Siegmund v. Bian et al

Filing 365

ORDER sustaining 277 Objections to Order of Magistrate Judge; reversing 265 Order on Motion to Compel. Signed by Judge Darrin P. Gayles on 4/6/2016. (zvr)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF FLORIDA
Case No. 12-62539-CIV-GAYLES/TURNOFF
FREDERICK SIEGMUND, derivatively
on behalf of LINKWELL CORPORATION,
Plaintiff,
v.
XUELIAN BIAN, et al.,
Defendants,
and
LINKWELL CORPORATION,
Nominal Defendant.
/
ORDER
THIS CAUSE comes before the Court on Defendants Xuelian Bian and Wei Guan’s
Objections [ECF No. 277] to an Order by Magistrate Judge William C. Turnoff [ECF No. 265]
granting the Plaintiff’s motion to compel Defendants Xuelian and Wei to respond to requests for
production [ECF No. 240]. The Court has considered the order, the motion briefs, the objections,
the record, and the applicable law, and is otherwise fully advised in the premises.
I.

BACKGROUND
The Court recites only the facts pertinent to ruling on the Objections. In this shareholder

derivative action, Plaintiff Frederick Siegmund, on behalf of Linkwell Corporation (“Linkwell”),
alleges that Xuelian and Wei, as directors of Linkwell, breached their fiduciary duties of loyalty,
due care, and good faith by, inter alia, causing Linkwell to issue nearly all its equity, assets, and
operation to themselves and the other Defendants for inadequate consideration. The Objections
currently before the Court are just one small part of a lengthy discovery dispute between the parties.

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Xuelian and Wei became officers and directors of Linkwell in 2005. Xuelian was CEO,
President, and Chairman of the Board of Directors, and Wei was Vice President and a member of
the Board of Directors. On November 17, 2014, in response to an earlier discovery motion filed
by the Plaintiff, Xuelian and Wei filed sworn declarations in which each testified that he resigned
from his position as director and officer, effective July 18, 2014. [ECF Nos. 219-1 & 219-2]. They
also provided Linkwell’s corporate resolutions accepting those resignations.
On January 8, 2015, the Plaintiff served Xuelian and Wei with requests for production (the
“Requests”). In their response, filed February 12, 2015, Xuelian and Wei objected to a majority
of the Requests seeking Linkwell corporate documents by claiming they do not have any responsive documents in their possession, custody, or control, due to the fact that they had resigned from
their executive positions at Linkwell months earlier. On March 11, 2015, the Plaintiff filed a
motion to compel Xuelian and Wei to respond to the Requests. [ECF No. 240]. He argued that it
was not plausible that Xuelian and Wei, as directors of Linkwell, did not have possession, custody,
or control of the Linkwell corporate documents he sought to discover.
Magistrate Judge William C. Turnoff held a hearing on the motion to compel on April 9,
2015. At the hearing, Plaintiff’s counsel provided a printout of Linkwell’s amended annual report
from sunbiz.org (the website for the Florida Department of State, Division of Corporations), dated
June 24, 2014, which listed Xuelian and Wei as directors. Based on this, Plaintiff’s counsel argued
that Xuelian and Wei were still at that time directors of Linkwell. Counsel for Xuelian and Wei,
referring to the previously filed declarations, argued that they had resigned as officers and directors
of Linkwell months prior to the Plaintiff’s Requests and therefore could not produce the corporate
documents. The Magistrate Judge noted that there was a probable relationship between Xuelian
and Wei and the new directors at Linkwell who might be willing to respond to Xuelian and Wei’s
requests to obtain the documents (should they be compelled to make them) and further commented

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on the negative inference that could reasonably follow from the fact that they resigned shortly after
being served with the complaint.
The Magistrate Judge did not make factual findings, but granted the Plaintiff’s motion to
compel based on the record before him. He said that it would be up to Xuelian and Wei “to comply
and to do everything they can within their power,” and he ordered them to either produce the
documents within fourteen days or, presumably, the Plaintiff would “move for appropriate consequences.” [ECF No. 277-1 at 22-23]. Further, while acknowledging Xuelian and Wei’s argument
that they could not comply with the requests, the Magistrate Judge determined that there is no
reason why they could not request the documents of their former corporation. [Id. at 23]. The
next day, he entered a written order granting the motion to compel for the reasons stated at the
hearing in open court (the “Order”). [ECF No. 265]. Xuelian and Wei filed the instant Objections
on April 24, 2015, and the Plaintiff responded (the “Objections”). [ECF Nos. 277 & 289].
II.

