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Jon Domanus, et al v. Derek Lewicki

June 8, 2012

JON DOMANUS, ET AL., PLAINTIFFS,
v.
DEREK LEWICKI, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Magistrate Judge Nan R. Nolan

MEMORANDUM OPINION AND ORDER

This action arises out of Plaintiffs' allegations of a complex, bicontinental racketeering and fraud scheme spanning over ten years. On February 21, 2012, Plaintiffs filed a Motion for Discovery Sanctions Against Defendants ("Motion") due to spoliation of evidence, alleging that Defendants Derek Lewicki and Richard Swiech intentionally destroyed a computer hard drive, which contained relevant information.*fn1 On March 13, 2012, Defendants filed their response, and Plaintiffs filed a reply on March 27, 2012. For the reasons stated below, the Motion is granted in part and denied in part.

I. BACKGROUND

A. The Complaint

On August 28, 2008, Plaintiffs, who are shareholders in Krakow Business Park SP. Z O.O. ("KBP"), brought an action alleging a pattern of fraud and deceit, corporate looting and misappropriation of corporate funds, and money laundering by various individual and corporate defendants. Plaintiffs have named KBP and its wholly owned subsidiaries (the "KBP entities") as derivative defendants in this action, but seek no relief from these entities. Plaintiffs assert direct and derivative claims under 18 U.S.C. § 1962 ("RICO"), as well as liability under several common law theories including fraud, conversion, breach of fiduciary duty, tortious interference with prospective business advantage, civil conspiracy, violation of the Uniform Fraudulent Transfer Act, 740 ILCS §§ 160/1 et seq., and for an accounting.

The gravamen of the Complaint*fn2 is that the direct Defendants, led by Derek Lewicki, Richard Swiech, and his brother, Adam Swiech, working with each other and with and through a host of foreign and domestic corporations that they control, engaged in a pattern of misconduct designed to rob the KBP entities of their assets, which the direct Defendants used to finance real estate developments in suburban Chicago. The Complaint describes four types of misconduct: (1) sham contracts and payments for inadequate consideration; (2) self-dealing leases; (3) land misappropriation; and (4) construction kickbacks. Defendants used proceeds generated by their misconduct as capital contributions by Adam Swiech, who then claimed to be the majority shareholder of KBP. These sham contributions diluted the shareholdings of Plaintiffs, who contend that they are the rightful majority shareholders of KBP, although they currently appear on the books as minority shareholders. In April 2012, the District Judge granted Plaintiffs' motion for a preliminary injunction preventing Defendant Adam Swiech from voting his shares to approve any issuance of shares that would dilute Plaintiffs' shareholdings below 25 percent. See Domanus v. Lewicki, 2012 WL 1247102 (N.D. Ill. April 13, 2012). In her ruling, the District Judge noted that Plaintiffs have identified "extensive evidence" supporting their claims of misconduct by the direct Defendants. Id. at *3--4.

B. The Hard Drive

On May 20, 2011, Defendants' former counsel sent Plaintiffs' counsel 1,800 pages of documents, explaining that they "were recovered from a hard drive belonging to Richard Swiech [(the "Hard Drive")] and have been unavailable until now." (Michaels Decl. ¶¶ 2--3 & Ex. A.) After reviewing the production, Plaintiffs' counsel found it incomplete and requested that Defendants' counsel provide more information about the Hard Drive and agree to a forensic inspection. (Id. Ex. B.) Defendants' counsel responded that Plaintiffs' concerns were "unfounded and unreasonable" and refused to answer any questions about the Hard Drive or agree to a forensic inspection. (Id. Ex. C.) Defendants' counsel explained that the Hard Drive was not in her possession; instead, she was relying on Richard Swiech's representations as to the Hard Drive's contents:

I assure you that I have explained to [Richard Swiech] the breadth of what you are searching for, and I am confident that he understands. I do not believe there are any responsive files, e-mails or otherwise, which are available from the hard drive which have not been produced. (Id. Ex. C.) However, two weeks later, Defendants' counsel reported that there were more documents on the Hard Drive after all:

I have had some additional conversations with my client to absolutely verify that there was nothing else [on the Hard Drive]. It looks like there was a misunderstanding regarding what was responsive and needed to be produced, so I'm learning there are some additional documents, mostly emails I believe, which may be responsive and were not produced. (Id. Ex. E.)

The parties addressed the Hard Drive issue at a June 29, 2011 status hearing. (Michaels Decl. Ex. F ("June 29, 2011 Hr'g Tr.").) Defendants' counsel requested additional time to review the "21 CD-ROMs of data" that she had just received from Richard Swiech. (June 29, 2011 Hr'g Tr. 5.) Counsel reiterated that she was not in possession of the Hard Drive but that she believed it was in Illinois, rather than Poland, where some of Defendants reside. (Id. 6.) The Court granted Defendants 60 days to review the 21 discs of documents. (Id. 9, 12.) In response to Plaintiffs' counsel request for a statement that the Hard Drive "be preserved," the Court reminded the parties and their counsel of their obligation to preserve evidence. (Id. 12--13.)

