VESTIS, LLC, et al. Plaintiffs, v. CARMEL SALES, LTD., et al., Defendants Case No. 8:18-cv-02257-DOC-KESx United States District Court, C.D. California Filed November 21, 2019 Counsel Michael J. Perry, Michael J. Perry Law Offices, Marina Del Rey, CA, Peter W. Ross, Tyler J. King, Browne George Ross LLP, Los Angeles, CA, for Plaintiffs. John M. Houkom, Andres F. Quintana, Quintana Law Group APC, Calabasas, CA, for Defendants Scott, Karen E., United States Magistrate Judge REPORT AND RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE *1 This Report and Recommendation (“R&R”) is submitted to the Honorable David O. Carter, United States District Judge, pursuant to the provisions of 28 U.S.C. § 636 and General Order 05-07 of the United States District Court for the Central District of California. I. INTRODUCTION Defendants/Counter-Claimants Caramel Sales LTD (“Caramel”), David Popeck (“Popeck”), TET APS (“TET”), and Thomas Schmidt (“Schmidt”) (collectively, “Defendants”) move for terminating or evidentiary sanctions against Plaintiffs/Counter-Defendants Vestis LLC (“Vestis”) and Ginve Modas, SL (“Ginve Modas”) (collectively, “Plaintiffs”) due to discovery misconduct. (Dkt. 128 [“Motion”].) After receiving opposition and reply briefing (Dkt. 132 [“Opp'n”], Dkt. 135 [“Reply”] ), the Magistrate Judge held a hearing on October 29, 2019. (Dkt. 147.) For the reasons stated below, the Magistrate Judge recommends the following terminating sanctions: (a) strike Vestis and Ginve Modas's answers to Defendants' Second Amended Counterclaims (Dkt. 55 [“Caramel Counterclaim”] and Dkt. 56 [“TET Counterclaim”] ); (b) enter default judgment against Vestis and Ginve Modas on the Second Amended Counterclaims; and (c) dismiss Vestis and Ginve Modas's Complaint (Dkt. 1 at 8-32 [“Complaint”] ). II. FACTUAL BACKGROUND Because the Court recently summarized the parties' allegations when ruling on Defendants' motions for judgment on the pleadings, this R&R will not repeat all the details. (See Dkt. 154, 159.) As relevant to the instant motion, Plaintiffs Vestis and Ginve Modas are involved in the wholesale and retail apparel business. Although both entities do business in southern California, Vestis is a Nevada limited liability company with its principal place of business in Las Vegas, Nevada, and Ginve Modas is a Spanish limited liability company with its principal place of business in Barcelona, Spain. (Compl. at ¶¶ 1-2). Counter-Defendants Serge Recchia and Morgan Recchia are a father and son who are the principals of Ginve Modas and Vestis, respectively.[1] (Dkt. 132-1 ¶ 1; Dkt. 132-3 ¶ 1.) Defendants Caramel and Popeck are based in France, and Defendants TET and Schmidt are based in Denmark. (Compl. ¶¶ 4-6.) Plaintiffs agreed to sell Defendants 180,000 pairs of Levi's brand jeans, for which Defendants made five payments to Plaintiffs totaling €1,116,513. (Compl. Exs. A and B; Caramel Countercl. ¶¶ 17-22.) Plaintiffs failed to deliver the jeans. (Id. ¶¶ 26, 30.) Defendants allege that, between May 2017 and September 2017, Plaintiffs made a series of false representations to Defendants about the status of the order. Defendants allege that Plaintiffs emailed a series of inauthentic documents that purported to show, e.g., that the sale of the jeans had been authorized in the European Economic Community, that the jeans had been delivered to Germany but blocked at the port, that Plaintiffs had obtained insurance over the goods, etc. (Id. ¶¶ 23-25.) Defendants allege that Plaintiffs have not returned any portion of the €1,116,513 paid by Defendants for the jeans. (Id. ¶ 40.) *2 Plaintiffs' Complaint contends that Defendants breached the parties' mutual non-disclosure agreements and committed various torts by misusing and failing to keep confidential Plaintiffs' proprietary information. (See Dkt. 154.) Defendants' Counterclaims are for breach of contract and money had and received. (See Dkt. 159.) III. DISCOVERY MISCONDUCT Before filing the instant motion (Dkt. 128), Defendants filed multiple discovery motions, triggering hearings, telephonic conferences with the Magistrate Judge, and orders compelling Plaintiffs to respond to discovery, appear for depositions, and produce documents. (See, e.g., Dkt. 57, 58, 62, 69, 70, 74, 75, 76, 85, 91, 95, 96, 97, 99, 107, 108, 122, 127.) Defendants' motion summarizes these proceedings accurately (Mot. at 8-14), so the Court will focus on