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Sentis Group, Inc. v. Shell Oil Co.

March 24, 2009

SENTIS GROUP, INC.; CORAL GROUP, INC., PLAINTIFFS - APPELLANTS,
v.
SHELL OIL COMPANY; EQUILON ENTERPRISES, LLC, DOING BUSINESS AS SHELL OIL PRODUCTS US, DEFENDANTS - APPELLEES.



Appeal from the United States District Court for the Western District of Missouri.

The opinion of the court was delivered by: Melloy, Circuit Judge.

Submitted: February 13, 2008

Before MELLOY, GRUENDER, and SHEPHERD, Circuit Judges.

The district court dismissed Plaintiffs' claims with prejudice as a sanction for discovery abuses and other abuses of the judicial process. The district court relied, in part, on Rule 37 of the Federal Rules of Civil Procedure and on a finding that Plaintiffs had willfully and prejudicially violated several discovery orders. The district court also cited its own inherent authority to police the conduct of the parties before the court and identified numerous instances of behavior that it deemed abusive but that were unrelated to the court's discovery orders. After the district court announced its intention to dismiss Plaintiffs' case with prejudice, but before it entered a written dismissal order, Plaintiffs filed a motion asking the district court to recuse itself. The district court denied that motion. Plaintiffs appeal as to the sanction and the recusal issues. We reverse as to the recusal issue, vacate the order of dismissal, and remand for reassignment and reconsideration of the motion for sanctions.

I. Background

The parties in this case provoked the district court into making untempered comments, using profane language, and taking actions that created an appearance of partiality. Reversal is warranted because the sanction of dismissal rested upon the cumulative findings of several alleged abuses, one of which was clearly erroneous, and several of which involved the court's resolution of close questions. We do not believe any of the alleged abuses, standing alone, necessarily justified the sanction of dismissal. Further, given the severity of the sanction, we do not believe it is appropriate to apply a harmless-error analysis after removing from consideration one or more of the several bases offered as cumulative support for the sanction. Finally, given the appearance of partiality, it is necessary on remand to revisit the close questions that drove the sanctions decision.

Having reviewed this matter thoroughly, we are neither unsympathetic toward the district court nor blind to the course of conduct that triggered the court's frustration. We emphasize that our decision rests on the appearance of partiality, not a finding of partiality. We make no comment as to the range of possible remedies available on remand other than to note that neither party behaved in a manner consistent with the spirit of cooperation, openness, and candor owed to fellow litigants and the court and called for in modern discovery. We do not intend to suggest through this opinion that we condone Plaintiffs' behavior or tactics. Also, it seems clear that at some point in the proceedings, Defendants' goal shifted from conducting effective discovery to fanning the flames of the court's frustration and building a case for sanctions. As such, we encourage the court on remand to carefully consider the actions of all parties, paying particular attention to the question of prejudice in determining what, if any, sanction is appropriate.

a. General Background

Plaintiffs are two corporations engaged in the business of operating Shell-brand gasoline stations and convenience stores under contracts with Defendants. The parties refer to the contracts as Multi-Site Operator Agreements (the "Agreements"). The Agreements impose an obligation on Defendants to make expense payments to Plaintiffs to reimburse Plaintiffs for certain costs of maintaining retail gasoline operations. Plaintiffs' underlying allegations, broadly drawn, are that Defendants induced Plaintiffs to enter into the Agreements and calculated subsequent payments employing misrepresentations and fraud. Specifically, Plaintiffs allege that Defendants induced them to enter into the Agreements by providing false historic expense and profit figures and that Defendants calculated the expense payments using a method different from what they had represented at the time of contracting. Plaintiffs assert state-law claims including claims of fraud and breach of contract and a federal claim under the Petroleum Marketing Practices Act, 15 U.S.C. §§ 2801-41. Plaintiffs seek over $28 million in damages.

Discovery in this matter was protracted and contentious. Defendants sought financial information from Plaintiffs as relevant to the underlying question of liability and as relevant to the scope and cause of Plaintiffs' alleged damages. We address in detail the discovery disputes and the parties' actions throughout discovery and leading up to dismissal of this case. For clarity, however, it first is necessary to introduce and explain the roles of the people involved in the case.

b. Key Personnel

Alan Barazi is Plaintiffs' owner and principal officer. He communicated with Defendants' employees or officers by various methods, including via email, when the parties were negotiating the Agreements. In addition, before this litigation commenced, he taped three conversations between himself and Defendants' officers. His emails and the secretly recorded tapes are at the center of two of five issues that led to dismissal of the case.

