Client and Counsel Jointly and Severally Liable for Monetary Sanctions Based on Inadequate Search for and Untimely Production of ESI; Evidentiary Sanctions Also Recommended

R & R Sails Inc. v. Ins. Co. of Pa., 251 F.R.D. 520 (S.D. Cal. 2008)

After a fire destroyed plaintiff’s manufacturing facility, defendant paid plaintiff for loss of property, but plaintiff claimed that the value of all lost property exceeded the amount paid.  Plaintiff also sought further payment under the insurance contract for loss of income, business interruption and extra expenses.  Plaintiff sued to enforce the contract, and also alleged bad faith in the handling of the claim.

In discovery, plaintiff noted that "conspicuously absent" from defendant’s production of documents were "electronic or handwritten daily activity records/logs which are generally kept with an adjuster’s notes and telephone call records.”   Defendant insisted that the documents did not exist.  During a discovery conference on the matter, the court expressed doubt as to the records’ nonexistence and ordered defendant either to produce the requested documents or submit a sworn declaration that the records did not exist.  Defendant thereafter submitted a sworn declaration from its senior property claims examiner (Lombardo) stating that "[t]here were no daily activity logs or telephone record logs that were created or maintained in connection with plaintiff’s claim."

The representation turned out to be inaccurate, as the records requested by plaintiff did exist in a computerized database maintained by defendant.  While preparing for his deposition on the day before it was to occur, Lombardo informed defense counsel about the electronic records he maintained, and then printed them out from his computer.  After reviewing them for privilege, defense counsel faxed 11 pages of the notes to plaintiff’s counsel.  The deposition proceeded the next day, but was re-noted to allow plaintiff’s counsel to fully review the ESI produced.

Approximately one month later, the deposition of Lombardo’s manager, who had initially been responsible for plaintiff’s claim, was to take place.  While preparing this witness for deposition, on the day before it was to occur, defense counsel realized he had failed to produce six pages of electronic notes that Lombardo had provided to him a month earlier.  Defense counsel produced the remaining ESI on the morning of the manager’s deposition.  The parties agreed to continue the manager’s deposition to another date, so that plaintiff’s counsel could review the newly-produced documents.

Plaintiff thereafter sought sanctions under Rules 26 and 37 for the inaccurate discovery responses and Lombardo’s inaccurate declaration, and defendant’s untimely production of ESI.

Sanctions under Rule 26

The court found that defendant’s production of electronically-stored claim log entries demonstrated that defendant had made incorrect certifications to plaintiff and representations to the court that defendant’s production of discovery was complete.  Defendant responded that it was "substantially justified" in maintaining its position, arguing that Lombardo had failed to recognize that the database that he entered notes into contained the "daily activity logs or telephone records" that plaintiff had been requesting.  The court rejected the argument, faulting both the witness and defense counsel:

Lombardo has been an insurance adjuster for twenty-six years and explains that he did not associate the AEGIS database with the claim file that he maintains because "[t]he AEGIS computer system records are kept on a computer system that is separate from my file materials and I do not have a practice of printing them out to put in my file."  Defendant argues that this "honest mistake" substantially justifies the incorrect certifications made to Plaintiff, as well as the false declaration provided to Plaintiff in response to this Court’s Order of November 29, 2007.  However, to give meaning to the certifications provided on discovery responses, Rule 26(g) requires attorneys or parties to sign their responses "after a reasonable inquiry."  Evidence of such an inquiry prior to January 2007 may provide this Court with justification for the incorrect certifications provided to Plaintiff.  Instead, this Court is presented with evidence that Lombardo was maintaining a claim log on his own computer using the AEGIS system while failing to recognize that this log was the same "record/log" being requested by Plaintiff.  Lombardo entered notes of a communication with counsel into the AEGIS system on November 16, 2007, immediately prior to counsel’s representation to this Court that such a system was not possessed by Defendant and close in time to his signing a declaration that no such notes are maintained.  The Court cannot find that a reasonable inquiry was made into whether Defendant possessed discovery responsive to Plaintiff’s requests, and therefore the Court does not find Defendant’s incorrect certifications to be substantially justified.

Sanctions under Rule 37

In addition, the court found that neither set of claim log entries were produced in a timely manner, and that these failures caused plaintiff’s counsel to attend depositions which could not be properly completed.  Thus, it determined that defendant was liable for sanctions, pursuant to Federal Rule of Civil Procedure 37(c), for failing to supplement initial disclosures in a timely matter as required by Federal Rule of Civil Procedure 26(e).

As a result, the magistrate judge issued an order that defendant and its counsel were jointly and severally liable for attorneys’ fees and costs of $39,915 caused by the failure to search for and timely produce the requested ESI.

Non-Monetary Sanctions

Based on defendant’s past failure to timely produce ESI, and plaintiff’s concern that additional responsive ESI may be in defendant’s possession, the court found it necessary to recommend non-monetary sanctions "aimed at resolving the compliance issue and restoring some confidence in the discovery process."  Bd. of Regents of Univ. of Neb. v. BASF Corp., 2007 WL 3342423 (D. Neb. Nov. 5, 2007) (ordering sanctions where responsive documents were produced one day before the deposition of a key witness but without evidence of a willful failure to produce).  The court noted that the deadline for percipient discovery in this case was April 4, 2008, and that the introduction of any documents or ESI which had been requested by plaintiff but not produced by defendant within the discovery period, would risk prejudice to plaintiff.  Accordingly, the court recommended to the United States District Judge assigned to the case that defendant be precluded from relying on or introducing any documents, testimony, or expert witness’ testimony which relied on documents or ESI that was requested by plaintiff but was not produced by defendant on or before April 4, 2008.