the three most egregious examples. Plaintiffs' counsel largely does not dispute the facts concerning Plaintiffs' discovery misconduct and has moved to be relieved as counsel due to Plaintiffs' failure to comply with discovery orders, communicate with counsel, and other circumstances. (Dkt. 145.) A. Failure to Appear for Depositions. In the Spring of 2019, Defendants noticed depositions of Vestis and Ginve Modas under Federal Rule of Civil Procedure 30(b)(6). (Dkt. 96 at 2.) Vestis and Ginve Modas designated Serge and Morgan Recchia to appear as the witnesses. (Id. at 5; Mot. at 11.) After Defendants were unable to get a commitment for deposition dates, Defendants applied ex parte to compel the depositions. (Dkt. 96, 97.) At a telephonic conference on August 26, 2019, the Court ordered Plaintiffs to provide at least 10 available dates in September and October 2019 for the four depositions (i.e., two Rule 30(b)(6) depositions and depositions of Serge and Morgan Recchia as individual Counter-Defendants). (Dkt. 107; Mot. at 12.) After providing dates, Plaintiffs moved ex parte to continue the depositions, alleging that Morgan Recchia's passport had sustained water damage while he was honeymooning in the Maldives. (Dkt. 115.) He claimed that he needed to obtain a birth certificate to get a replacement passport, which would cause a significant delay. (Id. at 5; see also Mot. at 12-13.) On September 13, 2019, the Court denied the application and ordered the Recchias to appear for their depositions on September 30, October 1, and October 2, 2019, noting that they had made “implausible” representations about the reasons for requesting delay and that the Court “strongly suspect[ed]” the real reason was lack of sufficient motivation to appear. (Dkt. 118.) The Recchias failed to appear, citing an elective dental procedure Serge Recchia underwent on September 19, 2019 (i.e., after the Magistrate Judge's order to appear) and a letter from his dentist recommending that he not travel by plane until October 20, 2019. (Dkt. 128-3 at 17 [Quintana Decl. Ex. AE]; Dkt. 132-1 at 2 ¶ 3 [Serge Recchia Decl.]; Dkt. 132-2 [dentist's letter].)[2] They also stated that Morgan Recchia had “been rebuffed in his attempts to obtain an expedited passport” in Spain and was “forced to travel to France to obtain a new” one. (Dkt. 128-3 at 17; see also Opp'n at 14.) *3 The Recchias then proposed later dates in October. (Dkt. 128-3 at 17.) Mindful of the November 18, 2019 discovery cutoff (Dkt. 40), Defendants agreed, but the Recchias failed to appear on those dates, too. (Reply at 11.) As of the October 29, 2019 hearing on the present motion, the Recchias had proposed no further dates for their depositions. Defendants filed a status report on November 5, 2019, advising that despite additional demands, the Recchias have neither appeared nor agreed to appear for their depositions. (Dkt. 152.) The November 18 discovery cutoff has now expired without Vestis or Ginve Modas producing any Rule 30(b)(6) witnesses for deposition. B. Failure to Produce Financial Documents. The core of this dispute has always concerned what happened to the €1,116,513 that Defendants paid Plaintiffs for the Levi's jeans. Plaintiffs produced records showing receipt of the money transferred to accounts controlled by Ginve Modas. (Mot. at 19-20; Opp'n at 8; Reply at 15-16.) Despite admitting receipt of the money, Plaintiffs have produced no financial records showing what subsequently happened to it. At a telephonic hearing on July 18, 2019, the Court ordered Plaintiffs to produce banking records for the accounts that had received the money, finding that Defendants were entitled to trace where the money had gone. (Dkt. 85 [minutes]; Mot. at 19.) On September 19, 2019, the Court entered a written, omnibus order memorializing this ruling, ordering Plaintiffs to produce the documents by September 26, 2019, and ordering Plaintiffs to pay $30,906 in monetary sanctions to Defendants. (Dkt. 122 at 3, 6-7, 10.) Although Plaintiffs argue that they produced certain records evidencing transfers of the money (Opp'n at 8), their briefing tacitly admits that they have not produced all of the relevant bank statements (see Reply at 15-16). At the October 29, 2019 hearing on this motion, Plaintiffs' counsel admitted that despite Plaintiffs' having filed this lawsuit in September 2018 (Dkt. 1 at 7) and having had more than a year to investigate