ASI, Inc. v. Aquawood, LLC

Background

ASI, Inc. filed this action in 2019 against multiple Defendants to collect an $8.5 million judgment entered in 2013 against Manley Toys, Ltd. ASI alleged a broad conspiracy to avoid paying that judgment. The court stated that the case’s merits had been delayed by discovery disputes.

ASI sought financial information dating back to 2012 from individual and entity Defendants, along with information about the location of the Manley Server. The Special Master ordered Defendants to produce unredacted financial records dating back to 2012 unless a compelling reason for redaction was approved. The Special Master also required Defendants with access to the Manley Server to produce it or its contents and required most Defendants to provide declarations about the server’s location.

No Defendant fully complied with the discovery order. Defendants produced no financial documents from before 2015, continued making redactions without first obtaining the required approval, and did not produce the Manley Server or its contents. The Hong Kong Defendants submitted declarations stating that they did not know the server’s location, but evidence from a separate deposition indicated that Alan Chan had not tried to locate it.

Sanctions and objections

ASI moved for sanctions, including default judgment. The court previously declined to impose default judgment because it considered that sanction too severe, then returned the matter for consideration of other sanctions. The magistrate judge later ordered all Defendants to pay ASI’s attorney’s fees and costs for bringing the sanctions motion and imposed one adverse factual finding.

The adverse factual finding states that, for purposes of this action, each Defendant failed to preserve and therefore caused the destruction of some or all of its bank statements, tax records, and general ledgers from 2012 to the present.

Defendants argued that they had not been on notice to preserve records dating back to 2012 and had no duty to preserve records held by financial institutions. They also argued that ASI had not shown prejudice, that their redactions were justified, that the Hong Kong Defendants had complied with the server-declaration requirement, and that the fee award was improper because ASI had not meaningfully met and conferred or because Defendants’ conduct was substantially justified.

Court’s analysis

The court reviewed the magistrate judge’s non-dispositive pretrial order under the deferential standard applicable to such orders. It could reverse only if the order was clearly erroneous or contrary to law. A finding is clearly erroneous when the reviewing court is firmly convinced that a mistake was made; a decision is contrary to law when it fails to apply or misapplies relevant law or procedural rules.

The court held that Defendants’ duty to preserve relevant evidence began when the complaint was filed in 2019. Because the action focused on recovering the 2013 judgment, financial records dating back to 2012 were relevant. The court also held that the duty extended to financial records held by third-party institutions because Defendants had the legal right or practical ability to obtain them.

The court found that ASI was prejudiced because it could no longer access financial records from the years surrounding the judgment that formed the basis of the action. It concluded that the sanctions imposed under Federal Rule of Civil Procedure 37 did not require proof that Defendants intentionally destroyed the records. The court also found that continuing to redact documents without the Special Master’s approval violated the discovery order.

The court rejected the Hong Kong Defendants’ argument that submitting bare declarations was enough. It held that superficial compliance was insufficient where the evidence indicated that Alan Chan had not attempted to locate the server. The court further held that the fee award was authorized under Rule 37(b)(2)(C), which did not contain the meet-and-confer exception relied on by Defendants, and that Defendants’ conduct was not substantially justified.

Finally, the court held that the adverse factual finding was not too broad or contrary to law. It concluded that the finding addressed the prejudice caused by the failure to preserve relevant financial information and could be clarified later if necessary at trial.

Disposition

The court overruled Defendants’ appeals and objections and affirmed the magistrate judge’s order granting in part and denying in part the motion for sanctions. The court granted in part and denied in part ASI’s motion for sanctions. Under the order, Defendants are jointly and severally liable for ASI’s attorney’s fees for bringing the sanctions motion, with ASI’s attorneys directed to submit an affidavit describing related fees and costs since March 1, 2023. The adverse factual finding regarding destruction of financial records also remains established for purposes of this action.