Name of Assigned Judge Judge Zagel
Sitting Judge if Other or Magistrate Judge than Assigned Judge
Plaintiffs' motion for sanctions (126) is denied.
Plaintiffs Reiniche, Chausmer and Post ("Individual Plaintiffs") have been shareholders of Health Alliance Holdings, Inc., ("HAH") a Delaware corporation, since 2002. They brought suit to compel HAH to sue derivatively on behalf of HA Holdings for breaches of fiduciary duty by the directors and shareholders of HA Holdings. This is essentially a double derivative suit. Because the allegations in this case involve a string of complicated facts that are irrelevant to this motion, I will save a recitation of the facts for a later date. Important to this motion is the fact that HA Acquisition, LLC, a defendant in this case, is now known as Prevalence Holdings, LLC; Prevalence Holdings is the sole member of Prevalence Health, LLC.
On August 19, 2009, I informed the parties that I had considered Defendant's pending and fully briefed motion to dismiss, and that I was prepared to issue my opinion and enter an order of dismissal within a few days. The following day, Plaintiffs filed an emergency motion to take the deposition of Jeff Pitts ("Pitts"). Pitts is a principal IT employee or consultant for Prevalence (and former HA Acquisition employee). According to Plaintiffs, Pitts had advised a fellow colleague, David Walker, that "there was some electronically stored information" in a Health Alliance computer pertaining to certain actions of Defendant John Hennessy. On June 9, 2009, Prevalence Health had filed a Chapter 11 bankruptcy proceeding in the Southern District of Mississippi. As part of this proceeding, Prevalence Health sought to sell all assets by September 2009, with a hearing to approve the sale on September 1, 2009. On November 10, 2008, Plaintiffs' counsel had sent a letter to bankruptcy counsel for Prevalence Health, Stephen W. Rosenblatt ("Rosenblatt"), seeking to preserve records including electronically stored information. Fearing that the computers (and the date contained therein) would be scrubbed and sold as part of the bankruptcy, Plaintiffs sought to depose Pitts, presumably so they could identify the data they needed, determine where it was stored, and attempt to preserve it. I granted Plaintiffs' motion, and delayed entry of the memorandum opinion and order.
On August 26, 2009, Plaintiffs' counsel sent a letter to Rosenblatt informing him of my order granting Plaintiffs' motion to depose Pitts. The following day, Plaintiffs' counsel left Rosenblatt a voice mail in an attempt to arrange the deposition.
On August 29, Plaintiffs' counsel spoke to counsel for Pitts, who advised him that he was prepared to accept service of a subpoena for Pitts. The next day, Plaintiffs' counsel sent the subpoena, and on August 31, Plaintiff filed a notice of expedited deposition of Pitts, which announced that the deposition was scheduled for September 3, 2009. Plaintiffs' counsel began to make arrangements for the deposition, including the provision of video conferencing services.
On August 31, 2009, Rosenblatt faxed to Plaintiffs' counsel a letter in which he stated that Prevalence "cannot preserve the information" requested in the preservation letter, citing undue burden on and expense to a party that is not a defendant in this case. Rosenblatt pointed out that Plaintiffs had made no offer to pay for the requested preservation or to indemnify the bankruptcy estate for any opportunity costs associated with the preservation. The letter invites a response from Plaintiffs' counsel with any suggestions as to how the burden on Prevalence accompanying any preservation might be eased. The following day, Plaintiffs' counsel tried to reach Rosenblatt and left him a voice mail. Later that day, Plaintiffs' counsel decided that Rosenblatt had instructed Pitts not to respond to questions regarding the computer system. According to Plaintiffs, Rosenblatt suggested that the only way for Plaintiffs to obtain the information they wanted was by means of a deposition notice pursuant to Federal Rule of Civil Procedure 30(b)(6). Plaintiffs cancelled the pending deposition.
On September 2, 2009, Rosenblatt filed in the Mississippi bankruptcy court an amended motion for a protective order prohibiting parties in this case from requiring the preservation of electronically stored information and taking Pitts's deposition.
On September 3, 2009, Plaintiffs filed a motion to compel discovery and for sanctions pursuant to Federal Rule of Civil Procedure 37. I granted the motion in part, ordering that Pitts deposition be taken and that Plaintiffs bear the cost of preserving any electronic information. Pitts deposition was taken on September 8, 2009. On September 22, after the sale of Prevalence's assets, Defendants filed a motion to require Plaintiffs to specify documents that might need to be preserved should the appellate court reverse this Court's dismissal. In their motion, Defendants note that the order of the Bankruptcy Court approving the sale expressly requires the purchaser to comply with any order this Court may enter to preserve records and electronically stored information. I ordered a response by October 1, 2009, and again by February 22, 2010, after Plaintiffs' counsel sought an extension. To date, no response has been filed.
On April 30, 2010, the Defendants Jamie Martin, E.B. Martin, Jr., HA Acquisitions, LLC, and EBM Ventures, LLC (the "Martin Defendants") moved for entry of the dismissal order. The motion notes that on April 5, 2010, after hearing nothing from Plaintiffs' counsel on the matter, counsel for the Martin Defendants forwarded to Plaintiffs a $15,000.00 estimate for the imaging and preservation of the servers at issue.
Plaintiffs did not respond.
On May 13, Plaintiffs filed the motion for sanctions that is presently before me. In it, Plaintiffs argue that pursuant to Rule 37, they are entitled to $3,804.36 in costs for the Pitts deposition (including air travel for one of Plaintiffs' counsel, and transcript, video hookup, and facilities fees), and $15,000.00 for the costs of preservation of records. I denied Plaintiffs' request for preservation fees, but set a briefing schedule on the issue of the costs for ...