Regardless of whether you’re the plaintiff or defendant in an insurance dispute, fabricating or otherwise altering evidence can have some very serious consequences. Earlier this summer, the Sixth District Texas Court of Appeals issued a memorandum opinion involving two of the most severe sanctions parties can face under Texas law for such misconduct – monetary sanctions and the striking of a parties’ pleadings, also known as the “death penalty” sanction.
The case, Knoderer v. State Farm Lloyds,1 stems from a heated insurance dispute between the insureds, William Knoderer and Susan Knoderer, and their insurance carrier, State Farm Lloyds, which arose after the Knoderer’s home was flooded in February of 2008 due to a plumbing system leak. Although State Farm Lloyds initially agreed to pay for the damages to the Knoderer’s home, it later alleged that certain markings on the water valve evidenced the Knoderer’s had intentionally caused the flood. The Knoderer’s denied State Farm Lloyds claims for fraud and subsequently filed suit against the insurer for deceptive business practices.
At his deposition, Mr. Knoderer testified that he had six photographs proving the fitting examined by State Farm Lloyds’ expert was not the fitting that failed. Mr. Knoderer claimed that after the fitting had failed, but before he had given it to State Farm Lloyds, he marked the fitting with an engraving tool and photographed the fitting. The Knoderer’s then moved to strike State Farm Lloyds’ expert’s testimony and attached these photographs. The implication was that State Farm Lloyds’ had fabricated evidence, since the fitting examined by State Farm Lloyds’ expert did not have these same markings.
In an interesting turn of events, State Farm Lloyds then moved for sanctions against the Knoderer’s claiming it was the photographs attached to the Knoderer’s motion – not the ones relied upon by State Farm Lloyds’ expert – that had been fabricated. While the trial court denied State Farm Lloyds’ motion, it later ordered the Knoderer’s to produce the hard drive containing the photographs to their insurer, which was “to be preserved and not altered in any way.”
State Farm Lloyds filed another motion for sanctions after its inspection of the hard drives revealed that the files had been deleted by a program purchased the day after the trial court ordered the Knoderer’s to preserve the files. The trial court granted State Farm Lloyds’ motion and struck the Knoderer’s pleadings. The trial court also ordered Mr. and Mrs. Knoderer to pay all of the attorney’s fees, expert fees and costs incurred by State Farm Lloyds in the litigation – which totaled over a million dollars.
The Sixth District Texas Court of Appeals, however, reversed a trial court’s ruling after determining that the monetary sanctions against the Knoderer’s were excessive and the conduct by the Knoderer’s was not so egregious as to warrant the "death penalty" sanctions. Regarding the “death penalty” sanctions, the court explained:
The so-called “death penalty” sanctions, which effectively decide a case on the merits, are more extreme than other sanctions and are to be used in only a limited range of cases. Our reading of the more stringent factors for review of “death penalty” sanctions suggests that they use the relationship and proportionality factors, but raise the bar in each case. In evaluating the relationship between the sanction and the conduct it addresses, “death penalty” sanctions can be appropriate where a party’s conduct “justifies a presumption that its claims or defenses lack merit.” Then, evaluating proportionality, before a sanction that effectively disposes of a case on the merits is appropriate, lesser sanctions must at least be considered to remedy the problem. In all but the most egregious cases, the sanctioning court must actually test lesser sanctions before striking pleadings. In all cases, the record must reflect that the trial court considered the availability of appropriate lesser sanctions and must contain an explanation of the appropriateness of the sanction imposed. The trial court need not test the effectiveness of each available lesser sanction by actually imposing the lesser sanction on the party before issuing the death penalty sanction; rather, the trial court must analyze the available sanctions and offer a reasoned explanation as to the appropriateness of the sanction imposed.
Although (a) we defer to the implied findings that the six fitting photographs were fabricated and that evidence concerning the fabrication was destroyed, we conclude that the death penalty sanctions in this case fail to survive either the relationship test or the proportionality test, because (b) the abuse does not justify the required implied finding that the Knoderers caused the February 20, 2008, water leak and (c) the record does not reflect the required consideration of appropriate sanctions lesser than the death penalty.
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Here, the destroyed evidence could have supported or undercut only the argument that the six photographs were fabricated, not the ultimate issues in the lawsuit. Therefore, the destruction of the data related to the six photographs does not justify a conclusion that the Knoderers’ claims lack merit.
In reversing the monetary sanctions award for all the fees and costs incurred by State Farm Lloyds, the court relied on the Texas Supreme Court’s opinion in Low v. Henry,2 which suggests that sanction award of attorneys’ fees are limited to those fees “incurred because of the sanctionable conduct.” The appellate court found the million dollar sanction an abuse in discretion since “[o]nly the attorneys’ fees, expert fee, and costs related to the six fabricated photographs should be included in the sanctions.” The appellate court further noted there was no evidence Mrs. Knoderer had committed any wrongdoing and, under Texas law, she could not be held personally liable for the actions of her husband. Thus, the court held, “both the death penalty and monetary sanctions assessed against [Mrs. Knoderer] must fall.”
It is important to note that while the appellate court did not find the circumstances in Knoderer warranted the harsh sanctions imposed by the trial court, this does not mean that the alleged misconduct will go unpunished. Indeed, the opinion explicitly authorized the trial court to assess other, less severe sanctions against Mr. Knoderer for allegedly fabricating evidence. The real lesson from this case is that misrepresenting facts, fabricating evidence or disobeying discovery orders can come at a very high cost and is just simply never worth it.