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Babcock Power, Inc. v. Kapsalis

United States District Court, W.D. Kentucky, Louisville Division

June 30, 2017

BABCOCK POWER, INC., et al., Plaintiffs,
v.
STEPHEN T. KAPSALIS, et al., Defendants.

          MEMORANDUM OPINION AND ORDER

          Colin Lindsay, United States District Court Magistrate Judge

         On February 7, 2017, defendant Stephen T. Kapsalis (“Kapsalis”)[1] filed a “Motion for Discovery” (DN 398) and “Supplemental Memorandum in Support of his Written Objections and Motion for Protective Order and to Quash the January 23, 2017 Subpoena and Motion for Discovery” (“Supplemental Memorandum”) (DN 398-1). On February 22, 2017, plaintiffs Babcock Power, Inc. and Vogt Power International, Inc. (“plaintiffs”) filed a response (DN 405). On February 22, 2017, non-party Sterling Group, LP (“Sterling”) filed a brief (DN 410) addressing the issues raised in the Motion for Discovery and Supplemental Memorandum. On March 1, 2017, Kapsalis filed a reply (DN 417) and plaintiffs filed a response (DN 418) to Sterling's brief. On March 8, 2017, the Court held an evidentiary hearing on the issues raised in these filings. On April 10, 2017, plaintiffs, Kapsalis, and counsel for plaintiffs, Kelly Gallagher (“Gallagher”), filed proposed findings of fact and conclusions of law. (See DNs 437-39.) Therefore, this matter is ripe for review.

         I. BACKGROUND

         The case has a long and tortured history marked by contentious litigation of a wide range of discovery issues. The purpose of the background is to provide enough history to give context to the Court's decision; the background will not cover every single discovery ruling made or issue addressed by the Court. Instead, the background will (1) recount the rulings (or pertinent parts of rulings) that the Court deems relevant to the issues at hand; (2) relay other pertinent facts; and (3) address how the allegations that are the subject of the Motion for Discovery and Supplemental Memorandum and related filings came before it and culminated in the evidentiary hearing held on March 8, 2017.

         A. The Court's Discovery Rulings

         1. December 30, 2015 Memorandum Opinion and Order (DN 158)

         On November 9, 2015, plaintiffs filed a “Motion to Compel Responses to Their First Set of Interrogatories and Requests for Production from Defendant Express Group Holdings, LLC” (“Motion to Compel Express”) (DN 127). On December 30, 2015, the Court issued a memorandum opinion and order (DN 158) denying, in toto, the Motion to Compel Express.

         Requests for Production 6, 8, 10, 13, and 15 were among the discovery requests at issue in the Motion to Compel Express. Those requests were as follows:

Request for Production 6: Any and all communications between or among you and any agents, attorneys, servants, employees, successors and Black & Veatch and any agents, attorneys, servants, employees, successors of Black & Veatch from April 11, 2013 through the present.
Request for Production 8: Any and all communications between or among you and any agents, attorneys, servants, employees, successors and Calpine and any agents, attorneys, servants, employees, successors of Calpine from April 11, 2013 through the present.
Request for Production 10: Any and all communications between or among you and any agents, attorneys, servants, employees, successors and Fluor and any agents, attorneys, servants, employees, successors of Fluor from April 11, 2013 through the present.
Request for Production 13: Any and all communications between or among you and any agents, attorneys, servants, employees, successors and Siemens and any agents, attorneys, servants, employees, successors of Siemens from April 11, 2013 through the present.
Request for Production 15: Any and all communications between or among you and any agents, attorneys, servants, employees, successors and LG&E and any agents, attorneys, servants, employees, successors of LG&E from April 11, 2013 through the present.

(DN 127-2 at 13-15.)

         In its memorandum opinion and order, the Court addressed Requests for Production 6-16 as a whole. The Court stated that, based on the information contained in the Motion to Compel Express and accompanying memorandum, the “only request for production for which plaintiffs have demonstrated some sort of relevancy is Request No. 10 and only for communications occurring between April 11, 2013 and April 11, 2014.” (DN 158 at 9.) The Court further noted:

Plaintiffs have not demonstrated why communications with respect to each entity described in Requests for Production 6-9 and 11-16 are relevant to its claims or alleged damages. Plaintiffs have not stated why they need “[a]ny and all communications” as opposed to communications regarding a specific topic; Requests for Production 6-16 are also overbroad for this reason.

