10th Circuit holds sanctions for failing to disclose insurance policy authorized by rules of civil procedure against counsel of record but not against in house counsel under facts of the case.

Sun River Energy, Inc. v Nelson (Pennington and Csajaghy, Appellants)

Pennington and Csajaghy represented Energy. The district court entered a rule 11 sanction order against them for discovery abuse namely failing to disclose an insurance policy which arguably covered Nelsons counterclaim. The panel affirmed as to Csajaghy and reversed as to Pennington. It held that Rule of Civil Procedure 37(c)(1) does not authorize sanctions against attorneys as historical practice limited sanctions to parties, (c)(1) does not explicitly extend sanctions to attorneys, the trend is for sanctions against counsel to be explicitly authorized by the applicable rule which is not the case here. The panel held that the district court did have inherent authority to sanction attorneys in order to enforce its orders against bad faith noncompliance. Applying, the panel held that Pennington was not counsel of record at the time of the nondisclosure and did not act in bad faith after he became counsel of record. Thus, the sanctions order had to be reversed. As to Csajaghy, the panel held rule 37(b)(2) explicitly authorizes sanctions and sanctions were appropriate here as he had the duty to review the policy, only assumed Pennington had done so and thus did not have substantial justification to not disclose the policy, Csajaghy never exercise the legal judgment required by the disclosure rule and mere belief a policy is unlikely to provide coverage is no excuse to fail to disclose, there was no error in sanctioning counsel but not energy as the district court found the attorneys were responsible of the nondisclosure, and Csajaghy had opportunity to object to the sanction through reconsideration motions and thus there was no due process violation.