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United Central Bank v. Kanan Fashions

September 21, 2011

UNITED CENTRAL BANK, PLAINTIFF,
v.
KANAN FASHIONS, INC., CREATIVE WAREHOUSING (CHICAGO), LLC, KANAN CRUISES, INC., KANAN HOLDINGS, LLC, VARSHA SHAH, AND MEHUL SHAH, DEFENDANTS.



The opinion of the court was delivered by: Judge Feinerman

MEMORANDUM OPINION AND ORDER

Plaintiff United Central Bank ("United") brought this action against Mehul Shah, Varsha Shah, Kanan Fashions, Inc. ("Fashions"), Creative Warehousing (Chicago), LLC ("Creative"), Kanan Cruises, Inc. ("Cruises"), and Kanan Holdings, LLC ("Holdings"), alleging breach of contract, breach of guaranty, and replevin. The case concerns four loans issued by United's predecessor, Mutual Bank, to the four entity defendants (collectively, "Borrowers"); the individual defendants guaranteed the loans. The court granted United partial judgment on the pleadings against the Borrowers on United's contract claims regarding what have been called Loan Nos. 2 and 3, which were made to Creative and Fashions, and Loan No. 4, which was made to Holdings and Cruises. 2011 WL 686810 (N.D. Ill. Feb. 18, 2011). The court subsequently allowed Fashions to pursue a counterclaim against United for breach of contract on Loan No. 1, which was made only to Fashions. 2011 WL 1838775 (N.D. Ill. May 13, 2011). The claims and counterclaims regarding Loan No. 1 remain unresolved, as do United's breach of guaranty claims against the individual defendants.

In September 2010, United filed a motion for sanctions against Defendants and their former counsel, Alan Borlack, Eric Grossman, and David Muschler of the law firm Bailey, Borlack & Nadelhoffer LLC (collectively, "Bailey"). Doc. 206. The motion charges Defendants and Bailey with spoliation of evidence for failing to preserve relevant electronically stored information ("ESI") on a computer server kept at a warehouse in Aurora, Illinois. The sanctions motion and all related matters were referred to the magistrate judge. The parties submitted extensive briefing (Docs. 207, 272, 309, 320, 355, 369), and the magistrate judge conducted a five-day evidentiary hearing. After receiving post-hearing briefs (Docs. 407, 410, 412), the magistrate judge issued a detailed and comprehensive Report and Recommendation recommending that sanctions be imposed on Defendants but not on Bailey. Doc. 425. Specifically, the magistrate judge recommended: (1) that United be awarded fees and expenses incurred in bringing and prosecuting the sanctions motion; (2) that Defendants be precluded from introducing any evidence related to data that was on the server and that cannot be found elsewhere; (3) that an adverse inference is warranted; and (4) that the adverse inference be implemented by informing the jury that Defendants abandoned the server and instructing the jury that Defendants' failure to preserve the server may be considered evidence that the server contained information unfavorable to Defendants.

Defendants timely filed objections to the Report and Recommendation pursuant to Federal Rule of Civil Procedure 72. Familiarity with the Report and Recommendation, a copy of which is attached hereto, is assumed.

A. Standard of Review

Neither side's briefs addressed the standard of review the court must employ in considering whether to adopt the Report and Recommendation. As a general rule, when a district court considers objections to a magistrate judge's ruling on a nondispositive matter, the magistrate judge's ruling will be set aside only if it is "clearly erroneous or contrary to law."

