Lightspeed Media Corporation v. Smith et al

Filing 232

ORDER re: 216 Minute Order Regarding Retained Funds, 229 Order to Show Cause and 230 Response to Order to Show Cause. The request to transfer $47,171.75, Steeles half of the $94,343.51 Discovery Sanction, from the retained funds to Smith is GRANTED. The Court DIRECTS the Clerk of the Court to take the necessary steps to complete this transaction. The Court will address all remaining issues at the October 20 Show Cause Hearing, including whether to (1) fine Steele in an amount n ecessary to reimburse the Court for the costs incurred as a result of his misrepresentations to this Court and (2) fine Steele in the amount of $47,171.76 to cover the unpaid costs incurred by Smith in conducting discovery necessitated by Steeles misrepresentations to this Court.See attached Order for Specifics. Signed by Judge David R. Herndon on 10/14/2016. (dsw)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ILLINOIS
LIGHTSPEED MEDIA CORP.,
Plaintiff,
vs.

No. 3:12-cv-889-DRH-SCW

ANTHONY SMITH, et al.,
Defendants.
ORDER
HERNDON, District Judge:
INTRODUCTION
This matter is before the Court on Anthony Smith’s application for
$94,343.51 of the funds submitted to the Court (Doc. 230). Based on the record
and the following, the Court ORDERS as follows:
BACKGROUND
On June 5, 2015, the Court issued an order finding that Lightspeed’s
counsel Paul Duffy (“Duffy”) and John Steele (“Steele”) engaged in unreasonable,
willful obstruction of discovery in bad faith.” (Doc. 199). Consequently, the Court
imposed discovery sanctions, payable to Anthony Smith (“Smith”), in the amount
of $94,343.51 (Smith’s discovery costs) (Doc. 210). The monetary sanction as to
Steele and Duffy was to be “apportioned equally” between the two attorneys (Doc.
210, p. 2,4). Hereinafter, the Court will refer to this sanction as the Discovery
Sanction.

The June 5, 2015 Order also found Steele and Lightspeed’s counsel, Paul
Hansmeier (“Hansmeier”) in contempt for misleading the Court by claiming
insolvency in relation to the Section 1927 Sanctions Order. 1 The Court ordered
Steele and Hansmeier to pay contempt sanctions of $65,623. Hereinafter, the
Court will refer to this sanction as the Contempt Sanction.
Hansmeier noticed an appeal from the contempt sanction on July 6, 2015
(Doc. 204). A week thereafter, he filed for bankruptcy (Doc. 228-1 p. 6). Steele
noticed an appeal on August 7, 2015 (Doc. 211). Duffy died on August 10, 2015,
without having filed a notice of appeal (Doc. 228-1 pp. 2 & 6).
On or about August 10, 2015, Steele transferred funds to the Court via two
separate wire transfers: One wire transfer in the amount of $65,000 (apparently
in relation to the Contempt Sanction on behalf of himself and Hansmeier) 2 and a
second wire transfer in the amount of $47,171.75 (one-half of the Discovery
Sanction).
Because an appeal was pending, the Court entered a minute order stating
that it would “retain the $112,171.75 pending the outcome of the appeal.” (Doc.

1

The Court previously sanctioned attorneys Steele, Duffy, and Hansmeier pursuant to 28 U.S.C. §
1927 (Doc. 100). The attorneys denied that they could comply (Doc. 101, 115, 127, and February
2014 in camera filings). Smith’s subsequent financial discovery demonstrated that Steele and
Hansmier did in fact have sufficient assets to satisfy the Section 1927 Sanctions Order (Doc. 199
pp. 14-16).
2
Hansmeier noticed an appeal from the contempt sanction on July 6, 2015 (Doc. 204). He filed
for bankruptcy in Minnesota on July 13, 2015 (Doc. 228-1 p. 6). Hansmeier declared that his
obligation for the contempt sanction would be paid by Steele (Doc. 230-1). Hansmeier’s
bankruptcy was converted to a Chapter 7 (Doc. 228-1 p. 6; Doc. 229 p. 1).

216). Further, pending the outcome of the appeal, the Court directed the party
entitled to the money to “make an application to the Court for its receipt.” Id.
On July 19, 2016, the Seventh Circuit ruled on Hansmeier and Steele’s
appeals from the Discovery Sanction and the Contempt Sanction (Doc. 228-1).
Hansmeier’s appeal was dismissed for lack of standing because only his
bankruptcy trustee was authorized to pursue it. Id. p. 7. The Seventh Circuit
affirmed the $94,343.51 Discovery Sanction. Id. pp. 10-12. It vacated the $65,623
contempt sanction against Steele upon finding it “was a criminal contempt
imposed without the process required by the Fifth Amendment to the U.S.
Constitution.” Id. p. 15. The Seventh Circuit remanded for further proceedings as
to the Contempt Sanction. Id.
Presently, a Show Cause Hearing is set for October 20, 2016 to address the
Contempt Sanction (Doc. 229). On September 23, 2016, Smith filed a pleading
that (1) responds to the Court’s Show Cause Order in relation to the Contempt
Sanction and (2) seeks distribution of funds in relation to the Discovery Sanction.
Steele has not filed any briefing in relation to the Show Cause Order and has not
responded to Smith’s briefing. This Order addresses the distribution of funds in
relation to the Discovery Sanction. The Court will address matters pertaining to
the Contempt Sanction at the October 20 Show Cause Hearing.
ANALYSIS
On appeal, the Discovery Sanction was affirmed in full (Doc. 228-1 pp. 912). The Seventh Circuit entered judgment on July 19, 2016 and its mandate

