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Trial court abused its discretion by ordering discovery sanction after prohibiting affirmative defenses in contract dispute
TRACEY BLAIR
Legal News Reporter
Published: February 19, 2013
A trial court abused its discretion by ordering a discovery sanction that prohibited a plastics recycling company from asserting affirmative defenses in a contract dispute with a bank, the 7th District Court of Appeals ruled this week.
In addition, the appellate court also found a Columbiana County judge improperly awarded summary judgment in favor of plaintiff-appellee Huntington National Bank.
According to case summary:
In December 2007, Edward McNee, owner of Jasar Recycling Inc., signed an agreement to buy the remaining inventory from Capco Polymer Industries Inc., a failing plastics recycler.
While Capco was in business, it had obtained financing from Huntington, which was given a security interest in the inventory.
According to the agreement, Jasar was to pay Huntington for the inventory and remove it all by the end of the month.
In addition, Jasar was supposed to pay the bank directly within 10 business days from the date the inventory was removed.
But the agreement expired after Capco decided to sell the inventory to other buyers, according to McNee.
McNee said he later agreed to a new offer to buy Capco’s remaining inventory. McNee argued Huntington was not involved in the agreement and was not a third-party beneficiary because Jasar agreed to pay Capco — not Huntington.
Meanwhile, after removing some of the inventory, McNee said he discovered the inventory was “contaminated.” However, Capco refused to let Jasar return the inventory.
After Jasar did not pay Capco or Huntington for the inventory, the bank filed a 2008 complaint against Jasar, seeking damages for alleged breach of contract and unjust enrichment.
In 2009, Huntington served discovery requests on Jasar.
Huntington was not satisfied with Jasar’s responses. Bank attorneys claimed Jasar responded to only six of 21 interrogatories.
At the deposition, Jasar’s attorneys produced 13 pages of documents that it had inadvertently withheld from Huntington, and they agreed to give additional discovery information to the bank.
During a 2010 hearing, a magistrate found Jasar failed to provide the additional discovery and once again found them in contempt.
The magistrate then awarded sanctions that found a contract did exist between the two plastic companies and that Huntington is a third-party beneficiary of the contract.
In addition, an order was issued barring Jasar from presenting evidence supporting affirmative defenses and an award for Huntington’s attorney fees and costs for failure to comply with discovery.
The trial court also granted summary judgment in Huntington’s favor, ruling the agreement was a valid contract and that Huntington was a third-party beneficiary.
According to the ruling, Jasar was obligated to buy and remove all of Capco’s inventory and to pay Huntington.
The court also found Huntington was damaged by $99,335.16 plus interest. The bank was also awarded $7,767.50 plus interest for attorney fees.
In July 2011, Jasar appealed judgments granting summary judgment in favor of Huntington and granting the bank’s attorney fees.
Jasar argued the trial court’s sanctions imposed for the discovery violation were too severe and arbitrary.
“Jasar contends that by imposing as a sanction a finding that a contract existed between Jasar and Capco of which Huntington is a third-party beneficiary and by prohibiting Jasar from asserting any affirmative defenses, the trial court essentially grated Huntington a default judgment,” according to the 3-0 opinion written by 7th District Judge Gene Donofrio.
Jasar’s counsel argued the judge should have imposed the least severe sanction, since Huntington’s lawyers admitted Jasar did not intentionally withhold the documents.
“Under these circumstances, the discovery sanctions constituted an abuse of discretion,” Donofrio wrote. “The court needlessly imposed the most severe sanctions possible. The court entered findings that a contract existed between Jasar and Capco and that Huntington was a third-party beneficiary to that contract. And the court prohibited Jasar from presenting any affirmative defenses. In imposing these sanctions, the court essentially entered judgment for Huntington.”
The appellate court also found Jasar’s second assignment of error — that summary judgment was improper — had merit because there was a genuine issue of material fact.
“The agreement sets forth clear terms and also clearly identifies Huntington as an intended third-party beneficiary,” according to the opinion. “However, at his deposition McNee stated that Capco terminated the agreement.”
7th District judges Cheryl L. Waite and Mary DeGenaro concurred with the opinion.
The trial court’s discovery sanctions and summary judgment award in favor of Huntington were reversed and remanded to the trial court, which may impose less severe discovery sanctions.
The case is cited Huntington National Bank v. Jasar Recycling, Inc., No. 11-CO-24.