By Jeff MacHarg and Sarah Traynor
Think back-dating that email will help your case? Think again.
Ford v. Jurgens, 2022 NCBC Order 9 (N.C. Super. Ct. Feb. 16, 2022) involved a dispute between a nonprofit real estate investment association (“the Association”) and two members of its board of directors, Kathie Russell and Carl Arnold Jurgens. Russell, as it happens, is also an attorney and member of the North Carolina State Bar.
The Association claimed that Jurgens and Russell improperly transferred certain assets, including cash, from the Association (a non-profit entity) to a for-profit entity in violation of association’s bylaws. Id. ¶¶ 9–10. The Association also claimed that Russell secretly profited from the Association’s purchase of a property that, unbeknownst to the Association, was half-owned by Russell.
In defense, Russell and Jurgens claimed that any asset transfer was legal and in compliance with bylaws. Id. ¶ 13. Of course, this defense put the bylaws front and center. As to the self-interested transaction, Russell claimed that she divested her interest in the selling company before the transaction occurred, so she did not profit from the sale; and she produced the bylaws and the emails to prove it. Id. ¶¶ 38, 40.
In the subject Motion for Sanctions, the Association claimed that the bylaws Russell produced were altered and that emails Russell produced were fabricated out of whole cloth. Id. ¶¶ 3, 11. Regarding the bylaws, the Association compared the version produced by Russell to the original 2003 version and a matching version received from another board member in 2020. Id. ¶ 14. This comparison showed that the original 2003 version had been altered in a way that would allow for the transfers at issue. But who made the changes? The Association hired a forensic examiner, but all the examiner could establish was that someone identified as “Susan” made the changes. Id. ¶¶ 20, 24, 26. Coincidentally, a “Susan” did work in Russell’s office, but Russell denied making the changes and claimed she did not know how the change were made. Id. ¶¶ 24, 29. Given Russell’s denials and the lack of evidence regarding when and by whom the changes were made, Judge Earp held that Plaintiffs failed to meet their burden to proof and did not to impose sanctions for the alleged alteration of the bylaws. Id. ¶ 55.
Judge Earp reached a very different conclusion on the emails. For background, the Association claimed that Russell caused it to purchase a property from a seller (“AK”) that, unbeknownst to the Association, was half owned by Russell. According to the Association, AK bought the property, doubled the price, and flipped it to the Association. Id. ¶ 37. Russell never disclosed her ownership interest in AK. Id. ¶ 36.
In her defense, Russell produced a series of “draft” emails as proof that she gave up her half interest in AK to the other owner before this transaction. Id. ¶ 39. But the Association’s forensic computer expert concluded that the drafts were complete fakes. As Judge Earp explained, “Russell attempted to change history saying, ‘I know we made the offer in the name of AK Partners but I can just sign my half of the partnership over to you and I will step out of it. If you are willing … I would stay out of it to avoid conflicts.’” Id. ¶ 40. In this crafted (and fictitious) exchange, the other owner replied, “Call me. I’m willing.” Id. The forensic expert examined the emails and concluded that they were actually created by Russell seven months before the email’s sent date, a fact that Russell never denied. Id. ¶ 41.
This fabrication of evidence, Judge Earp concluded, was “intolerable litigation misconduct” and a clear violation of Rule 26(g) by which parties certify that discovery responses are not interposed for an improper purpose. Id. ¶ 56. As a result, it was both within her inherent power and within the powers conferred by the Rules of Civil Procedure for Judge Earp to sanction Russell. Id. ¶ 50–51. The question then became: what is an appropriate sanction?
The Association, of course, asked the Court to strike Russell’s answer and enter judgment against her. Id. ¶ 58. The Court acknowledged that such a sanction was potentially appropriate and was within its power; But Judge Earp opted for something more surgical. Id. ¶¶ 59, 62–63. First, Judge Earp ordered Russell to personally pay all parties for the costs associated with Plaintiffs’ motion, including attorneys’ fees related to the parties’ briefs and supplementary materials, expert costs, and preparing for and arguing at the hearing. Id. ¶ 64. According to later filings, the Associations’ costs exceeded $115,000.00. Def.’s Resp. to Pl.’s Pet. for Costs, ECF No. 162. Russell has opposed recovery of the full amount, claiming the amount is excessive. Id.
The Court also imposed an additional evidentiary sanction, allowing evidence of Russell’s fabrication of the emails to be admitted at trial for impeachment purposes, regardless of whether this particular property transaction (which is one of many transactions at issue) is ultimately tried before a jury. 2022 NCBC Order 9, at ¶ 66. This ensures, of course, that no matter what claims get to trial, Russell’s credibility as a party will be put before the jury. Finally, Judge Earp directed the Association to provide a copy of the sanctions order to the North Carolina State Bar for review and decision regarding further discipline of Russell as a practicing attorney. Id. ¶ 68.
Obviously, the severity of these sanctions reflect the severity of the wrongdoing. And they are an important cautionary tale to all litigants. Thinking of back-dating that email? Think again.