*1 Before the Court is the plaintiffs' Motion for Spoliation Sanctions (Doc. 150), which was referred to the undersigned for a Report and Recommendation.

I. INTRODUCTION

The plaintiffs seek sanctions pursuant to Fed. R. Civ. P. 37 and the “Court's inherent authority.” (Doc. 192, p. 7). The plaintiffs allege that defendants Ron E. Carlson, Jr. (Ron Jr.) and Christine Carlson, individually or together, spoliated various categories of evidence. These categories include (1) electronic data relevant to CRC's claims in this case, (2) physical files relating to CRC's finances, (3) Ron Jr. and Christine's personal tax returns, and (4) documents related to the purported 2014 proxy. The plaintiffs seek various remedies, including adverse inference instructions to the jury regarding certain categories of allegedly spoliated evidence; leave to present evidence to the jury of defendants' alleged wrongdoing in deleting electronically stored information (ESI); dismissal of Ron Jr.'s counterclaims that are premised on the alleged 2014 proxy; and attorneys' fees incurred in presenting the plaintiffs' Motion for Spoliation Sanctions.[1]

The Court held an evidentiary hearing on the motion on July 12 and 13, 2022, and took the Motion under advisement. (Docs. 204-205). Following requested extensions of time, the parties submitted proposed findings and conclusions several months later. (Docs. 249-250). The Court has considered the motion and briefs (Docs. 150, 178, 185); the hearing testimony of Donovan Farrow, Gregg Carlson, Martin Gandarilla, Vanessa Carlson, Brian Willms, Ron Carlson, Jr., Jon Tatum, Zachary Barron, and Christine Carlson' and the exhibits admitted during the hearing: Plaintiff's Exhibits (PX) 1 through 6, 8, 12 through 15, 23, 24, 25-2, 25-3, 25-5, 25-6, 31, 32, and 56; Defendants' Exhibits (DX) 1 through 45, 47, 48, 50, 51, 52, and 54 through 59. (Doc. 205).

Based on the referenced information and applicable law, the Court submits the following findings of fact and conclusions of law and recommends that the Motion for Spoliation Sanctions (Doc. 150) be granted in part and denied in part.

II. FINDINGS OF FACT

Background

*2 1. Commercial Resins Company, Inc. (CRC) is owned by members of the Carlson family and was founded by Ron Carlson, Sr. (Ron Sr.) more than 40 years ago. On January 1, 2018, Ron Jr. was CRC's president. Tr. 484. His wife, Christine Carlson, was employed as CRC's controller. Tr. 366.[2] The shareholders of CRC at the time included Ron Sr. and his four sons, defendant Ron Jr. and plaintiffs Gregory Carlson (Gregg), Kevin Carlson, and J. Mark (Mark) Carlson.

2. The claims in this case involve allegations by the plaintiffs that Ron Jr. and Christine Carlson “used their positions of trust to siphon millions of dollars from the company, as well as other company assets, for their own personal use and benefit.” (Doc. 32 at 1-2).

3. The plaintiffs allege that the misuse of CRC assets involved improper payments to other entities that CRC partnered with, including Boulder Supply and Innovative Distribution Services (IDS). (Doc. 150 at 4, 11).

4. In early 2018, Ron Jr. admitted to two brothers, Kevin and Mark Carlson, that he had borrowed or taken from CRC funds totaling “about $700,000.” Tr. 121, 128. A fourth brother, Gregg, was informed about Ron Jr.'s admission soon thereafter. Tr. 128.

5. Ron Jr. compiled a list of “loans” he had taken, between February 2015 and March 2018, from three sources owned by CRC: an American Bank account, a Chase Bank account, and an American Express credit account. Tr. 121-122; see PX 31. The total amount of these transfers was determined to be approximately $928,000. See PX 31.

6. The plaintiffs allege that the total amount of misappropriated funds well exceeds the amount to which the defendants admitted. The plaintiffs' accounting expert reviewed CRC records and identified over $6 million in “questionable and unauthorized” direct disbursements to the defendants, and over $5.6 million in “questionable disbursements” to other businesses, including Boulder Supply and IDS, in which the defendants allegedly have or had an ownership interest. (See Doc. 150-3).

7. The plaintiffs further allege that the defendants hampered their ability to determine the extent of financial misconduct by intentionally spoliating relevant ESI and other evidence.

8. Gregg testified that, at a meeting in the spring of 2018, Ron Jr. stated that he had “60 or 70 boxes of data” from CRC. Tr. 130-131. Ron Jr. denied making that statement. Tr. 520.

9. In a letter dated March 22, 2018, Gregg, through his then-counsel Robert Sartin, threatened “legal action against Ron Jr. and Christine” and demanded that CRC's Board produce “the Company's books and business records” in order “to investigate potential breaches of fiduciary duty and other misconduct, ... and also to permit a third-party audit of the Company's books and records.” PX 4. The letter also demanded “immediate steps to ensure the preservation of all relevant books, records, and electronically stored information.” Id. Ron Jr. forwarded the letter to CRC's attorney, Andrea Cutter. Id.

10. In a March 23, 2018 email to Gregg, Ron Jr. stated:

PX 5.

11. Over the next year, Gregg and his younger brothers sought to obtain passwords to the company's accounting system. Tr. 123-124. Gregg testified that he and his younger brothers had not been able to inspect CRC's accounting data “for three or four years.” Tr. 129.

