Shcherbakovskiy v. Da Capo Al Fine, Ltd.

05-0394(L)
Shcherbakovskiy v. Da Capo Al Fine
1 UNITED STATES COURT OF APPEALS
2 FOR THE SECOND CIRCUIT
3 August Term, 2005
4 (Argued: October 27, 2005 Decided: June 11, 2007)
5 Docket Nos. 05-0394(L); 05-2391(XAP)
6 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
7 GRIGORY SHCHERBAKOVSKIY,
8 Plaintiff-Counter-Defendant-Appellant-Cross-Appellee,
9 - v. -
10 DA CAPO AL FINE, LTD.,
11 Defendant-Counter-Claimant-Appellee-Cross-Appellant,
12 HOWARD G. SEITZ,
13 Defendant-Counter-Claimant-Appellee.
14 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
15 B e f o r e: WINTER, POOLER, and SOTOMAYOR, Circuit Judges.
16 Appeal from a default judgment entered in the United States
17 District Court for the Southern District of New York in favor of
18 defendant-counterclaimant (Charles L. Brieant, Judge). We vacate
19 and remand.
20 ERIC R. LEVINE (Stephen L. Weinstein, on the
21 brief), Eiseman, Levine, Lehrhaupt &
22 Kakoyiannis, New York, New York, for
23 Plaintiff-Appellant.
24
25 ROBERT M. CALLAGY (Aaron M. Zeisler, on the
26 brief), Satterlee Stephens Burke & Burke LLP,
27 New York, New York, for Defendant-Appellee.
1 WINTER, Circuit Judge:
2 Grigory Shcherbakovskiy appeals from Judge Brieant’s
3 issuance of a default judgment dismissing appellant's complaint
4 and granting appellees' counterclaims, on which a judgment for
5 $1.4 million was entered. Appellant also asks that, if we
6 reverse the default judgment, we rule on the denial of his
7 motions to dismiss one counterclaim as legally insufficient.
8 Defendants cross-appeal, challenging the amount of the damages
9 awarded on the counterclaims.
10 We vacate the default judgment. We remand with instructions
11 to assign the case to a different judge.
12 BACKGROUND
13 On October 30, 2001, Shcherbakovskiy entered into a Joint
14 Venture Agreement with Da Capo Al Fine, Ltd. to restructure ZeTek
15 Power, a British manufacturer of alkaline fuel cells. At the
16 time, ZeTek Power was in the British equivalent of
17 debtor-in-possession bankruptcy. Howard G. Seitz, a member of DC
18 Al Fine’s board of directors and its lawyer, negotiated the
19 agreement with Shcherbakovskiy. Under the agreement, DC Al Fine
20 and Shcherbakovskiy each contributed $250,000 to the joint
21 venture. That $500,000 allowed ZeTek Power to continue its
22 operations while in bankruptcy. However, by December 13, 2001,
23 ZeTek Power had exhausted its financial resources.
24 DC Al Fine then formed a wholly-owned subsidiary called Da
2
1 Capo Fuel Cell Company. Seitz wrote to the administrator of
2 ZeTek Power’s estate in Great Britain and offered, on behalf of
3 DC Fuel Cell, to buy ZeTek Power's assets for $550,000. Pursuant
4 to an Asset Transfer Agreement, dated October 31, 2002, between
5 DC Fuel Cell and ZeTek Power’s joint administrators, DC Fuel Cell
6 purchased ZeTek Power's assets. After DC Fuel Cell acquired
7 ZeTek Power's assets, they were transferred to a new entity
8 called Eident, formed by DC Fuel Cell with another company.
9 On February 24, 2003, Shcherbakovskiy filed suit against
10 Seitz and DC Al Fine in the Southern District of New York. His
11 complaint alleged that: (i) Seitz and DC Al Fine fraudulently
12 induced him to enter the joint venture agreement funding ZeTek
13 Power and (ii) Seitz and DC Al Fine, by acquiring ZeTek Power's
14 assets for themselves, breached fiduciary duties owed him under
15 the joint venture agreement. Seitz and DC Al Fine answered the
16 complaint and asserted counterclaims for breach of contract,
17 breach of fiduciary duty, and conversion.
18 The conversion counterclaim involved a Russian subsidiary of
19 ZeTek Power, ZeTek Russia. ZeTek Russia’s assets included a
20 development agreement with Russia's Rocket Space Corporation,
21 known as Energia. The counterclaim alleged that Shcherbakovskiy
22 helped organize Independent Power Technologies ("IPT"), a Russian
23 limited company. He now serves as chairman and is a minority
24 shareholder of IPT. The conversion counterclaim alleged that IPT
3
1 wrongfully took control of ZeTek Russia's assets, including its
2 employees, goodwill, and contract with Energia.
