James T. Scatuorchio Racing Stable, LLC et al v. Walmac Stud Management, LLC et al
Filing
297
MEMORANDUM OPINION AND ORDER: Plts' 207 Motion for an adverse inference instruction is DENIED. Signed by Judge Danny C. Reeves on 5/27/2014. (STC)cc: COR
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
CENTRAL DIVISION
(at Lexington)
JAMES T. SCATUORCHIO RACING
STABLE, LLC, et al.,
Plaintiffs,
V.
WALMAC STUD MANAGEMENT,
LLC, et al.,
Defendants.
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Civil Action No. 5: 11-374-DCR
MEMORANDUM OPINION
AND ORDER
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Plaintiffs James T. Scatuorcho, LLC, James T. Scatuorchio, Kevin Scatuorchio, Courtney
Sullivan, and Bryan Sullivan have moved for an order granting an adverse inference jury
instruction. The plaintiffs contend this instruction is necessitated by Defendants Walmac Farm,
LLC (“Walmac Farm”), Walmac Stud Management, LLC (“Walmac Stud”), and John T.L Jones’
alleged failure to provide certain discovery. [Record No. 207] For the reasons discussed below,
the motion will be denied.
I.
On October, 30, 2013, a hearing was held before United States Magistrate Judge Robert
E. Wier to address several discovery disputes. [Record No. 177] The defendants argued that the
plaintiffs had not complied with the Court’s previous order regarding the supplementation of
discovery. [Id., p. 1] Likewise, the plaintiffs alleged numerous discovery deficiencies by the
defendants. The magistrate judge that the plaintiffs were to have access to all bank records
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directly relating to Ready’s Image connected to deposit or disbursement. However, he also
indicated that the plaintiffs were not entitled to trace assets from the Walmac general accounts
unless they reflected payments and disbursement directly concerning Ready’s Image. [Id., p. 2]
Magistrate Judge Wier further directed that, if the defendants did not have such records,
they must make a diligent effort to secure them from the bank. The defendants were also ordered
to produce any and all documents that “reflect, relate to, and/or corroborate co-owner payment
of Ready’s Image syndicate billing and/or receipt of syndicate disbursements.” [Id.] Magistrate
Judge Wier went on to state that the defendants must “produce the Haldeman [sic] debt
forgiveness records. It is relevant, at least in this instance, for Plaintiffs to test whether Walmac
provided debt relief to an insider at the same time that insider was a syndicate debtor.” [Id., p.
3]
Following the hearing, the plaintiffs made several requests regarding the defendant’s
alleged discovery deficiencies . [Record Nos. 207-4, 207-5, 207-6, 207-7] Through these letters
and other correspondence, the plaintiffs identified various documents they believed were missing
from discovery and required by the Court’s prior orders. These items included: (i) general
ledgers for Walmac Farm and Walmac Stud; (ii) documents evidencing payments by Walmac
Stud to Walmac Farm for the Walmac syndicate bills; (iii) cancelled checks; (iv) properly
redacted bank statements; (v) documents evidencing the Hardeman debt forgiveness; and (vi)
Ledbetter Trust payments. [Record No. 207-1, pp. 3-7]
The plaintiffs argue that, because the defendants have failed to produce these documents,
they are entitled to an adverse inference jury instruction concerning the information this evidence
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may have included. They assert that the defendants have withheld the various records despite
Court orders and various discovery requests, that this was done with a “culpable state of mind,”
and that all of the records were relevant to their claims. [Id., pp. 9-11]
The defendants have produced over 871 megabytes of data constituting approximately
20,000 pages of material relevant to Ready’s Image. This does not include documents produced
by non-parties in response to subpoenas. The defendants represent that they have produced
evidence including, but not limited to: (i) copies of all invoices to co-owners up to April, 2013;
(ii) copies of payments from all the co-owners; (iii) bank records for payments to the Walmac
Farm operating account for expenses relevant to Ready’s Image; (iv) A Walmac Farm
disbursement journal showing payments made to vendors; (v) invoices from all vendors; (vi)
documents showing all income generated by Ready’s Image; (vii) spreadsheets from 2009 to
2013 documenting the breeding seasons showing all mares bred to Ready’s Image and the
conditions of the breeding; and (viii) copies of all nominations contracts, mare share contracts,
and letters of nomination allocation to the co-owners between 2009 to 2013. [Record No. 242,
p. 4] They assert that this material contains all information relevant to Ready’s Image. [Record
No. 226 ¶ 21]
II.
