Babcock Power Inc. et al v. Kapsalis

Filing 450

MEMORANDUM OPINION AND ORDER by Magistrate Judge Colin H. Lindsay. Motion for Discovery (DN 398 ) is denied. Request for additional discovery and sanctions are denied; however, Court will, sua sponte, sanction plaintiffs. Plaintiffs to pay to Ka psalis reasonable attorneys' fees and expenses as set forth. Within 14 days Kapsalis to file itemization of attorneys' fees and expenses as set forth. Within 14 days of filing by Kapsalis of such documentation, plaintiffs to pay amount re quested or file objections as to reasonableness of amounts claimed. Plaintiffs prohibited from using information obtained pursuant to January 23, 2017 subpoena as set forth. Plaintiffs must destroy hard drive as set forth and file notice of compliance. cc: Counsel(JAC)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
LOUISVILLE DIVISION
CIVIL ACTION NO. 3:13-CV-717-CRS-CHL

BABCOCK POWER, INC., et al.,

Plaintiffs,

v.
STEPHEN T. KAPSALIS, et al.,

Defendants.

MEMORANDUM OPINION AND ORDER
On February 7, 2017, defendant Stephen T. Kapsalis (“Kapsalis”)1 filed a “Motion for
Discovery” (DN 398) and “Supplemental Memorandum in Support of his Written Objections and
Motion for Protective Order and to Quash the January 23, 2017 Subpoena and Motion for
Discovery” (“Supplemental Memorandum”) (DN 398-1).

On February 22, 2017, plaintiffs

Babcock Power, Inc. and Vogt Power International, Inc. (“plaintiffs”) filed a response (DN 405).
On February 22, 2017, non-party Sterling Group, LP (“Sterling”) filed a brief (DN 410)
addressing the issues raised in the Motion for Discovery and Supplemental Memorandum. On
March 1, 2017, Kapsalis filed a reply (DN 417) and plaintiffs filed a response (DN 418) to
Sterling’s brief. On March 8, 2017, the Court held an evidentiary hearing on the issues raised in
these filings. On April 10, 2017, plaintiffs, Kapsalis, and counsel for plaintiffs, Kelly Gallagher
(“Gallagher”), filed proposed findings of fact and conclusions of law.

(See DNs 437-39.)

Therefore, this matter is ripe for review.

1

The other defendant in this matter, Express Group Holdings, LLC (“Express”), has filed for bankruptcy;
consequently, this action has been stayed with respect to Express. (DNs 377, 379.)

1

I.

BACKGROUND
The case has a long and tortured history marked by contentious litigation of a wide range

of discovery issues. The purpose of the background is to provide enough history to give context
to the Court’s decision; the background will not cover every single discovery ruling made or
issue addressed by the Court. Instead, the background will (1) recount the rulings (or pertinent
parts of rulings) that the Court deems relevant to the issues at hand; (2) relay other pertinent
facts; and (3) address how the allegations that are the subject of the Motion for Discovery and
Supplemental Memorandum and related filings came before it and culminated in the evidentiary
hearing held on March 8, 2017.
A.

The Court’s Discovery Rulings
1.

December 30, 2015 Memorandum Opinion and Order (DN 158)

On November 9, 2015, plaintiffs filed a “Motion to Compel Responses to Their First Set
of Interrogatories and Requests for Production from Defendant Express Group Holdings, LLC”
(“Motion to Compel Express”) (DN 127).

On December 30, 2015, the Court issued a

memorandum opinion and order (DN 158) denying, in toto, the Motion to Compel Express.
Requests for Production 6, 8, 10, 13, and 15 were among the discovery requests at issue
in the Motion to Compel Express. Those requests were as follows:
Request for Production 6: Any and all communications between or
among you and any agents, attorneys, servants, employees,
successors and Black & Veatch and any agents, attorneys, servants,
employees, successors of Black & Veatch from April 11, 2013
through the present.
Request for Production 8: Any and all communications between or
among you and any agents, attorneys, servants, employees,
successors and Calpine and any agents, attorneys, servants,
2

employees, successors of Calpine from April 11, 2013 through the
present.
Request for Production 10: Any and all communications between
or among you and any agents, attorneys, servants, employees,
successors and Fluor and any agents, attorneys, servants,
employees, successors of Fluor from April 11, 2013 through the
present.
Request for Production 13: Any and all communications between
or among you and any agents, attorneys, servants, employees,
successors and Siemens and any agents, attorneys, servants,
employees, successors of Siemens from April 11, 2013 through the
present.
Request for Production 15: Any and all communications between
or among you and any agents, attorneys, servants, employees,
successors and LG&E and any agents, attorneys, servants,
employees, successors of LG&E from April 11, 2013 through the
present.
(DN 127-2 at 13-15.)
In its memorandum opinion and order, the Court addressed Requests for Production 6-16
as a whole. The Court stated that, based on the information contained in the Motion to Compel
Express and accompanying memorandum, the “only request for production for which plaintiffs
have demonstrated some sort of relevancy is Request No. 10 and only for communications
occurring between April 11, 2013 and April 11, 2014.” (DN 158 at 9.) The Court further noted:
Plaintiffs have not demonstrated why communications with respect
to each entity described in Requests for Production 6-9 and 11-16
are relevant to its claims or alleged damages. Plaintiffs have not
stated why they need “[a]ny and all communications” as opposed
to communications regarding a specific topic; Requests for
Production 6-16 are also overbroad for this reason.
(Id. at 10.)
The Court also addressed Request for Production 21.

Request for Production 21

requested “[a]ny and all documents concerning the performance of Stephen Kapsalis, including
3

but not limited to, any performance reviews conducted by Express, Express’ Board of Directors
or the Sterling Group.” (DN 127-2 at 17.) The Court found that the relevancy of the documents
sought via Request for Production No. 21 was not obvious and had not been established by
plaintiffs at that juncture. (DN 158 at 10.) The Court concluded:
In sum, plaintiffs have not provided the Court with enough
information with which to properly evaluate its Motion to Compel.
Moreover, on their face and without more information, plaintiffs’
discovery requests are overbroad and/or unduly burdensome.
Consequently, the Motion to Compel will be denied.
That being said, at the December 3, 2015 hearing, the
parties indicated they would work together to come to an
agreement regarding the scope of plaintiffs’ discovery requests; the
Court expects them to do so and will consider any remaining
dispute at a later time.
(Id. at 11.)
2.

February 26, 2016 Memorandum Opinion and Order (DN 204)

On October 28, 2015, Sterling filed a “Motion for Protective Order, to Quash Subpoena,
and for Sanctions, Including Cost-Shifting” (“Motion to Quash by Sterling”) (DN 118) seeking
to quash a subpoena issued by plaintiffs out of this Court on September 21, 2015. On February
26, 2016, the Court issued a memorandum opinion and order granting in part and denying in part
the Motion to Quash by Sterling. Specifically, the Court granted the Motion to Quash by
Sterling insofar as it sought to quash the September 21, 2015 subpoena, but denied it insofar as it
requested a protective order against future discovery and sanctions against plaintiffs. (DN 204 at
14.)
Request 1 in the subpoena to Sterling sought “[a]ll correspondence (either electronic or
otherwise) between or among Kevin Garland, Gary Rosenthal and/or Brad Staller and Stephen
4

Kapsalis from December 1, 2012 to the present that has not previously been produced.” (Id. at
3.) In granting the Motion to Quash by Sterling with respect to Request No. 1, the Court noted
that, while it had fewer qualms about the time period for which communications were sought, the
request was “extraordinarily broad” because it was not limited to a specific subject matter. (Id. at
3-4.)
Request 6 in the subpoena to Sterling sought “[a]ll correspondence (either electronic or
otherwise) between Stephen Kapsalis and the Board of Directors for Express Group Holdings
from December 1, 2012 to the present that has not previously been produced.” (Id. at 6.) In
granting the Motion to Quash by Sterling with respect to Request No. 6, the Court stated:
Sterling and plaintiffs make the same arguments as they did with
respect to Request No. 1. Plaintiffs also state that Kapsalis sent
portions of the strategic planning documents of Vogt and Babcock
to the Express Board of Directors. Plaintiffs assert that they are
entitled to know if other documents or portions of documents were
also sent to the Express Board of Directors. Plaintiffs assert that
this request is narrowly tailored to obtain this information. The
Court disagrees; the subject matter of the correspondence is not
limited in any fashion. For the reasons stated heretofore, the Court
finds that this request is overbroad because it is not limited in
subject matter or scope.
(Id.)
Request 12 in the subpoena to Sterling sought “[a]ny and all documents (either electronic
or otherwise) concerning Stephen Kapsalis’ performance as Chief Executive Officer of Express.”
(Id. at 9.) In granting the Motion to Quash by Sterling with respect to Request 12, the Court
found that this category of documents was not obviously relevant to plaintiffs’ claims. (Id.)
Request 17 in the subpoena to Sterling sought “[a] copy of any joint defense agreement
between and/or among Stephen Kapsalis, Express and Sterling.” (Id. at 11.) In granting the
5

Motion to Quash by Sterling with respect to Request 17, the Court rejected plaintiffs’ claims of
relevancy. (Id. at 12.)
Nonetheless, in the memorandum opinion and order, the Court stated that it did not find
that plaintiffs’ requests have no merit whatsoever. (Id.) The Court further stated, “Rather, many
of them are simply too broad and the Court is not in the best position to craft more narrow
requests. At the hearing conducted by the Court on December 3, 2015, plaintiffs’ counsel agreed
to talk to opposing counsel about a ‘reasonable restriction’ with respect to their discovery
requests.” (Id.)
3.

March 2, 2016 Order (DN 208)

In the March 2, 2016 order, the Court stated, among other things:
The Amended Scheduling Order (DN 186) is further amended as
follows:
Fact discovery deadline: April 1, 2016*
*All discovery that is outstanding must be completed by this date.
No additional discovery is permitted.
Plaintiffs’ expert disclosure deadline: March 15, 2016
Defendants’ expert disclosure deadline: April 22, 2016
Expert discovery deadline: May 20, 2016
Dispositive motion deadline: June 22, 2016
(DN 208 at 4.) This conference was not conducted on the record.
4.

March 7, 2016 Subpoena to Sterling and Related Order

On March 7, 2016, Gallagher caused a subpoena (DN 226-2) to be issued to Sterling in
conjunction with this action. In response, on March 21, 2016, Sterling filed a motion to quash
6

(DN 226) in this action. In an order (DN 357) dated October 4, 2016, the Court denied the
motion to quash without prejudice, finding that the motion to quash should have been filed in the
district where compliance was required, presumably the Southern District of Texas.

On

November 30, 2016, Sterling filed a motion to quash in the Southern District of Texas; that
motion to quash was then transferred to the Court and referred to the undersigned for a ruling.
Rule 45 Motion to Quash March 7, 2016 Subpoena Served on Sterling by Respondents, and for
Sanctions, The Sterling Group, L.P. v. Babcock Power, et al., Misc. Action No. 3:17-mc-1-CRS,
(W.D. Ky. Nov. 30, 2016), ECF No. 1; Order, The Sterling Group, Misc. Action No. 3:17-mc-1CRS (W.D. Ky. Jan. 20, 2017), ECF No. 5; Order Referring Motion to Magistrate Judge, The
Sterling Group, Misc. Action No. 3:17-mc-1-CRS (W.D. Ky. Feb. 8, 2017), ECF No. 14. The
Court has not yet issued a ruling on the motion to quash.
5.

