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Lm Insurance Corp v. Aceo

October 24, 2011


The opinion of the court was delivered by: Judge Nordberg

Magistrate Judge Cole


LM Insurance Co. ("LM"), has sued defendant, ACEO, Inc. ("ACEO"), and others, including Messrs. Hombs and Jatho, over what LM alleges are fraudulent misrepresentations the defendants made in ACEO's application for insurance.*fn1 The policy in question covered workers' compensation claims and to determine the risk involved-and the corresponding premium-LM had to ascertain ACEO's full payroll exposure. In brief, LM claims that ACEO misrepresented what type of business it was (saying it was a temporary staffing company rather than an employee leasing company), what its total payroll exposure was, what companies it was affiliated with, and whether there were any outstanding workers' compensation claims. As a result of these alleged misrepresentations, LM claims the premium was significantly underestimated by perhaps millions of dollars. Moreover, because one of ACEO's affiliated companies had an outstanding premium debt, ACEO wasn't even eligible for coverage.

On September 1, 2011, I granted the Plaintiff's Motion to Compel. [#202, 211]. What necessitated the motion was but the most recent in a long series of unapologetic failures by the defendants and their lawyers to abide by their obligations to participate fully and fairly in discovery. Those failures raise an additional element of concern since one of the defendants' counsel, Andrew L. Jones, is appearing in this case pro hac vice. The history of the case and illustrative examples of the unacceptable conduct by the defendants and their lawyers may be found in: LM Ins. Corp. v. ACEO, Inc., 2011 WL 2937300, 2 (N.D.Ill.2011); LM Ins. Corp. v. ACEO, Inc., 2010 WL 893097, 1 (N.D.Ill.2010); LM Ins. Corp. v. ACEO, Inc., 2010 WL 1655206, 2 (N.D.Ill.2010)("All parties in litigation have an obligation to participate fairly in discovery. Alliance's response to my order of March 10th is indefensible and makes a mockery out of these obligations."); LM Insurance. Corp. v. ACEO, Inc., 2010 WL 1655206 (N.D.Ill. 2010).*fn2

The motion to compel that was heard on September 1 involved the defendants' failure to have turned over very significant documents, which they claimed did not exist. Or at least, that they could not be found. The documents were thereafter obtained from a former employee and proved to be singularly unfavorable to the defendants. At the September 1 hearing, it was brought to the court's attention that the defendants' lawyers had never asked individuals to search their own computers or files for the documents and that they had never instructed employees to maintain documents following the initiation of litigation. After hearing argument on the motion -- Mr. Jones participated by phone, as he has been allowed to do in every instance save one -- I granted the motion and instructed the plaintiff to file an appropriate fee petition. See #211. The parties had been repeatedly advised that discovery disputes would be decided against the backdrop of Rickels v. City of South Bend, Indiana, 33 F.3d 785, 786-87 (7th Cir. 1994): "'The great operative principle of Rule 37(a)(4) is that the loser pays.' Charles Alan Wright & Arthur R. Miller, 8 Federal Practice and Procedure § 2288 at 787 (1970). Fee shifting when the judge must rule on discovery disputes encourages their voluntary resolution and curtails the ability of litigants to use legal processes to heap detriments on adversaries (or third parties) without regard to the merits of the claims." (Parenthesis in original). [See ## 38, 167, 174, 208].

On September 2nd, the day after the hearing on the plaintiff's motion to compel, Mr. Jones, acting as though the events of September 1 had never occurred, sent counsel for the plaintiff an email, which stated that defendants had prepared a "draft Declaration" stating that there was no need to ask individual employees to produce documents because emails were stored on a "central server." Mr. Jones threatened that if the draft declaration was not sufficient to resolve the issues in plaintiff's motion, then Mr. Jones would be filing a "motion for sanctions." In response, counsel for the plaintiff, on September 6, wrote to Jones:

In your email you are asking me to negotiate regarding a Motion which has already been granted by Judge Cole. Weeks ago (see our letter of August 11th) we asked to you to provide an affidavit addressing the issues in the Motion to Compel, but same was never provided -- and the Court has now granted our Motion. We are all bound by the Court's Order regarding this matter. Lastly, regarding the draft Declaration itself, same does not address the fundamental issues in our Motion: why is it that relevant emails were not produced? and why is it that Mr. Jatho and Mr. Hombs both denied (under oath) having knowledge of fraudulent workers' compensation certificates?