3 Shcherbakovskiy moved to dismiss the conversion
4 counterclaim. The motion argued that ZeTek Russia was a
5 not-for-profit organization and, under Russian law, could not
6 have legally transferred its assets to DC Al Fine. Therefore,
7 the argument went, because DC Al Fine had no claim of ownership
8 of ZeTek Russia's assets, DC Al Fine could not assert a claim for
9 conversion of them. The motion also sought to have
10 Shcherbakovskiy's own complaint deemed to conform to the factual
11 claim that ZeTek Russia was a not-for-profit organization or to
12 give appellant an opportunity to amend the complaint.
13 The district court denied the motion to dismiss the
14 conversion counterclaim in a two-paragraph order dated October
15 16, 2003. It read in full:
16 The within pleading motion (Doc. No. 11)
17 serves no useful purpose and is denied. The
18 Counterclaims pleaded in the Answer are
19 sufficient to satisfy Rule 8(a) F.R.Civ.P.
20 It is not necessary at this time to determine
21 choice of law with finality, however, the
22 Court understands that the Counterclaims are
23 based on breach of an agreement which is
24 regulated by the laws of the United Kingdom
25 or New York, not Russia.
26
27 While this Court agrees that, were
28 traditional common law pleading required, a
29 partner or joint venturer cannot commit the
30 tort of conversion of firm property, the
31 pleading gives adequate notice of Defendant
32 DeCapo's claim that Plaintiff got away with
33 some or all of the property in Russia in
4
1 which DaCapo had some interest, in violation
2 of the agreement of the parties, resulting in
3 a triable fact issue.
4
5 At the heart of the present dispute is a discovery request
6 by Seitz and DC Al Fine to Shcherbakovskiy for "documents
7 relating to the technology which [IPT] is offering in America and
8 other places throughout the world." Shcherbakovskiy, by way of
9 affidavit and deposition testimony, stated that he had no access
10 to the documents because he was only the non-executive chairman
11 of IPT and, under Russian law and a confidentiality agreement
12 with ZeTek Russia, could not overrule the decision of ZeTek
13 Russia's board to deny access to the documents. Appellees argue
14 that appellant's position was at odds with a letter he had
15 written suggesting his absolute control of the company.
16 Shcherbakovskiy has also produced a letter from Russian counsel
17 suggesting that disclosure by him of some or all of the materials
18 sought, which may involve sensitive technology, might cause
19 Russian authorities to bring criminal proceedings against him,
20 including one for treason.
21 At a December 2, 2003 conference, the district court took a
22 dim view -- quoted at length below -- of Shcherbakovskiy’s
23 explanation and, in a December 12, 2003 order, ordered
24 Shcherbakovskiy to produce the documents in question. The order
25 warned that “[i]f plaintiff fails to produce documents responsive
26 to [the order] on or before January 6, 2004, the court will
5
1 dismiss the Complaint, with prejudice and with costs, against the
2 plaintiff and will grant the counterclaims of Da Capo.”
3 Shcherbakovskiy did not produce the documents, and on January 30,
4 2004, the court dismissed his complaint and granted default
5 judgment to DC Al Fine and Seitz on their counterclaims.
6 Sometime in January 2004, Seitz realized that the conversion
7 counterclaim properly belonged to DC Fuel Cell, a non-party.
8 Seitz then prepared an assignment transferring the claim from DC
9 Fuel Cell to DC Al Fine. That assignment, although drafted in
10 January 2004, was dated effective as of April 3, 2003.
11 Shcherbakovskiy filed another motion to dismiss the
12 conversion counterclaim, arguing that the assignment was a sham
13 created merely to give DC Al Fine standing. The district court
14 referred this motion, along with the question of damages on the
15 counterclaim judgment, to Magistrate Judge Fox.
16 In his Report and Recommendation, the magistrate judge
17 concluded that Seitz’s assignment of the conversion counterclaim
18 was valid, even though executed after the commencement of
19 litigation. The district court adopted that report over
20 Shcherbakovskiy's objection.
21 The magistrate judge issued a second report concluding that
22 DC Al Fine was entitled to a jury trial on the issue of damages
23 on the counterclaims. The district court adopted the conclusions
24 of that report.
