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United States v. Cardinal Growth, L.P.

United States District Court, N.D. Illinois, Eastern Division

February 23, 2015

UNITED STATES OF AMERICA, Plaintiff,
v.
CARDINAL GROWTH, L.P., Defendant.

MEMORANDUM OPINION AND ORDER

RUBÉN CASTILLO, Chief District Judge.

The United States, on behalf of its agency the Small Business Administration ("the SBA" or "the Receiver"), brought this action against Cardinal Growth, L.P. ("Cardinal") for violations of the Small Business Investment Act of 1958 ("the Act"), 15 U.S.C. § 661 et seq. (R. 1, Pl.'s Compl. ¶¶ 8, 9.) Pedersen & Houpt, P.C. ("P&H"), an Illinois law firm, served as Cardinal's principal transactional counsel. (R. 84, Pl.'s Resp. at 1.) Presently before the Court is P&H's petition for costs incurred in connection with a document production request made by the SBA. (R. 80, Pet. for Costs at 1.) For the reasons stated below, the Court denies the petition for costs.

BACKGROUND

Cardinal is a Delaware limited partnership with its principal office in Chicago, Illinois. (R. 1, Pl.'s Compl. ¶ 3.) On July 7, 2000, the SBA licensed Cardinal under the Act to operate as a Small Business Investment Company ("SBIC"). (Id. ¶ 5.) The Act authorizes the SBA to promulgate regulations governing SBICs. (Id. ¶ 6.) The Act also authorizes the SBA to provide financing to licensed SBICs. ( Id. ¶ 8.) Pursuant to the Act, the SBA provided financing to Cardinal through the purchase of securities in the amount of roughly $51 million. (Id. ¶ 8(a).) As of June 2011, Cardinal had failed to repay approximately $21 million of those funds. (Id. )

On June 15, 2011, the SBA filed a complaint against Cardinal seeking a receivership and other injunctive relief. (R. 1, Pl.'s Compl.) In its complaint, the SBA asserted that Cardinal's debt constituted a "condition of Capital Impairment" in excess of that allowed by SBA regulations. (Id. ¶¶ 15, 19.) On June 20, 2011, by agreement of the parties, the Court entered a Consent Order of Receivership ("Order") appointing the SBA as Receiver of Cardinal. (R. 6, Order ¶ 1.) The Order charged the SBA with "marshaling and liquidating all of Cardinal's assets, " "satisfying the claims of creditors, " and "pursu[ing] and preserv[ing] all of [Cardinal's] claims." (Id. ¶¶ 1-2.) To accomplish those goals, the Order grants the Receiver "immediate possession of all assets, bank accounts or other financial accounts, books and records and all other documents or instruments relating to Cardinal, " and directs, in pertinent part, that Cardinal's past and present attorneys turn over all such documents in their possession. (Id. ¶ 3.) The Order also directs Cardinal's past and present attorneys to "produce any documents as required by the Receiver[.]" (Id. 6.)

From 2000 to 2011, P&H served as Cardinal's transactional counsel. (R. 84, Pl.'s Resp. at 1.) During that period, P&H collected more than $2 million in fees from Cardinal, drafted and prepared hundreds of transactional documents, and participated in the design of numerous complex transactions. (Id. at 2.) Several of those transactions resulted in Cardinal incurring substantial losses. (Id. ) The SBA, as Receiver, has expressed a "significant interest" in the details surrounding those and similar transactions. (Id. ) In the exercise of its duties, the SBA has "undertaken a detailed forensic investigation" that in part has required the SBA to "examine... the correspondence, including e-mails, between Cardinal's principals and various other persons, including Cardinal's counsel." (Id. ) Accordingly, on October 21, 2011, the SBA submitted a document production request to P&H pursuant to the Court's Order. (Id. at 3.) Specifically, the SBA requested that:

[P&H] turn over to the Receiver all books, records, documents, accounts and all other instruments and papers of and relating to Cardinal, including (without limitation) all files, work papers, correspondence, letters, e-mails, pleadings, notes, memoranda, drafts, bills, invoices, and any other documents or recordings of any kind, in paper or electronic format, relating to Cardinal.

( Id., Ex. A) (internal quotation marks omitted).

In responding to the request, P&H retained an outside vendor, Project Leadership Associates ("PLA"), to perform e-mail database searches and segregate responsive data. (R. 80, Pet. for Costs at 1.) P&H subsequently produced thousands of e-mails to the SBA. (R. 84, Pl.'s Resp. at 5.) P&H now claims that it incurred $44, 256.70 in out-of-pocket costs as a result of its efforts, and seeks reimbursement of these costs under Rule 45 of the Federal Rules of Civil Procedure. (R. 80, Pet. for Costs at 3-4.) The SBA objects to this request, arguing that P&H is not entitled to reimbursement of its costs incurred in connection with the document request. (R. 84, Pl.'s Resp. at 6-9.)

LEGAL STANDARD

Pursuant to Rule 45, a subpoena may command "production of documents, electronically stored information, or tangible things[.]" Fed.R.Civ.P. 45(c)(2)(A). The issuing party "must take reasonable steps to avoid imposing undue burden or expense" on the party subject to the subpoena. Fed.R.Civ.P. 45(d)(1). When a third-party is ordered to produce documents pursuant to a subpoena, "the presumption is that the responding party must bear the expense of complying with discovery requests, " including requests for electronic data. DeGeer v. Gillis, 755 F.Supp.2d 909, 928 (N.D. Ill. 2010) (citation omitted). However, "cost-shifting should occur when an order requiring compliance subjects a non-party to significant expense.'" Id. (citation omitted); see also Fed.R.Civ.P. 45(d)(2)(B)(ii) (providing that a court may compel production from a third party but "must protect a person who is neither a party nor a party's officer from significant expense resulting from compliance"). Ultimately, the decision whether to award costs is a matter of the Court's discretion. See Spears v. City of Indianapolis, 74 F.3d 153, 158 (7th Cir. 1996).

ANALYSIS

P&H argues that it is entitled to reimbursement of its production costs under Rule 45. (R. 80, Pet. for Costs at 3.) As a factual matter, however, the SBA's document request was not made pursuant to Rule 45. Rather, the SBA made the request pursuant to this Court's Order, which, by its terms, is binding on P&H as a former counsel of Cardinal. ( See R. 6, Order ¶ 3.) Thus, Rule 45 does not control.

Even if Rule 45 did control, P&H would not be entitled to reimbursement under that Rule. When a non-party is ordered to produce documents pursuant to a Rule 45 subpoena, "the presumption is that the responding party must bear the expense of complying with discovery requests." DeGeer, 755 F.Supp.2d at 928. Although a requesting party must avoid imposing "undue burden or expense" on the responding party, Fed.R.Civ.P. 45(d)(1), "a non-party can be required to bear some or all of its expenses where the equities of a particular case demand it, " In re Exxon Valdez, 142 F.R.D. 380, 383 (D.D.C. 1992). This includes situations where a non-party has derived substantial income from a party. See id. at 383-84. Courts generally consider three factors when deciding whether to shift the cost of production from a non-party to the requesting party: "(1) whether the ...


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