According to the Complaint filed in Michael Distefano and Nicole Distefano v Law Offices of Barbara H. Katsos, PC and Barbara H. Katsos, Michael DiStefano and a non-party were owners of a limited liability company that was the franchisee of three Cold Stone Creamery Inc. ice cream parlors. In 2006, the three stores suffered financial difficulties due to an extended power failure earlier in 2006. The Complaint further alleges that as a result, DiStefano sought legal advice from Barbara Katsos, Esq., and eventually retained her for the purposes of commencing a Chapter 11 bankruptcy proceeding. That proceeding was ultimately withdrawn in 2010 and subsequently the DiStefanos filed the instant lawsuit. The Complaint interposes claims of legal malpractice in connection with the Chapter 11 proceeding along with claims for breach of contract and breaches of fiduciary duty.
The focus of this blog will be Katsos’ failure to preserve data relevant to the malpractice lawsuit.
Relevant Facts Per Court’s Decision
During a discovery status conference before Magistrate Judge A. Kathleen Tomlinson, counsel for Defendants advised the Court that Katsos had discarded her computer at some point prior to the malpractice litigation being commenced. In response, the Court directed defense counsel to provide the Court with an affidavit detailing the circumstances of how the computer was discarded. After receipt of the affidavit, the DiStefanos moved for spoliation sanctions pursuant to Rule 37. The Court temporarily denied that motion, without prejudice, pending a hearing. See DiStefano v Law Office of Barbara H. Katsos, PC, No. CV 11-2893, 2013 WL 1339548, at *9 (EDNY Mar 29, 2013). Specifically, the Court found that “a hearing is necessary to explore the circumstances under which the alleged spoliation occurred” (id. at *8) (internal quotations omitted). The Court instructed Katsos to be prepared to testify – or bring someone who could testify – as to specific topics relevant to the issue of spoliation (i.e., the document preservation undertaken when the DiStefanos instituted an adversary proceeding in March 2010).
Which Rule 37 Applies?
Before assessing the testimony presented at the evidentiary hearing, Judge Tomlinson was required to determine which version of Rule 37(e) was applicable to the motion – those in effect pre-2015 amendment? Or those currently in effect in 2017? Citing Magistrate Judge Francis’ decision in Cat3, LLC v Black Lineage, Inc. (144 FSupp3d 488 [SDNY 2016]) (previously mentioned in my August 31, 2016 E-Discovery Update: ESI Sanctions in Federal Court During 2016 (Well, through July)), the Court noted that for cases filed before the effective date of the amendments, courts have discretion to determine which version of the Rule to apply based upon what is “just and practicable.” Thus, Judge Tomlinson opted for the older version of the Rules based upon three considerations. First, the parties briefed the spoliation motion in 2013 based upon the former Rule 37 in. Second, the evidentiary hearing was conducted under the tenants of former Rule 37. And third, the conduct relevant to the motion began more than seven years before the current version of Rule 37 took effect.
Relevant Testimony At Hearing*
According to the Court, the testimony at the evidentiary hearing established the following facts:
- While representing the DiStefanos in 2009, Katsos’ office computer crashed and a freelance computer technician told Katsos it “was bad and that nothing could be recovered”;
- That same technician replaced the defective computer parts and drilled holes in the replaced hard drives;
- At no time after this litigation began did Katsos take any affirmative steps to save electronic information;
- Katsos did not issue any written instructions to her staff regarding the obligation to preserve ESI;
- Katsos testified she was “amazed” she did not find more emails when searching her AOL accounts;
- Katsos contacted her email provider only to learn that AOL “had no ability to save emails past the 27-day mark” absent some affirmative action by Katsos earlier;
- Katsos’ electronic retention policies were essentially non-existent in that “everything was made in hardcopy” (and emails Katsos deemed subjectively relevant were often printed) and filed in storage cabinets;
- There was no backup system in place to preserve electronic data;
- Katsos was unaware of any method to set up automatic deletion of emails from her email account nor was she aware of how emails might be saved or deleted from a “sent folder”; and
- Katsos’ office manager was not computer savvy and Katsos knew this when she hired the office manager.
Notwithstanding the foregoing facts, Magistrate Judge Tomlinson spared Katsos the most severe sanctions available to the Court under the pre-amendment Rule 37(e) because the Court believed that Katsos’ actions were not taken in bad faith. Specifically, the Court noted that “[r]ather than bad faith…Katsos’ actions were occasioned by (1) her position as a solo practitioner utterly naïve about her obligations to preserve electronic evidence and (2) her total reliance upon and complete delegation to an outside consultant the responsibility for setting up and maintaining the computer system in her office.” Moreover, the Court found that Katsos’ “utter ignorance of (i) her ESI preservation responsibilities and (ii) her efforts to save ‘substantive’ emails can be considered, to some degree, as ‘positive evidence’ of good faith.”
Ultimately, the Court concluded, “on the ‘continuum of fault ranging from innocence to the degree of negligence to intentionality’….this case falls on the spectrum between negligence and gross negligence, and closer to the former than the latter.’” Indeed, the Court found no evidence of intentional or malicious spoliation but said Katsos had “at the very least, acted with a ‘pure heart and an empty head.’”
Thus, the Court ordered Katsos to pay Defendants’ attorneys’ fees and costs incurred in connection with the spoliation motion as a sanction.
Although the Court demonstrated leniency when imposing its sanctions, there are many important lessons to internalize from the Court’s 60-page decision. Included among them:
- The pre-Amendment Rules are alive and well. Given that litigations tend to span many years, it is possible you/client could be subject to stiffer sanctions under the still-viable former Rule 37(e);
- Ignorance of one’s preservation obligations will not insulate you from sanctions. In fact, while Katsos’ lack of computer sophistication may have helped her when it came time for sanctions to be imposed (i.e., she was merely negligent), the fact remains she was sanctioned! And remember – certain state’s ethics decisions expressly find that ignorance of technology is a violation of one’s duty of competence; and
- Finally, there are resources available to help smaller firms and solo practitioners comply with their various discovery obligations – including me! Farrell Fritz’s E-Discovery practice group is always willing to help so don’t hesitate to contact us if confronted with an ESI issue