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Buchl v. Gascoyne Materials Handling & Recycling, LLC

United States District Court, D. North Dakota

June 25, 2019

James Buchl and Doren Chatinover, Plaintiffs,
v.
Gascoyne Materials Handling & Recycling, LLC, Defendant.

          ORDER RE MOTIONS TO COMPEL

          Charles S. Miller, Jr. United States Magistrate Judge.

         Before the court are motions to compel discovery, two by the defendant and one by the plaintiffs. For the reasons set forth below the motions are granted in part and denied in part.

         I. BACKGROUND

         This action arises out of a business relationship between plaintiffs, James Buchl and Doren Chatinover, and defendant, Gascoyne Materials Handling & Recycling, LLC, (herein “defendant” or “Gascoyne”) that was never formally documented and went wrong. The parties have differing views as to what the nature of the relationship was and what caused it to end. Plaintiffs now are suing Gascoyne on a variety of claims and Gascoyne has countersued plaintiffs. Some discussion of the positions of the parties and the claims being asserted is necessary given the disputes over the scope of discovery.

         It appears that the relationship between the parties that is now in dispute began when Buchl and another individual named Broe teamed up with Gascoyne to do electrical and instrumentation work on a large construction project at the refinery in Mandan, North Dakota, which at the time was owned by Tesoro. Gascoyne was and still is a limited liability company that is 100% owned by its two members, William Pladson and William Dahlin. It got its start providing landfill and recycling services in North Dakota, with its principal office located in Dickinson, North Dakota. Gascoyne did not have the technical expertise to do the work on the Tesoro project. Buchl and Broe provided that. What Gascoyne did have that Buchl and Broe did not were the financial resources to fund the work and staff to provide home office support in terms of accounting, payroll, securing of insurances, etc.

         The work on the Tesoro project was done under the auspices of a new division of Gascoyne entitled GMHR Field Services (“GMHR”) with Buchl and Broe being independent contractors to GMHR. Gascoyne agreed to pay Buchl and Broe an hourly salary for their work in staffing and managing the project along with a 50% share of the profits at the end.

         Because the Tesoro refinery project was a success, Buchl was interested in doing future projects with Gascoyne and, when Broe decided to pursue other opportunities, Buchl brought Chatinover on board. The two of them then proceeded to do other projects with Gascoyne during the period from 2010-2017 and it is this work that is now in dispute.

         Plaintiffs contend that they had an oral agreement with Gascoyne that they collectively would have a 50% partnership interest in GMHR. Plaintiffs claim that, after there was disagreement over the reconciliation of the amounts owed them on the next big project after Tesoro, they attempted to memorialize their relationship in a 2012 draft agreement that Buchl prepared but was never signed by the parties. While not signed, plaintiffs contend this draft agreement governs the relationship of the parties because, according to them, Pladson agreed to sign it, but ultimately never did, and the parties subsequently acted in conformity with terms of the unsigned agreement-at least in their view. Among other things, the unsigned 2012 draft agreement (which both parties refer to the “2012 Goal Sheet”) provided for the following:

• There would be 50%/50% split of profits and assets arising out of GMHR activities between Gascoyne and plaintiffs on all GMHR activities.
• Plaintiffs would diligently pursue new projects and provide on-site management on new projects acquired.
• Gascoyne would provide home office support in terms of accounting, payroll, and obtaining necessary insurances.
• In recognition that GMHR would be operating as a startup enterprise and may go periods between projects, plaintiffs would be paid a salary of between $12, 000 and $14, 000 per month while there was project work ongoing, and a $10, 000 per month when no project was underway with the latter being a draw against outstanding and future profits payable to the plaintiffs.
• Profit sharing payments would only be made when there is money to support the payments and not before there is a positive cash flow on a project.[1]

         Plaintiffs contend that, for the next several years, Pladson provided reconciliation statements that purported to set forth the project income, expenses, and the amount of profits to be split on projects completed during the past year. Plaintiffs allege that, from the very beginning, Pladson claimed improper and/or inflated expenses in his yearly reconciliations so as to reduce the profits that would be payable to plaintiffs and that this ultimately caused the relationship to deteriorate to the point where by late 2016 Pladson and Buchl were no longer talking. Plaintiffs further claim that, in early 2017, Pladson caused GMHR to stop paying them completely. Plaintiffs contend that, because of their not being paid and Pladson's accounting chicanery, they were effectively frozen out of the partnership and for this reason had to start their own company, ION Field Services, LLC. (“ION Field Services”).

