The opinion
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re: ) Chapter 11
)
JMO Wind-Down, Inc., ) Case No. 16-10682 (BLS)
)
Debtor. )
___________________________________ )
JMO WIND DOWN LIQUIDATING )
TRUST, )
)
Plaintiff, )
)
v. ) Adv. Proc. No. 17-51042 (BLS)
)
DANIEL MATTES, THOMAS )
KASTENHOFER, CHAD STARKEY, )
AMPALU INVESTMENT CMBH, )
and KTI PRIVATSTIFTUNG, )
___________________________________ )
OPINION
Before the Court is the JMO Winddown Trust’s (hereinafter the “Trust” or the
“Plaintiff”) Motion for Finding of Spoliation of Evidence and for Sanctions (the “Motion”)
[Docket No. 70]. By the Motion, the Trust asks the Court to conclude that Defendant Daniel
Mattes has intentionally concealed or destroyed evidence in this matter, and further asks the
Court to enter default judgment against Mr. Mattes as a sanction for his conduct. For the reasons
that follow, the Court will grant the Motion and enter default judgment against Mr. Mattes.
BACKGROUND
These Chapter 11 bankruptcy proceedings were commenced on March 21, 2016 (the
“Petition Date”). Prior to the Petition Date, the Debtor was engaged in the business of online
and mobile identity management and credentials authentication. The Debtor’s assets were sold
pursuant to a motion filed under 11 U.S.C. §363, and subsequently the Court confirmed the
Debtor’s Plan of Liquidation by Order dated October 21, 2016. The Trust came into being on
the effective date of the Plan and possesses the right and authority to, inter alia, prosecute claims
and causes of action previously held by the estate.
This adversary proceeding was filed by the Trust on September 1, 2017 and sought
recovery against several former officers and directors of the Debtor for alleged breaches of
fiduciary duty and related theories. The record reflects that all parties to the suit (including Mr.
Mattes) participated in a series of mediations in 2019. The third of these mediations resulted in a
global settlement among all parties in December of 2019, and the litigation was consensually
stayed while the parties worked to document the settlement.
Mr. Mattes backed out of that settlement just a month later. The Trust documented and
consummated the settlement with all of the remaining defendants, and Mr. Mattes filed his
answer generally denying the Trust’s allegations on February 21, 2019. As will be discussed in
greater detail below, following the filing of Mr. Mattes’ answer the Trust propounded standard
discovery requests upon Mr. Mattes to get the lawsuit moving forward.
The record reflects that in June 2019, the Trust and Mr. Mattes re-engaged in settlement
discussions. The record further reflects that Mr. Mattes and the Trust again reached a
comprehensive settlement in June of 2019. Mr. Mattes again backed out of the settlement
shortly thereafter. The Trust moved in this Court to enforce the terms of the settlement it
believed Mr. Mattes had agreed to. Finding that there was not presently a binding agreement
between the parties, the Court denied the Trust’s request in January of 2020 [Docket No. 60].
That left the parties to proceed forward with litigation.
As detailed more fully below, the Trust spent well over a year communicating with
counsel for Mr. Mattes in an effort to obtain responses to basic discovery requests clearly
relevant to the dispute. The end result of this effort is effectively no meaningful production or
responses from Mr. Mattes, and Mr. Mattes has not produced a single document. Further, it is
apparent that Mr. Mattes destroyed or has concealed emails and information from his personal
computer that he was obliged to retain, preserve, and ultimately produce.
Litigation Hold and the Discovery Process
Well in advance of the Petition Date, the Debtor’s Board of Directors authorized a special
committee of the Board to conduct an investigation into alleged and suspected financial
irregularities and wrongdoing. In connection therewith, the Board retained the international law
firm Cooley LLP (“Cooley”) to conduct the investigation.
The record reflects that in 2015 Cooley delivered to Mr. Mattes and others a
comprehensive litigation hold directive that required the preservation of specified documents:
Further, please be advised that you, Thomas, and Chad, should not delete any
emails or documents related to (1) the Company’s revenue accounting and
forecasting for 2013 and 2014, (2) the secondary sales (including any internal
communications regarding the sales, communications with counsel regarding the
sales, or communications with purchasers and or Citizen VC), and (3) the
promissory note following the Series C investment in October 2013.
(Martin Decl. at Ex. A, March 31, 2015 email) [Docket No. 70, ¶ 2]. The record reflects that the
Cooley firm engaged for months with Mr. Mattes and ultimately obtained only a few emails from
Mr. Mattes.
