DoubleLine Capital LP v. Odebrecht Finance, Ltd

Background

The plaintiffs—DoubleLine Capital LP, DoubleLine Income Solutions Fund, and DoubleLine Funds Trust—bought two bonds issued by an Odebrecht affiliate and guaranteed by Construtora Norberto Odebrecht, S.A. They brought federal securities-fraud and state-law claims based on alleged false and misleading statements about Odebrecht’s large bribery scheme.

The plaintiffs sought documents that Odebrecht had provided to the U.S. Department of Justice and other government or regulatory agencies. In an October 14, 2020 order, the court directed the defendants to produce nonprivileged documents responsive to Requests for Production 1, 3, and 4. The defendants had previously represented that they were willing and able to produce those documents without separately identifying which documents had been given to particular authorities.

After the court issued the order, the defendants moved for reconsideration, arguing that Brazilian law broadly prohibited production. Judge Moses denied that motion. The defendants did not object to either order and did not produce the required documents. They later maintained that foreign-law confidentiality obligations prevented compliance. The opinion states that the defendants continued refusing to comply for more than 20 months and also resisted other discovery concerning the bribery allegations.

Positions of the parties

The plaintiffs sought a default judgment, a civil-contempt fine of $10,000 per day, or factual findings under Federal Rule of Civil Procedure 37(b). They argued that the withheld documents were important to proving that the alleged misrepresentations were material, particularly because other evidence systems were unavailable.

The defendants accepted that they were not complying with the discovery order but argued that their conduct was not willful or in bad faith because Brazilian law barred production. They proposed findings that they had made unspecified false statements with the required state of mind and that Odebrecht Engenharia e Construção S.A. was the successor of Construtora Norberto Odebrecht, S.A. They also argued that no expenses should be awarded because their noncompliance was substantially justified.

Analysis

Rule 37(b) allows a court to impose sanctions when a party fails to obey a discovery order. Possible sanctions include treating facts as established, barring evidence or arguments, striking pleadings, staying the case, dismissing claims, entering judgment, or treating the violation as contempt. The rule also generally requires an award of reasonable expenses caused by the violation unless the failure was substantially justified or an award would otherwise be unjust.

Judge Moses concluded that the defendants’ noncompliance was willful under the governing standard. The order was clear, the defendants understood it, and their failure was not caused by something outside their control. The defendants could have objected to the order, sought permission from Brazilian authorities, or complied and accepted the risk of consequences in Brazil. Instead, they chose not to pursue those options. The judge also found that the defendants had not made good-faith efforts to comply and had taken a broader position that prevented plaintiffs from obtaining related information through admissions, interrogatories, or depositions.

The judge rejected the defendants’ proposed limited findings because they would not cure the prejudice to the plaintiffs. The proposed findings would establish only unspecified misrepresentations, without establishing what the misrepresentations were or whether they were material. That would leave plaintiffs unable to prove an essential part of their securities-fraud claims.

The judge also rejected the plaintiffs’ requests for a default judgment and coercive civil-contempt sanctions. A default judgment would relieve plaintiffs of proving elements not dependent on the withheld discovery, including reliance and damages, and would be disproportionately harsh. A daily fine was unlikely to produce compliance and was not necessary to compensate plaintiffs.

Order

The court granted the plaintiffs’ motion for discovery sanctions. Under Rule 37(b)(2)(A)(i), the following facts were ordered taken as established for purposes of the action:

Under Rule 37(b)(2)(A)(ii), the defendants were precluded from offering evidence or argument contesting those established facts. Under Rule 37(b)(2)(C), they were ordered to pay the plaintiffs’ reasonable expenses, including attorneys’ fees and out-of-pocket costs caused by the discovery violation, including expenses for seeking substitute discovery and litigating the sanctions motion. The amount of those fees and costs was left for a later determination based on declarations and supporting records. All relief not expressly granted was denied.

The court also ordered the opinion and order filed under seal at a viewing level limited to the parties’ attorneys and court personnel, with a later opportunity for proposed redactions before public filing.