Quang Le v. Humphrey
Quang Le v. Humphrey
2012 WL 12871812 (N.D. Ga. 2012)
August 10, 2012
O'Kelley, William C., United States District Judge
Summary
The court disregarded the affidavit of Rebekah Pappas to the extent that it was not based on personal knowledge, was based on hearsay, or contained legal conclusions. The court also ordered the parties to appear before the court to present evidence as to whether respondents have fully responded to all discovery requests, including ESI, which may contain evidence relevant to the discovery requests.
Phuc Quang Le, Petitioner,
v.
S. Hubert Humphrey, Jr., and World Marketing Alliance, Inc., Respondents
v.
S. Hubert Humphrey, Jr., and World Marketing Alliance, Inc., Respondents
CIVIL ACTION NO. 1:10-CV-00408-WCO
Signed August 10, 2012
Counsel
Lindsey Walker Hillis, The Hillis Firm, Atlanta, GA, for Petitioner.Eckhart Blackert, Scott Robert Hoopes, Timothy Sheffield Walls, Mills & Hoopes, LLC, Lawrenceville, GA, for Respondents.
O'Kelley, William C., United States District Judge
ORDER
*1 The captioned case is before the court for consideration of petitioner's motion for sanctions and contempt [80] and petitioner's motion to strike [87].
I. Factual Background
Respondent World Marketing Alliance, Inc. (“WMA”) “operated as an insurance agency and as a marketing company that managed a sales force of independent contractors who sold the products of client companies with whom WMA maintained contractual relationships.” (Pet. to Confirm Arbitration Award Ex. A 1.) At all relevant times, WMA was owned or controlled by respondent S. Hubert Humphrey, Jr. (“Humphrey”). (Id. at 3; Resp. to Pet. to Confirm Arbitration Award 4.)
Petitioner Phuc Quang Le worked as an independent contractor selling insurance products for WMA pursuant to a written contract (the “Agreement”). (Pet. to Confirm Arbitration Award Ex. A 2.) Petitioner signed the Agreement with WMA in or about January 1992 when WMA was known as Alexander, Inc.
According to the Agreement, petitioner's “sole compensation was commissions earned from the sale of insurance and other financial products WMA marketed on behalf of client companies.” (Id.) The compensation structure was as follows:
The client companies were referred to as “Preferred Companies” or “Preferred Product Providers.” The Preferred Product Providers paid WMA a commission for each of their insurance products sold in an amount determined by the value of the product (“Commissions”). The major portion of commissions paid to agents was received in the first year through an “advance” commission payment which was then earned over the first year of the policy if it remained in force. [Petitioner] was paid a percentage of these first-year commissions according to his agent level on the date of sale. The insurance products subsequently required customers to make periodic payments to the Preferred Product Providers in order to remain in force. The payments made by customers in the second year and thereafter generated a small renewal commission which was then paid out through the commission system. These periodic renewal commissions were also known as “Trailing Commissions.” WMA's business model encouraged its independent contractors to recruit others who would also work as independent contractors selling insurance products for WMA's Preferred Product Providers and be paid commissions. In furtherance of this model, WMA established a multilevel marketing structure in which independent contractors would receive a small percentage of the commissions generated from insurance products sold by the contractors they recruited. This percentage was known as “Override Commissions.” The persons recruited by the independent contractor were referred to as the contractors “Downline.”
(Id. at 3.)
In June 2000, WMA terminated its association with petitioner.[1] Petitioner claimed, among other things, that the termination constituted a breach of contract, and he sought arbitration pursuant to the terms of the Agreement. In June 2001, “WMA sold its marketing force and substantially all of its assets to World Financial Group, Inc. (‘WFG’).” (Id. at 5.) At the time of this sale, WMA explicitly recognized the existence of petitioner's claims and included petitioner on WMA's list of ongoing litigation with the claim being described as “alleged wrongful termination.” (Mot. for Sanctions and Contempt Ex. 1.) At that time, WMA's parent company was World Money Group, Inc. (“WMG”) and Humphrey was the majority shareholder of WMG.
*2 After the sale of its assets, WMA instituted a shareholder distribution to WMG, and “[t]hereafter, WMG made a shareholder distribution to Humphrey and other minority shareholders of WMG.”[2] (Pet. to Confirm Arbitration Award Ex. A 5.) After the sale of substantially all of its assets and cash distributions to its shareholders, WMA continued to show in excess of $25 million in assets. More specifically, WMG's consolidated balance sheet of December 31, 2001, shows that WMA's assets included an officers' receivable in the amount of $25,277,684. (Def.'s Ex. 13.) The officers' receivable “came into being from expenses that were charged to Mr. Humphrey or Mr. Montgomery ... [, and i]t is an accumulation of expenses beginning with a balance that was entered in 1996 and went forward.” (Tr. of June 19, 2012 Hr'g 16.) In connection with garnishment issues, respondents contended that the officers' receivable was transferred from WMA to WMG in 2002. In their response to petitioner's motion for sanctions and contempt, however, respondents state that “WMA has been consistent in its representations to [p]etitioner that the $24-$28 million account receivable does not exist, having been zeroed out by payments to WMA by Mr. Humphrey and Mr. Montgomery that need to be reconciled against the receivable.” (Resp. to Mot. for Sanctions and Contempt 4.)
After the sale of assets, WMA ceased all operations as an insurance agency, and its activities have been limited almost exclusively to wrapping up business affairs. (Tr. of Mar. 5, 2012 Hr'g 142; Aff. of Pappas ¶ 2.) Rebekah Pappas is the accountant for WMA. (Tr. of June 19, 2012 Hr'g 14.) She “was hired in December 2001 to work for World Leadership Group, and in conjunction with that [she] also handled the accounting for [WMA].” (Id.) WMA currently maintains its financial data on a computer in the office of Hyperion Business Solutions, which is a company owned by Pappas. (Aff. of Pappas ¶ 5.)
