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Lloyds' London v. The Narrows, L & L Enterprises (1/29/93), 846 P 2d 118
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NOTICE: This opinion is subject to formal correction
before publication in the Pacific Reporter. Readers are
requested to bring typographical or other formal errors to
the attention of the Clerk of the Appellate Courts, 303 K
Street, Anchorage, Alaska 99501, in order that corrections
may be made prior to permanent publication.
THE SUPREME COURT OF THE STATE OF ALASKA
UNDERWRITERS AT LLOYD'S LONDON,)
)
Appellant, ) File Nos. S-4388/4723
)
v. ) 3AN 89 09272 CI
)
THE NARROWS, L & L ENTERPRISES,) O P I N I O N
a partnership composed of )
JEANNE L. LINDLEY and CARSON )
E. LINDLEY, d/b/a THE NARROWS, )
JEANNE L. LINDLEY, CARSON E. )
LINDLEY, )
)
Appellees. ) [No. 3923 - January 29, 1993]
________________________________)
Appeal from the Superior Court of the State
of Alaska, Third Judicial District,
Anchorage, Victor D. Carlson, Judge.
Appearances: Leo W. Fraser, Mendes & Mount,
New York, New York; Robert L. Eastaugh,
Delaney, Wiles, Hayes, Reitman & Brubaker,
Anchorage; and Leroy J. Barker, Robertson,
Monagle & Eastaugh, Anchorage, for Appellant.
Murphy L. Clark, Clark, Walther & Flanigan,
Anchorage, for Appellees.
Before: Rabinowitz, Burke, Matthews and
Compton, Justices. [Moore, Chief Justice, not
participating].
BURKE, Justice.
I. INTRODUCTION
The Narrows, a bar, restaurant and residence owned by
Jeanne L. Lindley and Carson E. Lindley, was destroyed by fire in
May 1989. After their proof of loss claim was rejected, the
Lindleys (hereinafter "the insured") sued Underwriters1 alleging
breach of contract and a "bad faith"refusal to pay on their
claim.2 In August 1990 Superior Court Judge Victor Carlson
compelled Underwriters to produce, inter alia, its "bad faith"
claims files and the financial statements of its members. He
also ordered Underwriters to produce witnesses for depositions.
In November the insured moved for sanctions, arguing that
Underwriters failed to comply with the court's August order.
Judge Carlson granted the insured's motion for sanctions and
struck Underwriters' answer, resolving all liability in the
insured's favor. A jury trial commenced to determine the amount
of the insured's damages. In January 1991 the jury returned a
verdict against Underwriters, awarding the insured $150,000 for
loss of economic benefit, $1,000,000 for emotional distress, and
$60,000,000 as punitive damages. Judge Carlson then awarded
attorneys fees of $24,541,426. Underwriters appeals.
We vacate Judge Carlson's sanctions order and remand
for trial on all liability issues.
II. DISCUSSION
A. STANDARD OF REVIEW.
If a party fails to obey a discovery order, a trial
court may impose sanctions under Civil Rule 37(b).3 We review
such decisions for abuse of discretion. Rohweder v. Fleetwood
Homes of Oregon, 767 P.2d 187, 190 (Alaska 1989).
B. RELEVANT AUTHORITY.
The law on Rule 37 sanctions in Alaska is well settled.
Issue establishment under Rule 37(b), that is, conclusively
resolving an issue against a party who does not comply with
discovery orders, is an "extreme sanction which should be used
only in extreme cases." Otis Elevator Co. v. Garber, 820 P.2d
1072, 1074 (Alaska 1991). For this reason, the trial court must
find that the non-complying party "willfully" violated the
discovery order in question. Alaska Trams Corp. v. Alaska Elec.
Light & Power, 743 P.2d 350, 354 (Alaska 1987), cert. denied, 485
U.S. 905 (1988). "Willfulness"is defined as the "conscious
intent to impede discovery, and not mere delay, inability or good
faith resistance." Hawes Firearms Co. v. Edwards, 634 P.2d 377,
378 (Alaska 1981). We have held that before a court may impose
litigation ending sanctions for discovery violations the record
must clearly indicate a reasonable exploration of possible and
meaningful alternatives to dismissal. Sandstrom & Sons, Inc. v.
State, P.2d Op. No. 3909 (Alaska, Dec. 24, 1992).