the facts, he did not know where the money was. C. Failure to Produce Evidence about the Forged Documents. After Defendants paid Plaintiffs more than €1 million, Defendants allege that they were emailed fake documents intended to trick them into believing that jeans had been shipped when, in fact, no jeans had been shipped. (Dkt. 55 at 7-11 ¶¶ 23-25 [Caramel's Second Am. Countercl.]; see also Dkt. 159 at 2, 5.) Defendants have pursued discovery to learn who created the fake documents (a fact that might be disclosed by computer metadata attached to a native file) and who sent the fake documents to Defendants (a fact that might be disclosed by examination of messaging applications, texts, or emails). Plaintiffs have not provided basic discovery on this topic. (See Mot. at 17-19.) At the July 18, 2019 telephonic hearing, as memorialized in the Court's omnibus order of September 19, 2019, the Court ordered Plaintiffs to produce the native format versions of these emails. (Dkt. 122 at 7 ¶ 2.) Plaintiffs contend that they lost access to the relevant email addresses (serge@americanbrandsoutlet.edu and morgan@americanbrandsoutlet.edu) when the IT person hired to manage the American Brands outlet website[3] and corresponding email accounts was fired and moved to an unknown location in Peru. (Dkt. 132-3 at 2 ¶ 4 [Decl. of Morgan Recchia].) They claim that they have been unable to contact the fired IT person and that the company that hosted the email addresses has refused to reset the password without the involvement of the fired IT person. (Id.; see also Opp'n at 7.) *4 Similarly, at the October 29 hearing on this motion, they contended that a third-party cloud-based storage company in Switzerland has custody of some relevant email files, but they admitted that they have not taken basic steps to try to access those documents, such as having their lawyer contact the company to request them or seeking a subpoena. They contend that they cannot access relevant WhatsApp messages outside the United States, but they fail to explain why those messages were not accessed during trips to the United States, such as in July 2019. (Dkt. 132-3 at 2-3 [Decl. of Morgan Recchia]; Reply at 8.) IV. SANCTIONS Defendants request that the Court sanction Plaintiffs either by: (a) striking Vestis and Ginve Modas's Complaint, as well as their answers to the Second Amended Counterclaims, and entering judgment against them on those claims; or (b) imposing evidentiary and issue preclusive sanctions in connection with Plaintiffs' Complaint and Defendants' Second Amended Counterclaims. (Mot. at 2.) Defendants list the requested evidentiary sanctions in Exhibit AX to the Motion. (Mot. at 31; Dkt. 128-7 at 74-127 [listing hundreds of matters that Defendants request should either be “taken as established” or about which Plaintiffs should be “precluded from introducing evidence”].) Defendants also request that Plaintiffs be ordered to pay Defendants $9,960, the expenses they incurred in bringing the instant motion. (Mot. at 3.) A. The Court's Authority to Sanction Discovery Abuses. Under Federal Rule of Civil Procedure 37(b), the Court has broad discretion to impose sanctions as a remedy for non-compliance with a discovery order. Here, there are at least two orders that Plaintiffs violated: (1) the September 13, 2019 order for the Recchias to appear for their Rule 30(b)(6) depositions on behalf of Ginve Modas and Vestis (Dkt. 118); and (2) the September 19, 2019 omnibus order to provide written and documentary discovery and pay sanctions (Dkt. 122). Sanctions may include directing that certain facts be established, prohibiting the disobedient party from introducing evidence, striking pleadings, and entering default judgments. Fed. R. Civ. P. 37(b)(2). “A terminating sanction, whether default judgment against a defendant or dismissal of a plaintiff's action, is very severe” and is only justified upon a showing of “willfulness, bad faith, and fault.” Conn. Gen. Life Ins. Co. v. New Images of Beverly Hills, 482 F.3d 1091, 1096 (9th Cir. 2007) (citation omitted). To establish that a party's conduct rises to the level of willfulness, bad faith, or fault, “all that is required” is “disobedient conduct not shown to be outside the control of the litigant.” Henry v. Gill Indus., Inc., 983 F.2d 943, 948 (9th Cir. 1993) (citation omitted). Even where a party's failure to comply is willful, the Court