Ritchie Risk-Linked Strategies Trading (Ireland), Ltd. v. Coventry First LLCRitchie Risk-Linked Strategies Trading (Ireland), Ltd. v. Coventry First LLC
DECISION AND ORDER
I. BACKGROUND
By Order dated January 9, 2012, Magistrate Judge Debra Freeman, to whom this matter has been referred for supervision of pretrial proceedings, issued an a Report and Recommendation (the “Report”), a copy of which is attached and incorporated herein, recommending that the Court deny the motion of defendants seeking to preclude plaintiffs from claiming certain bankruptcy fees and costs as a component of compensatory damages. The Report further recommended that the Court impose sanctions on plaintiffs pursuant to
II. STANDARD OF REVIEW
A district court evaluating a magistrate judge’s order with respect to a matter not dispositive of a claim or defense may adopt the magistrate judge’s findings and conclusions as long as the factual and legal bases supporting the ruling are not clearly erroneous or contrary to law. See
III. DISCUSSION
Upon review of the full factual record in this litigation, including the parties’ respective papers submitted in connection with the underlying motion, as well as the Report and applicable legal authorities, the Court concludes that the findings, reasoning, and legal support for the recommendations made in Report are not clearly erroneous or contrary to law and are thus warranted. Accordingly, for substantially the reasons set forth in the Report, the Court adopts the Report’s recommendations in their entirety.
IV. ORDER
For the reasons discussed above, it is hereby
ORDERED that the Report and Recommendation (the “Report”) of Magistrate Judge Debra Freeman dated January 9, 2012 (Docket No. 97) is adopted in its entirety, and the motion of defendants (Docket No. 82) is DENIED, and it is further
ORDERED that plaintiffs be sanctioned in the manner set forth in the Report for failure to adequately comply with their disclosure obligations pursuant to
SO ORDERED.
REPORT AND RECOMMENDATION
TO THE HONORABLE VICTOR MARRERO, U.S.D.J.:
In this action, referred to this Court for general pretrial supervision pursuant to
BACKGROUND
A. Plaintiffs’ Damages Disclosures in Ritchie I
1. Damages Demands in Plaintiffs’ Original Complaint
This action is the second of two lawsuits commenced in this Court by Plaintiffs against Defendants, in connection with Plaintiffs’ purchase of secondary-market life insurance policies from Defendants. The first of those actions, Ritchie Capital Management, L.L.C. v. Coventry First LLC, No. 07 Civ. 3494(DLC),
Plaintiffs alleged in Ritchie I that Defendants had expertise in purchasing life insurance policies in the secondary market; that Plaintiffs relied on that expertise by contributing financing for Defendants to purchase policies for Plaintiffs for a planned securitization transaction; but that Defendants then obtained policies for Plaintiffs through bid-rigging and fraud, leading to an investigation by the New York Attorney General’s Office and a down-grading by Moody’s of its rating of the policies, which in turn made it impossible for Plaintiffs to complete the securitization. (See Ritchie I Dkt. 1 (Complaint, dated May 2, 2007 (“Ritchie I Compl.”)), ¶¶ 7-52, 58-67; Ritchie I Dkt. 49 (Amended Complaint, dated Aug. 1, 2007 (“Ritchie I Amended Compl.”), ¶¶ 42-67, 89-90.)) In Ritchie I, Plaintiffs initially asserted claims against Defendants and their principals, officers, and employees for violations of Racketeer Influenced and Corrupt Organizations Act,
2. Disclosures Following Plaintiffs’ Bankruptcy Filing
On June 20, 2007, shortly after Ritchie I was filed, and before fact discovery in the action had begun, Plaintiffs filed for bankruptcy. (See Memorandum of Law in Support of Motion to Preclude Plaintiffs’ Request for “Costs and Fees Related to the Bankruptcy Process,” dated June 7, 2011
a.
