An important aspect of litigation for plaintiffs is being able to assess the level of conduct that will require plaintiffs to seek sanctions against a defendant. As such, a reasonable question is what type of conduct would warrant an adverse inference instruction? The court looked to answer this question in In re Black Diamond Mining Company, LLC, et al., v. Ira J. Genser, et al., Civil No. 13-125-ART (E.D. Ky. July 22, 2014).
The dispute over discovery sanctions arose between the Trustee of the Black Diamond Mining Company Unsecured Creditors Trust (“Trustee”) and turnaround specialists Ira Genser, Larry Tate, and their employer, Alvarez & Marsal North America, LLC (“A&M).
Defendants were accused of trying to sell the company to a competitor and as a result, allowing numerous profitable opportunities to slip away. As restructuring efforts and relations collapsed, a liquidation plan was confirmed and the Trustee filed suit. Plaintiffs requested all documents relating to Defendants’ work on the Black Diamond project.
Issues during discovery included:
1. Defendant Genser stating that he did not recall what happened to his notebook that he used while at Black Diamond;
2. Defendant Tate stating that he deleted information from his computer and threw away paper notes without informing anyone;
3. Defendants’ production of electronic documents yielded files that could not be opened or located; and
4. The likelihood that Defendants had destroyed relevant evidence.
Based on the foregoing, Plaintiffs moved for sanctions, including dismissal of the A&M parties’ counterclaims, a non-rebuttable adverse inference instruction, and attorneys’ fees.
In analyzing the evidence before it, the court iterated:
1. The court must engage in first determining whether the party moving for sanctions demonstrated that sanctions are warranted at all and secondly, use its discretion to fashion an appropriate penalty;
2. None of the defendants demonstrated bad faith, rather negligent behavior seems to be the overriding cause for failure to produce documents;
3. Adverse inference instructions as sanctions for spoliation are preferred by governing law, while dismissal sanctions are rarely considered appropriate; and
4. Whether an adverse inference instruction is permissive or mandatory must be determined on a case-by-case basis.
Accordingly, the court found that an adverse inference was appropriate.
The court further stated that a permissive adverse inference instruction would best serve the interests of justice, as it leaves the ultimate determination of the merits of each claim to the jury, and a mandatory instruction about the parties’ negligent failure to exercise sound business judgment would be akin to the highest sanction even though the parties did not demonstrate bad faith.