Opinion
Civil No. 04-0123 WJ/DJS.
March 23, 2006
ORDER OVERRULING OBJECTIONS TO MAGISTRATE'S ORDERS
THIS MATTER comes before the Court upon American Contractors Indemnity Company's ("ACIC") Objections to the Magistrate's Orders on Plaintiffs' Third Application for an Order Compelling Discovery and Motion for Sanctions and Request for Oral Hearing and to the Magistrate's Denial of ACIC's Motion for Leave to File a Surreply in Opposition to Plaintiff's Third Application for Order Compelling Discovery, filed February 14, 2006 (Doc. 159).
I. Factual Background Leading Up to Magistrate Svet's Order
A more detailed factual background leading up to Judge Svet's decision on the motion to compel is set out in his Order on that motion. Doc. 155 ("February 1st Order"). In order to put the facts into context for purposes of this Order, the following are the relevant facts.
The underlying case is a dispute between Shaw and Associates, Inc. and Jerry Shaw and Associates, Inc. (collectively, "Shaw") and American Contractors Indemnity Company (ACIC) concerning the scope and nature of agreements governing the management, collection and accounting of premiums and claims related to surety bonds maintained by ACIC. Shaw is suing ACIC for breach of contract, breach of implied covenant of good faith and fair dealing, breach of fiduciary duty, conversion, interference with contractual relations, and violation of state insurance codes. The allegations in the complaint revolve around oral modifications made to the agreements between Shaw and ACIC, although initially the terms of the joint venture agreement between the parties were set forth in writing. These oral modifications occurred during communications between Skip Baumgarten ("Baumgarten") and Jerry Shaw. Apparently Baumgarten and his wife were close on a social as well as business level with Jerry Shaw and his wife.
Baumgarten is the founder and principal shareholder of ACIC, and was its CEO until he suffered an incapacitating heart attack on July 15, 2001, leaving him unable to communicate and thus unable to testify or provide evidence regarding the oral modifications of the joint venture agreement. This situation is largely responsible for the instant discovery dispute.
Plaintiffs served requests for production ("RFP") seeking all computer hard drives for copying of documents related to Shaw for certain individuals, including but not limited to Baumgarten (RFP 38), and any and all files maintained by certain individuals, again including but not limited to Baumgarten (Second RFP 57). ACIC objected to Request No. 38, but ultimately produced thousands of pages of internal ACIC email, and represented to Plaintiffs that it had produced all relevant documents from the hard drives of ACIC's senior management personnel. With regard to Request No. 57, ACIC asserted that it had already produced all non-privileged documents responsive to this request.
Plaintiffs contend that during the course of discovery, ACIC failed to disclose that its former President, Andy Faust, deleted emails from Baumgarten's laptop computer. Up until mid-August, 2005, Plaintiffs believed ACIC had produced all relevant documents that might have resided at one time on the computer hard drives of ACIC's senior management, including Baumgarten. However, on that day, at Mrs. Baumgarten's deposition, Plaintiffs discovered evidence that Andy Faust had erased Baumgarten's e-mail from his laptop computer at the office, based on Mrs. Baumgarten's testimony as well as a letter dated September 24, 2001, which contained notes handwritten by Mrs. Baumgarten. Plaintiffs claim that prior to Mrs. Baumgarten's deposition, ACIC had not disclosed that any of Baumgarten's email had been deleted, and thus they were completely unaware of this situation.
In late August 2005, Plaintiffs took depositions of James Ferguson, ACIC's Chief Financial Officer, and James (Mike) Holbrook, ACIC's Corporate Counsel at the time of Baumgarten's heart attack. Both individuals testified that they were aware that Andy Faust had deleted emails from Baumgarten's laptop computer shortly after Baumgarten's heart attack. According to Holbrook, the deletions occurred around the time when Jerry Shaw called ACIC shortly after Baumgarten's heart attack, to set up a meeting because he was concerned about his relationship with ACIC. Attempts to recover the deleted material from Baumgarten's computer were unsuccessful. The computer was reformatted and re-assigned.
Plaintiffs became concerned that Faust and others at ACIC may have deleted and destroyed other records and email from other ACIC computers. Plaintiffs moved the Court for an order compelling ACIC to produce for inspection and examination of computer drives and backup hard drives utilized by key ACIC management personnel from 1994 through 2002 as well as various other categories of records related to issues created by Mr. Faust's deletion of Baumgarten's email. Magistrate Judge Svet's Order on that motion to compel is now the subject of this appeal.
In his February 1st Order, Judge Svet granted Plaintiffs' motion in part, compelling Defendant to produce for inspection and examination by appropriate experts "any and all computer hard drives and any backup media used from 1994 through 2002," but limiting production of these documents to those regarding Skip Baumgarten and Andy Faust. Doc. 155 at 13. Judge Svet deferred ruling on the sanctions requested by Plaintiffs until after ACIC produced the requested materials.
