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In re Mediation In Health Diagnostic, Laboratory, Inc. Cases

United States District Court, E.D. Virginia, Richmond Division

January 23, 2018



          David J. Novak, Judge

         This matter comes before the Court on reconsideration from the District Court. (ECF No. 60.) For the reasons set forth herein, the Court reaffirms the imposition of sanctions upon the Liquidating Trustee pursuant to its November 9, 2017 Order. (ECF No. 50.) The Court further reduces the attorneys' fees of the Bouton and Cornwell Defendants pursuant to the lodestar analysis as more fully explained below.

         I. BACKGROUND

         On September 16, 2016, the Liquidating Trustee filed a complex 76-count Omnibus Complaint on behalf of the creditors of Health Diagnostic Laboratory, Inc. ("HDL") against over 100 defendants and claiming approximately $600 million in damages. The crux of the Complaint avers that HDL and its independent contractor Blue Wave Healthcare Consultants, Inc. ("BlueWave") engaged in several illegal sales practices that ultimately harmed its creditors. The defendants range in scope from HDL's officers, directors, and shareholders all the way down to the individual medical salespeople who sold HDL's products - some of whom made very small profits that likely add up to less than a day of attorneys' fees in this case. The Liquidating Trustee's blunderbuss approach applies not only to the sheer volume of defendants and their various levels of culpability, but also to the many causes of action against those defendants regardless of ultimate viability.

         Even though a realistic settlement of this entire case will likely recover only a small portion of the alleged losses, the attorneys' fees continue to mount well into the millions of dollars each month, thereby reducing the ultimate recovery to HDL's creditors. Indeed, in 2017, the Liquidating Trust paid attorneys well over $11 million. Bankr. Case No. 15-32919 (ECF Nos. 1942, 3298, 3497, 3687.) With discovery continuing well into 2019 and thousands of open adversary proceedings still pending, lawyers will continue to chip away at the funds available to HDL's creditors. Recognizing the importance of prompt resolution to maximize recovery for the creditors, the District Court referred this case to the undersigned early in the process for mediation. ("Referral Order" (ECF No. 1).)

         Settlement of any case requires an evaluation of the merits of the claim - a particularly difficult task here due to the broad and undetailed Complaint levied by the Liquidating Trustee. With respect to the over twenty individual salespeople and their entities at issue here (the Bouton and Cornwell Defendants), the task proves even more difficult because they fall "downstream" of the core allegations in the Complaint. These salespeople did not make up the HDL corporate board nor were they leaders at Blue Wave. Instead, they simply constitute the sales force who marketed HDL's products. Even though the Liquidating Trustee has sued each of these salespeople in his or her individual capacity, the Liquidating Trustee lumps them all together in his Complaint as the "BlueWave Sales Representative Defendants" with no distinction. Although these broad generalities may satisfy pleading requirements in the Bankruptcy Court, this does not provide the undersigned sufficient specifics with respect to each individual's potential liability to facilitate meaningful mediation. For that reason, the Court ordered the Liquidating Trustee to provide a settlement memorandum outlining the factual and legal underpinnings of his claims against each independent sales defendant. ("August 9 Order" (ECF No. 12).) The Order specifically provides that the "Liquidating Trustee shall prepare a separate memorandum for each of these [] Defendant groups, but the Liquidating Trustee shall provide distinct factual allegations and accompanying support as to each individual Defendant within each group." Id. The purpose of this Order was not to provide the Bouton and Cornwell Defendants with early discovery, but to give the undersigned adequate specifics to evaluate the case for settlement against each individual.

         On October 30, 2017, the Liquidating Trustee submitted one memorandum purportedly encompassing the Bouton and Cornwell Defendants. The Court thereafter ordered the parties to file pleadings as to whether the Liquidating Trustee had actually complied with the August 9 Order.[1] ("November 1 Order" (ECF No. 38).) After oral argument and by Order dated November 9, 2017, this Court found that the Liquidating Trustee failed to comply with the August 9 Order, because he did not provide "distinct factual allegations and accompanying support as to each individual Defendant" ("Sanctions Order" (ECF No. 50).) Instead, the Liquidating Trustee's memorandum contained a generalized discussion of his claims against "all the defendants" with references to some general emails and other documents.

         Contrary to the Liquidating Trustee's assertions, the Court's conclusion that he did not comply had nothing to do with formatting. In fact, the undersigned specifically told the Liquidating Trustee that the Court's concern did not lie with the technical deficiencies in his memorandum. See Tr. at 34:14-15 (ECF No. 55 Ex. 1.) Instead, the Court explained that the Liquidating Trustee's violation struck at the very heart of the substance, because he failed to break down his theory person by person, so that the Court could assess the merits with respect to each individual defendant. For example, the Liquidating Trustee mentioned two Defendants, Seneca Garrett and Courtney Love, only once in his memorandum with no factual specifics to link them to any of his many legal theories. The memorandum simply described Ms. Garrett as "a Cobalt sales representative, " and Ms. Love as an "assistant [] who sells ancillary services to doctors." The memorandum mentioned several other Defendants only two or three times, again with no factual specifics. These bare references give the Court no clue as to the strengths of the Liquidating Trustee's fraud, tortious interference, conspiracy or unjust enrichment claims against these particular defendants.[2] And the Liquidating Trustee's broad allegations that "each of the Defendants perpetuated the P&H Scheme" or that "each of the Defendants received commissions for their participation in the P&H Scheme" do not satisfy the Court's request for specifics as to each individual. (ECF No. 44, at 3-4.). The August 9 Order specifically directed the Liquidating Trustee to provide factual specifics for each defendant, and he unquestionably failed to do so.