Fed. R. Civ. P. 72(a); see Hall v. Norfolk S. Ry. Co., 469 F.3d 590, 594-95 (7th Cir. 2006); Bobkoski v. Bd. of Educ. of Cary Consol. Sch. Dist. 26, 141 F.R.D. 88, 90 (N.D. Ill. 1992). Some authorities hold that discovery sanctions are nondispositive matters and therefore that a district judge reviews only for clear error a magistrate judge's imposition of such sanctions. See Hutchinson v. Pfeil, 105 F.3d 562, 566 (10th Cir. 1997) (because "[d]iscovery is a nondispositive matter, and magistrate judges have the authority to order discovery sanctions[,] . the district court must defer to the magistrate judge's ruling unless it is clearly erroneous or contrary to law"); Grimes v. City & Cnty. of S.F., 951 F.2d 236, 240-41 (9th Cir. 1991) (holding that discovery sanctions are nondispositive pretrial matters reviewable for clear error under Rule 72(a)); Joza v. WW JFK LLC, 2010 WL 3619547, at *2 (E.D.N.Y. Sept. 10, 2010) ("monetary sanctions pursuant to Rule 37 for noncompliance with discovery orders usually are committed to the discretion of the magistrate, reviewable by the district court under the 'clearly erroneous or contrary to law' standard") (citing Thomas E. Hoar, Inc. v. Sara Lee Corp., 900 F.2d 522, 525 (2d Cir. 1990)); Rodriguez v. United States, 2009 WL 3756605, at *2 (S.D. Cal. Nov. 6, 2009) ("The 'clearly erroneous' standard applies to the magistrate judge's factual determinations and discretionary decisions, including an order imposing discovery sanctions.") (citing Maisonville v. F2 Am., Inc., 902 F.2d 746, 748 (9th Cir. 1990)); Innis Arden Golf Club v. Pitney Bowes, Inc., 629 F. Supp. 2d 175, 191-92 (D. Conn. 2009) ("Because the [sanctions] ruling was a determination of a non-dispositive discovery matter, this Court reviews the ruling according to the 'clearly erroneous or contrary to law' standard."). Other authorities hold that the district judge should apply the de novo standard set forth in Rule 72(b)(3) when reviewing a magistrate judge's imposition of discovery sanctions, see Mintel Int'l Grp. v. Neergheen, 636 F. Supp. 2d 677, 690-91 (N.D. Ill. 2009), or award of attorney fees, see MacNeil Auto. Prods., Ltd. v. Cannon Auto. Ltd., 2011 WL 812140, *3 (N.D. Ill. Mar. 1, 2011) (citing Alpern v. Lieb, 38 F.3d 933, 935 (7th Cir. 1994)).

There is no need to choose sides in this case. The reason is that where, as here, "a magistrate judge chooses to issue a Report and Recommendation instead of an Order on a nondispositive motion and neither party opposes that choice, the district judge shall presume that the parties acquiesced to the magistrate judge's treatment of the matter as dispositive and, therefore, shall make a de novo review of those portions of the Report and Recommendation to which timely objections are made." Silva v. Potter, 2006 WL 3298543, *1 (M.D. Fla. Sept. 25, 2006); see also Lancellotti v. Fay, 909 F.2d 15, 17 n.2 (1st Cir. 1990); Hopkins v. Buffalo Pumps, Inc., 2009 WL 4496053, *2-3 (D.R.I. Dec. 1, 2009); Gropp v. United Airlines, Inc., 817 F. Supp. 1558, 1561-62 (M.D. Fla. 1993). Accordingly, the undersigned district judge shall review de novo the portions of the Report and Recommendation to which United has made "specific written objections." Fed. R. Civ. P. 72(b)(2); see Kanter v. Comm'r, 590 F.3d 410, 416 (7th Cir. 2009). After conducting de novo review, the undersigned "may accept, reject, or modify the recommended disposition; receive further evidence; or return the matter to the magistrate judge with instructions." Fed. R. Civ. P. 72(b)(3); see Schur v. L.A. Weight Loss Ctrs., Inc., 577 F.3d 752, 760 (7th Cir. 2009).

B. Defendants' Objections to the Report and Recommendation

The undersigned district judge has carefully considered Defendants' objections to the Report and Recommendation. Applying de novo review, and with one exception noted below, the undersigned adopts the Report and Recommendation and overrules Defendants' objections in their entirety. Because there is not much to add to the magistrate judge's comprehensive factual findings and legal analysis, only a brief discussion of Defendants' principal objections is necessary.

First, invoking an advice of counsel defense, Defendants contend that because Bailey instructed them that "nothing should be done with or to any of the computers, servers or related equipment" and that they were "not to take any action," they cannot be sanctioned for "doing nothing" to preserve the server. Doc. 434 at 3-4. The argument fails to persuade. Neither the letter nor the spirit of Bailey's instruction to "do nothing" reasonably suggested that Defendants would meet their discovery obligations by not taking the affirmative steps to safeguard critical ESI. What Bailey meant by "do nothing" obviously was to "do nothing" that would compromise the information contained on the server. In any event, "do nothing" in no way characterizes Defendants' conduct regarding the server. As the magistrate judge found:

[T]he ultimate responsibility for the spoliation of the warehouse server rests with Defendants. . Defendants [engaged in a] scheme to avoid producing the warehouse server. Defendants repeatedly put [Bailey] off without explaining their delay in transporting the server. They deliberately kept [Bailey] out of the loop regarding their agreement with [First Midwest Bank] and their ongoing negotiations with Associated to purchase the server. . Defendants even orchestrated the sale of the server to a foreign corporation in order to eliminate whatever information is on the server.

Doc. 425 at 48. That is, Defendants did precisely what Bailey instructed them not to do: they took affirmative steps that, apparently by design, resulted in the loss of the server and its data.

Second, Defendants contend that they cannot be sanctioned for spoliation because the server was "in possession and control of a third party," First Midwest Bank. Doc. 434 at 10. The magistrate judge ...


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