The Pension Comm. Of The Univ. Of Montreal Pension Plan v. Banc Of Am. Sec. LLC

• Decision Date: 15 January 2010
• Docket Number: No. 05 Civ. 9016(SAS).,05 Civ. 9016(SAS).
• Citation: 685 F.Supp.2d 456
• Parties: The PENSION COMMITTEE OF the UNIVERSITY OF MONTREAL PENSION PLAN, et al., Plaintiffs, v. BANC OF AMERICA SECURITIES, LLC, Citco Fund Services (Curacao) N.V., the Citco Group Limited, International Fund Services (Ireland) Limited, Pricewaterhousecoopers (Netherland Antilles), John W. Bendall, Jr., Richard Geist, Anthony Stocks, Kieran Conroy, and Declan Quilligan, Defendants.
• Court: U.S. District Court — Southern District of New York

685 F.Supp.2d 456

The PENSION COMMITTEE OF the UNIVERSITY OF MONTREAL PENSION PLAN, et al., Plaintiffs,

v.BANC OF AMERICA SECURITIES, LLC, Citco Fund Services (Curacao) N.V., the Citco Group Limited, International Fund Services (Ireland) Limited, Pricewaterhousecoopers (Netherland Antilles), John W. Bendall, Jr., Richard Geist, Anthony Stocks, Kieran Conroy, and Declan Quilligan, Defendants.

No. 05 Civ. 9016(SAS).

United States District Court, S.D. New York.

Decided: Jan. 15, 2010.

As Amended May 28, 2010.

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Scott M. Berman, Esq., Anne E. Beaumont, Esq., Amy C. Brown, Esq., Philip A Wellner, Esq., Robert S. Landy, Esq., Lili Zandpour, Esq., Friedman Kaplan Seiler & Adelman LLP, New York, NY, for the Plaintiffs.

Lewis N. Brown, Esq., Dyanne E. Feinberg, Esq., Terence M. Mullen, Esq., Elizabeth A. Izquierdo, Esq., Gilbride, Heller & Brown, P.A., Miami, FL, Eliot Lauer Esq., Michael Moscato, Esq., Curtis, Mallet-Prevost, Colt & Mosle LLP, New York, NY, for the Citco Defendants.

Peter K. Vigeland, Esq., Dawn M. Wilson, Esq., Paul M. Winke, Esq., Wilmer Cutler Pickering Hale and Dorr LLP, New York, NY, for Defendant Banc of America Securities LLC.

AMENDED OPINION AND ORDER

SHIRA A. SCHEINDLIN, District Judge:

Zubulake Revisited: Six Years Later

I. INTRODUCTION

In an era where vast amounts of electronic information is available for review discovery in certain cases has become increasingly complex and expensive. Courts cannot and do not expect that any party can meet a standard of perfection. Nonetheless, the courts have a right to expect that litigants and counsel will take the necessary steps to ensure that relevant records are preserved when litigation is reasonably anticipated, and that such records are collected, reviewed, and produced to the opposing party. As discussed six years ago in the Zubulake opinions, when this does not happen, the integrity of the judicial process is harmed and the courts are required to fashion a remedy. Once again, I have been compelled to closely review the discovery efforts of parties in a litigation, and once again have found that those efforts were flawed. As famously noted, "[t]hose who cannot remember the past are condemned to repeat it." ¹ By now, it should be abundantly clear that the duty to preserve means what it says and that a failure to preserve records—paper or electronic—and to search in the right places for those records, will inevitably result in the spoliation of evidence.

In February, 2004, a group of investors brought this action to recover losses of 550 million dollars stemming from the liquidation of two British Virgin Islands based hedge funds in which they held shares Lancer Offshore, Inc. and OmniFund Ltd. (the "Funds").² Plaintiffs ³ have asserted claims under the federal securities laws and under New York law against former directors, administrators, the auditor, and the prime broker and custodian of the Funds.⁴ The Funds were managed by Lancer Management Group LLC ("Lancer") and its principal, Michael Lauer.⁵The Funds retained Citco Fund Services (Curacao) N.V. ("Citco NV") to perform certain administrative duties, but it eventually resigned as administrator of the Funds.⁶ On April 16, 2003, Lancer filed for bankruptcy.⁷ On July 8, 2003, the Funds were placed into receivership in the Southern District of Florida.⁸

