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

Background

The dispute arises from the Petters Ponzi scheme and BMO Harris’s predecessor bank’s handling of PCI’s account. Douglas A. Kelley, acting as trustee of the BMO Litigation Trust, alleges that BMO Harris was complicit in the scheme and failed to respond properly to irregularities. Four claims remained: violation of the Minnesota Uniform Fiduciaries Act, breach of fiduciary duties, aiding and abetting fraud, and aiding and abetting breaches of fiduciary duties.

The bankruptcy court previously found that BMO Harris intentionally destroyed email backup tapes containing pre-March 2005 electronically stored information, despite a duty to preserve them, and imposed three sanctions: an adverse-inference instruction, permission for Kelley to present evidence about the destruction, and a prohibition on BMO Harris’s objecting to certain pre-March 2005 emails or documents produced by third parties. The district court had affirmed that sanctions order but had not previously defined the instruction’s scope.

Adverse-Inference Sanction

The court held that the jury will receive a permissive adverse-inference instruction after the evidentiary phase of trial. The instruction will allow, but not require, the jury to infer that the destroyed evidence was harmful to BMO Harris or favorable to Kelley. BMO Harris may present reasonable rebuttal evidence and argument, and Kelley may present evidence about the destruction, including cross-examination of experts whose opinions rely on the absence of evidence.

The court declined to make the inference mandatory or irrebuttable. It reasoned that the record did not show that BMO Harris destroyed one particular, crucial document; instead, a large volume of tapes was destroyed, and the precise contents could not be determined. The court also excluded evidence about the conduct or credibility of BMO Harris’s counsel as witnesses because its risks of unfair prejudice, confusion, misleading the jury, and wasted time outweighed its value on the issue the jury must decide. The parties’ spoliation evidence remains subject to reasonable limits and the Federal Rules of Evidence.

The court therefore granted in part and denied in part BMO Harris’s motion for clarification and denied Kelley’s cross-motion for a preliminary, mandatory, non-rebuttable adverse-inference instruction.

Expert Testimony

The court applied Federal Rule of Evidence 702 and the reliability principles associated with Daubert. It explained that experts may describe specialized, observable facts and industry practices, but may not replace the jury by directly deciding a person’s or entity’s knowledge, intent, motive, credibility, or other mental state.

Charles Grice. Kelley’s motion concerning BMO Harris’s banking expert was granted in part and denied in part. Grice may testify about observable documents, statements, conduct, account activity, and banking factors that could help the jury assess M&I’s or its employees’ mental states. But he may not speculate or directly opine about the mental states of M&I, its employees, or third parties. The court rejected Kelley’s challenges based on the factual foundation of Grice’s opinions and their relationship to the spoliation sanction, treating those disputes as matters for cross-examination and credibility rather than admissibility.

Karl Jarek. Kelley’s motion concerning BMO Harris’s damages expert was granted in part and denied in part. Jarek may testify about observable conduct and financial evidence relevant to causation, and the court denied challenges to his qualifications, causation opinions, methodology, and application of that methodology. But the court excluded opinions about the knowledge or culpability of PCI’s investors; opinions reducing damages based on offsets, deductions, settlements, or other recoveries obtained by Kelley or PCI’s creditors; and alternative damages theories relying on those improper reductions. The court also held that Jarek would not be allowed to offer an opinion that PCI was an unharmed sham entity because BMO Harris represented that it would not offer that opinion at trial.

Catherine Ghiglieri. BMO Harris’s motion concerning Kelley’s banking expert was granted in part and denied in part. Ghiglieri may testify about banking practices, industry standards, technical information, and the significance of M&I’s conduct. She may not opine about willful blindness, the knowledge or mental state of M&I, its employees, or PCI’s investors, except that she may describe objective facts and direct admissions. She also may not testify that M&I violated the Bank Secrecy Act or other federal laws and regulations. The court rejected BMO Harris’s challenges based on Ghiglieri’s summary of evidence and qualifications concerning deposit-account control agreements and PCI’s purported business.

Theodore Martens. BMO Harris’s motion to exclude Kelley’s damages expert was denied. The court concluded that Martens’s damages approach was consistent with Minnesota law because the alleged injury to PCI was its insolvency and inability to repay creditors after fraudulent depletion of its assets. Later recoveries by creditors or Kelley did not require reducing the alleged damages. The court also held that the challenged methodology and an alleged calculation discrepancy went to the weight and credibility of Martens’s testimony, not its admissibility.

Bifurcation of Trial

BMO Harris asked the court to hold a separate trial on punitive damages. The court denied that motion. It held that Federal Rule of Civil Procedure 42, rather than Minnesota’s bifurcation statute, governed the procedural question. The court found that separating punitive damages would be burdensome and time-consuming and that BMO Harris had not shown a sufficient risk that a unified trial would cause unfair prejudice.

Disposition

The order: (1) granted in part and denied in part BMO Harris’s clarification motion; (2) denied Kelley’s motion for a preliminary, mandatory, non-rebuttable adverse-inference instruction; (3) granted in part and denied in part Kelley’s motion to exclude expert testimony; (4) granted in part and denied in part BMO Harris’s motion to exclude Ghiglieri’s testimony; (5) denied BMO Harris’s motion to exclude Martens’s testimony; and (6) denied BMO Harris’s motion to bifurcate the trial.