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In re Modern Plastics Corp.

United States District Court, W.D. Michigan, Southern Division

September 22, 2017




         This is a consolidated appeal from several orders of the Bankruptcy Court of the Western District of Michigan. Modern Plastics Corporation filed for bankruptcy under Chapter 7 of the Bankruptcy Code. In connection with the bankruptcy proceedings, one of Modern Plastics' creditors, New Products Corporation, filed an adversary proceeding against the former bankruptcy trustee, Thomas Tibble. As part of the discovery process in the adversary proceeding, New Products' counsel, Mark Demorest, served subpoenas duces tecum on seven non-parties: Steven M. Siravo; Bank of America, NA (“BOA”); Theodore B. Sylwestrzak; John G. Cameron, Jr.; Dickinson Wright PLLC; Evergreen Development Company, LLC; and 3 OCIR 337, LLC. Appellants are New Products and Demorest. Appellees are the seven non-party recipients of the subpoenas (“Recipients”).

         In this appeal, Appellants challenge the bankruptcy court's order requiring New Products and Demorest to pay $166, 187.50 of Recipients attorney's fees and expenses for responding to the subpoenas. Appellants also challenge the bankruptcy court's orders finding them in contempt for failing to pay the aforementioned amount, and ordering them to pay $4, 275 of Recipients' attorney's fees and costs for bringing a motion for contempt. Having considered the parties' briefs and the record, the Court finds that oral argument is unnecessary. For the reasons stated herein, the Court affirms the bankruptcy court's orders.

         I. Background

         A. Adversary Proceeding

         Modern Plastics ceased operations in 2008 and filed its petition for relief under Chapter 7 of the Bankruptcy Code in January 2009. Tibble was appointed to be the trustee for the bankruptcy estate. The assets in the estate included 12 acres of real estate in Benton Harbor, Michigan, on which sat Modern Plastics' offices, warehouse, and a manufacturing facility (the “Property”). At the time, the Property was encumbered by mortgages held by Bank of America (“BOA”) and tax liens. Tibble attempted to sell the Property several times in 2009, with BOA's consent, but he was not successful. 3 OCIR 337 and Evergreen were potential purchasers of the Property. BOA, 3 OCIR 337, and Evergreen were represented by the law firm Dickinson Wright.

         The condition of the buildings on the Property deteriorated substantially over the next few years as a result of looting, vandalism, and lack of maintenance. In March 2013, New Products purchased BOA's mortgages on the Property. Several months later, New Products brought an adversary action against Tibble, claiming that he breached his fiduciary duties by failing to maintain and protect the Property. Demorest represented New Products in the adversary proceeding.

         B. Subpoenas

         To obtain information relevant to New Products' claims against Tibble, Demorest issued subpoenas duces tecum to Dickinson Wright, Dickinson Wright attorneys Sylwestrzak and Cameron, BOA, and BOA Vice President Steven Siravo.[1] The subpoenas sought 36 categories of documents spanning a nine-year time period dating back to January 1, 2005. Demorest served the subpoenas on August 28, 2014, and requested compliance within a little over two weeks, due to deadlines in the adversary proceeding. The scheduling order in the adversary proceeding required the parties to file any motions for summary judgment by September 29, 2014. Demorest apparently wanted to review any documents produced in response to the subpoenas before the deadline for filing a motion for summary judgment.

         On September 4, Recipients' counsel, Christina K. McDonald, e-mailed Demorest and requested an extension of time for compliance with the subpoenas until October 31, 2014. She told Demorest that it would take “quite some time and work to determine what might exist” in response to the subpoenas. (PageID.673.)[2] Demorest replied the next day, suggesting that they talk after McDonald “had a chance to review the Subpoena.” (PageID.672.) McDonald responded that the subpoenas were self-explanatory, and she wanted to know if Demorest would grant an extension. (PageID.671.) Demorest told her that they could discuss an extension, but he did not understand why an additional six weeks would be necessary. (PageID.670.) McDonald explained that an extension was necessary because of the scope of the subpoena request, the amount of preliminary work required, and the unavailability of personnel. (Id.) McDonald suggested a procedure whereby Recipients would file a written response to the subpoena, including any objections and/or a motion for a protective order, by September 26. (Id.) In addition, Recipients would propose a date for inspection and copying of non-privileged documents, which McDonald anticipated would be October 31. McDonald offered to inform Demorest before September 26 if she believed that the documents would not be ready by October 31. (Id.)

         Demorest replied about a week later, on September 11. He told McDonald that he would agree to extend the time for a written response to the subpoenas to September 23, but that he needed the documents responsive to the subpoena no later than October 10. (PageID.676.)

