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Creative Resources Group of New Jersey, Inc. v. Creative Resources Group, Inc.
E.D.N.Y., 2002.
United States District Court,E.D. New York.
CREATIVE RESOURCES GROUP OF NEW JERSEY, INC., Plaintiff,
v.
CREATIVE RESOURCES GROUP, INC., and Alan Bart, Defendants.
Alan Bart, individually and on behalf of Creative Resources Group, Inc., Defendants and Counterclaim Plaintiffs,
v.
Creative Resources Group of New Jersey, Inc., and Marc DiGiorgio, Counterclaim Defendants.
No. CV 00-1565(TCP)(WDW).
Oct. 29, 2002.
REPORT & RECOMMENDATION & ORDER
WALL, United States Magistrate Judge.
Before the court is the renewed motion by the plaintiff and counterclaim defendant, Creative Resources Group of New Jersey (“ CRGNJ” ), for sanctions against the defendants and counterclaim plaintiffs, Alan Bart and Creative Resources Group, Inc. (“ CRG” ). For the reasons set forth infra, the court will order monetary sanctions in the amount of $34,400.00 in reasonable attorney's fees and costs against individual defendant Alan Bart, and will recommend to District Judge Thomas C. Platt that an adverse inference jury instruction be given at trial against both Bart and CRG.
BACKGROUND
This renewed motion for sanctions is the culmination of a tortuous discovery process in this two and a half year old case. The plaintiff commenced this action in March 2000, seeking to recover $98,248.74 in commissions allegedly owed to it by the defendant CRG under the terms of CRG's administrator agreement with Caliber One Indemnity Insurance Company. See Rosenfeld Decl. in Supp. at ¶ 2. The plaintiff claims that, under the Agreements, CRG acted as managing general agent for Caliber One for insurance programs for certain industries, including loggers and hazmat transporters. The plaintiff, CRGNJ, acted as the “ administrative back office for these programs.” Id. In exchange for CRGNJ's services, CRG agreed to pay CRGNJ specified percentages of the premiums paid by the insureds in the various industries. Id. Defendant Alan Bart was a fifty percent shareholder of CRG. Id. at ¶ 4.
In November 1999, CRG's other fifty percent shareholder, Philip Miller, accused Bart of falsifying insurance premium amounts on the declarations pages of the insurance policies issued to Miller's catering industry clients. Id. These alleged acts occurred in connection with the Caterers Insurance Program, in which CRG acted as managing general agent. Bart's affiliated and wholly owned brokerage company, Total Coverage Agency, Inc., acted as the broker of record. Id. Plaintiff contends that the Caterers Program malfeasance led to a series of events that harmed it and led to the commencement of this lawsuit. Id. at ¶ 5. Specifically, the plaintiff claims that the Caterers Program events caused Bart to wrongfully refuse “ to remit premiums to Caliber One, resulting in Caliber One's termination” of the hazmat and loggers programs and “ led Bart to inexplicably refuse to sign plaintiff's commission checks resulting in the commencement of this lawsuit” in March 2000. Id.
In April 2000, the defendants filed their Answer and Counterclaims. In June 2001, the plaintiff made a motion to dismiss the counterclaims, and District Judge Platt heard argument on July 21, 2001. Although there is disagreement between counsel as to the precise result of the motion to dismiss, the upshot of it was that the defendants were given twenty days in which to file amended counterclaims. In his papers, counsel for the plaintiff states that the amended counterclaims were filed on August 16, 2001 and were answered on August 31, 2001. Rosenfeld Decl. at ¶¶ 7-8. The court's docket, however, does not reflect the filing of either document.
Prior to the motion to dismiss the counterclaims and its aftermath, and after various delays and adjournments, an initial conference was held before the undersigned on November 2, 2000, at which it became clear that the parties had not complied with their Rule 26 obligations. A second initial conference was held on December 13, 2000, a discovery schedule was entered into, and discovery*98 commenced. Relevant to the current motion for sanctions, FN1 in July 2001 plaintiff served its Second Request for Production of Documents on the defendants. See Rosenfeld Decl., Ex. B. The request covered a broad range of documents pertaining, inter alia, to the Caterers Program, including “ (a) documents relating to the authorization to issue as well as the issuance by defendants of any and all finance agreements relating to the Caterers program; (b) invoices sent by Bart or Total Coverage Agency, Inc. to clients or customers in connection with the Caterers Program; (c) any indication of payment by Bart, Total Coverage or CRG in connection with the Caterers Program; (c)[sic] any insurance policies, drafts, finance agreements, checks, correspondence or other documents issued, created, sent or received pertaining to the Caterers Program; and (d) any production reports issued by CRG, Bart or Total Coverage in connection with the Caterers Program.” Rosenfeld Decl. at ¶ 9.
