Feeassco, LLC v. The Steel Network , 264 N.C. App. 327 ( 2019 )

IN THE COURT OF APPEALS OF NORTH CAROLINA
No. COA18-739
Filed: 19 March 2019
Durham County, 16 CVS 5386
FEEASSCO, LLC, and JW COMPANY, LLC, Plaintiff,
v.
THE STEEL NETWORK, INC., Defendant.
Appeal by Defendant from order entered 2 November 2017 by Judge Elaine M.
O’Neal and two orders entered 23 January 2018 by Judge Orlando F. Hudson, Jr., in
Durham County Superior Court. Heard in the Court of Appeals 31 January 2019.
Bugg & Wolf, P.A., by William R. Sparrow and Joseph R. Shuford, for
Plaintiffs-Appellees.
Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., by Clint S. Morse, for
Defendant-Appellant.
COLLINS, Judge.
Defendant appeals from three discovery orders entered in Durham County
Superior Court. The underlying case involves a sales commission dispute between
Plaintiffs and Defendant over commissions allegedly owed to Plaintiffs by Defendant.
In the first order (November Order), the trial court granted Plaintiffs’ motion to
compel discovery. In the second order (Sanctions Order), the trial court granted
Plaintiffs’ motion for sanctions based on Defendant’s failure to comply with the
FEEASSCO, LLC V. THE STEEL NETWORK, INC.
Opinion of the Court
November Order. In the third order (Denial Order), the trial court denied
Defendant’s motion to compel discovery and motion for sanctions.
The November Order did not unreasonably expand the manner of discovery
production, and the trial court did not abuse its discretion in entering that order.
Moreover, the trial court did not abuse its discretion by striking Defendant’s answer
and entering judgment for Plaintiffs on liability pursuant to the Sanctions Order, and
the order did not violate Defendant’s due process rights. Finally, the Denial Order is
an interlocutory order that does not affect a substantial right and we dismiss
Defendant’s appeal from that order.
I. Procedural History and Factual Background
In 2015, Feeassco, LLC, and JW Company, LLC, (Plaintiffs) entered into
separate contracts with The Steel Network, Inc., (Defendant) wherein Plaintiffs
would sell and solicit orders for Defendant’s products within assigned territories. The
contracts included a two-tiered commission structure, which paid different rates for
“Basic Commission” and “Growth Commission.” Plaintiffs commenced this action on
12 December 2016, asserting claims for breach of contract, quantum meruit, unfair
and deceptive trade practices, and attorneys’ fees. Plaintiffs alleged, amongst other
things, that over the nearly two years under the contract, Defendant improperly
calculated commissions payments, stopped paying commissions, and failed to provide
contractually required commissions statements and sales reports.
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Also on 12 December 2016, Plaintiffs served Defendant with a “First Set of
Interrogatories” and a “First Requests for Production of Documents.” Defendant
objected to each interrogatory as “overly broad, unduly burdensome, and not
reasonably calculated to lead to the discovery of admissible evidence[,]” and provided
minimal information for some interrogatories.
Defendant objected to each request for production as follows:
[Defendant] objects to this request as overly broad, unduly
burdensome, and not reasonably calculated to lead to the
discovery of admissible evidence. Subject to and without
waiving the foregoing objections, [Defendant] will produce
or make available for inspection and copying nonprivileged
documents responsive to this request within its possession
at a mutually convenient time and place after entry of an
appropriate confidentiality agreement and protective
order.
Defendant filed an Answer on 13 February 2017.
On 13 March 2017, Defendant responded to the First Requests for Production
of Documents with a one-page spreadsheet entitled “Sales Rep Summary - December
2016.” On 8 May 2017, Defendant produced three more documents, one of which was
a copy of the “Sales Rep Summary - December 2016.” Defendant produced 430
documents on 19 June 2017.
The parties attempted mediation in September 2017, but were unable to reach
an agreement. Plaintiffs filed a motion to compel discovery on 3 October 2017. In
late October and early November 2017, Defendant produced approximately 19,000
pages of documents. The trial court heard Plaintiffs’ motion to compel on 2 November
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2017. At the conclusion of the hearing, the trial court granted Plaintiffs’ motion,
ordering Defendant to restate its responses to the First Set of Interrogatories without
objection, except as to privilege, and to comply fully with Plaintiffs’ First Requests for
Production by 20 November 2017. This November Order required Defendant to
produce, amongst other things: correspondence related to Plaintiffs; all “customer
orders, invoices, sales confirmations and return forms for Plaintiffs’ territories”;
commission statements and sales reports; Defendant’s state and federal tax returns
for 2015 and 2016; and financial statements for 2015 and 2016.
