Cedar Rapids Lodge & Suites, LLC et al v. JFS Development, Inc. et al

Filing 192

ORDER adopting 160 Report and Recommendations to deny 136 Motion for Sanctions against Defendant John F. Seibert filed by Michael Coborn, Raymond Mulford, Cedar Rapids Lodge & Suites, LLC, Jerred Ruble, Scott Shisler, Ronald Sailer, Jacob Sailer, Theresa A Mulford, Pamela J. Cobb Revocable Trust, James T Rymes, Julie Shisler and Rhonda L Coborn. 173 Plaintiffs Objections are overruled and the 136 Motion for Sanctions is denied. Signed by Chief Judge Linda R Reade on 11/29/2011 (copy w/NEF to Dft Vosburg via US Mail). (skm)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF IOWA
CEDAR RAPIDS DIVISION
CEDAR RAPIDS LODGE & SUITES,
LLC et al.,
Plaintiffs,

No. 09-CV-175-LRR

vs.

ORDER

JFS DEVELOPMENT, INC., f/k/a JCS
DEVELOPMENT, INC., et al.,
Defendants.
____________________
TABLE OF CONTENTS
I.

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II.

PROCEDURAL BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

III.

RELEVANT FACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

IV.

STANDARDS OF REVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

V.

APPLICABLE LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

VI.

OBJECTIONS TO THE REPORT AND RECOMMENDATION . . . . . . . . 7
A.
Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
B.
Prejudice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

VII.

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
I. INTRODUCTION
The matters before the court are Plaintiffs’ “Motion for Sanctions Against

Defendant John F. Seibert for Spoliation of Evidence” (“Motion for Sanctions”) (docket
no. 136) and Plaintiffs’ Objections (docket no. 173) to United States Magistrate Judge Jon
S. Scoles’s Report and Recommendation (docket no. 160). Judge Scoles recommends that
the undersigned deny Plaintiffs’ Motion for Sanctions.
II. PROCEDURAL BACKGROUND
On December 3, 2009, Plaintiffs filed an eighty-seven-page, eighteen-count

Complaint (docket no. 1). The Complaint arises from the development of an AmericInn
hotel (“Hotel”) in Cedar Rapids, Iowa. Plaintiffs allege that Defendants fraudulently
induced them to invest in the Hotel and proceeded to mishandle the financing, construction
and/or management of the Hotel. Plaintiffs seek monetary damages and declaratory relief.
Since Plaintiffs filed the Complaint, Defendant Ted Vosburg has filed for
bankruptcy, see “Notice of Filing of Bankruptcy” (docket no. 132), and the Clerk of Court
entered a Default (docket no. 101) against Defendant JFS Development, Inc. (“JFS”). The
Plaintiffs have also dismissed their claims against Defendant Marc Gabrielson. See
“Stipulation for Dismissal” (docket no. 181). A jury trial is scheduled to commence
before the undersigned in January of 2012.
On December 3, 2009, Plaintiffs mailed a “litigation hold/spoliation letter” to
Seibert, which instructed him to “secure and preserve” documents related to the Hotel
project. Pl. Ex. 1 (docket no. 136-1). On November 15, 2010, Plaintiffs filed a “Motion
to Compel Production of Documents” (docket no. 89), which claimed that Seibert’s and
JFS’s initial disclosures were incomplete and that they did not respond to subsequent
document requests. On the morning the parties were scheduled to argue the Motion to
Compel Production of Documents, counsel for Seibert and JFS sent Plaintiffs 2600 more
pages of documents and stated that there were no other responsive documents. See Pl. Ex.
5 (docket no. 136-5). On December 6, 2010, Judge Scoles granted the Motion to
Withdraw (docket no. 95) that counsel for Seibert and JFS filed.
On January 13, 2011, Plaintiffs filed a “Motion to Compel Production of
Defendants [Seibert’s] and [JFS’s] Computer Systems and Hardware for Inspection and
Copying” (“Motion to Compel”) (docket no. 96). On January 27, 2011, Judge Scoles held
a hearing on the Motion to Compel. See Minute Entry (docket no. 102). Robert H. Miller
and Kevin J. Visser represented Plaintiffs at the hearing. Seibert did not appear and was
not represented. On February 1, 2011, Judge Scoles granted the Motion to Compel and