On or about July 5, 2007, roughly two weeks after the bankruptcy filing, Plaintiffs made initial disclosures under
Ritchie Capital has alleged that it suffered damages in an amount believed to be not less than approximately $700 million, based on, among other things, the amounts for which Plaintiffs purchased the insurance policies from Defendants, the accretion of the policies, the ongoing cost of servicing the policies, the premiums for the policies, lost opportunity costs relating to the inability to carry forward the planned securitization transaction, and reputation damages. Ritchie Capital is entitled to treble damages pursuant to [RICO], compensatory damages, and punitive damages. The documentation on which Ritchie Capital relied in reaching this initial estimate is described above, under ‘Documents.’ Ritchie Capital will further refine its claim for damages as the litigation progresses.
(Ritchie I Dkt. 39 (Plaintiffs’
Thus, despite their bankruptcy filing, Plaintiffs made no adjustment of the damages demand contained in their Complaint. Moreover, in describing the components of their damages, Plaintiffs made no express mention of any anticipated bankruptcy fees or costs. Similarly, the section of Plaintiffs’ disclosure regarding “Documents,” which identified categories of documents that Plaintiffs stated they might use to support their claims, did not refer to any anticipated bankruptcy-related fees or costs. (See id,., at 3-4 (Section B).) The closest listed category of documents was “[b]illing and payment records,” but Plaintiffs specified that such documents included “records of premium and service fee payments for the policies” (id., at 4), making no suggestion that the category was intended to cover records of bankruptcy fees or costs.
b. Responses to Document Requests
In November 2007, Plaintiffs produced responses to document requests served by Defendants. (See Brown Deck, Ex. 5 (Plaintiffs’ Responses to Coventry First LLC’s First Set of Document Requests, dated Nov. 8, 2007).) In response to Defendant’s Document Request No. 47, calling for production of “[a]ll communications and documents concerning [Plaintiffs’] contention that ‘Plaintiffs have suffered damages in an amount believed tо be not less than $700 million [on their contract claim], including all documents necessary to substantiate and to calculate Plaintiffs’ alleged damages,” Plaintiffs asserted objections, but stated that, subject to and without waiving their objections, they would produce non-privileged, responsive documents (id., at 21-22 (Response to Request No. 47)). Apparently, however, Plaintiffs did not make any production of documents that post-dated their bankruptcy filing.
In fact, on March 11, 2008, Defendants wrote to the Court, seeking assistance in resolving a discovery dispute regarding Plaintiffs’ unilateral decision to impose date restrictions on their entire document production. (See Brown Deck, Ex. 6 (Letter to the Hon. Denise L. Cote, from Dane H. Butswinkas, Esq., dated Mar. 11, 2008).) While Defendants did not specifically complain about Plaintiffs’ failure to produce documents in response to Document Request No. 47 (see id., at 1 (itemizing certain other document requests as being relevant to “important matters in this case”)), Defendants generally took issue with the fact that, “[f]or the majority of Defendants’ requests, Plaintiffs ha[d] refused to seаrch for or produce documents and communications created after May 2, 2007 (the date this lawsuit was filed)” and, “[i]n all other instances in which they have agreed to produce documents, Plaintiffs ha[d] imposed a date restriction of June 20, 2001 (the date Plaintiffs filed for bankruptcy)” (id.).
B. Plaintiff’s Damages Disclosures in Ritchie II
On March 18, 2008, Plaintiffs voluntarily dismissed Ritchie I, without prejudice. (See Ritchie I Dkt. 77.) Meanwhile, the bankruptcy court continued to administer various aspects of the bankruptcy case. (See generally Bankruptcy Docket.) In January 2008, the policies purchased by Plaintiffs were sold at auction, under the supervision of the bankruptcy court (see id., at 24, 31), and, ultimately, on Februаry 4, 2009, the bankruptcy court closed the final adversary proceeding, which was the last substantive matter adjudicated in the bankruptcy (see id., at 54).
On February 6, 2009, two days after the end of the bankruptcy proceedings, and nearly a year after the dismissal of Ritchie I, Plaintiffs returned to this Court, filing the instant action (“Ritchie II”). Ritchie II, like Ritchie I, was initially assigned to Judge Cote (see Dkt. 4), but was reassigned to Judge Marrero on April 9, 2010 (see Dkt. 46).
