OPINION GRANTING, IN PART, AND DENYING, IN PART, DEFENDANT'S MOTION FOR SANCTIONS
ARTHUR J. GONZALEZ, Bankruptcy Judge
On March 24, 2008, Plaintiffs, GFI Acquisition, LLC ("GFI") and related entities,
American Federated, in its attempt to prove that GFI had knowledge of the lock-out features well in advance of signing the PSA, requested that GFI produce documents related to the transaction. 10/26/09 Decl. of Alaine S. Greenberg, former counsel to GFI, in Opp'n to Mot. for Sanctions ("Greenberg Decl.") ¶ 6. The Defendant was especially interested in obtaining email communications evidencing the fact that GFI had received copies of the promissory notes which contained the lock-out features. Although the Defendant was certain Plaintiffs should be in possession of such emails, they were not produced. There was one email in particular, sent by American Federated to GFI on April 25, 2007, which attached copies of the promissory notes. When GFI did not produce this email or many others that American Federated sent to GFI regarding the transaction, American Federated became suspicious of GFI's willingness to fulfill its discovery obligations in good faith. American Federated now brings a motion for sanctions pursuant to Federal Rule of Civil Procedure 37(d) against the Plaintiffs.
The complaint was served on the Defendant on April 2, 2008. Greenberg Decl. ¶ 5. On April 14, 2008, the Defendant served Plaintiffs with a request for production of documents. Id. ¶6. The Defendant also served a subpoena duces tecum upon Moshe Lehrfield of Greenberg Traurig, P.A., who was GFI's counsel regarding the purchase of the properties. Id. Lehrfield was deposed on June 3, 2008, and Greenberg Traurig produced responsive, non-privileged documents on that same date. Id. ¶ 12. GFI later responded to the April 14 request for production by claiming that all of its relevant documents had been produced in conjunction with Lehrfield's deposition. Id. ¶ 15. According to Ms. Greenberg, GFI's original attorney during the pending litigation and also of Greenberg Traurig, Lehrfield would have been copied on almost all of GFI's communications regarding the PSA, whether they included third parties or were only among GFI employees. Id. ¶ 9. She did note that GFI was instructed to look for documents that it did not copy Lehrfield on. Id. ¶ 15. American Federated's counsel was surprised that, considering the size of the transaction, GFI had not turned over any emails that were solely between GFI employees at this point.
The litigation was transferred to this Court some time after an entity of GFI's parent company, A&M Florida Properties LLC, filed a voluntary petition under Chapter 11 of Title 11 of the Bankruptcy Code in the Southern District of New York. Id. ¶ 16. At that point, GFI retained new counsel, Kevin Nash of Goldberg Weprin Finkel Goldstein LLP. Id. ¶ 17. According to Ms. Greenberg, other than assisting with legal analysis on certain issues, Greenberg Traurig has not been directly involved in the litigation since the transfer. Id. In August 2009, Nash ordered GFI to perform a "company-wide" search, purportedly to straighten out the discovery issues with the email production. See Ch. 11 Hr'g Tr. at 5, Oct. 14, 2009 ("Oct. 14, 2009 Tr."); 08/25/09 Dep. Tr. of Will Watkins ("Watkins Tr."), Ex. M to Mot. for Sanctions, at 17:8-23. This search was conducted under the direction of Deborah Garfinkle, GFI's Chief Technology Officer. See Oct. 14, 2009 Tr. at 11. According to the Defendant, it resulted in GFI turning over 346 previously unproduced, hard copy documents.
Although Nash called it a "company-wide" search, he was uninformed on the detailed workings of GFI's computer system and email retention policies. GFI's system distinguishes an employee's "live" email box from his or her "archive" and "deleted items" folders. 10/26/09 Decl. of Deborah Garfinkle Decl., in Opp'n to Mot. for Sanctions ("Garfinkle Decl.") ¶ 7. GFI employees have discretion to move emails from their live inboxes into archive folders and regularly do so. Id. ¶ 9. When an employee deletes an email from his or her mailbox, that message often goes into the deleted items folder. Id. ¶ 10. These messages, like those moved into archives, remain on GFI's system.