On February 8, 2010, nearly ten years after WMA terminated its association with petitioner, petitioner obtained an award for approximately $1.2 million (the “Award”) following proceedings before the American Arbitration Association (“AAA”) that were governed by the Federal Arbitration Act. The Award included the following findings of fact by the arbitrator:[3]
The Arbitrator does note that the June 2001 [nearly $90 million cash] distribution does not appear to have left WMA insolvent. Other more questionable subsequent transactions [including the alleged transfer of the $25 million loan owed to WMA by Humphrey] could not have been known to Claimant and were not disclosed in this arbitration until certain documents and testimony were produced on the eve of, and during, the hearing. Respondents' resistance to producing such financial information was extreme and unjustified and raises an inference of intent to conceal information from creditors.
Thus it appears that from June 2001 to December 2002 (the period when Claimant was pursuing his claims for wrongful termination against the Broker Dealer, WMA and Humphrey), Humphrey may have caused the insolvency of WMA by distributions to himself or his other corporate entities.
Respondents deserve sanctions for their delays in producing documents and information and for repeated misrepresentations relating to the creation, existence, availability, or destruction of documents and information.
(Pet. to Confirm Arbitration Award Ex. A 9, 5, 13.) In response to repeated demands for payment of the Award, WMA represented that it had no money to pay the Award.[4]
On February 12, 2010, petitioner filed his verified petition against WMA and Humphrey seeking confirmation of the Award and invoking federal jurisdiction under the New York Convention (the “Convention”). In their unverified pleading filed on March 3, 2010, in partial opposition to petitioner's petition for confirmation, respondents: (1) admitted this court's jurisdiction; (2) did not present any evidence rebutting petitioner's jurisdictional allegations that the Award arose out of commercial relationships falling under the Convention; and (3) invoked and relied on this court's jurisdiction to seek a modification of the Award.
*3 At a status conference held on April 1, 2010, the court inquired whether the parties needed a hearing, and counsel for respondents reported that the “matter is ripe for consideration, and that ... the matter has been significantly briefed and there is no need for a hearing.” (Minute Text of Status Conference on April 1, 2010.) This court accepted jurisdiction to consider the parties' cross-confirmation/modification requests and on November 5, 2010, issued an order and judgment granting the former and denying the latter. Respondents took no appeal. Respondents continue to claim that WMA has no money to pay the Award.
To collect his judgments, on March 2, 2011, petitioner served his post-judgment discovery requests on WMA. WMA did not provide any responses. Having received no communication regarding the discovery requests, petitioner's counsel sent a letter dated April 18, 2011, to William H. McLean[5] making a good faith attempt to obtain WMA's compliance with its discovery obligations. By letter dated April 21, 2011, McLean responded, claiming that he did not represent WMA.
On April 22, 2011, petitioner served the discovery requests on James F. Tenney, WMA's registered agent. WMA did not respond. Having received no communication regarding the April discovery requests, petitioner's counsel sent a letter dated May 26, 2011, to Tenney making a good faith attempt to obtain WMA's compliance with its discovery obligations. In an email sent on June 1, 2011, Tenney denied that he represented WMA[6] and claimed that he was “not able to respond on behalf of this company.”
On June 16, 2011, petitioner filed a motion to compel post-judgment discovery responses. On June 30, 2011, rather than responding to the merits of petitioner's motion to compel, respondents filed a motion for relief from the order pursuant to Federal Rule of Civil Procedure 60(b)(4) (“Rule 60 Motion”) claiming that this court's order and judgment confirming the Award and denying respondents' motion for modification were void for lack of jurisdiction. On July 12, 2011, petitioner filed his response to the Rule 60 Motion. In their reply filed on July 26, 2011, respondents cited but did not attach an affidavit of David Michael Anderson. On August 9, 2011, respondents filed their motion for leave to amend their reply brief in support of their Rule 60 Motion, in which respondents sought this court's permission to file the affidavit of Anderson.
On December 16, 2011, this court entered an order in which it, among other things: (a) denied respondents' motion for relief from its order confirming the Award; (b) directed WMA to file responses, without objection, to the written discovery no later than January 3, 2012;[7] and (c) directed respondents and their counsel to “APPEAR on January 18, 2012, at 10:30 a.m. and SHOW CAUSE why they should not be sanctioned with regard to the matters discussed [in the order (the “Show Cause Hearing”) ].” (Dec. 16, 2011, order referred to herein as the “Show Cause Order” 19-21.)
*4 After the Show Cause Order was entered, petitioner served notices for post-judgment deposition and corresponding subpoenas on WMA, Humphrey, Montgomery, and Anderson for depositions scheduled January 6, 2012, and January 9, 2012. Petitioner also served subpoenas requiring Humphrey and Anderson to appear at the Show Cause Hearing.
On January 2, 2012, a federal holiday and the day before it was required to comply with the Show Cause Order, WMA filed a voluntary petition in bankruptcy. In re World Marketing Alliance, Inc., No. 12-50080-JB (Bankr. N. D. Ga. 2012) (the “Bankruptcy Case”). Relying on the Bankruptcy Case filing, WMA did not comply with the Show Cause Order or respond to petitioner's post-judgment subpoenas for depositions. The Show Cause Hearing scheduled for January 18, 2012, was postponed.
In or about May 2011, WMA had received approximately $106,000, which it held briefly in its bank account before transferring it to a third party account. (Mot. for Sanctions and Contempt Ex. 4.) In preparation for filing bankruptcy, WMA caused the approximately $106,000 to be transferred back into WMA's bank account and disbursed $15,000 to Leon Jones, the lawyer who filed the bankruptcy petition. The balance (approximately $91,000) was turned over to William Laying, the interim Chapter 7 trustee assigned to the case. Almost immediately, Laying filed an application to hire counsel and an accountant.
