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Archive for December 9th, 2009

Case Summary: Elec. Mach. Enters.; Spoliation arising from a Bankruptcy Claim

Posted by rjbiii on December 9, 2009

Elec. Mach. Enters. v. Hunt Constr. Group, Inc. (In re Elec. Mach. Enters.), 416 B.R. 801 (Bankr. M.D. Fla. 2009)

Procedural History: Adversary Proceeding arising from Chapter 11 filing by electrical contractor, in the jurisdiction of the Middle District of Florida. Plaintiff electrical contractor (EME) sought damages from construction manager for, inter alia, spoliation of evidence.

Factual Background: A construction management business, Construct Two Construction Managers, Inc., was formed specifically to manage one particular project: the building of a the Orange County Convention Center in Orlando, Florida. Construct Two was a joint venture between two large, national construction-related businesses, Hunt Construction Group (HCC) and The Clark Construction Group (CCG). During the project, there were scheduling and coordination issues that resulting in the need for re-work, resulting in plaintiff’s claim for additional charges. Also during the project, the plaintiff electrical contractor filed for relief under Chapter 11 of the bankruptcy code. EME finished all of its designated tasks associated with the construction project despite this filing.

During the project, EME hired Richard Coble, a construction dispute consultant, to assist in compiling information, initially to determine what was happening on the Project and subsequently to determine possible claims that EME might have in connection with the Project. In December of 2003, after completion of the construction project, Mr. Coble became aware that project documents belonging to HCC were being thrown into a dumpster located on the project site. EME instituted this suit to prevent the further destruction of documents related to its claims against HCC. The court also issued an injunction requiring HCC to retrieve and preserve whatever thrown-away Project documents still existed from the job site dumpster, at its own cost.

Discussion on the Spoliation Claim:
HCC did not convincingly dispute the fact that their documents ended up in the dumpster. It did argue, in its own defense, that no one at HCC was aware of possible litigation from this project until EME filed this adversary proceeding. The court was not persuaded by this, however, given the numerous complaints, claims, disputes, threatened and actual lawsuits, and public records requests advanced by EME and others. Although both CGG and HCC had a document retention policy, there was no policy for the joint venture entity created for this project.

One HCC official testified that no attorneys from either Hunt or their outside counsel advised him not to throw away Project documents during the month of July 2003. That same official also testified that no one ever advised him that HCC needed to maintain all records relating to EME. This testimony confirmed Mr. Sterling’s testimony that HCC employees were to use their own judgment as to what to destroy. Until receiving this court’s TRO prohibiting the destruction of relevant documents, HCC took no action to preserve documents relating to the Project. Thereafter, the parties participated in a massive effort to retrieve and restore the discarded documents. This required restoration of physical documents as well as the retrieval of electronically stored documents. The court then analyzed what, if any, remedies were available to EME for spoliation under the law.

Spoliation as a Cause of Action
The court began by citing Sterbenz v. Attina, 205 F. Supp. 2d 65, 74 (E.D.N.Y. 2002) to note that there is no federal cause of action for spoliation. The court stated that at one time, the State of Florida recognized both a first-party cause of action brought by a party to the underlying lawsuit and a third-party cause of action brought against a non-party for either negligent or intentional spoliation of evidence. After the Florida’s Supreme Court’s decision in Martino v. Wal-Mart Stores, Inc., 908 So. 2d 342 (Fla. 2005), there is no longer a first-party cause of action for spoliation against the same defendant as in the underlying litigation. The court commented that in Martino, the state Supreme Court held that the availability of sanctions, including the imposition of evidentiary presumptions and inferences, provides sufficient protection to the plaintiff where the defendant in the litigation commits negligent or intentional spoliation of evidence. A cause of action brought by a third-party still exists.

Spoliation Sanctions
The began its analysis of possible sanctions by noting that Federal Courts were split on the question of whether the Federal or State law governs the imposition of spoliation sanctions in federal courts sitting in diversity. The Eleventh Circuit has held that Federal Law governs, but is informed by state law. The court, therefore, addressed the applicable federal case law on spoliation sanctions in the Eleventh Circuit before turning to the principles of Florida law governing the imposition of spoliation sanctions.

