Shcherbakovskiy v. Da Capo Al Fine

05-0394(L)
Shcherbakovskiy v. Da Capo Al Fine
UNITED STATES COURT OF APPEALS 1
FOR THE SECOND CIRCUIT 2
August Term, 2005 3
(Argued: October 27, 2005 Decided: June 11, 2007) 4
Docket Nos. 05-0394(L); 05-2391(XAP) 5
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GRIGORY SHCHERBAKOVSKIY, 7
Plaintiff-Counter-Defendant-Appellant-Cross-Appellee, 8
- v. - 9
DA CAPO AL FINE, LTD., 10
Defendant-Counter-Claimant-Appellee-Cross-Appellant, 11
HOWARD G. SEITZ, 12
Defendant-Counter-Claimant-Appellee. 13
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B e f o r e: WINTER, POOLER, and SOTOMAYOR, Circuit Judges. 15
Appeal from a default judgment entered in the United States 16
District Court for the Southern District of New York in favor of 17
defendant-counterclaimant (Charles L. Brieant, Judge). We vacate 18
and remand. 19
ERIC R. LEVINE (Stephen L. Weinstein, on the 20
brief), Eiseman, Levine, Lehrhaupt & 21
Kakoyiannis, New York, New York, for 22
Plaintiff-Appellant. 23
24
ROBERT M. CALLAGY (Aaron M. Zeisler, on the 25
brief), Satterlee Stephens Burke & Burke LLP, 26
New York, New York, for Defendant-Appellee. 27

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2
WINTER, Circuit Judge: 1
Grigory Shcherbakovskiy appeals from Judge Brieant’s 2
issuance of a default judgment dismissing appellant's complaint 3
and granting appellees' counterclaims, on which a judgment for 4
$1.4 million was entered. Appellant also asks that, if we 5
reverse the default judgment, we rule on the denial of his 6
motions to dismiss one counterclaim as legally insufficient. 7
Defendants cross-appeal, challenging the amount of the damages 8
awarded on the counterclaims. 9
We vacate the default judgment. We remand with instructions 10
to assign the case to a different judge. 11
BACKGROUND 12
On October 30, 2001, Shcherbakovskiy entered into a Joint 13
Venture Agreement with Da Capo Al Fine, Ltd. to restructure ZeTek 14
Power, a British manufacturer of alkaline fuel cells. At the 15
time, ZeTek Power was in the British equivalent of 16
debtor-in-possession bankruptcy. Howard G. Seitz, a member of DC 17
Al Fine’s board of directors and its lawyer, negotiated the 18
agreement with Shcherbakovskiy. Under the agreement, DC Al Fine 19
and Shcherbakovskiy each contributed $250,000 to the joint 20
venture. That $500,000 allowed ZeTek Power to continue its 21
operations while in bankruptcy. However, by December 13, 2001, 22
ZeTek Power had exhausted its financial resources. 23
DC Al Fine then formed a wholly-owned subsidiary called Da 24

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3
Capo Fuel Cell Company. Seitz wrote to the administrator of 1
ZeTek Power’s estate in Great Britain and offered, on behalf of 2
DC Fuel Cell, to buy ZeTek Power's assets for $550,000. Pursuant 3
to an Asset Transfer Agreement, dated October 31, 2002, between 4
DC Fuel Cell and ZeTek Power’s joint administrators, DC Fuel Cell 5
purchased ZeTek Power's assets. After DC Fuel Cell acquired 6
ZeTek Power's assets, they were transferred to a new entity 7
called Eident, formed by DC Fuel Cell with another company. 8
On February 24, 2003, Shcherbakovskiy filed suit against 9
Seitz and DC Al Fine in the Southern District of New York. His 10
complaint alleged that: (i) Seitz and DC Al Fine fraudulently 11
induced him to enter the joint venture agreement funding ZeTek 12
Power and (ii) Seitz and DC Al Fine, by acquiring ZeTek Power's 13
assets for themselves, breached fiduciary duties owed him under 14
the joint venture agreement. Seitz and DC Al Fine answered the 15
complaint and asserted counterclaims for breach of contract, 16
breach of fiduciary duty, and conversion. 17
The conversion counterclaim involved a Russian subsidiary of 18
ZeTek Power, ZeTek Russia. ZeTek Russia’s assets included a 19
development agreement with Russia's Rocket Space Corporation, 20
known as Energia. The counterclaim alleged that Shcherbakovskiy 21
helped organize Independent Power Technologies ("IPT"), a Russian 22
limited company. He now serves as chairman and is a minority 23
shareholder of IPT. The conversion counterclaim alleged that IPT 24

