PAIN CENTER OF SE INDIANA, LLC et al v. ORIGIN HEALTHCARE SOLUTIONS LLC et al

Filing 74

ORDER SUSTAINING Plaintiff's 68 Objection/ Appeal of Magistrate Judge Decision to District Court. Motion is REMANDED to the Magistrate Judge for proceedings consistent with this Entry. Signed by Judge Richard L. Young on 3/12/2014. (TMD)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION

PAIN CENTER OF SE INDIANA, LLC;
INDIANA PAIN MEDICINE AND
REHABILITATION CENTER, P.C., and
ANTHONY ALEXANDER, M.D.
Plaintiffs,
vs.
ORIGIN HEALTHCARE SOLUTIONS
LLC;
SSIMED (d/b/a SSIMED Holding, LLC);
ORIGIN HOLDINGS, INC., a Delaware
Corporation; JOHN DOES (1-50)
inclusive; and JOHN DOES (1-100)
inclusive
Defendants.

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1:13-cv-00133-RLY-DKL

ENTRY ON PLAINTIFFS’ OBJECTION TO MAGISTRATE JUDGE LARUE’S
JANUARY 28, 2014 ENTRY
Plaintiffs, the Pain Center of SE Indiana, LLC, The Pain Medicine and
Rehabilitation Center, P.C. and Anthony Alexander, M.D., object to the Magistrate
Judge’s January 28, 2014 Entry denying Plaintiffs’ Motion to Compel Defendants, Origin
Healthcare Solutions, LLC, SSIMED, d/b/a SSIMED Holding, LLC, and Origin
Holdings, Inc., to answer requests numbered 84 through 101 of Plaintiffs’ First Set of
Production of Documents. For the reasons set forth below, the court SUSTAINS the
Plaintiffs’ Objection and REMANDS the motion to the Magistrate Judge for proceedings
consistent with this Entry.
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I.

Background
According to the First Amended Complaint (“Complaint”), SSIMED was

established in 1991 as an electronic health record vendor and provider of physical
software and services. (Filing No. 16, at ECF p. 4). The software was directed at
medical claim coding, patient appointment tracking, and medical insurance billing.
(Filing No. 16, at ECF p. 4). Plaintiffs entered into contracts to purchase this software in
2003 and in 2006 from SSIMED but at some later point, Origin Healthcare Solutions
assumed the contracts as successor-in-interest to SSIMED. (Filing No. 16, at ECF p. 4,
Filing No. 16, at ECF p. 10, Filing No. 16, at ECF p. 16). Origin Holdings is the parent
corporation of Origin Healthcare Solutions. (Filing No. 16, at ECF p. 5).
Plaintiffs’ Complaint generally alleges that the software they purchased from
Defendants (collectively referred to in the Complaint as “Origin” or the “Origin
entities”), entitled “Practice Manager” and “EMRge”, was defective, support services
were deficient, and, as a result, Plaintiffs suffered multimillion-dollar losses. (See
generally, Filing No. 16). The 48-page Complaint consists of thirteen Counts, including
a count for fraud (Count I), fraud in the inducement (Count II), breach of contract (Count
III), unjust enrichment (Count V), breach of warranties (Count VI), and fraudulent
misrepresentation (Count VII).
As regards the three Origin entities who are named defendants in this action, the
Complaint alleges that:
The Origin entities, and each of them, were an owner, a co-owner, an agent,
representative, partner, and/or alter ego of its co-defendants, or otherwise
acting on behalf of each and every remaining Origin entity and, in doing
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things hereinafter alleged, were acting within the course and scope of their
authorities as an owner, a co-owner, an agent, representative, partner,
and/or alter ego of its co-defendants, with full knowledge, permission and
consent of each and every remaining defendant, each co-defendant having
ratified the acts of the other co-defendants.
In support of this allegation, the Complaint alleges that: (1) all operated and were
headquartered during the relevant time period at the same corporate address; (2) in
correspondence to investors, the public, and consumers, the Origin entities utilized the
names of all the various Origin entities interchangeably; (3) the Origin entities shared
common directors and other personnel; (4) the Origin entities made decisions in a
