Kelley v. BMO Harris Bank

• Decision Date: 29 September 2022
• Docket Number: 19-cv-1756 (WMW)
• Parties: Douglas A. Kelley, in his capacity as the Trustee of the BMO Litigation Trust, Plaintiff, v. BMO Harris Bank N.A., as successor to M&I Marshall and Ilsley Bank, Defendant.
• Court: U.S. District Court — District of Minnesota

Douglas A. Kelley, in his capacity as the Trustee of the BMO Litigation Trust, Plaintiff,
v.
BMO Harris Bank N.A., as successor to M&I Marshall and Ilsley Bank, Defendant.

No. 19-cv-1756 (WMW)

United States District Court, D. Minnesota

September 29, 2022

ORDER

Wilhelmina M. Wright United States District Judge

In this bankruptcy matter, Plaintiff Douglas A. Kelley, in his capacity as the Trustee of the BMO Litigation Trust (hereinafter, Kelley or the Trustee), and Defendant BMO Harris Bank N.A. (BMO Harris) cross-move to exclude expert testimony. (Dkts. 110, 118, 119.) The parties also cross-move for clarification as to the scope of, and how the jury will be presented with, the adverse inference spoliation sanction that the Court previously imposed against BMO Harris. (Dkts. 138, 149.) And BMO Harris moves to bifurcate the punitive damages portion of trial from the liability and compensatory damages portion of trial. (Dkt. 154.) For the reasons addressed below, the parties' motions to exclude expert testimony and motions for clarification are granted in part and denied in part, and BMO Harris's motion to bifurcate is denied.

BACKGROUND

This bankruptcy matter arises from a Ponzi scheme orchestrated by Thomas J. Petters and his associates between 1994 and 2008. Petters was the owner,

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director and CEO of Petters Company, Inc. (PCI). Throughout the Ponzi scheme, PCI obtained billions of dollars from investors through fraud, false pretenses and misrepresentations about PCI's purported business. Billions of dollars were wired into and out of PCI's depository account at National City Bank, which M&I Marshall and Ilsley Bank (M&I) acquired in July 2001. BMO Harris is the successor to M&I, and the claims at issue in this bankruptcy matter pertain to M&I's handling of PCI's account.

In the underlying fraud action, the district court appointed Kelley as the equity receiver for PCI in 2008. See United States v. Petters, No. 08-SC-5348 (ADM/JSM), 2008 WL 4614996, at *3 (D. Minn. Oct. 6, 2008). The district court also enjoined third-party financial and banking institutions-including BMO Harris, as successor to M&I- from disposing of any material “business, corporate, foundation, banking, financial, and/or accounting records in their possession” that pertain to Petters, PCI and other affiliated entities. Id.

Kelley filed for Chapter 11 bankruptcy relief on behalf of PCI and the bankruptcy court appointed Kelley as the Chapter 11 Trustee. In re Petters Co., 401 B.R. 391, 415 (D. Minn. Bankr. 2009). The bankruptcy court confirmed PCI's Second Amended Plan of Chapter 11 Liquidation, which transferred certain assets, including the causes of action at issue here, to the BMO Litigation Trust. The Trustee subsequently commenced this adversary proceeding alleging that BMO Harris was complicit in the Ponzi scheme through its dealings with Petters, PCI and PCI's account. The Trustee alleges that BMO Harris failed to respond to irregularities as required by banking regulations that, together

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with other acts and omissions, legitimized and facilitated the Ponzi scheme. Four of the Trustee's claims remain unresolved: Count I alleges that BMO Harris violated the Minnesota Uniform Fiduciaries Act, Count II alleges that BMO Harris breached its fiduciary duties to PCI, Count III alleges that BMO Harris aided and abetted fraud against PCI and Count IV alleges that BMO Harris aided and abetted the breach of fiduciary duties owed to PCI.

During fact discovery, which ended in 2018, several disputes arose with respect to BMO Harris's preservation and production of email backup tapes. In particular, these disputes pertained to the Trustee's attempts to obtain M&I email records from before March 2005, when M&I implemented a new email archive system.^[1]

In a July 1, 2019 Order, the bankruptcy court granted the Trustee's motion for spoliation sanctions against BMO Harris. The bankruptcy court found that, at least as early as January 2010, BMO Harris had a duty to preserve email backup tapes as evidence. The bankruptcy court also found that BMO Harris did not take reasonable steps to preserve the email backup tapes and, to the contrary, BMO Harris intentionally destroyed email backup tapes that contained electronically stored information from before March 2005 that cannot be restored or replaced. As a result, the bankruptcy court found, the Trustee has been prejudiced because the destroyed evidence likely contained relevant information that cannot be obtained from an alternative source. Relying on the

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circumstantial evidence in the record, the bankruptcy court also found that BMO Harris acted in bad faith with the intent to deprive the Trustee of the use of this evidence.