Two years later, following the plan confirmation, the Trust sent another litigation hold
letter to Mr. Mattes. That directive provided, in relevant part, as follows:
Accordingly, Mr. Mattes has a continuing duty to prevent any and all spoliation of
evidence related the Liquidated Trustee Claims. More specifically, Mr. Mattes
and his agents and associates are under a duty to preserve any and all physical
evidence, physical and electronic documents, files, emails (including emails
to/from the dmattes45@gmail.com email address) . . .
No physical or electronic evidence or other items relevant to the Liquidated
Trustee Claims should be altered, destroyed, or disposed of in any way. Any
regularly scheduled purging or deletion should be immediately halted to the
extent necessary to adhere to this notice. Electronic data must be preserved in its
original electronic format. Electronic materials that should be preserved include, but
are not limited to, documents, spreadsheets, emails and attachments, text messages,
voice mail, recorded conversations, facsimile logs, electronic calendars, and
application software required to access such data. The electronic information must
be preserved whether it is on a desktop computer, server, laptop, PDA, portable
drive, cell phone, storage device, backup tape, or elsewhere.
It is Mr. Mattes’ duty to notify his agents and any other associates or interested
persons of their duty to preserve such physical and electronic items. As such, Mr.
Mattes and his agents or associates must (1) suspend any regularly scheduled
document destruction; (2) inform all agents and associates to immediately
cease deleting and preserve potentially relevant data; (3) stop any automatic
deletion or alteration of emails or other electronic data by email programs,
telephone and other electronic systems, as well any automatic deletion or
alteration by internet and telecommunications service providers; and (4) stop
any automatic recycle or deletion of data on personal computers, telephones,
voice mails, tablets, and other devices.
(Martin Decl. at Ex. D) [Docket No. 70, ¶ 6).
After the collapse of both of the settlement agreements that Mr. Mattes had ostensibly
entered into, the Trust spent over a year endeavoring to obtain discovery from Mr. Mattes.
When Mr. Mattes implausibly responded that he had no documents from his private Gmail
account (which he was under an obligation to preserve dating back to at least 2015), the Trust
spent months negotiating with Mr. Mattes the terms for joint engagement of a discovery
consultant to search Mr. Mattes’ Gmail account for responsive documents. The consultant was
engaged (at the Trust’s expense) in May 2020.
The discovery consultant’s report [Docket No. 70] is brief. After describing at least three
dozen search terms, no responsive emails were found, and the discovery consultant concluded
that the personal emails of Mr. Mattes had been purged:
On September 30, 2020 iDS inspected Daniel Mattes laptop computer and there
were no emails located on his laptop. iDS also inspected the Gmail account and
found no logs available within the Gmail account. iDS cannot tell when the Gmails
from within the date range between February 2010 and April 2015 were purged.
(Vaughn Decl. ¶ 6) [Docket No. 70, Ex. 2].
The end result of five years of litigation holds and legitimate discovery requests in a
lawsuit in federal court culminated in zero production and a clear record that Mr. Mattes has
failed to comply with his legal obligations. The Trust moved for a finding of spoliation and for
sanctions on October 15, 2020. A hearing on the Trust’s Motion was held on January 19, 2021.
At the conclusion of the hearing, the Court acknowledged the severity of the potential sanction
and afforded the parties two weeks to attempt to consensually resolve this matter, failing which
the Court would issue its ruling. The Court is now advised that settlement efforts have failed.
This matter is ripe for decision.
DISCUSSION
Sanctions for violation of the discovery rules are governed by Bankruptcy Rule 7037.
That rule provides, in relevant part, as follows: “[i]f electronically stored information that should
have been preserved in the anticipation or conduct of litigation is lost because a party failed to
take reasonable steps to preserve it, and it cannot be restored or replaced through additional
discovery, the court:
(1) upon finding prejudice to another party from loss of the information, may order
measures no greater than necessary to cure the prejudice; or
(2) only upon finding that the party acted with the intent to deprive another party of
the information’s use in the litigation may:
(A) presume that the lost information was unfavorable to the party;
(B) instruct the jury that it may or must presume the information was
unfavorable to the party; or
(C) dismiss the action or enter a default judgment.
“In law, spoliation refers to the hiding or destroying of litigation evidence, generally by
an adverse party.” Williams v. BASF Catalysts LLC, 765 F.3d 306, 320 (3d Cir. 2014) (internal
citations and quotations omitted). “In the event that a party undertakes spoilage, the sanctions
available to a court include dismissal of the relevant claim or a presumption by the factfinder that
the spoiled evidence was harmful to the offending party’s case.” Capogrosso v. 30 River Court
East Urban Renewal Co., 482 Fed. Appx. 677, 682 (3d Cir. 2012), citing Bull v. United Parcel
Serv., Inc., 665 F.3d 68, 72–73 (3d Cir. 2012). “A party who has reason to anticipate litigation
has an affirmative duty to preserve evidence which might be relevant to the issues in the
lawsuit.” In re Wechsler, 121 F. Supp. 2d 404, 415 (D. Del. 2000). This “duty to avoid spoliation
extends to the realm of electronic evidence. Thus, a defendant who is found, for example, to have
deleted data on a hard drive, deleted a web page, or deleted e-mail backup tapes, may be exposed
to liability in much the same way as a defendant who destroys evidence in a more conventional
manner.” Eidson, Lewis S., et al., 5 Litigating Tort Cases, § 58:29 (2020).
