Diamond Consortium, Inc. et al v. Hammervold et al
MEMORANDUM OPINION AND ORDER. Defendants Motion for Sanctions Due to Fabrication of Evidence (Dkt. #208 filed in Case No 4:16cv94) is hereby GRANTED IN PART AND DENIED IN PART. Plaintiffs shall stipulate that the Grading Disclosure did not appear on any invoices, appraisals, point of sale, and repair receipts for transactions occurring before May 25, 2016. Signed by Judge Amos L. Mazzant, III on 6/30/2017. (kls, )
United States District Court
EASTERN DISTRICT OF TEXAS
DIAMOND CONSORTIUM, INC.; DAVID
MARK HAMMERVOLD; HAMMERVOLD
Civil Action No. 4:17-CV-452
MEMORANDUM OPINION AND ORDER
Pending before the Court is Defendants’ Motion for Sanctions Due to Fabrication of
Evidence (Dkt. #208). Having considered the pleadings, the Court finds that the motion should be
granted in part and denied in part. Plaintiffs shall not be permitted to allege at trial that any
invoices, appraisals, point of sale, or repair receipts issued to customers before May 25, 2016
contained the written disclosure stating that the standards of diamond grading vary between
In this matter, Plaintiffs The Diamond Consortium, Inc. d/b/a The Diamond Doctor
(“Diamond Doctor”) and David Blank (collectively, “Plaintiffs”) allege that Defendants Brian
Manookian, Brian Cummings, Cummings Manookian, PLC (collectively, the “Manookian
Defendants”) and Mark Hammervold and Hammervold PLC (collectively, the “Hammervold
Defendants”) engaged in a scheme to defraud and extort Plaintiffs (Dkt. #131). Plaintiffs allege
that the Manookian Defendants created websites and advertisements “falsely accusing The
Diamond Doctor of having committed ‘diamond fraud’ and ‘cheating’ customers through the sale
of ‘overgraded’ diamonds” (Dkt. #131 at ¶ 29). Plaintiffs allege that Manookian threatened
Plaintiffs with several diamond over-grading lawsuits, unless Plaintiffs retained Cummings
Manookian as counsel and paid a $25,000 monthly retainer fee for a period of 120 months, totaling
three million dollars (Dkt. #131 at ¶ 51). Plaintiffs allege that the Manookian Defendants’
“campaign was and is completely false” and that “The Diamond Doctor and Blank do not commit
‘fraud’ or sell ‘overgraded diamonds’” (Dkt. #131 at ¶ 33). Regarding their diamond grading,
Plaintiffs allege that:
The Diamond Doctor has had, and continues to maintain, a consistent policy of
disclosing to its clients the potential for significant differences between grading and
certifications from one laboratory to another. Simply put, The Diamond Doctor
makes its clients aware that a certification from one lab may be perceived as being
more reliable than a certification from another. These disclosures include the
potential for higher appraised values for diamonds with particular certifications and
the resulting retail pricing disparities.
(Dkt. #131 at ¶ 23). In the pending Motion for Sanctions Due to Fabrication of Evidence, the
Manookian Defendants allege that the Diamond Doctor did not in fact disclose to its clients the
potential for differences between grading certifications (Dkt. #208). The Manookian Defendants
issued Plaintiffs a request for production of documents providing any information to customers
about diamond grading. The Manookian Defendants allege that Plaintiffs produced fabricated
sales receipts and appraisals containing a diamond grading disclosure that was not included on
original sales receipts and appraisals (Dkt. #208). Defendants allege that Plaintiffs created
“evidence beneficial to them in hopes of escaping a finding of fraud, which would undo all of its
allegations that Defendants’ advertisements are false.” (Dkt. #208 at p. 12).
In response, Plaintiffs state that Diamond Doctor “does not maintain, and has never
maintained, physical or electronic copies of invoices or appraisals.” (Dkt. #236 at ¶ 1). Plaintiffs
state that Diamond Doctor retains electronic records of all data pertaining to inventory and each
customer transaction on Excel databases in its inventory management and point of sale system,
Jewels2000 by LogicMate (“LogicMate”) (Dkt. #236 at ¶ 1). According to Plaintiffs, “[w]hen an
invoice or appraisal is queried in LogicMate, the system retrieves relevant data points from the
Excel databases and prints them on a template that exists in LogicMate (Dkt. #236 at ¶ 3). Invoicerelated data points are printed on an invoice template and appraisal related data points are printed
on an appraisal template (collectively, “Templates”) (Dkt. #236 at ¶ 3).