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4
wrongfully took control of ZeTek Russia's assets, including its 1
employees, goodwill, and contract with Energia. 2
Shcherbakovskiy moved to dismiss the conversion 3
counterclaim. The motion argued that ZeTek Russia was a 4
not-for-profit organization and, under Russian law, could not 5
have legally transferred its assets to DC Al Fine. Therefore, 6
the argument went, because DC Al Fine had no claim of ownership 7
of ZeTek Russia's assets, DC Al Fine could not assert a claim for 8
conversion of them. The motion also sought to have 9
Shcherbakovskiy's own complaint deemed to conform to the factual 10
claim that ZeTek Russia was a not-for-profit organization or to 11
give appellant an opportunity to amend the complaint. 12
The district court denied the motion to dismiss the 13
conversion counterclaim in a two-paragraph order dated October 14
16, 2003. It read in full: 15
The within pleading motion (Doc. No. 11) 16
serves no useful purpose and is denied. The 17
Counterclaims pleaded in the Answer are 18
sufficient to satisfy Rule 8(a) F.R.Civ.P. 19
It is not necessary at this time to determine 20
choice of law with finality, however, the 21
Court understands that the Counterclaims are 22
based on breach of an agreement which is 23
regulated by the laws of the United Kingdom 24
or New York, not Russia. 25
26
While this Court agrees that, were 27
traditional common law pleading required, a 28
partner or joint venturer cannot commit the 29
tort of conversion of firm property, the 30
pleading gives adequate notice of Defendant 31
DeCapo's claim that Plaintiff got away with 32
some or all of the property in Russia in 33

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5
which DaCapo had some interest, in violation 1
of the agreement of the parties, resulting in 2
a triable fact issue. 3
4
At the heart of the present dispute is a discovery request 5
by Seitz and DC Al Fine to Shcherbakovskiy for "documents 6
relating to the technology which [IPT] is offering in America and 7
other places throughout the world." Shcherbakovskiy, by way of 8
affidavit and deposition testimony, stated that he had no access 9
to the documents because he was only the non-executive chairman 10
of IPT and, under Russian law and a confidentiality agreement 11
with ZeTek Russia, could not overrule the decision of ZeTek 12
Russia's board to deny access to the documents. Appellees argue 13
that appellant's position was at odds with a letter he had 14
written suggesting his absolute control of the company. 15
Shcherbakovskiy has also produced a letter from Russian counsel 16
suggesting that disclosure by him of some or all of the materials 17
sought, which may involve sensitive technology, might cause 18
Russian authorities to bring criminal proceedings against him, 19
including one for treason. 20
At a December 2, 2003 conference, the district court took a 21
dim view -- quoted at length below -- of Shcherbakovskiy’s 22
explanation and, in a December 12, 2003 order, ordered 23
Shcherbakovskiy to produce the documents in question. The order 24
warned that “[i]f plaintiff fails to produce documents responsive 25
to [the order] on or before January 6, 2004, the court will 26

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6
dismiss the Complaint, with prejudice and with costs, against the 1
plaintiff and will grant the counterclaims of Da Capo.” 2
Shcherbakovskiy did not produce the documents, and on January 30, 3
2004, the court dismissed his complaint and granted default 4
judgment to DC Al Fine and Seitz on their counterclaims. 5
Sometime in January 2004, Seitz realized that the conversion 6
counterclaim properly belonged to DC Fuel Cell, a non-party. 7
Seitz then prepared an assignment transferring the claim from DC 8
Fuel Cell to DC Al Fine. That assignment, although drafted in 9
January 2004, was dated effective as of April 3, 2003. 10
Shcherbakovskiy filed another motion to dismiss the 11
conversion counterclaim, arguing that the assignment was a sham 12
created merely to give DC Al Fine standing. The district court 13
referred this motion, along with the question of damages on the 14
counterclaim judgment, to Magistrate Judge Fox. 15
In his Report and Recommendation, the magistrate judge 16
concluded that Seitz’s assignment of the conversion counterclaim 17
was valid, even though executed after the commencement of 18
litigation. The district court adopted that report over 19
Shcherbakovskiy's objection. 20
The magistrate judge issued a second report concluding that 21
DC Al Fine was entitled to a jury trial on the issue of damages 22
on the counterclaims. The district court adopted the conclusions 23
of that report. 24

