Opinion
NOT FOR PUBLICATION
ORDER ON TRUSTEE'S MOTION FOR SANCTIONS AGAINST ANGELA SABELLA AND DYNAMIC FINANCE CORPORATION FOR FAILURE TO COMPLY WITH DISCOVERY ORDERS
PETER W. BOWIE, Chief Judge United States Bankruptcy Court
Richard Kipperman, the chapter 11 trustee ("Trustee") of the estate of North Plaza, LLC ("Debtor"), has painstakingly sought information in this case. In furtherance of that goal, the Trustee sought and obtained authority to issue subpoenas to various entities and "additional persons possessing knowledge of [the Debtor]..." This authority was memorialized in the Amended Order on Ex Parte Application for Order Directing Examination and Production Pursuant to Rule 2004 which was entered on September 19, 2006 ("Rule 2004 Order"). Based thereon, the Trustee served subpoenas on Alcon Group Inc., ("Alcon"), Custodian of Records of Alcon Group, Inc., and Isaac Lei ("Lei") on February 16, 2007 ("Subpoenas"). Under the Subpoenas, Alcon and Lei were requested to appear and produce documents. Before the appearance date Alcon and Lei served the Trustee with objections to the Subpoenas asserting several grounds including that Alcon and Lei's communications with counsel for Dynamic Finance Corporation ("Dynamic") and Angela Sabella ("Sabella") were protected by Dynamic and Sabella's attorney-client privilege because Alcon and Lei were serving as "client representatives" of Dynamic and Sabella. The Trustee responded with a motion to compel directed only to Alcon and Lei, seeking an order directing only Alcon and Lei to produce the documents requested in the Subpoenas. Dynamic and Sabella stepped in to assert their attorney-client privilege and defend against the motion to compel (although the objection was filed by Lei, counsel for Lei explained that Lei would not be participating substantively in the matter - that it was "going to be a Dynamic Sabella show...").
After substantial briefing and a lengthy evidentiary hearing, the Court found that Alcon and Lei were not acting as "client representatives" of Dynamic and Sabella, and were thus not covered by their attorney-client privilege. Accordingly, the Court granted the Trustee's Motion to Compel Alcon and Lei to produce the documents sought in the Subpoenas. This ruling was set out in the Order on Trustee's Motion to Compel Discovery from Isaac Lei/The Alcon Group, entered on June 2, 2008 ("Discovery Order"). ///
The Trustee now alleges that Alcon and Lei have violated the Rule 2004 Order and the Discovery Order by failing to so produce, an allegation the Court accepts for the purpose of this ruling. The Trustee seeks sanctions, however, not against Alcon and Lei, but against Dynamic and Sabella for the failure to comply (Sanctions Motion).
The obvious problem with the Trustee's Sanctions Motion is that neither the Rule 2004 Order (or more accurately the Subpoenas authorized thereby), nor the Discovery Order are directed to Dynamic and Sabella and they do not require Dynamic and Sabella to do anything.
In an effort to overcome this difficulty, the Trustee cites the Court to Federal Rule of Civil Procedure 71 (made applicable to this bankruptcy matter by Federal Rules of Bankruptcy Procedure 7071 and 9014) which provides:
When an order grants relief for a nonparty or may be enforced against a nonparty, the procedure for enforcing the order is the same as for a party.
On its face, Rule 71 merely provides a procedure for enforcement of an order where a nonparty is subject thereto. It does not provide that a nonparty is subject to any order granting relief. For this proposition, the Trustee turns to case law, none of which, however, apply Rule 71 to a subpoena or order compelling production.
The present case is not the same as Peterson v. Highland Music, Inc., 140 F.3d 1313, 1324 (9th Cir.), cert, denied, 525 U.S. 983, 119 S.Ct. 446, 142 L.Ed.2d 401 (1998). In that case, defendants to a rescission action, GML and Gusto, violated a judgment by continuing to license master recordings they were ordered to return to plaintiffs. Third parties, Highland and Hawkins, who were not named in the judgment, were nevertheless held in contempt for their efforts in assisting defendants to violate the judgment as their licensing agents:
Highland and Hawkins certainly had notice of the contents of the judgment for rescission, a fact they do not deny, and evidence concerning their licensing activities amply supports a finding that they flagrantly and deliberately aided and abetted GML and Gusto in violating the express terms of the judgment, granting licenses when they had previously stipulated that GML would transfer no rights to Highland pending the outcome of the dispute and continuing to do so following the judgment, when, as Highland knew, GML and Gusto no longer owned the rights to the Masters. This evidence is sufficient to support a finding of contempt against Highland and Hawkins, even though they were not parties to the underlying action.
