American Precision Industries, Inc. v. Federal Insurance Company et al

Filing 64

DECISION AND ORDER granting 60 Motion for Discovery against Non-Party API Heat Transfer, Inc. Signed by Hon. H. Kenneth Schroeder Jr. on 7/16/2018. (HKG) (A copy of this Decision and Order was mailed to API Heat Transfer, Inc. at the the following address: 2777 Walden Avenue, Buffalo, NY 14225)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NEW YORK

AMERICAN PRECISION INDUSTRIES,
INC.,
Plaintiff,
v.

14-CV-1050-RJA

FEDERAL INSURANCE COMPANY,
FIREMAN’S FUND INSURANCE
COMPANY, and NORTH RIVER
INSURANCE COMPANY,

Defendants.

DECISION AND ORDER
This case was referred to the undersigned by the Hon. Richard J. Arcara,
in accordance with 28 U.S.C. § 636(b)(1)(A), for all pretrial matters. Dkt. No. 8.
American Precision Industries, Inc. (“API”) commenced this action on December 16,
2014, seeking a declaration that the defendant Insurers, Federal Insurance Company
(“Federal”), Fireman’s Fund Insurance, and North River Insurance Company, must
defend and indemnify API “in connection with [all pending and future] asbestos-related
claims asserted against API,” and reimburse defense fees and costs and settlement
amounts “previously incurred by API in connection with these [asbestos-related claims].”
Dkt. No. 1, ¶ 33. Currently before this Court is Federal’s Motion for Discovery Against
Non-Party API Heat Transfer, Inc. (Dkt. No. 60). For the following reasons, the Motion
is GRANTED.

FACTS
Corporate History
API was formed as a corporation under New York law in 1946. Dkt.
No. 33-7, p. 6. Federal sold API five annual comprehensive general liability insurance
policies covering the period from April 1, 1992 through April 1, 1997. Dkt. Nos. 33-10,
33-11, 33-12, 33-13, 33-14. In 1996, API formed three subsidiary companies: API
AirTech, Inc., API Basco, Inc., and API Heat Transfer, Inc. (“Heat Transfer”). Dkt. No.
33-7, p. 6. In 1997, API transferred certain assets to AirTech and Basco in return for all
outstanding shares of those companies. Dkt. No. 33-1, p. 6-7. That same year, API
transferred all of the outstanding shares of AirTech and Basco to Heat Transfer in return
for all of the shares of Heat Transfer. Dkt. No. 33-1, p. 8. API never transferred any
asbestos liabilities to Heat Transfer, AirTech, or Basco during these transactions. Dkt.
No. 33-1, p. 2; Dkt. No. 37, p. 6.

Thereafter, Heat Transfer merged into AirTech and the surviving company
retained the name Heat Transfer. Dkt. No. 33-7, pp. 8-9. At the end of 1998, Basco,
and two other entities, API Ketema, Inc., and API Schmidt-Bretten, Inc., merged into
Heat Transfer. Dkt. No. 33, p. 9. At that time, API owned all of Heat Transfer as a
subsidiary. Dkt. No. 333-7, p. 9. In 2002, API sold Heat Transfer to API Heat Transfer
Technologies Corporation. Dkt. No. 33-7, p. 10.

According to the Complaint, API has been named as a defendant in
hundreds of asbestos claims in numerous states since approximately 2002. Dkt. No. 1,

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¶ 13. These asbestos claims allege third-party bodily injuries resulting from exposure to
asbestos contained in products manufactured and/or sold by API, specifically, in heat
exchangers manufactured and/or sold by API. Dkt. No. 1, ¶¶ 14-15. The alleged thirdparty bodily injuries occurred during one or more of the periods covered by the policies
issued by Federal and the two other defendant Insurers, Fireman’s Fund Insurance
Company and North River Insurance Company. Dkt. No. 1, ¶ 16.

Discovery Dispute
Federal argues, and this Court agrees, that because API seeks coverage
from Federal for amounts it expended to defend non-party Heat Transfer, the factual
issue of whether Heat Transfer has its own coverage that would be triggered by the
suits is indisputably relevant to this action. Also relevant is whether Heat Transfer is
entitled to a defense and/or indemnification from API under a 2002 Stock Purchase
Agreement under which API sold all of its shares of Heat Transfer to API Heat Transfer
Technologies Corporation. Dkt. No. 60-2, p. 1.

To shed light on these issues, Federal served a Subpoena on Heat
Transfer on October 31, 2016, requiring production of documents related to: API Heat
Transfer, Inc’s incorporation; asset sales or stock transactions between API Heat
Transfer, Inc. and API; API Heat Transfer, Inc.’s merger into API AirTech, Inc.; the
changing of API Airtech, Inc.’s name to API Heat Transfer, Inc.; the merger of API
Basco, Inc. and API Ketema, Inc. and API Schmidt-Bretten, Inc. into API Heat Transfer,
Inc.; shares of stock issued by, or other assets owned by, API Heat Transfer, Inc. and/or

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API AirTech, Inc.; mergers, acquisitions, or other transactions impacting the corporate
structure of API Heat Transfer, Inc. since a 2002 stock purchase; and any and all
insurance policies issued to API Heat Transfer, Inc. providing general liability coverage
for any period since API Heat Transfer, Inc.’s and/or API Airtech, Inc.’s incorporation.
Dkt. No. 60-2, pp. 2-3. Heat Transfer did not respond to the Subpoena by the October
31, 2016 deadline. Dkt. No. 60-2, p. 3.