The court began by noting that the Eleventh Circuit has not enunciated a standard for the imposition of spoliation sanctions where the underlying cause of action arises under Florida law. In Flury v. Daimler Chrysler Corp., 427 F.3d 939, 944 (11th Cir. 2005), the panel adopted the law of the state (Georgia) to guide its analysis. The panel also found that Georgia law was “wholly consistent with federal spoliation principles.” While defendant argued that Flurry applied to this case, the court stated that Georgia law materially differs from Florida law in this area, leading the court to reject applying the Flurry factors to the instant matter. Instead, the court fully followed the standards set under Florida law.

The definition of spoliation, under Florida law, is the “intentional destruction, mutilation, alteration, or concealment of evidence.” Impositions of sanction are meant to ensure the non-spoliator does not bear an unfair burden, and to serve as a deterrent to “miscreant defendants.”

The court explained that the Fourth District Court of Appeal has articulated the following three threshold questions that a court must answer before imposing spoliation sanctions in Florida:

  1. whether the evidence existed at one time,
  2. whether the spoliator had a duty to preserve the evidence, and
  3. whether the evidence was critical to an opposing party being able to prove its prima facie case or a defense.

The court concluded that the first factor had been adequately proved by EME. The second factor, however, was less clear. In Florida, the court explained, a duty to preserve evidence can arise by contract, by statute, or by a properly served discovery request (after a lawsuit has already been filed). The court noted that the majority of Florida courts have held that there is no common law duty to preserve evidence before litigation has commenced. While the court agreed that there was no doubt that HCC destroyed arguably relevant documents before EME’s lawsuit, EME had not provided sufficient argument that there existed any duty under Florida to retain those documents. EME’s citing of Federal cases to bolster its argument that a duty to preserve evidence arises either “when the party has notice that the evidence is relevant to litigation or when a party should have known that the evidence may be relevant to future litigation,” did not meet the court’s definition of being “informed by state law.” Because of this, the court could not justify the imposition of sanctions. The court noted that in an unreported case arising under Georgia law, the Eleventh Circuit recently stated that spoliation includes “the destruction or significant alteration of evidence. or the failure to preserve property for another’s use as evidence in pending or reasonably foreseeable litigation.” The court, nevertheless stated that unlike in Florida, under Georgia law, spoliation includes the destruction of evidence “that is necessary to pending or contemplated litigation.” Thus the court found its own conclusions to be consistent.

Although the court found that the existence of a duty was not proved by plaintiff, it noted that there was some support for imposing an adverse inference where critical evidence was destroyed intentionally, pre-litigation, even where no duty to preserve existed. In Martino, the Florida Supreme Court, while dividing remedies for spoliation into “lighter” and “stronger” groups, had found that where evidence is “intentionally lost, misplaced, or destroyed” the appropriate sanctions would be found in Florida Rule of Civil Procedure 1.380(b)(2) and include applying an adverse jury inference; whereas, where “the loss of the evidence was determined to be negligent the . . . rebuttable presumption of negligence for the underlying tort” applies. The court discussed the Fourth District Court of Appeal’s decision in Golden Yachts, Inc. v. Hall, 920 So. 2d 777 (Fla. Dist. Ct. App. 4th Dist. 2006), that opened up the possibility of applying the “lighter” sanction of adverse inference where no duty existed if the pre-litigation spoliation was intentional.

The court drew a correlation between this principle and the Federal principle of imposing sanctions where bad faith on the part of the spoliator was evident. It observed that the 11th Circuit requires a finding of bad faith before imposing an adverse inference sanction.

The final factor examined by the court was whether the destroyed evidence was critical for proving a prima facie case or a defense. The court reasoned that if spoliation sanctions are imposed “to assure that the non-spoliator does not bear an unfair burden,” then there is no reason to apply sanctions where no harm comes from the spoliation. The court noted that EME produced substantial evidence in this case to establish its claims in the underlying litigation. The court determined that while the disposed documents may have further undermined HCC’s defenses or supported EME’s claims, none of the destroyed documents were truly critical to EME’s case. Accordingly, the court concluded that under Florida law, it could not impose sanctions on HCC.

Posted in 11th Circuit, Adverse Inference, Bankruptcy Court, Bankruptcy Judge Michael G. Williamson, Case Summary, Case Summary-FL, M.D. FL., Sanctions, Spoliation, Uncategorized | 1 Comment »