Aetna Group USA, Inc. v. AIDCO International, Inc.

Filing 60

ORDER denying respondent' 25 MOTION for an order finding they have complied with the Court's post-judgment discovery order, for the cessation of discovery, or for a hearing on outstanding discovery matter; and denying respondents' [26 ] MOTION for the temporary cessation of post-judgment discovery. REPORT AND RECOMMENDATION that the respondents' 25 MOTION for the return of attorney fees be Denied; and the district judge should issue a show cause order to respondents to ap pear at a date certain before the district judge to show cause during a hearing why they should not be held in contempt of court for failing to obey the Court's June 8, 2011 discovery order. ( Objections to R&R due by 8/30/2012). Signed by Magistrate Judge Karen L. Litkovitz on 8/13/2012. (art)

UNITED

STATES

DISTRICT

COURT

SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION

Case No. 1: 11-mc-023

AETNA GROUP USA, INC.,
Plaintiff

Spiegel, J.
Litkovitz, M.J.

vs

ORDER AND REPORT
AND RECOMMENDATION

AIDCO INTERNATIONAL, INC.,
Defendant

Plaintiff Aetna Group USA, Inc. (Aetna) seeks post-judgment discovery in this matter
from non-parties NS Fund I, LLC, Palligistics, LLC, Salh F. Khan, and Olivia K. Khan
(respondents).

The matter is presently before the Court on Aetna's motion for contempt (Doc.

18); respondents' motion for an order finding respondents have complied with this Court's order
compelling post-judgment discovery, terminating plaintiffs post-judgment discovery attempts,
ordering plaintiff to return attorney fees paid by respondents, or in the alternative setting a
hearing on outstanding discovery matters (Doc. 25), and Aetna's response to respondents' motion
(Doc. 31 ).

The matter is also before the Court on respondents' motion for a temporary cessation

of discovery (Doc. 26) and Aetna's opposing memorandum (Doc. 30).
For the reasons that follow, it is recommended that a show cause order be issued to
respondents NS Fund I, LLC, Palligistics, LLC, Salh F. Khan, and Olivia K. Khan to appear
before the district judge on a date certain and show cause why they should not be held in
contempt of court. 1
1

The undersigned magistrate judge issues a report and recommendation and a certification of contempt
under 28 U.S. C. § 63 6(e)( 6)(B )(iii) because the relief sought by plaintiff Aetna exceeds the magistrate judge's
contempt authority. See U.S. v. Andriacco, 106 F. Supp.2d 991,995 n.3 (S.D. Ohio 1999).

1

I.

AETNA'S MOTION FOR CONTEMPT (DOC. 18)

A.

MAGISTRATE JUDGE'S AUTHORITY ON MOTION FOR CONTEMPT

Section 636(e) of the United States Magistrate Judges Act governs the contempt authority
of magistrate judges.

28 U.S.C. § 636(e)(l).

That section provides that a "magistrate judge

serving under this chapter shall have within the territorial jurisdiction prescribed by the
appointment of such magistrate judge the power to exercise contempt authority as set forth in this
subsection."

In civil cases where the parties have not consented to final judgment by the

magistrate judge, contempt is governed by Section 636(e)(6)(B):
(6) Certification of other contempts to the district court.--Upon the commission of
any such act--

(B) in any other case or proceeding under subsection (a) or (b) of this section,
or any other statute, where-(i) the act committed in the magistrate judge's presence may, in the
opinion of the magistrate judge, constitute a serious criminal
contempt punishable by penalties exceeding those set forth in
paragraph (5) ofthis subsection,
(ii) the act that constitutes a criminal contempt occurs outside the
presence of the magistrate judge, or
(iii) the act constitutes a civil contempt,
the magistrate judge shall forthwith certify the facts to a district judge and may
serve or cause to be served, upon any person whose behavior is brought into
question under this paragraph, an order requiring such person to appear before a
district judge upon a day certain to show cause why that person should not be
adjudged in contempt by reason of the facts so certified. The district judge shall
thereupon hear the evidence as to the act or conduct complained of and, if it is
such as to warrant punishment, punish such person in the same manner and to the
same extent as for a contempt committed before a district judge.
28 U.S.C. § 636(e)(6)(B).

2

The magistrate judge's role on a motion for contempt in non-consent cases is to certify
facts relevant to the issue of contempt to the district judge.

See, e.g., International Brotherhood

ofElectrical Workers, Local474 v. Eagle Electric Co., Inc., No. 06-2151,2007 WL 622504, at
*1, n.1 (W.D. Tenn. Feb. 22, 2007); US. v. !vie, No. 05-2314,2005 WL 1759727, at *1, n.l, and
*2 (W.D. Tenn. June 14, 2005).

See also NXIVM Corp. v. Bouchey, No. 1:11-mc-0058, 2011

WL 5080322, at *3 (N.D. N.Y. Oct. 24, 2011) (and cases cited therein).

"The certification of

facts under section 636( e) serves to determine whether the moving party can adduce sufficient
evidence to establish a prima facie case of contempt."

Telebrands Corp. v. Marc Glassman,

Inc., No. 3:09cv734, 2012 WL 1050018, at *1 (D. Conn. March 28, 2012) (quoting Church v.
Steller, 35 F. Supp.2d 215, 217 (N.D. N.Y. 1999)).
B.

