                   NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
                              File Name: 08a0557n.06
                             Filed: September 11, 2008

                                                   No. 07-3338

                               UNITED STATES COURT OF APPEALS
                                    FOR THE SIXTH CIRCUIT


SCOTT PELTZ,                                                        )
                                                                    )          ON APPEAL FROM THE
         Plaintiff-Appellee,                                        )          UNITED STATES DISTRICT
                                                                    )          COURT     FOR     THE
v.                                                                  )          NORTHERN DISTRICT OF
                                                                    )          OHIO
RICHARD MORETTI, et al.,                                            )
                                                                    )                     OPINION
         Defendants;                                                )
                                                                    )
GEORGE A. VINCE, JR.; BATES AND VINCE,                              )
LLD; ALAN P. METZGER; ANDERSON                                      )
METZGER & COMPANY, PC,                                              )
                                                                    )
         Defendants-Appellants.                                     )


BEFORE: MARTIN and NORRIS, Circuit Judges, and STAMP, District Judge.*

         ALAN E. NORRIS, Circuit Judge. This case stems from an ill-conceived effort to transfer

assets to a new corporation in order to shield them from a money judgment. The principal

shareholder of both corporations, Richard Moretti, has been found liable for the transfer, and has

elected not to appeal. The district court also ruled that the accountant and lawyer for Moretti and his

companies participated in a civil conspiracy with Moretti to fraudulently transfer the assets, and thus

held them jointly and severally liable for the entire underlying judgment. It is this judgment that is

before us on appeal.


         *
          The Honorable Frederick P. Stamp, Jr., Senior United States District Judge for the Northern District of W est
Virginia, sitting by designation.
No. 07-3338
Peltz v. Moretti, et al.

        A central issue in this case is that many of the facts supporting the finding of a civil

conspiracy were established through plaintiff’s motions for discovery sanctions filed pursuant to Fed.

R. Civ. P 37(b)(2)(A). For the reasons that follow, we conclude that the sanctions imposed cannot

stand, and because we cannot discern from the record whether the district court’s decision can

survive absent these Rule 37 “deemed” facts, we vacate the judgment and remand for further

proceedings consistent with this opinion.

                                                  I.

        Richard Moretti was the owner of Moretti Nursery, Inc., an Ohio corporation he

purchased from his father. Scott Peltz obtained a judgment against Moretti Nursery, Inc. in the

amount of $72,317.90, based on a claim that arose in a bankruptcy preference action. Peltz, as

plan administrator, was authorized under a post-confirmation estate agreement to pursue claims

of the debtor’s estate.

        In the midst of Peltz’s collection efforts, Richard Moretti, allegedly on the advice of his

accountant, Alan P. Metzger, and lawyer, George A. Vince, Jr., formed R & V Moretti, Inc. and

transferred to it Moretti Nursury Inc.’s assets. In a deposition, Moretti admitted that the new

corporation was formed for the very purpose of transferring the nursery assets in an attempt to

continue operating his nursery business without paying the judgment amount to plaintiff.

        In August 2006, the court granted Peltz’s motion for partial summary judgment as to

defendant Moretti and his companies on claims of breach of fiduciary duty, fraudulent transfer,

and alter ego, rendering Moretti personally liable for the judgment along with his companies.



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No. 07-3338
Peltz v. Moretti, et al.

        At the same time, in the pursuit of his civil conspiracy claim, Peltz successfully moved

for an order compelling discovery from Metzger and Moretti, following their failure to respond

to interrogatories and requests for the production of documents related to the transfer of assets. In

October 2006, Peltz moved for Rule 37 sanctions against both the Moretti companies and

Metzger, claiming they still had not provided the requested information as ordered by the court.

        Moretti’s request that the trial be continued was denied and a bench trial was held on

November 8, 2006. None of the defendants attended the trial; according to the handwritten trial

notes, the trial consisted mainly of Peltz reading portions of Moretti’s deposition transcript. At

the trial, the court directed both plaintiffs and defendants to file proposed findings of fact and

conclusions of law. Following the trial, Peltz amended his motion for Rule 37 discovery

sanctions against Moretti and Metzger, asking the court to establish several additional factual

allegations.

