In a recent decision in Tsung Tsin Ass'n v. Tian Xiang Zhu, Index No. 651584/2023, Doc. No. 213, 2023 BL 426536 (Sup. Ct. N.Y. Cnty. Nov. 16, 2023), Justice Schecter of the New York County Commercial Division took the rare step of striking a defendant’s answer for repeated discovery violations. This decision provides an example of the consequences that may be visited upon a party for repeat discovery violations in a Commercial Division proceeding.

Background

This decision stemmed from allegations of corporate fraud and waste against six former officers and directors of the Tsung Tsin Association, Inc. (the “Association”), an 83-year-old civic organization that owns two commercial buildings in Manhattan’s Chinatown.[i] The Association brought this action against these former officers and directors over allegations that they enriched themselves through: (1) the pocketing of proceeds from buying funeral plots in bulk and then illegally selling them to third-parties; (2) the taking of payments in exchange for below-market leases in the Association’s buildings; and (3) the siphoning of proceeds from refinancing those properties.[ii] The Association further alleged that the defendants destroyed or falsified board minutes related to those schemes and otherwise removed records of their alleged malfeasance.

One of the defendants, Tian Xiang Zhu (“Zhu”), served as a co-chairman and director of the Association between 2016 and 2022. The Association brought three claims against him for (1) violating his duties to the Association under Not-For-Profit Corporate Law Sections 717, 719, and 720, (2) corporate waste and injury, and (3) accounting.[iii] The Association brought similar claims against the five other defendants.[iv]

As the Court recounted in its November decision, “attempting to induce the defendants to comply with their discovery obligations has been difficult in this case. While many of the defendants have finally begun to come into compliance after significant court intervention, [Zhu] appears impervious to the court's efforts.”[v]

Earlier, the Court set a July 10, 2023, deadline for discovery demands.[vi] The Association served its demands on Zhu on that date, but Zhu provided only a partial response on August 28,[vii] more than two weeks after the deadline stipulated to by the parties.[viii] At a September 14 compliance conference, Zhu’s counsel indicated that his client would provide further materials.[ix] Following that same conference, the Court ordered the parties to provide “a joint status update by September 28, 2023.”[x]

On September 28, the parties informed the Court, in a joint letter, that Zhu failed to provide those materials (and that the Association believed that another defendant’s discovery responses were deficient).[xi] The Court responded on the same day, issuing an order instructing Zhu (and the other defendant) to confer with the Association and to update the Court with any disputes by October 4, 2023.[xii] While the Association was able to confer with the other defendant, counsel for Zhu did not respond by the October 4 deadline.[xiii] After receiving that update via a joint letter to the Court, Justice Schecter ordered Zhu’s counsel to file a letter by 12:00 PM on the following day, October 5, with the Association filing a response by 3:30 PM that same day. The Court further denied an earlier request from the Association to file a motion to compel—pending the aforementioned letter from Zhu’s counsel.[xiv]

Zhu’s counsel did not comply with the 12:00 PM October 5, 2023 deadline, so the Court issued another order on October 6 permitting the plaintiff to “file any appropriate motion.”[xv] The Association responded by filing a motion to strike Zhu’s answer on October 20.[xvi] On October 25, Zhu’s counsel provided a two-page affidavit, arguing that the issue was moot because Zhu sent an updated and complete response on October 23.[xvii] But that affidavit did not attach the updated responses, and his counsel’s only response to the Association’s contention—in a subsequent joint letter—that those responses were insufficient was that he “disagrees with Plaintiff’s characterization of Zhu’s discovery compliance or lack thereof.”[xviii]

At this point, the Court had had enough. In a conditional order issued on October 27, 2023, Justice Schecter stated emphatically that:

No reasonable attorney should think this is an acceptable way to practice in the Commercial Division. The court cannot tolerate counsel that refuses to play by the rules and consequently wastes the resources of the parties and the court trying to compel compliance with the most basic litigation obligations.[xix]

The Court overruled all of Zhu’s discovery objections, “[s]ince Zhu has not properly responded to the discovery requests or this motion.”[xx] Justice Schecter further ordered Zhu to (1) serve supplemental discovery responses, (2) produce all documents responsive to the Association’s demands, and (3) “personally (i.e., not his counsel) file a detailed Jackson affidavit” covering his efforts to comply with the discovery demands.[xxi] The deadline for these tasks was set for November 3.

