United States District Court, E.D. New York
MEMORANDUM AND ORDER
KATHLEEN TOMLINSON United States Magistrate Judge.
case arises from the ultimate deterioration of the
attorney-client relationship between the Plaintiffs and the
Defendants here. It began 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was withdrawn from the Bankruptcy Court on August 23, 2010.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
the February 17, 2012 Discovery Status Conference, counsel
for the Defendants advised the Court that Defendant Katsos
discarded her computer at some point before this litigation
commenced. See 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. After receiving the
affidavit, Plaintiffs filed a motion seeking sanctions for
spoliation. See DE 31. In adjudicating that motion,
the Court determined that an evidentiary hearing was
necessary. See Memorandum and Order [DE 48]. Having
conducted the evidentiary hearing, the Court now issues this
decision which constitutes its findings as to the spoliation
issue as a result of the hearing testimony and the
parties' motion papers.
Brief Background Facts
to the Complaint, Michael Distefano and non-party Franco
Treglia were owners of SharpImage Enterprises LLC
(“SharpImage”). 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 Franco 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.
The Previous Motion For Spoliation
Court issued a Memorandum and Order on March 29, 2013
addressing Plaintiffs' motion for sanctions against the
Defendants, brought pursuant to Rule 37 of the Federal Rules
of Civil Procedure, for alleged spoliation of evidence.
See DiStefano v. Law Office of Barbara H. Katsos,
PC, No. CV 11-2893, 2013 WL 1339548 (E.D.N.Y. Mar. 29,
2013). At that time, the Court temporarily denied the motion,
without prejudice, pending a hearing. DiStefano,
2013 WL 1339548, at *9.
Memorandum and Order, the Court pointed out that the central
issue raised in Plaintiffs' motion was Defendant
Katsos' destruction of and/or failure to preserve
electronic discovery. Id. at *3. Applying the now
benchmark three-part test set forth in Byrnie v. Town of
Cromwell, 243 F.3d 93, 107-112 (2d Cir. 2001), the Court
first concluded that Defendant Katsos' duty to preserve
documents and information arose at least as early as February
2009 “when Michael DiStefano terminated the
attorney-client relationship between Plaintiffs and
Defendants” in his letter dated February 24, 2009.
Id. at *5. The Court further noted that Plaintiffs
had purportedly questioned the legality of trusts created by
Attorney Katsos on behalf of the Plaintiffs in the Summer of
the second prong of the Byrnie test (“culpable
state of mind”), this Court held that “other
factual matters require consideration and clarification and .
. . a hearing is necessary to explore the circumstances under
which the alleged spoliation occurred.” Id. at
*8 (citing F.D.I.C. v. Malik, 2012 WL 1019978, at *1
n.1 (E.D.N.Y. Mar. 26, 2012)) (scheduling hearing to
determine attorney's culpability). In directing that a
hearing proceed, the Court instructed Defendant Katsos to be
prepared to testify, among other things, on the following
1. Katsos' normal document
2. the number of computers utilized in Katsos' law office
prior to 2009, when the computers were purchased, and the
specific circumstances surrounding the breakdown of each of
3. the service agreements for those computers and the
4. whether Katsos maintained a network server;
5. AOL's automatic deletion policies to the extent they
were explained to Katsos;
6. a complete list of every email address used by Defendant
Law Offices of Barbara H. Katsos, PC and Defendant Barbara
Katsos or her staff to communicate with Plaintiffs;
7. Katsos' attempts to gain access to the email accounts
used by her paralegals and interns referenced in Paragraph 5
of Katsos Aff. II and page 16 of Plaintiffs' Memorandum;
8. the document preservation steps undertaken by Katsos when
Plaintiffs instituted an adversary proceeding against her in
March of 2010;
9. the retention and utilization of the services of Jan
Id. To the extent that Defendant Katsos took the
position that she would be unable to testify as to all of
these topics, she was directed to bring to the hearing
another individual or individuals from her office who could
answer the questions regarding these topics. Id. The
Defendants were directed to prepare a subpoena, to be
“so ordered” by the Court directing non-party Jan
Sloboda to appear at the hearing. Id. at *10.
regard to the third prong of the Byrnie test - that
the destroyed evidence was “relevant” to the
party's claim or defense - the Court pointed out that
“[b]ecause the state of mind of the alleged spoliator
determines what standard is necessary to prove relevance,
” id. at *9, a hearing was necessary. At that
juncture, the Court found that Plaintiffs had not established
the relevance of the destroyed material, but ruled that
Plaintiffs would be given the opportunity to question
Defendant Katsos at the hearing regarding this third prong of
the spoliation test. Id.
