Kelly v. Bmo Harris Bank N.A. (In re Petters Co.), Jointly Administered under BKY 08-45257

• Decision Date: 01 July 2019
• Docket Number: ADV 12-4288,Jointly Administered under BKY 08-45257
• Citation: 606 B.R. 803
• Parties: IN RE: PETTERS COMPANY, INC., et al., Debtors. (includes Petters Group Worldwide, LLC; PC Funding, LLC; Thousand Lakes, LLC; SPF Funding, LLC; PL Ltd., Inc.; Edge One LLC; MGC Finance, Inc.; PAC Funding, LLC; Palm Beach Finance Holdings, Inc.) 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. Bankruptcy Court — District of Minnesota

606 B.R. 803

IN RE: PETTERS COMPANY, INC., et al., Debtors.(includes Petters Group Worldwide, LLC; PC Funding, LLC; Thousand Lakes, LLC; SPF Funding, LLC; PL Ltd., Inc.; Edge One LLC; MGC Finance, Inc.; PAC Funding, LLC; Palm Beach Finance Holdings, Inc.)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.

Jointly Administered under BKY 08-45257

ADV 12-4288

United States Bankruptcy Court, D. Minnesota.

Filed July 1, 2019

William Bornstein, Michael A. Collyard, Sarah E. Friedricks, Thomas L. Hamlin, Peter C. Ihrig, Michael D. Reif, Valerie A. Stacey, Chelsea A. Walcker, Robins Kaplan LLP, Minneapolis, MN, Sherli Furst, Carly Ann Kessler, Robins Kaplan LLP, New York, NY, J Jackson, Dorsey & Whitney LLP, Minneapolis, MN, for Plaintiff.

Michael B. Apfeld, Sean O'D. Bosack, John L. Kirtley, Godfrey & Kahn S.C., Milwaukee, WI, Debra Bogo-Ernst, Christopher S. Comstock, Ethan A Hastert, Thomas S. Kiriakos, Lucia Nale, Thomas V. Panoff, Joshua D. Yount, Lori Zahalka, Mayer Brown LLP, Gary A. Isaac, Chicago, IL, Andrew J. Calica, Gina L Del Tatto, Richard A Spehr, Mayer Brown LLP, New York, NY, Keith S. Moheban, Adine S. Momoh, Stinson Leonard Street LLP, Minneapolis, MN, for Defendant.

ORDER GRANTING PLAINTIFF'S MOTION FOR RULE 37 SANCTIONS FOR DEFENDANT'S SPOLIATION OF EVIDENCE

KATHLEEN H. SANBERG, UNITED STATES BANKRUPTCY JUDGE

This matter is before the Court on Liquidating Trustee Douglas A. Kelley's ("Plaintiff") Motion for Rule 37 Sanctions for the Spoliation of Evidence by BMO Harris Bank N.A. ("Defendant").¹

On March 5, 2019, the Court heard oral argument on Plaintiff's motion. Michael Collyard appeared for Plaintiff and Richard Spehr appeared for Defendant.

The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157(b)(1) and 1334, Fed. R. Bankr. P. 7001, and Local Rule 1070–1. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(H). Venue in this Court is proper pursuant to 28 U.S.C. §§ 1408 and 1409.

The Court grants the motion and finds that the actions taken by Defendant warrant sanctions under Federal Rule of Civil Procedure 37(e) for the spoliation of evidence. An adverse inference instruction that Defendant intentionally destroyed and failed to preserve Minnesota email backup tapes that it knew were harmful is appropriate. In the event the District Court finds that this Court lacks the authority to make such a determination, the Court recommends the same.

Given the serious nature of spoliation sanctions, the Court will go through a detailed and thorough review of Defendant's conduct but will first summarize the facts leading to its conclusions.

Summary

The issue in this motion is whether Defendant intentionally or in bad faith destroyed or failed to preserve electronically stored information ("ESI") on computer backup tapes that contained relevant information in this case that it had a duty to preserve. The Court finds that Defendant did.

During discovery in this case, Defendant has dragged its feet or fought production of relevant information every step of the way. When the issue of the lost or destroyed computer backup tapes arose, however, the fight turned to deceit and obfuscation. Defendant lied to its counsel, lied to the Court, and lied to Plaintiff.

Defendant's actions in destroying or failing to preserve the backup tapes, its actions during this case, and the $2 billon dollar value of the case (and motive for Defendant to destroy information) leads the Court to conclude that Defendant intentionally destroyed or failed to preserve the email backup tapes.

