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IN RE OLD BANC ONE SHAREHOLDERS

December 8, 2005.

IN RE OLD BANC ONE SHAREHOLDERS SECURITIES LITIGATION.


The opinion of the court was delivered by: WAYNE ANDERSEN, District Judge

MEMORANDUM, OPINION AND ORDER

On August 18, 2005, Magistrate Judge Morton Denlow issued a Report and Recommendation recommending that Plaintiffs', Old Banc One Shareholders, motion for sanctions due to spoliation of evidence be granted and that, as a sanction, Bank One Corporation ("Bank One") is precluded at trial from cross-examining Plaintiffs' financial expert, Dr. Hitzig. This case is before the Court on the objections of the Old Banc One Shareholders to Judge Denlow's Report and Recommendation regarding Plaintiffs' motion for sanctions. Also before the Court is Bank One's response to the Report and Recommendation. For the following reasons. Plaintiffs' objections and Bank One's response are denied, and the Report and Recommendation is adopted by this Court in full.

BACKGROUND

  On October 2, 1998, Banc One Corporation ("Old Banc One") merged with First Chicago NBD, forming Bank One Corporation. Plaintiffs allege that the two companies made misrepresentations related to Old Banc One's credit card division, First USA Bank ("First USA"), which artificially inflated the stock price at the time of the merger. Plaintiffs allege that these misrepresentations damaged shareholders of both parent companies. During discovery. Plaintiffs requested documents to enable them to challenge the Bank's methodology and calculations regarding the financial impact of the payment processing problem. Bank One could not produce many of these documents because the documents could not be found. Plaintiffs argue that Bank One has destroyed documents that the Plaintiffs have requested and that this destruction precludes Plaintiffs from adequately challenging the Bank's methodology and calculations regarding the financial impact of the payment processing problems. Plaintiffs claim that Bank One's retention policy permitted documents and data essential to their claims to be deleted or destroyed. As a result, Plaintiffs brought this motion for sanctions against Bank One claiming spoliation of evidence.

  In their motion for sanctions due to spoliation of evidence. Plaintiffs argue that the appropriate remedy is a default judgment in their favor. In the alternative, Plaintiffs request a negative inference jury instruction which instructs the jury that it can draw a negative inference against Bank One that the financial statements were materially overstated.

  Bank One argues that it has met its obligation to preserve documents relating to this litigation, it has produced enough information for the Plaintiffs to adequately challenge the remediation estimates and methodology, and the information which Plaintiffs seek is unnecessary to their case. Bank One admits, however, that many of these documents have not been produced despite their best efforts to locate them.

  On August 18, 2005, Magistrate Judge Denlow issued his Report and Recommendation which recommended that Plaintiffs' motion for sanctions be granted. In his comprehensive Report and Recommendation, Judge Denlow ruled as follows:
1. Bank One had a duty to preserve several categories of documents the Plaintiffs have justifiably requested; 2. Bank One breached that duty to preserve because it had notice that the categories of documents listed were relevant. Bank One has not been able to produce these documents and thus it has breached its duty to retain these relevant documents;
3. The breach was not the result of willful document destruction or bad faith, but rather ineffective preservation policies, which rise to the level of fault;
4. Plaintiffs will suffer prejudice as a result of Bank One's breach of its preservation duties; and
5. The prejudice suffered by Plaintiffs can be remedied without imposing the draconian sanction of default judgment. Plaintiffs' prejudice can be remedied by disallowing Bank One from cross-examining Plaintiffs' financial expert, Dr. Hitzig.
  Currently pending before the Court are Plaintiffs' objections to the Report and Recommendation and Bank One's response to the Report and Recommendation.

  DISCUSSION

  A federal court may sanction a party for spoliation of evidence under either its inherent authority or under Federal Rule of Civil Procedure 37. Chambers v. Nasco, 501 U.S. 32, 50-51 (1991). A court may sanction a party pursuant to Rule 37 for discovery violations; however, these sanctions are limited to circumstances in which a party violates a court order or discovery ruling. Brandt v. Vulcan, Inc., 30 F.3d 752, 756 n. 7 (7th Cir. 1994). A Court's inherent authority, however, is based on the Court's power to manage and ensure the expeditious resolution of cases on its docket and is not limited to discovery violations. Barnhill v. United States, 11 F.3d 1360, 1367 (7th Cir. 1993).

  The court has broad discretion to fashion an appropriate sanction. Nat'l Hockey League v. Metro. Hockey Club, Inc., 427 U.S. 639, 642-43 (1976). The Seventh Circuit has held that sanctions should be proportionate with the circumstances surrounding the failure to comply with discovery orders. Barnhill, 11 F.3d at 1367. Further, the Seventh Circuit has held that a court can impose the severe sanction of default judgment or dismissal with prejudice only if the offending party's conduct evinces willfulness, bad faith, or fault. Marracco v. General Motors Corp., 966 F.2d 220, 224 (7th Cir. 1992).

  Under Fed.R.Civ.P. 72, the standard of review employed by the court to review matters determined by a magistrate judge depends on whether the matter is dispositive or nondispositive. Fed.R.Civ.P.72. "[R]esolution of a sanctions request is a dispositive matter capable of being referred to a magistrate judge only under [28 U.S.C.] § 636(b)(1)(B) or § 636(b)(3), where the district judge must review the magistrate judge's report and recommendations de novo." Retired Chi. Police Ass'n v. Firemen's Annuity & Benefit Fund of Chi., 145 F.3d 929, 933 (7th Cir. 1998).

  Plaintiffs' primary objection to the Report and Recommendation is that Judge Denlow did not employ severe enough sanctions against Bank One. Plaintiffs seek a default judgment in their favor or, in the alternative, the striking of Bank One's affirmative defenses or the issuance of an adverse inference jury instruction. Plaintiffs argue that Bank One's breach of its duty to preserve the documents in question was the result of willful document destruction or bad faith.

  Bank One also disagrees with the sanctions recommended by Judge Denlow because, it claims, Plaintiffs failed to show that they were prejudiced by Bank One's failure to locate the missing documents. Bank One also argues that the sanctions proposed by Judge Denlow go far beyond remedying any prejudice suffered by Plaintiffs.

  A party's duty to preserve specific types of documents does not arise unless the party controlling the documents has notice of those documents' relevance. Turner v. Hudson Transit Lines. Inc., 142 F.R.D. 68, 72-73 (S.D.N.Y. 1991). Usually, this notice arises from discovery requests or from the ...


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