United States District Court, D. Maryland
CHARTER OAK FIRE INSURANCE COMPANY, et al.
AMERICAN CAPITAL, LTD., et al.
DEBORAH K. CHASANOW, District Judge.
Presently pending and ready for resolution in this insurance case is a motion for sanctions (ECF No. 330) filed by Defendants and Counterclaimants American Capital, Ltd., Scientific Protein Laboratories LLC ("SPL"), and Spectator Management Group ("SMG"). The issues have been briefed, and the court now rules, no hearing being deemed necessary. Local Rule 105.6. For the following reasons, Defendants' motion for sanctions will be denied.
Some familiarity with the underlying facts of this case is presumed. ( See ECF Nos. 42, 64, 77, 92, 170, 184, 267). In brief, this case concerns an insurance coverage dispute between two insurance companies, Plaintiffs Charter Oak Fire Insurance Company and Travelers Property Casualty Company of America (together, "Travelers" or "Plaintiffs"), and an investment fund, Defendant American Capital, Ltd. ("American Capital"). Beginning in 2008, Defendants American Capital and SPL became involved in more than 100 lawsuits pertaining to the allegedly defective drug heparin. Many of the complaints in these lawsuits allege that SPL is a subsidiary of American Capital. A dispute subsequently arose about whether the underlying heparin lawsuits implicate certain primary and umbrella insurance policies that Plaintiffs issued to American Capital for the years 2006 through 2009 ("the Policies"). Travelers filed the instant declaratory judgment action seeking rescission or reformation of the Policies, or, alternatively, a declaration that Travelers does not owe defense or indemnity coverage to either American Capital or any of its alleged subsidiaries for the underlying heparin lawsuits.
The parties commenced discovery on January 20, 2012 and the case was referred to Magistrate Judge Schulze for resolution of all discovery disputes on November 27, 2012. (ECF No. 145). Soon thereafter, discovery problems began to arise, primarily surrounding Plaintiffs' rescission claim. The rescission claim is grounded on alleged misrepresentations and omissions made by American Capital that it did not have subsidiaries and that it was not seeking coverage for other entities.
Under Maryland law, Travelers ultimately bears the burden of establishing promptness as an essential element of its rescission claim. Finch v. Hughes Aircraft Co., 57 Md.App. 190, 244 (1984) ("A plaintiff seeking rescission must demonstrate that he acted promptly after discovery on the ground for rescission."). Plaintiffs filed this action on January 16, 2009, and initially took the position that documents created on or after September 2, 2008 were created in anticipation of litigation and thus were protected. On November 20, 2012, Defendants moved to compel production of claims handling materials. On December 21, 2012, Judge Schulze granted Defendants' motion and ordered production of all withheld documents created after September 18, 2008, with redactions only for attorney impressions and opinions. Numerous objections to Judge Schulze's ruling followed from Plaintiffs.
Central to Defendants' motion for sanctions is Plaintiffs' compliance with the memorandum opinion and order issued on February 11, 2013, overruling Plaintiffs' objections in part and sustaining them in part. (ECF Nos. 170 & 171). Specifically, Judge Schulze's ruling was limited to the waiver of privilege for the documents related to Plaintiffs' rescission claim that were created after September 18, 2008: "what is relevant to the issue of promptness is limited to the timing of Plaintiffs' investigation into, and conclusions about, the facts that American Capital allegedly misrepresented in its insurance applications." (ECF No. 170, at 25). Consequently, Plaintiffs were ordered to produce all documents, or portions thereof, indicating - as a factual matter - when Travelers began to investigate whether, or reached a conclusion that, inter alia, American Capital had subsidiaries. (ECF No. 170). The order outlined eight areas of factual information to which it applied, but allowed attorney impressions and legal opinions to be redacted from such documents: (1) American Capital had subsidiaries; (2) American Capital acquired SPL in 2006; (3) American Capital acquired SMG in June 2007; (4) American Capital had been named as a defendant in a heparin lawsuit prior to submitting its 2008 renewal application to Travelers; (5) the suspected tainted heparin and heparin's active pharmaceutical ingredient had been recalled in early 2008; (6) the allegedly tainted heparin ingredients had been processed in China; (7) SPL participated in a joint venture that processed heparin sodium API in China; and (8) the heparin lawsuits predating American Capital's 2008 renewal application sought damages in excess of $10, 000. (ECF No. 170, at 25). The memorandum opinion noted that "it is irrelevant whether such factual information is contained in documents that were created by Travelers' nonattorney claims employees, in-house counsel, or outside coverage attorneys." ( Id. at 26). It was further held that "[i]f Plaintiffs contend that any documents should be withheld in their entirety because they contain no factual information relevant to the issue of promptness, such documents must be submitted to Judge Schulze for in camera review." ( Id. ). Plaintiffs were instructed to comply with the February 11, 2013 production order by March 1, 2013. (ECF Nos. 170 & 171).
