In Charlestown Capital Advisors v. Acero Junction, Inc., No. 18-CV-4437 (JGK) (BCM) (S.D.N.Y. Sept. 30, 2020), New York Magistrate Judge Barbara Moses granted in part the plaintiff’s motion for sanctions of the defendants for failure to preserve the business email account of the defendant’s co-President and Director, whose signature appeared on an agreement between the two parties at the heart of the dispute, but denied it with respect to the level of sanctions, stating that “the record does not contain clear and convincing evidence that the Acero Defendants acted ‘with the intent to deprive [plaintiff] of the information’s use’ in this action”.

Case Background

In this breach of agreement case where the plaintiff sought damages over an agreement allegedly signed by Jateen S. Kapoor, co-President and Director of the defendant company (which entitled them to fees for an M&A transaction of $2.6 million), Kapoor testified that he did not negotiate or sign the agreement, that he did not learn of its existence until April 2018 (even though a fully-executed copy was emailed to him by the plaintiff on January 12, 2018) and that he lacked authority to bind the defendants to its terms.

During discovery, the defendants failed to institute an effective litigation hold or effectively preserve ESI relevant to this action, including Kapoor’s business email account. A year later, the defendants indicated that a “mid-level human resources person” deleted the entire Kapoor Account as part of a “wholesale” deletion of former employee emails and a subset of Kapoor emails identified as potentially relevant to the case also disappeared, having been “unwittingly” stored for only 15 days on “Google servers.” Although counsel knew about the destruction of both data sets in August 2019, he failed to tell the plaintiff or the Court until November 2019, one month before the close of discovery.

After Kapoor testified at deposition that he still had copies of his emails on a laptop, the defendants (with help from an eDiscovery vendor) reviewed approximately 50,000 emails recovered from Kapoor’s laptop but, after a “de-duplication procedure” (that appeared to include what the plaintiff produced as part of deduplication), produced only 412 emails, only 24 of which were exchanged with the plaintiff, a small fraction of the 1,650 emails exchanged between the parties produced by the plaintiff itself.  Notably absent was the January 12, 2018 email from Charlestown to Kapoor, attaching a fully-executed copy of the Agreement.

Judge’s Ruling

Judge Moses found that the defendants had an obligation to preserve the ESI and that they failed to take reasonable steps to do so (both of which the defendants did not deny).  With regard to whether the ESI could be replaced through additional discovery, Judge Moses stated:

“Defendants’ efforts were inadequate for at least two reasons. First, the only evidence that Kapoor’s laptop contained all of the emails that the Acero Defendants deleted when they destroyed his account in mid-2019 is Kapoor’s own, somewhat hazy, testimony at deposition, much of which is not even in the record in admissible form, but was instead recited to the Court, by counsel, at oral argument…Second, and even more problematic, is the substantial evidence before the Court that the January 27, 2020 production was, in fact, incomplete. It included only ‘34 files containing the word ‘Charlestown,’ ‘ only 412 emails ‘to, from, copied to, or blind copied to’ the Kapoor Account, and only 24 emails between the Kapoor Account and Charlestown’s personnel…Given the affirmative defenses in this case, the arrival of that January 12 Email in Kapoor’s inbox has independent evidentiary significance, as does the metadata that would show when Kapoor received it, when (if at all) he opened it, and when (if at all) he forwarded it or took other action concerning it. The Acero Defendants have never produced the January 12 Email, nor any of the related metadata, which raises questions not only about the fate of that email (and others known to plaintiff but not produced by defendants) but also about the existence of other potentially probative emails not currently known to plaintiff.”

As a result, Judge Moses found that “Sanctions Are Warranted Under Rule 37(e)(1)”.  But, with regard to more severe sanctions under subsection (e)(2) (such as the entry of a default judgment against the Acero Defendants), Judge Moses stated: “the record does not contain clear and convincing evidence that the Acero Defendants acted ‘with the intent to deprive [plaintiff] of the information’s use, in this action”.  As a result, Judge Moses stated:

“Consequently, the Court will impose monetary sanctions on the Acero Defendants sufficient to deter them from further misconduct and compensate Charlestown for its attorneys’ fees and other expenses incurred in obtaining documents and information that should have been provided many months earlier and in litigating the instant sanctions motion. In addition, defendants will be precluded from arguing or offering testimony or other evidence designed to show that Kapoor did not send or receive emails that have been produced by other parties and that show any of Kapoor’s known email addresses as the sender or a recipient. Thus, for example, Kapoor may not deny that the January 12, 2018 email from Charlestown, together with its attachment, appeared in his inbox, in the ordinary course, at or shortly after the time it was sent by Charlestown. Finally, Charlestown will be permitted to present evidence to the finder of fact at trial regarding the loss of the Kapoor ESI and – in the event the case is tried to a jury – may seek an appropriate jury instruction, the wording of which will be at the discretion of the trial judge, allowing the jury to consider that loss of that evidence, and the circumstances of its loss, in evaluating witness credibility and otherwise making its determinations.”

So, what do you think?  Did the sanction fit the action here?  Please share any comments you might have or if you’d like to know more about a particular topic.

Case opinion link courtesy of eDiscovery Assistant.

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