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Consumer Financial Protection Bureau v. NDG Financial Corp.

United States District Court, S.D. New York

March 29, 2018

NDG FINANCIAL CORP. et al., Defendants.




         Pursuant to Rule 37(b)(2)(A) of the Federal Rules of Civil Procedure, Plaintiff Consumer Financial Protection Bureau ("CFPB") moves for sanctions against Defendants NDG Financial Corp., E-Care Contact Centers, Ltd., Blizzard Interactive Corp., New World Consolidated Lending Corp., New World Lenders Corp., Payroll Loans First Lenders Corp., New World RRSP Lenders Corp., Kimberly DeThomas, Emerald Willow Holdings, Ltd., Jeremy Sabourin, Red River Holdings Company, Ltd., William Wrixon, and Twillingate Holdings, Ltd. (the "Canadian NDG Defendants"), based on their failure to comply with discovery. For the reasons set forth below, I recommend that CFPB's motion be GRANTED in part and DENIED in part.


         The alleged facts underlying this action have been set forth in previous decisions of the Court, including the Decision and Order Denying Defendants' Motion to Dismiss. Consumer Financial Protection Bureau v. NDG Financial Corp. (NDG Financial), No. 15 Civ. 5211, 2016 WL 7188792, at*1-5 (S.D.N.Y. Dec. 2, 2016), Dkt 98. Most relevant to this motion, however, are procedural facts. A brief summary of the factual and procedural background follows.

         A. Factual Background

         CFPB initiated this action against twenty-one interconnected corporations and individuals that allegedly operated a cross-border online payday lending scheme from 2005 to 2013. The scheme primarily involved making loans to U.S. consumers in violation of state usury laws and then using unfair, deceptive, and abusive practices to collect on the loans and profit from the revenues.[1] CFPB alleges that the corporations and individuals operated as a "seamless" enterprise dubbed the "NDG Enterprise."[2] The FAC alleges violations of the Consumer Financial Protection Act of 2010 ("CFPA"), 12 U.S.C. § 5536(a), as well as the Credit Practices Rule, 16 C.F.R. § 444.2(a)(3). CFPB seeks permanent injunctive relief, restitution, refund of monies paid, and disgorgement of ill-gotten gains. By alleging a common enterprise, CFPB seeks to hold each defendant jointly and severally liable for all the alleged acts.[3]

         The various defendants comprise assorted groups within the NDG Enterprise. Two of these groups are based on geography. The "Canadian Corporate Group" is comprised of NDG Financial Corp. and several of its direct subsidiaries and sub-subsidiaries.[4] The "Maltese Group" includes Northway Financial Corp., Ltd., and Northway Broker, Ltd., both of which are corporations based in Malta.[5]

         Two other groups are the "Original Owners" and the "Current Owners." According to the FAC, the NDG Enterprise was initially owned and controlled by three corporate entities, each of which was owned and controlled by one of the individual defendants; together these corporations and individuals are the Original Owners: Sagewood Holdings Ltd., owned and controlled by Peter Ash; Knightsbridge Holdings Ltd., owned and controlled by Paul Ash; and 0562752 B.C. Ltd., owned and controlled by Paul Grehan.[6]

         In 2013, ownership and day-to-day management of the NDG Enterprise transferred from the Original Owners to the Current Owners.[7] Like the Original Owners, the Current Owners are three corporate entities owned and controlled by three individuals: Emerald Willow Holdings, Ltd., owned and controlled by defendant DeThomas; Red River Holdings Company, Ltd., owned and controlled by defendant Sabourin; and Twillingate Holdings, Ltd., owned and controlled by defendant Wrixon.[8]The Current Owners and the Canadian Corporate Defendants are referred to herein collectively as the "Canadian NDG Defendants." The FAC alleges that the Original Owners continued to exercise control at the board level over the NDG Enterprise even after the transfer of ownership.[9]

         B. Procedural Background

         CFPB filed its initial complaint against Defendants in July 2015 and the FAC on December 11, 2015. Defendants then filed motions to dismiss. The motions to dismiss sought dismissal for lack of personal jurisdiction and failure to state a claim. The Court denied the motions to dismiss in their entirety. NDG Financial at *1; see also Consumer Financial Protection Bureau v. NDG Financial Corp., No. 15 Civ. 5211, 2016 WL 7742784, at *1 (S.D.N.Y. Dec. 19, 2016), Dkt. 109.