“As part of complying fully with Plaintiffs’ First Requests for Production,” the
November Order also required Defendant to submit to an audit of its sales data
within its electronic sales and accounting systems by an independent accounting firm
selected by Defendant on or before 20 November 2017. It further required Defendant
to make someone available to guide the auditor through Defendant’s electronic
systems. The November Order allowed Plaintiffs’ counsel to be present at the audit,
but prohibited other Plaintiffs’ representatives from being present. In auditing the
electronic systems, the auditor was to have “access to all information that is
‘reasonably calculated to lead to the discovery of admissible evidence’ within the
meaning of Rule 26 of the NC Rules of Civil Procedure.” The scope of the audit was
“limited to data, documents[,] and information regarding or related to the product
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categories identified in the Plaintiffs’ sales representative agreements and to sales
recorded from 2014 through the date of the audit in Plaintiffs’ sales territory only.”
On 19 December 2017, Defendant moved to compel Plaintiffs’ answer to
Defendant’s interrogatory number 3 for failure to provide a complete damages
calculation. Defendant also moved for sanctions, asserting Plaintiffs had not targeted
discovery to the needs of the case and sought discovery disproportionately large to
any amount in controversy.
On 28 December 2017, Plaintiffs moved for an order sanctioning Defendant for
violations of the November Order. Following an 8 January 2018 hearing on the
parties’ motions, the trial court granted Plaintiffs’ motion for sanctions (Sanctions
Order) and denied Defendant’s motion to compel and motion for sanctions (Denial
Order). Defendant appeals.
II. Issues
Defendant raises four issues on appeal: (1) the trial court erred when it ordered
Defendant to submit to an audit of its electronic systems in the November Order; (2)
the trial court’s findings of fact and conclusions of law do not support the entry of the
Sanctions Order; (3) the Sanctions Order violated Defendant’s due process rights; and
(4) the trial court erred by denying Defendant’s motion to compel and motion for
sanctions.
III. Jurisdiction
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We first address our jurisdiction to hear the appeals from the November Order,
Sanctions Order, and Denial Order as all three orders are interlocutory. See Veazey
v. Durham, 231 N.C. 357, 362, 57 S.E.2d 377, 381 (1950) (noting that an interlocutory
order “does not dispose of the case, but leaves it for further action by the trial court
in order to settle and determine the entire controversy”). Generally, an appeal from
an interlocutory order will be dismissed by this Court unless the trial court has
entered certification under N.C. Gen. Stat. § 1A-1, Rule 54(b), or the appeal affects a
substantial right which would be jeopardized absent a review prior to a final
determination on the merits. In re Pedestrian Walkway Failure, 173 N.C. App. 254,
262, 618 S.E.2d 796, 802 (2005) (citation omitted).
Generally, a discovery order, including an order compelling discovery, is not
immediately appealable. Id. (citation omitted). However, when a discovery order is
enforced by sanctions pursuant to N.C. Gen. Stat. § 1A-1, Rule 37(b), the order affects
a substantial right and is immediately appealable. Id. (citation omitted). The appeal
tests the validity of both the discovery order and the sanctions imposed. Id. (citation
omitted). Moreover, although it is interlocutory, a party may appeal from an order
imposing sanctions by striking its answer and entering judgment as to liability. Vick
v. Davis, 77 N.C. App. 359, 360, 335 S.E.2d 197, 198 (1985).
Here trial court’s Sanctions Order struck Defendant’s answer and entered
judgment for Plaintiffs as to liability as sanctions pursuant to Rule 37(b) for alleged
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violations of the November Order compelling discovery. Accordingly, the November
Order as enforced by the Sanctions Order, and the Sanctions Order striking
Defendant’s answer, affect a substantial right and are immediately appealable, and
this appeal testing the validity of both the November Order and the Sanctions Order
is properly before us. Id.
