James v. National Financial LLC ( 2014 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
GLORIA JAMES, on behalf of herself and )
all others similarly situated, )
)
Plaintiffs, )
)
v. ) C.A. No. 8931-VCL
)
NATIONAL FINANCIAL LLC, and LOAN )
TILL PAYDAY LLC, )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: November 3, 2014
Date Decided: December 5, 2014
Richard H. Cross, Jr., Christopher P. Simon, CROSS & SIMON, LLC, Wilmington,
Delaware; Alexander J. Pires, Jr., Diane E. Cooley, PIRES COOLEY, Washington, D.C.;
Attorneys for Plaintiff Gloria James and all others similarly situated.
Edward T. Ciconte, Daniel Christopher Kerrick, CICONTE, ROSEMAN &
WASSERMAN, Wilmington, Delaware; Kenneth Dubrow, THE CHARTWELL LAW
OFFICES, LLP, Philadelphia, Pennsylvania; Attorneys for Defendant National Financial
LLC d/b/a Loan Till Payday LLC.
LASTER, Vice Chancellor.
In May 2013, plaintiff Gloria James obtained a short-term, high-interest-rate loan
from defendant National Financial LLC (“National”). After defaulting, James sued
National on behalf of herself and a class of similarly situated borrowers, alleging that
National‟s loan practices were unconscionable and its loan terms unenforceable.
During discovery, James asked National to provide information about the loans it
made between September 20, 2010, and September 30, 2013, including the annual
percentage rates (“APRs”). After National moved for a protective order, the court ordered
National to produce certain categories of information, including the APRs. National
produced a spreadsheet containing some of the categories but not others. When James
checked the APRs against the few loan documents she had, they differed. When James
deposed National‟s principal, who created the spreadsheet, he agreed that the data
contained errors, and he gave other testimony that called into question the reliability of
the spreadsheet.
James amended her complaint to add a claim that, by making loans without
disclosing accurate APRs, National had violated the federal Truth in Lending Act (the
“TILA”), 15 U.S.C. §§ 1601-1667f. She also moved to compel production of an updated
spreadsheet containing accurate information. The court granted the motion and ordered
National to produce an updated spreadsheet. The court also ordered National to retain a
qualified information technology (“IT”) consultant to assist National in exporting the data
from its computer system and to provide James with an affidavit from the IT consultant
attesting to the procedures used to populate the spreadsheet.
1
National produced what purported to be an updated spreadsheet, but the
spreadsheet omitted information required by the court‟s order. National did not produce
the affidavit. National instead provided James with a letter from an IT consultant that did
not address the procedures used to populate the spreadsheet. The letter stated only that it
would take many thousands of hours for the IT consultant to transfer paper records into
electronic form. It thus answered a question that had not been asked, while failing to
address the question that the court had ordered answered. After James objected to the
form of the letter, National provided a notarized version.
James has moved for entry of a default judgment as a sanction against National for
failing to comply with this court‟s order. Discovery taken in connection with the motion
revealed that (i) National did not ask the IT consultant about populating the spreadsheet,
(ii) the IT consultant did not know about the court‟s order or the requirement of an
affidavit, (iii) the conversation with the IT professional about transferring records took
about twenty minutes, and (iv) after James objected to the letter, National caused one of
its employees to notarize the letter without the IT consultant‟s knowledge.
This decision holds that as a consequence of National‟s discovery misconduct, it is
deemed established for purposes of trial that the APRs disclosed on the updated
spreadsheet were incorrect and fell outside the tolerance permitted by the TILA. Because
the positions National took in discovery were not substantially justified, this decision
awards James the expenses, including attorneys‟ fees, that National‟s discovery failures
caused her to incur.
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I. FACTUAL BACKGROUND
The factual background is drawn from the pleadings and submissions made in
connection with the earlier discovery motions and the current motion for sanctions. The
discussion does not comprise findings of fact in the post-trial sense, but rather represents
how the record appears at this preliminary stage.
A. The Loan
On May 7, 2013, James borrowed $200 from National, which does business in
multiple locations in Delaware under the name Loan Till Payday LLC.1 National is a
Utah limited liability company that advertises, markets, and makes small-dollar, high-
interest loans, which are referred to colloquially as “payday loans” because a borrower
ostensibly repays the loan on the next payday.
James needed the $200 to pay for rent and groceries. The loan agreement, which
consisted primarily of boilerplate provisions, imposed onerous terms. It contemplated
twenty-six bi-weekly payments of $60 with a final balloon payment of $260. The total
repayments add up to $1,620, for a cost of credit of $1,420 and an APR of 838.45%.
James did not negotiate the terms of the loan. She avers that she did not understand the
loan agreement fully.
James broke her hand on the day after she took out the loan, which limited her
ability to work. She made the first $60 payment but missed the second. On June 14, 2013,
1
James originally sued National and Loan Till Payday LLC, believing them to be
separate entities. After discovery revealed that National does business under the name “Loan Till
Payday LLC,” the court instructed the parties to amend the caption to reflect this reality. Counsel
agreed to do so, but they have not been able to accomplish this simple task.
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National withdrew $63 from her bank account, comprising the agreed-to bi-weekly
payment of $60 plus a $3 late fee. Ever since, James‟ inability to work has prevented her
from making the bi-weekly payments.
B. James Files Suit
Under National‟s standard loan agreement, which James signed, a borrower agrees
to mandatory arbitration and waives any right to arbitrate on a class-wide basis. The loan
agreement gives a borrower sixty days after signing the agreement to opt out of the
mandatory arbitration provision.
On June 14, 2013, James sent National a letter opting out of mandatory arbitration.
