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MARATHON ASHLAND PETROLEUM LLC v. EQUILI COMPANY

May 4, 2004.

MARATHON ASHLAND PETROLEUM LLC, Plaintiff, -against- EQUILI COMPANY, L.P. and EQUILI CO., COMPANY II, Defendants


The opinion of the court was delivered by: KEVIN FOX, Magistrate Judge

MEMORANDUM and ORDER

I. INTRODUCTION

Before the Court is the defendants' motion for discovery sanctions, made pursuant to Fed.R.Civ.P. 37. By their motion, defendants seek: (1) an order directing plaintiff to produce for deposition its accountant, Price Waterhouse Coopers ("PWC"), (2) the production of a memorandum, which plaintiff claims is a privileged communication, prepared by one of plaintiff's witnesses, and (3) sanctions in the amount of § 50,000 against plaintiff and its counsel. Plaintiff opposes the motion. For the reasons set forth below, the motion is granted in part and denied in part.

  II. BACKGROUND

  In January 2003, counsel for plaintiff Marathon Ashland Petroleum LLC ("MAP") informed the defendants, Equili Company, L. P. and Equili Company II, L. P. (collectively "Equili"), and the Court that certain documents, which may have been produced previously, had recently come to the attention of certain employees of MAP. All discovery in this action was to have been completed on June 21, 2002. On January 14 and January 24, 2003, the pertinent documents were produced to the defendants. Thereafter, on January 29, 2003, defendants reexamined Todd Russell ("Russell"), a MAP employee, who had been deposed previously, on June 25, 2002, concerning, inter alia, a spreadsheet he had prepared in anticipation of the deposition of Gary Peiffer ("Peiffer"), MAP's Senior Vice President for Financing. The spreadsheet, entitled "Ocean Tanker Operating Cash Flows," has been marked as defendants' Exhibits 463, 463A and 506. The spreadsheet indicates, among other things, that the vessels at issue in this litigation had an operating loss in 1998 of § 2,057,764.

  At his first deposition, in June 2002, Russell was questioned by the defendants concerning whether revenue generated by MAP's own use of the vessels (called by defendants "intra-company" revenue and by plaintiff "intercompany" revenue), was included in the total vessel revenue reflected in the spreadsheet he had prepared. Russell testified as follows:
Q: Do you know whether intercompany rental revenues are accounted for here?
A: I don't believe that intercompany revenue is included in there.
Q: Do you have any idea how much the intercompany revenue might have been for the years `98 through 2000?
A: As I prepared this document, I believe on the underlying documents where these numbers were sourced from, I believe I had determined the relet revenue, within the company revenues, I believe I had quantified that, but I have to look.
Q: Do you know where that would be accounted for on this spread sheet?
A: I don't think those are on this spreadsheet. I believe what I have here is a third-party presentation.
Q: What do you mean by a third-party presentation?
A: Outside of the company, transactions outside of the company.
  When he was reexamined, on January 29, 2003, Russell stated that intercompany revenues were, in fact, included in the total vessel revenue reflected in the spreadsheet he had prepared, and that his "[p]rior testimony was incorrect." The defendants contended that if the revenue reflected in the spreadsheet did not include intercompany revenue, and if such revenue was, as defendants estimate based on certain documents, approximately § 3 million, then it is reasonable to conclude that the vessels did not operate at a loss in 1998, as MAP has maintained. However, Peiffer in his deposition of August 1, 2002, stated that he believed the total revenue reflected in the spreadsheet prepared for him by Russell did include intercompany revenue. In addition, David Bibler ("Bibler"), an accountant employed by MAP, also testified, on June 26, 2002, that he believed intercompany revenue was included in the total vessel revenue for 1998.

  In March 2003, the defendants initiated the instant motion for sanctions. They contended that they had been prejudiced by plaintiff's late production of documents and by Russell's change in testimony, and that both his testimony and the spreadsheet prepared by him should be precluded. The defendants also contended that testimony by other witnesses concerning the spreadsheet should be precluded, because the defendants could not cross-examine those witnesses. In response, the plaintiff argued that testimony concerning the spreadsheet was given by numerous witnesses before Russell's renewed deposition of January 2003, and that defendants had given no valid reason why the exhibits or testimony concerning them should be precluded.

  The defendants also maintained that paragraph 36 of plaintiff's Local Civil Rule 56.1 statement, submitted in support of plaintiff's summary judgment motion, should be stricken. That portion of plaintiff's statement asserted that "MAP had an operating loss for the Vessels in 1998 of § 2,057,764." According to defendants, given Russell's change in testimony, and the initially differing testimony of Peiffer and Bibler, plaintiff could not present the spreadsheet and its calculations as facts about which there was no material dispute. In response, the plaintiff argued that the loss amount reflected in paragraph 36 of its Local Civil Rule 56.1 statement was supported by other documents and should not be stricken.

  The defendants also claimed that, because of Russell's change in testimony, they required additional discovery. Consequently, defendants sought an order directing plaintiff to produce for deposition a representative of its accountant, PWC. Defendants also moved to compel production of a memorandum, dated January 27, 2003, which was prepared by Russell prior to his renewed deposition. In response, plaintiff argued that deposition of a representative of PWC was unwarranted under the circumstances and that the memorandum prepared by Russell was a privileged communication drafted for MAP's counsel and, thus, need not be disclosed. Finally, the defendants claimed that they were entitled to § 50,000 in sanctions against MAP and its counsel, as well as attorney's fees and expenses in connection with the renewed depositions taken in January 2003.