On January 12, 2012, petitioner filed a motion in the Bankruptcy Case seeking dismissal and annulment of the stay based on lack of jurisdiction and other reasons and, in the alternative, for relief from stay or abstention. In his motion, petitioner asserted that WMA could not meet its burden of establishing the bankruptcy court's jurisdiction because, among other reasons, it could not prove either (a) that the filing was authorized, or (b) that it meets the threshold jurisdictional requirement of good faith. A hearing was held on January 25, 2012, to address petitioner's motion. At the hearing, Bankruptcy Judge Bihary questioned WMA's bankruptcy counsel whether “involving [a trustee and his accountant] in any of this ... is useful or if it's just literally bleeding that bank account down.” (Tr. of Jan. 25, 2012 Bankr. Case hr'g 42.) During the hearing, WMA consented to the entry of an order lifting the stay and dismissing that case. (Id. at 61.)
On January 27, 2012, the bankruptcy court in the Bankruptcy Case entered an order which noted that the case involved only three non-insider creditors: (1) Le, who asserts a claims in excess of $1.2 million based on the Award, (2) I&G, who asserts a claim in excess of $1 million arising out of a settlement agreement and consent judgment entered in a Georgia Superior Court case against WMA and numerous affiliated entities, and (3) Fidelity Bank, who holds “an unliquidated claim of $15,000 for what has been described as a credit card debt on which Mr. Humphrey is shown as co-debtor.” (Jan. 27, 2012 Bankr. Case Order 3.) That order dismissed the Bankruptcy Case because “there is [no] benefit to creditors for [WMA] to remain in bankruptcy.” The order expressly concluded that “this case was filed on January 2, 2012 to avoid having to comply with the Show Cause Order entered in the District Court Case.” (Id.) Thereafter, approximately $90,000, constituting funds remaining after expenses, was disbursed equally between petitioner and I&G.
*5 On March 5, 2012, the court held the Show Cause Hearing which initially was scheduled for January 18, 2012. The hearing was continued and completed on May 7, 2012. On March 26, 2012, petitioner filed his motion for sanctions and contempt.
II. Legal Analysis
A. Motion for Sanctions and Contempt.
In his motion, petitioner requests that the court (1) impose sanctions against respondents and their counsel, and (2) hold respondents in contempt and incarcerate Humphrey until he complies with the subpoenas served on him and causes WMA to comply with this court's orders and judgments. Petitioner contends that respondents' misconduct has included the withholding or destruction of evidence, blatant misrepresentations, obfuscation, and obstreperous conduct designed to simply delay and exhaust petitioner and his counsel.
This court has authority to impose sanctions on respondents and their counsel for various reasons including, but not limited to, unnecessary delay, vexatious multiplication of proceedings, and bad faith conduct. See Fed. R. Civ. P. 11(c)(4); 28 U.S.C. § 1927; Chambers v. NASCO, Inc., 501 U.S. 32, 43 (1991). Pursuant to Federal Rule of Civil Procedure 11 (b), sanctions may be imposed when a pleading is “presented for any improper purpose, such as to harass, cause unnecessary delay, or needlessly increase the cost of litigation .... [or] the claims, defenses, and other legal contentions are [not] warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law or for establishing new law.” FED. R. CIV. P. 11 (b). “[T]he central purpose of Rule 11 is to deter baseless filings in district court and ... streamline the administration and procedure of federal courts.” Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 393 (1990).
In addition, pursuant to § 1927, “[a]ny attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct.” 28 U.S.C.A. § 1927. Furthermore, Federal Rule of Civil Procedure 37(b) provides, among other things, that “[i]f a party or a party's officer, director, or managing agent – or a witness designated under Rule 30(b)(6) or 31(a)(4) – 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 .... [which] may include .... dismissing the action or proceeding in whole or in part; ... rendering a default judgment against the disobedient party... [or] treating as contempt of court the failure to obey [the court's] order.” FED. R. CIV. P. 37 (b)(2)(A). Federal Rule of Civil Procedure 45(e) also provides that “[t]he issuing court may hold in contempt a person who, having been served, fails without adequate excuse to obey the subpoena.” FED. R. CIV. P. 45(e). The Supreme Court has stated that “the 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. Metro. Hockey Club, Inc., 427 U.S. 639, 643 (1976) (affirming the district court's dismissal of the case for failure to timely answer written interrogatories).
*6 Finally, the court may impose sanctions on parties, counsel, or both pursuant to its inherent judicial power. “[I]t is firmly established that [t]he power to punish for contempts is inherent in all courts [and t]his power reaches both conduct before the court and that beyond the court's confines.” Chambers, 501 U.S. at 44 (internal quotation and citation omitted). This power is derived from the court's need “to manage [its] own affairs so as to achieve the orderly and expeditious disposition of cases.” Id. at 43. The power “can be invoked even if procedural rules exist which sanction the same conduct.” Id. at 46. The court may impose sanctions “when a party shows bad faith by delaying or disrupting the litigation or by hampering enforcement of a court order.” Id. In Chambers, the Supreme Court upheld a sanction of nearly one million dollars in attorneys' fees imposed under the district court's inherent power to sanction a litigant for bad faith conduct.
“Bad faith exists when the court finds that a fraud has been practiced upon it, or ‘that the very temple of justice has been defiled,’ or where a party or attorney knowingly or recklessly raises a frivolous argument, delays or disrupts the litigation, or hampers the enforcement of a court order.” Quantum Communications Corp. v. Star Broadcasting, Inc., 473 F. Supp. 2d 1249, 1268-69 (S. D. Fla. 2007). See Nat'l Hockey League, 427 U.S. at 643 (affirming the district court's finding of bad faith for failing to timely answer interrogatories). Knowingly false or misleading statements made to the court constitute fraud on the court sufficient to justify the imposition of sanctions. See In re Amtrak “Sunset Limited” Train Crash in Bayou Canot, Alabama On September 22, 1993, 136 F. Supp. 2d 1251, 1269-70 (S. D. Ala. 2001).
