No Sanctions for Destruction of Data Resulting from Mistaken Belief that Computers had been Imaged

Fed. Trade Comm’n v. First Univ. Lending, LLC, No. 09-82322-CIV, 2011 WL 673879 (S.D. Fla. Feb. 17, 2011)

Relevant data was lost when a group of computers was scrubbed and sold by defendants with the permission of the court-appointed Receiver.  The permission was given, on the condition that the computers were scrubbed, because of the Receiver’s mistaken belief that all relevant computers had been imaged.  As a result of the loss of data, defendants filed a motion for spoliation sanctions for what they described as “the FTC’s bad-faith destruction of Defendants’ computer systems.”  For the reasons discussed below, defendants’ motion was denied.

In this case, defendants came under investigation by the FTC for their mortgage modification practices.  In the course of that investigation, a temporary Receiver was appointed who subsequently took control of defendants’ business premises.  The court also imposed a preliminary injunction which mandated the preservation of relevant evidence.

To summarize broadly, in the course of subsequent discovery, the FTC sought to image defendants’ relevant computers, including all of their servers which, pursuant to FTC protocol, were required to be imaged.  Defendants were not forthcoming about the existence of several servers, however, and images of those computers were not taken.  Later, because of the Receiver’s mistaken belief that all of defendants’ computers had been imaged, defendants were given permission (by an agent of the Receiver) to do “what it wished” with a group of computers but were specifically instructed to scrub the computers before transferring them to a third party.  (The court attributed the Receiver’s mistaken belief that all computers had been imaged to the testimony of an FTC investigator which left the impression that they had, and which the court concluded had been overheard by an agent of the Receiver.)  Accordingly, the computers were scrubbed by the defendants and sold.  As a result, and because not all of the computers had been imaged, relevant data was lost.  Defendants subsequently moved for the court to enjoin prosecution or, alternatively, for spoliation sanctions based on the loss of that data which defendants claimed was vital to their defense.  Specifically, defendants argued that sanctions were warranted for “the FTC’s bad-faith destruction of Defendants’ computer systems” reasoning that the destruction should not be attributed to the defendants “because the Receiver’s agent instructed Defendants to scrub the computer system.”

Taking up the motion, the court first established the relevant law, including the need for a showing of bad faith to justify the imposition of an adverse inference and the ability of a party to show such bad faith through either direct or circumstantial evidence.  Applying the law to the facts of the case, the court found that defendants had provided no evidence of bad faith.  More notable, though, was the court’s subsequent reasoning that “Defendants have not even made the necessary prerequisite showing that the FTC was the spoliator in this case.  Indeed, the FTC did not destroy Defendants’ computer system; Defendants did.”  The court went on to reason that “even assuming arguendo, that Defendants decimated their hard drives solely because the Receiver’s agent directed them to do so, such a circumstance would not change the fact that neither the Receiver nor any of her agents is the FTC.  Rather, ‘[a] receiver is a neutral court officer appointed by the court…”  Accordingly, the court concluded that “sanctioning the FTC is not appropriate.”

Nonetheless expanding upon its analysis, the court went on to find that “to the extent that Defendants’ position can be construed to seek to attribute blame to the FTC for the Receiver’s direction to scrub the computers based on [the FTC investigator’s] misstatement,” (a misstatement an agent of the Receiver was believed to have overheard) which the court conceded could, at worst, have been construed as negligent, there was no evidence of sufficient culpability to justify the imposition of sanctions.

The court next found that defendants failed to show that the absence of the evidence was fatal to their defense where, as was discussed at length in the opinion, alternative sources of information existed that would allow defendants to defend themselves.

Finally, the court reasoned that defendants could not succeed in their motion “for the independent reason that the FTC was under no obligation to preserve Defendants’ computers” particularly where the FTC never possessed or controlled the computers (but rather the Receiver did) and where the FTC had no obligation to image all of the computers in the first place.  Instead, the court indicated in footnote, “the FTC had an obligation to preserve the evidence that it had in its custody, such as the images the FTC made of certain of Defendants’ computers.” (Emphasis added.)

A copy of the full opinion is available here.