6
1 A three-day jury trial to determine damages on the
2 conversion counterclaim ensued. The jury found that DC Al Fine
3 was entitled to $500,000 in compensatory damages for
4 Shcherbakovskiy’s breach of contract and $1,400,000 for his
5 conversion of ZeTek Russia's property. DC Al Fine was awarded
6 only the larger of those two amounts –- $1,400,000 –- because the
7 district court held that the damages for the breach of contract
8 were included in the award for conversion and that combining the
9 awards would therefore lead to a double recovery.
10 Shcherbakovskiy has appealed from the entry of the default
11 judgment and from the denial of his motions to dismiss the
12 conversion counterclaim. DC Al Fine and Seitz cross-appeal from
13 the damages award.
14 DISCUSSION
15 Shcherbakovskiy argues on appeal that: (i) the default
16 judgment dismissing Shcherbakovskiy’s complaint and granting Da
17 Capo’s counterclaims was an abuse of discretion; (ii)
18 Shcherbakovskiy’s motions to dismiss the conversion counterclaim
19 should have been granted both because ZeTek Russia was a not-for-
20 profit company powerless to transfer its assets and because DC Al
21 Fine's claim to the assets in question was based on an invalid
22 assignment from DC Fuel Cell; and (iii) we should reassign the
23 case to a different judge on remand. DC Al Fine argues on the
24 cross-appeal that the special verdict form misstated the law when
7
1 it characterized the breach of contract and conversion damages as
2 duplicative.
3 a) Default Judgment
4 We review the imposition of sanctions for noncompliance with
5 discovery orders for abuse of discretion. Jones v. Niagara
6 Frontier Transp. Auth., 836 F.2d 731, 734 (2d Cir. 1987). “A
7 district court would necessarily abuse its discretion if it based
8 its ruling on an erroneous view of the law or on a clearly
9 erroneous assessment of the evidence.” Cooter & Gell v. Hartmarx
10 Corp., 496 U.S. 384, 405 (1990).
11 Rule 37(b) provides that a court may impose sanctions “as
12 are just” on a party for disobedience of a discovery order. Fed.
13 R. Civ. P. 37(b)(2). We have noted that district courts possess
14 “wide discretion” in imposing sanctions under Rule 37. Daval
15 Steel Prods. v. M/V Fakredine, 951 F.2d 1357, 1365 (2d Cir.
16 1991). However, “[t]he sanction of dismissal should not be
17 imposed under Rule 37 unless the failure to comply with a
18 pretrial production order is due to ‘willfulness, bad faith, or
19 any fault’ of the deponent.” Salahuddin v. Harris, 782 F.2d
20 1127, 1132 (2d Cir. 1986) (quoting Societe Internationale Pour
21 Participations Industrielles et Commerciales v. Rogers, 357 U.S.
22 197, 212 (1958)).
23 Neither the December 12, 2003 order nor the January 30, 2004
24 judgment contain factual findings or legal reasoning underlying
8
1 and explaining the default judgment. These are contained
2 entirely in a transcript of a hearing held on December 2, 2003.
3 During appellee's argument for the production of documents,
4 the court repeatedly asked why the issue could not be left in the
5 status quo, with appellant claiming a lack of access subject to
6 impeachment based on his position in the company, size of
7 investment, and inconsistent statements in a letter. In the
8 court's view, "no jury is going to believe he has no documents."
9 Appellant's counsel then stated his position in a colloquy
10 that we set out in pertinent part:
11 MR. WEINSTEIN: Good morning. First of all,
12 I just want to briefly address some of the
13 factual statements that [my adversary] made.
14
15 THE COURT: You're free to do that. I assume
16 that you're not agreeing with his factual
17 statements. But I have the problem of today.
18 My problem today is why these documents don't
19 have to be produced under some kind of
20 protective order, if necessary, . . . So I
21 have to resolve these issues and get the case
22 ready for trial. I don't want you to
23 misunderstand. We have a felony trial
24 ongoing here this morning and a violation of
25 probation coming in. We have other business
26 besides somebody who doesn't want to produce
27 documents.
28
29 MR. WEINSTEIN: I'll address that directly.
30 Mr. Shcherbakovskiy is the nonexecutive
31 chairman of ITP. He stated under oath that
32 he doesn't have any documents himself.
33
34 THE COURT: You don't believe that he has no
35 control over the documents, do you?
36
37 MR. WEINSTEIN: Yes, I do.
38
9
1 THE COURT: I think a jury is going to be
2 very incredulous when they're confronted with
3 that, and you buy the farm around here. If
4 you're going to take a bad position in
5 discovery like that or allow your client to
6 take it, you're not going to come in and blow
7 hot and cold at the trial. You're not going
8 to take a different position with me, because
9 if you are, your adversary is going to ask
10 for a jury instruction.