Finally, the sanction must be "sufficiently related" to the
discovery violation. Honda Motor Co. v. Salzman, 751 P.2d 489,
493 (Alaska 1988). We must determine "if the established issue
is an `element of the dispute that cannot be determined on the
merits without disclosure of the evidence the court has ordered
the party to produce.'"Id. (quoting Hazen v. Municipality of
Anchorage, 718 P.2d 456, 460 (Alaska 1986)). For example, in
Honda Motors, we affirmed a sanction conclusively establishing
the defendant's liability because the trial court imposed
sanctions only after Honda repeatedly refused to produce design
defect documents in a products liability case. Id. We relied on
the fact that without these documents the plaintiff could not "be
expected to prove either the existence of a defect or causation."
Id.(emphasis deleted). Thus, the sanctions were "closely
tailored to Honda's misconduct."Id.
C. THE SUPERIOR COURT ABUSED ITS DISCRETION WHEN IT
DISMISSED UNDERWRITERS' ANSWER FOR ITS FAILURE TO
COMPLY WITH THE AUGUST 13 DISCOVERY ORDER.
In his August 13 order, Judge Carlson reopened
discovery to "pursue any issues relating"to a claims handling
procedure manual that Underwriters had produced in June. He set
October 19 as the closing date for this new round of discovery.
He ordered Underwriters to produce witnesses in Anchorage. He
also ordered Underwriters to complete its responses to the
insured's November 1989 interrogatories by August 31.
Judge Carlson relied on three violations of his August
13 order to support his sanctions order:4
1. Lloyd's willfully refused to comply
with the order of this court dated August 13,
1990, in refusing to produce all other claims
files materials where bad faith claims . . .
had been asserted against Lloyd's. . . .
2. Lloyd's willfully refused to comply
with the order of this court dated August 13,
1990, in refusing to produce the financial
statements and financial information of the
members of the syndicates that participated
in the insurance policy issued to the
plaintiffs in this case. . . .
3. Lloyd's willfully refused to produce
witnesses for the depositions noticed by
plaintiffs to resume on November 7, 1990.
After careful consideration, we conclude that Judge
Carlson's findings are not supported by the record and therefore
do not support the court's extreme sanction of establishing
Underwriters' liability.
1. The "bad faith"claims files. In November 1989 the
insured requested that Underwriters produce, inter alia, "all
claims files where it is claimed or alleged that [Underwriters]
had acted in bad faith." On January 29, 1990, Lloyd's responded
"None." It was not until November 16, 1990, nine months after
Underwriters attested that no files existed, and two and a half
months after the August 31 deadline identified in the August 13
order, that Underwriters produced 2,000 pages of "bad faith"
files, consisting of complaints, answers and judgments from cases
involving the 32 syndicates underwriting the policy.
We condemn Underwriters' failure to forthrightly answer
the insured's initial request for the "bad faith" files.
However, the appropriate focus for determining the propriety of
the sanctions order is not Underwriters' response to the
interrogatories, but its response to Judge Carlson's August 13
order.
The sanctions order is factually incorrect when it
states that Lloyd's failed to produce "bad faith"claims files.5
The properly presented issue is whether Underwriters' late
production of only the complaints, answers and judgments of its
"bad faith" files constitutes willful non-compliance with the
August 13 discovery order.
The insured complained that the documents that were
produced fell short of the court's order and were not detailed
enough to support the insured's conspiracy theory. However,
Judge Carlson never determined if Underwriters' response was
adequate. Although the documents were available for the court's
inspection, Judge Carlson issued his order without reviewing
them.6 Before adopting a sanction as drastic as issue
establishment, the superior court must very carefully consider a
party's alleged non-compliance with its order compelling
discovery. Honda Motors, 751 P.2d at 493. Judge Carlson's
failure to do so here constitutes an abuse of discretion.
Judge Carlson also abused his discretion by failing to
explore the possibility of less drastic sanctions. The
transcript of the sanctions hearing is completely void of any
exploration of sanctions short of an issue establishment sanction
which resulted in judgment on liability against Underwriters.
The only indication in the order itself that the trial court
conducted such an inquiry is this introductory paragraph: "The
court has made every effort to tailor the sanctions being granted
against the gravity of the discovery abuses and the violations of
the orders of this court, and not as punishment or as a fine
against Underwriters at Lloyd's London." Such conclusory
language does not evidence the kind of "reasonable exploration"
that we require. See Otis Elevator, 820 P.2d at 1074 ("The
court's statement that Otis intentionally failed to make
discovery from the outset of this litigation is too general to
serve as a basis for affirming the order.").