On September 20, 2013, James filed a verified class action complaint in this court against
National on behalf of herself and similarly situated borrowers. She alleged that National‟s
lending practices were unconscionable in light of the inequality of bargaining power
between National and its customers, the use of boilerplate provisions in the loan
documents, and the practice of charging delinquency payments and excessive interest
rates. Count I sought a permanent injunction barring National from collecting on the
loans made to James and other class members. Count II sought a declaration that the
terms of National‟s loan documents were unenforceable. Count III alleged that National
breached the implied covenant of good faith and fair dealing inherent in the loan
agreements. Count IV alleged that National unjustly enriched itself at the expense of the
class members. Count V alleged violations of the Delaware Consumer Fraud Act, 6 Del.
C. §§ 2511-2527.
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On October 10, 2013, National moved to compel arbitration and to dismiss the
Complaint under the creative theory that James could not state a claim for a class action
under Rule 23. This court denied the motion to dismiss, noting that James had opted out
of arbitration and that National‟s arguments against class certification were premature.
At the time National moved to compel arbitration, National and its counsel 2 knew
that James had opted out of arbitration. National and its counsel had made that point
affirmatively as grounds for dismissal of an earlier action under the TILA that James filed
in federal court. Because National and its counsel knew that their motion to compel
arbitration had no factual basis, James moved for sanctions under Rule 11. The court
granted the motion.
C. The First Discovery Order
After the denial of the motion to dismiss, James served document requests and
interrogatories. Among other things, the discovery requests sought documents and
information relating to the loans offered by National since September 20, 2010, including
an electronic copy of the data from any database containing the loan information.
National moved for a protective order, contending that the discovery was overbroad.
Although the court partially granted National‟s motion, finding that certain of
James‟ requests were overbroad, the court‟s ruling required National to provide discovery
2
Unless otherwise specified, references to National‟s counsel denote National‟s
forwarding counsel. Although National‟s Delaware counsel has played a minimal, base-
tending role that is inconsistent with the Court of Chancery‟s expectations, National‟s
Delaware counsel does not appear to have participated actively in sanctionable discovery
misconduct.
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in response to other requests or narrowed versions of the requests. See Dkt. 44 (the “First
Discovery Order”). Most pertinently, the First Discovery Order required National to
provide the following information for the loans made between September 20, 2010, and
September 30, 2013:
● The disbursement date of the loan.
● The type of contract.
● Where the loan was initiated (e.g., online, store location, etc).
● The APR.
● The finance charges (as identified on the loan agreement).
● The amount financed.
● The total amount of payments.
● The schedule for payments (weekly, bi-weekly, or monthly).
● The amount of money actually given to the customer, such that if the loan
was a refinancing and the customer only received a portion of the funds, the
amount the customer received.
● Whether the loan was a rollover or refinancing.
● Whether the customer had borrowed from National before.
● The total payments made by the customer on the loan.
● Whether the loan was paid off.
● Whether the loan was written off.
● Whether the loan was in default.
This decision refers to these categories as the “Loan History Information.”
The court rejected National‟s argument that providing the Loan History
Information was overly burdensome given National‟s failure to support its claim of
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burden, the standardized nature of the loans, and the need for National to maintain and
access loan data in the ordinary course of business and to meet regulatory requirements.
The court noted that National could provide the Loan History Information in the form of
a spreadsheet. The court expected that National had software that could spit out the
information. National‟s counsel did not contend otherwise.
D. The Initial Spreadsheet
On February 28, 2014, National produced an Excel spreadsheet that purported to
provide the Loan History Information (the “Initial Spreadsheet”). Rather than only
addressing the period covered by the First Discovery Order, the Initial Spreadsheet
provided data for loans going back to January 1, 2006. This confirmed that the data was
easily accessible and not burdensome to provide.
The Initial Spreadsheet included a column containing APRs, but the columns
labeled “Schedule of Payments,” “Total Amount of Payments,” and “Finance Charges”
were blank. The Initial Spreadsheet therefore did not provide James with all of the
information required by the First Discovery Order or enable her to verify the APRs. Her
counsel used the few loan documents she had to check the APRs. The figures on the
Initial Spreadsheet did not match the loan documents.
James‟ counsel deposed National‟s principal, Timothy McFeeters. He testified that
he created the Initial Spreadsheet himself, without assistance, by exporting data from
National‟s software system. He explained that the software system had the ability to
generate reports and that he could specify the categories to include in the report, such as
the borrower‟s name, amount borrowed, amount repaid, APR, and other types of
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information. He said that he picked which categories to export. He did not review the
data for accuracy or have anyone else check it.
McFeeters acknowledged the discrepancies between the APRs on the Initial
Spreadsheet and those in the loan agreements, but he offered no explanation other than it
must have been an error on his part when exporting the data. McFeeters [1] at 96 (“Error
on Tim.”). He suggested that the errors might have occurred because the court ruled when
issuing the First Discovery Order that National did not have to provide names of
individual borrowers, so he had attempted to enter manually an identifying number for
each individual borrower. National had approximately 10,000 customers and over 20,000
loans, making this a tedious task.
McFeeters also testified that the Delaware State Banking Commission (the
“Banking Commission”) had audited National between four and ten times after he
purchased National in January 2013. He said the Banking Commission had expressed
concern about inaccurate APRs. McFeeters testified that National changed its method of
calculating APRs in response to the Banking Commission‟s concerns.
After deposing McFeeters, James‟ counsel asked National‟s counsel to provide an
updated version of the Initial Spreadsheet. National‟s counsel agreed, but the updated
version never followed. When James‟ counsel pressed the issue, National‟s counsel
reneged, purportedly because McFeeters‟ deposition testimony adequately explained the
reasons for the errors in the Initial Spreadsheet.
On May 6, 2014, James filed an Amended Verified Class Action Complaint (the
“Amended Complaint”). The new pleading added Count VI, which alleged that National
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violated the TILA by failing to disclose accurate APRs in its loan agreements. On June
10, James sought further discovery, including admissions from National that the APRs in
its loan agreements executed between September 10, 2010, and December 31, 2013, fell
outside the acceptable tolerance under the TILA.
