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Johnson Marcraft, Inc. v. Western Surety Co.

United States District Court, M.D. Tennessee, Nashville Division

February 28, 2018

JOHNSON MARCRAFT, INC., Plaintiff,
v.
WESTERN SURETY COMPANY, Defendant/Third-Party Plaintiff,
v.
ALEXANDER MECHANICAL CONTRACTORS, INC., Third-Party Defendant/ Counter Plaintiff.

          The Honorable Curtis J. Collier, District Judge.

          REPORT AND RECOMMENDATION

          BARBARA D. HOLMES UNITED STATES MAGISTRATE JUDGE.

         Pending before the Court are the (i) Plaintiff's Motion for Partial Summary Judgment (Docket No. 79); (ii) Motion to Dismiss Count II of Johnson Marcraft, Inc.'s Complaint filed by Defendant Western Surety Company (Docket No. 80); (iii) Plaintiff's Motion for Sanctions Against Defendant Western Surety Company (Docket No. 88); (iv) Emergency Motion of Alexander Mechanical Contractors, Inc. to Determine Whether an Enforceable Settlement Agreement Exists (Docket No. 115); and, (v) Johnson Marcraft, Inc.'s Motion to Enforce Settlement Against Alexander Contractors, Inc. (Docket No. 116). By order entered on December 18, 2017 (Docket No. 153), all dispositive motions were referred to the undersigned Magistrate Judge for report and recommendation.[1]

         The Court has reviewed the motions and the parties' respective responsive filings.[2] For the following reasons, the undersigned Magistrate Judge respectfully recommends that Western Surety Company's Motion to Dismiss Count II of Johnson Marcraft, Inc.'s Complaint (Docket No. 80) be DENIED and Plaintiff's Motion for Sanctions Against Defendant Western Surety Company (Docket No. 88) be GRANTED.[3] Further, the undersigned respectfully recommends that Johnson Marcraft, Inc.'s Motion to Enforce Settlement Against Alexander Contractors, Inc. (Docket No. 116) be GRANTED and the Emergency Motion of Alexander Mechanical Contractors, Inc. to Determine Whether an Enforceable Settlement Agreement Exists (Docket No. 115) be DENIED. Based on the recommendation that the settlement between Plaintiff Johnson Marcraft, Inc. and Defendant Alexander Mechanical Contractors, Inc. be enforced, and because there is no other timely and substantive opposition to the motion, the undersigned also respectfully recommends that the Plaintiff's Motion for Partial Summary Judgment (Docket No.79) be GRANTED.

         I. MOTION TO DISMISS AND MOTION FOR SANCTIONS

         A. Background

         The underlying relationships and transactions between the parties giving rise to this lawsuit are recited in the Court's memorandum of June 22, 2016 (Docket No. 40). Those facts are not again recited here except as necessary to add context to the pending matters.

         In this breach of contract action, JMI asserts additional claims in Count II for vexatious refusal to pay a claim under Missouri law (Docket No. 1 at 10-11), and, alternatively, for bad faith refusal to pay a claim under Tennessee law in Count III (Docket No. 1 at 11-12). In its answer (Docket No. 17), Western asserts as a first affirmative defense that the complaint generally fails to state a claim upon which relief can be granted.

         Fairly early in this case, a discovery dispute arose about the sufficiency of responses by Defendant Western Surety Company (“Western”) to discovery requests propounded by Plaintiff Johnson Marcraft, Inc. (“JMI”). See Plaintiff's Motion to Compel at Docket No. 38. One of the specific discovery requests in dispute was JMI's contention interrogatory seeking description of each ground on which Western alleged that JMI's complaint failed to state a claim with all supporting facts and documents. Id. at ¶¶ 20-31. See also Order entered on July 8, 2016, Docket No. 46 at 7-9. In its ruling on this discovery dispute, the Court held that this was a proper discovery request, which Western could not answer, as it originally did, by simply referencing produced documents. Id. Western was therefore compelled to “provide the requested information in narrative format under oath with specific detail” and to further “identify [in its sworn response] by specific Bates numbers the documents that Western contends support or relate to its position, as stated in the narrative interrogatory response.” Id. at 9.

         There is no dispute that in its amended discovery responses, Western identified only one ground as being the basis for its defense of failure to state a claim, namely, that no money is due or owing to JMI because JMI allegedly did not properly fabricate the materials in question. See Docket No. 62-1 at 4-5 and Docket No. 102 at 1-2. Despite not having identified any other grounds for its failure to state a claim defense, on April 28, 2017, Western filed a motion to dismiss under Fed.R.Civ.P. 12(b)(6), seeking dismissal of Count II of the complaint as failing to state a claim, based on choice of law arguments (Docket Nos. 80 and 82). Upon the filing by Western of the motion to dismiss on grounds that Tennessee law, not Missouri law, applies and precludes JMI from recovering on its vexatious refusal to pay claim, JMI then sought sanctions for Western's failure to have timely disclosed the choice of law contention in its amended discovery responses (Docket No. 88), as directed by the Court's prior order. Docket No. 46 at 7-9.

