DRIP CAPITAL INC v. JY IMPORTS OF NY INC (2024)

REPORT AND RECOMMENDATION

Plaintiff Drip Capital, Inc. brings this action against Defendants JY Imports of NY Inc. (“JY Imports”); Unique Jems, Inc.; Miriam Jacobowitz (“Ms. Jacobowitz”); Yoel Jacobowitz (“Mr. Jacobowitz”); and Jacob Schwartz (collectively, “Defendants”) to recover money that Plaintiff claims it is owed pursuant to a financing agreement between Plaintiff and JY Imports. See Dkt. Nos. 1, 24. Discovery in this case has been ongoing since January 30, 2024, and this Court has issued multiple orders requiring Defendants to comply with their discovery obligations. After Defendants’ repeated noncompliance with multiple Court orders, the Court permitted Plaintiff to move for sanctions and held an evidentiary hearing where Ms. Jacobowitz, Mr. Jacobowitz, and Mr. Schwartz testified.

Currently pending before this Court, on a referral from the Honorable Ramon E. Reyes, Jr., United States District Judge, is Plaintiff's motion for sanctions. See Dkt. No. 92; see Order dated September 17, 2024. For the reasons explained below, the undersigned respectfully recommends that Plaintiff's motion for sanctions be GRANTED in part and DENIED in part.

I. Background

A. Factual Background

Plaintiff alleges that it entered into a financing agreement with JY Imports pursuant to which it provided funds to support the company's business operations. See generally Dkt. No. 24. Plaintiff alleges that JY Imports subsequently defaulted on the loan, owing $92,068 in principal and $9,158 in accrued interest as of November 16, 2022. Id. ¶ 12.

Plaintiff alleges that the individual defendants, particularly Ms. Jacobowitz and Mr. Schwartz, allegedly operated JY Imports as their “personal instrumentality and alter ego,” thereby ignoring corporate formalities. Id. ¶¶ 21-22. Plaintiff alleges that the assets of JY Imports, including inventory funded by Drip Capital's loans, were allegedly transferred to Unique Jems and other entities controlled by the defendants at below-market value or without consideration. Id. ¶¶ 78-79. Plaintiff contends that these transfers left JY Imports insolvent and, in turn, unable to meet its debt obligations to Plaintiff. Id. ¶ 85. These actions are alleged to have been undertaken with the intent to defraud creditors. Id. ¶ 84.

Plaintiff asserts claims for breach of contract, fraudulent conveyance, and alter ego liability, and seeks to void the transfers from JY Imports to Unique Jems, as well as money damages in excess of $100,000.00. Id. ¶¶ 73-109.

B. Relevant Procedural History

On December 8, 2022, Plaintiff filed a complaint against JY Imports and Ms. Jacobowitz. See Dkt. No. 1. On March 19, 2023, Defendants filed their answer. See Dkt. No. 9. The parties were subsequently referred to arbitration, and an arbitration award was entered on August 10, 2023. See Aug. 10, 2023 Dkt. Order. On September 6, 2023, Plaintiff filed a demand for trial de novo. See Dkt. No. 22.

On October 18, 2023, Plaintiff filed an amended complaint, adding Mr. Schwartz, Mr. Jacobowitz, and Unique Jems as Defendants and asserting new claims for veil-piercing, alter-ego liability, and fraudulent conveyance. See Dkt. No. 24. Defendants answered the amended complaint on November 28, 2023. See Dkt. No. 37.

On January 23, 2024, the undersigned held an initial conference. See Jan. 23, 2024 Dkt. Entry. Defense counsel, Scott Levenson, Esq., failed to appear despite receiving notice via ECF. See id.; see also Dkt. No. 42. The following day, Mr. Levenson informed the Court that he had missed the conference due to a medical issue. See Dkt. No. 45. The Court rescheduled the conference for January 30, 2024, at which time discovery deadlines were set. See Jan. 24, 2024 Dkt. Entry; Jan. 30, 2024 Dkt. Entry.

On May 2, 2024, Defendants filed a motion to dismiss, which is pending sub judice. See Dkt. No. 51.¹ Subsequently, on June 14, 2024, the parties submitted a joint status report wherein Plaintiff noted Defendants’ failure to respond to Plaintiff's Requests for Production (“RFP”), responses to which had been due May 10, 2024. See Dkt. No. 53. Plaintiff's RFP, dated April 10, 2024, sought various documents, including bank records, communications among Defendants, and agreements with Amazon related to the business transactions described in the amended complaint. See Dkt. No. 54-1.

On June 14, 2024, the Court ordered Defendants to serve responses to any outstanding discovery requests by June 17, 2024, and warned of potential sanctions for noncompliance. See June 14, 2024 Dkt. Order. Mr. Levenson thereafter purportedly served Plaintiff with a document production. See Dkt. No. 54.

On June 18, 2024, Plaintiff filed a motion to compel Defendants to provide complete responses to the RFP and for sanctions against Defendants and Mr. Levenson. See Dkt. No. 54. According to Plaintiff, “Defendants ha[d] produced nothing with the exception of bank statements as to only a small component of the case which were long-ago already possessed by plaintiff (they were simply now re-produced)․ In short, defendants have produced nothing new at all, and essentially nothing at all, despite this Court[’s] June 14 Order.” Id. at 1 (emphasis in original). Plaintiff argued that Defendants’ conduct was “untenable” and “sanctionable ․ on its face[,]” pointing to deposition testimony from Ms. Jacobowitz, who purportedly testified that she was in business with Mr. Jacobowitz and Mr. Schwartz using “assets formerly owned by the defunct JY Imports defendant through the entity known as Unique Jems, Inc.” Id. at 3. Plaintiff also attached “pages from the Amazon website showing Unique Jems as the seller of essentially the same products once sold by JY imports” and which were “identified by Ms. Jacobowitz during her deposition as being sold today by Unique Jems.” Id. Despite this testimony and evidence, Plaintiff alleged that Defendants had not produced any internal communications or any documents or communications with Amazon. See id.

In response, the Court scheduled a discovery conference to address the issues raised in Plaintiff's motion. See June 21, 2024 Dkt. Entry.

On June 24, 2024, Defendants filed a notice of consent to change their attorney, seeking to replace Mr. Levenson with Mr. Christian Martinez, Esq. See Dkt. No. 61. Defendants also requested an adjournment of the discovery conference. See Dkt. No. 62. The Court rejected the notice for noncompliance with Local Civil Rule 1.4 and denied the adjournment request. See June 24, 2024 Dkt. Order.

On June 24, 2024, the court held the discovery conference as scheduled, and Plaintiff's counsel, Mr. Levenson, and Mr. Martinez appeared. See June 24, 2024 Dkt. Order. The Court noted that the scope of the RFP was reasonable with the sole exception of Request No. 15, which sought various communications, which the Court limited to business, rather than personal, communications. See Dkt. No. 92-1 ¶ 7. The Court denied Plaintiff's motion to compel in light of the substitution of counsel; however, the Court ordered the parties to meet and confer regarding the issues raised in Plaintiff's motion. See June 24, 2024 Dkt. Order. The Court further ordered Mr. Levenson to file a formal motion to withdraw as counsel. Id.

On June 28, 2024, Mr. Levenson moved to withdraw as counsel for Defendants. See Dkt. No. 64. That same day, the Court issued an order deferring ruling on the motion to withdraw until Mr. Martinez was admitted to this Court and noticed his appearance on the docket. See June 28, 2024 Dkt. Order.

On July 8, 2024, Plaintiff filed a letter indicating that Defendants had not engaged with discovery and had not produced any new documents since Mr. Martinez appeared in the case. See Dkt. No. 67.