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7
A three-day jury trial to determine damages on the 1
conversion counterclaim ensued. The jury found that DC Al Fine 2
was entitled to $500,000 in compensatory damages for 3
Shcherbakovskiy’s breach of contract and $1,400,000 for his 4
conversion of ZeTek Russia's property. DC Al Fine was awarded 5
only the larger of those two amounts –- $1,400,000 –- because the 6
district court held that the damages for the breach of contract 7
were included in the award for conversion and that combining the 8
awards would therefore lead to a double recovery. 9
Shcherbakovskiy has appealed from the entry of the default 10
judgment and from the denial of his motions to dismiss the 11
conversion counterclaim. DC Al Fine and Seitz cross-appeal from 12
the damages award. 13
DISCUSSION 14
Shcherbakovskiy argues on appeal that: (i) the default 15
judgment dismissing Shcherbakovskiy’s complaint and granting Da 16
Capo’s counterclaims was an abuse of discretion; (ii) 17
Shcherbakovskiy’s motions to dismiss the conversion counterclaim 18
should have been granted both because ZeTek Russia was a not-for- 19
profit company powerless to transfer its assets and because DC Al 20
Fine's claim to the assets in question was based on an invalid 21
assignment from DC Fuel Cell; and (iii) we should reassign the 22
case to a different judge on remand. DC Al Fine argues on the 23
cross-appeal that the special verdict form misstated the law when 24

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8
it characterized the breach of contract and conversion damages as 1
duplicative. 2
a) Default Judgment 3
We review the imposition of sanctions for noncompliance with 4
discovery orders for abuse of discretion. Jones v. Niagara 5
Frontier Transp. Auth., 836 F.2d 731, 734 (2d Cir. 1987). “A 6
district court would necessarily abuse its discretion if it based 7
its ruling on an erroneous view of the law or on a clearly 8
erroneous assessment of the evidence.” Cooter & Gell v. Hartmarx 9
Corp., 496 U.S. 384, 405 (1990). 10
Rule 37(b) provides that a court may impose sanctions “as 11
are just” on a party for disobedience of a discovery order. Fed. 12
R. Civ. P. 37(b)(2). We have noted that district courts possess 13
“wide discretion” in imposing sanctions under Rule 37. Daval 14
Steel Prods. v. M/V Fakredine, 951 F.2d 1357, 1365 (2d Cir. 15
1991). However, “[t]he sanction of dismissal should not be 16
imposed under Rule 37 unless the failure to comply with a 17
pretrial production order is due to ‘willfulness, bad faith, or 18
any fault’ of the deponent.” Salahuddin v. Harris, 782 F.2d 19
1127, 1132 (2d Cir. 1986) (quoting Societe Internationale Pour 20
Participations Industrielles et Commerciales v. Rogers, 357 U.S. 21
197, 212 (1958)). 22
Neither the December 12, 2003 order nor the January 30, 2004 23
judgment contain factual findings or legal reasoning underlying 24

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9
and explaining the default judgment. These are contained 1
entirely in a transcript of a hearing held on December 2, 2003. 2
During appellee's argument for the production of documents, 3
the court repeatedly asked why the issue could not be left in the 4
status quo, with appellant claiming a lack of access subject to 5
impeachment based on his position in the company, size of 6
investment, and inconsistent statements in a letter. In the 7
court's view, "no jury is going to believe he has no documents." 8
Appellant's counsel then stated his position in a colloquy 9
that we set out in pertinent part: 10
MR. WEINSTEIN: Good morning. First of all, 11
I just want to briefly address some of the 12
factual statements that [my adversary] made. 13
14
THE COURT: You're free to do that. I assume 15
that you're not agreeing with his factual 16
statements. But I have the problem of today. 17
My problem today is why these documents don't 18
have to be produced under some kind of 19
protective order, if necessary, . . . So I 20
have to resolve these issues and get the case 21
ready for trial. I don't want you to 22
misunderstand. We have a felony trial 23
ongoing here this morning and a violation of 24
probation coming in. We have other business 25
besides somebody who doesn't want to produce 26
documents. 27
28
MR. WEINSTEIN: I'll address that directly. 29
Mr. Shcherbakovskiy is the nonexecutive 30
chairman of ITP. He stated under oath that 31
he doesn't have any documents himself. 32
33
THE COURT: You don't believe that he has no 34
control over the documents, do you? 35
36
MR. WEINSTEIN: Yes, I do. 37
38

