Opinion
12905-20
07-06-2023
CINDAT MANHATTAN HOTEL PORTFOLIO LLC, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
L. Paige Marvel, Judge
On January 12, 2023, respondent filed a Motion to Compel Production of Documents in which he requested that we enter an order compelling petitioner to produce the documents requested in respondent's third request for production of documents served on petitioner on December 9, 2022. On January 13, 2023, we granted respondent's Motion to Compel Production of Documents. Our Order stated in part that "petitioner shall, on or before February 1, 2023, produce to counsel for respondent each and every document requested in respondent's third request for production of documents served on petitioner on December 9, 2022, which are in petitioner's possession, custody, or control." Our Order also stated that "in the event petitioner does not fully comply with the provisions of this Order, this Court will consider imposing sanctions pursuant to Tax Court Rule 104, which sanctions may include dismissal of this case and entry of a decision against petitioner." Petitioner's newly retained counsel entered appearances on January 24, 2023, and January 26, 2023. Petitioner's former counsel filed a Motion to Withdraw as Counsel on January 29, 2023, which we granted on January 30, 2023.
On April 14, 2023, respondent, pursuant to Rule 104, filed a Motion to Impose Sanctions requesting that we impose sanctions on petitioner for failing to comply with our January 13, 2023, Order. On April 21, 2023, we ordered petitioner to file a response to respondent's Motion to Impose Sanctions by May 12, 2023. On May 11, 2023, petitioner filed its Reply to Motion to Impose Sanctions. On May 26, 2023, respondent filed a Motion for Leave to File a Response to Reply to Motion to Impose Sanctions, which we granted on June 8, 2023. On June 13, 2023, petitioner filed a Motion for Leave to File Sur-Reply to Response to Reply to Motion to Impose Sanctions, which we granted on June 15, 2023. We will grant respondent's Motion to Impose Sanctions as stated herein.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Under Rule 104(c), if a party fails to obey an order made by the Court with respect to Rule 72, which concerns the production of documents, the Court may make such orders as to the failure that are just, including certain enumerated orders. Respondent argues that sanctions are appropriate because petitioner's response to respondent's third request for production of documents, which respondent received on February 2, 2023, "did not fully comply with the Court's January 13, 2023 Order as petitioner did not produce each and every document requested in" respondent's third request for production of documents. Specifically, respondent's objections to petitioner's response fall into two categories: (1) petitioner did not initially provide any response to paragraphs 23, 33-38, or 40-41 of respondent's third request for production of documents except that it was is in the process of assembling the requested documents and anticipated a supplemental production and (2) petitioner's response to paragraphs 30-32 and 44-45 identified the entire production of documents as responsive to the request for documents specified in each paragraph.
Petitioner made a similar statement as to each paragraph in its February 3, 2023, supplemental response.
Respondent notes in his Motion to Impose Sanctions that this case has been pending since petitioner filed its Petition on November 5, 2020, and that he sent petitioner various informal discovery requests pursuant to Branerton Corp. v. Commissioner, 61 T.C. 691 (1974), without receiving a response before he sought formal discovery. Respondent reports receiving petitioner's response to the third request for production of documents, along with "a few documents", on February 2, 2023. Respondent avers that he received a supplemental response and 1,331 pages of documents in hard copy form on February 3, 2023, as well as another 4,503 pages of documents in hard copy form on February 6, 2023. Respondent notes that he sent petitioner a letter on February 27, 2023, identifying the above-stated issues with petitioner's response to his third request for documents and requesting that petitioner provide responsive documents by March 10, 2023. Petitioner replied in a letter dated March 10, 2023, that it searched its records and does not have any documents responsive to paragraphs 23, 33-38, and 40-41. Petitioner did not concede that any of the requested documents did or did not exist, but only that it could not locate them after a diligent search. It also disagreed that its responses to paragraphs 30-32 and 44-45 were overly broad. The parties met on April 6, 2023, and petitioner produced additional documents, but respondent asserts that only two of them were responsive to its third request for production of documents. Respondent deemed one of the two documents responsive to paragraph 40 of the third request for production of documents, and the other responsive to paragraph 4.
