United States District Court, E.D. Kentucky, Southern Division
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For Taft A. McKinstry, as Trustee of the BD Unsecured Creditors Trust, Appellant, Counter Defendant: Ellen Arvin Kennedy, Grahmn Morgan, LEAD ATTORNEYS, Mackenzie Mayes Walter, Dinsmore & Shohl LLP - Lexington, Lexington, KY.
For Ira J. Genser, Larry Tate, Alvarez & Marsal North America, LLC, Appellees, Counter Claimants: Chacey R. Ford, Jay Edward Ingle, Mary Elisabeth Naumann, LEAD ATTORNEYS, Jackson Kelly PLLC - LEXINGTON, Lexington, KY; John C. Goodchild , III, LEAD ATTORNEY, Morgan, Lewis & Bockius, LLP - Chicago, Chicago, IL; Shevon L. Scarafile, LEAD ATTORNEY, PRO HAC VICE, Morgan Lewis & Bockius LLP - Philadelphia, Philadelphia, PA.
For Jones Day, Appellee: Matthew Curtis Corcoran, Robert Hamilton, LEAD ATTORNEYS, PRO HAC VICE, Jones Day - Columbus, Columbus, OH.
MEMORANDUM OPINION AND ORDER
Amul R. Thapar, United States District Judge.
Like the proverbial horseshoe nail, a single document could cost a party victory in a lawsuit. For this reason, courts must faithfully enforce discovery rules to deter abuses. Courts have broad authority to penalize those who flout the codes of conduct governing modern civil litigation as they see fit. How then should a court respond to allegations that a party destroyed documents they were supposed to turn over to their opponents? Should the wrongdoer be ordered to forfeit an issue? Should it be crippled with a fine? Or should it be forced to surrender entirely, by striking key causes of action from its pleadings?
The spoliation claims before this court provide an opportunity to determine how to calibrate sanctions for parties who fail to preserve key documents in either physical or electronic form. For the reasons discussed below, this Court GRANTS the motion for sanctions in part and DENIES it in part.
The present dispute over discovery sanctions is the latest battle in a lengthy and bitter conflict between the Trustee of the Black Diamond Mining Company Unsecured Creditors Trust (" Trustee" ) and turnaround specialists Ira Genser, Larry Tate, and their employer, Alvarez & Marsal North America, LLC (" A& M" ). To provide context for this order, a brief discussion of the relevant history of the underlying bankruptcy litigation follows. See also Sergent v. McKinstry , 472 B.R. 387, 393-95 (E.D. Ky. 2012).
In February of 2008, Black Diamond Mining Company, LLC (" Black Diamond" ) sought to remedy its precarious financial position. Faced with gloomy accounting prospects, company advisors engaged A& M to " develop[ ] possible restructuring plans or strategic alternatives for maximizing the . . . value of [Black Diamond's] various business lines . . . ." See Ex. 1 at 2 (Engagement Letter dated February 20, 2008). As part of this arrangement, Black Diamond appointed A& M employees Larry Genser and Ira Tate as the Chief Restructuring Officer (" CRO" ) and the Chief Financial Officer, respectively. Id. at 1. Despite assuming these new roles, Genser and Tate remained employees of A& M, still subject to its internal policies. Id. at 2. Both officers were granted immunity from any liability to Black Diamond, unless a court determined that their actions or omissions amounted to gross negligence or willful misconduct. Id. at 2-3.
This last clause gained significance during the officers' tenure at Black Diamond.
Genser and Tate allegedly wanted to sell the company to a competitor. According to the Trustee, they focused single-mindedly on that one possibility, allowing many other profitable opportunities to slip away. Sergent , 472 B.R. at 393. Accordingly, relations between the various stakeholders in the bankruptcy soured, and, as Genser testified, their interactions became very contentious. By April of 2009, litigation seemed almost certain, and A& M's general counsel notified Genser and Tate, among others, to save documents related to the Black Diamond engagement as part of a litigation hold. Ex. 13 at 2 (April 20, 2009 Email from A& M General Counsel to Genser and Tate instructing them to " preserve and retain any and all documents and information . . . in connection with the Black Diamond engagement . . . ." ).
Soon afterward, both the restructuring efforts and the relations between the unsecured creditors, Genser, Tate, and A& M wholly collapsed. In July of 2009, the Bankruptcy Court confirmed a final liquidation plan. R. 29-7. The plan recognized the appointment of the Trustee and confirmed her authority to bring lawsuits on behalf of the unsecured creditors against Genser, Tate, and A& M under the terms of a Settlement Agreement. R. 29-7 at 15, 24. Genser, Tate, and A& M formally ended their engagements on this note; however, their interactions with the Trustee would continue long after their last day on the job. The Trustee filed a suit in state court in July of 2010 that the A& M parties removed to this Court. See Sergent , 472 B.R. at 394. During discovery, the Trustee requested all documents relating to the A& M parties' work on the Black Diamond project. See, e.g. , R. 23-25 at 2 (Request for Production of Documents dated August 2011).
Unfortunately, the acrimony in the bankruptcy was not enough; soon, discovery became contentious as well. In his deposition, Genser revealed that he did not recall what he had done with a notebook he had apparently kept during his time at Black Diamond. R. 23-6 at 8 (Genser Deposition, Tr. at 244). Tate stated that he deleted information from his computer and threw away paper notes without informing anybody at A& M. R. 23-7 at 5 (Tate Deposition Tr. 29). Moreover, A& M's production of electronic documents yielded files that could not be opened or located. R. 23-45. And the documents that the A& M parties successfully produced raised suspicions about whether Genser and Tate had improperly destroyed relevant evidence. On July 6, 2009, Genser sent Tate an email void of text except for its subject line, which contained only the words " no emails." R. 23-50. On July 22, 2009, Tate sent Genser an email confirming that Genser wanted " all of the documents, filings etc[.]" on his desk to be shredded. Ex. 16 (" Shred Email" ). That same day, the parties signed a Settlement Agreement authorizing suit against the A& M parties. See R. 11-2.
Based on these circumstances, the Trustee grew suspicious about the absence of potentially relevant documents from production and moved for sanctions. In support of her motion, she argued that the destroyed and inaccessible documents would have revealed, among other things, that Genser and Tate botched multiple opportunities to sell Black Diamond's coal at favorable prices. R. 23 at 5. The Trustee requested severe sanctions, including dismissal of the A& M parties' counterclaims, a non-rebuttable adverse inference jury instruction, and attorneys' fees.
On June 10, 2014, this Court conducted an evidentiary hearing where the parties examined ...