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Fidelity National Title Insurance Co. v. Captiva Lake Investments, LLC

United States District Court, Eastern District of Missouri, Eastern Division

January 7, 2015




This matter is before the Court on defendant’s motion for sanctions for spoliation of evidence and misrepresentation. Plaintiff has filed a response in opposition and the issues are fully briefed.

I. Background

This dispute concerns the availability of coverage under a loan policy of title insurance issued in conjunction with a construction project. Defendant Captiva Lake Investments, LLC (Captiva) claims that it is entitled to defense and indemnification with respect to mechanics’ liens and for unmarketability of title. Plaintiff Fidelity National Title Insurance Company (Fidelity) asserts that it has provided a defense for the mechanics’ liens, that a policy exclusion bars coverage, and that the policy does not provide coverage for Captiva’s alleged unmarketability of title. Both parties seek declaratory relief. Captiva additionally asserts counterclaims for breach of contract, vexatious refusal, and tortious interference.[1]

This is Captiva’s fourth discovery-related motion in a dispute that is now several years old. In May 2011, Captiva served requests for production of all documents related to its claims, triggering a lengthy negotiation over materials Fidelity claimed were protected under the attorney-client privilege and the work-product doctrine. In early 2012, Captiva became aware of two sets of materials that Fidelity had not produced or listed in its privilege log: materials in Fidelity’s computer-based “Claims Processing System” (CPS) and monthly Major Claims Reports (MCRs).[2] In June 2012, Captiva filed a motion to compel production of these materials. After an in camera review, the court found that Fidelity had waived its attorney-client privilege and work-product protections to these materials by failing to properly include them in its privilege logs. The court directed Fidelity to produce the MCRs and materials in CPS no later than September 4, 2012. [Doc. #113].

Fidelity did not fully comply with the order -- it produced only partial information from CPS and failed to produce four MCRs from 2010. Accordingly, on September 17, 2012, Captiva filed a motion for sanctions, seeking dismissal of Fidelity’s claims or, in the alternative, a forensic examination of its computer systems. Fidelity denied that its conduct was sanctionable and stated that it was consulting with a specialist to collect more data from CPS. On November 16, 2012, the court denied Captiva’s motion for sanctions and ordered Fidelity to file a status report addressing the progress of its consultation with e-discovery specialists. [Doc. #177].

The parties submitted cross-motions for summary judgment on January 14, 2013.[3] On February 7, 2013, Captiva filed a motion to compel production, stating that Fidelity concealed or withheld relevant documents, made unfounded privilege claims, and withheld documents until after depositions had been completed. Captiva also moved for the appointment of a specialist to examine Fidelity’s computer system. After a hearing on April 23, 2013, the court appointed William A. Whitledge to inspect Fidelity’s computer systems and directed the parties to develop a protocol for the inspection. [Doc. #229].

Mr. Whitledge completed his report on June 16, 2014. [Doc. #254-1]. His findings are summarized as follows: (1) as of the date of his report, Fidelity had not instituted a litigation hold, id. at 2; (2) Fidelity did not conduct a systematic search of its computer systems, including its email archive, for discoverable information before May 5, 2013, id. at 2-3; (3) in 2011 and 2012, a contractor lost as many as 13 million email messages while implementing an email retention program, id. at 4; (4) Fidelity was able to recover files on the computer assigned to former claims handler Mark Dickhute, but did not preserve any of his network share, id. at 4-5; and (5) new entries into the CPS overwrite existing data without retaining a copy and logs generated by the system are destroyed after a month, id. at 6-8.

II. Discussion

Captiva seeks sanctions pursuant to Fed.R.Civ.P. 37 and the court’s inherent power, which includes the discretionary “ability to fashion an appropriate sanction for conduct which abuses the judicial process.” Chambers v. NASCO, Inc., 501 U.S. 32, 44-45 (1991); see also Stevenson v. Union Pac. R.R. Co., 354 F.3d 739, 750 (8th Cir. 2004); Ameriwood Indus. v. Liberman, No. 4:06CV524DJS, 2007 WL 5110313, at *4 (E.D. Mo. July 3, 2007); Process Controls Int’l, Inc. v. Emerson Process Mgmt., 4:10CV645 CDP, 2011 WL 5006220, at *5 (E.D. Mo. Oct. 20, 2011). Captiva alleges that Fidelity has engaged in spoliation of evidence, caused prejudicial delay in the production of evidence, and made egregious misrepresentations to the court.

A. Spoliation

A spoliation-of-evidence sanction requires “a finding of intentional destruction indicating a desire to suppress the truth.” Greyhound Lines, Inc. v. Wade, 485 F.3d 1032, 1035 (8th Cir. 2007) (quoting Stevenson v. Union Pac. R.R. Co., 354 F.3d 739, 746 (8th. Cir. 2004)). “Intent is rarely proved by direct evidence, and a district court has substantial leeway to determine intent through consideration of circumstantial evidence, witness credibility, motives of the witnesses in a particular case, and other factors.” Greyhound, 485 F.3d at 1035 (quoting Morris v. Union Pac. R.R., 373 F.3d 896, 902 (8th Cir. 2004)). An explicit finding of bad faith is not required to impose sanctions on a party that destroys specifically-requested evidence after litigation has commenced. Gallagher v. Magner, 619 F.3d 823, 845 (8th Cir. 2010) (quoting Stevenson, 354 F.3d at 749-50). The obligation to preserve evidence begins when a party knows or should have known that the evidence is relevant to future or current litigation. E*Trade Sec. LLC v. Deutsche Bank AG, 230 F.R.D. 582, 588 (D. Minn. 2005).

Fidelity did not issue a litigation hold with respect to Captiva’s claims, though the record establishes that it does issue holds in some instances. See Pl. Ex. B, Grube Aff. [Doc. #269-2]; Pl. Ex. J, Dec. 15, 2011 Memorandum regarding “legal hold” process. Fidelity asserts that a litigation hold was unnecessary here because it has a “document collection procedure.” See Pl. Ex. F “Major Claims Department Document Collection Procedures” [Doc. #269-6] (for each claim, MCD staff retain hard copies of documents in physical file, and emails and electronic documents in separate electronic folders). The mere existence of a procedure is insufficient to satisfy Fidelity’s obligations to preserve discoverable evidence, if it does not actually preserve evidence. See E*Trade, 230 F.R.D. at 589 (“When litigation is imminent or has already commenced, ‘a corporation cannot blindly destroy documents and expect to be shielded by a seemingly innocuous document retention policy.’”) (quoting Stevenson, 354 F.3d at 749). As discussed below, the failure to impose a litigation hold resulted in the deletion of unknown numbers of emails. The court finds that Fidelity’s failure to implement a litigation hold establishes the necessary intent to support the imposition of sanctions. See Doe v. Norwalk Cmty. Coll., 248 F.R.D. 372, 378-79 (D. Conn. 2007) (defendants subject to sanctions for loss of electronic information when they failed to issue litigation hold); E*Trade, 230 F.R.D. at 592 (imposing sanctions where company failed to issue litigation hold on emails in reliance on its backup tapes, which it then destroyed pursuant to retention policy); Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 221 (S.D.N.Y. 2003) (defendant’s failure to include backup tapes in preservation order after onset of litigation was sanctionable).

There must be a finding of prejudice to Captiva before the court can impose a sanction for destruction of evidence. Hallmark Cards, Inc. v. Murley, 703 F.3d 456, 460 (8th Cir. 2013) (citing Stevenson, 354 F.3d at 746). Captiva asserts that it ...

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