Praetorian Insurance Company v. Axia Contracting, LLC et al

1
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Magistrate Judge S. Kato Crews
Civil Action No. 1:17-cv-02034-WJM-SKC
PRAETORIAN INSURANCE COMPANY,
Plaintiff,
v.
AXIA CONTRACTING, LLC, et al.
Defendants.
ORDER RE:
MOTION FOR SANCTIONS, MOTION TO EXTEND DISCOVERY, AND
MOTION TO AMEND COMPLAINT [DKTS. 107, 111, 117]
In 2017, a fire caused extensive damage to a hotel owned by Defendant 255
Blackhawk Hospitality, LLP (“Blackhawk”). The hotel was still under construction at
the time of the fire. Defendant Axia Contracting, LLC (“Axia”), was the general
contractor on the project. The hotel was insured by a policy issued by Plaintiff
Praetorian Insurance Company (“Praetorian”).
The Amended Complaint [Dkt. 15] alleges there was no security fencing on
three sides of the property and the fire was caused by arson committed by individuals
who accessed the construction site. Based on Defendants’ alleged failure to install
protective devices around the hotel, Praetorian filed this declaratory judgment action
seeking a determination it did not owe Defendants insurance benefits related to the
Case No. 1:17-cv-02034-WJM-KAS Document 137 filed 06/23/22 USDC Colorado
pg 1 of 14

2
fire. Defendants answered and asserted counterclaims for, inter alia, bad faith breach
of contract and unreasonable delay or denial of insurance benefits under Colo. Rev.
Stat. §§ 10-3-115 and -1116.
The Court bifurcated discovery in this case. The first phase was to focus on
discovery relevant to the policy’s Protective Devices Endorsement. [Dkt. 42.] If
necessary, 	the 	parties 	would 	then 	conduct 	discovery 	relevant 	to 	Defendants’
counterclaims. Following this first phase of discovery, summary judgment briefing, a
remand from the Tenth Circuit, and another round of summary judgment motions,
the parties commenced the second phase of discovery. [Dkt. 92.]
In 	September 	2021, 	during 	the 	Rule 	30(b)(6) 	deposition 	of 	Axia, 	Jeff
Schaumann (a member of Axia) testified to a 2017 legal dispute between Defendants
Blackhawk and Axia (“Blackhawk v. Axia”) which involved the lack of fencing around
the hotel, Blackhawk’s losses from the fire, and a $2 million settlement between them.
This was the first time Praetorian heard of Blackhawk v. Axia. Based on this
testimony, Praetorian asked Defendants to supplement their written discovery
responses. They did so and produced nearly 16,000 pages of new documents claiming
these new materials were nonresponsive to the discovery requests. 1 Defendants
produced these new documents in two supplements in October 2021, and one
supplement in November 2021.
1 The Court has not reviewed the entirety of the 16, 000 pages. Rather, it has reviewed
a sufficient sample of these documents to satisfy itself that the forthcoming findings,
conclusions, and orders are justified.
Case No. 1:17-cv-02034-WJM-KAS Document 137 filed 06/23/22 USDC Colorado
pg 2 of 14

3
Praetorian 	filed 	the 	present 	motion 	seeking 	sanctions 	for 	this 	belated
disclosure. [Dkt. 107.] Also before the Court is Praetorian’s request to amend its
complaint and its reply to Defendants’ counterclaims. [Dkt. 117.] In addition,
Defendants have moved to extend the deadline for serving written discovery. [Dkt.
111.]
A. 	MOTION FOR SANCTIONS
1. 	Legal Principles
Federal Rule of Civil Procedure 26(a)(2)(E) requires parties to supplement
their disclosures “when required under Rule 26(e).” Rule 26(e)(1)(A) provides a party
must supplement when “the party learns that in some material respect the disclosure
or response is incomplete or incorrect, and if the additional or corrective information
has not otherwise been made known to the other parties during the discovery process
or in writing.” Supplementation is a means for “correcting inaccuracies, or filling the
interstices of an incomplete report based on information that was not available at the
time of the disclosure.” Mullin v. Hyatt Residential Grp., Inc., No. 13-cv-2348-WJM-
NYW, 2015 WL 1502379, at *3 (D. Colo. Mar. 27, 2015) (quoting Aid for Women v.
Foulston, 2005 WL 6964192, *3 (D. Kan. July 14, 2005)). When “a party fails to
provide information . . . required by Rule 26(a) or (e), the party is not allowed to use
that information . . . to supply evidence on a motion, at a hearing, or at a trial, unless
the failure was substantially justified or is harmless.” Fed. R. Civ. P. 37(c). In
Case No. 1:17-cv-02034-WJM-KAS Document 137 filed 06/23/22 USDC Colorado
pg 3 of 14