On July 11, 2024, Mr. Levenson filed a letter stating that Mr. Martinez was “not under any obligation to discuss this case with opposing counsel until he is admitted into the Eastern District and he is currently on vacation for the next two weeks. If opposing [counsel] would like to renegotiate dates moving forward, we will be obliging and will work together to resolve this matter.” Dkt. No. 70. Responding to Plaintiff's claim that Defendants had not produced any new documents since the Court's June 24, 2024 Order, Mr. Levenson stated that he had previously served discovery responses on Plaintiff on June 14, 2024, and had “submitted all the documentation that our client has sent us and has in their possession.” Id.

Later on July 11, 2024, Mr. Martinez appeared in this case, see Dkt. No 71, and the Court granted Mr. Levenson's motion to withdraw as counsel, see July 11, 2024 Dkt. Order. The Court also ordered the following:

Defendants are ordered to make a supplemental production in response to Plaintiff's Request for Production of Documents by July 18, 2024. In addition, by July 18, 2024, each Defendant shall produce to Plaintiff an affidavit stating that they have no additional responsive documents in their possession, custody, or control. The affidavits shall also describe how Defendants conducted their search and the parameters they used to search for responsive documents. Plaintiff shall notify the Court by July 19, 2024 if Defendants do not comply with this order. Defendants are advised that there will be no extensions of this deadline, and failure to comply may result in sanctions.

July 11, 2024 Dkt. Order (emphasis in original).

On July 12, 2024, Defendants requested additional time to comply with the July 11, 2024 order. See Dkt. No. 72. The Court denied the request in part and directed Defendants to comply with the July 18, 2024 supplemental production deadline; however, the Court extended the deadline for Defendants to submit their affidavits to July 24, 2024. See July 12, 2024 Dkt. Order.

On July 19, 2024, Plaintiff filed a letter indicating that Defendants had not complied with the Court's July 11 and July 12, 2024 orders. See Dkt. No. 74. According to Plaintiff, Defendants had not made a supplemental production, and there had been no communication from Defendants or Mr. Martinez. Id. In response, the Court ordered Defendants to show cause why sanctions should not be issued against them for failing to comply with the Court's orders. See July 19, 2024 Dkt. Order.

On July 22, 2024, Defendants filed a letter requesting sanctions against Plaintiff because “discovery was provided to opposing counsel's office by email on June 14, 2024 [by prior counsel]. We have until July 24, 2024 to provide our client's affidavits.” See Dkt. No. 75. Defendants effectively relied on their June 14, 2024 document production and did not make a supplemental production, notwithstanding the Court's July 11 and July 12 orders directing them to do so. As a result, on July 22, 2024, the Court denied Defendants’ request for sanctions and scheduled an in-person status conference. See July 22, 2024 Dkt. Order.

On July 25, 2024, Plaintiff filed a letter indicating that on July 24, 2024, Defendants’ former counsel, Mr. Levenson had sent Plaintiff three affidavits from the individual Defendants along with various attachments. See Dkt. No. 77. Plaintiff raised several issues with Defendants’ purported supplemental production, including that: (1) the production was not meaningful and consisted only of (i) personal bank statements from the individual defendants, (ii) a few personal tax returns (which were not all that was requested), and (iii) Unique Jems's 2022 tax return, which shows $1.3 million of revenue; (2) Defendants did not produce: (i) Unique Jems's bank statements or any other financial documents, (ii) Defendants’ communications with Amazon (where JY Imports primarily operated), or (iii) communications among, by, or to Defendants; (3) the affidavits of Ms. Jacobowitz and Mr. Schwartz were not signed; (4) the affidavits produced—which were all very similar in form and content—set forth a mix of objections and assertions that some documents are not in the affiant's possession (but without explanation as to how that could be in light of objective facts and documents known) and most documents requested were not mentioned at all; and (5) the affidavit of Yoel Jacobowitz states “the documents that I allegedly have and will not hand over were asked for under a false premise that I own or indeed have knowledge of the business entities and contracts.” Id. at 2 (emphasis in original affidavit). Plaintiff noted, however, that “the $1.3+ million tax return for Unique Jems from 2022 produced by Mr. Jacobowitz identifies him as the President and sole owner of Unique Jems,” which Plaintiff also confirmed with the New York State Secretary of State. Id.

On July 30, 2024, the Court held a telephonic discovery conference, which Mr. Martinez did not appear for despite receiving notice via ECF. See July 30, 2024 Dkt. Order. The Court ordered Defendants to show cause why sanctions should not be issued and ordered Plaintiff to file a letter, by 5:00 p.m. on August 1, 2024, that set forth, in a chart format, the specific discovery requested from Defendants and what materials were produced in response, if any. Id. The Court ordered Defendants to file their response by August 2, 2024. See id.

On July 31, 2024, Mr. Martinez filed a letter indicating that he missed the July 30, 2024 conference because of a family emergency. See Dkt. No. 78. The Court therefore declined to impose sanctions. See July 31, 2024 Dkt. Order.

On August 1, 2024, Plaintiff filed a letter that identified each document produced by Defendants in response to Plaintiff's RFP. See Dkt. No. 79. According to Plaintiff, Defendants had produced: (1) a Certificate of Incorporation for JY Imports; (2) letter from the IRS assigning an Employer Identification Number for JY Imports; (3) two unidentified agreements between “Fox Print Toys” and an unknown entity (Plaintiff guesses that the entity is likely Amazon); (4) Jacob Schwartz's personal bank statements from January 1, 2023 through June 30, 2024; (5) Yoel Jacobowitz's personal bank statements from July 1, 2022 through June 30, 2024; (6) Miriam Jacobowitz's personal bank statements from December 1, 2021 through June 30, 2024; (7) Unique Jems's 2022 Tax Return; (8) Jacob Schwartz's 2021 and 2023 tax returns; and (9) Yoel Jacobowitz's 2021-2023 tax returns. See id.

Defendants did not respond to Plaintiff's August 1, 2024 letter despite the Court's order to do so. See August 4, 2024 Dkt. Order. As a result, on August 4, 2024, the Court ordered Defendants to show cause why sanctions should not be issued based on their failure to file a response letter in accordance with the Court's order. Id.

On August 5, 2024, Mr. Levenson filed a response to the order to show cause on behalf of Defendants. See Aug. 5, 2024 Dkt. Order. Because Mr. Levenson had previously withdrew as counsel for Defendants, the Court terminated the filing and ordered Mr. Levenson to refrain from making further filings in this case. See id. The Court ordered Mr. Martinez to file a response to the order to show cause on behalf of Defendants. See id. Later that day, Mr. Martinez filed the same letter as Mr. Levenson's letter, but on his own letterhead. See Dkt. No. 81. The crux of the letter was that Defendants claimed to have no additional responsive documents in their possession. See id.

That same day, the Court held an in-person discovery conference, which Mr. Martinez failed to appear for, alleging that he had mistakenly traveled to the Central Islip federal courthouse for the conference. See Aug. 5, 2024 Dkt. Entry. The Court permitted Mr. Martinez to appear by phone, declined to issue sanctions, and warned Mr. Martinez that future non-appearances would result in sanctions. Id.; see Dkt. 82 at 2.