2. The financial statements. The insured's November
1989 discovery request asked for "current financial statements of
all of the participants in the Underwriters at Lloyd's London
portion of the insurance coverage." When Underwriters did not
comply, the insured moved to compel. At the August hearing on
the matter, Underwriters complained of the undue burden of this
request.7 Judge Carlson asked if a discovery limit might be
appropriate. He then suggested a few himself, such as limiting
the production of financial statements to those with at least a
"one percent" stake in the policy, or simply requiring
Underwriters to disclose financial information of the "whole
conglomeration, Lloyd's of London."
In response to this order, Underwriters produced copies
of the Lloyd's Insurance Market's Global Reports for 1985-89, the
latest individual financial statements for each of the 32
syndicates having an interest in the policy, and a list of each
underwriter ("numbering in the tens of thousands"), listing the
individual amount of premium income that could have been written
for the Underwriter's account during 1989. Underwriters never
produced the financial statements of the individual underwriters.
Based on the financial information Underwriters produced, it can
not be said that Underwriters' actions evidence a "conscious
intent to impede discovery." Alaska Trams, 743 P.2d at 354.
When the August 13 order is read in conjunction with Judge
Carlson's suggestions at the August 9 hearing, it is reasonable
to conclude that Underwriters substantially complied with the
order. Underwriters did, in fact, produce financial information
for the "whole conglomeration"(i.e. Lloyd's) and for everyone
with at least a "one-percent stake"in the policy (i.e. the 32
syndicates). Furthermore, regardless of whether
Underwriters complied with the order, a liability sanction for
not producing the financial information was an abuse of
discretion because the sanction does not satisfy the "substantial
relation" test. See Honda Motor, 751 P.2d at 493. For the
sanction to be more than "mere punishment"the established issue
must be an "element of the dispute that cannot be determined on
the merits without disclosure of the evidence the court has
ordered the party to produce."Id. Wealth was only relevant to
punitive damages,8 not liability on the contract and/or tort
claims. The contract and tort claims could be resolved on the
merits without the financial statements. Thus, Judge Carlson's
order, which granted sanctions in part based on Underwriters'
failure to produce certain financial statements, is "mere
punishment"and must be vacated.
3. The November 7 depositions. The third and final
reason Judge Carlson gave for imposing sanctions was
Underwriters' refusal to resume depositions on November 7. Judge
Carlson's August 13 order stated that discovery would close on
October 19. On August 21 the insured provided Underwriters with
notice that it had scheduled a series of depositions which would
last five weeks. The depositions began as scheduled on September
17, 1990. After seven consecutive days of testimony, the
depositions were suspended so that Underwriters' New York counsel
could fly to London to gather more information (specifically, the
"bad faith"files). On September 21 (two days before counsel's
departure) both sides agreed to continue the depositions until
October 1 or 2. On September 23, at the completion of the first
round of depositions, after Underwriters' counsel was set to fly
to London, the insured's counsel changed his mind and said that
he was ready to recommence depositions on September 27.
Underwriters' counsel nevertheless flew to London as planned.
On September 27 we granted Underwriters' motion for a
stay in discovery pending consideration of defendant's petition
for review of the August 13 order.9 The petition was eventually
denied, and the stay lifted on October 22, three days after Judge
Carlson originally ordered discovery to close.
On October 25 the insured noticed a resumption of
depositions to begin on November 7. Underwriters refused to
produce witnesses and on October 31 moved instead for a status
conference. The insured moved for sanctions on November 8.
Judge Carlson did not deny Underwriters' motion for a status
conference until November 11, four days after the depositions
were scheduled to begin. Judge Carlson's denial of the status
conference request makes no mention of the proposed resumption of
depositions, and does not address Underwriters' theory that the
deadline for closing discovery expired while this court was
considering its petition for review. The insured did not move to
resume the depositions after November 11. Attention thereafter
was directed toward the sanctions motion.
Underwriters now argues, in effect, that it cannot be
sanctioned for simply following orders. That is, its refusal to
conduct depositions between September 27 and October 22 was
reasonably based on our stay of discovery, and its refusal to
resume depositions on November 7 was reasonably based on the
passing of Judge Carlson's original October 19 discovery
deadline. It is axiomatic that for Rule 37 sanctions to be
appropriate, a party must willfully fail to comply with an
existing order. While Underwriters was, of course, free to
resume the depositions on November 7, to require Underwriters'
attendance (and to sanction it for not attending) would have
taken another order extending the discovery deadline.