2

ordered Seibert and JFS to produce their computer systems and hardware for inspection
and copying at their expense. See Order (docket no. 103). Seibert eventually complied
with the Order after some logistical disputes. On February 15, 2011, Plaintiffs filed a
“Motion to Compel Access to Documents” (docket no. 104), which Judge Scoles denied,
see “Ruling on Motion to Compel” (docket no. 113).
On July 28, 2011, Plaintiffs filed the Motion for Sanctions. On August 23, 2011,
Judge Scoles held a hearing on the Motion for Sanctions. See Minute Entry (docket no.
144). At the hearing, attorneys Miller, Visser and Brian Thomas represented Plaintiffs,
Seibert appeared personally and represented himself, and attorney Kevin Caster appeared
on behalf of Defendant Lightowler Johnson Associates, Inc. On September 27, 2011,
Judge Scoles filed the Report and Recommendation. On October 11, 2011, Plaintiffs filed
their Objections. The matter is now fully submitted and ready for decision.
III. RELEVANT FACTS
In the Motion for Sanctions, Plaintiffs seek a default judgment against Seibert,
arguing that he failed to adequately respond to discovery requests and intentionally
destroyed evidence. In response to the Motion to Compel, Seibert produced seven
computers/laptops, ten internal/external hard drives and twenty-three compact discs for
Plaintiffs’ forensic computer expert, Rick Stieghorst, to analyze. Stieghorst made copies
of the evidence, returned the originals to Seibert and analyzed the copies at a forensic lab.
During the analysis, Stieghorst searched the data on the computers and hard drives using
search terms and a protocol the parties had previously agreed upon. Stieghorst stated that
the search resulted in 34,025 previously undiscovered documents. Pl. Ex. 7 (docket no.
136-7) at ¶ 13.
During the forensic search, Stieghorst noted several issues. First, Stieghorst
identified four hard drives that had been connected to Seibert’s old laptop and three hard
drives that had been connected to another of Seibert’s laptops but were not among the

3

external drives that Seibert produced. Id. at ¶¶ 6-7. Additionally, two of the external
drives that Seibert produced were too physically damaged to be examined. Id. at ¶ 8.
Seibert’s explanation at the hearing for the missing drives was that an external drive might
have been attached during computer repairs, to download information to give to third
parties or customers or for an employee’s personal use. See Hearing Tr. (docket no. 169)
at 61-62, 71.
Second, Stieghorst reported that, during a system upgrade on one of Seibert’s
laptops in May of 2010, all of the laptop’s files were moved to temporary folders, and the
temporary folders were subsequently deleted when the upgrade was complete. Pl. Ex. 7
at ¶ 19. The analysis showed that many folders that seemed relevant to the Hotel project
existed as of the system upgrade in 2010 but were not found on the laptop during the
forensic examination on February 16, 2011. See id. Seibert indicated at the hearing that
the folders may never have contained files if they were created for a potential future
property. See Hearing Tr. at 65-66.
Third, Stieghorst reported that files in one of the hard drives had been moved to the
“Recycle Bin” or permanently deleted the day before the forensic analysis occurred, and
he was only able to recover some of the files. See Pl. Ex. 7 at ¶ 20. Seibert testified that
he had taken his laptop in for repairs, resulting in multiple sets of backup data on the
external hard drive from his computer and the computer that the repair store loaned to him.
See Hearing Tr. at 71-72. Seibert said that he asked the repair store to consolidate the
information on the hard drive, and he did not pick up the hard drive until the day before the
forensic examination. Id.
Fourth, the analysis further revealed that the master folder on another external hard
drive was deleted, and, while some of the files were duplicated elsewhere in the information
that Seibert produced, other files were not recoverable and could not be found in other
locations. See Pl. Ex. 7 at ¶ 21. Stieghorst also found “orphaned files” that still existed

