In Pension Comm. Of the University of Montreal Pension Plan, et. al. v. Banc of America Securities, LLC, et. al., 05 Civ. 9016 (S.D.N.Y. January 11, 2010),  Judge Shira A. Scheindlin, in an 85-page opinion, granted defendants' motion for sanctions holding plaintiffs' failure to issue a timely litigation hold amounted to gross negligence and warranted an adverse inference instruction.

In February 2004, a group of investors brought this action to recover money lost as a result of the liquidation of two British Virgin Island based hedge funds. In discovery, defendants found gaps in plaintiffs' document productions and moved for sanctions alleging that each plaintiff failed to preserve and produce documents, and submitted false declarations regarding their document collection and preservation efforts.

Judge Scheindlin agreed, finding that all of the plaintiffs were either negligent or grossly negligent in meeting their discovery obligations. The court's lengthy opinion delves deeply into the core issues of the case:  (1) the determination of plaintiffs' culpability (negligence, gross negligence or willfulness); (2) the interplay between the duty to preserve evidence and the spoliation of evidence; (3) the extent to which a party should bear the burden of proving that evidence has been lost or destroyed and the consequences resulting from that lost; (4) and the appropriate remedy for the harm caused by the spoliation.

Defining Culpable Conduct

Judge Scheindlin ruled that after July 2004 when the final relevant Zubulake IV opinion was issued, the failure to issue a written litigation hold constituted gross negligence because the failure to preserve would likely result in the destruction of relevant evidence.  While plaintiffs, through their counsel, did request some employees to collect potentially relevant data in anticipation of filing their complaint, the court reiterated that the duty to preserve requires more - an affirmative obligation to tell employees not to destroy potentially relevant evidence.  The court found plaintiffs' failure to instruct its employees to preserve was gross negligence.  In addition, the court ruled that declarations proffered by plaintiffs' employees detailing their preservation efforts were "false and misleading and/or executed by a declarant without personal knowledge of its contents."

The court also ruled that some plaintiffs' failure to obtain records from all employees, including those who may have only had a passing encounter with the issue in the litigation, likely constituted negligence.  Likewise, the failure to take "all appropriate measure" to preserve electronically stored information falls into the negligence category.

The Duty to Preserve and Spoliation

It is axiomatic that a duty to preserve arises when a party reasonably anticipates litigation.  The duty is based on the court's inherent authority to impose sanctions for spoliation to redress conduct "which abuses the judicial process."  Judge Scheindlin ruled that plaintiffs' duty was triggered far in advance of the litigation, in large part, because plaintiffs controlled the timing of the litigation.  Yet, plaintiffs did not issue written litigation hold instructions to their employees until several years into the litigation, if at all.  

The Burden of Proof

The court's analysis focused on who should bear the burden of proving the existence and potential relevance of documents that are no longer available.  According to the court, the burden of proof question differs depending on the severity of the sanction.  For lesser sanctions, such as cost-shifting or fines, the court's focus is more on the conduct of the spoliating party than whether the documents were lost.  The higher the degree of culpability, the less attention the court will give to whether the documents were relevant and any resulting prejudice to the innocent party.  In the case of severe sanctions, such as dismissal, preclusion, or an adverse inference instruction, the court will also consider whether any missing evidence was relevant and whether the innocent party suffered prejudice as a result of the lost information. Relevance and prejudice may be presumed when the spoliating party acted in bad faith or in a grossly negligent manner.  However, if the spoliating party's conduct is merely negligent, the innocent party must prove both relevance and prejudice to justify the court's imposition of severe sanctions.

Judge Scheindlin noted that no matter what level of culpability is found, all presumptions are rebuttable and the spoliating party should have the opportunity to demonstrate the lack of prejudice to the innocent party.  For example, the spoliating party may demonstrate 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. 

Remedies

The court has broad discretion to craft the appropriate spoliation sanctions.  However, the court must impose the least harsh sanction that can provide the adequate remedy, including ordering further discovery, cost-shifting, fines, special jury instructions, preclusions, and the entry of default judgment or dismissal.

Here, although, the case did not present any egregious examples of purposeful evidence destruction, the court ruled that a laundry list of inactions by most of the plaintiffs amounted to gross negligence, including the following failures: (1) to issue a written litigation hold; (2) to identify the key players and to ensure that their electronic and paper records were preserved; (3) to cease the deletion of email or to preserve the records of former employees that were in their possession; (4) to preserve backup tapes when they were the sole source of relevant information or related to key players.

Accordingly, with respect to the grossly negligent plaintiffs, the court recommended an adverse jury instruction.  In addition, all plaintiffs were subject to monetary sanctions, including costs, as well as  attorneys' fees associated with reviewing plaintiffs' declarations, deposing the declarants and the cost of bringing the motion to compel. The court also ordered certain plaintiffs to restore backup tapes and search and produce any potentially relevant information, or demonstrate why the tapes could not be searched. For a copy of the court's ruling, click here.