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Banco del Atlantico, S.A. v. Woods Industries Inc.

March 7, 2008

BANCO DEL ATLANTICO, S.A. AND HSBC MEXICO, S.A., PLAINTIFFS-APPELLANTS,
v.
WOODS INDUSTRIES INCORPORATED, WILLOW PROPERTIES, INC., NAHUM SHAR, ET AL., DEFENDANTS-APPELLEES.



Appeal from the United States District Court for the Southern District of Indiana, Indianapolis Division. No. 03 C 1342-Larry J. McKinney, Judge.

The opinion of the court was delivered by: Evans, Circuit Judge

ARGUED FEBRUARY 13, 2008

Before CUDAHY, POSNER, and EVANS, Circuit Judges.

This case is a dozen years old, which would ordinarily mean that the issue raised on appeal should certainly not be about discovery. But this is not your ordinary case. Its history is extraordinary-extraordinarily troublesome. The case was pending in a federal district court in Texas for over seven years and has been pending in a federal district court in Indiana for five. But after all this time, the only issue before us is whether the district judge abused his discretion in dismissing the plaintiffs' case because they violated, in several respects, an order entered pursuant to Federal Rule of Civil Procedure 30(b)(6). The violations involved the plaintiffs' failure to produce deponents prepared to address the topics in defendant's notice of deposition, their failure to produce or account for important documents, and their instructing witnesses to be unavailable for deposition.

In a bulky (285-paragraph, 108-page!) second amended complaint, the plaintiffs charged the defendants with "a prolonged, elaborate and sophisticated" fraud scheme in violation of the federal racketeering statute (RICO), plus a bevy of other claims. The allegations are that the defendants Alfred Stauder and David Felts owned an Indiana company called Woods Wire Products Inc. (Woods I). The company manufactured and distributed electrical products. In 1986, Mario Cruz-Prieto Perez, Stauder, and others formed a Mexican company they called Industrias Corelmex, S.A. de C.V. to be a supplier for Woods I. In 1987, Banco del Atlantico loaned $300,000 to Corelmex before it was operational. The loan was secured by a mortgage on Corelmex's industrial plant. In August 1991, Atlantico entered into a $7 million loan agreement which consolidated and restructured previously issued lines of credit. At least one other loan followed. The various loans were secured by the Corelmex plant and equipment, a mortgage on other real estate, and "guarantees" from Woods I.

The plaintiffs allege that the loans were induced by a number of false statements relating to the value of the collateral, Corelmex's financial condition, and Woods I's intention to recognize its commitments under the guarantees. For instance, Stauder and Felts sold Corelmex to Cruz. The sale was not disclosed, and the allegation is that it is unlikely Atlantico would have approved the financing had it known of the sale. Also, in March 1993, virtually all of Woods I's assets and liabilities were purchased by Pentland USA. However, excluded from the transfer was Woods I's guarantee of Atlantico's loans to Corelmex. Woods I's business was continued by Woods II under Pentland's close supervision.

The present lawsuit was filed by Banco del Atlantico, S.A. in the United States District Court for the Southern District of Texas in 1996. Less than two years later, Atlantico ceased operation and Banco International, S.A. (Bital), its receiver, took over the prosecution of this lawsuit. HSBC Mexico, S.A. was joined as a plaintiff in 2004.

While the case was pending in Texas, the defendants moved to dismiss on grounds of forum non conveniens, international comity, and failure to state a claim. In response to the motion based on forum non conveniens, the plaintiffs argued that the alternative forum, the Mexican court which was now handling Corelmex's bankruptcy (for by this time the company was in bankruptcy), was corrupt. Plaintiffs also contended that defendants had bribed the Mexican judge. A magistrate judge, apparently unim-pressed with these claims, recommended dismissal of the case.

It was two years after the recommendation was entered that a district judge stated his concern over the allegations of corruption. He ordered limited discovery on that issue, authorizing Atlantico to depose six individuals with relevant knowledge. He also ordered that a brief summarizing the evidence of corruption be filed by March 23, 2001. The deadline came and went and nothing was filed.

Further proceedings were held in Texas but nothing was resolved, and the case was transferred to the United States District Court for the Southern District of Indiana in March 2003.

After the case had been pending for almost 10 years, the first Rule 30(b)(6) depositions were attempted. In response to the notice for the deposition, plaintiffs designated Maricela Huerta Cova, the person who signed interrogatory answers, as the deponent. The deposition began in January 2006, but produced virtually no information because plaintiffs' counsel interposed an inordinate number of privilege and work product objections, instructing Huerta Cova not to answer even basic questions. For instance, counsel instructed Huerta Cova not to answer this question: "Are you a witness as a representative of HSBC Mexico today?"

Understandably unsatisfied with the deposition, defendants moved to compel further testimony. In an April 28, 2006, order, Magistrate Judge V. Sue Shields called the deposition a "fiasco." She said:

[T]he vast majority of plaintiffs' objections were utterly without merit and evince either a complete lack of understanding of the Federal Rules of Civil Procedure or, and far more likely, an intentional effort to obfuscate and to impede the defendants' legitimate efforts at obtaining discovery in this case.

The magistrate judge pointed out that she had held more than once that defendants are entitled to know what evidence the plaintiffs have and how they intend to prove their case. She did not recommend sanctions but ...


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