The Denial Order denies Defendant’s motion to compel and motion for
sanctions. Again, “[d]iscovery orders are generally not immediately appealable
because they are interlocutory and do not affect a substantial right that would be lost
if the ruling were not reviewed before final judgment.” Stokes v. Crumpton, 369 N.C.
713, 719, 800 S.E.2d 41, 45 (2017) (quotation marks, brackets, and citations omitted).
However, orders denying discovery are immediately appealable when “the desired
discovery would not have delayed trial or have caused the opposing party any
unreasonable annoyance, embarrassment, oppression or undue burden or expense,
and if the information desired is highly material to a determination of the critical
question to be resolved in the case.” Id. (quotation marks and citations omitted).
Information desired is highly material to the determination of the critical
question where the information is “essential” to proving the elements of a claim, cf.
Harbour Point Homeowners’ Ass’n v. DJF Enters., 206 N.C. App. 152, 163, 697 S.E.2d
439, 447 (2010), and withholding that information would “effectively preclude[]” the
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requesting party from making or defending that claim, cf. Tennessee-Carolina
Transp. Inc. v. Strick Corp., 291 N.C. 618, 625, 231 S.E.2d 597, 601 (1977).
Defendant’s motion requested the trial court to compel Plaintiffs to “fully and
completely respond to Interrogatory No. 3.” Interrogatory No. 3 requested Plaintiffs
to “[i]dentify and describe all damages claimed by you in as much detail as you are
able to provide, including: (a) a complete description of the method of calculation of
each category of damages; [and] (b) a detailed description of each item of individual
damages . . . .” Plaintiffs responded as follows:
JWC is claiming damages for breach of contract, quantum meruit, unfair
and deceptive trade practices and attorneys’ fees. In particular,
[Defendant] has failed to properly calculate and pay the growth
commission due for both 2015 and 2016. This includes making improper
deductions, failing to report or credit all sales within JWC’s territory,
failing to make payments on a monthly basis and failing to make any
payments for 2016. The exact amount due cannot be determined as of
the date of this response due to [Defendant]’s failures to allow an audit
per the contract and to produce documents in a timely and complete
manner during the lawsuit. [Defendant] has also failed to pay all of the
basic commission due for 2016. Interest is due on all overdue growth
and basic commission payments at the legal rate allowed by law until
paid. There will also be additional commission due for 2017 and 2018
per Section 7·of the contract. The method by which JWC calculates its
damages is as follows: the total commission due to JWC as provided in
JWC’s contract with [Defendant] minus the payments [Defendant] has
already made to JWC. JWC’s contract with [Defendant] may be found
at TSN_0020113 together with TSN_0011814. Further, due to
[Defendant]’s unfair and/or deceptive trade practices, these damages
should be trebled and attorneys’ fees and costs added. Finally, JWC is
entitled to recover its attorney fees, costs and expenses incurred in
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having to file a suit to enforce the parties’ contract. These fees, costs
and expenses continue to accrue each day this lawsuit continues.1
Defendant asserted that “Plaintiffs’ argument as to why it cannot calculate
their alleged damages is unfounded” as Defendant had already given them all the
information needed to make such calculations. While Plaintiffs’ damages calculations
are “essential” to Plaintiffs proving their claims for breach of contract, quantum
meruit, and unfair and deceptive trade practices, Defendant essentially conceded that
the information necessary for both Plaintiff and Defendant to calculate those
damages is in Defendant’s possession as “Defendant had already given them all the
information.” Moreover, Plaintiffs’ inability or refusal to provide the requested
calculations to Defendant would not “effectively preclude[]” Defendant from
defending against Plaintiffs’ claims, as Defendant was in as good or better position
than Plaintiffs to make those calculations. Accordingly, the information desired is
not “highly material to a determination of the critical question to be resolved in the
case[,]” Stokes, 369 N.C. at 719, 800 S.E.2d at 45, and the order denying Defendant’s
motion to compel does not affect a substantial right. Defendant’s appeal from the
Denial Order denying its motion to compel is dismissed.
Defendant’s brief does not address the interlocutory nature of the denial of its
motion for sanctions and does not contain “facts and argument to support appellate
1 Plaintiffs’ responses for JW Company, LLC, (JWC) and Feeassco, LLC, were substantively
the same.
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review on the ground that the challenged order affects a substantial right.” N.C. R.