At the August 5, 2024 conference, the Court made a detailed record of Defendants’ repeated discovery violations and noncompliance with Court orders, noting that Defendants, at that point, had failed to comply with Court orders on at least four occasions. See Dkt. 82 at 2; see also Dkt. No. 90 (transcript of August 5, 2024 conference). Following the conference, the Court issued a discovery order, which directed Defendants to, inter alia, take the following actions by August 9, 2024:

1. Produce a properly executed and signed copy of the affidavit of Miriam Jacobowitz, which Defendants were previously ordered to produce pursuant to the Court's July 11, 2024 order;

2. Produce a signed affidavit from Yoel Jacobowitz that sets forth the ownership structure of Unique Jems and describes, with specificity, the entities and/or individuals who have an ownership interest in Unique Jems; and

3. Produce supplemental written RFP responses that comply with the Federal Rules of Civil Procedure and Local Civil Rules of the United States District Courts for the Southern and Eastern Districts of New York. Defendants are ordered to provide a separate response to each document request. For each request, if Defendants’ position is that they have already produced all documents responsive to that request that are in their possession, custody, or control, then Defendants shall provide the Bates numbers of the responsive documents and the dates on which these documents were served on Plaintiff. If Defendants claim they do not have responsive documents to a specific request, the response shall have a statement to that effect; and

4. For each response where Defendants maintain that responsive documents do not exist or, alternatively, that they do not have responsive documents in their possession, custody, or control, Defendants are ordered to produce an additional affidavit or additional affidavits that set forth, at minimum, the following information:

a. A statement indicating which document request is being referenced;

b. A statement indicating the date in which the affiant searched for responsive documents and a description of the locations searched;

c. If the affiant maintains that certain documents do not exist, a statement that sets forth their grounds for such belief; and

d. If the affiant maintains that any document requested is no longer in their possession, custody, or control, a statement setting forth what was done with the document, the reasons for the transfer or disposition of the document, and the date of the transfer or disposition.

See Dkt. No. 82 at 1-3 (emphasis added). The Court also ordered the parties to file a joint letter regarding Defendants’ compliance with Dkt. No. 82 by August 12, 2024. Id. at 4. The Court scheduled an in-person conference for August 22, 2024 as well. Id. The Court warned Mr. Martinez and Defendants that if they did not comply with this Order, “the Court will issue sanctions as appropriate.” See id.; see also Dkt. No. 90 (transcript from conference).

On August 9, 2024, Defendants filed written discovery responses, a supplemental document production, and affidavits from each individual Defendant. See Dkt. No 83. The majority of the documents submitted, however, were blank pages. See id. Defendants’ affidavits stated that they had searched their homes and office for responsive documents and made “good faith efforts to provide all the documentation and business records” in their possession. See Dkt. Nos. 83-4 – 83-6.

On August 11, 2024, Plaintiff requested an extension to file the joint status report, asserting that Defendants’ production consisted primarily of “blank documents (with the exception of some gibberish characters or a tiny snippet of text in a few instances as to the otherwise blank documents).” Dkt. No. 84 at 1. The Court granted Plaintiff's request, extending the deadline to August 15, 2024, and reiterated its prior directive that Defendants produce Bates-stamped documents. See Aug. 11, 2024 Dkt. Order. The Court again warned of potential sanctions for further noncompliance. See id.

On August 12, 2024, Mr. Martinez filed a letter indicating that he was having technical issues and could not produce Bates-stamped documents by the end of the day in accordance with the Court's order. See Dkt. No. 86.

On August 15, 2024, Plaintiff filed a letter indicating that it had still not received any additional materials from Defendants. See Dkt. No. 87. In response, the Court ordered Defendants to produce Bates-stamped documents by August 16, 2024, at 5:00 p.m. and extended Plaintiff's deadline to file a joint status report to August 20, 2024. See Aug. 15, 2024 Dkt. Order.

On August 20, 2024, Plaintiff filed a letter describing its review of the additional documents produced by Mr. Martinez, which Plaintiff claimed contained “absolutely not a single new page of production as compared with the July 24 production with the exception of copies of the individual defendants’ driver's licenses.” See Dkt. No. 88 at 4. Plaintiff further asserted that Defendants’ supplemental responses raised new (and untimely) objections, despite the Court's prior finding that the scope of the RFPs were reasonable. Id. at 5. Plaintiff claimed that Defendants had not produced key documents, including any internal communications, communications with Amazon or Walmart, bank statements from Unique Jems, or records relating to more than $2 million in gross revenue shown on Unique Jems's tax return. Id. Additionally, Plaintiff highlighted that Defendants’ affidavits failed to comply with the Court's August 5, 2024 order insofar as they did not describe any electronic search for documents. Id. at 6. Plaintiff also pointed out inconsistencies in Yoel Jacobowitz's affidavits regarding ownership of Unique Jems. Id. at 5-6. For example, Mr. Jacobowitz's affidavit stated that he was the 100% owner of Unique Jems, see Dkt. No. 83-4 ¶ 8, but his earlier affidavit denied ownership of the company and refused to produce documents on such grounds, see Dkt. No. 77; Dkt. No 88.

Mr. Martinez did not contribute to the August 20, 2024 joint status report, as required. See Dkt. No 88. Instead, later in the day on August 20, 2024, Defendants filed their portion of the joint status report separately on the docket, asserting that they possessed no further responsive documents. See Dkt. No. 89. Mr. Martinez stated that he had done everything he could to comply with the Court's orders. Id.

On August 22, 2024, the parties appeared for a conference before the undersigned. See Aug. 22, 2024 Dkt. Entry. At the conference, the Court indicated that it was “inclined to issue sanctions due to Defendants’ repeated discovery violations and failure to follow Court orders” and ordered Plaintiff to file a motion for sanctions. Id.

On September 9, 2024, Plaintiff filed its motion for sanctions, seeking both case-dispositive sanctions against Defendants and monetary sanctions against Defendants and their counsel under Fed. R. Civ. P. 37(b)(2) and the Court's inherent authority. See Dkt. No. 92. Defendants filed their opposition on September 16, 2024, Dkt. No. 93, and Plaintiff filed a reply on September 19, 2024, Dkt. No. 94. The Court subsequently scheduled an evidentiary hearing for October 9, 2024, limiting the testimony to the individually-named Defendants and exhibits relevant to Sections I through IV of Plaintiff's memorandum of law; the Court declined to hear testimony on the previously-raised issue of the alleged unlicensed practice of law by a non-party to this case. See Sep. 19, 2024 Dkt. Entry; Oct. 3, 2024 Dkt. Entry.

On October 9, 2024, the Court held an evidentiary hearing and heard testimony from the individual Defendants, which is summarized below. See Oct. 9, 2024 Dkt. Entry. Plaintiff's counsel argued that sanctions were justified due to Defendants’ obstructive behavior and failure to provide meaningful discovery, describing their defense as a “war of attrition.” See October 9, 2024 Transcript (“Tr.”) at 5:15-22.

In contrast, Mr. Martinez argued that Plaintiff failed to establish that Defendants were in possession of material evidence that they willfully failed to disclose. Id. at 12:10-13. Mr. Martinez suggested that Plaintiff did not provide any basis for claiming that the documents sought were available to his clients but withheld intentionally. Id. Describing his clients as “poor business people” with limited education, Mr. Martinez emphasized that his clients had provided the records that they had in their possession and lacked the sophistication to maintain or retrieve records due to their educational and organizational limitations. Id. at 15:14-20. For example, Mr. Martinez suggested that many of the records sought might have been destroyed or were simply unavailable. Id.

Mr. Martinez also criticized Plaintiff for not seeking third-party discovery from entities like banks, email providers, or Amazon itself, arguing that Plaintiff could have pursued these avenues instead of solely relying on discovery demands from Defendants. Id. at 12:4-9.

