The Pension Committee of the University of Montreal Pension Plan v. Banc of America Securities, LLC, 2010 U.S. Dist. LEXIS 1839 (S.D.N.Y. Jan. 11, 2010)

Plaintiff producers were a group of investors who had brought an action to recover $550 million lost as a result of the liquidation of two British Virgin Island hedge funds. In October, 2007, the Citco Defendants claimed that large gaps in plaintiffs’ document production had been found. Depositions were held and declarations submitted between October, 2007 and June 2008. As a result of this discovery, defendant requestors moved for sanctions, alleging that plaintiffs had failed to properly preserve and produce documents, and had submitted false declarations regarding their efforts.

Judge Scheindlin then undertook an exhaustive review of the various aspects of the law underlying spoliation:

I begin with a discussion of how to define negligence, gross negligence, and willfulness in the discovery context and what conduct falls in each of these categories. I then review the law governing the imposition of sanctions for a party’s failure to produce relevant information during discovery. This is followed by factual summaries regarding the discovery efforts – or lack thereof – undertaken by each of the thirteen plaintiffs against whom sanctions are sought, and then by an application of the law to those facts.

Id. at *5-*6. The judge concluded that all plaintiffs were either negligent or grossly negligent in meeting their discovery obligations; thus, sanctions were required.

At the outset, there was no indication that plaintiffs had purposely destroyed evidence—“[t]his is a case where plaintiffs failed to timely institute written litigation holds and engaged in careless and indifferent collection efforts after the duty to preserve arose. As a result, there can be little doubt that some documents were lost or destroyed.” Id. at *6.

No clear definition of negligence, gross negligence or willfulness in the context of discovery misconduct had been found. The terms describe a continuum—conduct was either acceptable or unacceptable; once it was determined to be unacceptable, then the only question was “how bad is the conduct,” which was a judgment call made by the court. Nevertheless, “it is well established that negligence involves unreasonable conduct in that it creates a risk of harm to others, but willfulness involves intentional or reckless conduct that is so unreasonable that harm is highly likely to occur.” Id. at *7-*8.

In the discovery context, a failure to preserve evidence resulting in the loss of relevant information is negligent, and can be grossly negligent or willful, dependent on the circumstances. The intentional destruction of evidence after the duty to preserve attaches is willful. After the issuance of the final relevant Zubulake opinion in July 2004, “the failure to issue a written litigation hold constitutes gross negligence because that failure is likely to result in the destruction of relevant information.” Id. at *10.

In the collection and review process, “depending on the extent of the failure to collect evidence, or the sloppiness of the review, the resulting loss or destruction of evidence is surely negligent, and, depending on the circumstances may be grossly negligent or willful.” Id. at *12. The failure to collect records from key players, or the destruction of email or backup tapes, constitutes gross negligence or willfulness after the duty to preserve has attached. However, the failure to obtain records from all employees, as well as the failure to take all appropriate measures to preserve ESI, could constitute negligence. Generally, the duty to preserve information arises when a party reasonably anticipates litigation. The plaintiff’s duty usually arises before litigation starts because the plaintiff controls the timing of litigation.

The burden of proof depends on the sanction:

For less severe sanctions – such as fines and cost-shifting – the inquiry focuses more on the conduct of the spoliating party than on whether documents were lost, and, if so, whether those documents were relevant and resulted in prejudice to the innocent party. As explained more thoroughly below, for more severe sanctions – such as dismissal, preclusion, or the imposition of an adverse inference – the court must consider, in addition to the conduct of the spoliating party, whether any missing evidence was relevant and whether the innocent party has suffered prejudice as a result of the loss of evidence.

Id. at *17. Thus, the innocent party must establish the following: ”that the spoliating party (1) had control over the evidence and an obligation to preserve it at the time of destruction or loss; (2) acted with a culpable state of mind upon destroying or losing the evidence; and that (3) the missing evidence is relevant to the innocent party’s claim or defense.” Id. at *18-*19.

