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Ninth Circuit:
Noncompliance With Discovery Orders Justified Axing Suit
Defendants, Counsel Ordered to Show Cause Why Sanctions Should Not Be Imposed for Frivolous Appeal
By Kimber Cooley, Staff Writer
The Ninth U.S. Circuit Court of Appeals yesterday affirmed a district court’s entry of a default judgment against two defendants, accused in a civil action of insurance fraud, where they repeatedly failed to obey court orders relating to discovery and ordered that the defendants and their counsel show cause why sanctions should not be imposed for bringing a frivolous appeal.
Defense counsel—Ara Joe Keropian and the AJK Law Firm, located in Van Nuys—were also ordered to show cause as to why the court should not refer the matter to the State Bar of California due to frivolousness of the appeal and “multiple misstatements” made by Keropian at oral argument.
The opinion was authored by Ninth Circuit Judge Daniel P. Collins. It affirms the judgment of District Court Judge Otis D. Wright II of the Central District of California.
Ninth Circuit Judge Milan D. Smith and Seventh District Judge David F. Hamilton, sitting by designation, joined in the opinion.
Suit by Insurer
In May of 2020, Transamerica Life Insurance Company sued Akop Arutyunyan and his daughter, Anahit Arutyunyan, for allegedly engaging in a conspiracy to defraud Transamerica into paying benefits under a long-term care insurance policy. Claims based on fraud, civil theft, civil conspiracy, and restitution were asserted.
An assessment by a nurse, and subsequently by an independent doctor, found that Akop Arutyunyan was unable to perform the required number of “activities of daily life” set forth in the policy to trigger benefits. However, an investigator later assigned to the case observed him engaging in activities that contradicted the assessment.
Additionally, Anahit Arutyunyan provided a written statement that he was unable to perform those activities and that they had hired a caregiver, identified as Mr. Pzdikyan, to perform between three to eight hours of care services in the home. The surveillance by Transamerica revealed that Pzdikyan did not provide care on the dates represented to the insurance company.
The benefit payments were directed to Anahit Arutyunyan, and totaled $109,381.71.
Discovery Process
During the discovery process, although the defendants did provide some requested discovery, they did not provide their portions to the joint stipulations concerning Transamerica’s discovery motions, as required and repeatedly requested by Transamerica.
Upon being informed of the failure, Magistrate Judge John E. McDermott issued an order to show cause by Sept. 10, 2021 and admonished both defendants that failure to comply brings sanctions into play under Federal Rule of Civil Procedure, rule 37(b).
The response to the order to show cause was filed three days late, and did not explain why their sections of the joint stipulations had not been provided and did not provide substantive responses to each of the other particular discovery issues raised. However, the court accepted the counsel’s explanation that a calendaring system error resulted in the missed deadline, and accepted it as an excuse for the missing portions as well.
The court ordered that they provide their portions of the joint stipulations within 10 days, which they did, and for the parties to meet and confer.
On Oct. 20, 2021, the court instructed Transamerica to advise the defendants of what remained in dispute and what should be done to make the responses complete, and for the parties to meet and file a joint status report by Nov. 19.
Transamerica complied with the order, but reported that the Arutyunyans did not provide their supplemental responses, did not meet and confer, and did not supply their portion of the required joint status report.
On Nov. 22, McDermott ordered that the Arutyunyans provide the five specific categories of additional discovery and supplemental responses requested by Transamerica, warning that failure to comply would result in a recommendation to the district court for default judgment.
Objections Forfeited
The magistrate judge additionally ordered them to show cause why sanctions should not be imposed for the multiple violations of the Oct. 20 order. He further found that they lost the right to dispute any of the discovery requests.
The defendants failed to comply with this order, and McDermott recommended to Wright “that a default judgment be entered in Transamerica’s favor awarding all damages and declaratory relief sought in Transamerica’s Complaint, plus fees and costs.”
Wright on Jan. 24, 2022, rejected the Arutyunyan’s arguments that they sufficiently complied with the discovery process by providing all documents within their possession and control. He ordered entry of a default judgment against them, awarding compensatory damages of $109,381.71, as well as statutory treble damages in the amount of $218,763.42 and attorney fees which he set at $166,394.50.