1. Testimony of Miriam Jacobowitz

Miriam Jacobowitz was the first witness to testify, and her testimony primarily concerned her role as the owner of JY Imports and the business practices of the company. See generally Tr. Ms. Jacobowitz testified that she was 41 years old and that her highest level of education was 12th grade. See id. at 14:23-15:1. Ms. Jacobowitz testified that JY Imports is a corporation engaged in the wholesale business of “selling toys on Amazon.” See id. at 15:13-17:18, 20:23-21:2. She explained that she became the sole owner of JY Imports in 2019, purchasing it from Jacob Schwartz, a friend and her mother's neighbor, for $5,000. See id. at 15:7-11; 16:2-11. The transaction was not formally documented and was paid in cash. See id. at 16:12-25. Ms. Jacobowitz stated that she primarily focused on the creative aspects of JY Imports, such as designing products, while Jacob Schwartz handled financial matters, banking, taxes, and supply management. See id. at 17:3-20:4.

Ms. Jacobowitz acknowledged that she had access to JY Imports's bank records and email accounts but did not personally log in or maintain those records, relying instead on Mr. Schwartz for those tasks. See, e.g., id. at 32:6-39:11. She attributed the absence of relevant business documents, such as invoices and bank statements, to a lack of personal involvement in the operational side of the business and the reliance on shared computers and external storage, which she could no longer access. Id. at 28:2-32:24. Ms. Jacobowitz explained that she did not use internet-connected devices at home due to religious restrictions and relied on shared office computers for her business activities. Id. at 32:6-33:7. She claimed that this limited her ability to preserve or access electronic records, which she suggested might still be available through Mr. Schwartz. Id. at 30:7-30:25; 32:6-39:11.

When asked to discuss her specific efforts to search for responsive documents in connection with discovery sought in the present case, Ms. Jacobowitz explained that she conducted searches at her home and at the JY Imports office in September 2024. See id. at 27:4-31:16. Ms. Jacobowitz described JY Imports's office as a shared workplace with a shared desktop computer. Id. at 52:22-53:9. She testified that she attempted to login to the computer to search for responsive documents, but she could not remember the login information. See id. at 58:25-59:3. While Ms. Jacobowitz admitted that she used a Gmail account for JY Imports business, she did not take steps to access emails from the account. See id. at 47:24-48:12. She also did not contact JY Imports's accountant to obtain copies of the company's financial documents. Id. Ms. Jacobowitz stated that she first performed searches for responsive documents in September 2024—not in April 2024 when Plaintiff initially served the RFP—because “there was no reason to” perform a search prior to September 2024. Id. at 53:16-54:1.

Ms. Jacobowitz also testified about Unique Jems, which her husband Yoel purchased from her in 2020 for $3,000. See id. at 21:8-25. Like the JY Imports transaction, the sale of Unique Jems to Yoel was not documented. Id. at 21:19-20. Ms. Jacobowitz described Unique Jems as the retail arm of the two companies; JY Imports operated a “vendor account” on Amazon, which means it is a “wholesale business,” and sold toys to Unique Jems, “which sold them as retailers.” Id. at 20:24-21:2. Ms. Jacobowitz stated that she had minimal involvement in maintaining records for Unique Jems, despite owning the company prior to its sale in 2020, and deferred questions about its operations to Mr. Schwartz. See, e.g., id. at 55-56.

2. Testimony of Jacob Schwartz

Jacob Schwartz was the second witness to testify at the October 9, 2024 hearing. Mr. Schwartz, who is thirty-two years old, testified that he initially owned JY Imports before selling it to Ms. Jacobowitz in 2019. See id. at 64:8-71:1. Mr. Schwartz also testified about other businesses he owned, including Lavendar Associates, Inc., which was an Amazon marketplace business. Id. at 64:17-66:20.

Mr. Schwartz testified that even after he sold it, he continued to play a significant role in JY Imports, including handling financial matters, banking, and supplier relationships. Id. at 68:23-71:1. He confirmed that he was responsible for maintaining the company's records, including invoices, contracts, and bank statements. Id. Mr. Schwartz noted that gross earnings for JY Imports showed “$4 million in sales.” Id. at 119:10-16.

Mr. Schwartz also discussed the challenges faced by JY Imports, including its declining operations starting in 2021. Id. at 121:15-122:1. He testified that he facilitated a loan from Drip Capital to acquire inventory, but the business struggled to sell the stock effectively, resulting in financial difficulties. Id. at 121:15-122:1; 137:4-6. Mr. Schwartz admitted that he did not maintain thorough documentation of these transactions and attributed this to his limited organizational skills and the informal nature of the business's operations. See generally id.

When questioned about efforts to locate responsive documents, Mr. Schwartz first testified that he “probably” kept all of his emails in his personal Gmail account and that “anything” that was needed, he “can get.” Id. at 73:10-74:22. When asked why he did not provide “prior documents like contracts” to his counsel, he said he made no efforts “at all” to find them but that he “can give you everything.” Id. at 75:13-76:21. When asked by the Court as to what electronic search (if any) Mr. Schwartz conducted, Mr. Schwartz conceded that he “didn't search” for any electronic documents apart from bank statements. Id. at 78:3-79:19; 80:13-19. Mr. Schwartz further conceded that he should have “a lot of communication” with Amazon, including emails. Id. at 78:3-13. Additionally, when asked by the Court if he performed a search of his emails or emails received from Amazon, Mr. Schwartz answered, “no.” Id at 96:20-24.

Mr. Schwartz subsequently testified that he searched his office, including shared computer systems, for relevant materials such as bank statements, contracts, and invoices; however, he admitted that he could not recall the login information for key accounts, such as the company's Amazon vendor account, or Vendor Central account, or its bank accounts, which hampered his ability to retrieve digital records. Id. at 113:14-115:3, see also 69:15-73:79. Mr. Schwartz explained that many records were stored with Goflow, a company that provided inventory management and purchase orders, but he was unable to access those records because he stopped paying the subscription fee. See, e.g., at 72:15-20, 83:14-84:13.

Mr. Schwartz testified that he was aware of the Court orders to search for specific documents but was unclear on the exact details. Id. at 124:17-146:22. He explained that in response to the orders, he searched for agreements and information related to Drip Capital, but he did not conduct a thorough search of his emails for specific emails related to the litigation. See id. at 77:20-83:12. Mr. Schwartz admitted that he possessed emails with Amazon about purchase orders and payment information, as well as other emails related to Drip Capital, but he did not produce any of these documents. Id. at 77:20-83:12, 142:2-25. Mr. Schwartz affirmed that his affidavit was nonetheless accurate. Id. at 144:13-16. Mr. Schwartz claimed that he was aware of potential sanctions for not complying with Court orders, including the possibility of case-ending sanctions and monetary costs. Id. at 124:17-146:22.

3. Testimony of Yoel Jacobowitz

Yoel Jacobowitz was the final witness to testify at the October 9, 2024 evidentiary hearing. Mr. Jacobowitz testified that he was forty years old and was educated “in the yeshiva until 18.” Id. at 146:25-147:5. He testified that he purchased Unique Jems from his wife Miriam in 2020 for approximately $3,000, a transaction conducted in cash without formal documentation. Id. at 147:22-152:7. Mr. Jacobowitz explained that Unique Jems operated as a retail business on Amazon. Id. Mr. Jacobowitz stated that he was responsible for filing taxes for Unique Jems but did not have a systematic approach to organizing business documents. Id. at 154:13-17.

Mr. Jacobowitz described his limited involvement in the operational aspects of JY Imports, clarifying that he did not have affiliations with the company beyond his ownership of Unique Jems. Id. at 147:8-147:21. He noted that he managed his company independently and had no formal business agreements with JY Imports or Jacob Schwartz. Id.

Mr. Jacobowitz acknowledged being aware of Plaintiff's discovery requests and the Court's orders but stated that his role in responding to them was limited and largely informal. Id. at 149:21-23, 154:13-165:7. When shown a copy of the RFP, Mr. Jacobowitz acknowledged seeing the document but claimed he read it quickly and did not understand everything due to language barriers. He testified that he interpreted the requests as only seeking “big deals” like tax returns and bank statements, not granular records like itemized sales emails. Id. He acknowledged that there were “tens of thousands of Amazon-related emails.” Id. at 161:3-9. He noted that he “probably” has access to the email account but had not “check[ed] for a long time.” Id. at 161:9-13. He admitted that he has access to Unique Jems's bank records but did not produce responsive documents because he believed they had already been submitted. Id. at 149:21-151:5.

