GIACOMETTO RANCH INC. a Montana Corporation, TOM GIACOMETTO, a resident of Montana, and ROBERT GIACOMETTO, a resident of South Dakota, Plaintiffs, v. DENBURY ONSHORE LLC, a Delaware Corporation, and DENBURY OPERATING COMPANY, a Delaware Corporation, Defendants CV 16-145-BLG-SPW-KLD United States District Court, D. Montana Filed January 04, 2024 Counsel Derrick Braaten, Pro Hac Vice, Braaten Law Firm, Bismarck, ND, Kai Bjorn Thorsgard, Brown Law Firm, P.C., Billings, MT, Matthew J. Kelly, Tarlow Stonecipher Weamer & Kelly, PLLC, Bozeman, MT, for Plaintiffs. Christopher C. Voigt, Jon T. Dyre, Crowley Fleck PLLP, Billings, MT, for Defendants. DeSoto, Kathleen L., United States Magistrate Judge FINDINGS and RECOMMENDATION *1 This matter comes before the Court on Plaintiffs’ Motion to Hold Denbury in Contempt, to Sanction Denbury, and to Continue Trial in the Court's Discretion (Doc. 169). The Court held oral argument in this matter on November 29, 2023. Having considered the arguments and evidence presented, the Court recommends that Plaintiffs’ motion be granted in part and denied in part, as set forth below. I. Background This case arises from a long-standing commercial relationship between Plaintiffs Giacometto Ranch, Tom Giacometto and Robert Giacometto (“Giacometto”), and Defendants Denbury Onshore LLC and Denbury Operating Company (“Denbury”). The background facts of the commercial relationship and the current dispute are more particularly set forth in Doc. 78 and are summarized here for context. Giacometto Ranch is a 20,000-acre cattle and farming ranch located in Powder River County, Montana. Denbury conducts oil production operations in the Bell Creek Field in southeastern Montana and is the operator of oil and gas wells located on Giacometto Ranch. The current case was initially filed in 2016, and the operative pleading is now the Fourth Amended Complaint (“FAC”), filed on December 3, 2021. The FAC was filed largely to conform Giacometto's pleading to rulings issued by the Court. Giacometto asserts 14 claims seeking injunctive and declaratory relief, as well as damages, for Denbury's use of the surface estate, alleged breach of lease agreements, and violations of Montana's Surface Owner Damage and Disruption Compensation Act. The current motion arises from a series of ongoing discovery disputes between Denbury and Giacometto. On December 3, 2021, Giacometto filed a Motion to Compel Discovery (Doc. 107), and the Court held a hearing on that motion on June 23, 2022. The Court held a Zoom status conference to address discovery issues on July 27, 2022. On September 12, 2022, the Court held a telephonic status for discovery issues, memorializing certain deadlines and matters discussed in a September 14, 2022, order (Doc. 160). The Court granted Giacometto's Motion to Compel (Doc. 107) in part on September 30, 2022, ordering production of Denbury's ArcGIS maps and denying all other discovery requests as moot. (Doc. 161). Giacometto filed this Motion to Hold Denbury in Contempt, to Sanction Denbury, and to Continue Trial in the Court's Discretion on March 9, 2023. (Doc. 169). The Court held oral argument on this matter on November 29, 2023. II. Legal standard District courts may impose sanctions for litigation misconduct under both Federal Rule of Civil Procedure 37 and the court's inherent authority. Leon v. IDX Sys. Corp., 464 F.3d 951, 958 (9th Cir. 2006). Rule 37 authorizes a district court to impose sanctions against a party who fails to obey a court order compelling discovery. Fed. R. Civ. P. 37(b)(2)(A)(vii). “Regardless of the source of authority relied upon, the district court has broad discretion to fashion appropriate sanctions.” Webster v. Psychiatric Medical Care, LLC, 386 F. Supp. 3d 1358, 1362 (D. Mont. 2019) (citing Leon, 464 F.3d at 958). *2 In appropriate circumstances, the court may dismiss an action or enter a default judgment. Appropriate circumstances arise where “a party has engaged deliberately in deceptive practices that undermine the integrity of the judicial proceedings” or “has willfully deceived the court and engaged in conduct utterly inconsistent with the orderly administration of justice.” Leon, 464 F.3d at 958. Dispositive sanctions may