Judge: Mark A. Young, Case: 21SMCV00716, Date: 2024-11-19 Tentative Ruling

Case Number: 21SMCV00716    Hearing Date: November 19, 2024    Dept: M

CASE NAME:           SMC Specialty Finance LLC v. Sanping, et al.

CASE NO.:                21SMCV00716

MOTION:                  Motion for Sanctions

HEARING DATE:   11/19/2024

Legal Standard

If a party fails to obey a court order compelling it to provide a discovery response, “the court may make those orders that are just, including the imposition of an issue sanction, an evidence sanction, or a terminating sanction . . .. In lieu of or in addition to this sanction, the court may impose a monetary sanction . . ..” (CCP §§ 2030.290(c), 2030.300(e), 2031.300(c), 2031.320(c).) Misuse of the discovery process, which includes disobeying a court order to provide discovery, is conduct subject to sanctions. (CCP § 2023.010(g).) Possible sanctions are:

(a) [A] monetary sanction ordering that one engaging in the misuse of the discovery process, or any attorney advising that conduct, or both pay the reasonable expenses, including attorney's fees, incurred by anyone as a result of that conduct….

(b) [A]n issue sanction ordering that designated facts shall be taken as established in the action in accordance with the claim of the party adversely affected by the misuse of the discovery process. The court may also impose an issue sanction by an order prohibiting any party engaging in the misuse of the discovery process from supporting or opposing designated claims or defenses.

(c) [A]n evidence sanction by an order prohibiting any party engaging in the misuse of the discovery process from introducing designated matters in evidence.

(d) [A] terminating sanction by one of the following orders:

(1) An order striking out the pleadings or parts of the pleadings of any party engaging in the misuse of the discovery process.

(2) An order staying further proceedings by that party until an order for discovery is obeyed.

(3) An order dismissing the action, or any part of the action, of that party.

(4) An order rendering a judgment by default against that party.

(e) [A] contempt sanction by an order treating the misuse of the discovery process as a contempt of court.

(CCP § 2023.030.)

The party seeking to impose sanctions need only show the failure to obey earlier discovery orders. (Puritan Ins. Co. v. Superior Court (1985) 171 Cal.App.3d 877, 884 [interpreting former statute dealing with “refusal” to comply].) However, numerous cases hold that severe sanctions (i.e., terminating or evidentiary sanctions) for failure to comply with a court order are allowed only where the failure was willful. (R.S. Creative, Inc. v. Creative Cotton, Ltd. (1999) 75 Cal.App.4th 486, 495; Vallbona v. Springer (1996) 43 Cal.App.4th 1525, 1545; Biles v. Exxon Mobil Corp. (2004) 124 Cal.App.4th 1315, 1327.) The burden of proof then shifts to the party seeking to avoid sanctions to establish a satisfactory excuse for his or her conduct. (Corns v. Miller (1986) 181 Cal.App.3d 195, 201.)

Spoliation of evidence means the destruction or significant alteration of evidence or the failure to preserve evidence for another's use in pending or future litigation. (Willard v. Caterpillar, Inc. (1995) 40 Cal.App.4th 892, 907, overruled on other grounds in Cedars–Sinai Medical Center v. Superior Court (1998) 18 Cal.4th 1, 18, fn. 4; see Victor Valley Union High School District v. Superior Court of San Bernardino County (2023) 91 Cal.App.5th 1121, 1152 [duty to preserve evidence attaches where litigation was reasonably foreseeable].) Such conduct is condemned because it “can destroy fairness and justice, for it increases the risk of an erroneous decision on the merits of the underlying cause of action. Destroying evidence can also increase the costs of litigation as parties attempt to reconstruct the destroyed evidence or to develop other evidence, which may be less accessible, less persuasive, or both.” (Cedars, supra, 18 Cal.4th at 8.) It is a misuse of the discovery process, subject to a broad range of punishment including monetary, issue, evidentiary, and terminating sanctions. (Williams v. Russ¿(2008) 167 Cal.App.4th 1215, 1223; see CCP §§ 2023.010(d), 2023.030(a)-(d).)

