Atmosphere Hospitality Management, LLC v. Shiba Investments, Inc. et al

Filing 258

ORDER granting 150 Motion for Sanctions; denying as moot 220 Motion for Partial Summary Judgment; denying as moot 246 Motion to deem facts admitted.Defendants to fully satisfy their outstanding discovery obligations by 8/20/2015. Defendants to pay Atmosphere $4,422.32 by 8/20/2015. Signed by U.S. District Judge Karen E. Schreier on 7/29/2015. (KC)

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
WESTERN DIVISION
ATMOSPHERE HOSPITALITY
MANAGEMENT, LLC,

CIV. 13-5040-KES

Plaintiff,
vs.
ZELJKA CURTULLO,

ORDER ON
MOTION FOR SANCTIONS

Defendant,
and
SHIBA INVESTMENTS, INC.,
KARIM MERALI, and
Defendants and
Third-Party Plaintiffs,
vs.
JAMES HENDERSON,
Third-Party Defendant.

Plaintiff, Atmosphere Hospitality Management, LLC, and third-party
defendant, James Henderson (collectively “Atmosphere”), moves for sanctions
against defendants/third-party plaintiffs Shiba Investments, Inc., and Karim
Merali. The court grants in part and denies in part the sanctions requested by
Atmosphere.

BACKGROUND
Atmosphere brought this action against Shiba and Merali to resolve
issues related to a licensing contract and management contract between the
parties that allowed Shiba to operate a hotel it owned under Atmosphere’s
brand, “Adoba.” Following numerous discovery disputes, Atmosphere moved to
compel certain items of discovery. Docket 98. The court held a hearing on that
motion, and granted most, but not all, of the relief requested by Atmosphere.
Docket 135. Subsequently, Atmosphere filed a motion for attorney’s fees
relating to its first motion to compel discovery. Docket 147. Atmosphere also
moved for sanctions pursuant to Federal Rule of Civil Procedure 37(b)(2)(A)
based on a failure to comply with the court’s order on the motion to compel
responses to the first set of discovery. Docket 150. On January 9, 2015, the
court granted in part and denied in part Atmosphere’s motion for attorney’s
fees and ordered further briefing on the motion for sanctions. Docket 173.
DISCUSSION
Federal Rule of Civil Procedure 37(b)(2) states:
If a party or a party’s officer, director, or managing agent . . . fails
to obey an order to provide or permit discovery, including an order
under Rule 26(f), 35, or 37(a), the court where the action is
pending may issue further just orders. They may include the
following:
(i)

directing that the matters embraced in the order or other
designated facts be taken as established for purposes of the
action, as the prevailing party claims;

(ii)

prohibiting the disobedient party from supporting or
opposing designated claims or defenses, or from introducing
designated matters in evidence;
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(iii)

striking pleadings in whole or in part;

(iv)

staying further proceedings until the order is obeyed;

(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.

“Instead of or in addition to the orders above, the court must order the
disobedient party, the attorney advising that party, or both to pay the
reasonable expenses, including attorney’s fees, caused by the failure, unless
the failure was substantially justified or other circumstances make an award of
expenses unjust.” Fed. R. Civ. P. 37(b)(2)(C). To impose sanctions under Rule
37, “there must be an order compelling discovery, a willful violation of that
order, and prejudice to the other party.” Chrysler Corp. v. Carey, 186 F.3d
1016, 1019 (8th Cir. 1999). Sanctions must be “ ‘just’ and relate to the claim at
issue in the order to provide discovery.” Hairston v. Alert Safety Light Products,
Inc., 307 F.3d 717, 719 (8th Cir. 2002) (citation omitted).
As part of the January 9, 2015, order, the court concluded that the
initial requirements for the imposition of sanctions as laid out in Chrysler
Corporation were satisfied. Docket 172 at 13-14. Because defendants had not
briefed the issue regarding the specific sanctions Atmosphere sought,1 the

Rather, the only argument advanced by defendants was that they had
complied with the court’s order within the correct number of days allotted by the
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3

court directed the parties to submit further briefing. Additionally, the court
instructed Atmosphere to describe the sanctions it requested and to submit an
affidavit for a fee request. The court also cautioned:
Defendants should also explain what steps they have taken to
correct the insufficient discovery responses. In determining
sanctions, the court will consider, among other factors, whether
defendants have remedied their failure to comply with the court’s
order on the motion to compel. If defendants have not complied in
full with the court’s order at that time, the court will consider
imposing any and all sanctions authorized under Rule 37, up to
and including dismissal of the third-party complaint or entry of a
default judgment.
Id. at 14-15.
Defendants state that they have produced two tabulated binders
containing approximately 1,500 pages of information pertinent to Atmosphere’s
discovery requests. These binders were turned over to Atmosphere on
January 16, 2015. Additionally, they have been separated into 11 tabbed
sections (lettered A-K). Atmosphere has provided a copy of defendants’ most
recent supplemental response to its discovery request as of January 27, 2015.
Docket 199-1. Defendants thus contend that they have “provided plaintiffs with
the information requested in all outstanding discovery[.]” Docket 193 at 4.

court. The court explained that the rule defendants purported to rely on “does not
exist,” and determined that, with one exception, each of the defendants’ late-filed
responses were inadequate. See Docket 173.
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I.