must consider five factors in determining whether the circumstances warrant dismissal: (1) the public's interest in expeditious resolution of litigation; (2) the court's need to manage its docket; (3) the risk of prejudice to the party seeking sanctions; (4) the public policy favoring disposition of cases on their merits; and (5) the availability of less drastic sanctions.” In re Exxon Valdez, 102 F.3d 429, 433 (9th Cir. 1996). B. Award of Reasonable Expenses. Defendants are the prevailing party on this motion. Per Rule 37(a)(5), an award of reasonable expenses in favor of Defendants is justified. Defense counsel has provided a declaration describing the time worked and hourly rate underlying Defendants' request for $9,960.00. (Dkt. 128-1 ¶¶ 44-47.) The time spent and hourly rates are reasonable. Accordingly, Defendants should be awarded this amount. C. Terminating Sanctions. *5 The Court finds that Plaintiffs' failure to have their Rule 30(b)(6) witnesses appear for deposition was willful, in that the failure has not been shown to have been caused by circumstances outside the litigants' control. Even if his passport sustained water damage, Morgan Recchia could have gotten a replacement long before the noticed dates, had he tried to do so. (See Dkt. 117 at 5 [Defendants' opposition to Plaintiffs' motion to reschedule deposition, explaining why Morgan Recchia could have replaced his passport more quickly].) Even if Serge Recchia's dentist recommended against air travel, he could have postponed his dental procedure. Thus, Morgan and Serge Recchia not only failed to appear for their depositions, but also offered implausible explanations for their failure. When their bluff was called and they were offered later dates repeatedly, they still refused to appear. (Mot. at 11-14; Dkt. 152.) The Court also finds that Plaintiffs willfully failed to produce financial documents showing the location of the money paid to them by Defendants, and native versions of electronic communications that might have revealed who created the allegedly forged documents regarding the status of Levi's jeans shipment. Plaintiffs have not provided credible explanations for their failure to produce these documents. 1. Factor One: Public Interest in Expeditious Resolution Plaintiffs chose to file this lawsuit in California. Their representations that they would provide discovery – only to be followed by their failure to provide even basic discovery – has consumed undue Court resources. Years have passed since the disputed transaction, and despite Defendants' paying Plaintiffs more than a million Euros for a shipment of jeans that never arrived, Plaintiffs are no closer to repaying Defendants and have not even provided information as to the location of the funds Ginve Modas received. This factor weighs in favor of terminating sanctions. 2. Factor Two: Docket Management Plaintiffs' misconduct has flooded the docket with successful discovery motions by Defendants. The discovery cutoff has now passed without Plaintiffs' having provided basic discovery. Plaintiffs' only proposal to avoid prejudice to Defendants is to extend the discovery deadlines, but such extensions will interfere with other matters on the Court's busy docket, including other civil and criminal cases set for trial in which the parties are relying on firm dates. This factor weighs in favor of terminating sanctions. 3. Factor Three: Prejudice to Defendants Defendants cannot fairly be required to defend against Plaintiffs' claims at trial without the benefit of Rule 30(b)(6) deposition testimony and basic document production. Similarly, Defendants cannot fairly be required to prove up their counterclaims against Plaintiffs without such discovery. See Wanderer v. Johnston, 910 F.2d 652, 656 (9th Cir. 1990) (prejudice was “palpable” where a party failed to appear at depositions and failed to comply with court orders to produce discovery). Unreasonable discovery delays are presumptively prejudicial. Allen v. Bayer Corp., 460 F.3d 1217, 1227 (9th Cir. 2006). The required discovery has not happened before the November 18, 2019 cutoff date. Extending the cutoff date is no solution to prejudice when: (1) Plaintiffs' counsel are moving to withdraw, and (2) there is no reason to expect, based on their conduct to date, that Plaintiffs will be able to timely retain new counsel (and as corporate entities, they cannot appear without counsel) and comply with any new deadlines set by the Court. This factor therefore weighs heavily in favor of terminating sanctions. 