Surowiec v. Capital Title Agency, Inc.

District Court, D. Arizona
2011 U.S. Dist. LEXIS 48011, 2011 WL 1671925, 790 F. Supp. 2d 997 (2011)

ELI5:

Rule of Law:

A duty to preserve evidence arises when a party reasonably anticipates litigation, such as receiving a letter threatening legal action, and a failure to implement a litigation hold resulting in the loss of evidence may constitute gross negligence warranting an adverse inference jury instruction. Additionally, uncertainty regarding the exact amount of damages does not preclude recovery if the fact of damage is proven.

Facts:

Plaintiff James Surowiec purchased a condominium in Scottsdale, Arizona, from developer Shamrock Glen.
Defendant Scott Romley, an employee of Defendant Capital Title Agency, served as the escrow agent for the transaction.
Romley failed to ensure that existing liens held by investors on the property were paid off at closing, leaving the property encumbered.
Surowiec attempted to sell the property but was unable to do so because of the unresolved title defects and liens.
While Surowiec was unable to sell, the Arizona real estate market suffered a severe downturn, significantly reducing the property's value.
An attorney for the developer sent a letter to Capital Title's in-house counsel explicitly threatening litigation regarding the unpaid liens and mishandled escrow accounts.
Despite receiving this letter, Capital Title's counsel failed to issue a 'litigation hold' or suspend the company's automatic 30-day email deletion policy.
Relevant emails concerning Romley's involvement and the transaction were permanently deleted and destroyed.

Procedural Posture:

Plaintiff filed a complaint against Defendants in the U.S. District Court for the District of Arizona alleging breach of contract, fraud, and negligence.
Defendants filed a motion for summary judgment regarding compensatory and punitive damages.
Plaintiff filed a cross-motion for summary judgment on the claim of breach of fiduciary duty.
Plaintiff filed separate motions for sanctions alleging spoliation of evidence and discovery abuses.

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Issue:

Is the plaintiff entitled to summary judgment on fiduciary duty claims or sanctions for spoliation, and are the defendants entitled to summary judgment on damages where the precise amount is disputed and electronic evidence was destroyed?

Opinions:

Majority - Judge David G. Campbell

Yes, in part, as the court found that while genuine issues of material fact precluded summary judgment on the breach of fiduciary duty and the exact amount of compensatory damages, the defendants' failure to preserve evidence constituted gross negligence warranting sanctions. Regarding damages, the court rejected the defendants' argument that the plaintiff's damages were too speculative. The court reasoned that since the fact of damage (the inability to sell the asset) was proven, exact certainty in the amount was not required to survive summary judgment. However, the court granted summary judgment for the defendants on punitive damages, finding no clear and convincing evidence of an 'evil mind.' regarding spoliation, the court held that the threatening letter triggered a duty to preserve evidence. Capital Title's failure to stop its automatic email deletion constituted gross negligence. Consequently, the court granted a request for an adverse inference jury instruction, allowing the jury to presume the lost evidence was prejudicial, though it denied the harsher sanction of default judgment. The court also awarded monetary sanctions for discovery abuses related to inadequate document searches.

Analysis:

This decision is significant for its strict enforcement of electronic discovery obligations and the definition of when the duty to preserve evidence triggers. By ruling that a threatening letter creates a duty to preserve—even before a specific lawsuit is filed—the court places a heavy burden on corporate counsel to immediately implement litigation holds. The finding that a failure to issue such a hold constitutes 'gross negligence' sets a high standard for conduct in federal civil litigation. Furthermore, the case reinforces the principle that plaintiffs need not prove damages with absolute mathematical precision at the summary judgment stage, provided the existence of damage is clear.

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