Sentis Group, Inc. v. Shell Oil Co. , 763 F.3d 919 ( 2014 )

United States Court of Appeals
For the Eighth Circuit
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No. 12-3623
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Sentis Group, Inc.; Coral Group, Inc.
lllllllllllllllllllll Plaintiffs - Appellants
v.
Shell Oil Company; Equilon Enterprises, LLC, doing business as Shell Oil
Products US
lllllllllllllllllllll Defendants - Appellees
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Appeal from United States District Court
for the Western District of Missouri - Kansas City
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Submitted: April 14, 2014
Filed: August 14, 2014
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Before RILEY, Chief Judge, MELLOY and BENTON, Circuit Judges.
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MELLOY, Circuit Judge.
Plaintiffs Sentis Group, Inc., and Coral Group, Inc., sued Defendants Shell Oil
Company and Equilon Enterprises, LLC, alleging contract and fraud claims, and
violations of Missouri franchise laws as well as the Petroleum Marketing Practices
Act, 15 U.S.C. § 2801, et seq. The allegations relate to the inception and execution
of a gas-station and convenience-store operating agreement involving clusters of
stores in and around Kansas City. In a prior appeal, we reversed an earlier dismissal
sanction and remanded for reconsideration. On remand, the district court received
evidence and made a factual finding that Plaintiffs controlled and failed to preserve
certain evidence. The district court concluded Plaintiffs' failure to preserve evidence
caused sufficient prejudice to Defendants to serve as sanctionable spoliation. Given
Plaintiffs' cumulative pattern of conduct in this matter, and given the nature of the
missing evidence and its role in Plaintiffs' and Defendants' cases, the district court
concluded dismissal with prejudice was the appropriate sanction. We affirm.
I. Background
We discussed the facts and history of this case in detail in our prior opinion.
See Sentis Group, Inc. v. Shell Oil Co., 559 F.3d 888, 892–98 (8th Cir. 2009). We
review those facts briefly here and address in greater detail discovery and rulings that
took place following remand from our prior opinion.
The primary arguments behind Plaintiffs' lawsuit relate to provisions in the
operating agreement imposing a duty on Defendants to make payments to Plaintiffs
for certain site-specific expenses associated with maintaining retail gas-station
facilities. The expense payment provision states:
7(b) Expenses. Company shall pay Operator, for each month, an
amount deemed sufficient to cover Operator's reasonable, legitimate, and
necessary expenses to operate the Motor Fuel Facilities at the Locations
in the Cluster in a reasonable and efficient manner. Expense payment
amounts hereunder will be established by Company in its sole discretion
for a market and Location type by taking into consideration industry
standards or best practice standards, or, where applicable, historical data
or specific projected operating circumstances in the market. Expense
payment amounts for each Location are set forth in Exhibit A. Company
will periodically review the expense payment amounts, not less
frequently than annually, and may, in its sole discretion and at any time,
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increase or decrease the expense payment amount for any Location upon
notice to the Operator. If Operator's actual expenses, in the aggregate,
for operating the Motor Fuel Facilities at the Locations in the Cluster for
any month according to the obligations and standards set forth in this
Agreement are less than Company's aggregate payment for expenses
under this subarticle, the Operator may retain the overpayment as
additional compensation for that month. If Operator's actual expenses,
in the aggregate, for operating the Motor Fuel Facilities at the Locations
in the Cluster for any month exceed the aggregate amount paid by
Company, Operator shall be responsible for the shortfall amount.
Notwithstanding the foregoing, if Operator establishes, to Company's
satisfaction in its sole discretion, that any expense shortfall amount
experienced by Operator, in the aggregate, in operating the Motor Fuel
Facilities at the Locations in the Cluster for any year is the result solely
of an increase of an Uncontrollable Expense, or of a Controllable
Expense due to extraordinary or unforeseeable circumstances, then
Company shall reimburse Operator, upon presentation by Operator of an
invoice with documentation of such occurrence, the shortfall amount.
