Anderson v. Foundation for Advancement, Educ. and Employment of American Indians

• Decision Date: 10 September 1998
• Docket Number: No. 96-2221,96-2221
• Citation: 155 F.3d 500
• Parties: , RICO Bus.Disp.Guide 9564 Paull ANDERSON, Plaintiff-Appellee, v. FOUNDATION FOR ADVANCEMENT, EDUCATION AND EMPLOYMENT OF AMERICAN INDIANS, an Eleemosynary Corporation; H. Nicholas Johnson, Defendants-Appellants, Edward M. Mezvinsky, Defendant.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 500

155 F.3d 500

98 Fed.R.Serv.3d 981, RICO Bus.Disp.Guide 9564

Paull ANDERSON, Plaintiff-Appellee, v. FOUNDATION FOR ADVANCEMENT, EDUCATION AND EMPLOYMENT OF AMERICAN INDIANS, an Eleemosynary Corporation; H Nicholas Johnson, Defendants-Appellants Edward M. Mezvinsky, Defendant.

No. 96-2221.

United States Court of Appeals Fourth Circuit.

Argued May 8, 1998.

Decided Sept. 10, 1998.

ARGUED: William Thomas Dillard, Ritchie, Fels & Dillard, P.C., Knoxville, Tennessee, for Appellants. Christen Wood Burkholder, Christen W. Burkholder, P.C.,

Bristol, Virginia, for Appellee. ON BRIEF: Robert W. Ritchie, Ritchie, Fels & Dillard, P.C., Knoxville, Tennessee, for Appellants

Affirmed in part, vacated in part, and remanded by published opinion. Judge ERVIN wrote the opinion, in which Judge DIANA GRIBBON MOTZ and Senior Judge BEEZER joined.

OPINION

ERVIN, Circuit Judge:

The appellants in this case are the Foundation for Advancement, Education and Employment of American Indians and the Foundation's president, H. Nicholas Johnson (we will refer to the appellants collectively as the "Foundation," except where necessary to distinguish any separate actions by Johnson). The Foundation challenges the district court's grant of a default judgment against it under Rule 37 of the Federal Rules of Civil Procedure for abuse of the discovery process. The Foundation further claims that the complaint was invalid for failing to state a claim under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1861 (1994) et seq. Finally, the Foundation claims that the district court erred in the manner and amount in which it assessed damages.

We hold that the district court did not abuse its discretion in granting a default judgment under Rule 37, though we hold that the judgment should not have been based on Anderson's RICO claim. We do find, however, that the district court erred in its calculation of damages and therefore we remand for a hearing on damages in accordance with this opinion.

I.

In January of 1992, Paull Anderson, the plaintiff-appellee, entered into a "finders-fee" contract with the Foundation, which is a nonprofit organization under section 501(c)(3) of the Internal Revenue Code. The contract provided that the Foundation would pay Anderson 10 percent of the value of any property he persuaded people to donate to the Foundation.

The Foundation never paid Anderson for the work he claims he did on its behalf. Among other transactions, Anderson claims he mediated a deal between the owners of a tree farm and the Foundation. Once the Foundation owned the tree farm, it further promised to pay Anderson 10 percent of the value of any trees Anderson sold on behalf of the Foundation. He also claims to have arranged the donation of a former Unisys plant, worth six million dollars, to the Foundation.

Anderson sued the Foundation and its principals, H. Nicholas Johnson and Edward Mezvinsky (Mezvinsky was dismissed from the case for lack of personal jurisdiction) in district court, alleging civil RICO violations, fraud, and breach of contract. He claimed the Foundation engaged in a pattern of activity that involved persuading people to donate properties, or to work to obtain the donation of properties, without fulfilling the terms of the donation agreements. He also claimed the Foundation and its principals made promises that they had no intention of keeping in order to induce him to enter into the contracts.

The Foundation moved to dismiss for failure to state a claim on which relief can be granted under Federal Rule of Civil Procedure 12(b)(6). It argued that Anderson had failed to allege a "pattern of racketeering activity" sufficient to support the civil RICO claim and had failed to allege fraud with particularity under Fed.R.Civ.P. 9(b). The district court denied its motion, finding that Anderson had pled sufficiently to withstand a motion to dismiss under Rule 12(b)(6) on both counts.