12. Ron Jr. remained in the CEO position throughout 2018 and into the spring of 2019. Tr. 124-125.

13. In late 2018, Ron Sr. transferred his remaining shares of the company to Gregg, giving Gregg and his younger brothers (i.e., plaintiffs Kevin and Mark Carlson) a combined 55 percent share of CRC. Tr. 124-125. Gregg testified that Ron Sr. instructed him to fire Ron Jr. Id.[3]

14. The board of CRC terminated Ron Jr.'s and Christine Carlson's employment and positions with CRC on May 31, 2019. Tr. 124-127; Id. at 559-561; see PX 10.

15. The board also terminated the employment of Brian Willms, who was CRC's head of information technology. See Tr. 451. Willms also owned 16 percent of Boulder Supply. Tr. 448.

16. Gregg Carlson took over the CEO role after Ron Jr.'s termination in May 2019. Gregg testified that, as CEO, he faced a number of immediate problems that created a “perfect storm.” Tr. 229. The week after Ron Jr.'s firing, the landlord of CRC's facilities in Denver, Colorado and Sidney, Nebraska locked gates to the properties, blocking employees from entering. Tr. 137. Gregg enlisted the help of a top CRC salesperson “to get everybody back to work” in those facilities within a few days. Tr. 139. There was also a production problem at the Sidney, Nebraska plant, where “[t]he coatings [CRC] applied improperly were failing,” as well as a coating contamination problem. Tr. 226-228.

17. By May 31, 2019, Gregg and his younger brothers still had not received passwords to the company's accounting data system and other systems. As a result, they had been unable to “get control of [the] company.” Tr. 125. A tax accountant, Bud Sartain, was engaged to “open the general ledger and make sense of it” once the passwords were obtained. Tr. 134.

18. Jon Tatum, another accountant with Sartain's firm (Hogan Taylor), was retained to serve in the CFO capacity. Tr. 141. Tatum had “a lot of workout experience” salvaging troubled companies. Id. Lacking passwords to access the company's accounting system, Mr. Tatum and Gregg “appl[ied] pressure” to CRC's payroll contractor to make payroll for the week after Ron Jr.'s termination. Tr. 141-142.

19. CRC, through its attorneys, also asked for Christine Carlson to help process the first payroll cycle following the termination of Ron Jr. and Christine. Tr. 176. Christine agreed to do so. Tr. 359-360.

20. After Willms learned that Ron Jr. and Christine Carlson had been terminated, he spoke on the phone with Ron Jr. Tr. 448-449. Willms testified that Ron Jr. and Christine Carlson “asked [Willms] not to help [CRC] at this point at all.” Tr. 449 (quoting Willms deposition).

21. Gregg Carlson wrote a check to Willms, dated June 14, 2019, for $4,800. See PX 56. The memorandum line of the check states “June IT CRCO.” See id. Gregg testified that the purpose of the check was “to basically buy the passwords” to CRC's accounts and data. Tr. 146.

*4 22. On June 14, 2019, Willms provided a list of passwords to Tatum upon receiving the $4,800 check. Tr. 147; 289-290; see Tr. 453.

23. On November 14, 2019, CRC filed the initial Complaint in this case, naming Ron Jr. and Christine Carlson as defendants. (Doc. 1). The operative Second Amended Complaint (Doc. 32) asserts claims for fraud, breach of fiduciary duty, and violations of federal and state law based on the alleged deletion and misuses of CRC's electronic data.

2014 Proxy

24. The defendants produced a document styled as a proxy from Ron Sr. to Ron Jr., dated December 31, 2014. See DX 5.

25. The document, entitled Durable Irrevocable Proxy, states that it is “intended to invest in Ron JR rights, titles and interests of Ron SR to vote and/or give consent with respect to the Ron SR's shares.” Id. As stated in the proxy, there were 299,149 total issued shares of CRC, of which Ron Sr. owned 68,750 and Ron Jr. owned 114,450. See id. Thus, the proxy would have given Ron Jr. majority voting control over CRC's stock.

26. Ron Jr. asserted various counterclaims against CRC and/or Gregg Carlson and Vanessa Carlson, who is Ron Sr.'s widow. Among these counterclaims, Ron Jr. demands in Count I a declaration that the 2014 proxy was in effect when Ron Jr. was voted out of CRC and that, as a result, the corporate actions taken to remove Ron Jr. from his roles at CRC were void and improper. (See Doc. No. 41, ¶¶ 40–43; Doc. No. 42, ¶¶ 40–43). In a separate motion for partial summary judgment, CRC and the individual plaintiffs argue that this claim fails as a matter of law, because the proxy was no longer valid when the corporate actions were taken. (Doc. 227).

27. As relevant to the Motion for Spoliation Sanctions, the plaintiffs also assert that the purported proxy was “faked.” (Doc. 250 at 10).

28. Ron Jr. testified that the original proxy is “at American Bank, in Greg Rusco's file,” but when subpoenaed for documents relating to CRC, the bank did not produce the original or a copy of the proxy. Tr. 542.

29. The document copy that was produced bears the apparent signature of Ron Sr. See DX 5. Vanessa Carlson testified that she “believe[d]” the signature on the proxy was her husband's. Tr. 348.

30. The proxy, as originally drafted, contemplated that it would be notarized. Compare PX 12 with PX 15 and DX 27 (documents from Barron file). However, the only witness whose signature appears on the purported proxy is Christine Carlson's, and it was not notarized. See PX 12.