September 15, 2016 Memorandum Opinion and Order (DN 352)

On February 16, 2016, plaintiffs filed a “Motion to Compel Discovery from Defendant
Express Group Holdings, LLC” (“Second Motion to Compel”) (DN 196) seeking documents and
information in response to various interrogatories and requests for production served on Express.
On September 15, 2016, the Court issued a lengthy memorandum opinion and order addressing
the specific interrogatories and requests for production at issue; the Court will only recount
relevant portions of same.
In addressing the First Requests for Production, 17, 19, and 20 (requests related to
documents that reference information concerning plaintiffs or that reference plaintiffs), the Court
stated:
Plaintiffs state that these requests were an attempt to
identify search terms that could lead to the discovery of plaintiffs’
7

documents that may be in Express’s possession that have been
saved under different file names. In response, Express argues that
plaintiffs have forensic images of the Kapsalis hard drives; Express
also argues that a search of the Express server was conducted
pursuant to the proposed Agreed Order (DN 99).
The Court understands that part of the purpose of the
searches described in the proposed Agreed Order (DN 99) was to
discover any of plaintiffs’ proprietary, confidential, or trade secret
information that may have been copied from the Kapsalis hard
drives onto the Express server. At the hearing on the Motion for
Contempt (DN 143) held on June 7, 2016, plaintiffs’ expert Lacey
Walker testified that the file name search conducted pursuant to the
proposed Agreed Order (DN 99) would not have located a
document belonging to plaintiffs that had been renamed, as
plaintiffs now assert. (DN 279, pp. 210-12.) But plaintiffs’ counsel
was actively involved in the formation of the search parameters
memorialized in the proposed Agreed Order (DN 99). Moreover,
Mr. Walker was apparently retained by plaintiffs at or before the
initiation of this lawsuit – his declaration was filed along with the
complaint – and thus presumably could have provided input with
respect to the searches described in the proposed Agreed Order.
(See DN 1-1 [Decl. of Walker].) In other words, the proposed
Agreed Order could have included a search for key terms, yet it did
not.
The Court has heard no indication that plaintiffs’
proprietary, confidential, or trade secret information was taken by
Kapsalis other than via the Kapsalis hard drives – or at least no
such allegation has been made clear to the Court. Plaintiffs are not
entitled to yet another bite at the apple now. While the scope of
discovery is liberal, there are limits and those limits now require
the Court to consider proportionality to the needs of the case,
including the amount in controversy and whether the burden or
expense of the proposed discovery outweighs its likely benefit.
Plaintiffs have not demonstrated that a search of the Express
server would likely uncover documents that have not previously
been or could have been discovered. Moreover, plaintiffs have not
demonstrated that any of the documents were taken other than
through the Kapsalis hard drives (or, at least it has not been made
clear to the Court); in other words, plaintiffs have not shown that
the likely benefit of the proposed discovery outweighs the burden
and expense in this instance. Consequently, the Court finds that the
Motion to Compel is due to be denied with respect to these
requests for production.
8

(DN 352 at 12-14 [emphasis added].)2
The Court also addressed Third Request for Production 1, which requested “[a]ll
correspondence (either electronic or otherwise) between or among Kevin Garland, Gary
Rosenthal and/or Brad Staller and Stephen Kapsalis from March 15, 2013 to the present that has
not previously been produce[d].” (Id. at 23.) The Court stated:
Although the Court agrees that this request is overbroad and not
limited in scope, Express claims that it has produced responsive
documents. Therefore, the Court orders Express to either (1)
produce correspondence regarding Babcock, Vogt Power, or
HSRGs and aftermarket services between Kevin Garland, Gary
Rosenthal and/or Brad Staller and Stephen Kapsalis from March
15, 2013 to April 11, 2014; or (2) identify by Bates number
documents that have been produced that are responsive to same.
(Id. at 23-24.)
The Court also addressed Third Request for Production 2, which requested “[a]ll
correspondence (either electronic or otherwise) between Stephen Kapsalis and the Board of
Directors for Express Group Holdings from March 15, 2013 to the present that has not
previously been produced.” (DN 352 at 24.) The Court stated:
Again, while the Court agrees that this request is overbroad and not
limited in scope, Express claims that it has produced responsive
documents. Therefore, the Court orders Express to either (1)
produce correspondence regarding Babcock, Vogt Power, or
HSRGs and aftermarket services between Kapsalis and the Express
Board of Directors from March 15, 2013 to April 11, 2014; or (2)
identify by Bates number documents that have been produced that
are responsive to same.
(Id.)
On October 14, 2016, Express filed a notice of compliance (DN 364) with the Court’s
September 15, 2016 memorandum opinion and order.
2

For a more detailed discussion of the searches performed of the Express server and the issues arising from same,
see Document 351 at pages 1-16 and Document 352 at pages 4-6.

9

6.

December 8, 2016 Memorandum Opinion and Order (DN 381)

On May 12, 2016, plaintiffs filed a “Memorandum in Support of Their Motion to Compel
Discovery Regarding Dr. Andy Cobb” (“Motion to Compel Cobb”) (DN 260). On December 8,
2016, the Court granted in part and denied in part the Motion to Compel Cobb. (DN 381 at 8.)
The Court granted the Motion to Compel Cobb insofar as it requested a listing of all the hash
values of every file on the Express server at the time it was analyzed by Dr. Andy Cobb and One
Source Discovery. (Id. at 7-8.)

However, the Court expressly rejected plaintiffs’ request for a

copy of or access to the Express server. (See DN 260-1 at 5 [“Thus, Defendants have an
obligation to produce a copy of the server . . . .”]; id. at 6 [“Plaintiffs respectfully move this
Court to compel Defendants’ [sic] to . . . provide access to the Express file server . . . .”]; see also
DN 381 at 8.) Specifically, the Court denied the Motion to Compel Cobb insofar as it requested,
“without limits, access to Express’s server.” (Id.)
B.

Express Files Suggestion of Bankruptcy (DN 377) on November 11, 2016.

On November 11, 2016, Express and its non-party affiliates filed a Suggestion of
Bankruptcy (DN 377) with the Court. The Suggestion of Bankruptcy stated, in part:
PLEASE BE ADVISED that, as of the Commencement Date, any
new or further action against Express is stayed pursuant to section
362 of the Bankruptcy Code (the “Automatic Stay”), which
provides that the filing of the petition, among other things,
“operates as a stay, applicable to all entities, of the commencement
or continuation, including the issuance or employment of process,
of a judicial, administrative, or other action or proceeding against
the debtor that was or could have been commenced before the
commencement of the case under this title, or to recover a claim
against the debtor that arose before the commencement of the case
under this title ….” and of “any act to obtain possession of
property of the estate or of property from the estate or to exercise
control over property of the estate.” 11 U.S.C. § 362(a)(1) & (3).
10

PLEASE BE FURTHER ADVISED that any procedural or other
action against Express taken in this matter without obtaining relief
from the Automatic Stay from the Bankruptcy Court may be void
ab initio and may result in a finding of contempt against Plaintiffs.
Express reserves the right to seek relief in the Bankruptcy Court
from any judgment, order, or ruling entered in violation of the
Automatic Stay.
(Id. at 1-2.)

On November 23, 2016, Senior District Judge Charles R. Simpson III entered an

order (DN 379) staying the action with respect to Express. Judge Simpson’s order stated, “The
Automatic Stay provision, 11 U.S.C. § 362, precludes any further action against Express in this
matter, absent a lifting of the automatic stay by the bankruptcy court.” (Id.)
C.

On December 9, 2016, Plaintiffs File Suit Against Sterling in the Western
District of Kentucky.

On December 9, 2016, plaintiffs filed a lawsuit against Sterling in the Western District of
Kentucky. Complaint, Babcock Power, Inc., et al. v. The Sterling Group, L.P., Civil Action No.
3:16-cv-789-CRS (W.D. Ky. Dec. 9, 2016), ECF No. 1. This lawsuit is based largely on the
same facts underlying this action.
D.

January 23, 2017 Subpoena Issued to Express Bankruptcy Trustee

On January 23, 2017, a subpoena was issued out of the Western District of Kentucky
with the caption of this case, Babcock Power, Inc., et al. v. Stephen T. Kapsalis, Civil Action No.
3:13-cv-00717-CRS-CHL. (DN 390-2; DN 427 at 25.) The subpoena was issued to Scott P.
Kirtley (“Kirtley”), the bankruptcy trustee for Express3; the place of compliance was Tulsa,
Oklahoma and the date and time of compliance was January 27, 2017 at 10 a.m. (DN 390-2.)
The subpoena was signed by Gallagher. (Id.) The subpoena requested the following:

3

Kirtley is also referred to as “the Express bankruptcy trustee” in this memorandum opinion and order.

11

1. Copies of any insurance policies from 2012 to 2016 including commercial general
liability policies; professional liability or errors and omissions policies; employment
practices liability insurance policies; and, directors and officers liability policies.
2. Copies of any documents concerning the formation or operation of CCCG, LLC.
3. Copies of any agreements with Stephen T. Kapsalis (“Kapsalis”) including any
agreements entered upon the termination of Kapsalis’ employment with Express.
4. Copies of any agreement with Middleton Reutlinger including agreements to pay the
legal fees of Kapsalis.
5. Copies of any agreement with Clark Martin including agreements to pay the legal
fees incurred by him on behalf of Kapsalis, Express or The Sterling Group.
6. A copy of Kapsalis’ personnel file.
7. Copies of any documents concerning The Sterling Group’s ownership interest in
Express and the disposition of that interest.
8. Copies of any documents concerning or reflecting payment of a management fee to
The Sterling Group.
9. Copies of any indemnification agreement between/among Sterling, its lenders and
Express Group Holdings and its lenders concerning the BPI/Vogt Litigation (WDKY
3:13-CV-717-CRS-CHL).
10. Copies of any document concerning a reserve fund to pay for any potential judgment
in the BPI/Vogt Litigation (WDKY 3:13-CV-717-CRS-CHL).
11. Copies of any agreement between/among Sterling its lenders and Express Group
Holdings and its lenders concerning payment of any judgment in the BPI/Vogt
Litigation (WDKY 3:13-CV-717-CRS-CHL).
12. Records of payments made to Middleton Reutlinger.
13. Records of payments made to Schiff Hardin.
14. Records of payments made to Clark Martin.
15. Copies of any joint defense agreements between Express Group Holdings and
Stephen T. Kapsalis.

12

16. Copies of any joint defense agreement between Express Group Holdings and The
Sterling Group.
17. Documents concerning any sales made by Sound Technologies to Vogt Power during
2013.
18. Sales Force data for Express Group Holdings’ sales and sales efforts with regard to
Calpine, Black & Veatch, Fluor, Siemens and LG&E from 2013 through 2016.
19. All documents relating to Express’ bid for the Wolf Data Center project.
20. All documents relating to Express’ bid for the Jordan Cove Project.
21. All documents relating to Express’ bid for the Black Hills Project (C15-103).
22. All documents on Express’ servers, computers and external storage devices that bears
a Vogt Power International Inc. (“Vogt Power”) copyright.
23. All documents on Express’ servers, computers and external storage devices relating to
Nevada Power – Harry Allen, Profess Energy-Bartow, Southern Power – Stanton,
Duke Energy – Buck, Kleen Energy, Banderma, Loma de Lata and Isolux.
24. All documents on Express’ servers, computers and external storage devices that
include or contain any CAD standards belonging to Vogt Power.
25. All documents on Express’ servers, computers and external storage devices that
include or contain any ASME Calculations developed by Vogt Power.
26. All documents on Express’ servers, computers and external storage devices that
include or contain any information about or from Vogt Power’s TRS program.
27. All documents on Express’ servers, computers and external storage devices that
include or contain any information about or developed by Vogt Power with regard to
methods of modular construction.
28. Communications between Glenn Selby and any representative or employee of
Calpine, Black & Veatch, Fluor, Siemens and LG&E from 2013 through 2016.
29. Copies of any invoices from Digital Strata to Express.
30. Records of any payments made by Express Group Holdings to Digital Strata.
31. Copies of any invoices from One Source Discovery to Express Group Holdings.
13

32. Records of any payments made to One Source Discovery.
33. Email correspondence between Stephen T. Kapsalis and Kevin Garland from 2013
through 2016 and/or access to Kapsalis’ email account on the Express server.
34. Email correspondence between Stephen T. Kapsalis and Gary Rosenthal from 2013
through 2016.
35. Email correspondence between Stephen T. Kapsalis and Brad Staller from 2013
through 2016.
36. Email correspondence between Stephen T. Kapsalis and Bob Hogan from 2013
through 2016.
37. Email correspondence between Stephen T. Kapsalis and Patrick Hayes from 2013
through 2016.
38. Email correspondence between Stephen T. Kapsalis and the Express Board of
Directors from 2013 through 2016.
39. Preservation of Express Group Holding’s servers in the form of a bit by bit forensic
copy of the servers pending the outcome of the BPI / Kapsalis litigation.
40. Preservation of Stephen T. Kapsalis’ email box pending the outcome of the BPI /
Kapsalis litigation.
41. Preservation of Glenn Selby’s email box pending the outcome of the BPI / Kapsalis
litigation.
42. Preservation of any computers, laptops or other electronic devices used by Stephen T.
Kapsalis pending the outcome of the BPI / Kapsalis litigation.
(DN 390-2 at 5-7 [Schedule A to January 23, 2017 subpoena].)
E.

