JOANNA SEYBERT, District Judge.
Pending before the Court is Magistrate Judge A. Kathleen Tomlinson's Report and Recommendation ("R&R"), recommending that the Court grant Plaintiff's motion for sanctions (Docket Entry 92) in part and impose an adverse inference against Defendants at trial. (R&R, Docket Entry 151.) The Plaintiff and several Defendants filed objections to the R&R. (Docket Entries 156, 158, 159, 165) For the following reasons, the Court OVERRULES all of the parties' objections ADOPTS Judge Tomlinson's R&R in its entirety.
The Court assumes familiarity with the facts of this case, which are discussed within Judge Tomlinson's R&R. Briefly, this case was brought by an Official Committee of Unsecured Creditors ("Plaintiff") following the bankruptcy proceeding of Exeter Holdings, Ltd. ("Exeter" or "the Company"). (Compl., Docket Entry 3-9, at 1-2.) Plaintiffs sued numerous defendants, including Bruce Frank, Kathleen Frank, Larry Frank, Arnold Frank, Sondra Frank, Linda Haltman, and Michael Haltman ("Defendants"). (Compl. at 1-2.) Plaintiff claims that Defendants defrauded Exeter's creditors by transferring funds from Exeter to themselves, certain trusts, and other entities. (Compl. at 1-2.)
On February 2, 2015, Plaintiff filed a motion seeking sanctions for spoliation of evidence. (Docket Entry 92.) On April 7, 2015, the undersigned referred Plaintiff's motion to Judge Tomlinson for an R&R on whether the motion should be granted. (Docket Entry 125.)
Judge Tomlinson issued her R&R on August 25, 2015. (Docket Entry 151.) The R&R recommends that the Court grant Plaintiff's motion in part, and issue an adverse inference instructing the jury at trial that "it may infer that the spoliated evidence was largely damaging to defendants." (R&R at 43.) The R&R further recommends that the Court deny Plaintiff's request for a default judgment and defer ruling on Plaintiff's request for attorney fees. (R&R at 47-48.)
The Plaintiff and several Defendants filed objections to Judge Tomlinson's R&R. Linda and Michael Haltman filed objections on September 16, 2015 (Docket Entry 156), Plaintiff filed objections on September 17, 2015 (Docket Entry 157), Arnold Frank filed objections the same day (Docket Entry 159), and Bruce Frank filed objections on September 30, 2015 (Docket Entry 165). Each party's objections will be addressed in turn below.
"When evaluating the report and recommendation of a magistrate judge, the district court may adopt those portions of the report to which no objections have been made and which are not facially erroneous."
When a party raises an objection to a magistrate judge's report, the Court must conduct a
Linda and Michael Haltman ("the Haltman Defendants") object to Judge Tomlinson's R&R on a number of grounds. Principally they argue that Judge Tomlinson erred by: (1) not conducting an evidentiary hearing, (2) failing to determine that the evidence deleted by the Defendants was relevant, and (3) recommending that an adverse inference be issued as a sanction against Michael Haltman.
In her R&R, Judge Tomlinson found that Exeter and its officers had a duty to preserve relevant information concerning the Company's financial state beginning in December 2009, when Exeter was first sued by one of its creditor. (R&R at 32, 36.) However a forensic analysis of Exeter's sole computer undertaken by Plaintiff's forensic expert, Brian T. Fox ("Fox") of PricewaterhouseCoopers LLP ("PwC"), revealed that between January 7, 2004 and October 10, 2012, a total of 64,084 files and folders were deleted. (R&R at 25.) Of those files, 46,623 were deleted between January 1, 2011 and October 10, 2012. (R&R at 25.) Judge Tomlinson also found that Exeter's insiders failed to preserve the Company's backup files at Iron Mountain, a recordsstorage company, and failed to take steps to preserve relevant incoming email messages with the Company's email service provider, GoDaddy.com. (R&R at 35.)
In their brief in response to Plaintiff's sanction motion, the Haltman Defendants' forensic expert raised the argument that PwC failed to identify whether any relevant content was deleted. (
The Haltman Defendants now argue that Fox's affidavit set forth the "new" theory that Defendants only deleted 155 data files—not 64,084 files—and therefore Judge Tomlinson should have held an evidentiary hearing to more closely examine this issue. (Haltman Objec. at 11.) However, the Haltman Defendants' argument misconstrues the facts. Fox conducted an analysis of the files Defendants deleted to respond to the Haltman Defendants' argument that no data files had been deleted. Fox did not analyze all of the 64,084 files that were deleted—rather he only examined a sample of the files available on Exeter's hard drive. Fox then listed 155 data files in his affidavit that had been deleted by Defendants, thus confirming that Defendants had in fact deleted data files. It is thus disingenuous to say that Fox's affidavit puts forth any new theory.