(Id. at 10.)

         The Court also addressed Request for Production 21. Request for Production 21 requested “[a]ny and all documents concerning the performance of Stephen Kapsalis, including but not limited to, any performance reviews conducted by Express, Express' Board of Directors or the Sterling Group.” (DN 127-2 at 17.) The Court found that the relevancy of the documents sought via Request for Production No. 21 was not obvious and had not been established by plaintiffs at that juncture. (DN 158 at 10.) The Court concluded:

In sum, plaintiffs have not provided the Court with enough information with which to properly evaluate its Motion to Compel. Moreover, on their face and without more information, plaintiffs' discovery requests are overbroad and/or unduly burdensome. Consequently, the Motion to Compel will be denied.
That being said, at the December 3, 2015 hearing, the parties indicated they would work together to come to an agreement regarding the scope of plaintiffs' discovery requests; the Court expects them to do so and will consider any remaining dispute at a later time.

(Id. at 11.)

         2. February 26, 2016 Memorandum Opinion and Order (DN 204)

         On October 28, 2015, Sterling filed a “Motion for Protective Order, to Quash Subpoena, and for Sanctions, Including Cost-Shifting” (“Motion to Quash by Sterling”) (DN 118) seeking to quash a subpoena issued by plaintiffs out of this Court on September 21, 2015. On February 26, 2016, the Court issued a memorandum opinion and order granting in part and denying in part the Motion to Quash by Sterling. Specifically, the Court granted the Motion to Quash by Sterling insofar as it sought to quash the September 21, 2015 subpoena, but denied it insofar as it requested a protective order against future discovery and sanctions against plaintiffs. (DN 204 at 14.)

         Request 1 in the subpoena to Sterling sought “[a]ll correspondence (either electronic or otherwise) between or among Kevin Garland, Gary Rosenthal and/or Brad Staller and Stephen Kapsalis from December 1, 2012 to the present that has not previously been produced.” (Id. at 3.) In granting the Motion to Quash by Sterling with respect to Request No. 1, the Court noted that, while it had fewer qualms about the time period for which communications were sought, the request was “extraordinarily broad” because it was not limited to a specific subject matter. (Id. at 3-4.)

         Request 6 in the subpoena to Sterling sought “[a]ll correspondence (either electronic or otherwise) between Stephen Kapsalis and the Board of Directors for Express Group Holdings from December 1, 2012 to the present that has not previously been produced.” (Id. at 6.) In granting the Motion to Quash by Sterling with respect to Request No. 6, the Court stated:

Sterling and plaintiffs make the same arguments as they did with respect to Request No. 1. Plaintiffs also state that Kapsalis sent portions of the strategic planning documents of Vogt and Babcock to the Express Board of Directors. Plaintiffs assert that they are entitled to know if other documents or portions of documents were also sent to the Express Board of Directors. Plaintiffs assert that this request is narrowly tailored to obtain this information. The Court disagrees; the subject matter of the correspondence is not limited in any fashion. For the reasons stated heretofore, the Court finds that this request is overbroad because it is not limited in subject matter or scope.

(Id.)

         Request 12 in the subpoena to Sterling sought “[a]ny and all documents (either electronic or otherwise) concerning Stephen Kapsalis' performance as Chief Executive Officer of Express.” (Id. at 9.) In granting the Motion to Quash by Sterling with respect to Request 12, the Court found that this category of documents was not obviously relevant to plaintiffs' claims. (Id.)

         Request 17 in the subpoena to Sterling sought “[a] copy of any joint defense agreement between and/or among Stephen Kapsalis, Express and Sterling.” (Id. at 11.) In granting the Motion to Quash by Sterling with respect to Request 17, the Court rejected plaintiffs' claims of relevancy. (Id. at 12.)