The Court will go through the facts in complete and, sometimes, repetitious detail below, but the following is a summary recitation of what has happened that leads to the Court's conclusions and imposition of sanctions under Federal Rule of Civil Procedure 37(e) for Defendant's spoliation of evidence:

• Defendant destroyed approximately 60 computer backup tapes in 2010 and 2011 that it had a duty to retain. It destroyed the tapes 1) after receiving an order enjoining the destruction of information regarding Thomas J. Petters ("Petters"), Petters Company, Inc. ("PCI"), and its affiliates, 2) after discussing documentation retention with its counsel on a number of occasions, and 3) after having legal holds in place. These tapes were Defendant's only source of emails from a significant period in the relationship between Petters and Defendant;

• The destruction was not part of a routine process but rather a one-time project;

• Defendant lost or destroyed six computer backup tapes found in 2014 that it had a duty to retain;

• Defendant failed to disclose the tapes found in 2014 in connection with earlier litigation or in this case until this Court was considering sanctions regarding backup tapes found in 2017;

• Defendant found tapes in 2017 but failed to disclose the discovery to its own counsel until a month later and well after the deposition of a key witness;

• Defendant's counsel failed to disclose the discovery of the tapes to Plaintiff until after the close of discovery;

• Defendant cannot verify that the tapes found in 2017 were the same as those found in 2014 but continues to advance this argument;

• Defendant lied, by omission or commission, to the Court and Plaintiff, even after being sanctioned;

• Defendant produced documents for an in camera review by the Court that were redacted or incomplete;

• Defendant's witnesses and counsel failed to disclose information to the Court during several hearings;

• Defendant failed to timely produce evidence after being ordered to do so; and

• Defendant has been subject to discovery sanctions for willful discovery abuses and for failure to comply with the Court's discovery orders.

Arguments

Plaintiff, in his capacity as the Trustee of the BMO Litigation Trust, brings this motion under Rule 37(e) for sanctions based on two alleged spoliations of evidence: first, for the destruction of virtually all of the computer backup tapes—approximately 66—holding all emails and other information regarding Defendant's handling of Petters' and his affiliates' M & I bank accounts between 2010 and 2011; and second, for the failure to preserve six backup tapes that had not been destroyed but were found in August 2014. Plaintiff asserts that the lost or destroyed backup tapes were the only source of Defendant's emails that predate March 2005 and that covered a significant period during Defendant's dealings with Petters, PCI, and its affiliates. Plaintiff alleges that Defendant destroyed the tapes with an intent to deprive Plaintiff of the ability to use the information in this adversary proceeding. Among other remedies, Plaintiff requests an adverse inference jury instruction that Defendant intentionally destroyed evidence that it knew was harmful.

Defendant argues that Plaintiff's motion should be denied for four independent reasons. First, an adverse inference instruction and Plaintiff's other requested remedies are trial administration matters best left for the District Court. Second, Plaintiff cannot meet his burden of showing prejudice under Rule 37(e)(1). Third, Plaintiff cannot meet his burden of showing a bad faith intent under Rule 37(e)(2). And fourth, Plaintiff's requested sanctions are neither feasible nor appropriate.

Background and Procedural History

This adversary proceeding originates from the failure of the Petters' Ponzi scheme orchestrated by Petters" and his associates.² Plaintiff filed suit against Defendant on November 14, 2012, alleging violations of the Minnesota Uniform Fiduciaries Act, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, aiding and abetting fraud, and civil conspiracy for its actions in connection with Petters and Petters Company, Inc. ("PCI").³ Tens of billions of dollars in Ponzi scheme funds were routed through PCI's depository checking at National City Bank, opened in December 1999 (the "PCI Account"). M & I acquired National City Bank in July 2001. Plaintiff alleges that Defendant knew about Petters' fraud and through its banking and related financial services to Petters and PCI, was complicit in the Ponzi scheme by presiding over the PCI Account where the Ponzi scheme funds were laundered and failing to intervene despite significant "red-flag behavior."⁴ Requested damages in this case are almost $2 billion dollars.

After the Petters' Ponzi scheme was uncovered in late 2008, Judge Ann Montgomery of the United States District Court for the District of Minnesota appointed Plaintiff, Douglas Kelley, as the equity receiver for PCI and its affiliates. On October 11, 2008, Kelley, in his capacity and pursuant to his authority as receiver, filed a Chapter 11 petition for relief on behalf of PCI. Plaintiff was appointed the Chapter 11 Trustee on February 26, 2009.

Judge Gregory F. Kishel confirmed the Second Amended Plan of Chapter 11 Liquidation on April 15, 2016 (the "Plan").⁵ The Plan established the BMO Litigation Trust, which is administered by the Plaintiff as Liquidating Trustee.⁶ The Plan transferred the BMO Litigation Trust Assets, including the causes of action asserted in this adversary proceeding, to the BMO Litigation Trust.⁷

I. Ponzi Scheme's Collapse and Defendant's Anticipation of Litigation

On October 6, 2008, shortly after the Ponzi scheme collapsed and before the bankruptcy petition was filed, Judge Montgomery issued an Order for Entry of Preliminary Injunction on October 6, 2008 (the "Injunction Order").⁸ The Injunction Order enjoined third party financial and banking institutions, including Defendant, from disposing of any material "business, corporate, foundation, banking, financial, and/or accounting records in their possession" related to Petters, PCI, and other affiliated entities.⁹

There is no dispute that Defendant received the Injunction Order on the day it was issued. On that day, and on numerous...