Opinion ID: 3009524
Heading Depth: 2
Heading Rank: 1

Heading: The Applicable Sanctions Standard

Text: T.C. Rule 104(c) as quoted in Gerling Intern. Ins. Co. v. C.I.R., 839 F.2d 131, 136 n.7 (3d Cir. 1988), provides in pertinent part that: If a party. . . fails to obey an order made by the court . . . the Court may make such orders as to the failure as are just and among others the following: (1) An order that the matters regarding which the order was made or any other designated facts shall be taken to be 1 The Tax Court did not reach this issue because it found fraud. established for the purposes of the case in accordance with the claim of the party obtaining the order. The rule is quite similar to Fed. R. Civ. P. 37(b)(2), and we construe them in pari materia. We review the sanction of deeming facts to be true under an abuse of discretion standard. See Ins. Corp. of Ireland v. Compagnie Des Bauxites, 456 U.S. 694, 707, 102 S. Ct. 2099, 2107 (1982); Ali v. Sims, 788 F.2d 954, 957 (3d Cir. 1986). In the context of discovery abuse, the Supreme Court has provided guidance on use of the sanction of deeming facts to be established. In Ins. Corp. of Ireland, 456 U.S. at 707, 102 S. Ct. at 2107, the Court explained that Rule 37(b)(2) contains two standards -- one general and one specific -- that limit a district court's discretion. First, any sanction must be `just'; second, the sanction must be specifically related to the particular `claim' which was at issue in the order to provide discovery. In that case the Court held that the district court had not abused its discretion in deeming facts establishing personal jurisdiction to be true absent proof to the contrary, because defendants had repeatedly agreed to comply with discovery orders and then failed to do so despite warnings that sanctions would result. Ins. Corp. of Ireland at 707-09, 102 S. Ct. at 2107. The Court held that the second requirement, that the sanction be related to the claim at issue, was met because the sanctions took as established facts that plaintiff was seeking to prove through discovery. This court has not elaborated on or applied the Insurance Corp. of Ireland standard. In Ali, supra, we held that where a district court sanctioned defendants by deeming allegations in plaintiff's complaint to be admitted and granted summary judgment for plaintiff, the ruling was equivalent to a default judgment and thus required application of the standards we had set for issuing a sanction of dismissal. See 788 F.2d at 957. More specifically, we held in Ali that, under the factors we had articulated in Poulis v. State Farm Fire and Casualty Co., 747 F.2d 863 (3d Cir. 1984), the sanctions constituted an abuse of discretion. In Poulis we had explained that our review of a district court's dismissal with prejudice is guided by the manner in which the trial court balanced [six] factors . . . and whether the record supports its findings. Poulis, 747 F.2d at 868. The six factors are: (1) the extent of the party's personal responsibility; (2) the prejudice to the adversary caused by the failure to meet scheduling orders and respond to discovery; (3) a history of dilatoriness; (4) whether the conduct of the party or the attorney was willful or in bad faith; (5) the effectiveness of sanctions other than dismissal which entails an analysis of alternative sanctions; and (6) the meritoriousness of the claim or defense. Id. In Ali we applied these factors to reverse a sanction deeming certain facts to be true. We held that, even if there was inexcusable delay by the defendants in that case, there was no bad faith, no history of dilatoriness, little prejudice from the delay that was caused, and less severe sanctions were probably available. Under those circumstances, sanctions that were equivalent to dismissal constituted an abuse of discretion. Id. at 957-58. We explained that, [i]n Poulis, we established the strong presumption against sanctions that decide the issues of a case. Id. at 958.2 Here, unlike in Ali, the tax court's sanction did not end the case. At most the tax court deemed certain key facts admitted and reversed the burden of proof. While this is a severe sanction, it is not the same as deeming allegations in a complaint to be admitted or granting a default judgment. In Chilcutt v. United States, 4 F.3d 1313 (5th Cir. 1993), the Fifth Circuit considered the standards for imposing a similar sanction (of deeming prima facie elements of the plaintiffs' liability claim to be established). The court held that, although a court's decision to deem certain facts established may sometimes be equivalent to a default judgment, it was not equivalent where the sanctioned party (the government) was allowed to present its 2 We have reviewed sanctions deeming facts to be established on only two other occasions, and in neither did we establish standards for determining whether the trial court abused its discretion. In Reynolds v. United States, 192 F.2d 987, 998 (3d Cir. 1951), we held that where the government continued to refuse to produce documents based on a claim of privilege that had been overruled, the court was authorized by Rule 37 to deem the facts sought to be proved by the documents to be admitted -- but we did not consider whether the court had abused its discretion in applying such a sanction. And in Gerling we held that a similar sanction was illegitimate because there had not been any discovery abuse -- thus, there was no question whether the court had abused its discretion in imposing sanctions for discovery abuse. See Gerling, 839 F.2d at 139. case in chief and could have prevailed if it had established its contentions by a preponderance of the evidence. Id. at 1320 & n.18. Thus, instead of imposing the sanction under the standards appropriate for a dismissal, the court applied the two standards of Insurance Corp. of Ireland (the requirement of justness and the requirement that the sanction be related to the