“Motion for Protective Order and to Quash the January 23, 2017 Subpoena”
(“Motion to Quash”) (DN 390) is Filed on January 26, 2017.

On January 26, 2017, Kapsalis filed the Motion to Quash.4

In the Motion to Quash,

Kapsalis notified the Court that a subpoena had been served on the bankruptcy trustee for

4

Although the Motion to Quash was ultimately denied as moot (see Order at DN 436), the allegations set forth in it
are relevant to the issues at hand.

14

Express and sought a “protective order” to “quash the subpoena.” (DN 390-1 at 3.) Plaintiffs
filed a response to the Motion to Quash the next day, January 27, 2017. (See DN 391.) The
response was signed by plaintiffs’ lead counsel, Pamela J. Moore (“Moore”). (Id.) Plaintiffs set
forth “relevant facts,” which the Court will summarize. (Id. at 1-2.)
On February 16, 2016, plaintiffs filed a motion to compel discovery from Express. (Id. at
1.) On September 15, 2016, the Court issued a memorandum opinion and order compelling
Express to provide certain pieces of information and documents to plaintiffs. (Id.) Express
provided responses pursuant to the Court’s order; however, plaintiffs argued that before they
were able to seek “clarification on several of Express’ responses,” Express filed for bankruptcy
in the Northern District of Oklahoma. (Id. at 2.) According to plaintiffs, on December 5, 2016,
counsel for plaintiffs attended a meeting of creditors in Tulsa, Oklahoma; counsel for plaintiffs
requested several categories of documents from the Express bankruptcy trustee. (Id.) On
December 13, 2016, the Court held a telephonic status conference wherein plaintiffs stated that
they “alerted the Court and counsel for Kapsalis that counsel for Plaintiffs had attended the
Meeting of Creditors in the Express Bankruptcy and w[ere] pursing [sic] documents from the
Express Bankruptcy Trustee.” (Id.)5 Plaintiffs asserted that they were informed that Express’s
servers were being sold at the end of January and that if they wanted any documents, they would
need to serve a subpoena and collect them prior to that time. (Id.) Plaintiffs further stated,
“Accordingly on January 23, 2017 Plaintiffs served the Express Bankruptcy Trustee with a
subpoena (issued from the Northern District of Oklahoma) requesting production of several
categories of documents and requesting that the Express Bankruptcy Trustee take steps to

5

The December 13, 2016 telephonic status conference was not on the record and therefore there is no transcript of
same.

15

preserve evidence that might be on the Express servers pending the outcome of this litigation . . .
.” (Id.) (emphasis added). Plaintiffs also
acknowledge[d] that they issued the subpoena on fairly short
notice, however, they did so in order to preserve documents prior
to the sale of the Express Bankruptcy Estate. Relying on
representations made by the Bankruptcy Trustee, Plaintiffs seek to
preserve evidence that may otherwise be destroyed or may become
very difficult to access in the future.
(Id. at 4.) In their response, plaintiffs did not disclose—as later events would reveal—that they
were in the process of executing the subpoena. (See id.)
In the reply supporting the Motion to Quash, Kapsalis, upon information and belief,
alleged that Gallagher and plaintiffs’ expert witness, Walker, accessed the servers at Express’s
offices and downloaded some documents pursuant to the subpoena issued to the Express
bankruptcy trustee. (DN 392 at 1-2.)
On or about February 2, 2017, upon request of counsel, the Court scheduled a telephonic
status conference for February 8, 2017 to discuss the issues raised in the reply brief supporting
the Motion to Quash. (See February 2, 2017 text order at DN 393.)
F.

Motions to Quash are Filed by Sterling and Kapsalis on January 31, 2017
and February 6, 2017, respectively, in the Northern District of Oklahoma

On January 31, 2017, Sterling filed a motion to quash the January 23, 2017 subpoena to
the Express bankruptcy trustee in the United States District Court for the Northern District of
Oklahoma. The Sterling Group, L.P.’s Motion to Quash Portions of the January 23, 2017
Subpoena Directed to Trustee in Bankruptcy of Express Group Holdings, LLC, Babcock Power,
Inc., et al., v. Kapsalis, Misc. Action No. 17-mc-5-JED-TLW (N.D. Okla. Jan. 31, 2017), ECF
No. 1. Kapsalis followed suit by filing a motion to quash on February 6, 2016. Defendant
16

Stephen T. Kapsalis’ Motion to Quash Subpoena and For Protective Order and Opening Brief in
Support, Babcock Power, Inc., Misc. Action No. 17-mc-5-JED-TLW (N.D. Okla. Feb. 6, 2017),
ECF No. 10. Plaintiffs filed a response to Sterling’s motion to quash on February 7, 2017.
Respondents’ Opposition to the Sterling Group, L.P.’s Motion to Quash Portions of the January
23, 2017 Subpoena Directed to Trustee in the Bankruptcy of Express Group Holdings, LLC,
Babcock Power, Inc., Misc. Action No. 17-mc-5-JED-TLW (N.D. Okla. Feb. 7, 2017), ECF No.
15. Plaintiffs’ response is also Document 410-1 in the docket.
G.

Motion for Discovery (DN 398) and Supplemental Memorandum (DN 398-1)
are Filed on February 7, 2017.

On February 7, 2017, Kapsalis filed the Motion for Discovery (DN 398) and
Supplemental Memorandum (DN 398-1).

In the Supplemental Memorandum, Kapsalis

requested (1) discovery regarding the actions of Gallagher and Walker in conjunction with
search conducted pursuant to the subpoena issued to the Express bankruptcy trustee; (2) that
plaintiffs’ counsel and Walker preserve, return, and purge any documents, information, or data
obtained from the search; (3) that Gallagher and Walker provide written verification under oath
that they returned all copies of any such information and purged any electronic copies and detail
any communications they had with anyone at the Express bankruptcy trustee’s office; (4) that the
Court order the Express bankruptcy trustee to preserve any information or documents related to
the facts described in the filing; (5) appointment of a third party computer examiner to inspect,
analyze, and retrieve the data examined or copied by Gallagher and Walker; and (6) sanctions,
including attorneys’ fees. (Id. at 4-5.)

17

H.

February 8, 2017 Telephonic Conference

On February 8, 2017, the Court conducted a telephonic conference on the record. (DN
401.) The Court discussed, among other things, the procedural posture of the dispute, including
the Motion to Quash (DN 390) and the Motion for Discovery (DN 398).
With respect to the Motion to Quash, Moore stated that it was not properly before the
Court “because the subpoena was issued out of the North [sic] District of Oklahoma . . . [and] if
you want to file a motion to quash, that needs to be filed in the jurisdiction in which the
subpoena is seeking to be enforced.” (DN 401 at 6.)
With respect to the Motion for Discovery, Moore stated, “I’m not sure what [DN] 398
does. I mean, certainly there's no reason for discovery on Kelly Gallagher or Lacey Walker.
They've made very patently very clear in all the pleadings and will do so in an affidavit, if
necessary, that nothing was taken.” (Id. [emphasis added].) The Court discussed the allegations
made by Kapsalis in the Supplemental Memorandum (DN 398-1) and set an accelerated briefing
schedule in relation to same; the Court also set a hearing on the allegations for March 8, 2017.
(Id. at 8-10.)
Additionally, the Court prohibited plaintiffs from using, reviewing, or otherwise
accessing the information that was obtained or copied from the Express offices on January 2627, 2017. (Id. at 20-22.) Moore also requested permission for plaintiffs’ bankruptcy counsel to
participate in the March 8, 2017 hearing “to explain what it was that he gave us permission to do
and why; and also that my partner or our bankruptcy counsel in Oklahoma be allowed to
participate in the hearing so that they can fully argue the issues related to the bankruptcy
proceeding, which are distinct from the district court proceeding, but they’re obviously

18

intertwined, because I’m not qualified to do bankruptcy.” (Id. at 18.) The Court granted
permission to have plaintiffs’ bankruptcy counsel appear. (Id. at 25.)
With respect to plaintiffs’ position as to the subpoena issued to the Express bankruptcy
trustee, Moore stated, “In large measure, Your Honor, our steps were guided by bankruptcy
counsel, because we are now a creditor to the bankrupt estate.” (Id.) Moore also stated with
respect to plaintiffs’ bankruptcy counsel that “[h]e could be somebody who's just going to argue
that aspect of our position, which is that everything we've done is consistent with the bankruptcy
code and permissible. So I think that's very important for the court to understand . . . . Because I
think there's a significant disconnect between the understanding of what's actually gone on here,
and it arises as a result of the position of Express as a bankrupt entity . . . . And as I said, I am not
a bankruptcy lawyer, so my steps and everything we've done in this case has been guided by the
bankruptcy law . . . .” (Id. at 26, 28.)
Finally, Moore agreed that, absent some temporal exigencies, plaintiffs would not seek a
Rule 2004 examination in the Express bankruptcy proceedings that mirrored the requests
contained in the subpoena to the Express bankruptcy trustee. (Id. at 32-33.)
I.

March 8, 2017 Evidentiary Hearing

On March 8, 2017, the Court held an evidentiary hearing regarding the allegations made
in the reply (DN 392) supporting the Motion to Quash (DN 390) and the filings related to the
Motion for Discovery (DN 398). The following people testified at the evidentiary hearing:
Gallagher; plaintiffs’ bankruptcy counsel, Mark Craige (“Craige”); and Walker. The Court will
summarize pertinent parts of the testimony from the evidentiary hearing; the Court will also,

19

where necessary, cite to relevant portions of the declarations of Gallagher and Walker that were
filed in the record in advance of the evidentiary hearing.6
Plaintiffs retained Craige, a bankruptcy attorney in Tulsa, Oklahoma, in response to
Express filing bankruptcy. (DN 406 at 2.) Craige attended the Express creditors’ meeting on
December 5, 2016 on behalf of plaintiffs. (DN 427 at 120.)
On December 13, 2016, the Court held a telephonic conference wherein, according to
Gallagher, Moore stated that plaintiffs were pursuing documents from the Express bankruptcy
trustee. (Id.) There is no recording or transcript of this telephonic conference.
Craige communicated with the Express bankruptcy trustee, Kirtley, and/or his associate,
regarding plaintiffs’ desire to obtain documents and other data from the Express offices,
including from the servers located there. (See DN 406 at 2-3 [Gallagher Decl.]; DN 406-8 at 6-7
[January 18, 2017 e-mail from Craige to Kirtley]; see also DN 427 at 24-25.) In an e-mail dated
January 18, 2017 to Kirtley, Craige wrote, in part:
My co-counsel for Vogt who is seeking the discovery are Pamela
Moore and Kelly Gallagher with McCarter & English in Hartford,
Conn. (and other cities). They have a forensic expert, Lacey
Walker, Jr., who has been working on this case for years that they
want to use to review the files (both paper and data) in an effort to
locate the items on the list we discussed earlier today. To facilitate
this, I am inquiring as to whether our Mr. Walker and Ms.
Gallagher can have access to the computers, files and related data
on either January 26 or 27 of next week?
(DN 406-8 at 6.)

6

At the evidentiary hearing, plaintiffs objected to the use of the declaration of Christopher Masters, the former IT
director of Express, as evidence. (See DN 427 at 18-20; see also DN 410-2 [Masters Decl.].) While no ruling was
made at the evidentiary hearing, the Court does not rely on Masters’s declaration in this memorandum opinion and
order.

20

Kirtley required that plaintiffs present him with a subpoena, in addition to other conditions. (Id.
at 5; DN 427 at 23-25.)
Gallagher testified that around January 19, 2017, she became aware that a sale of some of
Express’s assets, including the servers, would be taking place. (DN 427 at 123.) Gallagher
testified that she believed that she learned around January 26, 2017, that the sale was going to
take place on January 31, 2017 and that the servers would not be wiped clean before they were
sold. (Id. at 123-24, 129.)
On January 23, 2016, Gallagher signed the subpoena to be served on Kirtley. (Id. at 2223.) The subpoena issued from this Court with the civil action number of this matter. (Id. at 23.)
The date of compliance on the subpoena was January 27, 2017 at 10 a.m. (Id. at 26.) Gallagher
e-mailed a copy of the subpoena to counsel for Kapsalis. (DN 406 at 4.)
On January 26, 2017, the day before the date of compliance listed in the subpoena,
Gallagher and Walker went to the Express offices in Tulsa, Oklahoma.

(DN 427 at 26.)