4

on the system but whose parent folders had been deleted, resulting in the files containing
only “garbage” data. Id. at ¶ 22.
Finally, during a review of Seibert and JFS’s emails, Stieghorst found an email with
the title “Cedar Rapids” sent to Seibert’s employee that was deleted out of the sent mail box
the day after it was sent. Id. at ¶ 23. Stieghorst testified that he thought this email was
likely “targeted to be deleted” because typically the purpose for selectively deleting emails
from the sent mail folder is to hide the existence of the email. Hearing Tr. at 59; see also
Pl. Ex. 7 at ¶ 23.
Plaintiffs state that the forensic analysis recovered “at least 5,196 documents” that
Defendants deleted in violation of the litigation hold and that there were potentially
thousands of relevant documents that could not be recovered during the analysis. Motion
for Sanctions at ¶¶ 17-18; see also Pl. Ex. 7 at ¶ 17.
IV. STANDARDS OF REVIEW
When a party files a timely objection to a magistrate judge’s report and
recommendation, “[a] judge of the court shall make a de novo determination of those
portions of the report or specified proposed findings or recommendations to which objection
is made.” 28 U.S.C. § 636(b)(1); see also United States v. Lothridge, 324 F.3d 599, 600
(8th Cir. 2003); Fed. R. Civ. P. 72(b)(3) (“The district judge must determine de novo any
part of the magistrate judge’s disposition that has been properly objected to.”). “A judge
of the court may accept, reject, or modify, in whole or in part, the findings or
recommendations made by the magistrate judge.” 28 U.S.C. § 636(b)(1); see also Fed. R.
Civ. P. 72(b)(3). It is reversible error for the district court to fail to engage in a de novo
review of a magistrate judge’s report when such review is required. See Lothridge, 324
F.3d at 600; Hosna v. Groose, 80 F.3d 298, 306 (8th Cir. 1996); Grinder v. Gammon, 73
F.3d 793, 795 (8th Cir. 1996). However, the court reviews portions of the report and
recommendation for which there are no objections for plain error only. See Griffini v.

5

Mitchell, 31 F.3d 690, 692 (8th Cir. 1994).
V. APPLICABLE LAW
The court has the discretion to “fashion an appropriate sanction for conduct which
abuses the judicial process.” Chambers v. NASCO, Inc., 501 U.S. 32, 44-45 (1991). This
discretion includes dismissal of a lawsuit. Edgar v. Slaughter, 548 F.2d 770, 772 (8th Cir.
1977) (citing sanctions authorized by Federal Rule of Civil Procedure 37(b)(2)). The power
to sanction by dismissal should be used sparingly, however, because “in our system of
justice the opportunity to be heard is a litigant’s most precious right and should be sparingly
denied.” Id. at 773. “‘[T]here is a strong policy favoring a trial on the merits and against
depriving a party of his day in court.’” Id. at 772 (quoting Fox v. Studebaker-Worthington,
Inc., 516 F.2d 989, 996 (8th Cir. 1975)). “Such a drastic sanction is typically reserved for
the most egregious offenses.” Process Controls Int’l, Inc. v. Emerson Process Mgmt., No.
4:10CV645 CDP, 2011 WL 5006220, at *7 (E.D. Mo. Oct. 20, 2011).
Courts have stated that a default judgment is not appropriate unless “a party’s
‘failure to comply [with discovery] has been due to . . . willfulness, bad faith, or any fault
of [the party].’” Comiskey v. JFTJ Corp., 989 F.2d 1007, 1009 (8th Cir. 1993) (alteration
in original) (quoting Societe Internationale Pour Participations Industrielles Et
Commerciales, S.A. v. Rogers, 357 U.S. 197, 212 (1958)). Dismissal is appropriate for
spoliation of evidence when a party’s “conduct ‘has precluded [the] action [from] being
decided on the merits; the jury can no longer weigh conflicting evidence because
[defendants have] ensured whatever evidence on certain of defendants’ computers that may
have been favorable to plaintiff will never see the light of day.’” Ameriwood Indus., Inc.
v. Liberman, No. 4:06CV524-DJS, 2007 WL 5110313, at *7 (E.D. Mo. July 3, 2007)
(quoting Commc’ns Ctr., Inc. v. Hewitt, No. Civ.S-03-1968 WBS KJ, 2005 WL 3277983,
at *3 (E.D. Cal. April 5, 2005)).
Before the court can sanction a party for spoliation of evidence, “‘there must be a