4
addition, a court may award attorney’s fees or impose other appropriate sanctions,
including those enumerated in Rule 37(b)(2)(A)(i)-(vi).
Praetorian seeks sanctions in the form of judgment in its favor and dismissal
of the counterclaims, as contemplated by Rule 37(b)(2)(A)(v) and (vi). [Dkt. 107.]
When a party violates Rule 26(e) by failing to timely supplement discovery responses,
the determination of whether a Rule 26(e) violation is justified or harmless is
entrusted to the broad discretion of the district court. Woodworker’s Supply, Inc. v.
Principal Mut. Life Ins. Co., 170 F.3d 985, 993 (10th Cir. 1999). “A district court need
not make explicit findings concerning the existence of a substantial justification or
the harmlessness of a failure to disclose.” Id. “Nevertheless, the following factors
should guide its discretion: (1) the prejudice or surprise to the party against whom
the testimony is offered; (2) the ability of the party to cure the prejudice; (3) the extent
to which introducing such testimony would disrupt the trial; and (4) the moving
party’s bad faith or willfulness.” Id.
2. 	Praetorian’s Discovery Requests
This dispute involves three separate rounds of written discovery Praetorian
served on Defendants. Defendants did provide timely responses and documents to
these respective requests at the time they were made, but they provided no materials
related to Blackhawk v. Axia or the completion and sale of the hotel after the fire.
Defendants did not produce the latter categories of documents until October and
November 2021 (“Late Disclosures”).
Case No. 1:17-cv-02034-WJM-KAS Document 137 filed 06/23/22 USDC Colorado
pg 4 of 14

5
i. 	Praetorian’s January 31, 2018 Requests for Production
Pertinent here, Praetorian served the following requests for production on
Blackhawk and Axia:
3. Produce any documents reflecting or regarding any communications
or correspondence between you, any insurance agent for you, Praetorian
and/or Safehold Special Risk regarding the presence or absence of any
fencing at the Project.
5. Produce any documents reflecting or regarding the purchase, rental,
and/or installation of fencing for the Project.
6. Produce any documents reflecting or regarding any decision not to
purchase, rent, and/or install fencing for the Project.
[Dkt. 107-5 (emphasis added).]
In 	their 	Late 	Disclosures, 	Defendants 	produced 	a 	cache 	of 	documents,
including, for example:
 	Emails between Jeff Schaumann and an adjuster at Liberty Mutual
(Axia’s liability insurer) discussing Liberty Mutual’s assessment that
“there is some liability for Axia failing to secure the premises,” and
agreeing to settle Blackhawk’s liability claim against Axia for $2
million;
 	A 	September 	7, 	2017 	email 	from 	Kelly 	Zander 	(a 	partner 	in
Blackhawk) advising Blackhawk planned to sue Axia because “Axia
is the negligent party here and definitely did not follow their own
policy;”
 	A September 27, 2017 letter from Blackhawk to Axia stating, “the
fire damage and any resulting delay was caused by or contributed to
by the negligence of Axia and its breaches of contract;” and,
 	A March 7, 2018 email from Mr. Zander stating, “Axia didn’t install
the fence per the insurance policy … . Axia somehow and inexplicably
allowed an open gas can to be left at the site and next to a pile of
Case No. 1:17-cv-02034-WJM-KAS Document 137 filed 06/23/22 USDC Colorado
pg 5 of 14