E. The Second Discovery Order
On July 17, 2014, James moved to compel National to provide the Loan History
Information. In connection with the motion to compel, James‟ counsel deposed
McFeeters for a second time. During this deposition, McFeeters retreated from his earlier
testimony that the discrepancies in the Initial Spreadsheet resulted from his own errors.
Instead, McFeeters suggested that the discrepancies resulted from updates made by
National‟s software provider, Infinity Enterprise Lending Software (“Infinity”), to the
software National used.
In opposing the motion to compel, National‟s counsel sought to revisit whether the
Loan History Information was relevant and to contend that production would be
burdensome. He asserted that because the TILA imposes a one-year statute of limitations,
Loan History Information should not be provided for loans issued more than one year
before the date of the Amended Complaint. He did not argue that extracting the
information from National‟s software was burdensome. Nor did he dispute that
National‟s software kept track of the APRs and could export the figures.
The court held again that the Loan History Information was relevant and not
burdensome to provide. Among other things, the court noted that it had ordered National
to produce Loan History Information pursuant to the First Discovery Order, before James
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ever asserted a TILA claim. The information was relevant and discoverable in light of
James‟ claims about National‟s unconscionable business practices. The information also
was relevant under the TILA to whether National acted with scienter.
After granting the motion to compel, the court entered an order requiring National
to provide accurate Loan History Information. Dkt. 120 (the “Second Discovery Order”).
The Second Discovery Order directed National to produce an updated version of the
Initial Spreadsheet. It specified that the updated version “shall contain accurate
calculations of the APR for each loan and shall populate with information the columns
labeled „Finance Charges,‟ „Total Amount of Payments,‟ and „Schedule of Payments‟
sufficient to support the calculation of the APR.” Id. ¶ 1. The Second Discovery Order
required that the updated version “be produced in native form so that Plaintiff can verify
the formulas and calculations.” Id. ¶ 2.
In light of McFeeters‟ testimony about how he personally prepared the Initial
Spreadsheet, the Second Discovery Order required National to employ an IT consultant
who could extract the data in an efficient and accurate manner, without requiring manual
inputs. The Second Discovery Order stated:
In preparing and producing this spreadsheet, Defendant shall employ a
qualified IT consultant who can extract the data from the Defendant‟s
system and import it into the spreadsheet in useable form. The IT
consultant shall provide the plaintiff with an affidavit describing the
procedures followed. The Defendant shall maintain the underlying records
and data used to create the spreadsheet so that they can be reviewed, if
necessary.
Id. ¶ 4. The Second Discovery Order did not require that the IT consultant be independent
or limit the ability of National or its counsel to interact with the IT consultant.
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F. The Updated Spreadsheet
On September 29, 2014, National‟s counsel purported to comply with the Second
Discovery Order by emailing James‟ counsel an Excel spreadsheet (the “Updated
Spreadsheet”) and a letter from neXVel Solutions (“neXVel”). The cover email stated:
Attached is a letter from neXVel Solutions, the IT company employed by
defendant to assist in the revision of the Excel spreadsheet, relative to the
above matter. As I earlier advised, the APR‟s [sic] appearing on the loan
agreements, themselves, are not part of the computer system and are not in
digital format.
I am asking that you please accept the attached letter in lieu of an affidavit;
however, if an affidavit is required, I can arrange for same.
Motion Ex. 5.
The letter from neXVel did not address the creation of the Updated Spreadsheet or
the extraction of data from National‟s computer system. It instead addressed the creation
of a new database from paper documents. The text read as follows:
Thank you for the opportunity to assist you in managing and converting
your loan records.
After auditing your existing loan documents by Infinity Software [sic], we
have determined the following:
1.) Your current loan contracts and records that we evaluated and
asked us [sic] to convert to excel [sic] are not in any digital
format.
2.) There is no automated way to properly and easily convert these
paper records into excel [sic] or any table based [sic] software
without avoiding a timely manual process.
3.) Any manual data entry process could take an average of 30
minutes per contract based on the amount of manual data entry
needed. Taking into consideration [sic] you have over 33,000
plus [sic] loans it would in theory take 16,500 man hours or
687.50 Days [sic] to manually input this data.
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Attached to this letter is an invoice for our time and we hope that our
analysis assists you moving forward.
Id.
After James‟ counsel explained that the neXVel letter did not comply with the
Second Discovery Order, National‟s counsel responded with the following email:
I am informed that National Financial‟s software company will not allow
access by an outside IT consultant. Please see the e-mail below from
Infinity to McFeeters, confirming same. This is why we had difficulty
obtaining the affidavit although I am told McFeeters is still attempting to
obtain an affidavit.
Id. Ex. 6. The statement that National‟s software vendor would “not allow access by an
outside IT consultant” differed in substance from his earlier representation that neXVel
had been “employed by defendant to assist in the revision of the Excel spreadsheet,
relative to the above matter.” According to the earlier representation, neXVel actually
assisted with the process as contemplated by the Second Discovery Order. According the
later representation, neXVel was not permitted to assist.
The email from National‟s counsel contained the following text, ostensibly
backing up his representation:
From: Shaye Friedman
Date: Mon, Sep 29, 2014 at 4:06 PM
Subject: Report
To: Tim McFeeters
Hello Tim,
As far as I can tell the data in the attached report looks accurate.
Unfortunately, we do not allow outside sources to program or develop in
our software.
Let me know if you have any questions or concerns.
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Regards,
Shaye
Id. Other than the email address, there was nothing to suggest that Friedman actually
worked for Infinity, what her title and position were, or whether she knew about the
Second Discovery Order or what National and neXVel were required to do.
