Steele Software Systems, Corp. v. Dataquick Information Systems, Inc.

Citations: 237 F.R.D. 561; 2006 WL 2833182Docket: Civil Action No. JFM-05-2017

Court: District Court, D. Maryland; October 3, 2006; Federal District Court

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Garnishment proceedings are underway in a case involving Data-Quick Information Systems, Inc. (Data-Quick) seeking to collect a judgment against Steele Software Systems Corp. (Steele Software) and its successor, Three S Delaware, Inc. After receiving a judgment amounting to $6,174,185.64 due to an upheld arbitration award, Data-Quick initiated discovery to enforce the judgment. On March 8, 2006, Data-Quick served document requests on Steele, defining “you” broadly to include Steele and its affiliates, among others. Steele's responses, due April 7, 2006, were delayed by a requested extension, which was granted under conditions that required a response and rolling production of documents by April 24, 2006.

Steele provided written responses but objected to the broad definition of "you," claiming it would necessitate producing documents from non-litigating corporate entities. Ultimately, Steele produced approximately 75 documents, primarily related to the formation of Three S, but failed to comply fully with the requests. The production of further documents was halted when Steele filed for bankruptcy on April 26, 2006. Following Steele's emergence from bankruptcy in June 2006, Data-Quick renewed its document requests. This memorandum supplements a previous ruling made during a telephone hearing on August 31, 2006, regarding the scope of Data-Quick’s Rule 34 document requests.

Whiteford, representing Steele, informed Data-Quick that Steele could not produce requested documents until the end of August, despite the documents being overdue by over sixty days. In response, Data-Quick filed a motion to compel under Rule 37 for the production of these documents, asserting that related Steele entities had documents within Steele’s control, thus requiring production under Rule 34. Steele contended it should not be obligated to produce documents held by nonparty Steele-related entities since the requests were directed only to Steele Software, claiming those documents were outside its custody or control.

A telephone hearing took place on August 31, 2006, where rulings were issued regarding Data-Quick's motion. The court noted that the application of Rule 34(a) concerning nonparties had not been recently addressed, prompting the decision to publish a detailed memorandum for future guidance. Rule 34 of the Federal Rules of Civil Procedure allows parties to request documents within another party's “possession, custody or control,” while Rule 34(c) indicates nonparties may be compelled to produce documents through a subpoena under Rule 45.

The central issue was whether a party must produce documents it "controls" under Rule 34(a) when they are physically held by a nonparty. Case law supports that a district court can require a party to produce documents held by a related nonparty if those documents are under the party's custody or control. The legal definition of "control" encompasses the authority or ability to obtain the documents. Courts have historically ruled that the corporate structure does not limit this control, allowing for the disregard of corporate forms to prevent obstructions in the discovery process.

To determine whether a party controls documents held by a related nonparty under Rule 34, several factors are crucial. Key considerations include: 1) the corporate structure of both the party and the nonparty; 2) the nonparty’s involvement in the transaction central to the litigation; and 3) the extent to which the nonparty stands to benefit from the case outcome. Additional factors include the routine exchange of documents between entities and any participation by the nonparty in the litigation.

The relationships between the party and nonparty are significant, encompassing shared ownership, overlapping management, and financial ties. Control can exist if both entities are owned by the same individual, as evidenced by cases like Perini America, Inc. v. Paper Converting Machine Co., where an individual served in leadership roles for both, and Evenflo, where related companies were owned by the same family member.

Furthermore, control is indicated when management is shared, as illustrated in Uniden, where executives from both companies had interrelated reporting structures. The court in Afros S.P.A. emphasized the relevance of the parent company's relationship to the litigation, particularly when it assigned patents to a subsidiary involved in the case.

Notably, documents held by a nonparty are not automatically discoverable due to corporate affiliation; specific evidence of control must be presented. If such evidence is established, it creates an inference of control, shifting the burden of proof to the nonparty if they fail to contest the assertions of control.

In the case concerning Steele entities, it is evident that Scott Steele has practical control over the documents in question, as he is the owner and president of most Steele entities. His mother, Meneta Steele, owns one entity but is also closely connected through her previous role as corporate secretary and shared legal representation.

Steele’s corporate entities exhibit significant interrelations. In December 2004, SteeleSoft, Inc. entered a stock exchange agreement with Steele Software, and in January 2004, Three S merged with Steele Software, assuming all its debts. SteeleSoft is the sole parent and shareholder of Three S, with Scott Steele as the sole shareholder of SteeleSoft. SteeleSoft’s website lists 3S/Real-Serv, Inc. as a "SteeleSoft company" and Iautomortgage Corporation as an "affiliate." Judge Motz recognized this interconnection, granting injunctive relief against Steele Software and its affiliated entities in a January 17, 2006 Order. The burden on Steele to produce requested documents is minimal as all entities operate from the same location, and Data-Quick has sufficiently established Steele’s control over these documents. Steele failed to provide substantive arguments or case law to support its claim that it was not obligated to produce documents from non-party entities. Consequently, Data-Quick’s Motion to Compel is granted, requiring Steele to produce documents from Scott Steele, Meneta Steele, SteeleSoft, Inc., Steele Soft Management, LLC, Three S Delaware, Inc., 3S/RealServ, Inc., and Iautomortgage Corp. Despite the merger filings indicating Steele Software no longer exists, Three S remains liable for Steele Software's debts. Confusion arose regarding representation for Steele Software, with requests for extensions being filed by two different law firms. Ultimately, Steele withdrew its bankruptcy filing after the judge noted the Delaware filing appeared to be an attempt to forum shop.