EVIDENTIARY OBJECTIONS

Defendants/Cross-Complainants’ objections to the Declaration of Gary Gorham are OVERRULED.

Analysis

Plaintiff/Cross-Defendant SMC Specialty Finance LLC (“SMC”) moves for sanctions against Defendant Beijing Zhumeng Qiming Culture & Art Co. Ltd. (“Zhumeng”) for discovery abuse.  SMC requests the following sanctions:

a) a monetary sanction against Zhumeng of $12,990 for the costs associated with bringing this motion;

b) an evidentiary sanction precluding Zhumeng from introducing evidence relating to its relationship, or lack of relationship, with Xi (Alex) Zhang (“Zhang”);

c) an evidentiary sanction in the form of a jury instruction that Zhumeng failed to maintain evidence, lost or discarded evidence, and submitted false responses to discovery in this case, and that the jury may infer from such conduct that the evidence would have been unfavorable to Zhumeng;

d) an issue sanction establishing that Zhang acted with the authority of Zhumeng, or the apparent authority of Zhumeng, to negotiate the disputed transaction with SMC; and/or

e) a terminating sanction striking Zhumeng’s Answer to SMC’s Complaint and its remaining claims in its Second Amended Cross-Complaint (“SACC”).

SMC argues that such sanctions are proper because Zhumeng admits that it: (1) failed to preserve evidence in the possession of its employees, agents and officers, (2) lost or discarded critical evidence in this case after litigation was filed, (3) served verified responses to discovery falsely stating that it never possessed such evidence, and (4) failed to amend its false discovery responses to cure its false statements. SMC argues that Zhumeng claims to have “lost” certain responsive documents after this lawsuit, including communications between Zhumeng’s principal Ke Liming and Zhang, and communications between an employee, Xuanxuan (“Tiffany”) Tie, and Zhang, as well as all communications regarding its $13.2 million dollar investment in the Midway film.

At-Issue Document Requests

On February 10, 2023, SMC propounded Requests for Production of Documents (“RPD”), Set One, which primarily sought documents relevant to the issue of whether Zhang was actually or apparently Zhumeng’s agent. (Gorham Decl., ¶ 5, Ex. A.) This is a critical issue in this lawsuit.  Relevant to this motion, SMC requested: a) all communications between Zhumeng and Zhang or documents relating to Zhang (RFP 5, 6); b) all communications with third parties about Zhang (RFP 7, 8); c) all communications between Zhumeng and its agents and employees, on the one hand, and Han Sanping, on the other hand. (RFP 9); d) documents relating to Zhumeng’s investment in Midway (RFP 4); e) communications with Midway Island Productions (“MIP”) (RFP 13); f) documents relating to the Substitution Agreement wherein Zhumeng substituted in for another Chinese company to provide financing (RFP 22); g) communications with Zhumeng’s co-defendant Zhengfu and its director Han Jianu (RFP 10, 11).

Zhumeng served its operative supplemental responses in March 2024. (Gorham Decl. ¶14, Ex. G.) In its supplemental responses as to RFP nos. 4, 5, 13, and 22, Zhumeng stated it “has produced or will produce all nonprivileged responsive documents in its possession, custody or control that it located after a diligent search and reasonable inquiry.” As to RFP nos. 6, 7, 8, 9, and 11, Zhumeng stated that after a diligent search and reasonable inquiry no responsive and nonprivileged documents were found because “such documents have never been in Zhumeng’s possession, custody or control.” Critical to the Court’s analysis, Zhumeng never disclosed that any documents were lost, misplaced or discarded. (Id.) In March 2024, Zhumeng produced documents consisting of 281 pages. (Gorham Decl. ¶ 11, Ex. F.)