Spoliation of evidence is the destruction or significant alteration of evidence, or the
failure to preserve property for another’s use as evidence in pending or reasonably foreseeable
litigation. Forest Labs., Inc. v. Caraco Pharm. Labs., Ltd., No. 06-CV-13143, 2009 WL
998402, at *1 (E.D. Mich. Apr.14, 2009). “An adverse inference for spoliation of evidence, or
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a spoliation inference, permits a [factfinder] to infer that destroyed evidence might or would have
been unfavorable to the position of the offending party.” Bankcorpsouth Bank v. Herter, No. 042420, 2009 WL 1596654 at *14 (W.D.Tenn.2009) (quoting Kounelis v. Sherrer, 529 F.Supp .2d
503, 520 (D.N.J.2008)). Additionally, an adverse inference instruction may be appropriate if a
party does not produce evidence peculiarly within its control. In re U.S. Truck Co. Holdings,
Inc., 341 B.R. 596, 607 (E.D. Mich. 2006); Provience v. City of Detroit, 10-11719, 2011 WL
7445088, at *6 (E.D. Mich. Nov. 28, 2011).
A party seeking an adverse inference instruction based on the destruction or loss of
evidence must show that: (i) the party controlling the evidence was obligated to preserve it when
it was destroyed; (ii) the evidence was destroyed “with a culpable state of mind;” and (iii) the
destroyed evidence was “relevant” to a party’s claim or defense such that a reasonable trier of
fact could find that it would support a claim or defense. Beaven v. U.S. Dep’t of Justice, 622
F.3d 540, 553 (6th Cir. 2010) (citations omitted). Further, “it must have been reasonably
foreseeable to the spoliating party that the evidence would be subject to discovery.” Kounelis,
529 F. Supp. 2d at 520. “The burden is on the party seeking to use the evidence to show . . . each
criterion.” Forest Labs., Inc. v. Caraco Pharm. Labs., Ltd., No. CIV.A.06-CV-13143, 2009 WL
998402, at *1 (E.D. Mich. Apr. 14, 2009). However, a party is not automatically entitled to an
adverse inference instruction simply because all elements are met. Kounelis, 529 F. Supp. 2d
at 520-21 ( “[A court] may, despite a finding that all of the elements entitling a party to an
adverse inference have been met, exercise [its] discretion and decide not to grant a request for
an adverse inference.”).
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III.
The plaintiffs argue that the defendants failed to produce discovery in violation of the
October 30, 2013 Order. [Record No. 207-1, p. 1] They claim that they have suffered
prejudiced and are entitled to an adverse inference instruction concerning the evidence not
produced. The defendants argue that all discoverable information concerning Ready’s Image
has been disclosed and any further discovery would be unnecessarily duplicative or irrelevant.
[Record No. 242, p. 1] They claim that responding to the plaintiffs’ motion is difficult because
it requires speculation concerning what the plaintiffs think the defendants have not produced,
how or why it was withheld, and how it relates to the plaintiffs’ claims. Additionally, the
defendants assert that the plaintiffs failed to comply with Local Rule 37.1, requiring parties to
participate in a discovery conference in good faith before filing any discovery motion. [Id., pp.
1-2]
A.
Local Rule 37.1
The defendants claim that while the plaintiffs have met the technical requirements of
Local Rule 37.1, they did not attempt to participate in a discovery conference in good faith.
[Record No. 242, p. 2] In support, they contend that the plaintiffs did not respond to their offer
for a telephonic conference until the day before the dispositive motion deadline. The defendants
argue that, once they followed up on this response from the plaintiffs’ counsel, the plaintiffs
indicated that a conference was no longer necessary as the current motion seeking an adverse
inference instruction had been filed. [Id.] The defendants maintain that had the plaintiffs been
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more receptive to a discovery conference, the issues presented in the current motion would have
been significantly limited.
Local Rule 37.1 states that “all counsel must make a good faith effort to resolve
extrajudicially any dispute relating to discovery,” prior to the filing of a discovery motion. L.R.
