Fox v. Studebaker-Worthington, Inc.

• Decision Date: 30 May 1975
• Docket Number: INC,No. 74-1286,STUDEBAKER-WORTHINGTO,74-1286
• Citation: 516 F.2d 989
• Parties: Anthony FOX et al., Appellants, v., et al., Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 989

516 F.2d 989

Anthony FOX et al., Appellants, v. STUDEBAKER-WORTHINGTON, INC., et al., Appellees.

No. 74-1286.

United States Court of Appeals Eighth Circuit.

Submitted Nov. 11, 1974.

Decided May 30, 1975.

James P. Larkin, Minneapolis, Minn., for appellants.

James H. O'Hagan, Minneapolis, Minn., for appellees.

Before VAN OOSTERHOUT, Senior Circuit Judge, HEANEY, Circuit Judge, and MEREDITH, ^* Chief District Judge.

VAN OOSTERHOUT, Senior Circuit Judge.

Plaintiffs Anthony Fox, Marcella Fox and George Hean appeal the dismissal of their complaint pursuant to Fed.R.Civ.P. Rule 37(d) for violations of the federal rules of discovery and the imposition of sanctions pursuant to Fed.R.Civ.P. Rule 37(b)(2)(A) establishing as true certain portions of defendants' counterclaim. We affirm as to the dismissal of plaintiffs' complaint but reverse on the matter of the counterclaim.

On December 12, 1969, the parties entered into an agreement (Stock Purchase Agreement) whereby Gravely Corporation, a wholly owned subsidiary of defendant Studebaker-Worthington, Inc., and a predecessor in interest of defendant Clarke-Gravely Corporation, purchased a snowmobile manufacturing operation, Couparral, from Anthony Fox, his wife Marcella Fox, and George Hean, a business associate. Part of the original purchase price pursuant to the Stock Purchase Agreement was to be paid to plaintiffs out of future profits of the business under defendants' management. Whether it was Couparral's insolvency from the beginning or defendants' mismanagement, the business showed no profit after defendants took over. Since there were no "future profits" and the full purchase price was not forthcoming, the plaintiffs sued for $10,000,000 in damages alleging mismanagement of the acquired company. Alleging fraud, defendants counterclaimed for return of $300,000 initially paid to plaintiffs as part of the purchase price for the business. Defendants sought additional damages for alleged violations of Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5 (promulgated pursuant to § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b)); violations of § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q; and violations of § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l. Fraud and misrepresentation by plaintiffs in the sale of Couparral are the basis of these allegations.

Prior to the date set for trial the parties engaged in discovery pursuant to the federal rules. Depositions were taken and interrogatories were submitted. Defendants' Set I Interrogatories were served on December 20, 1971, and answered by Anthony Fox and George Hean April 12, 1972. Defendants' Set II Interrogatories were served May 8, 1972, and answered by Anthony Fox July 10, 1972. In addition, supplemental answers to Set I Interrogatories were made by Anthony Fox in August of 1972. ¹ In depositions given by Anthony Fox he admitted engaging in certain electrical surveillance or "bugging" of defendants' offices. Said "bugging" included listening to and recording of conversations between defendants' officers and a variety of people including defendants' trial counsel. During the depositions Fox initially maintained that all recorded tapes of these conversations had been destroyed. This allegation was apparently made after his attorney advised Fox that such evidence would have to be produced during discovery. Fox subsequently changed his position and maintained that some of the tapes were still in his possession. In still a later deposition, Fox completely changed his story and said that no "bugging" had ever taken place, that his earlier stories were "fabrications borne out of frustration at being unable to acquire any information . . . (about) his former company," and that no tapes ever existed. ²

In response to plaintiffs' flagrant violations of the rules of discovery, the defendants moved for an order of dismissal, pursuant to Fed.R.Civ.P. 37(d), of plaintiffs' complaint. No Rule 37(a) order compelling plaintiffs to completely answer the interrogatories was sought by defendants. Describing the plaintiffs' conduct as "a shocking abuse of the Federal Rules of Civil Procedure governing the discovery process," the trial court on October 31, 1972, granted defendants' motion and dismissed plaintiffs' complaint. Although plaintiffs Marcella Fox and George Hean did not participate in the "bugging" incidents, the dismissal was against all plaintiffs.

The dismissal of plaintiffs' complaint left only the defendants' counterclaim for adjudication. Based on plaintiffs' conduct before and after the October 31st dismissal, the defendants again moved the district court for Rule 37 sanctions with respect to the counterclaims. On May 3, 1973, pursuant to Rules 37(d) and 37(b)(2)(A), defendants' motion was granted establishing as true allegations of certain paragraphs of the counterclaim.

