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Valentini v. Citigroup, Inc.

United States District Court, Second Circuit

August 16, 2013

BERNARDO VALENTINI et al., Plaintiffs,
CITIGROUP, INC. et al., Defendants.


JESSE M. FURMAN, District Judge.

Defendants Citicorp Financial Services ("CF SC"), Citibank, N.A. ("Citibank"), and Citi Private Bank (collectively, "Defendants"), bring this motion for discovery sanctions against Plaintiffs Bernardo Valentin ("Valentin") and Windsor International Co. ("Windsor") (collectively "Plaintiffs"), pursuant to Rule 37(b)(2) of the Federal Rules of Civil Procedure, for asserted violations of the Court's April 30th Revised Civil Case Management Plan and Scheduling Order (the "April 30th Order") and the Rule 26(f) Court Ordered Discovery Protocol, dated March 14, 2013 (the "Discovery Protocol"). Defendants also seek the imposition of security for costs pursuant to Local Rule 54.2, and have filed a separate motion to amend the Answer.[1] Plaintiffs oppose the motion for sanctions and security for costs, contending that they are now in compliance with the April 30th Order, that they did not violate their discovery obligations in bad faith, and that Defendants were not prejudiced by the late production of documents. They also oppose Defendants' motion to amend on grounds of futility and delay. For the reasons set forth below, Defendants' motion for sanctions and security for costs is GRANTED IN PART, and Defendants' motion to amend the Answer is GRANTED.


Pursuant to the Court-ordered case management plan governing this action, Defendants served Plaintiffs with their First Request for Production of Documents on December 19, 2012, requesting documents related to, among other things: (1) Valentini's communications with two of Defendants' employees; (2) a lawsuit that Pine Bank instituted against Valentini in Brazil; (3) Plaintiffs' purchase of structured notes from various financial institutions; and (4) Valentini's prior investments in Brazilian debt and securities. ( See Post Decl. ¶ 6 & Ex. C).[2] In their Response, dated January 21, 2013, Plaintiffs agreed to produce these documents ( id. Ex. E), and in the parties' Discovery Protocol, which was so-ordered by the Court on March 14, 2013, Plaintiffs agreed to search their electronically stored information for documents responsive to Defendants' requests ( id. Ex. F). After Plaintiffs failed to produce these documents in their initial production, Defendants repeated their requests in letters dated March 20, April 3, and May 2, 2013. ( See id. ¶ 10, Ex. I). Plaintiffs never responded to these letters. ( Id. ¶ 10). Defendants informed the Court of Plaintiffs' discovery deficiencies at an April 29, 2013 status conference, and by Order dated April 30, 2013, the Court directed that the parties "shall complete all outstanding production of documents by Friday, May 17, 2013." (Docket No. 42).

By letters dated May 21, 2013, May 24, 2013, and June 6, 2013, Defendants informed the Court that Plaintiffs had failed to comply with the April 30th Order. (Docket Nos. 44, 46 & 49). On June 13, 2013, the parties appeared before the Court for a status conference to address Plaintiffs' discovery deficiencies. At the conference, Plaintiffs' counsel informed the Court that they had recently discovered that Plaintiff Valentini had withheld numerous documents that counsel believed should have been produced to Defendants. (Post Decl. Ex. N at 3:10-5:21). Plaintiffs' counsel also disclosed that Windsor had not produced any documents in response to Defendants' discovery requests because the Windsor trust had been "revoked" and "they no longer have control over those documents." ( Id. at 11:15-18).

Pursuant to a Scheduling Order issued the same day, on June 24, 2013, Defendants filed their motion for sanctions for Plaintiffs' repeated failures to produce discovery materials in violation of the April 30th Order and the Discovery Protocol. Defendants seek dismissal of Plaintiffs' Complaint or, in the alternative, request "that the Court order the establishment of certain facts, together with the award of costs and attorney's fees, and order that Plaintiffs be required to post security for costs and attorney's fees." (Reply Mem. in Supp. Mot. for Sanctions 5-6). On July 9, 2013, Defendants separately moved to amend the Answer under Federal Rule of Civil Procedure 15(a)(2) to include: (1) an affirmative defense that Windsor lacks capacity and standing to maintain this lawsuit; and (2) a counterclaim for indemnification against Windsor for legal fees and expenses that have accrued, and continue to accrue, in this lawsuit. Plaintiffs oppose Defendants' motions.


A. Sanctions

Federal Rule of Civil Procedure 37 permits a court to impose a variety of sanctions for discovery-related abuses, and "affords the court broad discretion in fashioning an appropriate sanction.'" Linde v. Arab Bank, PLC, 269 F.R.D. 186, 195 (E.D.N.Y.2010) (quoting Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 101 (2d Cir. 2002)). The range of sanctions available to a court includes - but is not limited to - "orders deeming certain facts established; permitting an adverse inference instruction; striking pleadings; prohibiting the disobedient' party from making specific claims or introducing certain matters into evidence; dismissing a claim or the entire action or granting a default judgment against the disobedient party; or entering an order of contempt." Id. Where, as here, a party alleges that the opposing party failed to disclose documents it was required to produce, the "moving party bears the burden of showing that its adversary failed timely to disclose information required by Rule 26." In re Sept. 11th Liab. Ins. Coverage Cases, 243 F.R.D. 114, 125 (S.D.N.Y. 2007). To satisfy this burden, the moving party must demonstrate: "(1) that the party having control over the evidence had an obligation to timely produce it; (2) that the party that failed to timely produce the evidence had a culpable state of mind'; and (3) that the missing evidence is relevant' to the party's claim or defense such that a reasonable trier of fact could find it would support that claim or defense." Id. (quoting Residential Funding, 306 F.3d at 107).