App. P. 28(b)(4) (2018). “It is not the duty of this Court to construct arguments for or
find support for appellant’s right to appeal from an interlocutory order; instead, the
appellant has the burden of showing this Court that the order deprives the appellant
of a substantial right which would be jeopardized absent a review prior to a final
determination on the merits.” Jeffreys v. Raleigh Oaks Joint Venture, 115 N.C. App.
377, 380, 444 S.E.2d 252, 254 (1994). Defendant’s appeal from Denial Order denying
its motion for sanctions is dismissed.
IV. Discussion
A. November Order
Defendant first argues the trial court erred when it ordered Defendant to
submit to an audit of its electronic systems in the November Order. We disagree.
“It is a general rule that orders regarding matters of discovery are within the
discretion of the trial court and will not be upset on appeal absent a showing of abuse
of discretion.” Hudson v. Hudson, 34 N.C. App. 144, 145, 237 S.E.2d 479, 480 (1977).
An abuse of discretion occurs when the trial court’s ruling “is manifestly unsupported
by reason or is so arbitrary that it could not have been the result of a reasoned
decision.” State v. Hennis, 323 N.C. 279, 285, 372 S.E.2d 523, 527 (1988).
Discovery rules are designed to facilitate the disclosure of any relevant and
material information before trial which allows the parties to narrow and sharpen the
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issues and facts required for trial. Am. Tel. & Tel. Co. v. Griffin, 39 N.C. App. 721,
726, 251 S.E.2d 885, 888 (1979) (citation omitted). Further, “the discovery rules
‘should be constructed liberally’ so as to substantially accomplish their purposes.” Id.
at 727, 251 S.E.2d at 888 (citation omitted).
Rule 34 of our Rules of Civil Procedure provides:
Any party may serve on any other party a request (i) to
produce and permit the party making the request . . . to
inspect and copy, test, or sample any designated
documents, electronically stored information, or tangible
things . . . which are in the possession, custody or control
of the party upon whom the request is served; or (ii) to
permit entry upon designated land or other property in the
possession or control of the party upon whom the request
is served for the purpose of inspection and measuring,
surveying, photographing, testing, or sampling the
property or any designated object or operation thereon,
within the scope of Rule 26(b).
N.C. Gen. Stat. § 1A-1, Rule 34(a) (2017).
Subsection (i) governs requests for production of documents, electronically
stored information, and other tangible items while subsection (ii) governs entry upon
property for “inspection and measuring, surveying, photographing, testing, or
sampling the property . . . .” Id. If, “in response to a request for inspection submitted
under Rule 34, [a party] fails to respond that inspection will be permitted as
requested or fails to permit inspection as requested, the discovering party may move
for an order . . . compelling inspection in accordance with the request.” N.C. Gen.
Stat. § 1A-1, Rule 37(a)(2) (2017).
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Defendant concedes it did not comply with Plaintiffs’ original requests for
production, noting in its brief: “At the hearing on Plaintiffs’ Motion to Compel,
[Defendant] . . . acknowledged to the trial court that it should have included all sales
within Plaintiffs’ Territories as sought in Plaintiffs’ initial requests.” Defendant does
not take issue with the trial court’s order compelling Defendant to produce physical
copies of the requested documents. Defendant argues, however, that because
“Plaintiffs did not serve a request under Rule 34(a)(ii) to gain access to [Defendant’s]
electronic systems to audit [Defendant’s] sales in their respective Territories[,]” the
trial court had no legal authority to require Defendant to submit to an onsite audit of
its electronic systems. Defendant’s argument is misguided.
Plaintiffs requested production of “documents in the possession, custody and
control of Defendant pursuant to Rule 34 of the applicable Rules of Civil Procedure.”
Rule 34(a)(i) does not specify the manner in which documents may be requested or
may be compelled to be produced. While Plaintiffs requested that all responsive
documents be produced at the law offices of Bugg & Wolf, P.A., upon Defendant’s
failure to comply with the request, the trial court ordered Defendant, “[a]s part of
complying fully with Plaintiffs’ First Requests for Production[,]” to submit to an audit
of its electronic systems to gain access to the requested information. The trial court’s
order did not compel Defendant to allow Plaintiffs’ entry upon Defendant’s property
for “inspection and measuring, surveying, photographing, testing, or sampling the
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property . . . [,]” N.C. Gen. Stat. § 1A-1, Rule 34(a), but instead compelled Defendant
to allow electronic systems inspection as an alternative manner for ensuring the
production of the documents requested. The trial court was well-within its discretion
to order this alternative means of production. See Green v. Maness, 69 N.C. App. 403,
316 S.E.2d 911 (1984) (holding the trial court did not abuse its discretion when it
ordered additional discovery via oral depositions of defendant’s expert witnesses).
