Dorchester Fin. Holdings v. Banco BRJ S.A., New York District Court Orders Adverse Inference Sanctions for Destruction of Computer – A Crashed Computer “Is By No Means A Death Knell For The Data It Contains.”

In this case, Dorchester Financial Holdings sued the Brazilian bank, Banco BRJ, alleging that BRJ had committed breach of contract and fraud when it failed to honor a $250 million letter of credit that it had issued to Dorchester 2001. The Court granted default judgment to the Plaintiff in the initial case, however, based upon a motion by Dorchester, the Court vacated the default judgment and Dorchester refiled the case in 2011.

In the 2011 case, the trial Court referred all general pretrial proceedings, including discovery and non-dispositive motions to Magistrate Judge Fox. Dorchester filed an objection to a September 2014 order by Judge Fox imposing discovery sanctions relating to the destruction of a computer with documentation relevant to BRJ’s case. In his order, Judge Fox had precluded evidence derived solely from the computer, ordered Dorchester to pay Defendants’ attorney fees stemming from the sanctions dispute and required Dorchester to produce Robert Cox for a live deposition in the United Kingdom. In its objection, Dorchester contended that Judge Fox’s determinations were “clearly erroneous or contrary to law,” and asserted that the preclusion order was “tantamount” to dismissal. The trial Court observed that in “an abundance of caution” it would review Judge Fox’s order regarding spoliation de novo.

In the refiled action, BRJ alleged that the letter of credit was counterfeit. Dorchester claimed that it had executed a contract with BRJ which obligated it to issue a letter of credit and included a choice of law provision that required BRJ to adjudicate all disputes related to the letter of credit in New York. BRJ argued that the contract was counterfeit and characterized it as “suspicious.” Dorchester filed a First Amended Complaint (“FAC”) alleging breach of the newly identified contract. The case was dismissed by the trial court for lack of personal jurisdiction after which Dorchester successfully appealed and discovery commenced.

Prior to filing the initial suit, Dorchester’s officer and attorney, T.J. Morrow, collected both hard copy and electronic documents in Dorchester’s possession that were relevant to the suit. At some point between 2002 and 2012, Morrow transferred all the relevant material to the hard drive of a new computer he acquired. In March of 2012, in connection with Dorchester’s pending appeal of the FAC dismissal, Morrow printed copies of electronic documents that he thought would benefit Dorchester. Morrow chose not to print other documents relating to the dispute with BRJ. Morrow alleged that his computer “crashed” several days after he printed the documents related to Dorchester’s appeal in 2012. Morrow destroyed the computer without either consulting a computer specialist or notifying BRJ or the Court. Dorchester had also failed to create a backup of the hard drive, and as a result, all metadata and documents not previously printed were lost entirely.

In its analysis, the Court turned to the order by Judge Fox and noted that it explained the three elements of spoliation, specifically, an obligation to preserve, destruction with a culpable state of mind and relevancy of the destroyed evidence. Agreeing with Judge Fox, the Court noted that the first element of spoliation was satisfied as in March 2012, when Morrow’s computer allegedly crashed, Dorchester was under an obligation to preserve the documents and metadata on the hard drive. The Court observed that Dorchester’s preservation obligations did not cease when Morrow’s computer crashed and noted that a crashed computer is “is by no means a death knell for the data it contains.” The Court observed that by March 2012, it was a well-known that a technology specialist might be able to retrieve data from a failed computer hard drive. Further, the Court noted that in recent years courts have routinely ordered forensic examinations of failed hard drives during discovery. The Court therefore found that Dorchester had a duty to preserve Morrow’s computer after it had crashed and to make reasonable efforts to recovery the data resident on it. In a footnote, the Court noted that if Dorchester had issues with paying for a computer specialist it should have consulted with the Court and BRJ about a payment plan. While the Court acknowledged that no court in the Second Circuit had addressed the duty to preserve a failed computer or hard drive, it noted that its approach was in line with decisions in at least two federal jurisdictions.

Turning to the second spoliation element, the issue of culpable destruction, the Court observed that after Morrow’s hard drive crashed the only person he consulted was a family member with limited computer knowledge. Morrow had failed to involve a computer specialist to retrieve data and instead decided to destroy the computer. The Court described this action as “at a minimum, grossly negligent.” The Court noted that because Dorchester’s destruction of the computer prevented examination of the computer by a technical professional, the relevancy of the data it contained was “somewhat indeterminate.” The Court observed that no court within the Second Circuit had “squarely addressed” how that “particular type of indeterminacy affects spoliation analysis.” However based upon the facts presented, the Court concluded that the untimely destruction of Morrow’s computer qualified under the spoliation doctrine as the destruction of all information stored on the machine prior to the alleged crash.

The Court reached its decision based on several factors. The Court observed that it was likely that a forensic examination of the computer would have resulted in the retrieval of at least some of the data resident on the computer and noted that Dorchester did not disagree. The Court noted that the spoliation doctrine places the risk of erroneous judgment on the party who wrongfully created the risk. The Court observed that in this case, Dorchester created the risk surrounding the amount of evidence resident on Morrow’s computer at the time it was destroyed. The Court therefore placed the risk of erroneous judgment on Dorchester and concluded that all the data that was stored on the computer before the alleged crash remained viable afterward. The Court also held that declining to “extend the spoliation” doctrine to Dorchester’s misconduct might encourage similar misconduct, thereby “threatening the efficacy of the doctrine.” The Court observed that Dorchester gained an advantage from its action as it preserved the data beneficial to its claims while all other files and metadata “vanished.” The Court noted that if Dorchester’s actions did not qualify as spoliation, then “future parties may neglect to attempt data recovery from a failed hard drive—or even intentionally destroy a functioning drive—in the hope of biasing the universe of available evidence while escaping significant discovery sanctions”

Addressing the third spoliation element, the relevancy of the destroyed evidence, the Court held that as the destruction Morrow’s computer and the data it contained was at least grossly negligent, it assumed that the lost data was relevant to BRJ’s defense. Further, the Court noted that in Morrow’s testimony he stated that the computer contained discoverable electronic documents that he chose not to print as they were not beneficial to Dorchester. Concluding its spoliation analysis, the Court held that Dorchester committed spoliation meriting sanctions when it destroyed Morrow’s computer.

When determining the appropriate sanctions, the Court noted that as the only repository of electronic data in Dorchester’s possession, the destroyed computer included an “unknown number of lost documents” and metadata for surviving documents. As a result of the spoliation, the universe of documents had been dramatically reduced and only included documents favorable to Dorchester claims. The Court held that the prejudice to BRJ was “extreme in two respect: the potential scope of the evidence lost, and the pro-spoliator bias of the documents that remain.” The Court found that the prejudice could only be remedied by a “substantial sanction.”

After balancing the considerations of both parties in the matter, Court decided that an adverse inference sanction was more suitable to the case than the preclusion sanction ordered by Magistrate Judge Fox. The Court held that the “factfinder will be compelled to infer that Dorchester destroyed electronic evidence, including emails and metadata, favorable to BRJ’s claim that it did not participate in the transactions at issue in this action.” The Court also ordered Dorchester and Morrow to pay BRJ’s attorneys fees and costs associated with the spoliation dispute. The Court affirmed Judge Fox’s order requiring Dorchester to produce Robert Cox for a live deposition in the United Kingdom.

Dorchester Fin. Holdings v. Banco BRJ S.A., No. 11-CV-1529, 2014 WL 7051380 (S.D.N.Y. Dec. 15, 2014).

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