Kavod Pharmaceuticals LLC v. Sigmapharm Laboratories, LLC (In re TRI Harbor Holdings Corp.)

1

In Re TRI HARBOR HOLDINGS CORPORATION, et al.,^[1] Debtor.

KAVOD PHARMACEUTICALS LLC (f/k/a RISING PHARMACEUTICALS, LLC, f/k/a RISING PHARMACEUTICALS, INC.) and TRI HARBOR HOLDINGS CORPORATION (f/k/a ACETO CORPORATION), Plaintiffs, v. SIGMAPHARM LABORATORIES, LLC, Defendant.

No. 19-13448 (VFP)

Adv. Pro. No. 19-2053 (VFP)

United States Bankruptcy Court, D. New Jersey

November 22, 2022

Chapter 11

LOWENSTEIN SANDLER LLP ATTORNEYS FOR PLAINTIFFS, KAVOD PHARMACEUTICALS LLC (F/K/A RISING PHARMACEUTICALS, LLC, F/K/A RISING PHARMACEUTICALS, INC.) AND TRI HARBOR HOLDINGS CORPORATION (F/K/A ACETO CORPORATION) REYNOLD LAMBERT, ESQ. WOJCIECH F. JUNG, ESQ. GAVIN J. ROONEY, ESQ. ONE LOWENSTEIN DRIVE

ELLIOTT GREENLEAF, P.C. ATTORNEYS FOR DEFENDANT, SIGMAPHARM LABORATORIES, LLC HENRY F. SIEDZIKOWSKI, ESQ. ANDREW ESTEPANI, ESQ. TIMOTHY MYERS, ESQ. ELLIOTT GREENLEAF, P.C.

MEMORANDUM OPINION DENYING WITHOUT PREJUDICE SIGMAPHARM'S MOTION FOR SANCTIONS FOR SPOLIATION OF EVIDENCE PENDING RESULTS OF EVIDENTIARY HEARING TO BE COMBINED WITH TRIAL

HONORABLE VINCENT F. PAPALIA, United States Bankruptcy Judge

I. INTRODUCTION

This matter comes before the Court on the motion (the "Motion") filed by defendant Sigmapharm Laboratories, LLC ("Sigmapharm") for: (i) financial and other sanctions for alleged spoliation of evidence by plaintiffs, which are two of the nine jointly administered Debtor-entities, Kavod Pharmaceuticals LLC, f/k/a Rising Pharmaceuticals, LLC f/k/a Rising Pharmaceuticals, Inc. ("Rising"), and Tri Harbor Holdings Corp., f/k/a Aceto Corporation ("Aceto") (collectively, the "Plaintiffs"); and (ii) an evidentiary hearing on the Motion. Sigmapharm asserts that Plaintiffs destroyed or have withheld certain documents that they were required to maintain and produce under the audit and related provisions of the parties' June 22, 2006 Master Product Development and Collaboration Agreement, the Court Orders described below and the common law duty to preserve documents and information relating to an actual or reasonably foreseeable lawsuit.^[2] The Plaintiffs filed an objection that denies Plaintiffs' allegations in all material respects and asserts that the Motion is untimely. Sigmapharm has filed a reply.

II. JURISDICTIONAL STATEMENT

The Court has jurisdiction over this matter under 28 U.S.C. § 1334(b) and the Standing Orders of Reference entered by the United States District Court on July 10, 1984 and amended on September 18, 2012. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B) [claims allowance] and (O). In addition, a Bankruptcy Court has "jurisdiction to interpret and enforce its own prior orders." Travelers Indem. Co. v. Bailey, 557 U.S. 137, 151 (2009) (in that case, a Confirmation Order entered ten (10) years earlier). Venue is proper in this Court under 28 U.S.C. § 1408. The court issues the following findings of fact and conclusions of law pursuant to Fed. R. Bankr. P. 7052.

To the extent that any of the findings of fact might constitute conclusions of law, they are adopted as such. Conversely, to the extent that any conclusions of law constitute findings of fact, they are adopted as such.

III. STATEMENT OF RELEVANT FACTS AND PROCEDURE

A. Preliminary Statement

The dispute between the parties arises from a June 22, 2006 Master Product Development and Collaboration Agreement (the "Agreement") for producing, marketing and sharing profits from the sale of pharmaceuticals. Other details concerning the Agreement and the relationship between the parties are included in this Court's October 5, 2021 Opinion that granted in part and denied in part the parties' separate motions for summary judgment. Kavod Pharmaceuticals LLC v. Sigmapharm Labs., LLC (In re Tri Harbor Holdings Corp.), 2021 WL 4877265 (Bankr. D.N.J. Oct. 5, 2021) (the "Opinion").^[3] The findings of fact and conclusions of law from the Opinion are incorporated herein by reference. To the extent that this summary deviates from the Opinion, the Opinion controls.

