Arrowhead Capital Finance, Ltd. v. Seven Arts Entertainment, Inc.
OPINION AND ORDER re: #176 MOTION to Strike Document No. #52 and for Judgment Against Defendants filed by Arrowhead Capital Finance, Ltd., #165 MOTION Turnover and Attachment of Assets and Related Relief filed by Arrowhead Capital Finance, Ltd. For the reasons outlined above, Plaintiff's motion to strike SAEs answer and to enter default judgment for Plaintiff is DENIED. Plaintiff's motion to strike SAFELA's answer and enter default judgment for Plaintiff is GRANTED. Plaintiff's motion for turnover, attachment, and restraint is DENIED WITHOUT PREJUDICE. The Clerk of Court is directed to terminate the motions pending at docket entries 165 and 176. (As further set forth in this Opinion and Order.) (Signed by Judge Katherine Polk Failla on 5/2/2017) (mro)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
ARROWHEAD CAPITAL FINANCE, LTD.,
SEVEN ARTS ENTERTAINMENT, INC., and :
SEVEN ARTS FILMED ENTERTAINMENT
DOC #: _________________
DATE FILED: May 2, 2017
14 Civ. 6512 (KPF)
OPINION AND ORDER
KATHERINE POLK FAILLA, District Judge:
On September 16, 2016, the Court issued an Opinion and Order (the
“September 16 Opinion”) granting in part and denying in part Plaintiff’s motion
for summary judgment, denying Defendants’ cross-motion for summary
judgment, and imposing sanctions on Defendants and their counsel.
Specifically, the Court found that Plaintiff was entitled to a declaratory
judgment that Defendant Seven Arts Entertainment, Inc. (“SAE”) is liable to the
same extent as Seven Arts Filmed Entertainment Limited (“SAFE”) on the note
and the state-court judgment that are discussed in that opinion. The Court
denied Plaintiff’s summary judgment motion with regard to Defendant Seven
Arts Entertainment Louisiana, LLC (“SAFELA”).
Plaintiff moved subsequently for the turnover, attachment, and restraint
of SAE’s property. When Defendants failed to fulfill their pretrial discovery
obligations, Plaintiff also moved to strike Defendants’ Answers and to enter the
judgment sought in Plaintiff’s First Amended Complaint (the “Complaint”). For
the reasons set forth in the remainder of this Opinion, Plaintiff’s motion to
strike Defendants’ Answers and to enter judgment is granted in part and
denied in part. The Court will also impose monetary sanctions for Defendants’
interminable misconduct. Plaintiff’s motion for turnover, attachment, and
restraint is denied without prejudice to its renewal.
The Court presumes familiarity with the factual background of this
litigation, which was described in detail in the Court’s September 16 Opinion.
(Dkt. #143). See Arrowhead Capital Fin., Ltd. v. Seven Arts Entm't, Inc., No. 14
Civ. 6512 (KPF), 2016 WL 4991623, at *1-9 (S.D.N.Y. Sept. 16, 2016). Thus,
the Court here focuses its attention on the procedural posture of the case.
The Pre-Summary-Judgment Discovery Disputes and Attendant
Plaintiff first brought this action in New York State Supreme Court on
July 18, 2014. (Dkt. #1, Ex. A). The case was removed to this Court on
The facts in this Opinion are drawn from the parties’ submissions in connection with
each of Plaintiff’s instant motions, as well as submissions filed in connection with their
prior cross-motions for summary judgment. For convenience, the Court will refer to
Plaintiff’s Memorandum of Law in Support of Its Motion for Turnover and Attachment of
Assets of, and Related Relief Against, Defendants SAE and SAFE as “Pl. Turnover Br.”
(Dkt. #166), Defendants’ Memorandum in Opposition thereto as “Def. Turnover Opp.”
(Dkt. #168), and Plaintiff’s Reply Memorandum as “Pl. Turnover Reply” (Dkt. #169). The
Court will refer to Plaintiff’s Memorandum of Law in Support of Its Motion to Strike the
Answers of, and for Judgment Against, Defendants SAE and SAFELA, as “Pl. Str. Br.”
(Dkt. #177), Defendants’ Memorandum in Opposition thereto as “Def. Str. Opp.” (Dkt.
#180), and Plaintiff’s Reply as “Pl. Str. Reply” (Dkt. #193). Defendants’ Motion to Strike
Plaintiff’s motion for attachment and its supporting documents will be referred to as
“Def. Str. Br.” (Dkt. #180), Plaintiff’s Memorandum in Opposition thereto as “Pl. Str.
