United States District Court, M.D. Pennsylvania
MATTHEW W. BRANN, District Judge.
Currently pending before the Court is the Defendant's motion for sanctions due to spoliation of evidence and motion seeking to exclude the expert opinions and testimony of Plaintiffs' witnesses. Briefing has concluded and these motions are now ripe for disposition. For the reasons set forth below, Defendant's motion for spoliation sanctions is granted in part and denied in part. Defendant's motion to exclude expert witnesses James N. Dragotto and Murli Rajan will be denied without prejudice and with leave to renew its objections at a later date in accordance with this Memorandum. Defendant's motion to exclude the expert report of Lisa Bruno, CPA, will be granted.
On May 7, 2009, Plaintiffs Michael Bruno ("Mr. Bruno"), Lisa Bruno, CPA ("Ms. Bruno"), Bruno's Market, Inc. ("Bruno's Market"), and Bruno's Market II, Inc. (collectively "Bruno's") filed a Complaint against Defendant Bozzuto's, Inc. ("Bozzuto's") alleging, inter alia , breach of contract, negligence, negligent misrepresentation, and fraudulent misrepresentation. (ECF No. 1). This Complaint was twice amended. (ECF Nos. 8, 63). Bruno's alleges that in May 2007, Bozzuto's breached an oral contract to pay a debt of approximately $380, 000 that Bruno's owed to its then supplier Associated Wholesalers, Inc. ("AWI"), and that Bozutto's thereafter failed to supply groceries to Bruno's Market. (ECF No. 63).
As part of the process in providing groceries to Bruno's Market, Bozzuto's removed all AWI equipment from Bruno's Market and re-tagged all inventory using Bozzuto's barcodes. Id. at ¶ 25. At some point thereafter, AWI learned of these facts and threatened to sue Bozzuto's for tortious interference with contract. Id. at ¶ 26. Bruno's alleges that Bozzuto's then abandoned its contract with Bruno's, leaving them with equipment that was not capable of ordering inventory from AWI and was incapable of scanning any AWI bar-coded inventory. Id. at ¶ 28. Bruno's Market was forced to close down shortly thereafter, and Bruno's began considering litigation against Bozzuto's no later than May 31, 2007. (ECF No. 202, Ex. H, at 9).
Mr. and Ms. Bruno moved to California in August or September of 2008. Id. at ¶ 31; ECF No. 94, Ex. D, at 53. Before moving, the two threw away every paper record they possessed for Bruno's Market, including general ledgers, invoices, sales reports, cancelled checks, company bills, time clock reports, trial balances, balance sheets, income statements. Id. at 42:24-46:23; 52:19-55:12. Ms. Bruno explained that "it was very difficult for us to retain records, and at the time storage was way too high, so we threw the records out[.]" Id. at 52:25-53:3. The only computer that Bruno's Market's utilized was also "thrown out" by Ms. and Mr. Bruno. Id. at 54:3-10. Bruno's did not maintain any copies of the computer's software or any of the information contained within the computer. Id. at 54:11-16.
As part of discovery, on October 27, 2009, Bozzuto's requested any and all documents relating to the financial operations of Bruno's Market through 2008. (ECF No. 202, Ex. D). This request included documents such as balance sheets, profit and loss statements, and all tax returns. Id. On June 10, 2010 Bozzuto's sent a follow-up letter to Bruno's counsel, requesting "all financial record, trial balances, profit and loss statements, balance sheets, records of sales, cash disbursements, expenses, payroll and depreciation and all those documents related to the financial records [of Bruno's Market] from January 1, 2004 to present." Id. at Ex. E. In a reply letter dated June 15, 2010, counsel for Bruno's notified Bozzuto's that "none of the documents requested in [the] letter exist." Id. at Ex. F.
On March 24, 2011, Joseph Patterson, Bruno Market's accountant, confirmed that he maintained Bruno's Market's past federal and state tax returns. Id. at Ex. G, 9:20-10:11; 91:7-14; 99:11-16. He further testified that all other financial records were maintained by Bruno's. Id. Mr. Patterson stated that Bruno's Market created sales and expense reports, which were then entered into a computer program known as "DacEasy." Id. at 91:7-95:22. This program would then generate income statements and trial balances. Id.
On March 28, 2011, Ms. Bruno was deposed. Id. at Ex. H. Ms. Bruno noted that, as a CPA, she was aware that companies generally needed to maintain their financial records for at least three years from either "the date of the [tax] filing or the due date." Id. at 79:3-9. These documents should include general ledgers, bank statements, cancelled check, "and so on." Id. at 79:16-21.
On June 3, 2011, James Dragotto and Murli Rajan filed an expert report (the "First Dragotto-Rajan Report") on behalf of Bruno's calculating the future losses incurred as a result of Bozzuto's alleged breach of contract. Id. at Ex. I. This report calculated total damages between $2, 224, 565 and $2, 579, 939. Id. at 7. The First Dragotto-Rajan Report purportedly relied on numerous documents in reaching this conclusion, including past tax returns. Id. at 2. However, Mr. Dragotto later clarified that he and Mr. Rajan had relied almost exclusively upon a pro forma analysis performed by Bozzuto's showing that Bruno's would have projected future sales of $150, 000 per week. Id. at Ex. DD, 72:17-76:1. Mr. Dragotto did not analyze or review the calculations in any way; he relied upon the pro forma analysis "100 percent." Id. at 85:1-11.
