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AKH Company, Inc. v. Universal Underwriters Insurance Co.

United States District Court, D. Kansas

November 14, 2017

AKH COMPANY, INC., Plaintiff/Counter-Defendant,
v.
UNIVERSAL UNDERWRITERS INSURANCE COMPANY, Defendant/Counter-Claimant.

          MEMORANDUM & ORDER ON MOTION FOR SANCTIONS

          Kenneth G. Gale United States Magistrate Judge.

         Now before the Court is Defendant's “Motion for Sanctions.” (Doc. 478.) Having reviewed the submissions of the parties and the attachments thereto, the Court GRANTS in part and DENIES in part Defendant's Motion.

         BACKGROUND

         The above-captioned matter is a declaratory judgment action based on a dispute concerning insurance coverage and the settlement of a trademark dispute involving Plaintiff AKH and a third party. (See Doc. 1; Doc. 75, sealed, at 5-6 (underlying litigation hereinafter referred to as “RT litigation” or “RT case).) The RT litigation occurred in California. During the RT litigation, Defendant paid for the defense and settlement of claims against Plaintiff, which was both a defendant and the claimant in that case. The parties disagree concerning duties owned to each other arising out of that litigation. The claims in this case exceed five million dollars.

         The present case has a complicated procedural history involving nine motions to compel granted in favor of Defendant and three previous awards of sanctions against Plaintiff's counsel amounting to approximately $60, 000. (See e.g., Docs. 371, 375, 429, 492, 494 (text entry adopting Joint Stipulation on sanctions); see also Doc. 479, at 6-7).) The factual and procedural background of this case has been summarized multiple times in the context of this Court resolving “an inordinate number of increasingly contentious discovery disputes.” (Doc. 429, at 1-2.) Factual summaries incorporated herein by reference include those contained in the Order denying Gauntlett's Motion to Reconsider this Court's Order on Defendant's Motion to Compel (Doc. 339), the District Court's Memorandum and Order on Plaintiff's Objection to Order and Report & Recommendation on Renewed Motion for Sanctions (Doc. 400), and this Court's Order on Defendant's Motion to Compel Discovery and for Sanctions (Doc. 429).

         Defendant brings the current motion seeking sanctions for alleged misconduct by Plaintiff's counsel during depositions and destruction of documents. (See generally Docs. 478, 479.) According to Defendant, shortly after Plaintiff filed the present lawsuit,

[Plaintiff's] owners, Hratch and Andy Andonian, began implementing a plan to move all assets out of the company. By the end of 2013, millions of dollars in [Plaintiff's] assets had been transferred to other companies owned by Hratch and Andy Andonian or to their own personal bank accounts. As a result, by the following year, [Plaintiff] had no assets nor revenue and, unbeknownst to [Defendant], existed solely for the purpose of this lawsuit (with the legal expenses being paid through transfers of funds to the company by the owners). Consistent with that plan, [Plaintiff] and its counsel provided vague and inconsistent discovery responses about [Plaintiff's] financial picture.

(Doc. 479, at 4.) Defendant states that it has filed the present motion, not in an effort to expand the scope of discovery, but instead

to highlight for the Court that [Plaintiff] has still failed to comply with existing Orders of production, that [Plaintiff] has engaged in misconduct with regard to the deposition of [Plaintiff's representative(s)], and that [Plaintiff' has concealed or destroyed documents that have since been produced by [Plaintiff's] own agents (begging the question of why [Plaintiff] claimed to be unable to produce those documents).

(Id., at 5.)

         ANALYSIS AND ORDER

         A. Standards for Discovery and Sanctions.

         The Federal Rules of Civil Procedure give the court “ample tools to deal with a recalcitrant litigant.” Jones v. Thompson, 996 F.2d 261, 264 (10th Cir.1993). Whether or not to impose sanctions addresses the discretion of the court. See National Hockey League v. Metropolitan Hockey Club, Inc., 427 U.S. 639, 642, 96 S.Ct. 2778, 49 L.Ed.2d 747 (1976). The Court's discretion allows it to “use sanctions where necessary to insure . . . that lawyers and parties refrain from contumacious behavior . . . [and] that they fulfill their high duty to insure the expeditious and sound management of the preparation of cases for trial.” Baker v. Rivair Flying Service, Inc., 744 F.2d 1438, 1440 (10th Cir. 1984).