Have Defendants Fully Remedied Their Inadequate Discovery
Responses?
A.

Request for Production Number 2

Atmosphere’s RFP 2 stated:
Please produce a copy of all communications in hard copy and
electronic format, including email, text messages and attachments,
whether personal or business, by Defendants, its attorneys and/or
its employees, including but not limited to emails between, to, or
from Karim Merali, Sacha Merali, Mehdi Merali, Zeljka Curtilo,
Batool Merali and/or their attorney(s) regarding the Adoba brand,
Atmosphere, Jim Henderson, Adrienne Pumphrey, the agreements
between the parties to this litigation, the operation and/or
management of the Adoba hotel in Rapid City, the renovations of
the hotel to the Adoba brand, the use of the Adoba brand, the
intentions of the parties in their relations, any negotiations, and
the finances of both Adoba and Atmosphere. This request is not
asking for communications solely between a client and its/his/her
attorney.
According to defendants’ most recent supplemental response, the
following sections of its tabulated binders address this RFP:
Tab A (emails with Henderson regarding Agreements); Tab B
(additional emails with Henderson regarding agreements); Tab E
(renovation expenses for the hotel after 2012); Tab E (additional
renovation invoices and vendors); Tab F (miscellaneous emails
mostly following the inception of the management contract but
concerning the hotel); Tab I (emails, plans and related
documentation concerning hotel renovations); and Tab J
(additional renovation invoices)[.]
Docket 199-1.
Atmosphere maintains that there are several shortcomings with
defendants’ response. For example, Atmosphere notes that defendants have not
produced an email sent from Karim Merali to Mike Schmitz, an employee at the
hotel, discussing allegations defendants have made against James Henderson

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related to defendants’ third-party complaint and counterclaims. This email was
brought up at the September 29, 2014, hearing, and the court specifically
directed defendants to include that email (and emails similar to it) in their
response to this RFP. Docket 169 at 20-21.2 Defendants still have not done so.
Relatedly, Atmosphere contends that defendants have not disclosed all
communications pertaining to or containing attachments of drafts of the
contracts, which defendants agreed to produce after the parties met and
conferred. In a letter summarizing that meeting, counsel for Atmosphere
recalled that defendants agreed to produce those communications and asked
defendants’ counsel to respond with any disagreements to the summary.
Docket 100-5. No response was given. Although defense counsel has since
been disqualified (Docket 255), this court had twice admonished him to follow
through on the agreements made at the meet and confer. Docket 169 at 15-16;
Docket 173 at 9-10 n.1. Nonetheless, these communications have not been
turned over.
Atmosphere also doubts the completeness of defendants’ supplemental
responses, as the RFP sought “all” of the specified communications. But, for
example, Tab A consists of a single email from James Henderson to Karim and
Sacha Merali dated December 26, 2011, referencing “the Agreements
[Henderson] delivered to [the Meralis] 3 weeks ago[.]” Docket 199-10. This email
was disclosed by and used as Atmosphere’s Exhibit 57 at the preliminary
The court also directed defense counsel to complete a privilege log if he
believed any of the communications sought by the RFP were privileged. See Docket
169 at 21. A privilege log has not been submitted to the court.
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injunction hearing. Tab B similarly consists of one email from James
Henderson to Karim Merali dated December 15, 2011, explaining that
“Attached are the Agreements you requested in Electronic format.” Docket 19911.3 But Atmosphere also sought each communication that related to
subsequent drafts of those editable agreements. And while Tab I contains some
emails that pertain to the renovation of the hotel, a number of the documents
contain the actual plans and specifications to renovate the hotel rather than
communications, or are simply communications unrelated to the information
sought in this RFP. See Docket 199-12; Docket 199-13.
The court has before it only small portions of the approximately 1,500
pages of material provided to Atmosphere. On one hand, it appears the
defendants have, albeit belatedly, produced some of the documents sought by
Atmosphere’s RFP. On the other hand, defendants have not produced the
Schmitz email as instructed by this court or all of the communications
concerning drafts of the contracts as contemplated by the parties’ meet and
confer agreement. The court reiterated at the September 29, 2014, hearing that
if the party responding to an RFP does not have the documents being sought,
the party must sign a response to that effect. Docket 169 at 16; see also Fed.
R. Civ. P. 34. Such a response has not been provided, and the court will not
assume that defendants are not in possession of the documents Atmosphere
seeks. Moreover, defendants’ assertion that they have only recently been able
The two attachments are titled “Adoba Hotel Rapid City License
Agreement.doc” and “Atmosphere Adoba Hotel Rapid City Management
Contract.doc.” Docket 199-11.
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7

to locate this mass of documents is unaccompanied by affidavit or a citation to
other evidence within the record and borders on the incredible. See Docket 193
at 4 (explaining the difficulty in locating this information is attributable to
Atmosphere’s use of “systems unfamiliar to the Defendants,” the hotel
renovations, and ultimately that defendants were able to find the documents
“somewhat by accident”). Ultimately, defendants were required to show what
steps they have taken to cure their inadequate discovery responses and to cure
those inadequacies in full. Defendants have not done so. Consequently,
defendants’ response to this RFP remains inadequate.
B.

