Preventive Energy Sols., L.L.C. v. nCap Ventures 5, L.L.C.

• Decision Date: 11 July 2021
• Docket Number: Case No. 2:16-cv-00809-JCB
• Parties: PREVENTIVE ENERGY SOLUTIONS, L.L.C., a Wyoming limited liability company, Plaintiff, v. NCAP VENTURES 5, L.L.C., a Delaware limited liability company, Defendants. NCAP VENTURES 5, L.L.C., a Delaware limited liability company; and NCAP VENTURES 11, L.L.C., a Delaware limited liability company, Counterclaim Plaintiffs/Third-Party Plaintiffs, v. PREVENTIVE ENERGY SOLUTIONS, L.L.C., a Wyoming limited liability company; and KEVIN OLESON, an individual, Counterclaim Defendants/Third-Party Defendants.
• Court: U.S. District Court — District of Utah

PREVENTIVE ENERGY SOLUTIONS, L.L.C., a Wyoming limited liability company, Plaintiff, v. NCAP VENTURES 5, L.L.C., a Delaware limited liability company, Defendants.

NCAP VENTURES 5, L.L.C., a Delaware limited liability company;and NCAP VENTURES 11, L.L.C.,a Delaware limited liability company, Counterclaim Plaintiffs/Third-Party Plaintiffs, v. PREVENTIVE ENERGY SOLUTIONS, L.L.C., a Wyoming limited liability company;and KEVIN OLESON, an individual, Counterclaim Defendants/Third-Party Defendants.

Case No. 2:16-cv-00809-JCB

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH

July 11, 2021

MEMORANDUM DECISION AND ORDER

Magistrate Judge Jared C. Bennett

INTRODUCTION

On July 7, 2021, nCap Ventures 5, L.L.C. ("nCap 5") and nCap Ventures 11, L.L.C. ("nCap 11") (collectively, "nCap Defendants") filed their trial brief.¹ The brief provided that the nCap Defendants would argue at trial: (1) the contract between the parties in this action required Preventive Energy Solutions, L.L.C. ("Preventive") to convey a 20% membership interest to nCap 11; (2) Preventive refused to convey this 20% membership interest to nCap 11; and (3) had Preventive complied with this obligation, then nCap 11 would have received 20% of whatever gains and losses Preventive experienced during the relevant time of the contract (i.e., 2015-2016). The trial brief then stated that because Preventive experienced a loss of $1,376,176.00 from 2015 to 2016, nCap 11 should have been able to claim 20% of that loss but for Preventive's breach of the contract. Although 20% of Preventive's loss amounts to $275,235.20, nCap 11 stated that it was claiming a loss of $208,807.40 but did not explain why that loss was less than 20% of Preventive's actual loss.²

Preventive objected to nCap 11's presentation of this evidence of loss at trial.³ Specifically, Preventive contended that the nCap Defendants had failed to disclose this tax-loss calculation in their initial disclosures, any amended initial disclosures, or in discovery.⁴ Preventive then argued that this failure to disclose was neither substantially justified nor harmless because had this damage computation been disclosed previously, the parties would have engaged in further discovery to determine whether this purported 20% loss could have been an actual benefit to nCap 11 instead of a mere paper benefit that had no real-world impact on its tax liability.⁵ Preventive further argued that determining whether or how much of this 20% loss nCap 11 could have claimed on its taxes was a matter requiring expert testimony, and neither party has designated any experts in this action.⁶

In response to Preventive's objection, the nCap Defendants filed two documents. First, the nCap Defendants filed an amended trial brief stating that had Preventive conveyed a 20% membership interest, then nCap 11 would have been able to claim a loss of $275,235.20, which is arithmetically 20% of Preventive's loss.⁷ Second, the nCap Defendants filed a response to Preventive's objections.⁸ In that response, the nCap Defendants argue: (1) Preventive's objections to a trial brief have no basis in the Federal Rules of Civil Procedure;⁹ (2) Preventive's objections are untimely because the deadline for motions in limine has passed;¹⁰ (3) the nCap Defendants' disclosures adequately disclosed the basis for their damage figure;¹¹ (4) Preventive should have sought discovery about this topic;¹² and (5) even if these tax-loss figures should have been disclosed, failure to do so was harmless.¹³ Therefore, the nCap Defendants argued, the jury should be able to hear their loss theory.

After receiving the parties' briefing, the court had concerns in two areas: (1) whether Fed. R. Civ. P. 37(c)(1) required the exclusion of nCap Defendants' loss calculation; and (2) if these damages were excluded from trial, whether the nCap Defendants could make a prima facie showing of their breach of contract claims because damages is an element¹⁴ and must be an "actual financial loss."¹⁵ Given the importance of this issue to trial and to the survival of the nCap Defendants' counterclaims, the court convened a hearing by electronic means on July 9, 2021, at which it heard argument as to whether it should exclude the nCap Defendants' evidence of tax loss and, if so, whether the nCap Defendants' contract-based counterclaims could be presented to a jury.

