XYNGULAR, a Delaware corporation, Plaintiff Counter Defendant -Appellee,
MARC SCHENKEL, an individual, Defendant Counterclaimant Third-Party Plaintiff - Appellant,
RUDY REVAK, an individual; MARY JULICH, an individual; STEVE KOLE, an individual; MARC WALKER, an individual; BRUCE JENSEN, an individual; DAN MURPHY, an individual; RUSSELL FLETCHER, an individual; JIM NORTHROP, an individual; ROBERT SPANGLER, an individual; SYMMETRY CORPORATION, a Delaware corporation; GLOBAL VENTURES MANAGEMENT SERVICES LLC, a Delaware limited liability company; ALYTIS, LLC; GLOBAL VENTURES PARTNERS, Third-Party Defendants - Appellees.
from the United States District Court for the District of
Utah (D.C. No. 2:12-CV-00876-RJS-PMW)
Stephen Q. Wood (Mary Anne Q. Wood, with him on the briefs),
Wood Balmforth LLC, Salt Lake City, Utah, for Defendant
Counterclaimant Third-Party Plaintiff - Appellant.
F. James, Hatch, James & Dodge, P.C., Salt Lake City,
Utah (Mitchell A. Stephens and Justin L. James, Hatch, James
& Dodge, P.C., Salt Lake City, Utah, with him on the
brief for Plaintiff Counter Defendant-Appellee, and Stephen
E. W. Hale, Laura G. Kennedy, Matthew J. Ball, and Rita M.
Cornish, Parr Brown Gee & Loveless, P.C., Salt Lake City,
Utah, with him on the briefs, for Third-Party Defendants -
Appellees), for Plaintiff Counter Defendant-Appellee.
BRISCOE, SEYMOUR, and LUCERO, Circuit Judges.
LUCERO, CIRCUIT JUDGE.
Schenkel appeals the dismissal by the district court of his
claims against Xyngular Corporation and various third parties
as a sanction for abuse of what he claims was pre-litigation
discovery. Because we have not previously decided whether
pre-litigation conduct that did not give rise to the
substantive claims in a case is sanctionable by dismissal of
a party's claims, the issue remains an open question in
our circuit. We conclude that termination sanctions are
permissible when pre-litigation conduct is aimed at
manipulating the judicial process and is unrelated to the
conduct that gave rise to the substantive claims in a case.
Because the district court did not abuse its discretion in
concluding that these conditions were met in the present
case, we exercise jurisdiction under 28 U.S.C. §
Corporation, a marketing company, was formed in 2009.
Schenkel worked at Xyngular from the company's inception,
performing various services in exchange for an ownership
interest. In 2010, the relationship between Schenkel and
Xyngular's directors soured. Schenkel believed the
company was paying excessive amounts to Symmetry and Global
Ventures Management Services ("GVMS"),
entities that were owned by the Xyngular directors and
performed certain services for Xyngular. Believing that these
activities amounted to illegal self-dealing, Schenkel sent
Xyngular a demand letter on September 1, 2011, in which he
asked the Board of Directors to investigate. He also
requested that the Board pursue claims against certain
Xyngular employees for misappropriation of corporate assets,
corporate waste, self-dealing, and usurpation of corporate
opportunities. Between mid-2010 and mid-2011, Schenkel asked
Ian Swan, who was a Xyngular shareholder and IT consultant at
GVMS, to gather documentation regarding the suspected
self-dealing and the number of shares to which Schenkel was
entitled. In October 2011, Swan began to provide Schenkel
with the requested documents.
September 13, 2012, Xyngular filed suit against Schenkel,
seeking a declaratory judgment that he was entitled to only
two thousand shares and that his position as Master
Distributor was terminated along with any accompanying
rights. Xyngular also alleged that Schenkel committed
corporate waste and misappropriated corporate resources.
Schenkel responded by asserting a number of counter-claims
and third-party claims. He argued that he was entitled to 2,
600 shares, a permanent seat on Xyngular's Board of
Directors, and a non-terminable position in Xyngular's
distribution chain. He also alleged that Xyngular's
directors had engaged in self-dealing, concealed the presence
of lead in the company's products, and perpetuated sales
tax fraud committed by Symmetry. Schenkel attached several
documents he received from Swan as exhibits to his original
answer, counter-claim, and third-party complaint.
subsequently sought a temporary restraining order
("TRO") to restore his ownership interest, restore
his seat on the Board of Directors, and prevent the Xyngular
directors from looting the company. During a hearing on the
TRO request, Xyngular's counsel questioned the propriety
of Schenkel's receipt of documents from Swan. Xyngular
later moved for terminating sanctions,  alleging that
Schenkel encouraged Swan to steal documents belonging to
Xyngular, Symmetry, GVMS, and others. Xyngular argued that
many of these documents were kept on GVMS servers, which made
Schenkel's use of them in seeking a TRO improper.
Schenkel responded that Swan was authorized to access the
documents, that Swan gave the documents to Schenkel
voluntarily, and that Schenkel intended to use them to blow
the whistle on Xyngular's directors-not for the
purpose of litigation. He further alleged that Xyngular had
spoliated evidence and retaliated against him for
whistleblowing. After the court allowed additional discovery,
both parties filed cross-motions for terminating sanctions.
district court denied Schenkel's motion. As to
Xyngular's motion, the court found that Schenkel
encouraged Swan to remove documents from GVMS's servers
and then collected, reviewed, and used those documents in
support of his claims. It further found that the documents
belonged to Xyngular, GVMS, Symmetry, and various other
companies. The court noted that although Swan had
authorization to access the GVMS servers on which the
documents were stored, there was no evidence that Swan had
authority to remove the documents, possess them, or give them
to third parties. Even though Schenkel's conduct occurred
before litigation officially began, the court determined he
had obtained the documents in anticipation of litigation and
used them to support his claims. It also held that, as a
Xyngular shareholder, Schenkel was not entitled to receive
the documents in the manner he did because he did not use the
proper procedure to inspect the company's books and
records. Finally, the court concluded that Xyngular had met
its burden in showing that Schenkel acted willfully, in bad
faith, and with fault. It dismissed Schenkel's claims
without entering default against Schenkel on Xyngular's
claims. Additionally, the court excluded the documents
Schenkel obtained from Swan from evidence and awarded
Xyngular and the third parties their costs and fees in
bringing the sanctions motions. Schenkel timely appealed.
first argues that the district court exceeded its inherent
powers by imposing sanctions for pre-litigation conduct. He
largely relies on our decision in Towerridge, Inc. v.
T.A.O., Inc., 111 F.3d 758 (10th Cir. 1997), for the
proposition that a district court has inherent authority to
sanction only: (1) "bad faith occurring during the
course of litigation that is abusive of the judicial
process" and (2) "bad faith in bringing an action
or in causing an action to be brought." Id. at
768 (quotation omitted).
review a court's imposition of sanctions under its
inherent power for abuse of discretion." LaFleur v.
Teen Help, 342 F.3d 1145, 1149 (10th Cir. 2003)
(quotation omitted). "An abuse of discretion occurs when
the district court bases its ruling on an erroneous
conclusion of law or relies on clearly erroneous fact
findings." Ashby v. McKenna, 331 F.3d 1148,
1149 (10th Cir. 2003) (quotation omitted). In concluding that
Schenkel's conduct was sanctionable, the district court
considered not only Schenkel's misappropriation of
Xyngular's documents, but also his use of them in
anticipation of litigation and during the litigation itself.
We agree that under Towerridge, a ...