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Distefano v. Law Offices of Barbara H. Katsos, PC

United States District Court, E.D. New York

May 10, 2017

MICHAEL DISTEFANO and NICOLE DISTEFANO, Plaintiffs,
v.
LAW OFFICES OF BARBARA H. KATSOS, PC, and BARBARA H. KATSOS, Defendants.

          MEMORANDUM AND ORDER

          A. KATHLEEN TOMLINSON United States Magistrate Judge.

         This 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 The proceeding was withdrawn from the Bankruptcy Court on August 23, 2010.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 “Katsos”). Id.

         During 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.

         I. Brief Background Facts

         According to the Complaint, Michael Distefano and non-party Franco Treglia were owners of SharpImage Enterprises LLC (“SharpImage”).[1] 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.

         II. Procedural setting

         A. The Previous Motion For Spoliation Sanctions

         This 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.

         In the 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 2008. Id.

         As to 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 topics:

1. Katsos' normal document preservation/retention/deletion/destruction practices;
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 those computers;
3. the service agreements for those computers and the vendor(s) used;
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 Sloboda.

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.

         With 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.

         B. Which Version of Rule 37(e) Applies to this Motion?

         Before 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.[2]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.[3] 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. 37(e)(2).

         In 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 http://www.uscourts.gov/uscourts/RulesandPolicies/rules/Reports/ST09-2014.pdf. 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).

         Courts 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.

         III. The Evidentiary Hearing

         A. Preliminary Considerations

         The 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 destroyed.

         Having 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.

         B. The Testimony of Barbara Katsos

         Barbara Katsos testified that she became licensed as an attorney in June 1997. See Transcript of the June 4, 2013 Evidentiary Hearing at 5.[4] 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. Tr. 6.

         In 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.

         Katsos 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.

         When 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 room.
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.

Tr. 12-13.

         According 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 were handling?
A. Yeah.
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.
A. Right.
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. No.
Q. Okay.
A. There were not any.

Tr. 14-15.

         According 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.

         Katsos 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.

         Katsos 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.

         In 2009, Katsos and her staff were using email in the office to a limited degree. Tr. 24. They utilized the email address “bhkesq@aol.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.

         In 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 ...

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