Case law teaches that courts must undertake a two-step process to determine whether
spoliation sanctions are warranted. Archer v. York City Sch. Dist., 227 F. Supp. 3d 361, 379
(M.D. Pa. 2016), aff’d, 710 F. App’x 94 (3d Cir. 2017). The first inquiry is whether spoliation in
fact occurred. “Spoliation occurs where: the evidence was in the party’s control; the evidence is
relevant to the claims or defenses in the case; there has been actual suppression or withholding of
evidence; and the duty to preserve the evidence was reasonably foreseeable to the party.” Bull,
665 F.3d at 73. After a finding of spoliation, the second prong concerns the appropriate remedy.
A well-developed body of law identifies three factors for the Court to assess: (1) the degree of
fault of the party who altered or destroyed the evidence; (2) the degree of prejudice suffered by
the opposing party; and (3) whether there is a lesser sanction that will avoid substantial
unfairness to the opposing party and, where the offending party is seriously at fault, will serve to
deter such conduct by others in the future. GN Netcom, Inc. v. Plantronics, Inc., 930 F.3d 76, 82
(3d Cir. 2019), quoting Schmid v. Milwaukee Elec. Tool Corp., 13 F.3d 76, 79 (3d Cir. 1994); In
re DaimlerChrysler AG, No. CIV.A. 00-993-JJF, 2003 WL 22951696, at *1 (D. Del. Nov. 25,
2003) (same).
Dispositive sanctions are warranted only where “‘the non-responsible party’s case is
severely impaired because it lacked the information that was not produced.’” GN Netcom, Inc. v.
Plantronics, Inc., 930 F.3d 76, 82 (3d Cir. 2019), quoting Bull, 665 F.3d at 83. Prudence
counsels that the dispositive sanctions (such as entry of default judgment) are to be sparingly
applied, as the result is denial of a party’s day in court. Here, however, the sanction is
warranted.
As to the first prong, the record clearly supports a finding of spoliation. The missing
discovery is from Mr. Mattes’ personal Gmail account, indisputably within his control. Further,
the causes of action articulated in this litigation allege wrongdoing prior to 2015, and Mr. Mattes
used his personal account for company business extensively in this period. And yet, Mr. Mattes
has not produced any responsive information despite being under an obligation to preserve and
retain evidence dating back at least six years. Instead, the record demonstrates that he has
destroyed the evidence.
Turning to the appropriate remedy, the record is clear that Mr. Mattes is solely and
exclusively responsible for the loss or destruction of the emails. It was Mr. Mattes who enjoyed
control of the Gmail account after receipt of the litigation hold letter, and the only plausible
conclusion is that he destroyed the emails before proper discovery could take place.
The Trust has demonstrated that it is severely prejudiced by Mr. Mattes’ conduct. In this
adversary proceeding the Trust seeks damages from Mr. Mattes on account of his alleged breach
of his fiduciary duties while serving as an officer and director of the Debtor. Mr. Mattes used the
personal account to conduct company business, and he has intentionally destroyed and
suppressed pertinent evidence. The Court is entitled to infer that the destroyed evidence is of
value and that the Trust’s ability to fully and fairly litigate its case has been irretrievably
damaged. Collins v. Throckmorton, 425 A.2d 146, 150 (Del. 1980).
The record developed here shows that Mr. Mattes wiped clean his personal emails to
prevent the Trust and ultimately the Court from conducting a full proceeding and trial on the
merits. Moreover, Mr. Mattes has played games with the Trust and the Court, repeatedly
agreeing to and then backing out of settlements, and later causing the substantial delay and cost
of an outside investigation when he already knew the results.
Entry of default judgment as a sanction under Rule 37 is a severe penalty, to be imposed
rarely. Mr. Mattes’ conduct rises to a level that imposition of this sanction is not only warranted
but is the only appropriate remedy in light of the circumstances described and demonstrated here.
Default judgment will issue. Counsel for the Trust shall submit an appropriate form of judgment
order within seven (7) days of the date hereof.
BY THE COURT:
2? Qa f
Dated: February 17, 2021 eee a1 □
United States Bankruptcy Court