Goals of Spoliation Sanctions — Court of Appeals Has Discretion to Entertain Arguments on Appeal Not Raised below (Doctrine of Forfeiture) — Is Terminating Excessive If Case Would’ve Been Resolved on Purely Legal Grounds?

Gutman v. Klein, 515 F. App’x 8 (2d Cir. 2013):

Defendants-Appellants Zalman Klein ("Klein"), Dina Klein, A to Z Holding Corporation ("Holding"), A to Z Capital Corporation ("Capital"), and Washington Greene Associates ("WGA") (collectively, "defendants") appeal from two judgments (1) awarding damages to Holding, Capital, and WGA, with respect to derivative claims brought by plaintiff-appellee Aryeh Gutman ("Gutman"), (2) removing Klein as a partner of Paz Franklin Company and WGA, and (3) awarding attorney's fees to Gutman. The District Court, on the recommendation of Magistrate Judge Robert M. Levy, entered a default judgment against defendants after finding that Klein had spoliated his laptop's hard drive shortly before he was due to produce it to plaintiffs' counsel for court-ordered imaging. We assume the parties' familiarity with the facts and record of the prior proceedings, which we reference only as necessary to explain our decision to affirm.

We review a district court's imposition of spoliation sanctions for abuse of discretion. Allstate Ins. Co. v. Hamilton Beach/Proctor Silex, Inc., 473 F.3d 450, 456 (2d Cir. 2007). A sanction for spoliation of evidence "should be designed to: (1) deter parties from engaging in spoliation; (2) place the risk of an erroneous judgment on the party who wrongfully created the risk; and (3) restore the prejudiced party to the same position he would have been in absent the wrongful destruction of evidence by the opposing party." West v. Goodyear Tire & Rubber Co., 167 F.3d 776, 779 (2d Cir. 1999) (quotation marks omitted). A terminating sanction is a "drastic remedy" that "should be imposed only in extreme circumstances, usually after consideration of alternative, less drastic sanctions." Id. (quotation marks omitted).

Defendants argue principally that the sanction of a default judgment was excessive, as it put plaintiffs in a better position than they were in before Klein tampered with the laptop. Had the District Court not entered a terminating sanction, defendants argue, they could have asserted the affirmative defense of res judicata in an answer or motion to dismiss: the absence of evidence, no matter how central to the case, would have had no effect on the disposition of that defense, and the less drastic sanction of an adverse inference on all factual disputes would have accomplished the objectives of spoliation sanctions while preventing plaintiffs from receiving a windfall.

This argument was not raised before the District Court.

In their proposed findings of fact and conclusions of law in response to plaintiffs' motion for sanctions before the Magistrate Court, defendants urged only that the District Court find that Klein had not engaged in sanctionable conduct. In their objection to the Magistrate Court's Report & Recommendation recommending a default judgment -- the point at which it would have been most appropriate to raise this argument -- defendants did not argue that a terminating sanction was inappropriate because it would prevent them from defending the action on res judicata grounds. Although they suggested that an adverse inference would be more appropriate than a terminating sanction, defendants stated that such an inference would arise at the point of "crafting the jury charge for trial." Nor did their September 2008 letter to the District Court regarding a potential motion to dismiss for failure to state a RICO claim, which was sent while plaintiffs' motion for sanctions was pending, mention a res judicata defense. Similarly, neither defendants' June 2003 motion to dismiss nor their October 2009 motion to dismiss referred to res judicata. In sum, defendants failed to raise this argument before the District Court, and it is therefore forfeited on appeal. 1 See Local 377, RWDSU, UFCW v. 1864 Tenants Ass'n, 533 F.3d 98, 99 (2d Cir. 2008). Although "the doctrine of forfeiture is prudential and may be disregarded in our discretion," City of New York v. Mickalis Pawn Shop, LLC, 645 F.3d 114, 137 (2d Cir. 2011), we decline to disregard it in this case.

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