31. In 2018, Ron Sr. consulted an attorney, Zach Barron, for an opinion as to whether “the sale of [Ron Sr.'s] shares would nullify or terminate the proxy.” Tr. 404-405. The unsigned copy of the proxy in Barron's file, provided to Barron by Ron Sr., had a second page with a spot for a notary to witness the document. Tr. 414-415; Tr. 432; see DX 26.

32. Barron testified that he never saw a signed copy of the proxy. Tr. 404-405. He further testified that, during his meeting with Ron Sr. about the purported proxy, Ron Sr. “indicated ... that it was questionable whether he could recall if it was actually signed.” Tr. 405.

*5 33. When deposed, Christine testified that she “believe[d]” that she witnessed Ron Sr. signing the proxy on December 31, 2014. Tr. 383-384.

34. However, Vanessa Carlson testified that the proxy could not have been signed by Ron Sr. on that date. Tr. at 346-347. She testified that the couple had gone to their cabin at Grand Lake on December 30 to celebrate their wedding anniversary, and that Ron Sr. was with her all day on December 31. Tr. 345-347.

35. Christine testified that, in December 2014, the proxy was signed in the Tulsa office of attorney Fred Slicker, who had prepared the proxy. Tr. 384.

36. After Vanessa's testimony, Christine (who, as a party, was not excluded from seeing testimony of other witnesses) changed her testimony to say that she “could have” been in Tulsa to witness the proxy earlier in December 2014. See Tr. 352-354.

37. The Court finds Christine's testimony that the document was signed in Mr. Slicker's office earlier in December 2014 is not credible, for the reasons set forth below.[4]

38. On December 2, 2014 Christine had surgery. PX 24 at 17, Tr. 374-379. During his deposition, Ron Jr. testified that Christine's surgery required a recovery period of “a couple months,” during which Christine was unable to come in to work, but that she was able to “perform her job from home while she recovered.” PX 2 (deposition testimony of Ron Jr.) at 71. This is contrary to Christine's testimony at the hearing that she was able to travel to Oklahoma and witness the proxy that same month. Tr. 353-354.

39. On January 30, 2015 – a month after the purportedly signed and witnessed proxy – Mr. Slicker sent Ron Sr. an email attaching what Slicker called a “revised Proxy.” PX 15. Ron Sr. forwarded the email and draft proxy to Ron Jr. on February 5, 2015 with a note that “if you find it correct please send to Greg and we'll wrap this up.” Id.

40. Like the unsigned version of the purported proxy in Mr. Barron's possession, the version sent by Mr. Slicker in 2015 included an unexecuted notary witness page. Id. The proxy that was unsigned as of January 30, 2015 differs in certain respects from the proxy Christine testified she saw signed the previous month, in December 2014. In addition to the inclusion of a notary signature page, which is absent from the copy that was purportedly signed a month earlier, the 2015 draft contains a typo—an extra letter “t” in the second-to-last paragraph—that does not appear in the proxy that Christine says had been signed the month before:

Compare PX 14 with PX 15 at COMMERCIAL RESINS_007029-007030.

41. The notion that Ron Sr. had signed the proxy in front of Christine Carlson in December 2014 – a month before Slicker emailed a “revised” proxy containing only an added typo and a notary verification and sent the document in Word format with the newly-added typo as a “draft” to the client who had already signed it – is not credible.[5]

42. Ron Jr. scanned and emailed to himself a copy of the purported proxy on January 5, 2018, shortly in advance of his February 2018 disclosure about having taken money from CRC. PX 12. This is the earliest electronic evidence of an allegedly signed copy of the purported 2014 proxy.

Electronic Data

43. In the relevant timeframe, CRC utilized DriveHQ, which is a network storage system for backing up documents and sharing documents with other system users. Tr. 22. DriveHQ logged user activity such as opening or deleting files, logging in, or logging out. Tr. 26-28; PX 3.

44. In late 2021 or 2022, CRC engaged Alias Forensics and its CEO, Donovan Farrow, to examine the Drive HQ activity logs from June 2019 to identify any “oddities” or “anomalies” in user activity. Tr. 23.

45. The DriveHQ logs showed that, on various dates in June 2019 (following the May 31, 2019 termination of Ron Jr. and Christine Carlson from CRC), user R. Carlson logged in and performed various actions, including downloading documents to a separate storage location and moving certain files to the trash folder. Tr. 32-33, 38.[6]

46. Farrow's team performed an analysis of DriveHQ data and determined that the user R. Carlson deleted 3,849 items between June 20, 2019 and July 19, 2021. Tr. 36. Farrow testified that these actions were an “anomaly” and were not consistent with the user's previous activity. Tr. 36-37. Farrow testified that, based on the computer logs his firm obtained directly from DriveHQ, there was “no doubt” that the user R. Carlson did this. Tr. 47, 58.

47. Farrow's team further determined that the user C. Candy downloaded 15,600 files between May 20, 2019 and June 19, 2019. Tr. 37-41. The user “C. Candy” is the account belonging to Christine Carlson. Tr. 564. Farrow testified that the “download” action reflected the user “[t]aking data from DriveHQ and bringing it down” to another storage device, such as a flash drive or computer. Tr. 38.

48. Farrow's team determined that some of the “anomalous” activity in 2019 took place from IP addresses in northwest Arkansas, where Ron Jr. and Christine Carlson have a home. Tr. 58.

*7 49. Alias Forensics detected other logins from locations in Arkansas; northeastern Oklahoma; Sidney, Nebraska; and Southfield, Michigan, by the users B. Willms, C. Candy and/or R. Carlson. Tr. 97; see Tr. 363.

