Kenneth Nelson v. Bruce Schultz

• Court: Court of Appeals for the Seventh Circuit
• Decided: December 21, 2017
• Docket: 17-2092
• Status: Published

Opinion

In the

United States Court of Appeals For the Seventh Circuit ____________________ No. 17‐2092 KENNETH E. NELSON, Plaintiff‐Appellant,

v.

BRUCE R. SCHULTZ and JON K. RODGERS, Defendants‐Appellees. ____________________

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 15 C 8560 — Harry D. Leinenweber, Judge. ____________________

ARGUED NOVEMBER 15, 2017 — DECIDED DECEMBER 21, 2017 ____________________

Before WOOD, Chief Judge, and MANION and KANNE, Circuit Judges. PER CURIAM. Kenneth Nelson sued two former business partners, Bruce Schultz and Jon Rodgers, for breach of con‐ tract and several torts. During discovery Schultz and Rodgers asked Nelson to produce various bank statements and tax re‐ turns, which, the defendants said, they needed to defend against his claims. After Nelson refused, the district court granted the defendants’ motion to compel their production 2 No. 17‐2092

and warned him, twice, that it would dismiss the case if he did not produce the documents or provide an affidavit docu‐ menting a diligent search for them. Nelson did neither, and the judge dismissed the case for want of prosecution. On ap‐ peal Nelson argues that the district judge erred by not as‐ sessing whether his misconduct justified dismissing the case. Because the judge sufficiently evaluated this matter and did not abuse his discretion by dismissing the suit after multiple warnings, we affirm. This dispute began when Nelson, Schultz, and Rodgers formed an LLC to develop a property in Downtown Chicago. In mid‐2005 they created 664 N. Michigan, LLC, which, ac‐ cording to Nelson, they formed in order to develop the Ritz‐ Carlton Residences, a mixed‐use luxury skyscraper on the Magnificent Mile. The LLC’s operating agreement provided that development fees would be divided among the LLC’s managers “as they mutually agree” and that a manager of the LLC could be removed for cause by a majority vote of the LLC’s owners. According to Nelson, the LLC’s managers were Nelson Hotels, Inc. (Nelson was its president) and Prism Construction Management, owned by Schultz and Rodgers. In late 2005, Rodgers and Schultz voted to remove Nelson Hotels, Inc. as an LLC manager, which, according to Nelson, caused his company lose out on $1.13 million when the Ritz‐ Carlton Residences was built. Nelson asserts that Schultz and Rodgers removed his company as a manager to enrich them‐ selves; they justified their decision, however, on grounds that he had a negative $15 million net worth that prevented the LLC from getting financing for the development. Ten years later Nelson sued Schultz and Rodgers for breach of contract, unjust enrichment, breach of fiduciary No. 17‐2092 3

duty, and conversion. After Nelson’s lawsuit survived the de‐ fendants’ motion to dismiss, the parties proceeded to discov‐ ery. Schultz and Rodgers sought to gather evidence to support their defense that Nelson’s company had been removed as an LLC manager for cause—Nelson’s poor finances obstructed the project’s financing—and to examine whether Nelson mit‐ igated his damages from the alleged contract breach. They asked Nelson to produce his and his company’s tax returns for the previous ten years as well as his and his company’s loan applications and financial statements between 2004 and 2008. Nelson refused, arguing that he did not guarantee his “creditworthiness” when his company became one of the LLC’s managers and that many of the requested documents fell outside of the relevant period for mitigating damages. On the defendants’ motion, the judge compelled the disclosure of the requested documents. The judge reasoned that until he ruled on these documents’ relevance, the defendants should receive them so that they could prepare their defense. In response Nelson stated that, for almost all of the re‐ quested documents, he “believed” that they had been pro‐ duced and that he was “not in possession” of them. The de‐ fendants then moved for sanctions under Federal Rule of Civil Procedure 37(b)(2)(A)(v), asking the judge to dismiss the case because Nelson’s reply was “non‐responsive and eva‐ sive.” On the day before the hearing on the defendants’ sanc‐ tions motion, Nelson sent the defendants copies of his tax transcripts (partial records of his tax returns) for 2006 through 2011. At the first hearing on their sanctions motion, the defend‐ ants asserted that Nelson’s tax transcripts were inadequate 4 No. 17‐2092