Defendant’s argument is overruled.
B. Sanctions Order - Abuse of Discretion Claim
Defendant next argues the trial court abused its discretion when it granted
Plaintiffs’ motion for sanctions. Specifically, Defendant argues the trial court’s
findings of fact do not support the conclusion that Defendant violated the November
Order. We disagree.
We review the Sanctions Order, granting Plaintiffs’ motion for sanctions, for
an abuse of discretion. Graham v. Rogers, 121 N.C. App. 460, 465, 466 S.E.2d 290,
294 (1996) (“A trial court’s award of sanctions under Rule 37 will not be overturned
on appeal absent an abuse of discretion.”). The determination of whether to strike an
answer and enter default judgment because of noncompliance with discovery rules
“may be reversed for abuse of discretion only upon a showing that its ruling was so
arbitrary that it could not have been the result of a reasoned decision.” Essex Grp.,
Inc. v. Express Wire Servs. Inc., 157 N.C. App. 360, 362, 578 S.E.2d 705, 707 (2003)
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(affirming sanctions order striking defendants’ answer, entering default judgment
against defendants, and ordering defendants to pay costs and attorney fees).
N.C. Gen. Stat. § 1A-1, Rule 37, states in pertinent part: “If a party . . . fails
to obey an order to provide or permit discovery, including an order made under [Rule
37(a)] . . . a judge of the court in which the action is pending may make such orders
in regard to the failure as are just . . . .” N.C. Gen. Stat. § 1A-1, Rule 37(b)(2). One
of the options available to a trial court for addressing violations of an order to compel
discovery under Rule 37(a) is the entry of 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[.]” N.C. Gen. Stat. § 1A-1, Rule 37(b)(2)(c). Thus, by virtue of
its literal language, N.C. Gen. Stat. § 1A-1, Rule 37, authorizes a trial court to impose
sanctions, including striking an answer and entering judgment as to liability, upon a
party for discovery violations. See Badillo v. Cunningham, 177 N.C. App. 732, 734,
629 S.E.2d 909, 910 (2006).
“According to well-established North Carolina law, a broad discretion must be
given to the trial judge with regard to sanctions.” Batlle v. Sabates, 198 N.C. App.
407, 417, 681 S.E.2d 788, 795 (2009) (quotation marks and citation omitted). “A trial
court does not abuse its discretion by imposing a severe sanction so long as that
sanction is ‘among those expressly authorized by statute’ and there is no ‘specific
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evidence of injustice.’” Id. at 417, 681 S.E.2d at 795 (quoting Roane-Barker v. Se.
Hosp. Supply Corp., 99 N.C. App. 30, 37, 392 S.E.2d 663, 667 (1990)). However, before
imposing a severe sanction such as striking an answer and entering judgment as to
liability, a trial court must consider the appropriateness of less severe sanctions. See
Badillo, 177 N.C. App. at 734, 629 S.E.2d at 911.
In its Sanctions Order, the trial court made the following relevant findings of
fact:
1. On November 1, 2017, the Honorable Elaine M. O’Neal
entered an order granting Plaintiffs’ Motion to Compel
Discovery from Defendant (“November Order”).
2. The November Order was granted because of
Defendant’s failure to properly respond to Plaintiffs’ First
Interrogatories and First Requests for Production (“First
RFPs”) over the course of more than ten months, from
December 2016 through October 2017.
....
7. Defendant did not select an accounting firm for the
onsite audit by 5:00 p.m. on November 20, 2017, the
deadline in the November Order.
8. Defendant did not select an accounting firm until after
Plaintiffs informed Defendant that it missed the deadline.
9. Defendant failed to pay Plaintiffs’ reasonable expenses
associated with preparing, filing, and arguing Plaintiffs’
Motion by 5:00 p.m. on November 20, 2017, as required by
the Order.