Among the claims that the October 5, 2021 Opinion (and October 6, 2021 Order) left for trial are those included in Sigmapharm's Third Counterclaim of its August 19, 2019 Answer to the Plaintiffs' Complaint. The Third Counterclaim sought: (i) to compel Plaintiffs to make their books and records available for Sigmapharm's inspection; and (ii) to complete an audit of the parties' profit-sharing under the Agreement as mandated by §§ 1.36, 1.37, 5.3.4, 8.6, 12.5.3 of the Agreement (generally, the "Audit Requirements") and as compelled by certain Court Orders described infra.^[4] Section 8.6 of the Agreement ("Maintenance of Record; Audits") provided:

During the term of this Agreement and for a period of at least seven (7) years after the date of termination of this Agreement, each Party shall keep complete and accurate records of all expenses incurred by it under this Agreement, which expenses are to be reimbursed by one or both of the other Parties.^[5]

The October 5, 2021 Opinion (and October 6, 2021 Order) provided in relevant part:

4. The Court GRANTS IN PART and DENIES IN PART Plaintiff[s'] motion for summary judgment to disallow certain elements of Sigmapharm's Claim Nos. 155-2 (which pertains to Aceto) and 162-1 (which pertains to Rising) as follows: . . .

(B) The Court GRANTS IN PART Plaintiffs' motion for partial summary judgment that disgorgement is not an available remedy for breach of the Agreement; provided, however, that this relief is granted WITHOUT PREJUDICE to Plaintiffs' claims for damages resulting from any breach of the Agreement, including (without limitation) Plaintiffs' alleged failure to: (i) allow the audit; (ii) provide appropriate backup documentation; (iii) maintain necessary and transparent books and records; or (iv) properly perform the administrative duties under the Agreement, including those that gave rise to the administrative fee paid to Rising pursuant to the Agreement.^[6]

A July 22, 2022 Sixth Supplemental Joint Scheduling Order required the parties to file motions in limine by August 12, 2022, originally returnable on October 4, 2022, and fixed an October 13, 2022 conference to schedule trial dates beginning October 24, 2022 through December 2, 2022.^[7] The parties timely filed four (4) in limine motions. The Court rescheduled the return date of the in limine motions (along with the scheduling conference) to October 18, 2022 and then to November 9, 2022.

Sigmapharm filed the instant Motion on September 22, 2022, to be returnable at the same time as the in limine motions, and this Motion was adjourned to be heard at the same time as those motions. The concluding paragraph of Sigmapharm's brief seeks damages in "the full amount of $4 million of available funds for Sigmapharm's Proofs of Claims and its Counterclaims."^[8] That figure refers to the aggregate $4 million reserve created under the parties' Stipulation And Consent Order entered on December 12, 2021 in the main bankruptcy case.^[9] The sole decretal paragraph of Sigmapharm's proposed Order on this Motion expands the relief requested and states in full:

It is hereby ORDERED that Sigmapharm's Motion for Sanctions for Spoliation of Evidence and For an Evidentiary Hearing is GRANTED. JUDGMENT is hereby entered in favor of Sigmapharm and against [Plaintiffs] on all counts of [Plaintiffs'] Adversary Complaint and Sigmapharm's Counterclaims. [Plaintiffs'] Objections to Sigmapharm's Proofs of Claims are OVERRULED. [Plaintiffs] shall remit to Sigmapharm the Sigmapharm Rising Cash Reserve and the Sigmapharm Aceto Cash Reserve (as set forth in [the December 12, 2021 Stipulation and Consent Order]) within (2) two days of the entry of this Order.^[10]

Because this Motion overlaps in substantial part -- if not entirely -- with the essence of Sigmapharm's affirmative claims for damages arising from Plaintiffs' alleged breach of the Audit Requirements of the Agreement and Plaintiffs' defenses to those claims and seeks to add new theories of claims and damages ("spoliation") to Sigmapharm's existing claims based on the same or very similar underlying allegations, the Court will deny Sigmapharm's Motion, without prejudice to its rights to raise these claims again at trial, subject to any objections by Plaintiffs, including as to the timing of the Motion.

B. Alleged Facts and Past Procedure Relevant to the Spoliation Motion

Sigmapharm alleges at the core of its Motion that Plaintiffs have not produced, for a period of seven (7) years (since Sigmapharm's first demand in late 2015 for Plaintiffs to comply with the Audit Requirements to the present) adequate, neutral and/or third-party proofs of various expenses and deductions that reduced the parties' shared net profits under the Agreement.^[11] Sigmapharm alleges that Plaintiffs' failure or inability to produce these records violates:

(i) the October 26, 2018 Order issued by the District Court in the Eastern District of Pennsylvania compelling Plaintiffs to preserve records;^[12]

(ii) the June 7, 2021 Order issued by this Court enforcing the Audit Requirements of the Agreement;^[13] and

(iii) the duty to preserve documents and information relating to pending or reasonably foreseeable litigation.^[14]

In support of its claims, Sigmapharm also relies heavily on the December 18, 2020 deposition testimony of Eugene Hughes Sr., who served as Vice President of Finance for Rising Pharmaceuticals, Inc. from June 12, 2017 to April 19, 2019 and who described the type of document(s) that he deemed necessary to support the expenses and deductions that Sigmapharm questioned.^[15] Sigmapharm correlates its demands with Mr. Hughes's December 18, 2020 testimony as follows:

Category

Hughes Dep.

Hughes Description^[16]

Returns

231:16- 232:25

Certificates of Destruction.^[17]

CMS

...