Case No. 09-36943 Adv. No. 10-3057
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Lawrence S. Walter
United States Bankruptcy Judge
Judge L. S. Walter
DECISION GRANTING PLAINTIFF'S MOTION TO SHOW CAUSE,
FINDING DEFENDANT IN CONTEMPT, AND IMPOSING SANCTIONS
The court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334, and the standing General Order of Reference in this District. This matter is before the court on Plaintiff's Motion to Show Cause filed by Plaintiff Stephen E. Pomeroy ("Pomeroy") [Adv. Doc. 28], Memorandum in Opposition filled by Defendant/Debtor Michael P. Ziegler, Sr. ("Ziegler") [Adv. Doc. 52 (replacing Adv. Doc. 32)], and Pomeroy's Reply [Adv. Doc. 36].
The full evidentiary hearing held before this court on March 22, 2011 was the culmination of a dispute which had its origins in unrequited informal document requests by email from Pomeroy to Ziegler dating from late 2007. The conflict graduated to a formal discovery dispute in the Boone County Circuit Court in Kentucky from September 2008 to November 2009, and continued thereafter in this adversary proceeding for more than a year. The court finds that Ziegler willfully and in bad faith withheld critical probative documents from Pomeroy, or delayed explaining their unavailability, for a protracted period of time and contravened the order of this court in doing so. Consequently, Ziegler is also held in contempt. Because the court does not want to reward Ziegler for his intentional misconduct by depriving Pomeroy of an opportunity to prosecute his case, this court sanctions Ziegler by finding that salient facts alleged by Pomeroy in the complaint have been conclusively established.
FACTUAL AND PROCEDURAL BACKGROUND
Over the course of this adversary proceeding, the court has held two telephone pretrial conferences and two hearings pertaining to discovery matters for which transcripts were prepared. [Adv. Docs. 41, 42, 45 & 50]. The parties also filed stipulations of fact [Adv. Doc. 17] and do not challenge the authenticity or admissibility of the exhibits presented to the court. The facts contained in these documents together with the representations and testimony at the hearings and pretrial conferences are the source of the facts recounted below.
Ziegler, through his wholly owned company, the Ziegler Group, LLC, ("Ziegler Group") was a member, owner and manager of several limited liability companies. Ziegler exercised sole control over Ziegler Group which was generally a property management entity; other Ziegler-controlled entities provided specific services such as construction and maintenance (e.g., TZG Construction), or owned commercial real estate. Pomeroy invested $250,000 to acquire a 33.3% membership interest in The Shoppes of Hebron, LLC, ("Shoppes I") an entity that owned a retail shopping center in Hebron, Kentucky. Zeigler Group held a 50% interest and managed the property. A third party not involved in this dispute held the remaining 16.67% interest. Subsequently, Shoppes I acquired a 50% interest in The Shoppes of Hebron II, LLC ("Shoppes II"), owner of another retail shopping center in Hebron, Kentucky (Shoppes I and Shoppes II are jointly referred to as "Shoppes").
In late 2007 and throughout 2008, Ziegler Group encountered financial difficulties. These difficulties were manifested by mechanic's liens filed against the Shoppes properties sometime in 2008, closure of the Ziegler Group offices, and termination of all business activities in November of 2008. Subsequently, a bank initiated foreclosure proceedings on the Shoppes properties and had a receiver appointed for those properties in February of 2009. Initial Informal Document Requests, 2007-2008
As evidenced by copies of email correspondence, Pomeroy began requesting from Ziegler additional financial information pertaining to Shoppes as early as October of 2007. Pomeroy was initially seeking to value his interest in Shoppes for the purpose of selling that interest, but he was also increasingly concerned about the financial prospects of Shoppes and exactly where funds were being expended. The exchange of correspondence up until the commencement of litigation in September of 2008 was characterized by specific itemized requests from Pomeroy followed by promises, excuses, and limited compliance from Ziegler. With only minor exceptions, the information promised by Ziegler was never provided to Pomeroy. [Hearing on Motion to Show Cause, March 22, 2011, Transcript, Adv. Doc. 42 ("2011 Hrg. Tr."), pp. 26-29]. The information Pomeroy was able to acquire suggested intercompany loans or transfers, particularly transfers from Shoppes, in which Pomeroy had an interest, to entities in which he had no interest. Kentucky State Court Litigation, 2008-2009
Pomeroy filed suit in Boone County, Kentucky against Ziegler and his businesses on September 8, 2008. The financial documentation that Pomeroy had been seeking over the past months as a concerned investor, now became essential evidence to prove or disprove causes of action for fraud or defalcation by Ziegler. The previous informal colloquy by email became a full scale discovery dispute resulting in the state court entering three orders against Ziegler to compel discovery.
The case was actually styled Stephen E. Pomeroy and Involuntary Plaintiff Andrew S. Garrett v. Michael P. Ziegler, The Ziegler Group, LLC, The Shoppes of Hebron, LLC, and Shoppes of Hebron II, LLC, Case No. 08-CI-02160, Commonwealth of Kentucky Boone Circuit Court Division III. The entire complaint is attached as an exhibit to the proof of claim of Pomeroy filed of record in the Chapter 7 case of Michael Patrick Ziegler and Mary Jo Ziegler, Case No. 09-36943, United States Bankruptcy Court, Southern District of Ohio.
