California State Lands Commission vs Signal Hill Service Inc et al

Case Number

19CV04295

Case Type

Hearing Date / Time

Fri, 11/17/2023 - 10:00

Nature of Proceedings

Motion: Sanctions

Tentative Ruling

As set forth herein, the motion of plaintiff and cross-defendant California State Lands Commission is granted in part and denied in part. The court determines that the evidence presented the moving party is sufficient for the court to give CACI Nos. 203 and 204 as jury instructions at trial of this matter, leaving the inferences to be drawn from the loss of the hard drives to the trier of fact. The court awards monetary sanctions in favor of plaintiff California State Lands Commission and against defendant and cross-complainant Signal Hill Service, Inc., in the amount of $13,200.00, to be paid to counsel for plaintiff on or before December 15, 2023. In all other respects the motion is denied.

Background:

On August 14, 2019, plaintiff State Lands Commission (Commission) filed its complaint in this action against defendants Signal Hill Service, Inc. (Signal Hill) and Pacific Operators, Inc., dba Pacific Operators Offshore Inc. (Pacific Operators), asserting causes of action for breach of contract, trespass, and declaratory relief.

On October 15, 2019, defendants Signal Hill and Pacific Operators filed their demurrer to the complaint. On December 13, 2019, the court sustained the demurrer in part and overruled the demurrer in part, granting leave to amend.

On December 27, 2019, the Commission filed its first amended complaint (FAC).

On January 13, 2020, the Commission served its request for production of documents, set one (RFP). (Langone decl., ¶ 5 & exhibit C [Sheet decl., dated May 14, 2021, ¶ 4].)

On January 28, 2020, Signal Hill and Pacific Operators filed their answer to the FAC, admitting and denying allegations therein and asserting six affirmative defenses. Signal Hill, Pacific Operators, Carone Petroleum Corporation (CPC), and Carone Energy Corporation (CEC) concurrently filed their original cross-complaint (CC) in this action asserting a claim for inverse condemnation against Commission and the State of California (State).

On January 30, 2020, the federal defendants—newly added to the FAC—filed their notice of removal of this action to the United States District Court.

On February 20, 2020, the Commission received a written response and documents from Signal Hill and Pacific Operators in response to the RFP. (Sheet decl., dated May 14, 2021, ¶ 5 & exhibit B.)

On March 2, 2020, the United States District Court issued its order dismissing the federal defendants and remanding this action to this court.

On April 24, 2020, the Commission and State filed their demurrer to the CC.

On August 28, 2020, the court heard the demurrer and sustained the demurrer with leave to amend.

On September 22, 2020, following a meet and confer process, the Commission received some further documents from defendants. (Sheet decl., dated May 14, 2021, ¶ 7 & exhibit D.)

On October 1, 2020, Signal Hill (by itself) filed its first amended cross-complaint (FACC). On November 23, 2020, upon stipulation of the parties and order of the court, Signal Hill, Carpinteria Offshore Project Partnership, CPC, and CEC filed their second amended cross-complaint.

On December 1, 2020, the Commission received a further written response of Signal Hill to the RFP. (Sheet decl., ¶ 8.)

On January 7, 2021, upon stipulation of the parties and order of the court, Signal Hill and CPC filed their third amended cross-complaint (TACC).

Following the sustaining in part of the Commission’s demurrer to the TACC, on May 3, 2021, Signal Hill and CPC filed their fourth amended cross-complaint (4ACC) asserting two causes of action for breach of the Lease against the Commission.

On May 14, 2021, the Commission filed its motion to compel further responses to the RFP, which was originally set for hearing on July 23, 2021.

On June 21, 2021, the Commission filed its answer to the 4ACC, admitting and denying allegations therein and asserting 12 affirmative defenses. The Commission concurrently filed a cross-complaint against Signal Hill for indemnity and declaratory relief (Indemnity CC).

On July 20, 2021, Signal Hill filed its answer to the Indemnity CC, generally denying the allegations thereof and asserting two affirmative defenses.

Following continuances, on August 6, 2021, the Commission’s motion to compel further responses to the RFP was heard and granted in part as to requests for profit and loss statements and supporting documents.

On March 7, 2022, the Commission took the deposition of Richard L. Carone (Carone), Signal Hill’s Chief Executive Officer. Carone testified that approximately 25 hard drives were removed from computers when Signal Hill was shutting down so that the bulky computers would not have to be hauled around. (Carone depo., at pp. 200-201 [Langone decl., ¶ 8 & exhibit F, at pp. 230-231; Separate Statement (SS) at pp. 30-31].) According to Carone, the hard drives were not marked and he is not able to find where any of the hard drives went. (Carone depo., at p. 201.) The hard drives were temporarily moved from their original location in the Carpinteria office to an Oxnard facility. (Carone depo., at pp. 247-248.)