III. Legal Standard for Fed. R. Civ. P. 37(b) Sanctions

Federal Rule of Civil Procedure 37(b)(2) authorizes courts to impose sanctions on parties that fail to comply with discovery orders. The rule provides that “[i]f a party ․ fails to obey an order to provide or permit discovery ․ the court where the action is pending may issue further just orders.” Fed. R. Civ. P. 37(b)(2). The Second Circuit has described the three purposes behind Rule 37 sanctions as follows:

First, they ensure that a party will not benefit from its own failure to comply. Second, they are specific deterrents and seek to obtain compliance with the particular order issued. Third, they are intended to serve a general deterrent effect on the case at hand and on other litigation, provided that the party against whom they are imposed was in some sense at fault.

See Gilead Scis., Inc. v. Safe Chain Sols. LLC, No. 21-CV-4106 (AMD) (RER), 2023 WL 4991574, at *2 (E.D.N.Y. July 19, 2023), report and recommendation adopted, 2023 WL 5024696 (E.D.N.Y. Aug. 7, 2023) (quoting Update Art, Inc. v. Modiin Publ'g, Ltd., 843 F.2d 67, 71 (2d Cir. 1988)).

When considering a motion for sanctions, courts in this Circuit often evaluate four factors: “(1) the willfulness of the non-compliant party or the reason for noncompliance; (2) the efficacy of lesser sanctions; (3) the duration of the period of noncompliance; and (4) whether the non-compliant party had been warned of the consequences of ․ noncompliance.” Agiwal v. Mid Island Mortg. Corp., 555 F.3d 298, 302 (2d Cir. 2009). These factors, however, are not exclusive, nor must each weigh against the non-compliant party for sanctions to be imposed. See Icon Int'l, Inc. v. Elevation Health LLC, 347 F.R.D. 274, 285 (S.D.N.Y. 2024) (citing S. New England Tel. Co. v. Glob NAPs Inc., 624 F.3d 123, 144 (2d Cir. 2010)).

While prejudice to the moving party may weigh heavily in favor of sanctions, it is not a prerequisite in every case. See Brevard v. Schunk, No. 18-CV-00042 (BKS) (ML), 2020 WL 374563, at *5 (N.D.N.Y. Jan. 23, 2020) (quoting Royal Park Invs. SA/NV v. U.S. Bank Nat'l Ass'n, 319 F.R.D. 122, 129 (S.D.N.Y. 2016)). The Second Circuit and the Supreme Court have rejected a “no harm, no foul” standard, recognizing that sanctions under Rule 37 also serve broader purposes beyond addressing prejudice. See Martinez v. City of New York, No. 16-CV-79 (AMD) (CLP), 2018 WL 604019, at *22 (E.D.N.Y. Jan. 24, 2018) (quoting S. New England Tel. Co., 624 F.3d at 148–49). Moreover, any sanction imposed must relate to the specific claim or issue addressed by the discovery order. Daval Steel Prods., a Div. of Francosteel Corp. v. M/V Fakredine, 951 F.2d 1357, 1366 (2d Cir. 1991).

Courts have broad discretion to determine appropriate sanctions for discovery abuses and other litigation misconduct. See Gilead Scis., 2023 WL 4991574, at *2. Sanctions may include, among other remedies, deeming certain facts established, prohibiting the disobedient party from supporting or opposing designated claims or defenses, or from introducing designated matters in evidence, striking pleadings, staying proceedings, dismissing the action, entering a default judgment, or imposing monetary penalties. See Fed. R. Civ. P. 37(b)(2); see also Gilead Scis., 2023 WL 4991574, at *2-*3. Where “the nature of the alleged breach of a discovery obligation is the non-production of evidence, a district court has broad discretion in fashioning an appropriate sanction, including the discretion to delay the start of a trial (at the expense of the party that breached its obligation) ․ or to proceed with a trial and give an adverse inference instruction.” Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 107 (2d Cir. 2002).

Finally, even in the absence of a discovery order, a court may impose sanctions for discovery misconduct under its inherent authority to manage its own affairs. See Residential Funding Corp., 306 F.3d at 106-07; Chambers v. NASCO, Inc., 501 U.S. 32, 43 (1991) (“It has long been understood that ‘[c]ertain implied powers must necessarily result to our Courts of justice from the nature of their institution,’ powers ‘which cannot be dispensed with in a Court, because they are necessary to the exercise of all others.’ ” (citation omitted)).

IV. Discussion

A. Bases for Sanctions

1. Defendants’ Violation of Discovery Orders

As a preliminary matter, the Court must determine whether Defendants failed “to obey an order to provide or permit discovery.” Fed. R. Civ. P. 37(b)(2)(A). An order requiring a party to comply with its discovery obligations or with another party's discovery requests is a necessary predicate for imposing sanctions under Rule 37(b). Joint Stock Co. Channel One Russ. Worldwide v. Infomir LLC, No. 16-CV-1318 (GBD) (BCM), 2017 WL 3671036, at *18 (S.D.N.Y. July 18, 2017). As the Second Circuit has explained, “[p]rovided that there is a clearly articulated order of the court requiring specified discovery, the district court has the authority to impose Rule 37(b) sanctions for noncompliance with that order.” Daval Steel Prods., 951 F.2d at 1363.

Here, there is no dispute that the Court issued multiple orders directing Defendants to comply with their discovery obligations. On June 14, 2024, the Court ordered Defendants to serve responses to any outstanding discovery requests by June 17, 2024, and warned of potential sanctions for noncompliance. See June 14, 2024 Dkt. Order. On July 11, 2024, the Court ordered Defendants to supplement their document production and to produce affidavits describing the efforts they employed to search for responsive documents. See July 11, 2024 Dkt. Order. On August 5, 2024, the Court issued a second order reiterating the directive to supplement their production and to provide the required affidavit. See Dkt. No. 82.

It is equally undisputed that Defendants failed to comply with these orders. To date, Defendants have produced only the following documents: JY Imports's Certificate of Incorporation, a letter from the IRS assigning an Employer Identification Number to JY Imports, two unidentified agreements between “Fox Print Toys” and an entity suspected to be Amazon, copies of the individual Defendants’ personal bank statements, Unique Jems's 2022 tax return, Jacob Schwartz's 2021 and 2023 tax returns, Yoel Jacobowitz's 2021–2023 tax returns, and copies of the individual Defendants’ driver's licenses. See Dkt. No. 79.

Defendants have not produced critical categories of documents, including internal communications, electronic communications with Amazon or Walmart, bank statements from Unique Jems, or any documents supporting the $2 million in gross revenue reflected on Unique Jems's 2022 tax return. See id. Defendants initially claimed that these documents did not exist, asserting that they had not been retained or never existed in the first place. See Dkt. No. 93 at 8. They also contended that no communications could be produced because all communications were oral. Id. at 9.

Defendants’ testimony at the evidentiary hearing, however, established that these statements were, at minimum, not accurate. For example, Mr. Schwartz testified about receiving purchase orders from Amazon related to JY Imports, stating that he should have many communications regarding these purchase orders in his email. But when asked if he searched for and produced these communications, Mr. Schwartz admitted he did not conduct any meaningful search or provide the emails, despite their relevance to the litigation. Tr. 77:20-83:12, 142:2-25.