Opp.” (Dkt. #186), and Defendants’ Reply as “Def. Str. Reply” (Dkt. #191).
August 14, 2014. (Dkt. #1). After the Court denied Defendants’ motion to
dismiss Plaintiff’s Amended Complaint (Dkt. #44), the Court entered a case
management plan setting forth a discovery schedule on July 6, 2015 (Dkt.
Plaintiff first raised the issue of Defendants’ misconduct during discovery
in a letter dated September 21, 2015. (Dkt. #55). Plaintiff claimed that
Defendants had (i) made untimely and improper objections to Plaintiff’s
discovery requests, (ii) “[p]uff[ed] up” their document production with nonresponsive documents, (iii) refused to produce responsive documents, including
the bank records of the Seven Arts entities, and (iv) provided Plaintiff with
interrogatory responses deficient in several respects. (Id.; see also Dkt. #143 at
10-11). See Arrowhead Capital Fin., 2016 WL 4991623, at *5. The Court held
a conference to discuss these issues on October 6, 2016, at which the Court
expressed the distress caused by Defendants’ failure to produce documents
that should have been within their possession or control. (Dkt. #67). The
Court directed Defendants to produce these documents, which included, inter
alia, bank statements, updated sales histories, and distribution reports for six
of Defendants’ films. (Id.). The Court also requested that Plaintiff’s counsel
submit a complete list of all outstanding documents (id.), which list counsel
provided to the Court on October 8, 2015 (the “October 2015 List”). (Dkt. #61).
The Court endorsed the October 2015 List in its entirety and ordered
Defendants to produce the documents enumerated thereon by October 16,
2015, so that they could be used in connection with previously scheduled
depositions. (Dkt. #62).
At a second conference on November 12, 2015, which was occasioned
primarily by Defendants’ failure to produce witnesses for those depositions, the
Court noted that Defendants still had failed to produce the documents on the
October 2015 List. (Dkt. #89). The Court suspected that Defendants’
principal, Peter Hoffman, had violated the Court’s discovery orders, and
scheduled a contempt hearing to determine whether this was the case. (Id.).
The hearing was held on December 15, 2015 (the “December 15
Hearing”). (Dkt. #94). For the reasons explained in the September 16 Opinion,
the Court was not persuaded by Hoffman’s “laundry list of excuses for the
deficiencies in Defendants’ document production.” (Dkt. #143 at 45).
Arrowhead Capital Fin., 2016 WL 4991623, at *20. Rather, “the Court was left
with the distinct impression that Mr. Hoffman was making it up as he went
along in order to conceal his true motive: shielding assets, and the information
relating to those assets, from Defendants’ creditors, including Plaintiff in this
litigation.” (Id.). Id. At the hearing, the Court reserved decision on the
propriety of sanctions (Dkt. #94), but again ordered that (i) Plaintiff’s counsel
identify a list of outstanding discovery by January 8, 2016, and (ii) Defendants
produce the requested discovery by January 29, 2016, absent a specific and
sufficient explanation for Defendants’ failure to do so. (Dkt. #91).
Again, however, on February 20, 2016, Plaintiff advised the Court that
Defendants had failed to produce the requisite discovery. (Dkt. #129).
Specifically, Plaintiff advised the Court that Defendants “(i) on the one hand,
have withheld and failed to produce those accountings, bank statements,
participation statements and other documents they admit were held up
to and during 2015 on (among other things) their Zed One computer system”
while “(ii) on the other hand, [engaging] in classic spoliation of those
documents and that evidence, as they now purport to no longer be able to
access and produce those accountings, bank statements, participation
statements and other documents.” (Id.). Plaintiff renewed its request that the
Court sanction Defendants based on their continued failure to produce
In the September 16 Opinion, the Court sanctioned Defendants for their
conduct before and at the December 15 Hearing. (Dkt. #143 at 17 n.5, 46-51).
See Arrowhead Capital Fin., 2016 WL 4991623, at *8 n.5, *18-23. Utilizing its
authority under Federal Rule of Civil Procedure 37, the Court (i) precluded
Defendants from contesting the issue of personal jurisdiction, because
“Defendants’ persistent violations of the Court’s discovery orders prevented
Plaintiff from obtaining evidence that could be used to prove its jurisdictional
allegations”; (ii) ordered Defendants to pay the attorney’s fees that Plaintiff
incurred as a result of Defendants’ dilatory conduct in discovery; (iii) ordered
Defendants to retain second outside counsel “to do a thorough review of
Defendants’ files and determine whether Defendants possess additional
discoverable information,” and (iv) found that Hoffman was in contempt of
Court. (Id. at 46-51). 2 Arrowhead Capital Fin., 2016 WL 4991623, at *18-23.
