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 ...