Ohio Security Insurance Company V Best Inn Midwest Llc
In the
United States Court of Appeals
For the Seventh Circuit
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No. 23-1696
OHIO SECURITY INSURANCE COMPANY,
Plaintiff-Appellee,
v.
BEST INN MIDWEST, LLC,
Defendant-Appellant.
____________________
Appeal from the United States District Court for the
Southern District of Indiana, Indianapolis Division.
No. 1:20-cv-01223-RLY-MG — Richard L. Young, Judge.
____________________
ARGUED NOVEMBER 15, 2024 — DECIDED JULY 10, 2025
____________________
Before EASTERBROOK, ROVNER, and KIRSCH, Circuit Judges.
ROVNER, Circuit Judge. When vandals damaged air condi-
tioning units on its hotel rooftop, Best Inn Midwest, LLC (Best
Inn) filed a claim with its insurer, Ohio Security Insurance
Company (Ohio Security), which eventually denied the claim
and began inquiries to determine whether the hotel was va-
cant and thus not covered under the terms of the policy. When
Best Inn failed to supply Ohio Security with the requested in-
formation, the insurer filed suit seeking a declaration that the
2 No. 23-1696
insurance policy did not offer coverage for the claims. Best
Inn counter-sued claiming Ohio Security denied the claim in
bad faith, and Ohio Security moved the court for summary
judgment on that claim.
I.
Since 2010, Best Inn owned and operated a hotel with the
same name, “Best Inn,” in Indianapolis, Indiana. Ashok
Reddy is the sole owner of the Best Inn corporation. Reddy
was an inexperienced and absentee hotelier and, conse-
quently, the hotel was plagued with problems including
health code violations, dilapidation, criminal activity, and
dishonest employees. Among those problems, Reddy be-
lieved that his managers were manipulating guest logs to em-
bezzle cash payments. In 2014, the City obtained an injunction
forcing the hotel to close because of recurrent health code vi-
olations. When the City provisionally permitted the hotel to
reopen in 2017, Best Inn purchased a commercial property in-
surance policy from Ohio Security for coverage from Decem-
ber 20, 2018, through December 20, 2019. That policy, how-
ever, excluded insurance coverage for certain losses, includ-
ing vandalism, if a building was “vacant” for sixty consecu-
tive days or more. The policy defines a building as “vacant”
if less than 31% of its total square footage is rented or used by
the building in its customary operations.
Best Inn made fourteen claims under the policy, but only
one is at issue in this appeal—a claim for vandalism to air con-
ditioners located on the roof of Building A, one of five sepa-
rate (but connected) buildings. Building A contained a restau-
rant, which Best Inn concedes was not being used, a lobby,
front desk, offices, conference rooms, and a lounge area.
No. 23-1696 3
After Best Inn made its claim for damage to the air condi-
tioning units, Ohio Security sent its claims adjuster, Eric
Doyle, to inspect the property along with an independent in-
vestigator hired by Ohio Security’s Special Investigations
Unit. Doyle had recently been to the hotel to investigate a sep-
arate claim (not at issue in this appeal) for damage to the roof
upon which the air conditioning units were attached and had
denied that claim, finding that the damage to the roof was the
result of deterioration. After his visit on September 25, 2019,
Doyle denied the air conditioner claim as well, asserting that
he saw no new damage to the air conditioning units that was
not already part of the damage he had seen during his earlier
roof inspection. In his deposition he testified that he con-
cluded that the damage was “from the same vandalism that I
thought was from vacancy on my first claim.” R. 135-6 at 26.
Ohio Security concedes that Doyle’s assessment that there
had been no new damage was wrong and that he failed to
identify some recent vandalism that had damaged the air con-
ditioning units. In his deposition, Doyle also conceded that he
had just been in an accident and was not performing at his
best on the day of the investigation. The independent investi-
gator hired by Ohio Security, on the other hand, issued a re-
port that contradicted Doyle’s, noting the damage to the air
conditioners. At the end of the day, Doyle’s error had no effect
on Ohio Security’s ultimate denial of the claim, as Ohio Secu-
rity employees quickly began to have doubts about the occu-
pancy rate of the hotel. By the time Ohio Security filed suit for
declaratory judgment, its defense to payment of the claim was
not that the units had not sustained damage, but rather that
the policy did not cover acts of vandalism occurring when the
hotel was vacant, and the hotel was, indeed vacant.
