Delaware Corporate Law Decision – TR Investors, LLC v. Genger

January 28, 2010

Publication| Corporate Transactions| Corporate & Chancery Litigation

In TR Investors, LLC v. Genger, C.A. No. 3994-VCS (Del. Ch. Dec. 9, 2009), the Court of Chancery found that Arie Genger, the founder and chief executive officer of Trans-Resources, Inc. (“TRI”), acted in contempt of court and committed spoliation of evidence by authorizing the deletion of certain electronic files during pending litigation.  The Court’s remedy required Genger to (i) meet an evidentiary burden one level higher than would otherwise be applicable on any affirmative defense or counterclaim that he raised, (ii) produce any relevant documents to which he had made a claim of privilege, and (iii) produce corroborating evidence in the form of documents or another person’s testimony to the extent that the only evidence in support of Genger’s position on any material factual issue would be his own testimony.  Additionally, the Court awarded attorneys’ fees and expenses in a suggested amount of $750,000.  In its opinion, the Court emphasized its broad latitude to remedy violations of its orders and spoliation of evidence.

The plaintiffs (who were known as the “Trump Group”) and Genger had been involved in litigation for control over TRI’s board of directors.  In connection with the litigation, the Court entered a stipulated status quo order prohibiting the parties from destroying TRI-related documents (the “August Status Quo Order”).  To comply with the August Status Quo Order, TRI’s outside legal counsel hired the technology firm Kraft & Kennedy, Inc. (“K&K”) to copy and preserve the active files on TRI’s computer network.  K&K, however, did not copy and preserve several months of files on the network’s “unallocated” space, which contained both deleted files and temporary copies of files that had been previously opened.  After K&K’s review of TRI’s electronic files was completed, Oren Ohana, the technology consultant for Genger and TRI, informed Genger that copies of Genger’s personal files kept on TRI’s network may have been created and left on the network’s unallocated space.  At 1:00 a.m. on the night that TRI’s outside legal counsel and K&K concluded their review and left TRI’s offices, in an alleged effort to protect his personal files, Genger authorized Ohana to run software to permanently overwrite the unallocated space.

As part of a settlement to the litigation, the Trump Group took control of TRI.  Subsequent to the settlement, however, the Trump Group discovered that the unallocated space of TRI’s network had been overwritten.  As a result of its discovery, the Trump Group filed a motion to reopen the litigation and for an order to show cause as to why Genger should not be held in contempt of the August Status Quo Order.  In defense of the spoliation of evidence and contempt of court allegations brought by the Trump Group, Genger asked the Court to consider the actions taken by the Trump Group in violation of a separate status quo order that had been entered by the Court which prohibited the Trump Group from accessing or attempting to access Genger’s personal documents except in accordance with protocols outlined by the Court (the “December Status Quo Order”).

The Court found that the Trump Group had shown, by clear and convincing evidence, that Genger consciously violated the August Status Quo Order that prohibited him from tampering with or destroying any TRI-related files and therefore was in contempt of the Court’s order.  In so finding, the Court discredited Genger’s argument that he thought he was just disposing of copies of documents because he had acted “secretly, in the dead of night” and did not consult TRI’s legal counsel (or his own) in overwriting the unallocated space.  The Court also found that Genger was under a duty to preserve evidence under the August Status Quo Order but had acted intentionally (or at least recklessly) in deleting the data; thus he had spoliated evidence.  While the Court entered its stringent remedy, it did not enter the default judgment requested by the Trump Group, in part because of the Trump Group’s own conduct in failing to protect Genger’s personal information despite the December Status Quo Order.

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