The Court further instructed Zhu’s counsel to promptly meet and confer with counsel for the Association and file a joint letter by November 8. The Court then stated:

Given Zhu's history of disregarding court orders, anything short of complete compliance with this order will result in the striking of his pleadings. For the avoidance of doubt, this is a conditional order—and counsel should explain to his client what that means.[xxii]

Presumably the Court wanted Zhu’s counsel to explain that, under CPLR §3126, a court can, among many things, enter a conditional order “striking out pleadings or parts thereof” as a sanction for “refus[ing] to obey an order for disclosure or wilfully [sic] fail[ing] to disclose information . . . .”[xxiii]

On November 8, 2023, the parties filed a joint letter updating the Court on the status of Zhu’s compliance with the conditional order.[xxiv] Counsel for the Association claimed that Zhu did not comply with the Court’s order and that Zhu’s counsel did not contact the Association’s counsel until the morning of November 8. Zhu’s counsel did not dispute the last-minute contact; instead, he explained that he found out on November 5 that his client was outside of the country and unable to execute a Jackson affidavit. He maintained that Zhu complied with the discovery requests to the best of his ability with the prior October 23 response and asked the Court to both deny the Association’s motion and give either Zhu or himself an opportunity to file a statement detailing Zhu’s efforts to comply with the Association’s requests.

Discussion

The Court started its decision by recounting the long history of non-compliance with this sequence of discovery orders.[xxv] Justice Schecter acknowledged counsel’s representation that Zhu was outside of the country. But that didn’t explain why he didn’t ask for an extension before the November 3 deadline to comply with the conditional order or “why he ignored the September 28 and October 4 orders, the latter of which was directed to him personally.”[xxvi]

Justice Schecter observed that while each violation, in isolation, would warrant a lesser sanction, taken together that “conduct [was] willful and contumacious” and warranted something more severe.[xxvii] However, the Court still gave Zhu one last chance, and “did so in the usual way when faced with a party that appears willing to flout court orders with impunity absent any consequence” through a conditional order; a conditional order that Zhu then violated when he, inter alia, did not provide a Jackson affidavit by November 3, 2023. [xxviii]

The Court then observed that “[t]he automatic implication of Zhu's violation of the conditional order is well settled.”[xxix] Under New York law, conditional orders are self-executing and absolute.[xxx] Zhu’s failure to comply with the order or take “any of the requisite steps to be relieved from the consequences of violating a conditional order” meant that “Zhu’s answer must be stricken.”[xxxi] Moreover, this outcome was necessary, as the “failure to impose serious sanctions for Zhu's misconduct will undermine any incentive” for other defendants to comply with orders on other discovery issues in this matter.[xxxii]

The Court then concluded by noting that this order didn’t resolve the case against Zhu. The Association still needed to make a motion for default to “demonstrate the legal merit of plaintiff's claims notwithstanding that all of plaintiff's traversable allegations will be deemed true.”[xxxiii] Additionally, the Court anticipated a damages phase, with further discovery required from Zhu. Therefore, the Court strongly encouraged Zhu to provide that discovery, lest he be barred “from participating in the inquest.”[xxxiv]

Conclusion

The Commercial Division Court’s decision in Tsung Tsin Ass'n v. Tian Xiang Zhu, Index No. 651584/2023, Doc. No. 213, 2023 BL 426536 (Sup. Ct. N.Y. Cnty. Nov. 16, 2023) provides an example of the potential consequences for repeat discovery violations in this venue. While striking an answer is a rare sanction, it may be necessary to maintain “the credibility of court orders and the integrity of our judicial system” as the Court believed it was in these circumstances.[xxxv]

[i] Tsung Tsin Ass'n v. Tian Xiang Zhu, Index No. 651584/2023, Doc. No. 1 at 3-7 (Mar. 29, 2023).

