ROBERT W. LEHRBURGER, Magistrate Judge.
Pursuant to Rule 37(b)(2)(A) of the Federal Rules of Civil Procedure, Plaintiff Consumer Financial Protection Bureau ("CFPB") moves for sanctions against Defendants NDG Financial Corp., E-Care Contact Centers, Ltd., Blizzard Interactive Corp., New World Consolidated Lending Corp., New World Lenders Corp., Payroll Loans First Lenders Corp., New World RRSP Lenders Corp., Kimberly DeThomas, Emerald Willow Holdings, Ltd., Jeremy Sabourin, Red River Holdings Company, Ltd., William Wrixon, and Twillingate Holdings, Ltd. (the "Canadian NDG Defendants"), based on their failure to comply with discovery. For the reasons set forth below, I recommend that CFPB's motion be GRANTED in part and DENIED in part.
The alleged facts underlying this action have been set forth in previous decisions of the Court, including the Decision and Order Denying Defendants' Motion to Dismiss. Consumer Financial Protection Bureau v. NDG Financial Corp. (NDG Financial). No. 15 Civ. 5211, 2016 WL 7188792, at *1-5 (S.D.N.Y. Dec. 2, 2016), Dkt. 98. Most relevant to this motion, however, are procedural facts. A brief summary of the factual and procedural background follows.
CFPB initiated this action against twenty-one interconnected corporations and individuals that allegedly operated a cross-border online payday lending scheme from 2005 to 2013. The scheme primarily involved making loans to U.S. consumers in violation of state usury laws and then using unfair, deceptive, and abusive practices to collect on the loans and profit from the revenues.
The various defendants comprise assorted groups within the NDG Enterprise. Two of these groups are based on geography. The "Canadian Corporate Group" is comprised of NDG Financial Corp. and several of its direct subsidiaries and sub-subsidiaries.
Two other groups are the "Original Owners" and the "Current Owners." According to the FAC, the NDG Enterprise was initially owned and controlled by three corporate entities, each of which was owned and controlled by one of the individual defendants; together these corporations and individuals are the Original Owners: Sagewood Holdings Ltd., owned and controlled by Peter Ash; Knightsbridge Holdings Ltd., owned and controlled by Paul Ash; and 0562752 B.C. Ltd., owned and controlled by Paul Grehan.
In 2013, ownership and day-to-day management of the NDG Enterprise transferred from the Original Owners to the Current Owners.
CFPB filed its initial complaint against Defendants in July 2015 and the FAC on December 11, 2015. Defendants then filed motions to dismiss. The motions to dismiss sought dismissal for lack of personal jurisdiction and failure to state a claim. The Court denied the motions to dismiss in their entirety. NDG Financial at *1; see also Consumer Financial Protection Bureau v. NDG Financial Corp., No. 15 Civ. 5211, 2016 WL 7742784, at *1 (S.D.N.Y. Dec. 19, 2016), Dkt. 109.
On January 13, 2017, the Canadian NDG Defendants filed an Answer to the FAC. The Maltese Defendants did not. Instead, counsel for the Maltese Defendants filed a request to withdraw as counsel.
On March 16, 2017 the Parties, including the Canadian NDG Defendants but not the Maltese Defendants, filed a proposed Joint Discovery Plan in which the Defendants stated their intent to seek "discovery from both Plaintiff and Third-Parties," thus indicating their intent to participate in discovery.
During the ensuing months, all of the Canadian NDG Defendants failed to respond to CFPB's written discovery requests. Those requests included document requests and interrogatories seeking relevant information, including "(1) the specific consumers harmed and (2) the total harm suffered by each consumer."
On July 20, 2017, the Court issued an Order denying counsel's motion to withdraw and granting CFPB's motion to compel. As to the motion to withdraw, the Court found significant that "[t]he Canadian NDG Defendants' counsel readily admit that their clients have no intention of complying with Plaintiff's discovery requests or locating replacement attorneys."
In November 2017, CFPB filed two motions. One motion sought voluntary dismissal of the corporate and individual Original Owners: Peter Ash and Sagewood Holdings; Paul Ash and Knightsbridge Holdings; and Paul Grehan and 0562752 B.C.
On February 5, 2018, the Court granted CFPB's motion to voluntarily dismiss the Original Owners.
The second motion simultaneously filed by CFPB in November 2017 was the motion at bar for sanctions against the Canadian NDG Defendants. In support of its motion, CFPB points to the Canadian NDG Defendants' refusal to participate in discovery after initially indicating its intent to do so; their disregard of the Court's March 21, 2017 warning of sanctions for any discovery violation and of the Court's July 20, 2017 Order warning of sanctions including default judgment; and the fact that the Canadian NDG Defendants repeatedly stated their intent to default.
