Selective Lawlessness Is Still Lawlessness

Siry Inv., L.P. v. Farkhondhepour, No. B277750 (D2d2, as modified Mar. 23, 2020)

The trial court in this long-running partnership dispute entered a $7 million default judgment as a terminating sanction for discovery misconduct. Defendants raise three procedural issues on appeal.

First, the terminating sanctions were levied for Defendants’ non-compliance with two sets of discovery. Defendants failed to comply with these requests after being ordered by the court over and over again to respond without objections. They engaged in a campaign of extensive obstruction. Even after being ordered to produce, they continued to serve junk responses consisting only of hundreds of pages bogus objections. They repeatedly sought “reconsideration” and “clarification” of the court’s unambiguous orders. Their effort included an ex parte application where they failed to give notice to Plaintiff and then misrepresented the record at a hearing Plaintiff did not attend.

Defendants argue, however, that terminating sanctions aren’t appropriate because the discovery they stiffed Plaintiff on didn’t encompass every issue in the case. That, however, is not the law. In a noble effort to reconcile some not-super-consistent case law, the opinion starts off a very comprehensive synthesis of the standards applicable to discovery sanctions. It’s a good resource for anyone moving for them. Suffice it to say, the Court of Appeal finds that the applicable standards were squarely met here.

Moving on to the specific issue, discovery misconduct needs not go to every single issue to be tried in the case to merit terminating sanctions. As the Court explains, “selective lawlessness is still lawlessness.” Indeed, were Defendants correct about the rule, parties could shield themselves from the consequences of even severe discovery misconduct by being cooperative in discrete issues in a case. It would encourage the service of overbroad discovery to insure that the whole map would be covered by any non-compliance. And it would be contrary to the established rule that a propounding party does not need to establish prejudice to merit terminating sanctions—a rule that exists because prejudice could likely be proven only by the information that the intransigent party is refusing to produce.

The second issue is related, somewhat. One of the Defendants got indicted on a seemingly unrelated case. At some point after the trial court ordered him to cough up documents and answer interrogatories but before he was defaulted, he objected that the court’s orders compelling discovery violated his Fifth Amendment privilege. The trial court overruled the objection.

A civil litigant raising a Fifth Amendment privilege bears the burden of showing that discovery entails a disclosure of communications that are (1) compelled; (2) testimonial; and (3) incriminating. To show the third element, the objector needs to make a specific objection that explains how answering the discovery would furnish a link in the chain of evidence needed to prosecute him for a crime.

Defendant here didn’t meet his burden. First, his objection was too generic. It offered no explanation at all why the compelled disclosure would be incriminating. Second, along related lines, he thus did not bear his burden of showing that an injurious disclosure could result. Facially, the indicted crimes were unrelated to the issues on which discovery was sought. If there was some link, Defendant bore the burden of drawing it at a reasonable level of specificity. 

Finally, Defendant didn’t raise his objection until long after the trial court ordered him to produce the discovery and he failed to do so. A privilege that was not timely raised does not excuse Defendant’s refusal to abide by court orders.

The last issue deals with damages. The damages awarded after the default prove up included (1) $4 million in punitive damages; (2) almost $3 million in trebled damages under Penal Code § 496, which penalizes the receipt of stolen property; and (3) an award of attorneys’ fees under the same statute. 

Defendants moved for new trial, arguing that awarding the § 496 damages and fees was contrary to law, that the punitives were excessive, and that Plaintiffs were required to elect between punitive and trebled damages. The trial court agreed on everything but the § 496 issue and granted the motion to that extent.

A gating issue on the appeal—and the principal procedural issue—is whether Defendants had standing to move for a new trial, given that they were in default. As the Court here notes, a defendant can appeal a default judgment, albeit only on certain grounds not admitted by the default. One of these is that a damages award is contrary to law. And since an appeal is authorized, there’s no good reason why the defaulted defendant can’t raise these legal errors in a new trial motion. That’s generally consistent with the new trial statute, Code of Civil Procedure § 657, which permits a “party aggrieved” to seek a new trial based on an error of law.

On the merits of the damages issue, the trial court shouldn’t have awarded damages or fees under § 496. That statute deals with trafficking in stolen goods by persons other than the thief. The facts here involved fraudulent diversion of partnership revenue by the defendant. If § 496 applied to that kind of conduct, it would effectively permit a treble damages remedy for all financial fraud, which is not what the Legislature intended. Nor was there any other basis to award attorney’s fees to Plaintiff.

Reversed in part.