         “In considering the imposition of sanctions, the court must consider on a case-by-case basis whether a party's failure was substantially justified or whether other circumstances make the imposition of sanctions inappropriate.” United States v. A & P Arora, Ltd., No. 92-2185-KHV, 1993 WL 461914, at *2 (D. Kan. Oct. 29, 1993), aff'd, 46 F.3d 1152, 1995 WL 18276 (10th Cir.1995). The specific, alleged tactics employed by Plaintiff that are the subject of Defendant's motion will be discussed in turn.

         B. Deposition Misconduct.

         1. Failure to prepare witnesses.

         Plaintiff designated Hratch Andonian and Sergio Andonian as witnesses in response to Defendant's 30(b)(6) notice. (Doc. 479-1.) The notice sought witness(es) on the following topics:

• Plaintiff's corporate structure, internal management, teams, and employees, including employees' responsibilities, employees' compensation;
• Plaintiff's “web presence and the advertising and sale of tires or wheels over the internet, including but not limited to its use, ownership, design, or awareness of” discounttires.com and DTCmotorsports.com, ” and other domain names used by Plaintiff to advertise or sell over the internet;
• Documents produced Plaintiff, Gauntlett, or Paul Hastings pursuant to Court Orders from in this case “regarding the crime-fraud exception to the attorney-client privilege and/or work product doctrine”;
• Plaintiff's “financial status, tax returns, loans, bank accounts and statements, corporate credit cards, loans, financial transactions, net worth, profits, losses, revenue, expenses, and other information bearing on a potential punitive damages award, since the time of the Settlement until the present time”;
• The basis for Plaintiff's claim for damages;
• The basis for Plaintiff's responses to certain, specific discovery served in this litigation.

(Doc. 479-1, at 8-9.) The topics were those that Plaintiff either agreed to or was ordered to provide a witness by this Court. (Id., at n.1.)

         It is uncontroverted that both Hratch Andonian and Sergio Andonian testified that they did little or nothing to prepare for the depositions. Hratch Andonian stated he met with counsel for approximately 30 minutes but did not review any documents or his prior deposition transcript. (Doc. 479-2, at 18-19.) Sergio Andonian stated he did “[n]othing much” to prepare for his deposition. (Doc. 479-3, at 19.) More specifically, he testified that he had a 5 minute call with lead counsel, did not meet with local counsel, did not review documents, and did not speak with or interview any employees. (Id., at 19-20, 45.)

         Plaintiff now contends, however, that “[n]either witness accurately or completely described their preparation when asked about it during the deposition.” (See Doc. 486, at 21; see also 486-5, Chorbajian Decl. ¶ 4, 486-3, H. Andonian Decl. ¶ 10.) Rather, Plaintiff contends that “[l]eading up to the deposition, Mr. Chorbajian provided the witnesses with documents and deposition transcripts to review, met with the witnesses on multiple occasions, and regularly communicated with the witnesses about the case and their testimony.” (Doc. 486, at 21; see also Doc. 486-5 at ¶ 4-6; 486-3 at ¶¶ 5, 6, 8, 9.)

         The Court is not persuaded by Plaintiff's attempt to re-write the deposition testimony of its witnesses. Cf. Rios v. Bigler, 67 F.3d 1543, 1551 (10th Cir.1995) (holding that where an affidavit attempts to create a sham fact issue by contradicting sworn deposition testimony, it may be properly disregarded by the court). The Court is also unmoved by Plaintiff's offer to make Hratch Andonian available to testify again if Defendant “would agree to provide the specific questions in advance so that counsel could enure Mr. Andonian was fully prepared to answer them.” (Doc. 486, at 21.) Defendants are free to choose the manner and type of discovery they propound. White v. Union Pac. R.R. Co., No. 09-1407-EFM-KGG, 2011 WL 721550, at *2 (D.Kan. Feb. 22, 2011). Further, Defendant is not required to spoon-feed specific deposition questions to Plaintiff so that Plaintiff's counsel may help the proffered witnesses provide rehearsed responses. See Garcia v. Pueblo Country Club, 299 F.3d 1233, n.5 (10th Cir.2002) (holding that “[a] deposition is not a take home examination”).

         Based on the portions of the deposition transcripts submitted (as well as the apparently length of the depositions), the Court surmises that the witnesses at issue provided a significant amount of useful information in response to Defendant's deposition queries. Even so, no witness, no matter how well prepared, can be expected to have answers to every question potentially posed by opposing counsel. According to Defendant, however, the deponents were “unable to provide answers to several questions that could have been determined with a reasonable investigation, ” relating to the basis for Plaintiff's damage claim, Plaintiff's finances, and Plaintiff's use of the internet as a sales tool. (Doc. 479, at 9-12.)