Which Version of Rule 37(e) Applies to this
assessing the testimony presented at the Evidentiary Hearing,
the Court needs to resolve the issue of which version of Rule
37(e) applies in this case. The Court points out that when
the amendments to the Federal Rules of Civil Procedure
concerning discovery became effective on December 1, 2015,
some of the most significant changes took place in the Rule
governing sanctions related to spoliation.See Cat3, LLC
v. Black Lineage, Inc., 164 F.Supp.3d 488, 445 (S.D.N.Y.
2016). In particular, amended Rule 37(e) is much more
comprehensive than the previous “safe harbor provision
that protected against the imposition of sanctions where ESI
was lost as the result of routine computer functions such as
automatic deletion.” Id. United States
Magistrate Judge Jay Francis, who has been frequently cited
on ESI issues and spoliation, provided a comprehensive and
instructive discussion of the Rule change in the
Cat3 decision which this Court finds useful in
evaluating which version of the Rule should apply in the
instant case. In pertinent part, Judge Francis parsed
the changes as follows.
[The amended rule] was adopted to address concerns that
parties were incurring burden and expense as a result of
overpreserving data, which they did because they feared
severe spoliation sanctions, especially since federal
circuits had developed varying standards for penalizing the
loss of evidence. Fed.R.Civ.P. 37(e) advisory committee's
note to 2015 amendment. While some circuits had required a
showing of willfulness or bad faith before a court could
dismiss a case, enter judgment by default, or utilize an
adverse inference, the Second Circuit permitted such
sanctions upon a finding that the party that had lost or
destroyed evidence had acted negligently. Residential
Funding Corp. v. DeGeorge Capital Corp., 306 F.3d 99,
108 (2d Cir.2002). The Rules Advisory Committee explicitly
rejected the Residential Funding standard,
Fed.R.Civ.P. 37(e) advisory committee's note to 2015
amendment, and instead adopted the principle that severe
sanctions are only permitted where the court finds an
“intent to deprive another party of the
information's use in the litigation, ” Fed.R.Civ.P.
addressing whether the amendment to Rule 37(e) is to be
applied retroactively, Judge Francis noted:
In transmitting the proposed rules amendments to Congress on
April 29, 2015, Chief Justice John G. Roberts included an
order providing in part that “the foregoing amendments
to the Federal Rules of Civil Procedure shall take effect on
December 1, 2015, and shall govern in all proceedings in
civil cases thereafter commenced and, insofar as just and
practicable, all proceedings then pending.” 2015 U.S.
Order 0017. This order is consistent with the relevant
statutory provision, which states in part:
The Supreme Court may fix the extent to which such rule [of
procedure or evidence] shall apply to proceedings then
pending, except that the Supreme Court shall not require the
application of such rule to further proceedings then pending
to the extent that, in the opinion of the court in which such
proceedings are pending, the application of such rule in such
proceedings would not be feasible or would work injustice, in
which event the former rule applies.
28 U.S.C. § 2074(a). The issue, here, then, is whether
to apply the new version of Rule 37(e).
The new rule places no greater substantive obligation on the
party preserving ESI. Rather, “Rule 37(e) does not
purport to create a duty to preserve. The new rule takes the
duty as it is established by case law, which uniformly holds
that a duty to preserve information arises when litigation is
reasonably anticipated.” Report of Advisory Committee
on Civil Rules, App. B-15 (Sept. 2014), available at
This suggests that, since the amendment does not establish a
new rule of conduct, either version of the rule could apply.
However, both the Supreme Court's order and the governing
statute create a presumption that a new rule governs pending
proceedings unless its application would be unjust or
impracticable. 2015 U.S. Order 0017; 28 U.S.C. §
2074(a). Here, because the amendment is in some respects more
lenient as to the sanctions that can be imposed for violation
of the preservation obligation, there is no inequity in
applying it [citation omitted]. Cf. Ultra-Temp Corp. v.