also be appropriate where the misconduct “relates to the matters in controversy in such a way as to interfere with the rightful decision of the case.” Renner v. Takeda Pharmaceuticals U.S.A. Inc., 2017 WL 120852, *2 (D. Mont. Jan. 12, 2017) (quoting United States v. Natl. Med. Enterprises, Inc., 792 F.2d 906, 912 (9th Cir. 1986)). III. Discussion Giacometto files this motion seeking (1) spoliation sanctions in the form of default on the issue of liability for punitive damages or, alternatively, an adverse inference instruction, (2) monetary sanctions for past and future failures to abide by this Court's orders and the Rules of Civil Procedure, and (3) if necessary in the Court's discretion, a short continuance of the deadline for the parties’ pre-trial order and trial dates. (Doc. 170 at 6). The Court notes that although Giacometto's motion broadly alleges liability for “malice”, counsel clarified in oral argument that this claim—at least as it pertains to the current motion—is particularly with respect to the location of the Minnelusa 4 well. (See Doc. 170 at 6, 10–11). A. Spoliation of phone records It is firmly established in the Ninth Circuit that “[a] federal trial court has the inherent discretionary power to make appropriate evidentiary rulings in response to the destruction or spoliation of relevant evidence.” Glover v. BIC Corp., 6 F.3d 1318, 1329 (9th Cir. 1993). A court may levy sanctions when a party knew, or should have known, that the spoliated evidence could be relevant to a claim. Glover, 6 F.3d at 1329. Sanctions “can range in severity from minor sanctions, such as awarding attorneys’ fees, to more severe sanctions, including permitting a jury to draw an adverse inference against a party responsible for the destruction of evidence, ordering the exclusion of evidence, or even dismissal of claims.” Sanders v. University of Idaho, College of Law, 634 F. Supp. 3d 936, 944 (D. Idaho 2022) (quoting Dickinson Frozen Foods, Inc. v. FPS Food Process Solutions Corp., 2019 WL 2236080, *6 (D. Idaho, May 21, 2019)). An appropriate sanction “must be determined on a case-by-case basis, and should be commensurate to the spoliating party's motive or degree of fault in destroying the evidence and the degree of prejudice suffered by the movant.” Sanders, 634 F. Supp. 3d at 944 (quoting Balla v. Idaho St. Bd. of Correction, 119 F. Supp. 3d, 1271, 1282 (D. Idaho 2015) (citation and internal quotation marks omitted)). The Court must select “the least onerous sanction corresponding to the willfulness of the destructive act and the prejudice suffered by the victim.” Apple Inc. v. Samsung Electronics Co., Ltd., 888 F. Supp. 2d 976, 992 (N.D. Cal. 2012). Giacometto moves for sanctions on the grounds that Denbury intentionally spoliated evidence from the cell phones of Denbury employees, including Kevin Anderson (“Anderson”) and Parker Bailey (“Bailey”). (Doc. 170 at 10). Anderson was the foreman assigned to communicate with Tom Giacometto and to relay those communications back to Denbury. (Doc. 170 at 10). Anderson was not responsible for selecting the location of the oil and gas wells. (Doc. 180 at 12). Due to limited service in the Bell Creek field, communications were often achieved by text; therefore, Giacometto maintains, Anderson's cell phone likely contained evidence of Denbury's malice toward Giacometto, particularly with respect to the disputed location of the Minnelusa 4 well. (Doc. 170 at 10–11). Anderson did not select the well's location, Denbury counters, and therefore any argument that his phone contained evidence of malice amounts to “pure speculation and conjecture.” (Doc. 180 at 12). In oral argument, Denbury noted the location was the result of business and geological reasons based on a prior well drill in the same area. (See Doc. 171-10 at 2). *3 Denbury issued Anderson a litigation hold letter on October 26, 2016, and again on June 26, 2019. (Doc. 170 at 12). Anderson responded to and accepted the hold letter on June 26, 2019. (Doc. 170 at 12). The letter directed that Anderson preserve text messages, e-mails, and “any physical objects relating to the Litigation and Denbury's relationship with Plaintiff.” (Doc. 170 at 12). Despite the litigation hold, Anderson's