The road paved with good intentions – A pure heart and an open checkbook

March 25th, 2009 | By William Connelly

See, In re Quintus Corp., 353 B.R. 77 (Bankr. D. Del. 2006)

A valid explanation is not enough.

Bankruptcy Court can be a dangerous place. What you knew or should have known can often be viewed through the 20/20 vision of hindsight. One example of this can be found in a decision out of Delaware.

A software vendor filed for protection under Chapter 11 of the Bankruptcy Code. While in Chapter 11, the debtor sold the majority of its assets to a competitor in return for cash, a note, and the asset-purchaser’s assumption of certain of the debtor’s liabilities. Nine months later, the case was converted to Chapter 7, and a Trustee was appointed to oversee the liquidation of the debtor.

Not long after the case was converted to Chapter 7, the asset-purchaser failed to make certain payments as required under the terms of its agreement with the debtor, and the Trustee brought suit. Discovery was commenced and cross-motions for summary judgment were filed.

The Trustee sought judgment in part, based on the purchaser’s destruction of certain of the debtor’s books and records, which it had purchased, but which it had agreed to preserve as part of the terms of the purchase.

The purchaser responded that it had deleted those portions of the debtor’s books and records from its computer servers prior to any of the acts or omissions which the Trustee alleged as the basis of his suit, and explained that the electronic information at issue was destroyed prior to the commencement of the adversary proceeding. Finally, the defendant argued that the electronic information was not intentionally deleted to thwart the Trustee or anyone else but, was instead deleted so as to free up memory on the computer system.

The Bankruptcy Judge was unconvinced.

From the court’s perspective, the question was if there had been a willful spoliation of evidence?

Parsing the defendant’s arguments down to their simplest essence, the court concluded that the destruction of electronic information issue was not accidental. In the court’s view, it was willful since the electronically stored information was destroyed pursuant to a deliberate decision of the defendant to regain storage space on its computer system. The court also found that since the defendant had a duty to pay the liabilities at issue and had not done so, the defendant should have anticipated litigation over its failure to do so. The court went on to find, therefore, that the deletion of the information from the computer system was willful, and therefore constituted willful spoliation of evidence. Finally, the court found that the defendant’s destruction of the electronic information severely prejudiced the Trustee.

What is missing from the court’s decision is any finding of malice or ill will on the part of the defendant in what it decided to delete or when it decided to make the deletions. In essence, no bad faith or malicious intent was necessary before sanctions are available. The lesson to be learned is that the deletion of ESI can result in severe penalties being assessed. How severe?

Summary judgment was entered in favor of the Trustee and against the defendant in the amount of $1,888,000.00.

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