6

finding of intentional destruction indicating a desire to suppress the truth.’” Menz v. New
Holland N. Am., Inc., 440 F.3d 1002, 1006 (8th Cir. 2006) (quoting Stevenson v. Union
Pac. R.R. Co., 354 F.3d 739, 746 (8th Cir. 2004)). “‘Intent is rarely proved by direct
evidence, and a district court has substantial leeway to determine intent through
consideration of circumstantial evidence, witness credibility, motives of the witnesses in a
particular case, and other factors.’” Greyhound Lines, Inc. v. Wade, 485 F.3d 1032, 1035
(8th Cir. 2007) (quoting Morris v. Union Pac. R.R., 373 F.3d 896, 902 (8th Cir. 2004)).
In addition to intent, a court must find that the destroyed documents prejudiced the
opposing party’s case. “There must be a finding of prejudice to the opposing party before
imposing a sanction for destruction of evidence.” Stevenson, 354 F.3d at 748 (citing Dillon
v. Nissan Motor Co., 986 F.2d 263, 267 (8th Cir. 1993)); see also Groves v. Cost Planning
& Mgmt. Int’l, Inc., 372 F.3d 1008, 1010 (8th Cir. 2004) (holding that a district court did
not err by “failing to recognize that [the defendant] destroyed documents” where the
plaintiff did not show that the destroyed documents would have helped prove her case).
“The requisite element of prejudice is satisfied by the nature of the evidence destroyed in
th[e] case.” Stevenson, 354 F.3d at 748 (holding that the district court did not abuse its
discretion in sanctioning a defendant for destroying an audio tape when it was the only
recording of conversations held at the time of a train accident); see also Gallagher v.
Magner, 619 F.3d 823, 844 (8th Cir. 2010) (holding that a district court’s refusal to grant
sanctions was not an abuse of discretion because there was no evidence of intent to destroy
and plaintiffs did not sufficiently show that missing emails “would be of a different
character than the emails already recovered and produced”), reh’g denied, 636 F.3d 380
(8th Cir. 2010), cert. granted, 79 U.S.L.W 3494 (U.S. Nov. 7, 2011) (No. 10-1032).
VI. OBJECTIONS TO THE REPORT AND RECOMMENDATION
Plaintiffs request in the Motion for Sanctions that the court sanction Seibert by
entering a default judgment against him for spoliation of evidence. Plaintiffs generally

7

object to Judge Scoles’ conclusion in his Report and Recommendation that Plaintiffs are not
entitled to a default judgment. Plaintiffs primarily claim that intent to destroy documents
can be inferred if the destruction happened after litigation commenced and that the
destruction of evidence prejudiced their case.
A. Intent
Plaintiffs first argue that it is not necessary for the court to find that Seibert had the
intent to destroy evidence with a desire to suppress the truth because the destruction of
evidence occurred after Seibert received the litigation hold letter. Plaintiffs rely on
Stevenson, in which the Eighth Circuit Court of Appeals held that the district court did not
abuse its discretion by giving an adverse interest jury instruction for spoliation of evidence.
The Eighth Circuit held that “[s]anctioning the ongoing destruction of records during
litigation and discovery by imposing an adverse inference instruction is supported by either
the court’s inherent power or Rule 37 of the Federal Rules of Civil Procedure, even absent
an explicit bad faith finding.” 354 F.3d at 750. Based on this holding, Plaintiffs argue that
if documents are destroyed after litigation has commenced, the intent requirement has been
fulfilled.
Given the facts that pertain to Seibert’s intent, the Stevenson holding does not
control. The Eighth Circuit has acknowledged that whether to impose a sanction and which
type of sanction to impose is within the district court’s discretion.
To be sure, a district court does not abuse its discretion by
imposing sanctions, even absent an explicit bad faith finding,
where a party destroys specifically requested evidence after
litigation has commenced. Stevenson, 354 F.3d at 749-50.
However, where a court expressly finds, as here, that there is
no evidence of intentional destruction of evidence to suppress
the truth, then the district court also acts within its discretionary
limits by denying sanctions for spoliation of evidence.
Gallagher, 619 F.3d at 845. Furthermore, there is support for declining to extend the
Stevenson holding to the sanction of dismissal. In Process Controls International, the
8

