Summary
striking portions of trial testimony concerning an investment committee meeting, and imposing monetary sanctions, where defendant failed to timely produce the minutes of the meeting
Summary of this case from Joint Stock Co. Channel One Russ. Worldwide v. Infomir LLCOpinion
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Jason Michael Halper, Matthew Moler Karlan, Jared Jon Stanisci, Todd Blanche, Cadwalader, Wickersham & Taft LLP, New York, NY, for Plaintiffs.
Christopher Michael Joralemon, Mark Adam Kirsch, Peter Michael Wade, Laura Faye Corbin, Alison Leigh Wollin, Gibson, Dunn & Crutcher, LLP, New York, NY, for Defendant.
MEMORANDUM & ORDER
WILLIAM H. PAULEY III, Senior United States District Judge
Kortright Capital Partners LP and its co-founders Matthew Taylor and Ty Popplewell (collectively, "Kortright") move for sanctions pursuant to Rule 37(c) and this Court’s inherent power against Investcorp Investment Advisers Limited ("Investcorp"). For the reasons that follow, Kortright’s motion is granted in part and denied in part.
BACKGROUND
This discovery dispute arises from Investcorp’s untimely production of minutes from a June 2016 Investcorp Investment Committee meeting (the "Minutes"). The following is principally drawn from the trial record and a joint submission by the parties on January 3, 2019 (the "Joint Submission").
The facts underlying this action are more fully set forth in this Court’s prior decisions, familiarity with which is presumed. See Kortright Capital Partners LP v. Investcorp Inv. Advisers Ltd., 257 F.Supp.3d 348 (S.D.N.Y. 2017); Kortright Capital Partners LP v. Investcorp Inv. Advisers Ltd., 327 F.Supp.3d 673 (S.D.N.Y. 2018); Kortright Capital Partners LP v. Investcorp Inv. Advisers Ltd., 2018 WL 6329396 (S.D.N.Y. Dec. 4, 2018).
I. Background
At trial, Kortright introduced a June 24, 2016 email from Investcorp’s Greg Berman (the "Berman Email"), stating in relevant part as follows:
I’ll be dialing into IC but wanted to share some brief thoughts/changes to recommendations.... Exit Kortright - they need steady bull markets. Nick spoke with Matt who is very unhappy. Minutes should reflect clients unwilling to move to new Man mgr following disappointing recent track.
(PX 211.) The last sentence of the excerpt from the Berman Email echoes a misrepresentation made by Investcorp’s Nick Vamvakas to Kortright’s Matthew Taylor on June 24, 2016 as to why Investcorp could not keep its client capital invested.
The Minutes, which correspond to an Investcorp Investment Committee meeting held on June 27, 2016, were circulated in a June 27, 2016 email from Marina Rodrigues, a data administrator at Investcorp. Rodrigues drafted the Minutes based on her contemporaneous handwritten notes and emailed her draft to Berman. After receiving comments from Berman, Rodrigues circulated the Minutes. The Minutes, Rodrigues’ handwritten notes, Rodrigues’ draft, and Berman’s response do not mention Kortright by name.
II. Procedural History
Investcorp produced the Berman Email to Kortright on February 10, 2017. On July 20, 2017, Kortright’s counsel requested the minutes referenced in the Berman Email. Following that request, counsel for Investcorp attempted to locate the document within the universe of 127,000 documents that Investcorp and its counsel had identified as potentially relevant. However, those efforts were fruitless because the Minutes were not part of that document population. Two months later, Kortright’s counsel renewed its request for the minutes referenced in the Berman Email. After additional searches, Investcorp’s counsel informed Kortright on September 29, 2017 that it could not identify a document likely to be the minutes referenced in the Berman Email after a reasonable and diligent search. On October 16, 2017, Kortright’s counsel sent a follow up letter requesting further clarity on Investcorp’s efforts but claims that those entreaties went ignored.
Fast forward one year to November 27, 2018. During witness preparation, Investcorp’s counsel— apparently out of curiosity— asked an Investcorp witness if he had seen minutes from a June 2016 Investment Committee meeting and requested that the witness locate any such minutes. Investcorp located the Minutes and forwarded them to its counsel. (See Trial Tr. at 1335-36.) Investcorp’s counsel decided that the Minutes were not responsive to any requests for production served by Kortright and subsequently opted not to use them at trial.