The Post-Summary-Judgment Discovery Disputes and Instant
A conference was held on November 2, 2016, pursuant to which the
Court awarded $15,672.82 in attorney’s fees and costs against Defendants for
the conduct sanctioned in the September 16 Opinion. (Dkt. #153, 157). The
possibility of an order of attachment was also discussed (Dkt. #157), and the
parties were directed to advise the Court of their positions regarding such an
Order following the conference, on or before November 11, 2016. (Dkt. #154).
A bench trial was set to begin on March 6, 2017.
On November 11, 2016, the parties advised the Court that Defendants
refused to “voluntarily agree to an order of attachment prior to final judgment.”
(Dkt. #155). Defendants committed to deliver to Plaintiff by November 21,
2016: (i) SAFELA’s operating agreement; (ii) confirmation that the Multi-Picture
Distribution Agreement dated October 1, 2013, between SAE and SAFELA had
not been amended or assigned; (iii) confirmation that SAE’s 4,500,000 shares
of The Movie Studio Inc. had not been
pledged, hypothecated, sold, or transferred[,] that there
is no agreement in effect relating to or which may affect
or restrict sale or transfer of those shares; that there is
no restriction on sale or other transfer of any of those
The Court also imposed a modest sanction on Defense counsel. (Dkt. #143 at 51-53).
See Arrowhead Capital Fin., Ltd. v. Seven Arts Entm't, Inc., No. 14 Civ. 6512 (KPF), 2016
WL 4991623, at *23-24 (S.D.N.Y. Sept. 16, 2016). However, in its Opinion dated May 2,
2017, the Court reconsidered that portion of its opinion, ultimately declining to impose
sanctions on counsel directly. (Dkt. #194).
shares ... [,] and that SAE has possession of the stock
certificate evidencing those shares; and
(iv) documents establishing that The Movie Studio Inc. “has no rights, and thus
no membership or other ownership interests in or to SAFELA[,] nor any right to
operate SAFELA[,] nor any ownership, distribution, or other rights in or with
respect to the ‘Arrowhead Films,’ ... and related rights and proceeds thereof.”
(Id.). The Court endorsed this production deadline, and set a briefing schedule
for Plaintiff’s contemplated motion for an order of attachment. (Dkt. #156).
Plaintiff filed its motion on December 1, 2016 (Dkt. #159, 165-67); Defendants
filed their opposition on December 2, 2016 (Dkt. #160, 168); and Plaintiff filed
its reply on December 31, 2016 (Dkt. #169-70).
While this motion was pending and the March trial date drawing near, on
January 2, 2017, Plaintiff filed a letter (i) advising the Court of Defendants’
“continuing disobedience” with regard to the Court’s discovery and sanctions
orders, and “recent ongoing refusal to provide proper signed and sworn
responses to [Plaintiff’s] discovery requests,” and (ii) requesting leave to move
under Rule 37 to strike Defendant SAFELA’s answer and enter judgment
against it. (Dkt. #171). Plaintiff advised the Court that Defendant had not
complied with the Court’s directive in the September 16 Opinion that
Defendants engage separate discovery counsel. (Id.). Additionally, Plaintiff
indicated that Defendants had failed to provide Plaintiff with the proper pretrial
discovery that it needed. Plaintiff alleged it had been “denied proper, sworn
information and documentation as to (among other things) SAFELA’s
management, film distribution, business, collections, bank accounts, financial
statements, tax returns, payments to or for Peter Hoffman and to his daughter
Kate Hoffman, and otherwise.” (Id.).
The Court discussed these disputes at a telephonic conference on
January 18, 2017. (See Dkt. #173). The Court adjourned the March 6, 2017
trial, determining that it could not go forward in light of Defendants’ failure to
produce the requisite discovery, and set a briefing schedule for Plaintiff’s
contemplated Rule 37 motion. (Id.). Plaintiff filed its Motion to Strike the
Answers of SAE and SAFELA and to Enter Judgment for Plaintiff on February
13, 2017. (Dkt. #176-78). Defendants filed their opposition on March 10,
2017 (Dkt. #187-88) and Plaintiff filed its reply on March 25, 2017 (Dkt. #193).