“While bad faith is the key to unlocking the court's inherent power, a court must do more than conclude that a party acted in bad faith; it should make specific findings as to the party's conduct that warrants sanctions.” In re Porto, 645 F.3d 1294, 1304 (11th Cir. 2011) (internal quotation and citation omitted). See Byrne v. Nezhat, 261 F.3d 1075, 1123 (11th Cir. 2001) (holding that “[u]nless the evidence on the issue of bad faith is uncontroverted, a district court should examine a party's conduct and make findings on that issue.”); Rothernberg v. Sec. Mgmt. Co., 736 F.2d 1470, 1472-73 (11th Cir. 1984) (remanding for factual findings as to bad faith because “bald assertions provide no meaningful basis for this court to review the ultimate finding of ‘bad faith.’ ”); In re Sunshine Jr. Stores, Inc., 456 F.3d 1291, 1304 (11th Cir. 2006) (affirming award of sanctions pursuant to bankruptcy court's inherent powers where the court's “sanctions order contained a detailed chronology of [the creditor's] repeated failure[s].”).
In support of its motion, petitioner asserts that respondents and their counsel engaged in bad faith conduct in filing and prosecuting their baseless Rule 60 Motion. The court agrees. The court finds that there is sufficient evidence to conclude that respondents filed the Rule 60 Motion to avoid and delay its discovery obligations. As set forth above in detail, WMA, McLean, and Tenney did not timely respond to repeated discovery requests. In their belated responses to petitioner's counsel's inquiry, both McLean and Tenney claimed they did not represent WMA. If this was indeed the case, they should have timely responded to petitioner's discovery requests by informing petitioner of that fact. Moreover, the record indicates otherwise. Though McLean testified that he stopped representing WMA after the court entered the order confirming the Award, there is no record of McLean's withdrawal as respondents' attorney from this case. McLean also filed the Rule 60 Motion on respondents' behalf. In addition, petitioner points out that the Georgia Secretary of State website on February 18, 2011, (as last refreshed on June 16, 2011) showed that WMA's registered agent is Tenney.[8] (Pet'r's Mot. to Compel Ex. 1.)
*7 Having forced petitioner to file a motion to compel, respondents did not bother responding to the motion and, instead, filed the Rule 60 Motion. Respondents alternatively requested additional time to respond to discovery requests without even attempting to explain the reasons for not having responded in the first place. In their Rule 60 Motion, respondents claimed that this court's order and judgment confirming the Award and denying respondents' motion for modification were void for lack of jurisdiction. Almost 16 months after they invoked this court's jurisdiction, respondents sought to relitigate petitioner's reliance on the Convention as his basis for federal jurisdiction.
The court finds that the record does not support respondents' argument that the Rule 60 Motion was filed in good faith “based on the factual information provided by Michael Anderson.” The court notes that the Rule 60 Motion was filed without any supporting evidence to refute petitioner's verified statement of facts in his petition that established the applicability of the Convention. Respondents rely on Anderson's affidavit to show that the nature of petitioner's relationship with WMA was not sufficiently international to warrant the invocation of the Convention. This affidavit should have been submitted in response to the petition, which was filed on February 12, 2010. At the very least, the affidavit and the arguments it purports to support should have been submitted with respondents' Rule 60 Motion of June 30, 2011. Respondents also failed to present any affidavit evidence when they filed their reply brief in support of their Rule 60 Motion. Respondents did not seek to submit Anderson's affidavit until they filed their motion to amend their reply brief to support their Rule 60 Motion. In that motion, respondents sought to supplement the pleading with Anderson's affidavit but did not explain the delay and merely requested leave for an amendment “to clarify the factual and legal issues.” According to email communications between McLean and Anderson, despite filing the Rule 60 Motion on June 30, 2011, respondents' counsel made no effort to contact and obtain an affidavit from Anderson until July 20, 2011. (Mot. for Sanctions and Contempt Ex. 5.)
As the court addressed in its Show Cause Order denying respondents' motion to amend their reply brief to support their Rule 60 Motion, Anderson's affidavit was deficient in several respects. Anderson was unqualified and incapable of making certain statements included in the affidavit. For example, Anderson stated: “There are no records that Mr. Phuc Quang Le ever entered into any agreement with WMA of Canada, or with WMA Philippines.” (Aff. of Anderson ¶ 6.) Anderson was trained in software and computers, was not trained in the interpretation of contracts, worked in WMA's IT department, and did not know whether physical files were created or maintained by WMA for petitioner's agency contracts. (Tr. of Mar. 5, 2012 Hr'g 67-68.) Anderson did not have the competence or “personal knowledge” to testify as to the contracts.
Furthermore, Anderson's testimony shows that he cannot refute petitioner's sworn statement of facts regarding doing business in other countries. Anderson testified, in part, as follows:
Q: Well, Let's see what affidavit you did make. It is true, isn't it, Mr. Anderson, that you don't know one way or the other whether Mr. Le ever executed any agreement or other paperwork necessary for him to benefit from any product sold in other countries by persons in his downline, correct?
A: I can assume that he did not since he did not have any such information on the computer. You see, we paid thousands of people and we never went back to the original files to go see whether we were going to pay them. ....
*8 Q: Mr. Anderson, the question that I asked you was that you have no idea one way or the other whether Mr. Le ever executed any agreements or other paperwork necessary for him to benefit from any product sold in other countries by persons in his downline, correct, yes or no?
A: I have an idea, yes. You said I have no idea. I am pretty sure he didn't.
....
Q: I am showing you what has been marked as Exhibit 6.
A: Okay.
Q: This is the draft of the affidavit that was sent to you prior to you actually signing the one that has been marked as Exhibit 5, correct?
A: Right.
....
Q: And that paragraph says: “P. Q. Le never executed any of the agreements or paperwork necessary for him to benefit from any product sold in those countries by persons in his downline.” Do you see that?
A: I do.
Q: And you asked Mr. McLean to take that out because you couldn't testify to that under oath, correct?
A: He didn't ask me whether I had a pretty good idea or whether I was nearly certain, he said, can you testify to this under oath, which I can't. I can't say that a mistake in Mr. Le's case was not made, that he did not execute those agreements and then actually it never made it into the database. I can't say for sure that has happened. However, if Mr. Le produced a check, then it would show that he did.
