Finding Defendants’ Behavior “a Textbook Case of Discovery Abuse,” Court Orders $1,022,700 in Monetary Sanctions

Kipperman v. Onex Corp., 2009 WL 1473708 (N.D. Ga. May 27, 2009)

In this constructive transfer and fraud case arising out of the 2003 bankruptcy of Magnatrax Corporation, plaintiff alleged numerous discovery abuses on the part of defendants and sought sanctions accordingly.  Among the abuses described were several allegations related to defendants’ failure to produce information stored on backup tapes, even upon being ordered to do so, and other various and related misdeeds.  Calling defendants actions a “textbook case of discovery abuse,” the court found in favor of plaintiff but declined to strike defendants’ answer, as requested, and ordered defendants to pay plaintiff $1,022,700 in monetary sanctions.

In his motion for sanctions, the plaintiff established six categories of alleged discovery abuses, including the category “electronic or email discovery.”  Details of the alleged discovery abuses in this category revolved around the question of defendants’ obligation to restore and produce responsive information stored on backup tapes.  The question arose in light of the notable lack of email identified as responsive following defendants’ initial search of their electronic systems and in light of another party’s production of emails that should also have been produced by defendants, but were not.  Defendants explained that the emails were likely stored on email backup tapes. Defendants further indicated their belief that they were not required to bear the burden and expense of restoring and searching the tapes but agreed to consider such action if plaintiff would pay.

The parties could not reach agreement and the issue was brought before the court on one of plaintiff’s motions to compel.  Prior to the hearing, defendants undertook a sample search of three of the backup tapes, including a 2003 file server tape which resulted in 28,000 “hits.”  The email server portion of the tape was not tested.  At hearing, plaintiff argued that the 28,000 hits, among other evidence, indicated the likely existence of additional relevant emails.  Defendants strongly objected to such an inference and argued that the “hits” plaintiff relied on were not emails, that no one really knew what was stored on the backup tapes, that evidence suggested there was a low likelihood of locating any emails, that the information would be “dubious at best,” and that restoration and searching would result in extremely high costs to defendants.  Examples of specific arguments made by defendants include:  "Plaintiffs don’t know and we don’t know whether there is a single e-mail on there, a single e-mail in any way related to this case"; "[t]he fact that there are two or three e-mails that they have found in the Magnatrax documents would tend to indicate that there is a very low likelihood of any e-mails"; and "[w]e don’t even know whether people readily used e-mails.  This was not a BlackBerry era at the time.”  These arguments were later found by the court to be misleading and, in some cases, were specifically contradicted by other evidence.

At the hearing, the court ordered defendants to conduct a sample search on two tapes designated by plaintiff.  Defendants complied in part by unilaterally deciding to search only seven mail boxes present on one tape and deciding to redact certain documents.  Thousands of documents were hit, and rolling production began.

Plaintiff filed a motion to compel defendants to fully comply with the court order and, because the sample tapes did not cover the entire time frame that they were expected to cover, for an additional tape to fill the gap.  Again the defendants were strongly opposed and indicated that searching the two tapes cost more than $600,000.  The court decided to enforce its order to search the two tapes in their entirety and granted plaintiff’s request for an additional tape to fill the gap.  The court did offer defendants an option to reduce the scope of the necessary search but defendants failed to avail themselves of that option.

Despite ongoing disagreement between the parties, production was eventually certified by defendants as complete.  Soon thereafter, plaintiff filed the instant motion for sanctions and outlined the discovery abuses related to electronic discovery, as well as five other categories of alleged discovery abuse.

Addressing plaintiff’s allegations surrounding the backup tapes, the court indicated its understanding of defendants’ initial refusal to produce electronic discovery from its backup tapes, but went on to condemn defendants’ subsequent behavior including their “blatant misrepresentations about the value of e-mail discovery in this case in an effort to influence the court’s ruling…and for behaving as if they, and not the court, got to decide what…was relevant…and what was not.”  The court went on to state that it had relied on defendants’ misrepresentations when making its determination as to whether discovery of the tapes was warranted and in crafting its “’two tape’ solution” and that “it now appears that defense counsel’s statements were either purposefully misleading or made with a reckless disregard for the truth.”  The court’s illustrative discussion of defendants’ various wrongdoing went on for several paragraphs.

Among the various other discovery abuses alleged were accusations of incomplete discovery, additional misrepresentations to the court, and multiple failures to abide by the court’s orders.

Accordingly, the court determined sanctions were warranted.  Establishing its ability to order sanctions under both the Federal Rules (Fed. R. Civ. P. 26 and 37) and its own inherent authority, the court found defendants’ actions a “textbook case of discovery abuse.”  The court went on to point out the prejudice to plaintiff as a result of defendants’ discovery behavior and rejected defendants argument that no such prejudice existed in light of their eventual compliance with their obligations.

Explaining that because there were “novel issues of liability presented in this matter,” that “the ad damnum clause in this case is hundreds of millions of dollars,” and that “plaintiff has the raw material and document it needs to proceed with its case and this court has the means, through re-depositions and supplemental expert reports, to minimize a large portion of the damage done,” the court indicated its unwillingness to “take the dramatic action” of striking defendants’ answer.  Instead, the court ordered defendants to pay plaintiff $1,022,700 in monetary sanctions, an amount equal to plaintiff’s attorney’s fees related to the difficulties created by defendants’ discovery behavior.

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