DISCUSSION
As an initial matter, Investcorp consents to striking the relevant trial testimony based on its failure to timely produce the Minutes. Accordingly, Kortright’s request to strike trial testimony regarding the Minutes is granted on consent of the parties, and the parties shall stipulate to the portions of the trial testimony to be stricken. However, Kortright also seeks an adverse inference "that Investcorp’s conduct demonstrates consciousness of fault— i.e., of having negligently misrepresented to Plaintiffs repeatedly between April 6 and June 24, 2016 Investcorp’s desire to consent to and participate in the Man Transaction." (Joint Submission, ECF No. 173, at 21-22.)
I. Adverse Inference
An adverse inference instruction based on the failure to produce evidence in time for use at trial requires a showing that (1) the party having control over the evidence had an obligation to timely produce it; (2) that the party that failed to timely produce the evidence had "a culpable state of mind"; and (3) that the missing evidence is "relevant" to the party’s claim or defense such that a reasonable trier of fact could find that it would support that claim or defense. Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 107 (2d Cir. 2002).
Rule 37(c) provides that if a party fails to disclose information, it generally cannot use that information, and the court may also impose the sanctions listed in Rule 37(b)(2)(A)(i)-(vi). See Fed.R.Civ.P. 37(c)(1)(C). Rule 37(b)(2)(A)(i) allows the court to order that "designated facts be taken as established for purposes of the action."
A. Obligation to Produce
This Court concludes that Investcorp had an obligation to produce the Minutes. Investcorp asserts that the Minutes are not responsive to Kortright’s formal requests for production and that they would not have been captured through the agreed upon search parameters developed during discovery. (See Joint Submission, at 7-8.) However, courts in this circuit recognize that the obligation to produce described or referenced documents "will be triggered ‘by either a formal or informal discovery request.’ " LPD N.Y., LLC v. Adidas Am., Inc., 2018 WL 6437078, at *3 (E.D.N.Y. Dec. 7, 2018) (citing Coppola v. Bear Stearns & Co., 2005 WL 3159600, at *7 (N.D.N.Y. Nov. 16, 2005) ); see also A.V.E.L.A., Inc. v. Estate of Marilyn Monroe, 2014 WL 1408488, at *2 (S.D.N.Y. Apr. 11, 2014).
The relevant point is that Kortright made an informal request for the Minutes in July 2017 and renewed that request in September 2017. Even crediting Investcorp’s contemporaneous representations that it could not locate any document likely to be the June 2016 Investment Committee meeting minutes after a reasonable and diligent search, it at minimum had an obligation to supplement that response in November 2018, when Investcorp forwarded the Minutes to counsel. Thus, contrary, to Investcorp’s assertions, neither the fact that the Minutes were not responsive to Kortright’s formal requests for production nor the fact that Kortright did not serve additional requests for production absolves Investcorp of its obligation to produce documents responsive to Kortright’s informal requests.
B. State of Mind
The record also reveals that Investcorp acted with the requisite state of mind. The Second Circuit has, in articulating the analogous standards for adverse inference instructions based on non-production and spoliation, held that the state-of-mind requirement could be satisfied upon a showing of ordinary negligence. Residential Funding Corp., 306 F.3d at 108. To be sure, the 2015 amendments to Rule 37— which codified in Rule 37(e) a uniform standard for the issuance of adverse inference instructions to remedy the loss or destruction of electronically stored information ("ESI")— expressly rejected cases such as Residential Funding Corporation that "authorize the giving of adverse inference instructions on a finding of negligence or gross negligence." See Fed.R.Civ.P. 37(e)(2) advisory committee’s note to 2015 amendment. Instead, the Rule requires "that the party acted with the intent to deprive another party of the information’s use in the litigation." Fed.R.Civ.P. 37(e)(2). Nevertheless, this Court concludes that Rule 37(e) neither governs the non-production of evidence nor supersedes Residential Funding Corporation’s state-of-mind holding insofar as it applies to the non-production of evidence.