On September 9, Jones responded with another threat to seek sanctions if counsel for the plaintiff persisted in seeking fees. The e-mail concluded with this distasteful and heavy-handed threat:

... if you want my help to avoid legal malpractice and to go after Beazley/Lloyd's then back off and settle with Hombs and Jatho. Email me or call me on my cell phone (214-883-6024) today, or next week will be the beginning of the end for you for this case, and probably end your representation.

After this less than subtle approach was rebuffed, came this bit of fustian from Mr. Jones: "Your gross misinterpretations of the spoken and written word have damaged my clients. I will seek to recover those damages from you and your client. As to settlement, my clients hereby completely withdraw all offers."

In due course, a fee petition for $2047.50 was filed. By any standard, the amount of time spent and the fees charged were eminently reasonable. If anything, the fees were cheap. Mr. Jones did not challenge either the reasonableness of the fees or the hours claimed to have been spent. Instead, he filed a vitriolic response, attacking the plaintiff's counsel and, audaciously, asking that fees be awarded in the defendants' favor "because plaintiff is abusing the discovery process." {Response, ¶3)(Emphasis supplied) [# 212]. The plaintiff has accurately described Jones as having "acted in a bullying and unprofessional manner" and in "a manner which ignores what this Court has advised, what this Court has cautioned and, not least, what this Court has Ordered."

Not only is the conduct of Mr. Jones improper, it is also baseless as a matter of fact. At the hearing on September 1, the defendants contested the motion to compel by arguing that their employees had simply "misunderstood the question" when they testified that they were never asked to produce emails/documents. "[C]hang[ing] positions as nimbly as if dancing a quadrille," Orloff v. Willoughby, 345 U.S. 83, 87 (1953), Mr. Jones' new position on behalf of his client is that there was never any need to ask any employee to look for "any documents or emails" on their computers or in their files since all documents were maintained on a central server. (See Defendants' Response, 3; Ex. B, ¶3).

The argument is based upon an affidavit from Roy Hombs, a defendant in the instant case and whose non-produced emails are the subject of the present controversy. He alleges that he is the former CFO of ACEO, Inc. and that the critical emails involving him and defendant Jatho were not found on the "central server," despite a supposedly "thorough search" of the server. (Response at unnumbered page 2, ¶5, Ex. B). Hombs claims that there was no need to ask any ACEO employee to review or produce "any documents or emails" since everything was stored on a central server. (Ex. B, ¶3). I do not credit this conclusory statement, and it most certainly does not justify the apparent failure of Mr. O'Connor and Mr. Jones to have instructed the defendants as to how to search for and gather documents required in discovery.*fn3 Nor does Hombs attempt to explain how the documents, which involved "fraudulent certificates of insurance," were overlooked or how, if they were only located on the server, Ms. Wren produced them. In short, Mr. Hombs' abbreviated and conclusory rendition of events is implausible and thus, unconvincing. Cf. Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 575 (1985)(implausible testimony need not be credited); United States v. Boatner, 478 F.2d 737, 742 (2nd Cir.1973); Pinpoint, Inc. v. Amazon.Com, Inc., 2004 WL 2792012, *2 (N.D.Ill .2004) (Posner, J.).

Ms. Wren's affidavit, which is attached as Exhibit C to the plaintiff's reply memorandum [#214] states that she was never asked to produce those emails or any other documents by Jatho or Hombs. As was discussed at the hearing on September 1, had the defendants asked their employees (including Ms. Wren) to produce documents, then the emails relating to the fraudulent certificates of insurance would have been produced in discovery - and they would have been produced before Plaintiff took the deposition of Mr. Jatho, Mr. Hombs and Mr. Jerrid Woodhurst. It is simply untenable and unacceptable ...

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