On April 21, 2022, the Commission’s counsel corresponded via email with counsel for Signal Hill regarding the missing hard drives. (Langone decl., ¶ 8.) On June 23, the Commission propounded written discovery to ascertain the whereabouts of the missing hard drives. (Langone decl., ¶ 8 & exhibit F.)

On August 8, 2022, defendants responded to the discovery about the hard drives stating that they do not know where the hard drives are and believe they are lost. (Langone decl., ¶ 8 & exhibit F.)

On July 14, 2023, the Commission filed its motion for summary judgment or summary adjudication. The hearing on that motion was continued by the court and is now set for January 12, 2024.

On August 28, 2023, the Commission filed this motion for sanctions for spoliation of evidence. The Commission seek evidence, issue, and monetary sanctions. The motion is opposed by defendants.

Trial is now set for May 17, 2024.

Analysis:

The Commission seeks sanctions against Signal Hill for failure to maintain the hard drives which has resulted in the destruction of evidence. The case of Victor Valley Union High School District v. Superior Court (2023) 91 Cal.App.5th 1121 (Victor Valley) is instructive.

In Victor Valley, the plaintiff sued a school district for negligence and other causes of action arising from an alleged sexual assault on the plaintiff when the plaintiff was in high school. (Victor Valley, supra, 91 Cal.App.5th at p. 1132.) During discovery, the plaintiff learned that video that captured some of the events surrounding the alleged sexual assault had been erased. (Ibid.) The plaintiff moved for terminating sanctions, or alternatively, for evidentiary or issue sanctions under Code of Civil Procedure section 2023.030. (Id. at pp. 1132-1133.) The trial court concluded that the erasure of the video was the result of negligence and not intentional wrongdoing, but granted evidentiary, issue, and monetary sanctions based on its conclusion that the district was under a duty to preserve relevant evidence including the video. (Id. at p. 1133.)

On writ review, the Victor Valley court first determined that the safe-harbor provision of Code of Civil Procedure section 2030.030, subdivision (f) did not apply to preclude sanctions based upon the destruction of electronically stored information if the evidence was lost when the party was under a duty to preserve it. (Victor Valley, supra, 91 Cal.App.5th at p. 1138.) The court stated:

“One serious form of discovery abuse is the spoliation of evidence, which is defined as the destruction or alteration of relevant evidence or the failure to preserve evidence for another party’s use in pending or future litigation. [Citations.] ‘No one doubts that the intentional destruction of evidence should be condemned. Destroying evidence 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.’ [Citation.]” (Victor Valley, supra, 91 Cal.App.5th at p. 1139.)

“ ‘Chief among’ the nontort remedies for the spoliation of evidence ‘is the evidentiary inference that evidence which one party has destroyed or rendered unavailable was unfavorable to that party.’ [Citation.] In addition, ‘[d]estroying evidence in response to a discovery request after litigation has commenced would surely be a misuse of discovery within the meaning of [former] section 2023, as would such destruction in anticipation of a discovery request,’ and the available sanctions to remedy that abuse include such ‘potent’ measures as ‘monetary sanctions, contempt sanctions, issue sanctions ordering that designated facts be taken as established or precluding the offending party from supporting or opposing designated claims or defenses, evidence sanctions prohibiting the offending party from introducing designated matters into evidence, and terminating sanctions that include striking part or all of the pleadings, dismissing part or all of the action, or granting a default judgment against the offending party.’ [Citation.]” (Victor Valley, supra, 91 Cal.App.5th at pp. 1139-1140.)

After considering parallel federal law, the Victor Valley court determined that a party may be sanctioned for failing to preserve evidence:

“The federal courts have held that ‘ “a party can only be sanctioned for destroying evidence if it had a duty to preserve it.” ’ [Citation.] ‘Spoliation refers to the destruction or material alteration of evidence or to the failure to preserve property for another’s use as evidence in pending or reasonably foreseeable litigation.’ [Citation.] The duty to preserve evidence includes the related duty to suspend the routine destruction of documents. ‘ “Once the duty to preserve attaches, a party must ‘suspend any existing policies related to deleting or destroying files and preserve all relevant documents related to the litigation.’ ” ’ [Citations.]” (Victor Valley, supra, 91 Cal.App.5th at pp. 1143-1144, fn. omitted.)