50. Farrow's team also found an “anomaly” where an administrative account (identified as “CRCO”), used by Willms, had downloaded over 3,400 files in June 2019. Tr. 23, 41-42. Farrow stated that Willms told him Willms was the only person with access to the “admin” account. Tr. 25.

51. Ron Jr. testified that he moved his files from the home screen of his company laptop in Sidney, Nebraska, to a blue flash drive. Tr. 499. He then took the blue flash drive and the company laptop computer to his home in Arkansas the next day. Tr. 500.

52. Ron Jr. further testified that, when he deleted the documents from his company laptop in June of 2019, he didn't know he was deleting the documents from CRC's DriveHQ computer system. Tr. 500-501. He testified that he did not intend to make the documents inaccessible. Tr. 512.

53. Ron Jr. said he deleted the files because he had been terminated and was going to leave his laptop with CRC and he “did not want to leave [his] laptop exposed to a casual passersby [sic] who could log in and look at company data.” Tr. 499-500.

54. Based on the names of the deleted documents, Ron Jr. targeted for deletion documents relating to important substantive issues in this case, including, inter alia, the purported proxy, upon which his counterclaims depend, and also financial records relating to the company IDS. See generally PX 3:

55. Christine Carlson testified that she only deleted documents in the normal course of business. Tr. 360-361. She denied having deleted any files from DriveHQ. Tr. 362.

56. Willms testified that he uploaded CRC's accounting data to DriveHQ, downloaded a copy of the accounting data onto his own laptop at home, and then deleted the data from Drive HQ. He claimed that he did so in order to preserve a backup for potential use in defending against claims in the future. Tr. 466-468. Willms testified that he later delivered a thumb drive containing this data to his attorney. Tr. 471-474.

57. Willms testified that he did not delete any files at the direction of Ron Jr. or Christine Carlson. Tr. 456-457. The Court finds Willms' testimony was not credible. The evidence shows that Willms had a motive to assist the defendants in hindering CRC's investigation into financial misappropriation. When asked whether he thought about “taking what [he] felt was justice for Ron Jr., and Christine into [his] own hands,” Willms admitted that “[i]t might have crossed [his] mind.” Tr. 454. Moreover, the fact that Willms would not provide the company's passwords to Gregg Carlson without first receiving a check in June 2019, as well as Willms's suspicious and anomalous activities in downloading and deleting company accounting information from DriveHQ when he was aware that he, Ron Jr. and Christine Carlson were terminated, indicates that Willms was acting in the interests of Ron Jr. and Christine Carlson. Not only did he apparently follow their request of Willms “not to help Commercial Resins at this point at all” (Tr. 449), but it is also apparent that Willms attempted to actively undermine CRC's ability to promptly gain access to CRC computers.

*8 58. In June and July of 2019, Gregg Carlson discovered that some data had been deleted from CRC's computer systems, including folders referencing IDS and Boulder Supply, and accounting data. Tr. 151-158; PX 25-2; DX 20. Gregg testified that he contacted the server headquarters to attempt to recover files but was unable to do so. Tr. 154-155. Gregg also sought help from an acquaintance in the data security field named Brady Deetz, but Deetz was not able to recover any data. Tr. 155-157.

59. CRC's new officers enlisted accountants with the Hogan Taylor firm to secure backup copies of the accounting system. Tr. 158.

60. In June 2022, Farrow's team attempted to recover deleted data from server backup data. Tr. 48. They were able to recover a portion of the deleted data.

61. Farrow testified that, after recovering the partial backups, he and his team recovered “probably 10 percent” of the files Alias found to have been deleted in 2019. Tr. 84.

62. Farrow explained that, in digital forensics, each file has a hash value, which he likened to a “fingerprint of a file[ ... that] will remain the same no matter where [the file] goes.” Tr. 51. A file's hash value “won't change,” even if the file is moved to a USB drive or cloud storage, “as long as nothing has changed inside that document.” Id.

63. In a typical forensic investigation, Farrow testified that he would first forensically preserve a collection of files and “put a hash value on all of those” files, to create a “pristine” copy for comparison. Tr. 51-52.

64. In this case, Farrow learned that deleted files were automatically overwritten by DriveHQ 30 days after deletion. Tr. 90-91.

65. Because the data deleted in 2019 had been overwritten, Farrow's team was unable to collect a “pristine” set of the deleted files. Tr. 52.

66. The hash value of recovered files did not match those of any recovered files. Alias's investigation found that files that were deleted from DriveHQ “had been manipulated.” Tr. 51. As a result, even if Alias recovered files with the same name as deleted files, it was unable to determine whether the contents of the file were the same as those deleted in 2019. Tr. 111; see Tr. 50-53.

67. Ron Jr. created a summary exhibit listing documents purportedly relating to IDS, which was produced in discovery. See DX 33; see also Tr. 568-569. He testified that certain IDS financial bank and other records were in the custody of CRC or its accountants. See DX 33; see also Tr. 563.

68. Ron Jr. produced a flash drive (the blue flash drive) purporting to contain IDS-related documents. DX 29. DX 33 also indicates that IDS financial statements and general ledgers for the years 2010 and 2013 through 2019 were located on the CRC computer server or were produced by CRC in discovery. See DX 33, p.1.