Request for Production Number 5.

Atmosphere’s RFP 5 stated:
For each such email produced in response to Request for
Production Nos. 2, 3 and 4, please provide a copy of the
corresponding .pst file, a print-out of the email listed amongst the
other emails in the Sent box sent on the same day as the email
produced, a print-out of the email listed amongst other emails in
the Inbox or other folder received on the same day as the email
produced, a print out of all metadata for each email produced, and
all emails saved and produced in their native format on a CD. This
request requires this information even for emails that may have
been previously produced.
Defendants’ most recent supplemental response to Atmosphere’s
discovery requests does not address this RFP. See Docket 199-1 (responding to
RFP 6 after responding to RFP 3). Thus, Atmosphere contends that defendants
have done nothing to remedy their inadequate response. Defendants’ only
argument on this point pertains to an email allegedly sent from Karim Merali to
James Henderson on December 31, 2011. A screenshot of this email was

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introduced as defendants’ Exhibit Y during the preliminary injunction hearing
in October 2013.4 It purported to contain a finalized version of the Adoba
licensing agreement and asked James Henderson to “Please review and let me
know if [it is] ok per our discussions late last night.”
Atmosphere claims it has neither received a copy of this email from
defendants as asked for in its RFP 2, or the types of related data sought in its
RFP 5. Defendants ignore Atmosphere’s allegation that they have not produced
the communication and instead argue that Daniel Meinke, an analyst for
Computer Forensic Resources and one of Atmosphere’s experts, has located
and made a copy of the email after collecting forensic images of the hard drives
from several of Karim Merali’s computers. See Docket 193-2. Meinke’s findings
were forwarded to Atmosphere on January 6, 2015. Docket 193-1; Docket 1934. Atmosphere acknowledges that it received this report, but points to a
subsequent report by Meinke. See Docket 199-9. In this later report, Meinke
explains that he was able to locate two identical images of the email, but
provided several reasons why he did not believe the email itself was ever
actually sent to James Henderson. Id. at 3-4. For example, the images of the
email were located in the Merali’s “Inbox” rather than the “Sent” messages
folder. Id. at 4. Meinke also noted discrepancies between the timestamp on
Exhibit Y and the two copies he was able to locate. Id. (explaining the

A copy of the email later forwarded to attorney Clayborne accompanied the
screenshot, which displays the text of the email more clearly.
4

9

timestamp on Exhibit Y read “4:59 PM” but the timestamp on the copies read
“5:58 PM”).
Meinke’s doubts that the email was ever sent have been reinforced by
Karim Merali. Atmosphere’s third set of discovery requests, and Karim Merali’s
responses to them, includes the following disclosure:
48. Admit that your Exhibit Y introduced at the preliminary
injunction hearing was never emailed to James Henderson.
RESPONSE: Admit. I believe it was hand delivered.
Docket 184-2. Obviously, Atmosphere sought an admission to whether the
communication portrayed in the exhibit, not the physical exhibit itself, was
ever emailed to James Henderson. Notably, the signature on this response is
dated January 15, 2015. Docket 184-2 at 3. Thus, six days had elapsed since
this court warned defendants that sanctions would be forthcoming if they did
not fully and completely remedy their inadequate discovery responses. Whether
or not Merali intended this response to be a poorly conceived and incredulous
answer to Atmosphere’s request for admission, the court will take Merali at his
word: The email was never sent.
Beyond this, defendants have offered nothing to suggest they have fully
produced the documentation sought by this RFP. Consequently, defendants’
response remains inadequate.
C.

Request for Production Number 8

Atmosphere’s RFP 8 stated:

