,
78 S.Ct. 1087, 2 L.Ed.2d 1255, we said, 546 F.2d at 341: “Societe implies that consideration of foreign law
problems in a discovery context is required in dealing with sanctions to be
imposed for disobedience and not in deciding whether the discovery order should
issue.” We also said, Ibid. at 342: “When and if a subsequent order of the court imposes a
harmful sanction, that order may then be reviewed.” The district court has now imposed sanctions. It makes no
practical difference whether its order be reviewed on direct appeal or by
mandamus. Andersen is entitled to a review. We have here “a final
disposition of a claimed right which is not an ingredient of the cause of
action and does not require consideration with it.” Cohen v.
Beneficial Loan Corp., 337 U.S. 541, 546-547, 69
S.Ct. 1221, 1226, 93 L.Ed. 1528. Although the order may be collateral, we are
convinced that under Cohen v. Beneficial Loan Corp., it is appealable.
Accordingly, No. 77-1591, the petition for mandamus, is dismissed. The sole issue concerns the validity of the sanctions. The as yet
untried case was filed in April, 1972, and was transferred to the District of
Colorado on November 17, 1972. See In re King Resources Company Securities
Litigation, Jud.Pan.Mult.Lit., 352 F.Supp. 975. On the comparatively simple
question presented, we are confronted with a record of approximately 3,000
pages plus six large envelopes of material. Briefs of 172 pages, plus
appendices, have been filed. The briefs are replete with invectives,
maledictions, and denunciations which we ignore. We also ignore
Andersen’s persistence in disparaging and derogating the trial judge
and his actions. Ohio loaned King Resources Company, KRC, eight million dollars
allegedly in reliance on financial statements prepared by Andersen, 546 F.2d at
339-340. Fund of Funds, Ltd., FOF, an important customer of KRC, was a
subsidiary of Investors Overseas Services, Ltd., IOS, a Canadian corporation
with its principal place of business in Geneva, Switzerland. 75 F.R.D. at 15.
Ohio claims that the relationship between KRC and FOF was not noted by Andersen
in the KRC financial statements. Andersen denies any liability or wrongdoing.
Its knowledge of the KRC-FOF-IOS connection is relevant and important to the
lawsuit. 75 F.R.D. at 15. On October 24, 1975, Ohio served on Andersen a request for
production of documents including, as Request No. 26, material relative to
Andersen’s examination of IOS after January 1, 1967. During a November
7 conference, held pursuant to a local court rule, Andersen objected to
discovery from other than its Denver office and raised the “foreign
law” issue. The conference was unproductive and Ohio moved to compel
response to its requests. On December 16 the court ruled that the requests were
meritorious and ordered Andersen to produce the requested documents from its files
within the United States. With regard to foreign secrecy laws, the court said: “ * * * if there is going to be any question of foreign
secrecy laws, they are going to have to be specified with great particularity
and specificity.” On April 15, 1976, Ohio filed another discovery motion related to
documents in Andersen’s [*1373] Geneva
office and concerned with the relationship between KRC and IOS.
Andersen’s April 30 reply to this request had attached a memorandum of
Swiss counsel stating in general terms the requirements of Swiss law. Ohio then
obtained, and tendered to Andersen, consents of FOF, and other related
companies, to the production of the documents. Andersen filed a memorandum
reasserting the Swiss law problem and rejecting the consents. A May 27 order of the court directed Andersen to comply with the
discovery requests. On June 17, Andersen moved for withdrawal of the May 27
order saying that it had been taken by surprise. In support of the motion it
said that one of its lawyers was going to Geneva to consult with Swiss counsel: “to determine what documents and information may be
available for examination by Ohio without violating Swiss criminal law, e. g.,
the opportunity to consult with Swiss counsel as to the legal effect of the
consents filed by Ohio and determine what, if any, documents and information
sought may legally be provided pursuant to such consents.” Earlier, it had represented to the court that the documents were
not producible because of Swiss law and that the consents were inadequate. It
is incomprehensible and inexplicable how Andersen could make such
representations when it did not know what the documents contained and still had
to send a lawyer to Switzerland to get the information. We agree with the
statement of the trial court, 75 F.R.D. at 17, that Andersen’s conduct “places in substantial doubt the credibility of both the
written opinion of Swiss counsel and Andersen’s own insistence that it
had 'proceeded in good faith to do the best it can.' ” On June 25 the court denied Andersen’s motion to stay the
May 27 order and directed counsel to meet and discuss the discovery problems.
On June 28 Andersen filed a notice of appeal from the May 27 order. The court
modified the order on July 2 and directed Andersen to make “every
effort” to produce the documents by July 12. On July 9 Andersen
appealed from that order. Ohio then moved for sanctions for noncompliance and
Andersen filed in the court of appeals a petition for mandamus relief. At a
hearing on July 22, ten days after the deadline set by the court, Andersen
finally produced 84 newspaper clippings from its Geneva files and filed a
status report saying that 110 additional documents were on their way from Geneva
and were expected within the week. The explanation for delay in producing the
newspaper clippings is unconvincing. See 75 F.R.D. at 18 n. 4.