CERTIFIED FACTS

The following facts are certified to the district court: In September 2010, plaintiff Aetna
obtained a judgment against AIDCO International, Inc. (AIDCO), a now-dissolved Michigan
corporation, for approximately $644,000 in the United States District Court for the Northern
District of Georgia.

Plaintiff claims that during the pendency of that litigation, AIDCO and one

of its creditors, NS Fund I, LLC (NS Fund), took steps to fraudulently transfer AIDCO's assets.
On March 8, 2010, pursuant to an Asset Purchase Agreement (APA) (Doc. 5, Exh. B), AIDCO
sold substantially all of its assets to Palligistics, LLC, a newly formed company, and Palligistics
acquired AIDCO's assets in exchange for assuming AIDCO's $2.2 million debt toNS Fund (Doc.
1, Exh. G).
AP A.

Plaintiff alleges that AIDCO was immediately dissolved following execution of the

(Doc. 6 at 2).

3

On November 15,2010, plaintiff served the respondents, all ofwhom are non-parties,
with subpoenas duces tecum to obtain post-judgment discovery pursuant to Fed. R. Civ. P. 69.

2

Plaintiff seeks discovery on the theory that the transfer of AIDCO's assets to Palligistics was a
fraudulent transfer.

Plaintiff contends that Palligistics, the Khans - who are the former owners

of AIDCO - and/or NS Fund are liable for the judgment against AIDCO because the AP A was a
fraudulent transaction amounting to a de facto merger and Palligistics is merely a continuation of
AIDCO.
In response to the subpoenas, respondents provided some discovery but also objected to
many of the requests and failed to supplement their responses to plaintiffs satisfaction,
prompting plaintiff to file in this Court motions to compel respondents to comply with the
subpoenas duces tecum.

(Docs. 1, 2, 3).

Respondents asserted in response to the motions that

Palligistics was created one month before execution of the AP A for the purpose of acquiring the
assets of AIDCO and "there are no document based communications between them."
14).

(Doc. 5 at

Respondents stated that "[t]he APA was discussed orally and all other communications

involved attorneys and drafting the AP A."

(!d.).

Respondents represented that "[t]he only past

transaction that could reasonably lead to the discovery of concealed or fraudulently transferred
assets is the AP A and all information relating to this transaction has previously been provided to
Plaintiff."

(Doc. 5 at 7).

Respondents indicated they remained willing to supplement their

responses to the extent they could identify further responsive documents, while disputing

2

That rule provides in relevant part, "In aid of the judgment or execution, the judgment creditor ... whose
interest appears of record may obtain discovery from any person - including the judgment debtor - as provided in
these rules .... " Fed. R. Civ. P. 69(a)(2). Respondents concede that subpoenas may be served on non-parties in
aid of execution of the judgment pursuant to Rule 69(a)(2). (Doc. 5 at 7).

4

plaintiffs assertion that the transfer of assets from AIDCO to Palligistics was fraudulent and
maintaining that neither Salh nor Olivia Khan, AIDCO's former owners, are owners of
Palligistics.

(!d. at 5).

Respondents stated they would provide an affidavit explaining their

efforts to locate responsive documents.

(!d. at 11 ).

On April 14, 2011, the undersigned held a hearing on plaintiffs motions to compel,
following which plaintiff and respondents provided supplemental memoranda to the Court
identifying the document requests that remained in dispute.

(Docs. 12, 13, 14).

On April25,

2011, respondents represented to the Court they had provided to plaintiff all relevant documents
that pertained to the business transactions among them and that there were no other responsive
documents of which they were aware. (Doc. 13 at 5). Respondents identified "a hard drive
belonging toNS Fund that crashed" as "[t]he only possible location of any relevant
communications" among respondents and their subsidiaries and affiliates since January 1, 2008.
(!d.). In response, plaintiff stated its willingness to undertake efforts to recover information

from the hard drive at its own expense. (Doc. 14 at 5).
The undersigned issued an order on June 8, 2011, acknowledging that the discovery
plaintiff sought from respondents is relevant to plaintiffs claim that the AP A between AIDCO
and Palligistics amounts to a de facto merger and therefore creates successor liability.

The

Court ordered respondents to produce items of discovery specified in its order that were relevant
or reasonably calculated to lead to the discovery of admissible evidence, including software
license agreements to which AIDCO was a party (Item 1); contracts between AID CO and any
other party as of specified dates ranging from September 24, 2008 to December 8, 2010,
including but not limited to AIDCO's contracts with Kraft, Proctor & Gamble, Solo Cup, R.A.
5

Jones, Ventura Foods, and Kraft Food, Aidco's facilility lease, and Aidco's lease for a computer
system (Item 2); all documents that evidence, reflect upon, relate to or refer to AIDCO's financial
condition since January 1, 2007 (Item 3); all documents that evidence, reflect upon, relate to or
refer to any payments made by AID CO, Palligistics, and NS Fund to any employee, agent or
representative of AIDCO since September 24, 2008 (Item 4); financial information for Salh and
Olivia Khan (Items 5, 6, 7); all documents that evidence, reflect upon, relate to, or refer to any
consideration the Khans have received, have been promised, or expect to receive from
Palligistics or NS Fund and their subsidiaries and affiliates (Item 8); all documents that evidence,
reflect upon, relate to or refer to ownership of Palligistics (Item 9); all business transactions of
any type or nature between and/or among AIDCO, Palligistics, NS Fund and/or the Khans, as
well as their subsidiaries and affiliated entities, since January 1, 2008 (Item 10); and all
communications between and/or among AIDCO, Palligistics, NS Fund and/or the Khans, as well
as their subsidiaries and affiliated entities, since January 1, 2008 (Item 11).
The Court specifically ordered respondents to provide the following to plaintiff within 20
days of the Court's order:
•