10

Please produce a copy of all employee records and payroll records
for 2008, 2009, 2010, 2011, 2012 and 2013.
The court limited the timeframe of this RFP to 2011 through 2013. Docket 169
at 26-27. Additionally, the court ordered defendants to include any
nondisclosure agreements that may have been signed and a list of employees in
its response. Id.
Defendants’ most recent supplemental response transcribed the text of
Atmosphere’s RFP 7 and labeled it as RFP 8. Compare Docket 164-2 at 1
(Atmosphere’s RFP 7, which reads: “Please produce a copy of the Profit and
Loss Statements, balance sheets and IRS statements of the Defendants for
2006, 2007, 2008, 2009, 2010 and 2011.”) with Docket 199-1 at 8 (same text
labeled as Atmosphere’s RFP 8). Nonetheless, defendants state that the
following sections of its tabulated binders address RFP 8:
See Tab H . . . This tab would include the relevant 941 Forms,
defendants[’] employee information as well as the general ledger for
the hotel property during these time frames. To the extent this
response request[s] information concerning independent
contractors, including individual employees of that information
[sic] is also contained within Tabs D and E of the same document.
Docket 199-8.
Defendants’ supplemental response suggests that Tab H contains
documents for “the[] time frames” sought by the RFP. In other words, it
contains documents from 2011 through 2013. Defendants’ brief nonetheless
describes the contents of Tab H as “every employer’s form 941 for the time from
May 2013 through December 2013, all quarterly earnings reports (listing all
employees) for that same time, and the complete hotel general ledger for
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January 1, 2013 through December 31, 2013.” Docket 193 at 3 (emphasis
added). Atmosphere likewise notes that Tab H only contains information from
2013. Docket 198 at 17 (discussing Tab H’s applicability to RFP 9).
Assuming defendants have produced the appropriate kinds of documents
sought by the RFP, it is unclear whether they have also produced those
documents for 2011-2013 (as the supplemental response suggests) or that they
have only produced documents for 2013 (as the parties’ briefs suggest). The
court instructed defendants to explain what steps they have taken to alleviate
their incomplete discovery responses. The ambiguity with what, in fact,
defendants have produced is their own making, and defendants have provided
no reason for the court to assume a complete disclosure has been made.
Moreover, defendants also contend that they do not have any
nondisclosure agreements in their possession. See Docket 193 at 11. This
statement appears in defendants’ brief. There is no accompanying citation
supporting this claim. Again, the court admonished defense counsel at the
September 29, 2014, hearing that if the responding party to an RFP does not
have the documents being sought, that party must sign a response to that
effect. Docket 169 at 16. Defendants’ freestanding assertion in their brief is not
a substitute for that requirement. Thus, not only is defendants’ response to
RFP 8 inadequate, but defendants have again failed to follow proper procedure
responding to the RFP itself.
D.

Request for Production Number 9

Atmosphere’s RFP 9 stated:
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Please produce a copy of all employee, personnel, or owner files for,
and wages, amounts paid, or owners' disbursements to Karim
Merali, Batool Merali, Mehdi Merali and Sacha Merali from April
2013 through the present.
Defendants’ supplemental response to this RFP is:
There are no owner files for these individuals. All employee files
can be accessed by referring to Tab[] H . . . and specifically the
general ledger attached thereto. It should be noted that payments
made to Sacha and Medhi Merali in the general ledger would
reflect payments made to them for reimbursements and as
independent contractors.
Docket 199-1 at 8. The information sought by the RFP included documents
from April 2013 to the present. Tab H, as discussed regarding RFP 8, only
includes documents from 2013. Even if a line were drawn at January 27, 2015,
the date that defendants’ supplemental response was signed, defendants’
response would not have included the documents sought by the RFP from 2014
to that date.
Additionally, the court specifically stated that defendants should produce
documents related to owner distributions as part of its response to this RFP.
Docket 169 at 27. Defendants’ supplemental response speaks of “owner files,”
but does not address owner distributions. At best, it appears from the record
that defendants have produced a single document pertaining to distributions
made to Karim Merali for 2013 and 2014. See Docket 164-1 at 32. Yet, Sacha
Merali and Medhi Merali are also owners. See Docket 199-1 at 2-3. While
defendants’ response speaks of so-called “reimbursements” paid to Sacha
Merali and Medhi Merali, it says nothing of distributions and, again, the

13

general ledger attached to Tab H only contains information from 2013. Thus,
defendants’ response to this RFP remains inadequate.
E.

Request for Production Number 10

Atmosphere’s RFP 10 stated:
Please produce a copy of all Kabamesa records of revenue paid to it
from Shiba or Atmosphere for 2011 and 2012.
The scope of this RFP has been narrowed to payments made from Shiba to
Kabamesa from 2011 through 2012. Docket 169 at 28. Defendants’ latest
supplemental response does not address this RFP. See Docket 191-1 at 8
(responding to RFP 9 and then RFP 21).
The court previously determined that what defendants had produced in
response to this RFP was insufficient. Docket 173 at 11 (“The four pages make
no mention of Kabamesa, nor does the response contain any of Kabamesa’s
records. This response is insufficient.”). Aside from an unsupported claim to
have produced its complete ledger and “all checks,” defendants point to no new
information they have produced that addresses this RFP. Consequently,
defendants’ response to this RFP remains inadequate.
F.

