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Winner v. Etkin & Company

June 17, 2008


The opinion of the court was delivered by: Terrence F. McVerry United States District Court Judge


Before the Court for consideration are DEFENDANT ETKIN & COMPANY'S MOTION PURSUANT TO F.R.C.P. 37 FOR FAILURE TO OBEY A DISCOVERY ORDER AND TO COMPEL FURTHER DISCOVERY (Document No. 38) and DEFENDANT ETKIN & COMPANY'S MOTION PURSUANT TO F.R.C.P. 37 TO COMPEL FURTHER DISCOVERY (Document No. 39). Plaintiff James E. Winner, Jr. ("Winner") has filed responses to both motions (Document Nos. 40, 42) and Defendant Etkin & Company, Inc. ("ECI") has filed reply briefs (Document Nos. 41, 43). Numerous exhibits have been submitted. The motions are ripe for decision.

This case arose out of ECI's efforts to secure a buyer for Winner Steel, Inc. ("Winner Steel"), which is allegedly controlled by Winner. On May 17, 2005, ECI and Winner Steel entered into an agreement (the "May 17, 2005 Agreement") that provided for a Success Fee to ECI if it found a buyer for Winner Steel. James Winner signed that agreement in his capacity as Chairman of the Company. The agreement contains an arbitration clause. ECI filed a claim in arbitration against the Company and James Winner in his individual capacity. Winner filed the instant suit, seeking a declaration that he is not bound to participate in the arbitration in his individual capacity. Thus, this federal litigation has a very limited scope.

"Arbitration is fundamentally a creature of contract. . . . [N]o party can be forced to arbitrate unless that party has entered into an agreement to do so." Kaplan v. First Options of Chicago, Inc., 19 F.3d 1503, 1512 (3d Cir. 1994). The only contract which contains an arbitration clause is the May 17, 2005 Agreement executed between ECI and Winner Steel. ECI contends, nevertheless, that Winner can be compelled to participate in the arbitration in his individual capacity under the alter ego theory.

Motion for Failure to Comply with Prior Order

ECI contends that despite the Court's Order dated February 28, 2008, which directed Winner to produce all responsive and unprivileged documents, "certain responsive documents do not appear to have been produced."*fn1 In light of the quantity of documents contained in the privilege log prepared by Winner, ECI's expectations regarding the existence of additional responsive documents appear to be reasonable. Specifically, ECI contends that the following categories of documents should exist, but have not been produced: (a) communications among Winner, the Winner Steel Board of Directors and/or the Shareholders of Winner Steel relating to the sale of Winner Steel's assets, including documents relating to the January 2007 letter of intent and April 2007 asset purchase agreement; (b) Winner Steel financial records; (c) Winner Steel Liquidating Trust documents; (d) documents relating to funds set aside for claims; and (e) agreements concerning Winner Steel stock. ECI states that it brought these concerns to the attention of Winner's counsel and requested a supplemental production, but counsel responded that the original document production was comprehensive and complete.

Winner, in response, states that counsel undertook extraordinary efforts to comply with this Court's order, which resulted in the production of over 60,000 pages of documents. Winner avers that all responsive documents have been produced. Counsel further avers that the production was not "scrambled." Specifically, Winner explains that it should not be surprising that he communicated with the co-owners of Winner Steel (who were family members) in person, rather than in written documents. Winner asserts that audited financial statements for Winner Steel from 2003-2006 were produced, as were balance sheets and year-to-date statements of cash flows through February 28, 2007, an estimate of working capital prepared as of April 30, 2007, accounts payable and accounts receivable as of April 24, 2007, and a Closing Statement and Flow of Funds Memorandum prepared for the closing. Winner avers that it also produced all financial documents relating to the Winner Steel Liquidation and the Winner Steel Inc. Liquidating Trust. Winner states that documents relating to the escrow of funds at closing have been produced and that there are no documents showing funds "set aside" for satisfaction of potential claims by creditors. Finally, Plaintiff contends that because the irrevocable trusts that own Winner Steel stock for the benefit of Winner's children were created in 1992 (prior to the creation of Winner Steel) and do not refer to Winner or name him as a party, they are outside the scope of document request No. 9.*fn2

In its reply brief, ECI points out that Winner's obligation was to produce documents in the form in which they were kept in the ordinary course of business, or labelled by document request, rather than producing documents in the manner in which they were "located and retrieved." The Court agrees with ECI. ECI continues to believe that additional responsive documents exist and should be produced.

At bottom, the discovery process relies upon the good faith and professional obligations of counsel to reasonably and diligently search for and produce responsive documents. See Fed. R. Civ. P. 26(g) (effect of signature) and Advisory Commentary to 1983 Amendment ("spirit of the rules is violated when advocates attempt to use discovery tools as tactical weapons rather than to expose the facts and illuminate the issues"). The Commentary to the 1983 Amendment to Subdivision (g) explains: "If primary responsibility for conducting discovery is to continue to rest with the litigants, they must be obliged to act responsibly and avoid abuse." Winner's counsel avers that an "extraordinary effort" was undertaken and that all responsive documents have been produced. The Court recognizes and appreciates ECI's suspicions that additional documents should exist. However, the Court has no independent way to determine whether or not Plaintiff's response was comprehensive and Plaintiff cannot be required to "prove a negative" by demonstrating that non-existent documents do not exist. The Court accepts Plaintiff's counsel's representation that a comprehensive search was conducted and that all responsive documents have been produced. To the extent that Defendant is able to develop evidence that this representation is incorrect, the Court will entertain an appropriate motion at that time.

In accordance with the foregoing, DEFENDANT ETKIN & COMPANY'S MOTION PURSUANT TO F.R.C.P. 37 FOR FAILURE TO OBEY A DISCOVERY ORDER AND TO COMPEL FURTHER DISCOVERY (Document No. 38) is DENIED, with the exception of documents relating to or reflecting trust arrangements as set forth infra in footnote 2.

Attorney-Client Privilege Log

Winner has prepared a privilege log which lists 3,949 documents that were withheld on the basis of "attorney client privilege." ECI challenges the withholding of these documents on two grounds: (1) that the log itself is grossly inadequate to meet Winner's burden to establish the attorney-client privilege; and (2) that ECI is "within the privilege" such that assertion of the attorney-client privilege is unwarranted. Defendant has submitted an affidavit from William Etkin, which describes the extensive communications he had with Winner and Winner Steel's counsel regarding legal advice relating to the sale of Winner Steel to Duferco U.S. Investment Corp. ("Duferco"). As relief, ECI seeks an order compelling Winner to produce the affected documents or, at a minimum, to prepare a more detailed privilege log.

Winner, in response, contends that the privilege log is "more than adequate to support the claim of privilege" and that it would be unreasonable to require him to incur the time and expense to revise it. Winner asks the Court to limit discovery pursuant to Fed. R. Civ. P. 26(b)(2)(C)(iii). Plaintiff points out that only twelve of the documents on the log were sent to or from Winner. Plaintiff also avers that errors on the log will be corrected, and that all documents which Etkin previously received will be produced. Plaintiff attempts to distinguish the authorities cited by ECI for the proposition that he was within the attorney-client privilege. Plaintiff does not, however, challenge the factual averments contained in the Etkin affidavit.

The general principles governing the attorney-client privilege are straight-forward. The attorney-client privilege represents a policy judgment that in some circumstances, encouraging a client to fully disclose information to legal counsel is more important than providing the decision-maker with all relevant facts. "Nevertheless, because the privilege obstructs the search for the truth and because its benefits are, at best, 'indirect and speculative,' it must be 'strictly confined within the narrowest possible limits ...

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