The opinion of the court was delivered by: Hughes, U.S.M.J.
This matter is before the Court upon the Motion of Plaintiff Peter Barkouras ("Plaintiff") for Sanctions pursuant to Federal Rules of Civil Procedure 16(f) & 37 against Defendant vCollect Global ("vCollect") for failure to provide a current audit, as required by the Court's May 16, 2006 Pretrial Scheduling Order, and for failure to provide documentation which Plaintiff needs to determine the net worth of vCollect. VCollect and Defendant Laurence A. Hecker (collectively "Defendants") oppose the Motion. The Court entered an Order on May 16, 2006 which, in part, required both Defendants to produce certain discovery, specifically a current audit, no later than June 16, 2006. Plaintiff alleges vCollect produced an unaudited balance sheet which showed a positive net worth as of April 30, 2006 and that Defendants subsequently have provided inconsistent disclosures. The Court reviewed the written submissions of the parties and conducted oral argument on February 21, 2007. For the reasons that follow, the Court will grant in part and deny in part Plaintiff's Motion for Sanctions against Defendants for failing to comply with the May 16, 2006 Pretrial Scheduling Order requiring production of certain discovery.
A. Factual Background and Procedural History
Plaintiff has brought the present action seeking money damages and declaratory relief against Defendants for allegedly violating the Fair Debt Collection Practices Act ("FDCPA") in mailing collection letters. (See Docket Entry # 14). Defendant Hecker is a practicing attorney in New Jersey who performs debt collections on behalf of Defendant vCollect. (See Docket Entry # 6). VCollect acquires debts already in default and then tries to collect them. (See Docket Entry # 14). Defendants mailed Plaintiff two Demand Letters seeking to collect on a debt. Id. at 2. Plaintiff alleged that these Defendants violated several aspects of the FDCPA by acting "in a false, deceptive, or misleading and unfair manner" to Plaintiff. (See Docket Entry # 1). Plaintiff also alleged that Defendants misled Plaintiff "by placing the debt collection communications on Hecker letterhead" even though the Defendants had no intention of taking legal action and the Plaintiff's file was not reviewed by an attorney. Id. at ¶ 56, 57. Defendants admitted to sending identical form letters to thousands of people similarly situated to Plaintiff. (See Docket Entry # 14).
Plaintiff subsequently filed a Motion for Class Certification under Federal Rule of Civil Procedure 16 on October 27, 2006. (See Docket Entry # 11, 14). In opposition to this Motion, Defendants' main argument was that the class action was inferior to individual suits since class members would receive only a de minimis recovery at best due to Defendants' negative net worth. (See Docket Entry # 14). The Court, in a decision by Judge Thompson, held that Defendants were trying to use their negative net worth as an attempt "to avoid suits altogether." Id. at 6. The Court granted Plaintiff's Motion for Class Certification on December 8, 2006. Id. at 8.
Plaintiff filed a Complaint-Class Action against Defendants on January 30, 2006. (Pl.'s Br. at 1). Defendants Hecker and vCollect filed an Answer on March 31, 2006. (See Docket Entry # 6). The Court entered a May 16, 2006 Pretrial Scheduling Order, which set forth a schedule for discovery, a settlement conference call, and the Motion for Class Certification. (Pl.'s Br. at 1).
The Court's May 16, 2006 Pretrial Scheduling Order instructed Defendants to "produce current audit no later than June 16, 2006." (See Docket Entry #8). In response, vCollect produced (1) an Affidavit ("First Affidavit") signed by Lawrence Weil ("Mr. Weil") dated June 16, 2006, (2) a "Commitment Letter" and "Amended and Restated Loan Agreement," (3) a document entitled "vCollect Income Statement for the Twelve Months Ending December 31, 2005" ("2005 Income Statement") that allegedly showed profits of $1,641,397.53 for December 2005, and (4) a Second Affidavit ("Second Affidavit") by Mr. Weil alleging the unreliability of the 2005 Income Statement, particularly in regards to December. (Pl.'s Br. at 2, 4, 6).
On December 18, 2006, Plaintiff filed a Motion for Sanctions pursuant to Rule 16 for Defendants' failure to comply with the May 16, 2006 Pretrial Scheduling Order and Rule 37 for false and misleading disclosures during discovery. (See Docket Entry # 15). Plaintiff seeks both monetary damages and equitable relief based on its effort to obtain information about vCollect's net worth that Defendants were ordered to produce by the Court. (Pl.'s Br. at 1).