Request for Production Number 12

Atmosphere’s RFP 12 stated:
Please produce a copy of Karim Merali's electric, sewage, internet,
cable bills and other utilities for his personal residence in 2012
and 2013.
The court previously observed that, “Defendants have provided utility bills from
2012 through October 2014 and stated that additional records had been

14

requested and would be provided upon receipt.” Docket 173 at 11. Thus, at
that time, defendants’ response was sufficient. Id.
Atmosphere has since explained that while it has received the water,
sewage, power, and propane bills that it sought, it has not received Karim
Merali’s personal internet or cable bills. In an (albeit unsigned) previous
response to this same RFP, Karim Merali indicated he received service from
Midcontinent Communications. See Docket 100-2 at 6. Thus, as Atmosphere
suggests, Karim Merali likely does have cable and internet bills as sought by
the RFP. By the same token, Merali has not stated in a signed response to this
RFP that he does not receive such services and therefore did not have any
internet or cable bills to produce.
Additionally, defendants last responded to this RFP in October 2014 by
declaring that “additional records have been requested and will be provided
upon receipt.” See Docket 164-1 at 2. Defendants’ latest supplemental
response, filed on January 27, 2015, neither addresses whether any additional
records obtained in the interim have been provided nor further responds to this
RFP at all. See Docket 191-1 at 8 (responding to RFP 9 and then RFP 21).
Consequently, the court concludes defendants have not fully responded to
Atmosphere’s RFP 12.
G.

Request for Production Number 13

Atmosphere’s RFP 13 stated:

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Please produce documents which show from what account the bills
referred to in Request for Production No. [12] were paid.5
Defendants’ latest supplemental response does not address this RFP. See
Docket 191-1 at 8 (responding to RFP 9 and then RFP 21). Rather, defendants’
most recent response to this RFP is from October 2014, which the court
determined to be insufficient. Docket 173 at 11. At that time, the only
documents cited by defendants as responsive to this RFP were the same utility
bills it produced in response to RFP 12. See Docket 164-1 at 2. While those
documents showed that the bills had been paid, they did not show what
accounts the bills were paid from.
Defendants assert that their compelled discovery responses include
“personal checks for Merali showing payment of certain of those expenses from
his personal account or that of his wife.” Docket 193 at 14. This statement
contains no explanatory citation, and it is not clear what part or parts of the
two supplemental binders (assuming those are what defendants are referring
to) include those personal checks. Atmosphere notes that it has received a total
of four checks signed by Karim Merali from 2012, but none from 2013. Docket
198 at 19. If defendants did produce checks or other documents showing from
what accounts all of Karim Merali’s personal utilities were paid, it was

The text of this request refers back to RFP 11, rather than 12. See Docket
164-1 at 2. In turn, RFP 11 sought “a copy of all labor and wage citations, reports,
findings, audits, and related documents, including assessed fine information for
Adoba or the Radisson hotel from 2004-2012.” Id. Thus, RFP 11 did not seek the
production of any “bills” as RFP 13 suggests. This appears to be a typographical
discrepancy of no consequence, as the parties do not disagree that RFP 13 meant
to refer to the bills sought by RFP 12.
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incumbent on defendants to bring that evidence to the court’s attention.
Defendants have not done so. Their response to this RFP remains inadequate.
H.

Request for Production Number 14

Atmosphere’s RFP 14 stated:
Produce a copy of the utilities bills and revenue associated with the
Defendants' warehouses and rental homes for 2012 and 2013.
Defendants’ latest supplemental response does not mention this RFP. See
Docket 191-1 at 8 (responding to RFP 9 and then RFP 21). Defendants concede
that the utility bills for defendants’ warehouses and rental homes in 2012 and
2013 were paid by or out of the hotel’s operating account.6 See Docket 193 at
14. Atmosphere accepts this admission. Regarding the revenue associated with
those properties, defendants contend that it was collected by James Henderson
from February 2012 to April 2013. Defendants provide no citation for where
this assertion is derived from, or offer an explanation for what happened to the
revenue in January 2012 or from March to December 2013. Defendants’
response to this RFP is remains inadequate.
I.

Request for Production Number 15

Atmosphere’s RFP 15 stated:

Defendants assert that the documents it has provided establish this fact,
although they cite no portion of the court record or the tabulated binders they
provided to Atmosphere to support their statement. The court previously
determined that the documents produced by defendants in response to this RFP
were inadequate. See Docket 173 at 12. Thus, while Atmosphere accepts
defendants’ admission, defendants have not demonstrated to the court that it has
actually produced the documents in question in satisfaction of this RFP.
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Please produce documents which show from what account the bills
referred to in Request for Production No. [14] were paid.7
Defendants’ latest supplemental response does not mention this RFP. See
Docket 191-1 at 8 (responding to RFP 9 and then RFP 21). As with RFP 14,
defendants have acknowledged that the bills for defendants’ warehouses and
rental homes for 2012 through 2013 were paid by or out of the hotel’s
operating account. Atmosphere accepts this admission.8
J.

