Plaintiff’s Misstatements to Court and Failure to Preserve Electronic Financial Records Warrant Ultimate Sanction of Dismissal

Ridge Chrysler Jeep, LLC v. Daimler Chrysler Servs. N. Am., LLC, 2006 WL 2808158 (N.D. Ill. Sept. 6, 2006)

In this opinion (which was issued September 6, 2006, not 2005), the court adopted the Report and Recommendation of the magistrate judge assigned to handle discovery disputes in the case, and dismissed the case with prejudice. One basis for dismissal related to plaintiffs’ failure to preserve and produce financial records stored on computers and misrepresentations about same.

Plaintiffs were two dealerships (“Midlothian” and “Marquette”) that filed a verified complaint alleging that Chrysler persisted in a “shocking corporate policy of blatant racial discrimination and redlining” by refusing to provide financing for African-American customers purchasing cars at the dealerships. Plaintiffs alleged violation of the Automobile Dealers’ Day in Court Act, as well as state law violations of the Illinois Motor Vehicle Franchise Act, tortious interference with prospective business advantage, and breach of contract. Mr. Gerald Gorman was the president and owner of both dealerships, and he personally verified the facts included in plaintiffs’ verified complaint.

Chrysler filed a verified counterclaim against the dealerships, and added Gorman and his wife, Elizabeth Gorman, as counterclaim defendants. Chrysler alleged that plaintiffs defaulted on the original loan and security agreements through misleading statements, incomplete records, and payments to Gorman personally. Chrysler sought replevin, damages as against the Gormans for their personal guarantees of loan documents, and damages for breach of contract against both plaintiffs.

Subsequently, the dealerships filed an emergency request for a TRO against Chrysler. The dealerships alleged that Chrysler had refused to finance vehicle purchases from the Dealerships, and that Chrysler had threatened to stop all pending vehicle orders unless Gorman infused capital into the Dealerships and signed a release of claims against Chrysler, which Gorman refused to sign. The TRO request alleged that by early 2003, Chrysler retaliated by restricting factory orders, terminating lines of credit and sending notice of repossession. The dealerships requested a TRO to reinstate the lines of credit, lift the factory order restrictions, and cease the repossession. The dealerships alleged that without the TRO, they would be “forced out of business within days.” Gorman supplied an affidavit in support of the TRO, stating that he had: (i) tried to obtain alternate financing, but had been unable to due so due to the pending litigation, and (ii) put $925,000 of personal, unencumbered funds back into the dealership as working capital. Gorman’s affidavit specifically stated that the $925,000 “was an investment of personal money and is wholly unencumbered” and that the investment funds came from “sale of stock certificates and a direct investment from a long time business associate.” The court granted a stipulated TRO, but only after plaintiffs met certain conditions set by the court.

Later, during discovery, Chrysler moved for sanctions via two motions: one for false statements by Gorman in connection with the TRO, and a second for deliberate efforts by plaintiffs to conceal discoverable material. As grounds for the second motion, Chrysler cited “willful (or at least grossly negligent) failure to turn over to Chrysler a computer containing materially relevant data from Midlothian that could not be obtained elsewhere, as well as other missing financial data from the Dealerships.”

The dealerships maintained their financial records and general balance electronically, on a computer and accounting system rented from Reynolds & Reynolds, a data system vendor specializing in auto dealerships. The data for Midlothian was maintained on a computer located at Midlothian. The dealerships also maintained backup tapes, and also allegedly printed reports of some portions of the balance sheet.

During discovery, Chrysler had sought balance sheet information in both paper and electronic form. Plaintiffs had responded that they would produce the relevant and non-privileged information they had in their possession. Plaintiffs produced some paper records, but not a complete set of the financial records for the relevant periods. They produced some monthly data and some backup tapes, but did not produce Marquette’s monthly information in any form for 2000 and 2001, or most of the backup tapes, or the electronic balance sheet.

Starting in early 2004, Chrysler began to ask about the missing paper and electronic financial information. Chrysler’s attorneys specifically requested the electronic version, stating that the “client’s financial information-including their general ledgers-was stored on your clients’ computers.” Counsel for plaintiffs responded that “all Reynolds & Reynolds material in the possession of the dealerships or owner have been produced.” A few days later, counsel for plaintiffs restated “as for financial records on hard drive or discs, my clients again have none.” Counsel for plaintiffs reiterated in correspondence in May 2004 that “the dealerships have not had access to the Reynolds & Reynolds system since [the dealerships] went out of business.” Chrysler never received the data that was missing since the initial productions in late 2003.

