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HESS v. REG-ELLEN MACHINE TOOL CORP.

May 21, 2003

JOHN HESS, PLAINTIFF,
v.
REG-ELLEN MACHINE TOOL CORP., AND REG-ELLEN MACHINE TOOL CORP. EMPLOYEE STOCK OWNERSHIP PLAN, DEFENDANTS



The opinion of the court was delivered by: P. Michael Mahoney, Magistrate Judge

Report and Recommendation

John Hess ("Plaintiff") filed a lawsuit against Reg-Ellen Machine Tool Corporation ("Reg-Ellen") and Reg-Ellen Machine Tool Corporation's Employee Stock Ownership Plan ("Reg-Ellen ESOP Plan") (collectively "Defendants"), with jurisdiction based on ERISA, 29 U.S.C. § 1132. Plaintiff's three count complaint seeks, inter alia, recovery of benefits due under terms of the Reg-Ellen ESOP Plan.

On September 12, 2001, this court held an Initial Pretrial Conference. At that conference, the Magistrate Judge ordered the disclosure of all 26(a)(1) material by October 3, 2001, a fact discovery cutoff date of April 30, 2002, and a dispositive motions due date of May 31, 2002. Plaintiff submitted his Rule 26(a)(1) disclosures on October 3, 2001 containing nine names, while Defendant served his Rule 26(a)(1) disclosures, date unknown, containing only one name. On September 16, 2002, almost one year after disclosing 26(a)(1) material, Plaintiff filed his motion for summary judgment. In response to Plaintiff's motion for summary judgment, on January 27, 2003,*fn1 Defendants included the affidavits of Timothy Turner ("Mr. Turner") and Lorraine Morris ("Ms. Morris"), two previously undisclosed witnesses. Plaintiff filed a Motion to Exclude Evidence or in the Alternative Motion to Strike Affidavits ("Plaintiff's Motion to Strike") on March 10, 2003. Defendants, probably sensing a problem, filed, on March 19, 2003, Defendants' Response to Plaintiff's Motion to Strike ("Defendants' Response") (incorrectly labeled a Reply) to Plaintiff's Motion to Strike and, additionally sought leave from the court to disclose Mr. Turner and Ms. Morris, almost one year after the fact discovery cutoff date. (Def.'s Resp. at 9) ("WHEREFORE, . . . Defendant be granted leave to disclose Timothy Turner and Lorraine Morris. . . .")

On March 25, 2003, Judge Reinhard, after having to read all the briefs submitted by Plaintiff and Defendant in relation to Plaintiff's motion for summary judgment and all the briefs submitted by Plaintiff and Defendant in relation to Plaintiff's Motion to Strike, denied Plaintiff's Motion for Summary Judgment without prejudice, returned the case to the Magistrate Judge for necessary discovery and requested the Magistrate Judge write a Report and Recommendation addressing whether sanctions, including attorney's fees, should be imposed against Defendants and/or their counsel for the discovery violation of not disclosing the previously-named witnesses and, if so, the nature and amount of those sanctions. After having an in court hearing regarding the issue of whether sanctions should be imposed against Defendants and/or their counsel for discovery violations, the court gave each side an opportunity to argue their side in writing. On April 30, 2003, Defendants' counsel submitted his Brief in Response to Sanctions Claim of Failure to Disclose Witnesses ("Defendants' Brief in Response") and on May 7, 2003, Plaintiff's counsel submitted his Reply Brief On Sanctions ("Plaintiff's Reply Brief"). For the reasons stated below, it is the Report and Recommendation of the Magistrate Judge that Defendants' counsel be ordered to pay Plaintiff's counsel two thousand seven hundred seventy two dollars ($2772.00).

Background

Plaintiff, in his amended complaint, alleges that around June 5, 1998, he requested that he be allowed to diversify his assets in the Reg-Ellen ESOP for the contributions to the Plan prior to 12-1-94 pursuant to the plan amendment and to transfer value of his pre-12-1-94 ESOP assets to other investments. (Am. Compl. at ¶ 5). Allegedly, around November 3, 1995, Reg-Ellen amended the Reg-Ellen ESOP to provide, among other things, the following:

Section 4.12(j) ". . . Although Participants shall continue to have the right to direct the investment of the Participant's account as to contributions made on or before November 30, 1994, Participants shall have no rights pursuant to Section 4.12. to direct the investment of the Participant's account made on or after December 1, 1994.
(Id. at ¶ 6). Between July 1998 and November 1998, Reg-Ellen allegedly denied Plaintiff's request to move his pre 12-1-94 stock out Reg-Ellen's company stock and into other investment accounts. (Id. at ¶ 9). Plaintiff alleges that as a result of this denial, Plaintiff suffered financial losses in excess of $111,000.00. (Id. at ¶ 14).