11
12 MR. WEINSTEIN: Our position, we've been
13 informed under Russian law --
14
15 THE COURT: Don't give me that.
16
17 MR. WEINSTEIN: He has no control.
18
19 THE COURT: You're a plaintiff here in
20 Westchester County, New York. You're under
21 my discovery rules. If you don't abide by my
22 discovery rules, two things are going to
23 happen. Either you're going to lose your
24 case on the merits with the jury because
25 they're going to figure your client is lying,
26 or you're going to get dismissed on the
27 merits by the Court for failing to honor my
28 directions. I don't care about Russian law.
29 I believe that the average juror will think
30 that he has constructive possession of these
31 records and he can get to them if he really
32 wants to.
33
34 MR. WEINSTEIN: With all due respect, your
35 Honor, this Court doesn't have power to order
36 the company to turn over the documents.
37
38 THE COURT: But I have power to dismiss your
39 case with prejudice and costs. I'll do that
40 right now.
41
42 MR. WEINSTEIN: These documents, first of
43 all, are not for our case, they're for
44 defense's --
45
46 THE COURT: No, no. Don't give me that.
47
48 MR. WEINSTEIN: But it's true.
10
1 THE COURT: It's not true. You're going to
2 produce them under a protective order or I'm
3 going to toss your case and you'll explain to
4 the Second Circuit. It's that simple truth
5 with me. I don't have time to listen to a
6 lot of drivel. This is ordinary discovery.
7 Your client sought out this forum.
8
9 MR. WEINSTEIN: My client is suing
10 individually. He's being counterclaimed
11 individually. ITP is not a party to this.
12 If they want these documents, they could have
13 sued --
14
15 THE COURT: I'm going to order their
16 production within 20 days. I'm going to have
17 a precise enough order so I can make it
18 stick. If you don't comply, I'm going to
19 drop the case for the plaintiff, dismiss it
20 with prejudice and costs and I'm going to
21 take an inquest on the counterclaims and you
22 can go your merry way. I don't have to
23 listen to this kind of nonsense and I take a
24 dim view of this fellow saying he can't, that
25 he has no access to these records. He's
26 what, the chairman of the board, is that what
27 he is?
28
29 MR. WEINSTEIN: He's chairman of the board.
30 He doesn't control the board. He's not the
31 majority shareholder. He asked the board to
32 produce the documents at a recent meeting
33 following the letter I got from Mr. Callaghy
34 --
35
36 THE COURT: I don't believe it. I'm telling
37 you right now I don't believe it. Why don't
38 the two of you confer and get a protective
39 order and take 15 days to go get these
40 records. . . And after that, if you don't
41 comply with United States discovery, out you
42 go. Do you want to do that?
43
44 MR. WEINSTEIN: I have no choice.
45
46 THE COURT: You have no choice except to call
47 my bluff, which is not a bluff, and go to the
48 Circuit, because you're not going to do this,
11
1 you're not going to access a federal forum in
2 the United States and come in here and tell
3 this court and tell a jury, oh, I'm suing
4 individually. I'm only the chairman of the
5 board and I can't produce any of these
6 allegedly relevant documents, and then tell
7 him also they don't exist. They'll laugh at
8 you. You've done enough trial work to know
9 that. These jurors will be smirking.
10
11 MR. WEINSTEIN: They won't be smirking
12 because they can't even establish a prima
13 facie case. They.
14
15 THE COURT: All I know is this --
16
17 MR. WEINSTEIN: He can't identify a single
18 asset of ZeTek Moscow.
19
20 THE COURT: You're not going to split his
21 identity. He's here and he's going out the
22 window unless he complies with United States
23 discovery. That's it. If you want to confer
24 with each other and see if you can find a
25 fair way to resolve this, do it. . .
26
27 MR. WEINSTEIN: I would need to consult with
28 my client. But I believe that since he has
29 no control over ITP --
30
31 THE COURT: I don't believe it. I told you
32 that.
33
34 MR. WEINSTEIN: -- he may be unable to comply
35 with the order.
36
37 THE COURT: And maybe the moon will fall onto
38 the earth. Lots of things can happen in the
39 future. I won't put up with this nonsense,
40 I'm telling you right now. If you want to
41 stick to your position, them I'm going to ask
42 Mr. Callaghy to draft a proper order ordering
43 precisely what's to be produced, setting a
44 reasonable time to do it, giving you a return
45 date to come in here and produce it here in
46 court. I want him to add into that proposed
47 order any protective provisions that you need
48 to preserve your trade secrets or whatever.
