Opinion
Civil Action No. 18-cv-00746-MSK-SKC
09-06-2019
GSL GROUP, INC., Plaintiff, v. TRAVELERS INDEMNITY COMPANY, Defendant.
OPINION AND ORDER SUSTAINING IN PART AND OVERRULING IN PART OBJECTIONS AND DENYING MOTION TO AMEND
THIS MATTER comes before the Court pursuant to the Defendant's ("Travelers") Objections (# 41) to the Magistrate Judge's December 5, 2018 Order (# 38) quashing, in part, Travelers' discovery subpoena, and third-party Impact Claim Services, Inc.'s ("Impact") response (# 44); and Travelers' Motion for Leave to File a Second Amended Answer and Counterclaim (3 51), Plaintiff GSL Group, Inc.'s ("GSL") response (# 53), and Travelers' reply (# 60). Also pending is Travelers' Motion to Stay Discovery (# 52) pending a ruling on its Objections, which the Court denies as moot.
FACTS
According to the Complaint (# 3), GSL owns certain commercial property in Denver, Colorado. Travelers is the insurer on an all-risk policy issued to GSL. On June 5, 2015, a hail storm allegedly caused damage to GSL's property, and GSL made claim on the Travelers policy. GSL retained a public adjuster, Derek O'Driscoll, and his firm, Impact Claim Services (collectively, "Impact" unless otherwise specified) to pursue the claim on its behalf.
Travelers initially denied the claim because it found no damage to the property that was caused by the hail storm. For the remainder of 2015 and into early 2016, GSL repeatedly presented Travelers with additional information about the claim, requesting that it reconsider the denial. Travelers, for its part, maintained that coverage was properly denied. In February 2016, however, Travelers reversed course, finding that some of the damage claimed by GSL was covered and estimated the value of the claim to be $500,000. The parties continued to discuss the claim and its valuation, and by July 2016, Travelers had revised its estimate of the covered loss to be more than $950,000.
In August 2016, however, purporting to tender payment of the undisputed amount of the claim, Travelers paid GSL about $275,000. The parties continued to discuss the claim, its value, and Travelers' estimates through the remainder of 2016. Near the end of that year, GSL invoked the appraisal provision of the policy, by which each side nominated an appraiser and the two appraisers jointly selected an umpire to resolve valuation disputes. Each side nominated an appraiser. GSL's appraiser was Juan Cartaya. By September 2017, the appraisers had reached an agreed-upon valuation of the claim at approximately $1.6 million. In October 2017, Travelers paid the agreed-upon amount.
GSL then commenced the instant action, alleging claims for: (i) common-law bad faith breach of contract, and (ii) unreasonable delay in payments in violation of C.R.S. § 10-3-1115 and -1116. In response, Travelers raised a number of affirmative defenses, including that GSL's claims were barred due to GSL's non-compliance with policy provisions requiring "that both parties select a competent and impartial appraiser."
In July 2018, the undersigned issued a decision in Copper Oaks Master Home Owners Association v. American Family Mut. Ins. Co., 2018 WL 3536324 (D.Colo. July 23, 2018), vacating an appraisal award upon a finding, among other things, that the insured's designated appraiser was not "impartial" as required by the parties' contract. The instant case shares several commonalities with Copper Oaks. GSL's counsel is the Merlin Law Group ("Merlin"), which also represented the insured in the Copper Oaks matter. Travelers' counsel also represented the insurer in Copper Oaks. Both GSL and the insured in Copper Oaks retained Impact to serve as a public adjuster. Believing that it could challenge Mr. Cartaya's impartiality on the same grounds litigated in Copper Oaks, Travelers issued a subpoena to Impact, requesting production of some 19 categories of documents.
The Court assumes the reader's familiarity with the Copper Oaks decision.
