Aquino v. Alexander Capital LP

Background

The case arose from the failed initial public offering and bankruptcy of Inpellis, Inc. The bankruptcy trustee assigned claims to Convergent Distributors of Texas, LLC, which sued Alexander Capital, LP, Joseph Amato, Rocco Guidicipietro, and NESA Management, LLC. The plaintiff alleged that the defendants engaged in fraudulent conduct surrounding the offering.

Jan Schlichtmann had been the plaintiff’s lead attorney. Earlier in the case, the court disqualified him after learning that he had drafted a declaration containing materially false or misleading statements about Daniel Glosband’s knowledge and ability to testify about the Shareholder Resolution Trust. During the later bench trial, the court questioned witnesses about Schlichtmann’s conduct and about the loss or destruction of an Inpellis computer server. The court had previously found that the plaintiff failed to take basic steps to preserve the server and that its destruction likely prejudiced the defendants.

After the court ruled for the defendants at trial, Schlichtmann filed a motion as an interested party seeking the judge’s recusal and asking the court to strike statements made during trial. The plaintiff joined that motion. The defendants separately sought sanctions and attorney’s fees, including fees related to the plaintiff’s motion to disqualify defense counsel and fees caused by the server’s spoliation. “Spoliation” means the loss, destruction, or failure to preserve evidence.

Recusal and Motion to Strike

The court denied the Schlichtmann motion in its entirety, including the plaintiff’s joinder. Under 28 U.S.C. § 455, recusal is required when a judge’s impartiality might reasonably be questioned or when the judge has personal bias or prejudice concerning a party. The court explained that critical statements and unfavorable rulings based on matters learned during the case generally do not establish disqualifying bias.

The court found that its comments about Schlichtmann’s sworn declaration, his role in preparing witnesses, the possible referral to the Southern District of New York Grievance Committee, and the Inpellis server reflected matters developed during the litigation rather than an improper outside bias. It also stated that it knew of no authority permitting it to erase trial statements merely because Schlichtmann considered them inappropriate. The court concluded that the motion to recuse and strike statements was without merit.

Attorney’s Fees and Sanctions

The defendants sought sanctions for the plaintiff’s motion to disqualify defense counsel. The court denied that request. It held that the motion lacked merit but was not entirely without a factual or legal basis because defense counsel had some involvement in events relevant to the case, including submissions to the Financial Industry Regulatory Authority. The defendants also did not provide sufficiently specific proof that the motion was filed for an improper purpose or in bad faith. The court therefore found that sanctions under the court’s inherent authority and 28 U.S.C. § 1927 were not warranted.

The court granted the defendants’ request for attorney’s fees incurred as a result of the plaintiff’s spoliation of the Inpellis server. It explained that Federal Rule of Civil Procedure 37(e)(1) allows measures necessary to cure prejudice from lost electronically stored information and does not always require proof that a party intended to deprive another party of evidence. The court found that the plaintiff’s failure to preserve the server was negligent, that the server likely contained relevant emails and financial records, and that the defendants were likely prejudiced.

The court limited the award to fees directly caused by the spoliation and the related litigation. It did not set the amount in this opinion. Instead, it ordered the defendants to submit a further written filing proving the amount by January 12, 2024, and permitted the plaintiff to respond by January 22, 2024. No reply or oral argument was anticipated at that time.

Other Disposition

The court declined to refer Schlichtmann’s misconduct to the Southern District of New York Grievance Committee, concluding that no material benefit would result from a referral at that point. Judge Jed S. Rakoff thus denied the Schlichtmann motion in its entirety, denied sanctions connected to the motion to disqualify defense counsel, and granted attorney’s fees directly resulting from the server’s spoliation.