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10
THE COURT: I think a jury is going to be 1
very incredulous when they're confronted with 2
that, and you buy the farm around here. If 3
you're going to take a bad position in 4
discovery like that or allow your client to 5
take it, you're not going to come in and blow 6
hot and cold at the trial. You're not going 7
to take a different position with me, because 8
if you are, your adversary is going to ask 9
for a jury instruction. 10
11
MR. WEINSTEIN: Our position, we've been 12
informed under Russian law -- 13
14
THE COURT: Don't give me that. 15
16
MR. WEINSTEIN: He has no control. 17
18
THE COURT: You're a plaintiff here in 19
Westchester County, New York. You're under 20
my discovery rules. If you don't abide by my 21
discovery rules, two things are going to 22
happen. Either you're going to lose your 23
case on the merits with the jury because 24
they're going to figure your client is lying, 25
or you're going to get dismissed on the 26
merits by the Court for failing to honor my 27
directions. I don't care about Russian law. 28
I believe that the average juror will think 29
that he has constructive possession of these 30
records and he can get to them if he really 31
wants to. 32
33
MR. WEINSTEIN: With all due respect, your 34
Honor, this Court doesn't have power to order 35
the company to turn over the documents. 36
37
THE COURT: But I have power to dismiss your 38
case with prejudice and costs. I'll do that 39
right now. 40
41
MR. WEINSTEIN: These documents, first of 42
all, are not for our case, they're for 43
defense's -- 44
45
THE COURT: No, no. Don't give me that. 46
47
MR. WEINSTEIN: But it's true. 48

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11
THE COURT: It's not true. You're going to 1
produce them under a protective order or I'm 2
going to toss your case and you'll explain to 3
the Second Circuit. It's that simple truth 4
with me. I don't have time to listen to a 5
lot of drivel. This is ordinary discovery. 6
Your client sought out this forum. 7
8
MR. WEINSTEIN: My client is suing 9
individually. He's being counterclaimed 10
individually. ITP is not a party to this. 11
If they want these documents, they could have 12
sued -- 13
14
THE COURT: I'm going to order their 15
production within 20 days. I'm going to have 16
a precise enough order so I can make it 17
stick. If you don't comply, I'm going to 18
drop the case for the plaintiff, dismiss it 19
with prejudice and costs and I'm going to 20
take an inquest on the counterclaims and you 21
can go your merry way. I don't have to 22
listen to this kind of nonsense and I take a 23
dim view of this fellow saying he can't, that 24
he has no access to these records. He's 25
what, the chairman of the board, is that what 26
he is? 27
28
MR. WEINSTEIN: He's chairman of the board. 29
He doesn't control the board. He's not the 30
majority shareholder. He asked the board to 31
produce the documents at a recent meeting 32
following the letter I got from Mr. Callaghy 33
-- 34
35
THE COURT: I don't believe it. I'm telling 36
you right now I don't believe it. Why don't 37
the two of you confer and get a protective 38
order and take 15 days to go get these 39
records. . . And after that, if you don't 40
comply with United States discovery, out you 41
go. Do you want to do that? 42
43
MR. WEINSTEIN: I have no choice. 44
45
THE COURT: You have no choice except to call 46
my bluff, which is not a bluff, and go to the 47
Circuit, because you're not going to do this, 48

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12
you're not going to access a federal forum in 1
the United States and come in here and tell 2
this court and tell a jury, oh, I'm suing 3
individually. I'm only the chairman of the 4
board and I can't produce any of these 5
allegedly relevant documents, and then tell 6
him also they don't exist. They'll laugh at 7
you. You've done enough trial work to know 8
that. These jurors will be smirking. 9
10
MR. WEINSTEIN: They won't be smirking 11
because they can't even establish a prima 12
facie case. They. 13
14
THE COURT: All I know is this -- 15
16
MR. WEINSTEIN: He can't identify a single 17
asset of ZeTek Moscow. 18
19
THE COURT: You're not going to split his 20
identity. He's here and he's going out the 21
window unless he complies with United States 22
discovery. That's it. If you want to confer 23
with each other and see if you can find a 24
fair way to resolve this, do it. . . 25
26
MR. WEINSTEIN: I would need to consult with 27
my client. But I believe that since he has 28
no control over ITP -- 29
30
THE COURT: I don't believe it. I told you 31
that. 32
33
MR. WEINSTEIN: -- he may be unable to comply 34
with the order. 35
36
THE COURT: And maybe the moon will fall onto 37
the earth. Lots of things can happen in the 38
future. I won't put up with this nonsense, 39
I'm telling you right now. If you want to 40
stick to your position, them I'm going to ask 41
Mr. Callaghy to draft a proper order ordering 42
precisely what's to be produced, setting a 43
reasonable time to do it, giving you a return 44
date to come in here and produce it here in 45
court. I want him to add into that proposed 46
order any protective provisions that you need 47
to preserve your trade secrets or whatever. 48