FN1. The court notes that conferences and motions not mentioned in this Order took place. Because they are not relevant to the current motion, they have been omitted from the procedural history.
In August 2001, the defendants responded in writing to the demand, conditioning the document production on the plaintiff's execution of a confidentiality agreement.FN2 Id. at ¶ 10. The defendants ultimately agreed to make all of CRG's and Total Coverage's records available at their shared offices. Id. In October 2001 plaintiff visited the offices and inspected the documents from CRG and Total Coverage. Id. at ¶ 11. A review of the documents revealed that certain documents that the plaintiff expected to find were missing, notably, policy declarations pages, finance agreements, client applications, premium notices, invoices, insurance binders, rating sheets and finance agreements that could provide evidence of the premiums that Bart had charged. Id. at ¶ 11.
FN2. The defendants' condition was later withdrawn as to certain insurance brokerage agreements that would have been shared with third parties in the usual course of business. See Rosenfeld Decl. at ¶ 10.
The plaintiff sent a letter to court dated October 27, 2001, noting the defendants' failure to produce the documents and requesting an extension of the discovery deadline. In that letter, the plaintiff noted the “ absence of critical records missing from the files of Mr. Bart, CRG and Total Coverage Agency,” specifying the absence of “ the majority of the declaration pages from the insurance policies and virtually all of the financing agreements and related documents pertaining to the 1999 policy years for insureds covered under the Caterers program.” 10/27/01 Letter at 2. The plaintiff stated its intention to try to get the missing documents from third party discovery to “ substantiate its [counterclaim] defense relating to defendant Bart's falsification of insurance policy declaration pages and financing agreements.” Id. at ¶ 11, Ex. C. The plaintiff explained that it needed to get documents that reflected “ the true premium numbers.” Id. at 3. The court granted a thirty day discovery extension.FN3
FN3. The discovery deadline was again extended at a conference held on December 12, 2001, at which time a pretrial conference was scheduled for February 26, 2002.
Defendant Alan Bart was deposed in November 2001 and testified, inter alia, about the contents of the files maintained by Total Coverage Agency and CRG. At his deposition, he testified that the documents that the plaintiff claimed were missing from the production were the kinds of documents that insurance brokers kept in the normal course of business, for example, applications with underwriting information, rating analyses, applications containing the insurance company's approved premium number, the insurance policies, executed finance agreements and insurance binders. See Nov. Tr. at 60-66, 90-92, Rosenfeld Decl., Ex. D. Bart also testified that “ the work file that a broker or general agent keeps on his record about a particular account,” existed for both Total Coverage and CRG (id. at 95), that the CRG client files contained a copy of each insurance file issued by the insurance company (id. at 66), and that the Total Coverage client files contained copies of the written insurance binder and the signed finance agreements (id. at 95).
*99 Bart also testified that, after a dispute with his business partner, Philip Miller, in November 1999, Bart “ secured” all of the Total Coverage records in his own office. Id. at 312-13. There was no discussion of how any of those documents might have “ gone missing.” In response to the question, “ To the best of your knowledge, at the time you took the documents and secured them in the office, all of the files were still in your office?” Bart answered, “ Yes.” Id. at 317. The inescapable inference flowing from his testimony is that the insurance documents sought in the document demand did exist, had been placed by Bart in his office in November 1999, four months prior to the commencement of this lawsuit, and were, according to Bart's sworn testimony, still secured in his office as of November 13, 2001, when his deposition took place.
On or about January 10, 2002, plaintiff CRGNJ served a “ follow-up” document subpoena on non-party Total Coverage. Rosenfeld Decl. at ¶ 14 & Ex. E. Plaintiff claims that this subpoena was “ the result of painstaking efforts to obtain information from third parties which would identify some of the documents missing from Bart's prior production,” and was issued “ in response to repeated comments by Bart's attorneys that the insurance records identified by Bart at his November 13, 2001 deposition as having been ‘ secured’ had been overlooked by plaintiff during the review and document inspection conducted by plaintiff in October 2001.” Id. The court notes that the defendants' comments that some of the missing documents had been overlooked by plaintiff's counsel, which is tantamount to a statement that those documents existed as of October 2001, is at odds with the later claims that the documents were missing or nonexistent.
