Default Judgment Recommended by Magistrate Judge Following Defendants’ Repeated Violations of Discovery Orders

14 Jan 2022

In STATE FARM MUTUAL, AUTOMOBILE INSURANCE CO., v. MAX REHAB PHYSICAL THERAPY, LLC, ET AL., No.: 18-13257 (E.D. Mich. June 28, 2021), before the Magistrate Judge was the issue of Defendants’ repeated violations of Plaintiff’s discovery requests and various court orders and whether default judgment in favor of Plaintiff was the appropriate sanction.

In December 2019, State Farm served Defendants with three sets of interrogatories and a request to produce documents. In a July 2020 order, the Court found that Defendants failed to respond timely to Plaintiff’s discovery requests, and that Defendants used meaningless objections that amounted to a waiver of objections.  The Court then ordered Defendants to fully respond to the discovery requests by August 2020. Defendants, however, violated the order, and Plaintiffs moved for sanctions and to compel answers to a second set of a request for production of documents.

As a result of Defendants’ subsequent change of counsel, the parties stipulated to adjourn the discovery deadline for three months, and for Defendants to “immediately begin production of all outstanding materials and information that are the subject of State Farm Mutual’s pending motion for sanctions and second motion to compel, which Defendants will aim to complete within the next three weeks.”   The Court approved the stipulation and extended Plaintiff’s discovery deadline until Feb. 8, 2021, but expressly stated that no further discovery extensions would be granted.

In January 2021, Plaintiff renewed its motions for sanctions and to compel discovery before the Magistrate Judge, arguing that Defendants violated the July 2020 order and did not provide responses or documents requested in its second set of document requests.  Instead of entering an order for the extensive continuing discovery, the Court ordered Plaintiff to file a motion for default judgment and held an evidentiary hearing.

A District Court may sanction parties with entry of default judgment for discovery abuses per Rule 37(b)(2)(A)(vi). The Court considered four factors: (1) whether the disobedient party acted in willful bad faith; (2) whether the opposing party suffered prejudice; (3) whether the Court warned the disobedient party that failure to cooperate could result in a default judgment, and; (3) whether less drastic sanctions were imposed or considered.  The Court’s most important consideration was whether Defendants “acted in willful bad faith.” Courts find willful and bad faith where the party “display[s] either an intent to thwart judicial proceedings or a reckless disregard for the effect of his conduct on those proceedings.”

First, the Court noted Defendants’ violation of the two orders for them to produce all requested documents. The Court found that Defendants’ failure to turn over electronic devices supported willful bad faith as it violated Plaintiff’s discovery requests.  Within Plaintiff’s motion for default judgement, more evidence was provided which displayed Defendants’ intent to either intentionally or recklessly thwarted their discovery obligations.

At first, Defendants denied any use of email, phones, or computers for business purposes. The Court found the denials to be proven untrue when third party subpoenas revealed copies of business and patient-related email and text messages to and from Defendants. Plaintiff identified 12 email accounts, but Defendants only produced 39 emails for the period beginning in 2012, and from only two of the accounts Plaintiff discovered. The emails provided by Defendants were not from emails Defendants acknowledge they used for business.

The Court noted that Defense counsel signed supplemental responses to discovery requests stating all available documents, including the requested emails, were uploaded to a cloud storage and were accessible through a link.  However, during the evidentiary hearing, counsel for Defendants acknowledged that no one from his firm searched the email accounts from which no emails were produced. Rather, counsel relied on his client’s assertion that the email accounts had no business or patient related emails.

Finally, one of the defense witnesses submitted an affidavit falsely claiming that Defendants had comprehensively searched for ESI. The Court found that Defendants did not search or preserve the witness’ smart phone and at least two computers an employee used for her work for Defendants.  Another of Defendants’ key employee also corroborated during her deposition that no one told her to preserve or search for any electronic records even though she used two computers at home to access patient files and input data related to patient treatment.

Additionally, Defendants failed to produce 1099 forms for any contractors they paid and produced only three years of the requested K-1 forms reflecting equity distributions to the individual Defendants. Defendants also produced no records for 24 relevant patients at issue, no billing and other records for many other patients. Defendants further destroyed patient and scheduling records, despite their critical relevance to Plaintiff’s allegations, and both witnesses testified to destroying patient notes.

Second, the Court found that the prejudice factor also favored the entry of default judgment. A party is prejudiced when it is “unable to secure the information requested and required to waste time, money, and effort in pursuit of cooperation which the opposing party was legally obligated to provide.” After more than two years of efforts and two orders for Defendants to respond to discovery requests, Defendants’ failure to produce all requested documents was “dismissive, cavalier, and likely intentionally obstructive.”

Third, the Court found that Defendants engaged in bad faith and contumacious conduct, and that Defendants received sufficient warnings that their disobedience could prompt a default judgment against them.  Finally, given that the Court imposed lesser sanctions in the July 2020 order, but that Defendants still violated the order and the stipulated order in Oct. 2020, it was too late for lesser sanctions and default judgment was the only sanction that “would protect the integrity of the pre-trial proceedings.”

Accordingly, the Magistrate Judge recommended that Plaintiffs’ motion for default judgement be granted.