“ ‘The duty to preserve material evidence arises not only during litigation but also extends to that period before the litigation when a party reasonably should know that the evidence may be relevant to anticipated litigation.’ [Citations.] [¶] Whether litigation is ‘ “reasonably foreseeable” ’ ‘is an objective standard, asking not whether the party in fact reasonably foresaw litigation, but whether a reasonable party in the same factual circumstances would have reasonably foreseen litigation. [¶] When litigation is “reasonably foreseeable” is a flexible fact-specific standard that allows a district court to exercise the discretion necessary to confront the myriad factual situations inherent in the spoliation inquiry. [Citation.] This standard does not trigger the duty to preserve documents from the mere existence of a potential claim or the distant possibility of litigation. [Citation.] However, it is not so inflexible as to require that litigation be “imminent, or probable without significant contingencies ....” ’ [Citation.]” (Victor Valley, supra, 91 Cal.App.5th at p. 1144.)

The Victor Valley court thus concluded that “the safe-harbor provision of section 2023.030(f) does not apply when ESI was altered or destroyed when the party in possession and/or control of the information was under a duty to preserve the evidence because the party was objectively aware the ESI would be relevant to anticipated future litigation, meaning the litigation was ‘reasonably foreseeable.’ [Citation.]” (Victor Valley, supra, 91 Cal.App.5th at p. 1149.) The Victor Valley court then determined that the trial court had applied the correct “reasonably foreseeable” standard in finding that the safe-harbor provision did not apply. (Id. at p. 1152.) The court, however, determined that the trial court was obliged to consider a lesser sanction:

“ ‘ “The trial court has broad discretion in selecting discovery sanctions, subject to reversal only for abuse. [Citations.] The trial court should consider both the conduct being sanctioned and its effect on the party seeking discovery and, in choosing a sanction, should ‘ “attempt[ ] to tailor the sanction to the harm caused by the withheld discovery.” ’ [Citation.] The trial court cannot impose sanctions for misuse of the discovery process as a punishment. [Citation.] [¶] The discovery statutes evince an incremental approach to discovery sanctions, starting with monetary sanctions and ending with the ultimate sanction of termination. ‘Discovery sanctions “should be appropriate to the dereliction, and should not exceed that which is required to protect the interests of the party entitled to but denied discovery.” ’ [Citation.] If a lesser sanction fails to curb misuse, a greater sanction is warranted: continuing misuses of the discovery process warrant incrementally harsher sanctions until the sanction is reached that will curb the abuse.” ’ [Citation.]” (Victor Valley, supra, 91 Cal.App.5th at p. 1158.)

“When exercising its discretion to determine which form of sanction is most appropriate for a discovery violation, a trial court should consider various factors, including ‘the importance of the materials that were not produced—from the perspective of the offended party’s ability to litigate the case—and what prejudice, if any, the offended party suffered ....’ [Citations.] ‘ “[T]he sanction chosen should not provide a windfall to the other party, by putting the prevailing party in a better position than if he or she had obtained the discovery sought and it had been favorable.” ’ [Citation.]” (Victor Valley, supra, 91 Cal.App.5th at p. 1158.)

“ ‘A discovery order, though not in the form of a default or dismissal, is justifiably treated as such where the effect of the order is to preclude proof of essential elements of each cause of action.’ [Citation.] ‘The sanction of dismissal or the rendition of a default judgment against the disobedient party is ordinarily a drastic measure which should be employed with caution. [Citation.] The sanction of dismissal, where properly employed, is justified on the theory the party’s refusal to reveal material evidence tacitly admits his claim or defense is without merit.’ [Citation.] Except for in cases of extreme misconduct and when other viable options are unavailable, a trial court abuses its discretion when a sanctions order deprives a party ‘of any right to defend the action upon its merits’ and was ‘designed not to accomplish the purposes of discovery but designed to punish’ the party for not fully complying with its discovery obligations. [Citations.]” (Victor Valley, supra, 91 Cal.App.5th at pp. 1158-1159.)

The evidence strongly supports the determination (1) that Signal Hill was under a duty to preserve evidence, and (2) that the hard drives were lost or destroyed notwithstanding the duty to preserve evidence. These points are not meaningfully disputed by Signal Hill. This action was filed in August 2019. The hard drives disappeared after October 2019. (Brogan decl., ¶ 2.) Signal Hill knew that documents were needed for this litigation at a time before the hard drives disappeared. (Carone depo., at p. 255.)