[A]ccess toNS Fund's hard drive ... for purposes of data recovery at plaintiffs expense

.... ,
•

[A]ny other communications, whether in hard copy or electronic format, that exist as
requested by Item 11. . . . To the extent respondents claim any such communications are
subject to the attorney-client privilege, respondents must produce a privilege log detailing
the senders, recipients, dates, and topics of the communications.

(Jd. at 15).

On June 29, 2011, respondents filed a "Notice of Compliance with Court's Order,"
stating that on June 27, 2011, they had complied with the Court's June 8, 2011 order directing

6

them to provide additional discovery. (Doc. 16). Respondents listed the documents they had
provided, indicated they were unable to locate certain information, and specified other
information that was yet to be provided. In response to Item 11, respondents stated that Salh and
Olivia Khan were "reviewing old em ails" to determine if it was necessary to compile a privilege
log of communications between respondents' counsel, and if no such communications were
found, they would provide an affidavit explaining their efforts to plaintiffs counsel. (Doc. 16 at
2).

Respondents stated that NS Fund was "in the process of making arrangements with Plaintiff

and Plaintiffs data recovery experts regarding imaging [NS Fund's] damaged disk drive" and
hoped to provide the image sometime that week. (!d.).
On July 7, 2011, respondents indicated to plaintiff through counsel that they would make
NS Fund's hard drive available for mirror imaging following the execution of a "HIPPA Business
Associates Agreement" and Confidentiality Agreement by plaintiffs electronic discovery vendor
Global Legal Discovery, LLC ("Global") and CompuSleuth, an Ohio sole proprietorship and
Global affiliate. (Doc. 19-1, Declaration ofWilliam Daniel Davis, Esq., ,-r 3). Those entities
executed the requested documents and sent them to respondents' counsel, Benjamin J.
MacDowell, by email on July 8, 2011. (!d. at ,-r 4; Exh. B). On July 14, 2011, Todd Markley,
the sole proprietor of Compusleuth, met with Neil Johnson, the President ofNS Fund, to retrieve
the hard drive for mirror imaging. Mr. Johnson did not produce NS Fund's hard drive but
instead gave Mr. Markley a 16GB USB flash memory stick with a handwritten note stating, in
essence, that NS Fund had recently moved its offices and the hard drive could not be located.
(Doc. 19-2, ,-r 3, Affidavit ofTodd Markley, Exh. A). On that same date, Mr. Davis informed
Mr. MacDowell that NS Funds' failure to produce the hard drive was unacceptable. (Doc. 19-1,
7

Exh. C). Mr. MacDowell responded by email that his client had told Mr. MacDowell that the
disk had been "lost in his office move." 3 (Id.; Exh. C).
On July 21, 2011, Aetna filed its motion for contempt, alleging that respondents were in
willful contempt of the Court's June 8, 2011 order directing them to produce certain items of
post-judgment discovery enumerated in the Court's order within 20 days. (Doc. 18). Plaintiff
moved pursuant to Fed. R. Civ. P. 45(e), 18 U.S.C. § 401, and/or the Court's inherent authority
for an order directing respondents to show cause why they should not be held in contempt and
required, jointly and severally, to pay a fine of$644,244.74 or, in the alternative, (a) $5,000.00
per day until they purge themselves of the contempt, and (b) plaintiffs reasonable attorney's fees
and litigation expenses. !d. Plaintiff asserted that respondents refused to obey the Court's order
to provide the following discovery within 20 days: (1) access toNS Fund's hard drive for
purposes of data recovery at plaintiffs expense, and (2) "all communications between and/or
among AIDCO, Palligistics, NS Fund and/or the Khans, as well as their subsidiaries and
affiliated entities, since January 1, 2008." (Item 11). (Jd. at 3, citing Doc. 15 at 14-15).
Plaintiff stated that as of July 21, 2011, it had not received a single email from the Khans or an
affidavit setting forth the Khans' efforts to retrieve documents. (Doc. 18 at 4-5). Plaintiff
further stated that when it sought to retrieve the hard drive for mirror imaging on July 14, 2011,
following execution of the confidentiality agreements with Global and Compusleuth, respondents
did not produce the hard drive; respondents instead turned over a 16GB USB flash memory stick
with a note stating, in essence, that the hard drive had been misplaced (Doc. 19-2, Markley Decl.,
3

Mr. Davis states in his Declaration that Mr. MacDowell informed him of this on Friday, July 15, 2011, as
shown in the email attached as Exhibit C, but Exhibit C shows the date of the email is Thursday, July 14,2011.
(Doc. 19-1, Exh. C).