....
Q: You cannot say that Mr. Le did not do business in Canada, can you?
A: I can only say that there is no evidence that Mr. Le was ever paid in Canada, that he ever intended to be paid in Canada. Whether he ever did any business in Canada with or without WMA I cannot say. I can only say there is no evidence in the computer that he ever did.
(Id. at 71-74, 81.)
Moreover, Humphrey admitted that petitioner “may well have” been with him in the offices of WMA Canada in Toronto, Canada, and that petitioner “may have a downline” in Canada. (Id. at 41, 44.) More specifically, Humphrey testified:
Q: So you are telling me that you came to this court and said Mr. Le had no contracts or no business in Canada without ever looking at his file?
A: I have never said that he has had no business in Canada. I am not saying he doesn't have a downline up there, he may have a downline, but if he did not have an agreement with WMA of Canada, he would have never been treated in the override situation, never would have made any money for it.
For all of the foregoing reasons, the court finds that the Rule 60 Motion was not filed in good faith. All evidence supports the conclusion that filing the Rule 60 Motion was a part of respondents and their counsel's continued attempts to delay payment of money owing to petitioner for more than ten years.
After being denied the Rule 60 Motion, respondents compounded their misconduct by filing a bankruptcy petition instead of complying with this court's Show Cause Order, which had rejected their request for additional time to respond to discovery requests and required full and complete compliance with their discovery obligations by January 3, 2012. On January 2, 2012, a federal holiday and the day before it was required to comply with the Show Cause Order, WMA filed its Bankruptcy Case.[10] In re World Marketing Alliance, Inc., No. 12-50080-JB (Bankr. N. D. Ga. 2012). Relying on the Bankruptcy Case filing, WMA did not comply with the Show Cause Order or respond to petitioner's post-judgment subpoenas for depositions. The Show Cause Hearing scheduled for January 18, 2012, had to be postponed.
*9 Respondents argue that the bankruptcy filing was made in good faith, that “WMA was not looking to avoid having to respond to post-judgment discovery” and that it “was going to produce its finances to its creditors, including [petitioner].” At the March 5, 2012, Show Cause Hearing, Leon Jones, the bankruptcy attorney who accepted a $15,000 retainer from WMA's funds and filed the bankruptcy petition, testified that the Bankruptcy Case was a legitimate filing. More specifically, Jones testified: “Because it was authorized under the bankruptcy code and the end result was we got funds distributed to the creditors pro rata based on the funds on hand. There was a pot of money there and we got it distributed to the creditors. So, to me, that is a legitimate function of the bankruptcy court.” (Tr. of Mar. 5, 2012 Hr'g 104.) Jones explained, however, that filing the bankruptcy petition “wasn't [his] idea.”[11] (Id. at 105.) Jones further explained: “When it was brought to me, it was as a bankruptcy case was needed, I reviewed it, I thought it was a viable case, I thought it was a proper case or I wouldn't have filed it. And so, I mean, I reviewed the code, there were creditors, there was money on hand, we were going to file it. And so the decision was made to file it and that is what we did.” (Id.) In essence, Jones testified that the filing of the Bankruptcy Case satisfied the requirements of the bankruptcy code. This does not support the conclusion that the bankruptcy filing was made in good faith. Regardless of whether the bankruptcy filing was technically authorized by the bankruptcy code, the court finds that such filing was unnecessary and was done for purposes of delay.
The record shows that WMA received the funds at issue (i.e., $106,000) in or about May 2011. (Mot. for Sanctions and Contempt Ex. 4.) This was after WMA was served with post-judgement discovery requests beginning on March 2, 2011, and shortly before petitioner filed his motion to compel discovery on June 16, 2011. Instead of disclosing the funds through discovery, respondents filed the bankruptcy petition the day before they were required to do so by this court's Show Cause Order. With respect to I&G, the competing creditor involved in the bankruptcy distribution, the court notes that a settlement agreement was not entered as a consent judgment in Fulton County Superior Court until January 6, 2012, four days after the bankruptcy filing. The consent judgment in the amount of $1.3 million was against WMA, Humphrey, and 22 other related affiliates or parties. (Reply to Mot. for Sanctions and Contempt Ex. 3.) It appears that I&G did not become the competing creditor until four days after the Bankruptcy Case was filed.
At the hearing to consider petitioner's motion to dismiss the Bankruptcy Case,[12] Bankruptcy Judge Bihary questioned whether “involving [a trustee and his accountant] in any of this ... is useful or if it's just literally bleeding that bank account down.” (Tr. of Jan. 25, 2012 Bankr. Case hr'g 42.) Bankruptcy Judge Bihary found that “the [bankruptcy] case was filed to avoid having to comply with an order entered by the District Court.” (Id. at 78.) The bankruptcy judge also announced her conclusion that the case will be “[d]ismiss [ed] .... because it really has no legitimate debt collective collection purpose here.” (Id. at 72.) WMA consented to the entry of an order lifting the stay and dismissing that case. (Id. at 61.)
On January 27, 2012, the bankruptcy court in the Bankruptcy Case entered an order which stated, among other things:
After hearing from counsel, the Court concludes that this Chapter 7 case should be dismissed. Neither [Le] nor I&G believe there is any benefit to creditors for [WMA] to remain in bankruptcy. The Court further concludes that this case was filed on January 2, 2012 to avoid having to comply with the Show Cause Order entered in the District Court Case. Both I&G and [Le] have been litigating with [WMA] and related parties, and each has counsel with a level of experience and knowledge in the collection of their respective judgments which cannot be replicated by a Chapter 7 trustee at this time.
*10 (Jan. 27, 2012 Bankr. Case order 3.) (Id.) The court concurs with the bankruptcy judge's conclusions. For the reasons set forth above, the court finds that WMA filed the bankruptcy petition to avoid compliance with the Show Cause Order and judgments of this court; to frustrate petitioner and his counsel's post-judgment collection attempts; to delay, evade, or avoid the Show Cause Hearing; and to avoid having to pay petitioner the $106,000.
