The United States Court of Appeals for the Tenth Circuit has held that an attorney may be sanctioned under Rule 37 of the Federal Rules of Civil Procedure for failing to disclose a client’s D&O policy that potentially covered securities-related claims asserted against the  client. Sun River Energy, Inc. v. Nelson, 2015 WL 5131947 (10th Cir. Sept. 2, 2015).

The district court set a deadline for the parties’ disclosures, pursuant to Rule 26(a)(1)(A), of “any insurance agreement under which an insurance business may be liable to satisfy all or part of a possible judgment in the action or to indemnify or reimburse for payments made to satisfy the judgment.” The plaintiff had a D&O insurance policy that potentially covered securities-related counterclaims asserted by the defendants. The plaintiff did not disclose the existence of the D&O policy until 18 months after the deadline for doing so, and only after the defendants repeatedly requested the information and filed a motion to compel. The defendants then moved for sanctions against the plaintiff and its in-house and outside counsel. The district court concluded that the plaintiff itself should not be held responsible for the non-disclosure, but held the plaintiff’s in-house and outside counsel personally liable for the defendants’ attorneys’ fees in pursuing the motion for sanctions.

On appeal, the Tenth Circuit first considered the sanctions imposed against the plaintiff’s in-house counsel pursuant to Rule 37(c)(1), which authorizes sanctions for the failure to disclose or supplement information as required by Rule 26(a) in the absence of a substantial justification for the nondisclosure. The court held that sanctions under Rule 37(c)(1) apply only to parties and not to their counsel. The court further held that it could not uphold the sanctions award under its inherent power to sanction abuse of the judicial process because the standard for doing so is much more stringent than the “no substantial justification” standard of Rule 37(c)(1) and requires a finding that the conduct was taken in bad faith, vexatiously, wantonly, or for oppressive reasons.

The court then considered the sanctions imposed against the plaintiff’s outside counsel under Rule 37(b)(2), which authorizes sanctions against a party or an attorney for failing to comply with a discovery order—here, the district court’s scheduling order setting forth the initial disclosure deadline. The outside counsel argued that his conduct was substantially justified, and thus did not warrant the sanctions, because he had assumed that the plaintiff’s in-house counsel had reviewed the insurance policy and that it would be unusual for a D&O policy to cover securities claims against a corporation. The court found that the outside counsel’s assumption that the in-house attorney had reviewed the policy was baseless and that the outside counsel had an obligation to review the actual terms of the insurance policy to evaluate the possible availability of coverage. Accordingly, the court held that the district court did not abuse its discretion and upheld the sanctions award against the plaintiff’s outside counsel for failing to disclose the D&O policy.