        A few weeks after the trial, Moretti finally sprang into action, filing his own summary

judgment motion, a motion for reconsideration of the court’s grant of partial summary judgment

in favor of Peltz against Moretti, and a response to Peltz’s amended motion for sanctions. Peltz

filed a motion to strike Moretti’s motion and memorandum in opposition to the previously

granted partial summary judgment against him.

        On January 3, 2007, the court issued its ruling, denying defendant’s motion for

reconsideration, striking defendants’ memorandum in opposition to partial summary judgment,

and granting plaintiff’s amended motion for Rule 37 discovery sanctions against Metzger and



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Peltz v. Moretti, et al.

Moretti. The court ultimately made the following findings of fact and conclusions of law based

both upon the evidence at trial and its ruling on the motions for sanctions:

        1.      The United States District Court for the District of Delaware entered
                judgment in favor of Scott Peltz, as the Plan Administrator for the
                Consolidated Estate of Creditors, in the amount of $72,317.90, against
                Moretti Nursery, Inc.

        2.      Under Ohio law, civil conspiracy consists of a malicious combination of
                two or more persons to injure another in person or property, in a way not
                competent for one alone, resulting in actual damages.

        3.      A malicious combination of two or more persons to injure another in
                person or property as required to support a civil conspiracy claim under
                Ohio law is satisfied in this case.

        4.      Defendants Richard N. Moretti and Venetta A. Moretti consulted with
                George A. Vince, Jr., Bates & Vince, LLC, Alan P. Metzger, and
                Anderson Metzger & Company, PC, to fraudulently transfer the assets of
                Moretti Nursery, Inc., into R & V Moretti, Inc., a corporation formed for
                the purposes of avoiding the debt owed to Plaintiff.

        5.      George Vince, Jr., of Bates & Vince, LLC, in consultation with Richard N.
                Moretti, incorporated R & V Moretti, Inc. and facilitated the transfer of
                valuable assets from Moretti Nursery, Inc. to R & V Moretti, Inc., with
                knowledge that the debt to Plaintiff remained unsatisfied.

        6.      Alan P. Metzger, of Anderson Metzger & Company, PC, likewise
                facilitated the transfer of valuable assets from Moretti Nursery, Inc. to R &
                V Moretti, Inc., with knowledge that the debt to Plaintiff remained
                unsatisfied.

        7.      With the knowledge of Defendants, Moretti Nursery, Inc. transferred its
                valuable rights and assets to R & V Moretti, Inc., while insolvent, but still
                possessing significant assets and while the judgment in favor of Scott Peltz
                remained unsatisfied.

        8.      Richard N. Moretti and Venetta A. Moretti, as co-owners of R & V
                Moretti, Inc., received the fraudulently transferred assets of Moretti
                Nursery, Inc.

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No. 07-3338
Peltz v. Moretti, et al.

        9.      The fraudulent transfers of property from Moretti Nursery, Inc. to R & V
                Moretti, Inc. are an unlawful independent acts for purposes of finding a
                civil conspiracy under Ohio law.

        10.      Plaintiff has suffered injury and unjust loss as a result of Defendants’
                conduct.

        11.     Defendants are jointly and severally liable to Plaintiff for $72,317.90 in
                compensatory damages.

        12.     Punitive damages are not warranted in this case.

Peltz v. Moretti, 2007 WL 14687, at *4 (N.D. Ohio Jan. 3, 2007).

        Defendants filed motions for reconsideration, additional findings of fact, to alter or

amend judgment, and a motion for a new trial, all of which were denied.

                                                  II.

        “We review for clear error the district court’s findings of fact and we review de novo the

district court’s conclusions of law.” Univ. Hosps. v. S. Lorain Merchs. Ass’n Health & Welfare

Benefit Plan & Trust, 441 F.3d 430, 433 (6th Cir. 2006) (citing Anderson v. Int’l Union, United

Plant Guard Workers of Am., 370 F.3d 542, 551 (6th Cir. 2004)). We review a district court’s

order granting discovery sanctions for an abuse of discretion. First Bank of Marietta v. Hartford

Underwriters Ins. Co., 307 F.3d 501, 510 (6th Cir. 2002).