8

~~

2-5); and when plaintiff protested, respondents indicated the following day that the hard drive

had been "lost." (Doc. 19-1, Davis Decl.

at~

6). As of July 21, 2011, respondents had not

produced the hard drive. (Doc. 18 at 4). It was not until July 25, 2011, soon after the contempt
motion was filed, that NS Fund provided the hard drive to the data recovery company selected by
plaintiff. This was 27 days after the Court imposed deadline. (Docs. 15-1, 59-2).
Respondents claim the hard drive was lost when NS Fund moved its operations and it was
produced as soon as it was located. (Doc. 59 at 2).
On August 23 and 24, 2011, Salh and Olivia Khan filed affidavits. (Docs. 22, 23, 24).
Salh Khan states that he is the president and sole remaining officer of Aidco (Doc. 22

at~

3) and

Olivia Khan states she is the former CEO and Vice-President of Marketing of Aidco (Doc. 23 at
~

3). Both Salh and Olivia Khan state that Aidco has not conducted any business since March

2010 when its assets were sold to Palligistics (Docs. 22, 23

at~

4); they could not locate in their

possession any paper or electronic based communications to or from any third parties concerning
the AP A, including written or electronic correspondence to or from them as officers of Aidco or
to or from any Aidco officers, employees or agents (!d. at

~

5); and the communications that

took place regarding the AP A "during this time period" largely took place at Aidco's
headquarters, on the telephone, and in discussions with attorneys who drafted the agreement.
(Doc. 22 at

~

6). The Khans further stated in their affidavits that they took the following steps

to search for paper or electronic based correspondence related to the AP A: (1) they searched for
paper based communications and discovered none; (2) they asked "third party Information
Technology Company, hired by Palligistics to search and to recover archived electronic
communications related to the Aidco Purchase Agreement by requesting all archived Aidco
9

electronic correspondence for the entirety of2009 through the winding up of Aidco's affairs in
March 2010;" and (3) following the search by "the third party," the Khans "again spoke to
'Aidco's Information Technology group' and discovered that the person could not locate archived
electronic communications of Aidco for the entirety of2009 through the winding up of Aidco's
affairs in March of2010." (Docs. 22,23

at~

7). Salh Khan further stated in his affidavit that

to his knowledge, his 401k statement, all W2 statements for the requested time periods, all tax
returns, and all bank account statements for personal accounts have been provided to plaintiff.
Doc. 22 at

~

11 ). The Khans stated that they had no other information in their possession that

had not already been provided to plaintiff that was responsive to plaintiffs requests for
information. (Docs. 22, 23

at~

12).

Salh Khan also filed an affidavit as the authorized representative of Blue Horizon Group
USA, LLC (BHG) on August 24, 2011. (Doc. 24). Khan states that BHG was formed for the
sole purpose of holding a membership interest in Palligistics
representatives, officers or employees ofBHG

(~

(~

4); there are no other authorized

5); BHG was properly formed in the State of

Ohio on February 24, 2010, and it has conducted no business other than maintaining a
membership interest in Palligistics

(~~

6, 7); the 2010 tax return had not yet been filed for BHG

and all bank accounts for BHG had been provided to

plaintiff(~~

8, 9); there are no written or

electronic communications to or from BHG regarding the AP A as it was formed only to maintain
a membership interest in Palligistics

(~

10); and neither he nor BHG have in their possession any

other information belonging to BHG that has not already been provided to plaintiff that is
responsive to plaintiffs discovery requests(~~ 11, 12).
On August 26, 2011, respondents filed a motion asking the Court to issue an order

10

finding they have complied with the Court's order compelling all post-judgment discovery;
ordering that plaintiff may not pursue further post-judgment discovery from respondents;
ordering that plaintiff must repay respondents $1,791.50 in attorney fees they required as a
condition to withdraw their contempt motion; and requesting, in the alternative, that the
undersigned set a hearing date on these matters to provide proper guidance to all involved parties
regarding discovery. (Doc. 25). Respondents represented in their motion that after the Court
issued its June 8, 2011 order and before plaintiff filed its contempt motion, respondent "NS Fund
misplaced the damaged hard drive" it had indicated it would provide to respondents during the
course of a move to a new office. (!d. at 3). Respondents further represented that the APA was
"largely discussed orally and that there likely are not any communications of the sort that
Plaintiffs (sic) seek available." (!d. at 7).
Respondents further represented that all servers and computers owned by AIDCO were
transferred to Palligistics as part of AP A; the servers were searched; and the Khans asked the
"Information Technology Company" to search for "all" AIDCO communications during the
relevant time period. (!d., citing Exh. 5, Khan Affs. at 1f 7). Respondents further represented
that "no emails were found in the search." (!d.).
The parties thereafter agreed to postpone a hearing on the pending motions while they
attempted to resolve the outstanding discovery issues on their own.

During a telephone status

conference held on January 18, 2012, the parties advised the undersigned that they had reached a
settlement agreement in principal, and the matter was continued to give the parties an opportunity
to finalize the terms of their agreement.