Mr. Schwartz also testified about having access to financial and vendor records associated with JY Imports but stated he did not attempt to retrieve these documents. Id. at 73-75. Specifically, he acknowledged that agreements and other transactional documents with Amazon existed within the Vendor Central system but claimed he no longer had access and made no effort to contact Amazon to recover these documents. Id. at 113:14-115:3, see also 69:15-73:79.

Mr. Schwartz also admitted he received emails from accountants related to financial transactions with Drip Capital. Id. at 77:20-83:12, 142:2-25. Although he confirmed the existence of these emails, he conceded that he did not provide them to his attorney or the Plaintiff as required by Court orders. See id.

Mr. Jacobowitz acknowledged that he retained access to bank accounts and banking records for Unique Jems but did not provide them as part of the discovery process. Id. at 149:21-151:5. Mr. Jacobowitz stated that he was under the impression these records had already been submitted, which was ultimately incorrect. Id. He explained that his failure to produce them was due to what he described as a “sloppy reason,” but admitted he could still provide the bank statements if requested following the hearing. Id. at 150:7-17. Mr. Jacobowitz also testified that he had no formal system for organizing or filing documents related to Unique Jems, but despite this lack of organization, he admitted to being responsible for filing taxes for the company. Id. at 154:13-155:2; Mr. Jacobowitz did not, however, produce these records as part of the litigation, nor did he take substantive steps to locate or submit them.

At bottom, many of the documents requested are the types of corporate records that should ordinarily be available to Defendants. See, e.g., Anhui Konka Green Lighting Co. v. Green Logic Led Elec. Supply, Inc., No. 18-CV-12255 (MKV) (KHP), 2021 WL 807209, at *4 (S.D.N.Y. Mar. 3, 2021) (granting an adverse inference based on defendants’ failure to produce corporate records because “[c]orporate documents are the type of documents that should be readily available to Defendants”). Defendants’ testimony establishes that they have such documents, and other responsive documents, in their possession but did not produce these documents despite repeated Court orders to do so.

Accordingly, this Court concludes that Defendants failed to comply with discovery orders in violation of Fed. R. Civ. P. 37(b)(2).

2. Willfulness

The first factor the Court must consider in assessing Plaintiff's motion for sanctions is Defendant's “willfulness” or “reason for noncompliance.” See Agiwal, 555 F.3d at 302. “Non-compliance with a court's discovery order is willful when the order is clear, the party understood the order, and the failure to comply is not due to factors beyond the party's control.” Martinez, 2018 WL 604019, at *23.

Here, Defendants’ testimony indicates a pattern of willful non-compliance with Court orders and an overall lack of effort in complying with their discovery obligations. Ms. Jacobowitz testified that she conducted only a superficial search for documents, failing to attempt meaningful retrieval of shared computer records, email communications, or financial documents. See, e.g., Tr. 27:4-31:16, 32:6-39:11, 47:24-48:12. Her reliance on Mr. Schwartz for all operational records, despite being the owner of JY Imports, does not absolve her of her obligations under discovery rules. Ms. Jacobowitz admitted that she had login access at one point to electronic records, but made no effort to retrieve credentials or request records from third parties, such as banks or Amazon, even when these were central to the discovery demands. See id. at 47:24-48:12. This demonstrates not only negligence but a willful failure to comply with Court orders by knowingly avoiding avenues to recover responsive documents.

Mr. Schwartz, who controlled much of the financial and operational information for JY Imports, admitted to being aware of the discovery requests but described his search efforts as incomplete and ineffective. Id. at 75:13-76:21, 78:3-79:19, 80:13-19. He failed to access or preserve key records, including bank statements and Amazon account data, despite being the primary person responsible for these operations. Id. Mr. Schwartz did not contact service providers or third parties to retrieve lost credentials or documents. Id. at 113:14-115:3, see also 69:15-73:79. His acknowledgment that he did not adequately maintain or recover documents, despite knowing their importance to the litigation, further demonstrates a willful disregard for his discovery obligations.

Mr. Jacobowitz similarly displayed a pattern of non-compliance and inaction, particularly regarding his responsibilities as the owner of Unique Jems. Although he acknowledged the discovery requests pertaining to Unique Jems and the Court's discovery orders, he failed to undertake any meaningful search for responsive documents, whether physical or digital. Id. at 149:21-23, 154:13-165:7. He admitted he had responsive documents in his possession but did not produce these documents. Id. at 161:3-9. Mr. Jacobowitz's testimony also revealed that Unique Jems engaged in transactions with JY Imports, yet he did not produce any documentation regarding these dealings. Id. at 147:8-151:11. This omission, combined with his failure to conduct even basic searches for records, further supports a finding of willful non-compliance.

Defendants argue that their lack of legal sophistication and informal practices explain their failure to produce documents. See, e.g., id. at 12:14-20. As an initial matter, it simply belies common sense for Defendants to be such unexperienced businesspeople that they cannot produce basic documents while also running multiple businesses—particularly a business earning more than $4 million in sales. See id. at 119:12-19.

But even if the Court were to accept Defendants’ characterization of themselves as accurate, these factors would not excuse Defendants’ complete lack of effort to retrieve documents or their repeated non-compliance with court orders. Courts have consistently held that litigants must make reasonable and good-faith efforts to comply with discovery rules, and failing to do so constitutes willful non-compliance. See In re Tartaglione, No. 04-CV-22783 (ASH), 2008 WL 336844, at *7 (S.D.N.Y. Feb. 5, 2008) (finding willfulness where disobedient party “repeatedly failed to produce critical documents or respond to proper document requests and interrogatories, and there was reason to doubt [the party's] credibility and forthrightness”); see also Handwerker v. AT & T Corp., 211 F.R.D. 203, 209 (S.D.N.Y. 2002) (“[A] party's persistent refusal to comply with a discovery order presents sufficient evidence of willfulness, bad fault or fault.” (cleaned up)).

Additionally, Defendants’ attempt to shift blame to their prior attorney is unpersuasive. Even if it were assumed, without deciding, that their prior attorney inadequately explained Defendants’ disclosure obligations, Defendants’ conduct after Mr. Martinez joined the case underscores their continued non-compliance. After the substitution of counsel, Defendants still failed to produce any documents, maintaining instead that they had no responsive documents in their possession. They reinforced this position by signing new affidavits to that effect. When challenged, Defendants shifted responsibility to Plaintiff, suggesting Plaintiff should obtain the documents from third parties.

Such an argument, however, does not absolve Defendants of their obligation to produce relevant documents in their possession or control. These actions collectively demonstrate a pattern of non-compliance that rises to the level of “willfulness ․ rather than inability to comply or mere oversight.” Nieves, 208 F.R.D. at 535; see also Fredericks v. Borden, No. 17-CV-00015 (BKS) (DJS), 2024 WL 4534079, at *10 (N.D.N.Y. Oct. 21, 2024) (finding willfulness based on “(1) prior defense counsel's original decision to intentionally exclude a critical logbook page, (2) Defendant's failure to disclose the logbook pages when prompted by trial counsel, and (3) Defendant's continued insistence that the logbook pages are not relevant”); cf. Knox v. United States, No. 12-CV-01741 (SALM), 2016 WL 4033086, at *11 (D. Conn. July 27, 2016) (declining to find willfulness where plaintiff's new counsel argued that previous counsel “improperly, inadequately and ineffectively represented her” and that “discovery abuse was unaware and unintentional by plaintiff”).

In short, the evidence supports the conclusion that Defendants willfully violated Court orders. Defendants’ failure to act—despite being aware of their discovery obligations and the threat of sanctions—demonstrates an abdication of responsibility to locate and provide documents. Accordingly, the undersigned finds that Defendants’ failure to comply with discovery orders was willful.

