Corporate Recovery Associates LLC v. Kevin Ruelas, et al.
Case No: 18CV05060
Hearing Date: Tue Jul 23, 2019 9:30

Nature of Proceedings: Motion Compel Compliance With Defendants’ First Set of Requests for Production of Documents

Motion of Defendants Charles Miller, Pierre Chao, John Mei, David Oldham, and Christopher Holmes to Compel Compliance with Request for Production of Documents

ATTORNEYS:

For Plaintiff Corporate Recovery Associates, LLC, as trustee for the Liquidating Trust of Channel Technologies Group, LLC: Edward Jason Dennis, Samuel B. Hardy, Christian A. Orozco, Lynn Pinker Cox & Hurst LLP

For Defendants Charles Miller, Pierre Chao, John Mei, David Oldham, and Christopher Holmes: Howard J. Steinberg, Greenberg Traurig, LLP

(For other appearances see list)

RULING: For the reasons set forth herein, the motion of defendants Charles Miller, Pierre Chao, John Mei, David Oldham, and Christopher Holmes to compel compliance with the response of plaintiff Corporate Recovery Associates, LLC, as trustee for the Liquidating Trust of Channel Technologies Group, LLC, to defendants’ request for production of documents is granted in part and denied in part. The motion is granted to require plaintiff to provide reasonable access to the documents sufficient for the moving defendants to inspect, review, and copy any or all of the documents produced. Reasonable access shall not be limited to one continuous period of time but shall reasonably accommodate the scope of the review sought by moving parties. In all other respects, the motion to compel is denied.

Background:

On October 15, 2018, plaintiff Corporate Recovery Associates, LLC, as trustee for the Liquidating Trust of Channel Technologies Group, LLC (Trustee) filed its complaint against defendants arising out of allegations that the managers of Channel Technologies Group, LLC (CTG), in breach of their duties, diverted CTG’s assets to other entities.

On March 14, 2019, defendants Charles Miller, Pierre Chao, John Mei, David Oldham, and Christopher Holmes (collectively, moving parties) served their first set of requests for production of documents (RFP) on Trustee. (Steinberg decl., ¶ 2 & exhibit A.) (Note: The declaration of counsel contains only a few of the electronic bookmarks required by Rules of Court, rule 3.1110(f)(4).)

On April 23, 2019, Trustee electronically served its responses to the RFP on moving parties. (Steinberg decl., ¶ 3 & exhibit B.) The response to each of the requests is:

“The Trustee will produce responsive documents in its possession obtained from the debtor in bankruptcy. But given that this request includes non-electronic documents, the Trustee will provide Defendants the opportunity to examine and copy the documents at a mutually convenient time and place.”

The production of documents consists of 166 boxes of documents in storage in San Diego (the Storage Documents). (Feferman decl., ¶¶ 8-9.) According to Trustee, after CTG entered bankruptcy, the restructuring officer and his assisting company (CR3) tasked CTG employee Damon De La Pena to assist in collecting and storing CTG documents. (Feferman decl., ¶ 8.) De La Pena organized the Storage Documents into boxes shipped to Iron Mountain, a data management center, employing a 27 page transmittal sheet, which was finalized on April 24, 2017. (Feferman decl., ¶ 10 & exhibit A-6.) The Transmittal Sheet provides a box number, a date range, and a description. (Ibid.) Since being in possession of the Storage Documents, the Storage Documents are kept in the same order as received and no independent organization has been done, with the only changes being the replacement of deteriorating boxes. (Feferman decl., ¶¶ 21, 22.)

Moving parties now move to compel compliance with their response to the RFP. Moving parties argue that Trustee is obligated to identify documents to the specific categories of document production requests. Trustee opposes the motion, arguing that it has complied with its obligations under the Code of Civil Procedure.

In their reply, moving parties raised issues regarding production of documents not part of the moving papers. The Court does not address new issues raised in reply.

“If a party filing a response to a demand for inspection, copying, testing, or sampling, under Sections 2031.210, 2031.220, 2031.230, 2031.240, and 2031.280 thereafter fails to permit the inspection, copying, testing, or sampling, in accordance with that party’s statement of compliance, the demanding party may move for an order compelling compliance.” (Code Civ. Proc., § 2031.320, subd. (a).)

“Any documents produced in response to a demand for inspection, copying, testing, or sampling, shall either be produced as they are kept in the usual course of business, or be organized and labeled to correspond with the categories in the demand.” (Code Civ. Proc., § 2031.280, subd. (a).)

The principal point of contention between the parties is whether production of the Storage Documents, as they are stored, complies with section 2031.280, subdivision (a). Trustee has not attempted to categorize or label the Storage Documents to correspond to each categories in the demand, but simply made all of the Storage Documents available to the moving parties. The moving parties complain that this is improper and that there is no admissible evidence that the documents are produced as they are kept in the usual course of business.

The situation here, although perhaps not unusual, is at least not the prototypical situation for which the discovery rules were designed. In the typical situation involving a business, the party producing the documents is an ongoing business for which the documents are kept as they are used. Here, the business that generated the documents is not ongoing and the evidence shows that, as part of its bankruptcy, the documents were collected and stored.