12
1 And then if he doesn't do it, out you go and
2 I'll hold an inquest on the counterclaims.
3 If you want to gamble on whether the Circuit
4 will uphold that, you can gamble. Your
5 client can gamble. I don't care.
6
7 MR. WEINSTEIN: All right. I'll consult with
8 Mr. Callaghy and with my client. I believe
9 that we're going to have to go to the Second
10 Circuit on this.
11
12 THE COURT: That's fine with me. I'm not
13 going to allow anybody to come in here as a
14 plaintiff and lie like that or take the
15 position that I'm only here individually and
16 I can't access these Russian records because
17 I don't control the board, I'm only the
18 chairman.
19
20 MR. WEINSTEIN: What is the purpose, what is
21 the purpose of corporate structure and laws
22 if --
23
24 THE COURT: It's not to be used as a method
25 of fraud.
26
27 MR. WEINSTEIN: It's not a method of fraud.
28
29 THE COURT: You have your opinion and I have
30 my opinion. I told you what to do. You're
31 either going to do it or not. I don't care.
32 Why don't you try to be sensible. Why don't
33 you not lead your client down the primrose
34 path because you think you're right and try
35 to be sensible. . .
36
37 It's very wrong to test the Court's resolve
38 to preserve the sovereignty of the United
39 States and the integrity of our pretrial
40 discovery. That's very wrong and it's going
41 to get your client into a bad situation.
42
43 MR. WEINSTEIN: I'm unaware of any caselaw
44 where a person has been sued individually and
45 has been forced to produce documents from a
46 foreign corporation.
47
48 THE COURT: One of us is wrong.
13
1 (Recess)
2
3 Turning to the legal issues first, a party is not obliged to
4 produce, at the risk of sanctions, documents that it does not
5 possess or cannot obtain.1 See Fed. R. Civ. P. 34(a) (“Any party
6 may serve on any other party a request . . . to produce . . .
7 documents . . . which are in the possession, custody or control
8 of the party upon whom the request is served . . . .” (emphasis
9 added)), E.E.O.C. v. Carrols Corp., 215 F.R.D. 46, 52 (N.D.N.Y.
10 2003); see also Societe Internationale pour Participations
11 Industrielles et Commerciales, S.A. v. Rogers, 357 U.S. 197, 204
12 (1958) (acknowledging that Rule 34 requires inquiry into whether
13 party has control over documents), Fisher v. U.S. Fidelity &
14 Guar. Co., 246 F.2d 344, 350 (7th Cir. 1957). We also think it
15 fairly obvious that a party also need not seek such documents
16 from third parties if compulsory process against the third
17 parties is available to the party seeking the documents.
18 However, if a party has access and the practical ability to
19 possess documents not available to the party seeking them,
20 production may be required. In Re NASDAQ Market-Makers Antitrust
21 Litig., 169 F.R.D. 493, 530 (S.D.N.Y. 1996).
22 In the present case, appellant denies both the legal and
23 practical ability to obtain the documents from IPT. He claims
24 that, although Chairman of the Board, his minority status as a
25 shareholder and Russian law pose insurmountable barriers to his
14
1 obtaining the documents. The district court disposed of
2 appellant's claim on two grounds. The court took the view that
3 Russian law was irrelevant in discovery matters in United States
4 courts. In the court's view, therefore, even if appellant's
5 claim as to Russian law was true, sanctions would be justified.
6 Nevertheless, it also made a credibility finding that appellant's
7 factual claim was untrue, stating in strong terms that it did not
8 believe the claim. On this record, these grounds cannot support
9 the sanction imposed, even under an abuse of discretion standard.
10 Appellees are entitled to the production of the documents in
11 question if appellant has access to them and can produce them.
12 Appellees cannot as a practical matter compel IPT to produce them
13 in this litigation, and they are of undoubted relevance to the
14 counterclaims. However, contrary to the district court's view,
15 Russian law is relevant to the issues and poses no threat to the
16 sovereignty of the United States. See United States v. Funds
17 Held in the name of Wetterer, 210 F.3d 96, 106 (2d Cir. 2000)
18 (“Questions relating to the internal affairs of corporations . .
19 . are generally decided in accordance with the law of the place
20 of incorporation.”). If Russian law prohibits appellant from
21 obtaining and producing the documents even with the agreement of
22 IPT's board and an appropriate protective order in the district
23 court, then the matter is at an end.