Plaintiff’s Rule 37 Motion to Strike SAFELA’s Answer and Enter
Judgment in Plaintiff’s Favor Is Granted
Federal Rule of Civil Procedure 37 provides that where “a party or a
party’s officer, director, or managing agent ... fails to obey an order to provide
or permit discovery ... the court where the action is pending may issue further
just orders,” which may include, among other things, orders “striking pleadings
in whole or in part; ... dismissing the action or proceeding in whole or in part;
[or] rendering a default judgment against the disobedient party.” Fed. R. Civ.
P. 37(b)(2)(A); see also Fed. R. Civ. P. 16(f)(1)(C) (authorizing the award of
sanctions, including those sanctions provided in Fed. R. Civ. P. 37(b)(2)(A)(ii)(vii), where a party or its attorney “fails to obey a scheduling or other pretrial
order”). “[I]nstead of or in addition to” such just orders, “the court must order
the disobedient party, the attorney advising that party, or both to pay the
reasonable expenses, including attorney’s fees, caused by the failure, unless
the failure was substantially justified or other circumstances make an award of
expenses unjust.” Fed. R. Civ. P. 37(b)(2)(C) (emphasis added). The Second
Circuit has deemed “certain Rule 37 remedies,” including “dismissing a
complaint or entering judgment against a defendant ... severe sanctions,” but
allowed that “they may be appropriate in ‘extreme situations,’ as ‘when a court
finds willfulness, bad faith, or any fault on the part of the’ noncompliant party.”
Guggenheim Capital, LLC v. Birnbaum, 722 F.3d 444, 450-51 (2d Cir. 2013)
(quoting Bobal v. Rensselaer Polytechnic Inst., 916 F.2d 759, 764 (2d Cir.
1990)); accord, e.g., Bhagwanani v. Brown, 665 F. App’x 41, 44 (2d Cir. 2016)
(summary order) (affirming conclusion that dismissal of plaintiff’s complaint
was permissible sanction for failure to comply with discovery orders); Roberts v.
Bennaceur, 658 F. App’x 611, 614 (2d Cir. 2016) (summary order) (affirming
entry of default judgment “as a discovery sanction against [d]efendants after
two years of their repeated defiance of court orders”).
Several considerations inform a court’s decision to impose sanctions
under Rule 37, including: “‘[i] the willfulness of the non-compliant party; [ii] the
efficacy of lesser sanctions; [iii] the duration of the noncompliance; and
[iv] whether the non-compliant party had been warned’ that noncompliance
would be sanctioned.” Guggenheim Capital, 722 F.3d at 451 (quoting Agiwal v.
Mid Island Mortg. Corp., 555 F.3d 298, 302 (2d Cir. 2009) (per curiam)). The
Court will consider these factors in turn in the section that follows. 3
In the September 16 Opinion, the Court sanctioned Defendants for their
conduct up to and at the December 15 Hearing. (Dkt. #143 at 17 n.5, 46-51).
See Arrowhead Capital Fin., 2016 WL 4991623, at *8 n.5, *18-23. The Court
therefore focuses here on Defendants’ conduct subsequent to that hearing. 4
And for the reasons set out below, the Court finds that (i) Defendants’ non-
Though Plaintiff has only moved for sanctions under Rule 37, the Court notes that it
also possesses inherent power to punish for contempt of its orders. See Goodyear Tire
& Rubber Co. v. Haeger, 581 U.S. ___, 137 S.Ct. 1178, 1186 (Apr. 18, 2017); see also
Ransmeier v. Mariani, 718 F.3d 64, 68 (2d Cir. 2013); Revson v. Cinque & Cinque, P.C.,
221 F.3d 71, 78 (2d Cir. 2000) (“The court has inherent power to sanction parties and
their attorneys, a power born of the practical necessity that courts be able ‘to manage
their own affairs so as to achieve the orderly and expeditious disposition of cases.’”
(quoting Chambers v. NASCO, Inc., 501 U.S. 32, 44 (1991))). This power persists even
where bad-faith conduct could also be sanctioned by the Federal Rules or by statute.