Similar to the pre-litigation period, Ziegler's counsel made promises to produce the requested documents, but the documents were never fully produced. In a memorandum filed on or about February 4, 2009 in opposition to Pomeroy's first motion to compel discovery, Ziegler's counsel stated "The undersigned counsel anticipates having the remainder of Defendants' discovery responses produced in the near future; specifically it is anticipated that the requests will be completed on or about February 23, 2009." [Adv. Doc. 13, Ex. G]. Again, on or about April 2, 2009, prior to entry of the second order compelling discovery, Ziegler's counsel filed a memorandum in opposition to Pomeroy's motion to show cause stating that calculation of the loans was in progress and that the requested information was being compiled from electronic storage and would be "completed in the near future." [Pl. Ex. 19]. On April 23, the state court entered its second order compelling discovery. On September 4, it entered its third order compelling discovery, the text of which reflects the judge's skepticism about Ziegler's belated claims that certain documents did not exist. The court noted evidence of intercompany loan balances and again ordered Ziegler to produce the corresponding documentation. [Pl. Ex. 4]. Two months later, Ziegler filed his bankruptcy case. Adversary Proceeding, 2010-2011
The current adversary proceeding was filed on February 12, 2010. Instead of the state law counts, the adversary complaint contains causes of action for nondischargeability pursuant to 11 U.S.C. § 523(a)(2) and (4), but the operative facts and central allegations remain much the same. The same documents sought by Pomeroy in the state court litigation are likewise essential to Pomeroy's case in the adversary proceeding. The longstanding discovery issues were discussed by the parties with the court at the preliminary pretrial conference held by telephone on May 19, 2010. At that time, the court inquired into the nature of the dispute, emphasized the importance of cooperation in such matters, and warned of the potentially dispositive sanctions that might ensue if critical documents were not produced. In response, counsel for Ziegler responded constructively: "I will again meet with Mr. Ziegler and I will again review with him the documents you want or you think you don't have and I will be able to prepare a response, either we have them or we don't have them. I've got no problem with that." [First Telephone Pretrial Conference, May 19, 2010, Transcript, Adv. Doc. 41 ("2010 P.C. Tr."), p. 6].
Four months later on October 1, 2010, Pomeroy filed a motion to show cause and to compel discovery. [Adv. Doc. 13]. The motion thoroughly explained in chronological order the history of the discovery dispute beginning with Pomeroy's initial demand for documents on May 16, 2008. Attached to the motion were seventeen exhibits including copies of letters, motions, and state court orders, all of which made it abundantly clear what documents Pomeroy had been seeking and what efforts had been taken to acquire them. Among the exhibits were copies of two recent letters from Pomeroy's counsel to Ziegler's counsel dated June 3, 2010 and June 28, 2010. The June 3 letter precisely outlined the documents requested and the June 28 letter was a reminder that continued noncompliance would result in the filing of a motion.
A hearing was held on the motion on December 1, 2010. [See Final Pretrial Conference/Hearing on Motion to Show Cause and Compel Discovery, Dec. 1, 2010, Transcript, Adv. Doc. 45 ("2010 Hrg. Tr.")]. At this hearing, counsel for Ziegler stated that he had not received either of the June letters from Pomeroy's counsel and that he had not been served with the motion to show cause. No explanation was provided for his non-receipt of the letters. As for service of the motion, however, it was determined during the course of the hearing that Ziegler's counsel had failed to register electronically with the court as mandated by the court's Administrative Procedures for Electronic Case Filing. Compounding the problem, Ziegler's counsel had retained local surrogate counsel to handle all electronic filing, but had failed to ensure that local counsel would forward any notices and filings received electronically. In short, as the court explained and Ziegler's counsel acknowledged, the motion had been properly served and the failure to properly respond to it was entirely the fault of Ziegler's counsel.
In any event, the court chose not to impose any sanctions and instead treated the motion solely as one to compel discovery. After receiving some assurances that discoverable documents existed and were not being withheld pursuant to some privilege or defense, the court required the parties to prepare a consensual draft order compelling production of the documents within a reasonable period of time.
The Order Compelling Discovery [Ad. Doc. 23] was entered on December 15, 2010. It ordered that relevant documents be produced by Ziegler to Pomeroy on or before December 31, 2011. The itemized list of documents set forth in the order was a comprehensive recapitulation of the lists that had appeared in various forms since the time of the initial attorney demand for documents on May 16, 2008 preceding the state court litigation and it even incorporated by reference "[a]ll documents identified in Order of the Boone County Circuit Court dated April 23, 2009."
On January 5, 2011, the court held another pretrial conference by telephone. [See Second Telephone Pretrial Conference, Jan. 5, 2011, Transcript, Adv. Doc. 50 ("2011 P.C. Tr.")]. Counsel for Pomeroy stated that Ziegler had not complied with the December 15, 2010 order compelling discovery and in fact had produced nothing but duplicative documents or items not responsive to the discovery order. Counsel for Ziegler claimed to have produced what he and his client thought was responsive and indicated a need for further clarification of what was missing. The court directed the parties to resolve the issues informally and warned that significant sanctions would be imposed if warranted.