1. Damages Demand in Plaintiffs’ New Complaint
In their new action, Plaintiffs reasserted their contract claim against Defendants. (See Complaint, dated Feb. 6, 2009 (“Compb”) (Dkt. 1).) Specifically, in Ritchie II, Plaintiffs alleged that Defendants breached certain warranties and representations contained in the two policy purchase agreements. (See id., ¶ 12.) This time, however, with respect to damages, Plaintiffs sought “not less than $400,000,000” (id., ¶ 66), presumably because Plaintiffs had recouped some of their originally-claimed losses by selling the policies in the bankruptcy proceedings. As to any breakdown of their damages, Plaintiffs demanded, in the “Wherefore” clause of their Complaint:
(a) All compensatory damages sustained by Plaintiffs;
(b) Attorneys’ fees and costs;
(c) Prejudgment and post-judgment interest; and
(d) Such other relief as the Court may deem just and proper.
(Id., at ¶ 22.)
2. Plaintiffs’ Reliance on Their Earlier
Given that Ritchie II relied on essentially the same factual allegations as Plaintiffs had made in Ritchie I, the parties stipulated that the discovery exchanged in Ritchie I — including the parties’
3. Testimony of Plaintiffs’ Rule 30(b)(6) Witness on Damages
In any event, fact discovery in Ritchie II then proceeded, for over a year. During the course of that discovery, Defendants served Plaintiffs with deposition notices under
On March 11 and 12, 2010, Plaintiffs’
4. Interrogatory Responses
On Februаry 23, 2010, about a month before discovery was set to close, Defendants served Plaintiffs with a set of interrogatories, including the following:
For each and every cause of action alleged against Defendants, explain in detail how each Plaintiff has been injured by the alleged wrongful conduct; state the amount of damage claimed by each Plaintiff; and explain how that damage amount was calculated, including but not limited to providing specific calculations identifying the total dollar amounts of damages allegedly owed to each Plaintiff.
(Brown Decl. Ex. 14 (Defendant Coventry First LLC’s Second Set of Interrogatories), at 6 (Interrogatory No. 10).) On March 25, 2010, Plaintiffs served responses, objecting on various grounds to this interrogatory, but, notwithstanding their objections, stating:
Plaintiffs do not possess the answer to Interrogatory No. 10 at this time. Fact discovery is not closed as there are additional depositions to be taken. Furthermore, expert reports have not yet been submitted ____ Since Plaintiffs’ experts have not yet completed their review and analysis of the damages in this case, Plaintiffs cannot, at this time, provide an accurate damages calculation. Plaintiffs will be seeking the following categories of damages:
• Compensatory damages;
• Expectation damages, including lost profits;
• Prejudgment and post-judgment interest; and
• Attorney’s fees.
(Brown Decl., Ex. 15 (Plaintiffs Responses and Objection to Defendant’s Second Set of Interrogatories, dated Mar. 25, 2010), at 14.) Again, Plaintiffs said nothing, in particular, regarding any bankruptcy-related fees or costs.
5. Amended Interrogatory Responses
Fact discovery finally closed in Ritchie II on May 5, 2010. (See Dkts. 52, 53.) Then, on March 14, 2011, nearly a year after fact discovery had been completed, and more than two years after the closing of the bankruptcy proceedings, Plaintiffs amended their response to Defendants’ interrogatory regarding damages. (See Brown Decl., Ex. 1 (Plaintiffs Second Amended Responses and Objections to Defendant’s Second Set of Interrogatories, dated Mar. 14, 2010), at 12.) In their amended responses, Plaintiffs, for the first time, stated that their “compensatory damages” included over $12 million (specifically, $12,718,973.00) that Plaintiff claimed to have paid in “costs and fees related to the bankruptcy process.” (Id.)
C. Defendants’Motion To Preclude
In the motion now before the Court, Defendants complain that Plaintiffs not only failed to make this disclosure in a timely
Plaintiffs counter that they complied with
DISCUSSION
I. DISCOVERY SANCTIONS
In their motion, Defendants primarily argue that Plaintiffs should be sanctioned under
A. Applicable Legal Standards
1.
Pursuant to
The duty to supplement “applies whether the corrective information is learned by the client or by the attorney.”
3.