24 However, if Russian law prohibits production simply because
15
1 board approval –- or waiver of a confidentiality agreement as to
2 production in the United States under a proper protection order -
3 - is necessary, then the issue of appellant's control of IPT
4 arises. If the district court finds that, contrary to
5 appellant’s present claim, IPT is his alter ego or his investment
6 in it is sufficient to give him undisputed control of the board,
7 such a finding could support an order to produce. See 7 Moore’s
8 Federal Practice § 34.14[2][c] (“[W]hen an action is against an
9 officer individually, and not also against the corporation,
10 production may be denied unless there is evidence that the
11 officer is the ‘alter ego’ of the corporation” (citing Am.
12 Maplan Corp. v. Heilmayr, 203 F.R.D. 499, 502 (D.Kan. 2001)); see
13 also A.F.L. Falck, S.P.A. v. E.A. Karay Co., Inc., 131 F.R.D. 46,
14 48-49 (S.D.N.Y. 1990) (holding that because the individual party
15 controlled two non-party corporations, he also controlled
16 production of their documents). On the present record, however,
17 which includes appellant's affidavit that, although Board Chair,
18 he is a minority shareholder and Russian law prevents his
19 production of the documents, a finding of control cannot be
20 sustained, at least without further explanation. A remand is
21 therefore necessary to explore Russian law and, if necessary,
22 appellant's control of IPT, an issue that may involve a finding
23 as to his credibility. Both the inquiry into Russian law and
24 appellant’s control of IPT will inform a finding as to
16
1 appellant's willfulness, or lack thereof, in refusing to produce
2 the documents. On remand, the district court should also
3 consider Shcherbakovskiy’s claim that to turn over the documents
4 would subject him to criminal sanctions under Russian law, and
5 evaluate both the factual basis and legal consequence of that
6 claim in light of United States v. Davis, 767 F.2d 1025, 1033-34
7 (2d Cir. 1985) (describing the balancing test with which to
8 evaluate the propriety of orders directing production of
9 documents abroad where such production would violate the laws of
10 the state where they are located).
11 Moreover, the district court did not consider the efficacy
12 of lesser sanctions. See Minotti v. Lensink, 895 F.2d 100, 103
13 (2d Cir. 1990) (per curiam) (finding no abuse of discretion when,
14 among other things, “the district court explored numerous options
15 before ordering dismissal”); see also Fed. R. Civ. P. Rule
16 37(b)(2) (enumerating lesser sanctions, including, for example,
17 issuing an order deeming the disputed issues relevant to the
18 unproduced documents determined adversely to the position of the
19 disobedient party). So far as can be gleaned from the
20 transcript, the court chose between the extremes of the status
21 quo and dismissal of the complaint and granting of the
22 counterclaims.
23 With no findings or explanation from the district court, we
24 cannot conclude that the sanction of dismissal of the complaint
17
1 and granting of the counterclaims was appropriate. Rule 37
2 permits the imposition of “just” sanctions; the severity of the
3 sanction must be commensurate with the non-compliance. The
4 sanction of dismissal “‘is a drastic remedy that should be
5 imposed only in extreme circumstances,’ usually after
6 consideration of alternative, less drastic sanctions.” John B.
7 Hull, Inc. v. Waterbury Petroleum Prods., Inc., 845 F.2d 1172,
8 1176 (quoting Salahuddin, 782 F.2d at 1132); see also id.
9 (“Dismissal under Rule 37 is warranted, however, where a party
10 fails to comply with the court’s discovery orders willfully, in
11 bad faith, or through fault.”); Cine Forty-Second Street Theatre
12 Corp. v. Allied Artists Pictures Corp., 602 F.2d 1062, 1066 (2d
13 Cir. 1979) (finding that dismissal is not appropriate “[w]here
14 the party makes good faith efforts to comply, and is thwarted by
15 circumstances beyond his control.”).
16 Findings of bad faith and consideration of lesser sanctions
17 are particularly necessary here in light of two factors. First,
18 the district court repeatedly stated that the failure to produce
19 the documents would inevitably alienate a jury, suggesting that
20 appellees would not be prejudiced by the absence of the
21 documents. Second, while the documents in question appear to
22 relate only to appellees' conversion counterclaim, the district
23 court dismissed appellant's complaint as well, again without
24 findings or other explanation. We do note that appellant's
18
1 claims may be so related to the ownership of ZeTek Power, and,
2 through it, ownership of ZeTek Russia that appellant should not
3 be allowed to pursue them in the face of a valid default judgment
4 for appellees on the counterclaims. Such a conclusion, however,
5 can be reached only after further consideration by the district
6 court.
