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Nelson v. Schultz

United States Court of Appeals, Seventh Circuit

December 21, 2017

Kenneth E. Nelson, Plaintiff-Appellant,
Bruce R. Schultz and Jon K. Rodgers, Defendants-Appellees.

          Argued November 15, 2017

         Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 15 C 8560 - Harry D. Leinenweber, Judge.

          Before WOOD, Chief Judge, and Manion and Kanne, Circuit Judges.

          PER CURIAM.

         Kenneth Nelson sued two former business partners, Bruce Schultz and Jon Rodgers, for breach of contract and several torts. During discovery Schultz and Rodgers asked Nelson to produce various bank statements and tax returns, which, the defendants said, they needed to defend against his claims. After Nelson refused, the district court granted the defendants' motion to compel their production and warned him, twice, that it would dismiss the case if he did not produce the documents or provide an affidavit documenting a diligent search for them. Nelson did neither, and the judge dismissed the case for want of prosecution. On appeal Nelson argues that the district judge erred by not assessing whether his misconduct justified dismissing the case. Because the judge sufficiently evaluated this matter and did not abuse his discretion by dismissing the suit after multiple warnings, we affirm.

         This dispute began when Nelson, Schultz, and Rodgers formed an LLC to develop a property in Downtown Chicago. In mid-2005 they created 664 N. Michigan, LLC, which, according to Nelson, they formed in order to develop the Ritz-Carlton Residences, a mixed-use luxury skyscraper on the Magnificent Mile. The LLC's operating agreement provided that development fees would be divided among the LLC's managers "as they mutually agree" and that a manager of the LLC could be removed for cause by a majority vote of the LLC's owners. According to Nelson, the LLC's managers were Nelson Hotels, Inc. (Nelson was its president) and Prism Construction Management, owned by Schultz and Rodgers.

         In late 2005, Rodgers and Schultz voted to remove Nelson Hotels, Inc. as an LLC manager, which, according to Nelson, caused his company lose out on $1.13 million when the Ritz-Carlton Residences was built. Nelson asserts that Schultz and Rodgers removed his company as a manager to enrich themselves; they justified their decision, however, on grounds that he had a negative $15 million net worth that prevented the LLC from getting financing for the development.

         Ten years later Nelson sued Schultz and Rodgers for breach of contract, unjust enrichment, breach of fiduciary duty, and conversion. After Nelson's lawsuit survived the defendants' motion to dismiss, the parties proceeded to discovery.

         Schultz and Rodgers sought to gather evidence to support their defense that Nelson's company had been removed as an LLC manager for cause-Nelson's poor finances obstructed the project's financing-and to examine whether Nelson mitigated his damages from the alleged contract breach. They asked Nelson to produce his and his company's tax returns for the previous ten years as well as his and his company's loan applications and financial statements between 2004 and 2008. Nelson refused, arguing that he did not guarantee his "creditworthiness" when his company became one of the LLC's managers and that many of the requested documents fell outside of the relevant period for mitigating damages. On the defendants' motion, the judge compelled the disclosure of the requested documents. The judge reasoned that until he ruled on these documents' relevance, the defendants should receive them so that they could prepare their defense.

         In response Nelson stated that, for almost all of the requested documents, he "believed" that they had been produced and that he was "not in possession" of them. The defendants then moved for sanctions under Federal Rule of Civil Procedure 37(b)(2)(A)(v), asking the judge to dismiss the case because Nelson's reply was "non-responsive and evasive." On the day before the hearing on the defendants' sanctions motion, Nelson sent the defendants copies of his tax transcripts (partial records of his tax returns) for 2006 through 2011.

         At the first hearing on their sanctions motion, the defendants asserted that Nelson's tax transcripts were inadequate substitutes for his tax returns and that they still had not received the requested bank statements. The judge agreed and told Nelson that he had "one more chance" to produce the requested documents or else he was "going to probably dismiss it for want of prosecution." The judge added that if Nelson did not have some of the requested documents, he should provide "a crystal-clear affidavit" stating the actions that he and his attorney took to locate them.

         Before the next production deadline, Nelson produced only one of the requested tax documents and provided a declaration that largely copied his response to the defendants' first production request. This declaration included Nelson's assertion that the requested documents "in possession, custody, or control of Nelson from 2004-2008 are believed to have been produced. For these years, Nelson is not in possession of these documents."

         At the second hearing on their sanctions motion, the defendants argued that Nelson's declaration, like his response to their first production request, was self-contradictory-Nelson said that he produced the requested documents but also that he did not have them. Nelson's counsel responded that he misinterpreted the judge's previous order to produce the documents. The judge then gave Nelson five additional weeks either to produce the requested documents or provide an affidavit stating that he did not have them despite a diligent search. The judge closed the hearing with a second warning: "If you don't show a very, very, very substantial effort to comply, then I'm going to probably dismiss the complaint for want of prosecution."

         Nelson did not produce any documents by the next deadline. One month after the deadline, Nelson forwarded the defendants an email he had received from his company's bank, which said that it kept records going back only seven years. Nelson also ...

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