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Nelson v. Nelson

Supreme Court of North Dakota

August 22, 2019

Steven Nelson, individually, and in the right of and for the benefit of J & S Nelson Farms, LLP, Plaintiff and Appellant
v.
James Nelson, Brian Nelson, David Nelson, and J & S Nelson Farms, LLP, Defendants and Appellees

          Appeal from the District Court of Grand Forks County, Northeast Central Judicial District, the Honorable John A. Thelen, Judge.

          DeWayne A. Johnston (argued) and David C. Thompson (appeared), Grand Forks, ND, for plaintiff and appellant.

          Patrick J. Sinner (argued) and Kip M. Kaler (appeared), Fargo, ND, for defendants and appellees.

          OPINION

          VANDEWALLE, CHIEF JUSTICE.

         [¶1] Steven Nelson, individually and for the benefit of J&S Nelson Farms, LLP, appealed from a judgment determining the value of his interest in the Nelson Farms partnership and an order denying his post-judgment motions. Steven Nelson argues the district court erred by ordering various sanctions and determining the value of the partnership. We conclude the district court did not err by striking some of Steven Nelson's claims as a discovery sanction, awarding the defendants a portion of the attorney's fees they incurred in this action, or determining the value of Steven Nelson's interest in the partnership. However, we also conclude the district court abused its discretion by ordering Steven Nelson reimburse the partnership for the attorney's fees and costs it incurred as a result of a separate action in federal court. We affirm as well as we reverse.

         I

         [¶2] In 2015 in United States District Court for the district of Minnesota, Steven Nelson sued James Nelson; AgCountry Farm Credit Services, ACA; and two of AgCountry's employees for claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. Steven Nelson alleged James Nelson and the AgCountry defendants conspired and engaged in racketeering activities through a pattern of false financial reporting, fictitious financial transactions, tax evasion, and theft. The complaint was dismissed for failing to state a claim upon which relief can be granted. Nelson v. Nelson, Civ. No. 14-4854, 2015 WL 4136339 (D. Minn. July 8, 2015). The dismissal was affirmed on appeal. See Nelson v. Nelson, 833 F.3d 965 (8th Cir. 2016).

         [¶3] In September 2015 in Grand Forks County District Court, Steven Nelson sued James Nelson, Brian Nelson, David Nelson, and J&S Nelson Farms, LLP, seeking a declaratory judgment and damages for numerous claims related to operation of the Nelson Farms partnership. Steven Nelson alleged he was a partner of Nelson Farms, the defendants were also partners, he was wrongfully dissociated from the partnership through the defendants' wrongful actions, and the defendants were responsible for the improper diversion of approximately $2, 000, 000 in partnership funds for their personal use.

         [¶4] The defendants answered and counterclaimed requesting the district court determine Steven Nelson had been dissociated from the partnership and determine the extent to which he was entitled to a buy-out and all offsets the partnership or individual partners were entitled to as a result of any damages caused to the partnership. The defendants also requested the court dismiss Steven Nelson's complaint.

         [¶5] In November 2015, the defendants moved to dissociate Steven Nelson from the partnership under N.D.C.C. § 45-18-01, alleging he engaged in conduct relating to the partnership which made it not reasonably practicable to carry on the business in partnership with him. In December 2015, the district court granted the motion, found reconciliation of the partners was not a realistic possibility and Steven Nelson indicated he wanted a buy-out, and ordered Steven Nelson shall no longer be a partner of Nelson Farms as of January 1, 2016.

         [¶6] On October 13, 2016, the defendants moved to compel discovery under N.D.R.Civ.P. 37. The defendants alleged they served interrogatories and a request for production of documents on Steven Nelson on May 3, 2016, responses were due on June 16, 2016, Steven Nelson responded on June 21, 2016, and the responses were significantly deficient. The defendants claimed they had several discussions and meetings with Steven Nelson and he continued to fail to provide appropriate discovery responses. The defendants requested the court issue an order compelling Steven Nelson to answer interrogatory #7, requesting Steven Nelson identify and provide certain information about every transaction for which he was seeking recovery, and provide documentation in response to request for production of documents #4, requiring Steven Nelson to produce all documents identified relating to each transaction in interrogatory #7. The defendants claimed Steven Nelson's response was in the form of three documents, which at best was "a conclusory list of transactions that have some issue." The defendants asserted Steven Nelson simply identified an entire series of transactions he apparently disputed but did not identify what was wrong with the transactions, indicate whether he disputed the entire transaction, explain how he calculated his damages as a result, or produce the supporting documents. The defendants also requested the court award them attorney's fees and reasonable expenses for the motion. Steven Nelson opposed the motion to compel and moved for a protective order.