4 No. 23-1696
In fact, the shift in theory happened fairly quickly. Shortly
after Doyle’s inspection, Ohio Security invoked language in
the policy requiring Best Inn to supply the insurer with cer-
tain information about the operations of the hotel. On January
30, 2020, Ohio Security sent Reddy a request for an examina-
tion under oath and for certain documents concerning the ho-
tel’s occupancy history to determine whether Building A was
vacant within the meaning of the policy. When Best Inn failed
to respond, Ohio Security wrote to Reddy on March 7, but that
correspondence went unanswered as well. Having failed to
receive any responses that could enlighten Ohio Security
about occupancy, on March 19, 2020, Ohio Security filed a de-
claratory judgment action seeking a ruling that it owed no
duty under the policy because the building was vacant at the
time of the damage. Best Inn removed the case to federal court
on the basis of diversity of citizenship—Ohio Security is a
New Hampshire corporation with its principal place of busi-
ness in Massachusetts; Best Inn is an Indiana corporation. See
28 U.S.C. §1332.
Counsel for Ohio Security again wrote to Reddy on March
20 and 30, requesting documents, and after failing to receive
a response, filed a discovery request on April 17, 2020, asking
for the hotel’s guest registers and guest records for 2019; pay-
roll, employee attendance, and revenue records for 2019; and
tax returns and profit/loss statements for 2019 (and prior
years). 1 But even with the imprimatur of a lawsuit, and a fol-
low up email on May 19, Best Inn failed to comply.
1 On several occasions, counsel for Ohio Security wrote directly to
Reddy as opposed to Best Inn’s attorney as Reddy’s counsel changed
(continued)
No. 23-1696 5
On June 16, 2020, both party’s lawyers and Reddy had an
extensive telephone conference during which they discussed
the discovery requests. Ohio Security resent the discovery re-
quests to Reddy’s new counsel that same day. Three days
later, on June 19, 2020, both party’s lawyers and Reddy at-
tended the magistrate judge’s status conference to discuss the
case, including Best Inn’s discovery obligations. When the an-
swers to those requests were still not forthcoming, counsel for
Ohio Security again contacted Reddy on July 2 and July 24,
and then contacted Reddy’s new counsel on August 12, 21,
and November 4, all to no avail.
On November 4, 2020, Ohio Security filed a motion to
compel discovery responses, which the district court granted
on November 10, 2020, ordering Best Inn to timely and com-
pletely respond to the overdue discovery requests by Novem-
ber 25, 2020. Best Inn sent Ohio Security a few records, specif-
ically innkeeper tax records, but those records merely showed
the hotel’s total monthly receipts and did not provide infor-
mation about occupancy rates and thus were not responsive
to the discovery requests.
Later, after attorney meet-and-confer conferences on De-
cember 1 and 11 failed to provoke Best Inn’s response, the dis-
trict court, on December 17, issued a second order mandating
that Best Inn provide Ohio Security with the requested dis-
covery responses by December 31, 2020. Despite two court or-
ders compelling production—as well as repeated requests by
Ohio Security both to counsel and directly to Reddy—Best Inn
still failed to produce the requested documents.
several times and there were times when Reddy was unrepresented. See,
e.g., R. 83-9, 83-10.
6 No. 23-1696
Consequently, on January 12, 2021, Ohio Security moved for
discovery sanctions against Best Inn, requesting an order de-
claring the hotel “vacant” within the meaning of the policy.
On May 3, 2021, Ohio Security sent Reddy and his attor-
ney a letter explaining the result of its investigation, including
its expert reports and its finding that the hotel was vacant as
defined by the policy. Best Inn alleged in filings to the court
that some of the logs were destroyed by dishonest employees,
and that many guest logs were consumed in a fire that oc-
curred on November 3, 2020. On May 28, 2021, the magistrate
judge issued a report and recommendation that the court
grant Ohio Security’s motion for sanctions and declare the ho-
tel vacant for the period of January 1, 2019, through December
20, 2019. The district court adopted that recommendation and
entered the order on August 16, 2021.