Petitioner argues that its newly retained counsel commenced compliance with all Court orders and discovery requests immediately upon retention. Petitioner reports making a production of 1,331 pages on February 2, 2023, and informing respondent in its response that it was still in the process of searching for additional documents and would make a supplemental document production. Petitioner reports providing respondent with a supplemental response and 4,503 pages of documents on February 3, 2023, and a further supplemental production of 1,560 pages on April 6, 2023. Petitioner states that it located no documents responsive to paragraphs 23, 33-38, and 40-41, other than a small number produced on April 6, 2023. It also states that it designated the entirety of the document production as responsive to paragraphs 30-32 and 44-45 because "these requests are extremely broad and concern the core issue of this case." Petitioner argues that "the fact that Petitioner is unable to find (further) documents in response to certain document requests is not a sanctionable failure." It also argues that it "would be severely prejudiced by the imposition of sanctions. Contrarywise, the Respondent suffers no prejudice by having to work cooperatively with the Petitioner in agreeing to facts and documents when they can, and presenting disputed facts and documents at trial when the parties cannot."
Regarding the first category of respondent's objections, although petitioner's newly retained counsel's expressed commitment to compliance with petitioner's discovery obligations and the Court's orders is admirable, petitioner has a history of ignoring informal and formal discovery requests in this case since at least November 2020 and has failed to advance discovery in this case until recently. Our January 13, 2023, Order gave petitioner a deadline to produce all documents responsive to respondent's third request for production of documents. That deadline was not an invitation to draw out the search for responsive documents endlessly in a manner that may ultimately prejudice respondent's ability to prepare the case for trial or cause needless delay or expense. Petitioner did not provide a definitive response to paragraphs 23, 33-38, and 40-41 until March 10, 2023. Petitioner did not object in its February 2 or 3, 2023, responses to the requests respondent made in paragraphs 23, 33-38, and 40-41, let alone during the 30-day period following December 9, 2022, for service of a response on respondent under Rule 72(b)(2). Petitioner also did not make a motion to extend the deadline for its response. Petitioner therefore had an obligation to respond to the requests in those paragraphs by the deadline stated in our January 13, 2023, Order. We find that petitioner's dilatory course of conduct in the months leading up to the February 1, 2023, deadline imposed by our January 13, 2023, Order rises to the level of a sanctionable failure. We will therefore limit petitioner's ability to introduce documents or materials responsive to paragraphs 23, 33-38, and 40-41, as we explain further below.
Our October 26, 2022, Standing Pretrial Order was still in effect at the time of that deadline, and remained so until we struck the case from our February 27, 2023, New York City, New York, trial session on February 10, 2023. Nonetheless, petitioner's newly retained counsel was unable to provide a definitive response to paragraphs 23, 33-38, and 40-41 until March 10, 2023, after the date originally scheduled for trial of this case. We primarily attribute this inability to petitioner's failure to engage constructively in the discovery process until its newly retained counsel entered appearances.
To be clear, we do not find petitioner or its newly retained counsel to have committed a sanctionable failure by reason of the early February productions that, possibly, were marginally late. The motion papers do not disclose how or when petitioner sent hard copies to respondent, and in any case, any lateness appears to have been the result of a race against the clock by very newly retained counsel. We also do not take issue with the further supplemental production in early April, which (1) occurred after we continued this case, (2) occurred before a new pretrial order was in effect, and (3) may have been necessary under Rule 102. Furthermore, we make clear that we do not take issue with petitioner's statement that it has not located additional responsive documents. Instead, we take issue only with the prejudice that its failure to engage in timely discovery has caused, and may continue to cause, to respondent.
Regarding the second category of respondent's objections, we need not make any determination regarding whether paragraphs 30-32 and 44-45 of respondent's third request for production were overly broad because petitioner did not make any objection to those requests in its February 2 or 3, 2023, responses, let alone before the deadline under Rule 72(b)(2) for it to respond to respondent's third request for production of documents. Petitioner was therefore obligated to comply with the requests in a timely fashion. Nonetheless, even though they were not overly broad, paragraphs 30-32 and 44-45 still made broad document requests related to the ultimate issues in the case, and we cannot say that petitioner's citation of the entirety of the production in response to them rose to the level of a sanctionable failure under the circumstances here. Even paragraph 44, whose request to "[p]rovide all documents describing how petitioner qualifies as a real property trade or business under IRC § 163(j) and related Regulations" initially appears narrow, specifies that the request includes documents describing "petitioner's day-to-day operations with respect to such real property." The correctness of petitioner's reliance on these documents to support its theory of the case is a matter for trial, absent a showing that the documents had no reasonable relation to the requests.
