Sentis Group, Inc., Coral Group, Inc. v. Shell Oil

• Citation: 559 F.3d 888
• Decision Date: 24 March 2009
• Docket Number: No. 07-2573.,No. 07-3162.,No. 07-2308.,07-2308.,07-2573.,07-3162.
• Parties: SENTIS GROUP, INC.; CORAL GROUP, INC., Plaintiffs-Appellants, v. SHELL OIL COMPANY; Equilon Enterprises, LLC, doing business as Shell Oil Products US, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

559 F.3d 888

SENTIS GROUP, INC.; CORAL GROUP, INC., Plaintiffs-Appellants, v. SHELL OIL COMPANY; Equilon Enterprises, LLC, doing business as Shell Oil Products US, Defendants-Appellees.

No. 07-2308.

No. 07-2573.

No. 07-3162.

United States Court of Appeals, Eighth Circuit.

Submitted: February 13, 2008.

Filed: March 24, 2009.

Curtis L. Tideman, argued, Overland Park, KS, Frederick K. Starrett, Overland Park, KS, Jeffrey R. King, Alok Ahuja, Kansas City, MO, on the brief, for appellants.

David Micheal Harris, argued, Dawn M. Johnson, Jordan B. Cherrick, Kansas City, MO, on the brief, for appellees.

Before MELLOY, GRUENDER, and SHEPHERD, Circuit Judges.

MELLOY, Circuit Judge.

The district court dismissed Plaintiffs' claims with prejudice as a sanction for discovery abuses and other abuses of the judicial process. The district court relied, in part, on Rule 37 of the Federal Rules of Civil Procedure and on a finding that Plaintiffs had willfully and prejudicially violated several discovery orders. The district court also cited its own inherent authority to police the conduct of the parties before the court and identified numerous instances of behavior that it deemed abusive but that were unrelated to the court's discovery orders. After the district court announced its intention to dismiss Plaintiffs' case with prejudice, but before it entered a written dismissal order, Plaintiffs filed a motion asking the district court to recuse itself. The district court denied that motion. Plaintiffs appeal as to the sanction and the recusal issues. We reverse as to the recusal issue, vacate the order of dismissal, and remand for reassignment and reconsideration of the motion for sanctions.

I. Background

The parties in this case provoked the district court into making untempered comments, using profane language, and taking actions that created an appearance of partiality. Reversal is warranted because the sanction of dismissal rested upon the cumulative findings of several alleged abuses, one of which was clearly erroneous, and several of which involved the court's resolution of close questions. We do not believe any of the alleged abuses, standing alone, necessarily justified the sanction of dismissal. Further, given the severity of the sanction, we do not believe it is appropriate to apply a harmless-error analysis after removing from consideration one or more of the several bases offered as cumulative support for the sanction. Finally, given the appearance of partiality, it is necessary on remand to revisit the close questions that drove the sanctions decision.

Having reviewed this matter thoroughly, we are neither unsympathetic toward the district court nor blind to the course of conduct that triggered the court's frustration. We emphasize that our decision rests on the appearance of partiality, not a finding of partiality. We make no comment as to the range of possible remedies available on remand other than to note that neither party behaved in a manner consistent with the spirit of cooperation, openness, and candor owed to fellow litigants and the court and called for in modern discovery. We do not intend to suggest through this opinion that we condone Plaintiffs' behavior or tactics. Also, it seems clear that at some point in the proceedings, Defendants' goal shifted from conducting effective discovery to fanning the flames of the court's frustration and building a case for sanctions. As such, we encourage the court on remand to carefully consider the actions of all parties, paying particular attention to the question of prejudice in determining what, if any, sanction is appropriate.

a. General Background

Plaintiffs are two corporations engaged in the business of operating Shell-brand gasoline stations and convenience stores under contracts with Defendants. The parties refer to the contracts as Multi-Site Operator Agreements (the "Agreements"). The Agreements impose an obligation on Defendants to make expense payments to Plaintiffs to reimburse Plaintiffs for certain costs of maintaining retail gasoline operations. Plaintiffs' underlying allegations, broadly drawn, are that Defendants induced Plaintiffs to enter into the Agreements and calculated subsequent payments employing misrepresentations and fraud. Specifically, Plaintiffs allege that Defendants induced them to enter into the Agreements by providing false historic expense and profit figures and that Defendants calculated the expense payments using a method different from what they had represented at the time of contracting. Plaintiffs assert state-law claims including claims of fraud and breach of contract and a federal claim under the Petroleum Marketing Practices Act, 15 U.S.C. §§ 2801-41. Plaintiffs seek over $28 million in damages.