Chris Walls is a business consultant Plaintiffs characterize as a member of management. Plaintiffs designated Walls as an expert on the topic of the Agreements and site operations. Prior to this litigation, Walls assisted Plaintiffs in negotiating and evaluating the merits of the Agreements, and he subsequently assisted in the management and operation of the stations and in the ongoing analysis of financial performance at the stations. Although Plaintiffs now characterize Walls as an employee and insist he is a non-retained expert, Walls submitted bills to Plaintiffs on an hourly basis for his work on letterhead from his own consulting firm, TQM Consulting. At the start of litigation, Walls's resume listed TQM as his employer, but he changed that designation in the course of litigation and eventually listed Plaintiffs as his employers.

Defendants assert Plaintiffs continually shifted their characterization of Walls's status back and forth between that of consultant and/or employee. Defendants assert it was Plaintiffs' goal to protect certain information Plaintiffs had shared with Walls as privileged while at the same time characterizing Walls as an outside consultant so that he could view information Defendants argue was subject to a protective order. Production related to Walls appears to have been the primary issue that frustrated the court and led to dismissal of the case. Four of the five discovery orders involved production related to Walls.

Nick Anton is an accountant who served as Plaintiffs' employee at the time Plaintiffs entered into the Agreements. Plaintiffs assert that Anton's employment ceased in late 2004 or early 2005 and that he has served as an outside accounting consultant since that time. Defendants point out, however, that Barazi and Anton signed state liquor-license applications after 2005 and that the state liquor-license applications name Anton as a manager, managing officer, or managing agent.

Defendants argue that Plaintiffs and Barazi lied to the court and to Defendants about Anton's status in order to prevent Defendants from gaining access to information held by Anton. Two of the five issues that led to the sanction of dismissal involved Anton. One was related to purported misrepresentations about Anton's status and Plaintiffs' failure to comply with an order to make Anton appear at a court hearing. The other was related to a triple-hearsay report of an alleged attempt to pay Anton to withhold information.

c. Perceived Abuses that Served as the Basis for Dismissal

i. Documents and Discovery Orders Related to Chris Walls

Plaintiffs filed the present action in July 2005. In their Rule 26(a)(1) disclosures, they designated Walls as a person with knowledge of their claims. In early 2006, Plaintiffs produced a privilege log to Defendants referring to fifty-eight purportedly privileged documents Walls reviewed and/or generated. Defendants subpoenaed Walls, and in April 2006, Plaintiffs objected, claiming Walls was Plaintiffs' employee and expert. Plaintiffs then failed to produce Walls for a fact deposition. Defendants moved to compel separate depositions of Walls as a fact witness and as an expert witness, and the district court granted the motion. Notwithstanding the district court's grant of this motion, Defendants failed to exercise their authority to take an expert-witness deposition of Walls.

Walls's fact-witness deposition took place in May 2006. In the deposition, Walls stated that all services he provided to Plaintiffs were through his own consulting firm, TQM; TQM billed Plaintiffs for Wall's services on TQM letterhead; and TQM received $300 per hour from Plaintiffs for Walls' services. Walls never received a W2 form from Plaintiffs. Nevertheless, Walls stated that he considered himself Plaintiffs' employee. Defendants agree that, since 2005, Walls has spent "98 percent of his time assisting Plaintiffs with their claims that the MSO Model was flawed and that Shell was not properly calculating rent and expense payments." Counsel for Defendants, in fact, characterize Walls as "an important fact witness in this case, and he's a management member of the plaintiff organization who probably is appearing to be one of the central figures."

In the course of the fact-witness deposition, Walls referred to one specific document that he created and used in a presentation to Plaintiffs' former counsel. The document was an attempt by Walls to describe Plaintiffs' claims and arguments for the purpose of litigation. Defendants subsequently demanded production of this one document. Plaintiffs refused, and Defendants sought an order from the district court directing Plaintiffs to disclose this one document. The district court entered a first discovery order on June 16, 2006, that stated, as relevant for the purpose of this appeal, "For each of Plaintiffs' experts, Plaintiffs are ordered to produce the information considered by and/or relied upon in forming that expert's opinion." Plaintiffs continued to refuse to disclose the document, claiming that it was a document generated by Walls rather than a document considered or relied upon by Walls in forming his opinion.

Defendants again sought an order from the district court, and on July 13, 2006, the court entered a second discovery order that stated, "Plaintiffs are ordered to produce any reports or analysis produced [created] by Chris Walls from February 5, 2005, as referred to by Chris Walls in his deposition." Plaintiffs continued to refuse to give the document to Defendants because, according to Plaintiffs, Walls had created the document at issue prior to February 5, 2005. In addition, Plaintiffs asserted the document was protected by attorney--client privilege, and they claimed the district court had not addressed Plaintiffs' claims of privilege. Defendants do not seriously dispute this assertion as they admit the district court, at most, had only implicitly ruled against privilege prior to August 2006.