To address these issues, the Court considers multiple factors. While the documents are apparently stored in broad categories, the indexing system is very general. Thus, one factor that the Court considers in addressing the issues raised by moving parties is the ability of the parties to access and identify particular documents among the Storage Documents. The extent that the Storage Documents are organized so that they would be accessible for use after storage helps to identify the extent to which the Storage Documents are “are kept in the usual course of business.”

Another consideration is the scope of the RFP categories. Overproduction of documents is a greater issue where RFP categories are narrow. Here, the RFP categories are extremely broad. For example, RFP No. 14 is: “All DOCUMENTS and COMMUNICATIONS RELATED to the allegations set forth in paragraph 32 of YOUR COMPLAINT.” As defined in the RFP, “[t]he terms ‘RELATE TO’ and ‘RELATING TO’ shall mean referring to, alluding to, responding to, regarding, concerning, discussing, showing, describing, reflecting, analyzing, constituting, including, mentioning, in respect of, or about.”

Paragraph 32 of the complaint is: “Mr. Ruelas, Mr. Chao, Mr. Mei, Ms. Chen, Mr. Shaw, Mr. Holmes, Mr. Miller, Mr. Oldham, and Does 1–10 breached their fiduciary duties owed to CTG by engaging in the following conduct, which includes but is not limited to:

“• Self-dealing, including but not limited to,

“○ Pursuing their self-interests at the expense of CTG and their obligations as fiduciaries;

“○ Misdirecting CTG funds to pay for undue benefits and distributions for themselves; and

“○ Using the advantage of their position to misappropriate CTG’s assets and proceeds from the sale of the same to themselves; and

“• Engaging in transactions on behalf of themselves that were not fair and equitable to CTG and violated their fiduciary duties to CTG.

“• Diverting funds that would have been retained by CTG, thereby rendering CTG insolvent and unable to pay its debts to its creditors.

“• Making and receiving improper corporate distribution in violation of California Corporate Code sections 17704.05–.06.”

One reading of RFP No. 14 therefore is a request for all documents that have any connection to Trustee’s claims of breach of fiduciary duty by any defendant. When viewed from the context of a later claim by the moving parties that some document later shown to be relevant to Trustee’s claim was not produced as required by RFP No. 32, it is not an unreasonable position of Trustee that, because all available documents were in some way involved in the operation of CTG, all available documents are related (in the broad definition of the RFP) to the allegations of paragraph 32.

All of the RFP categories are similarly broad and encompass each of the substantive allegations of Trustee’s complaint. As the response to RFP No. 32 demonstrates, an order to further identify documents to RFP categories would not likely be productive in the sense of providing much substantial improvement in the organization of the production of documents.

Another factor that the Court considers is that the production of documents does not appear to have been the subject of any substantial review by Trustee to verify that box labels are accurate (so that critical documents are not hidden among apparently inconsequential documents) or to verify that the production is not overwhelmed by nonresponsive documents. Although Trustee was not responsible for the box labelling, the Trustee is responsible to produce only documents that are responsive to the request.

In opposition to the motion, Trustee has provided photographic evidence of the production, showing the boxes as they are stored and the contents of some boxes. (Bass decl., ¶ 6 & exhibit B.) The Court notes that the box labels appear to be more descriptive of their contents than the available indexes. (E.g., compare identification of customer box 8.5 in Bass decl., exhibit A-11.5, p. 189, with the photograph of customer box 8.5 in Bass decl., exhibit B-4, p. 245.) As the boxes physically exist, the boxes appear to be sufficiently identified for document retrieval as to demonstrate that the storage of the documents is reasonably the equivalent of “as they are kept in the usual course” of this defunct business.

It appears to the Court that the practical result of all of this is that the production of documents substantially complies with the requirements of the Code of Civil Procedure, subject to two qualifications. The first qualification is that it is unclear whether the moving parties assert that the production is over-inclusive, that is, that documents which are not responsive to any RFP request are included within the production. If there is a category of documents among the Storage Documents that moving parties agree are not responsive to any request (hypothetically, for example, employee payroll information), then those documents should not be produced and Trustee would have a corresponding responsibility to ensure that boxes labelled as containing those documents do not also contain other documents that would be responsive. Presuming that the moving parties want access to all of the documents and simply complain that the documents should be organized by Trustee category by category, then the production is sufficient in its present form.

The second qualification relates to access to the documents. Production of documents in this volume is not sufficient by permitting a single discrete access to the documents. Trustee needs to provide reasonable access over a much broader period of time so that the moving parties may reasonably review the documents and arrange for copying. Although the Court will not order it in the context of this motion, the parties may want to consider a joint, cost-sharing approach to scanning some or all of the documents so that the documents may be available for review and use electronically. The Court will leave it to the parties to work out appropriate arrangements, expecting that further resort to a motion should be used only after reasonable good faith efforts have been exhausted.