Plaintiff state that the Templates “are hard-coded into LogicMate and contain static
information that does not regularly change from sale to sale (things like the Diamond Doctor logo,
website . . . and legal disclaimers)” (Dkt. #236 at ¶ 3). Plaintiffs state “[b]y nature of the LogicMate
internal structure and functioning, Diamond Doctor has no ability to print a queried invoice or
appraisal on the old Template in effect at the time of the original transaction” (Dkt. #236 at ¶ 5).
“As a result, the newly-generated document will not be an exact duplicate of the original if any
changes to the Template have been made since the time of the original document” (Dkt. #236 at
On May 18, 2016, Defendants requested copies of any invoices or appraisals Diamond
Doctor provided to any customers purchasing EGL-graded diamonds from 2010 through the
present (Dkt. #236 at ¶ 6). On May 25, 2016, Diamond Doctor’s custodian of records, Nicole
Becker (“Becker”), updated Diamond Doctor’s invoice, appraisal, point of sale, and repair
Templates to include a written disclosure regarding diamond grading standards (Dkt. #236 at ¶ 9).
The disclosure states:
“A diamond certificate, also called a diamond grading report is a report created by
an independent laboratory stating the quality of a diamond according to their
grading standards. The standards of grading vary between laboratories.”
(the “Grading Disclosure”).
(Dkt. #236 at ¶ 9); (Dkt. #236 at Exhibit 1A). Invoices and appraisals printed after May 25, 2016
include this Grading Disclosure (Dkt. #236 at ¶ 9). However, the Grading Disclosure would not
have appeared on any invoices or appraisals for transactions occurring before May 25, 2016
(Dkt. #236 at ¶ 9). Counsel for Plaintiffs was unaware of this change to the Templates (Dkt. #236
at ¶ 9).
On December 7, 2016, Plaintiffs’ counsel produced over 53,000 pages of documents to
Defendants, including invoices and appraisals that were “all printed on the Templates in effect at
the time they were printed rather than the Templates in effect at the time of the past transactions”
(Dkt. #236 at ¶ 8). As a result, the produced documents contained the Grading Disclosure that was
not present on invoices or appraisals for transactions occurring before May 25, 2016 (Dkt. #236 at
¶ 9). On April 20, 2017, Becker signed a Business Records Affidavit stating that the produced
documents were true and correct copies of the sales receipts made by the Diamond Doctor
(Dkt. #208, Exhibit 6). Becker stated that the only known differences between the produced
documents and original sales receipts given to customers were the redacted customer names and
contact information and lack of photographic images (Dkt. #208, Exhibit 6).
After receiving original sales receipts and appraisals from Diamond Doctor customers,
Defendants noticed the discrepancy between the produced documents containing the Grading
Disclosure and original sales receipts not containing the Grading Disclosure (Dkt. #208 at p. 7).
On May 17, 2017, Counsel for the Manookian Defendants contacted counsel for Diamond Doctor
explaining the discrepancies and their intent to file a motion for sanctions (Dkt. #236 at ¶ 14). On
May 17 and 18, 2017, counsel for Diamond Doctor reviewed the produced documents and
contacted counsel for the Manookian Defendants to explain the LogicMate system and why the
produced documents contained the Grading Disclosure (Dkt. #236 at ¶ 15). Counsel for Diamond
Doctor offered to enter into any necessary stipulations to remedy the discrepancies (Dkt. #236 at
On May 18, 2017, counsel for the Manookian Defendants filed the pending Motion for
Sanctions Due to Fabrication of Evidence (Dkt. #208).
That same day, the Hammervold
Defendants filed a Motion Joining in Co-Defendants Motion for Sanctions due to Fabrication of
Evidence (Dtk. #209). On May 24, 2017, Becker testified during her deposition that when she
signed the Business Records Affidavit in April 2017, she did not review the documents produced
in December 2016 and was not aware that the produced documents contained the Grading
Disclosure (Dkt. #208, Exhibit 2). Becker testified she did not add the Grading Disclosure for
purposes of the lawsuit (Dkt. #208, Exhibit 2).
On June 8, 2017, Plaintiffs filed a response (Dkt. #236). On June 22, the Manookian
Defendants filed a reply (Dkt. #256).
Federal Rule of Civil Procedure 37 authorizes sanctions for failure to comply with
discovery orders. The Court may bar the disobedient party from introducing evidence, or it may
direct that certain facts shall be “taken to be established for purposes of the action.” Fed. R. Civ.
P. 37(b)(2)(A)(i). Rule 37 also permits the court to strike claims from the pleadings and even to
“dismiss the action . . . or render a judgment by default against the disobedient party.” Roadway
Express, Inc. v. Piper, 447 U.S. 752, 763 (1980); accord Fed. R. Civ. P. 37(b)(2)(A)(v)–(vi). “Rule
37 sanctions must be applied diligently both to penalize those whose conduct may be deemed to
warrant such a sanction, [and] to deter those who might be tempted to such conduct in the absence
of such a deterrent.” Roadway Express, 447 U.S. at 763–64.