37.1. The dispute surrounding the current motion was first raised and addressed by the
magistrate judge during the October 20, 2013 discovery conference where he ordered that the
defendants produce the discovery that is discussed in the pending motion. [Record No. 177]
When a party’s discovery-related motion follows a prior dispute on the same issues and attempts
to enforce a prior order, compliance with Local Rule 37.1 is not necessary. In re 1995 Dupont
Litig., No. CIV.A. 04-191-DLB, 2007 WL 2316911, at *2 (E.D. Ky. May 11, 2007). While, the
plaintiffs’ actions are not commendable, compliance with Local Rule 37.1 is not necessary for
the present motion.
B.
General Ledger
The plaintiffs assert that the defendants were required keep books and records that reflect
all of the receipts and disbursements related to Ready’s Image. They claim that the defendants
use of double-entry accounting indicates that they should have a general ledger reflecting all of
the receipts and transactions relating to the thoroughbred. [Record No. 207-1, p. 3] However,
the defendants respond that a general ledger for Ready’s Image in the Northern Hemisphere does
not exist. [Record No. 242, p. 12] Additionally, they argue that any information that a general
ledger would contain was produced on March 31, 2012, in Discovery Set RI and then
supplemented to be current through April 30, 2013. [Id., p. 13] The defendants also maintain
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that while it is possible to run something similar to a general ledger through their accounting
software, it is unnecessary and impractical because it would produce irrelevant information
concerning other horses and information related to Ready’s Image that has already been
produced. [Id., p. 14]
While the alleged general ledger may be relevant to the defendants’ proposed set-off
defense, an adverse inference instruction concerning this document is not appropriate. The
defendants support their assertions with the affidavit of their attorney Michael Galasso. In his
sworn statement, Galasso states that a general ledger, as described by the plaintiffs, does not
exist. [Record No. 226 ¶ 22] He goes on state under oath that the defendants have produced all
documents relating to transactions relevant to Ready’s Image and any information produced from
a general ledger-type document from their accounting software would be duplicative or
irrelevant. [Id. ¶¶ 27, 30] Thus, while the plaintiffs assert that the ledger would have even more
information related to Ready’s Image, the defendants have offered a sworn statement that such
a document does not exist.
Under the facts presented, the Court is reluctant to give an adverse inference instruction
against the sworn testimony of the defendants’ counsel. There appears to be no duty to create
or maintain a document like the plaintiffs describe. Further, there cannot be any culpable state
of mind or bad faith in failing to produce or preserve a document that does not exist. Certainly,
there is no prejudice to the plaintiffs if any relevant information that a general ledger would
contain is already in their possession. Additionally, the Court finds the reasons for not producing
an entire report from the accounting software persuasive.
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When there is a lack of fault, a sanction for spoliation will not be appropriate. Adkins,
554 F.3d at 652. And giving an adverse inference instruction for the non-production of nonexistent general ledger would not serve the “prophlyactic, punitive, and remedial rationales
underlying the spoliation doctrine.” W. v. Goodyear Tire, 167 F.3d at 779. Therefore, the
motion as it pertains to the general ledger will be denied.
C.
Documents Evidencing Payment from Walmac Farm to Walmac Stud
The plaintiffs also request an adverse inference instruction concerning documents
evidencing payments from Walmac Farm to Walmac Stud. [Record No. 207-1, p. 4] They assert
that these documents are relevant because they would assist in proving that the defendants
favored insiders to the detriment of the plaintiffs. [Id., p. 10] The defendants argue that these
documents are not relevant because the payments made from Walmac Farm to Walmac Stud
were not made on the level of a single horse. [Record No. 242, p. 18] Thus, they claim, there
is not adequate relevance as these payments would not sufficiently relate to Ready’s Image and
all evidence showing payments related to the horse has been previously disclosed. [Id.]
Notwithstanding the possible relevancy of the requested evidence at the time the motion
was filed, it appears that the alleged documents do not help support any claim or defense
currently pending. While the payments may have assisted the plaintiffs in their claims of breach
of the COA and fraud, these transactions allegedly demonstrating a pattern of preference to
insiders to the detriment of the plaintiffs have no relevance to the claims asserted against
Lincoln-Walmac regarding their behavior in the Southern Hemisphere. Further, these alleged
documents do not support the claims asserted for breach of the Mare Agreement concerning non-
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payment. Since the proposed evidence is no longer relevant to any of the pending claims, an
adverse inference instruction for their non-production would not be proper. Beaven, 622 F.3d
at 553.
D.
Cancelled Checks
The plaintiffs argue that defendants produced a series of redacted bank statements for
Walmac Farm’s operating account that showed payments of expenses relevant to Ready’s Image.
