Commercial Litigation and Arbitration

Rules 26, 34, 37 — Document Production: Party Has Control of Documents If It Has the Right or Ability to Obtain Them on Demand — Sanctions: Contempt Power Shouldn’t Generally Be Used to Award Non-Coercive, Compensatory, $ Sanctions (Good Quote)

Claude Worthington Benedum Foundation v. Harley, 2014 U.S. Dist. LEXIS 99019 (W.D. Pa. July 22, 2014):

Plaintiff seeks sanctions based on Federal Rule of Civil Procedure 37(b)-(c). (Docket No. 71). Generally, Rule 37 governs sanctions imposed against a party that fails to provide discovery as required by the discovery rules or a court order. Fed. R. Civ. P. 37. District courts  [*7] are afforded broad discretion as to the type and degree of sanctions imposed, but the sanctions must be just and related to the claims at issue. Trask v. Olin Corp., 298 F.R.D. 244, 257-58 (W.D. Pa. 2014) (Fischer, J.).

Rule 37(b) applies where a party fails to comply with a Court's Order directing discovery. Fed. R. Civ. P. 37(b). For such a violation, Rule 37(b)(2) specifically permits several sanctions including discretion to deem facts as established, bar evidence, strike or dismiss pleadings, stay further proceedings, enter a default judgment, or find a party in contempt.5 Id.

5   Rule 37(b)(2)(A)(vii), which provides for civil contempt for the violation of a discovery order, is sometimes "used as a lesser sanction in lieu of dismissal or default." Gregory P. Joseph, Sanctions: The Federal Law of Litigation Abuse 742, § 49(B)(5) (5th ed. 2013) (citing Xaphes v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 102 F.R.D. 545 (D. Me. 1984)). The contempt power "should not generally be used to award non-coercive, compensatory financial sanctions for discovery abuse because the attorney's fees and costs incurred as a result of the violation" can be recovered under other subsections of Rule 37. Id.

By contrast, Rule 37(c) permits sanctions where a party fails to fulfill its duties to disclose or supplement discovery pursuant to Rule 26(a) and (e). Under Rule 37(c)(1), a party is specifically precluded from using evidence at trial that was not disclosed as required under Rule 26(a) or (e). Fed. R. Civ. P. 37(c)(1). Additionally, the district court may grant additional sanctions such as reasonable expenses caused by the failure to disclose or supplement, including attorney's fees. Fed. R. Civ. P. 37(c)(1)(A). Sanctions should not be awarded, however, if the failure to disclose or supplement was substantially justified. Id. "Substantial justification for the failure to make a required disclosure has been regarded as justification to a degree that could satisfy a reasonable person that parties could differ as to whether the party was required to comply with the disclosure request. The test of substantial justification is satisfied if there exists a genuine dispute concerning compliance." Tolerico v. Home Depot, 205 F.R.D. 169, 175-76 (M.D. Pa. 2002) (citations omitted).

Although not raised by Plaintiff, the Court notes that Rule 26(g) permits the Court to impose sanctions sua sponte on counsel and/or the party who violates Rule 26. Rule 26(g) provides that, by signing a discovery response, counsel certifies that the disclosure is "complete and correct as of the time it is made." Fed. R. Civ. P. 26(g)(1). The Committee Notes clarify that Rule 26 imposes an affirmative duty on parties "to engage in pretrial discovery in a responsible manner that is consistent with the spirit and purposes of Rules 26 through 37," and specifically  [*11] provides that counsel's signature "certifies that the lawyer has made a reasonable effort to assure that the client has provided all the information and documents available to him that are responsive to the discovery demand." 97 F.R.D. 165, 218 (1980).


Plaintiff argues that sanctions are warranted here because Defendants' dilatory production has caused Plaintiff to incur significant costs, primarily relating to the work of its expert forensic accountant, Mr. Tantlinger, who not only spent time compiling a list of documents that Defendants had not produced, but also incurred fees in preparing his expert report without the benefit of the missing documents. (Docket Nos. 70; 74). Thus, it is more than likely that Plaintiff will require a new or amended report, thereby incurring additional costs. (Id.). To that end, Plaintiff requests the following relief: (1) that Defendants be ordered to pay reasonable attorney's fees and costs, including expert fees; and (2) that to the extent Plaintiff seeks additional depositions with the benefit of these late-produced documents, Defendants should be ordered to pay fees and costs associated with same. (Docket No. 70 at 5, 8).