United States District Court for the Eastern District of Missouri declined to dismiss an
action against a party that burned documents after litigation began. 2011 WL 5006220, at
*5, *7. The District Court held that a finding of intent to destroy with the desire to
suppress the truth was necessary for dismissal and the spoliation at issue was not serious
enough to warrant dismissal. Id. at *7. The court, citing Stevenson, went on to give an
adverse inference instruction because the party destroyed evidence after litigation started.
Id. at *8.
The court agrees with Judge Scoles that the record does not establish that Seibert
intentionally destroyed evidence with a desire to suppress the truth. Seibert provided
explanations for much of the missing evidence, and Seibert’s actions in this case do not rise
to the level of actions in cases where courts have found that computer documents were
intentionally deleted. See Ameriwood Indus., 2007 WL 5110313, at *3-5 (holding that
installing and using computer scrubber software to delete files on multiple computers days
before the computers were to be produced was sufficient to establish intentional
destruction); Commc’ns Ctr., 2005 WL 3277983, at *1-3 (holding that destruction of
evidence was intentional where the defendant installed and used a program called “Evidence
Eliminator” to specifically target and delete apparently relevant files and reformatted a hard
drive after receiving a court order to produce mirror images of hard drives). Furthermore,
the court declines to extend the Stevenson holding to the sanction of dismissal in this case.
Such a severe sanction is not appropriate without sufficient evidence of intentional
destruction of evidence with a desire to suppress the truth.
B. Prejudice
Plaintiffs also argue in their Objections that the documents destroyed were relevant
to their claims, and the loss of that evidence was therefore prejudicial to their case.
Plaintiffs argue that, where there is a finding of bad faith, relevance and prejudice can be
inferred. Plaintiffs incorrectly conclude that Judge Scoles acknowledged bad faith by

9

Seibert in his Report and Recommendation. Judge Scoles stated that there is evidence that
documents were destroyed after Seibert received the litigation hold letter, but that “a
stronger showing of bad faith is required” for default judgment.

Report and

Recommendation at 19. The court agrees that, because there is insufficient evidence that
Seibert intentionally destroyed documents, there is no finding of bad faith, and, therefore,
the inference of prejudice is not available on these facts.
Plaintiffs also have not shown that the missing files would be different or more
helpful to their claims than the significant number of documents that Plaintiffs already have
received and recovered. See Gallagher, 619 F.3d at 844. Unlike the unique audio tape in
Stevenson, there is not sufficient proof that the loss of these computer documents is
prejudicial to Plaintiffs’ case. See 354 F.3d at 748. Plaintiffs maintain that the forensic
examination did not recover evidence relating to the Hotel project investment prospectus
or evidence of negotiations and discussions regarding the draft agreement between the
architect and CRLS. Plaintiffs, however, do not present any evidence beyond conjecture
that documents relating to these specific aspects of Plaintiffs’ claims were deleted. The
court therefore agrees with Judge Scoles that the record does not support a finding that the
missing evidence would likely support Plaintiffs’ claims.
Plaintiffs argue that default is the only sanction that is appropriate under the
circumstances of this case. Citing Leon v. IDX Sys. Corp., 464 F.3d 951 (9th Cir. 2006),
Plaintiffs claim that lesser sanctions are not sufficient to remedy the harm caused in cases
where documents have been permanently deleted in bad faith. Because the record is not
sufficient to support a finding of bad faith the court finds that entering a default judgment
is not the appropriate sanction here.
VII. CONCLUSION
In light of the foregoing, the court finds that, while there is evidence that documents
were destroyed after Seibert received the litigation hold letter, there is not sufficient

10

evidence of intent or prejudice to warrant a default judgment against Seibert. The loss of
the destroyed documents in this case does not preclude this action from being tried on the
merits. Furthermore, there is a strong public policy in favor of deciding a case on the
merits, and Plaintiffs may request an adverse interest instruction at the time of trial.1
It is HEREBY ORDERED THAT:
(1)

Plaintiffs’ Objections (docket no. 173) are OVERRULED;

(2)

The Report and Recommendation (docket no. 160) is ADOPTED; and

(3)

The Motion for Sanctions (docket no. 136) is DENIED.

DATED this 29th day of November, 2011.

1

Plaintiffs request an adverse interest instruction in their Objection, but they did
not request it in the Motion for Sanctions. Consequently, the court declines to decide
the issue at this time.
11