         Nonetheless, in the memorandum opinion and order, the Court stated that it did not find that plaintiffs' requests have no merit whatsoever. (Id.) The Court further stated, “Rather, many of them are simply too broad and the Court is not in the best position to craft more narrow requests. At the hearing conducted by the Court on December 3, 2015, plaintiffs' counsel agreed to talk to opposing counsel about a ‘reasonable restriction' with respect to their discovery requests.” (Id.)

         3. March 2, 2016 Order (DN 208)

         In the March 2, 2016 order, the Court stated, among other things:

The Amended Scheduling Order (DN 186) is further amended as follows:
Fact discovery deadline: April 1, 2016*
*All discovery that is outstanding must be completed by this date. No additional discovery is permitted.
Plaintiffs' expert disclosure deadline: March 15, 2016 Defendants' expert disclosure deadline: April 22, 2016 Expert discovery deadline: May 20, 2016 Dispositive motion deadline: June 22, 2016

(DN 208 at 4.) This conference was not conducted on the record.

         4. March 7, 2016 Subpoena to Sterling and Related Order

         On March 7, 2016, Gallagher caused a subpoena (DN 226-2) to be issued to Sterling in conjunction with this action. In response, on March 21, 2016, Sterling filed a motion to quash (DN 226) in this action. In an order (DN 357) dated October 4, 2016, the Court denied the motion to quash without prejudice, finding that the motion to quash should have been filed in the district where compliance was required, presumably the Southern District of Texas. On November 30, 2016, Sterling filed a motion to quash in the Southern District of Texas; that motion to quash was then transferred to the Court and referred to the undersigned for a ruling. Rule 45 Motion to Quash March 7, 2016 Subpoena Served on Sterling by Respondents, and for Sanctions, The Sterling Group, L.P. v. Babcock Power, et al., Misc. Action No. 3:17-mc-1-CRS, (W.D. Ky. Nov. 30, 2016), ECF No. 1; Order, The Sterling Group, Misc. Action No. 3:17-mc-1-CRS (W.D. Ky. Jan. 20, 2017), ECF No. 5; Order Referring Motion to Magistrate Judge, The Sterling Group, Misc. Action No. 3:17-mc-1-CRS (W.D. Ky. Feb. 8, 2017), ECF No. 14. The Court has not yet issued a ruling on the motion to quash.

         5. September 15, 2016 Memorandum Opinion and Order (DN 352)

         On February 16, 2016, plaintiffs filed a “Motion to Compel Discovery from Defendant Express Group Holdings, LLC” (“Second Motion to Compel”) (DN 196) seeking documents and information in response to various interrogatories and requests for production served on Express. On September 15, 2016, the Court issued a lengthy memorandum opinion and order addressing the specific interrogatories and requests for production at issue; the Court will only recount relevant portions of same.

         In addressing the First Requests for Production, 17, 19, and 20 (requests related to documents that reference information concerning plaintiffs or that reference plaintiffs), the Court stated:

Plaintiffs state that these requests were an attempt to identify search terms that could lead to the discovery of plaintiffs' documents that may be in Express's possession that have been saved under different file names. In response, Express argues that plaintiffs have forensic images of the Kapsalis hard drives; Express also argues that a search of the Express server was conducted pursuant to the proposed Agreed Order (DN 99).
The Court understands that part of the purpose of the searches described in the proposed Agreed Order (DN 99) was to discover any of plaintiffs' proprietary, confidential, or trade secret information that may have been copied from the Kapsalis hard drives onto the Express server. At the hearing on the Motion for Contempt (DN 143) held on June 7, 2016, plaintiffs' expert Lacey Walker testified that the file name search conducted pursuant to the proposed Agreed Order (DN 99) would not have located a document belonging to plaintiffs that had been renamed, as plaintiffs now assert. (DN 279, pp. 210-12.) But plaintiffs' counsel was actively involved in the formation of the search parameters memorialized in the proposed Agreed Order (DN 99). Moreover, Mr. Walker was apparently retained by plaintiffs at or before the initiation of this lawsuit - his declaration was filed along with the complaint - and thus presumably could have provided input with respect to the searches described in the proposed Agreed Order. (See DN 1-1 [Decl. of Walker].) In other words, the proposed Agreed Order could have included a search for key terms, yet it did not.
The Court has heard no indication that plaintiffs' proprietary, confidential, or trade secret information was taken by Kapsalis other than via the Kapsalis hard drives - or at least no such allegation has been made clear to the Court. Plaintiffs are not entitled to yet another bite at the apple now. While the scope of discovery is liberal, there are limits and those limits now require the Court to consider proportionality to the needs of the case, including the amount in controversy and whether the burden or expense of the proposed discovery outweighs its likely benefit. Plaintiffs have not demonstrated that a search of the Express server would likely uncover documents that have not previously been or could have been discovered. Moreover, plaintiffs have not demonstrated that any of the documents were taken other than through the Kapsalis hard drives (or, at least it has not been made clear to the Court); in other words, plaintiffs have not shown that the likely benefit of the proposed discovery outweighs the burden and expense in this instance. Consequently, the Court finds that the Motion to Compel is due to be denied with respect to these requests for production.

