Auto-Owners Ins. Co. v. Summit Park Townhome Ass'n

FILED
United States Court of Appeals
PUBLISH Tenth Circuit
UNITED STATES COURT OF APPEALS March 23, 2018
Elisabeth A. Shumaker
FOR THE TENTH CIRCUIT Clerk of Court
_________________________________
AUTO-OWNERS INSURANCE
COMPANY, a Michigan
corporation,
Plaintiff Counter Defendant-
Appellee, No. 16-1352
v.
SUMMIT PARK TOWNHOME
ASSOCIATION, a Colorado
corporation,
Defendant Counterclaimant-
Appellant.
_________________________________
Appeal from the United States District Court
for the District of Colorado
(D.C. No. 1:14-CV-03417-LTB)
_________________________________
Bradley A. Levin (Jeremy A. Sitcoff, and Nelson A. Waneka, with him on
the briefs), Levin Sitcoff PC, Denver, Colorado, for Defendant
Counterclaimant-Appellant.
Evan Bennett Stephenson (Michael L. O’Donnell, Terence M. Ridley, and
Cedric D. Logan, with him on the brief), Wheeler Trigg O’Donnell LLP,
Denver, Colorado, for Plaintiff Counter Defendant-Appellee.
_________________________________
Before TYMKOVICH, Chief Judge, BRISCOE, and BACHARACH,
Circuit Judges.
_________________________________
BACHARACH, Circuit Judge.
_________________________________
This appeal grew out of a dispute between an insured (Summit Park
Townhome Association) and its insurer (Auto-Owners Insurance Company)
over the value of property damaged in a hail storm. To determine the
value, the district court ordered an appraisal and established procedural
requirements governing the selection of impartial appraisers. After the
appraisal was completed, Auto-Owners paid the appraised amount to
Summit Park. But the court found that Summit Park had failed to make
required disclosures and had selected a biased appraiser. In light of this
finding, the court vacated the appraisal award, dismissed Summit Park’s
counterclaims with prejudice, and awarded interest to Auto-Owners on the
amount earlier paid to Summit Park.
Summit Park appeals, making six arguments:
1. The district court lacked authority to issue the procedural
requirements.
2. Summit Park and its counsel did not violate the procedural
requirements.
3. The district court erred by vacating the appraisal award.
4. The district court erred by using its inherent powers to sanction
Summit Park.
5. The sanction (dismissal of Summit Park’s counterclaims)
constituted an abuse of discretion.
6. The award of interest based on the amount paid to Summit Park
constituted a deprivation of due process.
2
We affirm. In the absence of a successful appellate challenge to the
disclosure order, Summit Park was obligated to comply and did not. The
court was thus justified in dismissing Summit Park’s counterclaims. In
addition, Summit Park’s failure to select an impartial appraiser compelled
vacatur of the appraisal award under the insurance policy. Finally, Summit
Park obtained due process through the opportunity to object to the award of
interest.
I. Summit Park was sanctioned for violating the district court’s
order.
The parties agreed that damage had occurred from a hail storm, but
they disagreed on the value of the damage. Auto-Owners sued for a
declaratory judgment to decide the value, and Summit Park filed
counterclaims.
Summit Park retained Merlin Law Group attorneys Mr. William
Harris and Mr. David Pettinato, who successfully moved to obtain an
appraisal based on the insurance policy. In the event of an appraisal, the
insurance policy required:
[E]ach party will select a competent and impartial appraiser.
The two appraisers will select an umpire. If they cannot agree,
either may request that selection be made by a judge of a court
having jurisdiction. The appraisers will state separately the
value of the property and amount of loss. If they fail to agree,
they will submit their differences to the umpire. A decision
agreed to by any two will be binding.
Appellee’s Supp. App’x, vol. 1 at 123.
