In 2015, the Tenth Circuit Court of Appeals in Sun River Energy v. Nelson affirmed an award of sanctions against outside counsel for failing to disclose a directors-and-officers policy potentially providing coverage for securities counterclaims asserted by the defendants. Both in-house counsel and outside counsel were aware of the policy but assumed that it would not provide coverage because no directors or officers were named in the counterclaims. However, neither undertook an extensive investigation of the policy’s provisions and the policy was not disclosed until some 18 months after the initial disclosure deadline. Opposing counsel moved for sanctions, which the district court approved against both in-house and outside counsel personally.
On appeal, the Tenth Circuit noted outside counsel obligations under Fed. R. Civ. P. 26(g) to make accurate and complete investigation of disclosures and noted the failure of outside counsel to meaningfully review the policy. On the other hand, the court reversed the sanction award against the in-house attorney, finding that while he later entered an appearance in the case, he was not responsible for the inaccurate disclosure at issue.
For both in-house and outside corporate counsel, the court’s holding raises the issue of what amounts to adequate and complete investigation for disclosures or discovery responses certified by counsel. An implication of the holding is that outside counsel must actually review potentially applicable policies, or alternatively, verify that in-house counsel have, in fact, reviewed the policy and confirmed its scope and applicability.
—Greg S. Hearing, Gordon & Rees LLP, Denver, CO