Buyer beware: suspicious timing warrants adverse inference instruction for spoliation of electronic data, and a punitive damage claim based on that inference

March 5th, 2009 | By Steve Puiszis

Smith v. Slifer Smith & Frampton/Vail Associates Real Estate, LLC, 2009 WL 482603 (D. Colo., Feb. 25, 2009)

A real estate broker and the brokerage firm he worked for were retained by the plaintiffs to sell a parcel of property in Vail, Colorado. The property was sold for $2,846,250, based on the defendants’ recommendation. Less than three months later, the same property was resold by the buyer in the first transaction for $7,200,000, with the defendants again serving as the broker for that transaction. Plaintiffs subsequently filed suit claiming negligent misrepresentation, fraud, concealment, and that the defendants had breached their statutory duties as a transaction broker.

In discovery, plaintiffs sought production of emails and other electronic documents on the brokerage firm’s servers, and on the broker’s work and home computers. A forensic examination of the broker’s home computer revealed that a secure deletion (wiping) software called “Anti Tracks” had been downloaded from the Internet, and used on the broker’s home computer resulting in the loss of data from thousands of files and folders. A similar examination of the broker’s computer at work revealed that information appeared to have been deleted from that computer as well, and that the computer’s hard drive had been reformatted. Plaintiff’s forensic computer expert opined that the process to reformat the drive was too involved and complicated to be unintentional.

The district court acknowledged that there was no smoking gun establishing who caused the data loss, nor could anyone pinpoint exactly what information had been deleted. However, it was apparent that the defendants had failed to properly preserve potentially relevant information. In the court’s view, the “highly-suspect timing” of the use of the wiping software on the defendant’s home computer and the reformatting of the hard drive of his work computer was sufficient to establish that evidence had been destroyed in bad faith to prevent disclosure of relevant information from those computers. Therefore, the court ordered that an adverse inference instruction be issued, and allowed the plaintiffs to add a punitive damages claim based on the adverse inference. The court further awarded plaintiffs their fees and costs, including expert costs associated with plaintiffs’ sanctions motion, and related discovery expenses incurred as a result of the defendants’ actions.

The court observed that plaintiffs had the burden of proving by a preponderance of the evidence that the defendants failed to preserve evidence or destroyed it. The court had little difficulty finding that evidentiary threshold had been met in light of the circumstances presented.

There was no dispute that a wiping program had been downloaded onto the broker’s home computer after a duty to preserve information had been triggered. There also was no dispute that the wiping program had been removed from that computer several days before a forensic image of the computer’s hard drive was created by plaintiffs’ expert. The court concluded that a significant number of files had been deleted from that computer which otherwise would have been subject to discovery in the case. A number of folders in which information or data would normally be stored were empty. Additionally, the broker’s work computer had been reformatted the day before the plaintiff’s deposition, and one day after the defendants responded to plaintiff’s first production request. The court noted the timing of the data destruction indicated that whoever was responsible knew that discovery from those computers would reveal information that the defendants did not want to be known.

While plaintiffs did not know precisely what data had been destroyed, the court borrowed a line from Residential Funding Corp, v. DeGeorge Financial Corp., 306 F.3d 99, 109 (2d Cir. 2002), where the Second Circuit explained:

Courts must take care not to hold the prejudiced party to too strict a standard of proof regarding the likely contents of the destroyed [or unavailable] evidence, because doing so would subvert the purposes of the adverse inference instruction, and would allow parties who have … destroyed evidence to profit from that destruction.

Additionally, the court in Slifer Smith noted that where a party destroys evidence in bad faith, “that bad faith alone is sufficient circumstantial evidence from which a reasonable fact finder could conclude that the missing evidence was unfavorable to that party.” Id. The court determined that plaintiffs had adduced sufficient evidence to support an inference that the deletion of some of the missing data had harmed plaintiffs’ ability to prove their case. The court noted that during the relevant time frame, the primary computer used by the broker was his office computer, and that he routinely used his home computer to check his email at work. Since there was evidence that various emails had been sent by the broker and to him concerning the property, the court ruled that the issuance of an adverse jury instruction was appropriate under the circumstances.

What makes the Slifer Smith decision notable is not just the adverse inference instruction, but the fact that the court allowed plaintiffs to amend their complaint to add a claim for punitive damages based on that inference. If that type of sanction does not catch a client’s attention and demonstrate that the duty to preserve must be taken seriously, nothing will.

Softpedia describes Anti Tracks as “a complete solution to protect your privacy and enhance your PC performance. With a simple click Anti Tracks [will]securely erase your internet tracks, computer activities and programs history information stored in many hidden files on your computer.” However, as with many wiping programs a forensic examination of a computer will reveal its use.

After Slifer Smith, perhaps the old credo Buyer Beware should be changed to Broker Beware.

Computer screenshot photo courtesy Flickr user dannyman under this Creative Commons license.

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