6
lumber. Without a shadow of a doubt Axia’s negligence led to the
fire…”
[See Dkt. 107 at pp.4-5 and Dkt. 107-7 (Exhibit G).] On their face, these documents
are responsive to Praetorian’s January 31, 2018 requests for production, but were not
produced by Defendants until the fall 2021.
ii. 	Praetorian’s January 19, 2021 Requests for Production
On January 19, 2021, Praetorian served Defendants additional document
requests seeking documents regarding “construction of the project (including any
related contracts), loans, [and] the loss or claim and/or sale of the project.” [Dkt. 107
at p.8 (emphasis added) and Dkt. 107-8 (Exhibit H).]
In their Late Disclosures, Defendants included:
 	Documents related to a $5 million line of credit obtained by the
Blackhawk partners for the project;
 	Emails with realtor David Erb in July 2017 after the loss and
regarding Defendants’ financial position, ability to complete the
project, and interpretation of the Protective Devices Endorsement;
 	Emails between Mr. Schaumann and Mr. Zander regarding potential
cash contributions to bring the construction loans into balance and
the decision to sell the project in September 2017;
 	A letter regarding an indemnification claim tendered by Axia’s
liability carrier to a subcontractor, AGC Company, whom it believed
may be responsible for the fire as a result of leaving gas cans at the
construction site;
 	Spreadsheets 	prepared 	in 	the 	fall 	of 	2017 	in 	conjunction 	with
Defendants’ 	marketing 	the 	property 	to 	potential 	buyers, 	which
appears to calculate the repair costs related to the fire loss at $2.4 or
$2.6 million, in contrast to the $2.9 million indicated in connection
with the insurance claim; and,
Case No. 1:17-cv-02034-WJM-KAS Document 137 filed 06/23/22 USDC Colorado
pg 6 of 14

7
 	The construction contract entered by Axia Contracting Texas, LLC
and LN Hospitality Denver, LLC, the entity that purchased the
project in 2018.
[See Dkt. 107 at pp.5-6 and Dkt. 107-10 (Exhibit J).] It is again mystifying how there
could be any doubt these documents are responsive to Praetorian’s January 19, 2021
requests for production.
In addition, in responding to the original discovery requests, Defendants
changed Praetorian’s definition(s) of “Project” to limit it only to pre-fire construction,
which would exclude documents related to the completion of the project after the fire.
They also added the definition of “Lender” and “Construction Loan” to refer only to
their loan from First National Bank, which would exclude the $5 million line of credit
used to finish the project. [Dkt. 107-9 (Exhibit I).]
iii. 	Praetorian’s May 7, 2021 Requests for Production
In May 2021, Praetorian issued further discovery to Defendants requesting
budgets or estimates for construction, and communications with LN Hospitality
regarding the sale of the property. [Dkt. 107-11.] Defendants’ original position was
all responsive documents had been produced. However, in addition to the documents
described above, Defendants’ Late Disclosures included emails and bids sent by Mr.
Schaumann to LN Hospitality during sales negotiations, the construction contract,
and 20 draw requests submitted to LN Hospitality during construction showing the
actual cost to complete the project. Under the broad scope of discovery, these
Case No. 1:17-cv-02034-WJM-KAS Document 137 filed 06/23/22 USDC Colorado
pg 7 of 14

8
additional 	documents 	are 	responsive 	to 	Praetorian’s 	May 	2021 	requests 	for
production. 2
3. 	Discussion
Rule 26(e)(1)(A) requires timely supplementation of disclosures. Fed. R. Civ. P.
26(e)(1)(A). The Court finds Defendants’ second, third, and fourth supplemental
disclosures are untimely in violation of Rule 26(e) because they were made on October
4 and 14, 2021, and November 3, 2021, respectively, disclosing responsive documents
from 2017 and 2018. Defendants do not contend these were recently discovered
documents or the documents only recently came into their possession, custody, or
control. The question, therefore, is whether Defendants’ violation of Rule 26(e) is
substantially justified or harmless. While the Court is not required to make specific
findings in this regard, the Court shares some findings to lend context to its ruling.
i. 	Substantially Justified
Defendants’ 	explanations 	for 	the 	Late 	Disclosures 	are 	various 	and
unsatisfying. 	For 	example, 	they 	contend 	Praetorian 	requested 	production 	of
communications with third parties and not those between Defendants. [Dkt. 119 at
p.9.] They argue, therefore, any communications between the two Defendants
2 Defendants argue the bid for completion of construction is nonresponsive because
the contract is between LN Hospitality and Axia Contracting Texas, LLC, a different
corporate entity. But the request for production asks for budgets produced by
Defendants or any third party. Furthermore, to the extent the sale of the property
was contingent on the cost of completion, these bids would nevertheless be relevant
and responsive. [Dkt. 107-11 at pp.4-5.]
Case No. 1:17-cv-02034-WJM-KAS Document 137 filed 06/23/22 USDC Colorado
pg 8 of 14