In order to ensure parties’ compliance with the mandatory disclosure requirements of
[i]n addition to or instead of this sanction, the court, on motion and after giving an opportunity to be heard:
(A) may order payment of the reasonable expenses, including attorney’s fees, caused by the failure;
(B) may inform the jury of the party’s failure; and
(C) may impose other appropriate sanctions, including any of the orders listed inRule 37(b) (2) (A) (i) — (vi).
Id. In turn,
The purpose of
Courts, in fact, have “broad discretion” to determine the nature of any sanction that should be imposed under
“Before [granting] the extreme sanction of preclusion,” the Court “should inquire more fully into the actual difficulties which the violation causes, and must consider less drastic responses.” Outley v. New York,
Even where preclusion is not ordered under
“Monetary sanctions are appropriate ‘to punish the offending party for its actions [and] to deter the litigant’s conduct, sending the message that egregious conduct will not be tolerated.’ ” Green v. McClendon,
1. Plaintiffs’ Violations of
Defendants argue that
This Court agrees that Plaintiffs’
The Court also agrees with Defendants that, if Plaintiffs were claiming millions of dollars in damages as a result of the bankruptcy proceedings, then they should have not have argued to the Court that virtually all documents generated after the bankruptcy filing were irrelevant to these proceedings, or that the relevance of almost all documents related to the bankruрtcy was so slight that it was plainly outweighed by the burden of production. To the contrary, documents regarding Plaintiffs’ costs in the bankruptcy — and any offsetting benefits to Plaintiffs that derived from that proceeding — would all have been highly relevant to Plaintiffs’ damages claim (see Def. Mem., at 17-18 (citing cases)), and unquestionably should have been subject to production. Quite apart from whether Plaintiffs’ argument in opposition to Defendants’ application to compel served to mislead to the Court, it assuredly cemented Defendants’ understanding that Plaintiffs were not making any affirmative claim for damages based on the bankruptcy proceedings.
Overall, this Court finds that Plaintiffs did not comply with the requirements of
2. Plaintiffs’ Arguments Regarding “Justification” and “Harmlessness ”
Even where there is violation of
As to whether their dilatory conduct was “substantially justified,” Plaintiffs primarily argue, as noted above, that their disclosures during the fact-discovery period were sufficient because they “consistently indicated” that Plaintiffs were seeking “compensatory” damages, which should have signaled Plaintiffs’ intent to seek bankruptcy fees and costs. (PI. Mem., at 12.) By seeking to justify their
Plaintiffs’ additional argument to justify the meager nature of its damages disclosures — that it was premature to make such disclosures without the benefit of expert discovery — is also unpersuasive, as most, if not all, of Plaintiffs’ claimed damages relating to the bankruptcy could have been readily calculated without special expertise. For example, if attorneys’ fees in the bankruptcy were being claimed, Plaintiffs could have simply provided the total amount spent on such fees, which would have been available from the attorneys’ bills. As Plaintiffs did not commence Ritchie II until after the completion of the bankruptcy proceedings, those bills would presumably have been in Plaintiffs’ possession at the start of the re-filed action. Moreover, even if Plaintiffs could not provide an exact or comрlete calculation of their damages without an expert analysis, Plaintiffs offer no compelling justification for their fail
Plaintiffs also have not satisfied their burden of demonstrating that their failure to make timely disclosure was “harmless,” within the meaning of
Plaintiffs also suggest that Defendants, in fact, engaged in the fact discovery necessary for them to evaluate Plaintiffs’ damages claim. (See PL Mem., at 19-20 (stating that, “despite [Defendants’] purported reliance on alleged representations that actions after Plaintiffs filed for bankruptcy were irrelevant, Defendants engaged in substantial fact discovery regarding the bankruptcy process”).) Yet even assuming that Defendants did conduct fact discovery regarding certain aspects of the bankruptcy proceedings, Plaintiffs have not been able to point to any documents or testimony obtained by Defendants through that discovery that directly relate to Plaintiffs’ claimed attorneys’ fees or bankruptcy costs. Nor have Plaintiffs been able to demonstrate that, through discovery, Defendants explored the various types of offsetting benefits that Plaintiffs received from the bankruptcy. As Defendants argue:
[A]ny award of bankruptcy fees and costs would be offset by savings resulting from the bankruptcy process.... As only a few of the many possible examples of such potential offsets, Plaintiffs may well have benefitted from their bankruptcy filing because they were able to obtain medical underwriting information which they had not purchased from LST or Coventry First, for a fraction of its value as a result of pressure created by the bankruptcy process____And, separately, the value of the Policies may have increased as their underwriting was updated based on this information____Plaintiffs also were able to strip various contractual limitations on the*161 Policies’ resale, which likely enabled Plaintiffs to market the Policies to a broader universe of buyers____Plaintiffs also were able to strip Coventry First’s servicing rights in the bankruptcy, which saved them significant costs associatеd therewith, and likely allowed them to sell the Policies for more than they otherwise could have.... Defendants have not taken meaningful discovery on any of these issues.