Advanced Vacuum Systems, Inc., 194 F.R.D. 378, 381
(D.Mass.2000) (holding that, while conduct of litigant should
be judged by Rule 11 in effect when conduct occurred,
sanctions should be governed by amended rule, which made them
discretionary rather than mandatory).
Cat3, LLC v. Black Lineage, Inc., 164 F.Supp.3d at
495-96. Finding that there would be no inequity in the
specific circumstances set forth in Cat3, Judge
Francis chose to do to consider the defendants'
spoliation motion under the amended version of Rule 37(e).
within this Circuit have applied the amended version of Rule
37(e) on a case-by-case basis. See Citibank, N.A. v.
Super Sayin' Publishing, LLC, 14-CV-5841, 2017 WL
946348, at *2 (S.D.N.Y. Mar. 1, 2017) (notwithstanding
plaintiff's argument that application of new Rule 37(e)
was not just and practicable, court applied new Rule finding
that plaintiff made the motion more than nine months after
the new Rule took effect and cited the current version as the
only rule to be applied); Best Payphones, Inc. v. City of
New York, 1-CV-3924, 2016 WL 792396, at *5 (E.D.N.Y.
Feb. 26, 2016) (applying amended Rule 37(e) and noting that
“as to the emails . . . at the time in issue,
preservation standards and practices for email retention were
in flux”). Other courts have chosen to apply the Rule
as it existed prior to the 2015 Amendments. See Hadiyah
v. City of New York, 12-CV-6180, 2017 WL 530460, at
*26-*27 (E.D.N.Y. Feb. 7, 2017) (applying the three-part
Byrnie test to find plaintiff negligent in losing
her cell phone containing a video of the underlying incident
but denying adverse inference instruction); Learning Care
Group, Inc. v. Armetta, 315 F.R.D. 433, 440 (D. Conn.
2016) (court disagreed with plaintiff's argument that new
Rule applied and that negligence in destruction of a laptop
was not a sufficiently culpable state of mind to warrant
sanctions, finding that applying the new rules would be
neither just nor practicable “because the parties first
raised this issue in September 2015, prior to the application
of the new rules”); Thomas v. Butkiewicus, No.
3:13-cv-747, 2016 WL 1718368, at*7 (D. Conn. Apr. 29, 2016)
(finding that “it would be unjust to utilize the new
Rule 37(e) in this proceeding, ” and deciding instead
to “apply the traditional standard for assessing the
need for spoliation sanctions in this case” where the
action “was filed more than two-and-a-half years before
the change to Rule 37(e) took effect”). This Court
finds that applying current Rule 37(e) is not “just and
practicable” in the specific circumstances of this case
because (1) the parties briefed this motion under former Rule
37; (2) the Evidentiary Hearing was conducted under the
tenets of former Rule 37; and (3) the conduct relevant to the
motion began more than seven years before the current version
of Rule 37(e) took effect. Therefore, the Court will proceed
to examine Defendant Katsos' conduct under the version of
Rule 37 in effect prior to the 2015 Amendments.
The Evidentiary Hearing
first prong of the Byrnie test as applied to these
circumstances of this case was discussed in the previous
Memorandum and Order. See DE 48 at 4, 6-13. The
first element a party must show when seeking sanctions for
the destruction of evidence is “that the party having
Control over the evidence had an obligation to preserve it at
the time it was destroyed.” Chin v. Port Auth. of
New York and New Jersey, 685 F.3d 135, 162 (2d Cir.
2012). The Court here determined that Defendant Katsos had a
duty to preserve documents and materials and that such duty
arose as early as late February 2009, “when Michael
DiStefano terminated the attorney-client relationship between
Plaintiffs and Defendants.” DE 48 at 8. The termination
of Katsos' services occurred prior to the alleged
destruction of the documents at issue here. Id. at
11. In the specific circumstances of this case, then, the
Court held in its March 29, 2013 Memorandum and Order that
Defendant Katsos had a duty to preserve the materials at
issue in this motion at the time those materials were
already found that Defendant Katsos had a duty to preserve
the materials, the Court now focuses on the two remaining
prongs of the Byrnie test, namely, the
“culpable state of mind” factor and the
“relevance” of the destroyed evidence to the
claims and/or defenses in the case. Because the state of mind
of the alleged spoliaor determines what standard is necessary
to prove relevance, the Court directed that an evidentiary
proceeding be held in order to make this determination.