Based on these findings, the bankruptcy court concluded that sanctions against BMO Harris are warranted under Rules 37(e)(1) and 37(e)(2) of the Federal Rules of Civil Procedure. Specifically, the bankruptcy court granted the Trustee's request for three remedial sanctions: (1) requiring an adverse inference instruction at trial advising the jury that BMO Harris intentionally destroyed evidence that it knew was harmful to its case, (2) permitting the Trustee to present evidence to the jury about BMO Harris's destruction of evidence, and (3) prohibiting BMO Harris from objecting to the introduction of any pre-March 2005 emails or documents produced from third parties. BMO Harris appealed, and this Court affirmed the bankruptcy court's Spoliation Order.

The parties now cross-move to exclude the opinions and testimony of each party's respective banking and damages experts. The parties also cross-move for clarification as to the scope of the adverse inference spoliation sanction and how that issue will be presented to the jury at trial, including whether the sanction involves a rebuttable presumption. In addition, BMO Harris moves to bifurcate the punitive damages portion of the trial from the liability and compensatory damages portion of the trial.

ANALYSIS

I. Cross-Motions for Clarification as to Adverse Inference Sanction

BMO Harris moves for clarification as to the scope of, and how the jury will be presented with, the adverse inference spoliation sanction that the Court previously

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imposed against BMO Harris. Specifically, BMO Harris seeks clarification as to whether the adverse inference sanction functions as a rebuttable presumption, whether BMO Harris will be permitted to elicit rebuttal evidence as to the spoliation issue and whether the Trustee will be permitted to elicit evidence pertaining to the conduct or credibility of BMO Harris's counsel. The Trustee argues that the adverse inference sanction is not rebuttable and proposes a preliminary adverse inference jury instruction that would require the jury to accept as true certain facts underlying the adverse inference sanction. And the Trustee contends that, if such an instruction is given, there will be no need for either party to present evidence as to the spoliation issue.

Under Rule 37, Fed. R. Civ. P., federal courts have the authority to impose sanctions, including an adverse inference instruction, if a party fails to take reasonable steps to preserve electronically stored information that should have been preserved during or in anticipation of litigation and the information cannot be restored or replaced through additional discovery. Fed.R.Civ.P. 37(e); see also Fed. R. Bankr. P. 7037 (providing that Rule 37, Fed. R. Civ. P., “applies in adversary proceedings” in bankruptcy court). Federal courts also have inherent authority to impose sanctions against a party when that party destroys evidence that it knew or should have known is relevant to imminent litigation and, in doing so, prejudices the opposing party. See Dillon v. Nissan Motor Co., 986 F.2d 263, 267 (8th Cir. 1993). The nature of the sanction imposed is within a district court's discretion. Id.

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Before imposing certain types of sanctions, such as an adverse inference instruction requiring or permitting the jury to presume that the lost information was unfavorable to the sanctioned party, a court must find that the sanctioned party “acted with the intent to deprive another party of the information's use in the litigation.” Fed.R.Civ.P. 37(e)(2); accord Stevenson v. Union Pac. R.R. Co., 354 F.3d 739, 746-47 (8th Cir. 2004). In a July 18, 2022 Order, this Court affirmed the bankruptcy court's finding that BMO Harris destroyed evidence with the intent to deprive the Trustee of that evidence.

After a district court has made the requisite finding of intent under Rule 37(e)(2), determining the particular type of adverse inference instruction to give as a spoliation sanction is within a district court's discretion. See Davis v. White, 858 F.3d 1155, 1160 (8th Cir. 2017). A court may adjust the severity of an adverse inference instruction either by instructing the jury that certain specific facts must be accepted as true or by imposing a general, but rebuttable, presumption that the spoliated evidence would have been harmful to the sanctioned party or favorable to the innocent party. See Evenson v. Johnson Bros. Liquor Co., No. 18-cv-3188 (JRT/LIB), 2020 WL 12948541, at *14 (D. Minn. Nov. 12, 2020). Here, the bankruptcy court granted the Trustee's request for three remedial sanctions: (1) requiring an adverse inference instruction at trial advising the jury that BMO Harris intentionally destroyed evidence that it knew was harmful, (2) permitting the Trustee to present evidence to the jury about BMO Harris's destruction of evidence and (3) prohibiting BMO Harris from objecting to the introduction of any pre-March 2005 emails or documents produced from third parties. This Court affirmed

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the bankruptcy court's findings and imposition of sanctions but did not specifically address the scope of the sanctions or the type of adverse inference instruction that should be given to the...