Although Fox's affidavit did present new information relevant to the disposition of the sanctions motion, the decision to hold an evidentiary hearing is discretionary.
The Haltman Defendants next argue that Judge Tomlinson's R&R is flawed because Plaintiff never definitively established that any relevant evidence was destroyed. (Haltman Objec. at 13.) But this argument ignores the factual record and misconstrues Judge Tomlinson's R&R.
First, the Haltman Defendants fail to acknowledge the proof that Defendants likely destroyed evidence relevant to this case. Specifically, (1) PwC identified 27 QuickBooks files that were deleted on November 21, 2011, shortly after Exeter filed for Bankruptcy; (2) there was a spike in the number of deleted files in September 2011 and November 2011—also coinciding with Exeter's bankruptcy; and (3) Defendants' forensic expert, Leondard Weinstein, could not come forward with a credible reason for the loss of tens of thousands of files from Exeter's sole computer. (R&R at 25-31.) Therefore, the Court will not entertain Haltman Defendants' attempt to twist the facts.
In addition, the Haltman Defendants misconstrue the findings within Judge Tomlinson's R&R. A party seeking sanctions for spoliation of evidence must establish the following three elements: "(1) that the party having control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that the records were destroyed with a `culpable state of mind' and (3) that the destroyed evidence was `relevant' to the party's claim or defense such that a reasonable trier of fact could find that it would support that claim or defense."
In her R&R, Judge Tomlinson recommends imposing an adverse inference upon the former officers Exeter and several defacto officers because they had a duty to preserve relevant documents on behalf of the Company. (
Sanctions for spoliation are intended to "(1) deter parties from engaging in spoliation; (2) place the risk of an erroneous judgment on the party who wrongfully created the risk; and (3) restore
It would certainly be unfair to impose an adverse inference instruction "where some third-party, rather than the defendants at trial, caused the erasure."
However, whether Michael Haltman was in fact an officer of Exeter is a separate question. Michael Haltman claims in an affidavit that he was merely an employee of Exeter, not an officer, who happened to the wife of Linda Haltman, the President of Exeter. (Michael Haltman Aff., Docket Entry 156-11, ¶¶ 6-7.) Although Michael Haltman affirms that he had "no control over any aspect of Exeter's decision-making," there is significant evidence to the contrary. (Michael Haltman Aff. ¶ 9.) Linda Haltman testified during a hearing that her husband was in fact an officer of Exeter. (Mar. 23, 2012 Hr'g Tr. 114:9-12
The Haltman Defendants' objections are therefore OVERRULED. The Objections filed by Arnold Frank and Bruce Frank (Docket Entries 159, 165) are similarly OVERRULED. Both sets of Objections merely reiterate the argument that none of the files on Exeter's computer were ever deleted, and this argument has been addressed and rejected by the Court.
Plaintiff objects to Judge Tomlinson's R&R on the ground that a default judgment is the only adequate remedy for Defendants misconduct. (Pl.'s Objec. at 9.) Plaintiff argues that a default, rather than an adverse inference, is called for here because Plaintiff cannot reconstruct Exeter's financial picture. However, Plaintiff made the exact same argument in their original motion papers, and their argument was considered and rejected by Judge Tomlinson. (
After examining cases in which sanctions have been levied for discovery violations, Judge Tomlinson found that a default judgment was not called for in this case because, "this is [] not a case where Defendants have failed to comply with multiple discovery orders of this Court, have failed to heed prior lesser sanctions that have been levied or have disregarded prior warnings that continued noncompliance would result in a default judgment." (R&R at 44-45.) Having reviewed the cases relied upon by Judge Tomlinson, the Court agrees. Therefore, Plaintiff's Objections are OVERRULED.
For the foregoing reasons, all of the parties' Objections (Docket Entries 156, 158, 159, 165) are OVERRULED and Judge Tomlinson's R&R (Docket Entry 151) is ADOPTED IN ITS ENTIRETY. Therefore, Plaintiff's motion for sanctions for spoliation of evidence (Docket Entry 92) is GRANTED IN PART, DENIED IN PART, and DEFERRED IN PART. Specifically, (1) Plaintiff's request for the imposition of an adverse inference instruction at trial is GRANTED; (2) Plaintiff's request for a default judgment is DENIED; and (3) the Court DEFERS ruling on Plaintiff's request for attorney fees. Should Plaintiff wish to pursue an award of attorney fees, it shall file a motion pursuant to Federal Rule of Civil Procedure 37 within forty-five (45) days from the date of this Memorandum & Order. The motion must be accompanied by an attorney declaration with appropriate supporting documentation and a memorandum of law.
Plaintiff's counsel is directed to serve a copy of this Memorandum & Order the
SO ORDERED.