Operator shall maintain accurate documentation sufficient to prove all
expenses. Payments hereunder will be prorated for any period less than
a month.
Plaintiffs assert in their complaint that Defendants fraudulently induced
Plaintiffs to enter into the operating agreement by presenting false historic expense
data. Plaintiffs also assert that Defendants breached the operating agreement and
deprived Plaintiffs of the benefit of their bargain by subsequently calculating expense
payments using a different method than represented at the time of contract formation.
Plaintiffs insist that their own actual operating expenses are irrelevant to their claims.
They argue instead that liability can be determined and damages can be measured by
looking only at Defendants' historic site expenses. Finally, Plaintiffs allege that
Defendants initiated a sale of gas-station locations without honoring Plaintiffs' rights
under a state of Missouri franchise statute and the federal Petroleum Marketing
Practices Act.
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In response, Defendants deny Plaintiffs' allegations and argue that Plaintiffs
paid substantial sums to consultants for expenses that were not site-specific and
otherwise obfuscated the record of their site-specific expenses in a manner that
overstated Plaintiffs' actual expenses. Defendants allege that expense payments to
Plaintiffs were adjusted based on Plaintiffs' representations regarding actual
performance and expenses. Defendants also assert that Plaintiffs initially treated
Plaintiffs' own financial performance and actual expenses as material to their claims.
Defendants argue, therefore, that Plaintiffs' financial records are discoverable, vital
to the question of damages, and vital to the underlying question of liability (for
reasons primarily related to the role that actual expenses play in the contract language
as quoted above).
Discovery disputes erupted resulting in multiple discovery conferences with,
and orders from, the district court. These disputes culminated in an initial dismissal
of the complaint as a sanction against Plaintiffs, as set forth in a June 2007 order.
That dismissal relied on the collective effect of several separate perceived abuses,
including: (1) Plaintiffs' failure to comply with several discovery orders concerning
an expert witness/business consultant named Chris Walls; (2) Plaintiffs' failure to
disclose the nature of its relationship with accountant Nick Anton and Plaintiffs'
failure to produce financial records held by Anton; (3) purported attempts by Plaintiffs
to bribe Anton to hide documents; (4) the production of surreptitiously recorded
conversations; and (5) the production of certain emails.
We held that the evidence of Plaintiffs' attempts to bribe Anton to hide
documents—reports from counsel containing multiple layers of hearsay concerning
unsolicited phone calls from persons claiming to represent Anton—lacked sufficient
indicia of reliability to serve as one of the bases for imposing sanctions. Sentis, 559
F.3d at 900–01. We also held that it was not clear to what extent Plaintiffs actually
failed to comply with each of the several discovery orders related to Walls. Id. at
902–03. We held the extent of non-compliance with discovery orders was unclear
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given differences between the several orders and given Plaintiffs' eventual production
of certain documents for the district court's in camera review. Id. at 903. Finally, we
noted that the other issues appeared to involve arguable close-call interpretations of
the record. Id. at 903–04. We emphasized that because the initial dismissal rested
on several separate alleged abuses, our conclusions as to some of those issues made
remand necessary to assess the continued propriety and scope of sanctions. Id. at 901.
On remand, the parties conducted additional discovery. Anton had by this time
disappeared along with his computer, which held much of Plaintiffs' financial
information. Defendants deposed several attorneys to gain a picture of the
communications about purported bribe attempts involving Anton. Defendants also re-
deposed Alan Barazi, Plaintiffs' owner and principal officer.
The district court then held a lengthy evidentiary hearing at which Barazi and
others testified. The court expressly found Barazi non-credible, noting that he gave
multiple answers in conflict with prior testimony and looked around the courtroom
furtively and uncomfortably when doing so. In the context of this credibility
determination, the court listed the following as circumstantial evidence supporting
Defendants' claim that Plaintiffs had attempted to bribe Anton to conceal evidence:
(1) Barazi paid Anton $50,000 in May of 2007 (long after discovery disputes had
erupted in this matter and only one month prior to the initial dismissal order); (2)
Anton attempted to sell information to Defendants; (3) Barazi claimed he continued
to trust Anton even after learning that Anton had tried to sell information to
Defendants; and (4) Anton and his computer had disappeared. The district court also
emphasized that Plaintiffs did not initially disclose Anton as their accountant, failed
to identify him in response to initial discovery requests, and otherwise prevented
Defendants from gaining a clear picture of the relationship between Plaintiffs and
Anton. The district court noted that Barazi's companies had paid Anton or paid bills
for Anton totaling over $155,000 during a time period for which Plaintiffs had
previously reported payments of only $46,000.