On November 15, 2016, Federal’s counsel spoke with Heat Transfer’s
then Chief Financial and Administrative Officer, who advised that the Subpoena had
been forwarded to Heat Transfer’s attorneys, Paul, Weiss, Rifkind, Wharton & Garrison
LLP. Dkt. No. 60-2, p. 3. Between November 16, 2016, and March 28, 2018, Federal’s
counsel emailed or phoned Heat Transfer’s designated counsel no less than six times to
get Heat Transfer to comply with the Subpoena. Dkt. No. 60-2, pp. 3-4. Numerous
times, Federal’s counsel warned that if the subpoenaed documents were not provided,
Federal would have no choice but to move this Court for an Order directing Heat
Transfer to comply. Dkt. No. 60-2, pp. 3-4.

On March 28, 2018, Heat Transfer’s counsel sent an email providing an
unverified, two-sentence synopsis of the corporate transactions involving Heat Transfer.
Dkt. No. 60-8, p. 2. Heat Transfer’s counsel never provided the documents demanded
in the Subpoena nor did it object to the requests made therein.

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DISCUSSION
Rule 26(b)(1) of the Federal Rules of Civil Procedure provides that:
“[p]arties may obtain discovery regarding any nonprivileged matter that is relevant to
any party’s claim or defense and proportional to the needs of the case, considering the
importance of the issues at stake in the action, the amount in controversy, the parties’
relative access to relevant information, the parties’ resources, the importance of the
discovery in resolving the issues, and whether the burden or expense of the proposed
discovery outweighs its likely benefit.” Fed. R. Civ. P. 26(b)(1). “Subpoenas issued
under Rule 45 are subject to the relevance requirement of Rule 26(b)(1).” In re Refco
Sec. Litig., 759 F. Supp. 2d 342, 345 (S.D.N.Y. 2011); see Ford Motor Credit Co. v.
Meehan, No. CV 05-4807, 2008 WL 2746373, at *4 (E.D.N.Y. July 11, 2008); During v.
City Univ. of New York, No. 05 Civ. 6992, 2006 WL 2192843, at *82 (S.D.N.Y. Aug. 1,
2006). “The party issuing the subpoena must demonstrate that the information sought
is relevant and material to the allegations and claims at issue in the proceedings.” Night
Hawk Ltd. v. Briarpatch Ltd., 03 Civ. 1382, 2003 WL 23018833, at *8 (S.D.N.Y. Dec. 23,
2003); see also Salvatorie Studios, Int’l v. Mako’s Inc., 01 Civ. 4430, 2001 WL 913945,
at *1 (S.D.N.Y. Aug. 14, 2001).

A district court may impose sanctions on a non-party for failure to comply
with a subpoena under Federal Rule of Civil Procedure Rule 45(g). Rule 45(g) provides
as follows:
Contempt. The court for the district where compliance is required – and
also, after a motion is transferred, the issuing court – may hold in
contempt a person who, having been served, fails without adequate
excuse to obey the subpoena or an order related to it.
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“The Court has the power under this rule to impose contempt simply on the basis of
failure to comply with a subpoena.” Painewebber Inc. v. Acstar Ins. Co., 211 F.R.D.
247, 249 (S.D.N.Y. 2002) (citing Diamond v. Simon, 1994 WL 10622, at *1 (S.D.N.Y.
Jan. 10, 1994)); Daval Steel Products v. M/V Fakredine, 951 F.2d 1357, 1364 (2d Cir.
1991); Hunter TBA, Inc. v. Triple Sales, 250 F.R.D. 116, 117 (E.D.N.Y. 2008).

“Absent an improperly issued subpoena or an ‘adequate excuse’ by the
non-party, failure to comply with a subpoena made under Rule 45 may be deemed a
contempt of the court from which the subpoena issued. Indeed, the judicial power to
hold a non-party who has failed to obey a valid subpoena in contempt is the primary
mechanism by which a court can enforce a subpoena.” Beare v. Millington, No.
07-CV-3391, 2010 WL 234771, at *3 (E.D.N.Y. Jan. 13, 2010) (internal citations
omitted); Jalayer v. Stigliano, No. CV102285LDHAKT, 2016 WL 5477600, at *2
(E.D.N.Y. Sept. 29, 2016). Put another way, a non-party who knowingly fails to comply
with a duly issued subpoena and offers no justification for his or her failure to comply
may be found in contempt under Rule 45. See Sprint Nextel Corp. v. Ace Wholesale,
Inc., No. 1:12-cv-2902, 2014 WL 4308355 (S.D.N.Y. Aug. 26, 2014); Freund v.
Weinstein, No. 08 cv 1469, 2009 WL 4065585, at *1 (E.D.N.Y. Nov. 23, 2009).

Having reviewed Federal’s papers in support of it’s Motion for Discovery
Against Non-Party Heat Transfer (Dkt. Nos. 60, 62), I find that the discovery Federal
seeks is central to this case and satisfies the standard of proportional relevance
embodied by Rule 26. See Sibley v. Choice Hotels Int’l, No. CV 14-634, 2015 WL

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9413101, at *2 (E.D.N.Y. Dec. 22, 2015) (recognizing that “the current version of Rule
26 defines permissible discovery to consist of information that is, in addition to being
relevant ‘to any party’s claim or defense,’ also ‘proportional to the needs of the case’”)
(internal citations omitted).

Based on the foregoing, Federal’s Motion for Discovery Against Non-Party
API Heat Transfer (Dkt. No. 60) is GRANTED. Accordingly, it is hereby ORDERED that
Heat Transfer shall provide all documents responsive to the previously issued
Subpoena within ten (10) days of receiving this Order. Sanctions are hereby
DEFERRED but may be imposed against Heat Transfer if all responsive documents are
not produced within this time frame upon further application to this Court.

SO ORDERED.

DATED:

Buffalo, New York
July 16, 2018

s/ H. Kenneth Schroeder, Jr.
H. KENNETH SCHROEDER, JR.
United States Magistrate Judge

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