Once the district court found that the hotel was vacant as
a matter of law, it granted summary judgment to Ohio Secu-
rity on Best Inn’s counterclaim for bad faith; there was noth-
ing left to decide. Best Inn appeals both the district court’s
sanction order as well as its grant of Ohio Security’s motion
for summary judgment.
II.
Federal Rule of Civil Procedure 37 authorizes district
courts to issue sanctions for noncompliance with discovery
requests and court orders, and district courts have broad dis-
cretion to do so. See Fed. R. Civ. P. 37; Chambers v. NASCO,
Inc., 501 U.S. 32, 45 (1991); United States v. Mitrovich, 95 F.4th
1064, 1069 (7th Cir. 2024). We review such orders for an abuse
of discretion only. Musser v. Gentiva Health Servs., 356 F.3d
751, 755 (7th Cir. 2004). When a party disobeys a discovery
No. 23-1696 7
order, a court may “direct[] that the matters embraced in the
order or other designated facts be taken as established for
purposes of the action … .” Fed. R. Civ. P. 37(b)(2)(A)(i). How-
ever, a sanction should be proportionate to the infraction. Eb-
meyer v. Brock, 11 F.4th 537, 547 (7th Cir. 2021). In fashioning
an appropriate sanction, courts consider “the frequency and
magnitude of the [party’s] failure to comply with court dead-
lines, the effect of these failures on the court’s time and sched-
ules, the prejudice to other litigants and the possible merits of
the plaintiff’s suit.” Rice v. City of Chicago, 333 F.3d 780, 784
(7th Cir. 2003) (quoting Williams v. Chicago Bd. of Educ., 155
F.3d 853, 857 (7th Cir. 1998)).
The district court found that Best Inn was well aware of its
discovery obligations and yet “utterly failed to disclose
and/or preserve critical records in this case.” R. 91 at 5. The
court noted the many times that Ohio Security put Reddy on
notice of the hotel’s discovery obligations and the fact that the
insurer was stymied by Best Inn’s dilatory tactics. When add-
ing together phone calls, emails, discovery requests, confer-
ences, and court dates, our review of the record reveals well
over a dozen attempts by Ohio Security to garner information
to which it clearly was entitled both by the terms of the policy
and by court order. As the district court put it:
Not only did Best Inn fail to respond to Ohio Se-
curity’s requests, but it also failed to respond to
this court’s orders directing it to disclose the rec-
ords. (Filing No. 44, Order Granting Motion to
Compel; Filing No. 50 Order Granting Motion
to Amend the Case Management Plan). By the
time Best Inn granted Ohio Security access to
the building in January 2021, the hotel was in
8 No. 23-1696
shambles and the records had been destroyed.
(See Dietz Dec. ¶ 6; see also Filing No. 83-12,
Photos of Hotel). This is clear grounds for sanc-
tions.
R. 91 at 6. The district court then agreed with the magistrate
judge’s recommendation that the proper remedy was to find
the hotel “vacant” as the term is used in the insurance con-
tract. According to the court,
a monetary sanction and a spoilation instruction
(should this make it to a jury) would not ac-
count for the egregiousness of the violations. A
lesser sanction would also severely hamstring
Ohio Security because Ohio Security would be
left to prove “vacancy” with little to no evi-
dence. Second, Best Inn’s conduct amounts to
bad faith. Best Inn engaged in dilatory tactics by
failing to respond to any of Ohio Security’s re-
quests; ignoring two court orders; and waiting
a full year until it granted Ohio Security access
to the hotel. What’s more, Reddy has told this
court different stories about the existence and
location of the records. (See Filing No. 79, Dec-
laration of Ashok Reddy at 2 – 3) (explaining
dishonest staff had stolen the records); (id. at 4)
(explaining the records were destroyed in a
fire). Although this is a strong sanction, Best
Inn’s tactics severely prejudiced Ohio Security
and wasted much of this court’s time.