....
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11. Defendant did not pay Plaintiffs’ reasonable expenses
associated with preparing, filing, and arguing Plaintiffs’
Motion until after Plaintiffs reminded Defendant of its
obligation. Plaintiffs did not receive Defendant’s check
until December 1, 2017.
12. During the onsite audit, the independent accountant
made the following requests of Defendant:
a. Reports of Defendant’s sales for all of Defendant’s
territories for 2014 through the date of the Onsite
Audit;
b. A digital copy of Defendant’s QuickBooks;
c. The spreadsheets and other work papers with
Defendant’s commission calculations for the
Plaintiffs at the time Defendant paid the Plaintiffs;
d. Defendant’s final and signed tax returns for 2015
and 2016; and
e. Defendant’s sales tax reports for 2015 and 2016.
13. The accountant’s requests were within the scope of the
November Order, specifically paragraph 7(g), and the
parameters for the audit provided by Plaintiffs to
Defendant. Defendant never objected to Plaintiffs’
parameters.
14. These requests were necessary for the independent
accountant to complete the audit.
15. Defendant did not provide the independent accountant
with the information he requested.
16. During the onsite audit, Defendant designated Mr.
Sean Wilson as the person with knowledge of its accounting
systems.
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17. Mr. Wilson left the audit, without explanation, for
nearly four hours.
18. Mr. Wilson’s departure made it impossible for the
independent accountant to complete the audit.
19. Paragraph 7(e) of the November Order provided that
the independent accountant would be the person to
personally review Defendant’s accounting systems.
20. At the audit, Mr. Wilson did not allow the accountant
to review the accounting system himself, but instead made
the accountant review the accounting systems through Mr.
Wilson.
21. Defendant also refused to allow Plaintiffs to obtain
copies of the data and information retained by the
accountant during the audit.
22. Defendant’s behavior during the onsite audit prevented
the independent accountant from obtaining the data and
information necessary to complete the onsite audit as
contemplated by the November Order.
23. Plaintiffs propounded a total of six interrogatories to
Defendant.
24. Plaintiffs’ interrogatories 3 and 4 requested that
Defendant identify Defendant’s customers in Plaintiffs’
territories for 2015 through the date of Defendant’s
response.
25. Defendant replied identically to both Interrogatory 3
and 4 as follows:
Nonprivileged information responsive to this
interrogatory can be derived or ascertained from
certain nonprivileged business document (sic) of
[Defendant] that [Defendant] will produce - subject
to an appropriate confidentiality agreement and
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protective order - by October 20, 2017 (to the extent
not already produced), and the burden of deriving or
ascertaining such information is substantially the
same for Plaintiffs as for [Defendant].
26. The burden of deriving or ascertaining the information
is not the same for Plaintiffs and Defendant. Defendant
can quickly derive or ascertain the requested information
from its sales and accounting systems, while Plaintiffs
would need to sort through Defendant’s production to
derive or ascertain this information. Defendant’s
responses were not proper and amounted to de facto
objections to Plaintiffs’ interrogatories and were non-
responsive.
27. Defendant did not produce the following documents as
required by the November Order:
a. Consolidated reports of invoices paid for all
customer business within Plaintiffs’ territories;
b. All correspondence regarding or related to
Plaintiffs; and
c. All customer orders and invoices for Plaintiffs’
territories.
28. Defendant did provide consolidated reports of invoices
to the independent accountant at the onsite audit.
However, Defendant did not provide those reports to
Plaintiffs and did not allow the accountant to provide them
to Plaintiffs.
29. Defendant has not produced all its sales reports for the
Plaintiffs’ territories as required by the November Order.
Defendant produced many copies of these reports to the
accountant during the onsite audit . . . . Defendant did not
allow Plaintiffs to have these reports and did not allow the
accountant to provide them to Plaintiffs.
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30. Defendant did not produce its signed 2015 or 2016 state
and federal tax returns to either Plaintiffs or the
accountant.
31. Defendant designated every single document it
produced as confidential.
32. Defendant’s failure to comply with the November Order
was not substantially justified and there are no
circumstances making an award of expenses unjust.
Defendant does not challenge these findings; thus, they are binding on appeal.