The Friedman email did not suggest that Infinity would not permit a third-party IT
consultant to use Infinity‟s software to export data, as McFeeters had done. The email
said only that Infinity would not permit an outside source “to program or develop in our
software.” The email therefore did not provide a justification for National‟s failure to
retain an IT consultant to assist in extracting and providing the data.
The claim that Infinity would “not allow outside sources to program or develop in
our software” conflicted with National‟s interrogatory responses, which averred that
National previously used Compliance Services, Inc. (“CSI”) to modify its software.
According to one response,
[o]n or about July 26, 2013, National contracted with [CSI] to assist
National in resolving any inaccuracies associated with the APR‟s [sic]
reflected on National‟s loan agreements including, without limitation,
identifying the source of any inaccuracies, or perceived inaccuracies, and
adjusting National’s software accordingly . . . . Through the efforts of CSI,
National changed the calculations of its APR‟s [sic] from a block rate to a
daily rate and adjusted its software accordingly upon which it continued to
rely.
Opposition Ex. C at 2 (second and third emphasis supplied). Yet if the Friedman email
was accurate, then Infinity should not have permitted CSI to “adjust” its software.
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More importantly, the representation by National‟s counsel that the APR
calculations “were not part of [National‟s] computer system and are not in digital format”
conflicted with at least two of National‟s interrogatory responses and McFeeters‟ earlier
testimony. The interrogatory response quoted above stated that National relied on its
software to make the APR calculations. That was how McFeeters testified during his
second deposition, when he contended that changes to the software generated the
erroneous APRs in the Initial Spreadsheet. National adopted this account in another
interrogatory response, which stated:
[After his deposition on April 23, 2014], McFeeters contacted [Infinity], the
computer and/or software company which supplied and maintained
National‟s computer software, inquiring why the annual percentage rates
(“APR‟s”) [sic] reflected on several of National‟s loan agreements differed
from the APR reflected in the computer data. McFeeters was informed that
as Infinity made changes and/or updates to the software, APR data would
change. Thus, while McFeeters initially believed the discrepancies between
the APR‟s [sic] reflected on the loan agreements and in the computer data
was [sic] solely his error, he subsequently determined that this was not
necessarily the reason, but that the data was altered by Infinity.
Id. at 3 (emphasis added).
James‟ counsel continued to press National about providing an affidavit. Rather
than doing so, National‟s counsel provided a version of the neXVel letter with a notary
stamp. When James‟ counsel asked National‟s counsel directly about the role neXVel
played in preparing the Updated Spreadsheet, National‟s counsel claimed not to know.
National‟s counsel then took the position that he had tried to stay out of the process of
preparing the Updated Spreadsheet because the Second Discovery Order required that the
IT consultant be “independent,” and he thought that if he inserted himself in the process,
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it would undermine the consultant‟s independence. Nothing in the Second Discovery
Order spoke in terms of independence or required that the IT consultant be neutral. The
Second Discovery Order required that National employ a “qualified” IT consultant to
help McFeeters export the data required by the First and Second Discovery Orders.
McFeeters chose to prepare the Updated Spreadsheet himself.
G. The Motion For Sanctions
On October 2, 2014, James moved for entry of a default judgment against National
as a sanction for National‟s violation of the Second Discovery Order. Alternatively,
James sought a deemed admission that the APR calculations for the loans on the Updated
Spreadsheet fell outside the range of tolerances established by the TILA.
On October 16, 2014, National‟s counsel told James‟ counsel that he wanted to
withdraw the neXVel letter on the ground that Chad Cushner, whose signature appeared
on the letter, had not signed in the presence of the notary. The notary who provided the
notarization is a National district manager and, ironically, responsible for training
employees on proper procedures. National‟s counsel wrote the court to raise the issue and
to express his concern that “this impropriety may have compromised [his] ability to serve
as Defendant‟s counsel.” Dkt. 132. At the request of National‟s counsel, the court held a
teleconference on October 21 during which National‟s counsel reiterated these points.
The court declined to make an advisory ruling regarding counsel‟s ethical obligations.
After the teleconference, James deposed Cushner, whom neXVel had identified as
its Rule 30(b)(6) witness. Cushner testified that McFeeters met with neXVel for
approximately one hour on September 24, 2014, and that perhaps twenty minutes was
15
spent discussing the effort involved in converting hard copy documents to a digital
format. McFeeters did not mention the Second Discovery Order, much less provide a
copy. McFeeters did not explain that National had been ordered to retain an IT consultant
to assist in extracting data from National‟s software system and using it to populate an
Excel spreadsheet. Cushner testified that National never gave neXVel an opportunity to
look at its software or to speak to anyone from Infinity. Cushner made clear that neXVel
was not involved in preparing the Updated Spreadsheet. Cushner testified that neXVel
billed McFeeters $60 for the entire meeting, suggesting that McFeeters paid
approximately $20 for neXVel‟s advice about converting hard-copy documents into
digital format.
Cushner testified that McFeeters asked neXVel to sign the letter after their initial
meeting. Cushner confirmed that no notary was present when he signed the letter, that he
did not know how the letter came to be notarized, and that he had not seen the notarized
letter until October 29, 2014, during his deposition. Cushner had not known that the
Second Discovery Order required National to provide an affidavit from an IT consultant
or that National would be using his letter for that purpose.
II. LEGAL ANALYSIS
“Candor and fair-dealing are, or should be, the hallmark of litigation and required
attributes of those who resort to the judicial process. The rules of discovery demand no
less.” E.I. DuPont de Nemours & Co. v. Fla. Evergreen Foliage, 744 A.2d 457, 461 (Del.
1999). “Discovery abuse has no place in [Delaware] courts, and the protection of
litigants, the public, and the bar demands nothing less than that [Delaware] trial courts be
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diligent in promptly and effectively taking corrective action to „secure the just, speedy
and inexpensive determination of every proceeding‟ before them.” Holt v. Holt, 472 A.2d
820, 824 (Del. 1984) (quoting Rule 1; emphasis in original).
