Ablan v. Bank of Am. Corp., No Sanctions for Failure to Produce ESI Stored With Vendor

In 2003, Plaintiffs entered into a Financial Representation Agreement (“FRA”) with Tax Strategies Group, LLC (“TSG”). On June 1, 2006, TSG filed a lawsuit in state court (“State Court Litigation”) against the Plaintiffs asserting breach of the Agreement. The Plaintiffs received numerous documents from TSG during the State Court Litigation.
The current litigation was filed in 2011, while the State Court Litigation was still pending. The parties subsequently entered into settlement agreements in the State Court Litigation, which was then dismissed.

In April of 2014, Plaintiffs’ counsel informed Defendants’ counsel that TSG information produced during the State Court Litigation had been “disposed of.” Additionally, the Plaintiffs notified the Defendants that during the State Court Litigation, their e-discovery vendor was in possession of images of TSG’s storage drives.
Subsequent to Defendants’ filing of a motion for discovery sanctions, and three months after discovery closed, the Plaintiffs located and produced 8 CD–ROMs containing in excess of 14,000 TSG documents. Defendants sought sanctions resulting from Plaintiffs’ tardy production and alleged two discovery violations: (1) Plaintiffs’ failure to timely produce 14,000 pages of TSG documents contained on the eight 8 CD-ROMs and (2) failure to produce 350,000 TSG documents in the possession of Plaintiffs’ vendor.

Addressing the timeliness of Plaintiffs’ supplemental production, the Court noted that as the Plaintiffs were in possession of the TSG documents while the State Court Litigation was pending they were therefore in possession of the 8 CD-ROMs containing TSG’s documents almost three years before disclosing the documents to the Defendants. The Court observed that the Plaintiffs did not deny that the documents included in their supplemental production were responsive to Defendants’ first discovery request. The Court therefore found the Plaintiffs had violated Rule 26(e) by failing supplement their production in a timely manner. The Court held that as a result, Rule 37 prohibited the Plaintiffs from using any new information on the 8 CD-ROMS “unless the failure was substantially justified or is harmless.”

The Court noted that the Plaintiffs offered no justification for their failure to produce the 8 CD ROMS in a timely manner. The Plaintiffs located the CD ROMS after their counsel initiated another search for TSG documents produced during the State Court Litigation in response to the motion for discovery santions. The Court observed that there was no reason in the record as to why the Plaintiffs’ first search failed to locate the CDs of TSG documents.

The Court then considered if the Plaintiffs non-compliance with Rule 26 was “harmless.” The Court found it was “too late to cure the problem of Plaintiffs’ tardy production” and noted that as discovery was closed and summary judgment filed, Plaintiffs’ late production prevented the Defendants from having a “full and fair” opportunity to investigate the new information or request additional discovery. The Court therefore held that allowing Plaintiffs to rely on new information that was revealed for the first time in their late production of TSG documents would prejudice the Defendants. While the Court found no evidence of bad faith with respect to the disclosure of the 8 CD-ROMs, it noted that there was a “basis for inferring willfulness” in the late production of 14,000 documents without a justification for their tardiness. The Court therefore barred the Plaintiffs from using new information on the CD-ROMs not previously produced by Plaintiffs or already in Defendants’ possession at summary judgment or at trial.

The Court then turned to Defendants’ contention that the Plaintiffs committed a discovery violation by failing to produce documents held by their vendor. Plaintiffs argued that they had no obligation to acquire and produce TSG’s computer media that they did not own, or of which they never had possession, custody, or control.

When considering whether Plaintiffs had a duty under Rule 34 to produce the documents being held by their vendor, the Court found that the Plaintiffs did not have sufficient control over the TSG documents in the vendor’s possession to warrant sanctions. The Court observed that while Plaintiffs had access to TSG documents on the vendors’ servers during the State Court Litigation there was no evidence that they still had access to the servers or were authorized to release information or permit others to access information on the vendor’s servers. The Court therefore held that the Plaintiffs did not have the “legal right to obtain document(s)” from the vendor because the data was not under their custody and control and that they were therefor not under a duty to produce the information. However, the Court observed that the Defendants could have subpoenaed the data from the vendor, but failed to do so. The Court noted further that while the Defendants’ claimed that they had been “deprived of critical TSG documents,” their failure to attempt to obtain the TSG documents from the vendor indicated that the Defendants did not believe that the information from the missing documents contained any information helpful to their case. The Court concluded that Defendants were not prejudiced by Plaintiffs’ failure disclose the vendor’s retention of TSG documents in a timely manner.

Magistrate Judge Daniel G. Martin recommended that the district court impose sanctions against the Plaintiffs in the form of attorney’s fees and prohibiting the Plaintiffs from using any of the disputed information at trial.

Ablan v. Bank of Am. Corp., 2014 WL 6704293 (N.D. Ill. Nov. 24, 2014)

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