Request for Production Number 16

Atmosphere’s RFP 16 stated:
Please produce a copy of all Opera system postings for accounts
receivable for 2004-2012.
The court adjusted the timeframe of this RFP to 2010 through 2012. Docket
169 at 29. Defendants’ latest supplemental response does not mention this
RFP. See Docket 191-1 at 8 (responding to RFP 9 and then RFP 21). Similarly,
Defendants do not point to any portions of the tabulated binders that address
this RFP. Rather, defendants assert that “this information [was] asked and
answered in previous discovery request[s].” Docket 193 at 15.
First, defendants do not explain which of its prior answers to
Atmosphere’s previous discovery requests they are referring to. Second,
following defendants’ October 2014 response, the court determined that
defendants had not, in fact, adequately responded to this RFP. Docket 173 at
This RFP original referred back to RFP 12. Like RFP 13, however, that
appears to be a typo and the parties do not disagree which documents are actually
being sought.
7

8

See n.6, supra.
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12. Defendants do not elaborate on what, if anything, they have produced since
that time. Thus, defendants’ response to this RFP remains inadequate.
K.

Request for Production Number 18

Atmosphere’s RFP 18 stated:
Please produce a copy of all electric and utility bills for the hotel
operations from 2004-2012.
The court adjusted the timeframe of this RFP from 2010 to February 1, 2012.
Docket 169 at 29-30. Defendants’ latest supplemental response does not
mention this RFP. See Docket 191-1 at 8 (responding to RFP 9 and then RFP
21). Defendants’ brief likewise does not contend that this information has been
produced as ordered by the court. Instead, defendants simply contend that the
sanctions Atmosphere has requested are inappropriate. Consequently,
defendants’ response to this RFP remains inadequate.
L.

Request for Production Number 20

Atmosphere’s RFP 20 stated:
Please produce any and all documents and records regarding any
franchise or license agreement between Defendants and any other
party.
Defendants’ latest supplemental response does not mention this RFP. See
Docket 191-1 at 8 (responding to RFP 9 and then RFP 21). Similarly,
defendants’ brief provides no indication that the court’s order to produce these
documents has been complied with. Rather, defendants merely argue against
the propriety of the sanctions Atmosphere has requested. Consequently,
defendants’ response to this RFP remains inadequate.

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M.

Request for Production Number 21

Atmosphere’s RFP 21 stated:
Please produce any and all documents and records regarding
Karim Merali's schedule, day planner, or calendar from 2004 to
date.
The court adjusted the timeframe of this RFP from October 2011 to December
2011. Docket 169 at 30. Atmosphere notes that it has obtained the information
it sought, but it was never produced by defendants. Rather, Atmosphere only
obtained this information after it had to pay for Daniel Meinke to retrieve it.
Defendants do not dispute this.
II.

Appropriate Sanctions
Atmosphere requests that the court render a default judgment against

defendants on Atmosphere’s complaint and to dismiss defendants’ third-party
complaint.9 The Eighth Circuit has long recognized that “in our system of
justice the opportunity to be heard is a litigant’s most precious right and
should be sparingly denied.” Edgar v. Slaughter, 548 F.2d 770, 773 (8th Cir.
1977). Thus, “[t]here is a strong policy favoring a trial on the merits and
against depriving a party of his day in court.” Fox v. Studebaker-Worthington,
Inc., 516 F.2d 989, 996 (8th Cir. 1975). Consequently, entry of a default
judgment “should be the rare judicial act.” Edgar, 548 F.2d at 773.