On March 4, 2011, Pomeroy filed a second motion to show cause [Ad. Doc. 28] which precipitated the evidentiary hearing held on March 22, 2011. [See 2011 Hrg. Tr.]. The motion was similar to that filed Oct 1, 2010 [Ad. Doc. 13] in that it contained a chronological outline of the discovery dispute, but it also included a chart specifying what document requests had been partially or completely ignored and attached twenty-one exhibits. One of the attached exhibits, Exhibit C [also Pl. Ex. 7 and Def. Ex. B], is a copy of an email message from Zeigler's counsel to Pomeroy's counsel dated December 31, 2010 (the last day for compliance with the court's order to compel) stating generally what documents were: (a) going to be delivered that day; (b) going to be delivered on Monday, January 3, 2011; (c) going to be delivered at some future unspecified time; (d) not going to be produced because they do not exist; and (e) not going to be produced because they probably do not exist. A more thorough and definitively stated letter from Ziegler's counsel to Pomeroy's counsel is dated January 31, 2011 [Pl. Ex. 8 and Def. Ex. C]. This letter more affirmatively states that no more responsive documents exist and attempts to explain any discrepancies. In his memorandum in opposition to Pomeroy's motion to show cause, Ziegler indicates for the first time that that in February of 2009 some of his business records and computers were seized by a receiver and "disposed of." [Adv. Doc. 52 (replacing Adv. Doc. 32)]. Evidentiary Hearing, March 22, 2011
At the March 22, 2011 evidentiary hearing, Ziegler provided additional detail relating to the bank seizure and alleged disposition of his business records and computers by a receiver in February of 2009. Ziegler testified that after the seizure he was only able to remove perhaps six or eight bankers' boxes of items from his previous office. Although he had some limited opportunity to go back to the office, the receiver wanted to charge $150 per hour to monitor the removal. Further attempts to gain entry were thwarted by a padlock. He was later told that items that were left on the premises, including documents and computer files, were disposed of by the receiver. When questioned as to the significance of the documents left behind, he indicated that he was not sure but that there might be some financial documents and cancelled checks.
Trial courts, including bankruptcy courts, have broad discretion in fashioning discovery sanctions. Rieser v. Clayton (In re Equity Land Title Agency, Inc.), 326 B.R. 427, 431 (Bankr. S.D. Ohio 2005). "Discovery sanctions are appropriate 'not merely to penalize those whose conduct may be deemed to warrant such a sanction, but to deter those who might be tempted to such conduct in the absence of such a deterrent.'" Id. (further citation omitted).
Federal Rule of Civil Procedure 37, incorporated in bankruptcy adversary proceedings by 7037, specifically provides for sanctions for the intentional failure to comply with discovery orders. Rule 37(b)(2)(A) states:
(2) Sanctions in the District Where the Action Is Pending.
(A) For Not Obeying a Discovery Order. If a party or a party's officer, director, or managing agent--or a witness designated under Rule 30(b)(6) or 31(a)(4)--fails to obey an order to provide or permit discovery, including an order under Rule 26(f), 35, or 37(a), the court where the action is pending may issue further just orders. They may include the following:
(i) directing that the matters embraced in the order or other designated facts be taken as established for purposes of the action, as the prevailing party claims;
(ii) prohibiting the disobedient party from supporting or opposing designated claims or defenses, or from introducing designated matters in evidence;
(iii) striking pleadings in whole or in part;
(iv) staying further proceedings until the order is obeyed;
(v) dismissing the action or proceeding in whole or in part;
(vi) rendering a default judgment against the disobedient party; or
(vii) treating as contempt of court the failure to obey any order except an order to submit to a physical or mental examination.
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(C) Payment of Expenses. Instead of or in addition to the orders above, the court must order the disobedient party, the attorney advising that party, or both to pay the reasonable expenses, including attorney's fees, caused by the failure, unless the failure was substantially justified or other circumstances make an award of expenses unjust.
Fed. R. Civ. P. 37(a)(2). Pursuant to this provision, possible sanctions for the failure to comply with discovery orders may include: 1) default; 2) prohibiting Debtor from using certain evidence at trial or barring him from testifying; 3) striking a party's affirmative defense(s); and/or 4) monetary sanctions in the form of opposing counsel's costs and expenses. See Fed. R. Bankr. P. 7037; LBR 7026-1(b); Harmon v. CSX Tramp., Inc. 110 F.3d 364, 366-67 (6th Cir. 1997); Bank One of Cleveland, N.A. v. Abbe, 916 F.2d 1067, 1073 (6th Cir. 1990) (noting that if a party has the ability to comply with a discovery order and does not, dismissal or entry of default judgment is not an abuse of discretion); Equity Land Title, 326 B.R. at 432 (failure to comply with discovery requests can lead to certain evidence of that party being denied at trial).