uniform voice; (5) the directors and personnel were aware of many of the allegations
giving rise to the Complaint, including knowingly creating, developing, and propagating
false information to consumers and investors; (6) the Origin entities commingled assets;
(7) the Origin entities’ objectives were common; (8) Origin Holding utilizes Origin
Healthcare Solutions as a shell and sham and, to the extent SSIMED exists, Origin
Healthcare Solutions utilizes SSIMED as a shell and sham to avoid individual liability;
and (9) shareholders invited the public (and the Plaintiffs) to deal with the Origin entities
as one entity. (Filing No. 16, at ECF pp. 5-7). As a result, Plaintiffs allege the Origin
entities are jointly and severally liable for all relief sought by the Plaintiffs. (Filing No.
16, at ECF p. 7).
Plaintiffs’ First Request for Production of Documents includes 103 document
requests; only requests numbered 84-101, described by the parties as the alter ego
requests, are at issue. (Filing No. 52-1, at ECF pp. 15-19). Those specific requests seek
records on various topics from the Origin entities, defined in the First Request for
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Production of Documents as including not only the three named defendant entities, but
also SSIMED Holdings, and Origin Parent, LLC. (Filing No. 52-1, at ECF p. 4).
Defendants objected, and the Plaintiffs filed the present Motion to Compel.
Before the Magistrate Judge, the Plaintiffs argued that: (1) the alter-ego discovery
is relevant to its claims and defenses, and is not limited solely to the alter-ego issue, but is
also germane to other issues; (2) the decision to stay discovery will add time and expense
to this case; (3) the decision to stay discovery will prejudice the Plaintiffs by, inter alia,
preventing them from filing a dispositive motion on that issue; and (4) Defendants have
asked for similar discovery; for example, asking for all financial records relating to the
operation or administration of Plaintiffs’ enterprises. Defendants responded that the alter
ego requests for production were: (1) overly broad because they included entities that
were not named in the Complaint; (2) not drafted with “reasonable particularity” as
required by Federal Rule of Civil Procedure 34(b)(1)(A); and (3) overly burdensome
given the time and cost of producing the discovery to date. Of notable import to the
present objection, Defendants also argued that alter ego discovery is relevant only if a
finding of liability against the Defendants on the underlying claims is established –
presumably during post-judgment proceedings supplemental. Thus, the court should stay
discovery on the alter ego issue, which is an issue for the court and not the jury, until a
finding of liability is established to minimize jury confusion and promote judicial
economy.
In denying Plaintiffs’ Motion to Compel the production of materials related to
requests numbered 84-101, the Magistrate Judge ruled:
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The Court agrees with Defendants that, considering the burden that
responding to Plaintiffs’ alter-ego requests would impose on them and
considering the conditional relevance of those requests (only if the jury
returns a verdict in Plaintiffs’ favor), Defendants need not comply with
Plaintiffs’ requests nos. 84-101 at this time. . . . [I]f Defendants move
before trial for summary judgment on the alter-ego issue, then Plaintiffs
will be entitled to conduct relevant discovery in order to permit them to
meaningfully respond to such a motion. Because the issue will be
determined by the Court, it might still decide to take such a motion under
advisement until after jury trial; however, Defendants’ filing of such a
motion before trial would tend to indicate that they have changed their
minds about whether the burden of production before trial is undue, leaving
judicial efficiency as the primary factor determining whether the motion is
held in abeyance.
(Filing No. 64, at ECF pp. 7-8).
II.