Collins’s Opinion
Collins rejected the argument that the defendants were “entitled to stand on their objections” to Transamerica’s discovery requests and the order to produce these materials was an abuse of discretion. He said this misconstrued the basis for the Nov. 22 order, explaining:
“That order did not purport to resolve the substantive validity of Defendants’ objections to these discovery requests. Instead, that order found that, because Defendants had ‘inexcusabl[y]’ failed to comply in multiple respects with the district court’s earlier October 20, 2021 order, Defendants’ objections to the five specified categories of discovery would be deemed, as a sanction under Rule 37, to be forfeited.”
Collins next addressed the Arutyunyans’ challenge to Wright’s decision to enter a default judgment as a sanction for the violations of court orders.
Five Factors
The jurist referred to the five factors listed in the 1987 Ninth Circuit case of Malone v. U.S. Postal Service, which are:
“(1)the public’s interest in expeditious resolution of litigation; (2) the court’s need to manage its docket; (3) the risk of prejudice to the [other party]; (4) the public policy favoring the disposition of cases on their merits; and (5) the availability of less drastic sanctions.”
Collins explained that “[t]he first two Malone factors are typically considered together” and in this case “the district court’s order entering a default judgment set forth at length the extent to which the discovery proceedings had been protracted by Defendants’ failure to comply with the October 20, 2021 and November 22, 2021 orders.” These factors, he reasoned, “therefore plainly favored entry of a default judgment.”
As to the third factor, “risk of prejudice,” he rejected the defendants’ arguments that the requested discovery—some of which was social media accounts and tax return information—had trivial significance to the case. He wrote:
“We have generally found that failure to comply with an order to produce specific discovery materials creates a sufficient risk of prejudice to satisfy this factor.”
He further noted that the fourth factor weighing “public policy favoring disposition of cases on their merits” always “weighs against a default judgment,” but is not dispositive of the determination alone.
As to the final factor considering the “availability of less drastic sanctions,” Collins quoted from a 2012 Ninth Circuit case of Hester v. Vision Airlines, Inc., which directed the court to consider:
“ ‘(1)whether the district court “explicitly discussed the alternative of lesser sanctions and explained why it would be inappropriate,” (2) whether the district court had “implemented lesser sanctions before ordering [entry of a default judgment]”, and (3) whether the district court had “warned the offending party of the possibility [of a default judgment].” ’ ”
Measured Approach
Collins found that “the district court applied a measured and gradational approach in responding to Defendants’ non-compliance with the court’s orders and local rules” and “all three of the considerations for applying the fifth Malone factor are satisfied here.”
He added:
“Because four of the five factors supported entry of a default judgment, the district court did not abuse its discretion in entering such a judgment in favor of Transamerica….And because Defendants’ opening brief does not challenge the scope of the relief that the district court awarded upon entry of default, any such objections have been forfeited.”
Frivolous Appeal
Collins concluded that the appeal was frivolous and noted:
“[A]t oral argument for this appeal, Defendants’ counsel repeatedly minimized, if not misrepresented, his lack of compliance with the district court’s orders in this case.”
He continued:
“It may well be that, when it comes to evaluating these multiple misstatements, this case may ultimately call for the application of what has been called ‘Hanlon’s Razor’: ‘Never attribute to malice that which is adequately explained by stupidity.…But even if these comments were not deliberate misstatements, it seems clear that they were at least made to this court with reckless disregard for their accuracy.”
The jurist added:
“In view of the frivolous nature of this appeal and the multiple misstatements made by counsel at oral argument, we have ordered Defendants and their counsel, by separate order filed contemporaneously herewith, to show cause why this court should not impose sanctions against them under 28 U.S.C. §1912, 28 U.S.C. §1927, Federal Rule of Appellate Procedure 38, and/or the inherent authority of this court….Defendants’ counsel is likewise ordered to show cause why this court should not refer this matter to the State Bar of California.”
The case is Transamerica Life Insurance Company v. Arutyunyan, 22-55199.
Valerie Rojas of the downtown Los Angeles firm of Cozen O’Connor was joined by two members of her firm’s Philadelphia office, appearing pro hac vice, in representing the insurer.
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