The Testimony of Barbara Katsos
Katsos testified that she became licensed as an attorney in
June 1997. See Transcript of the June 4, 2013
Evidentiary Hearing at 5. As to her educational background,
Katsos received a Bachelor of Science degree in Education and
then went on to complete a Master's degree in Special
Education and a Ph.D. in Educational Administration. Tr. 5.
She had taught every grade level from nursery school to
eighth grade and was responsible for setting up the Cathedral
School in New York City, the “flagship school of the
Greek Archdiocese” in Manhattan. Tr. 5-6. From1987 to
1993, Katsos served as the principal of the Cathedral School.
1993, Katsos began studies at CUNY Law School and ultimately
received her J.D. in 1996. Tr. 7. She was admitted to the Bar
of New York State in 1997. Id. While in law school,
Katsos served as an intern in the law office of Theodore
Prounis, the President of the Board of Trustees of the
Cathedral School, whose law practice encompassed trusts and
estates and business law. Tr. 7-8. Upon graduation from law
school in 1997, Katsos set up her own firm. Tr. 8.
testified that up until 1997, she had not received any formal
training in computers. Tr. 9. When she started up her
practice, she primarily handled landlord/tenant matters and
simple wills. Tr. 9. She continued to practice in the same
location - in the suite of offices where Mr. Prounis worked -
up through 2008, the time frame of the incidents giving rise
to the instant Complaint. Tr. 10. In 2008, Katsos had a staff
consisting of an office manager and a law student intern.
Id. The intern eventually received her J.D. and then
worked as a paralegal for Katsos while she took the Bar exam
Unfortunately, this individual, Jesika Thompson, passed away
before being sworn in as an attorney. Tr. 11. During the
summers, Katsos had interns from Marymount and NYU working in
the office. Tr. 12.
asked about her office's document retention, deletion and
destruction practices in 2009, Katsos testified that
“everything was made in hard copy.” Id.
She further stated “[b]asically that's what I had
learned to do was that - make copies of everything. We were
very meticulous. We had close to 100 file cabinets, and about
400 boxes in storage, and we kept every - every piece of
paper was made into a hard copy and it was preserved . . . in
file cabinets.” Id. As to document storage,
Katsos testified as follows:
Q. And it would be -
A. - in file cabinets.
Q. - Would it be put in a file relating to the client matter?
A. Yeah, there were subject matters. Each client would have a
subject matter, depending on the amount of work of that
client. If it was a small will, obviously it would be in a
smaller file. A larger amount of work went into redwells, and
they were categorized and put in file cabinets in the file
Q. All right, and to your knowledge, were those policies
followed with respect to the matters the firm was handling
with respect to Mr. Michael DiStefano and Nicole DiStefano?
A. Yes, yeah.
to Katsos, she produced approximately 10, 000 pages of
documents in the discovery process relating to the DiStefano
litigation. Tr. 13. In 2009, there were five computers in the
office - one for Mr. Prounis, one for the paralegal, one for
the office manager, one for the interns, and one for Katsos
herself. Id. Katsos did not know whether the five
computers were connected to a network server, but was told
that there was no server. Tr. 14. Any information regarding
matters being handled for Edward DiStefano were stored on
Barbara Katos' own computer in her office. Id.
That computer also contained information pertaining to other
clients' matters which Barbara Katsos was handling.
Id. As to the management of client information,
Katsos testified as follows:
Q. All right, and would the computer in your office also hold
the information pertaining to other client matters that you
Q. All right, and would other - would Mr. DiStefano's
matter, or for that matter, other client matters, be stored
on other computers in the office, to your knowledge?
A. Not really. Anything that was substantive - my computer
was the computer, sort of like the brains of the operation,
that had everything on it, in my - in my office.
Q. All right. Now you mentioned that the office manager had a
computer in her office.
Q. What was on the office manager's computer?
A. Besides Solitaire, unfortunately, my office manager was
not very computer literate, so the only thing that she would
really have would be how to order things, she would order the
office supplies. She's an older woman and it's fine,
and I hired her knowing she was not computer literate, which
was great, because she's wonderful in many other ways.