According to Gallagher, Kirtley had asked Gallagher to start executing the subpoena on January
26, 2017 to avoid being there on a Saturday. (Id.) Gallagher testified that she mistakenly
believed that the subpoena listed the date of execution as January 26, 2017. (Id. at 27-28.)
Jamey Iceberg (“Iceberg”), the information technology (“IT”) director for Kirtley’s law
firm, was present at the Express offices for part of the day on January 26th and 27th. (Id. at 2830, 110; see also DN 406 at 5-6, 8.)

Beginning on January 26, 2017, Walker began to run

several searches. Late in the morning on January 26, 2017, Gallagher received notice that
Kapsalis had filed the Motion to Quash (DN 390) with this Court. (DN 427 at 29-30.) Gallagher
did not instruct Walker to stop any of his searches. (Id. at 30.) Gallagher notified Iceberg of the
21

motion to quash. (Id.; DN 406 at 7.) According to Gallagher, she told Iceberg that they would
continue the “preservation efforts” and that plaintiffs would not look at any of the documents or
results of the searches until the Motion to Quash had been resolved. (DN 427 at 30, 32, 62; see
also DN 406 at 7-8.) Gallagher testified that Iceberg agreed. (DN 427 at 109-11; see also DN
406 at 7-8.)
Over the course of January 26-27, 2017, Walker conducted the following searches: (1)
searches on the financial server also known as the Timberline Server; (2) searches on the e-mail
server also known as the Outlook Server, specifically of the e-mail accounts of Kapsalis and
Glenn Selby; (3) search for “CCCG” and possibly other key words on the network share or file
server. (DN 427 at 188-90; see also DN 406 at 8-9; DN 407 at 3-5 [Walker Decl.]). The results
of those searches were exported to an external hard drive; Walker has custody of that external
hard drive. (DN 427 at 188-90; see also DN 407 at 3-5.) Walker was able to make a copy of the
Timberline Server, which was copied to an NAS external hard drive; Iceberg has custody of that
hard drive. (DN 427 at 190-91; see also DN 407 at 2 [Walker Decl.].) Walker attempted to
make a copy of the file server as well, but had trouble doing so. (DN 427 at 198-200; DN 407 at
2, 4 [Walker Decl.].) Iceberg was ultimately successful in making a copy of the file server; the
copy of the file server is on the same NAS external hard drive that contains a copy of the
Timberline Server. (DN 427 at 198.)
With respect to the searches of Kapsalis’s e-mail account, Gallagher testified that “[w]e
did not want to have our search results yield privileged information or potentially privileged
information.” (Id. at 60-62; see also DN 406 at 8.) Therefore,

e-mails

containing

e-mail

extensions for the attorneys representing Kapsalis, Express, and Sterling were excluded as well
22

as e-mails containing the word, “privileged.” (DN 427 at 60-62; DN 407 at 3 [Walker Decl.].)
No similar restrictions were made for the search of Selby’s e-mail account. (DN 427 at 61.)
Although not aware at the time of the search of the e-mail server, Gallagher testified the e-mail
address that she used for J. Clark Martin, an attorney for Sterling, was not the one that he
typically used for communications in this matter. (Id. at 60-61.) In other words, the e-mail
address that Martin used for communications with respect to this litigation was not excluded
from the search of Kapsalis’s e-mail account.
Gallagher testified that plaintiffs did not state in their response to the Motion to Quash,
which was filed on January 27, 2017, that any searches had been conducted. (Id. at 36, 44; see
also DN 391 [response to Motion to Quash].) To Gallagher’s knowledge, plaintiffs’ counsel did
not tell Kapsalis’s counsel on January 26 or 27, 2017 that searches were being conducted. (DN
427 at 40.)
At the evidentiary hearing, Gallagher testified that the purpose of the subpoena issued to
the Express bankruptcy trustee was “to generally obtain discovery that the Court had previously
ordered but which [plaintiffs] were not able to obtain because of the Express bankruptcy.” (Id. at
26.) Gallagher also testified that the “primary intent [of the subpoena] was to preserve . . . . The
secondary intent was to look for clarification on the production made by Express in October of
2016.” (Id. at 58.) The Court then asked, “Whether you call it clarification or anything else, the
intent was to look at the documents that were on the server; is that correct?” and Gallagher
replied, “Yes.” (Id.) Additionally, Gallagher testified as follows:
Q. My question was were any of these requests directed to
obtain information to use in the bankruptcy forum as opposed to
in this court or in the lawsuit against Sterling?
23

A. I believe that these were all directed -- these all related
to the current case with regard to Kapsalis.
Q. In this court?
A. In this court. Sorry.
Q. So is the answer “no,” the purpose of the subpoena was not
to obtain information for use in the bankruptcy forum?
A. Correct. It was not to obtain it for use in the bankruptcy
forum, but some of the requests were related to the fact that
Express had declared bankruptcy.
(Id. at 73.) Gallagher testified that plaintiffs did not file a motion to extend the discovery
deadline. (Id. at 47-48.)
Gallagher further testified, “The position we are taking is that we had an Express
bankruptcy trustee who was willing to produce the documents without objection. The subpoena
was negotiated with the trustee, who never raised any concerns about burden or proportionality.”
(Id. at 53.) Gallagher believed the February 26, 2016 memorandum opinion and order (DN 204)
only applied to Sterling and that it was appropriate to ask someone else the same question. (Id.
at 51-54.)
II.

DISCUSSION
After a careful review of the briefs and the record, the Court concludes that the issuance

of the subpoena to the Express bankruptcy trustee violated the Court’s March 2, 2016 scheduling
order and that plaintiffs should be sanctioned under Rule 16 of the Federal Rules of Civil
Procedure as a result; the Court will explain why below. In doing so, the Court will also address
the alarming conduct of plaintiffs’ counsel, most notably that of Moore. Additionally, the Court

24

will explain why it will not consider whether the subpoena at issue complied with Rule 45 and
address Local Rule 37.1’s meet and confer requirement.
A.

Sanctions Under Rule 167
1.

Rule 16

Pursuant to Rule 16 of the Federal Rules of Civil Procedure, “On motion or on its own,
the court may issue any just orders, including those authorized by Rule 37(b)(2)(A)(ii)–(vii), if a
party or its attorney . . . fails to obey a scheduling or other pretrial order.” Fed. R. Civ. P.
16(f)(1)(C). The sanctions available in Rule 37(b)(2)(A)(ii)-(vii) include:
(ii) prohibiting the disobedient party from supporting or opposing
designated claims or defenses, or from introducing designated
matters in evidence;
(iii) striking pleadings in whole or in part;
(iv) staying further proceedings until the order is obeyed;
7

The Court will briefly address its authority to sanction a party under Rule 16. Magistrate judges are statutorily
authorized under 28 U.S.C. § 636)(b)(1)(A) to “hear and determine any pretrial matter pending before the court”
subject to review by a district judge under the clearly erroneous or contrary to law standard. Indeed, pursuant to this
statutory provision, on May 14, 2015, this matter was referred to the undersigned for resolution of all litigation
planning issues, entry of scheduling orders, consideration of amendments thereto, and resolution of all nondispositive matters, including discovery issues. (DN 97.) Plaintiffs assert that, when a motion for sanction is
brought by a defendant and a third party, “it is unclear whether a magistrate judge has authority to issue sanctions . .
. .” (DN 438 at 32 n. 3.) As plaintiffs point out, however, at least one district court in the Western District of
Kentucky has held that a magistrate judge has the authority to impose sanctions sua sponte under Rule 16. Holly v.
UPS Supply Chain Sols., Inc., No. 3:13-CV-980-DJH-CHL, 2015 WL 4776904, at *3 (W.D. Ky. Aug. 12, 2015)
(finding settlement report and order sanctioning defendant sua sponte under Rule 16 was a non-dispositive pretrial
matter). This holding is in accord with holdings of other courts. See, e.g., Grenion v. Farmers Ins. Exch., No. CV
12-3219 JS GRB, 2014 WL 1284635, at *4 (E.D.N.Y. Mar. 14, 2014) (“Because sanctions pursuant to Rule 16(f)
fall within the scope of pretrial matters, magistrate judges are well within their authority to impose such sanctions.”);
Ewald v. Royal Norwegian Embassy, No. 11-CV-2116 SRN/SER, 2014 WL 5840566, at *2 (D. Minn. Mar. 7, 2014)
(applying clearly erroneous or contrary to law standard to sanctions imposed by magistrate judge under Rule 16);
CLM Partners LLC v. Fiesta Palms, LLC, No. 2:11-CV-01387-PMP, 2013 WL 6388760, at *3 (D. Nev. Dec. 5,
2013) (“Furthermore, courts within the Ninth Circuit have found that a magistrate judge's authority extends to the
imposition of monetary sanctions for the failure of a party to comply with the magistrate judge's settlement
conference order [under Rule 16].”) (collecting cases); cf. Massey v. City of Ferndale, 7 F.3d 506, 510-11 (6th Cir.
1993) (holding that a magistrate judge does not have authority to rule upon a post-dismissal motion for sanctions,
fees, and costs). The undersigned was expressly authorized to enter and amend scheduling orders in this matter.
Plaintiffs violated a scheduling order. Therefore, the Court has authority to, sua sponte, sanction plaintiffs under
Rule 16 for violating that scheduling order.

25

(v) dismissing the action or proceeding in whole or in part;
(vi) rendering a default judgment against the disobedient party; or
(vii) treating as contempt of court the failure to obey any order
except an order to submit to a physical or mental examination.
Fed. R. Civ. P. 37 (b)(2)(A)(ii)-(vii). Additionally, Rule 16 states, “Instead of or in addition to
any other sanction, the court must order the party, its attorney, or both to pay the reasonable
expenses—including attorney's fees—incurred because of any noncompliance with this rule,
unless the noncompliance was substantially justified or other circumstances make an award of
expenses unjust.” Fed. R. Civ. P. 16(f)(2).
2.

Plaintiffs Violated the March 2, 2016 Order

In the March 2, 2016 order, the Court stated, among other things, that the fact discovery
deadline was April 1, 2016 and that all discovery that was outstanding must be completed by that
date. (DN 208.) The Court further stated, “No additional discovery is permitted.” (Id.) “A
subpoena that seeks documents under Federal Rule of Civil Procedure 45 is a discovery device
subject to the same deadlines as other forms of discovery set forth in the court's scheduling
order.” Fabery v. Mid-S. Ob-GYN, No. 06-2136 D/P, 2000 WL 35641544, at *1 (W.D. Tenn.
May 15, 2008); see also Martin v. Oakland Cty., No. 2:06-CV-12602, 2008 WL 4647863, at *2
(E.D. Mich. Oct. 21, 2008) (“[A] a subpoena cannot be issued once discovery has closed.”). The
issuance of the subpoena to the Express bankruptcy trustee on January 23, 2017 in conjunction
with this action was “additional discovery” that clearly violated the March 2, 2016 scheduling
order.
Plaintiffs argue that the discovery deadline was April 1, 2016, but “neither Defendant nor
Express complied with that date, as evidenced by the several orders entered after April 1, 2016
26

compelling the production of documents and depositions.” (DN 418 at 4 [emphasis added].)
Plaintiffs further state, “The Court has both permitted and ordered discovery following the April
1, 2016 date in recognition of the fact that discovery from Kapsalis, Express, and Sterling
remained outstanding well after that date, and in fact remains outstanding as of today.” (Id. at 7
[emphasis added].)

The specific examples that plaintiffs cite are (1) the September 15, 2016

memorandum opinion and order (DN 352) issued by the Court regarding the Second Motion to
Compel; (2) plaintiffs advising the Court and Kapsalis during a December 13, 20168 telephonic
conference call that they were seeking information from the Express bankruptcy trustee; (3) the
December 8, 2016 memorandum opinion and order (DN 381) ordering Kapsalis to produce hash
value information; and (4) the pending “motion for discovery”9 from Sterling. (DN 418 at 7-8.)
Thus, plaintiffs conclude, that “[u]nder these circumstances, to suggest that the Court had a
blanket prohibition on any discovery occurring after April 1, 2016 is false.” (Id. at 8.)
Plaintiffs’ argument is a troubling mischaracterization of events. As an initial matter, the
April 1, 2016 deadline explicitly and specifically applied to outstanding discovery, that is,
discovery that had already been served by the parties. The order – issued on March 2, 2016 –
specifically and clearly stated that no additional discovery was permitted.

