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Current Developments in the Commercial Divisions of the
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Posted: October 14, 2013

Court of Appeals Affirms The Use of Default Judgment as a Discovery Sanction

On October 7, 2013, we noted that on September 10, 2013, the Court of Appeals heard argument in Merrill Lynch, Pierce, Fenner & Smith Inc., v. Global Strat, Inc., Docket No. 160, a case examining the extent to which a sanction of default can be imposed for discovery violations. On October 10, 2013, the Court of Appeals issued its decision on that appeal.

In a brief, unsigned memorandum decision, the Court of Appeals reaffirmed the availability of sanctions for failing to comply with discovery obligations, including the entry of a default judgment against a non-complying party. However, the Court of Appeals held that the trial court abused its discretion in imposing such a sanction on the individual defendants-appellants because the sanction imposed—the entry of a default judgment—was disproportionately harsh compared to the alleged discovery abuse. Among the factors that the Court of Appeals considered were that the sanction was for the failure of the individual defendants to produce documents that related to businesses that the individual defendants controlled at a time when the individual defendants had yet to answer the complaint and against whom a discovery stay had been granted, that the plaintiff had not sought a default judgment, and that the report of the referee to whom the trial court had referred the discovery dispute did not contain the factual basis for the imposition of a default sanction. In light of all these factors, the Court of Appeals remanded the matter back to the trial court for the imposition of an appropriate sanction presumably upon a better record.

While this is a case in which a default sanction was vacated, it serves as a cautionary tale for parties that do not comply (or who create the appearance of not having complied) with their discovery obligations. Here, the individual defendants had to go all the way to the Court of Appeals to get a sanction (which included a huge money judgment) reversed that was imposed against them at a time when the case against them was stayed and where the referral to the referee did not even include the question of whether such a sanction should be imposed. Litigants with less compelling excuses should continue to beware the trial court’s broad discretion to impose sanctions—even a default sanction—for refusing to meet their discovery obligations.

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