Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 93 C 1309--Paul E. Plunkett, Judge.
Before FLAUM and EASTERBROOK, Circuit Judges, and PAINE, District Judge. *fn1
This is an appeal of a final judgment of a United States District Court within this court's jurisdiction pursuant to 28 U.S.C. sec. 1291.
On July 4, 1990, the Garcia home was destroyed by fire. Over two years after the fire, Allstate Insurance Company, as subrogee of the Garcias ("Allstate") brought this products liability action against Sunbeam Corporation and Sunbeam Leisure Products ("Sunbeam"), alleging that the fire was caused by a defective Sunbeam gas grill.
On July 6, 1990, an Allstate adjuster went to the Garcia house to investigate the loss. He confirmed that the scene had not been disturbed and he photographed the scene. Later that same day, an engineer hired by Allstate examined the fire scene. He observed a spare propane cylinder in the fire debris immediately near the grill. He also determined that the grill components which survived the fire were the side range top burner assembly, gas control panel, grill frame assembly, L.P. operating cylinder with remains of pressure regulator and service valve installed, cooking grates and warming racks, and gas control valves. The engineer also took photographs which reveal that the spare cylinder was in the vicinity of the grill at the time soon after the fire. Based upon his investigation, the engineer opined that the fire originated in the area of the gas grill but he was unable to determine the actual cause of the fire at that time.
After the adjuster and the engineer investigated the fire scene but before they had identified the sole cause of the fire, they determined that the only significant evidence was the remains of the grill's fuel system. Therefore, they only saved the L.P. operating cylinder, the main burner, the primary control valves and the gas regulator remains. All remaining product evidence, including the grill frame, planking, control panel, side burner and second propane cylinder, was discarded.
On February 1, 1993, Allstate Insurance Company filed its Complaint against Sunbeam. After learning of Plaintiff's failure to preserve evidence it deemed significant physical evidence to its defense, Sunbeam filed a Motion for Sanctions for Evidence Spoilation [sic]. An evidentiary hearing was held by a magistrate judge to determine whether Allstate failed to preserve evidence as required under Illinois law, and if so whether Sunbeam's defense was prejudiced by Allstate's failure to do so.
After hearing the evidence from experts for each side, the magistrate judge found that a reasonable investigator would have known that 1) a tank containing propane, if heated, would release highly flammable propane gas, 2) that if the tank was overfilled, heat from the ambient air and a nearby operating gas grill could be enough to cause it to do so, 3) the vented propane could have been drawn into the grill casing and ignited; and 4) soot and charring on the second tank would indicate that it was touched by flames. The magistrate judge concluded that it was unreasonable for Allstate to have relied on statements from the insureds that the tank was both empty and, despite the photographs taken just after the fire, that the tank was stored at a distance from the grill. The magistrate judge also concluded that Sunbeam was irremediably prejudiced because it was deprived of what might have been convincing evidence that, in fact, the second tank was near the grill. Finding that Sunbeam's defense was seriously and materially weakened, the magistrate judge recommended that the complaint be dismissed.
The district court, upon de novo review of the record, adopted the magistrate judge's findings and dismissed the case as a sanction for spoliation of evidence and this appeal ensued.
This case was in the district court upon federal diversity jurisdiction. Generally, in a diversity case, state law governs issues that potentially alter the outcome of a case. See, Guaranty Trust Company v. York, 326 U.S. 99, 109 (1945). However, the federal rules of procedure and evidence always apply in federal litigation, whether or not they determine the outcome. Hanna v. Plumer, 380 U.S. 460 (1965); Walker v. Armco Steel Corp., 446 U.S. 740 (1980). Therefore, the standard of appellate review depends on federal rather than state law. Federal law provides that "Findings of fact shall not be set aside unless clearly erroneous." Fed. R. Civ. P. 52(a); Anderson v. Bessemer City, 470 U.S. 564 (1985). The question before us, then, is whether the district court's factual findings, upon which it relied when it granted the Appellee's motion for sanctions, are clearly erroneous. Further, the parties agree that in this case the pre-suit duty to preserve evidence is governed by Illinois law. Therefore, ...