Defendant seeks review on appeal of the Magistrate's decision, based on what they consider to be incorrect applications of the law and erroneous factual findings, under Fed.R.Civ.P. 72(a) and 28 U.S.C. § 636(b)(1)(A).
Legal Standard:
Under Rule 72(a) of the Federal Rules of Civil Procedure, the Court shall consider objections made by the parties and "shall modify or set aside any portion of the magistrate's order found to be clearly erroneous or contrary to law." Fed.R.Civ.P. 72(a); see also 28 U.S.C. § 636(b)(1)(A) (district judge may "reconsider any pretrial matter . . . where it has been shown that the magistrate's order is clearly erroneous or contrary to law"); Ehrenhaus v. Reynolds, 965 F.2d 916, 921 (10th Cir. 1992) (court must accept the magistrate's factual findings unless clearly erroneous).
I. Whether the Magistrate Judge's Determination Was Contrary to Law
ACIC contends that the Magistrate Judge misapplied the law on two fronts: (1) concerning the relevance of the deleted emails and the material Plaintiff seeks to have produced; and (2) in the denial of ACIC's leave to file a surreply.
A. Relevancy of the Material
Defendant's appeal is driven in part by what they view as a suggestion by the Court that spoliation may have occurred if the forensic experts who examine the computer drives are unable to find what Plaintiffs expect to find. ACIC argues that Judge Svet failed to conduct any analysis under the legal standard for spoliation, regarding whether ACIC had a duty to preserve evidence or whether sanctions were warranted. Defendant's position is that Plaintiffs have not shown that the material at issue (the deleted email) was sufficiently relevant either to trigger a duty to preserve it, or to warrant an imposition of sanctions because it was destroyed. There can be no basis for legal error concerning an imposition of sanctions, since Judge Svet made no findings or conclusions regarding sanctions. Rather, Judge Svet deferred ruling on the issue until after ACIC produces the requested materials. February 1st Order at 3.
However, in addressing Defendant's argument in objecting to the motion to compel, Judge Svet concluded that the deletion of Baumgarten's email occurred after ACIC could have reasonably anticipated litigation with Plaintiffs. See, Convolve, Inc. v. Compaq Computer Corp., 223 F.R.D. 162, 176 (S.D.N.Y.,2004) (citing Fujitsu Ltd. v. Federal Express Corp., 247 F.3d 423, 436 (2d Cir. 2001)); Silvestri v. General Motors Corp., 271 F.3d 583, 591 (4th Cir. 2001) (obligation to preserve evidence arises "when the party has notice that the evidence is relevant to litigation or when a party should have known that the evidence may be relevant to future litigation).
Based on exhibits and deposition testimony, Judge Svet concluded that by the time Baumgarten's laptop computer was reformatted, ACIC had already been apprised of Jerry Shaw's dissatisfaction with his treatment by ACIC, and therefore knew that litigation was very probable. ACIC pounces on a statement made by Holbrook during his deposition that he did not know there was a dispute between Shaw and ACIC. However, this statement is taken out of context from other statements made by Holbrook and which were noted by the Magistrate Judge (e.g., Holbrook's disbelief of Faust's self-serving reason for deleting the emails).
ACIC objects to Judge Svet's findings as conclusory and lacking any analysis as to why the deleted emails would be relevant regarding the terms of the ACIC-Shaw joint venture. This is a convenient argument for ACIC to make, considering that Faust, an ACIC officer, is responsible for deleting those emails and thus making it difficult, if not impossible, to determine exactly what they contained, without further inquiry. Nevertheless, Judge Svet's findings on the relevance of the material were not conclusory or based on mere assertion. After examining evidence presented to the Court in the form of affidavits and exhibits, Judge Svet concluded that: Faust had developed a personal animus against Shaw and disapproved of the way Baumgarten conducted his business with Shaw, and that literally within hours of Baumgarten's heart attack, Faust attempted to interfere with Baumgarten's business arrangement with Shaw. There was also evidence that Faust used his dominant position on the Executive Committee to bring about ACIC's termination of the seven-year ACIC-Shaw relationship, which resulted in the demise of Shaw's business. Judge Svet further determined that reformatting Baumgarten's laptop computer was prejudicial to Plaintiffs.
Convolve, on which ACIC relies, is not analogous to the situation here. In Convolve, the plaintiff "made no effort to determine the substance of those communications in anything but the most general terms. . . ." 223 F.R.D. at 176. Here, in contrast — as noted by Judge Svet, — when Shaw first discovered that ACIC failed to disclose Faust's deletion of emails from Baumgarten's laptop computer, Shaw diligently tried to uncover what it could by depositions of ACIC officers, through discovery requests by subpoenas to third parties, and finally by direct query to ACIC who had indicated it would provide details regarding Baumgarten's computer and hard drive, but never did. February 1st Order at 5-6.