69. The evidence shows that Ron Jr., Christine, and Willms moved and/or deleted unusual volumes of data during the weeks surrounding the termination of Ron Jr. and Christine's positions with CRC. See PX 3; Tr. 36-42. It is clear from the file names that the deleted ESI included evidence likely to have been relevant to the claims and/or defenses in this case. See id.

70. As a result of the actions of defendants and Willms, relevant ESI was lost. Even as to the recovered data, the forensic team was unable to confirm the recovered files matched the data that was deleted, because the documents had been modified. Tr. 51.

Physical Records

71. In 2017 or early 2018, Ron Jr. and Christine went to CRC's facility in Henderson, Colorado, and took possession of several boxes of documents. On two occasions, Martin Gandarilla, the manager at CRC's Henderson plant, saw Ron Jr. and Christine bring U-Haul trucks to Henderson to take boxes of CRC documents with them. The first time, Ron Jr. used a small U-Haul trailer. The second time, Christine came with a full-sized truck. Tr. 252-253. The two trips occurred about a “month apart.” Tr. 261-262.

*9 72. Gandarilla assisted Ron Jr. and Christine in loading the boxes onto the trailer, and they “instructed [him] what boxes needed to be loaded on these trailers.” Tr. 253. They instructed Gandarilla to load “financial documents or boxes that were labeled with financial.” Tr. 253.

73. Gandarilla estimated that Ron Jr. took with him “more than 25, 30 boxes,” and that Christine took approximately 10 boxes. Tr. 254. Defendants said, “they were taking these documents to Arkansas” to “operat[e] the company from their home.” Tr. 253-255.

74. According to Ron Jr., boxes with financial documents were routinely moved back and forth between Henderson and a different CRC facility in Sidney, Nebraska, in the “normal course of business.” Tr. 521.

75. Gandarilla testified that boxes of documents were not “moved back and forth between Sidney and Henderson over the years.” Tr. 264. The two occasions when Ron Jr. and Christine came with U-Hauls were the only occasions in Mr. Gandarilla's memory that he was asked to load boxes of CRC documents for transportation to another location. Tr. 254.

76. On March 23, 2018, in response to Gregg Carlson's demand for company financial documents, Ron Jr. sent an email to Gregg stating he had “the boxes of financial records here in Arkansas from 2012 to 2018.” PX 7.

77. In an April 9, 2018 email to Gregg, Ron Jr. stated, “I have until Friday [April 13] to have the books and records available for inspection by your attorneys. My plan is to rent a U-Haul trailer and take them to Denver on Wednesday or Thursday.” PX 8.

78. At his deposition, when asked what he did with “the financials,” Ron Jr. testified that “[t]hey were stored in boxes, and every box I had was delivered to my attorney.” Tr. 540-541; PX 2 (Ron Jr. Dep.) at 226:23-227:2.

79. In June 2019, the defendants' attorney produced seven boxes of documents, which were alleged to be CRC's “accounting records.” Tr. 541; DX 25. See also Tr. 361-362 (testimony of C. Carlson).

80. Ron Jr. testified that he returned the boxes of financial documents to the Sidney, Nebraska, facility in the summer of 2018, because CRC had recently reopened that facility. Tr. 525.

81. Based on the evidence regarding the boxes of financial records, the Court finds Ron Jr.'s testimony that he moved boxes of financial documents to Sidney, Nebraska, is not credible. Mr. Gandarilla testified he had never heard that anything like that had occurred. Tr. 255. Gregg testified that CRC has looked for the missing documents in both Denver and Sidney but “[t]he attic in Sidney had shadows, dust areas where boxes were sitting. We were looking particularly for things like tax returns. Couldn't find them.” Tr. 136.

Tax Returns

82. The defendants produced partial tax returns. See DX 57-58. During his hearing testimony, Ron Jr. testified that he produced “everything [he] had,” although the documents produced did not include complete tax returns. Tr. 553; see id. at 554-555. He testified that he did not destroy or spoliate any copies of his and Christine's tax returns in his possession. Tr. 486-488.

III. CONCLUSIONS OF LAW

A. ESI

First, the plaintiffs contend that both defendants intentionally spoliated Electronically Stored Information (ESI) relevant to CRC's claims and defenses in this case. Effective December 1, 2015, Fed. R. Civ. P. 37 was amended to “authoriz[e] and specif[y] measures a court may employ” if a party fails to take reasonable steps to preserve” ESI “that should have been preserved in anticipation ... of litigation.” Fed. R. Civ. P. 37(e) advisory cmte. note to 2015 amends. Rule 37(e) applies only to ESI, and only when such information is lost. Id. Because Rule 37(e) was in effect both at the time of the alleged conduct and when the sanctions motion was filed, Rule 37(e) controls with respect to any spoliation of ESI. Newberry v. Cty. of San Bernadino, 750 F. App'x 534, 537 (9th Cir. 2018). That is, the 2015 amendment “forecloses reliance on inherent authority or state law to determine when certain measures should be used.” Fed. R. Civ. P. 37(e) advisory committee's note to 2015 amendment; see Bush v. Bowling, No. 19-CV-0098-GKF-FHM, 2020 WL 5423986, at *2 (N.D. Okla. Sept. 10, 2020).