See Chambers, 501 U.S. at 50 (“[I]f in the informed discretion of the court, neither the
statute nor the Rules are up to the task, the court may safely rely on its inherent
power.”); see also Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 106-07
(2d Cir. 2002) (“Even in the absence of a discovery order, a court may impose sanctions
on a party for misconduct in discovery under its inherent power to manage its own
affairs.”). The Court notes also that other Courts entering default judgment have done
so pursuant to their authority under Federal Rule of Civil Procedure 55, in addition to
Rule 37. See Guggenheim Capital, LLC v. Birnbaum, 722 F.3d 444, 450 n.6, 454-57 (2d
Cir. 2013). The Court need not exercise these additional powers here, however, because
the parties have not asked it to and the Court’s authority under Rule 37 alone affords
an adequate basis for sanctions.
Defendants have argued that Plaintiff seeks to impose a “‘double sanction’ for prior
alleged discovery infractions.” (Def. Str. Opp. 4). Defendants reason that because “this
Court has already sanctioned SAE and SAFELA for ... [their] failure to properly respond
to prior discovery requests ... SAFELA should not be sanctioned twice for the same
discovery issues.” (Id. at 2). However, the September 16 Opinion only sanctioned
Defendants for their conduct up to and at the December 15 Hearing. (Dkt. #143 at 17
n.5, 46-51). See Arrowhead Capital Fin., 2016 WL 4991623, at *8 n.5, *18-23. This
Opinion sanctions Defendants for their misconduct since December 15, 2015. To the
extent that it considers the noncompliance for which Defendants were already
sanctioned, the Court merely does so to emphasize the egregiousness of Defendants’
subsequent misconduct. The Court does not here sanction Defendants for any conduct
compliance with its orders was willful; (ii) lesser sanctions have failed to compel
Defendants’ compliance; (iii) Defendants were noncompliant for years preceding
the September 16 Opinion, and their noncompliance has continued for over six
months since that Opinion’s issuance; and (iv) the Court repeatedly has
warned Defendants regarding the possible imposition of sanctions, including
specifically the possibility of a default judgment. Therefore, the Court grants
Plaintiff’s Rule 37 motion to strike SAFELA’s answer and enter a default
judgment against that entity. 5
Defendants’ Willful Non-Compliance
This Court is astounded, though perhaps it ought not to be, to find itself
once more in the position of sanctioning Defendants for failing to comply with
its direct orders. Indeed, to date, Defendants have failed to produce the very
discovery that Defendants’ prior failure to produce, in contravention of prior
orders, occasioned this Court’s imposition of sanctions in the September 16
Opinion. For example: The Court ordered Defendants to produce their
complete bank records on the October 2015 list (Dkt. #62), which records the
Court had also directed Defendants to produce at the October 6, 2015
conference (Dkt. #67). As of the November 12, 2015 Conference, and as of the
December 15 Hearing, and as of Plaintiff’s February 20, 2016 letter, these
records still had not been produced. (Dkt. #89, 91, 94, 129). Defendants were
Plaintiff has also moved to strike the answer of SAE and to grant defendant judgment
against that entity. (Pl. Str. Br. 1). However, because the Court has already entered
summary judgment against SAE in the September 16 Opinion, Plaintiff’s motion with
regard to SAE is denied as moot.
sanctioned for failing to produce these records in the November 2016 Opinion,
but still Defendants persist in their noncompliance. As of the date of Plaintiff’s
last filing in this case, Defendants had not produced these records. (See Dkt.
#193). The Court has no reason to believe they have been produced since.
The Court focuses on the example of Defendants’ bank records because it
lays plain the willful nature of Defendants’ noncompliance. Indeed, the Court
discussed this very aspect of Defendants’ noncompliance with Defendants’
counsel as early as October 6, 2015: At the conference held on that date,
mindful that any holder of a bank account generally can procure bank
statements by requesting them from the bank, the Court directed Defendants’
counsel to “get the bank statements. Your client knows how.” (Dkt. #67 at
44). But the records were not produced. At the December 15 Hearing, the
Court discussed these records with Hoffman repeatedly, reminding him of the
Court’s directive that he “to go back and get them.” (Dkt. #94 at 68:22).
Hoffman indicated that he could not provide certain bank records because they
were in the possession of the liquidators. (Id. at 68:22-70:10). But to the
extent bank records existed that were not, Hoffman “fully accept[ed] that
[Defendants] should track down every bank account statement that reflects
activity in the account that [they] can get [their] hands on. [Defendants] do not
dispute that and [they] are happy to do it.” (Id. at 70:7-10; see also id. at
74:14-15 (“[Defendants] are not disputing that any bank statements
[Defendants] have [they] should turn ... over even if I think they’re irrelevant.”)).