Specifically, Travelers requested: (i) Impact's "entire claim file" for the GSL matter; (ii) all contracts between Impact and any other party (including Merlin and Mr. Cartaya) relating to the GSL claim; (iii) all contracts between Impact and any insured who had also retained Merlin to act as their attorneys; (iv) all contracts between Impact and Merlin itself; (v) all documents reflecting communications between Impact and Merlin from 2012 to the present; (vi)-(viii) the same documents identified in requests (ii) through (v), albeit with Mr. Cartaya substituted for Merlin in each request; (ix) all of Impact's time records relating to the GSL claim; (x) all documents reflecting communications between Impact and 13 individuals or entities, to the extent those communications related to the GSL claim; (xi) all documents reflecting communications between Impact and any contractor who submitted a bid or estimate on GSL's claim; (xii) all documents reflecting GSL's retention of Impact; (xiii) all documents reflecting any payments Impact received relating to the GSL claim; (xiv) all estimates and draft estimates that Impact prepared regarding the GSL claim, including all "versions in their native format" in the Xactimate estimating software; (xv) copies of "all depositions that [Mr.] O'Driscoll has given in the last seven years," whether individually or as a representative of Impact; (xvi) all communications involving Impact that discuss GSL's claim; (xvii) all documents reflecting Mr. O'Driscoll's qualifications as a public adjuster; (xviii) all documents reflecting any disciplinary actions taken by regulators against Impact or Mr. O'Driscoll individually; and (xix) all documents relating to claims in which Impact served as public adjuster where an appraisal award was subsequently vacated.
Impact objected to certain requests, and, following the Magistrate Judge's procedure for discovery disputes, requested (# 37) that the Magistrate Judge conduct a hearing to address it. Construing the dispute as raising a motion by Impact to quash the subpoena, the Magistrate Judge conducted a hearing on December 5, 2018. Extensive arguments were presented by Travelers and Impact (and, despite its concession that it lacked standing to challenge the Impact subpoena, from GSL as well). The Magistrate Judge ultimately quashed the subpoena as to some of Travelers' requests(# 38), directing Impact to produce only "the public adjusting file as it pertains to this case and this claim, and non-privileged communications regarding the GSL claim." The Magistrate Judge found: (i) that there is a "high burden that applies when discovery is sought from non-parties" like Impact; (ii) that the cases Travelers relied upon - Copper Oaks and Auto-Owners Ins. Co. v. Summit Park Townhome Assn., 198 F.Supp.3d 1239 (D.Colo. 2016) - were distinguishable. Furthermore, the standard for assessing Mr. Cartaya's alleged partiality was that provided by the then-applicable Colorado Court of Appeals decision in Owners Ins. Co. v. Dakota Station II Condominium Assn., 444 P.3d 784 (Colo.App. 2017), rev'd in part, 443 P.3d 47 (Colo. 2019), namely, whether Mr. Cartaya had "acted with bias, in bad faith, or dishonesty" when formulating his appraisal. The Magistrate Judge also found that concerns about Mr. Cartaya's partiality were somewhat vitiated by the fact that Travelers' appraiser ultimately agreed with Mr. Cartaya on the claim's valuation, and that the requests upon Impact about the potential partiality of Mr. Cartaya were unduly burdensome, particularly because Travelers sought "a broad swath of information, in some instances going back six years, simply because that is when Impact began doing business in Colorado."
In Copper Oaks, the court found that, at the commencement of the appraisal process, the parties had agreed to abide by a "DORA bulletin" that imposed heightened disclosure obligations on each side. Although Travelers argued to the Magistrate Judge that the parties in this case also agreed to be bound by the DORA bulletin, the Magistrate Judge found that Travelers had not demonstrated the existence of such an agreement.
Travelers filed timely Objections (# 41) to the Magistrate Judge's ruling. Travelers contends: (i) the Magistrate Judge erred in applying Fed. R. Civ. P. 26(b)'s standard of allowing discovery on relevant matters; (ii) the Magistrate Judge erred in requiring Travelers to prove the existence of a disputed fact - the parties' agreement to the requirements of the DORA bulletin - in order to obtain discovery (and that newly-disclosed evidence establishes that such an agreement existed); (iii) the Magistrate Judge erred in treating Impact as a non-party because Impact "voluntarily inject[ed] itself into the dispute" by entering into an agreement with GSL to serve as public adjuster and receive a contingent fee; and (iv) the Magistrate Judge erred in finding that Travelers' request for Impact's "native" Xactimate file was overly broad.