Therefore, no

additional fact discovery was permitted to be served by any party. Moreover, even if one were
to somehow construe the March 2, 2016 order as stating that no additional fact discovery was
permitted after April 1, 2016, the issuance of the subpoena on January 23, 2017 – nine months
8

In their response to Sterling’s brief regarding the Motion for Discovery, plaintiffs state that the date of the
telephonic status conference was December 9, 2016; however, according to court records and Gallagher’s own
testimony at the evidentiary hearing, the conference was actually held on December 13, 2016. (DN 385; DN 427 at
120.)
9

Sterling has not filed a motion for discovery. The Court assumes that plaintiffs actually mean the pending motion
to quash filed by Sterling in the Southern District of Texas that was transferred to this Court and remains pending.

27

later – was still a clear violation of the order. Additionally, each specific event referenced by
plaintiffs fails to support their position.
First, plaintiffs’ argument that the Court re-opened discovery by granting in part
Plaintiff’s own motion to compel, is audacious but unavailing.

The September 15, 2016

memorandum opinion and order in question addressed discovery requests that had been served
by plaintiffs on November 14, 2014, October 9, 2015, and October 27, 2015. (DN 352 at 1-2
[quoting DN 196-1 at 2, 6].) The September 15, 2016 memorandum opinion and order simply
ordered Express to respond, or clarify its responses, to some of those discovery requests –
requests that had been served in 2014 and 2015. It in no way permitted any additional discovery
to be served. Indeed, all that was essentially left to be done after the March 2, 2016 order, as far
as fact discovery was concerned, was for the Court to referee any discovery dispute regarding
outstanding discovery – that is, discovery that had been served prior to March 2, 2016 – as well
as issue rulings on any pending discovery motions. (See, e.g., DN 385 [December 14, 2016
order stating, “The Court advised that rulings on the remaining motions will be forthcoming.”].)
In the September 15, 2016 memorandum opinion and order, the Court recounted the
history of the proposed Agreed Order (DN 99) and described how plaintiffs were actively
involved in creating the search parameters memorialized in same. (DN 352, p. 13.) The Court
stated that plaintiffs “are not entitled to yet another bite at the apple now,” meaning that plaintiffs
were not entitled to yet another search of the Express server. (Id.) The Court concluded, “While
the scope of discovery is liberal, there are limits and those limits now require the Court to
consider proportionality to the needs of the case, including the amount in controversy and
whether the burden or expense of the proposed discovery outweighs its likely benefit. Plaintiffs
28

have not demonstrated that a search of the Express server would likely uncover documents that
have not previously been or could have been discovered.” (Id. at 13-14 [emphasis added].) In
other words, the Court concluded that no additional search of the Express server should occur in
conjunction with the discovery requests at issue. To suggest that the September 15, 2016
memorandum opinion and order authorized additional discovery beggars belief.
Second, while the December 13, 2016 telephonic status conference was not on the record,
plaintiffs’ characterization of it as the Court or Kapsalis giving implicit permission for them to
conduct additional discovery in this action or to cause the subpoena to be issued to the Express
bankruptcy trustee in conjunction with this action is erroneous. At a minimum, it is clear that the
order arising out of the December 13, 2016 conference said nothing about permitting additional
fact discovery in this action, nor did it purport to re-open fact discovery.
Third, the December 8, 2016 memorandum opinion and order (DN 381) addressed
plaintiffs’ Motion to Compel Cobb (DN 260); the Motion to Compel Cobb concerned the expert
report of Cobb that was disclosed on April 22, 2016, the date of Kapsalis’s expert disclosure
deadline. (See DN 208 [setting forth expert disclosure deadlines].) The Court ordered, pursuant
to Rule 26(a)(2)(B)(ii), production of a listing of the hash values of every file on the Express
server because it considered that listing “facts or data” relied upon by Cobb in forming his expert
opinion. (DN 381 at 6-7.)

In no way can mandating the production of the listing of the hash

values pursuant to Rule 26(a)(2)(B)(ii) be construed as permitting plaintiffs to serve additional
fact discovery or the Court “ordering” additional discovery. Moreover, the Court therein once
again expressly rejected yet another request from plaintiffs to copy or access the Express server.
(Id. at 8.)
29

Fourth, in no way can the motion to quash filed by Sterling in the Southern District of
Texas, which has been transferred to this district, be construed as authorizing additional
discovery in contravention of March 2, 2016 order.

In fact, the motion to quash was filed by

Sterling with respect to a subpoena that plaintiffs caused to be issued to Sterling on March 7,
2016 – after the March 2, 2016 order stating that no additional fact discovery was permitted. See
Exhibit 8 to Sterling’s Rule 45 Motion to Quash March 7, 2016 Subpoena Served on Sterling by
Respondents, and for Sanctions, The Sterling Group, L.P., Misc. Action No. 3:17-mc-1-CRS
(W.D. Ky. Nov. 30, 2016), ECF No. 1-8 (3/7/2016 subpoena to Sterling).
In sum, the March 2, 2016 order did exactly what it purported to do – prohibit any
additional fact discovery to be served by any party.

A court order regarding outstanding

discovery requests served in 2014 and 2015 was not “additional discovery.” A court order
regarding supplementation of a timely disclosed expert report was not “additional discovery.” A
motion to quash filed by a non-party regarding a subpoena issued after the March 2, 2016 order
was not “additional discovery.”

Most importantly, none of these orders or events, either

implicitly or explicitly, permitted more discovery to be served by any party. As such, Rule 16(f)
mandates an award of attorneys’ fees unless plaintiffs can show that the noncompliance was
substantially justified or other circumstances make an award of expenses unjust.
3.

Plaintiffs’ Failure to Adhere to the March 2, 2016 Order Was Not
Substantially Justified.

Plaintiffs’ failure to obey the March 2, 2016 order was not substantially justified. In yet
another example of alarming behavior on the part of plaintiffs’ counsel, the justification for the
issuance of the January 23, 2017 subpoena has been a continuously moving target. Plaintiffs’

30

justifications for causing the subpoena to be issued have devolved into a game of judicial Whaca-moleTM.
a.

Plaintiffs’ Justifications for Causing the Subpoena to be
Issued.

In response to the Motion to Quash (DN 390), plaintiffs stated that the subpoena was
issued out of the Northern District of Oklahoma “to preserve evidence that might be on the
Express servers.” (DN 391 at 2; see also id. at 4 [“Plaintiffs acknowledge that they issued the
subpoena on fairly short notice, however, they did so in order to preserve documents prior to the
sale of the Express Bankruptcy Estate.”].)
Then, during the February 8, 2017 telephonic conference, Moore again stated that the
subpoena issued out of the Northern District of Oklahoma.

(DN 401 at 6.)

Moore also

suggested that the subpoena to the Express bankruptcy trustee was issued to protect plaintiffs’
rights as creditors. Moore stated that “[i]n large measure . . . [plaintiffs’] steps were guided by
bankruptcy counsel, because [plaintiffs] are now a creditor to the bankrupt estate [of Express].”
(Id. at 25.)

Moore further stated that everything plaintiffs had done was “consistent with the

bankruptcy code and permissible . . . . Because I think there’s a significant disconnect between
the understanding of what’s actually gone on here, and it arises as a result of the position of
Express as a bankrupt entity.” (Id. at 26.)
In the response to the Motion for Discovery (DN 398), plaintiffs’ argument regarding
justification for issuance of the January 23, 2017 subpoena also centered on their rights as
creditors in the Express bankruptcy action. See, e.g., DN 405 at 4 [“In this case, the requests
related to the Plaintiffs’ claims against the Debtor, as well as possible assets of the Debtor (such
as insurance) or bankruptcy actions (such as avoidance actions) that might be available to pay
31

creditors.”]; id. at 13 [“Bankruptcy Law Allows Plaintiffs Broad Discovery of the Debtor as
Creditors in the Bankruptcy Case”]; id. at 14 [“The scope of discovery in bankruptcy is very
broad.”]; id. at 15 [“As creditors in the bankruptcy case, Plaintiffs are entitled to the broad
discovery of the Debtor provided for under bankruptcy law and rules.”]; id. [“The Subpoena
seeks information that falls squarely within the scope of a creditor’s permissible discovery of a
debtor in bankruptcy.”]; id. at 18 [“The Plaintiffs acted in accordance with the exigencies of the
circumstances, with full and fair notice to Defendant, and in accordance with their rights under
bankruptcy law.”].) Plaintiffs also asserted that, “[i]n addition to their broad discovery rights
under bankruptcy law, all parties to the litigation had an interest in having information relating to
the litigation preserved.” (Id. at 16.)

Plaintiffs then admitted that they had in fact caused the

subpoena to be issued out of this Court: “The fact that the subpoena was issued out of this court
instead of the Bankruptcy Court is unfortunate but should not change the result in this case: first,
because Plaintiffs had a right to the information under bankruptcy law, second, because there
was an imminent need to preserve such information arising from the Trustee’s sale, and third,
because when Plaintiffs received notice of Defendant’s objection, they simply preserved the
information.” (DN 405 at 23 [emphasis added].)
Another nascent justification alluded to in plaintiffs’ response to the Motion to Discovery
was that Express had (allegedly) not complied a court order regarding discovery. Specifically,
plaintiffs asserted that Express had not complied with the September 15, 2016 memorandum
opinion and order (DN 352). Plaintiffs stated, “This Court issued an order dated September 15,
2016 compelling Express to produce documents and information. Express filed for bankruptcy in
November without having complied with the order.”
32

(DN 405 at 21 [emphasis added].)

Plaintiffs yet again attempt to rewrite history to suit their own ends. In the September 15, 2016
memorandum opinion and order, the Court ordered Express to comply by October 12, 2016 (DN
352 at 29); on October 14, 2016, Express filed a notice (DN 364) with the Court stating that it
had complied with the order and served supplemental responses on plaintiffs’ counsel on
October 12, 2016.
In plaintiffs’ response to Sterling’s memorandum in support of the Motion for Discovery,
they expound on this justification, stating, “Express was in violation of this Court’s September
2016 order compelling production of documents as of the date it filed for bankruptcy, as
reflected in a continuous stream of emails between counsel for Express and counsel for Plaintiffs
regarding same (attached hereto as Exhibit A).” (DN 418 at 2 [emphasis added].) However, a
review of Exhibit A does not support this assertion. The first page of Exhibit A consists of an email from counsel for Express to counsel for plaintiffs with an attachment called, “Supplemental
Disclosures Pursuant to 9-15-16-Order.” (DN 418-1 at 2.) In other words, the first page shows
that Express complied, or at least attempted compliance, with the September 15, 2016
memorandum opinion and order. The rest of Exhibit A consists of correspondence between
Moore and counsel for Express, none of which evidences a wholesale failure on the part of
Express to comply with the September 15, 2016 memorandum opinion and order.
Rather, in an e-mail dated October 13, 2016, Moore wrote, in part, “I have gone through
the responses minimally. I have a few questions regarding the new documents that you
produced. . . . I also have some concern about the designation. I have to be able to share the
information with at least someone from my client in order to understand its relevance.” (DN
418-1 at 11 [emphasis added].)

Moore further wrote, in part, on October 25, 2016, “As
33

requested, it is critical for me to determine the relevance of the information recently provided to
be able to share it with one or more approved reviewers at Babcock . . . . Will you agree to allow
me to share the recently produced data from Salesforce with them?” (Id. at 17 [emphasis
added].) And finally, on October 31, 2016, Moore wrote, in part,
I am sorry to be a nudge on this issue, but I really need to be able
to talk openly with my client about the sales that are reflected on
EGH000608-EGH000616. Can you please let me know if you will
agree that the Reviewers in the Agreed Order can be shown
documents marked Attorneys’ Eyes Only?
Also, if you have back up documents for the sales reflected on p.
EGH00610 where the customer is listed as Vogt Power
International, we formally request that they be produced.
Finally, as we discussed in our telephone conference of October,
please also provide a description of the search protocol used for
purposes of preparing Express’ response in paragraph 1 of the
Supplemental Disclosures.

(Id. at 18.) While plaintiffs may have desired additional documents or information, clarification
regarding certain responses, or to discuss a different designation for the documents, these e-mails
are evidence that Express did, in fact, produce documents and/or information in response to the
September 15, 2016 memorandum opinion and order. Thus, plaintiffs’ assertion that Express did
not comply with the September 15, 2016 memorandum opinion and order is, at a minimum,
misleading.
The next mole emerges in plaintiffs’ response to the motion to quash filed by Sterling in
the Northern District of Oklahoma. (See DN 410-1.)

