Yuanzong Fu v. Rhodes

This opinion is subject to revision before final
publication in the Pacific Reporter
2015 UT 59IN THE
SUPREME COURT OF THE STATE OF UTAH
YUANZONG FU, AKA FRANK FU,
Respondent,
v.
CLYDE RHODES, JOSEPH NASO, AND RENE NASO EVANS,
Petitioners.
No. 20130622
Filed July 23, 2015
On Certiorari to the Utah Court of Appeals
Third District, Salt Lake
The Honorable Judith S. H. Atherton
No. 080916174
Attorneys:
Randy B. Birch, Heber City, for petitioner
David J. Hodgson, Salt Lake City, for respondent
JUSTICE DURHAM authored the opinion of the Court, in which
CHIEF JUSTICE DURRANT, ASSOCIATE CHIEF JUSTICE LEE,
JUSTICE PARRISH, and JUDGE HANSEN joined.
Due to his retirement, JUSTICE NEHRING did not participate herein;
DISTRICT JUDGE ROYAL I. HANSEN sat.
JUSTICE DENO G. HIMONAS became a member of the Court on
February 13, 2015, after oral argument on this matter and,
accordingly, did not participate.
JUSTICE DURHAM, opinion of the Court:
INTRODUCTION
¶1 When the real estate bubble burst in 2008, the petitioners—a
group of real estate investors—defaulted on a series of loans from
respondent Yuanzong Fu. Fu sued. After more than a year of pretrial
litigation, the district court entered default judgment against the
petitioners because of their repeated failure to meet discovery
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Opinion of the Court
deadlines. This judgment was affirmed by the court of appeals,
which decided unanimously that the district court had not abused its
discretion by entering a default. Fu v. Rhodes, 2013 UT App 120,
¶¶ 10–11, 304 P.3d 80.
¶2 But the court of appeals was divided by a second issue,
namely, whether the petitioners could argue for the first time on
appeal that Fu’s complaint was legally insufficient. Two judges
concluded that they could not because challenges to the legal
sufficiency of a complaint must ordinarily be preserved, and court of
appeals precedent did not allow an exception for cases of default
judgment. Id. ¶¶ 12–19 (citing State v. Sixteen Thousand Dollars United
States Currency, 914 P.2d 1176 (Utah Ct. App. 1996)). One judge
disagreed, arguing that our precedent required such an exception. Id.¶¶ 23–30 (McHugh, J., concurring in part and dissenting in part)
(citing Skanchy v. Calcados Ortope SA, 952 P.2d 1071, 1076 (Utah 1998)
(“On appeal from a default judgment, a defendant may contest the
sufficiency of the complaint and its allegations to support the
judgment.” (internal quotation marks omitted))).
¶3 We granted certiorari, and we affirm the court of appeals on
both issues.
BACKGROUND
¶4 In 2006 and 2007, Yuanzong Fu lent the petitioners over
$170,000 to be used in their various real estate investment
businesses. In August 2008, Mr. Fu filed a complaint against the
petitioners alleging that they had failed to make required payments.
His prayer for relief rested on claims of breach of contract,
foreclosure, fraudulent transfer, fraud, and negligent
misrepresentation.
¶5 The petitioners filed their answer, and the parties proceeded
to discovery. The petitioners missed their first discovery deadline in
March 2009, and Mr. Fu agreed to a two-week extension. After the
petitioners missed their second deadline, the district court granted
Mr. Fu’s motion to compel discovery in May 2009. The order warned
the petitioners that if they failed to produce all requested documents
within ten days, their answer would be stricken and Fu would be
entitled to judgment as prayed for in the complaint.
¶6 More than eight months later, in January 2010, the district
court asked the parties why the lawsuit should not be dismissed for
failure to prosecute, as nothing had been filed with the court in the
entire intervening time. Mr. Fu answered that the respondents had
still not complied with the court’s May 2009 discovery order. The
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court set one last deadline for petitioners to produce all requested
materials or have their answer stricken: May 31, 2010.