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13
And then if he doesn't do it, out you go and 1
I'll hold an inquest on the counterclaims. 2
If you want to gamble on whether the Circuit 3
will uphold that, you can gamble. Your 4
client can gamble. I don't care. 5
6
MR. WEINSTEIN: All right. I'll consult with 7
Mr. Callaghy and with my client. I believe 8
that we're going to have to go to the Second 9
Circuit on this. 10
11
THE COURT: That's fine with me. I'm not 12
going to allow anybody to come in here as a 13
plaintiff and lie like that or take the 14
position that I'm only here individually and 15
I can't access these Russian records because 16
I don't control the board, I'm only the 17
chairman. 18
19
MR. WEINSTEIN: What is the purpose, what is 20
the purpose of corporate structure and laws 21
if -- 22
23
THE COURT: It's not to be used as a method 24
of fraud. 25
26
MR. WEINSTEIN: It's not a method of fraud. 27
28
THE COURT: You have your opinion and I have 29
my opinion. I told you what to do. You're 30
either going to do it or not. I don't care. 31
Why don't you try to be sensible. Why don't 32
you not lead your client down the primrose 33
path because you think you're right and try 34
to be sensible. . . 35
36
It's very wrong to test the Court's resolve 37
to preserve the sovereignty of the United 38
States and the integrity of our pretrial 39
discovery. That's very wrong and it's going 40
to get your client into a bad situation. 41
42
MR. WEINSTEIN: I'm unaware of any caselaw 43
where a person has been sued individually and 44
has been forced to produce documents from a 45
foreign corporation. 46
47
THE COURT: One of us is wrong. 48

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14
(Recess) 1
2
Turning to the legal issues first, a party is not obliged to 3
produce, at the risk of sanctions, documents that it does not 4
possess or cannot obtain.1 See Fed. R. Civ. P. 34(a) (“Any party 5
may serve on any other party a request . . . to produce . . . 6
documents . . . which are in the possession, custody or control 7
of the party upon whom the request is served . . . .” (emphasis 8
added)), E.E.O.C. v. Carrols Corp., 215 F.R.D. 46, 52 (N.D.N.Y. 9
2003); see also Societe Internationale pour Participations 10
Industrielles et Commerciales, S.A. v. Rogers, 357 U.S. 197, 204 11
(1958) (acknowledging that Rule 34 requires inquiry into whether 12
party has control over documents), Fisher v. U.S. Fidelity & 13
Guar. Co., 246 F.2d 344, 350 (7th Cir. 1957). We also think it 14
fairly obvious that a party also need not seek such documents 15
from third parties if compulsory process against the third 16
parties is available to the party seeking the documents. 17
However, if a party has access and the practical ability to 18
possess documents not available to the party seeking them, 19
production may be required. In Re NASDAQ Market-Makers Antitrust 20
Litig., 169 F.R.D. 493, 530 (S.D.N.Y. 1996). 21
In the present case, appellant denies both the legal and 22
practical ability to obtain the documents from IPT. He claims 23
that, although Chairman of the Board, his minority status as a 24
shareholder and Russian law pose insurmountable barriers to his 25

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15
obtaining the documents. The district court disposed of 1
appellant's claim on two grounds. The court took the view that 2
Russian law was irrelevant in discovery matters in United States 3
courts. In the court's view, therefore, even if appellant's 4
claim as to Russian law was true, sanctions would be justified. 5
Nevertheless, it also made a credibility finding that appellant's 6
factual claim was untrue, stating in strong terms that it did not 7
believe the claim. On this record, these grounds cannot support 8
the sanction imposed, even under an abuse of discretion standard. 9
Appellees are entitled to the production of the documents in 10
question if appellant has access to them and can produce them. 11
Appellees cannot as a practical matter compel IPT to produce them 12
in this litigation, and they are of undoubted relevance to the 13
counterclaims. However, contrary to the district court's view, 14
Russian law is relevant to the issues and poses no threat to the 15
sovereignty of the United States. See United States v. Funds 16
Held in the name of Wetterer, 210 F.3d 96, 106 (2d Cir. 2000) 17
(“Questions relating to the internal affairs of corporations . . 18
. are generally decided in accordance with the law of the place 19
of incorporation.”). If Russian law prohibits appellant from 20
obtaining and producing the documents even with the agreement of 21
IPT's board and an appropriate protective order in the district 22
court, then the matter is at an end. 23
However, if Russian law prohibits production simply because 24