By its plain terms, Rule 37(e) applies only when ESI "that should have been preserved" is "lost because a party failed to take reasonable steps to preserve it, and it cannot be restored or replaced through additional discovery." Moreover, Rule 37(e) only supersedes Residential Funding Corporation to the extent that it holds that ordinary negligence may give rise to an adverse inference instruction for the loss or destruction of ESI. As the Federal Circuit recently opined, because Rule 37(e) "only applies to sanctions based on a party’s ‘failure to preserve electronically stored information,’ " Residential Funding Corporation "remains good law in the Second Circuit" for "sanctions based on other discovery misconduct." Regeneron Pharms., Inc. v. Merus N.V., 864 F.3d 1343, 1364 n.7 (Fed. Cir. 2017); see also 1 Fed.R.Civ.P. Rules & Commentary R. 37 (explaining that "[t]o the extent Rule 37(e) effects a change of law in those circuits that formerly authorized adverse inference instructions and other severe sanctions for negligent spoliation, the change pertains only to loss of ESI"). Absent a clear directive in the Rules that a more culpable "state of mind" requirement is required for an adverse inference instruction for the untimely production of ESI, this Court declines to impose one. Cf. Design Strategy, Inc. v. Davis, 469 F.3d 284, 296 (2d Cir. 2006) ("Since Rule 37(c)(1) by its terms does not require a showing of bad faith, we now hold that such a requirement should not be read into the Rule.").
Prior to the 2015 amendments, the Second Circuit articulated an analogous three-pronged adverse inference test for spoliation of evidence independent of the Federal Rules. See, e.g., Byrnie v. Town of Cromwell, Bd. of Educ., 243 F.3d 93 (2d Cir. 2001); Kronisch v. United States, 150 F.3d 112 (2d Cir. 1998). With respect to the untimely production of evidence, Residential Funding Corporation — unlike Byrnie or Kronisch — appeared to root the authority to sanction in part to the Federal Rules. Residential Funding Corp., 306 F.3d at 106 (citing Fed.R.Civ.P. 37(b)(2)(A) ) (explaining that the failure to produce discovery in time for trial is "more akin to those in which a party breaches a discovery obligation or fails to comply with a court order regarding discovery," which may warrant an order that "designated facts shall be taken as established for the purposes of the action")
Because the Minutes were not lost, but merely untimely produced, a showing of ordinary negligence will satisfy the state-of-mind requirement. Although the record supports Investcorp’s representations that it did not act with any ill will or in bad faith, this Court cannot agree that Investcorp’s failure to timely produce the Minutes is the product of mere inadvertence. A review of the record submitted by the parties yields the conclusion that Investcorp’s failure to locate the document in 2017 or produce the document in November 2018 was negligent, especially because it knew since July 20, 2017 that Kortright had sought Investment Committee minutes from the June 2016 meeting. Accord In re Sept. 11th Liab. Ins. Coverage Cases ("9/11 Cases"), 243 F.R.D. 114, 130 (S.D.N.Y. 2007) (concluding that "[a] finding of negligence or worse would appear to be a more appropriate characterization" for "[c]ounsel’s failure to recognize the importance of [a particular document], and to produce it timely, especially when alerted to its possible existence by opposing counsel"). Investcorp retorts that it could not locate any June 2016 Investment Committee meeting minutes following Kortright’s 2017 requests because the Minutes were not part of the universe of documents that Investcorp and its counsel deemed to be "potentially relevant." But there is no reason why Investcorp could not have employed the same means it used to locate the document in November 2018— which do not appear to have been limited to any specific universe of documents— in responding to essentially the same particularized request for the Minutes by its counsel. See Valentini v. Citigroup, Inc., 2013 WL 4407065, at *3 (S.D.N.Y. Aug. 16, 2013) ("Counsel ha[ve] an obligation to advise their clients of their discovery obligations and to ensure that the relevant documents [are] produced."). Investcorp’s conduct is sufficient to establish that it acted with a negligent state of mind.
C. Relevance
Although this Court finds that Investcorp was negligent in not timely producing the Minutes, no adverse inference is warranted because the Minutes are not relevant to Kortright’s negligent misrepresentation claim. That claim requires a plaintiff to demonstrate that "(1) the defendant had a duty, as a result of a special relationship, to give correct information; (2) the defendant made a false representation that he or she should have known was incorrect; (3) the information supplied in the representation was known by the defendant to be desired by the plaintiff for a serious purpose; (4) the plaintiff intended to rely and act upon it; and (5) the plaintiff reasonably relied on it to his or her detriment." Anschutz Corp. v. Merrill Lynch & Co., 690 F.3d 98, 114 (2d Cir. 2012); accord Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 919 N.Y.S.2d 465, 944 N.E.2d 1104, 1109 (N.Y. 2011). Relevance in this context "means something more than sufficiently probative to satisfy Rule 401 of the Federal Rules of Evidence." Residential Funding Corp., 306 F.3d at 108-09.