The initial circumstances by which the hard drives were handled is also not disputed. Signal Hill’s Chief Financial Officer, Russell Howard, testified that when the office was abandoned, it was “like a train wreck.” (Howard depo., at p. 44; Brogan decl., ¶ 3.) Howard further testified: “I remember looking out my office window. There were a bunch of computer parts and towers and stuff, I mean overflowing in the trash bin.” (Ibid.)

From these circumstances, the parties draw starkly different inferences. The Commission infers that the loss of the hard drives was intentional and part of a larger pattern of discovery abuse where Signal Hill failed to conduct a reasonable search in response to discovery requests. Defendants argue that the loss of the hard drives was not intentional and was inadvertent. The evidence would support either contention. On the one hand, the hard drives, including specifically, the hard drives for the server(s) containing emails and business records, would be expected to contain information relevant to this litigation, both as to the Commission’s claims against Signal Hill and as to Signal Hill’s cross-claims against the Commission.

The Commission seeks an evidentiary sanction prohibiting Signal Hill from introducing evidence related to its profits and losses in support of its damages claim. (Motion, at p. 15.) The Commission also seeks an issue sanction designating as established fact “that until it filed its Fourth Amended Cross-Complaint on April 30, 2021, Signal Hill agreed that its lease was terminated on June 28, 2019.” (Motion, at pp. 15-16.)

With respect to the requested evidence sanction, the Commission argues that Signal Hill has never provided adequate profit and loss statements, and instead has only ever produced random reports and hearsay summaries. (Commission Separate Statement [PSS], at p. 15.) The loss of the hard drives prejudices the Commission’s ability to litigate these claims because of the absence of profit and loss statements or comparable financial documents to rebut Signal Hill’s allegations of damages. These lost records could also have supported the Commission’s trespass claims by evidencing profits Signal Hill may have earned in the time it illegally occupied state land. In response, Signal Hill argues that it produced detailed data on sales of oil and gas through various reports to federal agencies as well as purchase of natural gas by Chevron and So Cal Gas Company. (Defendants’ Response Separate Statement [DSS], at p. 2.)

With respect to the requested issue sanction, the Commission argues that Signal Hill agreed that the pipeline lease was terminated on June 28, 2019, until it filed its 4ACC. The loss of the hard drives prejudices the Commission’s ability to discover email communications regarding the June 28, 2019, termination hearing, and may contain data and communications related to Signal Hill’s understanding and calculation of when the lease terminated. (PSS, at p. 22.) In opposition, Signal Hill argues that the termination date of the lease is based upon the terms of the lease and that email communications or data contained in the lost hard drives would be unlikely to provide evidence pertinent to that issue. (DSS, at p. 7.) In reply, the Commission argues that it should be able to put the fact that Signal Hill identified the June 28, 2019, date as the date the lease was terminated without Signal Hill trying to challenge it “since all communication and evidence that might prove any other belief and understanding about the date of the lease termination was lost along with the hard drives.” (Reply, at pp. 7-8.)

“ ‘Discovery sanctions are intended to remedy discovery abuse, not to punish the offending party. Accordingly, sanctions should be tailored to serve that remedial purpose, should not put the moving party in a better position than he would otherwise have been had he obtained the requested discovery, and should be proportionate to the offending party’s misconduct.’ [Citation.]” (Padron v. Watchtower Bible & Tract Society of New York, Inc. (2017) 16 Cal.App.5th 1246, 1259–1260.)

As stated in Victor Valley, supra, quoting Cedars-Sinai Medical Center v. Superior Court (1998) 18 Cal.4th 1, 11, the evidentiary inference that evidence that a party has made unavailable was unfavorable to that party is a significant remedy for spoliation of evidence. “In determining what inferences to draw from the evidence or facts in the case against a party, the trier of fact may consider, among other things, the party's failure to explain or to deny by his testimony such evidence or facts in the case against him, or his willful suppression of evidence relating thereto, if such be the case.” (Evid. Code, § 413.) Evidence Code section 413 is implemented by CACI Nos. 203 and 204: “You may consider the ability of each party to provide evidence. If a party provided weaker evidence when it could have provided stronger evidence, you may distrust the weaker evidence.” (CACI No. 203.) “You may consider whether one party intentionally concealed or destroyed evidence. If you decide that a party did so, you may decide that the evidence would have been unfavorable to that party.” (CACI No. 204.)