         This was only one of multiple discovery disputes in this case brought to the Court's attention. Following this first discovery contest, Western asserted that documents produced by JMI were insufficient. See Docket Nos. 50, 51, 52, 53, 55, and 56. The Court resolved this matter by order entered on November 10, 2016 (Docket No. 57), after a telephonic discovery conference. Then, JMI raised issues of the adequacy of Western's compelled discovery responses (Docket Nos. 62, 63, ad 66) and the adequacy of Alexander's discovery responses (Docket Nos. 64 and 65). Because of the parties' failure to comply with the Court's procedures for resolution of discovery disputes, the Court denied those motions (Docket No. 67), without prejudice to refiling, which did not happen. After that, issues over the scheduling of third-party depositions arose (Docket Nos. 78, 85, and 93), in connection with which Western sought to hold out-of-district witnesses in contempt (Docket Nos. 103, 104, 105, and 106). This discovery dispute traveled to the District of Minnesota and back again. See Docket No. 109. The Court references these additional contests to show that the parties have a long and extensive history of discovery disputes in this case, as a result of which all of the parties have had multiple occasions, and therefore ample opportunity, to fully inform themselves of their respective discovery obligations and the consequences for failing to cooperate in discovery.

         B. Analysis

         When a party disobeys the pretrial orders of a federal court, the Federal Rules provide that the court may, on motion or on its own, issue “any just order, including those authorized by Rule 37(b)(2)(A)(ii)-(viii). Fed.R.Civ.P. 16(f)(1). The “just orders” authorized by Rule 37(b)(2)(A)(ii)-(viii) include “prohibiting the disobedient party from supporting or opposing designated claims or defenses, or from introducing designated matters in evidence.” Fed.R.Civ.P. 37(b)(2)(A)(ii). Under Rule 16(f), “[t]he district court has discretion to impose whichever sanction it feels appropriate under the circumstances.” Clarksville-Montgomery School System, v. U.S. Gypsum Co., 925 F.2d 993, 998 (6th Cir. 1991).

         When applying the substantially similar Rule 37, the Sixth Circuit employs a four-factor test to determine whether a sanction (even one other than dismissal) is appropriate:

The first factor is whether the party's failure to cooperate in discovery is due to willfulness, bad faith, or fault; the second factor is whether the adversary was prejudiced by the party's failure to cooperate in discovery; the third factor is whether the party was warned that failure to cooperate could lead to the sanction; and the fourth factor in regard to a dismissal is whether less drastic sanctions were first imposed or considered.

Doe v. Lexington-Fayette Urban County Government, 407 F.3d 755, 766 (6th Cir.2005) (quoting Freeland v. Amigo, 103 F.3d 1271, 1277 (6th Cir.1997)). The party seeking to avoid a sanction “has the burden of showing that his failure to comply was due to inability, not willfulness or bad faith.” United States v. Reyes, 307 F.3d 451, 458 (6th Cir.2002).

         As the basis for its failure to disclose a choice of law defense in its discovery responses, Western argues that the defense is not novel and should have been expected by JMI because it cannot recover under both state law theories. Docket No. 102 at 2. Western further contends that there is no prejudice to JMI because the evidence making up the choice of law defense has been brought to the attention of JMI through the motion to dismiss itself, and because discovery could be reopened on this issue. Id. at 3-4.

         Western misses the mark in a number of directions. First, the Federal Rules permit a party to plead alternative relief. Fed.R.Civ.P. 8(d)(2). Rule 8 expressly provides that, “[i]f a party makes alternative statements, the pleading is sufficient if any one of them is sufficient.” Id. Western clearly contends, under its general failure to state a claim defense, that neither of the alternative statements made by JMI in Count II is sufficient because Tennessee law applies and the relief sought is unavailable under Tennessee law, and it was therefore incumbent upon Western to identify this choice of law ground in its discovery responses.

         JMI specifically asked in discovery for Western to describe the grounds for any contention that the complaint failed to state a claim. When a dispute arose over the sufficiency of Western's responses to that discovery request, the issue was presented to the Court, and was intensely contested. The Court compelled Western to identify all of its contentions of failure to state a claim, and that direction was clear and unambiguous. Whether or not JMI should have expected Western to raise this as a ground for failure to state a claim is beside the point, and completely ignores the Court's instructions.

