Note: Liberty Mutual Insurance Co. (Insurer) agreed to provide a workers' compensation and claims administration plan for Atlas Resources, Inc. (Employer). The agreement required Employer to provide an irrevocable standby LC for USD 5,200,000 as security for amounts owed retroactively for premiums. Insurer was permitted to draw on the LC if Employer missed a payment or reimbursement deadline.

Subsequently, Insurer and Employer agreed to an escalating schedule of cash collateralization in addition to the LC, scheduled to continue for one year. One of these payments was due in November 2009. At the end of October 2009, Insurer and Employer mutually agreed to cancel their policy, and Employer requested a revised November payment schedule. Insurer responded by email that it was working to determine a revised collateral amount, but that the employee responsible was out of the office. While waiting for the revised amount, Employer did not make a payment, and Insurer drew down the entire LC.

Employer sued Insurer for negligent misrepresentation, unfair trade practices, unjust enrichment, and equitable estoppel. Insurer counterclaimed for breach of contract and monies owed and malicious abuse of process.

Throughout the discovery process, Insurer and its counsel had been sanctioned three times for discovery abuses. The first sanctions were issued because Insurer intentionally produced useless documents in response to discovery requests, failed to organize the responses that they did produce, and intentionally shuffled other documents in such a way as to make them unintelligible. The second and third sanctions were issued due to the "'cavalier, often disdainful, attitude adopted by [Insurer] and its counsel,' as well as a 'lackadaisical approach to discovery [which] [was] not in accordance with either the letter or the spirit of the federal discovery rules.'" Additionally, Insurer's counsel was found to have obstructed the discovery process with frequent frivolous objections and to have failed in its duty to facilitate effective discovery. The most substantial sanction was for USD 90,000, representing costs and fees. After the third sanction, the law firm representing Insurer changed lead counsel and attempted to remedy the previous abuses. As a result, substantial undisclosed evidence was uncovered.

Among this evidence were emails dated October 2009, prior to the alleged breach of contract. These emails were between Insurer and Insurer's employee responsible for revising the collateral payments, and included revised collateral calculations. As a result, Employer filed for additional sanctions, seeking dismissal of Insurer's counterclaims and judgment of liability against Insurer.

The United States District Court, District of New Mexico, Johnson, J., struck Insurer's counterclaims and awarded Employer reasonable costs and fees incurred due to Insurer's initial failure to disclose. The Judge also expressed his intent to order mediation, with Insurer bearing the fees and expenses. He "initially lean[ed] toward granting the extreme dispositive sanctions...requested by [Employer]"; however, he decided that the initiative Insurer's new counsel displayed in rectifying past discovery abuses demonstrated evidence precluding a finding of bad faith.



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.