Potlatch Corp. v. U.S.

• Decision Date: 08 June 1982
• Docket Number: No. 81-4201,81-4201
• Citation: 679 F.2d 153
• Parties: POTLATCH CORPORATION, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 153

679 F.2d 153

POTLATCH CORPORATION, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 81-4201.

United States Court of Appeals Ninth Circuit.

Argued and Submitted March 8, 1982.

Decided June 8, 1982.

Gilbert S. Rothenberg, Washington, D. C., argued, for defendant-appellant; John F. Murray, Richard Farber, Washington, D. C., on brief.

Don Paul Badgley, Bogle & Gates, Seattle, Wash., for plaintiff-appellee.

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

Before HAYNSWORTH ^*, MERRILL and WALLACE, Circuit Judges.

MERRILL, Circuit Judge:

The Government failed by seven weeks to comply with a discovery deadline set by the district court for the exchange of appraisal reports by expert witnesses. As a sanction for this failure, imposed pursuant to Rule 37(b)(2) (B) of the Federal Rules of Civil Procedure ¹, the Government was denied the right to call those experts as trial witnesses or to offer their reports in evidence. Following trial, judgment was rendered against the Government. On this appeal from judgment the question we face is whether imposition of the sanction under the circumstances here presented constituted an abuse of discretion. We have concluded that it did.

This action was brought by Potlatch Corporation (Taxpayer) to secure a refund of taxes. Taxpayer engages in the manufacture of forest products. In its tax returns for the years 1971 and 1972 it elected to use the provisions of 26 U.S.C. § 631(a), which section allows computation of gain from sale of timber on the basis of the fair market value of the timber sold as of the first day of the taxable year. The Commissioner disagreed with the valuation placed by Taxpayer upon its timber, and on the basis of his own valuation determined that there was a tax deficiency for those years (including an interest assessment) in the sum of over $6,000,000. After paying the additional taxes and interest, Taxpayer brought this suit for refund on August 1, 1979. The Government was served on August 8, 1979. From that date the chronology of events is of relevance.

On August 10, 1979 the United States Attorney for the Northern District of California requested the Internal Revenue Service administrative files on this matter and sought the defense recommendations of the Department of Justice.

On October 4, 1979 the Government's answer was filed.

On October 29, 1979, at a status conference before Judge Renfrew of the Northern District of California, Taxpayer requested firm dates for discovery and for the exchange of appraisal reports. The Government objected, stating that it was still studying the administrative files and that it had not yet had sufficient time to employ independent experts to appraise the timber. Judge Renfrew postponed the establishment of specific dates but urged the Government to make its selection of experts as soon as possible.

On December 5, 1979, at a second status conference before Judge Renfrew, the Government's attorney advised that the experts whom he had interviewed believed that they would require at least six months from the date of their employment to make their examinations and prepare their reports. He also advised that he expected to make his final selection of experts and receive Justice Department authorization for their employment in the near future. The court ordered that the exchange of appraisal reports take place by June 2, 1980; it also fixed August 29, 1980 as the last day for discovery and set trial for October 6, 1980.

On December 14, 1979 and January 8, 1980 the United States Attorney advised the Department of Justice of the two experts whom he desired to employ and requested authorization to hire them on the terms he had arranged.

On January 14 and January 29, 1980 authority to hire was granted. Expert witness agreements were formally executed on January 31 and February 3, 1980, and the experts commenced their work during the first week of February 1980.

On March 4, 1980 the case was reassigned to Judge Weigel of the Northern District of California.

On April 30, 1980 one of the Government experts advised the Government that he could not complete his report before July 30, 1980. The United States Attorney then informed Taxpayer that the Government would be unable to meet the deadline for exchanging reports.

On May 2, 1980 Taxpayer filed a motion to compel the exchange as had been ordered on December 5, 1979, and to exclude the testimony and reports of experts whose reports were not produced by June 2, 1980.

