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Discovery Delayed is Not Discovery Denied for Purposes of Sanctions

A recent unpublished Appellate Division decision holds that even a party’s willful refusal to produce documents demanded in discovery may not be a basis for dismissal of the party’s claims or defenses in a lawsuit. In Liberty Mutual Insurance Company v. Viking Industrial Security, Inc. et al., Docket No. A-6297-10T3 (N.J. Super. Ct. App. Div. January 8, 2014), an insurance fraud case, Liberty Mutual and the State of New Jersey (collectively, "Liberty Mutual") had obtained an order granting discovery sanctions against a group of defendants affiliated with the Viking Group, Inc. (Viking defendants). The trial court had found that the Viking defendants had engaged in "a calculated method of discovery misconduct," had acted in "enormous bad faith," and had "really done everything in their power to impede discovery in this matter." As a result the trial court entered a sanctions order, which established certain facts, allowed the jury to draw negative inferences against the Viking defendants, and awarded more than $108,000 in attorneys’ fees and costs. With the sanctions order, Liberty Mutual was then able to prevail on its claims and, ultimately, obtained a judgment against the Viking defendants for damages, penalties, interest, and attorneys’ fees. The Viking defendants then appealed, challenging the sanctions order as unwarranted.

The facts at issue involved the payroll of the Viking companies, which the defendants had under-reported for several years in order to receive lower premiums for workers’ compensation insurance issued by Liberty Mutual. As a result of the under-reporting, Liberty Mutual calculated Viking’s premiums using only the smaller payroll. Eventually, the State Office of Insurance Fraud Prosecutor contacted Liberty Mutual to report that an anonymous caller had alleged that Viking was not disclosing its actual payroll. In response to Liberty Mutual’s investigation, the Viking defendants’ accountant only provided the investigators with the smaller payroll and did not reveal that Viking maintained a complete payroll on its QuickBooks program.

Liberty Mutual suspected that Viking had not provided accurate payroll records and estimated a new premium. When Viking failed to pay the new premium, Liberty Mutual terminated its workers’ compensation policy. Viking’s accountant subsequently worked with Liberty Mutual to determine the correct premium and provided the complete payroll amount but he did not furnish the detailed QuickBooks records. Ultimately, Liberty Mutual and Viking reached an agreement under which the workers’ compensation policy would be reinstated in exchange for Viking’s $563,744 payment secured by a promissory note. Viking made a few payments on the note before defaulting. Liberty Mutual then sued.

During the course of the lawsuit, Liberty Mutual requested that the Viking defendants produce any payroll records maintained in electronic form. The Viking defendants did not provide the QuickBooks records, claiming that the payroll records were not kept in electronic form. Eventually, one of Viking’s bookkeepers testified about the QuickBooks records. Liberty Mutual then obtained an order compelling the Viking defendants to produce those records.

Once the records were produced Liberty Mutual was able to use the Quickbooks records in depositions and in preparing for trial. Liberty Mutual also obtained sanctions against the Viking defendants for their delay in producing the records, including attorneys’ fees, and a "spoliation order," which conclusively established certain facts in Liberty Mutual’s favor and allowed the jury to draw negative inferences against the Viking defendants.

On the Viking defendants’ appeal from the judgment, the appellate court reversed the trial court’s sanctions order. The Appellate Division did not equate the Viking defendants’ failure to turn over the records for almost a year to a spoliation situation in which a party "has hidden, destroyed, or lost relevant evidence and thereby impaired another party’s ability to prosecute or defend the action." It reasoned that, however recalcitrant the Viking defendants were, the QuickBooks records were eventually provided intact during the lawsuit and Liberty Mutual was able to use the records at depositions in preparing expert reports and at trial. Because the party seeking discovery ultimately received it, the court considered the extreme sanctions in the spoliation order to be inappropriate. However, the Appellate Division did approve the use of lesser sanctions, including the payment of Liberty Mutual’s attorneys’ fees, to level the playing field and eliminate any prejudice to Liberty Mutual from the delayed production.

The Viking Industrial Security case shows that, as long as the prejudice against a party by another party’s failure to make timely discovery can be cured by those lesser measures, courts will be reluctant to impose the severe sanctions of dismissal of a party’s claims or defenses.

©2019 Drinker Biddle & Reath LLP. All Rights Reserved

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Vincent Gentile, Commercial Litigation Lawyer, Drinker Biddle
Partner

Vincent E. Gentile litigates a broad range of civil and commercial matters from trial through appeal. He has represented major corporate clients in complex, multiparty cases and individuals and small businesses in both state and federal courts.

Vince concentrates his practice on financial litigation including defense of accountants and auditors, and on shareholder disputes involving closely held corporations, including shareholder "oppression" cases and appraisal actions. He successfully tried and defended an appeal on one of the early seminal...

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Stephen Long, Litigation lawyer, Drinker Biddle
Partner

Stephen R. Long is a trial lawyer with extensive experience in the litigation, trial, arbitration and mediation of complex commercial cases, employment disputes and the defense of professional negligence claims and asbestos injury product liability cases. He represents national law and accounting firms, Fortune 500 companies and liability, life and health insurers.

Steve has appeared in courts and administrative agencies across the country at trials, preliminary injunction hearings, dispositive motion hearings, appeal arguments and other proceedings. He has counseled corporate clients on employment matters and has handled numerous investigations of allegedly improper conduct in the workplace. Steve has defended accounting firms and individual auditors in securities class actions, “deepened insolvency” litigation and SEC investigations. He has also handled cases for large and small law firms in the defense of malpractice claims arising from transactional work, trust and estate engagements, IP matters and litigation. He recently tried to a successful conclusion a mesothelioma death case on behalf of a major valve manufacturer.

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Karen A. Denys , Drinker Biddle, Construction & Real Estate Attorney
Counsel

Karen A. Denys is counsel in the firm's Commercial Litigation Practice Group. Karen's practice focuses on construction contract drafting and litigation, real estate and land use litigation and general commercial litigation. 

Construction Law. The primary focus of Karen's practice is on construction law. Karen drafts and negotiates all forms of construction, architectural and engineering agreements (including agreements involving the design and construction of environmentally-sound green buildings) and counsels clients in project management and...

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John Mitchell, Environmental Litigation Lawyer, Drinker Biddle
Counsel

John P. Mitchell assists clients with large environmental lawsuits relating to soil and groundwater contamination and natural resource damages. He also handles other complex commercial litigation matters, including consumer fraud act cases, commercial foreclosure/creditors’ rights actions on behalf of large national lending institutions and other clients, actions in lieu of prerogative writs on behalf of developers and owners challenging zoning ordinances and challenging and defending municipal actions concerning development applications, commercial...

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