NACOLA MAGEE, et al. Plaintiffs, v. PORTFOLIO RECOVERY ASSOCIATES, LLC Defendant Case No. 12 C 1624 United States District Court, N.D. Illinois, Eastern Division Signed March 05, 2015 Counsel Daniel A. Edelman, Cassandra P. Miller, Cathleen M. Combs, James O. Latturner, Edelman, Combs, Latturner & Goodwin, LLC, Chicago, IL, for Plaintiffs Nacola Magee, James Peterson. Daniel A. Edelman, Edelman, Combs, Latturner & Goodwin, LLC, Chicago, IL, for Plaintiff Kathy Cole. David M. Schultz, Jennifer W. Weller, Hinshaw & Culbertson LLP, Chicago, IL, for Defendant. Martin, Daniel G., United States Magistrate Judge REPORT AND RECOMMENDATION *1 On October 15, 2014, Plaintiffs Nacola Magee and James Peterson (“Plaintiffs”) filed a Motion for Entry of Classwide Default Judgment with the District Court. (Dckt. 161). Plaintiffs seek default judgment as a sanction against Defendant Portfolio Recovery Associates, LLC (“PRA” or “Defendant”) for PRA's alleged failure to comply with this Court's July 31, 2014 discovery order concerning the production of class sampling information and PRA's payment of out-of-statute debts in disclosure states. Plaintiffs further claim that default judgment is warranted because (1) PRA spoliated evidence, (2) acted in bad faith by delaying its motion to compel arbitration, (3) prevented Plaintiffs from complying with the District Court's expert discovery schedule, and (4) designated inappropriate Rule 30(b)(6) witnesses. On January 8, 2015, District Judge John W. Darrah referred the motion to this Court for consideration. Because the motion raises dispositive issues, the Court issues a Report and Recommendation pursuant to Fed. R. Civ. P. 72. See United States v. Mitchell, 2013 WL 5951568, at *1 (N.D. Ill. Nov. 7, 2013); Escobedo v. Ram Shirdi, Inc., 2012 WL 4009720, at *1 (N.D. Ill. Sept. 12, 2012). The Court recommends that Plaintiffs’ motion be denied. Background Plaintiffs filed this class action suit against PRA for alleged violations of the Fair Debt Collection Practices Act (“FDCPA”), 15 U.S.C. § 1692, et seq. PRA purchases defaulted debts that are owed to other entities for personal, family, or household purposes. Plaintiffs claim that PRA violated the FDCPA by sending out debt-collection letters that were misleading because they contained settlement offers on debts that PRA failed to state were already time-barred. PRA further violated the FDCPA by referring to credit reporting practices that it knew did not apply to untimely debts. Under the Fair Credit Reporting Act, 15 U.S.C. § 1681c, most delinquent debts cannot appear on a debtor's credit report more than seven years and 180 days after the start of the delinquency. On Februar 5, 2015, the District Court certified two classes in this case. The first involves Count I of the amended complaint, alleging misleading settlement offers on time-barred debts. The second relates to Count II, involving threats of credit reporting practices. Legal Standard Courts have the power to impose discovery sanctions either pursuant to Fed. R. Civ. P. 37(b)(2), which requires the violation of a court order, or under its own “inherent power to impose sanctions for the abuse of the judicial system, including the failure to preserve or produce documents.” Northington v. H & M Int'l, 2011 WL 663055, at *12 (N.D. Ill. Jan 12, 2011); se also Barnhill v. United States, 11 F.3d 1360, 1367 (7th Cir. 1993) (stating that this power stems from a court's authority to manage its own affairs.). The analysis is the same under either standard. Danis v. USN Comms., Inc., 2000 WL 1694325, at *30 (N.D. Ill. Oct. 20, 2000). Rule 37 provides for default judgment as one of several sanctions that a court can impose. Fed. R. Civ. P. 37(b)(2)(A)(vi). Even though it is a severe sanction, a court “is not required to fire a warning shot” by first imposing a lesser penalty. Hal Commodity Cycles Mgmt. Co. v. Kirsh, 825 F.2d 1136, 1139 (7th Cir. 1987). However, default judgment does necessitate a showing of willfulness, bad faith, or fault on the part of the defaulted party. See Aura Lamp & Lighting, Inc. v. Int'l Trading Corp., 325 F.3d 903, 909 (7th Cir. 2003); Downs v. Westphal, 78 F.3d 1252, 1257 (7th Cir. 1996). Bad faith is “characterized by conduct which is either intentional or in reckless disregard of a party's obligations to comply with a court order.” Marrocco v. Gen. Motors