A N.J. District Court Judge ordered that a spoliation inference being given in response to a motion by plaintiff that the individual defendants were erasing information from the company’s computers.

The underlying case arose when the plaintiff, Paris Business Products, Inc. (Paris), brought suit against defendants, Genisis Technologies, LLC (Genisis), Robert Keicher, and Thomas Connors alleging fraud, breach of contract, and unjust enrichment.  Plaintiff requested that Keicher and Connors be held personally liable for the obligations of their company, Genisis.  The action alleged that the individual Defendants used Genisis as a “shell entity with no assets of value” in order to fraudulently obtain products from Paris without payment.  Plaintiff further asserted that the Individual Defendants made false representations about the solvency of Genisis and, based on these representations, Plaintiff extended credit and delivered goods to Genisis under a contract.  Genisis then failed to pay any of the invoices and ceased business operations soon after the goods were delivered.

In April 2007, the district court ordered that the individual Defendants preserve Genisis’s business records, including the maintenance of all paper and electronic business records.  The order notified the individual Defendants that a violation of the order could result in sanctions, including preclusion of evidence or the lesser sanction of an adverse inference.

One month later, Plaintiff filed this motion for sanctions alleging that the defendants falsely represented to the court at the previous hearing that Genisis’s business records were kept at a building on Smallman Street in Pittsburgh.  Plaintiff alleged that the Smallman Street property was “merely a front” for the company’s fraudulent activities.  Further, plaintiff alleged that Keicher informed them that Connors “blanked” the memories and erased all information from the company’s computers.  Plaintiff offered two photographs in support of its argument.  The first depicted the screen of a Genisis computer that shows the disk was reformatted.  The second depicts that the hard drives of the computers had been removed.

The individual Defendants did not oppose plaintiff’s motion for sanctions.

In granting plaintiff’s motion for sanctions, the Judge explained that 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.”  Although federal district courts may impose sanctions as serious as a dismissal of a claim or the suppression of evidence, the Third Circuit cautions that the imposition of drastic sanctions is only warranted once the court determines the degree of fault of the party, the degree of prejudice suffered, and whether a lesser sanction will avoid substantial unfairness to the opposing party while serving as a deterrence to the offending party in the future.

Though plaintiff requested the sanction of suppression of evidence, the Judge determined that the less drastic spoliation sanction of a spoliation inference was appropriate.  A spoliation inference is “a jury instruction permitting an inference that the destroyed evidence might or would have been unfavorable to the position of the offending party.”   

The Court noted that four requirements must be met to impose this sanction.  First, the evidence must be within the party’s control.  Second, there must be an appearance of actual suppression or withholding of evidence.  Third, the evidence in question must be relevant to claims or defenses in the case, and fourth, it must have been reasonably foreseeable that this evidence would later be discoverable.

Finding that all four requirements were met, the Judge granted plaintiff’s motion for sanctions by imposing a spoliation inference that “the destroyed records would have been unfavorable to the Individual Defendants in contesting claims against them.”

The judge first noted that the missing records were under the Individual Defendants’ control because they represented that the business records were kept at the Keicher Brothers, Inc. property, plaintiff submitted photographic evidence, and defendants failed to rebut the evidence.

The Court next found that there was sufficient evidence presented to show the Individual Defendants destroyed or withheld evidence in violation of the order.  The judge again pointed to plaintiff’s photographic evidence.  The judge further explained that evidence of the defendants’ intent to destroy evidence is not necessary to impose a spoliation inference because negligent destruction is sufficient as well.  Since the court’s order put the individual Defendants on notice regarding the relevance of the evidence, and because the evidence disappeared while under the individual Defendants’ control, the plaintiff met its burden to show actual suppression or withholding of evidence.

The third and fourth requirements for the sanction were also met according to the Court.  The judge found that the evidence was relevant to the claim because financial history is a critical issue in a fraud and breach of contract claim, especially when the plaintiff is requesting that the court pierce the corporate veil as a result of an undercapitalized shell company.  Further, the judge found that discovery of this evidence was reasonably foreseeable because at least since the filing of the complaint, the individual Defendants were on notice that Genisis’s financial history and solvency would be relevant to the case.

Finally, the Judge explained that the lesser sanction was warranted because it was unnecessary to preclude the defendants from trying to explain their transactions through evidence other than the business records.  The judge would have required more direct evidence of fault in order to impose the harsher sanction of suppression of evidence.

Author Bio: Lauren Winchester is a student at Seton Hall University School of Law (Class of 2012), where she serves as an articles editor for the Law Review and a research fellow for the Center for Policy and Research.  Lauren received a B.S. in Political Science from Carnegie Mellon University in 2009.  After graduating from Seton Hall Law, Lauren will work as an associate at Fox Rothschild LLP.