MEMORANDUM AND ORDER
The spoliation motion now before the Court raises significant issues about when the duty to preserve evidence arises, what constitutes ah adequate litigation hold, and what degree of culpability warrants spoliation sanctions. Determination of the motion ultimately turns, however, on whether relevant information has been lost.
The defendant, UBS Real Estate Securities, Inc. (“UBS”), contends that U.S. Bank, N.A. (“U.S. Bank”), the trustee for the trusts that are the nominal plaintiffs in this action, failed to implement any litigation hold when it should have reasonably anticipated litigation. Further, UBS maintains that when U.S. Bank belatedly sought to preserve documents, the hold that it did impose was inadequate. As a consequence, information was destroyed, and UBS now moves for an order dismissing the claims asserted by U.S. Bank or, at a minimum, an order directing the jury to draw an adverse inference against U.S. Bank. For the reasons that follow, the motion is denied.
Background
A. Residential Mortgage-Backed Securities
Asset-backed securities distribute risk and return to investors by pooling cash-producing financial assets and issuing securities backed by the pool of underlying assets. (Complaint (“Compl.”), ¶ 14). One form of asset-based securities comprises Residential Mortgage-Backed Securities (“RMBS”), where the underlying assets consist of residential mortgage loans. (Compl., ¶¶ 14-15). Generally, a sponsor will create a portfolio of mortgage loans, which it will transfer to a trust, sometimes through an intermediary known as the depositor. (Compl., ¶ 15). Once the trust receives the portfolio of mortgage loans, it issues RMBS, using the pool of loans as collateral. (Compl., ¶ 16). Investors purchase the securities, which are known as
B. The Transactions
Three transactions are at issue in this case. The first closed on November 15, 2006, and created the Mastr Adjustable Rate Mortgages Trust 2006-OA2 (“MARM 2006-OA2”). (Compl., 20). The Trust issued 21 classes of certificates with a total face value of $1.99 billion, backed by residential mortgages with an aggregate principal balance of approximately $2.01 billion at closing. (Compl., ¶ 20). The second transaction closed on January 16, 2007, and established the Mastr Adjustable Rate Mortgages Trust 2007-1 (“MARM 2007-1”). (Compl., ¶ 21). MARM 2007-1 issued 40 classes of certificates with a total face value of approximately $2.09 billion, backed by mortgages with an aggregate principal balance of approximately $645 million. (Compl., ¶ 21). Finally, the third transaction closed on May 15, 2007, creating the Mastr 2007-3 Adjustable Rate Mortgages Trust (“MARM 2007-3”). (Compl., ¶ 22). MARM 2007-3 issued 28 classes of certificates with a total face value of approximately $2.57 billion, backed by mortgages with an aggregate principal balance of approximately $2.58 billion. (Compl., ¶22). In each instance, UBS served as the sponsor, assembling the portfolio of residential mortgages, which it transferred to its affiliated depositor, Mortgage Asset Securitization Transactions, Inc. (“MAST”); MAST, in turn, conveyed the loans to the respective trusts. (Compl., ¶¶ 11, 23, 25). In each transaction, Assured Guaranty Municipal Corp. (“Assured”) provided financial guaranty insurance on certain classes of the certificates that the trusts ultimately issued. (Compl., ¶¶ 9, 20-22).
Each of the transactions was governed by a pooling and servicing agreement (“PSA”), the terms of which were substantially the same. (Compl., ¶¶ 25-30). In each of the PSAs, UBS made representations and warranties concerning the quality of the underlying residential mortgages, including that they were underwritten in accordance with the originator’s guidelines and that information about such items as the loan-to-value ratio of the mortgage and the borrower’s debt-to-income ratio was true and correct. (Compl., ¶¶ 27-28). Under the PSAs, if Assured, as Certificate Insurer, determined that any mortgage loan failed to conform to the representations in a material way, it was entitled to give notice to UBS, which was then obligated to cure the breach, substitute a conforming loan, or repurchase the defective loan. (Compl., ¶ 29). If UBS did not cure or repurchase the loan within 90 days, U.S. Bank, as Trustee, was required to enforce UBS’s obligations. (Compl., ¶ 30).