[ii] See id. at 3-4.

[iii] Id. at 21-22, 28-29.

[iv] Id. at 22-29.

[v] Tsung Tsin Ass'n v. Tian Xiang Zhu, Index No. 651584/2023, Doc. No. 213, 2023 BL 426536 at *1 (Sup. Ct. N.Y. Cnty. Nov. 16, 2023).

[vi] Tsung Tsin Ass'n v. Tian Xiang Zhu, Index No. 651584/2023, Doc. No. 28 (June 12, 2023).

[vii] See Tsung Tsin Ass'n v. Tian Xiang Zhu, Index No. 651584/2023, Doc. No. 162 at 9 (Oct. 17, 2023) (Memo ISO Plaintiff’s Motion to Strike).

[viii] Tsung Tsin Ass'n v. Tian Xiang Zhu, Index No. 651584/2023, Doc. No. 81 (Aug. 7, 2023).

[ix] Tsung Tsin Ass'n v. Tian Xiang Zhu, Index No. 651584/2023, Doc. No. 131 (Sept. 28, 2023).

[x] Tsung Tsin Ass'n v. Tian Xiang Zhu, Index No. 651584/2023, Doc. No. 110 (Sept. 14, 2023).

[xi] Tsung Tsin Ass'n v. Tian Xiang Zhu, Index No. 651584/2023, Doc. No. 131 (Sept. 28, 2023).

[xii] Tsung Tsin Ass'n v. Tian Xiang Zhu, Index No. 651584/2023, Doc. No. 132 (Sept. 28, 2023).

[xiii] Tsung Tsin Ass'n v. Tian Xiang Zhu, Index No. 651584/2023, Doc. No. 136 at 2 (Oct. 4, 2023).

[xiv] Id.

[xv] Tsung Tsin Ass'n v. Tian Xiang Zhu, Index No. 651584/2023, Doc. No. 140 (Oct. 6, 2023)(emphasis added).

[xvi] See Tsung Tsin Ass'n v. Tian Xiang Zhu, Index No. 651584/2023, Doc. Nos. 149-162 (Oct. 17, 2023).

[xvii] Tsung Tsin Ass'n v. Tian Xiang Zhu, Index No. 651584/2023, Doc. No. 172 at 1 (Oct. 25, 2023).

[xviii] Tsung Tsin Ass'n v. Tian Xiang Zhu, Index No. 651584/2023, Doc. No. 173 at 1 n.1 (Oct. 26, 2023).

[xix] Tsung Tsin Ass'n v. Tian Xiang Zhu, Index No. 651584/2023, Doc. No. 175 at 1 (Oct. 30, 2023).

[xx] Id.

[xxi] Id.

[xxii] Id.at 2.

[xxiii] N.Y. C.P.L.R. §3126.

[xxiv] Tsung Tsin Ass'n v. Tian Xiang Zhu, Index No. 651584/2023, Doc. No. 206 (Nov. 8, 2023).

[xxv] Tsung Tsin Ass'n v. Tian Xiang Zhu, Index No. 651584/2023, Doc. No. 213, 2023 BL 426536 at *1-2 (Sup. Ct. N.Y. Cnty. Nov. 16, 2023).

[xxvi] Id. at *2.

[xxvii] Id. at *2-3.

[xxviii] Id. at *3.

[xxix] Id. at *3.

[xxx] Id.

[xxxi] Id.

[xxxii] Id.

[xxxiii] Id.

[xxxiv] Id. at *4.

[xxxv] Id. at *2 (quoting Kihl v. Pfeffer, 94 N.Y.2d 118, 123 (1999)).