3. Duration of Noncompliance

The Court must also consider the duration of Defendants’ noncompliance with the Court's discovery orders. See Agiwal, 555 F.3d at 302. “Periods of non-compliance as brief as a few months have been held to weigh in favor of dispositive sanctions.” Martinez, 2018 WL 604019, at *28; see also Embuscado v. DC Comics, 347 F. App'x 700, 701 (2d Cir. 2009) (affirming dismissal under Rule 37 where party violated discovery orders for three months and deliberately and persistently violated orders to produce documents and appear for deposition); Icon Int'l, Inc., 347 F.R.D. at 287 (weighing in favor of dismissal where plaintiff violated discovery orders for approximately four months).

Here, Plaintiff served their RFP on April 10, 2024. See Dkt. No. 53. The Court first ordered the production of much of this discovery in its June 14, 2024 Order. See June 14, 2024 Dkt. Order. Since then, Defendants have either outright ignored the Court's orders or have filed inadequate and incomplete responses. In total, by the time the Court held the evidentiary hearing on October 9, 2024, Defendants had violated six Court orders, and to date, Defendants have still not produced substantially any additional documents. This factor therefore weighs in favor of sanctions. See Martinez, 2018 WL 604019 at *28; Icon Int'l, Inc., 347 F.R.D. at 287.

4. Efficacy of Lesser Sanctions

As noted in Icon Int'l, Inc., 347 F.R.D. at 290, 296, “[a] court should always seek to impose the least harsh sanction that will remedy the discovery violation and deter such conduct in the future” (quoting Farmer v. Hyde Your Eyes Optical, Inc., 13-CV-6653 (GBD) (JLC), 2015 WL 2250592, at *8 (S.D.N.Y. May 13, 2015)). Courts, however, are not required to exhaust all possible lesser sanctions before imposing dismissal or default if such measures are appropriate under the overall record. See Chowdhury v. Hamza Exp. Food. Corp., 308 F.R.D. 74, 83 (E.D.N.Y. 2015) (quoting Southern New England Tel. Co. v. Glob. NAPs Inc., 624 F.3d 123, 148 (2d Cir. 2010)).

Here, Defendants’ actions throughout the litigation reflect a consistent disregard for their discovery obligations. Defendants admitted under oath that they had access to or possessed responsive documents but did not produce them. For instance, Ms. Jacobowitz conceded that she could access banking records yet failed to retrieve them, see, e.g., id. at 24:19-25:19, 32:6-39:11, while Mr. Schwartz admitted he knew of financial records and agreements stored in Amazon's systems but took no steps to recover these documents. Id. at 113:14-115:3, see also 69:15-73:79. Similarly, Mr. Jacobowitz acknowledged access to financial and banking records related to Unique Jems but did not produce them, despite clear Court orders requiring compliance. Id. at 149:21-151:5. These admissions, coupled with Defendants’ attempts to shift responsibility to third parties or prior counsel, demonstrate willful non-compliance rather than inadvertent oversight.

Lesser sanctions, such as monetary penalties or additional time to comply, will not, alone, remedy the harm caused or deter further misconduct. Monetary sanctions would not address the prejudice suffered by Plaintiff, as critical documents remain undisclosed, leaving Plaintiff unable to fully pursue its claims. Additionally, given Defendants’ established pattern of non-compliance, financial penalties are unlikely to influence their behavior, particularly as they have consistently demonstrated a casual approach to their obligations and a reliance on informal practices.

Providing additional time or leniency would also prove ineffective. Over the course of six months, Defendants were afforded multiple opportunities to comply with discovery obligations but failed to do so. Despite repeated Court orders, Defendants neglected to perform meaningful searches, contact third parties for records, or provide satisfactory explanations for their non-compliance. Allowing further time would only serve to reward Defendants’ misconduct and undermine the integrity of the discovery process.

Following six months of non-compliance, numerous Court conferences, and repeated warnings, Plaintiff was permitted to move for sanctions under Rule 37. Instead of addressing the deficiencies, Defendants doubled down on their claims of full compliance. The evidentiary hearing testimony, however, again revealed these assertions to be, at best, misleading, and, at worst, completely fabricated. As the Martinez court observed, “[t]hat the defendants[ ] and their attorneys continued to insist that they were fully compliant in this context demonstrates that lesser sanctions would not affect the defendants’ behavior and would achieve none of the purposes of sanctions.” Martinez, 2018 WL 604019, at *31. “Especially in light of repeated warnings to defendants[,] ․ at a certain point, if a court does not eventually follow through on its warnings, it risks undermining its ability to control current and future would-be wayward litigants. ‘[U]nless Rule 37 is perceived as a credible deterrent rather than a “paper tiger,” the pretrial quagmire threatens to engulf the entire litigative process.’ ” Local Union No. 40 of the Int'l Ass'n of Bridge, Structural and Ornamental Iron Workers v. Car-Win Constr., Inc., 88 F. Supp. 3d 250, 265 (S.D.N.Y. 2015).

Having reviewed the current record of this case, and considering Defendants’ consistent non-compliance, the Court concludes that lesser sanctions would neither compel compliance nor deter future misconduct. Accordingly, a severe sanction is necessary to uphold the integrity of the judicial process and deter similar conduct. This factor, therefore, weighs heavily in favor of imposing a severe sanction.

5. The Court's Notices of Consequences

The Court next considers whether Defendants had notice that they could face sanctions if they failed to comply with their discovery obligations. See Agiwal, 555 F.3d at 302.

Defendants received multiple clear and specific warnings that they could face sanctions if they failed to comply with their discovery obligations and court orders. These warnings were explicit, detailed, and reinforced through repeated judicial admonitions and procedural rulings, providing ample notice of the consequences of continued non-compliance. The first specific warning came on June 14, 2024, when the Court ordered Defendants to respond to Plaintiff's outstanding discovery requests by June 17, 2024, and warned that noncompliance could result in sanctions. See June 14, 2024 Dkt. Order. Despite this warning, Defendants failed to provide complete responses, prompting the Court to hold additional conferences and issue further orders emphasizing the need for compliance.

A second critical warning was issued on July 11, 2024, when the Court explicitly ordered Defendants to supplement their document production by July 18, 2024, and submit detailed affidavits describing their search efforts. See July 11, 2024 Dkt. Entry. The Court emphasized that no extensions would be granted and that failure to comply could result in sanctions. Id. This order was reiterated on July 12, 2024, when the Court partially denied Defendants’ request for an extension and reaffirmed the deadlines for compliance. See July 12, 2024 Dkt. Entry. Defendants failed to meet these deadlines and did not produce meaningful supplemental documents or properly executed affidavits. Plaintiff raised these deficiencies in multiple filings, prompting the Court to issue further warnings, including an August 4, 2024 order requiring Defendants to show cause why sanctions should not be imposed. See August 4, 2024 Dkt. Entry

Additionally, during an August 22, 2024 conference, the Court explicitly stated that it was inclined to issue sanctions due to Defendants’ repeated discovery violations and directed Plaintiff to file a motion for sanctions. See August 22, 2024 Dkt. Entry. This warning, combined with prior orders and conferences, clearly informed Defendants of the potential consequences of their continued non-compliance.

Despite these repeated warnings, Defendants continued to disregard their obligations. Their supplemental productions included blank documents and omitted key materials, such as internal communications, financial records, and critical documents requested in Plaintiff's RFP. See Dkt. No 83. Moreover, their affidavits failed to meet the specificity requirements outlined in the Court's orders. See July 11, 2024 and July 12, 2024 Dkt. Orders; see Dkt. Nos. 83-4 – 83-6. These actions demonstrate a persistent disregard for the Court's directives and the discovery process, despite clear and specific warnings of potential sanctions.