R. 91 at 6.
No. 23-1696 9
The court evaluated thoroughly whether a lesser sanction
would be appropriate but determined that no other sanction
would suffice as Ohio Security would be left to prove that the
hotel was vacant without access to the evidence—evidence
that was no longer available due largely to Best Inn’s bad faith
conduct. Id. Indeed the entirety of Ohio Security’s case rested
on the vacancy of the hotel, and the documents were the key
to establishing that fact. We see no reason to disrupt the
court’s reasonable application of sanctions. The court also
considered the veracity of Reddy’s claims about what hap-
pened to the records and found them to lack credulity. Before
the district court, Best Inn had argued at times that dishonest
employees had stolen the records, and at other times that fire
and water damage from a fire had destroyed them. Best Inn
argues on appeal that both things are true. Nevertheless, the
district court had the best opportunity to determine whether
Reddy’s explanations engendered trustworthiness. See Do-
manus v. Lewicki, 742 F.3d 290, 298 (7th Cir. 2014). We will not
disturb the district court’s reasonable credibility finding on
this matter. See Anderson v. City of Bessemer City, N.C., 470 U.S.
564, 575 (1985); BRC Rubber & Plastics, Inc. v. Cont'l Carbon Co.,
981 F.3d 618, 622 (7th Cir. 2020). In any event, by the time the
fire consumed the guest logs, Ohio Security had been request-
ing access to them for over nine months.
Moreover, Best Inn does not deny that the discovery vio-
lations occurred (at least many of them), but rather that it was
Best Inn’s “lawyer who had orchestrated, facilitated and en-
acted [sic] most of the sanctionable conduct,” and there was
“no question … that Best Inn’s counsel played the primary
role in delaying discovery responses.” Reply Brief at 6, 8; see
also, Best Inn Brief at 9. But as Best Inn concedes, litigants are
bound by the acts and omissions of their lawyers, even when
10 No. 23-1696
those lawyers engage in intentional misconduct. Choice Hotels
Int'l, Inc. v. Grover, 792 F.3d 753, 754 (7th Cir. 2015). Best Inn
argues that it is unfair for it to shoulder all of the burden of
counsel’s wrongdoing and for his lawyer to suffer no conse-
quences. The consequences, however, are in the hands of Best
Inn. “When lawyers fail, the remedy is malpractice litigation
against the wrongdoer, not more litigation against an inno-
cent adversary in the original litigation.” Id.
We conclude that the sanction was an appropriate, propor-
tionate response to Best Inn’s conduct, and not an abuse of
discretion. And because the district court did not abuse its dis-
cretion by deeming the hotel vacant at the time the air condi-
tioner was vandalized, there are no remaining disputes as to
any material fact. See Fed. R. Civ. P. 56(a). The hotel was de-
clared vacant and thus the insurance policy simply did not
apply. This forecloses any argument from Best Inn that Ohio
Security denied coverage in bad faith and entitles Ohio Secu-
rity to summary judgment on Best Inn’s counterclaim of bad
faith. Celotex Corp. v. Catrett, 477 U.S. 317, 322–23 (1986). As
Best Inn concedes, the court’s sanction amounted to a dismis-
sal—there was nothing left to decide. A dismissal is well
within a court’s inherent authority “to manage [its] own af-
fairs so as to achieve the orderly and expeditious disposition
of cases.” Ebmeyer, 11 F.4th at 546 (quoting Schilling v. Wal-
worth Cnty. Park & Planning Comm’n, 805 F.2d 272, 274–75 (7th
Cir. 1986)). Moreover, even if Best Inn’s agent, Doyle, initially
denied coverage in bad faith as opposed to negligence (and
we see no support for that supposition), Ohio Security very
quickly determined that the true basis for denial was not that
the air conditioning units had not sustained damage, but that
the policy simply did not apply to the vacant hotel. To the ex-
tent there was any delay in determining the true reason why
No. 23-1696 11
Ohio Security need not cover the claim, Best Inn bore the
brunt of that responsibility. Very soon after the inspection,
Ohio Security began requesting the documentation to estab-
lish occupancy, but Best Inn refused to comply. Because Ohio
Security’s denial was not based on any assessment of damage
to the air conditioning units, none of the facts associated with
the inspection of those units was relevant to the resolution of
the case. The reasonable sanctions led to the appropriate grant
of summary judgment, thus allowing us to AFFIRM the judg-
ment of the district court in all respects.