One serious sanction allowed in Rule 37 for failing to comply with a discovery order is the entry of default judgment against the disobedient party. However, the Sixth Circuit has held that this extreme sanction "is a sanction of last resort that may be imposed only if the court concludes that a party's failure to cooperate in discovery is due to willfulness, bad faith, or fault." Bank One of Cleveland, 916 F.2d at 1073. The Sixth Circuit listed the following additional factors it would consider in reviewing a sanction decision under Rule 37: (1) whether the adverse party was prejudiced by the defaulting party's failure to cooperate in discovery; (2) whether the defaulting party was warned that failure to cooperate could lead to default; and (3) whether less drastic sanctions were imposed or considered before default was ordered. Id. See also Borock v. DeMaria Building Co., Inc. (In re Sardo Corp.), 1995 WL 871168, at *2 (E.D. Mich. Aug. 30, 1995).
After careful consideration of the testimony of the parties and the exhibits documenting the protracted attempts by Pomeroy to obtain documents from Ziegler, the court concludes that Ziegler is at fault in this matter and has willfully and intentionally obstructed the discovery process. Furthermore, Ziegler has disregarded the repeated admonishments of this court and has contravened this court's order compelling discovery. The court has reached this conclusion by primarily focusing its analysis on the discovery activity transpiring since the filing of this adversary proceeding on February 12, 2010. However, the history of this document dispute, beginning with informal communications in late 2007 through the state court litigation of 2008 and 2009, is instructive in showing Ziegler's pattern of conduct and his knowledge of the nature and import of the documents requested by Pomeroy. That history also provides some insight into the reasonableness of Pomeroy's expectations and interpretations of Ziegler's communications.
It is helpful in this analysis to compare the itemized documents contained in discovery requests, correspondence and court orders ranging throughout this history. The court has carefully reviewed all such documents available in the record and for illustrative purposes has selected a sampling of four that are particularly coherent as well as being temporally and substantively representative:
(1) May 16, 2008 letter from Brian Dunham, attorney for Pomeroy, to Ziegler requesting inspection of company books and records ("2008 Letter"). [Exhibit B to Adv. Doc. 1 and 13 and Exhibit D to Ad. Doc. 28]. This letter preceded commencement of the Kentucky state court litigation by more than three months;
(2) April 23, 2009 Order of the Boone County Kentucky Circuit Court in case no. 08-CI-02160 compelling discovery ("Kentucky Order"). [Pl. Ex. 3];
(3) June 3, 2010 letter from Robert Dawson, attorney for Pomeroy, to Stephen Bailey, attorney for Ziegler, following the May 19, 2010 pretrial conference in the adversary proceeding at which the court encouraged informal resolution of discovery issues ("2010 Letter"). [Pl. Ex. O]. Mr. Bailey claims non-receipt of this letter and the follow-up letter of June 28, 2010; and
(4) December 15, 2010 Bankruptcy Court Order Compelling Discovery and Denying Sanctions ("Bankruptcy Order"). [Adv. Doc. 23]. The order was drafted by counsel for both parties who were directed by the court to specify documents that the parties agreed were in existence and not justifiably withheld. In addition to an itemized list of documents, the order also incorporated by reference all documents identified in the Kentucky Order and the 2010 Letter.
Two categories of documents are ubiquitous, appearing in every request from the 2008 Letter through the Bankruptcy Order: 1) documents pertaining to intercompany transfers and/or loans; and 2) financial statements for Shoppes and some related entities. Two other categories of documents likewise originate with the 2008 Letter and span the entire dispute history, only absent from the Kentucky Order: 1) canceled checks; and 2) bank account statements. These four categories of document requests directly reflect Pomeroy's central concern throughout the Kentucky state litigation and this bankruptcy proceeding that Ziegler had transferred or loaned funds from Shoppes to other entities controlled by Ziegler thereby vitiating Pomeroy's investment in Shoppes. Such documentation would be essential to establish that inappropriate transfers had taken place and the amount of those transfers. Had Ziegler, early in this adversary proceeding, produced the documents in his possession that were responsive to these central requests and clearly stated that he had produced all such documents or that no responsive documents were in existence, there would likely have been no dispute. Unfortunately, the only response that approached such definitive clarity was the email sent by Ziegler's counsel to Pomeroy's counsel at the penultimate hour on December 31, 2010 supplemented by a letter on January 31, 2011. These responses were more than ten months after the filing of this adversary proceeding, more than two and a half years after the 2008 Letter, and subsequent to innumerable motions, hearings, communications, orders to compel, and their attendant costs.
Based upon the consistency of the primary requests for documents made repeatedly over a period approaching three years, the court can only conclude that Ziegler was well aware of what documents and financial information Pomeroy was seeking. His counsel in this proceeding should likewise have been aware in that he was a member of the same law firm that handled the Kentucky state court litigation and has displayed an awareness of the case history. [See 2010 Hrg. Tr., p. 8]. Given Ziegler's less than positive discovery history in state court, including three orders compelling him to turn over documents, it would seem that he would want to resolve those issues as soon as possible rather than risk having that history dredged up again to his detriment.