Standard of Review
Pursuant to Rule 72(a) of the Federal Rules of Civil Procedure, the district court

may modify or set aside any part of a non-dispositive order that is clearly erroneous or
contrary to law. A factual finding is “clearly erroneous” “‘if the district court is left with
the definite and firm conviction that a mistake has been made.’” Jones v. City of Elkhart,
No. 2:10-cv-402-TLS, 2012 WL 2458606, at *1 (N.D. Ind. June 27, 2012) (citing Weeks
v. Samsung Heavy Indus. Co., 126 F.3d 926, 943 (7th Cir. 1997)). A conclusion of law is
“contrary to law” where the magistrate judge “‘fails to apply or misapplies relevant
statutes, case law, or rules of procedure.’” Henry v. Centeno, No. 10 C 6364, 2011 WL
3796749, at *1 (N.D. Ill. Aug. 23, 2011) (quoting Tompkins v. R.J. Reynolds Tobacco
Co., 92 F.Supp.2d 70, 74 (N.D.N.Y. 2000)). With this standard in mind, the court now
turns to Plaintiffs’ objections.

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III.

Discussion
Plaintiffs argue the Magistrate Judge’s ruling is contrary to law because: (1) the

alter-ego allegations are relevant to the claims and defenses in this case, and (2) a stay of
the alter-ego discovery will result in prejudice to the Plaintiffs.
The alter ego theory is relevant to establishing whether liability attaches to a given
party. Thus, numerous courts address the alter ego issue as part of the underlying case.
See Longhi v. Mazzoni, 914 N.E.2d 834 (Ind.Ct.App. 2009) (appeal of trial court’s ruling
to pierce the corporate veil); Harnish v. Liberty Farm Equine Reproduction Ctr., LLC,
No. 3:10-cv-511-PPS, 2013 WL 3233243 (N.D.Ind. June 25, 2013) (corporate veil
piercing analyzed on summary judgment); Symons Int’l v. Continental Casualty Co., et
al., No. 1:01-cv-799-RLY-KPF, 2007 U.S. Dist. LEXIS 27356 (S.D. Ind. Mar. 31, 2007)
(corporate veil piercing analyzed on cross motions for summary judgment). Some courts,
however, do not. Mandeville v. Quinstar Corp., 109 Fed.App’x 191, 194 (10th Cir.
2004) (district court did not abuse its discretion in bifurcating breach of contract and
ERISA claims from alter ego issues); MidAmerican Dist., Inc. v. Clarification Tech., Inc.,
807 F.Supp.2d 646, 664, 683 (E.D. Ky. 2011) (district court affirmed magistrate judge’s
decision to bifurcate the contract claims from alter ego allegation and found that
equitable remedy of piercing the corporate veil should be pursued only if and when
defendant is found liable on underlying claims and unable to satisfy judgment); Higgins
v. Journal Register Co., No. 3:06-cv-1446(AVC), 2007 WL 3124731, at *3 (D. Conn.
Oct. 23, 2007) (denying motion to compel veil-piercing requests and finding the issue
should be bifurcated from the age discrimination claims “for the sake of convenience,
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minimization of juror confusion, and economy”). Accordingly, there is no hard and fast
rule governing discovery in cases involving an alter ego theory of liability; thus, the
propriety of the Magistrate Judge’s ruling comes down to her analysis regarding whether
a de facto stay of discovery was warranted in this case. The court uses the term de facto
because the ruling does not explicitly state that discovery is stayed, but that is the
implication.
The Federal Rules of Civil Procedure provide the court (in this case, the
Magistrate Judge) with broad discretion to control discovery in a given case. Semien v.
Life Ins. Co. of N. Am., 436 F.3d 805, 813 (7th Cir. 2006). For example, the court may
limit the frequency or extent of discovery if it determines that “the burden or expense of
the proposed discovery outweighs its likely benefit, considering the needs of the case . . .
and the importance of the discovery in resolving the issues.” Fed. R. Civ. P.
26(b)(2)(C)(iii). In addition, “for the parties’ and witnesses’ convenience and in the
interests of justice,” a court may limit the scope of discovery or control its sequence.
Fed. R. Civ. P. 26(d). Thus, “[i]n ruling on a motion to limit discovery[,] the [court] must
compare the hardship to the party against whom discovery is sought, if discovery is
allowed, with the hardship to the party seeking discovery if discovery is denied.”
Marrese v. Am. Academy of Orthopaedic Surgeons, 706 F.2d 1488, 1493 (7th Cir. 1983).
Here, the Magistrate Judge issued a de facto stay of discovery contingent upon
whether the Defendants move for summary judgment on the alter ego issue, in which
case the Plaintiffs would then have the opportunity to conduct discovery before filing a
response. (Filing No. 64, at ECF p. 7). The Magistrate Judge concluded that Defendants’
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filing of such a motion would “tend to indicate” that Defendants have “changed their
minds about whether the burden of production before trial is undue, leaving judicial
efficiency as the primary factor in determining whether the motion should be held in
abeyance.” (Filing No. 64, at ECF p. 7).
The court finds the Magistrate Judge’s ruling is contrary to law for three reasons.
First, contrary to Rule 26, the ruling effectively cedes control of the conduct and timing
of discovery to the Defendants. Second, the Magistrate Judge’s ruling is inconsistent, in
that she finds producing this discovery is unduly burdensome to the Defendants unless
the Defendants determine it is not, presumably through the filing of a motion for
summary judgment. Third, the Magistrate Judge’s ruling does not meaningfully take into
account Plaintiffs’ asserted grounds of prejudice: (1) “the discovery in dispute involves
overlapping theories beyond veil-piercing requiring additional judicial involvement if a
stay is granted”; (2) “Plaintiffs will incur additional delay and expense if discovery is
stayed at this stage”; (3) “Defendants have already requested information relevant to an
alter ego defense”; and (4) “Plaintiffs should not be deprived of a procedural mechanism
available to Defendants prior to its availability to Plaintiffs.” (Filing No. 55, at ECF p.
6). Accordingly, the Plaintiffs’ objection is SUSTAINED and the motion REMANDED
to the Magistrate Judge to determine whether the alter ego requests are overly broad and
not stated with reasonable particularity. If the requests themselves are permissible under
Rule 26, the Magistrate Judge should consider whether the burden on the Defendants’ in
producing this discovery outweighs the Plaintiffs’ interest in the discovery sought at this
stage of the proceedings. In making the second determination, the Defendants need to
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establish why producing this discovery is any more burdensome than responding to the
balance of the Plaintiffs’ First Request for Production now.
IV.

Conclusion
The court finds Plaintiffs’ objection has merit. The Plaintiffs’ objection (Filing

No. 68) is therefore SUSTAINED and the motion REMANDED to the Magistrate Judge
for proceedings consistent with this Entry.

SO ORDERED this 12th day of March 2014.

_________________________________
__________________________________
RICHARD L. YOUNG, CHIEF JUDGE
YOUNG, CHIEF JUDGE
RICHARD L.
United States District Court
United States District Court
Southern District of Indiana
Southern District of Indiana

Distributed Electronically to Registered Counsel of Record.

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