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Michael Distefano and Nicole Distefano v. Law Offices of Barbara H.

March 29, 2013

MICHAEL DISTEFANO AND NICOLE DISTEFANO, PLAINTIFFS,
v.
LAW OFFICES OF BARBARA H. KATSOS, PC AND BARBARA H. KATSOS, DEFENDANTS.



The opinion of the court was delivered by: A. Kathleen Tomlinson, Magistrate Judge:

MEMORANDUM AND ORDER

Pending before the Court is Plaintiffs' motion for sanctions pursuant to Rule 37 of the Federal Rules of Civil Procedure based on Defendants' alleged spoliation of evidence [DE 31]. For the reasons that follow, the Court is temporarily denying the motion, without prejudice, pending a hearing.

I. BACKGROUND

This case was initiated as an adversary proceeding in a Chapter 11 bankruptcy filed by Michael Distefano and Nicole Distefano ("Plaintiffs" or the "Distefanos") in the United States Bankruptcy Court for the Eastern District of New York. The proceeding was withdrawn from the Bankruptcy Court on August 23, 2010. See Compl. [DE 1-4]. In the Complaint, Plaintiffs assert claims for breach of contract, negligence/legal malpractice, and breach of fiduciary duty/duty of care against Defendants Barabara H. Katsos and the Law Offices of Barbara H. Katsos, PC ("Defendants" or "Katsos"). Id.

According to the Complaint, Michael Distefano and non-party Frank Treglia are owners of SharpImage Enterprises LLC ("SharpImage").*fn1 Id. ¶¶ 12. SharpImage is the franchisee of three Cold Stone Creamery, Inc. ("Cold Stone") ice cream parlors (the "Franchises"). Id. ¶ 13. In October of 2006, the Franchises began experiencing financial difficulties due to an extended power blackout in July of 2006 and were having problems meeting their obligations to their creditors. Id. ¶ 15. As a result, Michael Distefano sought legal advice from Barbara Katsos and eventually retained her. Id. ¶¶ 16-17. Plaintiffs allege that Katsos negligently and ineffectively advised the Distefanos to establish an irrevocable trust (the "Distefano Trust") in order to protect Michael Distefano's personal assets from the creditors of SharpImage. Id. ¶ 11. Plaintiffs further allege that Katsos' advice not to negotiate with Michael Distefano's and SharpImage's creditors alienated one of the creditors, Telerent Leasing Corporation ("Telerent"), causing Telerent to sue the Distefanos, SharpImage, and Treglia (the "Telerent Lawsuit"). Id. ¶¶ 23-24. As a result of Katsos' alleged negligent representation in the Telerent Lawsuit, Plaintiffs claim to have incurred substantial losses which ultimately led to Plaintiffs' filing for bankruptcy. Id. ¶¶ 25-28. Plaintiffs assert additional acts of professional negligence, including (1) Katsos' representation of Frank Treglia without obtaining a waiver of conflict of interest from Plaintiffs, id. ¶¶ 29-36, (2) Katsos' failure to pursue an insurance claim on behalf of Plaintiffs for their losses resulting from the July 2006 power blackout, id. ¶¶ 37-39, and (3) Katsos' failure to take action to prevent Cold Stone from terminating the Franchises, id. ¶¶ 40-48.

On February 17, 2012 the Court held a Discovery Status Conference. At that conference, counsel for Defendants advised the Court that Defendant Katsos discarded her computer at some point before this litigation commenced. DE 13. The Court directed Defendant Katsos to provide the Court and Plaintiffs' counsel with an affidavit detailing the circumstances under which the computer was discarded. Id. Defendant Katsos provided an Affidavit on March 5, 2012 [DE 15] ("Katsos Aff. I") which contained the following relevant paragraphs:

From in or about 1998 until sometime in 2009, an individual named Jan Sloboda would from time to time repair my computer(s) when necessary, or if they could not be repaired, dispose of the computer(s) and purchase a new one. I would reimburse Mr. Sloboda for the work he performed and for equipment he purchased for my office, all as an independent contractor. It was my understanding that Mr. Sloboda was self-employed.

At some point after my representations of Mr. DiStefano concluded and prior to 2010, I had to replace the computers in my office as they no longer functioned. I was advised by Mr. Sloboda that they could not be repaired. Mr. Sloboda took the computers from my office and purchased several new computers. Mr. Sloboda advised me that he did not believe any data could be recovered from the computers. I do not know what Mr. Sloboda did with the inoperable computers that he removed from my office. Mr. Sloboda ceased performing any work for me in 2009 or 2010 and I do not know his whereabouts or last known address.

The email address I generally used to exchange email correspondence with Mr. DiStefano during my representation and other email relating to the representation was an AOL address. I recently contacted AOL technical support to inquire if emails from several years ago could be recovered by AOL. I was informed by AOL that they could not recover emails from several years ago for the stated email address.

Katsos Aff. I ¶¶ 4, 6, 8.

After receiving Katsos Affidavit I, Plaintiffs filed the instant spoliation motion.