DISCUSSION
A.

Standard of Review

A party may file objections to a magistrate judge’s nondispositive pretrial order. Upon
review, the district court is required to consider the objections and must set aside any portion of
the order found to be “clearly erroneous or contrary to law.” Fed. R. Civ. P. 72(a). “A finding is
‘clearly erroneous’ when although there is evidence to support it, the reviewing court on the entire
evidence is left with the definite and firm conviction that a mistake has been committed.” Holton
v. City of Thomasville Sch. Dist., 425 F.3d 1325, 1350 (11th Cir. 2005) (citation and internal quotation marks omitted). “A ruling is contrary to law if the magistrate judge has misinterpreted or misapplied applicable law.” Root ex rel. A.R. v. Dudek, — F. Supp. 3d —, 2015 WL 9311651, at *2
(S.D. Fla. Dec. 18, 2015) (citation and internal quotation marks omitted). “In the absence of a legal

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error, a district court may reverse only if there was an ‘abuse of discretion’ by the magistrate
judge.” SEC v. Merkin, 283 F.R.D. 699, 700 (S.D. Fla. 2012).
B.

“Control” of Documents Under Fed. R. Civ. P. 34

Under Federal Rule of Civil Procedure 34, “control” governs the production of documents.
The Eleventh Circuit defines control “not only as possession, but as the legal right to obtain the
documents requested upon demand.” Searock v. Stripling, 736 F.2d 650, 653 (11th Cir. 1984). As
the parties do not seem to dispute that Xuelian and Wei do not have actual physical possession of
the requested Linkwell documents, they can be compelled to produce only documents they have
the “legal right” to obtain “upon demand.” Id. The Plaintiff, as the party seeking production of the
documents, bears the burden of proving that Xuelian and Wei have such control. United States v.
Int’l Union of Petrol. & Indus. Workers, AFL-CIO, 870 F.2d 1450, 1452 (9th Cir. 1989), cited in
Costa v. Kerzner Int’l Resorts, Inc., 277 F.R.D. 468, 473 n.2 (S.D. Fla. 2011).
“A corporation is a legal entity existing separate and distinct from its shareholders, officers,
and directors.” FMC Fin. Corp. v. Murphree, 632 F.2d 413, 421 (5th Cir. 1980); see also Whetstone
Candy Co. v. Kraft Foods, Inc., 351 F.3d 1067, 1074 (11th Cir. 2003) (recognizing that corporations
are separate legal entities under Florida law). As a corporation exists separately from its officers
and directors, it exists much more separately from its former officers and directors.
Per their sworn declarations, Xuelian and Wei were no longer officers and directors of
Linkwell as of July 18, 2014. The declarations were filed in this action a month and a half prior
to the date the Plaintiff served his requests. The sunbiz.corg annual report relied upon by the Plaintiff does not rebut the evidence already in the record that Xuelian and Wei were no longer Linkwell
directors. Merely holding the status as being the former director of a corporation does not satisfy
the “control” standard under Rule 34. To the extent that the Order holds that Xuelian and Wei had
control over the requested documents such that they could be compelled to produce them under