Defendants again sought an order from the district court, and on August 17, 2006, the court entered a third discovery order, stating, "Plaintiffs are ordered to produce the document created by Mr. Walls currently being withheld on grounds of privilege. This Court finds that any privilege was destroyed due to Mr. Walls' reliance on said document." Plaintiffs claim that in late August 2006, they produced the one document described in the third discovery order. Defendants claim Plaintiffs did not produce the document, but rather, produced a different document.

Defendants subsequently asked Plaintiffs for all fifty-eight documents from the privilege log. Plaintiffs refused, and on September 7, 2006, Defendants emailed a letter to the court asking the court to order Plaintiffs to produce all fifty-eight of the documents. The following day, the court issued an order that stated, in part:

Plaintiffs are ordered to produce any and all document or analysis developed by Chris Walls relating to this litigation, regardless of whether the document is claimed as privileged or if Chris Walls relied upon said document. The documents must be produced by noon on Monday September 11, 2007 [sic]. If this documents are not produced, Plaintiffs will not be permitted to present the testimony of Mr. Walls at trial.

On its face, this fourth discovery order was broader in scope than the preceding orders. On September 11, Plaintiffs petitioned our court for a Writ of Mandamus seeking to avoid production under a claim of privilege. In a responsive filing, Defendants clarified that they sought merely "data or other information considered by Chris Walls in forming his opinions." We denied the petition on September 26, 2006.

Shortly thereafter, Plaintiffs produced to the district court for in camera review documents they considered to be privileged documents related to Chris Walls without limitation to whether the documents were related to Walls's expert opinion. They also produced a different, more limited body of documents directly to Defendants.

Plaintiffs filed a motion for in camera review, and Defendants filed a motion for sanctions. Defendants alleged in their motion that the documents Plaintiffs produced directly to Defendants did not contain the fifty-eight documents from the March 2006 privilege log and that the documents contained Bates labels different from those referenced on the March 2006 privilege log.

The court did not rule on the motion for in camera review. Rather, it scheduled a hearing for December 15, 2006, to address the motion for in camera review and the issue of sanctions. We discuss the December 15, 2006 hearing below. After the hearing, but before the court entered its written order of dismissal, Plaintiffs provided a table that cross-referenced the new and old Bates labels.*fn1

ii. Nick Anton

A second discovery issue the court addressed at the sanctions hearing and in the court's order of dismissal involved the production of accounting information by Nick Anton and Plaintiffs' characterization of Anton as an outside consultant.

Plaintiffs assert that Anton was their employee when Plaintiffs began operations under the Agreements and remained an employee through late 2004 or early 2005. Plaintiffs assert, however, that Anton has been working for Plaintiffs as an outside consultant since early 2005. It appears that Plaintiffs have been consistent in this characterization of Anton's status to Defendants and to the district court. Barazi and Anton, however, submitted multiple liquor-license applications in Missouri during the pendency of this litigation, and they represented on the applications that Anton was Plaintiffs' manager, managing agent, or officer.

Defendants sought financial reports and tax returns held by Anton during Plaintiffs' initial production of documents. By mid 2006, it was not clear that Defendants had received all of the accounting information they requested. In particular, Defendants had not received a "payroll journal" they believed to be important to their case. Further, Defendants had received some information as raw data that was meaningless unless opened with the same computer program used by Plaintiffs. Defendants deposed Anton in May 2006, and at that time, Anton claimed that he did not maintain a "payroll journal." Defendants then asked the court for assistance.

On June 30, 2006, the court ordered Anton, Barazi, and one of Plaintiffs' employees to appear in court on July 6, 2006, for an evidentiary hearing. Barazi and the employee appeared, but Anton did not.*fn2 Plaintiffs' counsel represented to the court that Anton was on vacation over the Fourth of July and could not be reached despite Plaintiffs' repeated attempts. In response to this assertion, the district court stated, "[a]ll right, that's fine." At that hearing, Plaintiffs' attorney represented to the court that Anton was an outside consultant and not an employee. Although Barazi was present, he did not testify as to Anton's status.

In mid-August, the court ordered that Plaintiffs make Anton and his computer available for another deposition. Defendants deposed Anton a second time on September 13, 2006, and Anton complied with the order, bringing his computer to the deposition. After asking a few questions, Defendants discovered that Anton's computer did, in fact, contain a file named "payroll journal." Defendants ...


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