Commercial Division Blog

Posted: January 24, 2020 / Categories Commercial, Discovery/Disclosure, Sanctions

Discovery Sanction Reversed as Excessive

On January 14, 2020, the First Department issued a decision in Beach v. Touradji Capital Mgt., LP, 2020 NY Slip Op. 00230, reversing a discovery sanction as excessive, explaining:

[A]ppellants contend that they committed no discovery violations, but even if they did, the court's preclusion orders constituted an excessive sanction that deprived them of a fair trial. Plaintiffs maintain, and the court agreed, that appellants violated their discovery obligations by failing to produce the SEC documents in response to prior pretrial demands. Appellants counter that plaintiffs' litigation conduct constituted a waiver of post-note of issue discovery on the SEC issue, and that even if such discovery were proper, the documents in question bear, at most, a tenuous connection to only two of plaintiffs' earlier demands. We need not determine whether a discovery omission occurred, because even if the SEC communications should have been turned over prior to the trial, the delay in the document production did not warrant the severe sanctions imposed.

Pursuant to CPLR 3126, if a party refuses to obey an order for disclosure or willfully fails to disclose information which the court finds ought to have been disclosed, the court may make such orders with regard to the failure or refusal as are just. Although it is within the trial court's discretion to determine the nature and degree of the penalty, the sanction should be commensurate with the particular disobedience it is designed to punish, and go no further than that. Further, the drastic remedy of striking a party's pleading for failure to comply with a discovery order is appropriate only where it is conclusively demonstrated that the non-disclosure was willful, contumacious or due to bad faith.

Although the court here did not strike a pleading, its ruling could fairly be viewed as having done so, since the precluded evidence was critical to the fiduciary duty claims. Moreover, the court's drastic sanctions were disproportionate to the alleged discovery malfeasance. It is unclear why a short continuance to give plaintiffs time to review the newly-produced documents would not have been a viable option, or why further curative instructions would not have sufficed. The record as a whole does not support a finding of willfulness or bad faith so as to justify the severe sanctions imposed. No basis exists to indicate that this was anything other than a disagreement over the scope of discovery. Indeed, the court at trial stated that the alleged discovery omissions appear not to have been in bad faith.

Nor is there support in the record for plaintiffs' current assertion that appellants refused to obey a discovery order issued at the pretrial conference. Although a transcript of the pretrial conference does not exist, the court expressly acknowledged at trial that it did not issue a discovery order, but merely asked appellants to produce the documents. The court further observed that when appellants were subsequently ordered to produce the material, appellants complied. Likewise, at trial, counsel for plaintiffs described the court as merely having directed the parties to work it out.

The court's order precluding appellants from relying on the SEC violations as a basis for their fiduciary duty counterclaims, and from making any reference during the trial to Vollero's alleged destruction of evidence, warrants reversal and a new trial. Plaintiffs' alleged commission of SEC violations, and Vollero's spoliation of evidence, were critical components of appellants' fiduciary duty counterclaims. These allegations were also key to plaintiffs' breach of contract claims, because a faithless servant forfeits any right to compensation. Further, precluding appellants from presenting evidence that Vollero had destroyed evidence denied appellants a fair trial on all claims. As appellants point out, the trial was largely a credibility contest between Touradji and plaintiffs, and the preclusion of Vollero's alleged misconduct unduly hampered appellants' ability to undermine his testimony. Because we are ordering a new trial, we need not reach appellants' remaining grounds for reversal.

(Internal quotations and citations omitted).

A big part of complex commercial litigation is giving, receiving and evaluating evidence (this is called "discovery"). This decision discusses the problem of litigants not performing their discovery obligations and what can happen to them if they do not. Contact Schlam Stone & Dolan partner John Lundin at if you or a client has a question regarding discovery obligations (and what to do if a litigant is not honoring those obligations).