Shortly thereafter, Travelers moved (# 51) for leave to file a Second Amended Answer so that it could assert new counterclaims based on its recent discovery of facts relating to Mr. Cartaya's alleged partiality: (i) a claim for a declaratory judgment that no coverage exists under the policy for GSL's claims because GSL did not comply with the policy's appraisal provision by appointing an impartial appraiser; (ii) a claim seeking vacatur of the appraisal award; (iii) a claim that GSL materially breached the parties' contract by appointing a partial appraiser and by concealing material facts from Travelers about Mr. Cartaya's partiality, (iv) and (v) claims for breach of the covenant of good faith and fair dealing and unjust enrichment, based on essentially the same facts as the breach of contract claim; and (vi) a claim for recoupment of the sums already paid by Travelers to GSL.
ANALYSIS
A. Objections to the discovery ruling
Pursuant to 28 U.S.C. § 636(b)(1)(A), the Court reviews discovery rulings made by the Magistrate Judge to determine whether they are "clearly erroneous or contrary to law." See also Fed. R. Civ. P. 72(a). Under the "clearly erroneous" standard, the Court must affirm the ruling unless the Court has "a definite and firm conviction" that the Magistrate Judge "made a clear error of judgment or exceeded the bounds of permissible choice in the circumstances." Allen v. Sybase, Inc, 468 F.3d 642, 658 (10th Cir. 2006).
The scope of discovery that may be sought from a third party through a subpoena is the same that may be sought through Fed. R. Civ. P. 26(b). See Advisory Committee Notes to 1970 Amendment of Fed. R. Civ. P. 45(d)(1). Rule 26(b) provides that discovery may be had of "any nonprivileged matter that is relevant to any party's claim or defense and proportional to the needs of the case." The Rule subjects that inquiry to consideration of several factors, including: (i) the importance of the issues at stake in the action, (ii) the amount in controversy, (iii) the parties' relative access to relevant information, (iv) the parties' resources, (v) the importance of the discovery in resolving the issues, and (vi) whether the burden or expense of the proposed discovery outweighs its likely benefit. Fed. R. Civ. P. 26(b)(1).
This conclusion renders moot Travelers' argument that Impact should be treated as something more than an ordinary third-party here.
1. Document requests
It is undisputed that Travelers raised the issue of Mr. Cartaya's partiality as an affirmative defense, such that discovery focused on Mr. Cartaya would be relevant to it.. At the time of the hearing, there was some dispute between the parties as to whether Mr. Cartaya had agreed to be bound by the disclosure requirements of the DORA Bulletin, or whether the standard of conduct set by Dakota Station governed Mr. Cartaya's conduct. However, in its Objections, Travelers points to newly-discovered evidence that indicates that Mr. Cartaya did indeed agree to be bound by the standards set forth in the DORA Bulletin. This Court may consider evidence adduced for the first time in Objections. Henderson v. Echostar Communications Corp., 172 Fed.Appx. 892, 895 (10th Cir 2006). Impact has not disputed the evidence adduced by Travelers, and thus, the Court considers Travelers' Objections mindful that the DORA Bulletin sets the standard by which Mr. Cartaya's impartiality should be judged.
The Court does not understand Travelers to contend that it is entitled to some or all of the documents requested from Impact based on any other claims or defenses in this action. Travelers did invoke two additional defenses at the hearing - its defenses that GSL beached the contract by providing false or inaccurate information to Travelers and by failing to cooperate with Travelers for the same reasons. But Travelers' Objections do not appear to invoke those defenses; it identifies only its defense that "call[s] into question Mr. Cartaya's impartiality." Docket # 41 at 5.
This Court's analysis would not be materially different if the Colorado Supreme Court's Dakota Station standard applied instead.
Nevertheless, this Court agrees with the Magistrate Judge that Travelers' requests posed an undue burden on Impact. It is essential to remember that the fact Travelers intends to prove is not that Impact was partial in favor of GSL, but that Mr. Cartaya was. Travelers is correct that the appraiser's "long-standing referral relationship" with Impact was one of several factors considered by the Court in deciding Copper Oaks, but it was a relatively minor factor in that analysis and this Court expresses no opinion as to whether such a relationship, standing alone, could establish an appraiser's partiality. As such, information about Impact's direct dealings with Mr. Cartaya - e.g. requests (vi) through (viii) -- might have some limited relevance to Travelers' affirmative defense. But many of Travelers' requests veer far from demonstrating Mr. Cartaya's partiality. For example, Travelers' requests (ii) through (v) seek evidence about Impact's relationship with Merlin, not Mr. Cartaya. Other records, such as those relating to Impact's communications with GSL or records relating to Mr. O'Driscoll's own activities, have no apparent connection to Mr. Cartaya's alleged partiality. The Court understands Travelers' Objections to state that the sole basis for the subpoena on Impact is to establish "Mr. Cartaya's []partiality based on his relationships with both Impact and [ ] Merlin."
