Wyle v. R.J. Reynolds Industries, Inc.

• Decision Date: 30 June 1983
• Docket Number: No. 82-4266,82-4266
• Citation: 709 F.2d 585
• Parties: Frederick S. WYLE, Professional Corp., Trustee in Bankruptcy for Pacific Far East Line, Inc., Bankrupt, Plaintiff-Appellant, v. R.J. REYNOLDS INDUSTRIES, INC., R.J. Reynolds Tobacco Company, R.J. Reynolds Leasing Company, Sea-Land Services, Inc., and McLean Industries, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 585

709 F.2d 585

Frederick S. WYLE, Professional Corp., Trustee in Bankruptcy for Pacific Far East Line, Inc., Bankrupt Plaintiff-Appellant, v. R.J. REYNOLDS INDUSTRIES, INC., R.J. Reynolds Tobacco Company, R.J. Reynolds Leasing Company, Sea-Land Services, Inc., and McLean Industries Inc., Defendants-Appellees.

No. 82-4266.

United States Court of Appeals Ninth Circuit.

Argued and Submitted March 18, 1983.

Decided June 30, 1983.

William A. Wineberg, Jr., Broad, Schulz, Larson & Wineberg, San Francisco, Cal., for plaintiff-appellant.

Guy M. Struve, Lawrence E. Walsh, Mark E. Segall, Robert D. Kimball, Davis, Polk & Wardwell, New York City, Charles B. Cohler, Lasky, Haas, Cohler & Munter, San Francisco, Cal., for defendants-appellees.

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

Before WRIGHT, CANBY, and BOOCHEVER, Circuit Judges.

EUGENE A. WRIGHT, Circuit Judge:

In this appeal, we consider whether the district court abused its discretion when it dismissed Pacific Far East Line's (PFEL) complaint as a sanction for its false denials of rebating and its failure to comply with the court's discovery orders. We find the dismissal appropriate and affirm.

I. FACTS

On December 19, 1976, PFEL filed an amended complaint under Sec. 4 of the Clayton Act, 15 U.S.C. Sec. 15, alleging that Sea-Land had paid approximately $20 million in illegal rebates from 1971 through 1975. In its response, Sea-Land admitted that it had paid more than $19 million in possibly illegal rebates, but alleged by way of affirmative defense and counterclaim that PFEL had violated the antitrust laws by paying similar rebates and that PFEL had falsely denied rebating. PFEL denied Sea-Land's allegations, counterclaimed against Sea-Land, and demanded a jury trial.

In addition to filing pleadings denying the allegations of Sea-Land's affirmative defense and counterclaim, PFEL through its officers gave sworn testimony and filed sworn answers to interrogatories denying that the company had paid rebates during the relevant time period, January 1970 to October 1976, when PFEL filed suit. PFEL's counsel, Alioto & Alioto, made similar representations to the court.

On July 24, 1978, Sea-Land moved for sanctions against PFEL on the grounds that (1) PFEL had falsely represented to the court and during discovery that it had not engaged in rebating; and (2) PFEL had failed to comply with court orders directing the production of documents concerning PFEL's rebating practices. The motion sought several alternative sanctions, including dismissal of the complaint, striking the allegations of Sea-Land's rebating, or directing that it be taken as established at trial that PFEL had paid illegal rebates.

On December 13, 1978, during a hearing on a different issue, counsel for PFEL admitted that one of PFEL's agents, Nippon Maritime, had engaged in rebating before October 1976. Even though this rebating was done with the knowledge of a PFEL employee and with PFEL funds, PFEL disclaimed responsibility for the rebates. It argued that the rebates were prohibited by PFEL's contract with Nippon and had not been authorized by John Alioto, PFEL's president, until February 1978.

In January 1979, the district court announced its intention to hold an evidentiary hearing on the issues raised by Sea-Land's motion for sanctions. PFEL vigorously opposed such a hearing, contending that it would decide the very issue of rebating presented in the litigation and thereby deny its right to a jury trial. Hearings were held between June 29 and July 18, 1979, and again in May, June, and September 1980.

Meanwhile, in August 1978, PFEL was adjudicated a bankrupt and Robert Benedict was appointed trustee. After replacing Benedict as trustee in 1979, Frederick Wyle retained Broad, Khourie and Schulz as new counsel and appeared as the named plaintiff in May 1980. Wyle also filed amended answers to Sea-Land's counterclaim and interrogatory 4(d), admitting that agents of PFEL had engaged in rebating for some time before December 1976 and that PFEL had done so since January or February 1977.

The district court's opinion and order of September 3, 1981 dismissed PFEL's complaint and counterclaim. On a motion for reconsideration, the court issued a new opinion and order reaffirming the dismissal and certified the case for appeal under Fed.R.Civ.P. 54(b).

On appeal, PFEL contends that (1) the district court abused its discretion in granting dismissal because PFEL's misconduct, if any, was not willful; (2) the dismissal violated PFEL's right to a jury trial; (3) the imposition of dismissal as a sanction is inconsistent with the Bankruptcy Act; (4) Federal Rule of Civil Procedure 11 precludes dismissal; and (5) the district court's opinion is ambiguous and relies too heavily on Sea-Land's briefs.