In opposition to the sanctions motion, the Canadian NDG Defendants essentially make the same argument they did in opposition to the motion to voluntarily dismiss the Original Owners: that the sanctions sought would unfairly expose the Current Owners to liability for the entire NDG Enterprise, even though, according to them, they were involved only for the last five months of the eight-year-plus scheme.
When a party "fails to obey an order to provide or permit discovery" a district court may issue "further just orders," including, among others, an order "prohibiting the disobedient party from supporting or opposing designated claims or defenses, or from introducing designated matters in evidence," and "rendering a default judgment against the disobedient party." Fed. R. Civ. P. 37(b)(2)(A); accord Guggenheim Capital, LLC v. Birnbaum, 722 F.3d 444, 450 (2d Cir. 2013). "A district court has wide discretion in imposing sanctions, including severe sanctions, under Rule 37(b)." Funnekotter v. Agricultural Development Bank of Zimbabwe, No. 13 Civ. 1917, 2015 WL 3526661, at *4 (S.D.N.Y. June 3, 2015) (quoting Daval Steel Prods., a Division of Francosteel Corp. v. MN Fakredine, 951 F.2d 1357, 1365 (2d Cir. 1991)); accord Guggenheim, 722 F.3d at 450-51.
Courts typically consider the following factors when considering whether and to what extent to impose Rule 37 sanctions: "(1) the willfulness of the non-compliant party or the reason for noncompliance; (2) the efficacy of lesser sanctions; (3) the duration of the period of noncompliance; and (4) whether the non-compliant party had been warned that noncompliance would be sanctioned." Guggenheim, 722 F.3d at 451 (internal quotation marks omitted) (quoting Agiwal v. Mid Island Mortgage Corp., 555 F.3d 298, 302 (2d Cir. 2009) (per curiam)). "Because the text of the rule requires only that [a] district court's orders be just . . . and because [a] district court has wide discretion in imposing sanctions under Rule 37, these factors are not exclusive, and they need not each be resolved against the party . . . ." S.E.C. v. Razmilovic, 738 F.3d 14, 25 (2d Cir. 2013) (citation omitted) (internal quotation marks omitted) (quoting Southern New England Telephone Co. v. Global NAPs Inc., 624 F.3d 123, 144 (2d Cir. 2010)).
Sanctions pursuant to Rule 37(b) serve multiple purposes: "First, they ensure that a party will not benefit from its own failure to comply. Second, they are specific deterrents and seek to obtain compliance with the particular order issued. Third, they are intended to serve a general deterrent effect on the case at hand and on other litigations, provided that the party against whom they are imposed was in some sense at fault." Southern New England Telephone, 624 F.3d at 149 (internal quotations marks omitted) (quoting Update Art, Inc. v. Modiin Publishing, Ltd., 843 F.2d 67, 71 (2d Cir. 1988)); see also Grammar v. Sharinn & Lipshie, No. 14 Civ. 6774, 2016 WL 525478, at *2-3 (S.D.N.Y. Feb. 8, 2016).
"Although `[s]trong sanctions should be imposed only for serious violations of discovery orders' their imposition is `justified . . . when the failure to comply with a court order is due to willfulness or bad faith, or is otherwise culpable.'" Funnekotter, 2015 WL 3526661, at *4 (quoting Daval Steel, 951 F.2d at 1367); accord Guggenheim, 722 F.3d at 450-51. "The most severe in the spectrum of sanctions provided by statute or rule must be available to the district court in appropriate cases, not merely to penalize those whose conduct may be deemed to warrant such a sanction, but to deter those who might be tempted to such conduct in the absence of such a deterrent." Razmilovic, 738 F.3d at 25 (quoting Sieck v. Russo, 869 F.2d 131, 134 (2d Cir. 1989) (citing Supreme Court precedent and entering default against defendants who "elected to defy" two court orders to attend their depositions)). In short, "a court should not shrink from imposing harsh sanctions where they are clearly warranted." Funnekotter, 2015 WL 3526661, at *4 (quoting Lopez v. City of New York, No. 05 CV 3624, 2007 WL 2743733, at *7 (E.D.N.Y. Sept. 18, 2007)); accord Jones v. Niagara Frontier Transportation Authority, 836 F.2d 731, 735 (2d Cir. 1987).