¶7 On June 2, Mr. Fu moved the court to enter default judgment
against the petitioners as a discovery sanction under rule 37 of the
Utah Rules of Civil Procedure. Fourteen months after the original
discovery deadline, Mr. Fu claimed he had still not received a
number of requested financial records, including the “books and
records” of the petitioners’ investment company, proof of the
payments that the petitioners claimed they had made on the loans,
and the petitioners’ tax returns. He alleged further that the
petitioners’ failure to produce these documents had prevented him
from deposing a necessary witness. He accused the petitioners of
bad faith and dilatory tactics, citing their long and persistent history
of missing discovery deadlines.
¶8 The petitioners told a different story. They claimed that most
of the requested records had been provided, including their bank
statements, all their email correspondence with Mr. Fu, and all their
files on the specific investment properties that were relevant to the
case. Other records, including their tax returns, could not be
provided because they did not exist. In response to Mr. Fu’s
allegations of bad faith, they claimed that Fu himself had caused
much of the delay by not requesting to see the records when the
petitioners made them available. And to the extent the delay was the
petitioners’ fault, they made excuses: they weren’t entirely sure what
documents Mr. Fu was asking for, one of the petitioners traveled
extensively for work, and another was unemployed and moving
from house to house as his properties were foreclosed from under
him. The petitioners’ counsel pointed out that he was representing
them for free because they’d lost so much money and because he’d
been friends with petitioner Rhodes since middle school.
¶9 Nevertheless, the petitioners acknowledged that they had
not strictly complied with the discovery requests—not even by
August 2010, nearly three months after the final discovery deadline,
when the court held its first hearing on Mr. Fu’s motion. After the
court granted the motion, the petitioners objected to the entry of
default judgment, and the court held a second and final hearing in
December 2010. The petitioners acknowledged again that their
production of discovery materials had not “technically” complied
with the court’s orders, and the court granted Mr. Fu the relief
prayed for in his complaint.
¶10 On appeal the petitioners argued, as they had below, that
their discovery failures did not merit the extreme sanction of default.
Fu v. Rhodes, 2013 UT App 120, ¶ 10, 304 P.3d 80. They also argued,
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as they had not below, that default judgment could not be entered on
some claims because Mr. Fu’s complaint had not alleged sufficient
facts to support relief. Id. ¶ 9. Specifically, respondents argued that
Fu’s alleged facts did not allow the court to pierce the veil of their
LLC and hold them liable in their personal capacities. Id. ¶¶ 33–42
(McHugh, J., concurring in part and dissenting in part). They also
argued that Mr. Fu’s alleged facts did not support his claims of
fraud, negligent misrepresentation, foreclosure, and fraudulent
transfer. Id. ¶¶ 43–53.
¶11 The court of appeals rejected the first argument, concluding
that the default judgment had not been an abuse of discretion, and
refused to consider the second set of arguments because they had
not been preserved. We now review the court of appeals’ decision on
certiorari.
STANDARD OF REVIEW
¶12 “On certiorari, we review for correctness the decision of the
court of appeals . . . . The correctness of the court of appeals’ decision
turns, in part, on whether it accurately reviewed the [district] court’s
decision under the appropriate standard of review.” State v. Levin,
2006 UT 50, ¶ 15, 144 P.3d 1096. In other words, in order to
determine whether the court of appeals erred in finding that the
district court did not abuse its discretion, we must ourselves review
the district court’s decision for an abuse of discretion. See Kilpatrick v.
Bullough Abatement, Inc., 2008 UT 82, ¶ 23, 199 P.3d 957 (“[D]istrict
courts are granted a great deal of deference in selecting discovery
sanctions, and we overturn a sanction only in cases evidencing a
clear abuse of discretion.”).
¶13 We must also determine whether the court of appeals erred
in deciding it could not consider the petitioners’ legal sufficiency
arguments because they were unpreserved. This was a decision of
law, which we review for correctness. See Arnold v. Grigsby, 2009 UT
88, ¶ 7, 225 P.3d 192 (“We review conclusions of law for correctness,
granting the court of appeals’ decision no deference.”).