The Court directly asked Hoffman whether all bank accounts had been
identified for Plaintiff, and Hoffman answered affirmatively, naming accounts at
Coutts, Barclays, City National, and Regents banks. (Id. at 91:17-92:5).
Hoffman further affirmed that “[e]very single bank account that [Defendants]
could find in [its] system in the period of 2008 through present, I think was the
timeframe, was produced.” (Id. at 93:18-20). And he assured the Court that to
the extent any records were inadvertently missed, such as the bank records
from Regents Bank, Defendants would “have no issue with ... getting [their]
own bank statements from the bank instead of just saying, oh, gee, they aren’t
in our possession. [Defendants] quite agree.” (Id. at 94:8-10).
But Defendants never got their “bank statements from the bank,” despite
Hoffman’s agreement with the Court that there was nothing to prevent
Defendants from doing so. On February 20, 2016, Plaintiff advised the Court
that the bank statements, among other documents, had not been produced.
(Dkt. #129). And as of January 2, 2017, despite the imminent March 2017
trial date, Defendants’ bank statements still had not been produced. (Dkt.
#171). Indeed, as of the date of Plaintiff’s last filing in this case, Defendants
had still not produced Defendants’ bank statements. (Pl. Str. Reply 1-2). The
Court can come to no conclusion but that Defendants’ failure to comply with
the Court’s multiple directives was willful.
Defendants’ rebuttal arguments regarding these bank records are twofold: First, Defendants argue that Plaintiff has misinterpreted the records’
contents and exaggerated their import. (Def. Str. Opp. 2-3). Defendants
explain that the funds in the SAE and SAFELA accounts were there exclusively
for Hoffman’s “own business and income since he has no personal accounts,”
and included Hoffman’s social security payments, funds held in escrow for a
client, income from his consulting and legal services, and funds generated by
films “unrelated to the Arrowhead Titles.” (Id. at 3). Second, Defendants adopt
a “no harm, no foul” stance, arguing that because Plaintiff “served subpoenas
first and now has these records by response to those subpoenas, to which SAE
consented,” the records were never withheld by Defendants. (Id. at 2).
The Court is not persuaded. Taking Defendants’ second argument first,
the Court notes that Plaintiff’s ultimate procurement of the bank records was
despite Defendants’ efforts, rather than because of them. And the Court’s
focus in evaluating the need for sanctions is on Defendants’ conduct, not
Plaintiff’s; the fact that Plaintiff eventually procured the bank records it should
have had years ago has nothing to do with Defendants’ failure to comply with
this Court’s orders requiring Defendants to produce those bank records.
The Court rejects Defendants’ first argument for much the same reason.
Defendants were obligated to produce these bank records notwithstanding
Defendants’ estimation of their relevance. It matters little to the Court what
Defendants contend the records do or do not show. 6 Defendants are
The Court notes, however, that a review of the records’ contents only bolsters the
Court’s sense that sanctions must be imposed here. As Plaintiff argues, the records
demonstrate that Defendants had funds in accounts held in their names during the
times when Defendants allegedly lacked the assets to (i) maintain the Zed One server
and thereby records essential to this litigation; (ii) obtain special-purpose discovery
counsel; and (iii) pay the sanctions award owed to Plaintiff. (See Goldin Decl. Ex. 17AH). Defendants argue that these funds were used by Hoffman to “pay all his personal
expenses including utilities, phone, cable, etc.” (Def. Str. Opp. 3). And to some extent,
that appears to be true. But the Court notes that many funds were expended on what
it would deem luxury purchases, such as spa expenditures. (See Goldin Decl. Ex. 17A-
sanctioned here for their willful noncompliance with the Court’s orders that the
records be produced, which noncompliance Defendants have not disputed.
(See Pl. Str. Br., Goldin Decl. Ex. 9, 13 (promising, in cover letter to discovery
responses provided on January 25, 2017, to produce “SAFELA bank
statements ... next week,” while asserting within those very responses that all
bank records already had been produced)). Defendants’ arguments regarding
the relevance of the bank records are themselves irrelevant.