         Plaintiffs assert the following claims against Gascoyne: (1) a declaration that plaintiffs are entitled to 50% of GMHR's profits; (2) disassociation of partnership; (3) breach of fiduciary duty; (4) breach of joint venturer fiduciary duty; (5) breach of contract and/or implied contract; (6) appointment of receiver; (7) court ordered accounting; (8) court ordered dissolution of partnership; (9) unjust enrichment; (10) conversion; and (11) deceit/fraud. The damages plaintiffs claim are sweeping and include:

• The actual amount of their 50% share of profits on GMHR projects from 2011 through 2016 based on accurate accounting information, which amount they believe should be in the range of $3.5 million.
• 50% of the value of all GMHR assets.
• Unpaid salary payments.
• 50% of the profits on all GMHR projects that were ongoing in 2017 when they terminated their relationship with (or, in their spin, were “forced out” out of) GMHR.
• Lost future profits that would have been earned by GMHR but for the breakup.
• Startup costs for ION Field Services in an approximate amount of $1 million.

         Gascoyne denies there ever was any partnership with plaintiffs. Gascoyne claims plaintiffs were at all times independent contractors of GMHR, as a division of Gascoyne, and on a project-by-project basis were paid monthly amounts in compensation for their services along with a 50% share of any profits after the deduction of projects costs. In support, Gascoyne points to, among other things, the fact it did not sign the 2012 draft agreement and certain tax information that is consistent with plaintiffs being nothing more than independent contractors. Gascoyne specifically denies that plaintiffs ever obtained any ownership in the assets of GMHR.

         In addition to denying the existence of any partnership or joint venture, Gascoyne claims that the expenses it used to determine the amount of plaintiffs' share of any profits were not only legitimate but likely understated, so that any new reconciliation would likely result in a reduction of the amounts payable to plaintiffs. Gascoyne further asserts a defense of accord and satisfaction based upon plaintiffs' acceptance of the profit amounts tendered by Gascoyne with respect to a number of the projects. For other projects, Gascoyne claims that plaintiffs are not entitled to any further compensation given the termination of their relationship with Gascoyne and/or their failure to properly perform the independent contract work they agreed to perform. Finally, Gascoyne contends that, if it should be determined that plaintiffs had a partnership or joint venture relationship with it, then plaintiffs must bear their share of the losses for the projects that suffered losses.

         With respect to its counterclaim, Gascoyne contends that, beginning in 2016, plaintiffs started doing less and less work, delegating much of what they should have been doing to persons they had hired. According to Gascoyne, this included delegating the preparation of bids on several projects to Christopher Boushey, who did not have sufficient background and experience to prepare bids on large industrial or commercial projects. Gascoyne claims this resulted in GMHR underbidding several projects and losing a considerable amount of money. Gascoyne further claims that, after GMHR started losing money, it discovered a number of instances of alleged misconduct on the part of plaintiffs. According to Gascoyne, these included submission of false or padded expenses for reimbursement, submission of fraudulent invoices in the name of entities that plaintiffs allegedly had an interest in or other relationships with for work that was not performed or for prices that were inflated, diversion of work to others with whom plaintiffs had a relationship rather than seeking to obtain that work on behalf of GMHR, and indications that plaintiffs were intending to terminate their relationship with Gascoyne. Gascoyne claims it was at this point that plaintiffs (1) voluntarily terminated their relationship with Gascoyne and in the process of doing so wrongfully kept information, equipment, and other assets that belong to it, (2) moved forward with their competing business (ION Field Services) that they had set up several months earlier, and (3) soon thereafter merged with another entity, Royal Electric LLC, that earlier had been formed by Boushey while doing work for GMHR.