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16
board approval –- or waiver of a confidentiality agreement as to 1
production in the United States under a proper protection order - 2
- is necessary, then the issue of appellant's control of IPT 3
arises. If the district court finds that, contrary to 4
appellant’s present claim, IPT is his alter ego or his investment 5
in it is sufficient to give him undisputed control of the board, 6
such a finding could support an order to produce. See 7 Moore’s 7
Federal Practice § 34.14[2][c] (“[W]hen an action is against an 8
officer individually, and not also against the corporation, 9
production may be denied unless there is evidence that the 10
officer is the ‘alter ego’ of the corporation” (citing Am. 11
Maplan Corp. v. Heilmayr, 203 F.R.D. 499, 502 (D.Kan. 2001)); see 12
also A.F.L. Falck, S.P.A. v. E.A. Karay Co., Inc., 131 F.R.D. 46, 13
48-49 (S.D.N.Y. 1990) (holding that because the individual party 14
controlled two non-party corporations, he also controlled 15
production of their documents). On the present record, however, 16
which includes appellant's affidavit that, although Board Chair, 17
he is a minority shareholder and Russian law prevents his 18
production of the documents, a finding of control cannot be 19
sustained, at least without further explanation. A remand is 20
therefore necessary to explore Russian law and, if necessary, 21
appellant's control of IPT, an issue that may involve a finding 22
as to his credibility. Both the inquiry into Russian law and 23
appellant’s control of IPT will inform a finding as to 24

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17
appellant's willfulness, or lack thereof, in refusing to produce 1
the documents. On remand, the district court should also 2
consider Shcherbakovskiy’s claim that to turn over the documents 3
would subject him to criminal sanctions under Russian law, and 4
evaluate both the factual basis and legal consequence of that 5
claim in light of United States v. Davis, 767 F.2d 1025, 1033-34 6
(2d Cir. 1985) (describing the balancing test with which to 7
evaluate the propriety of orders directing production of 8
documents abroad where such production would violate the laws of 9
the state where they are located). 10
Moreover, the district court did not consider the efficacy 11
of lesser sanctions. See Minotti v. Lensink, 895 F.2d 100, 103 12
(2d Cir. 1990) (per curiam) (finding no abuse of discretion when, 13
among other things, “the district court explored numerous options 14
before ordering dismissal”); see also Fed. R. Civ. P. Rule 15
37(b)(2) (enumerating lesser sanctions, including, for example, 16
issuing an order deeming the disputed issues relevant to the 17
unproduced documents determined adversely to the position of the 18
disobedient party). So far as can be gleaned from the 19
transcript, the court chose between the extremes of the status 20
quo and dismissal of the complaint and granting of the 21
counterclaims. 22
With no findings or explanation from the district court, we 23
cannot conclude that the sanction of dismissal of the complaint 24

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18
and granting of the counterclaims was appropriate. Rule 37 1
permits the imposition of “just” sanctions; the severity of the 2
sanction must be commensurate with the non-compliance. The 3
sanction of dismissal “‘is a drastic remedy that should be 4
imposed only in extreme circumstances,’ usually after 5
consideration of alternative, less drastic sanctions.” John B. 6
Hull, Inc. v. Waterbury Petroleum Prods., Inc., 845 F.2d 1172, 7
1176 (quoting Salahuddin, 782 F.2d at 1132); see also id. 8
(“Dismissal under Rule 37 is warranted, however, where a party 9
fails to comply with the court’s discovery orders willfully, in 10
bad faith, or through fault.”); Cine Forty-Second Street Theatre 11
Corp. v. Allied Artists Pictures Corp., 602 F.2d 1062, 1066 (2d 12
Cir. 1979) (finding that dismissal is not appropriate “[w]here 13
the party makes good faith efforts to comply, and is thwarted by 14
circumstances beyond his control.”). 15
Findings of bad faith and consideration of lesser sanctions 16
are particularly necessary here in light of two factors. First, 17
the district court repeatedly stated that the failure to produce 18
the documents would inevitably alienate a jury, suggesting that 19
appellees would not be prejudiced by the absence of the 20
documents. Second, while the documents in question appear to 21
relate only to appellees' conversion counterclaim, the district 22
court dismissed appellant's complaint as well, again without 23
findings or other explanation. We do note that appellant's 24