Andersen explained its failure to produce the 194 concededly producible
documents by saying that it had failed to “focus” on the
problem of delay, 75 F.R.D. at 18. That failure does not excuse disobedience of
the court’s order. On July 23, the court entered a protective order
and directed that production be had by August 20. Documents trickled in for
several months. Some came from sources other than Geneva, and some pursuant to
an IOS consent that Ohio had presented to Andersen in May. See 75 F.R.D. at 19.
The court said, Ibid., that the “dilatory response to our December 16,
1975 order hardly bespeaks of the good faith compliance which Andersen
repeatedly asserts.” The facts in the instant case are distinguishable from those
considered in In re Westinghouse Electric Corporation Uranium Contracts
Litigation, 10 Cir., 563 F.2d 992. In that case Rio Algom was found in contempt
for failure to obey a discovery order. It asserted that it could not comply
because of Canadian law. In reversing we said that it had acted in good faith
and had made a diligent effort to comply. Ibid. at 998. We also noted that the
trial court had conducted no balancing of interests as required by Societe.
Ibid. at 999. In the instant case Andersen acted in bad faith and the balancing
was heavily on Ohio’s side. Another opinion relating to the same Westinghouse litigation, No.
77-1833, filed January 31, 1978, 570 F.2d 899, involved a protective order
relating to the taking of a [*1374] deposition. We
reversed on the peculiar facts of that case which are in no way comparable with
those presented in the instant controversy. On July 23 we granted a temporary stay of the May 27 and July 2
orders. 546 F.2d at 340. Our opinion upholding those orders was filed on
December 1, 1976, and the mandate issued on January 10, 1977. The Supreme Court
denied certiorari on February 22, 1977. See 429 U.S. 1096, 97
S.Ct. 1113, 51 L.Ed.2d 543. On January 19 Ohio renewed its request for the
imposition of sanctions. At an April 15 hearing Andersen conceded that some of
the documents ultimately produced after much delay were from sources other than
Geneva and said that on the advice of Swiss counsel, it had decided to take the
“risk” of violating Swiss law by producing the other
requested documents. In its May 23, 1977 order, 75 F.R.D. at 20, the court
found that “Andersen deliberately and willfully refused discovery for
an unreasonable period of time without justification.” The finding has
overwhelming support in the record. Andersen argues that the court failed to consider and recognize
Swiss law. In its December 16, 1975, order the court referred to
“foreign secrecy laws” and said that any questions in that
regard should be specified with “ particularity and
specificity.” The specification did not occur for many months. Without
the specifics the court had no need to determine Swiss law. Andersen could not
supply the specifics because it waited until the latter part of June to have
one of its counsel travel to Switzerland to examine the requested documents and
“consult with Swiss counsel to determine what documents and
information could and could not be made available in view of the applicable
Swiss secrecy laws.” After the consultation, documents began to come
in slowly. At the April 15, 1977 hearing, Andersen in effect withdrew its reliance
on Swiss law. No occasion ever arose for the court to decide a specific point
of Swiss law. Indeed, the record convinces us that Andersen’s claims
with reference to Swiss law were no more than diversionary tactics. In opposing the sanctions, Andersen emphasizes that it finally
produced the documents. Final production is not determinative. The Rule permits
a sanction when a party “fails to obey an order.” Andersen
refused willfully to obey for an unreasonable time on the contrived excuse,
eventually abandoned, of the Swiss secrecy laws. The ultimate, and reluctant,
production of documents, more than a year after a legitimate request, does not
absolve Andersen of the charge that it willfully failed to obey a valid court
order. Rule 37(b)(2), F.R.Civ.P., provides in pertinent part: “If a party * * * fails to obey an order to provide or
permit discovery * * * the court in which the action is pending may make such
orders in regard to the failure as are just, and among others the following: (B) An order refusing to allow the disobedient party to support or
oppose designated claims or defenses, or prohibiting him from introducing
designated matters in evidence.” The court ordered that Andersen “shall not oppose or
introduce any evidence opposing” Ohio’s claims that (1) on
and before April 10, 1970 Andersen had information relating to the financial
condition and liquidity of FOF which should have led it to realize that FOF
“would imminently cease to purchase natural resource interests from
KRC,” and (2) that on and before April 24, 1970, Andersen knew that
KRC was committed “to provide financing to IOS and was negotiating an
agreement to give KRC control of the operation of IOS.” 75 F.R.D. at
25-26. Andersen argues that the use of preclusionary sanctions is
premised on the presumption that the information withheld would have supported
its opponent’s case and that the presumption is not applicable here
because of final production. The presumption rationale is explained in [*1375] Hammond
Packing Co. v. Arkansas, 212 U.S. 322, 350-351, 29
S.Ct. 370, 53 L.Ed. 530, which upheld a default judgment entered after
disobedience of a discovery order. The Advisory Committee’s Note to
Rule 37, 28 U.S.C.A. Rule 37, p. 225, says that the Rule accords with Hammond. In Societe Internationale v. Rogers, 357 U.S. 197, 78 S.Ct. 1087,
2 L.Ed.2d 1255, the Court disapproved the sanction of dismissal for
noncompliance with a discovery order. In so doing it distinguished between
inability to comply and willful or bad faith noncompliance. Ibid. at 212,
78 S.Ct. 1087. In Norman v. Young, 10 Cir., 422 F.2d
470, we discussed both Hammond and Societe and upheld the sanction of
dismissal, noting, Ibid. at 474, that the disobedience was
“wilful” and “a direct flaunting of the
Court’s authority.” The instant case presents a similar situation. In National Hockey League v. Metropolitan Hockey Club, 427 U.S. 639, 96 S.Ct. 2778,
49 L.Ed.2d 747, the Court, in upholding the sanction of dismissal for
disobedience of a discovery order, discussed Rule 37(b)(2). It held that the
trial court did not abuse its discretion in ordering dismissal because of a
party’s “flagrant bad faith” and its
counsel’s “callous disregard” of their responsibilities.