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The court ultimately held, however, that this evidence showed merely that
Anton had attempted to solicit a bribe from Defendants, not that Plaintiffs had actually
bribed or attempted to bribe Anton. The court concluded this evidence was not
enough to sanction Plaintiffs. No party challenges these factual determinations,
including the credibility assessment of Barazi, on appeal.
Regarding Walls, the district court concluded that Plaintiffs had willfully
violated one underlying discovery order, but that a sanction of dismissal was not
appropriate for this violation. Rather, the court sanctioned Plaintiffs by excluding
Walls as an expert witness. Plaintiffs do not appeal this portion of the district court's
judgment.
The court also held that Barazi and Plaintiffs were responsible for the loss of
certain evidence, including store-specific computers, evidence of payments to Anton,
and check registers and checks. Further, the court held that Plaintiffs and Barazi had
access to and control of Anton and therefore were responsible for the loss of evidence
that had been in Anton's possession, including raw data and reports on Anton's
computers. The court described this evidence broadly as Plaintiffs' "financial
information" and described Barazi's failure to preserve evidence as "ongoing and
systemic." The court concluded the loss or failure to preserve this information was
intentional, stating:
The loss of Plaintiffs' financial information, particularly information that
passed through Anton's hands or that relates to Anton's compensation, is
so widespread that it cannot be mere negligence. There is a discernable
pattern here of depriving Defendants of access to this information. First,
Plaintiffs did not even identify Anton as their accountant until seven
months into the litigation. In fact, they arguably misled Defendants by
identifying someone else, Melissa Hurt, as their accountant. Second, the
loss of the various financial reports prepared by Anton and kept on his
computer appears aimed at preventing Defendants from learning what
Plaintiffs' expenses actually were. This deprives Defendants of their
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announced defense that Plaintiffs were, in fact, profitable. Third, the
failure to preserve and produce any receipts or invoices related to
Anton's compensation or reimbursement thwarts Defendants' efforts to
determine how much Anton was paid, or should have been paid, and so
impeach Plaintiffs' recordkeeping and general credibility. Obviously, it
precluded Defendants from determining whether the $50,000 paid to
Anton in May of 2007 was a bribe or an overdue payment for wages.
Fourth, and perhaps most damning, is that even after it was revealed that
Anton had solicited bribes from at least the Defendants, neither Barazi
or Plaintiffs (or Plaintiffs' counsel) ever took any measures to safeguard
or copy the financial information on Anton's computer. Consequently,
the Court holds Plaintiffs intentionally destroyed financial information
by "losing" it under circumstances that evidence a desire to suppress the
truth.
Turning to the question of prejudice, the district court concluded that neither the
loss of store-specific computers nor the loss of checks or check registers necessarily
would cause "irreparable" prejudice to Defendants because—in theory and at some
expense—these items likely could be reproduced from other sources (such as Anton's
computer or by ordering copies of checks from banks). The court also concluded that
Defendants likely and eventually could reconstruct a record of Plaintiffs' payments to
Anton.
The court concluded, however, that the loss of Anton's computer and the raw
data and reports contained on that computer caused irreparable prejudice because they
could not be replaced. The court stated "Anton's computer contained more than just
data, it included reports he generated based on his judgment about what data to use
and what calculations to make. Unfortunately, no one knows what accounting
methods he used, or how he reached his conclusions."