         Further, Western cannot now claim that its failure to identify the choice of law argument earlier was an inadvertent omission. Nor can Western rely on any lack of clarity in the Court's directions about Western's obligations in responding to JMI's contention interrogatories. While the Court stops short of finding that Western's actions rise to the level of bad faith, the Court does find Western's failure to identify choice of law as a ground for its failure to state a claim defense to be in willful disregard of the Court's order compelling detailed disclosure of all grounds for that defense. Western has made no showing that its failure to follow the Court's order was due to some inability to comply.

         Further, the Court finds that Western's failure to disclose this contention is prejudicial to JMI. Western bases its Motion to Dismiss on facts that would at least generate, if not require, additional discovery, including but not limited to, the intent of the parties (Docket Nos. 80 at 2 and 82 at 7), the order in which the subject Payment Bond was signed (Docket No. 82 at 2, n.3), and the location where the Payment Bond was signed (Docket No. 82 at 12-13). JMI had no opportunity for such discovery, because the deadline for completion of discovery expired on April 28, 2017 (see Order at Docket No. 72), the same date on which Western filed its Motion to Dismiss.[4]

         With respect to the severity of the sanction and prior warning, the Court notes that the lesser sanction of compelling responses was already afforded to Western. See Order at Docket No. 46.[5] Western thus had its chance to cooperate in discovery prior to imposition of sanctions. Further, the Court's earlier order clearly and explicitly instructed Western to comply with its discovery obligations, which Western elected not to do. Western's disregard for the opportunity given by the Court to provide a detailed response of all grounds for its claimed defenses compels the conclusion that no lesser sanction would be effective, nor is a lesser sanction warranted at this procedural posture in this case. See e.g. Universal Health Group v. Allstate Insurance Company, 703 F.3d 953 (6th Cir. 2013) (dismissal warranted by plaintiff's discovery violations that prejudiced defendant, even without explicit warning).

         For all of these reasons, Western is appropriately prohibited under Rule 37(b)(2)(A)(ii) from asserting its choice of law arguments with respect to Count II of the complaint as a sanction for failing to disclose choice of law as a ground for its failure to state a claim defense, as directed by the Court's order compelling that information.[6] JMI's Motion for Sanctions (Docket No. 88) should therefore be GRANTED and Western's Motion to Dismiss (Docket No. 80) should therefore be DENIED. The Court further finds that imposition of this sanction is sufficient in and of itself, such that an award of attorney's fees in addition would be unjust. Accordingly, the Court declines to award attorney's fees to JMI.[7]

         Additionally, JMI has clearly elected to proceed with its vexatious refusal to pay claim under Missouri law in Count II as the alternative to its bad faith refusal to pay claim under Tennessee law in Count III. JMI should therefore be precluded from pursuing Count III for the remainder of trial preparation and trial in this case. This election is only as between Count II and Count III. It does not impact any other claims made in the Complaint.[8]

         II. SETTLEMENT

         A. Background

         The parties' conflicting positions over whether a settlement occurred between JMI and Third-Party Defendant Alexander Mechanical Contractors, Inc. (“Alexander”) is collateral to the underlying litigation in this case. For that reason again, the Court does not find it necessary to detail the entire procedural history of this case. Instead, the Court will begin its discussion with the circumstances of the parties' attempt at settlement that resulted in the instant dispute.[9]

         After prior unsuccessful attempts at settlement, principals of JMI and Alexander began communicating directly in August of 2017 (without involvement of counsel) about the potential for settlement.[10] At some point, JMI President Tim Scharf and Alexander President Bill Alexander believed they were close enough to reaching a settlement that they brought in the lawyers to document the terms.

         On August 28, 2017, Mr. Alexander sent a draft release and settlement agreement, which had been drafted by Alexander's counsel, to Mr. Scharf. Mr. Scharf subsequently forwarded the draft release and settlement agreement to his attorneys, who then notified Alexander's counsel by email on August 30, 2017 that the proposed language of the draft settlement agreement was unacceptable. The point of discord about the settlement agreement was whether it would include a release of JMI's claims against Western. At that time, the parties acknowledged that there was no agreement to the global settlement originally provided for in Alexander's draft release and settlement agreement.

         Nevertheless, settlement discussions continued between the attorneys, and also between Mr. Scharf and Mr. Alexander separately. There is no dispute that on September 8, 2017, Alexander agreed to settlement in exchange for release of the claims by and between Alexander and JMI exclusive of Western. See Alexander Motion, Docket No. 115 at 4-5. On that date, Alexander's counsel confirmed this agreement by email to JMI's counsel, stating:

Please find enclosed Alexander's acceptance of your settlement offer of $310, 000 with a confidential settlement and release of all claims by and between JMI and Alexander.
In addition, we will be following up on this email with a second email that includes an offer … on behalf of Western Surety Company for full and final settlement of all ...

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