See Koufman v. Koufman, 330 N.C. 93, 97, 408 S.E.2d 729, 731 (1991) (“Where no
exception is taken to a finding of fact by the trial court, the finding is presumed to be
supported by competent evidence and is binding on appeal.”) (citations omitted).
These findings of fact amply support the trial court’s conclusion that “Defendant
failed to obey the November Order on numerous occasions, and was in contempt of
that Order” and that “[u]nder these facts, an order of sanctions against Defendant,
pursuant to Rule 37 . . . would be just.”
Defendant argues that when the electronic systems audit was performed, the
auditor increased the scope of the audit allowed under the November Order.
Defendant thus argues that it cannot be in violation of the November Order for failing
to acquiesce to this increased scope. However, the November Order stated: “In
auditing the electronic systems, the [auditor] shall be allowed access to all
information that is ‘reasonably calculated to lead to the discovery of admissible
evidence’ within the meaning of Rule 26 of the NC Rules of Civil Procedure.” As
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explained above, the trial court did not abuse its discretion in the November Order
by ordering an audit of Defendant’s electronic systems, and the findings of fact do not
support a conclusion that the audit went beyond the scope of the audit as specified in
the November Order. Nonetheless, even if findings of fact regarding the electronic
systems audit are disregarded, the trial court’s remaining findings of fact amply
support its conclusions that “Defendant failed to obey the November Order on
numerous occasions, and was in contempt of that Order” and that “[u]nder these facts,
an order of sanctions against Defendant, pursuant to Rule 37 . . . would be just.”
Additionally, the trial court concluded:
The Court has carefully considered each of the foregoing
facts, as well as their cumulative effect, and has also
considered the available sanctions for such misconduct,
including lesser sanctions. After thorough consideration,
the Court concludes that sanctions less severe than
striking Defendant’s answer and entering judgment for
Plaintiffs as to liability only would not be adequate given
the seriousness of the misconduct described above.
Accordingly, the trial court’s findings of fact support the conclusion that
Defendant violated the November Order on numerous occasions. Moreover, the trial
court considered lesser sanctions prior to striking Defendant’s answer and entering
judgment for Plaintiffs as to liability, sanctions which are expressly authorized by
statute. Thus, the trial court did not abuse its discretion in the Sanctions Order by
granting Plaintiffs’ motion for sanctions.
C. Sanctions Order - Due Process Claim
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Defendant next agues the trial court’s Sanctions Order violates its due process
rights. We disagree.
We repeat that this Court may overturn a trial court’s order of sanctions only
in the event of an abuse of discretion. Essex Grp., Inc., 157 N.C. App. at 362, 578
S.E.2d at 707. “A trial court may be reversed for abuse of discretion only upon a
showing that its ruling was so arbitrary that it could not have been the result of a
reasoned decision.” Id. (quotation marks and citation omitted). Here, the numerous
facts found by the trial court justify its imposition of sanctions on Defendant.
Sanctions such as striking answers and entering default judgment are well within
the court’s discretion in cases involving an abuse of discovery rules by one party.
Kewaunee Sci. Corp. v. E. Sci. Prods., 122 N.C. App. 734, 738, 471 S.E.2d 451, 453
(1996) (citing Roane-Barker, 99 N.C. App. at 36, 392 S.E.2d at 667.)
Defendant first asserts that because it made a diligent and good faith effort to
comply with the order, “[i]mposing drastic sanctions on [Defendant] under these
circumstances, especially considering the limited amount in controversy, violated
[Defendant]’s due process rights.” We disagree.
The unchallenged findings of fact do not support Defendant’s assertion of a
diligent and good faith effort. To the contrary, the findings of fact demonstrate a
protracted unwillingness to respond to Plaintiffs’ discovery requests or comply with
the trial court’s discovery order based, at least in part, on Defendant’s unsupported
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Opinion of the Court
insistence that Plaintiffs’ and the trial court’s actions were excessive, “considering
the limited amount in controversy[.]”
Defendant further contends, “even assuming arguendo that [Defendant] could
be characterized as less than diligent,” due process does not permit a trial court to
strike its answer as a discovery sanction because the facts in this case do not support
a Hammond Packing presumption of bad faith. See Hammond Packing Co. v.
Arkansas, 212 U.S. 322 (1909). Again, we disagree.