During the hearing, the nCap Defendants conceded that they had never provided this loss calculation to Preventive, but by disclosing that they were entitled to 20% of whatever member distributions Preventive made from 2015 to 2016, that was enough to satisfy their obligations under the Federal Rules of Civil Procedure. Additionally, they argued that even if they should have disclosed the figure, failure to do so was harmless because figuring out the tax loss was only a matter of simple arithmetic. The nCap Defendants confirmed that not being able to claim their portion of Preventive's loss amounted to a "tax loss" to nCap 11 but that they were not going to have any specific evidence of what that tax loss would be. Instead, the jury could infer that nCap 11 would have had a more favorable tax burden if it could claim such a loss. Preventive countered that determining an entity's actual tax loss is not a simple arithmetic calculation because laws such as 26 U.S.C. § 465 and 26 U.S.C. § 469 require a capital contribution to the entity for which a taxpayer claims a loss. The nCap Defendants never made any capital contributions to Preventive. Additionally, Preventive argued that even if the nCap Defendants could claim the purported loss, expert testimony regarding the nCap Defendants' structure, tax bracket, or pass-through status would be required to determine whether any of the entities suffered an actual loss that had any tangible tax benefit. In reply, the nCap Defendants argued that even if they were not entitled to claim this loss for want of a capital contribution, their damage was the lack of an opportunity to make a capital contribution. And, in any event, even if they could not show actual damage, then their counterclaims survived because they could claim nominal damages. The court stated that it was leaning toward excluding the evidence of tax loss but would reserve ruling until after the weekend to take these arguments under advisement.

After taking the weekend to consider the parties' arguments, the court excludes the evidence of tax loss under Fed. R. Civ. P. 37(c). Alternatively, under Fed. R. Evid. 403, the court excludes the evidence because the danger of confusing the issues substantially outweighs its probative value. Although this evidence is excluded, the court also rules that the nCap Defendants' contract-based counterclaims survive because they can seek nominal damages under Utah law.¹⁶ Each issue is discussed in order below.

ANALYSIS

I. THE TAX-LOSS EVIDENCE IS EXCLUDED UNDER FED. R. CIV. P. 37(c).

The nCap Defendants' tax-loss evidence should be excluded under Fed. R. Civ. P. 37(c). Rule 37(c)(1) requires the exclusion of evidence, "[i]f a party fails to provide information . . . as required by Rule 26(a) or (e) . . . unless the failure was substantially justified or is harmless." Thus, the court: (A) first addresses why the tax-loss calculation should have been disclosed under Rule 26(e) and then (B) shows that this failure to disclose was neither substantially justified nor harmless.

A. The Tax-Loss Information Should Have Been Disclosed Under Rule 26(e).

The nCap Defendants had an obligation to supplement their initial disclosures under Rule 26(e) by providing this damage computation long before filing their trial brief. Rule 26(a)(1) imposes an affirmative obligation upon parties to provide certain information "without awaiting a discovery request."¹⁷ This last quoted phrase emphasizes the purpose of initial disclosures, which "imposes on parties a duty to disclose . . . certain basic information that is needed in most cases to prepare for trial or make an informed decision about settlement."¹⁸ These disclosures are "the functional equivalent of court-ordered interrogatories," that are intended "to accelerate the exchange of basic information . . . and the rule should be applied in a manner to achieve these objectives."¹⁹ Because this clear auto-disclosure obligation exists, a party who fails to make the requisite disclosures cannot argue that its failure should be excused because the other party failed to ask the right discovery questions. The Rules Committee has effectively removed the natural human and attorney tendency to blame someone else.

These disclosure duties do not evaporate after the early exchange of initial disclosures. Rule 26(e) provides:

A party who has made a disclosure under Rule 26(a) . . . must supplement or correct its disclosure or response:

(A) in a timely manner if the party learns that in some material respect the disclosure or response is incomplete or incorrect, and if the additional or corrective information has not otherwise been made known to the other parties during the discovery process or in writing . . . .²⁰

Thus, a party must supplement if: (1) the party made a disclosure under Rule 26(a); (2) the party later learns that its prior disclosure is incomplete or incorrect in a material way; and (3) the information necessary to complete the prior disclosure is not already known to the other party. Each issue is addressed below.

1. The nCap Defendants Made Disclosures Under Rule 26(a).

The nCap Defendants made an initial disclosure under Rule 26(a). Rule 26(a) required the nCap Defendants to disclose, among other things, "a computation of each category of damages claimed by the disclosing party."²¹ When interpreting the Federal Rules of Civil Procedure, the court relies on their plain meaning.²² To determine a word's plain meaning, the court can consult a dictionary.²³ According to the Oxford Dictionary, the term "computation" means: "The action or process of computing,...