         On January 13, 2017, the Canadian NDG Defendants filed an Answer to the FAC. The Maltese Defendants did not. Instead, counsel for the Maltese Defendants filed a request to withdraw as counsel.[10] That request was accompanied by a declaration indicating that the Maltese Defendants asked their counsel to withdraw and that the Maltese Defendants did not "intend to defend the action in this forum."[11] The Court granted the motion to withdraw.[12] Several months later, CFPB moved for entry of default against the Maltese Defendants. The Clerk of the Court entered default on December 6, 2017.[13]

         On March 16, 2017 the Parties, including the Canadian NDG Defendants but not the Maltese Defendants, filed a proposed Joint Discovery Plan in which the Defendants stated their intent to seek "discovery from both Plaintiff and Third-Parties, " thus indicating their intent to participate in discovery.[14] On March 21, 2017, the Court rejected the Parties' proposed deadlines, ordering instead that all fact and expert discovery be completed by December 29, 2017.[15] The Court warned, "There will be sanctions for any efforts to delay discovery."[16]

         During the ensuing months, all of the Canadian NDG Defendants failed to respond to CFPB's written discovery requests. Those requests included document requests and interrogatories seeking relevant information, including "(1) the specific consumers harmed and (2) the total harm suffered by each consumer."[17] When CFPB followed up on the overdue responses, the Canadian NDG Defendants responded that they would not respond to any discovery but instead would "settle or default."[18] Accordingly, CFPB moved to compel the Canadian NDG Defendants to comply.[19] The day before a scheduled pre-motion conference call with the Court, counsel for the Canadian NDG Defendants sought to withdraw, explaining that the Canadian NDG Defendants "do not intend to continue defending the action in this forum."[20]

         On July 20, 2017, the Court issued an Order denying counsel's motion to withdraw and granting CFPB's motion to compel. As to the motion to withdraw, the Court found significant that "[t]he Canadian NDG Defendants' counsel readily admit that their clients have no intention of complying with Plaintiff's discovery requests or locating replacement attorneys."[21] As for the motion to compel, the Court ordered the Canadian NDG Defendants "to respond or object to Plaintiff's discovery requests within 20 days of the date of this order."[22] The Court reiterated its warning about sanctions, admonishing that "[i]f any Defendant fails to [comply with the Court's Order], the Court will entertain a motion for sanctions, including default judgment per Fed.R.Civ.P. 37(b)(2)(A)(vi) against that Defendant."[23] Suffice to say, none of the Canadian NDG Defendants complied with the Court's Order.

         In November 2017, CFPB filed two motions. One motion sought voluntary dismissal of the corporate and individual Original Owners: Peter Ash and Sagewood Holdings; Paul Ash and Knightsbridge Holdings; and Paul Grehan and 0562752 B.C.[24]As an alternative to dismissal, CFPB proposed amending the operative complaint to delete the Original Owners as parties.[25] The Canadian NDG Defendants opposed the motion. They claimed it would be unfair for the Original Owners to be dismissed, while the Current Owners - who allegedly were involved in the scheme for only five months while the Original Owners were involved for eight years - remained jointly and severally liable for the entire Enterprise.[26] The Canadian NDG Defendants contended that it would be fairer for CFPB to proceed with amending the complaint.[27]

         On February 5, 2018, the Court granted CFPB's motion to voluntarily dismiss the Original Owners.[28] The Court declined the request to proceed by an amended complaint because "[t]his is simply another gambit to overcome the fact that these parties are in default."[29] As to the Canadian NDG Defendants' "unfair prejudice" argument, the Court said such arguments have no bearing on the motion to voluntarily dismiss but "are better saved for their opposition to Plaintiff's likely motion for default judgment."[30]

         The second motion simultaneously filed by CFPB in November 2017 was the motion at bar for sanctions against the Canadian NDG Defendants. In support of its motion, CFPB points to the Canadian NDG Defendants' refusal to participate in discovery after initially indicating its intent to do so; their disregard of the Court's March 21, 2017 warning of sanctions for any discovery violation and of the Court's July 20, 2017 Order warning of sanctions including default judgment; and the fact that the Canadian NDG Defendants repeatedly stated their intent to default.[31] As sanctions for this conduct, CFPB asks the Court to (1) render a default judgment against the Canadian NDG Defendants, (2) preclude those Defendants from offering withheld evidence in connection with the calculation of consumer harm, and (3) impose an adverse inference that the withheld evidence would corroborate any evidence that CFPB submits in order to establish the amount of a default judgment.[32]

         In opposition to the sanctions motion, the Canadian NDG Defendants essentially make the same argument they did in opposition to the motion to voluntarily dismiss the Original Owners: that the sanctions sought would unfairly expose the Current Owners to liability for the entire NDG Enterprise, even though, according to them, they were involved only for the last five months of the eight-year-plus scheme.[33] After the Canadian NDG Defendants filed their supplemental memorandum, CFPB moved to strike it as procedurally improper.[34] The undersigned denied the motion to strike in part, stating that the Court would consider the authorities cited in the supplemental memorandum insofar as they addressed the sanctions issue, but would allow CFPB to submit a response.[35]CFPB filed its response on February 22, 2018.[36]