Efficacy of Lesser Sanctions
In the September 16 Opinion, the Court considered the panoply of
sanctions available under Rule 37. (See Dkt. #143 at 45). See Arrowhead
Capital Fin., 2016 WL 4991623, at *21. Incanting the litany of misconduct
apparent from a review of the record in this case, the Court noted that
measures short of sanctions had failed to compel Defendants’ compliance: “As
many times as the Court intervened, Defendants still refused to comply with
the Court’s discovery orders.” (Id.). Id. The Court noted that it had considered
entering default judgment against Defendants, but had decided that “an
intermediate course of action [was] sufficient.” (Id. at 46). Id. Rather than
defaulting Defendants, the Court opted instead to (i) “preclude[e] Defendants
from litigating the issue of personal jurisdiction”; (ii) “giv[e] a spoliation
H). And indeed, either way, this Court’s orders ought to have taken priority. These
were business accounts, held in Defendants’ names, and they should have been used
for business purposes, such as the payment of Defendants’ expenses and obligations in
this litigation. To be clear: The Court is not sanctioning Defendants on the basis of
Defendants’ budgetary failings. But these records do leave the Court, once again, with
the distinct and troubling sense that it has been lied to, and that is worth noting.
instruction, as appropriate, on any claims that are ultimately submitted to the
jury”; and (iii) impose a monetary sanction to “compensate Plaintiff for the
expense of bringing Defendants’ misconduct to the Court’s attention and to
ensure that Defendants comply with their discovery obligations going forward.”
(Id. at 45-47). Id. It was the Court’s hope that such “intermediate steps” would
“give Plaintiff a fair opportunity to present its case to the ultimate finder of
fact.” (Id. at 46). Id.
As is now evident, the Court was incorrect; an intermediate course of
action was not sufficient. Despite the sanctions imposed by the September 16
Opinion and November 2 Order, Defendants’ conduct has not changed.
Defendants have never produced the bank records and other accounting
documents that Plaintiff has sought for years, and which the Court has
repeatedly ordered Defendants to produce, and which Defendants have
conceded are within their powers to procure. Defendants have failed to retain
special purpose counsel for discovery, as ordered by the Court. (Dkt. #181 at
2-8). And Defendants have not done so despite this Court’s orders to the
contrary. The Court has exhausted its arsenal; no lesser sanction could suffice
to deter Plaintiff’s misconduct.
Duration of Noncompliance
This Court was first made aware of Defendants’ failure to comply with
their discovery obligations on September 21, 2015. (Dkt. #55). One year later,
at the time of the Court’s September 16 Opinion, Defendants’ misconduct had
not ceased. (Dkt. #143). See generally Arrowhead Capital Fin., 2016 WL
4991623. Indeed, it has continued through at least March 25, 2017, the date
of the last filing in this case. (Dkt. #193). If “more than enough time ha[d]
elapsed for the Court to impose harsh sanctions” as of September 16, 2016, the
same is all the more true today. (Dkt. #143 at 46). Arrowhead Capital Fin.,
2016 WL 4991623, at *21 (citing Agiwal, 555 F.3d at 303). Defendants’ prior
noncompliance notwithstanding, Defendants have failed to comply with the
orders in that Opinion, and other orders issued since, in the more than six
months that have elapsed. A period of six months is sufficient to justify the
imposition of sanctions here. See Agiwal, 555 F.3d at 303 (affirming dismissal
of action under Rule 37 on the basis of plaintiff’s defiance of court orders “over
a span of approximately six months”).
This Court has repeatedly warned Defendants that it would impose
sanctions if their noncompliance persisted. The Court did so prior to the
relevant period, in the conference held on October 5, 2015. (Dkt. #67 at 3335). The Court did so again in the September 16 Opinion, wherein the Court
specifically referenced the possibility of “entering default judgment against
Defendants on all counts in the Amended Complaint” for Defendants’ “willful
efforts to derail the discovery process,” but opted instead for an intermediate
course of action that would still give Plaintiff “a fair opportunity to present its
case.” (Dkt. #143 at 45-46). Arrowhead Capital Fin., 2016 WL 4991623, at
*21. And at the January 18 conference, Plaintiff explained why Defendants’
continued misconduct had robbed Plaintiff of this opportunity. (Dkt. #181).
The Court explored Plaintiff’s sanctions argument on the record, with Hoffman
and counsel for the parties, and the Court set a briefing schedule for Plaintiff’s
sanctions motion. (Id.). Notably, even since then, Defendants failed to comply
with the Court’s orders to provide Plaintiffs with the outstanding bank records
and other discovery.
