Clientron Corp. v. Devon IT, Inc.

July 12, 2018
 
Case Type:
Business
Case Status:
Reversed and Remanded
Citation:
No. 16-3432 (3rd Circuit, Jul 05,2018) Published
Tag(s):
Ruling:
The Court of Appeals vacated the District Court's sanction order, and remanded to impose a new sanction. Under Pennsylvania law, tenants by the entirety legally are treated as one person, and therefore liability is all or nothing. Though the District Court could treat Clientron's facts as established, or prohibit Defendants from supporting or opposing claims or defenses as a sanction, it could not piece the veil as to only part of the judgment or as to only one of two tenants. On remand, it may hold both tenants liable for everything, or refuse to hold either liable for anything.
Procedural context:
Clientron prevailed in the District Court, which entered judgment confirming an arbitration award in Clientron's favor against Devon IT worth over $7 million. In addition, the District Court held one of the two entireties owners of Devon IT, Bennett, personally liable for a portion of the judgment as a sanction for egregious discovery misconduct. Clientron appeals the District Court's refusal to pierce Devon IT's corporate veil to hold both entireties owners, Bennett and DiRocco, liable rather than just one. Clientron also appeals the District Court's failure to hold both owners personally liable for the entire judgment rather than just for the portion of the judgment directly connected with the discovery misconduct.
Facts:
Clientron manufactured and sold computer components to Devon IT, a Taiwanese company owned by Bennett and DiRocco as tenants by the entirety. Devon IT used the Clientron components to fulfill its contract with Dell. When Dell terminated its relationship with Devon IT, Clientron was still owed over $6 million in unpaid invoices. Dell paid Devon IT a $2 million termination payment, none of which made its way to Clientron. Clientron submitted an arbitration request to the Chinese Arbitration Association in Taiwan pursuant to the parties agreement, alleging breach of contract. The Taiwanese arbitrators ruled in Clientron's favor and awarded over $6.5 million in damages. Clientron, a Pennsylvania company, then sued Devon IT, Bennett, and DiRocco in the Eastern District of Pennsylvania to enforce the arbitration award. Clientron also sought an additional $14.3 million in damages for fraud and breach of contract stemming from nonpayment of invoices that were not covered by the Taiwanese arbitration. Cleintron also alleged that, under Pennsylvania law, Devon IT was the alter ego of its two sole shareholders, Bennett and DiRocco, and asked the District Court to pierce Devon IT's corporate veil. During pretrial discovery, Defendants continually failed to meet discovery obligations, asserting frivolous general objections, then making incomplete and nonresponsive productions, and refusing to designate a Fed. R. Civ. P. 30(b)(6) witness until after several motions and orders to compel, at which time Bennett, the chairman and sole member of Devon IT's board, claimed in his deposition to be unfamiliar with virtually all details of the case. The District Court granted summary judgment with respect to arbitration award in the amount of $6,943,817.13 as a matter of comity, and then proceeded to try the non-arbitrated breach, fraud, and veil-piercing claims. With inadequate discovery, Clientron was able to present some but not enough evidence at trial to support its veil-piercing claim. The jury returned a verdict of an additional $737,018 in damages on the breach claim, but rejected the fraud claim and declined to pierce the Devon IT corporate veil to hold Bennett and DiRocco personally liable for the contract judgment. The District Court held that Clientron failed to meet its burden on the veil-piercing claim, however, it nevertheless held Bennett personally liable for the $737,018 contract judgment, plus an additional $44,320 previously imposed upon Devon IT as a discovery sanction. The District Court refused to hold DiRocco personally liable for the arbitration judgment, the non-arbitration contract judgment, or for the discovery expense judgment, because it concluded that she had not personally participated in the discovery misconduct.
Judge(s):
Geenaway, Jr., Krause, Circuit Judges, and Jones, District Judge sitting by designation.
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