District Court Denies Request to Review Bankruptcy Court’s Spoliation Sanctions De Novo

By Karl Johnson posted 09-07-2022 11:34 AM



In Kelley v. BMO Harris Bank N.A., No. 19-CV-1756, 2022 WL 1771999 (D. Minn. June 1, 2022), the district court denied the defendant’s request for a pretrial evidentiary hearing to review de novo the bankruptcy court’s imposition of spoliation sanctions.

The plaintiff, the chapter 11 trustee for the bankruptcy proceeding concerning Petters Company Inc. (“PCI”), alleged that the defendant, BMO Harris N.A. (“BMO Harris”), was complicit with PCI’s fraudulent conduct. The bankruptcy court sent this case to the district court for trial, scheduled for October 2022, on four counts: violation of the Minnesota Uniform Fiduciaries Act, breach of fiduciary duty, aiding and abetting fraud, and aiding and abetting breach of fiduciary duty.

The defendant sought a case management conference and an order: (1) holding an evidentiary hearing to review de novo the spoliation sanctions imposed by the bankruptcy court on BMO Harris, (2) re-opening fact discovery, and (3) setting deadlines for pre-trial motions, including motions to exclude expert testimony. The district court decided these issues without a case management conference because the parties had sufficiently briefed the issues. It denied requests (1) and (2), and granted (3).

First, the district court denied the defendant’s request for a pretrial evidentiary hearing and de novo review of the bankruptcy court’s imposition of spoliation sanctions. It held that the bankruptcy court’s spoliation sanctions are reviewed for an abuse of discretion both as to the sanction imposed and the factual basis for the sanction. It compared bankruptcy judges in this respect to magistrate judges, whose rulings on discovery sanctions are granted substantial deference. The district court also concluded that the bankruptcy court has authority to order non-dispositive spoliation sanctions that will impact trial, even if the bankruptcy court lacks authority to conduct the trial.

Second, the district court denied the defendant’s request to re-open fact discovery related to the losses sustained by PCI’s third-party investors as untimely and procedurally improper. The bankruptcy court had already denied discovery of the third-party losses in a September 2017 order, which BMO Harris never formally appealed.

BMO Harris also argued that discovery should be re-opened because there was good cause to amend the pre-trial scheduling order. The district court rejected this argument, primarily because the defendant failed to act diligently. Crucially, BMO Harris waited over two years to request re-opening discovery for information about investor losses, and the bank failed to properly file a motion as required by Fed. R. Civ. P. 7(b). The district court also noted that the additional discovery sought was irrelevant, referencing a prior order where it held that the losses caused direct harm to PCI, and not to the investors in PCI. Furthermore, re-opening discovery would prejudice the plaintiff.

Third, the district court granted defendant’s request to set deadlines for pre-trial motions to exclude expert testimony.

Co-Editors in Chief
Karl J. JohnsonTaft Stettinius & Hollister LLP
David M. TanabeWinthrop & Weinstine, P.A.