The parties conducted discovery under the supervision of Magistrate Judge Kinser. The Foundation was extremely dilatory in responding to both interrogatories and requests for documents. A short summary of the procedural history follows:

After various preliminary skirmishes regarding service of process and responsive pleadings, the parties began discovery. On February 6, 1995, Anderson first submitted interrogatories and document production requests to the Foundation. The Foundation objected even to the most ordinary questions as "unduly burdensome or harassing" and responded "to be supplied" to almost all questions to which it did not object. On June 13, Magistrate Judge Kinser entered a partial scheduling order directing that the Foundation provide answers to interrogatories and document requests for all questions and requests to which it had not previously objected no later than June 26. The Foundation filed its interrogatory responses on June 26, and its document production responses on June 27. Those responses were still incomplete.

The parties dueled over discovery throughout the rest of the summer. The Foundation never supplied the requested documents, but renewed its objections to the pleadings (though its motion to dismiss under Rule 12(b)(6) had already been denied), complaining that the documents requested in discovery might incriminate them in racketeering activities.

In September, Magistrate Judge Kinser clarified the scope of discovery, ruling that the Foundation did not have to provide its tax returns but that it had to supply financial documents dating back to 1980. In October, the magistrate judge ordered the discovery provided by Anderson sealed and made unavailable to the Foundation until the Foundation had responded with some discovery of its own. Anderson alleges that this sanction was largely ineffective, due to discovery in a parallel action filed by Anderson against Mezvinsky in Tennessee, through which Anderson's discovery was apparently made available to the Foundation. In any event, the sanction did not enhance the Foundation's responsiveness.

Though the Foundation did not object to the sealing of the documents, it objected under Federal Rule of Civil Procedure 72 to the scope of the discovery ordered by the magistrate. The district court heard arguments on the Rule 72 motion in January, 1996. After the hearing, the district court modified the scope of the discovery order to include documents dating from 1985, rather than 1980. He then ordered the Foundation to respond to the outstanding discovery requests within 45 days of his January 10 order.

The 45-day period elapsed and, in violation of the January order, the Foundation had failed to respond to the discovery requests. On March 6, Anderson filed a motion for a default judgment under Rule 37, citing the Foundation's recalcitrance in the face of the court's orders, its rehashing of its 12(b)(6) arguments on every possible occasion, and the frequent changes in its testimony about disputed factual matters (including occasions when Mr. Johnson apparently outright lied). On April 8, the day the district court heard argument on the Rule 37 motion, the Foundation filed its response to the interrogatories that had not been stricken, and supplied three boxes of documents. At the hearing, the Foundation's new counsel stated that he had underestimated the time it would take to respond to the discovery orders and that he had yet to review more documents and information. According to Anderson, the boxes that were provided were sealed with labels addressing them to one of the Foundation's prior counsel (the Foundation and Mr. Johnson changed counsel numerous times throughout the proceedings), and therefore seemed to have been available for production for several months. Anderson's counsel also noted the existence of other documents that the Foundation had failed to provide but which Anderson had obtained through other means.

Anderson objected to the discovery responses as inadequate and renewed his motion for Rule 37 sanctions. The district court entered an order on May 1, which directed the Foundation to provide certain financial documents and warned it that failure to comply within 15 days would result in the imposition of a default judgment. The district court further ordered the Foundation to pay Anderson the reasonable costs of his attorneys' fees in seeking the Rule 37 sanctions.

The Foundation failed to respond during the 15-day time period, but on May 17 counsel filed a motion requesting an extension of time due, in part, to representations by the attorney with respect to a family medical emergency that had called him out of town. The district court granted this request for an extension and gave the Foundation until May 31 to provide the requested materials.

The May 31 deadline came and went with no response from the Foundation. Anderson renewed his request for Rule 37 sanctions, and the district court granted it, entering judgment in the amount of $1,108,708.80, which comprised the commission fees Anderson alleged he had earned in the complaint. The district court then trebled the damages and awarded an additional $1,000,000 in punitive damages. It also awarded Anderson $500,000 in attorneys' fees, which amount was subsequently reduced to $46,528.98.

The Foundation moved to vacate the default judgment, stating that it had supplied all documents that it possessed or that were readily available to it. It also disputed that the discovery order extended to 1985, despite the clear language of the district court's January 10 order. The district court heard argument on the matter on July 15, then held the record open for 10 days to receive any documents the parties cared to enter. At that time, Johnson submitted an affidavit saying he had turned over all documents in his possession or reasonably available to him.

On August 7, the district court affirmed its entry of default judgment. The Foundation appeals from that order.

II.

The...