        Federal Rule of Civil Procedure 37 governs when a party may move for an order

compelling discovery, and the sanctions available to a court if a party defies such an order.1


        1
         The text of Fed. R. Civ. P. 37 has been reworded and the subsections renumbered. The
version in effect at the time of this case provides in relevant part:

Rule 37. Failure to Make Disclosure or Cooperate in Discovery; Sanctions

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No. 07-3338
Peltz v. Moretti, et al.

        Rule 37(b)(2)(C) authorizes a court to go so far as to dismiss a complaint or render a

default judgment against a disobedient party. In the instant case, the district court did not grant

summary judgment, but rather deemed true certain facts alleged by the plaintiff pursuant to Rule

37(b)(2)(A). Courts have recognized, however, “that a court’s decision to deem certain facts

established may equate to a default judgment in some circumstances.” Chilcutt v. United States, 4

F.3d 1313, 1320 (5th Cir. 1993); see also Freeland v. Amigo, 103 F.3d 1271, 1276 (6th Cir.

1997) (stating that a sanction precluding certain expert testimony was tantamount to dismissal of

the case, and thus reviewing the sanction as one resulting in dismissal).

        In our view, the sanctions levied establish the elements necessary to show Metzger and

Vince participated in a civil conspiracy to fraudulently transfer assets, and thus we will review

the sanctions as being equivalent to a grant of default judgment under Rule 37(b)(2)(C).

        “The use of dismissal as a sanction for failing to comply with discovery has been upheld

because it accomplishes the dual purpose of punishing the offending party and deterring similar



               ....
        (b) Failure to Comply With Order.
               ....
         (2) Sanctions by Court in Which Action is Pending. If a party . . . fails to obey
       an order to provide or permit discovery . . . the court in which the action is pending
       may make such orders in regard to the failure as are just, and among others the
       following:
            (A) An order that the matters regarding which the order was made or any other
       designated facts shall be taken to be established for the purposes of the action in
       accordance with the claim of the party obtaining the order;
               ....
           (C) An order . . . dismissing the action . . . or rendering a judgment by default against the
disobedient party;

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No. 07-3338
Peltz v. Moretti, et al.

litigants from misconduct in the future.” Freeland, 103 F.3d at 1277 (citing Nat’l Hockey League

v. Metro. Hockey Club, Inc., 427 U.S. 639, 642-43 (1976)). However, “[d]ismissal of an action

for failure to cooperate in discovery is a sanction of last resort that may be imposed only if the

court concludes that a party’s failure to cooperate in discovery is due to willfulness, bad faith, or

fault.” Reg’l Refuse Sys. v. Inland Reclamation Co., 842 F.2d 150, 153-54 (6th Cir. 1988)

(quoting Patton v. Aerojet Ordnance Co., 765 F.2d 604, 607 (6th Cir. 1985)). This court uses a

four factor test when reviewing a decision by a district court to impose sanctions under Rule 37:

        The first factor is whether the party’s failure to cooperate in discovery is due to
        willfulness, bad faith, or fault; the second factor is whether the adversary was
        prejudiced by the party’s failure to cooperate in discovery; the third factor is
        whether the party was warned that failure to cooperate could lead to the sanction;
        and the fourth factor in regard to a dismissal is whether less drastic sanctions were
        first imposed or considered.

Freeland, 103 F.3d at 1277 (citing Reg’l Refuse Sys. v. Inland Reclamation Co., 842 F.2d at

154-55).

A. Discovery Sanction Facts Used Against Vince

        The discovery sanctions cannot stand as used against Vince. The record does not show

that Vince was ever served with a discovery request, much less a court order compelling

discovery. Discovery sanctions may be appropriate when a party “fails to obey an order to

provide or permit discovery.” Fed. R. Civ. P 37(b)(2). “[T]he general rule [is] that one party to

litigation will not be subjected to sanctions for failure to cooperate in discovery because of the

failure of another to comply with discovery, absent a showing that the other party controlled the

actions of the non-complying party.” Patton, 765 F.2d at 606 (quotation omitted). There is


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No. 07-3338
Peltz v. Moretti, et al.

nothing in the record to suggest that Vince controlled the actions of other, non-complying parties.

Without such a showing, the sanctions may not be used against a party who never defied a court

order compelling discovery.