particular claim at issue in the order to provide discovery) -- along with a third -- that the sanction meet the Rule 37 goals of punishing the party which has obstructed discovery and deterring others who would otherwise be inclined to pursue similar behavior. Id. at 1321. Because the sanction was not equivalent to default, for which a prerequisite under Fifth Circuit law is flagrant and willful disregard, the court suggested, in what it admitted to be dicta, that flagrant and willful disregard was not necessary. Id. at 1322 n.23. On the facts of the case, the Chilcutt court upheld the sanction. It stated that, where the district court had warned the government that it would issue sanctions and the government had repeatedly promised to be forthcoming, the plaintiffs had a colorable claim, and the evidence the government had hidden was relevant to the plaintiff's case, the sanction was just, related to the claim sought to be proved, and was necessary to compensate for non-compliance and to deter future violations. As for other considerations, the government's conduct was willful and was not solely the fault of its attorney. Id. at 1321-25. We agree with the Chilcutt court that cases on the sanction of dismissal are not automatically applicable to the sanction of deeming certain facts to be established. Nonetheless, the Poulis factors are relevant to evaluating such a sanction. This is clear from the fact that, in evaluating whether a district court has properly exercised its discretion in imposing the sanction of exclusion of testimony, a sanction less harsh than dismissal and probably similar to shifting the burden of proof, we consider factors similar to those in Poulis. See Meyers v. Pennypack Woods Home Ownership Ass'n, 559 F.2d 894 (3d Cir. 1977). We consider: (1) the prejudice or surprise in fact of the party against whom the excluded witnesses would have testified, (2) the ability of that party to cure the prejudice, (3) the extent to which waiver of the rule against calling unlisted witnesses would disrupt the orderly and efficient trial of the case or of other cases in the court, and (4) bad faith or willfulness in failing to comply with the district court's order. Id. Meyers and Poulis supply the sources of the standard we adopt here. Comparing the Meyers factors with Poulis, Factor 4 goes to a party's culpability as do factors 1, 3, and 4 of the Poulis factors. See supra at 16. Factors 1 and 2 go to prejudice as does factor 2 of Poulis. Factor 2 also goes to the ability to correct the problem with action less harsh than the sanction being considered as does factor 5 in Poulis. Moreover, just as the ultimate Poulis calculus is a balancing, we think that balancing similar factors is appropriate in assessing a sanction of deeming established certain facts. We apply a sliding scale - - the harsher the sanction being imposed, the more the balance will have to be against the party being sanctioned to justify the sanction. See National Hockey League v. Metropolitan Hockey Club, Inc., 427 U.S. 639, 643, 96 S. Ct. 2778, 2781 (1976) (dismissed); Society Internationale Pour Parcipations Industrielles et Commerciales v. Rogers, 357 U.S. 197, 212, 78 S. Ct. 1087, 1096 (1958) (dismissal); Donnelly v. Johns-Manville Sales Corp.,677 F.2d 339, 342-43 )3d Cir. 1982) (dismissal); Meyers v. Pennypack Woods Home Ownership Ass'n, 559 F.2d 894 (3d Cir. 1977) (exclusion of critical evidence). This approach is consistent with the Fifth Circuit's opinion in Chilcutt. Although the Chilcutt court held that the dismissal cases were not on point and that the test from Insurance Corp. of Ireland applied, the court referenced all of the factors we consider in dismissal cases. It considered the culpability of the sanctioned party including whether the violation was solely the fault of the attorney or was also the fault of the client, and the effectiveness of alternative sanctions. And while the court stated that willfulness was not required to impose a sanction of deeming facts proved (thus, incorporating our sliding scale theory of the appropriateness of sanctions), it also implied that willfulness was relevant. It stated that of course, the flagrancy of a party's behavior must be directly proportionate to the severity of the sanction imposed. Chilcutt at 1322 n.23.3 3 . Although the Chilcutt court also considered the role of the sanction in deterring future abuses, we need not consider that factor here since a deterrence analysis clearly does not fit This approach is also consistent with Insurance Corp. of Ireland itself. The standard articulated there, that a sanction must be 1) just and 2) specifically related to the particular `claim' which was at issue, was essentially a general standard for all Rule 37 sanctions. Thus, like our opinion here, our opinions in Poulis and Meyers had to be consistent with Insurance Corp. of Ireland because they involved Rule 37 sanctions. They were consistent with it because they were an elaboration of the meaning of just and related to the particular claim in particular contexts. In sum, in reviewing a trial court order deeming evidence admitted as a sanction for litigation misconduct, we will engage in a weighing and balancing exercise in which we consider: 1) culpability (including willfulness and bad faith, and whether the client was responsible or solely the attorney); 2) prejudice; and 3) whether lesser sanctions would have been effective. In making the actual balancing we utilize a sliding scale, so that bad faith, for example will have to be quite high to tip the balance if other factors strongly favor the taxpayers. We view this exercise to be a transliteration of the Insurance Corp. of Ireland standard in that the prejudice consideration subsumes the specific relatedness requirement, all of the factors of which essentially elaborate on justness. the unusual facts of this case. See our discussion of taxpayer's alleged bad faith infra at p. 24-30.