On May 9, 1980 Taxpayer's motion was heard by a magistrate who granted it without reaching the merits, explaining that Judge Weigel had issued a standing order barring magistrates from amending court orders respecting discovery or the fixing of trial dates. On the same day the Government moved the district court to vacate the magistrate's order.

On June 6, 1980 the Government's motion to vacate was heard by Judge Weigel. On June 9, 1980 it was denied.

On June 17, 1980 the Government moved for reconsideration. At the hearing on this motion on July 24, 1980 the Government attorney reported that he had received the reports of the Government experts and had sent them to Taxpayer's counsel. At this hearing, then, the Judge was aware that he was faced not with a refusal to comply with a court order, but rather with tardy compliance. He nonetheless announced from the bench that the motion would be denied. On August 3, 1980 it was denied by written order and the sanction as prayed was imposed for failure to meet the deadline. The court's order did, however, provide the following alternative:

Because of the Government's strong desire to utilize the reports prepared by its additional experts * * * the Court is willing to allow the Government to use these experts at trial if Potlatch is adequately compensated for the prejudice it will inure because of the late submittal of these reports. Accordingly, the Court will allow the Government to use Mr. Caddis and Mr. Williams at trial if it pays $10,000 (Ten Thousand Dollars) to Potlatch for the prejudice that will be suffered by Potlatch.

The Government explains that it was unable to avail itself of this alternative since it was without statutory authority voluntarily to make such a payment. Taxpayer does not dispute this. ²

In his written order, the judge set forth his reasons for imposing the sanction as prayed. We find his determinations inconsistent with the record in several respects.

First, the judge concluded that "it is apparent from the record that the Government never intended to comply with Judge Renfrew's order." This conclusion followed from his finding that the Government knew from the outset that its experts would be unable to meet the June 2 deadline yet never so informed the court or sought an extension of time.

In this regard, we note that the Government attorney advised the court at the December 5, 1979 status conference that he had not yet hired his experts and that those whom he had interviewed estimated that they would require six months to complete their appraisals and prepare their reports. The court having imposed the June 2, 1980 deadline with that knowledge, one might well have understood it as having said "Well, go ahead and try anyway." Apparently the Government is now being criticized and charged with some form of deception for having read the court's order in that light and having attempted compliance rather than having immediately thrown in its hand.

In fact it was not until April 30, 1980 that the Government was certain that its experts could not meet the deadline, and it promptly so notified Taxpayer. Moreover, it was not necessary for the Government attorney at that point to move to extend the deadline since his opposition to Taxpayer's motion to enforce the December 5 order served the same purpose. In light of these facts, we cannot agree that the Government's attempted compliance with the June 2 deadline somehow constitutes evidence of an intent on its part never to comply with Judge Renfrew's order.

Second, the judge concluded that the factors leading to the Government's failure to meet the discovery deadline, and in particular its delay in hiring its experts, were due to circumstances within its control. We must disagree.

As to the Government's delay in hiring its experts, we are faced with the interrelationship between the IRS and the Department of Justice, and the need for the United States Attorney in San Francisco to deal with the Department in Washington. We note the need for the Government attorney to secure the administrative file on this matter from the IRS, to study it, and to secure the defense recommendations of the Department before he could file the Government's answer; his need to find and interview appraisers able and willing to act and report within what was sure to be a limited period of time; his need to make a choice of appraisers and negotiate a fee likely to prove acceptable in Washington before authority to hire could be sought; and the need for the FBI to check the experts selected before authority to hire could be granted. In short, we note the facts of bureaucratic delay and red tape, which, while certainly not to be encouraged, cannot be ignored.

Once the experts had been hired, the completion date of their reports was beyond the control of the Government. And in fact the experts did well. They both submitted their reports within the six months from hiring that had on December 5, 1979 been predicted as the minimum time required to complete an appraisal. As we have noted, the court was advised at the July 24, 1980 hearing that the Government reports had already been sent to Taxpayer.

Further, it is not fair to cast the whole of the blame for any delay in submitting the reports on the Government. Taxpayer was not without its share. On February 11, 1980 the Government served a set of interrogatories on Taxpayer seeking...