Discovery in this matter was protracted and contentious. Defendants sought financial information from Plaintiffs as relevant to the underlying question of liability and as relevant to the scope and cause of Plaintiffs' alleged damages. We address in detail the discovery disputes and the parties' actions throughout discovery and leading up to dismissal of this case. For clarity, however, it first is necessary to introduce and explain the roles of the people involved in the case.

b. Key Personnel

Alan Barazi is Plaintiffs' owner and principal officer. He communicated with Defendants' employees or officers by various methods, including via email, when the parties were negotiating the Agreements. In addition, before this litigation commenced, he taped three conversations between himself and Defendants' officers. His emails and the secretly recorded tapes are at the center of two of five issues that led to dismissal of the case.

Chris Walls is a business consultant Plaintiffs characterize as a member of management. Plaintiffs designated Walls as an expert on the topic of the Agreements and site operations. Prior to this litigation, Walls assisted Plaintiffs in negotiating and evaluating the merits of the Agreements, and he subsequently assisted in the management and operation of the stations and in the ongoing analysis of financial performance at the stations. Although Plaintiffs now characterize Walls as an employee and insist he is a non-retained expert, Walls submitted bills to Plaintiffs on an hourly basis for his work on letterhead from his own consulting firm, TQM Consulting. At the start of litigation, Walls's resume listed TQM as his employer, but he changed that designation in the course of litigation and eventually listed Plaintiffs as his employers.

Defendants assert Plaintiffs continually shifted their characterization of Walls's status back and forth between that of consultant and/or employee. Defendants assert it was Plaintiffs' goal to protect certain information Plaintiffs had shared with Walls as privileged while at the same time characterizing Walls as an outside consultant so that he could view information Defendants argue was subject to a protective order. Production related to Walls appears to have been the primary issue that frustrated the court and led to dismissal of the case. Four of the five discovery orders involved production related to Walls.

Nick Anton is an accountant who served as Plaintiffs' employee at the time Plaintiffs entered into the Agreements. Plaintiffs assert that Anton's employment ceased in late 2004 or early 2005 and that he has served as an outside accounting consultant since that time. Defendants point out, however, that Barazi and Anton signed state liquor-license applications after 2005 and that the state liquor-license applications name Anton as a manager, managing officer, or managing agent.

Defendants argue that Plaintiffs and Barazi lied to the court and to Defendants about Anton's status in order to prevent Defendants from gaining access to information held by Anton. Two of the five issues that led to the sanction of dismissal involved Anton. One was related to purported misrepresentations about Anton's status and Plaintiffs' failure to comply with an order to make Anton appear at a court hearing. The other was related to a triple-hearsay report of an alleged attempt to pay Anton to withhold information.

c. Perceived Abuses that Served as the Basis for Dismissal

i. Documents and Discovery Orders Related to Chris Walls

Plaintiffs filed the present action in July 2005. In their Rule 26(a)(1) disclosures, they designated Walls as a person with knowledge of their claims. In early 2006, Plaintiffs produced a privilege log to Defendants referring to fifty-eight purportedly privileged documents Walls reviewed and/or generated. Defendants subpoenaed Walls, and in April 2006, Plaintiffs objected, claiming Walls was Plaintiffs' employee and expert. Plaintiffs then failed to produce Walls for a fact deposition. Defendants moved to compel separate depositions of Walls as a fact witness and as an expert witness, and the district court granted the motion. Notwithstanding the district court's grant of this motion, Defendants failed to exercise their authority to take an expert-witness deposition of Walls.

Walls's fact-witness deposition took place in May 2006. In the deposition, Walls stated that all services he provided to Plaintiffs were through his own consulting firm, TQM; TQM billed Plaintiffs for Wall's services on TQM letterhead; and TQM received $300 per hour from Plaintiffs for Walls' services. Walls never received a W2 form from Plaintiffs. Nevertheless, Walls stated that he considered himself Plaintiffs' employee. Defendants agree that, since 2005, Walls has spent "98 percent of his time assisting Plaintiffs with their claims that the MSO Model was flawed and that Shell was not properly calculating rent and expense payments." Counsel for Defendants, in fact, characterize Walls as "an important fact witness in this case, and he's a management member of the plaintiff organization who probably is appearing to be one of the central figures."

In the course of...