Great American Insurance Company v. Twin Cities Dance and Entertainment, LLC

Background

Great American Insurance Company sued Twin Cities Dance & Entertainment, LLC, alleging that Twin Cities committed fraud in connection with an insurance claim. The parties had contentious discovery, and Great American moved for sanctions based on Twin Cities' failure to comply with discovery orders.

Magistrate Judge Shannon G. Elkins issued a Report and Recommendation. It recommended denying sanctions under Rule 37(e)(1) of the Federal Rules of Civil Procedure and granting an adverse-inference instruction under Rule 37(e)(2) as a sanction for spoliation of evidence. Spoliation means the loss or destruction of evidence that should have been preserved for litigation. The recommended instruction was permissive rather than mandatory.

The parties did not dispute that Twin Cities should have preserved the text messages, failed to take reasonable steps to preserve them, could not restore or replace them, and acted with intent to deprive Great American of the messages. The parties also did not dispute that an adverse-inference instruction was an appropriate type of sanction. Great American's only objection concerned whether the instruction should be permissive or mandatory.

Court's Analysis

The court explained that Rule 37(e)(2) permits an adverse-inference instruction when electronically stored information that should have been preserved for litigation is lost, cannot be restored or replaced, and was lost because the party acted with intent to deprive another party of its use in the litigation. The court agreed with the magistrate judge that these conditions were met.

The court then considered the form of the instruction. A permissive inference can be rebutted with reasonable evidence. The Eighth Circuit has cautioned courts to avoid unfair prejudice by allowing the party that lost the evidence to present an innocent explanation, even when the party acted in bad faith. A mandatory instruction that settles a disputed fact without permitting rebuttal is generally reserved for cases involving destruction of a particular piece of crucial evidence.

The court found that the lost messages contained relevant information that could not be obtained from another source. But it also found that the record did not show that Twin Cities destroyed a particular document of crucial evidentiary value. The court therefore concluded that a permissive adverse-inference instruction was appropriate.

Ruling

The court overruled Great American's objection and accepted the Report and Recommendation. It granted in part and denied in part Great American's Motion for Sanctions for Failure to Comply with Discovery Orders. Specifically, the court granted the motion to the extent it sought an adverse-inference instruction under Rule 37(e)(2), ordered that the instruction be permissive rather than mandatory, and denied the motion to the extent it sought sanctions under Rule 37(e)(1).