Putting aside the events preceding the filing of this adversary proceeding on February 12, 2010, Ziegler had numerous opportunities to appropriately address these matters. To start with, the local bankruptcy rules for this district require early and cooperative exchange of discovery:
(a) Cooperation and Consultation. Discovery proceedings shall be promptly commenced. All counsel and any party appearing pro se are required to cooperate and consult with each other in a courteous manner in all matters related to discovery and shall freely exchange discoverable information and documents upon informal written request, whether or not a pretrial conference has been scheduled or held in a proceeding.
Local Bankruptcy Rule 2026-1. Three months transpired before the preliminary pretrial conference on May 19, 2010. Apparently, nothing constructive was accomplished during that period. The court first became aware of the historical discovery dispute at the pretrial conference and discussed it with the parties. As previously noted, the court was quite explicit in its admonitions, including a specific warning about sanctions. The response of Ziegler's counsel during the pretrial bears repeating: "I will again meet with Mr. Ziegler and I will again review with him the documents you want or you think you don't have and I will be able to prepare a response, either we have them or we don't have them. I've got no problem with that." (Adv. Doc. 47, p. 6).
Subsequent to the pretrial conference, Pomeroy's counsel sent two letters to Ziegler's counsel, one of which was the 2010 Letter containing a succinct list of documents requested but not yet received from Zeigler. Zeigler's counsel, of course, claims that he did not receive the letters, a claim that was not hotly contested at the hearing on December 1, 2010, but which may have been difficult to defend under the traditional "mailbox rule." The fate of the letters remains a mystery and the court does not necessarily disbelieve Ziegler's counsel, but again some proactivity on Ziegler's part was called for in the context of this case. At the very least, Ziegler should have reacted when Pomeroy's motion to show cause was filed and served on October 1, 2010. Ziegler's counsel claims that he was not served with the motion, but this excuse is not tenable where his own blunders and failure to follow the court's rules created the problem. After the pretrial conference, more than six months passed before the December 1 hearing and Ziegler did nothing to address the issues raised by Pomeroy's counsel and the court.
Where mail is properly addressed, stamped and deposited in the postal system, a presumption arises that it was properly sent to the addressee. In re Rayborn, 307 B.R. 710, 721-22 (Bankr. S.D. Ala. 2002). The Sixth Circuit has long applied the law as recognized in Rayborn. See Bratton v. Yoder Co. (In re Yoder Co.), 758 F.2d 1114, 1118 (6th Cir. 1985); Simpson v. Jefferson Standard Life Ins. Co., 465 F.2d 1320, 1323-24 (6th Cir. 1972).
Among other things, the hearing on December 1, 2010 resulted in the jointly drafted Bankruptcy Order compelling discovery discussed earlier. [Adv. Doc. 23]. At the hearing, the court directly asked Ziegler's counsel, Mr. Bailey, if the requested documents actually existed and were in the possession of Ziegler. Counsel responded affirmatively and indicated that there was no objection to turning over any such documents. Relevant passages from the hearing transcript follow: THE COURT: Here's the only possible outcome of this hearing. We have to have two things. We have to have an order that requires the turnover of the discovery that you don't really, Mr. Bailey, dispute that you can turn over anyway, right? MR. BAILEY: Your Honor, I have five boxes. THE COURT: So the stuff is there. MR. BAILEY: I would think so, Your Honor. THE COURT: So procedurally all we have before the Court in my estimation is a motion to compel turnover. Now, we're going to have to reschedule the trial because we're running up ... it's next week.
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THE COURT: Now what I want you to do, Mr. Hemmer, is submit an order which compels the specific discovery that you think you are entitled to. Run it by Mr. Bailey to make sure there is no misconception here. But sounds to me as if there's no dispute that the stuff exists and there's no dispute as to your entitlement to receive it. So if that's true, then all we need is an order compelling production of these documents, and you need to be very explicit about what they are, get an order on, allow a reasonable period of time to produce them. Reasonable period of time in my estimation would be two weeks. But if that's not reasonable come up with a reasonable period. If it's five boxes I'm not sure how you're going to do that. Are you going to produce the boxes for their copying I presume? That's how it would work? Okay, so we need to work this out. I'm hoping it can be done by consensus. MR. BAILEY: I have no problem. THE COURT: Alright, so there's going to be an order compelling discovery, it's going to have reasonable parameters, you're going to review it before I ever sign it. I want you to work it out. I'll sign the order. It will compel the discovery. And, of course, if the discovery doesn't happen then, then we're set up for a show cause hearing or whatever else happens. And even if that happens, the likelihood, the likely penalty is going to be that certain things will be construed against your client, Mr. Bailey, and, you know, there may be other issues as well. But that's usually what happens. I either construe it against the person who's not responding or don't allow them to use certain evidence that's helpful to them because they didn't produce it, it's very simple. [2010 Hrg. Tr., pp. 10-13].