Plaintiffs subsequently produced 4, 900 pages of previously withheld documents and submitted to Judge Schulze for in camera review documents that they believed were privileged. Plaintiffs' in camera submission amounted to a "document dump" on the court, lacking an index or any meaningful organization. Judge Schulze ordered resubmission, and on April 12, 2013, Plaintiffs resubmitted the withheld documents for in camera review, along with a certification from James E. Rocap III, one of Plaintiffs' attorneys from Steptoe & Johnson, REDACTED
(ECF No. 193-9 ¶ 8).
REDACTED (ECF No. 193, at 6). On July 24, 2013, Judge Schulze granted Defendants' motion to compel, ordering Plaintiffs to produce all claims handling documents created before December 8, 2008. (ECF Nos. 213 & 214). In ordering this production, Judge Schulze deferred in camera review of post-December 7, 2008 documents, and gave Defendants leave to "supplement their previously submitted objections to Plaintiffs' privilege logs" after reviewing the pre-December 8, 2008 documents. (ECF No. 213, at 11).
On December 2, 2013, Defendants once again moved to compel, this time seeking claims-handling documents post-dating December 8, 2008 on the basis that Plaintiffs did not anticipate denying coverage as of that date. (ECF No. 264). During the pendency of this motion, Plaintiffs produced a group of post-December 7, 2008 documents (which Plaintiffs believe were privileged), or portions thereof, on January 21 and 24, 2014. (ECF No. 332, at 22). Plaintiffs state that the documents were produced as part of a compromise production under a non-waiver agreement. Plaintiffs seem to be referring to an email exchange in which defense counsel represented: "[y]our goal, which I appreciate and would intend to honor, is that the supplemental production will not be deemed a voluntary act that would, without more, implicate possible subject matter waivers." (ECF No. 343-39, at 3). Plaintiffs represent that Defendants agreed not to seek sanctions when Travelers conceded to this non-waiver production. (ECF No. 343, at 22).
The January 2014 compromise production, however, actually prompted Defendants to file an amended motion to compel on February 10, 2014. (ECF Nos. 280 & 281). The amended motion to compel was fully briefed and Judge Schulze issued a letter order setting a hearing on April 10, 2014 to resolve Defendants' newest motion to compel. (ECF No. 306). Judge Schulze issued another letter order on March 28, 2014, clarifying that the issue for resolution at the hearing was whether any documents which Plaintiffs withheld - but which Defendants now have - "was, when submitted for in camera review on April 12, 2013, properly identified and described on the [April 12, 2013] privilege logs and properly certified to contain no information that was subject to Chief Judge Chasanow's disclosure order." (ECF No. 315, at 2). Plaintiffs subsequently agreed to produce all pre-suit documents in dispute to Defendants by April 15, 2014, and Judge Schulze approved the stipulated order. (ECF Nos. 323 & 325).
REDACTED Plaintiffs agreed "that there were 302 documents that were left off the CD - 245 of which Travelers had never logged. " ( Id. at 25) (emphasis in original). Plaintiffs ...