3
Based on continuing disputes between the parties, Auto-Owners
moved for an order compelling an “appraisal agreement” that would set the
procedural requirements for the appraisal. The court granted the motion
and set requirements, which included disclosure of facts potentially
bearing on the appraisers’ impartiality:
An individual who has a known, direct, and material interest in
the outcome of the appraisal proceeding or a known, existing,
and substantial relationship with a party may not serve as an
appraiser. Each appraiser must, after making a reasonable
inquiry, disclose to all parties and any other appraiser any
known facts that a reasonable person would consider likely to
affect his or her impartiality, including (a) a financial or
personal interest in the outcome of the appraisal; and (b) a
current or previous relationship with any of the parties
(including their counsel or representatives) or with any of the
participants in the appraisal proceeding . . . Each appraiser
shall have a continuing obligation to disclose to the parties
and to any other appraiser any facts that he or she learns after
accepting appointment that a reasonable person would consider
likely to affect his or her impartiality.
Appellant’s App’x at 75-76. The court warned: “Notice is given that, if the
court finds that the parties and/or their counsel have not complied with this
order, the court will impose sanctions against the parties and/or their
counsel pursuant to the court’s inherent authority.” Id. at 78 (capitalization
removed).
Summit Park selected Mr. George Keys as its appraiser, but Auto-
Owners expressed doubt about Mr. Keys’s impartiality. These concerns
escalated when Mr. Keys and the court-appointed umpire agreed upon an
4
appraisal award exceeding $10 million, which was 47% higher than Summit
Park’s own public adjuster had determined.
Following the appraisal award, Auto-Owners objected to Mr. Keys,
arguing that he was biased and that Summit Park had failed to disclose
evidence bearing on Mr. Keys’s impartiality. The district court agreed,
disqualifying Mr. Keys and vacating the appraisal order.
Auto-Owners then moved for sanctions against Summit Park. The
district court granted the motion and dismissed with prejudice the
counterclaims against Auto-Owners. In addition, the court ordered Summit
Park to pay $97,797.53 in interest based on a Colorado statute governing
withholding of funds. Colo. Rev. Stat. § 5-12-102(1)(a).
II. Summit Park was bound by the district court’s disclosure order.
Summit Park challenges the district court’s authority to enter the
disclosure order. This argument fails for the reasons discussed in Auto-
Owners Insurance Co. v. Summit Park Townhome Ass’n, No. 16-1348, slip
op. at 5-6 (10th Cir. Mar. 23, 2018) (to be published). Regardless of
whether the court had authority to enter the order, Summit Park was
required to comply in the absence of a successful appellate challenge.
Thus, Summit Park could be sanctioned for noncompliance.
III. The district court reasonably found that Summit Park had
violated the disclosure order.
5
Summit Park denies violating the disclosure requirement, arguing
that
 the district court misinterpreted the term “impartial” as it
applies to appraisers and
 Summit Park disclosed enough information about Mr. Keys.
We rejected both arguments in Auto-Owners Insurance Co. v. Summit Park
Townhome Ass’n, No. 16-1348, slip op. at 6-14 (10th Cir. Mar. 23, 2018)
(to be published). As we explained there, Summit Park’s counsel violated
the disclosure order. And this violation could be attributed to Summit Park
itself. See Link v. Wabash R.R. Co., 370 U.S. 626, 633-34 (1962) (a party
cannot “avoid the consequences of the acts or omissions of [a] freely
selected agent”). 1 As a result, we cannot disturb the finding that Summit
Park violated the disclosure order.
IV. The district court did not err in vacating the appraisal award.
Summit Park challenges vacatur of the appraisal award, contending
that
 the district court exceeded its authority by entering the
disclosure order and
 Summit Park did not violate the disclosure order.
We rejected these arguments in Parts II and III.
1
As discussed below, Summit Park also committed its own violations
of the disclosure order. See pp. 11-12, below.
6
But even if Summit Park had not violated the disclosure requirement,
the insurance policy would have compelled vacatur of the appraisal award.
The insurance policy stated that an appraisal award is valid only if signed
by two impartial appraisers, and the district court reasonably concluded
that Mr. Keys was biased based on his past expressions of favoritism
toward policyholders and his extensive relationship with the Merlin law
firm. With Mr. Keys disqualified, the appraisal award had only one valid
signature (the umpire’s). The award was therefore invalid under the terms
of the insurance policy.