The court's purpose, one that seemed clear to all counsel at the time, was to have the parties draft an order that narrowly defined the categories of existing relevant documents, an order that both counsel would agree to. Given the succinct list contained in the 2010 Letter, this did not seem to be a difficult task. However the resulting order was extremely broad, incorporating the 2010 Letter and the Kentucky Order as well as listing several new categories of documents. The strong implication of this order, at least in the view of Pomeroy's counsel and the court, was that the itemized documents were in existence and would be produced forthwith. Otherwise, why would Ziegler have agreed to include those documents in an order compelling discovery?
Consequently, when Ziegler ultimately either produced duplicative or irrelevant documents or stated that such documents did not exist, the negative reaction of Pomeroy's counsel is understandable. Also, viewed in historical context, the order seemed merely the latest manifestation of the many communications from Ziegler or his counsel that promised production of documents, implied that they existed, and then failed to deliver. Several such "teasing" communications during the course of this adversary proceeding have already been noted, but the pattern of unrequited promises extends back to at least January of 2008. The following chronological excerpts from Ziegler's email communications to Pomeroy or Pomeroy's counsel are illustrative:
+-----------------------------------------------------------------------------+ ¦ ¦"Glad to meet with you next week. What does Tuesday or Wednesday¦ ¦Jan. 31, ¦look like to you? I haven't sent you the information on purpose,¦ ¦2008 Feb. ¦we can talk about that at the meeting as well." [Pl. Ex. 9] ¦ ¦11, 2008 ¦ ¦ ¦ ¦"I passed along the list from our meeting to Donnelle and she ¦ ¦ ¦will be getting the info to me later this week." [Pl. Ex. 11] ¦ +------------+----------------------------------------------------------------¦ ¦March 29, ¦"Will forward YE Financials to you when ready this week." [Pl. ¦ ¦2008 ¦Ex. 13] ¦ +------------+----------------------------------------------------------------¦ ¦April 9, ¦"Will [send balance sheets] as soon as we receive the final ¦ ¦2008 ¦numbers from the tax accountants." [Pl. Ex. 10] ¦ +-----------------------------------------------------------------------------+
+-----------------------------------------------------------------------------+ ¦ ¦"The K-1s should be ready by the month end and that will provide us the¦ ¦April¦opportunity to also send you final YE statements. Q1 statements will ¦ ¦21, ¦also be ready by the end of the month. The remaining information we ¦ ¦2008 ¦will not be able to provide for at least 30-60 days, maybe longer" [Pl.¦ ¦ ¦Ex. 14] ¦ +-----+-----------------------------------------------------------------------¦ ¦ ¦"The financials aren't ready yet. She will be finalizing them next week¦ ¦May ¦while I'm at the conference. I'll have everything to you when I get ¦ ¦15, ¦back." [Pl. Ex. ¦ ¦2008 ¦ ¦ ¦ ¦12] ¦ +-----+-----------------------------------------------------------------------¦ ¦June ¦"[The financial statements] will be ready to be picked up on Friday ¦ ¦4, ¦after noon." [Pl. Ex. 15] ¦ ¦2008 ¦ ¦ +-----------------------------------------------------------------------------+
By his own admission, Ziegler failed to follow through with the promises contained in these various communications. [2011 Hrg. Tr., p. 48]. Likewise, during the Kentucky state court litigation, Ziegler's counsel made several representations to similar effect, including statements in a memorandum on April 2, 2009 that strongly suggests the existence of loan information and substantial electronic records:
Counsel for Defendants has informed counsel for Plaintiff that the loan calculation is being calculated presently and this information will be supplemented when available.... Next, much of the information and documentation requested is stored electronically. Defendants have had difficulty compiling all of the information requested but are in the process of doing so and expect to have the information completed in the near future. [Pl. Ex. 19].
The promised information was not forthcoming and Ziegler's testimony at the evidentiary hearing cast doubt on whether there was ever an attempt to compile electronically stored information. [2011 Hrg. Tr., pp. 75-78].
Despite the intermittent cooperative pronouncements of Ziegler's counsel during this proceeding, the result after months of delay has likewise been disappointing: very limited production of relevant documents coupled with the belated revelation that financial records were destroyed by the receiver. Furthermore, as became clear during the evidentiary hearing on March 22, 2011, the discovery responses and documents that Pomeroy was able to acquire certainly suggest that some documentation existed pertaining to loans or transfers of funds, notwithstanding Ziegler's denials. As early as December 2008, The Ziegler Group admitted in an answer to Pomeroy's requests for admissions in the Kentucky litigation that Shoppes I had "made loans and/or transferred funds to entities in which Pomeroy had no ownership interest." [Pl. Ex. 18]. To the same effect is Zeigler's counsel's admission in April of 2009 that "the loan calculation is being calculated presently" [Pl. Ex. 19]. The Shoppes I Federal Tax Form 1065 for tax year 2007 reveals a note receivable from the Ziegler Group in the amount of $48,561.00 and a note receivable from TZG Construction (a Ziegler-owned entity) in the amount of $8,000.00, both receivables from entities in which Pomeroy has no interest. [Pl. Ex. 23]. A balance sheet for Shoppes II dated July 31, 2007 reveals a note receivable from The Ziegler Group in the amount of $71,472.24 as well as two other inter-company receivables. [Pl. Ex. 24]. Indeed, it was this very evidence that appears to have impressed the Kentucky state judge as reflected in that court's third order to compel. In particular, the Kentucky judge notes that Ziegler's claim that Shoppes has made no loans to other entities is belied by a listing of loan balances "of the remaining entities. Plaintiff requests, and the Court again orders, Defendants to respond with the requested information regarding Shoppes and Shoppes II." [Pl. Ex. 4]. In effect, the state court indicates that the evidence contradicts Zeigler's denials, that intercompany loans had been made and additional loan documentation should exist and must be produced.
