Kelley v. BMO Harris Bank N.A., as successor to M&I Marshall and IIsley Bank

Background

These related bankruptcy matters involved an appeal by BMO Harris Bank N.A., successor to M&I Marshall and Ilsley Bank, from a bankruptcy court order imposing sanctions for the destruction and mishandling of email backup tapes. Douglas A. Kelley, acting as trustee of the BMO Litigation Trust, opposed the appeal.

The underlying bankruptcy matter arose from a Ponzi scheme involving Thomas J. Petters and Petters Company, Inc. The claims against BMO Harris concerned M&I’s handling of Petters Company’s account. During discovery, Kelley sought M&I email records from before March 2005, when M&I implemented a new email archive system.

M&I had received a 2008 court order prohibiting the destruction of records related to Petters, Petters Company, and affiliated entities. M&I also issued litigation holds in 2010. Nevertheless, as part of a server decommissioning project, M&I destroyed dozens of Minnesota email backup tapes between October 2010 and January 2011 without reviewing their contents or consulting counsel.

BMO Harris later learned of six Minnesota backup tapes in 2014 but did not search their contents or timely disclose them. In December 2017, BMO Harris found five additional Minnesota backup tapes but did not disclose them to the Trustee until the last day of fact discovery. BMO Harris also made vague and inconsistent statements about whether the 2014 tapes and 2017 tapes were the same and whether the 2014 tapes still existed.

Bankruptcy Court’s Sanctions Order

The Trustee moved for sanctions based on the destruction of at least 66 Minnesota backup tapes. The bankruptcy court found that BMO Harris had a duty to preserve the tapes by at least January 2010, failed to take reasonable preservation steps, and intentionally destroyed tapes containing electronically stored information from before March 2005 that could not be restored or replaced.

The bankruptcy court also found that the Trustee was prejudiced because the destroyed evidence likely contained relevant information unavailable from alternative sources. It found that BMO Harris acted in bad faith and intended to deprive the Trustee of the evidence, relying on circumstantial evidence including the destruction despite the injunction and litigation holds, the failure to review the tapes, and BMO Harris’s later discovery conduct and inconsistent representations.

The bankruptcy court imposed three sanctions under Rules 37(e)(1) and 37(e)(2) of the Federal Rules of Civil Procedure: an instruction allowing the jury to infer that BMO Harris intentionally destroyed evidence it knew was harmful; permission for the Trustee to present evidence about the destruction; and a prohibition on BMO Harris objecting to the introduction of pre-March 2005 emails or documents produced by third parties.

District Court’s Analysis

The district court reviewed the bankruptcy court’s sanctions order for abuse of discretion. Under Rule 37(e), a court may impose sanctions when electronically stored information that should have been preserved is lost and cannot be restored or replaced through additional discovery. More severe sanctions, such as an adverse-inference instruction, require a finding that the party acted with the intent to deprive another party of the information’s use in the litigation.

The district court held that the bankruptcy court reasonably inferred intent from the circumstances. BMO Harris destroyed the tapes after receiving an injunction and litigation holds, did not examine their contents, did not consult counsel, and knew the tapes likely contained unique and relevant pre-March 2005 emails. The district court characterized this conduct as willful ignorance rather than an innocent mistake.

The court also upheld the bankruptcy court’s reliance on BMO Harris’s later conduct. BMO Harris did not timely disclose the tapes found in 2014 and 2017, and its counsel and witnesses gave incomplete or inconsistent accounts. The district court concluded that this conduct supported the finding of bad faith and an intent to keep the information from the Trustee.

On prejudice, the district court held that the bankruptcy court reasonably found that the destroyed tapes likely contained unique and relevant evidence. The tapes were a primary, and possibly only, source of BMO Harris emails from before March 2005. The surviving tapes contained nearly seven million documents, including nearly 10,000 potentially non-duplicative and relevant emails according to BMO Harris’s representations. The court concluded that it was reasonable to infer that the destroyed tapes contained many additional relevant documents and that alternative sources would not necessarily provide evidence of the same quality or scope.

Disposition

Judge Wilhelmina M. Wright concluded that the bankruptcy court did not err in finding that BMO Harris intended to deprive the Trustee of relevant evidence or that the Trustee was prejudiced. The district court also concluded that the bankruptcy court did not abuse its discretion by imposing the sanctions. The court therefore affirmed the bankruptcy court’s July 1, 2019 order.