ANALYSIS
I. THE DISTRICT COURT DID NOT ABUSE ITS DISCRETION
¶14 When reviewing district courts’ discovery sanctions, we
“follow[] a two-step process.” Kilpatrick v. Bullough Abatement, Inc.,
2008 UT 82, ¶ 23, 199 P.3d 957. The first step is to ascertain whether
“the district court has made a factual finding that the party’s
behavior merits sanctions.” Id. Second, if the district court has made
the necessary factual finding, then we review its decision for an
abuse of discretion. Id.4
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A. Sanctions Were Appropriate
¶15 Here the first inquiry is not quite satisfied. The district court
based its sanction on the petitioners’ “continued failures to comply
with timely discovery, their failure to comply with the Court’s
previously entered Order to Compel, and their failure to comply
with the Case Management Orders.” It did not, as Kilpatrick required,
make a factual finding that the petitioners’ discovery violations were
“the result of willfulness, bad faith, fault or persistent dilatory
tactics.” Id. ¶ 26; see also Morton v. Cont’l Baking Co., 938 P.2d 271, 276
(Utah 1997) (“[Discovery sanctions are warranted if] (1) the party’s
behavior was willful; (2) the party has acted in bad faith; (3) the court
can attribute some fault to the party; or (4) the party has engaged in
persistent dilatory tactics tending to frustrate the judicial process.”).
¶16 But “[a] failure to make factual findings regarding
willfulness is not always grounds for reversal.” Kilpatrick, 2008 UT
82, ¶ 29. We can still affirm sanctions if the record and the court’s
factual findings demonstrate a basis for them, id., and we find that to
be the case here. Although we do not believe that the petitioners’
repeated disregard of discovery deadlines was tactical or the product
of bad faith, neither are we persuaded that the petitioners ever took
the court’s deadlines as seriously as they should have. We find it
particularly offensive that in August 2010—two months after the
final discovery deadline, with the threat of default judgment
imminent—the petitioners’ counsel still did not know exactly what
records had been produced, or even what records existed. This
seems to us to manifest an unwillingness to do the work involved in
responding adequately to discovery, as well as a careless disregard
for the court’s time and the plaintiff’s right to prosecute his case.
¶17 Under such circumstances, some sort of sanction was clearly
appropriate. We must therefore determine whether the district court
abused its discretion by choosing default judgment as the
appropriate sanction.
B. The Court Did Not Abuse Its Discretion by Entering Default Judgment
¶18 One of the situations in which a court can appropriately
enter default judgment is when “there has been a frustration of the
judicial process, viz., where the failure to respond to discovery
impedes trial on the merits and makes it impossible to ascertain
whether the allegations of the answer have any factual merit.” W. W.
& W. B. Gardner, Inc. v. Park W. Vill., Inc., 568 P.2d 734, 738 (Utah
1977). This is essentially the situation Mr. Fu complained of to the
court below: “We’ve alleged fraud [in the complaint] . . . . We believe
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there’s absolute fraud, and we need these books and records to
prove it. They have not provided them.”
¶19 Examining the record, we believe there was an adequate
basis for the trial court to agree with Mr. Fu that the petitioners’
discovery failures had rendered further litigation pointless. To begin
with, there is the sheer magnitude of the delay. The petitioners failed
to comply with their discovery deadline no fewer than four times,
twice in the face of court orders threatening default judgment. In
May 2009, the court ordered the petitioners to finish discovery in ten
days or have their answer stricken. Yet some requested records
remained outstanding a full fifteen months later.
¶20 In addition to the magnitude of the delay, we are also struck
by the petitioners’ apparent unreliability in explaining their
discovery difficulties to Mr. Fu and the court. As we already noted,
the petitioners’ counsel was still unsure about the status of important
discovery requests more than two months after the final deadline.