9
regarding Blackhawk v. Axia need not have been produced. But the definition of “You”
in the written discovery clearly refers to both Defendants. [Dkt. 107-5 at p.2.] Thus,
internal communications were contemplated and requested, and withholding them
on that basis was improper.
Defendants 	also 	argue 	that 	while 	Praetorian 	requested 	documents 	and
information regarding the presence or absence of the fence, the Blackhawk v. Axia
documents concern only the consequences of Axia’s failure to install a fence. [See Dkt.
119 at p.8.] But this is semantics. Defendants attempt to parse a distinction between
the absence of fence with a failure to install one. This is a distinction without a
difference. Moreover, the definition of “regarding” (as used in Praetorian’s requests)
is not nearly so narrow as Defendants would have it. Defendants’ entire argument
here 	borders 	on 	specious. 	Documents 	and 	communications 	discussing 	the
consequences of failing to install a fence plainly regard the absence of a fence and
should have been timely produced as responsive to Praetorian’s applicable requests.
The Court also agrees with Praetorian that Defendants improperly narrowed
the discovery requests by changing Praetorian’s definitions. The Court has reviewed
Defendants’ responses and although they are correct that Praetorian could have
discovered the changes Defendants made on its own, discovery should never be a
game of gotcha. Defendants did not object to any of Praetorian’s definitions to put
Praetorian on notice of their changes, nor (apparently) did Defendants confer with
Praetorian over the definitions before responding to the discovery. Surreptitiously
Case No. 1:17-cv-02034-WJM-KAS Document 137 filed 06/23/22 USDC Colorado
pg 9 of 14

10
altering the definitions or the scope of Praetorian’s requests was improper. Having
done nothing to alert Praetorian to the altered scope of Defendants’ responses, it was
not Defendants’ purview to re-write Praetorian’s discovery requests.
The Court is also not persuaded by Defendants’ reliance on the general
objections 	they 	included 	with 	their 	discovery 	responses 	to 	justify 	the 	Late
Disclosures. Boilerplate general objections are tantamount to no objection at all.
Bottoms v. Liberty Life Assur. Co. of Bos., No. 11-CV-01606-PAB-CBS, 2011 WL
6181423, at *7 (D. Colo. Dec. 13, 2011); EEOC v. Outback Steak House of Florida,
Inc., 251 F.R.D. 603, 608 (D. Colo. 2008) (“the burden of showing that the requested
discovery is objectionable falls on [the responding party] and it cannot be satisfied by
merely asserting a boilerplate objection to discovery without providing concrete
substantiation”).
Similarly, Defendants’ general objections challenging the discovery requests
as “overbroad” implicitly concede the requests encompass responsive information but
for Defendants’ secret modifications to the requests. Defendants were obligated to
reasonably construe the discovery requests. See, e.g., Adolph Coors Co. v. Am. Ins.
Co., 164 F.R.D. 507, 518 (D. Colo. 1993). They were not free to alter them in silence
and summarily dismiss them as “overbroad.” Fed. R. Civ. P. 37(a)(4) (“an evasive or
incomplete . . . response must be treated as a failure to . . . respond”). Likewise,
labeling a request as “unduly burdensome” cannot rest solely on that self-serving
label. Bottoms, 2011 WL 6181423, at *7.
Case No. 1:17-cv-02034-WJM-KAS Document 137 filed 06/23/22 USDC Colorado
pg 10 of 14

11
ii. 	Harmlessness
Praetorian has been prejudiced by these untimely disclosures. While the Court
is not persuaded these documents would have affected the summary judgment
outcomes—particularly considering District Judge Martinez’s statements he would
not review extrinsic evidence—Praetorian could have conducted further discovery
into these matters or made arguments on summary judgment apart from those
concerning the Protective Devices Endorsement in the policy. Praetorian took various
depositions 	(including 	Defendants’ 	respective 	Rule 	30(b)(6) 	depositions), 	hired
experts, and pursued legal theories based on what was represented by Defendants’
original disclosures. And the untimely disclosures, indeed, alter the factual landscape
relevant to the parties’ claims and defenses. So the Late Disclosures were not
harmless.
Parties to litigation are “required to reasonably construe [the opposing party’s]
interrogatories and requests for production and conduct a reasonable search for
responsive information.” Witt v. GC Servs. Ltd. P'ship, 307 F.R.D. 554, 568–69 (D.
Colo. 2014) (citing Reinsdorf v. Skechers, U.S.A., Inc., 296 F.R.D. 604, 615 (C.D. Cal.
2013)). The Court does not expect perfection and will not “‘infer nefarious intent or
bad faith’ from ‘ordinary discovery errors.’” Id. But the Court cannot overlook
discovery responses, like those here, that omit or withhold information plainly
responsive and unequivocally within the knowledge, possession, custody, and control,
of the responding parties. Id. (“A party answering interrogatories [and requests for
Case No. 1:17-cv-02034-WJM-KAS Document 137 filed 06/23/22 USDC Colorado
pg 11 of 14