In addition to claiming that they were

owed discovery by Express, plaintiffs asserted that “some of the documents subpoenaed will
soon be subject to discovery in a separate action filed by [plaintiffs] against Sterling . . . .” (DN

34

410-1 at 3; see also id. at 11 [“The evidence being preserved (without being reviewed) is also
highly relevant to claims made by [plaintiffs] against Sterling . . . .”]) Plaintiffs also, once again,
asserted that they were taking steps to “preserve evidence.” (Id. at 10.)
And finally, at the March 8, 2017 evidentiary hearing, the truth emerged. Gallagher
testified that the purpose of the subpoena issued to the Express bankruptcy trustee was for use in
the current matter before the Court, “not to obtain it for use in the bankruptcy forum . . . .” (DN
427 at 73.)

Gallagher further testified that the purpose of the subpoena was “to obtain

information for use in the Kapsalis case” as opposed to the lawsuit filed against Sterling. (DN
427 at 77.) Specifically, an exchange with counsel for Sterling and Gallagher went as follows:
Q. And that's consistent with your testimony that the purpose for
you being out there on the 26th and the 27th -- and I heard you
about preservation -- was to obtain evidence for the Kapsalis
lawsuit and to an extent the Sterling lawsuit, correct?
A. I don't know if it's to obtain evidence or -- if that's the right -- I
mean, a lot of the requests dealt with issues of damages and an
eventual judgment. I don't know if that constitutes evidence or not.
But it was to obtain information for use in the Kapsalis case.
Q. And in the Sterling case?
A. The subpoena was issued in the Kapsalis case. It was really for
the Kapsalis case. Sterling has its own deep pockets. The issue was
a judgment in this particular case and whether or not there would
be someone to pay for it.
(Id. at 77-78 [emphasis added]; see also id. at 118 [Q: “The purpose of going to secure these
documents from Express was because you knew that Express had documents that were
potentially relevant to this litigation; is that right? A: Correct.”].)
In sum, plaintiffs’ justification for the issuance of the subpoena to the bankruptcy trustee
has ranged from preservation of evidence to Express’s alleged noncompliance with the
35

September 15, 2016 memorandum opinion and order to protecting their rights as creditors in the
bankruptcy action to obtaining evidence to use in the lawsuit against Sterling to obtaining
discovery for use in this matter.

None of these reasons provide substantial justification for

causing the subpoena to be issued.
b.

Plaintiffs’ Proffered Justifications Do Not Have Merit.

First, to the extent that plaintiffs wanted to preserve evidence on the Express servers that
were to be sold and/or protect their rights as creditors in the bankruptcy proceeding, they could
have filed a motion in the bankruptcy court; at the time of the March 8, 2017 evidentiary hearing,
they had not. (See DN 427 at 168-69, 172.) The bankruptcy code may, as plaintiffs assert,
permit creditors almost unfettered access to a debtor’s books and records; however, this Court is
not a bankruptcy court. Thus, contrary to plaintiffs’ assertion, the fact that the subpoena issued
out of this Court instead of the bankruptcy court makes every difference and does, indeed,
change the result. There was an explicit order of this Court prohibiting further fact discovery;
there was an automatic stay imposed against Express. Plaintiffs chose to ignore all of these
things and attempted, under the guise of being creditors in a bankruptcy proceeding, to serve
additional discovery in this matter.10
Second, it is clear that Express did comply, at least in part, with the September 15, 2016
memorandum opinion and order. As demonstrated, plaintiffs’ evidence of non-compliance is
10

In the response to the Motion for Discovery, plaintiffs took issue with Kapsalis’s assertion that he had a personal
right or privilege in the Express documents. (DN 405 at 23.) Plaintiffs argued that Kapsalis “made no effort to stop
or condition the sale of these assets [i.e., Express’s personal property], or to otherwise protect the information that it
now vaguely describes as ‘privileged.’” (Id. at 24.) “If Defendant truly believed this information was confidential,
he would have taken some action to protect it in the bankruptcy court or with the Trustee; he did neither . . . . Even if
Defendant had any legitimate claim that such information was privileged, that claim was lost when the third party
took possession and control of the computers, servers, without objection by Defendant.” (Id. at 24-25.) The Court
finds it ironic that plaintiffs fault Kapsalis for failing to take action in the bankruptcy court when, as of the March 8,
2017 evidentiary hearing, they had not taken any action in the bankruptcy proceeding. If plaintiffs were truly
attempting to protect their rights as creditors, they should have taken action in that forum.

36

weak at best. Furthermore, plaintiffs had not raised on the record any issues with Express’s
production until after causing the subpoena to be issued.
Third, to the extent plaintiffs sought discovery pertinent to the action filed against
Sterling, they should have done so within the confines of that action.
This leaves the sole remaining claimed reason that plaintiffs caused the subpoena to be
issued to the Express bankruptcy trustee – to obtain discovery in this matter. But even if the
subpoena was issued to obtain more discovery in this matter, the deadline for discovery had long
past, this Court had explicitly ruled that no further discovery was to be had, and plaintiffs had not
filed any motion seeking to re-open discovery. By causing the subpoena to be issued, plaintiffs
ignored the discovery deadline and attempted an end-run around this Court’s orders.
Accordingly, the very issuance of the subpoena was odious.
Additionally, as demonstrated in the chart below, the subpoena sought several categories
of documents and/or information that the Court had specifically ruled were off limits or that had
to be limited in scope. This chart summarizes discovery requested by plaintiffs in the course of
this litigation, the Court’s orders regarding same, and the requests made in the January 23, 2017
subpoena.

37

PLAINTIFFS’ DISCOVERY REQUESTS

COURT
ORDER
REGARDING
DISCOVERY
REQUESTS

Request No. 6: Any and all
communications between or
among you and any agents,
attorneys, servants, employees,
successors and Black & Veatch
and any agents, attorneys,
servants,
employees,
successors of Black & Veatch
from April 11, 2013 through
the present.

December 30, 2015
memorandum
opinion and order
(DN 158) denied
plaintiffs’ Motion to
Compel
Express,
including
these
requests, in full.

Request No. 8: Any and all
communications between or
among you and any agents,
attorneys, servants, employees,
successors and Calpine and any
agents, attorneys, servants,
employees,
successors
of
Calpine from April 11, 2013
through the present.
Request No. 10: Any and all
communications between or
among you and any agents,
attorneys, servants, employees,
successors and Fluor and any
agents, attorneys, servants,
employees, successors of Fluor
from April 11, 2013 through
the present.
Request No. 13: Any and all
communications between or
among you and any agents,
attorneys, servants, employees,
successors and Siemens and
any agents, attorneys, servants,
11

Glenn Selby was an employee of Express. (See DN 427 at 61.)

38

DOCUMENTS
SOUGHT
BY
PLAINTIFFS
IN
JANUARY 23, 2017
SUBPOENA
28.
Communications
between Glenn Selby11
and any representative
or employee of Calpine,
Black & Veatch, Fluor,
Siemens and LG&E
from 2013 through
2016.

employees,
successors
of
Siemens from April 11, 2013
through the present.
Request No. 15: Any and all communications
between or among you and any agents,
attorneys, servants, employees, successors and
LG&E and any agents, attorneys, servants,
employees, successors of LG&E from April
11, 2013 through the present.
Request No. 21: Any and all documents
concerning the performance of Stephen
Kapsalis, including but not limited to, any
performance reviews conducted by Express,
Express’s Board of Directors or the Sterling
Group.

December 30, 2015 6. A copy of Kapsalis’
memorandum
personnel file.
opinion and order
(DN 158) denied
plaintiffs’ Motion to
Compel
Express,
including
this
request, in full.

Request 1:
All correspondence (either
electronic or otherwise) between or among
Kevin Garland, Gary Rosenthal and/or Brad
Staller and Stephen Kapsalis from December
1, 2012 to the present that has not previously
been produced.

Feb.
26,
2016
memorandum
opinion and order
(DN 204) granted
motion to quash the
subpoena
that
included this request.

33.
Email
correspondence
between Stephen T.
Kapsalis and Kevin
Garland from 2013
through 2016 and/or
access to Kapsalis’
email account on the
Express server.
34.
Email
correspondence
between Stephen T.
Kapsalis and Gary
Rosenthal from 2013
through 2016.
35.
Email
correspondence
between Stephen T.
Kapsalis and Brad
Staller
from
2013
through 2016.

39

Request 6:
All correspondence (either
electronic or otherwise) between Stephen
Kapsalis and the Board of Directors for
Express Group Holdings from December 1,
2012 to the present that has not previously
been produced.

Feb.
26,
2016
memorandum
opinion and order
(DN 204) granted
motion to quash the
subpoena
that
included this request.

38.
Email
correspondence
between Stephen T.
Kapsalis
and
the
Express
Board
of
Directors from 2013
through 2016.

Request 12: Any and all documents (either
electronic or otherwise) concerning Stephen
Kapsalis’ performance as Chief Executive
Officer of Express.

Feb.
26,
2016 6. A copy of Kapsalis’
memorandum
personnel file.
opinion and order
(DN 204) granted
motion to quash the
subpoena
that
included this request.

Request 17: A copy of any joint defense Feb.
26,
2016
agreement between and/or among Stephen memorandum
Kapsalis, Express and Sterling.
opinion and order
(DN 204) granted
motion to quash the
subpoena
that
included this request.

15. Copies of any joint
defense
agreements
between Express Group
Holdings and Stephen
T. Kapsalis.

Third Request for Production 1:
All
correspondence
(either
electronic
or
otherwise) between or among Kevin Garland,
Gary Rosenthal and/or Brad Staller and
Stephen Kapsalis from March 15, 2013 to the
present that has not previously been produced.

33.
Email
correspondence
between Stephen T.
Kapsalis and Kevin
Garland from 2013
through 2016 and/or
access to Kapsalis’
email account on the
Express server.

In the Sept. 15, 2016
memorandum
opinion and order
(DN 352), the Court
stated, “Although the
Court agrees that this
request is overbroad
and not limited in
scope, Express claims
that it has produced
responsive
documents.
Therefore, the Court
orders Express to
either (1) produce
correspondence
40

16. Copies of any joint
defense
agreement
between Express Group
Holdings
and The
Sterling Group.

34.
Email
correspondence
between Stephen T.
Kapsalis and Gary
Rosenthal from 2013
through 2016

regarding Babcock,
Vogt
Power,
or
HSRGs
and
aftermarket services
between
Kevin
Garland,
Gary
Rosenthal
and/or
Brad Staller and
Stephen
Kapsalis
from March 15, 2013
to April 11, 2014; or
(2) identify by Bates
number documents
that
have
been
produced that are
responsive to same.”
(Id.
at
23-24
[emphasis added].)
Third Request for Production 2:
All
correspondence
(either
electronic
or
otherwise) between Stephen Kapsalis and the
Board of Directors for Express Group
Holdings from March 15, 2015 to the present
that has not previously been produced.

In the Sept. 15, 2016
memorandum
opinion and order
(DN 352), the Court
stated, “Again, while
the Court agrees that
this
request
is
overbroad and not
limited in scope,
Express claims that it
has
produced
responsive
documents.
Therefore, the Court
orders Express to
either (1) produce
correspondence
regarding Babcock,
Vogt
Power,
or
HSRGs
and
aftermarket services
between Kapsalis and
the Express Board of
Directors from March
15, 2013 to April 11,
41

35.
Email
correspondence
between Stephen T.
Kapsalis and Brad
Staller
from
2013
through 2016.
40.
Preservation of
Stephen T. Kapsalis’
email box pending the
outcome of the BPI /
Kapsalis litigation.

38.
Email
correspondence
between Stephen T.
Kapsalis
and
the
Express
Board
of
Directors from 2013
through 2016.
40.
Preservation of
Stephen T. Kapsalis’
email box pending the
outcome of the BPI /
Kapsalis litigation.

2014; or (2) identify
by Bates number
documents that have
been produced that
are responsive to
same.” (Id. at 24
[emphasis added].)

As a final matter, it bears mention that the issuance of, and searches conducted pursuant
to, the subpoena went far beyond a violation of a scheduling order. A stay had been issued in
this matter against Express. The Court had repeatedly denied plaintiffs’ attempts to access
(again) the Express servers. Fact discovery had long closed. And under the guise of protecting
itself against the impending sale of Express’s servers, plaintiffs caused a subpoena to be issued
out of this Court to obtain discovery in conjunction with this action. In doing so, plaintiffs
sought what was essentially unfettered access to Express’s servers – servers that plaintiffs
themselves believed might contain privileged information. (See DN 427 at 60-61, 96, 98, 109.)
Moreover, while plaintiffs asserted that they had rights as creditors in the bankruptcy proceeding
against Express – a fact that the Court certainly does not dispute – at the time of the March 8,
2017 evidentiary hearing, they had failed to act within the bankruptcy proceeding to protect their
rights. Plaintiffs’ own bankruptcy counsel Craige testified that the subpoena was not issued in
conjunction with the bankruptcy action and had nothing to do with a 2004 examination. (DN
427 at 180-81.)