cell phone—and all its accompanying data—was replaced in 2021. (Docs. 170 at 29; 171-3; 180, ¶ 28). In oral argument, counsel for Denbury conceded that Anderson's cell phone data was lost in 2021, but counsel denied any intentional wrongdoing on the part of Denbury. Denbury's breach of its duty to preserve Anderson's text messages provides the basis upon which this Court exercises its authority to issue sanctions. Peschel v. City of Missoula, 664 F. Supp. 2d 1137, 1144 (D. Mont. 2009). Turning to the appropriate sanction, Giacometto urges this Court to enter default against Denbury on the issue of liability for punitive damages, particularly as to the placement of the Minnelusa 4 well. (Doc. 170 at 10–11, 24). Alternatively, Giacometto seeks a mandatory adverse inference instruction that Denbury destroyed the data because it contained evidence of Denbury's malice toward the Giacomettos. (Doc. 170 at 11, 24). In oral argument, counsel for Denbury acknowledged that while a sanction was appropriate, the Court should abstain from entering a default judgment. In determining whether to impose a dispositive sanction, the court should consider the following factors: (1) the presence of extraordinary circumstances; (2) willfulness, bad faith, or fault of the offending party; (3) the relationship between the misconduct and the matters in controversy; (4) the risk of prejudice to the party seeking sanctions; (5) the public policy favoring disposition of cases on their merits, and; (6) the efficacy and availability of lesser sanctions. Halaco Engineering Co. v. Costle, 843 F.2d 376, 380 (9th Cir. 1988); Leon, 464 F.3d at 958. After examining the factors set forth in Halaco Engineering and Leon, the Court declines to recommend a dispositive sanction. The Court does, however, find that a permissive adverse inference instruction is warranted under the circumstances. 1. Existence of extraordinary circumstances Extraordinary circumstances exist where the spoliation severely disrupts the orderly administration of justice and destroys the evidentiary balance necessary to the fact-finding process. Halaco, 843 F.2d at 380. For example, in Peschel, the court found extraordinary circumstances warranting of a severe sanction after the City of Missoula failed to preserve video footage of an arrest. 664 F. Supp. 2d 1137. Police cameras recorded the arrest at issue and uploaded the footage to the department's hard drive, where it was subsequently viewed by several police officers. Peschel, 664 F. Supp. 2d at 1141. At some point later, however, the city lost the video. Peschel, 664 F. Supp. 2d at 1141. The spoliated footage in Peschel unquestionably memorialized the central issue in the case—whether the police used unreasonable force—and, despite having been viewed by multiple officers, the city failed to use “even a modicum of prudence” to preserve the footage. Peschel, 664 F. Supp. 2d at 1146. As a result, “the spoliation irreparably jeopardized the accuracy of the fact-finding process to the prejudice of [the plaintiff].” Peschel, 664 F. Supp. 2d at 1146. The court therefore determined that a conclusive finding regarding the officers’ use of unreasonable force constituted the most appropriate sanction. Peschel, 664 F. Supp. 2d at 1145. Although the court stopped short of issuing a default judgment, it noted that its sanction effectively granted summary judgment on the issue. Peschel, 664 F. Supp. 2d at 1145–46. *4 Here, no such extraordinary circumstances exist. First, unlike the footage in Peschel, the contents of Anderson's cell phone—and any potential relevancy to the deteriorating relationship between Denbury and Giacometto—remain unknown. Second, unlike Peschel, where the video was uploaded to the city's servers and subsequently viewed by several personnel, Giacometto and Denbury dispute whether Denbury actually captured or processed the cell phone data prior to 2021. Giacometto alleges that Marc DellaValle, Denbury's IT department head, collected data from “employees like Kevin Anderson” in 2016 and 2021. (Doc. 170 at 13). The record, however, indicates otherwise: in response to whether he had collected data from Anderson's cell phone, DellaValle testified that he “couldn't honestly tell you if it was Kevin. Yeah, not really sure.” (Doc. 110-16 at 18). The Court recognizes the problem is, of course, that Denbury's spoliation is precisely why neither Court nor the parties can ascertain the contents of Anderson's phone. Denbury should not receive the benefit of this uncertainty. Therefore, although the Court declines to recommend a default judgment for the reasons set forth in this opinion, it does find that a lesser sanction is appropriate. 