In October, 2007, during the discovery process, Citco NV, its parent company, the Citco Group Limited, and former Lancer Offshore directors who were Citco officers (collectively with Citco NV, the "Citco Defendants") claimed that substantial gaps were found in plaintiffs' document productions. As a result, depositions were held and declarations were submitted. This occurred from October, 2007 through June, 2008. Following the close of this discovery, the Citco Defendants moved for sanctions, alleging that each plaintiff failed to preserve and produce documents—including those stored electronically—and submitted false and misleading declarations regarding their document collection and preservation efforts. The Citco Defendants seek dismissal of the Complaint—or any lesser sanction the Court deems appropriate—based on plaintiffs' alleged misconduct.

Because this is a long and complicated opinion, it may be helpful to provide a brief summary up front. I begin with a discussion of how to define negligence gross negligence, and willfulness in the discovery context and what conduct falls in each of these categories. I then review the law governing the imposition of sanctions for a party's failure to produce relevant information during discovery. This is followed by factual summaries regarding the discovery efforts—or lack thereof—undertaken by each of the thirteen plaintiffs against whom sanctions are sought, and then by an application of the law to those facts. Based on my review of the evidence, I conclude that all of these plaintiffs were either negligent or grossly negligent in meeting their discovery obligations. As a result, sanctions are required.

II. AN ANALYTICAL FRAMEWORK AND APPLICABLE LAW

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.

A. Defining Negligence, Gross Negligence, and Willfulness in the Discovery Context

While many treatises and cases routinely define negligence, gross negligence, and willfulness in the context of tortious conduct, I have found no clear definition of these terms in the context of discovery misconduct. It is apparent to me that these terms simply describe a continuum.⁹ Conduct is either acceptable or unacceptable. Once it is unacceptable the only question is how bad is the conduct. That is a judgment call that must be made by a court reviewing the conduct through the backward lens known as hindsight. It is also a call that cannot be measured with exactitude and might be called differently by a different judge. That said, it is well established that negli- gence involves unreasonable conduct in that it creates a risk of harm to others, but willfulness involves intentional or reckless conduct that is so unreasonable that harm is highly likely to occur.

It is useful to begin with standard definitions of each term and then to explore the conduct, in the discovery context, that causes certain conduct to fall in one category or another.

[Negligence] is conduct "which falls below the standard established by law for the protection of others against unreasonable risk of harm." [Negligence] is caused by heedlessness or inadvertence by which the negligent party is unaware of the results which may follow from [its] act. But it may also arise where the negligent party has considered the possible consequences carefully, and has exercised [its] own best judgment.¹⁰

The standard of acceptable conduct is determined through experience. In the discovery context, the standards have been set by years of judicial decisions analyzing allegations of misconduct and reaching a determination as to what a party must do to meet its obligation to participate meaningfully and fairly in the discovery phase of a judicial proceeding. A failure to conform to this standard is negligent even if it results from a pure heart and an empty head.

"Gross negligence has been described as a failure to exercise even that care which a careless person would use." ¹¹ According to a leading treatise—Prosser & Keeton on Torts—most courts find that gross negligence is something more than negligence "and differs from ordinary negligence only in degree, and not in kind." ¹²

The same treatise groups willful, wanton, and reckless into one category that requires "that the actor has intentionally done an act of an unreasonable character in disregard of a known or obvious risk that was so great as to make it highly probable that harm would follow, and which thus is usually accompanied by a conscious indifference to the consequences." ¹³

Applying these terms in the discovery context is the next task. Proceeding chronologically, the first step in any discovery effort is the preservation of relevant information. A failure to preserve evidence resulting in the loss or destruction of relevant information is surely negligent, and, depending on the circumstances, may be grossly negligent or willful.¹⁴ For example, the intentional destruction of relevant records, either paper or electronic, after the duty to preserve has attached, is willful.¹⁵ Possibly after October, 2003, when Zubulake TV was issued, ¹⁶ and definitely after July, 2004, when the final relevant Zubulake opinion was issued, ¹⁷ the failure to issue a written litigation hold constitutes gross negligence because that failure is likely to result in the destruction of relevant information.¹⁸

The next step in the discovery process is collection and review. Once again, depending on the extent of the failure to collect evidence,...