Plaintiffs have failed to offer any valid justification for their actions.

Consequently, the Court finds that plaintiffs’ actions in causing the subpoena to be issued to the
Express bankruptcy trustee and conducting searches with respect to same were not substantially
justified.
42

4.

An Award of Attorneys’ Fees and Expenses and Destruction of
Information Obtained Pursuant to the Subpoena is Not Unjust.

The Court finds appropriate an award of reasonable attorneys’ fees and expenses to
Kapsalis for time spent (1) preparing the Motion for Discovery (DN 398) and Supplemental
Memorandum (DN 398-1) as well as the reply; (2) preparing for and attending the March 8, 2017
evidentiary hearing; and (3) preparing the proposed findings of fact and conclusions of law.
Such an award is not unjust as it directly correlates to time spent by Kapsalis’s attorneys in
response to the actions of plaintiffs in causing the January 23, 2017 subpoena to be issued in
violation of the March 2, 2016 order. The Court finds that awarding attorneys’ fees to Sterling
would not be just in this instance as they are not a party to this lawsuit.

Moreover, while

Sterling has argued that sanctions were appropriate, it did not request any of its attorneys’ fees or
expenses. (See DN 410.)
In addition to awarding attorneys’ fees and expenses to Kapsalis, the Court will also (1)
prohibit the use in this lawsuit of the information obtained by plaintiffs pursuant to the January
23, 2017 subpoena; and (2) order plaintiffs and/or Walker to destroy the hard drive containing
the results of the searches made pursuant to the January 23, 2017 subpoena, and any other device
or medium in which the data resulting from the searches may reside. Such a sanction is not
unjust as the information was obtained in violation of the Court’s March 2, 2016 order and well
after the time for fact discovery had ended. Furthermore, the subpoena was issued after the
District Judge had imposed a stay in this matter with respect to Express.
B.

The Conduct of Plaintiffs’ Counsel

The Court is greatly concerned with statements and representations made by plaintiffs’
counsel – and in particular, Moore – in conjunction with the various filings, conferences, and
43

hearings in this matter, including in conjunction with the issues raised in the Motion for
Discovery and Supplemental Memorandum.
Examples of such conduct date back before the Motion for Discovery was filed. For
example, in the brief supporting the Second Motion to Compel, which was signed by Moore,
plaintiffs stated that Express “refused to produce a single document or piece of discoverable
information” in response to the three sets of requests; plaintiffs later stated that “Express
nonetheless has refused to produce anything other than to direct Plaintiffs to 170,000 pages of
documents that are generally nonresponsive.” (DN 196-1 at 2, 6.)

These two statements cannot

both be correct.
In a hearing conducted by the Court on December 3, 2015, an attorney for Sterling
argued that a discovery request by plaintiffs for all monthly financial reports for Express that
were in Sterling’s possession was overly broad. The following exchanged occurred:
THE COURT: The one thing that I’ve heard -- and I'm not saying
it’s the only one -- but the one request that I’ve been told about that
I have trouble aligning with your description is a request for all of
their financial statements.
MS. MOORE: That’s not what we asked for, Your Honor, but if it
were, I will tell you that I am more than willing to sit down and
talk to them about a reasonable restriction, but we've just been told,
“no, you can’t have anything,” and that is the difference.
THE COURT: Well, Mr. Hovious was stating his position for the
court’s consideration. I don’t believe he was purporting to make
any rulings about what you were going to get.
MR. HOVIOUS: Request for Production Number 19, “All monthly
financial reports for Express in Sterling’s possession,” period, all
of them, no limitation in time, no limitation in type, no limitation
whatsoever, and that's consistent with everything that they have
sought in this last round of discovery.
44

THE COURT: And if what you just read is all of it, then also no
limit -- no connection to Kapsalis or diversion of business . . . .
MS. MOORE: Your Honor, that may be overly broad. Believe me,
as I said, there are plenty of others that are very, very much
tailored to Kapsalis and specific individuals that had
communications with Kapsalis. And the problem we have is that
it’s like flat out, “no, you're not getting anything,” instead of
saying, “we’ll give you ‘X’”. And we would be more than willing,
if they said, “We’ll give you the financial reports that dealt with
the before and after picture of Express on the development of
HRSG’s since Kapsalis started there."
THE COURT: Well, look, we -- and this is triggered, Ms. Moore,
by what you just said, but this is for everyone’s benefit. We all
need to be -- you-all need to be extremely careful about what you
say on this issue. We’re on the record for a reason and we’re doing
this in this courtroom for a reason instead of around my conference
table or by phone, and what you told me was that they are all
limited. And Mr. Hovious read me one that's not limited and your
response was, “Well, the rest of them are limited.”
(DN 151 at 55-56.)
Counsel for plaintiffs’ conduct reached a fever pitch after Express filed for bankruptcy.
For example, the Court is greatly concerned with plaintiffs’ characterization of the December 13,
2016 telephonic status conference in plaintiffs’ response to the motion to quash filed by Sterling
in the Northern District of Oklahoma. (DN 410-1.) Plaintiffs stated:
On December 13, 2016 the WDKY held a telephonic status
conference, during which counsel for [plaintiffs] notified the
WDKY and counsel for Kapsalis that [plaintiffs] attended the
meeting of creditors in the Express bankruptcy and were pursuing
documents from the Express Bankruptcy Trustee because they had
outstanding discovery requests with Express at the time of the
bankruptcy filing. No objection to this effort was raised by the
WDKY or counsel for Kapsalis.
(DN 410-1 at 9 [emphasis added].)

45

As the Court has mentioned, for plaintiffs to imply that the Court (or Kapsalis) gave
implicit permission for them to conduct additional discovery in this action or to cause the
subpoena to be issued to the Express bankruptcy trustee in conjunction with this action is
disingenuous. At a minimum, it is clear that the order arising out of the December 13, 2016 said
nothing about permitting additional fact discovery in this action, nor did it purport to re-open fact
discovery. Moreover, this appears to be the first (and possibly only) time that plaintiffs’ have
asserted that they informed the Court and Kapsalis during this telephonic conference that were
pursuing documents because they had outstanding discovery requests from Express. Plaintiffs
certainly did not file any motion before Kapsalis filed the Motion to Quash that stated that
Express had outstanding discovery. And, again, although this telephonic status conference was
not on the record, none of what plaintiffs assert is reflected in the order arising out of same.
The Court would also be remiss not to address the various misstatements made by Moore
with respect to the Motion to Quash. The Court recognizes that an attorney might inadvertently
make a misstatement – and that is possibly what occurred when Moore represented, in both the
response to the Motion to Quash (which she signed) and to the Court during the February 8, 2017
telephonic conference that the January 23, 2017 subpoena issued out of the Northern District of
Oklahoma. Nonetheless, this is exactly the type of careless representation that has permeated the
filings and proceedings in this matter. It evidences at best an extreme lack of care on the part of
plaintiffs’ counsel.
When speaking about the Motion for Discovery (DN 398) at the February 8, 2017
telephonic conference, Moore stated, “I mean, certainly there's no reason for discovery on Kelly
Gallagher or Lacey Walker. They've made very patently very clear in all the pleadings and will
46

do so in an affidavit, if necessary, that nothing was taken.” (DN 401 at 6 [emphasis added].)
This turned out to be simply untrue. Gallagher and Walker both testified at the evidentiary
hearing that the results of searches conducted on various Express servers were in fact
downloaded to an external hard drive and removed from the Express offices on January 27,
2017. (DN 427 at 26, 32-33, 51; see also DN 407 at 3 [Walker Decl.].) Contradictorily, Moore
herself also stated in the same telephonic conference that “information [] was taken.” (DN 401
at 19; see also id. at 19-20 [“With regard to other issues that may arise in the course of
bankruptcy proceedings that have nothing to do with this case or the information was that was
preserved, then I’m fine with it.”] [emphasis added].)
In another example of similar behavior, in the response to the Motion for Discovery,
plaintiffs asserted that “[p]rior to February 8, Defendant Kapsalis, apparently communicated via
ex parte email to either the Court or the clerk in connection with the motion for discovery and for
sanctions. See Transcript of Telephonic Conference held February 8, 2017, 23:22–24:3. Plaintiffs
have never seen any communications relating to the request to file the Motion for Discovery.”
(DN 405 at 9.) What the Court said was this:
And I’m going to further direct that you coordinate with Theresa via email. I know that you know this, but just last week we had an issue with
someone who didn’t know this. But your e-mails and any discussions
with Theresa should be limited to how to access the video conference and
where your person is going to be. We got a long, long e-mail about the
merits of a case from someone who didn’t understand that distinction.
(DN 401 at 23-24 [emphasis added].) The Court was referring to an incident that occurred in
another case, not this one. And, even if the transcript is unclear in that regard, it is does not lend
support for the very specific allegation lobbed by plaintiffs that counsel for Kapsalis had ex parte
communications with the Court regarding the Motion for Discovery and sanctions.
47

The Court would (yet again) be remiss to not point out several alarming representations
in plaintiffs’ response to the motion to quash filed by Sterling in the Northern District of
Oklahoma. First, plaintiffs asserted that “discovery in the Kapsalis matter is not over.” (DN
410-1 at 11.) As the Court has already stated, no party was permitted to serve additional
discovery after the March 2, 2016 order; all outstanding/served discovery was to be completed
by April 1, 2016.

Discovery had come to a close. That the Court ordered one party to

supplement or produce documents to already served discovery requests does not change this fact.
Second, plaintiffs stated that the Court’s February 26, 2016 memorandum opinion order
is “now moot because a subsequent narrowed subpoena was served on Sterling which is still an
open issue in the Kapsalis Action.” (DN 410-1 at 12.) The Court has never deemed its February
26, 2016 memorandum opinion and order moot due to the issuance of another subpoena served
on Sterling, nor is it moot for any other reason. On the contrary, that subpoena is the subject of a
pending motion to quash.
Third, plaintiffs asserted:
[T]he documents Sterling is asking this Court to deny to
Respondents are, in large measure, documents that should have
been produced long ago to Respondents in accordance with an
order compelling their production from Express Group Holdings,
LLC (“Express”)—a now bankrupt estate. Before Respondents
could obtain full compliance with that order, Express declared
bankruptcy. As a result, Respondents exercised their rights as a
creditor to obtain the documents from the Bankruptcy Trustee, who
had no objection to providing them. Sterling’s current motion is in
direct conflict with a valid order of the Western District of
Kentucky holding that the documents sought are relevant and
necessary to Respondents’ claims in the Kapsalis Action.
(Id. at 2-3 [emphasis in original]; see also id. at 15 [“Much of the information being preserved,
however, has already been compelled to be produced by order of the WDKY and is not subject to
48

being quashed by an interloping third party, like Sterling.”].) This is a mischaracterization of the
facts.
In the response to Sterling’s motion to quash, plaintiffs asserted that three categories of
documents in the January 23, 2017 subpoena “would contain documents that Express was
compelled to produce to [plaintiffs] on September 15, 2016.” (Id. at 13.) According to plaintiffs,
those categories in the subpoena included:
33. Email correspondence between Stephen T. Kapsalis and Kevin Garland from
2013 through 2016 and/or access to Kapsalis’ email account on the Express server.
34. Email correspondence between Stephen T. Kapsalis and Gary Rosenthal from
2013 through 2016.
35. Email correspondence between Stephen T. Kapsalis and Brad Staller from 2013
through 2016.
(Id. at 12.) However, a close look at the September 15, 2016 memorandum opinion and order
(DN 352) does not jibe with plaintiffs’ description.
In the September 15, 2016 memorandum opinion and order, the Court addressed
plaintiffs’ Third Request for Production 1, which sought “[a]ll correspondence (either electronic
or otherwise) between or among Kevin Garland, Gary Rosenthal and/or Brad Staller and Stephen
Kapsalis from March 15, 2013 to the present that has not previously been produce[d].” (DN 352
at 23 [second substitution in original].) The Court specifically stated:
Although the Court agrees that this request is overbroad and not
limited in scope, Express claims that it has produced responsive
documents. Therefore, the Court orders Express to either (1)
produce correspondence regarding Babcock, Vogt Power, or
HSRGs and aftermarket services between Kevin Garland, Gary
Rosenthal and/or Brad Staller and Stephen Kapsalis from March
15, 2013 to April 11, 2014; or (2) identify by Bates number
documents that have been produced that are responsive to same.
49

(Id. at 22-23 [emphasis added].) To say that the Court, in its September 15, 2016 memorandum
opinion and order, compelled Express to produce the same documents requested by the subpoena
is not accurate. (See 410-1 at 13 [stating that “Sterling is essentially asking this court for a re-do
on an issue that has already been determined by the WDKY”].) For one, the Court compelled
production, in part, because Express claimed that responsive documents had already been
produced. Most importantly, the Court placed subject matter and temporal limits on what it
ordered Express to produce – limits that were not present in the requests contained in the
subpoena.
Additionally, in the January 23, 2017 subpoena, plaintiffs sought copies of any joint
defense agreements between Express and Kapsalis and Express and Sterling. A similar request
had been made by plaintiffs in the past and was the subject of the Court’s February 26, 2016
order (DN 204) addressing the Motion to Quash by Sterling.