Trial courts should be diligent in the imposition of sanctions upon a party
who refuses to comply with discovery orders, not just to penalize those
whose conduct warrants such sanctions, but to deter those who may be
tempted to abuse the legal system by their irresponsible conduct.
Hoag v. Amex Assurance Co., 953 A.2d 713, 717 (Del. 2008) (internal quotation marks
omitted).
“In the event this Court determines that sanctions for discovery abuses are
appropriate, the sanction must be tailored to the culpability of the wrongdoer and the
harm suffered by the complaining party.” Cartanza v. Cartanza, 2013 WL 1615767, at *2
(Del. Ch. Apr. 16, 2013), reargument denied, 2013 WL 3376964 (Del. Ch. July 8, 2013).
A trial court “has the power to issue sanctions for discovery abuses under its inherent
equitable powers, as well as the Court‟s inherent power to manage its own affairs.” Beard
Research, Inc. v. Kates, 981 A.2d 1175, 1189 (Del. Ch. 2009) (internal quotation marks
omitted); see Hoag, 953 A.2d at 716-17 (noting court‟s authority to impose sanctions for
discovery abuse under Rule 37 or pursuant to its “inherent authority”).
Rule 37(b)(2) identifies potential sanctions that a trial court can impose for
violating a discovery order, including but not limited to:
(A) An order that the matters regarding which the order was made or any
other designated facts shall be taken to be established for the purposes of
the action in accordance with the claim of the party obtaining the order;
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(B) An order refusing to allow the disobedient party to support or oppose
designated claims or defenses, or prohibiting that party from introducing
designated matters in evidence; [or]
(C) An order striking out pleadings or parts thereof, or staying further
proceedings until the order is obeyed, or dismissing the action or
proceeding or any part thereof, or rendering a judgment by default against
the disobedient party[.]
Ch. Ct. R. 37(b)(2).
Delaware Supreme Court decisions teach that the entry of a default judgment
under Rule 37(b)(2)(C) is “the ultimate sanction for discovery violations and should be
used sparingly.” Lehman Capital v. Lofland, 906 A.2d 122, 131 (Del. 2006) (emphasis in
original) (internal quotation marks omitted). “[A] default judgment should be granted if
no other sanction would be more appropriate under the circumstances.” Hoag, 953 A.2d
at 717. “Judgment by default is, of course, the extreme remedy and generally speaking
the Rule has been interpreted to require some element of willfulness or conscious
disregard of the order before such a sanction is imposed.” Sundor Elec., Inc. v. E.J.T.
Constr. Co., 337 A.2d 651, 652 (Del. 1975) (internal quotation marks omitted).
A less final but still serious discovery sanction is the entry of an order under Rule
37(b)(2)(A) that deems designated facts to be established or which draws an inference as
to a particular issue that is adverse to the party that failed to comply with its discovery
obligations. Delaware decisions have granted adverse inferences in cases involving the
spoliation of documents, where the evidence indicates that the party acted with a culpable
metal state. See Sears, Roebuck & Co. v. Midcap, 893 A.2d 542, 548 (Del. 2006); see
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also Collins v. Throckmorton, 425 A.2d 146, 150 (Del. 1980) (noting adverse inference
would be appropriate for spoliation).
A more moderate but still significant discovery sanction is to alter the burden of
proof on a particular issue, either by shifting it to the party that failed to comply with its
discovery obligations or by increasing or decreasing the relevant standard. See TR
Investors, LLC v. Genger, 2009 WL 4696062, at *2 (Del. Ch. Dec. 9, 2009) (Strine,
V.C.). In Genger, the defendant authorized a computer consultant to erase computer files
in direct violation of a status quo order. Despite concluding that the defendant
intentionally spoliated evidence in violation of a court order, Chief Justice Strine, writing
as a Vice Chancellor, declined to impose “the extreme remedy of a default judgment.” Id.
at *19. Choosing instead to “deprive [the defendant] of the advantages of any evidentiary
gaps that his own misbehavior might have been caused,” the Chief Justice elevated the
defendant‟s burden of proof by one level, increasing it from a preponderance of the
evidence to clear and convincing evidence. Id. In addition, because the defendant‟s
conduct created serious doubts as to his credibility, the Chief Justice held that the
defendant would not be able to establish any material facts by relying solely on his own
testimony; he only would be able to establish material facts if he could point to other,
additional evidence to corroborate his account. Id.
Rule 37(b)(2) further provides that if a defendant has violated a discovery order,
the court “shall require the party failing to obey the order or the attorney advising that
party or both to pay the reasonable expenses, including attorney‟s fees, caused by the
failure.” Ch. Ct. R. 37(b)(2) (emphasis added). Under this rule, expenses should be
19
awarded “unless the Court finds that the failure was substantially justified or that other
circumstances made an award of expenses unjust.” Id. The Delaware Supreme Court has
explained that under Rule 37, “when a party fails to comply with discovery orders of the
Court or otherwise engages in discovery abuses, the award of attorneys‟ fees and
expenses to the opposing party is mandatory, absent a showing by the wrongdoer that his
actions were substantially justified or that other circumstances make the award unjust.”
Bader v. Fisher, 504 A.2d 1091, 1096 (Del. 1986); accord Holt, 472 A.2d at 823.
The presumptive nature of the award under the current version of Rule 37(b)(2)
represented a change from prior practice. In 1970, the federal rules were revised to
introduce this approach “in order to encourage such sanction under such circumstances
and to that end the Rule places a burden on the disobedient party to show that his failure
was justified or that the other circumstances exist making an award unjust.” Wileman v.