*10 Rule 37(e) states:

Fed. R. Civ. P. 37(e) (emphases added). “As the party seeking relief, plaintiffs bear the burden of demonstrating that the requirements of Fed. R. Civ. P. 37(e) are met.” Bush, 2020 WL 5423986, at *2 (citing Mafille v. Kaiser-Francis Oil Co., No. 18-CV-586-TCK-FHM, 2019 WL 2189515, at *2 (N.D. Okla. May 21, 2019); Galbraith v. State Farm Fire & Cas. Co., No. CIV-16-1227-SLP, 2018 WL 8343833, at *2 (W.D. Okla. July 20, 2018) (collecting cases)).[7]

Here, the defendants do not dispute that the duty to preserve ESI applied to Ron Jr. and Christine Carlson in June 2019. Arguably, based upon the March 22, 2018 preservation demand in Robert Sartin's letter to Ron Jr., that duty existed over a year earlier. See PX 4. The deleted ESI includes information relevant to the claims and defenses in this case, including documents relating to a joint venture between CRC and an entity identified as IDS. The evidence further establishes that the defendants failed to take reasonable steps to preserve ESI that should have been preserved in the anticipation or conduct of litigation, and that relevant ESI was lost as a result.

*11 The defendants contend that the affected ESI was not “lost,” because information that appears to be “deleted” on the DriveHQ log may have been downloaded to a flash drive or another storage device. However, because of discrepancies in the hash values (i.e., digital fingerprints) of the deleted and recovered files, it is not possible to know whether any recovered files match the deleted data or were altered in some way. Tr. 111.

Accordingly, the plaintiffs have established all of the conditions set forth in Rule 37(e), sufficient to trigger further inquiry as to intent and/or prejudice. Fed. R. Civ. P. 37(e).

Intent

Rule 37(e)(2) limits the imposition of certain severe or dispositive sanctions to cases where the court finds that the spoliating party “acted with the intent to deprive another party of the information's use in the litigation.” Fed. R. Civ. P. 37, 2015 Adv. Cmte Notes. This subsection “covers any instruction that directs or permits the jury to infer from the loss of information that it was in fact unfavorable to the party that lost it.” Id.

A finding of intent may be made “on a pretrial motion ... or when deciding whether to give an adverse instruction at trial.” Id. Furthermore,

The requirement of intentional deprivation “is consistent with Tenth Circuit law regarding the imposition of severe sanctions in the form of adverse inference instructions.” Cox v. Swift Transp. Co. of Arizona, LLC, 2019 WL 3573668, at *2 (N.D. Okla. Aug. 6, 2019) (citing Turner v. Pub. Serv. Co. of Colo., 563 F.3d 1136, 1149 (10th Cir. 2009)); Bush, 2020 WL 5423986, at *4 n. 8 (noting that “[t]he rule is intended to reject cases that authorize the giving of adverse-inference instructions on a finding of negligence or gross negligence”) (internal citation omitted). Although Rule 37(e) does not define intent, “[c]ourts have found that a party's conduct satisfies the intent requirement when the evidence shows or it is reasonable to infer ... a party purposefully destroyed evidence to avoid its litigation obligations.” Porter v. City & Cty. of San Francisco, No. 16-cv-03771-CW(DMR), 2018 WL 4215602, at *3 (N.D. Cal. Sept. 5, 2018). Intent or “bad faith” generally is found where the spoliator's actions are responsible for the destruction of the evidence and the spoliator “fully appreciated the significance of the evidence to the anticipated litigation.” Oil Equip. Co. v. Modern Welding Co., 661 F. App'x 646, 653 (11th Cir. Sept. 9, 2016) (internal quotation and citation omitted).[8]

*12 Intent may be inferred if a party is on notice that the evidence was potentially relevant and fails to take measures to preserve relevant evidence, or otherwise seeks to “keep incriminating facts out of evidence.” Franklin v. Stephenson, No. 20-CV-0576 MIS-JFR, 2022 WL 6225303, at *9 (D.N.M. Feb. 16, 2022), report and recommendation adopted, No. 1:20-CV-576 MIS/JFR, 2022 WL 6103342 (D.N.M. Oct. 7, 2022) (citations omitted). Courts may also consider the timing of the loss of evidence in determining intent. See id., 2022 WL 6225303, at *9 (citing GN Netcom, Inc. v. Plantronics, Inc., No. 12-1318-LPS, 2016 WL 3792833, at *7 (D. Del. Jul. 12, 2016)).

Here, Gregg Carlson admitted that CRC did not issue a litigation hold. Tr. 171-173; Tr. 324-325. However, Ron Jr. affirmed in his testimony that he had received Robert Sartin's March 2018 letter seeking to inspect books and records. Tr. 535-536. That letter threatened potential litigation and expressly demanded preservation of CRC's books, records, and ESI. PX 4. Ron Jr. also confirmed that he hired his own attorney “in the middle of 2018.” Tr. 535. Ron Jr. testified that he did so “because the letter from Mr. Sartin accused me of all manners of wrongdoing,” and he “wanted advice as to whether or not [he] had any liability.” Tr. 536.

Although Ron Jr. denied understanding at that time that a legal proceeding was “likely,” that testimony is not credible in light of the other facts and circumstances described above. Moreover, the testimony of Ron Jr. that he never deleted files with the intention that they be removed or inaccessible is not credible. In fact, Ron Jr. testified that he deleted files from his company laptop—ostensibly in order to protect company data from potential exposure to a “casual passerby.” Tr. at 500. The anomalous nature and volume of downloads and deletions by Ron Jr., Christine, and Willms from CRC's computer systems, as well as the timing and the obvious relevance of some of the deleted files to the issues in this litigation, amply support a finding that the defendants intentionally deprived CRC of relevant ESI. See, e.g., Philips Elecs. v. BC Tech., 773 F. Supp. 2d 1149 (D. Utah 2011) (finding bad faith based on factors including the spoliating party's control and responsibility over laptops, timing of deletions, number of deletions made, lack of witness credibility, spoliator's calculated and methodical behavior, and others).

