In Terra Management Group v. Keaten the Colorado Supreme Court held on June 23 that a "court may sanction a party for the destruction of relevant evidence if the party knew or should have known that (1) litigation was pending or reasonably foreseeable and (2) the destroyed evidence was relevant to that litigation. The court established clear guidelines for when parties have a duty to preserve evidence before a lawsuit is filed, and when courts can impose adverse inference sanctions for failing to meet that duty.
Terra Mgmt. Grp. was a case arising from a toxic exposure claim involving suspected methamphetamine contamination in an apartment complex. When tenants complained of chemical fumes and health issues from a suspected meth lab in the unit below them, the property management company failed to preserve critical evidence during the eviction process. Despite company policy requiring photographs of tenant belongings during evictions, management failed to document potentially crucial evidence before renovating the unit.
Specifically, the trial court drew an adverse inference against the property management company based on its failure to preserve evidence from the downstairs unit that "would have established a link in the chain of evidence" against it.
The property management company's failure to preserve evidence turned costly when the trial court imposed an adverse inference sanction, ultimately contributing to a judgment against the company exceeding $10.5 million and $2.5 million in exemplary damages. The Colorado Court of Appeals affirmed the judgment, rejecting the management company's contention that the trial court erred in imposing a sanction for spoliation when Defendants had no notice that litigation was pending
What is an Adverse Inference Sanction?
When parties fail to meet their duty to preserve evidence, courts can impose various sanctions, including adverse inference instructions and/or sanctions.
An adverse inference sanction is a court-imposed penalty that allows the judge or jury to assume that destroyed or missing evidence would have been unfavorable to the party who failed to preserve it. Essentially, if you had a duty to keep evidence but destroyed it (whether intentionally or negligently), the court can instruct the fact-finder to infer that the missing evidence would have hurt your case and helped your opponent's case. For example, if a company destroys documents it should have preserved, the jury can be told to assume those documents contained damaging information against the company. And adverse inference sanction serves both as a punishment for spoliation (evidence destruction) and as a way to level the playing field by compensating the prejudiced party for the loss of potentially helpful evidence. Sanctions can take many forms, such as exclusion of evidence, monetary, or even terminating sanctions, i.e., dismissal of claims or defenses.
Critically, the Colorado Supreme Court noted that any adverse inference sanction must be proportionate to the circumstances and consider factors like the culpability of the party destroying evidence and the resulting prejudice.
Duty to Preserve Evidence
The Colorado Supreme Court clarified that a duty to preserve evidence arises when a party knows or should know that:
- Litigation is pending or reasonably foreseeable, and
- The evidence is relevant to that potential litigation
Importantly, the court emphasized that "reasonably foreseeable" litigation requires more than just the possibility of a lawsuit. The standard encompasses litigation that is "imminent, likely, or reasonably anticipated"—not merely a distant possibility.
Factors Courts Will Consider if litigation was reasonably foreseeable
When determining if litigation was reasonably foreseeable, Colorado courts may examine:
- Plaintiff's conduct: Delays in reporting concerns or filing suit, and whether anyone suggested the issue was resolved
- Defendant's actions: Consulting with attorneys, notifying insurers, or creating incident reports
- Nature of the situation: Large-scale incidents or serious injuries that commonly lead to litigation
- Communications between parties: Whether there were explicit threats of legal action.
Practical Implications for Colorado Practitioners
This ruling provides much-needed clarity for Colorado attorneys and their clients. The duty to preserve evidence now has defined parameters, helping parties understand when preservation obligations begin. Legal practitioners should advise clients to:
- Document potential incidents thoroughly
- Preserve relevant evidence when litigation becomes foreseeable
- Implement clear evidence retention policies
- Consider the cumulative effect of circumstances that might make litigation likely
The Terra Management decision reinforces that the duty to preserve evidence and potential adverse inference sanctions are serious considerations that can significantly impact litigation outcomes in Colorado courts.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