Respondents' previous history shows that the current misconduct is not uncommon. After the underlying arbitration process, the arbitrator concluded, among other things, that: (1) “Respondents' resistance to producing ... financial information was extreme and unjustified and raises an inference of intent to conceal information from creditors,” and (2) “Respondents deserve sanctions for their delays in producing documents and information and for repeated misrepresentations relating to the creation, existence, availability, or destruction of documents and information.” (Pet. to Confirm Arbitration Award Ex. A 9, 13.)
Petitioner requests that the court take judicial notice of WMA, Humphrey, and their counsel's noncompliance and delays in other cases. For example, in Rao v. WMA Securities, Inc., the Wisconsin Court of Appeals upheld a sanction striking the pleadings of WMA Securities, Inc. after a finding that, “... it was ‘abundantly clear’ to the court that WMA [Securities, Inc.] had ‘done everything possible to avoid giving information about this matter to the attorneys for the plaintiff.’ ” Rao v. WMA Securities, Inc., 301 Wis. 2d 748, 2007 WL 944293, at *3 (Wis. App. Mar. 29, 2007). WMA Securities, Inc. is WMA's “sister company,”[13] which was controlled by Humphrey and represented by McLean. In Rao, where both McLean and Anderson gave affidavits regarding discovery, the Wisconsin Court of Appeals found that “[t]he representation of WMA [Securities, Inc.] to the court was simply false.” Id.
In Domestic Bank v. Global Equity Lending, Inc., No. 1:07-cv-355-S, 2011 WL 6003911, at *2 (D.R.I. Sept. 8, 2011) (the “Rhode Island Case”), the United States District Court for Rhode Island sanctioned and entered a default against Global Equity Lending, Inc. (“Global”), another Humphrey-controlled affiliate,[14] and Humphrey, personally, for continued discovery abuses.[15] As in this case, Humphrey also attempted to delay the proceedings in the Rhode Island Case by arguing that the Rhode Island district court did not have personal jurisdiction over him or his company. The Rhode Island court rejected that argument and noted that “Defendants participated in the litigation (albeit in a dilatory way) for 15 months without filing a motion to dismiss for lack of personal jurisdiction.” (Mot. for Sanctions and Contempt Ex. 9 9-10.) That court concluded:
Defendants impeded discovery and stonewalled the progress of the case. They continually disobeyed court orders and shrugged off warnings of impending default, flouting the Court's authority and undermining its efforts to manage the litigation. Discouraging the facts anew, this Court concludes that the Magistrate Judge's entry of default was not a rash reaction to an isolated instance of non-cooperation but a considered response to a pattern of abuse that milder sanctions had failed to deter. Under these circumstances, entry of default is not excessively harsh and must be affirmed.
*11 (Mot. for Sanctions and Contempt Ex. 9 9.)
At the Show Cause Hearing, Humphrey referred to his contempt and misconduct in the Rhode Island Case as being “just more of a miscommunication.” (Tr. of Mar. 5, 2012 Show Cause Hr'g 50.) The court finds it troubling that sanctions from previous cases appear to have had no deterrent effect on Humphrey. The court finds, as the previous courts have done, that respondents and their counsel's conduct in this case constitutes intentional maneuvering designed to avoid complying with this court's order and to slow down petitioner's attempt to collect his judgments.
Finally, petitioner contends in his motion for sanctions and contempt that respondents continue to refuse to comply with their discovery obligations in accordance with the Show Cause Order, which directed them to respond fully and completely to petitioner's post-judgment discovery.[16] (Mot. for Sanctions and Contempt Ex. 11.) As the court set forth above, and in its Show Cause Order compelling production, respondents' failures and delays in responding to discovery requests have been flagrant. For example, while petitioner served his first discovery requests on March 2, 2011, and the Show Cause Order compelled production on or before January 3, 2012, WMA did not produce a single document until January 25, 2012.
Petitioner has demonstrated that even when documents were produced, many of those produced were incomplete, deficient, and confusing and required an inordinate amount of time and effort to decipher. For example, Anderson testified that his affidavit was prepared based on information contained in five tapes that he obtained sometime after his employment ended with WMA. (Tr. of Mar. 5, 2012 Hr'g 69-71.) These five tapes initially were copied onto a server computer owned and possessed by Anderson. (Id.) In preparation for giving his affidavit, Anderson copied some of the files onto another server “for convenience” but later deleted them. (Id.) In response to petitioner's request for the electronically stored information purportedly used by Anderson, respondents claim that the five tapes or what respondents have referred to as “HASUFEL” were produced to petitioner on a portable hard drive. (Id. at 24.) The hard drive was not produced until February 29, 2012, just days before the March 5, 2012 Show Cause Hearing. Petitioner states that hard drive, however, was corrupted and the files locked. Moreover, the files were password protected and no passwords were provided. As petitioner argues, this hard drive does not contain the exact files reviewed or used by Anderson in giving his affidavit, thus making it impossible for petitioner to look at the exact files relied upon by Anderson.[17] In addition, the court is troubled by respondents' casual attitude toward destroying record evidence.
*12 In their response to petitioner's motion, respondents went to great length to show the difficulties involved in finding and obtaining the documents necessary to respond to the discovery requests[18] and the inordinate amount of effort expended to provide the discovery responses under the circumstances.[19] Respondents asserted that they have provided responses to the discovery requests and that where deficiencies and disputes exist, they are acting to resolve them. Respondents also asserted that they have or will provide all the documents they were able to find in response to the discovery requests, but that they are unable to respond to all requests as they are unable to locate the relevant documents, if they exist.
At this juncture, the court cannot determine, without conducting another briefing or hearing, whether respondents have indeed responded fully to all discovery requests. In view of respondents' past delays and failures, the court is reluctant to accept, without verification, respondents' representation to the court. Accordingly, the court will conduct a hearing to determine if respondents have done as they have represented to the court. If not, the court may have no choice but to incarcerate Humphrey until full compliance is achieved.