Accordingly, the undersigned finds that Ron Jr. knowingly spoliated relevant ESI by removing it from CRC's computer systems, while he knew or should have known that such information “should have been preserved in the anticipation ... of litigation.” Fed. R. Civ. P. 37(e).[9]

Prejudice

The evidence also established that it is impossible for CRC to verify the content of the allegedly recovered files to determine whether they match the files that were deleted in 2019 or were altered or different documents altogether. Tr. 52; 111.

Relevance is a necessary component of proving such prejudice. Henning v. Union Pac. R.R., 530 F.3d 1206, 1219-20 (10th Cir. 2008) (in examining allegations of spoliation, “[r]elevance is a highly fact-specific inquiry,” and movant was not entitled to sanctions in absence of proof that the lost evidence was relevant). However, the rule

Fed. R. Civ. P. 37(e) advisory committee's note to 2015 amendment. As long as the prejudiced party has produced some evidence that destroyed information is relevant, a permissive inference is appropriate. See GN Netcom, Inc. v. Plantronics, Inc., No. CV 12-1318-LPS, 2016 WL 3792833 (D. Del. July 12, 2016) (because the court had found that spoliating party acted in bad faith, the burden shifted to the spoliator to show a lack prejudice resulting from destruction of evidence).

As set forth above, the filenames for many of the deleted files demonstrate that the documents were almost certainly relevant to the claims and defenses in this case. Many of those files were downloaded and/or deleted remotely by Ron Jr. after he was terminated from CRC and during a time when, according to Willms's testimony, Ron Jr. and Christine had asked Willms not to help CRC at all and while Willms himself was downloading and deleting a significant amount of data. Additionally, CRC has suffered financial prejudice related to the expense, time, and effort associated with forensic analysis and in bringing the Motion for Spoliation Sanctions.

The defendants argue that the plaintiffs bear responsibility for failing to recover deleted data in 2019, before the deleted files were automatically overwritten. (See Doc. 249 at 32-33). The defendants contend that, because some of the deleted ESI “could have been recovered” by late July of 2019, several weeks after Gregg Carlson became CEO, the plaintiffs are not responsible for the loss of this data. Id. at 33. However, the defendants cite no authority indicating that CRC's incoming officers had the burden to solicit forensic data recovery services during that time period—particularly when such efforts would have been out of the ordinary course of CRC's data practices—or that the efforts that were made to recover data were not reasonable. Given the uncontroverted evidence that the defendants removed thousands of files from CRC's server between May and July of 2019, the undersigned finds this argument without merit. The fact that CRC computer passwords were withheld by Willms until he received Gregg's check on June 14, 2019, two weeks after Ron Jr. and Christine were terminated, further debunks the defendants' attempt to blame the plaintiff for not immediately recovering the data deleted by Ron Jr.

The Tenth Circuit has noted that “common[ ] sense” supports requiring a party to show bad faith before imposing adverse-inference instructions. JetStream Ground Servs., 878 F.3d at 966 (“Information lost through negligence may have been favorable to either party, including the party that lost it, and inferring that it was unfavorable to that party may tip the balance at trial in ways the lost information never would have.”). In weighing the degree of misconduct involved in the defendants' spoliation, the Court notes that Ron Jr.'s actions were not as culpable as in some other cases where courts found a sanction of dismissal warranted. See Bistrian v. Levi, 448 F. Supp. 3d 454, 475-76 (E.D. Pa. 2020) (discussing use of circumstantial evidence to determine a party's intent in spoliating evidence); cf., e.g., Leon v. IDX Systems Corp., 464 F.3d 951, 951 (9th Cir. 2006) (finding willful spoliation of evidence supporting dismissal, where employee not only destroyed private files but intentionally deleted employment–related files and then wrote a program to write over the deleted documents after he filed his lawsuit); Kucala Enterprises, Ltd. v. Auto Wax Co., Inc., 2003 WL 21230605 (N.D. Ill. 2003) (dismissal imposed as sanction where, on the night before his computer was to be inspected by defendant's representative, plaintiff downloaded and used a program called “Evidence Eliminator” to delete approximately 15,000 files from his hard drive).

*14 On balance, the undersigned finds that the evidence weighs against imposing the most severe sanctions requested, including default judgment with regard to IDS or outright dismissal of the defendants' counterclaims that rely on the purported 2014 proxy. See, e.g., Fast v. GoDaddy.com LLC, 340 F.R.D. 326, 354 (D. Ariz. 2022) (finding the “ultimate sanction of case dismissal ... not warranted,” where spoliation affected evidence regarding damages, but “information obtained through discovery and response to [the defendants'] motion for sanctions will enable Defendants to prepare and present an effective damages defense, particularly given the other sanctions the Court intends to impose,” including adverse inference instruction and leave to present evidence of spoliation to the jury). However, there is clear and convincing evidence of intentional spoliation of ESI, sufficient to warrant the following recommended sanctions:

B. Other Evidence That Was Allegedly Spoliated

“Spoliation includes the intentional or negligent destruction or loss of tangible and relevant evidence which impairs a party's ability to prove or defend a claim.” U.S. ex rel. Koch v. Koch Indus., 197 F.R.D. 488, 490 (N.D. Okla. 1999). Spoliation sanctions for the destruction of evidence are proper when (1) a party has a duty to preserve evidence because it knew, or should have known, the litigation was imminent and (2) the adverse party was prejudiced by the destruction of the evidence. Burlington N. and Santa Fe Ry. Co. v. Grant, 505 F.3d 1013, 1032 (10th Cir. 2007) (citing 103 Investors I, L.P. v. Square D Co., 470 F.3d 985, 989 (10th Cir. 2006)); see also Ranchers Pipe & Steel Corp. v. Ohio Sec. Ins. Co., 2017 WL 6025327, *1 (N.D. Okla. December 5, 2017) (citing Turner, 563 F.3d at 1149).