C. The Litigation
On February 2, 2012, Assured filed an action against UBS in New York State Supreme Court, which UBS removed to this court on March 5, 2012 (the “Assured Litigation”). Assured asserted three claims for breach of contract and two claims for declaratory judgment. The first contract claim asserted that UBS breached its representations and warranties with respect to the quality of the underlying mortgages. Assured Guaranty Municipal Corp. v. UBS Real Estate Securities, Inc., No. 12 Civ. 1579,
UBS moved to dismiss the complaint, and on August 15, 2012, the Honorable Harold Baer, U.S.D.J., issued a decision granting the motion in part and denying it in part. He denied the motion to dismiss the contract claims contained in the first and third causes of action but dismissed the demands for declaratory judgment in the fourth and fifth causes of action. Id. at *3-7. Most importantly for present purposes, he dismissed Assured’s repurchase claims, holding that under the PSAs, Assured was not an entity that could enforce the repurchase obligation; it could only direct the Trustee to do so. Id. at *4.
Accordingly, U.S. Bank filed the instant action as a related case on September 28, 2013.
During the course of discovery, UBS raised a number of questions about U.S. Bank’s efforts to preserve electronically stored information. Pursuant to U.S. Bank’s standard policy, email messages are automatically deleted from the system after 90 days and then remain on backup media for another five days. (USBank Messaging Standard Detail, attached as Exh. 2 to Declaration of Scott D. Musoff dated June 19, 2013 (“Musoff Deel.”), at 1; Tr. at 20).
In order to implement the litigation hold, each custodian met first with a business person and later with a business person, in-house counsel, and outside counsel. (Coll-yard 4/22/13 Letter at 4). The custodians were instructed to preserve relevant e-mails by gathering and forwarding them to a legal hold folder that was not subject to autodelete. (Collyard 4/22/13 Letter at 4). Other documents were preserved because they were not subject to deletion at all. For example, when a U.S. Bank employee printed out an email and sent in to a central file, it would remain there indefinitely. (Collyard 4/22/13 Letter at 4). Similarly, documents pertaining to the individual deals were re
A. Legal Standard
“Spoliation is ‘the destruction or significant alteration of evidence, or the failure to preserve property for another’s use as evidence in pending or reasonably foreseeable litigation.’ ” Orbit One Communications, Inc. v. Numerex Corp.,
Where a party seeks sanctions based on the spoliation of evidence, it must establish:
(1) that the party having control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that the records were destroyed with a culpable state of mind; and (3) that the destroyed evidence was relevant to the party’s claim or defense such that a reasonable trier of fact could find that it would support that claim or defense.
Residential Funding,
1. Obligation to Preserve
“The obligation to preserve evidence arises when the party has notice that the evidence is relevant to litigation,” including instances where suit has not been filed but the party “should have known that the evidence may be relevant to future litigation.” Kronisch v. United States,
UBS presents a litany of occurrences that it asserts should have caused U.S. Bank to reasonably anticipate litigation. These began in early 2010, after Assured requested
1. Assured’s allegations of breaches of the representations and warranties on hundreds of loans and subsequent repurchase demands between August and December 2010. (Def. Memo, at 4-5);
2. Certain certifieateholders’ threats of litigation in August and September 2010. (Def. Memo, at 5-6);
3. Amendment of a complaint in December 2010 in a class action lawsuit pending in the District of New Jersey, which named the MARM 2007-3 Trust as a defendant, alleging that it issued documents containing “material misstatements of fact.” (Def. Memo, at 6);
4. U.S. Bank’s agreement in April 2011 to cooperate with Assured’s pre-litigation investigation into “enforcing put back rights on behalf of certificate holders” and Assured’s later inquiry requesting a discussion with U.S. Bank’s counsel on “how [ ] a lawsuit could be brought.” (Def. Memo, at 6-8; Email of Linda Kobrin dated March 29, 2011, attached as Exh. 15 to Musoff Decl., at 1; E-mail of Linda Kobrin dated Oct. 20, 2011, attached as Exh. 34 to Musoff Decl., at 1);
5. U.S. Bank’s recognition in November 2011 that Assured might request it “to send [ ] breach notices and repurchase demands” and Assured’s subsequent filing of the Assured Litigation in February 2012. (E-mail of Laura Cawley dated Nov. 18, 2011 (“Cawley 11/18/11 E-mail”), attached as Exh. 35 to Musoff Decl.; Def. Memo, at 8-9);
6. A certificateholder’s requests in July 2012 that U.S. Bank investigate the strength of Assured’s allegations and intervene in the Assured litigation. (Def. Memo, at 9-10);
7. Judge Baer’s August 19, 2012, ruling in the Assured Litigation that only U.S. Bank could enforce repurchase provisions of the PSAs. (Def. Memo, at 10-11); Assured Guaranty,2012 WL 3525613 , at *4;
8. The filing of this action in September 2012. (Def. Memo, at 11).
U.S. Bank contends that there was no “ ‘credible probability’ ” of litigation until September 28, 2012, when it filed this suit and promptly instituted a litigation hold.