         Based on these allegations, Gascoyne asserts claims for breach of contract, fraud/deceit, conversion, unjust enrichment, declaratory judgment, breach of fiduciary duty, and breach of partnership duties. Gascoyne seeks compensation for (1) the value of the assets it claims plaintiffs took when they terminated their relationship, (2) the losses GMHR suffered as a result of underbids on several jobs, (3) the failure of plaintiffs to perform work commensurate with the salaries they were paid, (4) plaintiffs' share of project losses if they are successful in proving the existence of a partnership or joint venture, and (5) damages resulting in GMHR having to close up its operations, purportedly as result of plaintiffs forming a competing business and stealing employees and customers.

         II. GOVERNING LAW

         Rule 26(b)(1) of the Federal Rules of Civil Procedure addresses the scope of discovery in civil actions. Specifically, it provides:

Unless otherwise limited by court order, the scope of discovery is as follows: Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense and proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties' relative access to relevant information, the parties' resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit. Information within the scope of discovery need not be admissible in evidence to be discoverable.

See also Colonial Funding Network, Inc. v. Genuine Builders, Inc., 326 F.R.D. 206, 211 (D.S.D. 2018) (“The reason for the broad scope of discovery is that ‘[m]utual knowledge of all the relevant facts gathered by both parties is essential to proper litigation. To that end, either party may compel the other to disgorge whatever facts he has in his possession.' 8 Wright & Miller, § 2007, 39 (quoting Hickman v. Taylor, 329 U.S. 495, 507-08 (1947)”). “Discoverable information itself need not be admissible at trial; rather, the defining question is whether it is within the scope of discovery.” Colonial Funding Network, 326 F.R.D. at 211 (citing Fed.R.Civ.P. 26(b)(1)).

         Rule 37 of Federal Rules of Civil Procedure sets forth the recourse available to a party whose requests for discovery go answered. Specifically, it provides that, “[o]n notice to other parties and all affected persons, a party may move for an order compelling disclosure or discovery.” Fed.R.Civ.P. 37(a)(1). It further provides that “[i]f a party fails to make a disclosure required by Rule 26(a), any other party may move to compel disclosure and for appropriate sanctions.” Fed. R. Civ. P 37(a)(3)(A). Finally, it provides that a party may move to compel a response from a party who fails to answer interrogatories or produce requested documents. Fed.R.Civ.P. 37(a)(3)(B)(iii)-(iv).

         III. PLAINTIFFS' MOTION TO COMPEL

         Plaintiffs in their motion to compel seek Gascoyne's compliance with respect to the parts of Plaintiffs' Request for Production of Documents (Set No. 1) (Doc. No. 52-7) set forth below:

A. Request No. 3
REQUEST NO. 3: Produce all bank statements, canceled check images and images of deposited checks for a time period of January, 2010 through present for all bank accounts held in the name of Gascoyne or GMHR Field Services.

         Gascoyne claims that the only bank account information that is relevant is that related to GMHR and that it has gone through the requested information and turned over that which it claims is related to GMHR. But there are a number of problems with Gascoyne's lack-of-relevancy argument not only with respect to the bank records that are the subject of this document request but also a number of the others requests for financial information.

         First, it appears GMHR, even as a “division” of Gascoyne, was not a standalone operation. Rather, Gascoyne provided financial and administrative support for the GMHR projects and part of the expenses claimed for this support include home office expense, insurance costs, interest on the project financing, shop charges, charges for use of equipment that Gascoyne claims it owned, etc. Plaintiffs claim that some of these expenses have been inflated or were otherwise not properly chargeable. This alone makes relevant at least some of Gascoyne's financial information (including bank records) that document these expenses.

         Second, some of the expenses at issue would not be totally GMHR's expenses or totally Gascoyne other operations' expenses; some allocation is required. And, the determination what allocation is fair requires looking at the bigger picture, including at least some of Gascoyne's financial and accounting information.