Having found contempt on the part of respondents and their counsel, the court must now determine the appropriate sanctions warranted by the misconduct. Once a district court finds a party in contempt, it has “broad discretion in fashioning a contempt sanction.” Sizzler Family Steak Houses v. Western Sizzlin Steak House, Inc., 793 F.2d 1529, 1536 n. 8 (11th Cir. 1986). This court may impose sanctions for both coercive and compensatory reasons. Citronelle-Mobile Gathering, Inc. v. Watkins, 943 F.2d 1297, 1304 (11th Cir. 1991). See also E.E.O.C. v. Guardian Pools, Inc., 828 F.2d 1507, 1515 (11th Cir. 1987). The court has “numerous options, among them: a coercive daily fine, a compensatory fine, attorney's fees and expenses to the receiver, and coercive incarceration.” Id. “Although the district court has the authority to impose sanctions designed to ensure compliance, the sanctions cannot be any greater than necessary to ensure such compliance.” Id.
Petitioner specifically requests that this court: (1) authorize petitioner to recover sanctions in the form of attorneys' fees related to his defense against the improper expansion of proceedings and willful attempts to oust or interfere with this court's jurisdiction, with such award being entered against respondents and their counsel, jointly and severally, and (2) authorize petitioner to recover, jointly and severally, against respondents and their counsel, an amount equal to the difference between (a) the $106,000 of cash that petitioner would have collected in May 2011 had WMA complied with its obligations in post-judgment discovery, and (b) the amount petitioner received after successfully obtaining relief from the stay and the dismissal of WMA's improper bankruptcy proceeding. The court finds petitioner's requests to be reasonable and appropriate.
*13 With respect to the second part of the sanctions, the court is aware of Jones's testimony that he did not discuss the bankruptcy filing with McLean and that all discussions regarding the bankruptcy filing were with Pappas, Humphrey, his counsel, Ted Stapleton, and Tenney, WMA's counsel. (Tr. of Mar. 5, 2012 Hr'g 104, 99.) Jones testified that he did communicate with McLean regarding discovery after the bankruptcy petition was filed. (Id. at 104.) Even if McLean had no involvement in the decision to file the bankruptcy petition, McLean was respondents' attorney of the record in this case. McLean never petitioned the court for permission to withdraw from this case. McLean was aware of petitioner's attempt to obtain post-judgment discovery responses from WMA in April 2011, before WMA received the funds. McLean had ample opportunity to advise respondents to respond to discovery requests. Accordingly, the court finds it appropriate to impose the above-mentioned sanctions on counsel.
Petitioner also requests that this court order Humphrey to be incarcerated until he (1) complies with the subpoenas served on him, and (2) causes WMA to comply with this court's orders and judgments. Respondents have represented to the court, as set forth above, that they have substantially complied with this court's orders and that they were in the process of fully complying. Respondents have also represented that if they did not produce certain requested documents, it is because they do not have them. The court shall conduct a hearing to verify respondents' representation and then decide whether incarcerating Humphrey is warranted. Citronelle-Mobile Gathering, Inc., 943 F.2d at 1304 (holding that “[s]anctions may be imposed to coerce the contemnor to comply with the court's order, but may not be so excessive as to be punitive in nature.”).
Therefore, the court hereby grants in part and defers in part petitioner's motion for sanctions and contempt.
B. Motion to Strike.
Petitioner moves the court to strike all or substantially all of the affidavit of Rebekah Pappas filed in opposition to petitioner's motion for sanctions and contempt. Petitioner argues that Pappas's affidavit is inadmissible because Pappas lacks personal knowledge, is incompetent to testify as to the matters in her affidavit, and because her affidavit is replete with hearsay and legal conclusions. See FED. R. EVID. 602, 801, 802, 803. Statements based on speculation or personal beliefs are generally improper. Pace v. Capobianco, 283 F.3d 1275, 1278-79 (11th Cir. 2002). In addition, conclusory allegations without foundation establishing personal knowledge must be disregarded. Leigh v. Warner Bros., Inc., 212 F.3d 1210, 1217 (11th Cir. 2000). Furthermore, this court will not consider affidavits containing hearsay. Macuba v. Deboer, 193 F.3d 1316 (11th Cir. 1999).
Contrary to petitioner's argument, however, Pappas's testimony regarding, among other things, her efforts to retrieve, organize, and produce documents in response to the discovery requests should not be stricken. Pappas testified that she, with some assistance, conducted the review and search of most of the documents related to discovery requests. (Tr. of Mar. 5, 2012 Hr'g 59-63.) In addition, Pappas is the accountant for WMA. (Tr. of June 19, 2012 Hr'g 14.) She “was hired in December 2001 to work for World Leadership Group, and in conjunction with that [she] also handled the accounting for [WMA].” (Id.) Accordingly, the court finds that such testimony is based on her personal knowledge and is admissible.[20] Without addressing each statement contained in the affidavit, the court finds that striking all or substantially all of the affidavit of Pappas is not warranted. In considering petitioner's motion for sanctions and contempt, the court has disregarded the affidavit to the extent that it is not based on personal knowledge, is based on hearsay, or contains legal conclusions.
*14 Therefore, the court hereby grants in part and denies in part petitioner's motion to strike.
III. Conclusion
For the foregoing reasons, the court hereby GRANTS in part and STAYS in part petitioner's motion for sanctions and contempt [80], and GRANTS in part and DENIES in part petitioner's motion to strike [87].
The court hereby ORDERS the parties to appear before the court on Wednesday, September 5, 2012, at 10:30 a.m. in Courtroom 1906 of the United States District Court, 75 Spring Street, Atlanta, GA, to present evidence as to whether respondents have fully responded to all discovery requests as directed by the orders of this court. At the hearing, the court shall also hear all evidence to determine the precise amount of the judgment to be entered against Humphrey pursuant to the order of this court dated July 16, 2012, as well as the precise amount of the sanctions to be imposed herein pursuant to Federal Rules of Civil Procedure 11, 37, 45, 28 U.S.C. § 1927, and inherent judicial power of the court. The parties are directed to present all evidence, including the amount petitioner received from Montgomery in the settlement, accrued attorneys' fees and costs, and accrued interest, so that the exact amounts can be calculated.
