Sale of Business as Spoliation

After the plaintiff filed suit in Centimark Corp. v. Pegnato & Pegnato Roof Mgmt., Inc., 2008 U.S. Dist. LEXIS 37057 (W.D. Pa. May 5, 2008), the corporate defendant filed for bankruptcy and the individual defendants arranged for the sale of all of the corporation's assets (a sale that was approved by the bankruptcy court). No provision was made in the contract of sale for access by the corporation or the individual defendants to relevant documents, all of which were among the assets sold and, of course, later lost or destroyed. Held, this failure to preserve evidence — either by copying the material before the sale or by ensuring access afterwards — constitutes spoliation.

Here, [plaintiff] CentiMark filed the instant complaint in May of 2005 alleging that [individual defendants] William and Maryella authorized, instructed, and otherwise knowingly participated in [corporate defendant] Pegnato's refusal to pay CentiMark the money it was owed.... The sale of Pegnato's assets to First Service, however, did not occur until January of 2006, over six months later. During that period of time, the documents at issue, which were clearly relevant to the instant litigation, were in Pegnato's control and accessible by William and Maryella who were not only the President and Chief Operating Officer, respectively, of Pegnato at the time but were represented by counsel.... Under these circumstances, the Pegnatos had a duty to preserve evidence relevant to the litigation and their failure to do so was, at the very least, negligent. See Mosaid, 348 F. Supp. 2d at 336, quoting Scott v. IBM Corp., 196 F.R.D. 233, 249 (D.N.J. 2000) ("While a litigant is under no duty to keep or retain every document in its possession, even in advance of litigation, it is under a duty to preserve what it knows, or reasonably should know, will likely be requested in reasonably foreseeable litigation"); Winters v. Textron, Inc., 187 F.R.D. 518, 520 (M.D. 1999) (Finding that knowledge of even a potential claim is sufficient to impose a duty to preserve evidence); Bowman v. American Medical Systems, Inc., No. 96-7871, 1998 U.S. Dist. LEXIS 16082, 1998 WL 721079, at *3 (E.D. Pa. Oct. 9, 1998) ("A party which reasonably anticipates litigation has an affirmative duty to preserve relevant evidence"). See also Barsoum v. NYC Housing Authority, 202 F.R.D. 396, 400 (S.D.N.Y. 2001), citing Kronisch v. United States, 150 F.3d 112, 126 (2d Cir. 1998) ("A party has a duty to retain evidence that it knows or reasonably should know may be relevant to pending or future litigation").

Moreover, the fact that defendants subsequently relinquished control over the relevant evidence when Peganto's assets were sold to First Service, which then lost or destroyed the evidence, does not relieve defendants of their responsibility in this regard as they had control of the documents for more than six months after this lawsuit was filed and before the assets were sold. Defendants could have — indeed, should have — taken precautions to preserve the information for litigation by maintaining copies of the documents pertaining to the lawsuit, giving CentiMark access to them before the sale was completed or, at the very least, by ensuring that CentiMark would have access to them after the sale was completed. See In re NTL, Inc. Securities Litigation, 244 F.R.D. 179, 197 (S.D.N.Y. 2007) (Finding that the defendant's duty to preserve potentially responsive documents for litigation arose at the very latest when the suit was filed and before it emerged from bankruptcy, and that defendant therefore engaged in spoliation of evidence when it transferred documents to the new operational company without preserving (or ensuring that the new company would preserve) the relevant information). See also Silvestri v. General Motors Corp., 271 F.3d 583, 591 (4th Cir. 2001) ("If a party cannot fulfill this duty to preserve because he does not own or control the evidence, he still has an obligation to give the opposing party notice of access to the evidence or of the possible destruction of the evidence if the party anticipates litigation involving that evidence"); Bowman v. American Medical Systems, Inc., 1998 U.S. Dist. LEXIS 16082, 1998 WL 721079, at *4 (Finding the fact that the evidence was actually destroyed by plaintiff's doctor rather than by the plaintiff himself, in no way relieved the plaintiff of his responsibility to preserve the allegedly defective product). Thus, despite William and Maryella's protestations to the contrary, they are responsible for the spoliation of these documents.

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