The results of the "company-wide" search were put onto CDs. Watkins Tr. at 17:8-14. Nash represented that he was in the process of having the contents of these CDs transcribed onto paper so that he could review them and withhold any privileged communications. Id. In September 2009, counsel for American Federated attempted to contact Nash by email, seeking the results of the "company-wide" search to use in preparation for the deposition of William Watkins, a GFI employee. See Email from Stephen Hunt, counsel to American Federated, to Nash (9/14/09), Ex. C to Defendant's Reply to Opp'n to Mot. to Compel. Nash's colleague, Ted Donovan
The Defendant brought the lack of email production to the Court's attention in a pre-hearing conference on September 15, 2009. 9/24/2009 Stipulation and Order Regarding Electronic Discovery ("Stipulation"), Ex. A to Mot. to Compel the Prod. Of Approx. 10,000 Emails from the Plaintiffs' Counsel ("Mot. to Compel"). The parties thereafter agreed to jointly retain a certified computer forensic technician, Vestige Digital Investigations ("Vestige"), to search the GFI computer system. See Id. ¶ 1.
Vestige first searched GFI's system in September 2009. 10/12/2009 Decl. of Gregory Kelley, Chief Technology Officer of Vestige, Ex. D to Defendants' Emergency Request For Status Conference Regarding Spoliation of Evidence
In an email exchange with Franklin Zemel, Defendant's counsel, Garfinkle responded to the suggestion that GFI was intentionally deleting emails. She informed him of the existence of the archive folders, and explained that GFI employees sometimes store emails in archives. Email from Garfinkle to Zemel (Oct. 12, 2009), Ex. A to Garfinkle Decl. Garfinkle indicated that GFI would have provided access to these folders all along if it had been asked to do so. Garfinkle Decl. ¶ 16. She did acknowledge that there were no items in the archives for Allen Gross, GFI's president, for the time period of July 1, 2007, through the end of 2007, and that she was still searching for a separate archive file for this time period. Id. ¶ 12. American Federated continued to maintain that GFI had not produced internal emails that must have existed at one time. The absence of Gross' archive file was another red flag in the eyes of American Federated. It believed that Gross was the most important figure in the transaction, and the latter half of 2007 was the time period most critical to the litigation.
At an October 28, 2009 hearing, Nash explained that he had only recently learned the difference between archives and live inboxes. Oct. 28, 2009 Tr. at 7. Upon its own search of the archives, GFI found the missing March 22, 2007 email as well as others. Id. GFI believes the whole situation could have been avoided had counsel for American Federated simply included the archives in its search request. Id. at 8. American Federated, on the other hand, believes that GFI should have known to search the archives, especially when Garfinkle was aware of GFI employees' routine archiving of their emails. Both sides agreed that Vestige would return to GFI to conduct a second search, this time including the archives. Id. at 14.
The second Vestige search took place in November 2009. 1/29/2010 Decl. of Jeffrey Stafford, paralegal for counsel to American Federated, in support of Mot. to Compel ("Stafford Decl.") ¶ 27. The Stipulation, signed by both parties and entered September 24, 2009, distinguished the two types of searches Vestige would be conducting. The documents discovered in "field searches" would be immediately available for American Federated's viewing. See Stipulation ¶ 2. A field search only examines the "To", "From", "CC", and "BCC" fields of an email. Stafford Decl. ¶ 21. If a searched term is located in one of those fields, the email will be picked up as responsive. Since a field search only attempts to locate emails sent or received by the agreed external parties mentioned in the Stipulation, it could not have produced any internal emails. Id. ¶ 37. Also, since an external party would always be included, none of the field search results would be privileged. See Id. Thus, no privilege review would be necessary, and Vestige could immediately make these emails available to Nash. The emails discovered in the "keyword" searches would be first sent to Nash so that he could withhold any privileged communications. See Stipulation ¶ 2. The keyword searches searched the body of an email in addition to the fields, and could possibly produce privileged communications. See Stafford Decl. ¶¶ 23-24. Therefore, Nash was to conduct a privilege review of the results of the keyword searches and authorize Vestige to release the non-privileged emails to American Federated. Id. ¶ 39.