(Def. Mem., at 17-18 (citations omitted).) While some of these potential savings may have been reflected in the policies’ ultimate sale prices, which Plaintiffs have apparently disclosed, the record before the Court bears no indication that Defendants had the opportunity to explore any cost savings that were separately realized by Plaintiffs, as a result of the bankruptcy. See Rienzi,
While a party may — and, indeed, has an affirmative obligation to — supplement fact disclosures that are discovered to be incomplete, such supplementation must be made “in an timely manner,”
3. Appropriateness of Preclusion Sanction
Despite Plaintiffs’ failure to comply with the discovery rules, and the resulting prejudice to Defendants, this Court is cognizant of the fact that preclusion is a harsh sanction, and of the importance of imposing such a sanction sрaringly. In this case, certain factors weigh in favor of preclusion, but others do not, which serves as a caution that such an extreme sanction may not be warranted.
Weighing in favor of preclusion is Plaintiffs’ anemic explanation for their failure to make or supplement their
Also weighing in favor of preclusion is the fact that, as described above, Defendants suffered substantial prejudice from proceeding through all of fact discovery without a full understanding of Plaintiffs’ damages claim, and from entering into the expert phase of discovery without having had the
On the other hand, the fact that the stakes are high in this case arguably weighs against preclusion, as precluding Plaintiffs from pursuing $12~plus million in damages would seem a particularly severe result. The high-stakes nature of this ease and the complexity of the issues to be tried also make it especially appropriate for the Court to consider the option of granting a reasonable continuance, so as to allow Defendants the opportunity to develop the full factual record that will be needed for summary judgment motions or trial.
With no trial date yet set, this Court sees no reason why a continuance would not be feasible here. See Schiller v. City of New York, Nos. 04 Civ. 7922(RJS)(JCF), 04 Civ. 7921(RJS)(JCF),
It would also be appropriate here for Plaintiffs to be required to pay Defendants the reasonable attorneys’ fees and costs they incurred in bringing this motion, as well as certain costs associated with the additional discovery. See
(awarding fees and costs incurred in connection with the sanctions motion, and also noting that “[cjourts in this circuit have often awarded attorney’s fees to sanction a party who disregards [its] discovery obligations”) (collecting eases); Zubulake,
Under the circumstances, I recommend that the Court:
(1) Order Plaintiffs to produce to Defendants all documents relating to the attorneys fees and costs incurred by Plaintiffs in the bankruptcy proceedings, without temporal limitation;
(2) Direct the parties to confer in good faith regarding the additional fact discovery (including both party and non-party discovery) that Defendants would reasonably require, in order to be able to respond adequately to Plaintiffs’ damages demand for bankruptcy fees and costs, and jointly to propose to the Court a schedule — not to exceed 120 days — for the completion of this additional fact discovery;
(3) Order Plaintiffs to pay the reasonable attorneys’ fees and costs — not to exceed the fees and costs for four hours of deposition time, per witness — associated with reopening the depositions of any fact witnesses who were already deposed by Defendants, and from whom Defendants now wish to obtain testimony regarding fees, costs, and/or financial benefits to Plaintiffs resulting from the bankruptcy proceedings; and
*163 (4) Order Plaintiffs to pay the reasonable attorneys’ fees and costs incurred by Defendants in making the sanctions motion.