Rule 37(b)(2) requires that any sanction be just and that the sanction relate to the particular
claim that was the subject of the discovery violations. Compaq Computer Corp. v. Ergonome Inc.,
387 F.3d 403, 413 (5th Cir. 2004). The penalized party’s discovery violation must be willful.
United States v. $49,000 Currency, 330 F.3d 371, 376 (5th Cir. 2003). A severe sanction under
Rule 37 is to be employed only where a lesser sanction would not substantially achieve the desired
deterrent effect. Id.
Defendants first request that the Court prohibit Plaintiffs from alleging at trial that they
adequately disclose grading differences. Plaintiffs have acknowledge that the Grading Disclosure
was inadvertently included in the produced invoices and appraisals. Plaintiffs agreed to enter into
any necessary stipulations to remedy the discrepancies (Dkt. #236 at ¶ 15). Plaintiffs shall not be
permitted to allege at trial that any invoices, appraisals, point of sale, or repair receipts for
transactions occurring before May 25, 2016 contained the Grading Disclosure.
“A spoliation instruction entitles the jury to draw an inference that a party who intentionally
destroys important documents did so because the contents of those documents were unfavorable
to that party.” Russell v. Univ. of Texas of Permian Basin, 234 F. App’x 195, 207 (5th Cir. 2007).
“A severe sanction such as . . . an adverse inference instruction requires bad faith and prejudice.”
Rimkus Consulting Grp., Inc. v. Cammarata, 688 F. Supp. 2d 598, 642–43 (S.D. Tex. 2010) (citing
Condrey v. SunTrust Bank of Ga., 431 F.3d 191, 203 (5th Cir.2005); Whitt v. Stephens County,
529 F.3d 278, 284 (5th Cir.2008)).
“Destruction or deletion of information subject to a
preservation obligation is not sufficient for sanctions.” Id. A court should not “draw an inference
of bad faith when documents are destroyed under a routine policy.” Russell, 234 F. App’x at 208.
The Manookian Defendants argue that the Court should instruct the jury that Plaintiffs
destroyed evidence and that the jury can infer the evidence was prejudicial to Plaintiffs (Dkt. #208
at p. 21). Defendants note that Texas law requires Diamond Doctor to maintain receipts for no
less than four years (Dkt. #256 at p. 7) (citing Tex. Tax Code § 151.025(1) (“all sellers . . . shall
keep . . . records of all gross receipts, including documentation in the form of receipts”)).
Defendants further state that even if Plaintiffs did not retain receipts and appraisals in the ordinary
course of business, Plaintiffs failed to preserve and retain receipts after the initiation of the lawsuit
(Dkt. #256 at p. 7).
Becker testified that “The Diamond Consortium, LLC does not maintain paper copies of
the printed copies of sales receipts and appraisals given to customers in its regular course of
business, but instead maintains the data as electronically stored information in industry/retailspecific computer programs.”
(Dkt. #236, Exhibit 1B).
Although Plaintiffs should have
maintained this information, a court should not “draw an inference of bad faith when documents
are destroyed under a routine policy.” Russell, 234 F. App’x at 208. Here, there is no evidence
that Diamond Doctor destroyed documents—it failed to maintain them in its regular course of
business. Although Plaintiffs were subject to a preservation obligation after the commencement
of this matter, failing to comply with this obligation is not sufficient for sanctions. The Court will
permit examination of witnesses during trial on this issue.
Defendants further argue that they will suffer prejudice because Plaintiffs have not
produced original records or testimony regarding the grading disclosures Diamond Doctor made
to its customers (Dkt. #256 at p. 10). However, the Court has already held that it will not permit
Plaintiffs to allege at trial that appraisals, invoices, point of sale, and repair receipts issued before
May 25, 2016 contained the Grading Disclosure. Further, on June 27, 2017, the Court allowed the
Manookian Defendants to issue forty subpoenas to Diamond Doctor’s customers to obtain
information regarding Diamond Doctor’s grading disclosures. Defendants’ request for a spoliation
instruction is therefore denied.
Defendant’s request for any attorneys’ fees incurred in connection with the pending motion
is denied at this time.
Defendants’ Motion for Sanctions Due to Fabrication of Evidence (Dkt. #208) is hereby
GRANTED IN PART AND DENIED IN PART. Plaintiffs shall stipulate that the Grading
Disclosure did not appear on any invoices, appraisals, point of sale, and repair receipts for
transactions occurring before May 25, 2016.
SIGNED this 29th day of June, 2017.
AMOS L. MAZZANT
UNITED STATES DISTRICT JUDGE
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