         Legal Standards

         When a party "fails to obey an order to provide or permit discovery" a district court may issue "further just orders, " including, among others, an order "prohibiting the disobedient party from supporting or opposing designated claims or defenses, or from introducing designated matters in evidence, " and "rendering a default judgment against the disobedient party." Fed.R.Civ.P. 37(b)(2)(A); accord Guggenheim Capital, LLC v. Birnbaurn, 722 F.3d 444, 450 (2d Cir. 2013). "A district court has wide discretion in imposing sanctions, including severe sanctions, under Rule 37(b)." Funnekotter v. Agricultural Development Bank of Zimbabwe, No. 13 Civ. 1917, 2015 WL 3526661, at *4 (S.D.N.Y. June 3, 2015) (quoting Daval Steel Prods., a Division of Franco steel Corp. v. MA/Fakredine, 951 F.2d 1357, 1365 (2d Cir. 1991)); accord Guggenheim, 722 F.3d at 450-51.

         Courts typically consider the following factors when considering whether and to what extent to impose Rule 37 sanctions: "(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 that noncompliance would be sanctioned." Guggenheim, 722 F.3d at 451 (internal quotation marks omitted) (quoting Agiwal v. Mid Island Mortgage Corp., 555 F.3d 298, 302 (2d Cir. 2009) (per curiam)). "Because the text of the rule requires only that [a] district court's orders be just. . . and because [a] district court has wide discretion in imposing sanctions under Rule 37, these factors are not exclusive, and they need not each be resolved against the party . . . ." S.E.C. v. Razmilovic, 738 F.3d 14, 25 (2d Cir. 2013)(citation omitted) (internal quotation marks omitted) (quoting Southern New England Telephone Co. v. Global NAPs Inc., 624 F.3d 123, 144 (2d Cir. 2010)).

         Sanctions pursuant to Rule 37(b) serve multiple purposes: "First, they ensure that a party will not benefit from its own failure to comply. Second, they are specific deterrents and seek to obtain compliance with the particular order issued. Third, they are intended to serve a general deterrent effect on the case at hand and on other litigations, provided that the party against whom they are imposed was in some sense at fault." Southern New England Telephone, 624 F.3d at 149 (internal quotations marks omitted) (quoting Update Art, Inc. v. Modiin Publishing, Ltd., 843 F.2d 67, 71 (2d Cir. 1988)); see also Grammar v. Sharinn & Lipshie, No. 14 Civ. 6774, 2016 WL 525478, at *2-3 (S.D.N.Y. Feb. 8, 2016).

         "Although '[s]trong sanctions should be imposed only for serious violations of discovery orders' their imposition is 'justified . . . when the failure to comply with a court order is due to willfulness or bad faith, or is otherwise culpable.'" Funnekotter, 2015 WL 3526661, at *4 (quoting Daval Steel, 951 F.2d at 1367); accord Guggenheim, 722 F.3d at 450-51. "The most severe in the spectrum of sanctions provided by statute or rule must be available to the district court in appropriate cases, not merely to penalize those whose conduct may be deemed to warrant such a sanction, but to deter those who might be tempted to such conduct in the absence of such a deterrent." Razmilovic, 738 F.3d at 25 (quoting Sieck v. Russo, 869 F.2d 131, 134 (2d Cir. 1989) (citing Supreme Court precedent and entering default against defendants who "elected to defy" two court orders to attend their depositions)). In short, "a court should not shrink from imposing harsh sanctions where they are clearly warranted." Funnekotter, 2015 WL 3526661, at *4 (quoting Lopez v. City of New York, No. 05 CV 3624, 2007 WL 2743733, at *7 (E.D.N.Y. Sept. 18, 2007)); accord Jones v. Niagara Frontier Transportation Authority, 836 F.2d 731, 735 (2d Cir. 1987).


         A. Default Judgment

         Sanctions unequivocally are appropriate in this case. All four of the primary factors considered on a sanctions motion militate toward imposition of sanctions. To begin, the Canadian NDG Defendants willfully disregarded the Court's orders compelling discovery. "Noncompliance with discovery orders is considered willful when the court's orders have been clear, when the party [to be sanctioned] has understood them, and when the party's noncompliance is not due to factors beyond the party's control." Grammar, 2016 WL 525478, at *3 (alteration in original) (quoting Baba v. Japan Travel Bureau International, Inc.,165 F.R.D. 398, 402-03 (S.D.N.Y. 1996), affd111 F.3d 2 (2d Cir. 1997)); accord j Thompson v. Jamaica Hospital Medical Center, No. 13 Civ. 1896, 2015 WL 7430806, at *3 (S.D.N.Y. Nov. 20, 2015). "Willful non-compliance is routinely found, for instance, where a party has 'repeatedly failed to . . . produce documents ... in violation of the district court's ...

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