Hunt & Associates P.C.

When Directors Assert Individual Privileges Preventing Their Corporation from Responding to Discovery Requests

What happens when a corporation can’t respond to proper discovery requests in civil litigation because its officers or directors refuse to provide the corporation with the information necessary to respond to those requests under a claim of personal privilege unavailable to the corporation?  Are the legal consequences to such a corporation softened if the corporation is publicly funded and the assertions of personal privilege on Fifth Amendment grounds by its directors “politically sensitive”?

In Diaz v. Migrant Council, 165 Wn.App. 59 (2011) the defendant’s board of directors fired the plaintiff when, as president of the publicly funded corporation, he asked board members to either provide proof of their legal status in the United States or resign after learning that certain social security numbers directors had provided for use on the corporation’s tax reports were invalid.   The plaintiff sought damages from the corporation claiming that his discharge as president violated public policy.

Diaz was an interlocutory appeal from the trial court’s discovery rulings.  While that appeal was pending the parties reached a settlement making the case moot.  The Court of Appeals still found the issues sufficiently important and likely to recur that it issued an opinion and ruling.

In that litigation the plaintiff issued an interrogatory and request for production seeking information and documents concerning the citizenship and legal status of each of defendant’s directors when he was fired.  Asserting their Fifth Amendment privilege against self incrimination, many of the directors refused to give the requested personal information to the corporation.  The corporation claimed that it was thus unable, through no fault of its own, to respond fully to the interrogatory or request for production.  Yet, of course, a corporation has no Fifth Amendment right against self incrimination.  Only individuals including its agents, employees and directors have such a personal right.

The trial court and the Court of Appeals quite correctly held that insofar as a corporation only acts through its officers, agents, employees and directors, the assertion of a personal privilege by those individuals did not absolve the corporation of its obligation to respond to proper discovery requests in litigation.  Both the trial and appellate courts held that a proper sanction for the corporation’s failure to respond with the information plaintiff sought was an order directing the trial court give an adverse inference instruction to the jury at trial: i.e., to tell the jury that it could infer from the corporation’s failure to respond with the requested information that some of the defendant’s directors were not legal residents of the United States.  That said, the Court of Appeals also reversed the trial court’s finding of contempt against the defendant corporation because, having diligently tried to obtain the information plaintiff had sought, the corporation had not willfully withheld it from plaintiff.

All in all, the penalty to the corporation seems unduly gentle.  The trial court had initially sanctioned the corporate defendant with an order of default but, on reconsideration at the defendant’s request, had softened its sanction to the adverse inference instruction, a modest award of attorney fees ($1,500.00 for at least 4 court hearings) and a finding of contempt which the Court of Appeals annulled.   In short, the plaintiff most surely suffered more economically from the corporation’s failure to respond fully to the discovery requests than the slight discomfort which the court inflicted on the recalcitrant defendant.  In fact, the plaintiff was still necessarily required to expend the time, effort and expense to produce evidence to rebut the defendant’s ability to argue against the “permissive inference.”

One can’t help but wonder if the “politically sensitive” basis of the privilege claim, which the court noted in passing, as well as the fact that the defendant was publicly funded through federal grants, might have made the court more merciful in this case than it might otherwise have been.  Regardless of such possible subconscious motives, the court’s opinion in Diaz is hardly a monument to the serious enforcement of discovery rules.

On balance, a conclusive presumption of the fact as to the citizenship and legal status of one or more of the defendant’s directors would have seemed a more fair sanction.  Defendant would still have been able to argue that there was no causal link between the presumed fact and its decision to fire plaintiff.   At the same time, plaintiff wouldn’t have to prepare to rebut defendant’s argument that the jury shouldn’t draw the obvious inference from its refusal or inability to respond to plaintiff’s legitimate discovery requests.

© 03/09/2012 Lawrence B. Hunt of Hunt & Associates, P.C.  All rights reserved.

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