We also note that, although petitioners’ counsel has claimed that
none of the requested tax returns existed at the time of the final
discovery deadline on May 31, 2010, the record demonstrates that he
himself thought they existed as late as May 5 of that year. In other
words, sixteen months after Fu requested the petitioners’ tax returns,
the petitioners had still not informed their lawyer that they had no
tax returns. Under such circumstances, it is unsurprising that Mr. Fu
claimed he had received conflicting reports from petitioners’ counsel
about the availability of various documents, and likewise
unsurprising that the district court apparently believed him.
¶21 It is possible, as the petitioners now argue, that lesser
sanctions would have been sufficient to allow justice to be done in
this case. Further, we do encourage district courts imposing
sanctions to consider alternative sanctions carefully before entering a
default. But the question on appeal is not whether some other
sanction would have been more appropriate; it is whether the party
challenging the trial court’s decision can demonstrate that default
judgment was inappropriate. And where, as appears to be the case
here, a party’s conduct during discovery has destroyed its credibility
with opposing parties and with the court, we cannot conclude that
the court’s decision to enter default judgment was an abuse of
discretion.
II. THE PRESERVATION RULE BARS CONSIDERATION OF THE
PETITIONERS’ LEGAL INSUFFICIENCY ARGUMENTS
¶22 Before the court of appeals, the petitioners argued for the
first time that the factual allegations of Mr. Fu’s complaint did not
legally support the relief that the district court had granted. Fu v.
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Rhodes, 2013 UT App 120, ¶ 9, 304 P.3d 80. They acknowledged that
this issue was not preserved, id., and the court of appeals declined to
consider it, id. ¶ 19.
¶23 On certiorari, the petitioners argue that the court of appeals
erred by not acknowledging an exception to the preservation rule for
parties who challenge the legal sufficiency of the complaint on
appeal from a default judgment. To support this argument, they
appeal to the principle that a default judgment may not be entered
on the basis of a legally insufficient complaint. Further, they point to
our decision in Skanchy v. Calcados Ortope SA, 952 P.2d 1071 (Utah
1998), which they claim held “that, on appeal from a default
judgment, a defendant may, for the first time, contest the complaint’s
sufficiency to support the judgment.” The court of appeals rejected
this interpretation of Skanchy, concluding that the Skanchy court did
not decide “whether a claim that a complaint was insufficient to
support a default judgment could be raised for the first time on
appeal, but whether it could be raised at all.” Fu, 2013 UT App 120,
¶ 16.
¶24 We find these arguments to be somewhat beside the point.
Skanchy concerned a default judgment entered for failure to appear,
Skanchy, 952 P.2d at 1074, and the difference between that situation
and this one is obvious. A defaulting party who has failed to appear
will typically have learned of the lawsuit very recently, and will
have had little time to assess the lawsuit’s merits before the deadline
passes for filing a notice of appeal or a rule 60(b) motion. The same
cannot be said of a party facing default because of discovery
sanctions, whose situation more closely resembles that of a party that
has lost at summary judgment or even after trial.
¶25 The petitioners’ circumstances are illustrative. They had
already been litigating this case for over two years when the court
granted Mr. Fu’s motion for entry of judgment. Even after the court
granted Fu’s motion, the petitioners still had time to file objections to
the proposed default judgment order, and they did so, leading the
district court to hold a second hearing on the issue three months
after it granted the motion. The petitioners had ample opportunity to
contest the legal sufficiency of Mr. Fu’s complaint before the district
court, and they failed to take advantage of it. We see no reason to
protect them from the consequences of that failure.
¶26 We therefore hold that where default judgment has been
entered as a discovery sanction, a party appealing from that
judgment may challenge the legal sufficiency of the complaint only if
it has preserved the issue before the district court or if one of the
normal exceptions to the preservation rule applies. The petitioners
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have identified no such exception here, and so we find no fault with
the court of appeals’ decision not to consider this issue.
CONCLUSION
¶27 The district court did not abuse its discretion, and the court
of appeals correctly determined that it should not consider the issue
of the complaint’s legal sufficiency because that issue had not been
preserved.
¶28 The decision of the court of appeals is affirmed.
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