Defendants contend they have not been given advance warning of a
terminating sanction, but such a claim cannot be countenanced in light of the
foregoing facts. Defendants have been warned; they cannot now complain
because they failed to take seriously the warnings they were given. Even
allowing that the September 16 Opinion referenced the possibility of default
judgment as a sanction only with regard to Defendants’ pre-December 2015
noncompliance, that reference gave Defendants notice that such a sanction
could be imposed if an intermediate sanction failed and Defendants’
misconduct persisted. See Guggenheim Capital, 722 F.3d at 452 (holding that
“district court’s warnings — which mentioned sanctions, but never the phrase
‘default judgment’ — were sufficient” because court warned defendant
“regularly and often”); see also id. at 453 (finding sufficiency of notice to
defendant was “reinforced” by fact that defendant “was not a pro se litigant in
the traditional sense,” since defendant “was counseled for most of the
proceedings below”). Plaintiff’s motion to strike SAFELA’s answer and to enter
a default judgment must be granted.
Additional Sanctions Are Warranted
Rule 37 requires that the Court “must order the disobedient party, the
attorney advising that party, or both to pay the reasonable expenses, including
attorney’s fees,” that were caused by Defendants’ failure to comply with the
Court’s discovery orders, “unless the failure was substantially justified or other
circumstances make an award of expenses unjust.” Fed. R. Civ. P. 37(b)(2)(C).
Absent a showing of substantial justification or injustice, therefore, this Court
must order Defendants to pay the reasonable expenses caused by their
noncompliance. See Novak v. Wolpoff & Abramson LLP, 536 F.3d 175, 178 (2d
Cir. 2008) (per curiam) (declining to hold that “Rule 37(b)(2) expenses are
mandatory,” but finding that “[t]he use of the word ‘shall’ certainly suggests
that an award of expenses is mandatory unless one of the two exceptions —
substantial justification or other circumstances — applies”); see also Underdog
Trucking, L.L.C. v. Verizon Servs. Corp., 273 F.R.D. 372, 377 (S.D.N.Y. 2011)
(“Rule  sets forth a [rebuttable] presumption in favor of awarding sanctions
against a party that complies with discovery demands after the filing of a
motion to compel.”). Therefore, Plaintiff is directed to advise the Court on or
before May 16, 2017, what expenses Plaintiff incurred as a result of
Defendants’ misconduct subsequent to the December 15 Hearing. Defendants
may oppose Plaintiff’s expense determination on or before May 23, 2017. This
opposition should address the reasonableness of Plaintiff’s calculation and the
applicability of any exception to Rule 37(b)(2). See Jay v. Spectrum Brands
Holdings, Inc., No. 13 Civ. 8137 (LTS) (DF), 2015 WL 6437581, at *12 (S.D.N.Y.
Oct. 20, 2015) (“Once it is shown that a discovery order was violated, the
disobedient party has the burden of showing that an award of the expenses
caused by the violation is not warranted.”).
Plaintiff’s Motion for Attachment, Restraint, and Turnover
In light of the foregoing, the Court suspects that the remedies sought by
Plaintiff may differ slightly from those requested in Plaintiff’s original motion.
For example, because the Court has now entered judgment against both
Defendants, and will enter a final judgment to that end consistent with Federal
Rule of Civil Procedure 54, the Court suspects Plaintiff may wish to abandon
its claim for pre-judgment relief under Federal Rule of Civil Procedure 64 and
focus instead on its arguments under Federal Rule of Civil Procedure 69. For
this reason, the Court dismisses Plaintiff’s motion without prejudice to its
Because the parties have already had an opportunity to brief this issue,
the Court will herein set an expedited briefing schedule for any renewed motion
that Plaintiff may wish to file. To the extent Plaintiff seeks to renew arguments
previously made, however, such arguments need not be briefed anew; Plaintiff
can simply advise the Court as such. Plaintiff may renew its motion for
turnover, attachment, and/or restraint, as appropriate in light of this Opinion,
on or before May 9, 2017. Defendant must oppose Plaintiff’s motion on or
before May 16, 2017. Plaintiff may reply, as needed, by May 23, 2017.
For the reasons outlined above, Plaintiff’s motion to strike SAE’s answer
and to enter default judgment for Plaintiff is DENIED. Plaintiff’s motion to
strike SAFELA’s answer and enter default judgment for Plaintiff is GRANTED.
Plaintiff’s motion for turnover, attachment, and restraint is DENIED WITHOUT
PREJUDICE. The Clerk of Court is directed to terminate the motions pending
at docket entries 165 and 176.
May 2, 2017
New York, New York
KATHERINE POLK FAILLA
United States District Judge
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