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Charter House Insurance Brokers v. New Hampshire Insurance Co.

*fn*: December 10, 1981.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 79 C 4715 -- Marvin E. Aspen, Judge .

Before Cummings, Chief Judge, Sprecher, Circuit Judge, and Campbell, Senior District Judge.*fn**

Author: Cummings

Charter House Insurance Brokers, Ltd. ("Charter House") appeals from the dismissal of its suit against New Hampshire Insurance Company ("NHIC"). The district court ordered the dismissal as a sanction for Charter House's refusal to comply with proper discovery requests. Finding no abuse of discretion by the district judge, we affirm.


Charter House sued NHIC for damages arising out of a 1978 government undercover operation that went awry. NHIC and its parent company, American International Group, Inc., had lent their cooperation to an FBI investigation of organized crime's activities in government-financed construction projects. Exactly how the operation went wrong is neither clear nor relevant to this appeal. Charter House claimed to have been caught in the fallout. It said it had been induced by Norman Reed, a middle-man acting for NHIC,*fn1 to broker construction surety bonds that were not valid. Charter House therefore sued NHIC in late 1978, alleging that: (1) NHIC was liable for premium losses of $237,244 because it clothed Reed with actual or apparent authority (Count I); (2) NHIC's agents'*fn2 deceit had caused Charter House to suffer $10.5 million of direct and consequential losses (Count II); (3) NHIC's letters disavowing the bonds defamed Charter House and caused it $10.5 million in losses (Count III); (4) NHIC's letters amounted to intentional interference with the business relationships of Charter House and its clients, for which a total of $40.5 million in compensatory and punitive damages was sought (Count IV); and (5) NHIC was liable for the $237,244 in premium losses because of its negligence in giving Reed its power of attorney.

NHIC's answer denied all responsibility for Reed's criminal activities and alleged that Charter House's own illegal brokerage practices prevented it from claiming damages from NHIC. NHIC also counterclaimed for $35 million in compensatory and punitive damages for Charter House's "malicious, wanton, reckless, and fraudulent" conduct in selling the bonds. At the urging of NHIC, the government was made a third party defendant in the suit and undertook to handle NHIC's defense and counterclaim and to indemnify NHIC against any liability. Thus after June of 1979, the litigation was mainly in the hands of Fred Louis and David Austern, Charter House's counsel, and Mark Kurzmann, a Justice Department attorney representing the government and NHIC.

The course of events after the filing of the complaint was far from smooth. In January 1979 Charter House made a Request for Production of NHIC Documents under Rule 34 of the Federal Rules of Civil Procedure. NHIC filed its objections within the thirty-day time period prescribed by the Rule. Govt.Br. 28a. Charter House also served interrogatories on NHIC, to which NHIC made timely objection under Rule 33. Govt.Br. 75a.*fn3 In November 1979 Charter House deposed NHIC's general counsel, and shortly thereafter NHIC complied with the original document production request. Charter House Br. 4; Govt. Br. 5-6.*fn4

NHIC filed two Requests for Production on Charter House, one on April 23, 1979, and another on October 10, 1979. Neither was complied with or objected to within the time limits of Rule 34. On February 12, 1980, NHIC presented to Judge Aspen a motion "For Sanction of Dismissal of Plaintiff's Claims * * * or * * * to Compel Production of Documents." At the time of the motion, Charter House had produced nothing, nor had it applied for a protective order. At the hearing, however, Charter House's counsel Fred Louis promised to turn over the documents requested within a ten-day period, if the court would postpone ruling on the motion until February 22. Mr. Louis clearly understood the seriousness of his undertaking: "The Judge stated that if discovery has not been completed by that time, he would grant the motion."*fn5

Some six hundred pages of material were mailed to Washington on February 18. As of the February 22 hearing, Mr. Kurzmann had not inspected them. He had been told by Mr. Millbranth, the Charter House attorney in charge of collecting and mailing the documents, that the material "substantially complied" with the requests for production, but lacked the financial statements of Mr. Foundos, an owner of Charter House, and the items requested about Royal Exchange, a premium finance company related to Charter House.*fn6

On February 22 Judge Aspen granted NHIC's motion to dismiss Charter House's suit. Under Rule 41(b) of the Federal Rules of Civil Procedure, this became a dismissal with prejudice. Charter House attorneys, having mistaken the time of the hearing, were not present.*fn7 On February 29 they presented a Motion to Vacate the Order of Dismissal. Judge Aspen had the case

referred to a magistrate, to supervise production of all documents by the plaintiff to the government to be done in 45 days; and to regulate discovery and submission of a pretrial order. Motion to vacate dismissal will be allowed in 45 days if magistrate certifies to Court that all documents have been turned over.

Order, February 29, 1980.

At that juncture the parties betook themselves to Magistrate Cooley, where problems of intransigence continued. After considerable jockeying by both sides, Mr. Louis provided identical affidavits of Mr. Foundos and Mr. Patterson, the owners of Charter House, in which they swore (Govt.Br. 101a, 102a):

(t)hat all of the documents, records and written material in the possession of Charter House Insurance Brokers, Ltd. and affiant has been produced and turned over to the ...

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