Ibid. at 643, 96 S.Ct. 2778. The Court emphasized that sanctions must be
available “in appropriate cases, not merely to penalize those whose
conduct may be deemed to warrant such a sanction, but to deter those who might
be tempted to such conduct in the absence of such a deterrent.” Ibid.
In the circumstances presented, the preclusionary sanctions were just and
authorized by the Rule. In addition to the preclusionary sanctions, the court ordered
Andersen to pay Ohio “$59,949 as a reasonable reimbursement for costs
and expenses.” 75 F.R.D. at 25. Rule 37(b)(2), F.R.Civ.P., lists
several sanctions which may be imposed for failure to comply with a discovery
order and concludes with this provision: “In lieu of any of the foregoing orders (for sanctions)
or in addition thereto, the court shall require the party failing to obey the
order or the attorney advising him or both to pay the reasonable expenses,
including attorney’s fees, caused by the failure, unless the court
finds that the failure was substantially justified or that other circumstances
make an award of expenses unjust.” Ohio filed a statement of its expenses, the details of which are
not attacked by Andersen. The breakdown of these expenses shows, 75 F.R.D. at
22 n. 8: Incurred to July 23, 1976 .... $16,460
Incurred in connection with Tenth Circuit proceedings ..... 27,997
Incurred in connection with Supreme Court proceedings ..... 15,492
-------
TOTAL
$59,549 Andersen argues that the expenses for the period before July 23
should not be awarded because the delay did not prejudice Ohio and because
during that period Andersen did not fail to obey a court order. In October,
1975, Ohio moved for production. Many conferences and hearings were held to
resolve the dispute over production. On May 27, 1976, the court entered its
order compelling production. Rule 37(a)(4) provides that if a motion to compel
discovery is granted, “The court shall * * * require the party * * * whose
conduct necessitated the motion * * * to pay to the moving party the reasonable
expenses incurred in obtaining the order, including attorney’s fees,
unless the court finds that the opposition to the motion was substantially
justified or that other circumstances make an award of expenses
unjust.” This provision for the payment of reasonable expenses to secure an
order compelling production applies. The record facts justify the award. Andersen’s next objection goes to the appellate expenses.
It says that the award conflicts with Rule 38, F.R.A.P., pertaining to the
award by the court of appeals of damages and costs resulting from frivolous
appeals. There is no conflict. Rule 37(b) permits the district court to award
[*1376] reasonable expenses and attorneys' fees for
disobedience of a discovery order. Andersen unsuccessfully attacked the
discovery orders both in the court of appeals and the Supreme Court. Its
argument that the court of appeals recognized the seriousness of the problem of
the Swiss secrecy laws does not impress us. Conflicts arising from the
interaction of domestic law relating to discovery and foreign secrecy laws are
important and troublesome. When the case was here before, we did not know that
Andersen had waited until the end of June, 1976, to investigate the Swiss
documents to determine the applicability of the Swiss laws and the adequacy of
the consents which Ohio had provided. We rejected Andersen’s general
reliance on Swiss law and now learn that we should have awaited the specifics. To secure production, Ohio had to oppose Andersen in both the
court of appeals and the Supreme Court. The award of the appellate expenses and
attorneys' fees was just and proper under Rule 37(b)(2). The record before us shows both flagrant bad faith and callous
disregard. Rule 1, F.R.Civ.P., provides that the Rules “shall be
construed to secure the just, speedy, and inexpensive determination of every
action.” The trial courts must administer the rules to attain the
proclaimed objective. See Robison v. Transamerica Insurance Co., 10 Cir.,
368 F.2d 37, 39. Enforcement of the rules requires sanctions for disobedience
of valid court orders. The trial court did not abuse its discretion when it
imposed the sanctions. |