2. Willfulness, fad faith, or fault “In cases where the drastic sanctions of dismissal or default are ordered, the range of discretion for a district court is narrowed and the losing party's non-compliance must be due to willfulness, fault, or bad faith.” Halaco, 843 F.2d at 380. “A party's destruction of evidence qualifies as willful spoliation if the party has some notice that the evidence was potentially relevant to the litigation before it was destroyed.” Sanders, 634 F. Supp. 3d at 944 (quoting State Farm Fire & Cas. Co. v. Gen Motors, 542 F. Supp. 3d 1124, 1131 (D. Idaho 2021) (citations omitted). Giacometto argues the facts surrounding the spoliation—specifically, the litigation holds and DellaValle's testimony—support the conclusion that the spoliation was intentional. (Doc. 170 at 13). As discussed above, however, this assertion is not reflected in the record. (See Doc. 110-16 at 18). Giacometto cannot sustain its burden in establishing that the spoliation was intentional. With that said, the record does establish that the spoliation arose from willfulness or fault on the part of Denbury. Denbury knew the cell phones contained potentially relevant information, as evidenced by the litigation holds, yet failed to implement proper systems to ensure they were preserved. Even assuming Denbury acted willfully, however, lesser sanctions are more appropriate in light of the factors. 3. Nexus between sanctions, misconduct, and matters in controversy The most critical criterion is that “the misconduct penalized must relate to matters in controversy in such a way as to interfere with the rightful decision of the case.” Halaco, 843 F.2d at 831. Here, Giacometto argues that the spoliated data likely contains evidence of Denbury's malice toward Giacometto, particularly with respect to the parties’ dispute over the Minnelusa 4. (Doc. 170 at 10–11). Unlike Peschel, however, where the video indisputably constituted the best evidence of what had occurred, the contents of Anderson's cell remain unknown—albeit, the Court acknowledges, as a direct result of the spoliation. Because the parties and the Court can only speculate as to their contents, and because Denbury has not acted in bad faith, a default on the issue of malice is inappropriate. 4. Risk of prejudice to Giacometto The prejudice inquiry “looks to whether the [spoliating party's] actions impaired [the affected party's] ability to go to trial or threatened to interfere with the rightful outcome of the case.” Leon, 464 F.3d at 959. In the absence of the text messages, Giacometto is prejudiced in that they must establish malice through other evidence. (Doc. 170 at 24). 5. Public policy favoring disposition of cases on their merits *5 The public policy favoring resolution of cases on their merits weighs against a default ruling. This is no less true here, and there are no alternative overriding public policy concerns. 6. Efficacy of lesser sanctions Before imposing a dispositive sanction, the court must first consider the feasibility of less drastic sanctions. Halaco, 843 F.2d at 281. As an alternative to default judgment, Giacometto seeks an “adverse inference and instruction to the injury indicating that Denbury destroyed the cell phone data [ ] because the data contained evidence of Denbury's malice toward Giacometto, and the jury may rely on this presumption as sufficient evidence of malice and liability to award punitive damages.” (Doc. 170 at 24–25). The Court agrees that an adverse inference instruction is appropriate. Where, as here, potentially relevant information has been destroyed, there is “a presumption that the destroyed evidence goes to the merits of the case, and further, that such evidence was adverse to the party that destroyed it.” Sanders, 634 