The documents sought in the subpoena fell into two general categories-insurance documents (sought in paragraphs 1 to 36 and 40) and bank records (sought in paragraphs 37 and 41-44). Defendants responded by stating that all of the documents in response to paragraphs 1 to 36 and 40-the insurance documents-would be made available if they were in the defendants' possession, and refusing to produce the Total Coverage bank records sought in paragraphs 37 and 41 to 43 F4 of the January 10th subpoena. Id. at ¶ 15. Paragraph 37 sought information relating to the removal of $100,000 from the Loggers Premium Account maintained by CRG/Bart into an account controlled by Total Coverage/Bart. Such information is relevant to the plaintiff's claim that Bart misappropriated at least $100,000. Id. at p. 3, n. 2. Paragraphs 41-44 sought Total Coverage banking records that the plaintiff believed would show the transfer of funds from various CRG accounts to Total Coverage accounts controlled by Bart, to the detriment of the plaintiff and counterclaim defendant Marc DiGiorgio. Plaintiff argued that these documents, would, at the least, “ raise a question as to whether Mr. Bart may have been engaged in the diversion of funds from CRG to Total Coverage.” Rosenfeld Letter 2/13/02 at 2.
FN4. It is unclear from the motion papers whether the defendants produced the documents sought in paragraphs 38, 39 and 44, which were not mentioned in the letter.
On February 13, 2002, plaintiff moved for an order compelling the production of the Total Coverage documents demanded in the January 10th subpoena. Id. at ¶ 16 & Ex. F. Defendants opposed the motion on behalf of Total Coverage in letters dated February 15 and February 25, 2002. They argued that some of the documents sought were not in their possession, did not exist, or were not relevant to issues in the lawsuit. At a telephone-status conference on February 26th, the discovery issues were discussed. During the conference, defense counsel told the court that he would produce the documents sought in paragraphs 1-36 and 40 of the subpoena (the insurance records), but continued to oppose the production of the bank records. By order dated March 4, 2002, the undersigned ordered the defendants to produce the bank records called for in paragraphs 37, 41, 42 and 43 no later than March 22. It was understood that the documents responsive to paragraphs 1-36 & 40 would be produced without the necessity of a court order.
Around this time, an application was made for the substitution of new counsel for defendants*100 CRG and Bart. See Dandeneau Letter dated 3/14/02. Although no formal substitution had yet been made, in a letters dated March 26 & 28, 2002, the proposed new counsel, Gerald Dandeneau, requested a “ modification” of the March 4th order compelling the production of the Total Coverage documents. The letters did not, however, specify the precise nature of the modifications sought.
By letter dated April 2, 2002, the plaintiff informed the court that the defendants had not complied with the March 4th order and sought sanctions. Rosenfeld Decl. ¶ 19, & Ex. G. By order dated April 8, 2002, the undersigned allowed the substitution of counsel and denied the “ modification” sought by the defendants. The defendants were ordered to comply with the March 4th order immediately. They did not do so.
On April 25th, FN5 the plaintiff made a motion pursuant to Fed.R.Civ.P. 37.3, seeking to compel the defendants' compliance with the March 4th and April 8th orders, and to compel Mr. Bart's appearance at his continued deposition. Plaintiff also moved for sanctions “ based upon defendant's continued and willful failure to comply” with the court's prior orders. Id. at ¶ 21 & Ex. I. The plaintiff argued that the defendants refused to turn over the bank records and that Bart would not appear for the continuation of his deposition. The defendants opposed the motion by letter dated April 29, 2002, arguing that they had sent the “ numerous documents,” presumably the bank records ordered to be produced in the March 4th and April 8th orders, to Kinko's for copying and that the plaintiff could obtain them by sending a check for the copying costs. At this point, the plaintiff was still operating under the assumption that the defendants would produce the requested insurance documents without further court intervention, as the defendants had represented to the plaintiff and to the court they would do. The defendants also took the position that Bart's deposition had already concluded and that there had been no prior court order that he appear. Plaintiff stated that the defendants had agreed to produce Mr. Bart.
FN5. Around April 25, the plaintiff also served its Third Request for the Production of Documents. Rosenfeld Decl., Ex. N. In his Declaration, counsel for the plaintiff complains that the defendants have wrongfully refused to produce a Confession of Judgment that Bart allegedly has given to his former counsel, sought in the Third Request. The defendants argue that the document is privileged. A review of the record does not show that a motion to compel that document was ever made by the plaintiff, and the court declines to consider the issue until such a motion is made. The same is true of the defendants' claim that the plaintiff has failed to produce certain documents demanded in discovery. See 9/9/02 Dandeneau Letter at 2 and Dandeneau Decl., Ex. B.
