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In re Centrix Financial, LLC

United States District Court, D. Colorado

May 26, 2015

In re CENTRIX FINANCIAL, LLC, et al.,
v.
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, and AIG DOMESTIC CLAIMS, INC., Defendants. CENTRIX FINANCIAL LIQUIDATING TRUST, and JEFFREY A. WEINMAN in his capacity as Trustee for the Centrix Financial Liquidating Trust, Plaintiffs,

ORDER

PHILIP A. BRIMMER UNITED STATES DISTRICT JUDGE

This matter is before the Court on four motions in limine [Docket Nos. 107-110] filed by plaintiffs Centrix Financial Liquidating Trust and Jeffrey A. Weinman (collectively, “Centrix” or “plaintiffs”).

I. BACKGROUND

On March 13, 2009, Centrix filed an adversary complaint against defendants in the Bankruptcy Court for the District of Colorado, alleging that defendants breached their obligation under a Fidelity Bond (the “fidelity bond” or “the bond”) issued by defendant National Union Fire Insurance Company of Pittsburgh, PA (“National Union”) to insure Centrix against fraudulent actions by Centrix officers and employees. Docket No. 1 at 41-44, ¶¶ 89-105; see generally Bankruptcy Case No. 09-01150-EEB. Centrix alleges that it suffered losses that are covered under the fidelity bond. Specifically, Centrix alleges that, from approximately 2002 to 2006, five former officers of Centrix Financial, LLC, Robert Sutton, John Schreven, Roland Anderson, Gerald Fitzgerald, and Howard Klemmer, fraudulently diverted “at least $83, 000, 000” from Centrix, Docket No. 1 at 22, ¶ 2, that the losses were covered by the fidelity bond, id. at 42, ¶ 93, and that defendants have refused to satisfy their obligations under the bond. Id. at 41, ¶ 87. Centrix brings claims for breach of contract, declaratory judgment, and specific performance. See generally Id. As relevant to the various motions in limine currently before the Court, National Union asserts the following defenses: that Centrix filed suit outside of the time allowed under the bond, that many of the alleged losses are expressly excluded by the bond, that the bond does not provide coverage for constructive fraud, and that Centrix failed to provide timely notice of its claim within 60 days as required by the bond. See Docket No. 95 at 9-13.

II. ANALYSIS

Evidence is relevant if “it has any tendency to make a fact more or less probable than it would be without the evidence; and . . . the fact is of consequence in determining the action.” Fed.R.Evid. 401. Federal Rule of Evidence 403 permits courts to exclude relevant evidence “if its probative value is substantially outweighed by a danger of one or more of the following: unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence.” Fed.R.Evid. 403.

A. Evidence of Alleged Spoliation and Defendants’ Motion for Spoliation Sanctions

Centrix moves to exclude evidence of alleged spoliation by non-parties Timothy Boates and two law firms, Squire Sanders & Dempsey (Squire) and Bryan Cave, [1] as well as any evidence of the motion for spoliation sanctions that defendants filed in the bankruptcy court. See Docket No. 107 at 2. Defendants’ spoliation motion was denied on May 11, 2015. See Bankruptcy Case No. 09-01150-EEB (Docket No. 279). Defendants respond that, by plaintiffs’ admission, Mr. Boates and attorneys at the two law firms played a “central role” in discovering the alleged fraudulent acts of Mr. Sutton, and that evidence of their destruction of documents is relevant to the issue of when Centrix was first put on notice of its claim. See Docket No. 113 at 2-4.

The bankruptcy court has determined that defendants are not entitled to discovery sanctions, including any adverse inference, for spoliation of evidence. The Court will not disturb that holding and therefore holds that defendants may not introduce any evidence of their spoliation motion. Moreover, the Court notes that the bankruptcy judge heard evidence and found that Mr. Boates and the Squire and Bryan Cave attorneys testified credibly that they did not intentionally destroy evidence related to this litigation. See Bankruptcy Case No. 09-01150-EEB (Docket No. 279 at 14). The Court finds that the risk of unfair prejudice is substantial if defendants were allowed to introduce evidence of destruction of documents and holds that defendants will not be permitted to relitigate this issue at trial.

The Court notes, however, that if defendants reasonably believe that the absence of documents has created an inference with respect to a particular witness that no such documents ever existed, defendants may ask to approach the bench and request permission to confront that witness as to why certain documents no longer exist. See M.D. Mark, Inc., No. 01-cv-00413-JLK, 2007 WL 2506645 (D. Colo. Aug. 29, 2007) (permitting limited inquiry at trial into loss of documents but not allowing defendants to characterize those documents in a manner that had been rejected by order of a special master).

B. Evidence and Testimony Regarding Centrix’s Discovery Misconduct

Centrix moves to exclude evidence concerning a motion to compel and for discovery sanctions that defendants filed on May 29, 2013 related to Centrix’s failure to produce documents from third-party law firms. Docket No. 108 at 2. The bankruptcy court granted defendants’ motion, ordered production of the relevant documents, and ordered Centrix to pay monetary sanctions. Bankruptcy Case No. 09-01150-EEB (Docket No. 182). Centrix argues that facts related to the sanctions motion are not relevant and that, even if they were, their probative value is substantially outweighed by their prejudicial effect. Docket No. 108 at 3-4. Defendants respond that, because the wrongfully withheld documents “contained the most vivid evidence yet that Plaintiffs manufactured their current ‘discovery’ story to circumvent the notice requirements in the Bond, ” evidence of Centrix’s prior discovery misconduct is probative of culpability and “demonstrates an awareness” that Centrix discovered the alleged misconduct before March 2007, barring its lawsuit. Docket No. 113 at 7.

The Court agrees with Centrix that evidence that Centrix withheld (but eventually produced) certain documents is substantially more prejudicial than probative. If, as defendants suggest, Centrix willfully obstructed discovery of the documents that were the most damaging to its case, then the documents should speak for themselves. Moreover, the Court finds that the probative value of such evidence is substantially outweighed by the danger of unfair prejudice. Defendants’ theory of how Centrix’s discovery conduct is relevant is that it “demonstrates an awareness that there is something to hide.” Docket No. 113 at 7. Defendants’ theory would invite the jury to determine the issue of notice not based on the evidence, but based on ...


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