Atmosphere also asks this court to enter an order compelling Sacha Merali
to respond to all written discovery requests. While the possible sanctions the court
may impose is not strictly limited to those enumerated in Rule 37(b)(2)(A), the
more appropriate way for Atmosphere to obtain this form of relief is by submitting
a Rule 37(a) motion.
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A default may be appropriate, however, “where the party against whom
the judgment is sought has engaged in ‘willful violations of court rules,
contumacious conduct, or intentional delays.’ ” Forsythe v. Hales, 255 F.3d
487, 490 (8th Cir. 2001) (quoting Ackra Direct Mktg. Corp. v. Fingerhut Corp., 86
F.3d 852, 856 (8th Cir. 1996)). Likewise, dismissal of a party’s claims may be
appropriate “when a party demonstrates a ‘blatant disregard of the Court’s
orders and the discovery rules,’ ” which prevents the opposing party from fairly
litigating its case. Chrysler Corp., 186 F.3d at 1020. Before imposing a sanction
of dismissal or default, however, “fairness requires a court to consider whether
a lesser sanction is available or appropriate.” Keefer v. Provident Life & Acc. Ins.
Co., 238 F.3d 937, 940 (8th Cir. 2000). But if the facts show both willful
misconduct and bad faith, the court “need not investigate the propriety of a
less extreme sanction.” Everyday Learning Corp. v. Larson, 242 F.3d 815, 81718 (8th Cir. 2001). In any case, the court “is not constrained to impose the
least onerous sanction available, but may exercise its discretion to choose the
most appropriate sanction under the circumstances.” Chrysler Corp., 186 F.3d
at 1022.
As the court previously found, defendants’ misconduct was willful.
Docket 173 at 13. That determination has only been reinforced by the fact that
the court gave defendants another opportunity to rectify their inadequate
discovery responses while the court deferred its determination of which
sanctions to impose. This was done because defendants did not brief the
sanctions issue at all, instead relying on a nonexistent rule to justify their
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failure to turn over the compelled documents on time. And yet, even with the
benefit of that additional opportunity, defendants have still either failed to
answer fully or failed to answer at all many of those same discovery requests.
Notably, this is not a case where the information sought by Atmosphere was
unknown or unavailable to defendants. See Comiskey v. JFTJ Corp., 989 F.2d
1007, 1009 (8th Cir. 1993). Nor were defendants’ failures based on any claim of
privilege, although the court instructed defendants to complete a privilege log if
they felt certain materials were in fact privileged. See id. (citing Shelton v. Am.
Motors Corp., 805 F.2d 1323, 1330 (8th Cir. 1986). Rather, defendants have
once again willfully violated the court’s order.
The most egregious of all defendants’ transgressions, however, pertains
to Exhibit Y, which defendants introduced at the preliminary injunction
hearing. The court relied upon the purported communication between Karim
Merali and James Henderson portrayed in that exhibit in its order denying
Atmosphere’s motion for preliminary injunction. See Docket 53. Atmosphere
has sought to obtain the email and data related to it in its RFPs. The court now
has reason to believe, based on Merali’s response to a request for admission,
that the email in Exhibit Y was in fact never sent. Defendants have also never
produced the email or the correlating data Atmosphere sought, and
Atmosphere’s expert has likewise been unable to locate the email in the “sent”
message folder. As the Tenth Circuit Court of Appeals has observed,
“[d]iscovery is not supposed to be a shell game, where the hidden ball is moved
round and round and only revealed after so many false guesses are made and
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so much money is squandered.” Lee v. Max Intern., LLC, 638 F.3d 1318, 1322
(10th Cir. 2011). Yet playing that type of shell game is precisely what
defendants have done, only the final revelation is that what was thought to be
hidden was in fact never there at all.
Thus, at its worst, defendants’ conduct demonstrates that it has
committed fraud on this court. At best, and construing Merali’s admission as a
flippant retort (in spite of this court’s order for defendants to fully satisfy their
discovery obligations), the court finds that such a response shows the type of
bad faith sufficient to warrant the harshest sanctions available under Rule 37.
Everyday Learning Corp., 242 F.3d at 817-18.
Even if the court concluded defendants had not acted in bad faith, the
less severe sanctions would still be inappropriate.10 The sheer number and
scope of the discovery requests that defendants have either failed to answer
fully or to answer at all render the sanctions under Rule 37(b)(2)(A)(i)-(iv)
unsuitable. Atmosphere’s discovery requests touch on virtually every claim
relevant to this case. For the court to impose the less severe sanctions in the
manner as requested by Atmosphere would accomplish virtually the same
thing as an order of default in Atmosphere’s favor and a dismissal of
defendants’ claims. Further, staying the procedure would not resolve the
prejudice to Atmosphere from defendants’ failure to cooperate in discovery.
Thus, the question becomes whether to grant Atmosphere’s request for a
Given the extent of their conduct, the court need not long contemplate
defendants’ request that only the costs incurred by Atmosphere to litigate this
issue ought to be imposed.
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default judgment in its favor or to dismiss defendants’ third-party complaint, or
both.
Considering the motion to dismiss defendants’ third-party complaint
first, Shiba and Merali have asserted claims for breach of contract, tortious
interference with a business expectancy, and conversion. Docket 8.11 These
claims are reasserted as counterclaims in Shiba and Merali’s answer to
Atmosphere’s amended complaint. Docket 46, Docket 47. Zeljka Curtullo has
not asserted any third-party or counterclaims of her own. See Docket 102.
Atmosphere’s ability to discover information related to the third-party
complaint and counterclaims and to defend itself in this matter has been
impeded by defendants’ misconduct. Not only have additional costs and delays
been incurred in general, but specific holes with regard to those claims have
not been filled in. For example, both Shiba and Merali accuse Atmosphere of
improperly paying James Henderson’s personal expenses and commingling
hotel funds into unapproved accounts. Many of Atmosphere’s unanswered
RFPs seek information related to payroll and accounting at the hotel, expenses,
and other financial information related to the operation of the hotel.
Additionally, the Schmitz email that the court ordered defendants to produce
(and any others like it) in response to RFP 2 related to these same allegations.
Atmosphere may be able to use that information or facts derived from it to
defend itself on defendants’ claims of breach of contract and conversion.
The court granted third-party defendant Henderson’s motion to dismiss
defendants’ RICO claims. Docket 67.
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Furthermore, all three of defendants’ remaining causes of action seek some
measure of monetary damages that the Adoba Hotel has allegedly incurred as a
result of Atmosphere’s actions. But defendants failed to fully respond to RFP 2,
in which Atmosphere seeks information regarding the finances of the Adoba
Hotel. A complete picture of the hotel’s financial state of affairs would be
germane to Atmosphere’s defenses to all three remaining claims.12
Ultimately, sanctions must be “ ‘just’ and relate to the claim at issue in
the order to provide discovery.” Hairston, 307 F.3d at 719 (citation omitted).
The court is also mindful that,
[T]he most severe in the spectrum of sanctions provided by statute
or rule must be available to the district court in appropriate cases,
not merely to penalize those whose conduct may be deemed to
warrant such a sanction, but to deter those who might be tempted
to such conduct in the absence of such a deterrent.
Nat’l Hockey League v. Metropolitan Hockey Club, Inc., 427 U.S. 639, 643
(1976). Atmosphere contends the circumstances here warrant dismissal of
defendants’ third-party complaint. Given the relationship between the
documents Atmosphere has sought, the fact that those documents could be
used to respond to defendants’ claims, the court’s prior order that defendants
provide the documents, and defendants’ second failure to comply with that
order, the court agrees with Atmosphere. Defendants’ third-party complaint is