In conclusion, Defendants had ample notice of the risk of sanctions through explicit judicial warnings and detailed court orders. Their failure to comply, even after repeated admonitions, indicates willful non-compliance and supports the imposition of sanctions under Rule 37. This procedural history underscores that Defendants were not only aware of the potential for sanctions but actively disregarded the Court's authority.

B. The Appropriate Sanction Here

Having clearly established that Defendants violated Court orders willfully and continuously, the only remaining question is the appropriate remedy. Plaintiff seeks case-dispositive or claim-dispositive sanctions, as well as sanctions and potentially an adverse jury instruction. See Dkt. No. 92. Defendants contend that sanctions should not be issued, arguing that they have not engaged in any misconduct and that Plaintiff has failed to act diligently in obtaining discovery. See Dkt. No. 93. For the reasons enumerated in this Report and Recommendation, the undersigned respectfully recommends that an adverse inference sanction is appropriate here.

As noted above, under Fed. R. Civ. P. 37(b)(2)(A), sanctions for discovery violations may include adverse inferences or more severe measures, such as striking pleadings. Courts typically reserve case-dispositive sanctions for extreme cases of bad faith or egregious misconduct, particularly where lesser sanctions would be ineffective. See Southern New England Tel. Co., 624 F.3d at 144 (noting that severe sanctions are appropriate only in cases of willfulness, bad faith, or gross negligence, coupled with significant prejudice to the opposing party); see also World Wide Polymers Inc. v. Shinkong Synthetic Fibers Corp., 694 F.3d 155, 159 (2d Cir. 2012) (explaining that striking a party's pleading “ ‘is a drastic remedy that should be imposed only in extreme circumstances,’ ․ usually after consideration of alternative, less drastic sanctions.” (citation omitted)).

Here, while Defendants’ conduct is egregious, striking their answer is a drastic measure that effectively ends their ability to defend themselves. Such a sanction should be imposed only when lesser measures would fail to remedy the harm caused or deter future misconduct. See Southern New England Tel. Co., 624 F.3d at 144; World Wide Polymers Inc., 694 F.3d at 159. An adverse inference, however, would adequately address the prejudice suffered by Plaintiff by allowing the jury to consider Defendants’ failure to produce discovery as evidence of unfavorable facts. This sanction ensures fairness while preserving the Defendants’ opportunity to present their case at trial. See Metro. Opera Ass'n, Inc. v. Local 100, Hotel Employees & Rest. Employees Int'l Union, 212 F.R.D. 178, 222 (S.D.N.Y. 2003) (explaining that an adverse inference sanction balances fairness and deterrence without imposing the extreme consequence of dismissal or default).

“Although adverse inference instructions ‘usually [are] employed in cases involving spoliation of evidence,’ a court also may grant an adverse inference instruction for the non-production of evidence.” Hawley v. Mphasis Corp., 302 F.R.D. 37, 54 (S.D.N.Y. 2014) (quoting Residential Funding Corp., 306 F.3d at 107) (finding that “an adverse inference instruction regarding [the defendant's] non-production of sales and commission records is the appropriate sanction for this misconduct”); see also Zubulake v. UBS Warburg LLC, 229 F.R.D. 422, 437 (S.D.N.Y. 2004) (considering “the full panoply of available sanctions,” and imposing an adverse inference instruction, for spoliation of evidence). An adverse inference is an appropriate sanction for the failure to produce a document where first, the party having control over the document had an obligation to timely produce it; second, the party that failed to timely produce the document had “a culpable state of mind”; and third, the missing document is “relevant” to the party's claim or defense such that a reasonable trier of fact could find that it would support that claim or defense. Residential Funding Corp., 306 F.3d at 107.

Here, each of these criteria is met: first, there is no doubt that Defendants were obligated to produce the requested discovery pursuant to the Court's orders and the motions to compel production. Second, the individual defendants have culpable states of mind; they repeatedly testified that they have access to documents but refused to even conduct a search or take reasonable steps to obtain the documents at issue. Third, there is little doubt that the discovery at issue is relevant to Plaintiff's breach of contact claims in this action.

Accordingly, the undersigned respectfully recommends that the Court should instruct the jury that, in light of Defendants’ failure to comply with discovery, the jury may infer that the withheld evidence would have been unfavorable to Defendants. Such an instruction not only addresses the evidentiary imbalance created by Defendants’ non-compliance but also emphasizes the importance of adhering to discovery obligations. This approach aligns with precedent in which courts used adverse inferences to remedy discovery violations and deter similar misconduct. See Residential Funding Corp., 306 F.3d at 109 (explaining that an adverse inference serves both remedial and punitive purposes).

Finally, as Defendants have provided testimony indicating that they can, in fact, conduct electronic searches and provide the requested discovery documents, the undersigned respectfully recommends that discovery be re-opened and that Defendants produce any outstanding discovery to Plaintiff within thirty days of the Court's ruling on the present Report and Recommendation. Should this proposal be adopted, the Court will promptly hold a status conference to ensure that Defendants have complied with all outstanding discovery requests.

C. Payment of Plaintiff's Expenses

In lieu of, or in addition to other sanctions, Rule 37 requires that the Court order the disobedient party, its attorney, or both to pay “the reasonable expenses, including attorney's fees,” caused by the failure to comply with a discovery order, unless the court finds the failure “substantially justified” or that “other circumstances make an award of expenses unjust.” Fed. R. Civ. P. 37(b)(2)(C). The language of the Rule is mandatory absent a showing by the non-compliant party of substantial justification or circumstances that would render awarding expenses unjust. See id.; Mugavero v. Arms Acres, Inc., 680 F. Supp. 2d 544, 574 (S.D.N.Y. 2010) (collecting cases).

Here, Plaintiff is entitled to reasonable expenses caused by Defendants’ failure to comply with the Court's orders. The undersigned, however, respectfully recommends that the Court stay any order related to attorney's fees until, at minimum, Defendants produce the outstanding discovery, as described above.

Further, the parties are encouraged to discuss settlement of Plaintiff's expenses (including attorney's fees) at their earliest convenience. If those efforts are not successful, and assuming the outstanding discovery is produced, Plaintiff shall file an updated fee application supported by declarations or affidavits substantiating its application within sixty days of the Court's ruling on this Report and Recommendation. Defendants shall file any opposition thirty days thereafter. Plaintiff shall be permitted to file a reply brief fourteen days after Defendants’ opposition filing.

V. Conclusion

For the foregoing reasons, this Court respectfully recommends that Plaintiff's motion be granted in part and denied in part.

Any objections to this Report and Recommendation must be filed within 14 days after service of this Report and Recommendation. See 28 U.S.C. § 636(b)(1); Fed. R. Civ. P. 72(b)(2). See also Fed. R. Civ. P. 6(a) & (d) (addressing computation of days). Any requests for an extension of time for filing objections must be directed to Judge Reyes. Failure to file objections within this period designating the particular issues to be reviewed waives the right to appeal the district court's order. See 28 U.S.C. § 636(b); Fed. R. Civ. P. 72(b)(2); Wagner & Wagner, LLP v. Atkinson, Haskins, Nellis, Brittingham, Gladd & Carwile, P.C., 596 F.3d 84, 92 (2d Cir. 2010); Kotlyarsky v. United States Dep't of Just., No. 22-2750, 2023 WL 7648618 (2d Cir. 2023); see also Thomas v. Arn, 474 U.S. 140 (1985).

SO ORDERED.

FOOTNOTES

1.   At a January 16, 2024 status conference, Defendants indicated that they had planned to move to dismiss the Amended Complaint. The Court noted that “[d]iscovery will not be stayed” pending motion practice. See Dkt. No. 41.

JOSEPH A. MARUTOLLO United States Magistrate Judge