Defendants failed to produce any additional Hard Drive documents by the 60-day deadline, and Defendants' counsel moved to withdraw. (Docs. 426, 431.) The Court granted new counsel until December 27, 2011, to produce all responsive Hard Drive documents from the 21 discs. (Docs. 440, 446.) On December 9, 2011, new counsel acknowledged that he, like previous counsel, had never taken possession of the Hard Drive. (Michaels Decl. Ex. G ("Dec. 9, 2011 Hr'g Tr.") 10.) The Court again reminded Defendants' counsel of Defendants' duty to preserve the Hard Drive, stating "You have told your clients that that Hard Drive has got to be preserved. And if you didn't, you should." (Id. 11.) Defendants eventually produced the Hard Drive documents from the 21 discs, totaling 22,942 pages. (Mot. 3; Michaels Decl. ¶ 10.) The documents, much of which were duplicates, included emails from nine email accounts belonging to Richard Swiech dated from September 2004 through November 2008, along with a number of documents from 2010 and 2011. (Michaels Decl. ¶¶ 10--11; Reply Ex. A; see Mot. 11 n.8.)

Plaintiffs were concerned that the production was still incomplete or altered and renewed their request for a forensic inspection of the Hard Drive. (Michaels Decl. ¶¶ 10--13 & Ex. M.) However, on January 24, 2012, Defendants' counsel informed Plaintiffs that Defendants could not consent to a forensics examination because the Hard Drive had been disassembled and was no longer available. (Id. ¶ 13 & Ex. H.)

In responding to the instant Motion, Defendants assert for the first time that the Hard Drive "crashed" in May 2009. (Richard Swiech Decl. ¶ 2.) Richard Swiech attests that he took the Hard Drive to an Apple store to be repaired but learned that it should be replaced, which is what he had done on May 19, 2009.*fn3 (Id. ¶¶ 2--3 & Ex. A.) Upon learning from "someone else" that the Hard Drive would cost about $2,700 to repair, Richard Swiech spoke with Defendant Lewicki, who thought he might be able to repair it. (Id. ¶ 4.) In December 2009 or January 2010, Richard Swiech sent the Hard Drive to Lewicki, who was in Poland at the time. (Id. ¶ 5; see Lewicki 3/12/12 Decl. ¶ 2.) Using a "special software program," Lewicki was "able to recover some files from the Hard Drive." (Lewicki 3/12/12 Decl. ¶ 3) (emphasis added). Richard Swiech "received those files and prepared them in PDF format for purposes of discovery in this case." (Richard Swiech Decl. ¶ 7.) Thereafter, in February 2010, "because the hard drive was inoperable and useless, other than for the fact that it contained shiny, interesting parts, [Lewicki] gave it to [his] friend's children to play with." (Lewicki 3/12/12 Decl. ¶ 4.)

II. DISCUSSION

Plaintiffs request that the Court sanction Defendants for their spoliation of evidence. "Spoliation refers to the destruction or material alteration of evidence or to the failure to preserve property for another's use as evidence in pending or reasonably foreseeable litigation." Pension Comm. of Univ. of Montreal Pension Plan v. Banc of Am. Sec., 685 F. Supp. 2d 456, 465 (S.D.N.Y. 2010); see The Sedona Conference Glossary: E-Discovery & Digital Information Management 48 (3d ed. Sept. 2010), available at www.thesedonaconference.org ("Spoliation is the destruction of records or properties, such as metadata, that may be relevant to ongoing or anticipated litigation, government investigation, or audit."). Motions seeking spoliation sanctions result from an alleged failure to preserve relevant evidence. "A party has a duty to preserve evidence, including any relevant evidence over which the party has control and reasonably knew or could reasonably foresee was material to a po- tential legal action." Krumwiede v. Brighton Assocs., L.L.C., 05 C 3003, 2006 WL 1308629, at *8 (N.D. Ill. May 8, 2006); see Victor Stanley, Inc. v. Creative Pipe, Inc., 269 F.R.D. 497, 525 (D. Md. 2010) ("Breach of the preservation duty, also, is premised on reasonableness: A party breaches its duty to preserve relevant evidence if it fails to act reasonably by taking positive action to preserve material evidence.") (citation omitted); accord Jones v. Bremen High Sch. Dist. 228, No. 08 C 3548, 2010 WL 2106640, at *6 (N.D. Ill. May 25, 2010).

Plaintiffs contend that Defendants deliberately destroyed the Hard Drive, which contained relevant information. (Reply 2.) Moreover, Plaintiffs assert that "Richard Swiech and Lewicki acted in bad faith by destroying the Hard Drive in the midst of this litigation, after Defendants produced some but not all documents from it and after Plaintiffs requested that it be forensically inspected." (Id.). As sanctions, Plaintiffs request that Richard Swiech and Lewicki be required to obtain and produce all relevant emails from their email providers and be barred from using any documents produced from the Hard Drive. (Mot. 9--11.)

Defendants do not dispute that the Hard Drive was destroyed. (Resp. 3; Lewicki Decl. ΒΆΒΆ 2--4.) Instead, they contend that (1) the production of the Hard Drive documents was complete prior to it being destroyed; (2) no preservation order was in place in February 2010 when the dissembled Hard Drive was given by Lewicki to a friend's ...


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