         [¶7] After a hearing, the district court ordered Steven Nelson to submit full and complete responses to interrogatory #7 and produce all documents responsive to request for production of documents #4 by December 8, 2016. The court also denied Steven Nelson's motion for a protective order and ordered Steven Nelson pay the defendants $1, 755 for their costs and attorney's fees.

         [¶8] In January 2017, the defendants moved to compel discovery and to hold Steven Nelson in contempt. The defendants alleged Steven Nelson continued to fail to produce any response to interrogatory #7 and did not produce any documents responsive to request for production of documents #4. The defendants also alleged Steven Nelson failed to pay the ordered costs and attorney's fees. The defendants requested the court sanction Steven Nelson for failing to comply with discovery by striking all claims in his pleadings requesting damages.

         [¶9] After a hearing, the district court granted the defendants' motion. The court found Steven Nelson failed to comply with the prior order compelling discovery, the defendants made numerous informal requests for Steven Nelson to provide the discovery and payment of the ordered costs and attorney's fees, Steven Nelson never fulfilled his promises to comply with discovery, and he disputed the need to comply with the order. The court stated Steven Nelson continued to dispute during the hearing that he needed to comply with the order to pay $1, 755 in costs and attorney's fees, but it had been informed the fees had been paid. The court ordered that Steven Nelson's damage claims related to interrogatory #7 and request for production of documents #4 were stricken from the complaint as a sanction for his failure to comply with discovery and that he pay the defendants $1, 320 as reimbursement for their legal costs and attorney's fees in bringing the second motion to compel.

         [¶10] After a bench trial, the district court decided the remaining issues, including the valuation of the partnership, sanctions, and attorney's fees. The court found Steven Nelson was dissociated from the partnership on December 31, 2015, the gross value of his interest in the partnership was $544, 397, the partnership previously paid Steven Nelson $371, 000, and the remaining balance of $173, 397 would be paid in accordance with the buyout provisions of the partnership agreement. The court ordered Steven Nelson's distribution from the partnership be reduced by $33, 666.04 for the litigation costs the partnership paid as a result of the federal RICO action. The court awarded the defendants 25 percent of their actual costs and attorney's fees in this case as a sanction for vexatious litigation. The court later calculated the actual amount of the attorney's fees and costs for the action based on the defendants' affidavit and ordered $29, 447.37 be deducted from the remaining amount owed to Steven Nelson for his share of the partnership. Judgment was entered in favor of Steven Nelson for $128, 919.49 for the remaining value of his share of the partnership.

         [¶11] Steven Nelson moved for a new trial or, alternatively, for relief from the judgment. The district court denied his motions.

         II

         [¶12] Steven Nelson argues the district court erred by striking all claims related to more than 2, 000 improper transactions as a discovery sanction. He contends he identified more than 2, 000 transactions in which James Nelson improperly took money from the partnership for personal use, James Nelson's actions were intrinsically improper, the defendants never described how additional explanation about each transaction was necessary or possible, and the sanction for the alleged discovery violation was too harsh.

         [¶13] The district court has broad discretion to impose appropriate sanctions for discovery abuses, and its decision will not be reversed on appeal unless the court abused its discretion. Bertsch v. Bertsch, 2007 ND 168, ¶ 13, 740 N.W.2d 388. A court abuses its discretion when it acts in an arbitrary, unreasonable, or unconscionable manner, it misinterprets or misapplies the law, or when its decision is not the product of a rational mental process leading to a reasoned determination. Perius v. Nodak Mut. Ins. Co., 2012 ND 54, ¶ 8, 813 N.W.2d 580. "The appellant who is contesting the district court's choice of a sanction has the burden of showing the abuse of discretion, and that burden is met only when it is clear that no reasonable person would agree with the trial court's assessment of what sanctions are appropriate." Ihli v. Lazzaretto, 2015 ND 151, ¶ 8, 864 N.W.2d 483 (quoting Fines v. Ressler Enters., Inc., 2012 ND 175, ¶ 15, 820 N.W.2d 688). This Court has said even when a party believes the district court's discovery order is erroneous, the party must comply as long as it remains in force. Bertsch, at ¶ 15.

         [¶14] The district court has a wide spectrum of sanctions for discovery violations, including striking pleadings and entry of default judgment against the disobedient party. Vorachek v. Citizens State Bank of Lankin, 421 N.W.2d 45, 50 (N.D. 1988). Rule 37(b), N.D.R.Civ.P., allows a court to impose sanctions on a party for failing to comply with a discovery order, stating:

For Not Obeying a Discovery Order. If a party or a party's officer, director, or managing agent-or a witness designated under Rule 30(b)(6) or 31(a)(4)-fails to obey an order to provide or permit discovery, including an order under Rule 26(f), 35, or 37(a), the court where the action is pending may issue further just orders. They may include the following:
(i) directing that the matters embraced in the order or other designated facts be taken as established for purposes of the ...

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