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19
claims may be so related to the ownership of ZeTek Power, and, 1
through it, ownership of ZeTek Russia that appellant should not 2
be allowed to pursue them in the face of a valid default judgment 3
for appellees on the counterclaims. Such a conclusion, however, 4
can be reached only after further consideration by the district 5
court. 6
We emphasize that there may be a plausible explanation that 7
supports the dismissal and default judgment entered by the 8
district court. But entering the default judgment without such 9
an explanation was an abuse of discretion. 10
b) Appellant's Motions to Dismiss 11
Appellant argues that DC Al Fine’s conversion counterclaim 12
does not state a valid claim for two reasons. First, he claims 13
that DC Al Fine has no ownership interest in ZeTek Russia 14
sufficient to support a conversion claim because ZeTek Russia was 15
organized as a non-commercial organization in Russia whose assets 16
could not legally have been transferred to DC Al Fine upon its 17
purchase of ZeTek, leaving DC Al Fine with no ownership interest 18
in ZeTek Russia upon which to base a claim for conversion. 19
Second, appellant maintains that DC Al Fine did not have standing 20
to assert the conversion counterclaim when it was filed and the 21
January 2004 assignment from DC Fuel Cell was ineffective because 22
it violated New York’s law against champerty. Appellant also 23
argues that, even if the assignment was valid, it could not cure 24

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20
the jurisdictional defect under Rule 17(a) in light of the 1
prejudice he suffered. That prejudice, he argues, lies in the 2
fact that he consented to New York jurisdiction only to the 3
extent necessary to bring the suit against DC Al Fine. 4
Although it would undoubtedly be helpful to provide a final 5
resolution of these issues, we decline to address the underlying 6
legal issues definitively. Our vacating of the default judgment 7
renders such a disposition unnecessary, and examination of the 8
legal issues strongly suggests that such a disposition at this 9
juncture would be imprudent. 10
In particular, there are many loose ends that are better 11
dealt with on motions for summary judgment or after a trial. For 12
example, whether ZeTek Russia is a not-for-profit company that 13
cannot transfer assets is an issue that cannot be disposed of on 14
either the face of the counterclaim or of appellant's complaint, 15
which he seeks to amend. Indeed, the parties went beyond the 16
face of the pleadings in arguing the issue in the district court. 17
Moreover, the district court's denial of the motion to 18
dismiss the conversion counterclaim because of ZeTek Russia's 19
status was not particularly responsive to the issue raised. It 20
framed the question as involving a choice of law issue as to a 21
breach of contract claim to which Russian law was in the court's 22
view irrelevant. Whatever may be the case as to the breach of 23
contract counterclaim, the conversion counterclaim does depend on 24

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21
a claim of ownership to which Russian law may be relevant. With 1
regard to the issues arising from the DC Fuel Cell/DC Al Fine 2
assignment, whether appellant was prejudiced by that assignment 3
because he consented to New York jurisdiction only to sue DC Al 4
Fine was never addressed by the district court. And we see no 5
reason in the circumstances described above to opine on 6
appellant's champerty argument at this time. 7
Each of these issues is potentially dispositive of the 8
conversion counterclaim, obviating the need to reach other 9
issues; each requires some amplification of the record; and each 10
may also become irrelevant if a valid dismissal as a sanction is 11
entered. 12
c) The Special Verdict Form 13
On cross-appeal, DC Al Fine challenges the special verdict 14
form used at the damages trial. That form directed the jury to 15
enter as its verdict only the larger of the award for breach of 16
contract or for conversion. “The formulation of special verdict 17
questions rests in the sound discretion of the trial judge, and 18
should be reviewed by an appellate court only for an abuse of 19
that discretion.” Vichare v. AMBAC Inc., 106 F.3d 457, 465 (2d 20
Cir. 1996). “In order to preserve for appeal any objection to 21
the form or substance of such questions, a party must object 22
before the jury has retired.” Smith v. Lightning Bolt Prods., 23
Inc., 861 F.2d 363, 370 (2d Cir. 1988); see Fed. R. Civ. P. 24

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22
49(a). 1
We believe it useful to address this issue. The sanction of 2
granting the counterclaims may be reentered and valid; if so, the 3
validity of the damages verdict will be in issue. Moreover, it 4
may be -- and we do not decide this -- that, if liability on the 5
counterclaims is established on the merits, a second damages 6
trial may be unnecessary. See Dazenko v. James Hunter Mach. Co., 7
393 F.2d 287, 291 (7th Cir. 1968). We therefore proceed to the 8
cross-appeal. 9
DC Al Fine has forfeited its challenge to the special 10
verdict form by agreeing to it at trial. Upon reviewing the 11
special verdict form, DC Al Fine’s counsel explicitly approved it 12
in the clearest terms, stating that “the special verdict form as 13
distributed is satisfactory to the plaintiff.” Counsel for DC Al 14
Fine did not object to the form nor offer any indication that it 15
was dissatisfied with it.2
16
When a party has failed to preserve an argument, we will 17
entertain it only if the alleged error is “fundamental.” Shade 18
v. Hous. Auth. of New Haven, 251 F.3d 307, 312-13 (2d Cir. 2001). 19
“An error is fundamental under this standard only if it is ‘so 20
serious and flagrant that it goes to the very integrity of the 21
trial.’” Id. at 313 (quoting Modave v. Long Island Jewish Med. 22
Ctr., 501 F.2d 1065, 1072 (2d Cir. 1974)). To meet this 23
standard, a party must demonstrate even more than is necessary to 24