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Rule 34, that ruling is contrary to law, as it improperly “disregards [Linkwell]’s corporate form
and its existence as a distinct legal entity.” Am. Maplan Corp. v. Heilmayr, 203 F.R.D. 499, 502
(D. Kan. 2001).
In American Maplan, the plaintiff, American Maplan Corporation (“AMC”), filed an
action against its former president, Heilmayr, alleging that he violated a covenant not to compete
when he became the president of a competitor company, Vinyl Extrusion Technologies (“VET”).
Heilmayr objected to a discovery order by the magistrate judge granting AMC’s motion to compel
to the extent that it required him to produce VET’s corporate books and records, arguing that he
could not be required to produce corporate documents in a suit brought against him personally. The
district court agreed with Heilmayr and reversed the magistrate’s order, finding that it “effectively
ignore[d] the distinction between a corporation, on the one hand, and its officers and shareholders,
on the other hand.” Id. Given that VET was not a sole proprietorship and that AMC had not
alleged that Heilmayer was the “alter ego” of VET (nor was there any evidence or allegation that
Heilmayer and VET were “essentially one and the same”), the court concluded that AMC “cannot
properly seek to obtain from one entity or individual what belongs to another.” Id.
Although American Maplan involved some idiosyncrasies of Texas law limiting the right
of access that officers and shareholders have to corporate books and records, the reasoning is still
equally applicable here. Whereas in American Maplan, the plaintiff was barred from compelling
a corporation’s president to produce that corporation’s books and records, here the Plaintiff—in a
situation one step removed—seeks to compel former directors to produce the books and records
of a corporation over which they no longer have control. The Plaintiff has not established that the
requested information could not be obtained directly from Linkwell, yet the Plaintiff seeks that
information from Linkwell’s former directors.

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The Plaintiff, in his response to the Objections, contends that “documents have been considered to be under a party’s control . . . when that party has the right, authority or practical ability
to obtain the materials sought on demand,” seemingly in support of the argument that Xuelian and
Wei have, at the very least, the “practical ability” to obtain the documents from Linkwell. [ECF
No. 289 at 9] (quoting Costa, 277 F.R.D. at 470 (citation and internal quotation marks omitted)).
Along those lines, the Magistrate Judge considered the potential relationship between Xuelian,
Wei, and their replacements on the board of directors at Linkwell in granting the motion to compel
because, perhaps, the new directors would be amenable to complying with the requests. But
“even under the most expansive interpretation of ‘control,’ the ‘practical ability’ to demand production must be accompanied by a similar ability to enforce compliance with that demand.” Klesch
& Co. v. Liberty Media Corp., 217 F.R.D. 517, 520 (D. Colo. 2003). A possibility that a request
might be complied with is not the same as “control” under Rule 34. See Chaveriat v. Williams Pipe
Line Co., 11 F.3d 1420, 1427 (7th Cir. 1993) (“[T]he fact that a party could obtain a document if
it tried hard enough . . . [or even] if it didn’t try hard at all does not mean that the document is in
its possession, custody, or control; in fact it means the opposite.”). A former director’s apparent
ability to request documents from his former corporation (or from the appropriate custodian at that
corporation) is not the same as the right to obtain those documents upon demand or the ability to
enforce compliance with that demand.
III.

CONCLUSION
In sum, the Court finds that the Magistrate Judge’s Order “effectively ignores the distinction

between a corporation, on the one hand,” and that corporation’s former directors and officers on
the other. American Maplan, 203 F.R.D. at 502. Because there is no legal authority through which
the Magistrate Judge could have compelled Xuelian and Wei to produce documents in the custody

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of a corporation from which they had long since resigned, the Order granting the motion to compel
is contrary to law.1
Accordingly, the Defendants’ Objections [ECF No. 277] are SUSTAINED and the
Magistrate Judge’s Order [ECF No. 265] is REVERSED.
DONE AND ORDERED in Chambers at Miami, Florida, this 5th day of April, 2016.

________________________________
DARRIN P. GAYLES
UNITED STATES DISTRICT JUDGE

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In making his ruling, the Magistrate Judge alluded to the specter of impropriety that seems to arise from Xuelian
and Wei’s sudden resignations from their positions following service in this suit. But such impropriety has no
bearing on either the Requests or the motion to compel, nor does it grant a court the authority to compel two nondirectors to produce documents from a corporation over which they no longer have control, and over which they
had no control at the time the Plaintiff requested the production. See Gray v. Faulkner, 148 F.R.D. 220, 223 (N.D.
Ind. 1992) (“The fact that a party may disbelieve or disagree with a response to a discovery request . . . is not a
recognized ground for compelling discovery, absent some indication beyond mere suspicion that the response is
incomplete or incorrect.”).

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