Also troubling to this court is Ziegler's late revelation of and subsequent inconsistent testimony about the unavailability of some documents because they were allegedly seized and destroyed by a receiver in February of 2009. This information was first disclosed in Ziegler's Memorandum in Opposition to Motion to Show Cause, filed with the court on March 18, 2011 [Adv. Doc. 52 (replacing Adv. Doc. 32)].
According to the memorandum, because the receiver seized his office space in February of 2009, "Mr. Ziegler was only able to remove certain items from the office. It is his understanding that many documents, furnishings, computers and other equipment were disposed of by the receiver." In his initial testimony at the March 22, 2011 hearing, Ziegler, upon being asked by his counsel if he had been able to retrieve any of his records after the bank seizure, responded that he "was able to load up probably a half dozen, maybe eight, bankers' boxes that I was able to load into my vehicle at the time." [2011 Hrg. Tr., p. 51]. Subsequently, when questioned by Pomeroy's counsel as to whether "some documents were in the possession of the receiver," Zeigler responded that "No, I don't believe anything is in the possession of the receiver. I've asked." [2011 Hr. Tr., p. 62]. Presumably, Zeigler meant that any documents that had been seized by the receiver had now been destroyed. Later in the proceeding, the court questioned Ziegler directly on this point. Zeigler indicated that he had only a limited opportunity to retrieve documents from his office, that the receiver wanted to charge $150.00 an hour to monitor the document removal, and that he (Ziegler) was unwilling to pay this price "to have somebody sit and watch me load up a truck for eight hours." [2011 Hrg. Tr., p. 82]. Zeigler then asserted that a subsequent attempt to gain entry was thwarted by a padlock and that he was informed that everything else on the premises had been disposed of. [2011 Hrg. Tr., p. 83]. In addition to computer files that were lost, Zeigler indicated that several boxes of documents were not retrieved. When asked about the likely significance of these documents to Pomeroy's case, Zeigler responded as follows:
That I don't know, Your Honor, with a hundred percent certainty. I would think there would probably be some things. There might be some additional financial statements in there that they might be able to look. There might be more cancelled checks that they could see.
[2011 Hrg. Tr., p. 84].
The timing of these disclosures, just before a hearing on a second motion to show cause, is particularly troubling. If the documents were actually seized and destroyed in early 2009, why string Plaintiff along for months and months with promises of imminent document production? Why consent to an order compelling discovery that mandates production of documents that do not exist? If the receiver had seized the premises and Ziegler was unwilling to pay the receiver's hourly rate to allow for retrieval of business documents, why was not Pomeroy, who had been requesting documents since 2007, informed so that he might contribute to the retrieval effort? In short, Ziegler's explanation of why the documents are now unavailable is just not credible. Either the documents did not exist (or were destroyed) and Zeigler was merely thwarting and prolonging Pomeroy's discovery efforts in bad faith, or the documents did exist and would have provided evidence helpful to Pomeroy, but Zeigler prevented Pomeroy from seeing them.
Ziegler's credibility was further eroded by some of his inconsistent and evasive testimony at the March 22, 2011 hearing. When asked by his own counsel whether he had ever produced any of the financial information to Pomeroy referenced in several 2008 email messages, Zeigler affirmatively stated "no," but when asked the same question by Pomeroy's counsel, he responded with "I don't recall." [2011 Hrg. Tr., pp. 48 and 68]. When asked by Pomeroy's counsel whether he had just been "stalling" Pomeroy when he had promised in an email message that financials would be available upon his return from a conference, Zeigler did not deny the allegation, but responded with "I don't recall the conversation." [2011 Hrg. Tr., p. 69]. Even when the court asked him directly why, early in the case, he had not just turned over the documents in his possession and indicated that there were no more in existence, Zeigler could not supply a direct and credible explanation.
Having carefully reviewed all of the testimony, exhibits, and filings in the record, including all of the historical discovery requests and responses submitted into evidence, the court concludes that Ziegler not only failed to cooperate in discovery, but did so willfully and in bad faith. Based upon the available evidence documenting transfers or loans from Shoppes to other entities controlled by Zeigler, it is reasonable to conclude that other documents memorializing and quantifying these transactions do exist (or did exist) and that Ziegler intentionally and unjustifiably withheld them from Pomeroy. Even if the court were to give credence to Ziegler's explanation that he just had sloppy business practices and that pertinent documents simply never existed or were seized and destroyed by a receiver, the determination of this court remains the same. There is no excuse, and Zeigler has supplied none, for failing early in this proceeding to provide to Pomeroy a definitive statement that certain documents do not exist together with an explanation of why. It is outrageous for Zeigler to suggest for the first time in a memorandum filed shortly before the evidentiary hearing in March of 2011 that critical documents may have been destroyed by a receiver back in February of 2009. If true, that information should have been immediately disclosed to Pomeroy so that he might have had an opportunity to obtain the documents directly from the receiver. If the court were to accept this version of the facts, it could only conclude that Zeigler deliberately and in bad faith chose to delay and disadvantage Pomeroy for years rather than reveal a simple truth.