SMC demonstrates that Zhumeng’s production included no emails, WeChat communications, text messages or written communication about its multi-million-dollar investment in Midway or negotiations thereto, which was Zhumeng’s sole purpose. (Gorham Decl., ¶13, see Qian Depo. 14:2-21 [Zhumeng’s sole business was its investment in Midway].) SMC notes that Zhumeng did not even produce responsive documents which it submitted earlier in this proceeding, despite indisputably having control over said documents. (See Gorham Decl., ¶27, Ex. S [November 4, 2020 e-mail from its employee Tiffany Tie to Lions Gate executive John Biondo, in which Tie stated that Zhang was “a former employee of Zhumeng”].)

Spoliation of Evidence, False Discovery Responses

SMC asserts that Zhumeng failed to preserve evidence, destroyed responsive documents, failed to conduct a reasonable search in responses to RFPs, and provided false responses to the RFPs. SMC argues that the recent depositions of Zhumeng’s PMKs confirms Zhumeng’s discovery abuse.

SMC asserts that Zhumeng’s PMK, Long Qian, admitted to failing to preserve responsive communications in the possession of its employees, agents and officers. PMK Qian explained Zhumeng has no policies regarding retention of emails and WeChats communications, and that nobody at Zhumeng made any effort to preserve Tie’s WeChat communications, despite her alleged importance to the Midway financing, which is central to this dispute. (Gorham Decl., ¶ 20, Ex. L, at 44:21-25.) Qian admits that she exchanged WeChats with Xi Xiaotang (the director of Jixiang, the other party to the Substitution Agreement and later a general manager of Zhumeng), Tiffany Tie (employed at Jixiang, Zhengfu, and Zhumeng at various relevant times), and Jianu Han (director of Zhengfu). (Id., at 42:11-16.) These communications are indisputably within the scope of the RFPs. Qian explains that she lost “most” of the WeChats due to “periodic cleansing” of her phone, and her changing of phones “from time to time.” Qian provides no details in opposition about her periodic cleansing of relevant and material evidence during the pendency of this suit. Qian also testified that no employees were asked to preserve documents.  (Id., at 43:13-44:1.)  While Qian states that a diligent search has been now made “in connection with discovery in this action,” that is not the issue before the Court.  (Qian Decl., ¶ 3.)  The critical time frame is whether evidence was preserved once litigation became reasonably foreseeable.

Furthermore, PMK Ke Leming, director and principal of Zhumeng, admitted at deposition that he communicated with Han Sanping and Zhang by WeChat, but had lost those messages because his phone was stolen while he was on a COVID-19 lockdown in December 2022. (Gorham Decl. ¶¶ 13, 21, Ex. M, at 25:15-17, 59-60; see Ke Liming Decl., ¶¶5-9.) The Court is unsure how a phone was stolen when someone was on a “lockdown,” but that is beside the point. These communications would have been “lost” ten months after this litigation was filed.

The PMKs’ deposition testimonies demonstrate that no reasonable efforts were made to obtain communications from several of Zhumeng’s current and former employees. For instance, Zhumeng made no effort to obtain WeChat communications from Tie, an employee during the pendency of this action, who allegedly negotiated the central transaction. (Id., at 45:5-8; 81:10-13; see RJN Ex. 1 [Tie’s decl. in Opp. to SMC’s MSA].) WeChats from Tie regarding Midway admittedly existed, but Zhumeng cannot explain what happened or why they were not secured. (Id., at 180-181.) Zhumeng also failed to search for e-mails to or from Zhang Guodong, the employee at Zhumeng who executed several of the Midway agreements and whose signature was allegedly forged on a 2020 letter of direction from Zhumeng to SMC. Despite the fact that such communications would be responsive to the subject RFPs, Zhumeng admits it did not attempt to search through Mr. Guodong’s email account. (Id., at 76:18-21, 80:24-91:2.)

             No financial models and no communications to or from Hu Jian regarding the Midway project were produced. (Gorham Decl., ¶14.) Qian did not know whether Hu Jian had “financial models relating to Midway” or whether there were any written documents at Zhumeng reflecting financial information about Midway. Qian responded that she was “not certain about that” and would “need to think about it or go back and look for it.” (Qian Depo, Gorham Decl., ¶ 20, Ex. L, at 65:16-22, 169:15-19.) Even though no finance information was produced, Zhumeng has proffered a declaration in which Tie explains that she “received profit reports” relating to Midway. (RJN ¶1, Ex. I, at ¶29; Gorham Decl. ¶13.)   

