Labadie Coal Co. v. Black, 217 US App. D.C. 239, 672 F.2d 92, 81-1014
| Citation | 33 Fed. R. Serv.2d (Callaghan) 947,217 U.S. App. D.C. 239,672 F.2d 92 |
| Decision Date | 16 February 1982 |
| Docket Number | No. 81-1014,81-1014 |
| Parties | LABADIE COAL COMPANY, A KENTUCKY CORPORATION, APPELLANTv. HARRY BLACK, DOING BUSINESS AS FAI TRADING, LTD. |
| Court | United States Courts of Appeals. United States Court of Appeals (District of Columbia) |
COUNSEL: Maxwell A. Howell, Washington, D. C., for appellant.
Labadie Coal Co. (Labadie) contends that the district court erred in dismissing its action holding appellee Black personally liable for money allegedly owed for coal sold to or through an entity called F.A.I. Trading, Ltd. (FAI). Labadie is right. We vacate the district court's judgment and remand this case for the district court to reopen the record and allow further discovery if requested.
Appellant Labadie is a Kentucky corporation engaged in processing and selling coal at its plant in South Williamson, Kentucky. Appellee Black is the director, president, and sole employee of FAI, which is styled as a "closely held family corporation," organized in August 1977 under the laws of Virginia. Acting through FAI, Black presented himself to serve as a "broker" between buyers and sellers of coal.
On 24 May 1978 Black visited Labadie's coal preparation plant to inspect the facility and to inquire about purchasing coal. Agreements were struck between Black and Labadie, calling for purchases from Labadie and the use of Labadie's facilities for shipping coal which FAI was to purchase from other sources. Labadie delivered coal under the contracts until late 1978, when it terminated its relationship with Black (or FAI) because FAI was behind in its payments on account. 1 Suit was brought in United States District Court for the District of Columbia, seeking $ 109,228.90 allegedly owed for shipments made.
Immediately prior to trial, defendant Black, who remained pro se throughout the proceedings, moved to dismiss the action on the ground that process had been served on him individually, that he had no business relationship with Labadie in his individual capacity, and that he could not be held personally liable for FAI's corporate obligations, if any. The district court, following a nonjury trial, dismissed the action with prejudice, "but only as to the issue of Harry Black's individual liability." 2 The court found that Labadie did not establish that FAI was a fiction, 3 and that it failed to pierce the corporate veil. 4
Appellant's principal contentions before this court are twofold: (1) that the trial court erred in admitting documents relating to the corporate existence of FAI, produced for the first time at trial despite plaintiff's repeated requests for the same documents during discovery; and (2) that the trial court erred in refusing to pierce FAI's corporate veil to hold Black personally responsible for the money owing. We examine each in turn.
A. Admission of Corporate Documents
On 12 May 1980 counsel for Labadie filed notice to defendant directing him to appear for deposition and to produce any books, records, or documents
relating to the purchase and sale of coal between Plaintiffs and Defendant or any corporation or company controlled or operated by Defendant during the years 1978 up to date as well as all books, records and documents relating to or concerning the existence of any corporate entity controlled by or operated by Defendant dealing with the sale and purchase of coal … including any corporate income tax returns, both federal and local, and other tax memoranda and also the federal and local income tax returns of Defendant, all for the years 1978 and 1979. 5
During three days of depositions over a period of two months-and even during the first two days of trial 6-much of the documentary evidence requested was alluded to but never produced, despite defendant's assurances that he would do so. For example, at the first deposition the following exchange occurred with reference to FAI:
Q. How many shares of stock are outstanding in the company …?
….