(Doc. 40).

finalize the terms of the settlement.
11

However, the parties were unable to

Plaintiff subsequently filed a series of declarations in response to the Khans' August 2011
affidavits. (Docs. 46-1, 48-1, 49-1, 50-1 -Declarations ofRonald Keith Stewart II, William
Daniel Davis, Stan King and Aaron Salisbury). In his declaration dated April24, 2012,
plaintiffs counsel William Davis stated that after he made a request to the Khans on March 28,
2012, to provide contact information for "Information Technology Company," the entity
referenced in their affidavits who searched for relevant electronic communications, the Khans
submitted a declaration identifying "Nexigen Communications, LLC" as the actual entity who
performed the work. (Doc. 50-1 ). In an email attached to the Declaration, Palligistics'
corporate counsel, Benjamin MacDowell, represented on behalf ofthe Khans that Salh Khan had
used the name "lTC" as a generic term in his affidavit because he could not remember the
company name when his affidavit was prepared; the actual company was "Nexigen
Communications" located in Erlanger, Kentucky; and Aaron Salisbury ofNexigen was assigned
to the Palligistics IT team. (Doc. 51-1, Attachment, email dated April10, 2012). Mr.
MacDowell represented that both teams were unable to locate communications. (ld.).
Salisbury states in his declaration that he is an information technology consultant at Nexigen and
from June 8, 2011 (the date of the Court's order) through the date of his declaration, neither the
Khans individually nor Palligistics retained the services ofNexigen to search for and/or recover
electronic communications and/or correspondence to and from AIDCO. (Doc. 50-2Declaration of Aaron Salisbury dated April24, 2012). The parties agree that neither the Khans
nor Palligistics ever hired an entity called "Information Technology Company" to recover
electronic communications or correspondence. Moreover, the declarations establish, and
respondents agree, that respondents did not hire Nexigen to recover such communications
12

following the date of the Court's order. (See. Doc. 59, Exhs. 1-5, Affidavits ofSalh Khan and
Olivia Khan, ,-r 10; Kerry Powell, former Vice-President of and General Manager of Palligistics;
Slade Hafner, former ChiefFinancial Officer ofPalligistics; and Philip Raines, former Account
Administrator of Palligistics). Powell's affidavit states that prior to June 8, 2011, Palligistics
asked Salisbury to search for Microsoft Outlook folders containing communications relating to
the Aidco and Palligistics transaction. (Doc. 59, Exh. 3, ,-r,-r 5-6).
Plaintiff recovered the following electronic communications from either the 16GB flash
memory drive that was produced by NS Fund on July 14, 2011, 4 or the hard drive that was
produced on July 25, 2011:
•

•

•
•
•
•
•
•

•

Email chain between Salh Khan and Neil Johnson (President ofNS Fund- See Doc. 5 at
14) dated January 16, 2010, pertaining to hypothetical transaction and referencing
AIDCO and NS Fund (Exh. A)
Email from Olivia Khan to Johnson and Salh Khan dated January 26,2010, with attached
minutes of meeting regarding asset sale of AIDCO to Palligistics and conversion ofNS
Fund debt (Exh. B)
Email from Johnson to Stephen Vegh dated February 8, 2010, regarding Palligistics
acquisition of AIDCO's assets, with loan request attached (Exh. C)
Email chain between Fred Robbins, Johnson, John R. Perkins, Jr., and Salh Khan dated
February 3 and 23, 2010, regarding draft operating agreement for Palligistics (Exh. D)
Email chain between Robbins, Perkins and Johnson dated March 1, 2010, with APA
balance sheet (Exh. E)
Email from Steve Sager to Johnson and Perkins dated March 8, 2010, with attached clean
and red-lined promissory notes from NS Fund to Salh Khan (Exh. F)
Email chain between Johnson, Salh Khan and Olivia Khan dated Aprill3, 2010,
regarding the proposed structure ofPalligistics (Exh. G)
Email chain between Salh Khan and Johnson dated April22-23, 2010 regarding the
valuation ofPalligistics, BHG's ownership, and an IRS issue, and referencing AIDCO
(Exh. H)
Email from Slade Hafner to Johnson dated June 10, 2010, with Palligisitics balance sheet
as ofMarch 31,2010 (Exh. I)
4

Plaintiff references the flash memory drive as being produced on June 14, 2011, but the email
correspondence establishes it was produced on July 14,2011. (Docs. 19-1, Exh. C; 19-2 at 'U'U 4, 5, Declaration of
Todd Markley).

13

•

Email chain between Salh Khan, Mark Heggem, Johnson, Christy Kessler, Slade Hafuer
and C. Kidson dated June 9 and 23, 2010, which appears to be a proposed capitalization
structure ofPalligistics and which mentions NS Fund's obligation (Exh. J).

(Doc. 45-1- Declaration of Attorney Davis filed on March 19, 2012).
Palligistics was placed into receivership on February 2, 2012. (Doc. 59 at 4). Ronald
Keith Stewart II, a former production manager at Palligistics, was subsequently retained by the
receiver, Chikol, LLC, to recover certain ofPalligistics' physical assets. (Doc. 46-1, 3/21112
Stewart Declaration). Among the assets he recovered were servers formerly in use at
Palligistics, which he personally copied and which contained 2 terrabytes (TB) of data. (!d. at
~~

4, 5). Mr. Stewart has personal knowledge from this process that the servers contain

electronically-stored information with creation dates spanning at least ten years, and the servers
and copies are currently in the receiver's possession. (Jd.

at~~

6, 7). Communications

responsive to plaintiffs subpoenas that were recovered from Palligistics' servers were provided
to plaintiffby the receiver. (Doc. 51-1, Exhs. 1, 2, 3- Declarations of Jack Snyder, Kerry
Powell, and William Daniel Davis). Many of the files are .pst Microsoft Outlook files. (Davis
Aff., Exh. 3,

~

5).