Signal Fin. Corp., 385 A.2d 689, 690-91 (Del. 1978) (citation omitted).
A major purpose of the 1970 revision of the discovery rules was to
encourage extrajudicial discovery with a minimum of court intervention.
One means of accomplishing that was to tighten the judicial sanctions with
respect to unjustified insistence upon or objection to discovery. This led the
draftsmen to place new emphasis on the availability and compulsory nature
of an award of expenses. The potential availability of the award of expenses
and fees was therefore broadened.
8B Charles Alan Wright, Arthur R. Miller & Richard L. Marcus, FEDERAL PRACTICE &
PROCEDURE § 2288 (3d ed. 2010) (citations omitted). The revision represented “an
attempt to induce courts to make the award more frequently.” Id. § 2281 (citations
omitted). Rule 37(b)(2) was amended in 1970 to follow the federal model. See Wileman,
20
385 A.2d at 690. As with its federal counterpart, Rule 37 was revised “to encourage such
sanctions where appropriate.” Bader, 504 A.2d at 1096.
A. The Discovery Violations
National violated the First Discovery Order and the Second Discovery Order. Its
discovery misconduct has been serious. National not only failed to produce required
information; it also provided a series of evolving explanations about why the information
was not produced accurately. It is impossible to reconcile National‟s various
explanations.
The First Discovery Order required that National provide information for the loans
it made between September 20, 2010, and September 30, 2013, including the APRs, the
finance charges, the schedule for payments, and the total payments made by the
borrower. National failed to comply with the First Discovery Order when it produced the
Initial Spreadsheet. The Initial Spreadsheet omitted information from the columns labeled
“Schedule of Payments,” “Total Amount of Payments,” and “Finance Charges,” and the
APRs were not accurate.
The Second Discovery Order required that National produce accurate Loan
History Information in the form of the Updated Spreadsheet. In light of McFeeters‟ self-
described technological limitations, the Second Discovery Order required that National
retain a qualified IT consultant to assist with extracting the data and creating the Updated
Spreadsheet. The Second Discovery Order ordered the IT consultant to provide an
affidavit attesting to the procedures it followed. National violated the Second Discovery
Order in three ways. The Updated Spreadsheet did not contain all of the required
21
information. It lacked accurate APRs. And National failed to retain a qualified IT
consultant and provide the required affidavit.
National is responsible for its discovery violations. When responding to the First
Discovery Order, McFeeters knew the specific information that he was obligated to
produce. Despite being able to export this information from the Infinity software system,
he chose not to select all of the required fields. The Initial Spreadsheet did not provide
the finance charges, schedule of payments, or total amount of payments. The Initial
Spreadsheet provided APRs, but did not include the information necessary for James to
verify the calculations. For those APRs where James had the underlying loan documents,
the figures did not match.
When responding to the Second Discovery Order, McFeeters again knew the
specific information that he was obligated to produce, and he knew he was required to
retain an IT consultant to assist him and provide an affidavit describing the procedures
that were followed. He did not retain an IT consultant, did not produce the information,
and did not provide the affidavit.
National‟s discovery violations were not isolated events, but rather part of a
pattern. This case began with National and its counsel filing an unfounded motion to
compel arbitration, despite knowing that James had opted out of the arbitration
agreement. That motion resulted in James moving for Rule 11 sanctions, which this court
granted. National next sought a protective order against virtually all discovery, and
although the court granted the protective order in part, the First Discovery Order required
National to produce a range of materials, including the Loan History Information.
22
National failed to comply with the First Discovery Order, leading to the Second
Discovery Order. National failed to comply with the Second Discovery Order, leading to
the motion for sanctions.
National‟s discovery violations appear to have been willful. In addition to the
recurring nature of the violations, National has changed position repeatedly and offered
inconsistent explanations. National originally asserted that the errors in the APRs on the
Initial Spreadsheet were due to mistakes by McFeeters, and National‟s counsel agreed to
produce a corrected version. He reneged. After James filed the second motion to compel,
National changed position and claimed that its software package caused the mistakes in
the APRs. McFeeters testified to that effect, and National‟s interrogatory responses
espoused that version of events. Then, when the Second Discovery Order specifically
called for National to produce the APRs and show how they were calculated, National
claimed that its software did not maintain the APRs.
The events surrounding the neXVel letter further evidenced the casual relationship
that National and its counsel seem to have with the truth. When National‟s counsel
originally provided the Updated Spreadsheet, his email did not suggest in any way that
neXVel had not been able to assist with the data or in its preparation. He referred to
neXVel as “the IT company employed by defendant to assist in the revision of the Excel
spreadsheet.”
In a separate email, National‟s counsel sent the letter from neXVel. The contents
of the letter told a different story. The letter was not an affidavit, and it did not identify
any procedures followed by neXVel. It sounded like a quote for work. When James‟
23
counsel pressed for an affidavit, National‟s counsel sent a notarized version of the letter.
It later turned out that the letter had not been signed in the presence of the notary, and
neXVel‟s Rule 30(b)(6) witness did not know how the letter came to be notarized.
The failure to meet the requirements for a valid notarization is a serious issue.
“[T]he requirement that the person whose signature is to be notarized personally appear[]
before the notary is both clear and readily accessible to anyone who undertakes any sort
of effort to find out.” Bessenyei v. Vermillion, Inc., 2012 WL 5830214, at *8 (Del. Ch.
