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Case Summary: Pension Comm. of the Univ. of Montreal; Importance of Litigation Hold Notices

Posted by rjbiii on March 1, 2010

Pension Comm. of the Univ. of Montreal Pension Plan v. Banc of Am. Secs, LLC, 2010 U.S. Dist. LEXIS 4546 (S.D.N.Y. Jan. 15, 2010)

Background: Action brought by investors to recover funds lost upon the liquidation of two hedge funds based in the British Virgin Islands. The court examines the litigation holds practice of the plaintiffs.

Basic Points:

  • Spoliation sanctions imposed despite no “egregious behavior.”
  • Lit Hold for Plaintiffs often (usually?) occur earlier than or Defendants.
  • New Balancing Test for Burden of Proof
  • Inefficiencies greatly increased legal fees
  • Defendant’s attack mode was effective
  • Collection methods placing “total reliance” on the custodian criticized.
  • Zubulake a watershed for this case’s participants.

The court begins by noting that we live in an era where there are vast amounts of ESI available for review, causing the discovery process to be complex and expensive. The opinion expresses the consoling thought that courts do not hold parties to a standard of perfection, but follows that with the warning that parties must preserve relevant records once litigation is reasonably anticipated, and must collect, review and produce those records to the other side. Failing to do so damages the integrity of the judicial system.

The Court continues by setting up the basic framework:

From the outset, it is important to recognize what this case involves and what it does not. This case does not present any egregious examples of litigants purposefully destroying evidence. This is a case where plaintiffs failed to timely institute written litigation holds and engaged in careless and indifferent collection efforts after the duty to preserve arose. As a result, there can be little doubt that some documents were lost or destroyed.

The question, then, is whether plaintiffs’ conduct requires this Court to impose a sanction for the spoliation of evidence. To answer this question, there are several concepts that must be carefully reviewed and analyzed. The first is plaintiffs’ level of culpability — that is, was their conduct of discovery acceptable or was it negligent, grossly negligent, or willful. The second is the interplay between the duty to preserve evidence and the spoliation of evidence. The third is which party should bear the burden of proving that evidence has been lost or destroyed and the consequences resulting from that loss. And the fourth is the appropriate remedy for the harm caused by the spoliation.

First, the court provided basic definitions for negligence and gross negligence. The court then discussed culpability (willfulness, gross negligence, and negligence) in the context of electronic discovery. The chart below summarizes the analysis.

Degree of Culpability for Specific Acts

The court qualified its judgments by stating that each case will turn on its own facts.

The court continued by noting that the common law duty to preserve evidence was well-recognized, that the breach of this duty invited sanctions from the court, and that the duty attached at the time a party reasonably anticipates litigation. Because Plaintiff’s control the timing of the litigation, their duty is often triggered before litigation commences. In this case, the court reasoned that by April of 2003, Lancer (one defendant hedge fund) had already filed for bankruptcy; Plaintiff UM had filed a complaint; at least two other plaintiffs (Hunicutt & Chagnon) had retained counsel, and plaintiff Chagnon had been in contact with other plaintiffs. With these facts listed, the court decided that by April 2003, therefore, plaintiffs, all sophisticated investors, should have been aware of pending collapse and litigation. Below, is a table that shows the steps plaintiffs took to preserve data, and the court’s analysis of those steps:

Court Analyzes Plaintiffs' Collections Methods

Interesting, the court describes two attacks on Plaintiffs’ process by Defendants that proved to be successful. By cross-referencing productions from other plaintiffs, former co-defendants, and the receiver in a related SEC action, Defendants identified 311 documents unaccountably absent from production. This, in turn, led to the discovery that almost all declarations were false and misleading or executed by declarants without personal knowledge of its contents.

Next, Defendants were able to convince the court that certain records had to missing, via logic, over plaintiffs’ objection. Defendants argued that:

  • All plaintiffs had a fiduciary duty to conduct due diligence before making significant investments in the funds.
  • Records must have existed documenting the due diligence, investments and subsequent monitoring of these investments.
  • The paucity of records produced by some plaintiffs and the admitted failure to preserve some records or search at all for others by all plaintiffs leads inexorably to the conclusion that relevant records have been lost or destroyed.

Here, then, the attack for defendants worked on two fronts: the technical and the legal.

The court then analyzed sanctions and their relative magnitudes of The discussion of sanctions and severity is summarized below.

Sanctions in Order of Severity

For less severe sanctions, the inquiry focuses more on the conduct of the spoliating party than on whether documents were lost, and, if so, whether those documents were relevant and resulted in prejudice to the innocent party. For severe sanctions, the innocent party must prove the following three elements: that the spoliating party:
(1) had control over the evidence and an obligation to preserve it at the time of destruction or loss;
(2) acted with a culpable state of mind upon destroying or losing the evidence; and that
(3) the missing evidence is relevant to the innocent party’s claim or defense.

