Patient To A Default

A letter opinion of the Delaware Court of Chancery grants a default judgment for litigation misconduct

This has been a high-touch case. Defendants 4301 Operations, LLC, and Brian Conners (“Defendants”) strung plaintiff Scarabee Holdings, LLC (“Plaintiff”) along in discovery, and Plaintiff sought help from this Court; I was patient, perhaps to a fault, and I gave Defendants the benefit of the doubt on multiple occasions. My tune changed when Defendants’ former Delaware counsel took the difficult and commendable step of notifying the Court that their clients had repeatedly lied in sworn and represented filings about fundamental facts supporting their defense. Defendants also falsified evidence in furtherance of their lies. The falsity of those statements was borne out in a deposition. Defendants’ misconduct presents the rare occasion when a default judgment is the only appropriate sanction.

The case

Plaintiff filed this action seeking a “Class B Preferred Return” payable annually under 4301 Operations’ LLC agreement “to the extent that the Board determines there are sufficient operating funds.” In discovery, Defendants told Plaintiff that 4301 Operations’ board (the “Board”) had never evaluated whether to pay the Class B Preferred Return, and indeed had never met.

Findings

Defendants submitted multiple filings governed by Rule 11 containing blatant and material lies. The filings stated the Class B Preferred Return was not owed because Conners had annually evaluated the Class B Preferred Return and  concluded 4301 Operations lacked the funds to pay it. That was the crux of Defendants’ defense. It was plainly material, and false. “To mislead the court and [Scarabee] about so fundamental a question . . . through plainly false pleadings is a clear violation of Rule 11.”

And Defendants violated Rule 37. Under Rule 37, “[i]f a party or an officer, director, or managing agent of a party . . . fails to obey an order to provide or permit discovery,” this Court “may make such orders in regard to the failure as are just.” On June 5, I entered an order accepting Defendants’ offer of discovery into Defendants’ ratification defense, and postponing trial. But Defendants did nothing but continue to lie in their written responses. When they made that offer, they had no intention of looking for more discovery. Now the full truth has come out: there was never a ratification, or any determination to ratify.

The next question is what to do about these violations. Under Rule 11, the “sanction imposed . . . must be limited to what suffices to deter repetition of the conduct or comparable conduct by others similarly situated.” And if a party “fails to obey an order to provide or permit discovery,” Rule 37 says the Court may implement sanctions “as are just.” Possible sanctions include “dismissing the action or proceedings or any part thereof, or rendering a judgment by default against the disobedient party.” “Discovery abuse has no place in our courts, and the protection of litigants, the public, and the bar demands nothing less than that our trial courts be diligent in promptly and effectively taking corrective action to ‘secure the just, speedy and inexpensive determination of every proceeding’ before them.”

Sanction

Defendants argue they are owed a trial on the merits. But Defendants planned to deprive Plaintiff of the same. Having affirmatively lied in multiple court filings and ignored Court orders, the rare sanction of default judgment is appropriate here under Rules 11 and 37.

(Mike Frisch)