When Chrysler deposed Gorman in June 2004, Gorman testified that there was no computer at Midlothian as of the date of his deposition, and that he did not know the location of any hard drive. He testified that he had “checked every square foot” in the Midlothian building, but did not find anything else. When Chrysler at last deposed Mr. Temple, the dealerships’ chief financial officer, he testified that Reynolds & Reynolds repossessed the physical computer from Midlothian’s offices in October 2004. He also testified that he told counsel about the repossession shortly after it occurred. Plaintiffs’ counsel did not communicate to counsel for Chrysler that the computer had been repossessed in October 2004.

In its motion for sanctions, Chrysler alleged that the financial data from both Midlothian and Marquette contained in the computer would have shown that plaintiffs engaged in inappropriate accounting practices that gradually dwindled the value of each of the dealerships. This, Chrysler alleged, would have shown that any financial harm to the dealerships came not from Chrysler’s alleged discriminatory lending practices, but rather from the poor management of the dealerships. Chrysler alleged that Gorman and the dealerships willfully withheld the Reynolds & Reynolds computer, containing the electronic financial data for Midlothian, and at least negligently withheld backup tapes and paper records, to the extent such records existed, for both Midlothian and Marquette.

In his detailed, 48-page Report and Recommendation of June 14, 2005 (available here), the magistrate judge decided that the combination of evidence presented by Chrysler constituted “clear and convincing evidence” that Gorman had made false statements and that Gorman and/or the dealerships had concealed relevant discoverable material. The magistrate judge found that “a lesser sanction is inappropriate” and recommended dismissal with prejudice. The district court agreed:

This clear and convincing evidence reveals that the Plaintiff, Gorman, lied in an affidavit submitted to the court in order to gain a monetary and strategic advantage over Defendant; misled Defendant as to the existence and location of evidence (the computers) which resulted in that evidence not being available for Defendant’s use in these proceedings; and either lost key pieces of evidence (notes of his conversations with Defendant’s agent) or fabricated their existence in the first instance, in an effort to bolster his position before the court and to inflame the passions of the court and the public. Each of these abuses can not be remedied by a monetary fine because each has resulted in damage that can not be remedied.

The court continued:

[T]he computers that were withheld from the defense could have supported Defendant’s theory that the withdrawal of floor plan financing was due to the financial incompetence of Plaintiffs and not from discriminatory motivations. Defendant took all appropriate steps to preserve that evidence to support its defense and counterclaims, yet Plaintiffs either intentionally concealed their existence until they were destroyed or acted with such incompetence that they were eventually destroyed. Either way, this critical evidence is lost forever and now Defendant is left to reconstruct its theories from spotty records and incomplete books. A monetary sanction can not bring that evidence back to life.

The court stated there was no doubt that Chrysler had been prejudiced by the conduct of plaintiffs throughout the case. The court observed that it had relied upon Gorman’s affidavit to compel Chrysler to enter into a “TRO that cost Chrysler in excess of half a million dollars.” It also noted that Chrysler had defended itself in the lawsuit for more than three years, and that the discovery materials withheld by plaintiffs were the key elements to Chrysler’s defense to the claims alleged by plaintiffs. The court further stated:

As to the prejudice to the legal system from Plaintiffs’ conduct, this case merits the harsh sanction of dismissal. The pattern of behavior exhibited by Plaintiffs included at least one prior incident of being fined for their abuse which demonstrates that the monetary sanction had little or no impact on deterring them from acting in the inappropriate manner in which they did. The Magistrate Judge correctly identified the difficulties during discovery which led to his eventual order requiring Plaintiffs to reveal the source of the money presented as part of the April TRO. Plaintiffs did not willingly reveal [plaintiffs’ counsel’s] role in the TRO money, requiring the Magistrate Judge to hold hearings to determine the source of that money. These are not the actions of truth-seeking individuals intent on having their day in court, but rather, sleight of hand tactics of manipulators seeking to use the federal court system to their own advantage. Plaintiffs’ actions with respect to the discovery violations constitute contumacious violations, having continued for nearly two years despite repeated requests from counsel for the Defendant, initially polite, and then increasingly firm, as the records and information essential to Defendant’s defense were not forthcoming. Even lacking prejudice to the non-offending party, a Court is entitled to say “enough is enough” in the face of flagrant violations by one party.

A copy of the underlying Report and Recommendation of June 14, 2005, is available here.