When evidence is destroyed in a grossly negligent manner or in bad faith, relevance and prejudice can be presumed, although the presumption is not required. When the spoliator is negligent, the innocent party must prove both relevance and prejudice. However, the standard of proof cannot be too strict so as to permit spoliators to profit from their conduct. Nevertheless, the presumption is rebuttable, and the spoliator must have the opportunity to demonstrate that the innocent party has not been prejudiced. Some level of proof is required, “lest litigation become a ‘gotcha’ game rather than a full and fair opportunity to air the merits of a dispute.” Id. at *22. Judge Scheindlin established the following standard:

To ensure that no party’s task is too onerous or too lenient, I am employing the following burden shifting test: When the spoliating party’s conduct is sufficiently egregious to justify a court’s imposition of a presumption of relevance and prejudice, or when the spoliating party’s conduct warrants permitting the jury to make such a presumption, the burden then shifts to the spoliating party to rebut that presumption. The spoliating party can do so, for example, by demonstrating that the innocent party had access to the evidence alleged to have been destroyed or that the evidence would not support the innocent party’s claims or defenses. If the spoliating party demonstrates to a court’s satisfaction that there could not have been any prejudice to the innocent party, then no jury instruction will be warranted, although a lesser sanction might still be required.

Id. at *22-*23.

In determining appropriate sanctions, “a court should always impose the least harsh sanction that can provide an adequate remedy. The choices include – from least harsh to most harsh – further discovery, cost-shifting, fines, special jury instructions, preclusion, and the entry of default judgment or dismissal (terminating sanctions). The selection of the appropriate remedy is a delicate matter requiring a great deal of time and attention by a court.” Id. at *24-*25. Although defendants requested dismissal of the claim, an adverse inference was more appropriate in this instance. Even the language of an adverse inference depends upon the circumstances:

In its most harsh form, when a spoliating party has acted willfully or in bad faith, a jury can be instructed that certain facts are deemed admitted and must be accepted as true. At the next level, when a spoliating party has acted will-fully or recklessly, a court may impose a mandatory presumption. Even a mandatory presumption, however, is considered to be rebuttable.

The least harsh instruction permit (but does not require) a jury to presume that the lost evidence is both relevant and favorable to the innocent party. If it makes this presumption, the spoliating party’s rebuttal evidence must then be considered by the jury, which must then decide whether to draw an adverse inference against the spoliating party. This sanction still benefits the innocent party in that it allows the jury to consider both the misconduct of the spoliating party as well as proof of prejudice to the innocent party. Such a charge should be termed a “spoliation charge” to distinguish it from a charge where the a jury is directed to presume, albeit still subject to rebuttal, that the missing evidence would have been favorable to the innocent party, and from a charge where the jury is directed to deem certain facts admitted.

Id. at *27-*28. The decision of whether to award sanctions is “inherently subjective,” based upon the court’s experience, and necessarily depends upon the facts of the case. However, a “failure to adhere to contemporary standards” can be gross negligence, which the judge defined (after the duty to preserve has arisen) as follows:

[T]o issue a written litigation hold, to identify the key players and to ensure that their electronic and paper records are preserved, to cease the deletion of email or to preserve the records of former employees that are in a party’s possession, custody, or control, and to preserve backup tapes when they are the sole source of relevant information or relate to key players.

Id. at *31-*32. Given that sanctions motions, an expensive and time-consuming process, will likely be increasingly sought by litigants, courts should give “the most careful consideration” before sanctioning a party, but in addition, parties need to “anticipate and undertake document preservation with the most serious and thorough care, if for no other reason than to avoid the detour of sanctions.” Id. at *32.

Turning to the facts, the court observed that after being retained in October or November, 2003, counsel contacted plaintiffs to begin collecting and preserving documents, instructing them to be overinclusive and that electronic documents were included. The court observed that these instructions did not meet the standard for a litigation hold:

It does not direct employees to preserve all relevant records — both paper and electronic — nor does it create a mechanism for collecting the preserved records so that they can be searched by someone other than the employee. Rather, the directive places total reliance on the employee to search and select what that employee believed to be responsive records without any supervision from Counsel. Throughout the litigation, Counsel sent plaintiffs monthly case status memoranda, which included additional requests for Lancer-related documents, including electronic documents. But these memoranda never specifically instructed plaintiffs not to destroy records so that Counsel could monitor the collection and production of documents.

Id. at *37-*38. Between 2004 and 2007, a stay pursuant to the Private Securities Litigation Reform Act was in place, and counsel did not address discovery issues while the stay was in place. A formal litigation hold was not issued until 2007. Defendants made their first document requests in May 2007, and depositions began in late August. By October, defendants were dissatisfied with plaintiffs’ efforts to provide missing documents, and the court subsequently ordered plaintiffs to provide declarations regarding their preservation efforts.