As is the usual practice of this court where attorney sanctions are involved, the clerk of the court is hereby DIRECTED to FORWARD a copy of this order to the State Bar of Georgia.
IT IS SO ORDERED, this 10th day of August, 2012.
Footnotes
Though petitioner voluntarily resigned in May 1995, he returned in February 1996 and resumed his relationship with WMA pursuant to the terms of the Agreement.
Nearly $90 million in cash was distributed to Humphrey, Thomas Wood Montgomery, Sr., and their wives. (Mot. for Sanctions and Contempt Ex. 2.)
In the Agreement, “[t]he parties ... agree[d] that the findings of fact issued by the Arbitrator(s), as reviewed, if applicable, shall be binding on them in any subsequent arbitration, litigation or other proceeding.” (Pet. to Confirm Arbitration Award Ex. B 6.)
Petition alleged: “To date, Respondents have not complied with the Arbitration Award and have failed to pay the sum awarded to Petitioner. Moreover, in response to Petitioner's inquiries, Respondents have refused to provide any assurances that the Arbitration Award will be paid.” (Pet. ¶ 29.)
According to the docket sheet, McLean is the attorney of record for respondents. Petitioner points out that, until recently, McLean's law firm was known as Merritt & Tenney. James F. Tenney was a named partner in that firm, has long been counsel for respondents, and has served for some time as WMA's registered agent. McLean's law firm changed its name to Merritt & Watson after Tenney left.
Petitioner points out that the Georgia Secretary of State website on February 18, 2011, (as last refreshed on June 16, 2011), showed that WMA is and remains an active Georgia corporation in good standing, that it has not been dissolved, and that its registered agent is James F. Tenney. (Pet'r's Mot. to Compel Ex. 1.)
WMA alternatively requested a 30-day extension from the date of disposition of the Rule 60 Motion. In this regard, the court concluded: “WMA has provided no basis for seeking an extension of time. WMA, having failed to participate in discovery, has not even attempted to set forth any reasons for its failure. The court finds that WMA's actions border on willfulness.” (Show Cause Order 18.)
In addition, Jones, the bankruptcy attorney, testified that he was under the impression that Tenney was “the lawyer or ... a lawyer for WMA.” (Tr. of Mar. 5, 2012 Hr'g 101.)
Anderson also testified that “there wouldn't be a check [from WMA Canada] if there wasn't a contract [with WMA Canada].” (Tr. of May 7, 2012 Hr'g 38.)
Petitioner also contends that WMA's skeletal bankruptcy petition did not contain any of the required schedules or the Statement of Financial Affairs.
The court notes that respondents asserted the attorney-client and joint-defense theories and instructed Jones to refrain from answering the following question: “Isn't it true, Mr. Jones, that you advised the Corporation [WMA] against filing bankruptcy.” (Tr. of Mar. 5, 2012 Hr'g 99, 101-103.) The invocation of the privilege permits the court to infer that the opinion provided was not favorable. Home Elevators, Inc. v. Millar Elevator Service Co., 933 F.Supp. 1090, 1092 (N. D. Ga. 1996).
This court can take judicial notice of documents filed by a party in a prior case. Horne v. Potter, 392 Fed.Appx. 800, 802 (11th Cir. 2010). See also FED. R. EVID. 201(b) (judicial notice is proper where the facts are “not subject to reasonable dispute” and “can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned.”).
At the Show Cause Hearing held on March 5, 2012, respondents' counsel described WMA Securities, Inc., as being a “sister company.” (Tr. of Mar. 5, 2012 Show Cause Hr'g 24.)
The court in Domestic Bank found that “Humphrey was ... a major shareholder in Global ... [and that] Global was the alter ego of Humphrey.” Domestic Bank, No. 1:07-cv-355-S, 2011 WL 6003911, at *1.
Humphrey testified that McLean was the attorney of record in this case. (Tr. of Mar. 5, 2012 Show Cause Hr'g 50.)
According to the declaration of Lindsey L. Walker filed on June 18, 2012, numerous discovery deficiencies still remained as of that date. (Decl. of Walker ¶ 4.)
Petitioner points out that Anderson also participated in the last-minute production of spreadsheets from electronically-stored information, the existence of which respondents had denied until the middle of the arbitration hearing. As a result, petitioner was left without any advance notice or ability to test the database accessed by Anderson.
Respondents explain that WMA has not been in business for more than 10 years and no longer maintains documents in the usual course of business. Respondents further explain that they had difficulty getting into the storage units where the WMA documents and documents from other companies were stored and that the stored documents were not labeled or organized. (Tr. of Mar. 5, 2012 Hr'g 59-63.)
Respondents explain that since the asset sale to WFG, WMA's activities have been limited almost exclusively to wrapping up business affairs. (Tr. of Mar. 5, 2012 Hr'g 142.) Respondents state that WMA does not have a principal place of business or any employees. (Aff. of Pappas ¶ 3-5.)
Petitioner also alleges that Pappas referred to a storage unit at her deposition and then changed her story to eight storage units at her testimony during the Show Cause Hearing. At the Show Cause Hearing, Pappas testified as follows:
Q. As of February 10th, 2012, you were talking to us about documents belonging to WMA that were stored in a unit, correct?
A. In storage units.
Q. In a unit, a singular unit, correct?
A. I don't know.
Q. At the time we took your deposition, you did not report or disclose to us that there were eight units; isn't that correct:
A. I don't believe you asked me about the units. I think at that point I told you I had gone through three of them.
(Tr. of May 7, 2012 Hr'g 59.) There appears to have been miscommunication or misunderstanding.