ACIC also contends that Judge Svet's conclusions as to the relevance of the emails were in error because Mr. Shaw testified that he does not have an email account, and that because Jerry Shaw and Baumgarten were the only two individuals who communicated about the Shaw contracts, the deleted emails could not possibly be relevant to the joint venture issue. ACIC needlessly narrows the focus, and thus the relevance, of the deleted material. In order to be relevant to the litigation, the deleted emails need not have been limited to correspondence regarding oral modifications of the joint venture between Jerry Shaw and Baumgarten. The material could also be relevant if it has some bearing on that business relationship. In light of the evidence which exists of the animosity Faust held for Shaw and his disapproval of the ACIC/Shaw business relationship, this connection could easily be inferred.
Accordingly, I find that Defendant's objections regarding Judge Svet's misapplication of the law to be unfounded. Judge Svet applied the correct legal standard on relevance, sufficient to warrant granting the Plaintiffs' motion to compel production of the requested material.
B. Denial of Leave to File Surreply
Judge Svet also denied ACIC's request to file a surreply to in opposition to Plaintiff's motion to compel. ACIC had argued that Plaintiffs' reply had presented new evidence and new legal arguments regarding evidentiary and culpability standards for a spoliation claim they failed to identify in their motion. ACIC urged the Court to either permit Defendant an opportunity to respond in a surreply, or refrain from relying upon the new material or argument in ruling on Plaintiff's motion.
Magistrate Judge Svet denied the request, finding that the arguments and exhibits contained in the reply were presented as rebuttal to ACIC's response. Doc. 153. Based on my review of the underlying pleadings, I find that Judge Svet's denial was not contrary to law. ACIC's response to Plaintiffs' third motion to compel transformed the issue from a request for production and sanctions based on a discovery that the email deletion had not been disclosed, to a full-blown spoliation analysis. In the response, ACIC argued that Plaintiffs had waived any request for production because the request was untimely, that Plaintiffs were not prejudiced by the deletion, and that the deletion occurred before ACIC could have reasonably anticipated litigation with Plaintiffs. Plaintiffs were entitled to explore these issues and support their position with appropriate evidence in the reply. Therefore, Defendant's objections are overruled in this regard as well.
II. Whether the Magistrate's Findings Are Clearly Erroneous
A finding of fact is clearly erroneous when, although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed. See, e.g., United States v. United States Gypsum Co., 332 U.S. 364, 395 (1948); Ocelot Oil Corp v. Sparrow Indus., 847 F.2d 1458, 1464 (10th Cir. 1988).
ACIC contends that Judge Svet's findings were based on evidence that was either incomplete, contradictory or illogical. ACIC first contends that the evidence was not sufficient for Judge Svet to find that ACIC had a duty to preserve evidence in anticipation of litigation as early as July 16, 2001, or by November 2001. ACIC again relies on the sole statement by Holbrook, out of context, that he did not think the parties were having a dispute. Holbrook was also aware, however, that Shaw called ACIC on July 16, 2001, the day after Baumgarten's heart attack, requesting a meeting because he was concerned about his relationship with the company with Baumgarten gone. Faust deleted Baumgarten's emails on July 17, 2001. See February 1st Order at 6 12.
ACIC also claims that Judge Svet relied on incomplete evidence by implying that Shaw was surprised to learn that Baumgarten's computer had been reformatted and reassigned in November 2001 was also based on incomplete evidence. ACIC contends that Shaw's counsel understood the circumstances and status of Baumgarten's hard drive as early as February 2005. The Court fails to see the significance of this, since Plaintiffs did not learn of the deletion of Baumgarten's email until August 17, 2005, when the reformatting of the laptop suddenly presented new implications.
Finally, ACIC contends that Judge Svet's finding that Shaw was prejudiced by the loss of Baumgarten's mail was based upon contradictory and illogical evidence. ACIC objects to Judge Svet's reliance on Shaw's allegations of Faust's personal animus toward Jerry Shaw, and to Judge Svet's conclusion that Faust tried to interfere with the relationship.
Judge Svet's findings were based on memos to the file and letters, some of which were generated within one to two months of Baumgarten's heart attack. See, February 1st order at 8-9. This evidence is not inconsistent with Judge Svet's findings that Faust harbored personal animus toward Jerry Shaw and that Faust tried to interfere with the ACIC-Shaw relationship.
ACIC might disagree with these findings, but has not presented this Court with argument or evidence which would render these findings clearly erroneous. Therefore, the Court accepts the Magistrate Judge's findings, and overrules ACIC's objections. See, Ehrenhaus v. Reynolds, 965 F.2d 916, 921 (10th Cir. 1992) (court must accept the magistrate's factual findings unless clearly erroneous).
In sum, the Court has reviewed ACIC's objections to Magistrate Judge Svet's denial of leave to file a surreply, and the granting in part of Plaintiff's third motion to compel. I find none of Judge Svet's findings to be contrary to law, or clearly erroneous.
THEREFORE,
IT IS ORDERED that Defendant's objections to the Magistrate Judge's Orders ( Doc. 159) are hereby OVERRULED.