Corp., 966 F.2d 220, 224 (7th Cir. 1992). Because of its severity, default judgment should be entered as a sanction only “when there is a clear record of delay or contumacious conduct, or when other, less drastic sanctions have proven unavailing.” Maynard v. Nygren, 332 F.3d 462, 468 (7th Cir. 2003). Discussion *2 Plaintiffs claim that sanctions are warranted because PRA (1) improperly delayed seeking arbitration, (2) prevented Plaintiffs from completing expert discovery in a timely manner, (3) named Rule 30(b)(6) witnesses who were unable to provide competent testimony, (4) failed to comply with Court orders concerning discovery, and (5) spoliated evidence. The Court addresses each of these concerns in turn. 1. Arbitration On August 19, 2014, PRA filed a motion to stay this case pending the completion of contemplated arbitration proceedings. Defendant alleged that Plaintiffs were subject to the arbitration provisions of an agreement that had been produced to PRA on July 17, 2014. (Dckt. 105). This Court denied PRA's motion in a detailed order. (Dckt. 165). Plaintiffs now demand default judgment by claiming that PRA sought arbitration in bad faith. Plaintiffs’ opening brief alleges that bad faith is shown by PRA's decision to wait over two years from the filing of this case to invoke the arbitration clause. Plaintiffs’ reply brief abandons this lateness claim, arguing instead that default judgment is justified because seeking arbitration at all was inherently “frivolous.” These claims are without merit. Plaintiffs filed this motion for default judgment with the District Court on October 15, 2014. Plaintiffs were fully aware at that time that the same lateness argument raised in the instant motion was still being considered by this Court as part of PRA's then-pending motion to stay the case pending arbitration. This Court issued a ruling two days later on October 17, 2014. It rejected Plaintiffs’ lateness argument by finding that PRA had not waived its right to seek arbitration. (Dckt. 165). The Court's analysis showed that PRA filed its motion to stay within three months of receiving the arbitration agreement in question. For all the reasons stated in the October 17 order, this limited period was not fatally late under the circumstances of this case. The Court rejects Plaintiffs’ lateness claim for the same reasons outlined in its prior order.[1] Plaintiffs’ second argument alleges that, based on this Court's analysis of the arbitration issue, it was inherently frivolous for PRA to have demanded arbitration at all. As a matter of background, PRA sought arbitration pursuant to the documents that governed the accounts that PRA had previously purchased from Capital One. These documents were in turn subject to the terms of a later settlement agreement that Capital One had reached as part of a Multidistrict Litigation case in the Southern District of New York, In re Currency Fee Antitrust Litigation, MDL No. 1409. Plaintiffs argued that the In re Currency Fee settlement barred enforcement of the account documents’ arbitration clauses. The Court did not reach the full merits of that claim. Instead, it denied PRA's motion to stay arbitration on the more limited ground that Defendant had failed to explain why it had the right to enforce the arbitration clauses in light of the In re Currency Fee settlement agreement. (Dckt. 165 at p. 8). *3 The Court disagrees that the issues involved in this analysis were so clear that PRA was unreasonable in seeking to enforce the arbitration clauses. The In re Currency Fee settlement presented several complex issues. If the matter had been as straight-forward as Plaintiffs allege, one would have expected that Plaintiffs’ earlier arguments opposing arbitration would have been clearly stated. As the Court explained, however, both Plaintiffs and PRA misconstrued the settlement agreement. (Dckt. 165 at p. 6, stating that “neither side has addressed [agreement] with much care”). Many problems were left unresolved. Plaintiffs never discussed why the settlement agreement applied to this case; both sides failed to note the full scope and nature of certain restrictions on arbitration that were contained in the settlement; and neither party discussed the key provision that applied the arbitration restrictions to third-party purchasers of Capital One's accounts. Like Plaintiffs, PRA could have stated the basis of its reasoning more carefully. That is not the same, however, as finding that PRA's motion to stay was frivolous. As a result, Plaintiffs have made no showing that default judgment is warranted. The Court recommends that Plaintiffs’ current motion be denied on this ground. 