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Companion Health Services, Inc v. George Kurtz and Mary Kay Reid

March 29, 2012



The opinion of the court was delivered by: Stahl, Circuit Judge.

Before Selya, Boudin and Stahl, Circuit Judges.

After three years of drawn-out proceedings in this contract dispute between plaintiff-appellee Companion Health Services, Inc. (Companion) and defendants-appellants George Kurtz and Mary Kay Reid and their various business entities, the district judge imposed a default as to all counts based on discovery violations by the defendants. The district court eventually lifted the default except as to Companion's veil piercing claim, allowing the substantive claims to go to trial. After a jury found for Companion and awarded over $1 million in damages, Kurtz and Reid, who were personally liable, appealed the district court's various orders pertaining to the default on the veil piercing claim. In this close case, because the district court imposed such a severe sanction based on a very limited slice of the relevant facts, we vacate the sanction and remand for further proceedings. We, however, deny Companion's cross-appeal for prejudgment interest.

I. Facts & Background

This appeal relates to the discovery process during the litigation of a Massachusetts state law contract dispute between Companion and George Kurtz and Mary Kay Reid (together, the individual defendants), as well as Majors Medical, Inc., Majors Mobility, Inc., Majors Mobility-Zanesville, LLC, and MMS Northern Detroit, Inc. (the corporate defendants) stemming from a deal to sell durable medical equipment (DME) in Wal-Mart stores. Companion was authorized to license space within Wal-Mart stores to companies that sell DME. In 2005 and 2006, Companion entered into licensing agreements with the defendants for three locations in Ohio and Indiana. In January 2007, Companion contracted with the defendants to take over twenty additional locations from a failing licensee, entering into what the parties denote as "the Master Agreement."*fn1 By March 31, 2007, the defendants, having failed to perform, shut down operations in all locations. Thereafter, on November 7, 2007, Companion sued the defendants in the United States District Court for the District of Massachusetts, alleging various breach of contract and related tort claims under state law,*fn2 and, significantly, requesting to pierce the corporate veil, such that the liability of the companies would also be imposed on the individual defendants, the two principals of all of the companies.*fn3

The litigation began fairly smoothly. After the complaint and answers were filed in November and December of 2007, respectively, the district court held a scheduling conference on January 28, 2008. The parties submitted their initial disclosures on schedule on February 29, 2008. However, on May 6, 2008, the day after submitting their first responses to Companion's interrogatories and document requests, the defendants' attorneys (from Hanify & King) moved to withdraw, citing an "irretrievable breakdown in the attorney-client relationship."*fn4 Companion opposed the motion to withdraw, noting that local rules prevented the corporate defendants from appearing before the court without representation, and urged the court to deny the motion unless the withdrawal could be contingent upon the appearance of successor counsel. The district court agreed, noting that the motion would not be allowed until successor counsel had filed an appearance.

Companion's attorney felt that the May 5 responses to the interrogatories and document requests, which were in large part related to the veil piercing claim, were inadequate, and relayed this concern to Hanify & King on May 14, 2008, via a discovery letter.*fn5 On May 19, 2008, Hanify & King told Companion's attorney that they were close to getting successor counsel and that it would respond to the discovery letter by May 23, 2008. However, they did not respond, and on June 2, 2008, Companion filed its first motion to compel responses, asserting that the responses had been inadequate and that not a single document had been produced. The district court did not immediately rule on the motion.

Four months after Hanify & King's motion to withdraw, the defendants finally succeeded in obtaining new counsel, and attorneys from Crowe & Dunn filed their appearances on September 2, 2008.*fn6 On November 4, the district court granted Hanify & King's motion to withdraw.

Proceeding with discovery, Companion's attorney and the defendants' attorneys from Crowe & Dunn agreed that Kurtz and Reid would be deposed on November 11 and 12, 2008, in Boston.*fn7 On November 10, Crowe & Dunn called Companion's counsel and informed him that Kurtz and Reid had decided they would not attend their depositions. After confirming on November 17 that Kurtz and Reid continued to refuse to come to Boston for their depositions, on November 19, Companion filed a motion to compel the depositions of Kurtz and Reid in Boston. The individual and corporate defendants opposed the motion collectively, making jurisdictional arguments as to why the depositions should not take place in Boston.

On December 5, while the motion to compel depositions was pending, Crowe & Dunn provided Companion with a sparse supplemental response to the pending interrogatories and document requests, which did not give Companion a single new piece of information.*fn8 On December 18, 2008, the parties filed a joint motion to extend the scheduling order, citing the difficulty in carrying out the depositions.*fn9 On December 22, 2008, the district court granted the motion to compel the depositions without explanation, ordering that the individual defendants appear for their depositions in Boston within forty-five days. A day later, on December 23, the district court granted the December 18 motion to extend the scheduling order, setting a new deadline of February 27, 2009, for the end of discovery.

On January 7, 2009, allegedly in reliance on promises by Crowe & Dunn that discovery responses beyond the December 5 supplemental response were forthcoming, Companion withdrew its motion to compel discovery responses. The motion had been filed on June 2, 2008, and was never ruled on by the district court. However, no further responses came. With little progress being made, on March 11, Companion renewed its motion to compel responses, which was opposed separately by each of the individual defendants as well as by the corporate defendants, largely for the same reasons as were stated in their initial objections.*fn10

Meanwhile, Companion had sought the names and addresses of the corporate defendants' former employees in its interrogatories; this information was never provided. Companion eventually obtained the names of two former employees from a non-involved third party and scheduled their depositions to be taken on April 3, 2009. On April 2, 2009, the defendants filed a motion for a protective order, seeking to prevent Companion from conducting the two depositions the next day. The defendants' objection to the depositions was that Kurtz and Reid allegedly would have been unavailable to listen in on the phone. On April 3, 2009, the day for which the depositions were scheduled, Companion filed its opposition to the motion for the protective order, and the judge denied the motion without explanation.

The depositions went forward on April 3, and during the depositions, Companion obtained the names of additional former employees. On April 14, 2009, Companion filed a motion to extend the time for filing summary judgment petitions in order to allow time to depose those additional employees. The next day, the district court granted the motion to extend.

On May 20, 2009, the defendants filed five separate motions for summary judgment, arguing that it was clear that the contract with Companion did not contain all material terms and was therefore not binding on them, and further, that piercing the corporate veil was inappropriate.*fn11 On June 26, 2009, Companion filed its opposition to the motions for summary judgment, arguing that an agreement ...

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