The duty to preserve arose, at the latest, when the Assured Litigation was filed in February 2012. Indeed, it may have arisen prior to that date, for example, in December 2011, when Assured had demanded the repurchase of thousands of loans. (Def. Memo, at 4; Complaint, Assured Guaranty Municipal Corp. v. UBS Real Estate Securities Inc., Index No. 650327/2012, New York County Supreme Court (“State Court Compl.”), attached as Exh. 8 to Musoff Deck, ¶ 52). While U.S. Bank contends that the mere investigation of certain loans, or even demands to repurchase, did not, in this ease, indicate a sufficient probability that the trustee would be directed to institute litigation (PL Memo, at 12), it is clear that by the end of 2011, the volume of those demands had exploded. Indeed, the principal value of those loans totaled almost $1 billion, but by February 2012, UBS had only agreed to re
However, it is unnecessary to decide if the repurchase demands alone triggered the obligation to preserve, because it is clear that when Assured sued UBS in connection with them, U.S. Bank should have expected that it would be required to participate in litigation. As Judge Baer held, the PSAs are clear: The trustee is the entity responsible for enforcing repurchase obligations, and Assured’s status as a third-party beneficiary of the agreements did not absolve the trustee of that responsibility. Assured Guaranty,
2. Culpability
“This circuit follows a ‘case-by-ease approach to the failure to produce relevant evidence’ because ‘such failures occur along a continuum of fault — ranging from innocence through the degrees of negligence to intentionality.’ ”
a. Bad Faith
UBS contends that U.S. Bank’s failure to preserve evidence constitutes bad faith for two primary reasons: (1) U.S. Bank allegedly ignored a warning in an order issued in Verona v. U.S. Bancorp, a case in the Eastern District of North Carolina, stating that “because of the extremely short retention time for certain documents and the absence of back-up tapes, [ ] U.S. Bank [ ] and [its] counsel must be particularly vigilant in promptly implementing legal holds so as to preserve evidence that may be relevant to future litigation” (Order dated April 19, 2010 (“Verona Order”), attached as Exh. 1 to Musoff Deck, at 9; Def. Memo, at 18); and (2) the litigation hold U.S. Bank implemented “was woefully insufficient,” because it did not suspend the auto-delete function for relevant custodians, omitted certain custodians, and “relied on each custodian’s self-selection of emails to send to a ‘litigation hold’ folder” (Def. Memo, at 19). But neither the Verona order nor U.S. Bank’s implementation of its litigation hold indicate bad faith.
First, while encouraging U.S. Bank to be vigilant in instituting legal holds, the Verona order actually approved of the company’s document retention policy, finding it a reasonable, “neutral policy aimed at managing the presumably large volumes of email generated by a sizable company.” (Verona Order at 6). There is no showing that U.S. Bank “ignored” the court’s advice; indeed, I fail to see how the admonition to be “vigilant” adds anything to this discussion. Vigilance is, of course, to be encouraged. But a failure of vigilance does not necessarily indicate bad faith.
Nor was U.S. Bank’s identification of the key players subject to the litigation hold inadequate. UBS complains that Laura Cawley, the “main contact between Assured and U.S. Bank,” was not included in the original litigation hold but was added at the beginning of 2013. (Def. Memo, at 19; UBS Real Estate Securities Inc.’s Reply Memorandum of Law in Further Support of Its Motion for Imposition of Sanctions for Spoliation of Evidence (“Reply”) at 7). However, as U.S. Bank explains, by March 2012, Ms. Cawley was no longer in a position pertinent to this litigation and all relevant documents had been handed off to her successor, who was included in the original litigation hold. (PI. Memo, at 19-20; Collyard 5/2/13 Letter at 4-5). Nor did the other employees added to the litigation hold have anything to do with the relevant loans at the inception of this action, and their files, too, were transferred to their successors. (Tr. at 91).
