Sun River Energy, Inc. v. Nelson

800 F.3d 1219, 2015 WL 5131947
CourtCourt of Appeals for the Tenth Circuit
DecidedSeptember 2, 2015
Docket14-1321
StatusPublished
Cited by68 cases

This text of 800 F.3d 1219 (Sun River Energy, Inc. v. Nelson) is published on Counsel Stack Legal Research, covering Court of Appeals for the Tenth Circuit primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Sun River Energy, Inc. v. Nelson, 800 F.3d 1219, 2015 WL 5131947 (10th Cir. 2015).

Opinion

BALDOCK, Circuit Judge.

James E. Pennington and Stephen E. Csajaghy, former counsel for plaintiff Sun River Energy, Inc. (Sun River) in the underlying proceedings, appeal from a judgment of the district court sanctioning them, jointly and severally, in the amount of $20,345 for discovery abuse under Fed. R. Civ. P. 37. They raise several legal, factual, and procedural challenges to the sanction. Exercising jurisdiction under 28 U.S.C. § 1291, 1 and reviewing the district court’s determination for abuse of discretion, see Olcott v. Bel. Flood Co., 76 F.3d 1538, 1557 (10th Cir.1996), we affirm the sanction imposed on Mr. Csajaghy but reverse the sanction imposed on Mr. Pennington.

I. BACKGROUND

“[A] party must, without awaiting a discovery request, provide to the other parties ... any insurance agreement under which an insurance business may be liable to satisfy all or part of a possible judgment in the action or to indemnify or reimburse for payments made to satisfy the judgment.” Fed. R. Civ. P. 26(a)(l)(A)(iv). Here, pursuant to a scheduling order issued by the magistrate judge that included a report of the parties’ discovery conference under Fed. R. Civ. P. 26(f), the initial date agreed for such disclosures was April 6, 2011. 2 It is undisputed that plaintiff Sun River had an insurance policy, entitled “Directors and Officers Liability Insurance Policy including Employment Practices and Securities Claims Coverage” (“D & O Policy”), ApltApp. at 324, which potentially covered securities-related counterclaims asserted by defendants, thus requiring Sun River to disclose the policy by April 6, 2011, pursuant to the scheduling order. Yet no disclosure of the policy was made until eighteen months later — only after counsel for defendants repeatedly pressed the issue based on other information raising suspicions of an undisclosed policy, and then filed a motion to compel its production. By that time coverage under this “claims made” policy had lapsed.

When the omission came to light, defendants moved for an order sanctioning Sun River under Rule 37(b)(2)(A) by dismissing Sun River’s claims against defendants and entering a default judgment for defendants on their counterclaims against Sun River. See Rule 37(b)(2)(A)(v) and (vi). The magistrate judge held an evidentiary hearing on the motion, taking testimony from attorneys Pennington and Csajaghy regarding events surrounding their failure to timely disclose the policy. At the time of the initial failure to disclose, Mr. Pennington was Sun River’s in-house counsel and *1223 Mr. Csajaghy was Sun River’s attorney of record in the litigation. Mr. Pennington later appeared on Sun River’s behalf as well, and Mr. Csajaghy withdrew shortly before disclosure of the policy. The magistrate judge ultimately recommended that the motion for sanctions be granted insofar as it sought a default judgment against Sun River on defendants’ counterclaims, but denied insofar as it sought dismissal of Sun River’s claims against defendants, which were not affected by the operative nondisclosure.

The magistrate judge noted that “[t]he evidence at the hearing of this matter did not establish intentional misrepresentation by [Sun River’s] attorneys,” but “did establish that neither attorney ever took a serious look at whether there was applicable insurance.” Aplt.App. at 513. Indeed, “Mr. Csajaghy testified that neither he nor Mr. Pennington pulled the [D & 0] policy to look at it.” Id. at 514. Both knew about the policy, but they “simply believed that, because no directors or officers (or any individual at all) w[ere] named in the counterclaim, the policy would not be relevant.” Id. at 513. The magistrate judge considered counsel’s conduct pertinent to Sun River’s liability for sanctions, and concluded that

regardless of the precise mens rea of [Sun River’s] general and outside counsel in failing to investigate properly and disclose the existence of insurance, they must be viewed as significantly culpable, especially when Defendants’ attorney’s attempts to bring the failure of disclosure to [Sun River’s] counsel’s attention did not result in a hard look at the availability of insurance but, rather, brought threats [by Mr. Csajaghy] against defense counsel for continuing to seek “nonexistent” insurance information .... I cannot help but find that the lack of inquisition from February 2011[when counsel initially conferred about the insurance disclosure] to October 2012 [when the D & 0 Policy was finally provided to defendants] exhibited deliberate indifference to the obligation of providing relevant insurance information under Rule 26.

Id. at 517 (emphasis added).

Sun River filed objections to the magistrate judge’s recommendation. The district court addressed those objections at the final pretrial conference held July 16, 2013, which was attended by Mr. Pennington but not Mr. Csajaghy, who had withdrawn by then. The district court agreed with the magistrate judge about counsel’s deficient performance with respect to disclosure of the D & O Policy, but concluded that Sun River should not be held responsible in the matter. Instead, the district court decided counsel were culpable for the disclosure violation and should be held personally liable for the attorney fees expended by defendants in pursuing the motion for sanctions. The amount of the sanction was subsequently set at $20,435.

Mr. Csajaghy and Mr. Pennington moved for reconsideration, raising legal, factual, and procedural objections to the sanction: (1) Rule 37(c) does not authorize the imposition of sanctions on counsel; (2) counsel acted with substantial justification, precluding the imposition of sanctions; (3) any sanction should have been imposed on Sun River, Mr. Pennington’s employer at the time of the initial nondisclosure, rather than on counsel; and (4) due process precluded the imposition of a sanction on Mr. Csajaghy, who had withdrawn and was not present at the July 16, 2013 pretrial conference when the district court redirected the focus of the requested sanction from Sun River to counsel. In response, defendants argued that the sanction was authorized not only under Rule 37, but under Rule 26(g)(3) and the district court’s inherent power as well. They also contended that counsel’s deliberate indifference to disclosure duties demonstrated the requi *1224 site lack of substantial justification; that sanctioning counsel rather than Sun River for counsel’s culpable omissions was appropriate; and that Mr. Csajaghy, who (with Mr.

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800 F.3d 1219, 2015 WL 5131947, Counsel Stack Legal Research, https://law.counselstack.com/opinion/sun-river-energy-inc-v-nelson-ca10-2015.