Q. Do you have with you the minute book, bylaws, and stock book of the company?
A. No, I do not. I will furnish that.
Q. You understand that under the notice to produce you are to bring those documents?
A. No, I don't. I was supposed to bring documents, but what did you want, the minute book, stock book-
Q. Minute book, stock book, and bylaws. That would probably save several questions.
A. I will deliver that to you within 48 hours. 7
Later on the same day:
Q. Cancelled checks and transportation documents to the extent you have them-
A. You've got them. I can give you that quickly. 8
At the second deposition, Black produced a "stock book" made up of several blank certificates stapled or clipped together. Four stubs showed that a total of 130 shares had been issued to Black's wife and three children. Letters, purchase orders, and lab test forms bearing the name of FAI Trading, Ltd., were also offered as evidence of FAI's corporate existence, but no "official" corporate documents were produced. Black's excuse for failing to supply additional evidence of corporate existence was that some of the other documents and records sought were lost or misplaced during a move to a new office. Again, Black agreed to advise Labadie's counsel immediately if the relevant documents were found. 9 The requested materials were not produced at the third deposition, or during the nearly three-month period between the discovery cutoff date, 31 July 1980, and the trial date, 16 October 1980.
On the third and final day of trial, after the plaintiff had rested, Black produced for the first time a certificate from the Commonwealth of Virginia, some cancelled checks, check stubs, bills, and a lease bearing FAI's name, offering them to establish FAI's corporate existence. Notwithstanding Labadie counsel's clear and timely objections, 10 the trial court admitted the evidence and relied upon it to find that FAI was a viable corporate entity. In this it erred.
Rule 26(e) of the Federal Rules of Civil Procedure governs the supplementation of responses to discovery:
A party is under a duty seasonably to amend a prior response if he obtains information upon the basis of which (A) he knows that the response was incorrect when made, or (B) he knows that the response though correct when made is no longer true and the circumstances are such that a failure to amend the response is in substance a knowing concealment.
A duty to supplement responses may be imposed by order of the court, agreement of the parties, or at any time prior to trial through new requests for supplementation of prior responses.
While the present record is far from clear on any point, it appears that the defendant may have deliberately withheld the documents and information sought during discovery. At the least, FAI's records were in such disarray that Black could not locate the material requested without an effort which he was unwilling to make prior to the last moments of trial itself. In either case, the failure to produce the ordinary corporate records would have justified drawing the normal inferences against Black as one who should have been able to produce those documents. Whatever may have been the actual reason for the failure to supplement his responses during discovery, the fact remains that he agreed during sworn deposition to provide Labadie with relevant documentation, and breached his duty under Rule 26(e) by failing to do so.
Rule 26(e) does not contain a specific sanction for failure to supplement discovery. Nevertheless, "(f)ew would question a court's inherent power to discipline breaches of (the rule), even in the absence of a court order." 11 Discovery sanctions are commonly left to the discretion of the trial court, but as a reviewing court we are not prevented from stepping in where, as in this case, the exercise of that discretion effectively rewards the errant party and unwarrantedly prejudices his opposition.
It was grossly unfair for the court to allow Black to produce corporate documents in the last hours of trial which plaintiff had been demanding throughout pretrial discovery. The court's failure to bar defendant's tardy production of the documents increased plaintiff's burden to discount FAI's corporate status, while at the same time depriving plaintiff of the opportunity to meet (or attempt to meet) that burden. Plaintiff was caught having rested its case when the documents were finally produced, and had little, if any, time effectively to inspect the documents and meaningfully to cross-examine Black as to their content and relevance. While a motion for continuance or other formal attempt to gain time adequate to examine carefully "surprise" evidence might normally have been appropriate, it is apparent from the record that a motion for such relief would have been a vain gesture. The court had made very clear that the trial, which already had languished for too long, would end that day:
THE COURT: Everything we hear in this case we will hear today, Sir. We have to put an end today … and everything we are receiving is going to be as of today. 12
In Gebhard v. Niedzwiecki 13 the court observed:
In cases where there is an honest mistake and the harm can be undone, it may frequently occur that a continuance or some other remedy would be adequate, but, where the violation is willful and the party guilty of the violation seeks to take advantage of it at a time when the harm cannot be undone, suppression of the evidence may very well be the proper and only available remedy. 14
This is such a case.
We recognize that the court's admission of the subject evidence over plaintiff's objection may have been in great part a result of its frustration over the...
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