Nov. 16, 2012) aff’d, 67 A.3d 1022 (Del. 2013); accord Basic Notarial Duties,
AMERICAN SOCIETY OF NOTARIES, http://www.asnnotary.org/?form=basicduties
(recognizing that “the „golden rule‟ of every notarial act, whether it is paper-based or
electronic, is the physical presence of the signer before the notary.”). Pennsylvania
currently follows the Notary Public Law and Uniform Acknowledgment Act,3 which
requires a notary to “know through personal knowledge or have satisfactory evidence that
the person appearing before the notary is the person described in and who is executing
3
In October 2013, the Pennsylvania General Assembly adopted the Revised Uniform
Law on Notarial Acts (“RULONA”), which will take effect after the Pennsylvania Department of
State has approved basic and continuing notary education courses. See New Pennsylvania Notary
Public Law (Dec. 5, 2013) (noting that “Pennsylvania notary public practice and procedure will
most likely not take effect until 2015.”), available at
http://www.portal.state.pa.us/portal/http;//www.portal.state.pa.us;80/portal/http;/www.portal.stat
e.pa.us;80/portal/server.pt/gateway/PTARGS_0_244608_1372259_0_0_18/Preliminary%20web
site%20posting%20for%20when%20RULONA%20passes.pdf. Like the current Pennsylvania
notary statute, RULONA requires the signer‟s personal presence before a notary. Compare 57
Pa.C.S. § 158.1 (“The officer notarizing the instrument shall know through personal knowledge
or have satisfactory evidence that the person appearing before the notary is the person described
in and who is executing the instrument.”) with 57 Pa.C.S. Ann. § 306 (“If a notarial act relates to
a statement made in or a signature executed on a record, the individual making the statement or
executing the signature shall appear personally before the notarial officer.”).
24
the instrument.” 57 Pa.C.S. § 158.1. “Under Pennsylvania law, [the signer‟s] failure to
appear before [the notary] at the time the notarizations took place renders the
notarizations invalid.”4
When James‟ counsel put National‟s counsel on the spot about neXVel‟s role,
National‟s counsel claimed ignorance. He asserted for the first time that he tried to stay
out of the process of preparing the Updated Spreadsheet because the Second Discovery
Order required that the IT consultant be “independent.” But the order did not impose that
requirement. Then, during the hearing on the motion for sanctions, National‟s counsel
offered a different explanation: “I have to confess to this Court, I am not computer
literate. I have not found presence in the cybernetic revolution. I need a secretary to help
me turn on the computer. This was out of my bailiwick.”
Professed technological incompetence is not an excuse for discovery misconduct.
Effective March 1, 2013, the Delaware Supreme Court amended Comment 8 to Rule 1.1
of the Delaware Lawyers‟ Rules of Professional Conduct, which addresses competence,
to include maintaining technological competence. The new comment states that “a lawyer
should keep abreast of changes in the law and its practice, including the benefits and risks
4
Bessenyei, 2012 WL 5830214, at *4; accord In re Petition of Valenty, 43 A.3d 464, 466
(Pa. 2012) (explaining that “an affiant must actually appear in person before the notary to swear
and subscribe to the facts in the affidavit, if the affidavit is to be valid”); In re Bokey’s Estate,
194 A.2d 194, 198 (Pa. 1963) (“The essence of the notarial certificate is that the document has
been executed, and that the notary knows that he is confronted by the signer, and that the signer
is asserting the fact of his execution”); Leyda v. Norelli, 564 A.2d 244, 246 (Pa. Super. Ct. 1989)
(“[N]otarization certifies the fact of execution by a person who purports to be the signer”).
25
associated with relevant technology . . . .”5 This language finds parallels in the
Pennsylvania Rules of Professional Conduct, where National‟s counsel is admitted to
practice, and the Model Rules of Professional Conduct. Compare id. with Pa. Rules of
Prof‟l Conduct R. 1.1 cmt. 8 and Model Rules of Prof‟l Conduct R. 1.1 cmt. 8.
“[D]eliberate ignorance of technology is inexcusable . . . . [I]f a lawyer cannot master the
technology suitable for that lawyer‟s practice, the lawyer should either hire tech-savvy
lawyers tasked with responsibility to keep current, or hire an outside technology
consultant who understands the practice of law and associated ethical constraints.” Judith
L. Maute, Facing 21st Century Realities, 32 Miss. C. L. Rev. 345, 369 (2013). Legal
publications in Delaware and Pennsylvania have discussed the amendments to Rule 1.1 in
similar terms.6
In light of this record, the court is forced to conclude that National and its counsel
willfully disregarded their discovery obligations and sought to mislead James and her
5
Del. Lawyers‟ Rules of Prof‟l Conduct R. 1.1 cmt. 8 (emphasis added). The citation to
Rule 1.1 is not meant to suggest that this court has made any determination regarding a potential
ethical violation. That question is reserved for the appropriate supervisory authorities. See
Crumplar v. Superior Court ex rel. New Castle Cnty., 56 A.3d 1000, 1009 (Del. 2012) (“Absent
conduct that prejudicially disrupts the proceeding, trial judges have no independent jurisdiction
to enforce the Rules of Professional Conduct.”); In re Infotechnology, Inc., 582 A.2d 215, 216-17
(Del. 1990) (explaining that absent conduct prejudicial to the proceeding, enforcement of Rules
of Professional Conduct must be left to authorities who oversee the bar). This decision has cited
Comment 8 only to illustrate the inadequacy of the most recent explanation for non-compliance
provided by National‟s counsel.
6
See Steven L. Butler, Securing Your Mobile Device, Del. Law., Fall 2014, at 20, 21;
Bruce E. Jameson, Technology Competence for Lawyers: Not an Oxymoron, Del. Law., Fall
2014, at 16; Kelly Phillips Erb, You Can’t Hide from Technology, Pa. Law., May/June 2014 56,
56.
26
counsel. Sadly, National‟s Delaware counsel bears some responsibility for the current
situation. Even when forwarding counsel has been admitted pro hac vice and is taking a
lead role in the case, the Court of Chancery does not recognize the role of purely “local
counsel.” State Line Ventures, LLC v. RBS Citizens, 2009 WL 4723372, at *1 (Del. Ch.
