H.S. Field Services, Inc. v. CEP Mid-Continent, LLC

Filing 74

OPINION AND ORDER by Magistrate Judge Paul J Cleary ; granting in part and denying in part 53 Motion to Compel; denying 61 Motion for Sanctions (kjp, Dpty Clk)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF OKLAHOMA

H.S. FIELD SERVICES, INC.
Plaintiff,
v.
CEP MID-CONTINENT, LLC,
Defendant.

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Case No. 12-CV-531-JED-PJC

OPINION AND ORDER
This matter is before the Court on the Renewed Motion to Compel and
for Sanctions (“Motion to Compel”) of Defendant CEP Mid-Continent LLC (“CEP”).
[Dkt. No. 53]. CEP complains that H.S. Field Services, Inc. (“HS”) has failed to
provide documents necessary for CEP to defend HS’s claims against it and to
prosecute CEP’s counterclaim. CEP asks the Court to direct HS to produce the
following:
o Daily Roustabout Worksheets;
o Daily employee timesheets, logs or work tickets;
o All Third-Party Invoices for charges billed by HS to CEP for invoices
that are the subject of CP’s audit or HS’s claims;
o Audited financial records and tax returns and related schedules;
o HS’s electronic QuickBooks.
At the heart of this discovery dispute is a disagreement between the
Parties over which of the above documents exist as well as the usual relevancy
issues. The Court conducted a hearing on March 11, 2014, and CEP placed
additional evidence in the record.
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I
BACKGROUND
CEP operates oil and gas leases in Osage County, Oklahoma, among other
places. Pursuant to a Master Service Agreement (“MSA”), HS provides various
work and services for CEP’s oil and gas leases. This lawsuit arises out of the ongoing business relationship between HS and CEP from May 2003 to February
2012. HS alleges that beginning in 2011, CEP failed to pay for services rendered
totaling $504,994.85.1 CEP has initiated an audit, pursuant to the terms of the
MSA, and has counterclaimed, alleging that HS breached its contracts with CEP
through improper charges and overcharges in excess of $1.5 million. [Dkt. No.
43].
The MSA was executed on March 25, 2009, and establishes basic terms of
the Parties’ agreement. Under the agreement, HS was to perform certain Work
for CEP. The Work included “all services” performed by HS for CEP and HS’s
“provision to [CEP] of products, equipment, supplies, or materials utilized in
connection with such services.” MSA, ¶1. Under the MSA, HS is to maintain “a
true and correct set of records pertaining to the Work,” and each subcontractor
is to retain “all records which are subject to inspection hereunder for the
applicable statute of limitations period.” Id. at ¶6. Furthermore, CEP may audit
any and all records of HS and of any subcontractor relating to HS’s Work:

HS’s First Amended Complaint asserts claims for open account, quantum
meruit and breach of contract. [Dkt. No. 13].
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Company [CEP] shall have to the right to audit Contractor’s {HS’s]
books and records relating to all invoices issued pursuant to this
Contract. Contractor agrees to maintain such books and records
for a period of two (2) years from the date such costs were incurred
and to make such books and records available to Company at any
time or times within such two-year period.
Id. at ¶12.
In mid-2011, problems arose between the parties and CEP did not pay
certain invoices. In November 2011, CP asserted its right under the MSA to
audit HS’s books regarding invoices. In July 2012, HS filed suit in Washington
County District Court; thereafter, CEP removed the case to this Court.2 CEP
filed its counterclaim in October 2012.
In furtherance of the audit, CEP requested a broad range of documentation
from HS. Disputes quickly arose over what information HS maintained and
what documents would be made available to CEP. After CEP served discovery
requests, further disputes arose including the breadth of document requests, and
the relevance of information sought. In May 2013, CEP filed a Motion to
Compel. [Dkt. No. 31]. After initial review of the motion and response, the
Court ordered the Parties to meet and confer over the scope of information
requested, and attempt to narrow their dispute. [Dkt. No. 44]. The Parties
seemed to have successfully resolved most of their disputes; therefore, the Court
The MSA provides that “[I]n the event that litigation arises in connection
with this Contract or any Work, any action must be brought in Harris County,
Texas.” [Dkt. No. 31-2, MSA, ¶ 13]. At the hearing held on March 11, 2014, both
Parties advised the Court that their clients were waiving their rights under this
forum selection clause.
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denied the Motion to Compel Without Prejudice. [Dkt. No. 46]. The Parties
were directed to “advise the Court well before the scheduled discovery cutoff” if
any matters were not fully resolved. [Id.].
On January 16, 2014, CEP filed the pending Renewed Motion to Compel
and for Sanctions. The Parties continue to disagree over what information is
relevant for purposes of Rule 26, and also what must be produced and has been
produced for purposes of the MSA audit. The Parties also contest what
documentation even exists – CEP claims that HS has lost or destroyed necessary
documents. HS denies this assertion.
II
APPLICABLE LEGAL PRINCIPLES
It is generally understood that discovery under the Federal Rules is
limited by relevance and burdensomeness. Rich v. Martin Marietta Corp., 522
F.2d 333, 343 (10th Cir. 1975); Littlebear v. Advanced Bionics, LLC, 2012 WL
2979023, *1 (N.D. Okla. July 20, 2012). Following the 2000 amendment of Fed.
R. Civ. P. 26, the Tenth Circuit Court of Appeals noted:
This change implemented a two-tiered discovery process; the first
tier being attorney-managed discovery of information relevant to
any claim or defense of a party, and the second being courtmanaged discovery that can include information relevant to the
subject matter of the action. See, e.g., 6 James Wm. Moore et al.,
Moore's Federal Practice § 26.41[1] (3d ed.2007) [hereinafter Moore's ];
8 Charles Alan Wright, Arthur R. Miller, & Richard L. Marcus,
Federal Practice and Procedure § 2008 (2d ed.2008) [hereinafter
Federal Practice]; Thomas D. Rowe, Jr., A Square Peg in a Round Hole?
The 2000 Limitation on the Scope of Federal Civil Discovery, 69 Tenn.
L.Rev. 13, 17 (2001). Accordingly, when a party objects that
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discovery goes beyond that relevant to the claims or defenses, “the
court would become involved to determine whether the discovery is
relevant to the claims or defenses and, if not, whether good cause
exists for authorizing it so long as it is relevant to the subject
matter of the action.” Fed.R.Civ.P. 26 advisory committee's note
(2000). This good-cause standard is intended to be flexible. Id.
When the district court does intervene in discovery, it has
discretion in determining what the scope of discovery should be.
In re Cooper Tire & Rubber Co., 568 F.3d 1180, 1188 -1189 (10th Cir. 2009).
While Rule 26 still contemplates liberal discovery and broad concept of
relevance, the Rule also recognizes that discovery must be proportionate to the
case and issues at hand. Fed. R. Civ. P. 26(b)(2). Trial courts have broad
discretion in managing discovery matters and are subject to review only for
abuse of discretion. Smith v. Sentinel Inc. Co., Ltd., 2011 WL 2883433, *1 (N.D.
Okla. July 15, 2011).
Rule 26(b)(1) provides that parties may obtain discovery “regarding any
matter, not privileged, that is relevant to the claim or defense of any party….
Relevant information need not be admissible at the trial if the discovery appears
reasonably calculated to lead to the discovery of admissible evidence.”
Fed.R.Civ.P. 26(b)(1). At the discovery phase of litigation “relevancy” is broadly
construed.
In this case, document production is also guided by the contractual
provisions of the MSA. CEP’s right to audit HS’s records and HS’s obligation to
retain certain documentation is set forth in Paragraphs 6 & 12. Under the MSA,
HS is required to retain certain books and records related to the Work
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performed for CEP for two years from the time the Work was performed. CEP
has the right to review these books and records within that two-year period.
III
DISCUSSION
The first issue the Court will address is the temporal scope of CEP’s
discovery. HS filed its breach of contract claim on July 23, 2012. [Ex. “A” to Dkt.
No. 2]. The contract between CEP and HS is governed by Texas law. MSA, ¶ 13.
Texas law provides for a four-year statute of limitations on written contracts.
V.T.C.A., Civil Prac. & Rem Code § 16.051; Lopez ex rel. Gutierrez v. Premium
Auto Acceptance Corp., 389 F.3d 504 (5th Cir. 2004) (In Texas, the residual fouryear statute of limitations generally governs contract actions.). Thus, the
relevant period for Rule 26 discovery as to the contract claims of HS and CEP
begins July 23, 2008 and extends to February 2012 (the “discovery time period”).
CEP also has a two-year window within which to audit HS’s books and
records related to the Work performed under the MSA. CEP asserted its right
to audit on November 30, 2011. Therefore, HS must make available its books
and records for auditing from November 30, 2009, to February 2012 (the “audit
time period”).
The evidence submitted to the Court indicates that HS has not
produced documents that it should have retained in connection with the
invoices it submitted for payment. The affidavit of Roxanne Haynes-Urbina
(“Haynes”) and her August 15, 2012, Audit Report establish some of the
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problems with HS’s supporting documentation for invoices it submitted for
payment. The signed statement of Robert Benfer, former HS Crew Foreman,
indicates that daily logbooks were kept at least by some HS employees and that
Roustabout Worksheets were required by HS management in order to prepare
invoices. Nevertheless, CEP has now been told that while Roustabout
Worksheets were used prior to 2008/09 and again after this lawsuit was filed,
few, if any, exist for 2008-12, the time period relevant to this litigation. This is
not consistent with Haynes’s recollection of what she was told by HS’s office
manager. Haynes stated that Jamie Laws told her that Roustabout Worksheets
and time records were used to prepare invoices. Particularly troubling to the
Court are statements made by Jim Shambles (“Shambles”), owner of HS,
concerning HS’s efforts to find relevant documents. At his deposition in January
2014, Shambles was asked about employee time records:
Q:
So the superintendent would then take this information and fill out
a schedule that reflected the daily hours worked by each employee. Is that
correct?
A:

Yes.