2. Expert Discovery Plaintiffs seek default judgment because PRA allegedly prevented them from completing expert discovery by the District Court's cutoff date of October 16, 2014. Like the arbitration issue, this claim involves a matter that was pending before this Court when Plaintiffs filed the instant motion with the District Court. Plaintiffs had asked this Court to strike the report of Defendants’ rebuttal expert Dr. James Wright because it was filed so late that Plaintiffs could not meet Judge Darrah's October 16 deadline for expert discovery. This Court concluded on January 14, 2015 that Dr. Wright's report was late, and that PRA had not given a cogent explanation for the delay.[2] (Dckt. 181). Nevertheless, the Court denied Plaintiffs’ motion to strike Wright's report outright. The key issue was whether Plaintiffs had been prejudiced by PRA's delay. That depended in turn on whether they would have an opportunity to depose Dr. Wright. The Court noted that Judge Darrah had stated on October 31, 2014 that, although expert discovery would not be extended at that time, “we'll go from there and see just what kind of prejudice this provides the plaintiff because of the alleged lack of timeliness in the disclosure.” (Id. at p.4). This left open the possibility that expert discovery could be extended in this case, depending on Plaintiffs’ demonstration of prejudice. On February 17, 2015, Judge Darrah granted Plaintiffs’ motion to supplement its expert disclosures. This allows Plaintiffs to submit a supplemental report by its expert Dr. Goldsmith that responds to Dr. Wright's expert report. This cures any prejudice that might have attached to Plaintiffs had they been required to stand on Dr. Goldsmith's original report. Plaintiffs argue in their supplemental reply that PRA has indicated that it will ask Judge Darrah to permit it to produce another supplement to Dr. Wright's report. Plaintiffs claim that this is sanctionable because it adds undue expense and time to the already-convoluted expert discovery in this case. The Court disagrees. Even if such a request were sanctionable, Plaintiffs have not explained why a less serious sanction than dismissal would be in order. See Maynard, 332 F.3d at 468 (stating that the sanction of dismissal is only justified were there is “a finding of willfulness, bad faith or fault, or long as [a court] first considers why lesser sanctions would be inappropriate”); Sun v. Bd. of Trustees of Univ. of Ill., 473 F.3d 799, 811 (7th Cir. 2007) (explaining that dismissal “should be used only in extreme situations, or when other less drastic sanctions have proven unavailing”). *4 The Court recommends that Plaintiffs’ motion be denied on this issue as moot. 3. The Rule 30(b)(6) Witness Plaintiffs further argue that default judgment is warranted because PRA named a Rule 30(b)(6) witness who was not prepared to provide adequate testimony. Like the other issues raised in the motion, this also involves a long history of prior motions with this Court. PRA named Neal Stern as its Rule 30(b)(6) witness. Plaintiffs claimed earlier, as they do now, that Stern was unable to testify fully on all of the topics that had been noticed for the deposition. They then sought to depose other corporate witnesses. PRA filed a motion for protective order asking this Court to bar these depositions. The Court denied the motion on August 7, 2014. (Dckt. 102). Plaintiffs argue that default judgment is in order because the “mere filing [of the motion for protective order] shows a deliberate effort on the part of PRA and defense counsel to conceal relevant information.” (Dckt. 161 at p. 15). These claims involve allegations of professional misconduct that have given the Court grave concern. The serious nature of these claims are underscored by Plaintiffs’ remarkable contention that defense counsel “lied” about the existence of documents, and that part of counsel's discovery response “was, at the very least, a lie.” (Dckt. 178 at p. 5). Such troubling and extraordinary claims require a high degree of evidence. A