Accordingly, we conclude that the district court did not err in
vacating the appraisal award.
V. The district court had the authority to dismiss Summit Park’s
counterclaims under the court’s inherent power and Fed. R. Civ.
P. 41(b).
We review the imposition of sanctions for abuse of discretion. Link
v. Wabash R.R., 370 U.S. 626, 633 (1962). Summit Park argues that the
district court abused its discretion by exercising the court’s inherent
powers rather than applying Fed. R. Civ. P. 11. This argument is based on
Chambers v. NASCO, Inc., 501 U.S. 32 (1991), which Summit Park
interprets as requiring application of the Federal Rules of Civil Procedure
(rather than the court’s inherent powers) when sanctioning a party for acts
taken in bad faith.
Summit Park’s argument fails for two reasons:
7
1. Chambers does not require consideration of Rule 11 before a
court can use its inherent powers.
2. The district court dismissed Summit Park’s counterclaims under
Fed. R. Civ. P. 41(b) as well as the court’s inherent powers.
First, Summit Park misreads Chambers; it does not require a court to
consider the Federal Rules of Civil Procedure before applying the court’s
inherent powers. Chambers states that “when there is bad-faith conduct in
the course of litigation that could be adequately sanctioned under the
Rules, the court ordinarily should rely on the Rules rather than the inherent
power.” 501 U.S. 32, 50 (1991). But Chambers adds that a court may
impose sanctions “by means of the inherent power” even if the “conduct
could also be sanctioned under the . . . Rules.” Id. Thus, Chambers does
not require the district court to consider Rule 11 sanctions before invoking
the court’s inherent powers. See Courtesy Inns, Ltd. v. Bank of Santa Fe,
40 F.3d 1084, 1089 (10th Cir. 1994) (stating that Chambers rejected
arguments that “the various sanctioning provisions of the federal rules
reflect legislative intent to displace the court’s inherent powers”); accord
Nat. Gas Pipeline Co. of Am. v. Energy Gathering, Inc., 2 F.3d 1397, 1407
(5th Cir. 1993) (“In Chambers . . . the Court held that the inherent power
to impose sanctions for bad-faith conduct during litigation was not
displaced by, and went beyond, such sanctioning mechanisms as Rule 11
and 28 U.S.C. § 1927.”).
8
Even if Chambers had required consideration of sanctions under the
federal rules, the district court could reasonably conclude that Rule 11
would not have covered Summit Park’s misconduct. Rule 11 does not
generally apply to a party’s out of court conduct. See Fed. R. Civ. P. 11
advisory committee note to 1993 amendment. And five of Summit Park’s
acts took place outside of court:
1. Summit Park made misrepresentations about Mr. Keys.
2. Summit Park retained Mr. Keys after investigating his
background.
3. Summit Park failed to disclose Mr. Keys’s original contract,
which had contained a contingent-cap fee.
4. A Summit Park executive gave false testimony about the
contract previously containing the contingent-cap fee.
5. Summit Park failed to correct the inaccurate testimony until
after the appraisal was completed.
Chambers does not require consideration of sanctions under the
federal rules before a court invokes its inherent powers. But even if
Chambers had imposed such a requirement, Rule 11 would not have
applied to much of Summit Park’s conduct.
Second, even under Summit Park’s reading of Chambers, the court
would not have abused its discretion. The district court did consider and
choose to issue a sanction under the rules: Fed. R. Civ. P. 41(b).
When imposing sanctions, the district court relied not only on its
inherent powers but also on Rule 41(b). Rule 41(b) provides that if a party
9
violates “a court order, a defendant may move to dismiss the action.” Fed.
R. Civ. P. 41(b). The district court invoked this rule, stating that it
“recognizes that the Court may dismiss a claim or action where a ‘plaintiff
fails to . . . comply with these rules or a court order.’” Appellant’s App’x
at 395 (quoting Fed. R. Civ. P. 41(b)).
The court could apply its inherent powers or Rule 41(b). Here, the
court invoked both and, in doing so, did not run afoul of Chambers.