[Record No. 207-1, p. 5] They claim that in this disclosure none of the information concerning
the checks was redacted, implying that they were all relevant to Ready’s Image. However, they
assert that the defendants did not produce the cancelled checks from this account making it
impossible to determine to whom the checks were written and to what expenses they relate. The
plaintiffs maintain that the defendants have failed to produce the cancelled checks from this
account. [Id.] In response, the defendants contend that all the cancelled checks relating to
Ready’s Image have been produced and that the it was not necessary to redact the check numbers
and amounts from those particular bank statements because that information did not divulge any
sensitive financial information regarding other horses. [Record No. 242, pp. 14-15]
The plaintiffs express incredulity with the fact that the defendants actually checked to see
if the cancelled checks did not relate to Ready’s Image and urge the Court not to rely on the
defendants’ unsworn statements. [Record No. 261, p. 10] However, the plaintiffs’ skepticism
concerning the veracity of the defendants’ statements is insufficientto warrant an adverse
inference instruction. The plaintiffs; doubt is insufficient to show that the defendants withheld
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or destroyed evidence they had a duty to preserve. Further, the plaintiffs have not provided any
examples of cancelled checks that may have been related to Ready’s Image’s expenses.
Further, the relevancy of this evidence to the pending claims is questionable. The
plaintiffs assert that these alleged cancelled checks that were not produced will demonstrate that
the defendants favored insiders, inflated expenses, and provided kickbacks. [Record No. 207-1,
p. 10] However, these assertions all pertain to claims that have been either referred to
arbitration, dismissed, or abandoned. Because the plaintiffs have not demonstrated that the
defendants withheld relevant evidence they had a duty to disclose, with a culpable state of mind,
an adverse inference instruction concerning cancelled checks would be improper. Beaven, 622
F.3d at 553.
E.
Redacted Bank Statements
The plaintiffs assert that the bank statements produced by the defendants contain
inconsistent and improper redactions , making verification of certain transactions and performing
an accurate accounting impossible. [Record No. 207-1, p. 5] As an example, the plaintiffs claim
that some bank statements reflect a withdrawal or transfer from one account to another, but the
statement on the other account was redacted and does not reflect the deposit. [Id.] The
defendants maintain that they have produced all relevant bank records relating to Ready’s Image.
[Record No. 242, pp. 18-19] The defendants also argue that even if the records had been
destroyed, it is irrelevant. [Id.]
This evidence has no relevance to the claims currently pending against Lincoln-Walmac.
The bank records that were allegedly improperly redacted pertain to the operating accounts of
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Walmac Farm, a distinct entity in a different hemisphere, subject to separate claims. Similarly,
the alleged evidence has no relevance to the remaining claims under the Mare Agreement. The
plaintiffs argue that properly redacted bank statements would support their claim that the
defendants mismanaged Ready’s Image by providing insider deals, improperly inflating their
expenses, and providing kickbacks to certain parties. [Record No. 207-1, p. 10] These alleged
bad acts would be relevant to the plaintiffs’ claims of breach of contract, the covenant of good
faith and fair dealing, and fiduciary duties under the COA and fraud, but these claims are no
longer before this court.
Further, the plaintiffs’ argue that statements reflect transfers or withdrawals to other
accounts that are not shown in the corresponding account. [Record No. 207-1, p. 5] As the
defendants correctly assert, even if all of the bank records had been destroyed, it would not harm
the plaintiffs’ claims. The defendants have produced numerous sources of data concerning the
expenses and disbursements related to Ready’s Image. [See Record No. 226, pp. 2-10] The
plaintiffs do not argue that there is any expense or payment evidenced in any of these other
sources (like the expense or disbursement journals) that does not appear in the bank records.
Further, Galasso states in his affidavit that all information relevant to Ready’s Image in the
Northern Hemisphere has been produced. [Record No. 226 ¶¶ 11, 12] Thus, considering the
lack of relevancy and lack of potential prejudice to the plaintiffs, an adverse inference instruction
is not appropriate relating to bank statements.
F.
