A Superior Court judge in Boston’s Business Litigation Session has ruled that a company that intentionally destroyed tens of thousands of pages of evidence must pay the plaintiffs’ counsel fees.

The judge further found that the action warrants a damaging jury instruction at trial.

The defendant, which operated a hedge fund at the center of a long-running dispute over ownership interests and management fees, argued that the judge should not impose sanctions because the pages were inadvertently destroyed and most were available to the plaintiffs in previously provided discovery.

But Judge Janet L. Sanders disagreed, saying she would instruct the jury that it could infer that relevant materials were not produced as a result of the defendant’s misconduct, and that had the documents been turned over, they “would have provided evidence of facts supportive of the plaintiff’s claim.”

“The judicial system depends in large part on the integrity of those who participate in it,” Sanders wrote. “This kind of conduct imposes significant costs on opposing counsel and requires the expenditure of judicial resources. It should not go unpunished.”

The judge, however, declined a request by the plaintiffs’ lawyer, Jonathan W. Fitch of Sally & Fitch in Boston, to enter a default judgment against the defendant.

The six-page decision is Idnani, et al. v. Venus Capital Management, Inc., et al.

Some explaining to do

Defense counsel Michael F. Connolly of Boston’s Mintz Levin said his firm entered an appearance in the lawsuit after the spoliation occurred.

Given that the plaintiffs were seeking a default judgment, Connolly said, Sanders’ sanction was fair and appropriate.

“Voluminous records were copied, retained and produced to the plaintiffs electronically,” he said. “Everything that was responsive and relevant to the case was produced electronically, and the papers that were discarded were either completely not relevant or simply paper copies of information that was available electronically.”

Although the plaintiffs likely will put on evidence to show that paper copies of documents were thrown away, Connolly said, the judge’s decision still allows him to explain the facts surrounding the discarded materials.

“We believe the explanation will resonate with reasonable jurors that none of the essential documents relating to the plaintiffs’ claim were, in fact, thrown away or discarded,” he said. “Would I rather this issue not be presented to the jury? Of course. But I do not view it as fatal to our client’s defense in any way.

But Lawrence M. Kraus of Foley & Lardner, counsel to a non-party witness deposed in Idnani, called the spoliation issue a “worst-case scenario” capable of occurring in almost any e-discovery dispute.

“I always say to clients that the worst document in the world is the one that doesn’t exist anymore,” he said. “You can explain away almost anything, but the document that’s missing is often the one that’s the trickiest to deal with.”

Sanders’ jury instruction on the missing evidence is sure to have an impact on settlement talks, the Boston lawyer predicted.

Most jurors would have difficulty overlooking the fact that a litigant destroyed such a large amount of material, he said.

“Jurors are going to know there’s information out there that’s missing, and they’re going to know by whose hands it’s missing from,” Kraus said. “You can try to explain it away, but at the end of the day that’s not a good set of facts to be going to trial with.”

Fitch declined to comment.

Stephen D. Riden, a commercial litigator at Beck, Reed, Riden in Boston, said there are few appellate decisions in Massachusetts defining the parameters of what is a permissible sanction in a spoliation case. As a result, lower court decisions like Idnani are likely to be cited in future spoliation cases, he said.

“By the time it gets to the appellate level, they’re looking at it from an abuse-of-discretion standard. So unless the judge has gone far afield of what an appeals court thinks is reasonable, they’re not going to issue an opinion to the contrary,” he said. “These are in-the-trenches discovery battles, and where you’re going to see the most well-developed analysis of the issues is in the trial court.”

John F. Welsh III of Bello, Black & Welsh in Boston, who argued a similar spoliation case in 2006 involving the intentional destruction of records, said judges are reluctant to enter default judgments or dismissals. Although it is within their discretion, they tend to refrain from doing so, he said, unless the destroyed evidence goes to a central issue in the suit.

“Typically, there has to be guilty intent of some nature or a fraud perpetrated on the court,” he said. “Even if the conduct fits that description, very seldom are you going to get a dismissal or a default judgment because that really is a death sentence, and there aren’t too many cases where a judge is going to feel comfortable doing that.”

No trash

The plaintiffs, Rajesh Idnani and Neelam Idnani Julian, filed suit in March 2010. The parties were then ordered to complete discovery by May 2011, with other fact discovery to be conducted four months later.

Defendant Venus Capital Management and its prior counsel, McDermott, Will & Emery, retained an e-discovery company to help respond to a plaintiffs’ document request.

The company collected, possessed and searched a large volume of electronic files from the defendant. McDermott partner Anthony A. Bongiorno also advised his clients in writing and orally about the need to preserve all records.

Last April, the e-discovery company made arrangements to come to the defendant’s office to collect hard-copy files. Shortly before it was scheduled to arrive, a Venus Capital CEO co-defendant took it upon himself to review the documents and discard whatever he determined not to be relevant to the litigation.

The CEO cleaned four and a half 36-inch file cabinets and three or four standard-size file cabinets. The cleanup occurred between 4 and 5:30 p.m., after regular trading hours, and involved between 18,720 and 51,600 pages of material, none of which were copied or recorded.

The CEO’s actions were contrary to the instructions he had received from Bongiorno, who declined a Lawyers Weekly request for comment.

Although the CEO stated that many of the materials had nothing to do with the lawsuit, he admitted they included printouts of screen shots of online account statements, vendor invoices and credit card statements.

When Bongiorno learned what had happened, he conducted his own investigation and determined that the Canons of Professional Conduct required him to disclose what had transpired to the court and opposing counsel.

At a hearing last July, Bongiorno informed the court that his client had destroyed relevant documents. He withdrew from the case a short time later, and Mintz Levin entered an appearance. The plaintiffs then filed a motion for sanctions.

‘Something to hide’

Sanders said she did not credit the CEO’s claim that his conduct was part of a “regular cleanup” or was undertaken to free up storage space, writing that some of the destroyed material conceivably fell within the scope of documents the plaintiffs requested.

“[The CEO’s] explanation for this … is not credible in light of the timing,” she said. “[T]he destruction occurred within days of [the e-discovery company’s] appointment to come to the [defendant’s] offices to view the materials for itself.”

Even though the CEO’s conduct was willful, and he was aware of his duty to preserve records, Sanders said, judges, as a general rule, should impose the least severe sanction necessary to remedy the victimized party.

“Although the prejudice to plaintiffs is not so strong as to justify default, there is certainly a potential that some relevant information has been irretrievably lost, and could have been of some benefit to plaintiffs’ case,” she said.

Even if the CEO believed most of the information could be found elsewhere, it did not mean the documents were any less relevant, the judge said. The discarded material could have included handwritten notes, which would not be maintained in electronic form.

“That [the CEO] decided to take the action that he did even after being specifically told by his attorney to retain records itself suggests that he may have had something to hide,” she said.

As part of her sanction, the judge ordered the defendant to pay all attorneys’ fees and costs incurred by the plaintiffs in litigating the spoliation issue.

The case is scheduled for trial in April.