II. THE SANCTION OF DISMISSAL

A. Standard of Review

Federal Rule of Civil Procedure 37 authorizes the district court, in its discretion, to impose a wide range of sanctions when a party fails to comply with the rules of discovery or with court orders enforcing those rules. National Hockey League v. Metropolitan Hockey Club, Inc., 427 U.S. 639, 96 S.Ct. 2778, 49 L.Ed.2d 747 (1976); United States v. Sumitomo Marine & Fire Insurance Co., 617 F.2d 1365, 1369 (9th Cir.1980). When choosing among possible sanctions, the district court may consider the deterrent value of an order of dismissal on future litigants as well as on the parties. National Hockey League, 427 U.S. at 642-43, 96 S.Ct. at 2780-81.

We shall not disturb the district court's exercise of discretion unless the record creates "a 'definite and firm conviction that the court below committed a clear error of judgment in the conclusion it reached upon a weighing of the relevant factors'." Anderson v. Air West, Inc., 542 F.2d 522, 524 (9th Cir.1976) (quoting In re Josephson, 218 F.2d 174 (1st Cir.1954). Dismissal, however, is authorized only where the failure to comply is due to willfulness, bad faith, or fault of the party. National Hockey League, 427 U.S. at 640, 96 S.Ct. at 2779; Sigliano v. Mendoza, 642 F.2d 309, 310 (9th Cir.1981).

Additionally, courts have inherent power to dismiss an action when a party has willfully deceived the court and engaged in conduct utterly inconsistent with the orderly administration of justice. Phoceene Sous-Marine, S.A. v. U.S. Phosmarine, Inc., 682 F.2d 802, 806 (9th Cir.1982).

The requirements of due process limit the court's exercise of its inherent power. Hammond Packing Co. v. Arkansas, 212 U.S. 322, 349-54, 29 S.Ct. 370, 379-81, 53 L.Ed. 530 (1909); Phoceene Sous-Marine, 682 F.2d at 806. Dismissal is a permissible sanction only when the deception relates to the matters in controversy, and because dismissal is so harsh a penalty, it should be imposed only in extreme circumstances. ¹ Raiford v. Pounds, 640 F.2d 944, 945 (9th Cir.1981).

B. Propriety of Dismissal

The district court based its decision to dismiss PFEL's complaint and counterclaim on two findings: (1) knowingly false denials of rebating by PFEL and its counsel, Alioto & Alioto; and (2) the Alioto firm's deliberate efforts to frustrate the production of documents on rebating. ² On appeal, PFEL contends that the court drew unreasonable inferences from ambiguous evidence to find willful misconduct by PFEL and its counsel.

(1) Denials of rebating

On numerous occasions between December 1976 and August 1979, PFEL denied that it had engaged in rebating before October 1976. Further, John Alioto, then president of PFEL, testified at his deposition in November 1976 that "we do not rebate in any trade."

The record supports the finding that these denials were knowingly false. Four senior officers of PFEL, Tarantino, Modica, Elliot, and Smith, knew that PFEL's agent, Nippon Maritime, had rebated before October 1976. Their knowledge is imputable to PFEL. See General Dynamics Corp. v. Selb Mfg. Co., 481 F.2d 1204, 1210-11 (8th Cir.1973), cert. denied, 414 U.S. 1162, 94 S.Ct. 926, 39 L.Ed.2d 116 (1974). ³

PFEL challenges also the finding that the Alioto law firm deliberately deceived the court about PFEL's rebating. The court concluded that Alioto & Alioto's failure to investigate PFEL's denials of pre-October 1976 rebating, even after learning in December 1976 that the company had been fined for rebating, was "the equivalent of knowledge of the truth." PFEL argues that the record does not support such a conclusion.

The record shows, however, that besides the December 1976 fine, the firm met with PFEL in 1977 to discuss rebates paid during that year and, in July 1978, the firm learned that PFEL's agents had paid rebates before October 1976. The district court did not err in concluding that the law firm's deliberate ignorance constituted the equivalent of knowledge of the truth. See United States v. Nicholson, 677 F.2d 706, 710-11 (9th Cir.1982) (one who is aware of a high probability of the existence of a fact, but deliberately ignores the fact, is deemed to have knowledge of the fact).

(2) Production of rebating documents

Sufficient evidence supports the district court's finding that PFEL, through Alioto & Alioto, willfully failed to comply with discovery orders to produce rebating documents possessed by PFEL or its agents. ⁴ In July 1978, after PFEL had failed to comply with a previous order to produce such papers, the court ordered it to direct its agents in the Far East to provide Sea-Land's representatives with immediate and continuous "neutral body" access to rebating and related documents. ⁵ The order set forth the text of a telex to be sent by PFEL to its agent. However, the Alioto firm sent a second telex forbidding PFEL's agents to answer questions or produce documents about PFEL's rebating without authorization from a representative of the Alioto firm.

PFEL argues that (1) the district court unreasonably inferred that the second telex was kept secret; (2) the court's order requiring...