United States District Court, N.D. Illinois, Eastern Division
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.
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
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
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.
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
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 complaint. Cohn v. Taco Bell Corp., 1995
WL 519968 at *5 (N.D. Ill. August 30, 1995).
In securities cases, corporations have a duty to preserve
documents pursuant to both the Federal Rules of Civil Procedure
and and Public Securities Ligitation Reform Act ("PSLRA").
However, the duty to preserve potentially discoverable
information does not require a party to keep every scrap of
paper. Danis v. USN Communications, 2000 WL 1694325, at *30,
*32 (N.D. Ill. Oct. 20, 2000). Instead, a party is required to
keep relevant evidence over which it had control and reasonably
knew or could foresee was material to the litigation. See
Marrocco v. General Motors Corp., 966 F.2d 220, 224 (7th
In this case, the records which Plaintiffs seek were created in
December of 1999. Bank One could have reasonably foreseen the
relevance of these documents because of the FUSA card member
lawsuits on May 28, 1999, the Office of the Comptroller of the
Currency's Notice on December 16, 1999, and the filing of the
Larson Complaint on April 6, 2000. The Complaint alleged that: 1)
FUSA violated Regulation Z and the GAAP; 2) Bank One was not
truthful in its public merger disclosures; and 3) the disclosures
materially misrepresented FUSA's financial well-being.
We find, as did Judge Denlow, that Bank One was on notice and
had a duty to preserve the following documents: 1) the missing
underlying data and calculations for the 540 of the Unknown
Population estimate under the Pool Approach; 2) the unmitigated
underlying data for the 16.450 samples of NPC from internal
audits; 3) the complete underlying data for the one million
"multipayments;" 4) documents related to the Fix Engine, Events
29 and 29B; and 5) other miscellaneous drafts of relevant
documents. In order to meet its obligations, Bank One needed to create a
comprehensive document retention policy to ensure that relevant
documents were retained and needed to disseminate that policy to
its employees. See In re Prudential Ins. Co. of Am Sales
Practices Litig., 169 F.R.D. 598, 615 (D.N.J. 1997). We find, as
did Judge Denlow, that Bank One had notice that these categories
of documents were relevant and, therefore, it had a duty to
retain them. Because Bank One has been unable to produce these
documents, we find that it has breached its duty to retain or
preserve these relevant documents for several reasons.
First, Bank One did not have a comprehensive document retention
policy in place during the Larson litigation. We find, as did
Judge Denlow, that the incomplete version of the Iron Mountain
policy and the non-final status of the policy referred to in the
Disadvantaged Customer Team ("DCT") email suggest that they were
not fully adopted or disseminated. Moreover, it took ten months
for Bank One to tailor a policy for the Larson litigation, which
suggests that the DCT and other teams followed no comprehensive
policy for the first year of this litigation.
Next, Bank One should not be allowed to limit the scope of its
document retention policies at will. Thus, it is of no
consequence whether Plaintiffs have enough data to prove their
case and whether further production of these categories of
documents will help Plaintiffs prove their case.
Finally, it appears from the record that any policies that Bank
One had in place were not properly disseminated to Bank One
employees. Several Bank One employees testified that they did not
know the missing categories of documents should be retained. Bank
One did not make a general dissemination in writing to all
employees of the necessity of preserving documents relating to this litigation, nor did it take any steps to ensure
that employees read the electronic version of the policy or that
they followed it.
For these reasons, we conclude, as did Judge Denlow, that Bank
One breached its duty to preserve documents by failing to
establish a comprehensive document retention policy and by
failing to properly disseminate the policy to its employees.
Having determined that Bank One breached its duty, we turn to
the issue of sanctions. We believe that Judge Denlow was correct
in his assessment that Bank One's conduct evinces fault, but not
willful destruction of documents or bad faith. While the loss of
several categories of documents reflects poor judgment, and the
failure to create and disseminate a comprehensive document
retention policy constitutes negligence on the part of Bank One,
there is no evidence that Bank One willfully destroyed any
Next, we turn to the issue of the prejudice Plaintiffs will
suffer due to Bank One's breach. The Seventh Circuit has held
that, although prejudice is not an element in imposing sanctions,
the Court should consider the prejudice to the non-offending
party's claim. See, e.g., Marrocco, 966 F.2d at 225. To suffer
substantive prejudice due to spoliation of evidence, the lost
evidence must prevent the aggrieved party from using evidence
essential to its underlying claim. Langley by Langley v. Union
Elec. Co., 107 F.3d 510, 515 (7th Cir. 1997).
In this case, Plaintiffs' expert. Dr. Hitzig claims that,
without the underlying data and calculations, he cannot precisely
estimate how much Old Banc One/First Chicago overstated the
financial condition of FUSA in its merger proxy/prospectus. We
agree with Judge Denlow's conclusion that, without an appropriate
estimate by Dr. Hitzig. Plaintiffs' case is prejudiced with
regard to the determination whether Bank One materially misstated
FUSA's financial well-being. Because parties must be allowed to prosecute a case based on
their chosen theory in light of all relevant evidence, we find
that Plaintiffs' case has been substantively prejudiced.
Finally, we find, as did Judge Denlow, that the "draconian"
sanction of a default judgment is not warranted in this case.
This is not a case in which a party is prevented from presenting
its case due to missing evidence, and this case can still be
tried on its merits. In this instance, lesser sanctions can
ameliorate the prejudice suffered by Plaintiffs, thus complying
with the Seventh Circuit's requirement that a sanction be
proportionate to the discovery violation. See Langley,
107 F.3d at 515.
For these reasons, we agree with Judge Denlow's recommendation
that Bank One be prevented from cross-examining Dr. Hitzig. The
jury shall be instructed as to this limitation and the reason for
its existence. Such an instruction will both remedy prejudice to
plaintiffs and allow the case to be decided on the merits.
Finally, we agree with Judge Denlow's recommendation that
Plaintiffs' request for attorneys fees be denied without
prejudice. It may be renewed at the end of the case. At that
time, the parties and the Court will be in a better position to
evaluate the impact of Bank One's failure to preserve the
documents at issue.
For the foregoing reasons, the Court adopts in full Magistrate
Judge Denlow's Report and Recommendation regarding Plaintiffs'
motion for sanctions due to spoliation of evidence. Plaintiffs'
motion for sanctions is granted in part and denied in part.
Plaintiffs' objections to the Report and Recommendation are
denied, and Bank One's response is denied. The following motions are denied as moot: Bank One's motion to
toll the time for filing objections to the Report and
Recommendation; Bank One's motion to extend the time to file its
response to Plaintiffs' objections; and Plaintiffs' motion to
strike portions of Bank One's response.
It is so ordered.
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