Id. at 1324. In the case at hand, the motion to compel and the Discovery Order which resulted therefrom were directed to Alcon and Lei. The Discovery Order instructed Alcon and Lei to produce the documents demanded in the Subpoenas. There,is no evidence that Dynamic and Sabella somehow rendered Alcon and Lei unable to complete this task. Alcon and Lei were quite capable of failing to comply with the dictates of the Discovery Order on their own by simply not producing the documents.
This case is also different from Ouinter v. Volkswagen of America, 676 F.2d 969 (3rd Cir. 1982). In that case, an expert witness, who was not named in a protective order, was held in contempt for disseminating information covered by the protective order where he knew of the order and was "legally identified with" the parties to the order. I_d. at 972. In our case it was not an affirmative action which violated the Discovery Order, but rather the failure to act. The only entities who could violate the Discovery Order by failing to act were the entities, Alcon and Lei, who were required to act. The Discovery Order placed no duty on Dynamic and Sabella. The Trustee goes to great lengths establishing that Dynamic and Sabella were "legally identified" with Alcon and Lei. However, legal identification is only part of the equation - the party to be sanctioned must also have violated the order. The Orders in this case directed Alcon and Lei to produce. The Court is not going to sanction Dynamic and Sabella for Alcon and Lei's nonperformance on the present record. If the Trustee seeks to compel Dynamic and Sabella to assist Alcon and Lei or to produce for them, he can bring a motion to compel directed to Dynamic and Sabella. If, as the Trustee asserts, Dynamic and Sabella are the ones with control over the documents sought, this would seem the logical approach.
Dentsply Int'l, Inc. v. Kerr Mfg. Co., 42 F.Supp.2d 385, 419 (D.Del.1999), involved the violation of an injunction by a nonparty that was nevertheless involved in underlying litigation. The court based its decision to hold the nonparty liable on FRCP 65(d) and its common law origins which is specific to injunctions. This Court finds a qualitative difference between an injunction, which prohibits an action, and is thus naturally applied to a related party who goes ahead and undertakes that action, and an order which demands an action on the part of the party.
Ultimately, the difference between this case and all of the cases relied upon by the Trustee is that the Subpoenas issued under the Rule 2004 Order and the Discovery Order directed Alcon and Lei to act - to produce documents. The orders in the cases relied upon by the Trustee directed the parties therein to refrain from acting. In the case at hand, Alcon and Lei allegedly violated the Orders by failing to act. They may have been persuaded by Dynamic and Sabella, but ultimately it was their failure to act which violated the Orders. In the cases cited by the Trustee, on the other hand, the orders forbade action and a nonparty, though related in some fashion to the party, went ahead and acted, thereby violating the orders. Based upon this distinction, the Court declines to impose sanctions on Dynamic and Sabella for Alcon and Lei's failure to comply with the Rule 2004 Order and/or the Discovery Order.
For the same reason, the Court declines to exercise its inherent civil contempt power to impose sanctions against Dynamic and Sabella based upon Orders which were not directed to them. Dynamic and Sabella have indeed been active in this case and in this discovery dispute. Dynamic and Sabella opposed the" production asserting their attorney-client privilege. The Court held that their attorney-client privilege did not extend to Alcon and Lei, and overruled the objection. However, to the extent there was a privilege to assert, it was their privilege, and it was appropriate for them to assert it, even if unsuccessfully. If the Trustee thinks the objection was made in bad faith, the Trustee has avenues to address this. Holding Dynamic and Sabella in contempt for Alcon and Lei's failure to comply with the Orders is not one of them.
The Trustee's Sanctions Motion is denied.
IT IS SO ORDERED.