issued on August 10, 2016 (Doc. 228, 228-2). Accordingly, Smith contends the
Discovery Sanction is now due and payable. Smith asks the Court to transfer
$47,171.75, Steele’s half of the $94,343.51 Discovery Sanction, from the retained
funds to Smith.
Additionally, Smith asks the Court to transfer $47,171.76, Duffy’s half of
the $94,343.51 Discovery Sanction, from the retained funds to Smith. In the
alternative, if the Court does not transfer $47,171.76 to Smith to cover Duffy’s
liability for his discovery obstructions, Smith argues the Court should transfer at
least that amount to Smith to cover Steele and Hansmeier’s obligations for their
contemptuous misrepresentations. With respect to these requests, the Court finds
as follows:
Transfer of Steele’s Half of the Discovery Sanction
The request to transfer $47,171.75, Steele’s half of the $94,343.51
Discovery Sanction, from the retained funds to Smith is GRANTED.

Request to Transfer $47,171.76, to Cover Duffy’s Liability
The request to transfer $47,171.76 to cover Duffy’s liability is DENIED.
The Discovery Sanction imposed by the Court was to be apportioned equally
between Steele and Duffy. The Court will not transfer funds posted by Steele to
cover Duffy’s half of the Discovery Sanction. The Court sympathizes with Smith’s
difficult position given the sudden death of Duffy. As set forth in Smith’s briefing,
no estate has been opened for Duffy. Because Duffy never posted security and left

no estate from which to collect debts, his half of the discovery sanction will be
difficult, if not impossible to satisfy. Nonetheless, the request to transfer funds
posted by Steele, for the purpose of covering Duffy’s portion of the Discovery
Sanction is DENIED.
Request to Transfer $47,171.76, as a Sanction for Steele and Hansmeier’s
Civil Contempt
The Discovery Sanction was imposed on Steele and Duffy for obstructing
Smith’s discovery efforts regarding the attorneys’ alleged inability to pay (Doc. 200
p. 2). Smith’s discovery efforts were necessitated only because of Steele and
Hansmeier’s contemptuous false statements. Smith argues that, in light of the
above, it is appropriate to transfer funds (posted by Steele on behalf of himself
and Hansmeier) to Smith to cover the unpaid portion of his discovery costs.
The Court is inclined to agree. The Seventh Circuit did not question the
Court’s finding that Steele and Hansmeier engaged in civil contempt. Rather, the
Seventh Circuit vacated 3 the $65,263 contempt award as not compensatory upon
finding that the $94,343.51 discovery sanction compensated any loss Smith
incurred (Doc. 228-1 p. 14). However, in light of Duffy’s death, Smith will receive
only half of the compensation he is owed. But for Steele and Hansmeier’s
contemptuous false statements, Smith would not have pursued the subject
discovery and would not have incurred $94,343.51 in costs. Imposing a fine on
Steele in the amount of $47,171.76 (the remaining costs to Smith) for his conduct
3

The award was vacated as to Smith. Hansmeier’s appeal was dismissed for lack
of standing.

would be purely compensatory and would be a permissible sanction for Steele’s
civil contempt.
The Court, however, will refrain from awarding costs at this time. Instead,
in order to allow Steele every opportunity to respond, the Court will consider this
matter at the Show Cause Hearing set for October 20, 2016.
CONCLUSION
The request to transfer $47,171.75, Steele’s half of the $94,343.51
Discovery Sanction, from the retained funds to Smith is GRANTED. The Court
DIRECTS the Clerk of the Court to take the necessary steps to complete this
transaction.
The Court will address the imposition of civil sanctions on Steele, in the
amount of $47,171.76, to compensate Smith for his unpaid discovery costs at the
October 20 Show Cause Hearing. Accordingly, at the Show Cause Hearing set for
October 20, 2016, Steele must show cause why he should not be held in civil
contempt for his misrepresentations to this Court and fined as follows:
(1) In an amount necessary to reimburse the Court for the costs incurred as
a result of Steele’s misrepresentations to this Court (see Doc. 229) and
(2) In the amount of $47,171.76 to cover the unpaid costs incurred by

Smith in conducting discovery necessitated by Steele’s misrepresentations to this
Court.
Dated: October 14, 201 6

Digitally signed by
Judge David R.
Herndon
Date: 2016.10.14
14:54:17 -05'00'
United States District Judge