F. Supp. 3d at 944 (quoting Apple Inc., Ltd., 888 F. Supp. 2d at 988). However, the Court finds that a mandatory inference is not justified by the record because a mandatory inference, like the conclusive finding in Peschel, effectively grants default on the issue of malice. Rather, an adverse instruction that permits—but does not require—a jury to infer that the lost evidence contains evidence that Denbury acted with actual malice is most appropriate. See Sanders, 634 F. Supp. 3d at 945. Such an instruction will “ameliorate any prejudice to [Plaintiff] by filling the evidentiary gap created by [Defendants] that destroyed evidence” without destroying the adversary process of litigation. Sanders, 634 F. Supp. 3d at 945 (quoting Ottoson v. SMBC Leasing & Fin., Inc., 286 F. Supp. 3d 570, 584 (S.D.N.Y. 2017) (citations omitted). B. Emails and attachments in native format Giacometto seeks an order compelling (1) production of native format emails and (2) sanctions to address Denbury's alleged failure to produce the emails. (Doc. 170 at 15). The Court begins with a brief review of the procedural background as it relates to the non-native emails. Giacometto filed the first motion to compel on December 3, 2021. (Doc. 107). On July 27, 2022, the Court held a status conference, during which the parties agreed Denbury had produced all emails in native format, and Giacometto would advise the Court should any issues remain. (Doc. 155, ¶ 4). On September 7, 2022, Giacometto sent a letter requesting an additional 138 emails in native format. (Doc. 180 at 16). On September 12, 2022, the Court held another discovery status conference, during which Giacometto advised there may be six or seven additional non-native attachments. (Doc. 160, ¶ 4). Denbury agreed to produce the missing attachments in native format. (Doc. 160, ¶ 4). On September 30, 2022, having heard nothing further from the parties and presuming the issue resolved, the Court denied Giacometto's motion to produce the non-native emails as moot. (Doc. 161). Giacometto filed the current motion on March 9, 2023, seeking the production of 391 native format emails, $1,875 in fees associated with processing, indexing, and analyzing the non-native pdf data from 2016 to 2021, as well as $25,000 to ensure “such recalcitrance on Denbury's part is not rewarded.” (Doc. 170 at 25). On March 20, 2023, Denbury asked Giacometto for a list or index of the 391 missing emails. (See Doc. 180-8). To the Court's knowledge, Giacometto never responded to that request. Denbury therefore argues that Giacometto lacks “clean hands” due to Giacometto's failure to confer with Denbury prior to filing the instant motion and to specify which emails had not been produced natively. (Docs. 180 at 15, 17; 180-8 at 1). Denbury emphasizes that it has not withheld information; rather, it has produced the information in a format Giacometto finds more difficult to index and search. (Doc. 180 at 17). *6 It appears that the first issue has been resolved. At oral argument, counsel for Giacometto advised the Court that Denbury had produced the missing emails, and as a result, Giacometto no longer sought an order compelling their production. In any event, counsel are required to meet and confer prior to filing a motion to compel discovery. Fed. R. Civ. P. 37(a)(1). Giacometto has provided no certification to that effect, and it appears that both Denbury and the Court believed that the email issue had been resolved in September 2022. Accordingly, for these reasons, the Court finds that the motion to compel should be denied. Turning now to Giacometto's request for sanctions, the Court notes that Rule 37 sanctions are triggered where a party disobeys a court order. Fed. R. Civ. P. 37(b)(2)(A). However, because the parties represented that the issues with respect to the non-native emails had been resolved, the Court's September 30, 2022, order denied Giacometto's motion to compel production of the non-native emails as moot. (See Doc. 161). The Court further finds that sanctions are not warranted in light of Giacometto's failure to confer with Denbury and respond to Denbury's requests for clarification. C. ArcGIS map files Giacometto makes several requests with respect to the