BMO Harris Bank N.A. v. Kelley

Background

These related bankruptcy matters arose from a Ponzi scheme involving Petters Company, Inc. (PCI) that operated between 1994 and 2008. The Trustee alleged that BMO Harris, as successor to M&I Marshall and Ilsley Bank, was complicit in the scheme through its handling of PCI’s bank account. The bankruptcy court’s plan transferred the relevant claims to the BMO Litigation Trust.

The appeal concerned email backup tapes from M&I’s Minnesota server. A 2008 injunction prohibited the destruction of records relating to Petters, PCI, and affiliated entities. M&I also issued litigation holds in 2010. Nevertheless, during a server decommissioning project, dozens of Minnesota backup tapes were destroyed between October 2010 and January 2011. The tapes were destroyed without reviewing their contents or consulting counsel.

BMO Harris later found six Minnesota tapes in 2014 and five more in 2017. It did not search the 2014 tapes, could not establish whether they were the same as the 2017 tapes, and did not timely disclose the 2017 tapes to the Trustee. Before that disclosure, BMO Harris had repeatedly represented that all Minnesota backup tapes had been destroyed by January 2011. The bankruptcy court found that BMO Harris made false, vague, inconsistent, and misleading statements about the tapes and had previously been sanctioned for unrelated discovery violations.

Bankruptcy Court’s Sanctions Order

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 electronically stored information that could not be restored or replaced. It also found that the Trustee was prejudiced because the destroyed tapes likely contained relevant information unavailable from other sources.

The bankruptcy court further found, based on circumstantial evidence, that BMO Harris acted in bad faith and intended to deprive the Trustee of the evidence. It imposed sanctions under Rules 37(e)(1) and 37(e)(2) of the Federal Rules of Civil Procedure: an instruction allowing the trial 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 certain pre-March 2005 emails or documents produced by third parties.

District Court’s Analysis

The district court reviewed the bankruptcy court’s discovery sanctions for abuse of discretion, giving substantial deference to the bankruptcy court’s factual findings and discovery-related decisions.

Intent to Deprive the Trustee of Evidence

Rule 37(e)(2) permits severe sanctions such as an adverse-inference instruction only when the court finds that a party acted with the intent to deprive another party of electronically stored information. The district court held that intent may be established through circumstantial evidence, including witness credibility, motives, and the surrounding circumstances.

The court upheld the finding of intent based on several circumstances: BMO Harris destroyed the tapes despite the injunction and litigation holds; it did not review the tapes or consult counsel; its employees knew the tapes might contain unique, relevant pre-March 2005 emails; BMO Harris failed to disclose the 2014 tapes for years; and it delayed disclosure of the 2017 tapes until after fact discovery had closed. The district court concluded that this conduct supported an inference of “willful ignorance” and bad faith rather than an innocent mistake.

Prejudice

The district court also upheld the finding that the Trustee was prejudiced. The tapes were a primary, and possibly the only, source of BMO Harris emails from before March 2005. Because BMO Harris had not reviewed or indexed the destroyed tapes, it was impossible to determine exactly what they contained. The court found it reasonable to infer that they included unique and relevant evidence, including information not preserved by BMO Harris’s later email archive system.

The court rejected BMO Harris’s argument that the destroyed information was merely cumulative or available from third parties. The surviving tapes contained millions of documents, including nearly 10,000 documents that BMO Harris acknowledged could be both nonduplicative and relevant. The district court also noted that third-party testimony or other sources might not provide evidence of the same quality or scope as the original emails and related files.

Disposition

The district court held that the bankruptcy court did not err in finding that BMO Harris acted with the intent to deprive the Trustee of relevant evidence or that the Trustee was prejudiced. It also held that the bankruptcy court did not abuse its discretion by imposing the spoliation sanctions. The court therefore affirmed the bankruptcy court’s July 1, 2019 order. Judge Wright signed the order on July 18, 2022.