In November, Vestige sent counsel for GFI two CDs containing 9,586 emails recovered from GFI's archives. 01/29/2010 Decl. of Gregory Kelley, in support of Mot. to Compel ¶ 9. These were the results of keyword searches, and thus had to be reviewed by Nash prior to being released to American Federated. As late as February 2010, American Federated's counsel had not received notification that any of these emails were available for viewing.
Nature of Alleged Sanctionable Behavior
As the email messages in question have been located following the second Vestige search, this is no longer a motion for sanctions for spoliation of evidence.
Authority for Imposition of Sanctions
A court has the authority to sanction a party for spoliation and other discovery misconduct under its inherent power to manage its own affairs or under Rule 37 of the Federal Rules of Civil Procedure. Phoenix Four, Inc. v. Strategic Resources Corp., No. 05 Civ. 4837(HB), 2006 WL 1409413, at *3 (S.D.N.Y. May 23, 2006). See also Residential Funding Corp. v. DeGeorge Financial Corp., 306 F.3d 99, 106-07 (2d Cir. 2002); DLC Management Corp. v. Town of Hyde Park, 163 F.3d 124, 135-36 (2d Cir. 1998); Metro Opera Ass'n, Inc. v. Local 100 Hotel Employees & Rest. Employees Int'l Union, 212 F.R.D. 178, 219 (S.D.N.Y. 2003) (citing Nat'l Hockey League v. Metro Hockey Club, Inc., 427 U.S. 639, 640 (1976)). A court possesses wide discretion when imposing these sanctions. Reilly v. Natwest Markets Group, Inc., 181 F.3d 253, 267 (2d Cir. 1999).
1. Dismissal of Plaintiffs' Case with Prejudice
Despite the fact that spoliation is no longer at issue here, the Defendant argues that the appropriate sanction here would be dismissal of the Plaintiffs' case with prejudice. Even in cases of alleged spoliation, the grant of a terminating sanction is harsh and rare. See Update Art, Inc. v. Modiin Pub., Ltd., 843 F.2d 67, 71 (2d Cir. 1988); Cine Forty-Second St. Theatre Corp. v. Allied Artists Pictures Corp., 602 F.2d 1062, 1064 (2d Cir. 1979); The Pension Committee of the University of Montreal Pension Plan, et al. v. Banc of America Securities, LLC, No. 05 Civ. 9016(SAS), 2010 WL 184312, at *6 (S.D.N.Y. Jan. 15, 2010) ("[A] terminating sanction is justified in only the most egregious cases, such as where a party has engaged in perjury, tampering with evidence, or intentionally destroying evidence by burning, shredding, or wiping out computer hard drives."). The behavior of the spoliating party in a case warranting a terminating sanction is far more egregious than anything GFI or its attorneys may have done here. See, e.g., National Hockey League v. Metropolitan Hockey Club, Inc., 427 U.S. 639, 640, 96 S.Ct. 2778, 2779, 49 L.Ed.2d 747 (1976) (per curiam) (upholding dismissal where plaintiff failed to answer crucial interrogatories for seventeen months despite numerous time extensions and warnings from the court); Embuscado v. DC Comics, 347 Fed.Appx. 700, 701 (2d Cir. 2009) (upholding dismissal where plaintiff willfully and deliberately violated a series of court orders requiring the production of documents and had been warned by the magistrate judge of a possible dismissal); Cine Forty-Second St. Theatre Corp., 602 F.2d 1062, 1068 (holding that dismissal was proper where party refused to comply with specific court orders to answer interrogatories for three years); Gutman v. Klein, No. 03 Civ. 1570(BMC), 2008 WL 5084182 at *2 (E.D.N.Y. Dec. 2, 2008) (granting default judgment where defendants intentionally destroyed evidence). While it is undoubtedly true that GFI and its counsel could have handled the discovery process better, there was no intentional destruction of evidence or failure to obey court orders. Dismissal would be unjustly harsh here, especially considering that American Federated eventually acquired the documents it sought all along. The Defendant's motion to dismiss with prejudice is denied.
