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By Tera E. Brostoff
An accounting services provider will face civil contempt sanctions for failure to provide adequate documents, including electronically stored evidence, after being subpoenaed by a liquidating trustee pursuant to Federal Rule of Bankruptcy Procedure 2004, the U.S. Bankruptcy Court for the Western District of Washington held April 5 in an unpublished decision (In re Consolidated Meridian Funds, Bankr. W.D. Wash., No. 10-17952-KAO, unpublished 4/5/13).
Defendant Moss Adams LLP failed to respond sufficiently to a subpoena by not producing emails and billing invoices until two years after the documents were initially requested, the court said.
Moss Adams failed to obey the subpoena “without adequate excuse,” including not issuing a document retention or litigation hold to ensure preservation of relevant documents. The company's conduct, executed mainly by law clerk Kathleen Quirk, warranted civil sanctions in the form of paying fees and costs incurred by the requesting party.
“When a non-party like Moss Adams is served with a subpoena, it has three options: it may (1) comply with the subpoena, (2) submit an objection, or (3) move to quash or modify the subpoena according to the procedures set forth in [Fed. R. Civ. P.] 45,” the court said, noting Moss Adams failed to do any of the three options.
In July 2010, numerous creditors of four funds filed involuntary Chapter 11 petitions, alleging that involuntary debtors were liable under investor notes in excess of $150 million and had defaulted in the payment of approximately $1.6 million in an alleged Ponzi scheme. Mark Calvert was appointed trustee. After Calvert's appointment, seven additional funds were placed into bankruptcy, as well as a management company for those funds.
Calvert filed a motion seeking to issue subpoenas for the production of documents to a number of the funds' outside service providers, which included Moss Adams. A Rule 2004 subpoena was issued in August 2010, which required the production of audits, financial statements, tax records, billing records, and emails. Responsive documents were defined to include both paper and electronically stored information.
Moss Adams' in-house counsel, Scott Kallander, law clerk Quirk, and auditor Scott Urquhart were tasked to respond to the subpoena.
Though Moss Adams had practiced ESI retention since 2004, individual employees were required to delete emails or archive them because their computers had limited storage space. Moss Adams did not issue a litigation hold and did not notify employees of a document production request.
Quirk produced two discs on which she saved approximately 12,000 pages of ESI, but told Calvert's attorney she would not be producing tax returns. The discs did not contain any emails Quirk had gathered or the billing records requested. In addition, Quirk alleged she produced documents to Moss Adams' vendor Lighthouse Legal Copy Service, but there was no evidence that she ever did so.
Over the next two years, Moss Adams handed over billing records, tax-related documents, and finally, emails. Many of the produced items that trickled in were in response to continued communication from Calvert's attorney notifying Moss Adams that it had not fully complied with the subpoena.
Nonetheless, in October 2012, Calvert filed a contempt motion, which sought to compel Moss Adams' compliance, as well as an order showing cause why Moss Adams should not be held in contempt. Shortly after, Moss Adams produced additional documents, including the missing Lighthouse documents.
The court orally ruled that Moss Adams had failed to comply with the subpoena, and the burden shifted to the accounting services provider to demonstrate it had taken all reasonable steps to comply.
The court emphasized the importance of efficiency in bankruptcy cases that warranted a Rule 2004 examination.
“A trustee in bankruptcy is under a duty to maximize the realization of the debtor's estate by marshaling the estate's assets and instituting all necessary litigation,” the court said, citing In re Dinubilo, 177 B.R. 932 (E.D. Cal. 1993). “When a trustee takes over a Chapter 7 case, the trustee must learn quickly about the debtor entity.”
However, the court did emphasize that courts have generally been reluctant to hold non-parties in contempt without the prior issuance of a court order compelling compliance with a subpoena. Moss Adams asserted it had complied with the only court order issued, rendering sanctions unwarranted.
Moss Adams emphasized it repeatedly asked Calvert to identify what he thought was missing from production.
But the burden was not on Calvert to determine what had already been produced and predict what had been withheld, the court explained.
“In addition, Ms. Quirk admitted at trial that the information produced on the two discs in response to the Subpoena was not produced in the same form as maintained by Moss Adams and that the files were not labeled or organized in any way to correspond to the document categories listed in the Subpoena,” the court said. “Given the state of the information produced, it was not even possible for the Trustee to ascertain what might be missing.”
The court held Moss Adams did not take all reasonable steps to comply with the subpoena. Quirk could have avoided mistakes by reviewing the list of information requested and checking off the categories of requested documents to ensure she had covered everything, the court said. In addition, no effort was made to preserve Moss Adams emails.
Michael Avenatti, counsel for Calvert, spoke with BNA April 18 about an additional reason he thought the court held Moss Adams in civil contempt.
“Kallander, the current general counsel for Moss Adams, held himself out as an expert on eDiscovery immediately prior to joining Moss Adams,” Avenatti told BNA. “We cross-examined him using articles he had written and statements he had made to show that he had not followed the most basic steps to preserve any of the eEvidence when this subpoena came in.”
“I think that had a significant impact on the court's decision ultimately to find Moss Adams in contempt and issue sanctions,” Avenatti explained, stating he believed the trustee may be entitled to spoliation instructions and that he would likely be pursuing such a ruling.
Fees and costs incurred by Calvert in enforcing the subpoena, as well as additional expenses incurred as a result of the failure to fully comply were deemed appropriate sanctions, the court said.
Bankruptcy Judge Karen A. Overstreet wrote the opinion.
Michael Avenatti and Scott Sims, of Eagan Avenatti LLP in Newport Beach, Calif., represented Calvert.
Kelly Corr, of Corr Cronin Michelson Baumgardner & Preece LLP in Seattle, represented Moss Adams.
By Tera E. Brostoff
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