“The district court has discretion to fashion an appropriate remedy depending on the culpability of the responsible party and whether the evidence was relevant to proof of an issue at trial.” Estate of Trentadue ex rel. Aguilar v. United States, 397 F.3d 840, 862 (10th Cir. 2005). A showing of bad faith, not merely negligence, is necessary for a jury instruction on adverse inference. Aramburu v. Boeing, 112 F.3d 1398, 1407 (10th Cir. 1997). However, a court may impose other sanctions for spoliation without evidence of bad faith. 103 Investors I, 470 F.3d at 989. A court should choose the “least onerous sanction necessary” to serve three remedial purposes: punishment, which “advance[s] the goals of retribution, specific deterrence, and general deterrence”; accuracy in fact-finding; and compensation to redress “the imbalance caused by the spoliator's destruction of relevant evidence.” Koch Indus., 197 F.R.D. at 483.

In deciding what level of sanction to impose, a court must consider the culpability of the party against whom sanctions are sought, as well as the relevance of the evidence to proving an issue at trial. See Estate of Trentadue, 397 F.3d at 862. The entry of default judgment or the imposition of adverse inferences require a showing of bad faith. Id. (adverse inferences); Max Int'l, LLC, 638 F.3d at 1321 (default judgment). “Mere negligence in losing or destroying” evidence is not enough to support imposition of either of these harsh sanctions. Turner, 563 F.3d at 1149 (quoting Aramburu v. Boeing Co., 112 F.3d 1398, 1407 (10th Cir. 1997)).

*15 The undersigned finds that the evidence justifies the following conclusions of law and recommended sanctions with respect to the remaining categories of evidence:

1. Physical Files Taken from CRC's Colorado Facility

Ron Jr.'s testimony at the hearing that he returned physical financial documents to the Sidney, Nebraska, site in the normal course of business is inconsistent with the fact that he had received a demand and preservation letter from Mr. Sartin more than a year earlier. Ron Jr. acknowledged in March 2018 that he had an obligation to turn over financial documents to Gregg's attorney, and he said that he would do so. PX 5. In that light, Ron Jr.'s testimony that he moved the financial documents to a file room in Sidney, Nebraska, cannot be considered to be in the normal course of business.

As set forth above, the defendants had a duty to preserve all such evidence because they knew, or should have known, that it was relevant to imminent potential litigation. Based on the evidence presented, the undersigned concludes that some of the contents of the estimated 30 to 40 boxes that the defendants took from Henderson, Colorado, were never returned to CRC or provided to the plaintiffs in this litigation. Clear and convincing evidence shows that the defendants destroyed or failed to preserve approximately two dozen boxes of financial documents, at a minimum.

Appropriate Sanctions:

CRC should be entitled to present evidence to the jury of the defendants' spoliation of physical files taken by Ron Jr. and Christine from Henderson, Colorado, in late 2017 or 2018.

The jury should be instructed that, unless the jury finds that the evidence contradicts the presumption, the jury may presume that the missing boxes contained information that would be unfavorable to the defendants' counterclaims and defenses if the documents were produced.

2. Tax Returns

The plaintiffs did not introduce any testimony or evidence refuting Ron Jr.'s testimony that he did not destroy or spoliate any copies of tax returns in his possession.[10] The plaintiffs did not provide evidence of prejudice relating to Defendants' tax returns.

The undersigned recommends that no sanctions be awarded with respect to the defendants' personal tax returns.

III. CONCLUSION AND RECOMMENDATION

For the reasons set forth above, the undersigned recommends that the Motion for Spoliation Sanctions (Doc. 150) be granted in part and denied in part, and that sanctions be imposed against the defendants to the extent recommended herein.

In accordance with 28 U.S.C. § 636(b) and Federal Rule of Civil Procedure 72(b)(2), a party may file specific written objections to this Report and Recommendation within 14 days. Such specific written objections must be filed on or before July 26, 2024. If specific written objections are timely filed, Rule 72(b)(3) directs that the district judge determine de novo any part of the magistrate judge's disposition that has been properly objected to. The district judge may accept, reject, or modify the recommended disposition; receive further evidence; or return the matter to the magistrate with instructions. Id.; see also 28 U.S.C. § 636(b)(1). The Tenth Circuit has adopted a “firm waiver rule,” which “provides that the failure to make timely objections to the magistrate's findings or recommendations waives appellate review of both factual and legal questions.” United States v. One Parcel of Real Prop., 73 F.3d 1057, 1059 (10th Cir. 1996) (quoting Moore v. United States, 950 F.2d 656, 659 (10th Cir. 1991)). Only a timely specific objection will preserve an issue for de novo review by the district court or appellate review.

*16 DATED this 12th day of July, 2024.