The declarations mentioned two different periods of time in which documents were searched (referred to by the court as the “2003/2004 Search” and the “2007/2008 Search”) in connection with two search requests. The declarants stated that they believed that all relevant documents had been found and produced, and that no responsive documents had been destroyed after either the request to preserve, or after the declarant had arrived at the company. (Several declarations were subsequently amended.) After the declarations were submitted, defendants asked for permission to conduct additional depositions, which was granted. By cross-referencing the various production sets, the Citco Defendants found 311 documents (the “311 Documents”) which should have been produced by 12 of the 13 plaintiffs, but were not. In addition, they discovered that “almost all of the declarations were false and misleading and/or executed by a declarant without personal knowledge of its contents.” Id. at *42.

The court found that the duty to preserve documents arose in April, 2003, a point at which several of the plaintiffs had retained counsel. Although the duty to issue a written litigation hold may not have been well established at that time, “it was beyond cavil that the duty to preserve evidence included a duty to preserve electronic records.” Id. at *44. The Citco Defendants pointed out that most of the 311 Documents post-dated the plaintiffs’ duty to preserve. At least for three of the plaintiffs, however, the documents were older records which might not have been available to them when the duty arose.

The Citco Defendants also asked the court to assume that “each plaintiff also received or generated documents that have not been produced by anyone and are now presumed to be missing.” Id. at *46. The court found the Citco Defendants’ argument in this regard to be “compelling”:

All plaintiffs had a fiduciary duty to conduct due diligence before making significant investments in the Funds. Surely records must have existed documenting the due diligence, investments, and subsequent monitoring of these investments. The paucity of records produced by some plaintiffs…and the admitted failure to preserve some records or search at all for others by all plaintiffs leads inexorably to the conclusion that relevant records have been lost or destroyed.

Id. at *46-*47.

The court’s culpability analysis was divided into pre- and post-2005 periods. The duty to issue a written litigation hold was established in the Southern District of New York by mid-2004, after the issuance of the last Zubulake opinion. The duty thereby attached to the instant litigation once it was transferred to that District in 2005. Failure to issue written holds at that point was “at minimum, grossly negligent,” as plaintiffs had admitted that no written litigation holds were issued until 2007. Id. at *48. Had the Citco Defendants been able to establish that documents were destroyed after 2005, severe sanctions would have been warranted, but they did not.

Conduct of the plaintiffs prior to 2005 was characterized by the court (other than the failure to issue written litigation holds) “as either grossly negligent or negligent because they failed to execute a comprehensive search for documents and/or failed to sufficiently supervise or monitor their employees’ document collection.” Id. at *49. The court found that six plaintiffs acted with gross negligence, and seven acted negligently. Id. at *51-*52.

Turning to the relevance and prejudice factors, the court found that the failure to produce the 311 Documents was not prejudicial because all of the documents were available from other sources. However, it would be impossible to judge the prejudicial effect of the emails and documents lost as a result of plaintiffs’ failures. Nevertheless, the court found that defendants had met their “limited burden” as to relevance in that regard: “The documents that no longer exist were created during the critical time period. Key players must have engaged in correspondence regarding the relevant transactions. There can be no serious question that the missing material would have been relevant.” Id. at *53-*54. Prejudice was “another matter:” “Unless they can show through extrinsic evidence that the loss of the documents has prejudiced their ability to defend the case, then a lesser sanction than a spoliation charge is sufficient to address any lapse in the discovery efforts of the negligent plaintiffs.” Id. at *55.

The court then reviewed the conduct of the thirteen plaintiffs individually. However, in regard to the six plaintiffs which acted in a grossly negligent manner, the court stated:

In each instance, these plaintiffs’ 2003/2004 Searches were severely deficient. In addition to failing to institute a timely written litigation hold, one or more of these plaintiffs failed to collect or preserve any electronic documents prior to 2007, continued to delete electronic documents after the duty to preserve arose, did not request documents from key players, delegated search efforts without any supervision from management, destroyed backup data potentially containing responsive documents of key players, and/or submitted misleading or inaccurate declarations. 99 From this conduct, it is fair to presume that responsive documents were lost or destroyed. The relevance of any destroyed documents and the prejudice caused by their loss may also be presumed.

99 A cautionary note with respect to backup tapes is warranted. I am not requiring that all backup tapes must be preserved. Rather, if such tapes are the sole source of relevant information (e.g. the active files of key players are no longer available), then such backup tapes should be segregated and preserved. When accessible date satisfies the requirement to search for and produce relevant information, there is no need to save or search backup tapes.

Id. at *56-*57. [In an amended Order (“Amended Order”) dated January 15, 2010, Judge Scheindlin added new footnote 99.] As a result, the Citco Defendants were entitled to a spoliation instruction which would permit the jury to assume that the missing documents were relevant or prejudicial, rebuttable by the plaintiffs. Conduct by the six defendants is described in detail at pages *63-*81 of the opinion.