4. Factor Four: Public Policy Favoring Disposition on the Merits This factor always weighs against terminating sanctions. When, however, Plaintiffs' non-compliance with discovery orders has frustrated an investigation of the merits, Plaintiffs cannot persuasively invoke this factor to oppose terminating sanctions. 5. Factor Five: Availability of Less Drastic Sanctions *6 The fifth factor asks the Court to determine the viability of less drastic sanctions by considering three sub-factors: (1) the availability of lesser sanctions; (2) the use of lesser sanctions before termination; and (3) whether the party was adequately warned of the possibility of termination. Conn. Gen. Life Ins. Co., 482 F.3d at 1096. Here, Plaintiffs' misconduct has escalated over time. They were given opportunities to provide discovery without facing monetary sanctions. They were ordered to pay about $30,000 in discovery sanctions, which they have not paid. They have given changing and implausible excuses for their discovery failures. They were given multiple opportunities to appear for deposition, but apparently made a deliberate decision not to do so before the discovery cutoff expired. As discussed above in support of the Court's finding of willful disobedience, they not only failed to appear, but gave implausible, pretextual reasons for their failures. The Court is therefore convinced that less drastic sanctions will not be effective. Less drastic sanctions would not remedy the prejudice to Defendants. Imposing monetary sanctions only and giving the parties more time to accomplish discovery would only enable Plaintiffs to continue avoiding payments already due to Defendants. Granting extensive evidentiary sanctions would eventually lead to the same end result (i.e., Plaintiffs would lose their claims and Defendants would prevail on their counterclaims) but only after the cost-increasing, pointless exercise of requiring Defendants to litigate summary judgment motions based on facts deemed true. The final consideration is whether the Court warned Plaintiffs about the possibility of case-dispositive sanctions. The Ninth Circuit has found that “it is not always necessary for the court to ... give any explicit warning.” See Valley Eng'rs v. Electric Eng'g Co., 158 F.3d 1051, 1057 (9th Cir. 1998). “The significance of warning is that a sanction may be unfair if the party could not have realized that it was in jeopardy of so severe a consequence if it was in error regarding its discovery posture.” Id. But these fairness concerns are not implicated where the party can “have been in no doubt” of the possibility, such as where the judge “repeatedly imposed monetary sanctions” that “had not worked to shake the [discovery sought] loose.” Id.; see also Malone v. United States Postal Service, 833 F.2d 128, 133 (9th Cir. 1987) (“A plaintiff can hardly be surprised by a harsh sanction in response to willful violation of a pretrial order” even where district court did not explicitly warn plaintiff that dismissal would follow violation of pretrial order). Here, between July 18, 2019, and August 26, 2019, during the multiple telephonic discovery hearings, the Court repeatedly ordered the Plaintiffs to cooperate with discovery and produce responsive documents. (See Dkt. 122 at 2.) When Plaintiffs defied the Court's verbal orders, the Court issued a comprehensive order on September 19, 2019, which included a significant monetary sanction exceeding $30,000.00. (Id. at 10.) The Court expressly waived the requirement of proceeding by way of a joint stipulation if Defendants chose to “file a motion for additional sanctions, including, but not limited to evidentiary sanctions, issue preclusion sanctions, and/or terminating sanctions.” (Id. at 11.) Thus, all counsel understood the possibility that at more drastic sanctions could follow if these were ignored.