VI. The district court did not abuse its discretion in dismissing
Summit Park’s counterclaims.
Summit Park contends that the district court committed two errors in
dismissing the counterclaims:
1. The dismissal was unwarranted because Summit Park had not
acted in bad faith.
2. The district court misapplied the factors from Ehrenhaus v.
Reynolds, 965 F.2d 916 (10th Cir. 1992).
Both arguments fail.
A. Standard of Review
In reviewing the sanction of dismissal, we apply the abuse-of-
discretion standard. Archibeque v. Atchison, Topeka & Santa Fe Ry., 70
F.3d 1172, 1174 (10th Cir. 1995).
B. The district court made a finding of bad faith.
Summit Park contends that the court could dismiss the counterclaims
only upon a showing of bad faith. For the sake of argument, we may
10
assume that Summit Park is right. Even with this assumption, Summit
Park’s argument would fail because the district court did find bad faith in
that
1. Summit Park had concealed the existence of Mr. Keys’s prior
contingent-cap fee,
2. Summit Park had selected Mr. Keys as an appraiser with
apparent knowledge of his bias, and
3. Summit Park had violated the disclosure order.
The district court found that Summit Park had acted in bad faith
partly by concealing the existence of Mr. Keys’s initial agreement, which
had capped his fee based on the amount of his appraisal. Under this
agreement, the fee cap would increase as the amount of the appraisal award
increased. This compensation agreement was replaced by one without a
contingent cap.
But Summit Park was not immediately forthcoming about the earlier
version of the agreement. For example, Summit Park’s representative, Mr.
David Malucky, stated under oath that the final version (without the
contingent-fee cap) was the only one that had ever been used. This
testimony was not true.
Summit Park corrected the misstatement but only after the appraisal
had been completed. Mr. Malucky testified that his mistake had been
innocent. Perhaps it was. But Mr. Malucky’s credibility presented a factual
matter for the district court, and it found Mr. Malucky’s explanation not
11
“entirely credible.” Appellant’s App’x at 397. We will defer to the district
court’s finding on Mr. Malucky’s credibility. See United States v. Jordan,
806 F.3d 1244, 1252 (10th Cir. 2015).
The district court also relied in part on Summit Park’s hiring of Mr.
Keys as an appraiser after investigating his background. The court could
reasonably infer that Summit Park had known that Mr. Keys was biased
and that hiring him would violate the district court’s order requiring
impartiality of each appraiser.
In addition, the district court relied on Summit Park’s role in
violating the disclosure order. Summit Park’s investigation of Mr. Keys
suggested awareness of facts bearing on his impartiality. Nonetheless,
Summit Park did not make the required disclosures or correct Mr. Keys’s
inadequate and misleading disclosures. As a result, the district court could
reasonably infer Summit Park’s bad faith in violating the disclosure order.
* * *
Even if the district court had to find bad faith before dismissing
Summit Park’s counterclaims, the court made the required finding and it
was supported by the record.
C. The district court properly applied the pertinent factors.
Summit Park also asserts an abuse of discretion based on the
pertinent factors. Under Ehrenhaus v. Reynolds, 965 F.2d 916 (10th Cir.
12
1992), a court should consider five factors before dismissing claims under
Rule 41(b):
1. “the degree of actual prejudice to the defendant,”
2. “the amount of interference with the judicial process,”
3. “the culpability of the litigant,”
4. “whether the court warned the party in advance that dismissal
of the action would be a likely sanction for noncompliance,”
and
5. “the efficacy of lesser sanctions.”
Mobley v. McCormick, 40 F.3d 337, 340 (10th Cir. 1994) (internal
quotation marks omitted). The district court did not abuse its discretion in
applying the five factors.
First, the district court concluded that Auto-Owners had incurred
substantial prejudice. Summit Park’s violation of the disclosure order
 sparked months of litigation over Mr. Keys’s eligibility as an
appraiser and the justification for sanctions and
 wasted eight months of litigation preceding the appraisal
process.
The additional months of litigation not only resulted in additional expenses
for Auto-Owners but also delayed resolution of its claim for a declaratory
judgment.