Sanctions unequivocally are appropriate in this case. All four of the primary factors considered on a sanctions motion militate toward imposition of sanctions. To begin, the Canadian NDG Defendants willfully disregarded the Court's orders compelling discovery. "Noncompliance with discovery orders is considered willful when the court's orders have been clear, when the party [to be sanctioned] has understood them, and when the party's noncompliance is not due to factors beyond the party's control." Grammar, 2016 WL 525478, at *3 (alteration in original) (quoting Baba v. Japan Travel Bureau International, Inc., 165 F.R.D. 398, 402-03 (S.D.N.Y. 1996), aff'd 111 F.3d 2 (2d Cir. 1997)); accord Thompson v. Jamaica Hospital Medical Center, No. 13 Civ. 1896, 2015 WL 7430806, at *3 (S.D.N.Y. Nov. 20, 2015). "Willful non-compliance is routinely found, for instance, where a party has `repeatedly failed to . . . produce documents . . . in violation of the district court's orders.'" Farmer v. Hyde Your Eyes Optical, Inc., No. 13 Civ. 6653, 2015 WL 2250592, at *7 (S.D.N.Y. May 13, 2015) (alterations in original) (quoting Doe v. Delta Airlines, Inc., No. 13 Civ. 6287, 2015 WL 798031, at *8 (S.D.N.Y. Feb. 25, 2015)).
All the hallmarks of willfulness are present here. The Order compelling discovery could not have been clearer: "The Canadian NDG Defendants are ordered to respond or object to Plaintiff's discovery requests within 20 days of the date of this order. If any Defendant fails to do so, the Court will entertain a motion for sanctions, including default judgment. . . ."
No sanction less than entry of default judgment would be effective. Orders to compel have failed to achieve compliance, and monetary sanctions (of an appropriate amount) would not bring about any different result. That is because the Canadian NDG Defendants are not merely being slow to comply or in need of monetary incentive; rather, as noted, they have "limited resources" to litigate and made a choice to default in the absence of settlement.
As to length of non-compliance, more than seven months have passed since the Court issued its Order compelling the Canadian NDG Defendants to comply with discovery and warning that the Court would entertain a motion for sanctions, including default judgment, if any Defendant failed to comply.
Finally, the Canadian NDG Defendants received fair warning more than once that their failure to comply could result in a default judgment. At the outset of discovery, the Court put them on notice that sanctions would be imposed "for any effort to delay discovery."
The Canadian NDG Defendants argue that the sanctions sought by CFPB should not be imposed because of the prejudice and "absurd[ity]" of a result in which the Canadian NDG Defendants are found liable for the entirety of the NDG Enterprise while all the other Defendants (the Original Owners) were dismissed "on the merits."
The Second Circuit Court of Appeals has cast doubt on the vitality of Frow in light of the subsequent enactment of Federal Rule of Civil Procedure 54(b), which authorizes entry of default judgment against fewer than all parties as long as there is no just reason for delay. International Controls Corp. v. Vesco, 535 F.2d 742, 746 n.4 (2d Cir. 1976) ("We think it most unlikely that Frow retains any force. . . . "). "[A]t most, Frow controls in situations where the liability of one defendant necessarily depends on the liability of the others." Id. Some district courts have applied Frow in that context. See, e.g., RSM Production Corp. v. Fridman, 643 F.Supp.2d 382, 414 (S.D.N.Y. 2009) (citing Vesco and applying Frow).
Even if Frow endures, the Canadian NDG Defendants cannot invoke it. The very premise of their argument — that voluntary dismissal of the Original Owners was a determination on the merits — is incorrect. The voluntary dismissal was "with prejudice," but that does not mean that the claims were determined to have no merit. The Court "rejected out of hand" this very argument when the Canadian NDG Defendants asserted it in opposition to CFPB's motion for voluntary dismissal.
Frow and its progeny also do not apply for a second reason: the liability of the Canadian NDG Defendants does not "necessarily depend" on the liability of the dismissed parties. Vesco, 535 F.2d at 746 n.4. The Canadian NDG Defendants argue otherwise, seizing on the fact that the operative complaint alleges their involvement in a "common enterprise," specifically the NDG Enterprise.
Although entry of default judgment is warranted, sanctions precluding the Canadian NDG Defendants from contesting the extent of consumer harm and the amount of an award at judgment are not. It is a well-established principle that while a defendant's default entitles a plaintiff to judgment on liability, the defendant is allowed the opportunity to contest the amount of damages. See, e.g., Bambu Sales, 58 F.3d at 852 (after granting default as discovery sanction, district court referred matter for inquest on damages); Vera v. Donaldo Law Firm, No. 17 Civ. 3123, 2017 WL 6873928, *3 (S.D.N.Y. Dec. 21, 2017) (following default, "Defendant should be given a reasonable opportunity to contest the amount of damages that Plaintiff is seeking"); Local Union No. 40 of the International Association of Bridge, Structural and Ornamental Iron Workers v. Car-Win Construction, 88 F.Supp.3d 250, 274 (S.D.N.Y. 2015) (although a default judgment establishes liability, "it does not reach the issue of damages"); Norcia v. Dieber's Castle Tavern, 980 F.Supp.2d 492, 500 (S.D.N.Y. 2013) (upon entry of default judgment, the court "accept[s] as true all of the factual allegations of the complaint, except those relating to damages" (quoting Au Bon Pain Corp. v. Artect, Inc., 653 F.2d 61, 65 (2d Cir. 1981)).