litigant should only raise such issues when it can produce at least some plausible evidence that the misconduct complained of has actually taken place. As the Seventh Circuit Standards for Professional Conduct state, attorneys “will not, absent good cause, attribute bad motives or improper conduct to other counsel or bring the profession into disrepute by unfounded accusations of impropriety.” (Lawyers’ Duties to Other Counsel at ¶ 4). The Court easily concludes that these allegations are without merit. Plaintiffs have not cited any evidence to support their troubling allegations. The premises of their claims are entirely unsubstantiated. Plaintiffs describe, for example, six deposition topics that Neal was allegedly not sufficiently familiar with. However, Plaintiffs have not provided copies of the deposition notices or a transcript of Neal's actual testimony. The Court has no cognizable evidence as to what Plaintiffs wanted him to testify on, or what he actually said.[3] A corporation has a duty under Rule 30(b)(6) to appoint a witness who can provide responsive testimony at the corporate deposition. See Mintel Intl. Group, Ltd. v. Neerghen, 2008 WL 4936745, at *4 (N.D. Ill. Nov. 17, 2008). But a party cannot reasonably ask for default judgment based on alleged misconduct simply by making unsupported representations to the Court. It must have an adequate evidentiary basis to bring a serious claim that opposing counsel was trying to conceal evidence. The problem is compounded here because Plaintiffs mischaracterize the nature of the events that followed Neal's deposition. PRA did file a motion for protective order, as Plaintiffs state. But it is inaccurate to claim that the motion was an attempt to hide evidence. PRA plainly stated that it was willing to provide additional corporate witnesses. (Dkct. 94). PRA's motion involved merely procedural matters. Plaintiffs had unilaterally noticed six PRA employees for deposition without first seeking leave of court. Defendant reasonably cited In re Sulfuric Acid Antitrust Litigation, 2005 WL 1994105, at *4-6 (N.D. Ill. Aug. 19, 2005) for the proposition that court approval was required for more than one Rule 30(b)(6) deposition under Rule 30(a). PRA also stated that its corporate witnesses would not be available prior to August 15, 2014. (Dckt. 94 at p. 2, “Defense counsel informed Plaintiffs’ counsel that it is happy to provide alternate dates, but it is possible that Defendant's witnesses ... are not available before August 15, 2014”). Defendant complained that Plaintiffs were unwilling to wait until then, though the deposition notices were only issued on July 18. (Pls. Mot. at Ex. R). *5 This Court denied the motion, as Plaintiffs state. It did so, however, only because the parties reached an agreement on the issue. (Dckt. 102). That is not a ground for entering default judgment. It also falls very far short of the high standard required for raising accusations of professional misconduct against another attorney. The Court recommends that Plaintiffs’ motion be denied on this point. 4. Discovery Plaintiffs’ most serious argument is that PRA has failed to comply with this Court's July 31, 2014 order, which granted Plaintiff's motion to compel. (Dckt. 98). The Court directed PRA to produce a random sampling of class files on the terms stated below. Defendant was also required to produce data concerning the collection of out-of-statute debts. The Court reasoned that out-of-statute debts could be less valuable than in-statute debts to an entity like PRA. Plaintiffs argue that PRA's compliance was been so inadequate that default judgment is warranted. a. Account Notes Defendant was directed to turn over a sample of class files as follows: PRA shall produce a random sampling of class files by taking a list of putative class members for each class. The files shall be arranged in alphabetical order. For every third person, PRA shall produce that class member's account file (including account notes, letters, and correspondence) until the class list is exhausted, or until 200 account files have been selected, whichever occurs first. (Id. at p. 8). As this language states, PRA was required to produce what Plaintiffs themselves identified in the earlier motion only as “account notes.” Plaintiffs now claim that in responding to the order PRA was reluctant to turn over