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23
meet the plain error standard in a criminal trial. See id.; 1
Travelers Indem. Co. v. Scor Reinsurance Co., 62 F.3d 74, 79 (2d 2
Cir. 1995) (“Fundamental error is narrower than the plain error 3
doctrine applicable to criminal cases.”). 4
There is no fundamental error here. The two theories of 5
liability advanced by DC Al Fine were conversion and breach of 6
contract. Under both theories, the injury to DC Al Fine arguably 7
stems from the loss of an opportunity to participate in IPT, 8
which DC Al Fine alleges is simply a company built around the 9
assets of ZeTek Russia. This is also the basis for the 10
conversion claim –- the misappropriation of the assets of ZeTek 11
Russia. 12
Of course, if a second trial on damages occurs, the parties 13
are free to make whatever arguments are available to them. 14
e) Reassignment to Another Judge 15
Shcherbakovskiy argues that the case should be reassigned to 16
another judge on remand. In considering whether to reassign a 17
case on remand, we look to the following factors: “(1) whether 18
the original judge would reasonably be expected upon remand to 19
have substantial difficulty in putting out of his or her mind 20
previously-expressed views or findings determined to be erroneous 21
or based on evidence that must be rejected, (2) whether 22
reassignment is advisable to preserve the appearance of justice, 23
and (3) whether reassignment would entail waste and duplication 24

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24
out of proportion to any gain in preserving the appearance of 1
fairness." United States v. Robin, 553 F.2d 8, 10 (2d Cir. 1977) 2
(denial of rehearing en banc). 3
There is little doubt that the district judge would follow 4
our instructions as to the law on remand. However, the judge has 5
rendered a visceral judgment on appellant's personal credibility, 6
namely that his denial of control was "nonsense," "drivel," a 7
"fraud," and a "lie." Whether any person can take an objective 8
second look at testimonial evidence after reaching such a 9
conclusion is questionable, but certainly the appearance of 10
justice would be well-served by reassignment on remand. Cullen 11
v. United States, 194 F.3d 401, 408 (2d Cir. 1999) (remanding for 12
a new sentencing proceeding before a different judge because the 13
sentencing judge had made a determination that the defendant was 14
not credible and “‘the appearance of justice is better satisfied 15
by assigning the resentencing to a different judge.’” (citing 16
United States v. Leung, 40 F.3d 577, 587 (2d Cir. 1994)). [A 17
148.17-.18] Given that the judgment below was entered after a 18
default, reassignment poses no costs in judicial economy. 19
Consequently, we direct that the case be reassigned to a 20
different judge on remand. 21
CONCLUSION 22
We vacate the default judgment and remand the case, which 23
shall be assigned to another judge. 24

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1. Of course, we agree with the district court that a party may
not "blow hot or cold" and, having persuaded the court in
discovery of its inability to produce such documents, later seek
to use them to help its case at trial. See Design Strategy, Inc.
v. Davis, 469 F.3d 284, 295-98 (2d Cir. 2006). Moreover, the
circumstances at trial may justify the jury's learning of the
party's non-production and drawing an adverse inference from it.
See Residential Funding Corp. v. DeGeorge Financial Corp., 306
F.3d 99, 106-07 (2d Cir. 2002).
2. To overcome this forfeiture, DC Al Fine relies on a statement
by the district court that “[y]ou’ll be deemed to make every
motion available to you under the rules.” However, this blanket
statement does not meet DC Al Fine’s burden of objecting to the
special verdict form under Rule 51, which requires that “[a]
party who objects to an instruction or the failure to give an
instruction must do so on the record, stating distinctly the
matter objected to and the grounds of the objection.” Fed. R.
Civ. P. 51(c)(1); see also Jarvis v. Ford Motor Co., 283 F.3d 33,
53, 56 (2d Cir. 2002). DC Al Fine failed to meet that
requirement.
FOOTNOTES 1
2
3

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