Hardeman Debt Forgiveness
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The defendants were directed to produce the Hardeman debt forgiveness records because
they were relevant to determine whether the defendants were providing debt forgiveness to an
insider at the same time he was a debtor to the syndicate in contravention to the interests of the
plaintiffs. [Record No. 177, p. 3] Following this Court’s Order, on November 19, 2013, the
defendants represented that they had searched the records at Walmac Farm and Walmac Stud and
determined that neither had any records of the debt forgiveness. [Record No. 207-17, p. 2] The
defendants also represented that the Ledbetter Trust would have the record and that counsel for
the trust would provide the record separately. [Id.] The Ledbetter Trust has not produced any
of these records to date.
On November 27, 2013, the plaintiffs served a subpoena duces tecum on counsel for
Hardeman, LLC for documents related to mares owned by Hardeman that were bred to Ready’s
Image. [Record No. 207-20] Counsel for Hardeman, LLC responded that any of the documents
that were requested by the subpoena would be in possession of Walmac Farm. [Record No. 20721] The plaintiffs served the defendants with this response on December 11, 2013, and
requested that they review their files to ensure that the relevant documents would be in the
upcoming supplemental discovery production. [Record No. 207-22] The plaintiffs represent that
the defendants never responded to this request. [Record No. 207-1, p. 7]
The defendants argue that all of the records pertaining to Hardeman’s debt forgiveness
have been produced. [Record No. 242] They claim that all documents concerning the mares
bred to Ready’s Image and the conditions under which they were bred were given to the
plaintiffs which include any mares owned by Hardeman. [Id.] The defendants also assert that
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any debt forgiveness provided to Hardeman is not relevant to determine if they provided an
insider debt relief while he was a syndicate debtor. They claim that the debt forgiveness
occurred in 2009 and the payments owed for breeding in 2009 were not due until the Spring of
2010 and that he has paid all amounts owed to the syndicate. Thus, they maintain that there was
no contemporaneous debt forgiveness while Hardeman owed money to Ready’s Image.
While the magistrate judge found that the Hardeman debt forgiveness records may be
relevant to the plaintiffs’ then pending claims, that determination is no longer accurate. Because
the plaintiffs’ claims are now limited to allegations of Lincoln-Walmac’s actions in the Southern
Hemisphere and lack of payment under the Mare Agreement, the possible debt forgiveness of
Hardeman is of little relevance. While this evidence may have been relevant to the plaintiffs’
claims of fraud, those claims are no longer pending before the Court. The claims asserted under
the Mare Agreement relate to the non-payment of the defendants and the possible application of
set-offs. The possibility that Walmac Farm and Walmac Stud may have been offering debt
forgiveness to an insider at the time they were a syndicate debtor does not support these claims.
G.
Ledbetter Trust Documentation
The plaintiffs learned through the deposition of Louis Fister, the defendants’ accounting
expert, that Walmac Farm pays the Ledbetter Trust $300,000.00 a year as a “management fee.”
[Record No. 207-1, p. 7] Defendant Jones is the sole beneficiary of the Trust. The plaintiffs
argue any record of this payment should have been disclosed because it relates to their claims.
The plaintiffs assert that if the Ledbetter Trust was providing management services for Walmac
Farm, it was providing services for Ready’s Image.
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However, the plaintiffs do not demonstrate how this discovery would be relevant to their
existing claims outside of a vague assertion that it would indicate that the defendants were
“moving money around.” This type of inquiry is not directly related to Ready’s Image. The fact
that Ready’s Image stands at Walmac Farm does not open the door to discovery of the Ledbetter
Trust’s records. Further, the plaintiffs’ assertions concerning the relevancy of this evidence are
in relation to their fraud claims which are no longer before the Court. Further, the defendants
have produced the three documents from the Trust that directly relate to Ready’s Image in
Discovery Set WF 844-866. [Record No. 242, p. 20] Without more, this evidence is not relevant
to their pending claims. If the subject evidence is not relevant to a claim or defense, an adverse
inference instruction is not appropriate. Beaven, 622 F.3d at 553.
IV.
Of the evidence allegedly not produced by the defendants, most would not be relevant
because the claims have been substantially reduced since the plaintiffs’ motion was filed. And
while the production of a general ledger may be relevant to challenge the proposed defense of
set-off concerning the Mare Agreement, defendants’ counsel has sworn under penalty of perjury
that no such document exists. Accordingly, it is hereby
ORDERED that Plaintiffs James T. Scatuorcho, LLC, James T. Scatuorchio, Kevin
Scatuorchio, Courtney Sullivan, and Bryan Sullivan’s motion for an adverse inference
instruction [Record No. 207] is DENIED.
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This 27th day of May, 2014.
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