Summit Park insists that Auto-Owners’ prejudice was self-inflicted
by its delay in objecting to Mr. Keys. As Summit Park observes, Auto-
Owners did not immediately launch a full investigation into Mr. Keys and
13
the disclosures. But the district court could reasonably decline to find a
waiver. Before the appraisal, Auto-Owners had repeatedly expressed
concerns to Summit Park about Mr. Keys’s impartiality. Thus, the district
court could reasonably pin fault on Summit Park rather than Auto-Owners.
Second, the district court found massive interference with the
judicial process. This finding was also reasonable, for the court could
justifiably consider Summit Park’s conduct as the reason for hundreds of
wasted hours by Auto-Owners, the court, and the appraisers.
Summit Park argues that its misconduct was not as egregious as the
misconduct of the sanctioned party in Ehrenhaus. In Ehrenhaus, the
sanctioned party “simply and intentionally refused to appear, which the
Court [found] to be in bad faith and willful and intentional disobedience to
two court orders.” 965 F.2d 916, 921 (10th Cir. 1992) (internal quotation
marks omitted).
For the sake of argument, we may assume that Summit Park did not
act as badly as the sanctioned party in Ehrenhaus. But Ehrenhaus did not
establish a floor of culpability. See LaFleur v. Teen Help, 342 F.3d 1145,
1151-52 (10th Cir. 2003) (upholding dismissal when the plaintiffs failed to
produce discovery documents by the deadline in violation of a discovery
order). The district court could reasonably determine that Summit Park’s
misconduct was sufficiently culpable to merit dismissal of the
counterclaims. See Jones v. Thompson, 996 F.2d 261, 265 (10th Cir. 1993)
14
(“[I]t is enough to say the [sanctioned party] repeatedly ignored court
orders and thereby hindered the court’s management of its docket and its
efforts to avoid unnecessary burdens on the court and the opposing
party.”).
Third, the court determined that Summit Park had some culpability.
As discussed above, Summit Park played a role in concealing the earlier
contingent-cap fee, selecting Mr. Keys, and failing to ensure the accuracy
of the disclosures. Summit Park argues that its behavior was not
sufficiently culpable for dismissal. But the district court gave only
moderate weight to this factor. Given the district court’s observation that
Summit Park’s actions “suggest[ed] bad faith,” the assignment of moderate
weight to this factor was reasonable. Appellant’s App’x at 399.
Fourth, the district court warned Summit Park of the risk of
dismissal. The court cautioned the parties, in all capital letters, that
“notice is given that, if the court finds that the parties and/or their counsel
have not complied with this order, the court will impose sanctions against
the parties and/or their counsel pursuant to the court’s inherent authority.”
Appellant’s App’x at 78 (capitalization removed). The warning was early
and prominent, stating that Summit Park could be sanctioned if it violated
the disclosure order.
Summit Park argues that the warning failed to clarify that dismissal
was a likely sanction. We have held that an express warning of dismissal is
15
not required. Instead, we have regarded notice as sufficient even when it is
constructive, rather than express. Ecclesiastes 9:10–11–12, Inc. v. LMC
Holding, 497 F.3d 1135, 1149-50 (10th Cir. 2007). Here the court could
regard the warning as constructive notice that dismissal of the
counterclaims would be a likely sanction for noncompliance. See id.
(stating that “Ehrenhaus’s notice prong was satisfied” despite the absence
of an express warning that the claim would be dismissed).
Fifth, the district court concluded that lesser sanctions would be
inadequate, putting great weight on this factor. Summit Park denies
consideration of lesser sanctions. We disagree. The court stated that it had
“given serious consideration to the efficacy of lesser sanctions and [had]
determined that only dismissal” would suffice. Appellant’s App’x at 401.
For this statement, the court explained that a sanction of attorneys’ fees
and expenses alone would not adequately deter Summit Park, its counsel,
or other potential wrongdoers from similar conduct in the future. This
explanation was supported by the record, and the court acted reasonably in
considering the possibility of lesser sanctions.
* * *
The district court reasonably concluded that four of the factors
merited great weight and one of the factors merited moderate weight.
