TeleVideo Systems, Inc. v. Heidenthal, 86-2129

• Decision Date: 02 September 1987
• Docket Number: No. 86-2129,86-2129
• Citation: 826 F.2d 915
• Parties: , RICO Bus.Disp.Guide 6729 TELEVIDEO SYSTEMS, INC.; K. Philip Hwang; C. Gemma Hwang, Plaintiffs-Appellees, v. Fred P. HEIDENTHAL, individually and dba South Harbor Investors and West Cliff Securities, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 915

826 F.2d 915

8 Fed.R.Serv.3d 989, RICO Bus.Disp.Guide 6729

TELEVIDEO SYSTEMS, INC.; K. Philip Hwang; C. Gemma Hwang, Plaintiffs-Appellees, v. Fred P. HEIDENTHAL, individually and dba South Harbor

Investors and West Cliff Securities, Defendant-Appellant.

No. 86-2129.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 10, 1987.

Decided Sept. 2, 1987.

John S. Siamas, Debra S. Belaga and Joseph S. Faber, San Francisco, Cal., for plaintiff TeleVideo Systems, Inc.

Allen Ruby, San Jose, Cal., for plaintiffs-appellees.

David Van Hoesen, San Francisco, Cal., for defendant-appellant.

Appeal from the United States District Court for the Northern District of California.

Before FLETCHER, BEEZER and THOMPSON, Circuit Judges.

PER CURIAM:

Appellant, Fred Heidenthal, appeals a default judgment entered against him as a sanction for his perjury during depositions and the false pleadings he filed with the court. The district court struck his answer and allowed the appellees to proceed with proof of their case unopposed. The court entered a judgment in excess of $11,000,000 for securities fraud and violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Secs. 1961 et. seq. (RICO). We affirm.

FACTS

TeleVideo Systems, Inc. and its principal shareholders brought suit against Heidenthal In depositions, Heidenthal did not deny orchestrating the diversion of corporate funds. Rather, he claimed that he acted at the behest of Mr. Hwang, the President of TeleVideo, to divert money from TeleVideo for Mr. Hwang's personal use. Heidenthal testified extensively and in great detail about a pseudo-gambling scheme (playing both sides of a bet) that he used as a vehicle to accomplish the diversion, and about other secret transfers of cash to Hwang. Much of the energies of appellees in preparing their case for trial necessarily was diverted to disproving these allegations.

a vice-president of the company, for securities fraud and RICO violations after discovering evidence of his substantial fraudulent activities. Heidenthal allegedly participated in the diversion of company funds to several fictitious businesses that he had "created."

On the day of trial, Heidenthal appeared in court and filed a written declaration that he had testified falsely in his depositions. Specifically, he admitted that he had not participated in a pseudo-gambling scheme but rather had lost $700,000 of appellees' money in gambling. He also stated that he did not transfer large sums of cash to Hwang. Appellees filed a motion for sanctions and for default judgment on their claims against Heidenthal. The court granted appellees' motion for sanctions. It struck Heidenthal's answer and then proceeded to hear appellees' proof in support of their claims against Heidenthal. At the conclusion of the hearing, the court awarded appellees $3,427,392.60 in actual damages together with $766,630.31 in attorneys fees. It directed that the damage award be trebled and that all stock in TeleVideo acquired by Heidenthal be restored to TeleVideo and that the stock purchase agreement between TeleVideo and Heidenthal be rescinded.

DISCUSSION

I.

Appellant claims that the district court abused its discretion in striking his answer and entering a default judgment against him. We disagree. Courts have inherent equitable powers to dismiss actions or enter default judgments for failure to prosecute, contempt of court, or abusive litigation practices. See Roadway Express, Inc. v. Piper, 447 U.S. 752, 764, 100 S.Ct. 2455, 2463, 65 L.Ed.2d 488 (1980); Link v. Wabash R.R., 370 U.S. 626, 632, 82 S.Ct. 1386, 632, 8 L.Ed.2d 734 (1962); United States v. Moss-American, Inc., 78 F.R.D. 214, 216 (E.D.Wis.1978). Although the inherent powers have been criticized as "nebulous" see Eash v. Riggins Trucking, Inc., 757 F.2d 557, 561 (3d Cir.1985), they are necessary to enable the judiciary to function. See Michaelson v. United States, 266 U.S. 42, 65, 45 S.Ct. 18, 19, 69 L.Ed. 162 (1924) (recognizing the inherent power of the courts to punish for contempts as essential to the administration of justice).

There are limits, however, on the power of courts to impose sanctions. The need for the orderly administration of justice does not permit violations of due process. See Phoceene Sous Marine, S.A. v. U.S. Phosmarine, Inc., 682 F.2d 802, 805-06 (9th Cir.1982) (recognizing that willful deceit and conduct utterly inconsistent with the orderly administration of justice would merit the imposition of severe sanctions, but finding that because defendant's deceit--falsely stating that he was too ill to attend trial--was unrelated to the merits of the controversy the sanction was inconsistent with due process); Securities and Exchange Commission v. Seaboard Corp., 666 F.2d 414, 416-17 (9th Cir.1982) (finding that a default judgment against the defendant for failure to pay a fine when the defendant had complied with an order to give a deposition was punitive and a violation of due process as the court could not presume that the case lacked merit); see also Hammond Packing Co. v. Arkansas, 212 U.S. 322, 349-54, 29 S.Ct. 370, 379-81, 53 L.Ed. 530 (1909) (upholding a default judgment for the defendant's failure to comply with an order to produce documents because the court could presume, from the failure to produce evidence relating directly to the merits of the matter, that the case was lacking in merit); Hovey v. Elliott, 167 U.S. 409, 413-14, 17 S.Ct. 841, 843, 42 L.Ed. 215 (1897) (finding that courts may not strike an answer and enter a default merely to punish a contempt of court unrelated to merits of case).

Appellant's elaborate scheme involving perjury clearly qualifies as a willful deceit of the court. Although the perjury occurred before the trial began, it infected all of the pretrial procedures and interfered egregiously with the court's administration of justice. The court sanctioned Heidenthal not only to punish him, but to enable the court to proceed to hear and decide the case untainted by further interference and possible further perjury on the part of Heidenthal.

Appellant argues that a default judgment of this magnitude was far too severe a penalty. He argues that he mitigated the harm by admitting before trial commenced that he had perjured himself; he urges that his confession warrants some favorable consideration and argues that this court should be lenient towards him in order not to deter future perjurers from making such admissions. In other words, appellant believes that his belated candor should be rewarded. In some circumstances we might agree that lesser sanctions would be appropriate where a defendant has admitted his falsehoods and they have not tainted the entire pretrial process. This is not such a case.

Appellant's recantation was not motivated by a desire to repent and set the record straight. Under questioning by the district judge, appellant revealed that even his admission was part of his elaborate scheme to prevail at trial. In answer to the district judge's question as to why he testified falsely in the depositions, appellant responded: "[b]ecause I was making sure that I would have him and Phil [Hwang] to the point where they thought they had me by the short ones, and they would get me in here and then,...