But computer literate she is not. So we've taught her a
little bit more, but she would order supplies on her
computer, and, you know, she could not - she does not have
the ability to write letters and type.
Q. All right, so is it accurate to say that client-related
matters were not -
A. Oh, no.
Q. - on that computer?
A. There were not any.
to Defendant Katsos, the computer the paralegals used was
physically located in a separate office. Tr. 15-16. That
computer stored transmittal letters, essentially cover
letters used when sending documents to a client. Tr. 16. The
cover letter would be mailed out but the document itself
would remain on the computer. Tr. 17. Mr. Prounis had his
computer in his own office with him. Tr. 19. Katsos testified
that the materials on Prounis' computer consisted of
Turbo Tax and tax materials since he did taxes for clients.
Id. The interns were permitted to use the computer
in the file room for projects assigned by Katsos or someone
else in the office. and they were able to access the internet
from the file room computer. Tr. 20.
also testified that from the time she left the Cathedral
School up until 2009, she never took a course in computers or
any CLE courses in computer management. Id. She did
not know the brand name of the computers in her office nor
the operating system used in each one Tr. 21. Katsos retained
outside help from an individual named Jan Sloboda.
Id. She had obtained Sloboda's name from a
teacher at the Cathedral School when she left to set up her
own practice. After interviewing Sloboda, Katsos retained him
and “he was with me from around” 1998 until 2009,
at which point she lost track of him. Tr. 22.
never had any formal written contract with Sloboda. Tr. 23.
When she called him with a problem, he came and fixed it. She
paid him in cash, and on a few occasions, she did some
personal legal work for him, as a “quid pro quo.”
Id. Katsos stated that even as she was then
testifying, she was not computer savvy.
2009, Katsos and her staff were using email in the office to
a limited degree. Tr. 24. They utilized the email address
“email@example.com.” Id. As to
saving any emails, Katsos stated that “if the email was
a substantive one, I would print it, so . . . For the most
part for myself so I could remember what I had written.
Because finding it was always a problem, and I knew that if I
needed to refer to it and it was substantive, I needed to
print it.” Tr. 25. Once the email was printed, it would
be placed in the file. In 2008 - 2009, because the office was
using AOL, each person working there had a separate AOL
account, including the paralegal, Prounis and Katsos herself.
Tr. 26. Katsos confirmed the three separate email addresses
being used. She also identified a fourth email address which
she believed was set up for the interns' use so that they
were not using their NYU email addresses. Tr. 28. According
to Katsos, she had no control over any of the email accounts
except her own and she did not know any of the passwords.
Id. Paralegal Chris McCarthy (who succeeded Jesika
Thompson) did not like AOL and set up another email address,
katsoslaw.com, using Microsoft Outlook. Tr. 29. Katsos
testified that she was never able to access anything from
that address and never used it. Tr. 30. She had no personal
knowledge about how to set up or purchase a domain name to
register a law firm. Id.
connection with the spoliation motion, Katsos' attorney,
Paul Callan, had requested that she go back and attempt to
access the email accounts of paralegals who had worked for
her in the past. She was not successful because she did not
know the passwords, did not know the answers to the security
questions and was blocked out. Tr. 31. When she contacted AOL
for the very first time - after this litigation had been
commenced - Katsos was advised that AOL does not retain
emails unless the user basically does something to retain
them. Katsos learned that retained emails were kept by AOL
for 27 days only. Tr. 32. She confirmed that she had never
instituted any mechanism to save AOL emails on her own local
computer, as opposed to on the AOL network. According to
Katsos, A. I never thought that I had to, no, I didn't.
Q. Well, did you know how to do it?
A. You know, I just - know. I mean, I didn't realize that
saving was an issue, that it was - you know, and I didn't
know how to do it anyway.
Q. Well, what did you think happened to emails?
A. I don't know. I thought that everything was - should
be there. I didn't realize that everything was not there.
I mean, I - you know. Because when I would go down, let's
say the next day, I would see it the next day, so I assumed
it didn't go anywhere, because I didn't get rid of
it. So I would assume that it would be there.
Q. Now when you say it, are you talking about -
A. Anything, you know.
Q. Are you talking about looking at your inbox? When you open
AOL and you ...