B. Discovery Sanctions Used Against Metzger

        The discovery sanctions against Metzger present a closer call, as he was served with

discovery requests, and ultimately defied a court order compelling discovery. Such recalcitrant

conduct would undoubtedly support some form of discovery sanctions, but after analyzing the

four factor test provided in Freeland, we conclude that the harsh sanctions granted by the district

court, which effectively ended the case, constitute an abuse of discretion and cannot stand.

        With respect to this first factor, this court “has held that absent a clear record of delay or

contumacious conduct, an abuse of discretion occurs if the district court dismisses an action with

prejudice.” Freeland, 103 F.3d at 1277 (citing Carter v. City of Memphis, 636 F.2d 159, 161(6th

Cir. 1980)).

        Moretti and companies, and Metzger, failed to respond to discovery requests. The order

compelling discovery from Moretti and Metzger was granted August 25, 2006, by a marginal

entry order following a status conference. The stated deadline for defendants to provide discovery

was August 31, 2006. Given that the defendants did not attend the status conference, or make an

appearance at the November 9, 2006 bench trial, one must conclude that the conduct of Moretti

and Metzger regarding discovery was contumacious, albeit for a relatively short period of time.

        Turning to the second factor, prejudice to the adversary, id., Peltz’s own argument

somewhat undercuts a finding of prejudice. Peltz earlier obtained summary judgment against

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Peltz v. Moretti, et al.

Moretti, which was not appealed. This judgment continues to provide him unfettered access to

any assets fraudulently transferred between companies, assets he claims in his brief are “more

that enough to pay the judgment” owed.

          Regarding the key information to be discovered, Peltz already had access to the list of

Moretti’s assets, the amount of the loan against the underlying Moretti assets, and notice that the

assets were encumbered (both actual notice from Moretti’s deposition and tax return, and

constructive notice from the public-record UCC filing statement). It would not have been

difficult to determine the market value of the listed assets and thus determine the extent of any

equity.

          Even with respect to the civil conspiracy claim, the prejudice resulting from the delay in

discovery was not severe. The cases that have found prejudice to the adversary often cite to many

months of costly delays, whereas this delay was a matter of weeks.

          “[T]he third factor is whether the party was warned that failure to cooperate could lead to

the sanction . . . .” Id. The district court in this case never explicitly warned the parties about the

possibility and severity of sanctions. Moretti and Metzger were served with Peltz’s motion for

sanctions on October 3, 2006, to which they objected on October 13, 2006. Of course they were

on notice that such sanctions could be granted. Peltz filed an amended motion for sanctions after

the bench trial, on November 17, 2006, to which defendants objected on November 28, 2006.

          Clear notice is required, and this court has previously held that “routine language in a

standard order, warning counsel of possible dismissal as a sanction for failure to comply . . . is

not necessarily sufficient prior notice to immediately warrant the extreme sanction of dismissal.”

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Peltz v. Moretti, et al.

Freeland, 103 F.3d at 1279 (citing Vinci v. Consol. Rail Corp., 927 F.2d 287, 288 (6th Cir.

1991)). This case is unusual in that the motions for discovery sanctions came only one month

before, and more than one week after, the trial. The motions provided notice as to the facts Peltz

sought to have the court deem true, but it does not seem that the motions for sanctions should

constitute prior notice in this case, because by then the parties did not appear to have sufficient

time to comply with discovery requests and prevent the grant of sanctions.

        If all the above factors make for a close call, the fourth factor is fatal. The fourth factor

“is whether less drastic sanctions were first imposed or considered” before the harsh sanction of

dismissal or default is imposed. Id. at 1277. This court has stated that “the sanction of dismissal

is appropriate only if . . . no alternative sanction would protect the integrity of the pretrial

process.” Mulbah v. Detroit Bd. of Educ., 261 F.3d 586, 594 (6th Cir. 2001) (quoting Carter, 636

F.2d at 161). There is nothing on the record to indicate that any lesser sanction, such as financial

penalties, perhaps designed to compensate for plaintiff’s increased discovery costs, were

considered or imposed.

        For these reasons, then, the sanctions against Metzger must be set aside.

                                                  III.