(DN 352 at 12-14 [emphasis added].)[2]

         The Court also addressed Third Request for Production 1, which requested “[a]ll correspondence (either electronic or otherwise) between or among Kevin Garland, Gary Rosenthal and/or Brad Staller and Stephen Kapsalis from March 15, 2013 to the present that has not previously been produce[d].” (Id. at 23.) The Court stated:

Although the Court agrees that this request is overbroad and not limited in scope, Express claims that it has produced responsive documents. Therefore, the Court orders Express to either (1) produce correspondence regarding Babcock, Vogt Power, or HSRGs and aftermarket services between Kevin Garland, Gary Rosenthal and/or Brad Staller and Stephen Kapsalis from March 15, 2013 to April 11, 2014; or (2) identify by Bates number documents that have been produced that are responsive to same.

(Id. at 23-24.)

         The Court also addressed Third Request for Production 2, which requested “[a]ll correspondence (either electronic or otherwise) between Stephen Kapsalis and the Board of Directors for Express Group Holdings from March 15, 2013 to the present that has not previously been produced.” (DN 352 at 24.) The Court stated:

Again, while the Court agrees that this request is overbroad and not limited in scope, Express claims that it has produced responsive documents. Therefore, the Court orders Express to either (1) produce correspondence regarding Babcock, Vogt Power, or HSRGs and aftermarket services between Kapsalis and the Express Board of Directors from March 15, 2013 to April 11, 2014; or (2) identify by Bates number documents that have been produced that are responsive to same. (Id.)

         On October 14, 2016, Express filed a notice of compliance (DN 364) with the Court's September 15, 2016 memorandum opinion and order.

         6. December 8, 2016 Memorandum Opinion and Order (DN 381)

         On May 12, 2016, plaintiffs filed a “Memorandum in Support of Their Motion to Compel Discovery Regarding Dr. Andy Cobb” (“Motion to Compel Cobb”) (DN 260). On December 8, 2016, the Court granted in part and denied in part the Motion to Compel Cobb. (DN 381 at 8.) The Court granted the Motion to Compel Cobb insofar as it requested a listing of all the hash values of every file on the Express server at the time it was analyzed by Dr. Andy Cobb and One Source Discovery. (Id. at 7-8.) However, the Court expressly rejected plaintiffs' request for a copy of or access to the Express server. (See DN 260-1 at 5 [“Thus, Defendants have an obligation to produce a copy of the server . . . .”]; id. at 6 [“Plaintiffs respectfully move this Court to compel Defendants' [sic] to . . . provide access to the Express file server . . . .”]; see also DN 381 at 8.) Specifically, the Court denied the Motion to Compel Cobb insofar as it requested, “without limits, access to Express's server.” (Id.)