ArcGIS map files. Giacometto first requests that the Court order production of all shapefiles for all layers of facilities in the Bell Creek Field. (Doc. 170 at 26). Giacometto next seeks monetary sanctions in the event these files are not produced. (Doc. 170 at 26). Lastly, Giacometto seeks $33,220.50 in fees incurred by their expert, Shane Bofto, for additional work due to Denbury's failure to produce the map files. (Doc. 170 at 26–27). The issue of the ArcGIS map has been thoroughly discussed by the parties in numerous hearings and status conferences. It is fair to say that the parties have had confusion and uncertainty about what was requested, what files comprise the ArcGIS map, and what files have been produced. The Court was assured multiple times by the parties that the issue could be resolved without court involvement, but ultimately an order compelling production was entered. It appears that although Denbury still professed to not understand what exactly had not been produced and what Giacometto was still seeking, and thus proposed a conference call with the attorneys and Denbury's IT department, the parties had little to no communication about the ArcGIS map between the date of the order and the filing of the instant motion. It appears Giacometto's first two requests have been resolved. In oral argument, counsel for Giacometto indicated he had received eight new layers—five of which included Denbury's facilities and one of which seemed to include the pipelines. Therefore, Denbury should not be held in contempt nor sanctioned for failure to produce the ArcGIS map files. As to Giacometto's request for expert fees, the Court notes that much of the work Bofto attributed to the ArcGIS maps took place from 2019 to early 2021, predating Giacometto's December 3, 2021, motion to compel (Doc. 107) and this Court's September 9, 2022, order compelling production of the ArcGIS maps (Doc. 161). (See Doc. 173-1). Given that a Court order compelling production had not been issued for most, if not all, of Bofto's expenses, the Court finds that Denbury should not be required to reimburse Giacometto for expert fees related to the ArcGIS maps. D. Attorney fees Giacometto seeks $56,732.50 in fees and expenses associated with bringing the motion to hold Denbury in contempt and for sanctions. (Doc. 170 at 27). In light of Giacometto's successful claim for spoliation sanctions, the Court finds it appropriate to grant reasonable attorney fees related to Giacometto's spoliation claim. However, as noted above, counsel have an ongoing obligation to meet and confer prior to filing a discovery motion. Despite Denbury's requests to meet and/or clarify the information Giacometto claims its missing, Giacometto has failed to do so. (See e.g., Doc. 180-8). Accordingly, the Court finds that any fees associated with the remainder of the motion should be denied. E. Continuance of trial *7 As a final matter, Giacometto requests a short continuance of the parties’ pre-trial order and trial dates. (Doc. 170 at 6). Because the Court finds Denbury produced the emails and ArcGIS files, a short continuance of the trial dates based on discovery issues is not necessary. This case has been ongoing for over seven years. At some point, the parties must proceed. IV. Conclusion For the reasons discussed above, IT IS RECOMMENDED that Plaintiffs’ motion (Doc. 169) be (1) GRANTED as to sanctions for the spoliation of evidence, and that the jury receive a permissive adverse inference instruction; (2) GRANTED as to reasonable attorney fees associated with bringing the spoliation claim, and (3) DENIED as to all other issues. If Presiding Judge Watters adopts the Court's Findings and Recommendations, this Court will set a briefing schedule to determine the reasonable attorney fees. NOW, THEREFORE, IT IS ORDERED that the Clerk shall serve a copy of the Findings and Recommendation of the United States Magistrate Judge upon the parties. The parties are advised that pursuant to 28 U.S.C. § 636, any objections to the findings and recommendations must be filed with the Clerk of Court and copies served on opposing counsel within fourteen (14) days after entry hereof, or objection is waived. DATED this 4th day of January, 2024.