The court determined dismissal was the appropriate sanction because "Plaintiffs'
consistently evasive and deceptive conduct . . . culminated with the loss of
irreplaceable information on Anton's computer[, and] without this information,
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Defendants cannot receive a fair trial." The court also described the role of the
financial information in the case, stating the information would be material to the
question of damages, the relationship between Plaintiffs and Anton, the compensation
to Anton, and the underlying issue of liability.
Plaintiffs appeal.
II. Discussion
The district court's imposition of the sanction of dismissal was an exercise of
the court's inherent authority. Stevenson v. Union Pac. R.R. Co., 354 F.3d 739, 745
(8th Cir. 2004). In reviewing the imposition of a sanction, we generally review for an
abuse of discretion, but our review "is more focused when the drastic sanction of
dismissal or default is imposed." Chrysler Corp. v. Carey, 186 F.3d 1016, 1020 (8th
Cir. 1999). That is not to say, however, that the district court lacks discretion or that
our review of a dismissal sanction takes a form different than an abuse-of-discretion
review. Rather, as evidenced by our prior opinion in this case, the "more focused"
nature of our review of a sanction of dismissal demands that we ensure dismissal was
in the range of permissible sanctions given the facts presented. See id. ("[I]f a default
judg[]ment lies within the spectrum of appropriate sanctions, we will not substitute
our own judgment for that of the district court even though we may have chosen a
different sanction had we been standing in the shoes of the trial court.").
In urging our court to find an abuse of discretion, Plaintiffs strive to isolate the
loss of Anton's computer from all other "evasive and deceptive" conduct identified by
the district court. While the district court's ultimate prejudice analysis cited only the
loss of Anton's computer as creating an irreparable type of prejudice, we do not read
the district court's opinion as isolating or compartmentalizing the loss of the computer
from Plaintiffs' other, "ongoing and systemic" failures to preserve and disclose
evidence. Rather, we interpret the district court's judgment on remand as holding that
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Plaintiffs carried on a pattern of evasive and objectionable conduct during and after
discovery and that, even though many of the misdeeds standing alone might not have
individually warranted dismissal, the disappearance of Anton and his
computer—following the pattern of evasiveness and obfuscation surrounding
Anton—were the straws that broke the camel's back.1
Given the history of this matter, as set forth above and as described at length
in our prior opinion and in the district court's order on remand, we agree that a
sanction was appropriate and that dismissal was a permissible sanction. The record
is adequately set forth and supports the district court's judgment regarding the
questions of bad faith, Plaintiffs' control of Anton, and the intentional (versus
negligent) nature of the ongoing and systematic suppression of evidence. As such, we
find no abuse of discretion. Dillon v. Nissan Motor Co., 986 F.2d 263, 268 (8th Cir.
1993) ("[W]hether the extent of a sanction is appropriate is a question peculiarly
committed to the district court."). Plaintiffs' arguments to the contrary are unavailing.
We write further to address several specific arguments that Plaintiffs raise on appeal.
Plaintiffs argue: (1) Defendants were granted access to Anton and his computer
in a court-ordered, 2006, post-discovery deposition, but Defendants voluntarily
terminated the deposition such that the later disappearance of Anton and his computer
cannot be deemed spoliation; (2) the missing evidence—evidence of Plaintiffs' actual
1
Although the district court and both parties in their appeal briefs refer to
"irreparable" prejudice, no party cites authority identifying this phrase as the
articulation of an exclusive standard for assessing the propriety of sanctions in general
or dismissal sanctions in particular. Prejudice, bad faith, and evidence of an effort to
suppress the truth are all required to impose a sanction of dismissal based upon
spoliation. Menz v. New Holland N. Am., Inc., 440 F.3d 1002, 1006–07 (8th Cir.
2006). The authority for such a sanction, however, ultimately lies with the court's
inherent authority to redress conduct that "abuses the judicial process." Stevenson,
354 F.3d at 745 (emphasis added). Here, the district court directed its sanction toward
a litany of conduct that it deemed abusive of the judicial process.
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expenses—is immaterial to Plaintiffs' claims and therefore cannot support a finding
of prejudice; (3) the missing evidence exists in other forms such that loss of the cited
evidence cannot be deemed prejudicial; and (4) any dismissal sanction should apply
only to certain claims.