When it comes to an adverse inference based on negligence, however, the "standard of relevance ... differs as between evidence that was destroyed and evidence that was untimely produced." 9/11 Cases, 243 F.R.D. at 125. Where a party seeks an adverse inference based on negligent spoliation of evidence, it "must adduce sufficient evidence from which a reasonable trier of fact could infer that the destroyed or unavailable evidence would have been of the nature alleged by the party affected by its destruction" precisely because its relevance cannot be ascertained. 9/11 Cases, 243 F.R.D. at 125 (citation omitted). By contrast, "an assessment of relevance is possible" when it comes to untimely produced evidence, as is the case here. 9/11 Cases, 243 F.R.D. at 125. In those circumstances, "the negligent party should sustain liability for breaching its discovery obligations where such breach causes injury, but the moving party should not obtain a windfall for uncovering evidence that would have made little difference in the underlying case." 9/11 Cases, 243 F.R.D. at 125.
Based on a review of the Minutes, this Court has difficulty conceiving how they would be relevant to or support Kortright’s negligent misrepresentation claim. The crux of that claim is whether Investcorp misrepresented its willingness to leave its client capital invested, which is separate from the reason or reasons why it did not do so downstream. While the Minutes are arguably relevant to the latter question, the misrepresentation as to the reason Investcorp did not leave its client capital invested does not form the basis for its negligent misrepresentation claim. Ultimately, "it is always preferable for issues to be adjudicated on the merits, rather than pursuant to discovery sanctions." Black v. Bowes, 2006 WL 3771097, at *7 (S.D.N.Y. Dec. 21, 2006). The inference that Kortright seeks— i.e., that Investcorp negligently misrepresented its willingness to leave its client capital invested— essentially absolves it of the duty to prove liability. Based on the marginal relevance of the Minutes, the comparative windfall an adverse inference would yield, the amorphous prejudice suffered by Kortright, and the fact that Investcorp has come forward with the evidence, an adverse inference is unwarranted. See Phoenix Four, Inc. v. Strategic Res. Corp., 2006 WL 1409413, at *7 (S.D.N.Y. May 23, 2006) (denying an adverse inference instruction for late production of evidence "where the [non-producing party has] come forward with the evidence, even if after the close of discovery").
II. Other Sanctions
Kortright suggests in a footnote that more severe sanctions than an adverse inference would be justified. However, because it does not explain which sanctions would be warranted or why, this Court again "declines the invitation to sift through the record" to ascertain the conduct that Kortright contends would warrant more severe sanctions. See Kortright Capital Partners LP v. Investcorp Inv. Advisers Ltd., 327 F.Supp.3d 673, 688 (S.D.N.Y. 2018). Nonetheless, a district court "has broad discretion in fashioning an appropriate sanction" where "the nature of the alleged breach of a discovery obligation is the non-production of evidence." Residential Funding Corp., 306 F.3d at 107; cf. Phoenix Four, Inc., 2006 WL 1409413, at *9 ("Even when a court denies other requested relief, it may still impose monetary sanctions for spoliation and other discovery misconduct.").
Although Kortright has not demonstrated why an adverse inference in particular is an appropriate sanction for Investcorp’s negligent breach of its discovery obligations, it is clear that something more is warranted than simply striking trial testimony. Investcorp readily admits that it should have produced the Minutes earlier. (Joint Submission, at 10, 11.) In this Court’s view, Kortright should be afforded the opportunity to question witnesses about the Minutes. The parties should meet and confer, and the parties should be prepared to discuss logistics when trial resumes on January 22, 2019.
Finally, an award to Kortright of its reasonable expenses and attorney’s fees caused by Investcorp’s failure to timely produce the Minutes is justified. Cf. Fed.R.Civ.P. 37(c)(1)(A) (providing in relevant part that if a party fails to disclose information, the court may "order payment of the reasonable expenses, including attorney’s fees, caused by the failure" on motion and after giving an opportunity to be heard). These sanctions appropriately serve the "threefold purposes" of deterring discovery misconduct, placing the risk of erroneously concluding that the Minutes should not be produced on "the party who wrongfully created the risk," and "restoring the prejudiced party to the position it would have been in had the misconduct not occurred." Phoenix Four, Inc., 2006 WL 1409413, at *3 (citing West v. Goodyear Tire & Rubber Co., 167 F.3d 776, 779 (2d Cir. 1999) ).
CONCLUSION
For the foregoing reasons, Kortright’s motion for sanctions is granted in part and denied in part. The parties shall stipulate as to the portion of the trial testimony to be stricken. The parties are further directed to meet and confer as set forth herein. Investcorp shall bear Kortright’s reasonable expenses and fees incurred in litigating this issue, which shall be determined after trial.
SO ORDERED.