Zapproved Case Summary

Zapproved Case Summary

Arrowhead Capital Fin., Ltd. v. Seven Arts Entertainment, Inc., No. 14 Civ. 6512 (KPF), 2016 U.S. Dist. LEXIS 126545 (S.D.N.Y. Sept. 16, 2016).

The court imposed substantial sanctions on the defendants and their counsel—including issue preclusion, spoliation instructions, a contempt finding, and attorneys’ fees—for their “egregious conduct” during discovery but stopped short of issuing a declaratory judgment.

The plaintiff, Arrowhead Capital Finance, brought suit seeking to enforce an incontestable state court judgment against the defendants, Seven Arts Entertainment, Inc. and Seven Arts Filmed Entertainment Louisiana LLC (collectively, “SAE”), “film companies managed by Peter Hoffman.”

By September 2015, Arrowhead advised the court that SAE and defense counsel “had engaged in various forms of misconduct during discovery,” making improper objections to discovery requests and omitting “obviously responsive documents.” Further, SAE “refused to provide witnesses’ last known addresses,” “improperly stamped all produced documents as ‘confidential’—even documents that were press releases,” and “refus[ed] to make their officers available for depositions.” During this dispute, “defense counsel allegedly admitted that he had not been reviewing the discovery responses” although he personally signed them; instead, he simply forwarded whatever Hoffman provided.

Despite two court conferences, SAE’s violations persisted—including their failure to make witnesses available after Arrowhead’s counsel flew to California for depositions—and Arrowhead requested that Hoffman be held in contempt of court for “directing defense counsel not to produce responsive documents.” At the ensuing contempt proceeding, “Hoffman offered explanations of varying plausibility” for SAE’s failure to provide discovery; for example, he “claimed that he was unaware of the Court order directing” production, though he had written a memo to counsel justifying why that production was unnecessary. He further testified that SAE “maintained ‘paperless office[s],’” storing their documents on a server operated by a third party that had since denied SAE access to that server due to nonpayment. Hoffman “readily and reflexively blamed his staff” for SAE’s failure to comply with discovery, and said he “deliberately chose not to review” documents to avoid any disputes.

In February 2016, Arrowhead again notified the court that SAE “had failed to turn over responsive discovery” and filed motions for a declaratory judgment and sanctions. In their own motion, SAE argued that the court lacked personal jurisdiction over them. However, the court decided that it “need not reach the merits” of these arguments because SAE’s persistent “noncompliance with discovery orders” forfeited them.

Under Federal Rule of Civil Procedure 37, the court considered the willfulness and duration of SAE’s discovery noncompliance, prior warnings, and the “efficacy of lesser sanctions.” As to willfulness, the court stated that SAE’s “misconduct in this litigation is as deep as it is wide,” citing SAE’s efforts to hide deponents, including defense counsel’s insistence that the CEO and CFO of SAE lacked “‘any information’ about the finances of their company.” In sum, and in light of SAE’s “entire course of conduct,” the court concluded that SAE was “deliberately making misrepresentations to the Court, cancelling depositions, and violating Court orders in an effort to prevent [Arrowhead] from gathering discoverable information,” “coupled with willful attempts to withhold relevant documents.”

SAE’s failure to preserve electronic documents on a third-party server, in concert with the nonpayment of the server provider, “transcended recklessness.” The court noted that “Hoffman offered a laundry list of excuses” for SAE’s poor document production, but as “this list grew longer, the excuses grew flimsier,” leaving the court “with the distinct impression that Hoffman was making it up as he went along…to conceal his true motive: shielding assets” from litigation. Hoffman effectively “ensured that [SAE’s] document productions would be incomplete.”

The court held that precluding any personal jurisdiction argument, combined with spoliation instructions for the jury, would “give [Arrowhead] a fair opportunity to present its case.” Additionally, the court ordered SAE to compensate Arrowhead for its costs in litigating discovery, held Hoffman in contempt for his “flagrant disregard” of court orders, and required SAE to “retain a second outside counsel…to do a thorough review” of their records and identify additional discoverable information.

Arrowhead Capital Fin., Ltd. v. Seven Arts Entertainment, Inc., No. 14 Civ. 6512 (KPF), 2016 U.S. Dist. LEXIS 126545 (S.D.N.Y. Sept. 16, 2016).

Takeaways

Given his transgressions, the court also sanctioned defense counsel for acting in “bad faith” to “improperly lengthen[] the proceedings.” This case makes plain that counsel must take the lead in discovery. Here, SAE’s CEO was a lawyer, but that does not excuse defense counsel’s abdication of decision-making to his client. Nor can it excuse the failure to address his client’s blatant misrepresentations or the “specious” arguments he advanced to the court.

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