12
production] must provide to the requesting party all ‘information that is available to
it and that can be given without undue labor and expense.”) (citing Lynn v. Monarch
Recovery Mgmt, Inc., 285 F.R.D. 350, 360 (D. Md. 2012)). Given the documents in
their possession at the time the requests were made, Defendants’ initial discovery
responses were inadequate and patently deficient. The Court finds Defendants’ Rule
26(e) violation was neither substantially justified nor harmless.
For these reasons, the Court finds sanctions (other than dismissal or judgment
in Praetorian’s favor) are appropriate. Therefore, Praetorian’s Motion for Sanction is
GRANTED IN PART, DENIED IN PART, and TAKEN UNDER ADVISEMENT IN
PART. The Court will conduct a hearing over what sanctions are appropriate under
the circumstances.
B. 	MOTION TO AMEND
Based on the content of the Late Disclosures, Praetorian seeks to add a claim
for breach of contract based on three new theories and amend its reply to the
counterclaims. The Court concludes there is good cause to allow Praetorian to amend
its pleading and its reply to the counterclaims. The Court declines to engage in a
futility analysis at this time (as argued by Defendants)—the futility argument is
more efficiently and effectively raised in the context of a motion to dismiss than it is
in a response to a motion to amend. See Fed. R. Civ. P. 1; White River Vill., LLP v.
Fid. & Deposit Co. of Maryland, No. 08-cv-00248-REB-MEH, 2013 WL 6168853, at
*4 (D. Colo. Nov. 25, 2013); Fuller v. REGS, LLC, No. 10-cv-01209-WJM-CBS, 2011
Case No. 1:17-cv-02034-WJM-KAS Document 137 filed 06/23/22 USDC Colorado
pg 12 of 14

13
WL 1235688, at *3 (D. Colo. Mar. 31, 2011) (the court was guided by pragmatism and
efficiency in exercising its discretion to grant motion to amend rather than apply
futility analysis). The Motion to Amend is GRANTED.
The Court TAKES UNDER ADVISEMENT, Defendants’ Motion to Extend
Discovery.
* 	* 	*
It is ORDERED as follows:
1. 	the Motion for Sanctions [Dkt. 107] is GRANTED IN PART to the extent
it sought sanctions against Defendants for the Late Disclosures; it is
DENIED IN PART to the extent it sought judgment or dismissal as a
sanction; and it is TAKEN UNDER ADVISEMENT IN PART insofar as
the 	Court 	will 	convene 	a 	hearing 	to 	determine 	the 	appropriate
sanction(s) to impose;
2. 	the Motion to Amend is GRANTED;
3. 	the Motion to Extend Discovery is TAKEN UNDER ADVISEMENT; the
Court will convene a status conference after Plaintiff’s amendments,
Defendants’ answer to the amended pleading, and Plaintiff’s reply to the
counterclaims, are on file to determine what discovery, if any, may be
necessary; and,
4. 	on or before the close of business on June 27, 2022, Praetorian shall
docket a clean copy of its Second Amended Complaint. Defendants shall
Case No. 1:17-cv-02034-WJM-KAS Document 137 filed 06/23/22 USDC Colorado
pg 13 of 14

14
answer or otherwise respond in accordance with the Federal Rules of
Civil Procedure. Thereafter, Praetorian may file its amended Reply;
5. 	once the amended pleadings are complete, the Court will select a date
for the sanctions hearing and status conference, which will occur
simultaneously. 3
Dated: June 23, 2022.
BY THE COURT:
______________________________
S. Kato Crews
United States Magistrate Judge
3 Within 14 days after service of a copy of this Order, any party may serve and file
written objections. 28 U.S.C. § 636(b)(1); Fed. R. Civ. P. 72(a). Failure to file written
objections will result in a waiver of the right to appeal the non-dispositive order. See
Sinclair Wyo. Ref. Co. v. A & B Builders, Ltd., 989 F.3d 747, 782 (10th Cir. 2021) (firm
waiver rule applies to non-dispositive orders); but see Morales-Fernandez v. INS, 418
F.3d 1116, 1119, 1122 (10th Cir. 2005) (firm waiver rule does not apply when the
interests of justice require review, such as when a “pro se litigant has not been
informed of the time period for objecting and the consequences of failing to object”).
Case No. 1:17-cv-02034-WJM-KAS Document 137 filed 06/23/22 USDC Colorado
pg 14 of 14