         Because the Liquidating Trustee's memorandum would not aid the mediation process, the Court rescheduled the settlement conference with the Bouton and Cornwell Defendants. The Court further ordered the Liquidating Trustee to submit another memorandum specifically breaking down each individual defendant and giving the legal theories and facts supporting those theories. As a sanction for the Liquidating Trustee's failure to comply with the August 9 Order, the Court required the Trustee to pay reasonable fees and costs incurred by the Bouton and Cornwell Defendants solely on the issue of whether the Liquidating Trustee violated the Order.

         The Liquidating Trustee filed objections to the Sanctions Order. (ECF No. 55.) On November 29, 2017, the District Court referred the matter back to the undersigned for a "re-evaluation of whether sanctions should be imposed, based upon the quality of the (new) submission. If the Magistrate Judge determines that sanctions remain appropriate, the Magistrate should specifically indicate the legal basis for his imposition of sanctions." (ECF No. 60.) Additionally, the District Court directed the undersigned to "consider the extent, if any, to which he should adjust the sanctions award based on (1) the lodestar factors enumerated in Johnson v. Georgia Hwy Express, Inc., 488 F.2d 714 (5th Cir. 1974), and (2) the issues raised in the Liquidating Trustee's objection concerning the scope of Defendants' Statements of Fees and Costs." The District Court took the Liquidating Trustee's Objections under advisement pending the undersigned's determination.

         In light of the District Court's Order, the undersigned issued a new scheduling order that directed the Bouton and Cornwell Defendants to file a response to the Liquidating Trustee's argument on the reasonableness of their fees and costs and whether they complied with the specific instructions to limit their fees and costs solely to the Liquidating Trustee's failure to comply with the August 9 Order. (ECF No. 63.) In addition, the Court ordered the Bouton and Cornwell Defendants to address whether the Court should reduce the sanctions in light of the Liquidating Trustee's revised submission. The Bouton and Cornwell Defendants have submitted their responses and the Liquidating Trustee filed a reply, rendering this matter ripe for decision.

         II. ANALYSIS

         A. Legal Authority for Imposing Sanctions

         Federal Rule of Civil Procedure 16 governs general case management and pretrial conferences, including settlement conferences, and is designed to be "broadly remedial, " giving courts the authority to actively manage their dockets from an early stage in the litigation. In re Baker, 744 F.2d 1438, 1440 (10th Cir.1984) (en banc); G Heilman Brewing Co. v. Joseph Oat Corp., 871 F.2d 648, 652 (7th Cir. 1989). Rule 16(a)(5) authorizes the court to direct the parties and attorneys to attend one or more pretrial conferences for the purpose of "facilitating settlement." In furtherance of this purpose, the District Court referred this case for mediation to the undersigned and specifically conferred the authority to "enter any orders necessary in furtherance of his settlement efforts." (Referral Order.)

         Pursuant to Rule 16 and the District Court's Referral Order, this Court issued a specific pretrial order on August 9, 2017 with which the Liquidating Trustee failed to comply. Rule 16(f) expressly authorizes sanctions if a party or his attorney "fails to obey a scheduling or other pretrial order." Courts have continuously held that this includes sanctions for failure to abide by an order issued for settlement purposes. G. Heilman Brewing Co., 871 F.2d at 656; Empire, Inc. v. Wal-Mart Stores, Inc., 188 F.R.D. 478, 482 (E.D. Ky. 1999); Dvorak v. Shibata, 123 F.R.D. 608, 611 (D. Neb. 1988); Nick v. Morgan Foods, Inc., 99 F.Supp.2d 1056, 1063 (E.D. Mo. 2000); MHD-Rockland Inc. v. Aerospace Distrib. Inc., 102 F.Supp.3d 734, 738-39 (D. Md. 2015); Reliance Nat'l Ins. Co. v. B. Von Paris & Sons., Inc., 153 F.Supp.2d 808, 810 (D. Md. 2001); CLM Partners LLC v. Fiesta Palms LLC, No. 2:11cv01387, 2013 WL 6388760, at *3-4 (D. Nev. Dec. 5, 2013).

         Rule 16(f)(2) provides that "[i]nstead of or in addition to any other sanction, the court must order the party, its attorney, or both to pay the reasonable expenses - including attorney's fees - incurred because of any noncompliance with this rule, unless the noncompliance was substantially justified or other circumstances made an award of expenses unjust." After giving the Liquidating Trustee notice and an opportunity to be heard on whether he complied with ...

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