“Rule 37(b)(2)(A)2 itself embodies the standard established in Hammond
Packing Co. v. Arkansas . . . for the due process limits on such rules.” Ins. Corp. of Ir.
v. Compagnie Des Bauxites De Guinee, 456 U.S. 694, 705 (1982). In Hammond
Packing, “the Court held that it did not violate due process for a state court to strike
the answer and render a default judgment against a defendant who failed to comply
with a pretrial discovery order.” Id. “[I]n instances of default judgment the
‘preservation of due process [is] secured by the presumption that the refusal to
produce evidence material to the administration of due process was but an admission
of the want of merit in the asserted defense.’” Id. (quoting Hammond Packing, 212
U.S. at 350-51).
“A proper application of Rule 37(b)(2) will, as a matter of law, support such a
presumption.” Ins. Corp. of Ir., 456 U.S. at 706 (citing Societe Internationale v.
2 Although Hammond Packing involves the Federal Rule of Civil Procedure 37(b)(2)(A), this
rule is essentially identical to our North Carolina Rule of Civil Procedure 37(b)(2).
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Opinion of the Court
Rogers, 357 U.S. 197, 209-13 (1958)). “If there is no abuse of discretion in the
application of the Rule 37 sanction, . . . then the sanction is nothing more than the
invocation of a legal presumption, or what is the same thing, the finding of a
constructive waiver.” Id.
In section IV. 2., above, we concluded the trial court did not abuse its discretion
in the application of the Rule 37 sanction. The trial court’s copious findings of fact
amply supported the trial court’s conclusions that “Defendant failed to obey the
November Order on numerous occasions, and was in contempt of that Order[;]” that
“[u]nder these facts, an order of sanctions against Defendant, pursuant to Rule 37 . . .
would be just[;]” and that “[a]fter thorough consideration, the Court concludes that
sanctions less severe than striking Defendant’s answer and entering judgment for
Plaintiffs as to liability only would not be adequate given the seriousness of the
misconduct described above.” The trial court’s proper application of Rule 37(b)(2), as
a matter of law, supported the “presumption of fact as to the bad faith and untruth
of an answer begotten from the suppression or failure to produce the proof
ordered . . . .” Hammond Packing, 212 U.S. at 351. Accordingly, as in Hammond
Packing, it did not violate due process for the trial court in this case to strike
Defendant’s answer and enter judgment in favor of Plaintiffs as to liability based on
Defendant’s failure to comply with the November Order.
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Opinion of the Court
Defendant finally argues that the sanction striking its answer and establishing
liability in favor of Plaintiffs violated Defendant’s due process rights because the
sanction was not “‘specifically related’ to the issue upon which discovery was sought
and refused[,]” as required by Insurance Corporation of Ireland. However, Defendant
overlooks our Rule 37 and misquotes Insurance Corporation of Ireland, both of which
refer to a “claim” as opposed to an “issue.”
Rule 37 provides that the trial court may issue “[a]n order that the matters
regarding which the order was made or any other designated facts shall be taken to
be established for the purposes of the action in accordance with the claim of the party
obtaining the order.” N.C. Gen. Stat. § 1A-1, Rule 37(b)(2). This Court has broadly
interpreted that language, even upholding a finding of fact establishing an entire
negligence claim on behalf of the party obtaining the order. Edwards v. Cerro, 150
N.C. App. 551, 557–58, 564 S.E.2d 277, 281 (2002). Likewise, Insurance Corporation
of Ireland, which involves Federal Rule 37, explains that “the sanction must be
specifically related to the particular ‘claim’ which was at issue in the order to provide
discovery.” Ins. Corp. of Ir., 456 U.S. at 707.
The particular claims at issue in the November Order included breach of
contract, quantum meruit, and unfair and deceptive trade practices. The sanction
striking Defendant’s answer and establishing liability in favor of Plaintiffs
specifically related to those claims. Accordingly, the Sanctions Order striking
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Opinion of the Court
Defendant’s answer and establishing liability in favor of Plaintiffs did not violate
Defendant’s due process rights.
V. Conclusion
The November Order and the Sanctions Order are affirmed. Defendant’s
appeal from the Denial Order is dismissed.
AFFIRMED IN PART; DISMISSED IN PART; AND REMANDED.
Judges TYSON and ZACHARY concur.
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