Travelers' Objections do not specifically identify which requests in the subpoena they continue to press before this Court, much less separately address errors by the Magistrate Judge with regard to each such request.
The Court is aware of Travelers' overarching theory that Impact, Mr. Cartaya, and Merlin all acted in concert with one another to conduct an appraisal favoring GSL. The Court rejects the suggestion that this theory justifies Travelers engaging in discovery of interactions between Impact and Merlin alone, where Mr. Cartaya was not selected as an appraiser (e.g. in Copper Oaks). Because Travelers' discovery requests to Impact are based on Travelers' affirmative defense challenging Mr. Cartaya's partiality, Mr. Cartaya's involvement in the matters sought to be discovered is essential.
Limiting discovery to only those requests that seek evidence of Impact's direct relations with Mr. Cartaya, the Court also agrees with the Magistrate Judge that those requests are considerably overbroad and burdensome. Notably, these requests direct Impact to review all of its client files (not just GSL's or other specified cases), for a time period covering six years or more, to determine whether Impact had any communications with Mr. Cartaya in any of those cases. Such communications might include such innocuous instances where Impact was simply inquiring about Mr. Cartaya's availability or willingness to appraise in a particular case or where Mr. Cartaya declined to accept a particular case. These types of situations would be of no probative value to Travelers' affirmative defense, yet require considerable effort by Impact to comply.
Moreover, the record reflects that Travelers has significant alternative avenues to obtain substantial amounts of the requested material. First, and perhaps most significantly, to the extent Travelers needs to know all cases on which Mr. Cartaya has served as an appraiser (including those cases on which he might have subsequently been disqualified), the most ready source of that information is not Impact, but instead Mr. Cartaya. Such documentation would either allow Travelers to determine which of those cases also involved Impact, or, at a minimum, would allow Travelers' subpoena to Impact to be more precisely-targeted. Second, the record reflects that Travelers was able to locate significant amounts of the requested information through other sources. Travelers' proposed counterclaims identify 19 specific cases it located in which Mr. Cartaya "served as the appraiser for clients of the Merlin Law Group" and 21 specific cases in which Impact "served as the public adjuster for clients of the Merlin Law Group." A simple cross-referencing of these two lists yields 8 instances in which Mr. Cartaya, Impact, and Merlin were all involved. Travelers could have limited its subpoena to Impact to requesting information about these particular cases, rather than requiring Impact to search the entirety of its files on its own.
At the hearing, Travelers' counsel stated that it had also served a subpoena on Mr. Cartaya, that "Mr. Cartaya has not objected and in fact, said that he acknowledged service of the subpoena and said that he would produce documents." (At other points in the hearing, Travelers appears to represent that Mr. Cartaya had not actually produced any documents and that Travelers was engaged in proceedings in Florida, where Mr. Cartaya resides, to enforce that subpoena.)
Travelers' tendered counterclaims list only 7 cases in ¶ 85, but appears to overlook Royal Crest Dairy, Inc. v. Continental Western Ins. Co., No. 17-cv-00949-RM-KLM (D.Colo.) --------
Based on these findings, this Court cannot say that the Magistrate Judge's conclusion that several of Travelers' requests in the Impact subpoena should be quashed was clearly erroneous or contrary to law.