Specifically, plaintiffs had

requested, “A copy of any joint defense agreement between and/or among Stephen Kapsalis,
Express and Sterling.” (DN 118-2 at 10.) The Court granted the Motion to Quash by Sterling
with respect to this request, finding that it was not relevant – a fact omitted by plaintiffs in their
response. (DN 204 at 11.)
The Court’s description of conduct of plaintiffs’ counsel, and especially that of Moore,
has not been without purpose. Plaintiffs’ counsel is on notice that the Court will not tolerate any
future misstatements or misrepresentations. In addition, the Court believes it is imperative to, as
much as it can, correct any misrepresentations that have been made to other Courts regarding this
Court’s rulings. And finally, the Court has done so to ensure that no further misrepresentations
are made to this Court or any other court in the future.
50

C.

Rule 45

The Court will not address whether the January 23, 2017 subpoena issued to the Express
bankruptcy trustee complied with the requirements of Rule 45, as that issue is not properly
before it. Issues with the form and substance of the subpoena will likely be addressed in
conjunction with the motions to quash the January 23, 2017 subpoena filed by Sterling and
Kapsalis in the Northern District of Oklahoma. See Fed. R. Civ. P. 45 (d)(3)(A) (“On timely
motion, the court for the district where compliance is required must quash or modify a subpoena
that: (i) fails to allow a reasonable time to comply; (ii) requires a person to comply beyond the
geographical limits specified in Rule 45(c); (iii) requires disclosure of privileged or other
protected matter, if no exception or waiver applies; or (iv) subjects a person to undue burden.”)
(emphasis added)12; see, e.g., Hogan v. Cleveland Ave Rest. Inc., No. 2:15-CV-2883, 2016 WL
7467968, at *2 (S.D. Ohio Dec. 28, 2016) (granting motion to quash because the subpoena was
unduly burdensome); Stahl v. Coschocton Cty., Ohio, No. 2:15-CV-572, 2016 WL 5341800, at
*3 (S.D. Ohio Sept. 23, 2016) (granting motion to quash subpoena because the subpoena at issue
“fail[ed] to provide a reasonable time for compliance”); In re CareSource Mgmt. Grp. Co., 289
F.R.D. 251, 252–53 (S.D. Ohio 2013) (granting motion to quash subpoena because “as currently
drafted, is unduly burdensome . . . .”). Alternately, if those motions to quash are transferred to
this Court, those issues may be addressed at that time.
D.

Local Rule 37.1

12

Rule 45 was extensively amended in 2013. One of the amendments required “subpoena-related motions and
applications [] to be made to the court where compliance is required under Rule 45(c).” Committee Notes to 2013
Amendments, Fed. R. Civ. P. 45(f).

51

Plaintiffs argue that the Court should not grant the Motion for Discovery because
Kapsalis failed to contact or attempt to contact counsel for plaintiffs prior to filing it pursuant to
Local Rule 37.1; plaintiffs also argue that Kapalis failed to contact or attempt to contact counsel
for plaintiffs prior to filing the Motion to Quash. (See DN 405 at 8-9.) Plaintiffs further assert
that Kapsalis failed to schedule a telephonic conference with the court before filing the Motion to
Quash and Motion for Discovery. (See DN 405 at 8-9; see also DN 294 [order stating that no
additional discovery motion may be filed without first scheduling a telephonic conference with
the Court].)
Local Rule 37.1 states:
The Court will not entertain discovery motions unless counsel have
conferred -- or attempted to confer -- with other affected parties in
an effort to resolve their dispute. The moving party must attach to
every discovery motion a certification that counsel have conferred
and are unable to resolve their differences. The certification must
detail counsel’s attempts to resolve the dispute.

Counsel for Kapsalis should have attempted to contact counsel for plaintiffs prior to
filing the Motion to Quash.

However, the Court recognizes that there was an exigent

consideration, as the subpoena was issued on January 23, 2017 and was to be executed on
January 27, 2017 (and was, in fact, executed a day earlier, on January 26, 2017). Furthermore,
Shannon Hamilton, one of plaintiffs’ attorneys, called one of Kapsalis’s attorneys on January 27,
2017 to discuss scheduling a telephone call with the Court regarding the Motion to Quash;
notably, Hamilton did not inform Kapasalis’s attorney during that conversation that the January

52

23, 2017 subpoena was in the process of being executed.13 (DN 409 at 2; see also DN 427 at 36,
40-41, 43-44, 169.)
Additionally, on February 7, 2017, the Court issued a text order scheduling, upon request
of counsel, a telephonic conference call with the Court on February 8, 2017; Kapsalis filed the
Motion for Discovery on the same day. The Motion for Discovery was not a discovery motion in
the traditional sense; it did not relate to a discovery dispute regarding the allegations made in the
operative complaint.

Rather, it concerned allegations of alarming conduct on the part of

plaintiffs’ counsel, and counsel for Kapsalis was justifiably concerned about the use of the
information obtained pursuant to the January 23, 2017 subpoena. Moreover, a telephonic
conference was held on the same day that the Motion for Discovery was filed. In short, this was
a highly unusual and rapidly developing situation. Accordingly, Kapsalis’s failure to comply
with Local Rule 37.1 will be excused.
Finally, plaintiffs state that the Court should not grant the Motion for Discovery because
of the failure of counsel for Kapalis to attempt to confer pursuant to Local Rule 37.1; however,
the Court is denying the Motion for Discovery. Consequently, the failure of Kapsalis’s counsel
to attempt to confer with plaintiffs’ counsel pursuant to Local Rule 37.1 is a non-issue under the
peculiar circumstances of this case.
III.

CONCLUSION

13

It is unclear whether counsel for Kapsalis knew that the subpoena was being executed at this point. On May 5,
2017, plaintiffs filed a Motion to Supplement the Record (DN 446). In the Motion to Supplement Record, plaintiffs
state that Elisabeth Gray, one of Kapsalis’s attorneys, informed plaintiffs on April 12, 2017 that she had a
conversation with the bankruptcy trustee on January 26, 2017 and advised him that Kapsalis would be objecting to
the subpoena served on it and subsequently sent a copy of the Motion to Quash and related filings to the bankruptcy
trustee. (Id. at 2.) As plaintiffs point out, Ms. Gray does not state whether, during that conversation, she was
informed that the subpoena was in the process of being executed. (Id.; see also DN 446-1 at 2 [“I had a
conversation with the Trustee’s office informing it we were objecting to the subpoena served on it and subsequently
sent copies of the Motion and related filings to the Trustee.”].) Regardless, it is of no moment to the Court’s ruling
contained herein.

53

Rule 1 of the Federal Rules of Civil Procedure states that the rules “should be construed,
administered, and employed by the court and the parties to secure the just, speedy, and
inexpensive determination of every action and proceeding.” Fed. R. Civ. P. 1 (emphasis added).
In the 2015 Year-End Report on the Federal Judiciary, Chief Justice John Roberts addressed the
2015 amendment to Rule 1 – the addition of the eight words emphasized above. 2015 Year-End
Report on the Federal Judiciary by Chief Justice John Roberts, Supreme Court of the United
States (Dec. 31, 2015). Chief Justice Roberts wrote, “The underscored words make express the
obligation of judges and lawyers to work cooperatively in controlling the expense and time
demands of litigation—an obligation given effect in the amendments that follow.” Id. at 6. As
an example, Chief Justice Roberts pointed to the change in Rule 26(b)(1), stating that it
“crystalize[d] the concept of reasonable limits on discovery through increased reliance on the
common-sense concept of proportionality.” Id. Chief Justice Roberts further stated:
The amended rule states, as a fundamental principle, that lawyers
must size and shape their discovery requests to the requisites of a
case. Specifically, the pretrial process must provide parties with
efficient access to what is needed to prove a claim or defense, but
eliminate unnecessary or wasteful discovery. The key here is
careful and realistic assessment of actual need. That assessment
may, as a practical matter, require the active involvement of a
neutral arbiter—the federal judge—to guide decisions respecting
the scope of discovery.
Id. at 7.
Discovery in this matter has been anything but speedy and inexpensive; indeed, the words
“unnecessary” and “wasteful” would describe many of the actions of the parties and the disputes
those actions have spawned. While plaintiffs’ actions detailed herein are extraordinary, they are
not the only guilty parties in this regard. All parties to this action, and even the non-party

54

Sterling, have consumed an inordinate amount of the Court’s time, as well as the United States
District Courts for the Southern District of Texas and the Northern District of Oklahoma.
The Court has endeavored to curb unnecessary and wasteful discovery in this matter,
while relying on the common-sense concept of proportionality. At the time plaintiffs caused the
subject subpoena to be issued, discovery had closed. The Court was addressing the remaining
discovery disputes. As was apparent from the orders cited in the background section addressing
plaintiffs’ various attempts to obtain an additional search of the Express server, no more searches
of the Express server were to be had. It was well past time to move forward in resolving this
matter, a matter that had been pending in this Court since 2013. Plaintiffs, however, were
apparently not satisfied. But, rather than object to the undersigned’s discovery orders or file a
motion to re-open discovery, plaintiffs, in a self-help remedy, caused a subpoena to be issued to
the Express bankruptcy trustee in conjunction with this matter and in direct violation of the
March 2, 2016 order.
The Court has a mandate, from the law, the Rules of Civil Procedure, and the Chief
Justice of the United States, to help secure a just, speedy, and inexpensive determination of every
action and proceeding. The sanctions awarded herein are one step toward that.
Accordingly,
IT IS ORDERED that the Motion for Discovery (DN 398) is DENIED. The request for
additional discovery and sanctions are denied; however, the Court will, sua sponte, sanction
plaintiffs under Rule 16 of the Federal Rules of Civil Procedure.
Accordingly,

55

IT IS FURTHER ORDERED that plaintiffs shall pay to Kapsalis reasonable attorneys’
fees and expenses incurred in (1) preparing the Motion for Discovery (DN 398) and
Supplemental Memorandum (DN 398-1) as well as the reply in support of same; (2) preparing
for and attending the March 8, 2017 evidentiary hearing; and (3) preparing the proposed findings
of fact and conclusions of law.
IT IS FURTHER ORDERED that within fourteen (14) days of the entry of this order,
Kapsalis shall file an itemization of the attorneys’ fees and expenses incurred in conjunction with
(1)-(3), including why such fees and expenses, along with the hourly rates, are reasonable.
Within fourteen (14) days of the filing by Kapsalis of such documentation, plaintiffs or their
counsel shall pay Kapsalis the amount requested or file with the Court any objections that they
have to Kapsalis’s attorneys’ fees and expenses; any such objections shall be limited to the
reasonableness of the amounts claimed.
IT IS FURTHER ORDERED that plaintiffs are prohibited from using in this matter the
information obtained pursuant to the January 23, 2017 subpoena, including any information from
the copies made of the Express servers.
IT IS FURTHER ORDERED that plaintiffs must (1) destroy the hard drive, and any
copies thereof, containing the results of the searches made pursuant to the January 23, 2017
subpoena, and any other device or medium in which the data resulting from the searches may
reside within fourteen (14) days of the entry of this order; and (2) file a notice of compliance
on the same date.
cc: Counsel of record
June 30, 2017

Colin Lindsay, MagistrateJudge
United States District Court
56