  In the interval since the defendants initially filed their sanctions motion, the parties have resolved four of the matters in dispute. As a result, the defendants no longer seek: (a) the preclusion of MAP's use of Exhibits 463, 463A and 506, (b) the preclusion of MAP's use of the testimony of any witnesses concerning these documents, (c) attorney's fees and expenses (MAP has paid defendants § 10,651.50 in attorney's fees and § 54.69 in expenses), or (d) the striking of certain portions of MAP's Local Civil Rule 56.1 statement, in light of a ruling by the assigned district court judge concerning the parties' respective summary judgment motions. Thus, the only issues that remain unresolved are whether: (1) the plaintiff should be directed to produce its accountant, PWC, for deposition, (2) the plaintiff should be directed to produce Russell's memorandum of January 27, 2003, and (3) the defendants are entitled to § 50,000 in sanctions against plaintiff and its counsel.

  III. DISCUSSION

  "Rule 37 of the Federal Rules of Civil Procedure sets forth the Court's procedures for enforcing discovery and sanctioning misconduct." Handwerker v. A T & T Corp., 211 F.R.D. 203, 208 (S.D.N.Y. 2002). In its most pertinent part, Fed.R.Civ.P. 37 provides:
If a party fails to make a disclosure required by Rule 26(a), any other party may move to compel disclosure and for appropriate sanctions. . . . For purposes of this subdivision an evasive or incomplete disclosure, answer, or response is to be treated as a failure to disclose, answer, or respond. . . . If a party . . . fails to obey an order to provide or permit discovery . . . the court in which the action is pending may make such orders in regard to the failure as are just. . . . [T]he court shall require the party failing to obey the order or the attorney advising that party or both to pay the reasonable expenses, including attorney's fees, caused by the failure, unless the court finds that the failure was substantially justified or that other circumstances make an award of expenses unjust.
Fed.R.Civ.P. 37(a)(2) & (3); (b)(2).
  "Even in the absence of a discovery order, a court may impose sanctions on a party for misconduct in discovery under its inherent power to manage its own affairs." Residential Funding Corp. v. DeGeorge Financial Corp., 306 F.3d 99, 106-107 (2d Cir. 2002). An award of sanctions under Fed.R.Civ.P. 37 serves three purposes: "(1) obtaining compliance with discovery orders; (2) ensuring the disobedient party does not benefit from non-compliance; and (3) providing a general deterrent in the particular case and litigation in general." Nieves v. City of New York, 208 F.R.D. 531, 535 (S.D.N.Y. 2002)(citing National Hockey League v. Metropolitan Hockey Club, Inc., 427 U.S. 639, 643, 96 S.Ct. 2778, 2781 [1976]). Although the court has wide discretion in imposing sanctions, severe sanctions should be imposed only for serious violations, such as when the failure to comply with a court order is due to willfulness, bad faith or gross negligence, rather than an inability to comply or mere oversight. See id. "Non-compliance may be deemed willful when the court's orders have been clear, when the party has understood them, and when the party's non-compliance is not due to factors beyond the party's control." Id. at 536 (quoting Bambu Sales, Inc. v. Ozak Trading Inc., 58 F.3d 849, 852-53 [2d Cir. 1995])(internal quotation marks omitted).

 Deposition of PWC

  Equili claims that it needs to depose a representative of MAP's accountant, PWC, in order "to ascertain what losses, if any, MAP incurred in connection with its exit strategy and how any purported loss was treated in MAP's reserves." Specifically, the defendants claim that, when they deposed Russell for the second time in January 2003, he gave "vague and equivocal testimony" about certain assumptions, which had been provided previously to a MAP expert, Augustus Elmer ("Elmer"), in a letter from MAP's counsel dated July 17, 2002. The assumptions, which Russell had helped to prepare, concerned MAP's estimated loss from exiting the operation of the two vessels that are the subject of this litigation, the exit cost accrual reserve that was set up at the time MAP acquired the vessels in January 1998, and whether the vessels had become uneconomic at the time MAP cancelled its vessel charters. The defendants assert that, given Russell's unsatisfactory testimony about the assumptions stated in the July 17, 2002 letter, they need additional discovery from PWC in order to "get straight answers" to their questions on this matter. The Court does not agree. In the first place, based on a review of the transcript of the renewed deposition of Russell taken on January 29, 2003, the Court finds that his testimony with respect to MAP's estimated loss from exiting the operation of its vessels and its exit cost accrual reserve was neither vague nor equivocal. Moreover, the defendants have had opportunities to seek to depose a representative of PWC previously during the course of this litigation. Indeed, in a letter dated July 29, 2002, counsel for the defendants informed counsel for the plaintiff that "we intend to subpoena MAP's accountants [PWC] concerning the basis for the exit cost reserve and any communications concerning whether the vessels were uneconomic." In his reply, dated July 30, 2002, counsel for the ...


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