Plaintiff alleges that vCollect failed to provide an audited balance sheet by June 16, 2006 and instead produced an unaudited balance sheet which showed a positive net worth as of April 30, 2006. Id. at 2. Plaintiff further alleges that the balance sheet did not contain either the value of vCollect's portfolio of debt or the value of any goodwill. Id. Plaintiff contends that Mr. Weil did not have sufficient knowledge to support the information in the First Affidavit and that many of the statements he gave in the First Affidavit were inconsistent or false including the information regarding a six million dollar loan that was owed by vCollect. Id. at 3.
Plaintiff also contests other documents provided by vCollect in support of its claim that it owed six million dollars which did not appear on the balance sheet. Id. Plaintiff contends that both the Commitment Letter and the Amended and Restated Loan Agreement contained contradictory information from the First Affidavit and that neither document provided any substantial evidence of the loan. Id. at 4. Plaintiff asserts that the Commitment Letter allegedly listed the loan amount as fifteen million dollars instead of six million and it referred to a loan between "Cordell Funding LLLP" and "Debt Holdings, Inc.," not a business loan for vCollect Global or a loan by Cordell Consultants, Inc., as stated in the First Affidavit. Id. at 6.
Plaintiff further contends that the 2005 Income Statement contradicted all the former claims of vCollect not earning a profit. Id. Plaintiff notes that the Second Affidavit contained information about an "erroneous entry of an unrealized sale of a debt portfolio." Id. at 7. Plaintiff alleges that there was no such line item as "sale of portfolio debt" identified in the income statement. Id. Plaintiff further alleges that the Second Affidavit contained information about entries that did not exist in vCollect's income statement. Id. Plaintiff's argument is that vCollect did not provide a substantial or even clear reason why the document purporting to be the 2005 Income Statement was unreliable. Id. Plaintiff further argues that vCollect did not give any legitimate reason for failing to provide the actual 2005 Income Statement, instead providing the aforementioned document that "purported to be the 2005 Income Statement." Id. Plaintiff alleges that the lack of an audited balance sheet along with documents containing contradictory information has caused Plaintiff to spend money and resources in an attempt to obtain information regarding vCollect's clear net worth. Id. at 8.
Defendants allege in opposition that Plaintiff's motion is being filed in order to circumvent the potential limitations imposed by FDCPA on recovery of reasonable fees based on the success of a prevailing party. (Defs.' Opp. Br. at 2). Defendants cite the FDCPA, noting that if Plaintiff was successful on a class basis, the class would recover no money from vCollect and very little from Defendant Hecker due to vCollect's negative net worth. Id.
Defendants further contend that Plaintiff is engaging in unnecessary discovery pursuits and that there is sufficient evidence to show that vCollect does not have sufficient net worth. Id. at 3. Defendants argue that the First Affidavit, signed by Mr. Weil, is supported by his own deposition testimony and further corroborates vCollect's insufficient net worth. Id. VCollect argues that ultimately, this will not provide any statutory recovery for the class. Id. at 4.
Defendants further argue that their inability to comply with the May 16, 2006 Pretrial Scheduling Order was neither intentional nor negligent. Id. at 3. Defendants argue they did not do anything "that unreasonably interfered with the expeditious management of this litigation." Id. at 4. Defendants also argue that they made a good faith effort to comply with the May 16, 2006 Pretrial Scheduling Order after the conference and that they notified Plaintiff that vCollect could not produce a proper GAAP-compliant audit for 2005. Id. at 2. VCollect contends it was not able to produce a proper GAAP-complaint audit since it did not have possession, custody, or control of the financial records needed to do the audit. Id. at 3.
Defendants claim that a person named Mr. Dalmia used vCollect and other companies to funnel defalcated funds for criminal purposes. Id. at 15. Defendants also contend that Allserve, the firm which was supposed to prepare the audit for vCollect, was indicted for theft of funds from various corporations, including vCollect. Id. Defendants claim that counsel for Plaintiff was notified by counsel for vCollect as soon as Defendants were made aware of Allserve's indictment. Id. Defendants further contend that they exercised due diligence by retaining an accounting firm to audit the limited financial records vCollect had for fiscal year 2005 in order to meet the May 16, 2006 Pretrial Scheduling Order, but that the audit could not be conducted due to insufficient financial records. Id. at 16. Defendants ultimately argue ...