In response,  [*12] Defendants concede that they did not produce all of the information required under this Court's Order and required by the Federal Rules of Civil Procedure. (Docket Nos. 72; 74). Counsel for Defendants also note that certain missing documents were not available to their expert, Mr. King, for his report. (Docket No. 74). Defendants nevertheless argue that sanctions are unwarranted, pointing to Plaintiff's delay in requesting the missing discovery. (Id.). On this point, Defendants argue that if Plaintiff had alerted counsel for Defendants as to the missing documents in January, February, or even March of 2014, Defendants would have arranged to produce same, and Plaintiff would not have incurred the costs and burdens for which it now seeks sanctions. (Id.).

Rules 26 of the Federal Rules of Civil Procedure requires parties and counsel to produce any nonprivileged matters that are "relevant to any party's claim or defense." Fed. R. Civ. P. 26(b)(1). This Court is satisfied that Defendants had custody and control over the bank records and accounting ledgers at issue, such that they bore the responsibility for production of same. A party is considered to have custody or control of documents if the party "has the legal right or ability to obtain the documents from another source upon demand." Mercy Catholic Medical Center v. Thompson, 380 F.3d 142, 160 (3d Cir. 2004). See also Poole v. Textron, 192 F.R.D. 494, 501 (D. Md. 2000) ("[A] party is charged with knowledge of what its agents know or what is in the records available to it."). Although Defendants may not have had actual possession of the records identified by Mr. Tantlinger, the Court nevertheless finds that Defendants had custody or control of them. See United States v. 2012 GMC Savannah Van WIN: 1GDS7DC40C1145561, Civ. No. 13-18, 2014 WL 2215933, *2 (W.D.N.C. May 29, 2014) (finding that a party had control over bank account statements and financial records held in its name, because even if the party did not have the documents within his possession, they were within his control). Defendants were therefore obligated to seek out and produce these records to Plaintiff, consistent with this Court's August 6, 2013 order. (Docket No. 56). Had these records been timely produced, Plaintiff would have avoided some of the expenses incurred related to Mr. Tantlinger.

Nevertheless, the Court agrees with Defendants that Plaintiff failed to promptly raise the issue of the incomplete production. At the case management conference in this case and in every case where this Court conducts a case management conference, counsel are urged to call chambers with any discovery issue. Counsel are also told that the Court will entertain monthly discovery conferences if the parties desire. Both counsel in this matter are sophisticated, experienced commercial trial lawyers. If they could not meet/confer and agree, they could have easily requested a discovery status conference or filed a motion; responded; and argued at hearing.

Mr. Tantlinger is a sophisticated witness, having worked in accounting since 1982. (Docket No. 71-3 at 7). He has prior experience as a forensic accountant in federal and state courts, in both criminal and civil matters. (Id.). During his deposition, Mr. Tantlinger testified that he was aware of what ledgers, account, and other financial information were missing from Defendants' production while he was preparing his expert report. (Tantlinger Deposition, May 7, 2014, 35:14-36:13, 46:11-14, 47:9-12, 64:9-16, 71:4-12). He should have immediately alerted Plaintiff's counsel in this regard. Plaintiff's counsel  [*15] could have moved to stay discovery and filed a motion with the Court at that time. As noted, the parties were able to work out agreements as to the missing documents when the Court directed them to meet and confer on May 29, 2014, just prior to the hearing on Plaintiff's Motion. (Docket No. 74). Had this occurred in January or February 2014, Plaintiff would have avoided many of the costs of which it now complains.

Therefore, Plaintiff may only recover the reasonable fees incurred related to Mr. Tantlinger's review of Defendants' production to determine what information was missing. In the event that either party prepares and produces a revised expert report to reflect the documents produced pursuant to this Court's June 4, 2014 Order, (Docket No. 77), the party shall bear its own costs.

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