         Defendant contends Plaintiff's approach “violated its obligations to provide knowledgeable witnesses to testify on the company's behalf.” (Id., at 9.) This District has held that “[p]roducing an unprepared witness for a 30(b)(6) deposition is ‘‘tantamount to a failure to appear' at a deposition' and constitutes sanctionable conduct.” (Id., quoting Starlight Int'l, Inc. v. Herlihy, 186 F.R.D. 626, 639 (D. Kan. 1999) (quoting United States v. Taylor, 166 F.R.D. 356, 363 (M.D. N.C. ).) The Court will thus review the specific areas of questioning about which Defendant complains in an effort to determine whether Plaintiff identified the proper witnesses - and sufficiently prepared them - to respond to topics enumerated in the 30(b)(6) subpoenas.

         a. Basis for Plaintiff's damages.

         It is undisputed that Plaintiff had sufficient notice that a proffered witness would need to testify regarding the categories of its damages. Plaintiff represented to Defendant that fact witness testimony regarding damages would be unnecessary because Plaintiff would rely on its expert for this. (Doc. 479, at 10; see also Doc. 479-4, at 3-4.) Defendant explained to Plaintiff that if Plaintiff's “expert testimony was stricken for any reason, [Defendant] would object to [Plaintiff's] efforts to offer fact witness testimony on the categories of [Plaintiff's] damages if it refused to provide deposition testimony on the same.” (Doc. 479, at 10.)

         Thereafter, Plaintiff proffered Hratch Andonian to testify regarding this subject. According to Defendant, the witness “was unprepared to provide that information, instead directing [Defendant] on a run-around, back to [Plaintiff's] expert.” (Doc. 479, at 10.) The following deposition exchange is illustrative of Defendant's concerns:

Q. Are you claiming that Universal owes AKH the $XX[1]contingency payment that it paid to Paul Hastings or not?
A. I'm not right now in position to answer that question because I -- you have been with the attorneys in conversation as to what our claims are and what your claims are. So for me to step into the middle of this right now is -- it's not a -- I wouldn't be -- that's why I'm hesitating to give you an answer because it's kind of --settlement or some kind of conversation has been already going on between the -- you as an attorney and our attorneys. Isn't that -- Q. Well, yes, but as the witness for AKH, we have a right to learn from you exactly what damages you're claiming from Universal and the basis for those claims. And so what I'm trying to figure out is whether AKH's position is that Universal should have paid the $XX contingency payment and, therefore, owes that money to AKH in this litigation.
A. So I'm saying I'm not prepared right now to tell you what our claim is or AKH's claim is going to be. I'm not in a position right now if I don't have all the whole picture in front of me.
***
Q. One of your experts is Andre Jardini. He lays out the basis in support for the attorneys' fees claim that you just -- you and I just talked about a little bit. Are you aware whether AKH has any other evidence to support its claim other than that identified by Mr. Jardini?
A. I can't answer that. I have no -- nothing to go by right now.
Q. So you don't know?
A. No.

(Doc. 479-2, at 264-65 (emphasis added).)

         Defendant argues that it is “unacceptable” that Plaintiff “claims to be unable to quantify the damages” it seeks “[a]t this late stage of the litigation . . . .” (Doc. 479, at 11.) Defendant contends that sanctions are necessary because it should not be “forced” to defendant at trial against a “nebulous” claim for damages. (Id.)

         The Court finds, however, that Plaintiff's damage claim is not “nebulous, ” despite the uncertainty of the witness testimony. Plaintiff has indicated it intends to rely on expert testimony regarding damages. (Doc. 486, at 20.) That expert has submitted a report and has been deposed by Defendant. (Id.)

         As stated above, Defendant warned that if Plaintiff refused to provide fact witness deposition testimony on damages, Defendant would object to efforts by Plaintiff to offer fact witness testimony at trial on the subject if the expert testimony was stricken for any reason. (Doc. 479, at 10.) In response, Plaintiff submitted Hratch Andonian for deposition on this subject. Plaintiff prepared Mr.

