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District Court Addresses Scope of Adverse Inference Sanctions, Expert Testimony, and Bifurcation

By Karl Johnson posted 30 days ago

  

 BANKRUPTCY BULLETIN

Contributing Editor: Jeff Merritt, Dorsey & Whitney LLP  

 

In Kelley v. BMO Harris Bank N.A., No. 19-CV-1756 (D. Minn. Sept. 29, 2022), the district court addressed the scope of adverse inference spoliation sanctions that were previously imposed; motions to exclude expert testimony; and a motion to bifurcate punitive damages from liability and compensatory damages.   

The plaintiff, the chapter 11 trustee for the bankruptcy proceeding concerning Petters Company, Inc. (“PCI”) and the defendant, BMO Harris Bank N.A. (“BMO Harris”), each filed motions for clarification on the scope of the adverse inference. Both parties also filed motions to exclude the others banking and damages experts. BMO Harris also filed a motion to bifurcate the punitive damages portion of the trial from the liability and compensatory damages portion of the trial.

The district court first addressed the scope of the adverse inference spoliation sanctions. The parties disagreed as to whether the adverse inference sanction was rebuttable. The district court held that since there was not an identified “particular document of crucial evidentiary value” that was destroyed, a permissive adverse inference subject to reasonable rebuttal was the appropriate sanction. The district court reasoned that allowing the sanctioning party to put on some evidence that might demonstrate an innocent explanation for the conduct would avoid unfair prejudice. For the same reason, the court held that the adverse inference jury instruction will not be provided until after the evidentiary phase of the trial concludes.

The district court then addressed each parties’ expert testimony. Both parties moved to exclude testimony from each other’s experts on banking and damages. The district court first addressed BMO Harris’ banking expert, finding that the expert had improperly opined about the mental state of what M&I Marshall and Ilsley Bank (“M&I”) (predecessor to BMO Harris) and its employees knew or did not know. BMO Harris’ banking expert also improperly speculated about the knowledge and mental state of third parties to, in turn, improperly speculate that M&I and its employees likely had the same knowledge and mental states. The district court disagreed with the trustee’s argument about the expert lacking sufficient factual basis and the expert’s testimony undermining the adverse inference sanction. Therefore, the district court granted in part the trustee’s motion to exclude BMO Harris’ banking expert’s testimony as it pertained to speculation about the knowledge and state-of-mind of others.

Next, the district court addressed BMO Harris’ damage expert finding that the expert had improperly opined about the knowledge and culpability of PCI’s investors; offsets, deductions, and recoveries; and alternative damage theories. The district court found that the expert’s testimony was not relevant to BMO Harris’ liability, was inconsistent with the collateral source rule, and relied on a “flawed legal theory” regarding offsets. The district court did not find the damages expert testimony pertaining to state-of-mind, causation, and undermining the adverse inference sanction to be improper and, accordingly, granted the trustee’s motion in part and denied it in part.

The district court then turned to the trustee’s experts. The district court found that the trustee’s banking expert had improperly testified to the state-of-mind of others – where the expert had testified to the “willful blindness” of M&I and its employees or what they knew.  Second, the district court also held that the trustee’s banking expert had improperly testified about the Bank Secrecy Act, stating that their opinions about whether M&I had violated the Bank Secrecy Act have “little or no apparent relevance,” and the risk of unfair prejudice outweighed the probative value of such opinions. The district court did not find that the trustee’s banking expert had improperly summarized evidence or was unqualified to testify about deposit account control agreements, as BMO Harris had argued. Hence, the district court granted BMO Harris’ motion to exclude the trustee’s banking expert in part and denied it in part.

The district court continued on to address the trustee’s damages expert. BMO Harris argued that the trustee’s damages expert’s testimony should be excluded because it was contrary to established law and the methodology the expert had relied on was unreliable and improperly applied. The district court held that BMO Harris failed to show that the damages expert’s testimony was improper and denied the motion to exclude the testimony.  

The district court then turned to the BMO Harris’ motion to bifurcate the punitive damages portion of the trial from the liability and compensatory damages portion of the trial. BMO Harris argued that Minnesota state law mandates bifurcation but the district court found that state law was inapplicable. The district court stated that even when applying state substantive law, federal courts apply federal law as to matters of procedure. The district court then looked at Federal Rules of Civil Procedure 42 to resolve the issue.

Rule 42 provides that “[f]or convenience, to avoid prejudice, or to expedite and economize, the court may order a separate trial of one or more separate issues.” Fed. R. Civ. P. 42(b). The district court noted that BMO Harris did not contend, and the district court could not conclude, that bifurcating would “promote convenience or otherwise expedite or economize the case.” BMO Harris did contend that bifurcation was necessary to avoid prejudice. BMO Harris argued that evidence of its financial condition, net worth, or income might influence the jury when assessing its liability or the amount of compensatory damages.

The district court pointed out that BMO Harris did not provide any evidence or persuasive argument to support its “broad, speculative generalization” about the risk of prejudice. “It is unlikely that jurors will be surprised to learn the financial condition, net worth or income of a large bank in a case such as this one.” Further, the court noted, the jury will be instructed as to the appropriate application of the law and the jury is presumed to follow the instructions. Accordingly, the district court denied BMO Harris’ motion to bifurcate.

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

 

 

 

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