The seven negligent defendants failed to issue a written litigation hold in a timely manner, and employees who could have possessed relevant documents were not clearly instructed to collect and preserve such documents. The court explained why their conduct did not meet the threshold for gross negligence:

The failure to institute a written litigation hold in early 2004 in a case brought in federal court in Florida was on the borderline between a well-established duty and one that was not yet generally required. Thus, the rule of lenity compels the conclusion that this conduct alone, under these circumstances, is not sufficient to find that a plaintiff acted in a grossly negligent manner. 178 I therefore have looked to any additional errors made during the discovery phase to deter-mine whether the conduct was negligent or grossly negligent. Here, as described below, each of the plaintiffs in this category engaged in additional negligent conduct in carrying out its discovery obligations.

178 I reach this conclusion, in part, because once the duty to institute a litigation hold was clearly established – when the case was transferred to this District in 2005, it is very likely that electronic records that existed in 2003 would have been lost or destroyed. Thus, instituting the litigation hold in 2005 instead of 2007 may not have made any difference.

Id. at *82-*83. The court described the conduct of the seven negligent defendants at pages *83-*103 of the opinion.

The text of the jury charge to be given to the six grossly negligent defendants is as follows:

The Citco Defendants have argued that 2M, Hunnicutt, Coronation, the Chagnon Plaintiffs, Bombardier Trusts, and the Bombardier Foundation [the plaintiffs found grossly negligent] destroyed relevant evidence, or failed to prevent the destruction of relevant evidence. This is known as the “spoliation of evidence.”
Spoliation is the destruction of evidence or the failure to preserve property for another’s use as evidence in pending or reasonably foreseeable litigation. To demonstrate that spoliation occurred, the Citco Defendants bear the burden of proving the following two elements by a preponderance of the evidence:
First, that relevant evidence was destroyed after the duty to preserve arose. Evidence is relevant if it would have clarified a fact at issue in the trial and otherwise would naturally have been introduced into evidence; and
Second, that if relevant evidence was destroyed after the duty to preserve arose, the loss of such evidence would have been favorable to the Citco Defendants.
I instruct you, as a matter of law, that each of these plaintiffs failed to preserve evidence after its duty to preserve arose….This failure resulted from their gross negligence in performing their discovery obligations. As a result, you may presume, if you so choose, that such lost evidence was relevant, and that it would have been favorable to the Citco Defendants. In deciding whether to adopt this presumption, you may take into account the egregiousness of the plaintiffs’ conduct in failing to preserve the evidence.
However, each of these plaintiffs has offered evidence that (1) no evidence was lost; (2) if evidence was lost, it was not relevant; and (3) if evidence was lost and it was relevant, it would not have been favorable to the Citco Defendants.
If you decline to presume that the lost evidence was relevant or would have been favorable to the Citco Defendants, then your consideration of the lost evidence is at an end, and you will not draw any inference arising from the lost evidence.
However, if you decide to presume that the lost evidence was relevant and would have been unfavorable to the Citco Defendants, you must next decide whether any of the following plaintiffs have rebutted that presumption: 2M, Hunnicutt, Coronation, the Chagnon Plaintiffs, Bombardier Trusts, or the Bombardier Foundation. If you determine that a plaintiff has rebutted the presumption that the lost evidence was either relevant or favorable to the Citco Defendants, you will not draw any inference arising from the lost evidence against that plaintiff. If, on the other hand, you determine that a plaintiff has not rebutted the presumption that the lost evidence was both relevant and favorable to the Citco Defendants, you may draw an inference against that plaintiff and in favor of the Citco Defendants – namely that the lost evidence would have been favorable to the Citco Defendants.
Each plaintiff is entitled to your separate consideration. The question as to whether the Citco Defendants have proven spoliation is personal to each plaintiff and must be decided by you as to each plaintiff individually.

Id. at *103-*106. [The text is reproduced here because of changes in the Amended Order.] The court emphasized that the jury must be instructed that the court had made no finding of possible relevance or prejudice in connection with the missing documents. That was for the jury to decide, which would then permit the jury to draw an adverse inference regarding those documents. Id. at *106, fn 250.

In addition, the court awarded monetary sanctions consisting of “reasonable costs, including attorneys’ fees, associated with reviewing the declarations submitted, deposing these declarants and their substitutes where applicable, and bringing this motion.” Id. at *107. Furthermore, as two plaintiffs had admitted that backup tapes existed and had not been searched. They were ordered to search the tapes or demonstrate why they could not be searched.

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