         McDonald wrote Demorest on September 15 and expressed concern that an October 10 deadline would be a “very short time frame” for responding to the subpoenas, given the “enormous breadth and scope of the requests and the amount of work that will be required to assess, gather and produce potentially responsive materials[.]” (PageID.770.) She also expressed “very real concerns about the exceedingly broad scope of the requests, the undue burden they place on Respondents, the obvious request for what [Demorest] must reasonably know to be privileged communications, and the ultimate purpose for [his] requests.” (PageID.771.) McDonald indicated that the recipients of the subpoenas would be willing to proceed based on the assumption that both sides would be able to agree on a protection order that would, among other things, provide for the reimbursement of costs. (Id.) McDonald also provided the recipients' formal, written objections to the subpoenas. Among other things, Recipients objected to production of documents without compensation for the costs and expenses of copying and producing the requested documents, including reasonable attorney's fees. (See Response of Steven Siravo and BOA to Subpoena, PageID.489.)

         Demorest did not respond immediately. Four days later, however, he issued a subpoena to 3 OCIR 337, another client of Dickinson Wright. This subpoena requested 58 categories of documents dating back to January 1, 2005, including 36 of the same categories in the other subpoenas. The subpoena to 3 OCIR 337 specified October 10 as the deadline for compliance.[3]

         On September 23, Demorest contacted McDonald and complained that BOA and Dickinson Wright had possessed their subpoenas for nearly three weeks, which was “more than adequate time to gather the requested information.” (PageID.317.) He offered to “discuss the most efficient way to get the requested documents[.]” (Id.) McDonald responded that three weeks had not been enough time, but that she would provide responsive documents as soon as she was reasonably able to do so. She also promised to provide a draft of a stipulated protective order. (Id.)

         On October 2, McDonald provided Demorest with the promised draft of the protective order, which provided that New Products “agrees to compensate Respondents for all actual costs and expenses incurred in copying and producing the requested documents, but those costs shall not include attorney's fees or lay labor costs unless those expenses are approved by the Court pursuant to a request or motion separate from this Stipulated Order.” (PageID.1135.)

         In an email to Demorest, McDonald explained the steps that had been taken thus far to respond to the subpoenas, including: identifying the relevant custodians at BOA and issuing them litigation holds, receiving BOA's paper files related to Modern Plastics, running a search of the relevant custodians' email messages using the term “Modern Plastics, ” creating a list of attorneys and staff at Dickinson Wright working on matters related to Modern Plastics, issuing a litigation hold to these individuals and contacting them to determine their involvement in the matters related to Modern Plastics, identifying the individuals at Dickinson Wright most likely to have responsive materials, and searching the email files of these individuals using the term “Modern Plastics.” (PageID.688-689.) The searches had turned up six boxes of documents and nearly 8, 000 email files, not including BOA's email correspondence. McDonald explained that it would not be possible to review all of this material by October 10, but she offered to produce documents on a “rolling basis.” (PageID.689.) She anticipated that review of the hard-copy documents would be complete by October 15, but that the email correspondence would take longer to review because much of it would be privileged or not subject to production. She suggested that Demorest could speed up the process by proposing additional search terms or limiting the list of custodians. Otherwise, she would proceed as proposed. (Id.)

         Demorest did not respond to McDonald's email. On October 13, he issued a subpoena to Evergreen Development Company, another potential purchaser of the Property and a client of Dickinson Wright. This subpoena requested 57 categories of documents dating back to January 1, 2005.[4]

         Near the end of October, having received no response from Demorest to her concerns about the scope of the subpoenas and the difficulty in complying with them, to her proposed protective order, or to her suggestions for modifying the subpoenas, McDonald notified Demorest that BOA's vendor had completed an initial search of BOA's emails and identified nearly 13, 000 potentially-responsive documents containing the search term “Modern Plastics.” (PageID.688.) McDonald again invited Demorest to limit the scope of his requests and warned that “BOA's review is likely to be quite expensive.” (Id.) She also notified him of her understanding that New Products had agreed to reimburse BOA for its costs of compliance.

         Another two months passed without word from Demorest. In late December, he attempted to contact McDonald to arrange a conference call. She responded by email on January 5, 2015, explaining that she had not received any response to her suggestion to limit the scope of responsive documents, so BOA and Dickinson Wright went ahead with their review. (PageID.832.) McDonald expected that documents responsive to each of the subpoenas would be ready for production by mid to late January, subject to the terms of a protective order. She told Demorest that BOA had incurred in excess of $100, 000 in fees and expenses, and that Dickinson Wright had incurred in excess of $50, 000 in fees and expenses. 3 OCIR 337's and Evergreen's expenses were “nominal in comparison.” (PageID.833.) She explained that none of the Recipients would turn over their documents without payment.