7 We emphasize that there may be a plausible explanation that
8 supports the dismissal and default judgment entered by the
9 district court. But entering the default judgment without such
10 an explanation was an abuse of discretion.
11 b) Appellant's Motions to Dismiss
12 Appellant argues that DC Al Fine’s conversion counterclaim
13 does not state a valid claim for two reasons. First, he claims
14 that DC Al Fine has no ownership interest in ZeTek Russia
15 sufficient to support a conversion claim because ZeTek Russia was
16 organized as a non-commercial organization in Russia whose assets
17 could not legally have been transferred to DC Al Fine upon its
18 purchase of ZeTek, leaving DC Al Fine with no ownership interest
19 in ZeTek Russia upon which to base a claim for conversion.
20 Second, appellant maintains that DC Al Fine did not have standing
21 to assert the conversion counterclaim when it was filed and the
22 January 2004 assignment from DC Fuel Cell was ineffective because
23 it violated New York’s law against champerty. Appellant also
24 argues that, even if the assignment was valid, it could not cure
19
1 the jurisdictional defect under Rule 17(a) in light of the
2 prejudice he suffered. That prejudice, he argues, lies in the
3 fact that he consented to New York jurisdiction only to the
4 extent necessary to bring the suit against DC Al Fine.
5 Although it would undoubtedly be helpful to provide a final
6 resolution of these issues, we decline to address the underlying
7 legal issues definitively. Our vacating of the default judgment
8 renders such a disposition unnecessary, and examination of the
9 legal issues strongly suggests that such a disposition at this
10 juncture would be imprudent.
11 In particular, there are many loose ends that are better
12 dealt with on motions for summary judgment or after a trial. For
13 example, whether ZeTek Russia is a not-for-profit company that
14 cannot transfer assets is an issue that cannot be disposed of on
15 either the face of the counterclaim or of appellant's complaint,
16 which he seeks to amend. Indeed, the parties went beyond the
17 face of the pleadings in arguing the issue in the district court.
18 Moreover, the district court's denial of the motion to
19 dismiss the conversion counterclaim because of ZeTek Russia's
20 status was not particularly responsive to the issue raised. It
21 framed the question as involving a choice of law issue as to a
22 breach of contract claim to which Russian law was in the court's
23 view irrelevant. Whatever may be the case as to the breach of
24 contract counterclaim, the conversion counterclaim does depend on
20
1 a claim of ownership to which Russian law may be relevant. With
2 regard to the issues arising from the DC Fuel Cell/DC Al Fine
3 assignment, whether appellant was prejudiced by that assignment
4 because he consented to New York jurisdiction only to sue DC Al
5 Fine was never addressed by the district court. And we see no
6 reason in the circumstances described above to opine on
7 appellant's champerty argument at this time.
8 Each of these issues is potentially dispositive of the
9 conversion counterclaim, obviating the need to reach other
10 issues; each requires some amplification of the record; and each
11 may also become irrelevant if a valid dismissal as a sanction is
12 entered.
13 c) The Special Verdict Form
14 On cross-appeal, DC Al Fine challenges the special verdict
15 form used at the damages trial. That form directed the jury to
16 enter as its verdict only the larger of the award for breach of
17 contract or for conversion. “The formulation of special verdict
18 questions rests in the sound discretion of the trial judge, and
19 should be reviewed by an appellate court only for an abuse of
20 that discretion.” Vichare v. AMBAC Inc., 106 F.3d 457, 465 (2d
21 Cir. 1996). “In order to preserve for appeal any objection to
22 the form or substance of such questions, a party must object
23 before the jury has retired.” Smith v. Lightning Bolt Prods.,
24 Inc., 861 F.2d 363, 370 (2d Cir. 1988); see Fed. R. Civ. P.
21
1 49(a).
2 We believe it useful to address this issue. The sanction of
3 granting the counterclaims may be reentered and valid; if so, the
4 validity of the damages verdict will be in issue. Moreover, it
5 may be -- and we do not decide this -- that, if liability on the
6 counterclaims is established on the merits, a second damages
7 trial may be unnecessary. See Dazenko v. James Hunter Mach. Co.,
8 393 F.2d 287, 291 (7th Cir. 1968). We therefore proceed to the
9 cross-appeal.
10 DC Al Fine has forfeited its challenge to the special
11 verdict form by agreeing to it at trial. Upon reviewing the
12 special verdict form, DC Al Fine’s counsel explicitly approved it
13 in the clearest terms, stating that “the special verdict form as
14 distributed is satisfactory to the plaintiff.” Counsel for DC Al
15 Fine did not object to the form nor offer any indication that it
16 was dissatisfied with it.2
17 When a party has failed to preserve an argument, we will
18 entertain it only if the alleged error is “fundamental.” Shade
19 v. Hous. Auth. of New Haven, 251 F.3d 307, 312-13 (2d Cir. 2001).