2. Native Xactimate file
Travelers also objects to that portion of the Magistrate Judge's ruling that compelled Impact to produce its estimates from the Xactimate software, but refused to require Impact to produce the "native" version of that file. As explained at the hearing, Xactimate is "an online software program and a database that tracks the prices for labor and materials across the country for construction." The precise contours of the dispute over production of the native Xactimate file are somewhat unclear from the hearing record. Impact explained that the "native" Xactimate file differed from the printed version (that Impact delivered to Travelers as part of the parties' valuation discussions) with regars to a feature called "auto trail." Adjusters working on several projects that use common building materials must cut and paste an estimate from one job - say, the cost to use a certain kind of roofing material - into the estimate for a different job. The auto trail function in the native file retains information from the unrelated job that the estimate was copied from, such as the customer's name and other details, whereas the printed version of the estimate discloses only the transposed cost. Impact argued that production of the native file would this disclose its "work product; [its] special sauce. That's the skill that makes him good at his job." Impact appeared to later clarify that the information they were seeking to avoid disclosing was "how long it takes [Impact] to do an estimate, exactly how they do it, exactly what they build in it."
In response, Travelers contended that adjusters in the industry commonly exchange native Xactimate files. It explained that printed estimates identify instances where the adjuster has modified Xactimate's default estimates for a particular line item, but do not disclose what was changed or in what way. It stated that native files "can expose inappropriate charges on the estimate and inappropriate manipulation of the estimate." (Travelers noted that GSL had requested Travelers' own native Xactimate files and Travelers had produced them.)
The Magistrate Judge did not initially rule on Travelers' request for the native Xactimate file, but directed Impact to produce its general appraisal records as part of producing its files on the GSL claim. Travelers' counsel then noted that "Xactimate native files wouldn't necessarily be included in that" and inquired whether the court was ordering the native files produced as well. The Magistrate Judge responded "if the native files are part of that file, whatever is part of that file is what my ruling is that you're entitled to. If that native files are part of it, then you'd be entitled to it. If the native files are not a part of that file, then I think it exceeds the scope of what I have found is the reasonable scope of discovery or the proportion of discovery." Counsel for Travelers then requested that counsel for Impact stipulate that the native file would be included in the appraisal files, but Impact's counsel refused to do so. The Magistrate Judge then announced that "I do not find that the native file is an appropriate request. I think it is an overly broad request in the context of the subpoena, so I do not find that the native file, Xactimate file, is something that Travelers is entitled to receive."
Giving due regard to the Magistrate Judge's careful consideration of the many aspects of the instant dispute, the Court nevertheless finds that the Magistrate Judge's refusal to require Impact to produce the native version of its Xactimate file with regard to the GSL claim was clearly erroneous. The record reflects that, initially, the Magistrate Judge made no particular findings about whether the native Xactimate file should be produced or not, allowing the question to turn on whether such records were part of other files that Impact was directed to produce. This suggests that the decision was not driven by any inherent characteristics of the native file itself, but rather, the particular location (physical or conceptual) in which it was kept. When he was advised that the native file was not "part of" the other files that were ordered produced, the Magistrate Judge did not make any additional findings about the native file itself other than to conclude that the request for the native file was therefore "overly broad."
Nothing in the record supports the conclusion that the request for the native Xactimate file was overly broad. It does not appear that any party misunderstood what was meant by the request for the native file or was unsure of how that file could be located and produced. Nor does it appear that production of the file - a piece of computerized data - would be particularly difficult or expensive. To the contrary, Travelers contended at the hearing that such files are routinely exchanged among adjusters and appraisers, and Travelers' Objections cite to numerous cases where courts have ordered native files to be produced. Impact did not dispute this contention, professing only that Impact does not routinely disclose its native files. In this regard, then, it appears that Impact's position is contrary to the general practice in the industry. In such circumstances, this Court cannot agree with the Magistrate Judge that production of the native file would impose a significant or atypical burden on Impact.
Impact's primary argument, both at the hearing and in response to Travelers' Objections, is that the native file should be protected as being Impact's "work product" or a "trade secret" or that it contains "confidential customer information." The Court is unpersuaded that Impact has a valid basis to oppose production of the native file on this ground. As noted above, the undisputed evidence is that such files are routinely exchanged among adjusters and that Travelers has already disclosed its own native file to GSL. This suggests that either the native files do not actually reveal as much information as Impact believes or that Impact's particular methods for constructing estimates in Xactimate are especially idiosyncratic compared to other adjusters and appraisers. If it is the former, there is little reason to deny disclosure of the native file. If it is the latter, and Impact constructs its estimates in an unusual or non-standard way, Travelers' interest in understanding how the GSL estimate was constructed is heightened, to the point that this Court finds it overcomes any contrary concerns. Moreover, the Court is confident that any genuine customer information or trade secret concerns by Impact can be addressed by requiring production of the native file to occur pursuant to an existing or future protective order limiting the native file's disclosure or use.