         Apparently, Demorest called McDonald the next day and objected to the costs. A month later, on February 2, Demorest sent McDonald a letter contending that: Recipients' request for reimbursement of $150, 000 in costs was “completely unreasonable”; Recipients were not entitled to reimbursement under Rule 45 of the Federal Rules of Civil Procedure because the court had not ordered them to comply with the subpoena; and Recipients had waived the right to seek costs by raising only “general” objections to the subpoenas. (PageID.694-695.)

         C. Costs of Compliance with the Subpoenas

         Recipients subsequently filed a motion for a protective order that sought reimbursement of approximately $180, 000 in fees and expenses incurred by Recipients for responding to the subpoenas. New Products opposed this motion and filed a motion to compel Recipients to turn over the relevant documents and to hold Recipients in contempt for failing to comply with the subpoenas. The bankruptcy court held a hearing on the parties' motions on April 16, 2015. At the hearing, Demorest acknowledged that his client would have to pay some of the costs for complying with the subpoenas, particularly copying costs, but not attorney's fees or labor costs. (4/16/2015 Hr'g Tr. 58-59, PageID.942-943.) After the hearing, the court granted the motion for a protective order and denied the motion to compel as moot. The bankruptcy court determined that New Products would bear some of the burden of the costs of compliance, but reserved the question as to the amount and nature of the costs that would be shifted to New Products or its counsel.

         Recipients turned over documents responsive to the subpoenas to Demorest and New Products on May 6, 2015. On June 24, the bankruptcy court held an evidentiary hearing on the issue that it had reserved. After the hearing, the court held that New Products and Demorest would be jointly and severally liable to BOA in the amount of $104, 770.00, and jointly and severally liable to 3 OCIR 337 and Evergreen in the amount of $61, 417.50. (7/23/2015 Mem. of Decision & Order, PageID.106.) These amounts included the fees paid by BOA to its third-party search vendor, Huron Consulting Group, and a portion of the legal fees charged by Dickinson Wright to BOA, 3 OCIR 337, and Evergreen in connection with responding to the subpoenas. The court directed Appellants to pay these sums to Dickinson Wright, who would distribute the money to its clients. (Id.)

         D. Reconsideration & Motion to Stay

         Appellants moved for reconsideration of the order requiring them to pay the subpoena expenses and filed a motion to stay enforcement of the order until 14 days after a decision on the motion for reconsideration. The court denied the motion for reconsideration and the motion to stay at the same time. (8/26/2015 Mem. of Decision & Order, PageID.177.)

         E. Contempt Proceedings

         Dickinson Wright subsequently asked New Products and Demorest for payment in accordance with the court's order. Appellants refused to pay in full, but proposed a payment plan. Recipients filed a motion to hold Appellants in contempt. In response, Appellants filed affidavits claiming that Demorest did not have the full amount and that New Products could not pay in full without suffering “substantial hardship.” The court held a hearing on the contempt motion and concluded that Appellants' responses were inadequate as a defense to contempt because they were “non-specific and conclusory[.]” (10/14/2015 Interim Order Regarding Contempt Mot., PageID.338, 339.) However, the court permitted Appellants to file a supplemental response before the court ruled on the contempt motion.

         In their supplemental response, Appellants' provided no further details regarding their inability to pay or the hardship that New Products would face if required to make payment in full. Instead, they asserted that New Products had made arrangements to pay the full amount due. (PageID.342.) Appellants proposed to make full payment to the Clerk of the Court “as an appeal bond, ” and filed a motion to stay collection pending appeal. (Id.) They contended that payment to the Clerk of the Court would render the motion for contempt moot. (PageID.343.)

         The bankruptcy court held that the supplemental response “establishes, rather than refutes, Mr. Demorest's and New Products'[] contempt.” (11/2/2015 Order Finding Contempt, PageID.22.) The court found them in contempt of the July 23, 2015 order and directed them to pay the full amount due to Dickinson Wright within seven days. The court also awarded Recipients their reasonable attorney's fees for bringing the motion for contempt. (PageID.24.) Before the court ruled on Appellants' motion for a stay pending appeal, Appellants' paid the full amount due under the bankruptcy court's July 23, 2015 order to Dickinson Wright. The court subsequently held a hearing on the motion for a stay and denied it because Appellants had already paid what was due. (11/16/2015 Order Denying Stay Pending Appeal, PageID.394.)

         Dickinson Wright submitted an affidavit and other documents seeking approximately $25, 000 in fees for bringing the motion for contempt on behalf of its clients. After considering these documents and the parties' arguments at a hearing, the bankruptcy court ordered New Products and Demorest to pay Dickinson Wright $4, 275.00 for bringing the contempt motion. (11/18/2015 Order Imposing Contempt Award, PageID.397, 401.) This amount was in line ...

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