         B. Express Files Suggestion of Bankruptcy (DN 377) on November 11, 2016.

         On November 11, 2016, Express and its non-party affiliates filed a Suggestion of Bankruptcy (DN 377) with the Court. The Suggestion of Bankruptcy stated, in part:

PLEASE BE ADVISED that, as of the Commencement Date, any new or further action against Express is stayed pursuant to section 362 of the Bankruptcy Code (the “Automatic Stay”), which provides that the filing of the petition, among other things, “operates as a stay, applicable to all entities, of the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title ….” and of “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” 11 U.S.C. § 362(a)(1) & (3).
PLEASE BE FURTHER ADVISED that any procedural or other action against Express taken in this matter without obtaining relief from the Automatic Stay from the Bankruptcy Court may be void ab initio and may result in a finding of contempt against Plaintiffs. Express reserves the right to seek relief in the Bankruptcy Court from any judgment, order, or ruling entered in violation of the Automatic Stay.

(Id. at 1-2.) On November 23, 2016, Senior District Judge Charles R. Simpson III entered an order (DN 379) staying the action with respect to Express. Judge Simpson's order stated, “The Automatic Stay provision, 11 U.S.C. § 362, precludes any further action against Express in this matter, absent a lifting of the automatic stay by the bankruptcy court.” (Id.)

         C. On December 9, 2016, Plaintiffs File Suit Against Sterling in the Western District of Kentucky.

         On December 9, 2016, plaintiffs filed a lawsuit against Sterling in the Western District of Kentucky. Complaint, Babcock Power, Inc., v. The Sterling Group, L.P., Civil Action No. 3:16-cv-789-CRS (W.D. Ky. Dec. 9, 2016), ECF No. 1. This lawsuit is based largely on the same facts underlying this action.

         D. January 23, 2017 Subpoena Issued to Express Bankruptcy Trustee

         On January 23, 2017, a subpoena was issued out of the Western District of Kentucky with the caption of this case, Babcock Power, Inc., v. Stephen T. Kapsalis, Civil Action No. 3:13-cv-00717-CRS-CHL. (DN 390-2; DN 427 at 25.) The subpoena was issued to Scott P. Kirtley (“Kirtley”), the bankruptcy trustee for Express[3]; the place of compliance was Tulsa, Oklahoma and the date and time of compliance was January 27, 2017 at 10 a.m. (DN 390-2.) The subpoena was signed by Gallagher. (Id.) The subpoena requested the following:

1. Copies of any insurance policies from 2012 to 2016 including commercial general liability policies; professional liability or errors and omissions policies; employment practices liability insurance policies; and, directors and officers liability policies.
2. Copies of any documents concerning the formation or operation of CCCG, LLC.
3. Copies of any agreements with Stephen T. Kapsalis (“Kapsalis”) including any agreements entered upon the termination of Kapsalis' employment with Express.
4. Copies of any agreement with Middleton Reutlinger including agreements to pay the legal fees of Kapsalis.
5. Copies of any agreement with Clark Martin including agreements to pay the legal fees incurred by him on behalf of Kapsalis, Express or The Sterling Group.
6. A copy of Kapsalis' personnel file.
7. Copies of any documents concerning The Sterling Group's ownership interest in Express and the disposition of that interest.
8. Copies of any documents concerning or reflecting payment of a management fee to The Sterling Group.
9. Copies of any indemnification agreement between/among Sterling, its lenders and Express Group Holdings and its lenders concerning the BPI/Vogt Litigation (WDKY 3:13-CV-717-CRS-CHL).
10. Copies of any document concerning a reserve fund to pay for any potential judgment in the BPI/Vogt Litigation (WDKY 3:13-CV-717-CRS-CHL).
11. Copies of any agreement between/among Sterling its lenders and Express Group Holdings and its lenders concerning payment of any judgment in the BPI/Vogt Litigation (WDKY 3:13-CV-717-CRS-CHL).
12. Records of payments made to Middleton Reutlinger.
13. Records of payments made to Schiff Hardin.
14. Records of payments made to Clark Martin.
15. Copies of any joint defense agreements between Express Group Holdings and Stephen T. Kapsalis.
16. Copies of any joint defense agreement between Express Group Holdings and The Sterling Group.
17. Documents concerning any sales made by Sound Technologies to Vogt Power during 2013.
18. Sales Force data for Express Group Holdings' sales and sales efforts with regard to Calpine, Black & Veatch, Fluor, Siemens and LG&E from 2013 through 2016.
19. All documents relating to Express' bid for the Wolf Data ...

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