In response, Bozzuto's submitted two expert reports, one by John Slavek, CPA (the "First Slavek Report") and one by David Duffus, CPA (the "First Duffus Report"). (Doc. 202, Ex. K, M). Mr. Slavek opined that, due to missing financial data, he could not "reach a conclusion within a reasonable degree of certainty concerning": (1) the profitability of Bruno's Market between April 1, 2006 and May 1, 2007; (2) the accuracy of the numbers used in the First Dragotto-Rajan Report; and (3) the financial condition of Bruno's Market between April 1, 2004 and May 31, 2007. Id. at Ex. K. However, the First Slavek Report did opine that the First Dragotto-Rajan Report was deeply flawed and inherently unreliable. Id. The First Duffus Report concurred with the First Slavek Report, and similarly concluded that the missing financial records prevented the completion of "a report which properly assesses Bruno's Market's financial condition and its alleged damages." Id. at Ex. M.
In October 2011, Bozzuto's filed a motion for sanctions based on spoliation of evidence related to the financial records destroyed by Mr. and Ms. Bruno. (ECF No. 94). Bozutto's argued that it was unable to assert three primary defenses as a result of the spoliation: (1) Bruno's Market's own poor financial condition was the sole cause of any harm suffered; (2) Bruno's Market was not profitable between April 1, 2006 and March 31, 2007; and (3) Bruno's expert report was inaccurate (collectively the "Three Defenses"). Id. Although the Court ultimately determined that spoliation of evidence occurred, (doc. 127, pp. 11-12), Bruno's asserted that the evidence was available electronically through the computer system owned by AWI. Id. at 10. Therefore, Bruno's was directed to obtain all of the requested data from AWI and turn the information over to Bozzuto's. Id. at 12. The Court concluded that "[i]f the requested data are no longer in AWI's possession, the Court will reconsider its ruling." Id.
Thereafter, Bruno's subpoenaed AWI seeking the relevant data, but AWI responded that it did not possess that data. Id. at Ex. O). AWI asserted that, contrary to Bruno's assertions, financial data was "maintained only at the retail store's location and is not, at any point, pulled back to AWI." Id. AWI did however produce weekly sales information for Bruno's Market from April 1, 2003 to May 12, 2007. Id. This sales information was obtained from a marketing program that extracted the information directly from Bruno's Market's point of sale machines. Id.
On June 19, 2013, Bruno's attorney forwarded 516 pages of information obtained from FMS Solutions ("FMS") to Bozzuto's attorney. (ECF No. 150, Ex. R(1)-(6)). This contained portions of Bruno's Market's general ledger from July 8, 2006 through May 12, 2007, including most of the relevant financial data for that period of time. Id. This was the only information that FMS possessed regarding Bruno's Market. (ECF No. 176).
On August 23, 2012, Ms. Bruno submitted an affidavit attesting that, based on the general ledger information, Bruno's Market sales for the 2007 fiscal year totaled $6, 211, 555.49. (ECF No. 202, Ex. T). Based on the information provided by FMS, Bruno's submitted recreated profit and loss statements and balance sheets for the period from July 2006 to March 2007, as well as the period from April 2007 to May 2007. Id. at Ex. W, X. These records demonstrated that Bruno's Market was losing money during its final year of operation. Id.
On June 23, 2014, Mr. Dragotto and Mr. Rajan submitted a revised expert report (the "Second Dragotto-Rajan Report"). (Doc. 202, Ex. Z). The Second Dragotto-Rajan report adjusted the value of Bruno's Market's debt and, as a result, reduced the alleged damages downward to between $2, 130, 129 and $2, 485, 503. Id. at 1. This report did not address any of the new financial information, but did address some of the concerns raised by Mr. Slavek and Mr. Duffus. Id. at 8-10.
In response, Mr. Slavek submitted a revised expert report on August 8, 2014 (the "Revised Slavek Report"). Id. at Ex. AA. The report concluded that "Bruno's Market was under increasing financial distress, especially during the period from April 2006 through mid-May 2007" and "was not operating profitably during this time and may well have had to close its store based solely on its poor financial condition." Id. at 18. The Revised Slavek Report again emphasized that, due to missing financial information predating April 2006, it could not "reach any opinion as to the accuracy of the figures in the [Second] Dragotto and Rajan Report to a reasonable degree of certainty[.]" Id. at 19.
A revised report was also created by Mr. Duffus on August 8, 2014 ("Revised Duffus Report"). Id. at Ex. BB. The Revised Duffus Report concluded that "[a]s of May 16, 2007, Bruno's Market has a negative equity value of between $594, 000 and $710, 400" which resulted in "no loss of equity value due to the allegations made against Bozzuto's[.]" Id. at 8. The report noted declining sales figures for Bruno's Market, and projected "cash flow deficits ranging between approximately $48, 000 and $184, 000" each year in the future. Id. at 18. Mr. Duffus opined that the Second Dragotto-Rajan was "speculative and unreliable[, ]" and noted that "nothing ha[d] been done to correct the flaws and deficiencies that existed in the [First] Dragotto-Rajan Report[.]" Id. at 24. The Revised Duffus Report reiterated that the "deficiencies in the [financial] information produced continue to preclude [the] ability to fully evaluate the purported damages presented in the [Second] Dragotto-Rajan Report." Id. at 34. Mr. Duffus based this assertion primarily upon the belief that Mr. Dragotto and Mr. Rajan relied on Bruno's Market's restated tax returns from the 2004, 2005, and 2006 fiscal years. Id.
Finally, Ms. Bruno submitted an expert report on October 31, 2014. Id. at Ex. CC. This report reiterated many factual issues already contained within the record, and responded to several ...