Nelson v. Schultz

Facts

P and Ds formed an LLC to develop a property in Downtown Chicago. 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. The LLC's managers were Nelson Hotels, Inc. (P was its president) and Prism Construction Management, owned by Ds. Ds voted to remove Nelson Hotels, Inc. as an LLC manager, which, according to P, caused his company to lose out on $1.13 million when the Ritz-Carlton Residences was built. P asserts that Ds 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 P sued Ds for breach of contract, unjust enrichment, breach of fiduciary duty, and conversion. The parties proceeded to discovery. Ds sought to gather evidence to support their defense that P's company had been removed as an LLC manager for cause and to examine whether P mitigated his damages from the alleged contract breach. They asked P 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. P 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. The judge compelled the disclosure of the requested documents. The judge reasoned that until he ruled on these documents' relevance, Ds should receive them so that they could prepare their defense. P claimed that he 'believed' that they had been produced and that he was 'not in possession' of them. Ds 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.' The day before the hearing on Ds' sanctions motion, P sent copies of his tax transcripts (partial records of his tax returns) for 2006 through 2011. Ds asserted that the tax transcripts were inadequate substitutes for his tax returns and that they still had not received the requested bank statements. The judge gave P one more chance to produce the requested documents or else the case may be dismissed. The judge added that if P 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. P produced only one of the requested tax documents and provided a declaration that the requested documents 'in possession, custody, or control of P from 2004-2008 are believed to have been produced. For these years, P is not in possession of these documents.' At the second hearing, the judge then gave P 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.' P did not produce any documents by the next deadline. One month after the deadline, P forwarded to Ds an email he had received from his company's bank, which said that it kept records going back only seven years. At the third hearing, P responded by telling the judge that after 'moving several times in the past years,' he did not have his tax returns or bank records from 2004 through 2008. The judge dismissed the case for 'want of prosecution.' P appealed. P contends that before dismissing this suit, the judge was required to consider its merits and the magnitude of his misconduct, which, he says, weigh in favor of a lesser sanction.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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