notes that were available through hyperlinks for each class member's file. (Pls. Mot. at 4). According to Plaintiffs, Defendant took the position that this set of account notes was outside the scope of the Court's order. PRA responds that the parties subsequently resolved this dispute. Plaintiffs disagree, claiming that PRA only agreed to turn over a “small fraction” of the account notes. (Reply at 6). Plaintiffs have not provided any evidence of what the hyperlink notes include, or even what they are (other than generalized statements). Plaintiffs allege that PRA incorrectly provided only “the first account note screen which appears on its PRANet computer system.” (Dckt. 161 at 4). No examples of these screens have been submitted. No explanation of what they contain has been given by either party. Plaintiffs’ earlier motion that led to the Court's order did not mention hyperlink account notes. (Dckt. 82). Neither side even contested the general topic of “account notes” in their previous briefing. This means that the Court has no clear idea what Plaintiffs are referring to, what they are complaining about, or what supports their respective claims on the issue. If Plaintiffs believed that PRA was not complying with the Court's order, they should have filed a motion to compel before discovery closed. It is not even clear from what has been presented that such a motion would have been granted. The Court cannot find that PRA should be sanctioned for flouting the July 31 order when Plaintiffs have not shown why this dispute falls squarely within the order's terms. The Court recommends that Plaintiff's motion be denied on this issue. B. Documents Concerning Out-of-Statute Debts *6 Plaintiffs second ground for default judgment presents more complex issues that require the Court to revisit the history of this dispute. After the Court issued the July 31 order, PRA reiterated its earlier position that it did not have documents responsive to the purchase of out-of-statute debts because it did not buy debts on a state-by-state basis. Plaintiffs then took the deposition of Rule 30(b)(6) witness Chris Graves. Plaintiffs then filed a motion to compel concerning a “scoring and dilutive pricing formula” that Graves had described. Plaintiffs claimed Graves’ testimony contradicted PRA's denial that it had responsive documents. While that motion was still awaiting a ruling by this Court, Plaintiffs filed the instant motion for default judgment on October 15, 2014 based on the same issue. This Court granted Plaintiffs’ motion to compel on October 16. (Dckt. 164). The Court directed the parties to meet and confer to identify the specific documents that Graves’ testimony encompassed. It also ordered PRA to file an affidavit if it determined that these documents did not actually exist.[4] The affidavit was to explain the steps that PRA took to reach that conclusion. Surprisingly, PRA's response to Plaintiffs’ default motion fails to take note of the Court's order that granted Plaintiffs’ motion to compel. It is impossible for the Court to assess the degree to which PRA has complied with its October 16 order when Defendant does not acknowledge its existence. Notwithstanding this oversight, default judgment is clearly no longer on the table concerning this issue. At the direction of this Court, the parties continued to negotiate their dispute concerning this set of discovery matters. On March 3, 2015, the parties submitted a stipulated statement that resolved the pricing model issue. (Dckt. 195). The Court recommends that Plaintiffs’ motion be denied as moot on this issue. 2. Spoliation When a party first reasonably foresees that litigation is on the horizon, it is required to suspend its ordinary policies governing how information is retained or destroyed and to put into place a litigation hold to preserve relevant material. Krumwiede v. Brighton Associates, L.L.C., 2006 WL 1308629, at *8 (N.D. May 8, 2006) (internal citation omitted). This extends to all evidence that is discoverable under Rule 26. Wiginton v. Ellis, 2003 WL 22439865, at *4 (N.D. Ill. Oct. 27, 2003). In analyzing whether sanctions are appropriate, a court is guided by three factors: (1) a breach of the duty to preserve or produce documents, (2) the level of culpability for the breach, and (3) the prejudice that results from the breach. Danis, 2000 WL 1694325, at *31. Plaintiffs originally claimed that PRA violated this standard because its Vice-President of Operations, Neal Stern, testified that there “might be some emails” concerning discussions about out-of-statute debts. Executive Vice-President of Core Acquisitions, Chris Graves, also said that he “thought” some emails might exist. (Dckt. 161 at p. 7). Plaintiffs argued that PRA spoliated evidence because it never put a litigation hold on these emails. *7 Those issues now appear to be moot. In its supplemental response, PRA submitted an affidavit from its litigation counsel Steven Zahn explaining that a litigation hold was put in place on February 11, 2012. Zahn has reviewed all emails to or from Neal Stern and Chris Graves containing the search parameters relevant to Plaintiffs’ request on out-of-statute debts. He identified one relevant email, which PRA claims is privileged. Defendant has submitted a privilege log to Plaintiffs. Plaintiffs have not responded to PRA's sworn statements in their supplemental reply. They cannot reasonably claim that default judgment is required on this issue without answering PRA's strong evidence rebutting the spoliation claim. The Court recommends that Plaintiffs’ motion be denied as moot on this issue. Conclusion For these reasons, the Court RECOMMENDS that Plaintiffs’ motion for entry of classwide default judgment and motion for sanctions against defense counsel [161] be denied. Written objections to any finding of fact, conclusion of law, or the recommendation for the disposition of this matter must be filed with the Hon. John W. Darrah within fourteen (14) after service of this Report and Recommendation. See Fed. R. Civ. P. 72(b). Failure to object will constitute a waiver of objections on appeal. ENTER: Footnotes [1] The Court notes that Plaintiffs never sought reconsideration of the Court's order, or filed objections with the District Court. The Court is, frankly, at a loss to understand how Plaintiffs can continue to ask for classwide default on grounds that have already been decided against them. A number of the other discovery violations that Plaintiffs raised were also pending a decision from this Court when this motion for default judgment was filed. That means that Plaintiffs essentially asked two Courts to consider the same disputes, while demanding that they issue incompatible remedies: this Court was asked to compel discovery so that the litigation could move forward; the District Court was asked to dismiss the case outright based on matters that were still under consideration by this Court. Plaintiffs’ strategy in this matter has given the Court serious pause. It goes without saying that seeking an entry of default judgment on grounds whose merits are still under consideration is improper. On February 12, 2015, the Court asked Plaintiffs if they still stood on all the grounds asserted in the instant motion. Plaintiffs indicated that they continued to press all the issues, presumably including those that have already been construed against them. [2] The Court delayed ruling on Plaintiffs’ motion to strike because Wright was deposed in another case on October 30, 2014, one day before Plaintiffs filed their reply brief. Plaintiffs stated that they would provide a transcript of the deposition when it was available. (Dckt. 172 at p. 5, n.2). The transcript could have clarified whether Plaintiffs were potentially prejudiced by PRA's lateness in providing Wright's report. The Court never received the transcript. [3] Insofar as the deposition notices were attached to earlier motions in this case, the Court declines to wade through the docket to locate them on its own. [4] Both parties refer to some form of affidavit that PRA submitted. Unfortunately, neither party has submitted it to the Court. Plaintiffs state that the affidavit was designed “to contradict the testimony provided by the corporate witnesses in an effort to avoid production.” (Dckt. 178 at 7). The time for rebutting Rule 30(b)(6) witnesses was in the briefing that led to the October 16 order. The Court concluded that PRA had failed to address the relevant issues head on in its response brief. (Dckt. 164 at pp. 3-4). The Court further notes that PRA stated in its response that the “parties agreed to put off production for a time period while they explored the possibility of settlement.” (Resp. at p. 4).