        Having dispensed with the sanctions, we must determine if the civil conspiracy judgment

can otherwise stand without reliance on deemed facts. “The tort of civil conspiracy is ‘a

malicious combination of two or more persons to injure another in property, in a way not

competent for one alone, resulting in actual damages.’” Williams v. Aetna Fin. Co., 700 N.E.2d

859, 868 (Ohio 1998) (quoting Kenty v. Transamerica Premium Ins. Co., 650 N.E.2d 863, 866

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No. 07-3338
Peltz v. Moretti, et al.

(Ohio 1995)). “Thus, in order to establish a claim of civil conspiracy, the following elements

must be proven: ‘(1) a malicious combination; (2) two or more persons; (3) injury to person or

property; and (4) existence of an unlawful act independent from the actual conspiracy.’” Aetna

Cas. & Sur. Co. v. Leahey Constr. Co., 219 F.3d 519, 534 (6th Cir. 2000) (quoting Universal

Coach, Inc. v. N.Y. City Transit Auth., Inc., 629 N.E.2d 28, 33 (Ohio Ct. App. 1993)).

        One element seems particularly difficult to establish in this case. Pivotal to finding a civil

conspiracy is the damage caused by the conspiracy, not simply the conspiracy itself. See Gosden

v. Louis, 687 N.E.2d 481, 497 (Ohio Ct. App. 1996) (“The damage is the gist of the action, not

the conspiracy . . . .”). The requirement that the conspiracy cause actual damages “means that, if

a plaintiff suffers no actual damages from the underlying unlawful act, there can be no successful

civil conspiracy action.” Id. (citing Minarik v. Nagy, 193 N.E.2d 280, 281 (Ohio Ct. App.

1963)).2

        The district court order states that the findings of fact and conclusions of law are based on

both the facts deemed true by sanction and the evidence presented at trial. Without the facts




        2
         There is Ohio case law holding that “there must be actual damages attributable to the
conspiracy in addition to those damages caused by the underlying tort in order for the plaintiff to
recover from the conspiracy.” Stiles v. Chrysler Motors Corp., 624 N.E.2d 238, 244 (Ohio Ct. App.
1993) (citing Minarik, 193 N.E.2d at 280-82) (emphasis added). See also Crosby v. Beam, 615
N.E.2d 294, 304 (Ohio Ct. App. 1992). The court in Gosden stated that these cases misread Minarik.
Gosden, 687 N.E.2d at 497. Neither the Supreme Court of Ohio, nor this court, has directly
addressed the issue. The district court for the northern district of Ohio confronted the issue, and
concluded that, in its opinion, “the Ohio Supreme Court would adopt the holding of Gosden if the
question was before it, for the reasons stated in that opinion.” Zeigler v. Findlay Indus., Inc., 380 F.
Supp. 2d 909, 914 (N.D. Ohio 2005). We agree.

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No. 07-3338
Peltz v. Moretti, et al.

established by sanction, we are unable to discern from the record which, if any, elements of the

alleged civil conspiracy might be established solely from the evidence presented at trial.

        If the district court finds facts from the trial alone that it deems sufficient to establish a

civil conspiracy, a more detailed finding of facts is required. Furthermore, any assessment of

damages must be accompanied by supporting findings of fact. The record reflects that some, if

not all, of the assets were encumbered. To the extent the assets were already encumbered, they

were not available to satisfy Peltz’s judgment. A transfer of these assets may have been unethical,

but under Ohio law cannot constitute a fraudulent transfer.3

                                                  IV.

        We conclude that granting discovery sanctions which effectively ended the case was an

abuse of discretion. The order of the district court is VACATED and this cause is REMANDED

for the purpose of determining if the facts established at trial are sufficient to support the

judgment and, if so, a determination of damages.




        3
          The Ohio Revised Code excludes from assets “[p]roperty to the extent it is encumbered by
a valid lien.” Ohio Rev. Code Ann. § 1336.01(B)(1). Thus, encumbered assets cannot be the subject
of a fraudulent transfer. See Baker & Sons Equip. Co. v. GSO Equip. Leasing, Inc., 622 N.E.2d 1113,
1119 (Ohio Ct. App. 1993); see also 24 O Jur 3d, Creditors’ Rights and Remedies § 600 (1998).

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