         Andonian, or chose not to prepare him, as it saw fit. Should Plaintiff need to rely on the deposition testimony provided by Mr. Andonian, it will rise or fall on the merits and sufficiency of the testimony provided. In other words, to whatever degree Plaintiff has failed to provide sufficient factual witness testimony regarding damages, Plaintiff runs the risk of being unable to support claims for such damages at trial if its expert is stricken. Plaintiff was free to make this tactical choice and has not acted in a sanctionable manner. The risk Plaintiff faces is sanction enough. Defendant's motion is DENIED in regard to deposition testimony regarding damages.

         b. Plaintiff's finances.

         Defendant also sought factual witness testimony regarding Plaintiff's “financial status, tax returns, loans, bank accounts and statements, corporate credit cards, loans, financial transactions, net worth, profits, losses, revenue, expenses, and other information bearing on a potential punitive damages award, since the time of the Settlement until the present time.” (Doc. 479-1, at 9.) This topic was revised by Defendant to comply with a prior Order by the undersigned Magistrate Judge granting in part a motion to compel filed by Defendant. (See Doc. 451.)

         Prior to the deposition, Plaintiff's counsel specifically assured Defendant that “[a]ny additional concerns you may have regarding . . . how AKH managed its finances can be properly addressed at Hratch Andonian's deposition.” (Doc. 479-5, at 2.) According to Defendant, however, Hratch Andonian had not reviewed tax returns in 6 to 8 months at the time of his deposition. (Doc. 479, at 11-12.) Defendant also contends he was unable to answer basic questions, including whether Plaintiff

had completed its production of documents, whether [it] had any financial statements prepared on its behalf after 2011, what legal settlements were reflected in [its] tax returns, why wires of funds were being made to . . . individuals, and details of the sales of assets among the various entities he owned, all critical to the valuation of [Plaintiff] and, thus, the punitive damages claim.

(Id., at 12; see also Doc. 479-2, at 37, 74, 76, 82-85, 92-93, 100-101.) On several occasions during the deposition, Hratch Andonian stated that he was not a CPA and/or that the question would need to be posed to a CPA. (See Doc. 479-2, at 37, 74, 76, 82-85, 92-93, 100-101, 115-116, 124.)

         Plaintiff, on the other hand, contends that Defendant's expectations for the deposition were unrealistic. Plaintiff argues that Defendant asked Hratch Andonian

to testify with the expertise of an accountant and to answer all their questions about AKH's financial condition, tax reporting, and banking records, no matter how obscure, remote, or complex. Universal badgered Mr. Andonian about individual line items on tax returns and bank statements that covered multiple years and thousands of transactions. (See, e.g., Exh. E, AKH Dep. at 69:25-70:4, 71:20-74:13, 75:14-22, 84:23-25, 104:3-19) No reasonable investigation could have prepared him to answer such questions unless he actually knew the questions in advance. Even though Mr. Andonian is not an accountant and therefore reasonably deferred to AKH's accountants on certain details, (see, e.g., Id. at 85:23-25, 410:2-411:17), Universal's lawyers openly criticized him for not having an accountant's expertise: ‘I can read the tax returns on my own. And so if your position is that you don't know anything else about the information other than what is in the tax returns, then it may be that we have to . . . go back to your accountant . . . .' (Id. at 85:8-14) That the accountants eventually gave depositions does not mean that Mr. Andonian failed to discharge his duties as AKH's Rule 30(b)(6) witness.

(Doc. 486, at 18-19.) Plaintiff also argues that the topics on Defendant's deposition notice “were extremely broad and did not identify any line items that [Defendant] intended to cover with respect to [Plaintiff's] tax returns and bank statements.” (Id., at n.5.)

         Some of the issues raised in the present motion, as well as one previous ruling by the undersigned Magistrate Judge (Doc. 374), evince an on-going effort by Plaintiff to obstruct discovery of its financial status. The discovery of Plaintiff's available assets against which to enforce a potential judgment is of understandable interest to Defendant, but not relevant to the substantive issues for trial. However, if Defendant prevails in proving its entitlement to an award of punitive damages, the financial status of Plaintiff may be relevant at trial to a determination of the amount of such an award. Mansourian v. Regents of the Univ. of Calif., No. 03-2591-FCD-EFB, 2011 WL 98814, at *1 (E.D. Cal. Jan. 12, 2011) (holding that “evidence of the financial status and worth” of a party against whom punitive damages are sought is relevant to the punitive damages claim, “including the reasonableness of a punitive damage award”).

         Discovery into this issue, however, has become the proverbial “tail wagging the dog” in this case. Sanctions are appropriate - and an appropriate sanction should be one which will allow the parties to ...


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