"Unless damages are certain, they must be proven in a post-default inquest. . . ." Norcia, 980 F. Supp. 2d at 500; see also Local Union No. 40, 88 F. Supp. 3d at 274-75 (recommending entry of default judgment as sanction, followed by inquest). The Court does not have before it any information about the extent of damages or any other monetary relief, such as restitution or disgorgement. An inquest is needed to make that determination, and the Canadian NDG Defendants should be given an opportunity to contest the amount claimed.
The Court has identified at least one case where the district court imposed sanctions that included not only default judgment but also precluded the defendant from "offering at the inquest any evidence on any of the subjects with respect to which plaintiff requested documents." Lumberman's Mutual Casualty Co. v. Holiday Vehicle Leasing, Inc., 212 F.R.D. 139, 143-44 (S.D.N.Y. 2002). While there is no doubt that the Court has discretion to sanction an uncooperative defendant with both default and preclusion at inquest, I do not consider such a sanction to be appropriate here. Although the Canadian NDG Defendants have acted willfully, that does not mean they acted in bad faith. To the contrary, they have been candid about their intent to default if the case did not settle. Moreover, had the Canadian NDG Defendants defaulted by not even answering the complaint, they would have had full opportunity to contest the amount of damages in an inquest. I do not find their conduct so egregious that they should be put in a worse position for entering the litigation but then deciding to default. Accordingly, I recommend not imposing the additional sanctions of evidence preclusion and adverse inference.
Rule 37 requires that the noncompliant party pay expenses as follows: "Instead of or in addition to the orders above, the court must order the disobedient party, the attorney advising that party, or both to pay the reasonable expenses, including attorney's fees, caused by the failure, unless the failure was substantially justified or other circumstances make an award of expenses unjust." Fed. R. Civ. P. 37(b)(2)(C) (emphasis added); accord Joint Stock Company Channel One Russia Worldwide v. Informir LLC, No. 16 Civ. 1318, 2017 WL 3671036, at *19, 27 (S.D.N.Y. July 18, 2017) (quoting provision and awarding expenses), report and recommendation adopted, 2017 WL 4712639 (S.D.N.Y. Sept. 28, 2017). In short, an award of expenses caused by noncompliance with a court order is mandatory unless the failure was justified or such an award would otherwise be unjust.
In this instance, CFPB has neither requested nor provided evidence of any expenses caused by the Canadian NDG Defendants' failure to comply with the Court's orders. Any cost associated with the earlier motion to compel could and should have been addressed in connection with that motion. The question here is whether there are any expenses caused by failure to comply with the Court's July 20, 2017 Order compelling compliance with discovery. The expense incurred in connection with making the present motion for sanctions would qualify. That said, even if the Canadian NDG Defendants had defaulted at the outset of the case before answering, CFPB still would have incurred the expense of making a motion for default judgment. As a result, CFPB may not have any additional expenses caused by the Canadian NDG Defendants' noncompliance. To the extent CFPB believes there are compensable expenses, however, it may apply to the Court by submitting appropriate proof and authority for the award no later than thirty days from decision on this Report and Recommendation.
For the foregoing reasons, I recommend that CFPB's motion for sanctions be GRANTED to the extent of entering default judgment of liability against the Canadian NDG Defendants, along with an award of costs (including attorneys' fees), if any, caused by noncompliance with the Court's July 20, 2017 Order, and DENIED to the extent that the motion requests additional or other sanctions. Pursuant to 28 U.S.C. § 636(b)(1) and Rules 72, 6(a), and 6(d) of the Federal Rules of Civil Procedure, the Parties shall have fourteen (14) days to file written objections to this Report and Recommendation. Such objections shall be filed with the Clerk of the Court, with extra copies delivered to the Chambers of the Honorable Colleen McMahon, United States Courthouse, 500 Pearl Street, New York, New York 10007, and to the Chambers of the undersigned, 500 Pearl Street, New York, New York 10007. Failure to file timely objections will preclude appellate review.
Respectfully Submitted,