If the parties cannot agree on a reasonable schedule to complete the additional discovery, or if they cannot agree on the scope of the additional fact discovery (and any additional expert discovery that it may occasion), then I further recommend that the parties be directed to set forth their particular disputes for this Court to review and resolve.
II. EQUITABLE ESTOPPEL
As an alternative to
A. Applicable Legal Standards
“Equitable estoppel” can form the basis of a claim, or it can serve as a defense. See, e.g., Halifax Fund, L.P. v. MRV Communications, Inc., No. 00 CIV 4878 HB,
Mem., at 23); to estop an employer from challenging an employee’s eligibility for statutory protection, see Kosakow v. New Rochelle Radiology Associates,
To establish the defense of equitable estoppel under New York law,
B. Application of Doctrine to This Case
While, as discussed above, equitable estoppel may be invoked as a claim or as an affirmative defense, Defendants have offered no support for the application of this doctrine in the discovery context, where the imposition of sanctions for discovery failures is governed by well-established rules and case law. Nor would the doctrine easily fit the facts presented here, which lend themselves more readily to analysis under
As a threshold matter, it is difficult to conclude that Defendants have shown, by clear and convincing evidence, that — either through
Similarly, it is difficult to characterize Plaintiffs’ arguments to Judge Cote regarding the appropriate scope of discovery as a misrepresentation or act of concealment, so as to make those arguments fit within the framework of the equitable estoppel doctrine. Although this Court is not aware of the precise statements made in the parties’ conference before Judge Cote, this Court has reviewed Plaintiffs’ past correspondence to Judge Cote, in which Plaintiffs principally argued that the burden of producing post-filing documents “regarding the policies at issue” outweighed those documents’ relevance. (See 3/13/08 Puceio Ltr., at 1.) Plaintiffs also argued that it would be particularly inappropriate to impose on Plaintiffs a substantial burden of production when the bankruptcy proceedings were the subject of a “voluminous public record.” (See id.) Although “[s]ilenee in the face of an explicit contrary assumption by an innocent party may constitute a concealment of facts or a false misrepresentation for estoppel purposes,” Gen. Elec.,
In addition, although this Court has already found that Defendants were prejudiced by Plaintiffs’ failure to make an adequate damages disclosure in a timely fashion, it would strain the estoppel doctrine to characterize Defendants as having changed their position, to their detriment, in reliance on Plaintiffs’ omission. A more apt description would be that, had Defendants been aware of the scope of Plaintiffs’ damages claim, Defendants would have known of the need for further inquiry, and would likely have sought further information, through the discovery process, to enable them to develop their defenses more fully. Such a situation is best dealt with under the discovery rules, which set out a scheme for addressing inadequate disclosures and the prejudice they can cause.
Overall, I recommend that the Court deny Defendants’ motion, to the extent that it seeks preclusion of Plaintiffs’ damages claim on the basis of equitable estoppel.
CONCLUSION
For all the foregoing reasons, I respectfully recommend that the Court deny Defendants’ motion (Dkt. 82) to the extent it seeks an order precluding Plaintiffs from claiming bankruptcy fees and costs as a component of compensatory damages, but I further recommend that Plaintiffs be sanctioned under
Pursuant to
Notes
. On July 17, 2007, Judge Cote issued an opinion dismissing all of Plaintiffs claims as pleaded, but granting Plaintiffs leave to re-plead their contract and RICO claims. Ritchie I,
. Although Defendants do not cite the sanctions provision of
. The Court also notes that including language like "among other things” in a damages computation, or indicating that a claim for damages will be "further refine[d] ... as the litigation progresses” {see Ritchie I Dkt. 39 (Plaintiffs’
. While any prior limit on the number of depositions taken by Defendants should be lifted in order to give meaning to this recommendation, this should not be viewed as an invitation for Defendants to notice an unreasonable number of additional depositions.
. Citing to Kosakow, 21A F.3d at 725, the parties invoke the federal standard for equitable estoppel. (See Def. Mem., at 23-24; PI. Mem., at 22-23.) In Kosakow, however, the Second Circuit employed the federal standard because the claims in that case were brought under federal statutes. Kosakow,