The prejudice to Pomeroy from Zeigler's actions is clear. In addition to the obvious loss of time and money, Pomeroy has been deprived of crucial evidence to prove his case and quantify his damages. The resources of this court as well as the Kentucky court have been horribly wasted. During the course of this adversary proceeding, beginning with the very first telephone pretrial conference, this court has consistently urged consensual resolution of these issues and has repeatedly warned Zeigler's counsel of the potential sanctions for failure to cooperate and effectuate discovery. By intentionally failing to timely produce documents itemized in the court's order of December 15, 2010 [Adv. Doc. 23], an order co-drafted by Zeigler's counsel, Zeigler has also directly contravened a court order, and is consequently held in contempt. Sanctions
Pursuant to Fed. R. Civ. P. 37(b)(2)(C), payment of reasonable expenses by the disobedient party, including attorney fees, is mandated where the party has failed to comply with the court's discovery order. In this case, Ziegler's actions warrant the granting of attorney fees. Counsel for Pomeroy has already filed an affidavit verifying the amount of attorney fees incurred by Pomeroy related to this dispute. Zeigler has objected to the reasonableness of those fees and the court will address that issue in a subsequent order or proceeding.
Additional sanctions are also warranted, but selection of the appropriate sanctions— tailored precisely to the wrong committed and the harm caused—is always a difficult and delicate task. First, the court chooses not to impose the most extreme sanction, default judgment. Ziegler's conduct and the harm caused by it are certainly sufficient to warrant such a sanction, but other considerations persuade the court that default is not appropriate in this case. For one thing, Pomeroy has not had an opportunity to demonstrate that the facts, as he supposes them to be, meet the elements of the causes of action in his complaint. Furthermore, Ziegler's liability for the debt at issue and the amount of that debt has never been established by the state court and there is no state cause of action before this court to allow for such a determination. Pomeroy's proof of claim in the amount of $125,000.00 remains of record and has not been objected to, but there has been no final determination of the claim. Therefore, granting default judgment may be more generous to Pomeroy than is warranted by the record.
Pomeroy has only asserted causes of action for nondischargeability of a debt under 11 U.S.C. § 523(a) in this adversary proceeding. However, such causes of action presuppose that a debt exists. See Weidle Corp. v. Leist (In re Leist), 398 B.R. 595, 601 (Bankr. S.D. Ohio 2008) (". . .a creditor must establish that he is owed a debt before it can be determined that the debt is nondischargeable under any § 523(a) exception to discharge."). Pomeroy has yet to establish Ziegler's liability for a liquidated debt pursuant to state law.
The more appropriate sanction is to designate certain facts as established that might otherwise have been proven or disproven by the missing documents. The financial documents at issue are not inconsequential, but were actually the catalyst for litigation in the first instance and are, if they exist, absolutely essential if Pomeroy is to prove liability and damages in his suit against Ziegler. Because of Ziegler's intentional misconduct, including noncompliance with this court's order, and because any other result would deprive Pomeroy of an opportunity to prosecute his case and correspondingly reward Ziegler's inappropriate behavior, the court finds these facts to be established: that Ziegler appropriated and transferred funds belonging to Shoppes, funds in his lawful possession and control, to other entities in which he had an ownership interest with the intent to defraud Pomeroy and deprive him of the benefit of his investment in Shoppes. In addition, should the absence of these same financial documents prove an impediment to the calculation of damages in favor of Pomeroy, the court may, as circumstances dictate, impose a presumption in favor of Pomeroy's proof of claim or other reasonable estimate of damages.
The court finds Ziegler to be in contempt of this court's order compelling discovery and finds that his failure to cooperate in discovery is without excuse and due to willfulness, bad faith, and fault. Consequently, the court issues the following sanctions. First, Ziegler is ordered to pay Pomeroy's attorney fees and costs associated with the discovery dispute. The court shall address the amount of attorney fees and costs to be imposed by separate order or proceeding.
Further, the court finds these facts to be established: that Ziegler appropriated and transferred funds belonging to Shoppes, funds in his lawful possession and control, to other entities in which he had an ownership interest with the intent to defraud Pomeroy and deprive him of the benefit of his investment in Shoppes. As future circumstances dictate, further sanctions in the form of a presumption of a damages amount may be imposed should the absence of the subject financial documents prove an impediment to the calculation of damages in favor of Pomeroy.
SO ORDERED. cc:
Matthew Donald Hemmer
Hemmer DeFrank PLLC Stephen A Bailey
The Drew Law Firm