July 19, 2019

Tenth Circuit: Sanctions Against Attorney Affirmed Where He Negligently Disregarded Discovery Obligations

The Tenth Circuit Court of Appeals issued its opinion in Sun River Energy, Inc. v. Nelson on Wednesday, September 2, 2015.

Attorneys James E. Pennington and Stephen E. Csajaghy were sanctioned for their refusal to disclose insurance coverage during securities litigation involving Sun River. Pennington was in-house counsel for Sun River and Csajaghy was retained to represent the company in the underlying litigation. During the underlying litigation, a magistrate judge set a discovery deadline of April 6, 2011, by which time Sun River was obligated to disclose any insurance coverage. However, no disclosure was made until nearly 18 months later, after repeated requests from opposing counsel, and by the time the policy was disclosed the coverage period had expired. Opposing counsel moved for sanctions against Sun River under Rule 37(b)(2)(A), requesting that Sun River’s claims against defendants be dismissed and entering default judgment for defendants on their counterclaims.

The magistrate judge held an evidentiary hearing, and ultimately recommended that default judgment be entered against Sun River but not approving dismissal. The magistrate judge noted that there was not intentional misrepresentation by Sun River’s attorneys, but neither attorney actually looked at the policy to see if it provided coverage, instead relying on their mistaken beliefs that the policy would not be relevant. Sun River objected to the magistrate judge’s recommendations, and a district judge addressed the contentions at a pretrial hearing. By that time, Csajaghy had withdrawn from the representation and Pennington appeared as counsel of record. The district court decided counsel were culpable for the misrepresentation and should be held personally responsible. The district court ultimately imposed the sanction of opposing counsel’s attorney fees against Pennington and Csajaghy in the amount of $20,435.

Pennington and Csajaghy moved for reconsideration, arguing Rule 37(c) does not allow imposition of sanctions on counsel, counsel acted with substantial justification, any sanction should have been imposed on Sun River, and due process precluded imposition of a sanction against Csajaghy, who had withdrawn before the sanctions were imposed. In response, defendants argued the sanction was not only justified under Rule 37 but under Rule 26(g)(3) and the district court’s inherent power as well, also noting that counsel’s deliberate indifference demonstrated a lack of substantial justification, sanctioning counsel was appropriate, and that both attorneys had been afforded substantial due process in the matter. The district court issued a thorough written decision, granting in part and denying in part the motion for reconsideration. The district court noted that Rule 37(b)(2)(C) authorizes a monetary sanction for failure to obey a discovery order and expressly allowed the attorney advising the party to be sanctioned, finding that since Csajaghy was Sun River’s attorney of record at the time of the discovery violation the sanction against him was appropriate. As to Pennington, since he was not the attorney of record at the time of the discovery violation, the district court held he was not subject to Rule 37(b)(2)(C) sanctions, but became responsible for timely updating discovery responses under Rule 26 when he became attorney of record, and therefore the sanction was justified under Rule 37(c)(1)(A). The attorneys appealed.

The Tenth Circuit began its analysis by examining the sanction against attorney Pennington. The Tenth Circuit noted that the only case law on the subject held that the sanctions were enforceable against parties only, not attorneys. The district court rejected the holding as unpersuasive, but the Tenth Circuit disagreed with the district court’s analysis as overbroad. The Tenth Circuit noted that there was no express textual reference extending the sanction against attorneys, and found that consideration of the relevant text cut against the district court’s analysis. Under the circumstances of this case, the Tenth Circuit found the sanctions against Pennington unwarranted by Rule 37. Turning to defendants’ argument that the sanctions were allowed by the district court’s inherent power, the Tenth Circuit again disagreed, finding that although his failure to disclose was not substantially justified, it was not vexatious, wanton, oppressive, or done in bad faith. The Tenth Circuit reversed the sanction against Pennington.

Turning to attorney Csajaghy, the Tenth Circuit found there was no question that the district court had authority to impose a personal sanction. Csajaghy objected to the sanction, arguing the sanction was not warranted on the facts, sanctioning counsel was inconsistent with the decision not to sanction Sun River, and the procedure through which he was sanctioned violated due process. The Tenth Circuit found no merit to any of his arguments. The Tenth Circuit admonished that, as counsel of record in the litigation, it was irresponsible for Csajaghy to assume that the in-house counsel, Pennington, had reviewed the policy. Even if had known Pennington reviewed the policy, Csajaghy should have conducted an independent review to satisfy his professional obligations. The Tenth Circuit further chastised Csajaghy for assuming the policy would not provide coverage in lieu of exercising critical judgment. The Tenth Circuit also approved of the district court’s decision to sanction Csajaghy while not sanctioning Sun River, because the company reasonably relied on its counsel to provide relevant disclosures and counsel failed to do so. Finally, the Tenth Circuit addressed Csajaghy’s due process arguments, and although it agreed with the district court that the initial order imposing the sanction was procedurally defective, any defect was cured by the subsequent proceedings on the motion for reconsideration.

The Tenth Circuit reversed the sanction against attorney Pennington and affirmed the sanction against attorney Csajaghy.

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