Q:

What was then done with that schedule?

A:
It would be given to the girl in the office and she would, when
Paychex would phone, she would read the hours, like I said before: 40 and 30,
40 and 24, 40 and 15.
Q:

Was that girl in the office Jamie Laws?

A:

Yes.

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Q:

And then what would Jamie Laws do with the schedule?

A:
Kept it in a file with that till, like I said, as far as I know, she kept it
in a file till she made sure that nobody came in complaining about their
paycheck.
Q:
records?
A:

Was she given any instructions as to how long to retain those

Not by me.

Q:
Have you asked Ms. Laws whether she retained past weekly
time records?
A:

I haven’t asked her, no.

Q:

How do you know that they no longer exist?

A:
They would have been in the Conex, in the boxes that you guys had
been through. And she did, she has been involved in all of this, too. She would
have known, she said have said something if they were anywhere else.
Q:

But you haven’t asked her if they exist someplace else?

A:

She knows you guys are going through the boxes.

Q:
My question to you is: At any time after this audit started have
you asked her what happened to the weekly time records for your
employees?
A:

No. I don’t recall that.

[Dep. of Jim Shambles, vol. II, p.167, line 24 – p. 169, line 7 (emphasis added)].
Thus, even after two motions to compel have been filed, multiple meetings
and communications between counsel over discovery, and visits to HS’s offices to
review documents, it appears that HS has not undertaken the basic inquiry into
whether requested documents exist. Rule 26(g) “imposes an affirmative duty to

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engage in pretrial discovery in a responsible manner that is consistent with the
spirit and purpose of Rules 26 through 37.” Rule 26 advisory committee’s note
(1980). A critical part of the discovery procedure is a “reasonable inquiry”
before a party responds to discovery requests. The responding party’s attorney
must make a reasonable inquiry “into the factual basis of his response.” Id. The
attorney may rely on assertions by the client “as long as that reliance is
reasonable under the circumstances.” Id.
Here, the Shambles deposition indicates that HS has not inquired of its
employees whether they know of documents responsive to CEP’s requests and if
they personally retained such documents. Shambles, for example, said he did
not inquire of Laws whether she retained any of the schedules reflecting
employee’s hours worked. Likewise, it is unclear what investigation was made
concerning Roustabout Worksheets. Clearly, more must be done in the way of
“reasonable inquiry” to determine what documents responsive to CEP’s requests
HS has in its possession, custody or control.
CEP’s Motion to Compel is GRANTED IN PART AND DENIED IN
PART. First, the relevant audit time period for review of documents under the
MSA is November 30, 2009, to February 2012. HS is hereby ORDERED to
produce within two weeks of the date herein, its QuickBooks electronic
information for the audit time period. HS is also ORDERED to produce any

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daily Roustabout Worksheets, employee timesheets and third party vendor
invoices for charges billed to CEP by HS for invoices for the audit time period.
In addition, CEP is entitled to discovery pursuant to Rule 26 as to HS’s
claims and CEP’s counterclaim. In this regard, HS is hereby ORDERED to
produce audited financial statements for July 2008 through 2011. Additionally,
HS shall produce Roustabout Worksheet and employee time sheets for July
2008 through November 2009, if they exist. As the Court has previously
Ordered, HS shall certify that it has made a reasonably thorough search for
these documents and shall advise CEP if these documents have been located and
for what time period. The communication is this regard is to be certified by
HS’s counsel and an officer of HS. If any such documents have been lost or
destroyed, HS shall certify that fact and explain when, how and why any such
destruction occurred. See Dkt. No. 72. This should be completed by April 1,
2014.
CEP’s MOTION FOR SANCTIONS
CEP also seeks an award of monetary and other sanctions against HS for
its discovery conduct. Whether sanctions are appropriate, and, if so, in what
form, is not clear from this record. It is unclear, for example, whether requested
documents exist but were not adequately searched for, or whether documents
were deliberately ignored, hidden or destroyed, or whether documents were
accidentally lost or destroyed. Much may depend on the testimony of witnesses

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who have not yet been deposed. Furthermore, properly developing the record
for purposes of a sanctions hearing will divert time and effort from the real
issues at hand: completing discovery and preparing for settlement or trial of
this case. Four Scheduling Orders have been entered in this case [Dkt. Nos. 21,
29, 49 & 69]. The Parties have less than 60 days to complete fact discovery and
only about 10 weeks to complete expert reports and discovery. Taking up the
sanctions issue at this time will pose obstacles to the Parties’ ability to meet the
Court’s trial schedule. Therefore, the Court DENIES WITHOUT PREJUDICE the
pending Motion for Sanctions [Dkt. Nos. 61 & 53]. The Court’s action is not to
be interpreted as a statement concerning the substantive merits of that motion;
rather, it merely recognizes that the Parties’ ability to complete discovery and
meet other scheduling deadlines will be impaired if they undertake satellite
litigation over sanctions at this time. The motion will be addressed if it is
renewed at the end of the case.
IT IS SO ORDERED this 18th day of March 2014.

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