SMC demonstrates that Zhumeng engaged in willful discovery abuse. SMC further shows that Zhumeng had a duty to preserve evidence starting at the latest, November 2020, when it learned that money due on Midway was the subject of SMC’s foreclosure proceeding. (Bakewell Decl., ¶ 27, Ex. 2.) The record demonstrates that it failed to preserve WeChat communications regarding Midway during the pendency of this suit. The evidence also supports the Court’s conclusion that Zhumeng’s agent(s) destroyed relevant communications during the pendency of this lawsuit, failed to conduct reasonably diligent searches, and provided false responses to the RFPs. Zhumeng’s current responses to the RFPs suggested that documents would be produced or have never been in its possession/custody/control, but did not state that any responsive documents were lost or destroyed as required by section 2031.230. Thus, at a minimum, Zhumeng has provided unexplained, false responses to the RFPs.

Zhumeng’s communications regarding Midway would be critical to resolving SMC and Zhengfu’s claims regarding the Midway rights. For instance, the representatives of MIP believed that Zhumeng was a company owned and controlled by Zhang and Han Sanping, as did Sacker, who represented Zhumeng (and other Han Sanping companies) in connection with Midway. Communications with those parties would confirm whether or not Zhumeng was using Zhang as an agent. The absence of these records speaks volumes against Zhumeng. In fact, the entirety of the record suggests intentional and willful spoliation of material evidence. Zhumeng therefore has the burden to explain its conduct.

Zhumeng claims that no willful discovery abuse occurred. Ke and Long’s explanations in opposition are perfunctory and incredible. Long provides no details on how the information on her phone was culled. Long simply expects the court to accept that she either intentionally deleted messages due to storage space, or lost the messages during unspecified phone exchanges without any specifics. Ke at least claims that the phone was stolen in December 2022 while he was locked down in quarantine. The Court is unsure how that theft could have occurred during a lockdown but will assume the contention is true. However, this was still well over a year after this lawsuit began, and apparently three months before he was even asked to preserve or look for these documents. In light of the May 2021, TRO hearing centered on Zhang’s authority, Ke’s position is utterly implausible. To strain credibility further, Ke now claims that these messages would be helpful for Zhumeng’s action. If the messages were so helpful for Zhumeng, then Zhumeng’s failure to preserve such messages, or produce them during the May 2021 TRO hearing, is truly confounding. Further, Zhumeng does not explain why it did not produce any WeChats, when Qian admits to having at least some WeChats. Zhumeng offers no explanation in opposition why they failed to produce any financial information regarding Midway, despite admitting on the record that they have profit reports. Zhumeng also fails to explain why they have not reached out to Tie or Xiaotang in an effort to mitigate this lost evidence.

The totality of the record demonstrates that the PMK’s intentionally deleted or failed to maintain the documents and communications in bad faith. This bad faith loss of evidence resulted in a substantial prejudice SMC’s rights to discovery and its ability to prosecute and defend this action.  Therefore, the remaining questions is the appropriate sanction.

Sanctions

In light of Zhumeng’s willful discovery violations discussed above, the Court tentatively issues the following sanctions:

1) monetary sanctions against Zhumeng in the noticed amount of $12,990.00; and

2) an evidentiary sanction in the form of a jury instruction that Zhumeng failed to maintain evidence, lost or discarded evidence, and submitted false responses to discovery in this case, and that the jury may infer from such conduct that the evidence would have been unfavorable to Zhumeng.

Tentatively, the Court is not inclined to issue more extreme sanctions on this record, but will discuss that issue during the hearing. While the Court believes that Zhumeng’s PMKs intentionally destroyed material evidence, and that terminating sanctions could be appropriate under such circumstances, the above sanctions will sufficiently mitigate any substantive harm to SMC without risking an unearned windfall to SMC.  

Accordingly, the motion is GRANTED.