Relevance and prejudice may be presumed when the spoliating party acts in bad faith or in a grossly negligent manner. The application of this presumption is at the discretion of the court. Typically, the innocent party must present intrinsic evidence that tends to show that the destroyed evidence was favorable to its case. No matter what level of culpability is found, any presumption is rebuttable. In order to strike a balance, the court crafted a new test:

When the spoliating party’s conduct is sufficiently egregious to justify a court’s imposition of a presumption of relevance and prejudice, or when the spoliating party’s conduct warrants permitting the jury to make such a presumption, the burden then shifts to the spoliating party to rebut that presumption. The spoliating party can do so, for example, by demonstrating 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. If the spoliating party demonstrates to a court’s satisfaction that there could not have been any prejudice to the innocent party, then no jury instruction will be warranted, although a lesser sanction might still be required.

The court next reviewed the calculus used for the imposition of sanctions. First, it noted that a court has broad discretion to determine the approprate sanction in the event of a breach of a discovery obligation. Sanctions should:

  1. deter parties from engaging in spoliation
  2. place the risk of an erroneous judgment on the arty who wrongfully created the risk; and
  3. restore the prejudiced party to the same position in which it would have been absent the wrongful destruction of evidence

A court should always impose the least harsh sanction that can provide an adequate remedy. Therefore, terminating sanctions are justified only in the most egregious cases, such as:

  1. Perjury;
  2. Tampering with evidence;
  3. Intentional destruction-burning, shredding or “wiping out” computer hard drives;

The court then articulated the standards for various jury instruction types, and this analysis is re-produced in the chart below:

Adverse Instruction Types

The court ultimately imposed monetary fines and the following instruction to the jury:

The Citco Defendants have argued that 2M, Hunnicutt, Coronation, the Chagnon Plaintiffs, Bombardier Trusts, and the Bombardier Foundation destroyed relevant evidence, or failed to prevent the destruction of relevant evidence. This is known as the “spoliation of evidence.”

Spoliation is the destruction of evidence or the failure to preserve property for another’s use as evidence in pending or reasonably foreseeable litigation. To demonstrate that spoliation occurred, the Citco Defendants bear the burden of proving the following two elements by a preponderance of the evidence:

First, that relevant evidence was destroyed after the duty to preserve arose. Evidence is relevant if it would have clarified a fact at issue in the trial and otherwise would naturally have been introduced into evidence; and

Second, that if relevant evidence was destroyed after the duty to preserve arose, the loss of such evidence would have been favorable to the Citco Defendants.

I instruct you, as a matter of law, that each of these plaintiffs failed to preserve evidence after its duty to preserve arose. This failure resulted from their gross negligence in performing their discovery obligations. As a result, you may presume, if you so choose, that such lost evidence was relevant, and that it would have been favorable to the Citco Defendants. In deciding whether to adopt this presumption, you may take into account the egregiousness of the plaintiffs’ conduct in failing to preserve the evidence.

However, each of these plaintiffs has offered evidence that (1) no evidence was lost; (2) if evidence was lost, it was not relevant; and (3) if evidence was lost and it was relevant, it would not have been favorable to the Citco Defendants.

If you decline to presume that the lost evidence was relevant or would have been favorable to the Citco Defendants, then your consideration of the lost evidence is at an end, and you will not draw any inference arising from the lost evidence.

However, if you decide to presume that the lost evidence was relevant and would have been unfavorable to the Citco Defendants, you must next decide whether any of the following plaintiffs have rebutted that presumption: 2M, Hunnicutt, Coronation, the Chagnon Plaintiffs, Bombardier Trusts, or the Bombardier Foundation. If you determine that a plaintiff has rebutted the presumption that the lost evidence was either relevant or favorable to the Citco Defendants, you will not draw any inference arising from the lost evidence against that plaintiff. If, on the other hand, you determine that a plaintiff has not rebutted the presumption that the lost evidence was both relevant and favorable to the Citco Defendants, you may draw an inference against that plaintiff and in favor of the Citco Defendants — namely that the lost evidence would have been favorable to the Citco Defendants.

Each plaintiff is entitled to your separate consideration. The question as to whether the Citco Defendants have proven spoliation is personal to each plaintiff and must be decided by you as to each plaintiff individually.

6 Responses to “Case Summary: Pension Comm. of the Univ. of Montreal; Importance of Litigation Hold Notices”

  1. […] Case Summary: Pension Comm. of the Univ. of Montreal; Importance of Litigation Hold Notices […]

  2. […] Case Summary: Pension Comm. of the Univ. of Montreal; Importance of Litigation Hold Notices […]

  3. […] Case Summary: Pension Comm. of the Univ. of Montreal; Importance of Litigation Hold Notices […]

  4. […] 9016, 2010 U.S. Dist. LEXIS 4546, 2010 WL 184312 (S.D.N.Y. Jan. 15, 2010) (see our case summary here). Unlike Montreal Pension Plan, this case involve allegations of intentional destruction of ESI, […]

  5. […] case Summary for Pension Committee here. Possibly related posts: (automatically generated)Case Summary: Elec. Mach. Enters.; Spoliation […]

  6. […] the legal hold notice process are long over­due, and their offer­ing seems timely, given the recent Scheindlin deci­sion. Today most of my clients use a mish­mash of home-grown email-based processes, although there are […]

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