Plaintiff filed a Motion for Leave to File Instanter Supplemental Brief in Support of
Motion for Contempt on April24, 2012. 5 (Doc. 51). The Court granted plaintiffs motion, and
plaintiff filed a supplemental brief in support of its motion for contempt on June 5, 2012.
53).

(Doc.

Plaintiff argues that a fine in the amount of $644,244.74 against respondents, jointly and

severally, is warranted because (1) NS Fund was approximately one month late in complying

5

Plaintiff did not attach its brief to the motion but subsequently filed the brief after being granted leave of
Court. (Doc. 53).

14

with the Court's June 8, 2011 order to tum over its hard drive; (2) affidavits the Khans have filed
are prima facie evidence of contempt because the statements in the affidavits show that the
Khans did not search their personal computers, neither Palligistics nor the Khans searched for
communications other than those "related to the [AP A]," and neither Palligistics nor the Khans
searched for communications for the 2008 or post-March 2010 time frame; and (3) the Khans
apparently lied to the Court as neither the Khans nor Palligistics ever hired an entity called
"Information Technology Company" (Doc. 53, citing Docs. 48-1, 49-1, 50-1), and after
Palligistics was placed into receivership on February 2, 2012, communications responsive to
plaintiffs subpoenas recovered from Palligistics' servers were provided to plaintiff by the
receiver.

(!d. at 4-5, citing Docs. 51-1, 51-2, 51-3).

Respondents filed a response to plaintiffs supplemental brief and supporting exhibits on
July 10, 2012.

(Doc. 59).

of the pertinent facts.

Respondents state that they largely agree with plaintiffs summary

(!d. at 2).

Respondents assert that in "probably" February or March of

2011, the Khans asked Nexigen to search the Palligistics server for "all archived electronic
correspondence for the entirety of2009 through the winding up of Aidco's affairs in March
2010."

(Doc. 59, citing Exhs. 1, 2- Khans Affidavits

at~~

12, 14).

They claim that during

this search, no Aidco Microsoft .pst history files were found; Palligistics was subsequently
placed into receivership on February 2, 2012, at which time plaintiff received copies of
Palligistics' servers containing communications responsive to Aidco's subpoenas; and the emails
that were located were emails saved to project files of the former company, Aidco, and because
they were not part of the email history N exigen was asked to search, they were not located by
Nexigen.

(Doc. 59 at 4; Khan Affidavits, Exhs. 1, 2 at~~ 20, 22- explaining that the reason
15

respondents did not find the emails plaintiff discovered on the Palligistics server was Nexigen
was not instructed to search individual file folders, which is where the em ails plaintiff found
were located, and neither Palligistics nor Nexigen thought to look in this area of the server.).
C.

ANALYSIS

Respondents' conduct constitutes disobedience of the Court's June 8, 2011 order
compelling post-judgment discovery.

Fed. R. Civ. P. 37(b)(2)(A)(vii) provides that where a

party or party's officer, director, or managing agent fails to obey an order to permit discovery, the
Court may issue further just orders, including "treating as contempt of court the failure to obey
any order.... "

The contempt power of the court "enforce[s] the message that court orders and

judgments are to be complied with in a prompt manner."

IBEW v. Gary s Elec. Serv. Co., 340

F.3d 373,378 (6th Cir. 2003) (citingNLRB v. Cincinnati Bronze, Inc., 829 F.2d 585,590 (6th
Cir. 1987)).

In a contempt proceeding, the moving party must demonstrate "by clear and

convincing evidence that the party to be held in contempt violated a court order."

US. v.

Conces, 507 F.3d 1028, 1041-42 (6th Cir. 2007); Gary's Elec. Serv. Co., 340 F.3d at 379.
"Once the movant establishes his prima facie case, the burden shifts to the contemnor who may
defend by coming forward with evidence showing that he is presently unable to comply with the
court's order."

Garys Elec. Serv. Co., 340 F.3d at 379 (emphasis in original) (citing United

States v. Rylander, 460 U.S. 752, 757 (1983)).

To satisfy this burden, respondents "must show

categorically and in detail why [they are] unable to comply with the court's order."
Rolex Watch US.A., Inc. v. Crowley, 74 F.3d 716, 720 (6th Cir. 1996)).

!d. (quoting

The Court must

consider whether respondents "took all reasonable steps within [their] power to comply with the
court's order."

Gary's Elec. Serv. Co., 340 F .3d at 379 (quoting Peppers v. Barry, 873 F .2d
16

967, 969 (6th Cir. 1989)).
In the instant case, respondents' failure to timely respond to the Court's order compelling
discovery and to provide to plaintiff specific items of discovery after being ordered to do so by
the undersigned magistrate judge constitutes disobedience of a lawful court order and thus
contempt before the magistrate judge.