On May 7, 2002, a conference was held, and the undersigned ruled from the bench that sanctions, the precise nature of which would be determined after a review of the record, would be imposed against the defendants. On May 9, 2002, before any order regarding the sanctions could be issued, the defendants moved for reconsideration of the decision to sanction them, although no specific sanction had yet been announced. The defendants claimed that they had complied with the court's orders by producing documents responsive to demands numbered 37, 41, 42, 43 and 44 “ to the extent that any such documents are available and in [Bart's] control and custody.” Dandeneau Letter of 5/9/02 at 1. The letter also stated that Bart would appear for an additional day of deposition.
In support of the motion for reconsideration, Alan Bart filed an affidavit in which he stated for the first time in regard to some of the bank documents that he had been ordered to produce that “ no such documents exist.” Bart Aff., dated 5/9/02 at ¶ 3. He also stated that he did not have certain other documents and did not know their location. Id. The plaintiff, opposing the motion, pointed out the incredible nature of most of Bart's claims that certain documents did not exist. For example, the plaintiff noted that Bart had been ordered to produce checks and deposit slips for three separate Total Coverage bank accounts, and that Bart's claim that “ no such documents exist” was belied by the fact that Bart had produced “ an arbitrary sampling of checks and deposit slips” from the accounts, but withheld others. Rosenfeld Letter, 5/16/02 at 2-3. The plaintiff also pointed out that Bart's claim that he “ did not *101 have” the application, corporate resolution and signature cards for each of the Total Coverage bank accounts was incredible. Id. In this regard, the plaintiff argued that inasmuch as Mr. Bart was the sole custodian of the bank documents, the inference must be drawn that Bart either destroyed the documents or was willfully refusing to produce them. Id. at 2. Finally, the plaintiff reported that the insurance documents, which the defendants had agreed to produce, had, like the bank documents, not been produced. Id.
A conference was held on May 30, 2002. After hearing argument from both sides, the undersigned found that the defendants had not complied with the prior orders of the court and concurred with the plaintiff's argument that Bart's claims that he did not have certain documents or that they did not exist were incredible at best. The civil conference sheet filed after the May 30th conference did not address the sanctions, but again ordered compliance with the discovery demands by June 7, 2002, and again ordered the continued deposition of Mr. Bart. The intention of the undersigned was to use the transcript of the oral argument on May 30th as a basis for specifying the sanctions that would be imposed. Unfortunately, it was later learned that the courtroom recording device that was supposed to make a record of the conference had malfunctioned, and no transcript of the proceeding was available on which to base an order.
Prior to appearing for his continued deposition, Bart issued a new response to the January 10th subpoena, specifically referring to the insurance documents. See Rosenfeld Decl. at ¶ 26. In it, Bart stated for the first time that Total Coverage no longer had many of the insurance documents that he had previously testified were among the records he “ secured” in November 1999. As noted earlier, Bart had previously stated, in his affidavit of May 9, 2002, that he did not have most of the bank documents or that they did not exist. He reiterated these claims at his deposition on June 12, 2002. See Rosenfeld Decl., Ex. A. The plaintiff argues that Bart's testimony at his deposition on June 12 “ reveals a litany of spoilation of evidence material to plaintiff's defense of the Counterclaims.” Id. at ¶ 26. Indeed, Bart's testimony as to the missing documents consists of repeated statements that he simply did not know what had happened to them, whether or not some of them had been discarded, who may have discarded them, or when they may have been lost. Id. at ¶¶ 27-29 & citations to transcript set forth therein. Moreover, some of his June 2002 testimony contradicts his testimony in November 2001 about the records he kept. Id.
Because the transcript of the May 30th conference had been lost, a conference was held on July 8, 2002, to discuss with the attorneys for both parties their understanding of the oral rulings from the May 30th conference. The parties agreed that sanctions had been imposed, but that the precise nature of those sanctions had not been determined. At the July 8th conference, Bart was ordered to appear for a deposition for the express purpose of verifying the extent of his discovery abuses and to provide an additional basis for the fashioning of sanctions. The parties were given a briefing schedule for the submission of papers regarding the sanctions, to include Bart's deposition transcript. See 7/08/02 Civil Conference Sheet. Bart was deposed on July 17, 2002. See Rosenfeld Decl., Ex. A. The court reserved decision on the defendants' motion for reconsideration.
The requisite papers were timely filed by both sides, and on September 25, 2002, oral argument was heard on the renewed motion. From the bench, the undersigned denied the motion for reconsideration and imposed two sanctions on defendants: (1) individual defendant Alan Bart will pay a monetary sanction in the reasonable amount incurred by the plaintiff as a result of the defendants' discovery abuses, and (2) an adverse inference charge should be given at trial, instructing the jury that it may infer that the missing documents would have been detrimental to the defendants/counterclaim plaintiffs, Alan Bart and CRG. The two sanctions are discussed in greater detail infra.