HVI Cat Canyon, CA Ordered to Pay Sanctions

United States v. HVI Cat Canyon, Inc., No. 2:11-cv-05097-FMO (PLAx) (C.D. Cal. Apr. 20, 2017).

In this case, a plaintiff’s failure to properly issue and confirm legal holds led to the spoliation of evidence and ultimately big sanctions. The decision came two years after HVI Cat Canyon filed a motion seeking sanctions in an ongoing case involving oil spills. The court, through a special master, ordered the State of California to pay nearly $1 million in attorneys’ fees for its loss of evidence.

This so-called “Targate” case began when the federal government and California sued HVI, alleging that its oil spills violated water-protection laws. In the course of litigation, HVI moved for sanctions. HVI argued that California spoliated evidence when it failed to issue a litigation hold but misrepresented that it had.

The district court found that spoliation had occurred. It ordered California to pay the costs and attorney fees HVI incurred in bringing its sanctions motion. The court referred the matter to a special master to determine how much California would pay and when.

The special master noted that the lodestar method is the chief way to determine an award of attorney fees. In that method, courts multiply “the number of hours the prevailing party reasonably expended … by a reasonable hourly rate.” While courts have discretion in calculating the lodestar figure, they should only depart from this method in “exceptional cases.”

HVI requested payment of the lodestar amount, $956,784. California did not object to $764,933. However, it disputed the remaining $191,851 as “not reasonable and necessary.” California conceded that “the hourly rates in question are reasonable,” so it only disputed the number of attorney hours. Specifically, California argued that HC’s unsuccessful attempts to obtain summary judgment and sanctions against the federal government inflated its hours. Additionally, California argued that HVI’s representation by “two sets of attorneys” created “unnecessary duplicative work.”

The court observed that the hours in a lodestar calculation are “not based on some ethereal ideal of efficiency but on what the lawyers reasonably had to do in order to reach a desired result.” Because California did not disclose its spoliation promptly, “HVI had to scratch and dig, confer and ponder to determine the nature and extent of the spoliation and resultant damage.” Therefore, “the amount of attorney time and effort expended were made necessary … by the State’s failure early on to forthrightly admit the spoliation of evidence.”

Regarding HVI’s unsuccessful sanctions motion against the federal government, the court noted the “close cooperation” between federal and state authorities in investigating and bringing these charges. Given California’s conduct, “it would be artificial and unfair to try to disentangle” which party was complicit in the spoliation or its nondisclosure. Similarly, “the motion for summary judgment and the spoliation issues were cut from the same cloth,” making HVI’s pursuit of summary judgment a necessary part of the work.

As to HVI’s representation by two law firms, the court concluded that their “joint effort was nonetheless efficient.” Moreover, “any actual duplication of effort” was “made … necessary by [the State’s] dissimulation.” Specifically, the court noted that protracted litigation drives up costs; here, “the State obfuscated for over a year.”

The court found that “[s]ubstantially reducing HVI’s attorneys’ fees would be tantamount to punishing HVI for working hard to uncover the spoliation.” Where HVI had provided “sufficiently detailed” timesheets and invoices to support its request, the court found no reason to reduce the disputed fees. The court therefore ordered the State to pay the full amount.

Finally, the court considered California’s request “to defer payment … until the case has concluded.” Noting that the “issue of spoliated evidence has been pending for more than two years,” the court decided that “further delay in payment [would] defeat the very purpose of monetary sanctions.” The court ordered payment of at least the undisputed amount by May 10, 2017, even if California appeals the remainder.

The outcome of this case teaches us several lessons. First, learn from California’s mistakes. The Magistrate’s Report and Recommendation noted that “California said it had imposed [a litigation] hold, apparently without ever checking to verify that it had done so.” Best practices demand issuing holds promptly and revisiting them periodically to ensure that custodians are complying with their terms.

Second, California should have “come forward promptly to admit the problem and recommend solutions.” Failing to acknowledge its mistakes drove the costs of litigation and sanctions higher. Addressing problems head on usually creates goodwill with the court and opposing counsel and can avoid further sanctions.

HVI’s success also teaches a final lesson. Its careful documentation and conservative, yet diligent, investigation won the day on spoliation and again on fees.

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