Respondents failed to timely produce within 20 days of

the Court's June 8, 2011 order the following discovery: (1) the NS Fund hard drive, and (2)
communications among themselves and their subsidiaries and affiliates since January 1, 2008.
Respondents have not shown they took "reasonable" steps to comply with this Court's order
compelling discovery.

To the contrary, respondents' explanations for why they failed to timely

produce the hard drive and responsive documents are inconsistent and are not credible.

Prior to

plaintiffs filing the motion for contempt, respondents consistently maintained that their
communications surrounding the AP A were primarily oral and there were no document based
communications in their possession. In response to subpoenas seeking communications among
respondents about the AP A, respondents represented they did not have possession, custody or
control of any responsive communications other than the AP A and related documents. (Docs. 1,
2, Exhs. M, N; Doc. 3, Exhs. 0, P). The Khans represented to the Court in March and April of
2011 that there were no document based communications between or among respondents. (Doc.
5 at 7, 14; Doc. 13 at 5). However, it is clear upon a review of the complete record in this case,

including the parties' briefs, affidavits and declarations, that respondents knew or should have
known of the existence of such communications and failed to conduct a reasonable search for
them.
First, respondents have not shown that they conducted a search for any documents for the

17

year 2008 as ordered by the Court in June 2011.

(Doc. 15 at 14).

Nor have respondents

offered an adequate explanation for their failure, asserting only that they limited their search to
the time period January 2009 through March 2010 because the servers that were searched are
assets of Palligistics and "logically, if there is no electronic correspondence of Aidco of any kind
from the period of January, 2009 through March, 201 0, there will not be any Aidco electronic
correspondence from earlier points in time." (Doc. 25 at 8). This is not an adequate
justification for failing to conduct a specific search for documents dating from January 1, 2008,
as ordered by the Court.
Second, respondents' efforts to locate electronic communications for the period 2009
through March of 2010 fall far short in several respects.

Respondents state in their affidavits

that in February or March of 2011, they retained the technology company "Nexigen" to search for
electronic communications for 2009 through March of2010.

(Doc. 59, Exhs. 1-5).

Respondents state that they limited the parameters of the search to the "entire email history of
Aidco," which disclosed no relevant email communications, and they did not instruct Nexigen to
search for individual file folders, which is where the relevant communications that plaintiff
subsequently found were located.

(Doc. 59 at 4-5).

Yet, respondents fail to provide a

plausible explanation for why they limited their search in this manner, stating only that
"Palligistics and Nexigen did not think to look in this area of the server" (that housed the
individual file folders) and therefore did not find the communications that plaintiff discovered
upon conducting its own search ofthe Palligistics servers.

Respondents' vague explanation

suggests that they did not make a reasonable effort to find the relevant communications in
response to plaintiffs discovery requests.
18

Moreover, respondents failed to take any steps to locate relevant email communications
in response to the Court's June 2011 order and instead relied on the unsuccessful search
conducted prior to issuance of the Court's order.

Respondents fail to explain why they did not

undertake additional efforts to find relevant communications following issuance of the order.
Respondents simply assert that the Court's order "did not require respondents to conduct another
search so another search was not conducted."

(Id. at 4).

This is not an adequate explanation.

Respondents represented to the Court that all servers and computers owned by Aidco were
transferred to Palligistics as part of the AP A. (Doc. 25 at 7 - "[N]o em ails were found in the
search. Logically, this is because the Aidco servers are now being used to house Palligistics
information because Palligistics took ownership of them in the Asset Purchase Transaction.").
Respondents therefore knew or should have known that the Palligistics servers would contain
relevant email communications, and respondents were obligated to take all reasonable steps to
find such communications. See Gary's Elec. Serv. Co., 340 F.3d at 379. Respondents' failure to
take any additional steps to search for relevant communications following issuance of the Court's
June 2011 order, coupled with the fact that plaintiff was able to find the undisclosed
communications so readily when given the opportunity to conduct its own search of the
Palligistics servers, indicates that respondents did not make a reasonable effort to comply with
the Court's order.
Finally, respondents have made conflicting representations about the availability of the
NS Fund hard drive and did not take reasonable steps to produce the hard drive in a timely
fashion.
For these reasons, it appears respondents have been less than forthcoming about their
19

efforts to find the relevant email communications and to produce the hard drive in a timely
manner.

It does not appear that respondents have taken "all reasonable steps within [their]

power to comply with the court's order."

See Gary's Elec. Serv. Co., 340 F.3d at 379.

Accordingly, it is submitted that the district judge should issue a show cause order to
respondents to appear at a date certain before the district judge to show cause during a hearing
why they should not be held in contempt of court for failing to obey the Court's June 8, 2011
discovery order.

(Doc. 15).

II. RESPONDENTS' MOTION FOR AN ORDER FINDING THEY HAVE COMPLIED
WITH THE COURT'S ORDER COMPELLING POST-JUDGMENT DISCOVERY,
TERMINATING PLAINTIFF'S POST-JUDGMENT DISCOVERY ATTEMPTS,
ORDERING PLAINTIFF TO RETURN ATTORNEY FEES PAID BY RESPONDENTS,
OR IN THE ALTERNATIVE SETTING A HEARING ON OUTSTANDING
DISCOVERY MATTERS (DOC. 25) AND RESPONDENTS' MOTION FOR
TEMPORARY CESSATION OF DISCOVERY (DOC. 26)
Respondents move the Court to issue an order finding they have complied with the
Court's order compelling discovery, terminating plaintiffs post-judgment discovery attempts, and
ordering plaintiffto return attorney fees paid to plaintiffs counsel.