substitutes for his tax returns and that they still had not re‐ ceived the requested bank statements. The judge agreed and told Nelson that he had “one more chance” to produce the requested documents or else he was “going to probably dis‐ miss it for want of prosecution.” The judge added that if Nel‐ son did not have some of the requested documents, he should provide “a crystal‐clear affidavit” stating the actions that he and his attorney took to locate them. Before the next production deadline, Nelson produced only one of the requested tax documents and provided a dec‐ laration that largely copied his response to the defendants’ first production request. This declaration included Nelson’s assertion that the requested documents “in possession, cus‐ tody, or control of Nelson from 2004–2008 are believed to have been produced. For these years, Nelson is not in posses‐ sion of these documents.” At the second hearing on their sanctions motion, the defendants argued that Nelson’s declaration, like his response to their first production request, was self‐ contradictory—Nelson said that he produced the requested documents but also that he did not have them. Nelson’s counsel responded that he misinterpreted the judge’s previous order to produce the documents. The judge then gave Nelson five additional weeks either to produce the requested documents or provide an affidavit stating that he did not have them despite a diligent search. The judge closed the hearing with a second warning: “If you don’t show a very, very, very substantial effort to comply, then I’m going to probably dismiss the complaint for want of prosecution.” No. 17‐2092 5

Nelson did not produce any documents by the next dead‐ line. One month after the deadline, Nelson forwarded the de‐ fendants an email he had received from his company’s bank, which said that it kept records going back only seven years. Nelson also provided a second declaration that generally mir‐ rored his first one. At the third hearing on the defendants’ sanctions motion, the defendants argued that Nelson’s second declaration was “completely evasive” because, as was the case with his first declaration, the second one stated that he produced the doc‐ uments to the extent he had them but also that he was “not in possession … . of these documents.” The defendants added that the statement from Nelson’s bank was incomplete be‐ cause Nelson did not declare that it was the only bank he used during the relevant period. Nelson responded by telling the judge that after “mov[ing] several times in the past years,” he did not have his tax returns or bank records from 2004 through 2008. The judge then dismissed the case using language that al‐ luded to both Federal Rules of Civil Procedure 37(b) and 41(b). He appeared to grant the defendants’ Rule 37(b) mo‐ tion, saying that it was “well taken,” but then, apparently ref‐ erencing Rule 41(b), explained that he dismissed the case “for want of prosecution as a sanction against the failure to coop‐ erate in discovery.” Likewise the judgment states that the judge dismissed the case for “want of prosecution” and reached this decision “on a motion,” an apparent reference to the defendants’ Rule 37(b) motion. Nelson then moved for reconsideration, arguing that the judge erred by dismissing his case without considering lesser 6 No. 17‐2092