Related to these issues, defendants continue to rely on the apocryphal
email in Exhibit Y in support of its other motions before this court. See Docket 211
at ¶ 12 (defendants’ statement of undisputed material facts) (quoting Exhibit Y).
Atmosphere and Henderson’s ability to address to such arguments effectively has
been stymied by defendants’ contradictory positions on the existence of this email
and the lack of clarity created by their discovery responses.
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dismissed with prejudice. For the same reasons, defendants’ counterclaims are
also dismissed with prejudice.
Relatedly, Atmosphere has moved for partial summary judgment on
Shiba and Merali’s third-party complaint and counterclaims. Docket 220.
Atmosphere filed a statement of undisputed material facts in support of its
motion for partial summary judgment and has also moved to have certain of
those facts deemed admitted. Docket 246. Because the court has dismissed
Shiba and Merali’s third-party complaint and counterclaims, Atmosphere’s
motion for partial summary judgment and motion to deem facts admitted are
denied as moot.
The court will not, however, end this litigation outright by also awarding
a default judgment in Atmosphere’s favor at this time. Rather, defendants will
be given another chance to fully satisfy their outstanding discovery obligations.
Thus, defendants have until August 20, 2015, to do so. If the defendants once
again have not complied in full with the court’s order at that time, the court will
consider imposing any and all sanctions justified by Rule 37, including entry of
a default judgment. The court will also withhold judgment on Atmosphere’s
request for a spoliation of evidence jury instruction at this time.
As a final consideration, Atmosphere has submitted affidavits to recover
its attorneys’ fees and expenses for prosecuting its motion for sanctions.
Docket 184-1, Docket 185-1. Attorney Frankenstein billed at an hourly rate of
$250. Attorney Smoot White billed at $210 per hour. Atmosphere was billed at
a rate of $100 per hour for the time of a paralegal. The court previously
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determined these rates are reasonable. Docket 173 at 3. The affidavits also
indicate attorney Frankenstein billed for 13 hours, totaling $3,250. Attorney
Smoot White billed for 4.2 hours, totaling $882. The paralegal billed for .4
hours, totaling $40. These sums amount to $4,172. The affidavits are
sufficiently detailed and the time expended appears to be reasonable.
Therefore, Atmosphere is entitled to recover $4,172 plus $250.32 (6 percent
sales tax) for a final award of $4,422.32.
CONCLUSION
Defendants have again failed to produce adequate responses to a number
of Atmosphere’s discovery requests. Atmosphere’s motion for sanctions (Docket
150) is granted. As an appropriate measure of sanctions, defendants’ thirdparty complaint and counterclaims are dismissed. Atmosphere is entitled to
recover its reasonable attorneys’ fees in connection with its motion for
sanctions. Accordingly, it is
ORDERED that defendants Shiba and Merali’s third-party complaint
(Docket 8) is dismissed with prejudice.
IT IS FURTHER ORDERED that defendants Shiba and Merali’s
counterclaims (Docket 46 at 9-12; Docket 47 at 9-10) are dismissed with
prejudice.
IT IS FURTHER ORDERED that defendants Shiba and Merali will pay
Atmosphere a total of $4,422.32 in attorneys’ fees and sales tax. Said amount
is due and payable by August 20, 2015.

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IT IS FURTHER ORDERED that Atmosphere’s motion for partial
summary judgment (Docket 220) is denied as moot.
IT IS FURTHER ORDERED that Atmosphere’s motion to deem facts
admitted (Docket 246) is denied as moot.
Dated July 29, 2015.
BY THE COURT:
/s/Karen E. Schreier
KAREN E. SCHREIER
UNITED STATES DISTRICT JUDGE

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