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Sent to you by pakurilecz via Google Reader: Suspicious Timing of
Destruction Results in Adverse Inference and Permission to Add a Claim
of Exemplary Damages despite Lack of "Smoking Gun" via Electronic
Discovery Law by [log in to unmask] (K&L Gates) on 3/10/09
Smith v. Slifer Smith & Frampton/Vail Assocs. Real Estate, LLC, 2009 WL
482603 (D. Colo. Feb. 25, 2009)

Plaintiffs, as representatives of an estate, retained defendants,
including broker Peter Seibert, to assist in selling a piece of the
estate’s property. The property eventually sold, on defendants’
recommendation, for approximately $2.8 million. 83 days later,
defendants assisted in reselling the property to a development company
for $7.2 million. On March 19, 2006, plaintiffs’ counsel contacted
defendants and informed them he was conducting an investigation into
the sale. On November 2, 2006, plaintiffs filed suit alleging inter
alia breach of statutory duties, negligence per se, negligent
misrepresentation, and fraud.

Plaintiffs served discovery requests on April 9 and July 30, 2007.
Included, were specific requests for electronically stored information
(“ESI”) and for inspection and sampling of certain of defendants’
computers. Defendants’ responses indicated that they had searched three
primary sources of potentially responsive ESI: Seibert’s old office
computer, his home computer, and his laptop.

On July 7, 2008, following plaintiffs’ filing of a motion to compel
certain ESI, defendants’ own expert, Ralph Gorgal, reported that
Seibert’s computer drives had been analyzed “to determine if secure
deletion (wiping) software had been installed.” He concluded that
Anti-Tracks, a data wiping program, had been installed on Seibert’s
home computer. He further concluded that the Anti- Tracks file was
created on August 17, 2006 and last accessed on September 6, 2007 –
mere days before copies of Seibert’s hard drives were taken. Both dates
fell considerably after defendants were put on notice of the
investigation and the resulting lawsuit. Gorgal’s report also indicated
that the use of Anti-Tracks had resulted in a substantial loss of data.

On July 18, 2008, the presiding District Court Judge granted a joint
Motion to Amend the Scheduling and Discovery Order and allowed
plaintiffs to supplement their expert’s disclosures relating solely to
the computer forensic examination. The order also allowed for
defendants to submit a rebuttal.

In his subsequent report, plaintiffs’ expert, David Penrod, confirmed
the presence of Anti-Tracks and the extent of the destruction of
electronically stored information on Seibert’s home computer.
Specifically, Penrod noted that his forensic program automatically
recovered 67,714 objects as Lost Files and he determined that “they had
been deleted as part of a systemic effort to eraser pertinent data,” as
evidenced by the timing of the destruction. Amongst the objects deleted
were “hives and individual keys of the Windows Registry stored within
System Restore Points” whose destruction “obliterates historical
records that can be used…to construct a chronology of system and user
activity.” Moreover, Penrod reported his analysis of the Lost Files
indicated that approximately 9,500 files, folders, and critical systems
were deleted between September 6, 2007 and September 14, 2007, the day
on which Seibert’s home computer was imaged, and that many of the
deletions appeared to have been accomplished manually.

Penrod also determined that Seibert’s office computer had been
reformatted on May 10, 2007, the day after Seibert responded to
plaintiffs’ RFPs and one day before his deposition. Penrod “opined that
the formatting was intentional because ‘the steps in the process are
too many and too complicated to be unintended. One must knowingly and
purposely engage in the process to complete it.’”

Defendants’ second expert, David Cowan, challenged Penrod’s conclusions
and methodology. Specifically, Cowan challenged Penrod’s conclusion
that Seibert’s home computer had been wiped and the evidence upon which
Penrod based that conclusion. The opinions of a third defense expert
were not considered for procedural reasons, but the court did note the
expert’s agreement that the data on the old office PC was destroyed
after May 10, 2007.

Considering the evidence before it, the court concluded that Penrod’s
opinions regarding the destruction of data were credible. The court
went on to find that despite “no smoking gun establishing who caused
the loss of data on the two computers,” the evidence “strongly supports
the conclusion that the person was defendant Seibert or someone acting
on his behalf.” Thus, the court found that plaintiffs showed by a
preponderance of the evidence that after the duty to preserve arose,
“defendants failed to preserve evidence and, in fact, destroyed it in
bad faith and intended to prevent disclosure of relevant evidence on
Seibert’s computers.” The court based its finding primarily upon the
“highly suspect usage of Anti-Tracks on Seibert’s home PC and the
timing of the destruction of the hard drive on Seibert’s old office PC.”

Considering the appropriate sanction, the court stated that “[w]here a
party destroys evidence in bad faith, that bad faith alone is
sufficient circumstantial evidence from which a reasonable fact finder
could conclude that the missing evidence was unfavorable to that
party." The court concluded that plaintiffs had provided sufficient
evidence to support an inference that the missing data was unfavorable
to the defendants. The court also found that Seibert’s destruction
resulted in substantial prejudice to the plaintiffs and forced them to
incur considerable expense.

Despite the damage to plaintiffs’ case, however, upon review of the
“so-called ‘Ehrenhaus factors’” (used to determine if terminating
sanctions are appropriate), the court declined to impose the severe
sanction of default judgment “‘[b]ecause dismissal with prejudice
defeats altogether a litigant’s right to access to the courts” and
“should be use of a weapon of last, rather than first, resort.’”
(Citation omitted.)

Instead, the court recommended the imposition of an adverse inference
instruction in favor of the plaintiffs. Additionally, the court granted
plaintiffs permission to amend their claims to add a claim for
exemplary damages based on the adverse inference. The plaintiffs were
also awarded their costs and attorney fees. The recommendation of the
court was adopted by the presiding Senior District Court Judge and an
order was entered accordingly.

A copy of the opinion is available here.


Special thanks to Michael Reagor of Dymond Reagor Colville, LLP for
ensuring this case came to our attention.

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