sanctions or the merits of his claims. The judge denied the mo‐ tion. He concluded that he permissibly dismissed the suit be‐ cause Nelson, despite receiving multiple warnings about the possibility of this sanction being imposed, had engaged in a “pattern of dilatory conduct” by failing “either to produce the records or declare that a reasonable search revealed nothing more.” On appeal Nelson argues that the district judge erred by failing to analyze whether the sanction was proportionate to his misconduct. He contends that before dismissing this suit, the judge was required to consider its merits and the magni‐ tude of his misconduct, which, he says, weigh in favor of a lesser sanction. As an initial matter, there is some confusion whether the judge dismissed this case under Rule 37(b) or Rule 41(b). But this confusion did not affect his determination of whether dis‐ missal was a proportionate sanction for Nelson’s misconduct. Both rules require that judges tailor sanctions to the severity of plaintiffs’ misconduct, see Johnson v. Chi. Bd. of Educ., 718 F.3d 731, 732–33 (7th Cir. 2013) (Rule 41(b) proportionality re‐ quirement), Langley by Langley v. Union Elec. Co., 107 F.3d 510, 515 (7th Cir. 1997) (Rule 37 proportionality requirement), and here, the judge satisfied both rules’ proportionality require‐ ments. The judge complied with Rule 37(b)’s proportionality re‐ quirement by showing that he evaluated the appropriateness of dismissal based on Nelson’s noncompliance with several discovery orders. See Brown v. Columbia Sussex Corp., 664 F.3d 182, 190 (7th Cir. 2011); Negrete v. Nat’l R.R. Passenger Corp., 547 F.3d 721, 724 (7th Cir. 2008) (requiring district court to as‐ No. 17‐2092 7

sess whether dismissal is “an appropriate sanction” for “dis‐ covery violations”). At the final hearing on the defendants’ sanctions motion, the judge stated that dismissal was war‐ ranted because of Nelson’s “failure to cooperate in discov‐ ery.” Moreover, in denying Nelson’s motion for reconsidera‐ tion, the judge said that Nelson’s “pattern of dilatory con‐ duct” despite two warnings justified dismissal. The judge did not abuse his discretion in making this evaluation because Nelson’s discovery violations were willful and repeated. See Negrete, 547 F.3d at 724. Although the judge did not make this finding explicitly, we “infer it … from the sanction order it‐ self.” Aura Lamp & Lighting Inc. v. Int’l Trading Corp., 325 F.3d 903, 909 (7th Cir. 2003). As the judge observed, Nelson did not cooperate in discovery. Despite three orders and two last‐ chance warnings, he did not produce the documents or pro‐ vide a declaration stating that he could not find them after a diligent search. Even if we construe the judge’s dismissal as arising under Rule 41(b), Nelson fares no better. To evaluate the proportion‐ ality of dismissing a case under this rule, a district judge must assess whether the plaintiff’s “neglect in pursuing his case was sufficiently serious to warrant dismissal.” McInnis v. Duncan, 697 F.3d 661, 664 (7th Cir. 2012); see also Aura Lamp, 325 F.3d at 909 (evaluating district judge’s conclusion that dis‐ missal was “only effective sanction at the time”). The judge’s statements that he dismissed this case for Nelson’s “failure to cooperate in discovery” and “pattern of dilatory conduct” show that he made this assessment. And the judge did not abuse his discretion in making this assessment because Nel‐ son’s violations of the court’s discovery orders constituted a “pattern of failure to meet court‐imposed deadlines.” Dicker‐ son v. Bd. of Educ. of Ford Heights, Ill., 32 F.3d 1114, 1117 8 No. 17‐2092

(7th Cir. 1994). Further, regarding the considerations that Nel‐ son says weigh in favor of a lesser sanction, they are merely “factors that are relevant to the district court’s decision,” Kasalo v. Harris & Harris, Ltd., 656 F.3d 557, 561 (7th Cir. 2011); a judge is not bound to evaluate them expressly. See Aura Lamp, 325 F.3d at 908 (identifying “principles” that “[i]deally, the district court should consider”); Ball v. City of Chi., 2 F.3d 752, 759–60 (7th Cir. 1993) (same). Nelson next argues that the district judge needed to con‐ sider lesser sanctions before dismissing the case. He is correct that the judge did not expressly evaluate this matter. But while district judges should weigh lesser sanctions before dis‐ missing a case, they are not required to. See McInnis, 697 F.3d at 665; Aura Lamp, 325 F.3d at 908–09. Given that the district judge permissibly concluded that Nelson’s misconduct war‐ ranted dismissal, it did not matter that the judge did not con‐ sider lesser sanctions first. The judgment of the district court is AFFIRMED.