Accordingly, the Court sustains Travelers' Objections and vacates that portion of the Magistrate Judge's Order that quashed Travelers' request for Impact's native Xactimate file for the GSL claim.
B. Motion to amend
Travelers seeks to amend its Answer to assert several counterclaims. Because Travelers motion comes long after the July 2018 deadline set in the Scheduling Order (# 24) for amendment of pleadings, Travelers must make two separate showings: (i) that there is good cause under Fed. R. Civ. P. 16(b)(4) to amend the Scheduling Order's deadlines to render the motion to amend timely; and (ii) that it satisfies Fed. R. Civ. P. 15(a)'s standard for allowing amendments. Birch v. Polaris Industries, Inc., 812 F.3d 1238, 1247 (10th Cir. 2015). The Rule 16 inquiry examines the movant's diligence: if the movant learned of new information through recent discovery, good cause might exist; if the movant knew of the underlying information but failed to promptly raise the new claims, leave to amend should be denied. Id.
Travelers contends that it only "recently discovered" grounds for believing that Mr. Cartaya might not be "impartial" as required under the policy. It seems to contend that it "began performing its own investigation into [the] relationships" between Merlin, Impact, and Mr. Cartaya around the time of the December 2018 discovery hearing, and that it was only upon such investigation that it learned of grounds to challenge Mr. Cartaya's impartiality. But Travelers' contentions are belied by its own pleadings. As early as May 2018, Travelers' Amended Answer (# 19) was asserting, as an affirmative defense, that Mr. Cartaya was not actually impartial. The Court is unable to ascertain how Travelers had sufficient facts under Fed. R. Civ. P. 11(b) to assert an affirmative defense that GSL had violated the policy by appointing a partial appraiser, but did not have sufficient facts to make the very same assertion in the form of a counterclaim until more than six months later. Travelers' remaining proposed counterclaims all similarly flow from the same core facts that underlie Travelers' initial affirmative defense - if Mr. Cartaya was partial, then GSL breached the policy and forfeited coverage, and GSL's breach entitles Travelers to recoupment or recovery via unjust enrichment or other claims. (Even Travelers' counterclaim that GSL breached clauses prohibiting fraud or misrepresentation flows from the same notion that Mr. Cartaya was "partial" under the Copper Oaks analysis because he concealed information about his relationship with Impact and Merlin.)
Moreover, nothing in the record suggests that anything impeded Travelers' ability to discover the specific information it recites in its counterclaims at an earlier time. Travelers has not contended that it only discovered the scope of Mr. Cartaya's connections to Impact and Merlin through the third-party subpoenas. Rather, the record reflects that Travelers complied the information about cases involving Mr. Cartaya and Merlin, found in paragraphs 80 and 81 of its proposed counterclaims, from its own review of public court dockets in Florida and Colorado. Nothing indicates why Travelers could not have conducted this same investigation and reached the same conclusions within the deadline for amending pleadings.
Accordingly, the Court finds that Travelers has not demonstrated good cause to amend the Scheduling Order under Rule 16(b)(4). Thus, its motion to amend is denied.
CONCLUSION
For the foregoing reasons, Travelers' Objections (# 41) are SUSTAINED IN PART and OVERRULED IN PART. The Court AFFIRMS that portion of the Magistrate Judge's December 5, 2018 Order (# 38) that quashed portions of Travelers' subpoena on Impact, except that the Court VACATES that portion of the Magistrate Judge's Order that quashed request #14, seeking production of Impact's native Xactimate files for GSL's claims. Impact shall produce the native file(s) to Travelers within 14 days of this Order, or upon such other date as the Magistrate Judge may direct. The Court DENIES Travelers' Motion to Amend (# 51) its Answer to assert counterclaims. The Court DENIES AS MOOT Travelers' Motion to Stay Discovery (# 52).
Dated this 6th day of September, 2019.
BY THE COURT:
/s/_________
Marcia S. Krieger
Senior United States District Judge