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TR Investors, LLC v. Genger, C.A. No. 3994-VCS (December 9, 2009)

December 9, 2009

In this memorandum opinion, the Court resolved a motion for contempt and spoliation, which was brought in connection with litigation over the control of Trans-Resources, Inc. (“TRI”) pursuant to 8 Del. C. § 225. Following a two-day trial, the Court found that the company’s founder and former CEO, Arie Genger, intentionally violated a Status Quo Order entered in the 225 action by deleting documents on the TRI computer system. As a remedy, the Court instituted a series of sanctions designed to deprive Genger of any evidentiary gaps in the upcoming 225 trial that his actions may have caused.

In connection with a 225 action, the Court entered a Status Quo Order, which prohibited the parties from tampering with or destroying TRI-related files. To preserve relevant information, the company’s lawyers supervised the process whereby Genger removed his personal effects from the company’s offices. After the attorneys left, however, Genger (with his computer consultant) employed computer “wiping” software to erase files from the “unallocated space” on his computer.  The unallocated space of a computer consists of temporary files (such as deleted emails), which exist until they are overwritten by other temporary files. After trial, the Court found that Genger intentionally violated the Status Quo Order and committed spoliation of evidence. The Court rejected Genger’s defense that he was innocently disposing of copies and that there was no evidence that any particular documents were lost. The Court determined that relevant documents had been lost due to Genger’s actions and that Genger believed his conduct would limit the information base in the pending 225 action.

In imposing a remedy short of the default judgment that plaintiffs requested, the Court considered numerous mitigating factors including: (1) part of Genger’s motivation was to protect his confidentiality interests in his personal information, which included sensitive information relating to Israel’s national security; (2) the plaintiffs did not suffer a high degree of prejudice because only files in the “unallocated space” of his computer were deleted and his active files still contained a large amount of relevant information; (3) the plaintiffs failed to take reasonable steps to protect Genger’s personal information once they assumed control of TRI; and (4) lesser available sanctions provided an adequate remedy.

The Court’s remedy included the following. First, the Court ordered Genger to produce certain documents to which he may have otherwise made a claim of privilege. This was designed to level the playing field given the diminished evidence base caused by Genger’s actions. Second, the Court elevated Genger’s burden of persuasion by one level on any affirmative defense or counter-claim in the 225 action. For example, if Genger must prevail by a preponderance of the evidence, he will now have to present clear and convincing evidence. Third, Genger’s mere word would be insufficient to meet his burden of persuasion in the 225 case. Rather, he will have to present corroborating testimony or documents. Finally, the Court ordered Genger to pay plaintiffs’ reasonable attorneys’ fees, with a suggested award of $750,000. Any disputes over the amount of attorneys' fees shall be submitted to a special master, with the costs of the master being charged against the party whose position as to amount deviates the most from the final amount awarded by the Court.

The full opinion is available here