Plaintiff's 26(a)(1) disclosures included nine individuals that Plaintiff believed were likely to have discoverable information relevant to the disputed facts. Of those nine, one individual, David Lewellen ("Mr. Lewellen"), is of particular importance. Plaintiff's 26(a)(1) disclosure included Mr. Lewellen (the fourth person in the list of nine) with the following statement regarding why Mr. Lewellen was disclosed by Plaintiff:

Mr. Lewellen was the President of Reg-Ellen, principal Plan sponsor and Plan Adminstrator from 1987 to 1998. He has knowledge of the intent of the 1994 Amendment and the Plan Sponsor's purpose in adding the new provision in section 4.12(i) to the Plan to allow participant to direct their pre- 124-94 accts. investment in either the Co. stock or the Trustee's Investment Fund after 12-1-94, and the promises made to the Participants about their rights under their Amendment.
Pl's Rule 26(a)(1)(A) Disclosures at 2 (emphasis added). Defendants' Rule 26 disclosures, on the other hand, included only one individual, Paul Lindvall, who Defendants claimed "would be the witness who would be called to testify as to the actions taken by the trustee and what actions the trustee has taken with respect to times material to this case." (Defs.' Initial Rule 26 Disclosure at 1). Nowhere within Defendants' Initial Rule 26 Disclosure are the names Mr. Turner or Ms. Morris mentioned.

According to Plaintiff, Mr. Lewellen was the president, board of directors member, and principal shareholder from 1978 to December 31, 1997 and was primarily responsible for the establishment of the 401(k) pension plan and ESOP which became effective December 1, 1987, and was amended in 1989 and again in 1994. (LR. 56.1(a) ¶ 3). Plaintiff included the affidavit of Mr Lewellen with his Motion for Summary Judgment. In his affidavit, Mr. Lewellen stated:

As Plan Administrator for the ESOP, I retained a pension consultant, n.k.a. McGladrey & Pullen, of Rockford, IL. to advise me on the appropriate amendment language. It was the intent of the Board of Directors in amending the ESOP, that we did not wish to affect or diminish the participant's rights to direct the investment of their accounts as to any contributions made on or before November 30, 1994, the day before the effective date of the Amendment. I was advised by McGladrey & Pullen and they insisted that specific language should be added as an amendment to Section 4 of the ESOP to assure that the Participants shall continue to have the right to direct the investment of the Participant's account as to contributions made on or before November 30, 1994, but no right to direct investment of the contributions made after December 1, 1994. I understood and interpreted the 1994 ESOP Amendment to mean that each Participant could continue to direct the investment of their Account as to any contributions made either by them or on their behalf, prior to December 1, 1994, notwithstanding any provision of Section 4.12. to the contrary, as was expressly stated in the 1994 Amendment.
(Lewellen Aff. at ¶ 4).

Defendants, in response to Plaintiff's 56.1 statement and Mr. Lewellen's affidavit, submitted their Response to Plaintiff's Statement of Material Facts, in which they stated:

Defendants deny Paragraph 4 of Plaintiff's Statement of Material Facts insofar as it states that David Lewellen was the ESOP Plan Administrator's designee from 1987 through December 31, 1997. David Lewellen's Affidavit clearly states that he was the ESOP Plan Administrator for the ESOP from 1987 through December 31, 1997. David Lewellen, however, was not the Plan Administrator, Reg-Ellen was the Administrator. (Timothy Turner Affidavit Paragraph 30, and Lorraine Morris Affidavit Paragraph 31, . . .).
(LR 56.1(b) at ¶ 4). Additionally, in submitting additional facts within their 56.1(b) statement, Defendants stated:
2. The board of directors of Reg-Ellen Machine Tool Corp. has never expressed an intent to allow, nor has it ever allowed any ESOP participant to liquidate money from Reg-Ellen Machine Tool Corp. into any other investment, until the participant has met the diversification requirements contained in Section 4.12(g), age 55 and 10 years of service. (Timothy Turner Affidavit Paragraph 17, and Lorraine Morris Affidavit Paragraph 18.).
3. The 1995 plan amendment was adopted in order to eliminate 401(k) elective deferral by participants (the ability of participants to have their own money withheld from their paychecks and contributed to the plan). From that point forward, the only contributions to the plan have been made by Reg-Ellen Machine Tool Corp. Previously, participants had the opportunity to decide whether to have their elective deferrals invested in Reg-Ellen Machine ...

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