[4] Plaintiffs cannot plausibly claim that they thought this Court would respond to their continued disobedience of discovery orders merely by piling on more monetary sanctions that they could ignore. *7 Other cases have imposed terminating sanctions for less egregious misconduct. In Pioche Mines Consol., Inc. v. Dolman, 333 F.2d 257 (9th Cir. 1964), the Ninth Circuit upheld the district court's entry of default against an individually-named defendant after he failed to appear for several depositions and his counsel informed the court that he would not appear for deposition due to poor health. Id. at 266-70. Although there was “doubt as to whether claimed disability was genuine,” id. at 266, the district court's entry of default was not based on a finding of any active deception, but was based on the defendant's passive acts of not appearing for multiple depositions and indicating that he would submit to deposition on his own terms. Id. at 267-69. In Hall v. Johnston, 758 F.2d 421 (9th Cir. 1985), the Ninth Circuit affirmed entry of default against a defendant who failed to appear at two noticed depositions without any justification. The sanctioned party had two opportunities to appear for two noticed depositions, but failed to appear at both without justification. Id. at 422. The sole basis for entry of default against the sanctioned party was his failure to appear at two depositions. Id. at 424-25. The Ninth Circuit affirmed the trial court's entry of default. Id. at 425; see also FTC v. A to Z Mktg., No. SACV 13-0919-DOC (RNBx), 2014 U.S. Dist. LEXIS 191687 (C.D. Cal. Sept. 2, 2014) (granting terminating sanctions where defendant dissipated assets in violation of preliminary injunction). Similar sanctions have been issued against plaintiffs. See, e.g., Lowry v. Heritage Sec., No. 09-CV-0882-, 2012 U.S. Dist. LEXIS 188841 (S.D. Cal. Oct. 31, 2012) (imposing terminating sanctions after pro se plaintiff lied about reasons he could not attend his court-ordered deposition); Reddy v. Gilbert Med. Transcription Serv., No. CV 10-0524-JFW (DTB), 2011 U.S. Dist. LEXIS 163031, 2011 WL 13176583 (C.D. Cal. Feb. 4, 2011) (imposing terminating sanctions after pro se plaintiff twice failed to appear for court-ordered deposition). The Ninth Circuit has held that, “[t]he most critical factor to be considered in case-dispositive sanctions is whether ‘a party's discovery violations make it impossible for a court to be confident that the parties will ever have access to the true facts,’ ” and that “[w]here a party so damages the integrity of the discovery process that there can never be assurance of proceeding on the true facts, a case dispositive sanction may be appropriate.” Conn. Gen. Life Ins. Co., 482 F.3d at 1097. Here, Plaintiffs' conduct has “so damage[d] the integrity of the discovery process” that the Court has no confidence that Defendants ever will receive the discovery ordered produced, or will be able proceed to a fair trial even if they do. See Valley Eng'rs, 158 F.3d at 1058. Because the Court finds actual prejudice to Defendants based on Plaintiffs' willful disobedience of court orders and that lesser sanctions are not available, the Court finds that terminating sanctions should issue. V. RECOMMENDATION Based on the foregoing, IT IS THEREFORE RECOMMENDED that the District Court issue an Order: (1) approving and accepting this Report and Recommendation; (2) directing Plaintiffs to pay Defendants $9,960.00, the reasonable expenses they incurred in filing the instant motion, within fourteen calendar days of entry of the Order, (3) and entering (a) default judgment against Plaintiffs Vestis and Ginve Modas on their Complaint (Dkt. 1), and (b) default judgment against Counter-Defendants Vestis and Ginve Modas on the Second Amended Counterclaims (Dkt. 55, 56). Footnotes [1] The Recchias are not named as Plaintiffs in the Complaint, but they are named as Counter-Defendants in the Second Amended Counterclaims. The current motion does not seek any sanctions against them personally. [2] At the August 26 telephonic conference, the Recchias' counsel stated that Serge Recchia had already undergone dental surgery and could not travel until December 2019. (Opp'n at 12.) This is inconsistent with Serge's declaration that the surgery occurred on September 19. [3] Plaintiffs “operate under the umbrella of the trade name ‘American Brands.’ ” (Dkt. 55 at 6 ¶ 16; Dkt. 65 at 4 ¶ 16.) [4] The “adequate warning” consideration seems most relevant to fairness when the party being sanctioned is self-represented or unsophisticated. Here, at all relevant times, Plaintiffs were corporate entities with counsel admitted to practice in the Central District of California (and thus familiar with the federal discovery rules), in a dispute over international business transactions exceeding 1 million Euros.