Defendants have made these showings. First, Plaintiffs clearly had an obligation to produce the requested materials under their control. In their First Request for Production of Documents, Defendants submitted specific requests to Plaintiffs, and those requests were well within the scope of permissible discovery ( see Post Decl. ¶ 6 & Ex. C), and renewed these requests in letters dated March 20, April 3, and May 2, 2013 ( id. ¶ 10 & Ex. I). Plaintiffs never responded to these requests, even after the Court's April 30th Order directed the parties to complete all document production by May 17, 2013.

Second, Plaintiffs had a culpable state of mind, as they and their counsel were at least negligent in failing to properly search for and produce responsive documents in a timely and thorough manner. See Short v. Manhattan Apartments, Inc., 286 F.R.D. 248, 254 (S.D.N.Y. 2012) ("MA's repeated refusal to turn over relevant documents - in direct violation of three separate Court orders - is enough to establish culpability."); R.F.M.A.S., Inc. v. So, 271 F.R.D. 13, 23 (S.D.N.Y. 2010) ("In the Second Circuit, negligence is sufficient to establish culpability." (citing Residential Funding, 306 F.3d at 108)). Plaintiffs' counsel argues that their clients are "not sophisticated users of the U.S. court system, " "had a misunderstanding of the discovery [process], " and "were very reticent to produce the documents, wrongly thinking the Court would understand." (Post Decl. Ex. N at 3:11-13, 3:22-23). Yet, as the Court stated on the record at the June 13th conference, having availed themselves of the United States court system, Plaintiffs have no credible excuse for their blatant disregard of the court's discovery process.

Moreover, Plaintiffs are represented by competent United States counsel. Counsel had an obligation to advise their clients of their discovery obligations and to ensure that the relevant documents were produced. See Yu Chen v. LW Rest, Inc., No. 10 Civ. 200 (ARR), 2011 WL 3420433, at *9 (E.D.N.Y. Aug. 3, 2011) (explaining that "once a party reasonably anticipates litigation, " discovery obligations arise and "run[] first to counsel, who has a duty to advise his client of the type of information potentially relevant to the lawsuit" (internal quotation marks omitted)). Although Defendants served their First Request for Production of Documents on December 19, 2012, there is no evidence - and no claim by Plaintiffs - that counsel worked with Valentini to respond to Defendants' requests. Indeed, it appears that Plaintiffs' counsel did not travel to Brazil to meet with Valentini to discuss his obligation to produce responsive documents until June - nearly seven months after the requests were made, and nearly two and a half years after Plaintiffs commenced this action. Moreover, in his deposition on July 23-25, 2013, Valentini testified that his counsel was not involved in collecting any electronically stored information and that he merely instructed an employee and his son to conduct a search for responsive e-mails. ( See Supp. Post Decl. (Docket No. 71) Ex. A at 59:2-61:18, 66:25-67:9; 694:25-695:10; 700: 17-25). These failures, combined with Plaintiffs' cavalier attitude toward their discovery obligations, are entirely inexcusable and plainly sufficient to establish at least a negligent state of mind.

Finally, the requested documents are relevant because they bear on the central allegations in the Complaint, namely the reasonableness of Plaintiffs' reliance and Defendants' alleged fraudulent representations. ( See, e.g., Compl. at 2, ¶¶ 32, 36, 38, 41, 44-45, 49-50, 65). Moreover, "[e]ven conduct characterized as purposeful sluggishness, ' or intentional delay, can support a finding of relevance, as can intentional acts that hinder discovery.' Short, 286 F.R.D. at 254 (quoting Residential Funding, 306 F.3d at 109-10). Because Defendants have satisfied their burden of showing that Plaintiffs failed to comply with their discovery obligations, that the breach of these obligations was at least negligent, and that the documents are relevant, imposition of Rule 37 sanctions is warranted.

The Court must next determine the appropriate sanction to impose, considering "(1) the willfulness of the non-compliant party or the reason for noncompliance; (2) the efficacy of lesser sanctions; (3) the duration of the period of noncompliance[;] and (4) whether the non-compliant party had been warned of the consequences of... noncompliance." Agiwal v. Mid Island Mortg. Corp., 555 F.3d 298, 302-03 (2d Cir. 2009) (internal quotation marks omitted). The Court must also consider the extent to which the prevailing party has been prejudiced by the defaulting party's noncompliance, see Anthropologic, Inc. v. Forever 21, Inc., No. 07 Civ. 7873 (RJS) (MHD), 2009 WL 690126, at *3 (S.D.N.Y. March 13, 2009), and must ensure that any sanction imposed is "just and commensurate with the failure to comply, " Biosafe-One, Inc. v. Hawks, 639 F.Supp.2d 358, 370 (S.D.N.Y. 2009). Extreme sanctions, such as striking a pleading or entering judgment against the offending party, ...

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