II. LEGAL STANDARD

"Spoliation is the destruction or significant alteration of evidence, or the failure to preserve property for another's use as evidence in pending or reasonably foreseeable litigation." West v. Goodyear Tire & Rubber Co., 167 F.3d 776, 779 (2d Cir. 1999); accord Byrnie v. Town of Cromwell, 243 F.3d 93, 107 (2d Cir. 2001). A court may impose sanctions against a party who spoliates evidence pursuant to Rule 37(b) of the Federal Rules of Civil Procedure as well as through the Court's inherent powers to control the judicial process and the litigation before it. See Residential Funding Corp. v. DeGeorge Fin. Corp., 306 F.3d 99, 106-07 (2d Cir. 2002); West, 167 F.3d at 779. In situations where sanctions are warranted, district courts have broad discretion in "crafting an appropriate sanction for spoliation." West, 167 F.3d at 779; see Fujitsu Ltd. v. Fed. Express Corp., 247 F.3d 423, 436 (2d Cir. 2001) ("The determination of an appropriate sanction for spoliation, if any, is confined to the sound discretion of the trial judge . . . ."); Reilly v. Natwest Mkts. Grp. Inc., 181 F.3d 253, 267 (2d Cir. 1999) ("Whether exercising its inherent power, or acting pursuant to Rule 37, a district court has wide discretion in sanctioning a party for discovery abuses."). The applicable sanction "should be molded to serve the prophylactic, punitive, and remedial rationales underlying the spoliation doctrine." West, 167 F.3d at 779. Stated another way, the selected sanction should be designed to "(1) deter parties from engaging in spoliation; (2) place the risk of an erroneous judgment on the party who wrongfully created the risk; and (3) restore the prejudiced party to the same position he would have been in absent the wrongful destruction of evidence by the opposing party." Id. (internal quotation marks omitted); accord Chin v. Port Auth. of New York & New Jersey, 685 F.3d 135, 162 (2d Cir. 2012).

In some instances, the spoliation of evidence "can support an inference that the evidence would have been unfavorable to the party responsible for its destruction." Zubulake v. UBS Warburg LLC, 229 F.R.D. 422, 430 (S.D.N.Y. 2004) ("Zubulake V") (quoting Kronisch v. United States, 150 F.3d 112, 126 (2d Cir. 1998)). A sanction in the form of an adverse inference instruction is, however, "an extreme sanction and should not be imposed lightly." Treppel v. Biovail Corp., 249 F.R.D. 111, 120 (S.D.N.Y. 2008); see Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 219 (S.D.N.Y. 2003) ("Zubulake IV") ("In practice, an adverse inference instruction often ends litigation - it is too difficult a hurdle for the spoliator to overcome.").

A party seeking sanctions has the burden of establishing "(1) that the party having control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that the records were destroyed with a 'culpable state of mind'; and (3) that the destroyed evidence was 'relevant' to the party's claim or defense such that a reasonable trier of fact could find that it would support that claim or defense." Residential Funding Corp., 306 F.3d at 107 (quoting Byrnie, 243 F.3d at 107-12); accord Centrifugal Force, Inc. v. Softnet Commc'n, Inc., 783 F. Supp. 2d 736, 741 (S.D.N.Y. 2011); Zubulake V, 229 F.R.D. at 430.

III. ANALYSIS

Before addressing the central request for relief, the Court must address two preliminary issues. First, Plaintiffs assert that Katsos Affidavit I is incomplete and not in compliance with the Court's Orders. They therefore seek sanctions "as the Court may see fit" for this deficiency. Pls.' Mem. [DE 33] at 7. The Court concludes that although Katsos Affidavit I is not a model of clarity, the submission complies at least minimally with the Court's directives and, consequently, the Court will not award sanctions on that basis. Plaintiffs also request that if the Court denies sanctions, that Plaintiffs be permitted to "depose Ms. Katsos on these issues, so that they may fully explore the potential spoliation of evidence in this matter." Pls.' Mem. at 8 n. 2; see id. at 23. The Court finds that it would likely have been more efficient for Plaintiffs to have taken that deposition (or requested permission to do so) before filing the instant motion. Plaintiffs should not expect multiple "bites at the apple" here. Since the Court is setting a hearing on this matter, further activity as to depositions or additional briefing are held in abeyance pending that hearing. If, after the hearing on this matter, the Court concludes that further briefing is warranted, the Court will issue additional directives.

Turning to the merits of the motion, the central issue raised is Defendants Katsos' destruction of and/or failure to preserve electronic discovery. Specifically, Plaintiffs argue that because "computer data recovery is quite advanced, and evidence may be reconstituted even where data has been rewritten," Katsos should not have turned her broken computers over to a third party and permitted their destruction. Pls.' Mem. at 9. Plaintiffs also argue that when Katsos learned of her computer failure in 2009, she should have taken steps "to contact AOL and copy those e-mails to another location, print them out, or otherwise preserve them." Id. at ...


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