Plaintiffs' claims regarding Defendants' termination of Anton's court-ordered
deposition (at which Anton brought his computer) are without merit. A transcript of
that deposition shows that Defendants suspended the deposition subject to resumption
if Plaintiffs did not provide requested materials. Defendants subsequently requested
certain materials, and Plaintiffs responded that most of those materials had been, or
need not be, provided. This response was one of the issues that triggered Defendants'
underlying motion for sanctions in this case. We do not interpret the transcript as
demonstrating that Defendants' termination of the deposition was a rejection of the
need for evidence from Anton. Further, during the deposition, Anton selectively
revealed portions of his computer's contents, claiming portions not revealed related
to other clients such that it was not clear what information he did and did not possess.
Finally, during the deposition, Anton revealed that he possessed a payroll journal that
Plaintiffs previously claimed did not exist.2 The fact that Defendants may have had
access to the computer at one point does not shield its later disappearance from claims
of spoliation. This is especially true where Defendants' suspension of the deposition
was contingent on receiving requested evidence and where the revelation of new
evidence made it reasonable for Defendants to seek time to digest what had been
revealed.
Collectively, Plaintiffs' remaining arguments reflect several mistaken views.
First, Plaintiffs' arguments presume that Plaintiffs possess the unilateral ability to
2
We question whether Defendants had actual "access" to the computer. Anton
had his computer present but refused requests for anyone other than himself to look
at the screen. Anton cited the reasons mentioned above as justification for his refusal
to give access to the reports and source data on the computer.
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dictate the scope of discovery based on their own view of the parties' respective
theories of the case. Litigation in general and discovery in particular, however, are
not one sided. See Fed. R. Civ. P. 26(b)(1) ("Parties may obtain discovery regarding
any nonprivileged matter that is relevant to any party's claim or defense . . . .")
(emphasis added). Plaintiffs assert that liability and damages on the contract claims,
for example, can be determined based solely on Defendants' historic expense data,
actual payments to Plaintiffs, and Plaintiffs' argument about how Defendants should
have calculated such payments. The contract language quoted above, however,
appears on its face to empower Defendants to take many other things into
consideration when determining expense payments. In fact, Defendants alleged in
their answer that they adjusted expense payments in response to Plaintiffs' purported
operating expenses. Further, in Plaintiffs' initial disclosures, Plaintiffs identified their
own actual operating expenses as material when they described documents supporting
their claims as follows: "Plaintiffs' financial records, including their records on the
actual profit margin, revenues, and expenses for their operated stations during the term
of the [operating] agreements." At that initial stage, then, Plaintiffs appear to have
considered their own expense data to be material to the case. In any event, it matters
not for the purpose of discovery which side's theory of the case might ultimately be
proven correct. What matters is that each side is entitled to pursue intelligible theories
of the case and Plaintiffs cannot, by their sole insistence, declare evidence
undiscoverable and irrelevant merely because it does not fit into their own theory of
the case.
Second, Plaintiffs suggest that discovery is limited to material that might be
deemed relevant and admissible at trial. Discovery is not limited in this manner.
Rather, discovery is a investigatory tool intended to help litigants gain an
understanding of the key persons, relationships, and evidence in a case and, as this
case well illustrates, the veracity of those persons and purported evidence, even if the
evidence discovered is later deemed not admissible. WWP, Inc. v. Wounded Warriors
Family Support, Inc., 628 F.3d 1032, 1039 (8th Cir. 2011) ("Broad discovery is an
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important tool for the litigant, and so '[r]elevant information need not be admissible
at the trial if the discovery appears reasonably calculated to lead to the discovery of
admissible evidence.'" (quoting Fed. R. Civ. P. 26(b)(1))).
Third, Plaintiffs appear to suggest that the concepts of materiality, relevancy,
and discoverability are fixed rather than fluid such that parties cannot change their
views of the necessity of certain information or their theories of the case during the
course of discovery as new facts and relationships are revealed or explained.