Dec. 2, 2009). “The admission of an attorney pro hac vice shall not relieve the moving
attorney from responsibility to comply with any Rule or order of the Court.” Del. Ch. Ct.
R. 170. “Our rules make clear that the Delaware lawyer who appears in an action always
remains responsible to the Court for the case and its presentation.” State Line Ventures,
2009 WL 4723372, at *1; accord Hsu v. Great Seneca Fin. Corp., 2010 WL 2635771, at
*4 (Del. Super. June 29, 2010), aff’d, 9 A.3d 476 (Del. 2010). “As officers of this Court,
[] Delaware lawyers are ultimately responsible for the documents they file with the Court
and serve on the [opposing party].” Bessenyei, 2012 WL 5830214, at *7. As such,
“Delaware counsel are expected to police the behavior of their out-of-state colleagues and
ensure that out-of-state counsel understand the standards expected by Delaware courts.”
Brian Cheffins, et al., Delaware Corporate Litigation and the Fragmentation of the
Plaintiffs’ Bar, 2012 Colum. Bus. L. Rev. 427, 463 (2012).
This expectation is particularly important during discovery. The court expects
Delaware counsel to play an active role in the discovery process, including in the
collection, review and production of documents. If Delaware counsel does not directly
participate in the collection, review and production of documents, then at a minimum
Delaware counsel should discuss with co-counsel the court‟s expectations.
27
In this case, Delaware counsel does not appear to have participated in the
discovery violations. Rather, Delaware counsel failed to stay meaningfully involved in
the case. There have been a series of indications that caused the court to suspect that
Delaware counsel saw itself as a mail drop, and on at least two occasions, the court
cautioned Delaware counsel off the record about the need to play a more substantive role.
Delaware counsel does not appear to have heeded those warnings. Had Delaware counsel
been more involved, the current regrettable situation might have been avoided.
B. The Appropriate Sanction
National‟s discovery misconduct calls for serious measures. Although I believe
that entry of a default judgment would be warranted on these facts, I will not grant that
remedy in light of the Delaware Supreme Court‟s guidance about invoking the ultimate
sanction and the availability of less punitive consequences.
As Chief Justice Strine noted while crafting the sanction in Genger, a lesser
sanction should “deprive [the defendant] of the advantages of any evidentiary gaps that
his own misbehavior might have been caused.” 2009 WL 4696062, at *19. Here, as in
Genger, National‟s conduct deprived James of the benefit of accurate Loan History
Information. At this point, the court lacks confidence that McFeeters and his counsel can
or will provide accurate information. To address this failure, an appropriate sanction is an
“order that the matters regarding which the order was made or any other designated facts
shall be taken to be established for the purposes of the action in accordance with the
claim of the party obtaining the order.” Ch. Ct. R. 37(b)(2)(A). For purposes of trial,
28
therefore, it is deemed established that the APRs for the loans disclosed on the Updated
Spreadsheet fell outside the acceptable range set forth in the TILA.
The deemed admission is not case dispositive. National‟s counsel has expounded
on National‟s multiple defenses and arguments, including the prospective testimony of an
expert who will explain that APRs are inherently unreliable. James still must carry her
burden of persuasion, and National still can rely on its other defenses. What National
cannot do any longer is contend that the APRs were accurate.
C. Fees And Expenses
Rule 37 contemplates a presumptive award of expenses, including attorneys‟ fees,
“unless the Court finds that the failure was substantially justified or that other
circumstances made an award of expenses unjust.” Ch. Ct. R. 37(b)(2). James seeks her
expenses for (i) preparing for and responding to National‟s motion for protective order,
(ii) reviewing the Initial Spreadsheet and taking the first deposition of McFeeters, (iii)
preparing for and arguing her motion to compel, (iv) reviewing the Updated Spreadsheet,
(v) taking the second deposition of McFeeters, and (vi) preparing for and arguing the
current motion for sanctions. Although not specifically mentioned, the Rule 30(b)(6)
deposition of neXVel falls within the scope of her request.
National‟s failure to comply with the Second Discovery Order was not
substantially justified. National did not follow the procedures set forth in the Second
Discovery Order and did not produce the information that the Second Discovery Order
required. National tried to mislead James into believing that it had attempted in good
faith to extract data from its computer system with neXVel‟s assistance. Only after James
29
pressed the issue did National and its counsel backpedal. The excuses offered by
National‟s counsel conflicted with positions National had taken earlier and with his
professional obligations.
Although James is entitled to her expenses, she has sought too expansive an
award. Rule 37(b)(2) contemplates an award of the “reasonable expenses, including
attorney‟s fees, caused by the failure” to obey a discovery order. The court did not shift
fees or expenses in connection with National‟s motion for protective order or the motion
to compel, and those rulings will not be revisited. James is entitled to the fees and
expenses she incurred after the entry of the Second Discovery Order, including in
connection with the review of the Updated Spreadsheet, the motion for sanctions, the
second deposition of McFeeters, and the Rule 30(b)(6) deposition of neXVel. Each of
those categories of expenses was caused by National‟s failure to comply with the Second
Discovery Order.
Rule 37(b)(2) authorizes the court to require that the expenses be paid by “the
party failing to obey the order or the attorney advising that party or both.” Given the roles
played by both McFeeters and National‟s counsel, the answer here is both.
James shall file a Rule 88 affidavit identifying her expenses and providing
supporting documentation. James also shall submit a proposed form of order. If National
disputes any of the expenses, then National shall file an opposition within two weeks.
James shall have one week to reply.
30
III. CONCLUSION
The motion for sanctions is granted. It is deemed established for purposes of trial
that the APRs for the loans disclosed on the Updated Spreadsheet were incorrect and fell
outside the tolerances set forth in the TILA. James is awarded her expenses, including
attorneys‟ fees, incurred due to National‟s failure to comply with this court‟s order.
31