(Docs. 25, 26).

For the

reasons explained in connection with plaintiffs motion for contempt, respondents are not entitled
to an order finding they have complied with the terms of the Court's June 8, 2011 order or to an
order terminating plaintiffs post-judgment discovery efforts.
Respondents also seek the return of $1,791.50 in attorney fees they paid to plaintiff
pursuant to the terms of an email exchange between their counsel.

The exchange began on July

27, 2011, when Mr. Davis, counsel for plaintiff, represented to Mr. MacDowell, counsel for
respondents, that in light ofNS Fund's production of the hard drive, plaintiff was "in principle
willing to withdraw [its] pending motion for contempt ifNS Fund agrees to pay the costs
20

[roughly $1 ,800] incurred in drafting the same. . . .

An actual stipulation/agreement would need

to be in a separate writing, independent of this email."

(Doc. 25-1 at 11).

In a subsequent

email dated August 1, 2011, Mr. Davis informed Mr. MacDowell that although he declined to
state definitively that the only remaining issue with respondents' production pertained to emails,
those remained plaintiffs biggest concern.

(!d.).

Mr. Davis stated to the extent the Khans

claimed they did not have possession, custody or control over any relevant emails, an affidavit
setting out that statement and the process by which the Khans reached their determination would
be appropriate.

(Jd.).

Mr. Davis also wrote: "Payment of the fees incurred in drafting the

motion to compel is a necessary condition to our withdrawal of the pending motion for contempt.
Accordingly, this motion should be resolved first, before we attempt to resolve all the terms and
conditions of an agreement to withdraw that motion, which, to reiterate, needs to be in a separate
authenticated writing to be valid."
in the amount of$1,791.50.

(!d.).

On August 9, 2011, respondents paid fees to plaintiff

(Doc. 25-1 at 16-17).

Subsequently, in an email dated August 11,

2011, Mr. Davis informed Mr. MacDowell that when respondents "compl[ied] with the order,
e.g., we get an affidavit from the Khans, we'll withdraw the motion [for contempt]."
at 20).

(Doc. 25-1

Respondents assert they complied with the terms of the agreement by filing the Khans'

affidavits on August 23, 2011 and August 24, 2011, stating they did not have possession, custody
or control over any relevant emails and indicating the process by which this determination was
reached.

(Doc. 25 at 4).

The Court should not order the return of attorney fees paid in light of respondents' failure
to comply with the terms of the Court's June 8, 2011 order on plaintiffs motions to compel.
(Doc. 15).

Because respondents failed to timely produce the discovery ordered by the Court,
21

plaintiff was justified in declining to withdraw its motion for contempt.
retain the fees it incurred in connection with the motion.

Plaintiff is entitled to

See Rule 37(b)(2)(C) (sanctions for

not obeying an order to provide discovery include the reasonable expenses, including attorney
fees, caused by the failure).

IT IS THEREFORE ORDERED:
1.

Respondents' motion for an order finding they have complied with the Court's post-judgment

discovery order, for the cessation of discovery, or for a hearing on outstanding discovery matters
(Doc. 25) is DENIED.
2.

Respondents' motion for the temporary cessation of post-judgment discovery (Doc. 26) is

DENIED.
IT IS THEREFORE RECOMMENDED:
1.

Respondents' motion for the return of attorney fees (Doc. 25) should be DENIED.

2.

The district judge should issue a show cause order to respondents to appear at a date certain

before the district judge to show cause during a hearing why they should not be held in contempt
of court for failing to obey the Court's June 8, 2011 discovery order.

IT IS SO ORDERED.

~X:~~-/

jc....::;e.o.:.....=.._!...!:VA.~--

Date:_....L,jg'-+j;..L..:C..-.3

=-==-0

Karen L. Litkovitz
United States Magistrate Judge

22

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION

Case No. 1: 11-mc-023

AETNA GROUP USA, INC.,
Plaintiff

Spiegel, J.
Litkovitz, M.J.

vs
AIDCO INTERNATIONAL, INC.,
Defendant

NOTICE
Pursuant to Fed. R. Civ. P. 72(b), WITHIN 14 DAYS after being served with a copy of
the recommended disposition, a party may serve and file specific written objections to the
proposed findings and recommendations.

This period may be extended further by the Court on

timely motion for an extension. Such objections shall specify the portions of the Report
objected to and shall be accompanied by a memorandum oflaw in support of the objections. If
the Report and Recommendation is based in whole or in part upon matters occurring on the
record at an oral hearing, the objecting party shall promptly arrange for the transcription of the
record, or such portions of it as all parties may agree upon, or the Magistrate Judge deems
sufficient, unless the assigned District Judge otherwise directs. A party may respond to another
party's objections WITHIN 14 DAYS after being served with a copy thereof. Failure to make
objections in accordance with this procedure may forfeit rights on appeal. See Thomas v. Arn,
474 U.S. 140 (1985); United States v. Walters, 638 F.2d 947 (6th Cir. 1981).

23