This case presents unusual facts, since half the time
alloted for discovery under the August 13 order was filled by our
discovery stay. We are wary of allowing Underwriters to use this
procedural peculiarity to escape its obligations under the order
to compel. Still, we are also cognizant of the requirement that
a party's non-compliance with an order be "willful"before issue
establishment sanctions are appropriate. Hawes Firearms, 634
P.2d at 378. By requesting a status conference, Underwriters
evidenced a good faith concern about the continued viability of
the order requiring production of witnesses. It would have been
helpful if the trial court had indeed scheduled the status
conference. Judge Carlson could then have issued a second order
reopening discovery. Without such an order, we cannot say that
Underwriters' refusal to produce witnesses on November 7 amounts
to willful non-compliance with an existing order.10
By vacating the sanctions order, we do not suggest nor
do we believe that Underwriters is free from blame. On remand,
it would be entirely appropriate to order Underwriters to pay all
costs associated with its failure to answer the interrogatories
honestly, and with its delay in producing relevant documents.
The superior court's sanctions order is VACATED, and
its partial judgment is REVERSED. The case is REMANDED for
further proceedings.11
_______________________________
1. "Underwriters"is short for Underwriters at Lloyd's,
London, the defendant-appellant in this case. Underwriters is an
"insurance market"comprised of aproximately 26,000 "Names", or
"Members", organized into about 400 syndicates. Thirty-two
syndicates underwrote Lloyd's portion of the policy for The
Narrows. The "lead syndicate"underwrote 13.1579% of Lloyd's
share. This syndicate contained about 1500 Names. The 32
syndicates represent "thousands of individual Lloyd's members."
Colin Benson was the lead syndicate's claims person. He made
claims decisions for his syndicate based on advice he received
from Underwriters' local attorney in Anchorage, Timothy Lynch.
The decisions for the remaining syndicates were made by Lloyd's
Underwriters Non-Marine Claims Office (LUNCO), which agreed with
the decisions made by Benson.
2. The complaint also listed Gotham Insurance Co. and
Lynch, Crosby and Sisson as defendants. Gotham and Underwriters
were each contractually liable for 50% of a covered loss on the
Narrows policy. Timothy Lynch, a partner in Lynch, Crosby and
Sisson, handled the claims processing for the insurers. The
trial judge's December 17, 1990 sanctions order against
Underwriters (discussed infra) suspended litigation against
Gotham and Lynch "pending the finalization of the Lloyd's
litigation."
3. Alaska Civil Rule 37(b)(2) reads in part:
If a party . . . fails to obey an order
to provide or permit discovery, . . . the
court in which the action is pending may make
such orders in regard to the failure as are
just, and among others the following:
. . . .
(C) An order striking out
pleadings or parts thereof, or staying
further proceedings until the order is
obeyed, or dismissing the action or
proceeding or any part thereof, or
rendering a judgment by default against
the disobedient party[.]
4. The sanctions order that Judge Carlson signed was
submitted by the insured with their November 8, 1990 motion for
sanctions. Judge Carlson made no changes to the seven page
document.
5. This error resulted from Judge Carlson signing the
insured's proposed order, which was filed on November 8, 1990.
Underwriters produced the files on November 16, 1990.
6. Judge Carlson concluded the sanctions hearing by stating
only this: "The Motion for Granting of Sanctions is granted. I
find that in fact the legal requirements to grant that motion
have -- are met. And therefore the order granting sanctions has
been signed."
7. Underwriters notes that each individual underwriter's
financial statement is from three to five pages long. It
estimates that producing all of the individual statements would
take 60,000 to 100,000 pages.
8. At trial, the insured's experts used information
obtained in discovery to calculate the income of all the
Underwriters, the assets of all the "Names", the wealth of the 32
syndicates behind the policy, and the wealth of all the members
of these 32 syndicates. The jury apparently used this
information to return a $60 million punitive damages award.
9. The petition was filed on September 13; the stay was
formalized on October 9.
10. One other aspect of the sanctions order merits brief
attention. In Paragraph 12, Judge Carlson found that "defendants
were without justification or reason in failing to pay or tender
the full policy limits to plaintiffs within 60 days after July
14, 1990." (The date should read 1989.) The order includes no
facts supporting this conclusion. The statement amounts to a
conclusion that no genuine issues of material fact exist on the
issue, although Judge Carlson had twice before denied the
insureds' summary judgment motions on this very point. The
insureds had not renewed their summary judgment motion and the
issue was not before the court at the December 17 hearing. The
court's conclusion was therefore procedurally inappropriate. See
Alaska Civil Rule 56.
11. Because of our holding today, the jury's award and Judge
Carlson's attorney's fee award are necessarily vacated. Our
vacation of the issue establishment sanction has made it
unnecessary to address any of the remaining issues raised in this
appeal.
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