It is true that producing voluminous unresponsive documents can constitute a sanctionable discovery abuse. See, e.g., Stooksbury v. Ross, 528 Fed.Appx. 547, 553 (6th Cir. 2013) (upholding default judgment in part because a "discovery submission was merely a document dump of mostly unresponsive information"); Scott Hutchison Enter. v. Cranberry Pipeline Corp., 318 F.R.D. 44, 54 (S.D. W.Va. 2016) ("The term 'document dump' is often used to refer to the production of voluminous and mostly unresponsive documents without identification of specific pages or portions of documents which are responsive to the discovery requests. . . . Such a tactic can bury relevant evidence and force the receiving party to expend considerable time and expense parsing through documents in order to glean information which may be relevant."). Nonetheless, our review of the reasonableness of petitioner's response to these paragraphs is hampered by the fact that the documents that petitioner cited in response to paragraphs 30-32 and 44-45 are not part of the motion papers, and the breadth of the requests makes a relatively voluminous response at least plausible. Even if some of the documents were unresponsive, as respondent asserts, we are left uncertain how serious the failure was. This is especially true since it is questionable, without further context, whether citing 5,834 pages constitutes a voluminous response. Cf. Stooksbury, 528 Fed.Appx. at 550 (describing nearly 40,000 pages as an unresponsive document dump); Clientron Corp. v. Devon IT, Inc., 310 F.R.D. 262, 266 (E.D. Pa. 2015) (93 boxes of irrelevant documents); Am. Rockwool, Inc. v. Owens-Corning Fiberglas Corp., 109 F.R.D. 263, 264 (E.D. N.C. 1985) (defendant "sent plaintiff to an Ohio warehouse containing more than a million invoice documents, unsorted by customer or product"). But see Scott Hutchison Enter., 318 F.R.D. at 49 (4,447 pages). We therefore will not impose any sanctions on petitioner with respect to paragraphs 30-32 and 44-45 of respondent's third request for production. We do not, however, abrogate any obligation that petitioner may have to turn over to respondent promptly any additional responsive documents or materials that it locates, nor do we limit our ability to exclude any such documents or materials at trial or impose further sanctions for any appropriate reason.
Although we take issue with some of petitioner's conduct in discovery, we are mindful that we should chart a course that does not result in undue prejudice to petitioner after accounting for the prejudice to respondent and that is consistent with the just, speedy, and inexpensive determination of this case. Cf. Rule 1(d). Rule 104(c)(2) permits us, upon a party's failure to comply with an order of the Court with respect to Rule 72, to "prohibit[] such party from introducing designated matters in evidence." See Zaklama v. Commissioner, T.C. Memo. 2012-346, at *33-34; McCanless v. Commissioner, T.C. Memo. 1987-573, 54 T.C.M. (CCH) 1111, 1114. We think that it is appropriate to restrict petitioner's ability to introduce into evidence documents and materials that would have been responsive to paragraphs 23, 33-38, and 40-41 of respondent's third request for production of documents that have not already been submitted to respondent as of the date of this Order. Petitioner is not entitled to benefit from the late fulfillment of its discovery obligations by choosing which of its late-discovered documents to introduce into evidence, especially since it already had adequate time to undertake discovery. Respondent was entitled to a response to each and every item in its third request for production of documents by the deadline specified in our January 13, 2023, Order, and petitioner had both formal and informal opportunities to provide the requested information. Petitioner's failure to provide a timely response to paragraphs 23, 33-38, and 40-41 of respondent's third request for production of documents was all the more serious because it occurred with less than a month before the beginning of the trial session, and also because it occurred before we had granted a continuance. While we conclude that an evidentiary sanction is appropriate, we do not think that more drastic sanctions, such as dismissal or deeming certain facts to be established for purposes of this case, are warranted under the circumstances presented here.
This Order does not change any obligation that petitioner may have to supplement its response to respondent's third request for production of documents under Rule 102, nor does it restrict respondent's ability to introduce any documents that petitioner locates and produces to respondent after the date of this Order into evidence. We may consider a motion by petitioner at a later date for leave of court to introduce any of the documents subject to this Order into evidence upon an ample showing that good cause or compelling circumstances exist to permit the introduction, provided that the requirements of the Federal Rules of Evidence are otherwise met. Either party may of course also file a motion in limine to seek a determination as to whether or not particular documents should be excluded for falling within the terms of this Order. Therefore, it is
ORDERED that respondent's Motion to Impose Sanctions, filed April 14, 2023, is granted in that petitioner is prohibited from introducing into evidence any documents or materials that would have been responsive to paragraphs 23, 33-38, and 40-41 of respondent's third request for production of documents that have not already been produced to respondent, except by leave of Court for good cause shown.