2. Adverse Inference Instruction
In order to obtain an adverse inference instruction for the late production of evidence, the moving party must establish that: (i) the party having control over the evidence had an obligation to timely produce it; (ii) the party that did not timely produce the evidence acted with a "culpable state of mind"; and (iii) the tardily produced evidence is "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." Phoenix Four, Inc., 2006 WL 1409413, at *3; Residential Funding Corp., 306 F.3d at 107; Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 220 (S.D.N.Y. 2003). In this circuit, a showing of ordinary negligence demonstrates the culpability necessary to justify an adverse inference instruction. Residential Funding Corp., 306 F.3d at 101; Phoenix Four, 2006 WL 1409413 at *4; Zubulake, 220 F.R.D. at 220; Chan v. Triple 8 Palace, Inc., No. 03 Civ. 6048(GEL)(JCF), 2005 WL 1925579, at *6 (S.D.N.Y. Aug. 11, 2005).
The granting of an adverse inference instruction is a severe sanction. Phoenix Four, Inc., 2006 WL 1409413, at *4; Zubulake, 220 F.R.D. at 219. Although it is arguable that the requisite elements are present in this case, the Court declines to engage in this analysis as such a penalty would be overly harsh for what has occurred here. See Convolve, Inc. v. Compaq Computer Corp., 223 F.R.D. 162, 169-70 (S.D.N.Y. 2004) (holding that full disclosure of previously unproduced documents would suffice as a remedy even when party had erroneously stated that the documents did not exist); Phoenix Four, Inc., 2006 WL 1409413, at *7 (holding that a sanction as severe as an adverse inference was not warranted where defendants came forward with the evidence, even though it was after the close of discovery); Williams v. Saint-Gobain Corp., No. 00 Civ. 502, 2002 WL 1477618, at *2 (W.D.N.Y. June 28, 2002) (holding that no basis for adverse inference instruction existed where defendant failed to produce emails until the eve of trial and there was no evidence of bad faith). In the end the Defendant was able to obtain the desired emails and there was no evidence of bad faith on the part of GFI's counsel.
3. Monetary Sanctions
In cases where discovery misconduct is found, a court retains the authority to impose monetary sanctions when it declines to impose a harsher sanction. See Phoenix Four, Inc., 2006 WL 1409413, at *9. While the delays in discovery were not caused by any intentional behavior, GFI's counsel did not fulfill its obligation to find all sources of relevant documents in a timely manner. Counsel has an obligation to not just request documents of his client, but to search for sources of information. Id. at *5. Counsel must communicate with the client, identify all sources of relevant information, and "become fully familiar with [the] client's document retention policies, as well as [the] client's data retention architecture." Zubulake v. UBS Warburg LLC, 229 F.R.D. 422, 432 (S.D.N.Y. 2004).
Had Nash fulfilled his obligation to familiarize himself with GFI's policies earlier, the forensic searches and subsequent motions would have been unnecessary. The Court finds that monetary sanctions are appropriate here and orders GFI and its counsel to reimburse American Federated its half of the cost of the forensic searches.
While the Court does find that sanctionable conduct occurred, the Defendant's motions for the severe sanctions of dismissal, or, in the alternative, an adverse inference instruction, are denied. The Defendant's motion for monetary sanctions is granted as set forth above.
American Federated is to settle an order consistent with this opinion. Prior to settlement of the prepared order, counsel for American Federated is to contact chambers to schedule further proceedings in this matter regarding the amount and allocation of the monetary sanctions.