20 “An error is fundamental under this standard only if it is ‘so
21 serious and flagrant that it goes to the very integrity of the
22 trial.’” Id. at 313 (quoting Modave v. Long Island Jewish Med.
23 Ctr., 501 F.2d 1065, 1072 (2d Cir. 1974)). To meet this
24 standard, a party must demonstrate even more than is necessary to
22
1 meet the plain error standard in a criminal trial. See id.;
2 Travelers Indem. Co. v. Scor Reinsurance Co., 62 F.3d 74, 79 (2d
3 Cir. 1995) (“Fundamental error is narrower than the plain error
4 doctrine applicable to criminal cases.”).
5 There is no fundamental error here. The two theories of
6 liability advanced by DC Al Fine were conversion and breach of
7 contract. Under both theories, the injury to DC Al Fine arguably
8 stems from the loss of an opportunity to participate in IPT,
9 which DC Al Fine alleges is simply a company built around the
10 assets of ZeTek Russia. This is also the basis for the
11 conversion claim –- the misappropriation of the assets of ZeTek
12 Russia.
13 Of course, if a second trial on damages occurs, the parties
14 are free to make whatever arguments are available to them.
15 e) Reassignment to Another Judge
16 Shcherbakovskiy argues that the case should be reassigned to
17 another judge on remand. In considering whether to reassign a
18 case on remand, we look to the following factors: “(1) whether
19 the original judge would reasonably be expected upon remand to
20 have substantial difficulty in putting out of his or her mind
21 previously-expressed views or findings determined to be erroneous
22 or based on evidence that must be rejected, (2) whether
23 reassignment is advisable to preserve the appearance of justice,
24 and (3) whether reassignment would entail waste and duplication
23
1 out of proportion to any gain in preserving the appearance of
2 fairness." United States v. Robin, 553 F.2d 8, 10 (2d Cir. 1977)
3 (denial of rehearing en banc).
4 There is little doubt that the district judge would follow
5 our instructions as to the law on remand. However, the judge has
6 rendered a visceral judgment on appellant's personal credibility,
7 namely that his denial of control was "nonsense," "drivel," a
8 "fraud," and a "lie." Whether any person can take an objective
9 second look at testimonial evidence after reaching such a
10 conclusion is questionable, but certainly the appearance of
11 justice would be well-served by reassignment on remand. Cullen
12 v. United States, 194 F.3d 401, 408 (2d Cir. 1999) (remanding for
13 a new sentencing proceeding before a different judge because the
14 sentencing judge had made a determination that the defendant was
15 not credible and “‘the appearance of justice is better satisfied
16 by assigning the resentencing to a different judge.’” (citing
17 United States v. Leung, 40 F.3d 577, 587 (2d Cir. 1994)). [A
18 148.17-.18] Given that the judgment below was entered after a
19 default, reassignment poses no costs in judicial economy.
20 Consequently, we direct that the case be reassigned to a
21 different judge on remand.
22 CONCLUSION
23 We vacate the default judgment and remand the case, which
24 shall be assigned to another judge.
24
1 FOOTNOTES
2
3 1. Of course, we agree with the district court that a party may
not "blow hot or cold" and, having persuaded the court in
discovery of its inability to produce such documents, later seek
to use them to help its case at trial. See Design Strategy, Inc.
v. Davis, 469 F.3d 284, 295-98 (2d Cir. 2006). Moreover, the
circumstances at trial may justify the jury's learning of the
party's non-production and drawing an adverse inference from it.
See Residential Funding Corp. v. DeGeorge Financial Corp., 306
F.3d 99, 106-07 (2d Cir. 2002).
2. To overcome this forfeiture, DC Al Fine relies on a statement
by the district court that “[y]ou’ll be deemed to make every
motion available to you under the rules.” However, this blanket
statement does not meet DC Al Fine’s burden of objecting to the
special verdict form under Rule 51, which requires that “[a]
party who objects to an instruction or the failure to give an
instruction must do so on the record, stating distinctly the
matter objected to and the grounds of the objection.” Fed. R.
Civ. P. 51(c)(1); see also Jarvis v. Ford Motor Co., 283 F.3d 33,
53, 56 (2d Cir. 2002). DC Al Fine failed to meet that
requirement.
25