Finally, the fact that custodians self-selected e-mails for retention is not evidence of bad faith in these circumstances. As noted above, the subject custodians were guided by both business people and counsel and thereafter monitored by counsel. Additionally, this is not a case where potential personal liability of the custodians might create an incentive not to act diligently to preserve information. The means by which the litigation hold was implemented therefore provides no evidence of bad faith.
Indeed, there is positive evidence of good faith. It is clear that U.S. Bank subjectively believed that it would not be required to participate in litigation because Assured could litigate the repurchase demands. While, as noted above, this mistaken belief does not excuse the failure to preserve, it does undermine UBS’ claim of bad faith,
b. Negligence and Gross Negligence
That U.S. Bank acted in good faith does not mean, however, that it lacks the requisite culpability. Its failure to begin retaining documents in anticipation of litigation at the inception of the Assured litigation was at least negligent. Worse, U.S. Bank failed to institute a litigation hold even after Judge Baer ruled that it was the only entity that could to enforce the repurchase provisions of the PSAs. At that point, U.S. Bank could no longer rely on its (mistaken) interpretation of the relevant agreements, and its failure to preserve documents ripened into gross negligence. See, e.g., Sekisui,
3. Relevance and Prejudice
There are two types of relevance that must be analyzed in deciding a motion
Second, a court must determine whether the destroyed evidence would have been favorable to the moving party. See id. at 438 (citing Residential Funding,
Based on documents produced by U.S. Bank and Assured, UBS contends that two types of relevant documents have been destroyed: (1) notice of alleged breaches served by Assured to UBS, which are relevant because prompt notice is a prerequisite to a purchase demand and (2) communications regarding forensic reviews of relevant loans. (Def. Memo, at 20-22; Reply at 7-9). This is sufficient to meet UBS’ light burden of showing both discovery relevance and assistive relevance.
Diane Reynolds, a Senior Vice-President of U.S. Bank who oversaw the account manager for the three trusts at issue here, testified that U.S. Bank did not perform any assessments of Assured’s repurchase demands and did not have any communications regarding those demands. (Tr. at 14-15, 55-56, 57-58, 62, 85). Indeed, U.S. Bank learned which loans were subject to repurchase demands only when Assured copied the trustee on those demands or sent U.S. Bank a breach notice.
This ease is thus different from the situation in Sekisui In that case, e-mails from two relevant custodians, one of whom had a cognitive disorder and therefore could not testify or be deposed, were destroyed. Sekisui,
For these reasons, UBS’ motion for sanctions for spoliation of evidence (Docket no. 79) is denied.
SO ORDERED.
Notes
. UBS moved to dismiss the complaint on the basis, among others, that the Trusts, which are the named plaintiffs, lack the capacity to sue. Judge Baer rejected that argument, finding that the pleadings made clear that the rights of the Trusts were being enforced by U.S. Bank as Trustee. MASTR Adjustable Rate Mortgages Trust 2006-OA2 v. UBS Real Estate Securities Inc., No. 12 Civ. 7322,
. "Tr.” refers to the transcript of the evidentiary hearing held on August 21, 2013.
. As noted, the defendant insists both that the litigation hold was not instituted promptly and that, when instituted, it was inadequate. (Def. Memo. at 13, 16-17). I address these arguments below.
. U.S. Bank’s subjective belief that it would not be litigating does not excuse the failure to preserve. See Apple Inc.,
. To be sure, a failure to implement a litigation hold properly could be significant beyond being probative of bad faith and could constitute sanctionable conduct on its own. However, for the reasons discussed, that is not the case here.
. Neither Residential Funding nor Sekisui clearly states which party must demonstrate discovery relevance; however, both make clear that so-called "assistive relevance," which I discuss below, must be demonstrated by the party who seeks sanctions, unless a presumption of relevance arises based on the culpability of the alleged spoliator. See Residential Funding,
. Because UBS has met this burden through positive evidence, it is unnecessary to determine whether UBS would be entitled to a presumption of relevance based on U.S. Bank’s gross negligence.
. According to Ms. Reynolds, a breach notice is "a notice provided by the entity within a PSA that has the ability to provide notice of a breach to the trustee.” (Tr. at 27). This document is different from a repurchase demand, which is subsequently sent to the entity with the obligation to repurchase a non-conforming loan. (Tr. at 28-29).