Under Ehrenhaus, the decision to order dismissal with prejudice was not an
abuse of discretion. See Ehrenhaus v. Reynolds, 965 F.2d 916, 922 (10th
16
Cir. 1992) (affirming the dismissal when two of the factors merited great
weight and the other three factors had some support in the record); see also
Gripe v. City of Enid, 312 F.3d 1184, 1188-89 (10th Cir. 2002) (affirming
the dismissal when there was no evidence to support the third factor).
VII. The district court did not deprive Summit Park of due process in
awarding interest on the overpayment to Summit Park.
The district court awarded Auto-Owners $97,797.53 for interest. This
award was based on the amount that Auto-Owners had paid to Summit Park
upon completion of the appraisal. When the appraisal was vacated, Auto-
Owners obtained repayment of the amount overpaid and sought interest
based on a Colorado statute:
When money or property has been wrongfully withheld,
interest shall be an amount which fully recognizes the gain or
benefit realized by the person withholding such money or
property from the date of wrongful withholding to the date of
payment or to the date judgment is entered . . . .
Colo. Rev. Stat. § 5-12-102(1)(a). Summit Park argues that the imposition
of interest resulted in a deprivation of due process. We disagree because
Summit Park had an opportunity to respond to Auto-Owners’ request for
interest. 2
After the appraisal award was vacated, Auto-Owners amended its
complaint to recoup (1) payments based on the appraisal and (2) interest on
2
Auto-Owners contends that Summit Park failed to preserve its due-
process challenge. For the sake of argument, we may assume that Summit
Park lacked an opportunity to raise a due-process challenge in district
court. Even with this assumption, the challenge would fail on the merits.
17
the wrongfully obtained award. Summit Park moved to dismiss Auto-
Owners’ claim for recoupment. The district court issued an order granting
Auto-Owners’ request for interest and denying Summit Park’s motion to
dismiss as moot. Summit Park argues that the court’s ruling essentially
constituted a default judgment on Auto-Owners’ claim for interest,
depriving Summit Park of due process by denying an opportunity to
respond to Auto-Owners’ request.
Summit Park is incorrect, for it had an opportunity to respond to
Auto-Owners’ request for statutory interest. This opportunity arose when
Auto-Owners requested statutory interest from Summit Park in a brief filed
in district court. Summit Park not only had the opportunity to respond but
also took advantage of that opportunity by objecting to the request for
interest. See Resolution Tr. v. Dabney, 73 F.3d 262, 268 (10th Cir. 1995)
(“[T]he opportunity to fully brief the issue is sufficient to satisfy due
process requirements.”).
Summit Park disagrees, pointing out that Auto-Owners’ request for
interest was contained in a motion for sanctions. In light of the nature of
the brief, Summit Park insists that it was on notice only as to Auto-
Owners’ request for interest as a sanction, not based on the Colorado
statute.
This argument is not supported by the record. In requesting interest,
Auto-Owners invoked Colorado Revised Statutes § 5-12-102(1)(a) and case
18
law applying this statute. See Appellant’s App’x at 234 (explaining that
under the Colorado statute, “wrongfully withheld money earns 8% interest
from the date the wrongful withholding commences until the date those
amounts are paid back”). With this authority, Auto-Owners asked the
district court for “statutory interest.” Id. Thus, Summit Park was fully
apprised of Auto-Owners’ reliance on the Colorado statute for an award of
interest.
* * *
In these circumstances, the district court did not deprive Summit
Park of due process because Summit Park had an opportunity to object to
the award of interest under the Colorado statute.
VIII. Conclusion
The district court did not err in sanctioning Summit Park. Regardless
of the validity of the disclosure order, Summit Park had a duty to comply.
Summit Park violated the disclosure order by failing to disclose
information bearing on Mr. Keys’s impartiality. Based on the violation of
the disclosure order, the district court did not err by vacating the appraisal
award and sanctioning Summit Park with dismissal of its counterclaims.
Nor did the court deprive Summit Park of due process by awarding interest
to Auto-Owners. We affirm.
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