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Bad Faith & Intentional Destruction of Relevant Evidence Sanctionable Under Rules 37(e)(1) and 37(e)(2)

By Karl Johnson posted 10-25-2019 06:21 PM

  
BANKRUPTCY BULLETIN
Editors-in-Chief
Karl Johnson, Briggs and Morgan, P.A.
Alexander J. Beeby, Larkin, Hoffman, Daly, & Lindgren Ltd.
Contributing Editors: Kesha Tanabe, Tanabe Law & Alexander M. Landreville & Nathan D. McDonald, University of St. Thomas Law
Judge_Sanberg_Kelley_v__BMO_Harris_Bank_N_A____Motion_for_Sanctions_.pdf

In Petters Company, Inc., et al. v. BMO Harris Bank N.A., ADV 12-4288 (July 1, 2019), the bankruptcy court granted the Plaintiff’s motion for Rule 37 sanctions and allowed an adverse inference jury instruction on the ground that Defendant bank intentionally destroyed relevant evidence in bad faith.

After the collapse of the Petters Ponzi scheme, the court issued an injunction that prohibited financial institutions, including Defendant, from destroying records or materials related to the Petters debtor entities. Though Defendant was subject to and received notice of the injunction, it failed to preserve electronically stored information (“ESI”) on computer servers and backup tapes within its possession and/or control. 

About a year after receiving notice of the injunction, the defendant decommissioned its email servers. Sometime later, sixty-six backup tapes were allegedly destroyed. In 2014, six backup tapes were discovered at one of Defendant's facilities (all of which had labels dating the tapes to the relevant time-period.)  But, Defendant asserted that no tapes had been found and it therefore failed to determine the contents of any of the tapes. These tapes have since disappeared. 

In 2017, five more archival tapes were discovered. Nonetheless, Defendant's employees continued to insist that all tapes had been destroyed. After close of the business day and within hours of the end of the discovery period, Defendant's counsel finally revealed the existence of the newly discovered tapes.

Defendant offered several justifications for its failure to adequately disclose the tapes. Defendant claimed that the tapes discovered in 2014 did not contain relevant information, but this could not have been known to Defendant because the contents had not been searched.  Further, Defendant claimed the 2014 tapes were duplicative of the information in another archive system; however, that archive system copied only e-mails, not calendar appointments or attachments. Finally, Defendant claimed the 2017 tapes were actually the re-discovered 2014 tapes, but again this was belied by the fact that the contents of the 2014 tapes were never searched and inventoried.

There are three elements of spoliation: (1) whether Defendant had a duty to preserve ESI; (2) whether Defendant took reasonable steps to preserve the ESI; (3) and whether the lost ESI can be replaced through additional discovery. Upon a determination that the offending party acted intentionally to harm another party’s case, the court may presume the evidence was unfavorable and issue an adverse inference jury instruction.

Based on the willful destruction of the initial sixty-six backup tapes, of which the Defendant had a duty to preserve and which could not be replaced by additional discovery, as well as Defendant's repeated acts of deceit and obfuscation towards the court and Plaintiff, the court held that Defendant's spoliation of evidence was in bad faith, which warranted an adverse inference jury instruction at trial. 


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