         Third, and particularly problematic with respect to the request for bank records, is the fact that Gascoyne did not bother to use a separate checking account for GMHR-related operations. And, given the nature of what is in dispute, plaintiffs are not required to accept Gascoyne's after-the-fact sorting of what it claims are bank records related to GMHR's activities and what records are not.

         Finally, based on what limited information is before the court, it does appear that Pladson in several instances claimed expenses in the yearly reconciliations that are at best questionable.

         While plaintiffs' need for broad financial discovery is clear enough from the foregoing, plaintiffs have supported their claim of need for broad financial discovery with a letter from the accounting firm that they have employed to conduct a forensic audit. In that letter, plaintiffs' forensic accounting firm has stated it will need not only the bank account information that is the subject of this document request, but also much of the financial information that is the subject of plaintiffs' motion to compel, in order to evaluate whether there has been a proper accounting for income, expenses, and profits by Gascoyne, and, if not, what amounts are now owed plaintiffs.

         As for Gascoyne's contention that allowing discovery of all of its bank account information will give plaintiffs access to confidential, proprietary, and trade secret information that has nothing to do with GMHR's activities, Gascoyne has put itself in this position by (1) not having a clearly defined agreement with plaintiffs, and (2) by the manner in which it thereafter conducted its business. Further, it appears Gascoyne has closed GMHR's operations and it failed here to demonstrate that it is now competing with plaintiffs or ION Field Services. Given these points, Gascoyne's concerns can reasonably be alleviated by the bank record information being treated either as “attorneys eyes only” or “confidential” as set forth below.

         Finally, to address what also may be in dispute, Gascoyne need only make the documents available in the manner in which they are kept for inspection and copying at one location-either where the bulk of the records are held or at the offices of its attorneys.[2]

         COURT RULING: Gascoyne shall comply with Request No. 3 in accordance with the foregoing, but may designate (1) the bank statements as “attorney eyes only, ” but subject to the proviso that plaintiffs' attorneys or their forensic experts may inquire of plaintiffs about specific matters in the statements that reasonably may relate to GMHR's activities, and (2) all of the other documents as “confidential” and subject to the court's existing confidentiality order. Also, because the volume of records may be large and both parties being required to supplement their discovery responses based on what follows, the court will give both parties 30 days to provide the information that the court is ordering must be produced.

         B. Request No. 4

         REQUEST NO. 4: Produce all Quickbooks backup files (.QBB or .QBW) or other accounting software backup files, for the years 2010 through present for both Gascoyne and GMHR Field Services.

         COURT RULING: Most of what the court has said with respect to Request No. 3 applies to Request No. 4. Gascoyne shall produce the documents that are the subject of Request No. 4 but may designate the documents or information “attorneys eyes only” for purposes of the court's confidentiality order, but subject to the proviso that plaintiffs' attorneys or their forensic experts may inquire of plaintiffs about specific matters set forth in the files that reasonably may relate to GMHR's activities.

         C. Request No. 5

         REQUEST NO. 5: Produce all federal tax returns for Defendant and GMHR Field Services including all schedules and enclosures for calendar years 2010 through 2017.

         There is a split in authority regarding the standard applied in determining the discoverability of tax returns. The two views are described as:

Courts have made it increasingly clear that tax returns in the hands of a taxpayer are not privileged from civil discovery. Nevertheless, judicial consensus exists that, as a matter of policy, great caution should be exercised in ordering the disclosure of tax returns. Unnecessary disclosure of tax returns is to be avoided.
Examination of case law reveals the emergence of a judicially developed “qualified privilege ... that disfavors the disclosure of income tax returns as a matter of general federal policy.” A two-prong test has been utilized to assess whether the qualified privilege should be overcome and a party's income tax returns should be disclosed. The court must determine whether (1) the tax return is relevant to the subject matter in dispute; and (2) a compelling need exists for the return, because the information sought is not obtainable from other sources. While the party seeking discovery of ...

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