McKinstry v. Genser (In re Black Diamond Mining Co.)

514 B.R. 230
CourtDistrict Court, E.D. Kentucky
DecidedJuly 22, 2014
DocketCivil No. 13-125-ART
StatusPublished
Cited by5 cases

This text of 514 B.R. 230 (McKinstry v. Genser (In re Black Diamond Mining Co.)) is published on Counsel Stack Legal Research, covering District Court, E.D. Kentucky primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
McKinstry v. Genser (In re Black Diamond Mining Co.), 514 B.R. 230 (E.D. Ky. 2014).

Opinion

MEMORANDUM OPINION AND ORDER

AMUL R. THAPAR, District Judge.

Like the proverbial horseshoe nail, a single document could cost a party victory in a lawsuit. For this reason, courts must faithfully enforce discovery rules to deter abuses. Courts have broad authority to penalize those who flout the codes of conduct governing modern civil litigation as they see fit. How then should a court respond to allegations that a party destroyed documents they were supposed to turn over to their opponents? Should the wrongdoer be ordered to forfeit an issue? Should it be crippled with a fine? Or should it be forced to surrender entirely, by striking key causes of action from its pleadings?

The spoliation claims before this court provide an opportunity to determine how to calibrate sanctions for parties who fail to preserve key documents in either physical or electronic form. For the reasons discussed below, this Court GRANTS the motion for sanctions in part and DENIES it in part.

BACKGROUND

The present dispute over discovery sanctions is the latest battle in a lengthy and bitter conflict between the Trustee of the Black Diamond Mining Company Unsecured Creditors Trust (“Trustee”) and turnaround specialists Ira Genser, Larry Tate, and their employer, Alvarez & Mar-sal North America, LLC (“A & M”). To provide context for this order, a brief discussion of the relevant history of the underlying bankruptcy litigation follows. See also Sergent v. McKinstry, 472 B.R. 387, 393-95 (E.D.Ky.2012).

In February of 2008, Black Diamond Mining Company, LLC (“Black Diamond”) sought to remedy its precarious financial position. Faced with gloomy accounting prospects, company advisors engaged A & M to “develop!] possible restructuring plans or strategic alternatives for maximizing the ... value of [Black Diamond’s] various business lines_” See Ex. 1 at 2 (Engagement Letter dated February 20, 2008). As part of this arrangement, Black Diamond appointed A & M employees Larry Genser and Ira Tate as the Chief Restructuring Officer (“CRO”) and the Chief Financial Officer, respectively. Id. at 1. Despite assuming these new roles, Genser and Tate remained employees of A & M, still subject to its internal policies. Id. at 2. Both officers were granted immunity from any liability to Black Diamond, unless a court determined that their actions or omissions amounted to gross negligence or willful misconduct. Id. at 2-3.

This last clause gained significance during the officers’ tenure at Black Diamond. [236]*236Genser and Tate allegedly wanted to sell the company to a competitor. According to the Trustee, they focused single-mind-edly on that one possibility, allowing many other profitable opportunities to slip away. Sergent, 472 B.R. at 393. Accordingly, relations between the various stakeholders in the bankruptcy soured, and, as Genser testified, their interactions became very contentious. By April of 2009, litigation seemed almost certain, and A & M’s general counsel notified Genser and Tate, among others, to save documents related to the Black Diamond engagement as part of a litigation hold. Ex. 13 at 2 (April 20, 2009 Email from A & M General Counsel to Genser and Tate instructing them to “preserve and retain any and all documents and information ... in connection with the Black Diamond engagement. ...”).

Soon afterward, both the restructuring efforts and the relations between the unsecured creditors, Genser, Tate, and A & M wholly collapsed. In July of 2009, the Bankruptcy Court confirmed a final liquidation plan. R. 29-7. The plan recognized the appointment of the Trustee and confirmed her authority to bring lawsuits on behalf of the unsecured creditors against Genser, Tate, and A & M under the terms of a Settlement Agreement. R. 29-7 at 15, 24. Genser, Tate, and A & M formally ended their engagements on this note; however, their interactions with the Trustee would continue long after their last day on the job. The Trustee filed a suit in state court in July of 2010 that the A & M parties removed to this Court. See Sergent, 472 B.R. at 394. During discovery, the Trustee requested all documents relating to the A & M parties’ work on the Black Diamond project. See, e.g., R. 23-25 at 2 (Request for Production of Documents dated August 2011).

Unfortunately, the acrimony in the bankruptcy was not enough; soon, discovery became contentious as well. In his deposition, Genser revealed that he did not recall what he had done with a notebook he had apparently kept during his time at Black Diamond. R. 23-6 at 8 (Genser Deposition, Tr. at 244). Tate stated that he deleted information from his computer and threw away paper notes without informing anybody at A & M.R. 23-7 at 5 (Tate Deposition Tr. 29). Moreover, A & M’s production of electronic documents yielded files that could not be opened or located. R. 23-45. And the documents that the A & M parties successfully produced raised suspicions about whether Genser and Tate had improperly destroyed relevant evidence. On July 6, 2009, Gen-ser sent Tate an email void of text except for its subject line, which contained only the words “no emails.” R. 23-50. On July 22, 2009, Tate sent Genser an email confirming that Genser wanted “all of the documents, filings etc[.]” on his desk to be shredded. Ex. 16 (“Shred Email”). That same day, the parties signed a Settlement Agreement authorizing suit against the A & M parties. See R. 11-2.

Based on these circumstances, the Trustee grew suspicious about the absence of potentially relevant documents from production and moved for sanctions. In support of her motion, she argued that the destroyed and inaccessible documents would have revealed, among other things, that Genser and Tate botched multiple opportunities to sell Black Diamond’s coal at favorable prices. R. 23 at 5. The Trustee requested severe sanctions, including dismissal of the A & M parties’ counterclaims, a non-rebuttable adverse inference jury instruction, and attorneys’ fees.

On June 10, 2014, this Court conducted an evidentiary hearing where the parties examined witnesses and submitted evi[237]*237dence into the record in support of their claims. Based on the testimony collected in the proceeding, the parties’ pleadings, and documentary evidence, the Court finds that spoliation sanctions in the form of adverse inference instructions are warranted.

DISCUSSION

This Court must conduct a two-step inquiry before assessing spoliation sanctions. First, the Court must determine whether the party moving for sanctions demonstrated that sanctions are warranted at all. This requires an affirmative answer to three questions: (1) whether there was a duty to preserve documents at the time the party with control over the documents destroyed them; (2) whether the party destroyed the documents with a culpable state of mind; and (3) whether a reasonable trier of fact would have found that the lost documents were relevant to a claim or defense in the litigation. Beaven v. U.S. Dep’t of Justice, 622 F.3d 540, 553 (6th Cir.2010).

Second, upon finding that sanctions are warranted, the Court may then use its discretion to fashion an appropriate penalty. Adkins v. Wolever, 554 F.3d 650 (6th Cir.2009) (en banc).

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Bluebook (online)
514 B.R. 230, Counsel Stack Legal Research, https://law.counselstack.com/opinion/mckinstry-v-genser-in-re-black-diamond-mining-co-kyed-2014.