Thereafter on October 26 and October 31, 1973, the court heard testimony regarding the extent of damages on the counterclaim. In accord with the factual allegations established in the counterclaim, the court held that defendants were entitled to recover damages for plaintiffs' misrepresentations.

Finding that Couparral stock had no value and that the purchase price was $600,000, ³ the court concluded that the $600,000 purchase price was recoverable. An additional $718,433.75 was awarded defendants as the amount the Couparral balance sheet, incorporated into the Stock Purchase Agreement, understated the company's liabilities. Thus a total $1,318,433.75 was awarded defendants on their counterclaim.

On appeal plaintiffs contend:

I. The court abused its discretion in dismissing plaintiffs' complaint as to Mr. Hean and Mrs. Fox.

II. The court abused its discretion in imposing Federal Rule of Civil Procedure 37(b)(2)(A) deeming admitted certain allegations of defendants' counterclaim.

III. The failure to prove due care, reliance and value of securities at time of purchase bars recovery in both federal statutory and common law security fraud actions.

I.

THE DISMISSAL OF PLAINTIFFS' COMPLAINT.

No complaint is made with respect to the dismissal of plaintiffs' complaint as to Anthony Fox. The court in its order dismissing the complaint states "it was conceded on argument of the motion that dismissal as to Anthony Fox was an appropriate sanction." In any event, the record clearly reflects that the court did not abuse its discretion in dismissing the complaint as to Mr. Fox.

Marcella Fox and George Hean contend that since they did not participate in unlawful "bugging" activities and their failure to answer interrogatories was merely inadvertent and untimely, the dismissal was improper as to them. The trial court based the dismissal as to them on (1) their "privity" to information Anthony Fox illegally obtained, and (2) their failure to answer defendants' interrogatories.

In support of the dismissal of the complaint as to all plaintiffs, the court found and determined:

Their cause of action must be dismissed because in the preparation of the case, as co-plaintiffs, they must necessarily have discussed its facts with Anthony Fox. Both Marcella Fox and George Hean testified at the hearing on this motion that they were not aware of the "bugging" activities of their co-plaintiff Anthony Fox and that they obtained no information from Anthony Fox derived by him from the "bugging." This testimony appears to be inherently implausible. No claim has been made that Hean and Marcella Fox never discussed the case with Anthony Fox. If Hean and Marcella Fox were unaware of the fact or scope of Anthony Fox's "bugging" activities, then they cannot now positively testify they are in possession of no information obtained by him through those activities.

Beside the taint of unlawful "bugging" with which Hean and Marcella Fox may be affected, these two plaintiffs are also guilty of failure to answer defendants' interrogatories. Further, it is apparent that were Hean and Marcella Fox to prosecute their claims, it would be imperative that Anthony Fox, admittedly possessed of illegally obtained evidence, be called to testify.

The sanctions available to a trial judge under Fed.R.Civ.P. are discretionary and the imposition of such sanctions will not be reversed unless there has been an abuse of discretion. General Dynamics Corp. v. Selb Manufacturing Co., 481 F.2d 1204, 1211 (8th Cir. 1973); 4A Moore's Federal Practice P 37.08 at 37-112-13 (2d ed. 1974). Where, however, the drastic sanctions of dismissal or default are imposed, the range of discretion is more narrow and the losing party's non-compliance must be due to wilfulness, fault or bad faith. Societe Internationale v. Rogers, 357 U.S. 197, 212, 78 S.Ct. 1087, 2 L.Ed.2d 1255 (1958); General Dynamics Corp. v. Selb Manufacturing Co., supra. A direct order by the court as provided in Rule 37(a) and (b) is not a prerequisite to imposition of sanctions under Rule 37(d). The rule permits immediate sanctions against parties for wilful failure to comply with discovery rules. Robison v. Transamerica Ins. Co., 368 F.2d 37, 39 (10th Cir. 1966); 2A Barron & Holtzoff, Federal Practice and Procedure, § 851 (Wright ed. 1961). Wilful failure to answer interrogatories may be the basis for a dismissal. General Dynamics Corp. v. Selb Manufacturing Co., supra ; Mangano v. American Radiator and Standard Sanitary Corp., 438 F.2d 1187, 1188 (3d Cir. 1971). Where interrogatories are filed late out of neglect or health reasons, dismissal or a default judgment is too harsh a sanction. See Vac-Air, Inc. v. John Mohr & Sons, Inc., 471 F.2d 231 (7th Cir. 1973). Whether or not Marcella Fox's and George Hean's failure to timely answer various interrogatories was wilful or in bad faith, we are satisfied from our review of the record that the conduct of Anthony Fox heretofore described constituted the "fault," "wilfulness," or "bad faith" required under Societe Internationale,...