Given the lack of dispute that hard drives, including server hard drives, were lost when Signal Hill was under a duty to preserve evidence and the conflicting inferences that may be drawn from the loss of such evidence, the court concludes that this evidence would support the giving of CACI Nos. 203 and 204 at trial of this matter and leaving the inferences to be drawn to the jury. This approach to the situation gives the trier of fact the opportunity to consider the effect of the unavailability of the evidence in context and does not provide either side with any evidentiary windfall.

After considering, among other things, the parties’ arguments and evidence regarding the importance of the lost hard drives from the perspective of the Commission’s ability to litigate the case and what prejudice the Commission may suffer, the court concludes that the issue and evidentiary sanctions sought by the Commission are not appropriate under the circumstances here. The lack of supporting documents already reflects poorly on the evidentiary value of Signal Hill’s claim for lost profits, and, as discussed above, by giving the jury CACI Nos. 203 and 204 as a lesser sanction, the jury will have the opportunity to draw further unfavorable inferences. The Commission’s ability to rebut these claims is adequately addressed by those unfavorable inferences. Similarly, the effective date of the termination of the Lease is predominantly determined by the language of the contract and applicable contract law. To the extent that Signal Hill’s beliefs or intentions notwithstanding the determination based upon contract law are relevant, the jury’s potential negative inferences from the loss of evidence again adequately address this issue. The court concludes that the giving of these jury instructions is a sufficient non-monetary sanction to address the issues raised by the Commission.

The remaining issue is the Commission’s request for monetary sanctions. Monetary sanctions are appropriate in connection with a motion for sanctions based upon spoliation of evidence. (Kwan Software Engineering, Inc. v. Hennings (2020) 58 Cal.App.5th 57, 76-77.) The Commission seeks monetary sanctions in the amount of $40,050.00. This amount consists of: (1) 33 hours of attorney time at $375 per hour for this motion, for a total of $12,375.00 (Langone decl., ¶ 14); (2) 36 hours of attorney time at $400 per hour for the motion to compel (heard on August 6, 2021), for a total of $14,400.00 (Sheet decl., dated May 14, 2021, ¶ 19); (3) 11.5 hours of attorney time at $600 per hour for time spent on discovery regarding the missing hard drives (Sheet decl., dated Aug. 25, 2023, ¶ 3); (4) 17.5 hours of attorney time at $350 per hour spent on discovery regarding the missing hard drives (Kerns decl., dated Aug. 25, 2023, ¶ 3); and (5) $250 in sanctions pursuant to Code of Civil Procedure section 2023.050.

As discussed above, the court determines that Signal Hill was under a duty to preserve the hard drives, but the hard drives were lost or destroyed when Signal Hill shut down its office. As discussed above, the evidentiary effect of this loss of potential evidence will be left to the jury. Nevertheless, regardless of whether this was intentional, negligent, or purely accidental, Signal Hill’s failure to address the absence of evidence in a straightforward manner in discovery complying with the Code of Civil Procedure necessitated some of the activity for which the Commission seeks monetary sanctions.

With respect to this motion, the court has reviewed the declaration of attorney Isabella A. Langone. The court finds the hourly rate reasonable, and under the circumstances here finds 26 hours of attorney time reasonable and appropriate, for a total for that item of $9,750.00. With respect to the prior motion which addressed multiple issues and was granted only in part, the court determined the appropriateness of sanctions in that motion in denying monetary sanctions. The court will not revisit that issue here. With respect to the two items for discovery following up the loss of the hard drives, the court finds the hourly rates reasonable, and finds three hours for attorney Leena M. Sheet and four hours for attorney Steven W. Kerns reasonable and appropriate under the totality of the circumstances here for a total of $3,200.00 (=$1,800 + $1,400) for this item.

“Notwithstanding any other law, and in addition to any other sanctions imposed pursuant to this chapter, a court shall impose a two hundred and fifty dollar ($250) sanction, payable to the requesting party, upon a party, person, or attorney if, upon reviewing a request for a sanction made pursuant to Section 2023.040, the court finds any of the following: [¶] (1) The party, person, or attorney did not respond in good faith to a request for the production of documents made pursuant to Section 2020.010, 2020.410, 2020.510, or 2025.210, or to an inspection demand made pursuant to Section 2031.010.” (Code Civ. Proc., § 2023.050, subd. (a)(1).)

The court finds that Signal Hill failed to respond in good faith to the Commission’s request for production of documents by failing in good faith to make a diligent and reasonable inquiry for responsive documents at the time of the response to the RFP (see Code Civ. Proc., § 2031.230) and imposes a $250.00 sanction pursuant to section 2023.050.

The court thus awards monetary sanctions in the total amount of $13,200.00 (=$9,750 + $1,800 + $1,400 + $250).