Relatedly, Plaintiffs' arguments presume that evidence once disclosed or made
available may be destroyed as though discovery rather than trial is the point of
litigation. Also, Plaintiffs fail to acknowledge that a district court's express finding
that a plaintiff's principal is non-credible may bear upon our review of the issue of
sanctions. Plaintiffs' arguments simply ignore the reality of a hotly contested case in
which the perceived withholding of evidence and obfuscation of persons' roles can
easily make litigants rethink their view of a situation or their need to review certain
materials (when for example, it is later revealed that substantial undisclosed and
hidden payments were made to an accountant who was not even initially identified as
the accountant).3
3
As an example of how Plaintiffs' lack of candor and obfuscation make it
particularly unfair to treat discovery goals and choices as fixed rather than fluid, we
note the issue of store-level computers, as set forth in the parties' briefs. In
Appellant's brief, Plaintiffs assert that they notified Defendants of the existence of
site-level or store-level computers that contained certain financial data. Plaintiffs also
assert that they notified Defendants of Plaintiffs' intent to sell the computers. Finally,
Plaintiffs assert that Defendants had no interest in examining or purchasing the site-
level computers and that, as such, Plaintiffs cannot have acted improperly by failing
to preserve the site-level computers. To support these assertions and arguments,
however, Plaintiffs cite to one page of deposition testimony from Barazi—a witness
the district court expressly found to be not credible. Further, even if Barazi were
credible, the cited page of testimony does not support the accompanying assertions
Plaintiffs make in their brief. Finally, even if Barazi had been deemed credible and
even if the cited testimony had stated what Plaintiffs claimed it stated, Plaintiffs'
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Finally, Plaintiffs argue that it is an abuse of discretion for a district court to
impose something other than the minimally punitive sanction available within the
range of possible sanctions. It is not. See, e.g., Avionic Co. v. Gen. Dynamics Corp.,
957 F.2d 555, 558 (8th Cir. 1992) (stating, albeit in the context of Fed. R. Civ. P.
37(b)(2), that, "When the facts show willfulness and bad faith, the selection of a
proper sanction, including dismissal, is entrusted to the sound discretion of the district
court."). Here, the district court concluded Defendants could not obtain a fair trial
without the missing information. We find no error in this conclusion, as it remains
unclear even today how various payments to Anton and others were related to site
expenses, how these expenses related to Plaintiffs' profitability, and whether, when
properly accounting for expenses, Plaintiffs did or did not earn the per-site profits
suggested in contract documents. The district court properly determined that
Defendants could not present their theory of the case without this information, and
they certainly could not properly impeach Anton or properly test any information that
passed through Anton's hands without access to Anton and the missing computer and
without a full and honest explanation of what Plaintiffs and Barazi paid to Anton for
what services.
III. Conclusion
It is important to note in this opinion following remand that this case has been
dismissed not once, but twice. In reversing the first dismissal we did not hold that
dismissal was beyond the range of potentially applicable sanctions. Rather, our earlier
panel held merely that one of the several bases that collectively supported the
dismissal—the bribery issue—did not enjoy adequate support in the record as it
existed at that time. In light of that determination, and in light of our abuse-of-
discretion standard of review, we remanded for reconsideration and further
ongoing obfuscation would have made it impossible for Defendants to know that such
computers might become necessary in the case.
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development rather than attempting to assess whether the other remaining bases for
dismissal could justify dismissal in the absence of the bribery issue. We even ordered
the case to be heard on remand by a different judge in light of the apparent anger the
ongoing disputes and behavior had triggered in the district court. It is clear to this
panel that, on remand, Plaintiffs and their principal did not take advantage of the
generous second opportunity that our court provided. The continued lack of candor
by Plaintiffs (as evidenced by, for example, the uncontested finding that Barazi was
non-credible) demonstrates well why the harsh sanction of dismissal was permissible.
We affirm the judgment of the district court.4
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4
Appellee's pending motion to strike portions of Appellant's Reply Brief is
denied as moot.
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