LendingTools.com., Inc. v. Bankers' Bank of Kansas

1

NOT DESIGNATED FOR PUBLICATION

Nos. 116,898
117,586

IN THE COURT OF APPEALS OF THE STATE OF KANSAS

LENDINGTOOLS.COM. INC.,
Appellee,

v.

BANKERS' BANK OF KANSAS, N.A.,
Defendant,

and

THE BANKERS' BANK, N.A.,
Appellant.


MEMORANDUM OPINION

Appeal from Sedgwick District Court; JAMES R. FLEETWOOD and J. PATRICK WALTERS, judges.
Opinion filed September 28, 2018. Affirmed in part, reversed in part, vacated in part, and remanded with
directions.

Lynn D. Preheim and Christina Joy Hansen, of Stinson Leonard Street LLP, of Wichita, for
appellant.

Jay F. Fowler and Amy S. Lemley, of Foulston Siefkin LLP, of Wichita, and Daniel E. Lawrence,
Stephen E. Robison, Charles E. Milsap, and Adam Burris, of Fleeson, Gooing, Coulson & Kitch, LLC, of
Wichita, for appellee.

Before GREEN, P.J., MCANANY and BRUNS, JJ.

PER CURIAM: These appeals are companions to case No. 116,382 arising out of an
action brought by LendingTools.com, Inc. (LendingTools) against the Bankers' Bank of
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Kansas, N.A. (BBOK) and The Bankers' Bank, N.A. for misappropriation of alleged
trade secrets under the Kansas Uniform Trade Secrets Act, K.S.A. 60-3320 et seq.; civil
conspiracy; and tortious interference with contract. Prior to trial, the district court granted
summary judgment to the defendants on the tort claims and the jury returned a defense
verdict on the misappropriation of trade secrets claim. After these appeals were filed, the
BBOK resolved its differences with LendingTools and is no longer a party to this lawsuit.

On appeal, The Bankers' Bank contends that the district court erred in denying the
motion for recovery of attorney fees filed pursuant to K.S.A. 60-3323. In addition, The
Bankers' Bank contends that the district court erred in imposing sanctions against it for
deleting recordings of telephone calls and for failing to preserve documents from its
Secure File Transfer Site and Google Docs Site. The Bankers' Bank also maintains that
the district court erred in denying its motions to reconsider the imposition of these
sanctions. We conclude that the district court did not abuse its discretion in denying the
motion for attorney fees under K.S.A. 60-3323. However, we reverse the district court's
denials of the motions to reconsider and remand them to the district court for further
proceedings. Finally, we deny LendingTools' motion for attorney fees on appeal.

FACTS

The underlying procedural and factual history is set forth in our opinion—also
filed today—in LendingTools.com, Inc. v. The Bankers' Bank, case No. 116,382. In this
opinion, we will focus on the facts relevant and material to the issues presented in these
appeals. Moreover, we will address additional facts as necessary in the Analysis section
of this opinion.

In a demand letter dated June 22, 2010, LendingTools' attorney alleged that The
Bankers' Bank had breached the terms of a confidentiality agreement and had
appropriated its trade secrets. The letter also requested that The Bankers' Bank
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"not . . . dispose of or destroy any records that relate in any way to the subject matter [set
forth in the letter]. This includes any written or electronic communications (including any
backup or archive copies) between you and any third parties, including but not limited to
Bankers['] Bank of Kansas, N.A., First National Bankers' Bankshares, and United
Bankers' Bank, concerning [LendingTools] products or services."

After receiving the letter, the in-house attorney for The Bankers' Bank evidently
advised its employees to provide her with any records that touched upon or concerned
any of LendingTools' products or services. In addition, the in-house attorney sent a letter
to LendingTools dated July 12, 2010, in which she stated that The Bankers' Bank did not
"receive any substantive confidential information" from either LendingTools or any other
entity referenced in the demand letter.

On May 20, 2011, LendingTools filed a petition in Sedgwick County against the
BBOK, alleging breach of contract. Specifically, LendingTools asserted that the BBOK
breached the Masters Services Agreement by violating a covenant not to compete and by
disclosing confidential information to The Bankers' Bank. However, LendingTools did
not name The Bankers' Bank as a defendant.

More than nine months later, on February 27, 2012, LendingTools filed an
amended petition adding The Bankers' Bank as a defendant. In the amended petition,
LendingTools initially asserted claims against The Bankers' Bank for breach of contract
as a partner or joint venturer with BBOK, tortious interference with contract,
misappropriation of trade secrets, and civil conspiracy. However, the tort claims asserted
against The Bankers' Bank were dismissed before trial.

On December 18, 2013, LendingTools moved for sanctions against The Bankers'
Bank pursuant to K.S.A. 60-237. In the motion, LendingTools asserted that The Bankers'
Bank deliberately destroyed relevant emails and other documents related to the litigation.
It appears that LendingTools' primary contention was that The Bankers' Bank had failed
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to implement a litigation hold after receiving the demand letter in June 2010. In response
to the motion, The Bankers' Bank argued that it did not have a legal duty to preserve the
potential evidence, that LendingTools had failed to show prejudice, and that the
circumstances presented did not warrant sanctions.

After the parties submitted briefs to address the burden of proof, the district court
conducted an evidentiary hearing on the motion for sanctions over several days in May
2014. Much of the hearing focused on the opinion of one of LendingTools' expert
witnesses, Lance Watson, who claimed that employees of The Bankers' Bank had
manually deleted recordings of telephone calls from an electronic storage system on four
occasions—(1) in August 2011; (2) in April 2012; (3) in December 2013; and (4) in
March 2014. It appears that Watson's opinions were provided to The Bankers' Bank only
eight days before the hearing.

Six days after receiving Watson's report, The Bankers' Bank provided
LendingTools with a report from one of its expert witnesses, Robert Meekins, who
opined that the deletion of the recordings of telephone calls from the electronic storage
system was not targeted. Instead, it was Meekins' opinion that the deletions were
performed in the regular course of business and were "consistent with an effort to create
more room on the system." In particular, he opined that the recordings were deleted from
the electronic system beginning with the oldest calls and moving forward to calls that are
more recent.

At the sanctions hearing, LendingTools called Watson as a witness and he
reiterated the opinions set forth in his report. In addition, the head of the Information
Technology department at The Bankers' Bank, Brad Richardson, testified. According to
Richardson, the recording system had malfunctioned in August 2011 and he manually
deleted the oldest recordings to make room for new recordings. Although Richardson did
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not recall any other manual deletions of recordings, he testified that if there were other
manual deletions he would have performed them.

On May 6, 2014, Judge Patrick Walters announced his ruling from the bench.
Although he found that The Bankers' Bank did not act in bad faith in deleting the
recordings of the telephone calls, Judge Walters found that the actions of its
representatives bordered on recklessness. In particular, he found that representatives of
The Bankers' Bank "knew or should have known that the litigation hold should have
commenced on the February 2012 date." He also found that the representatives of The
Bankers' Bank "were negligent in their discovery responses to the detriment of
[LendingTools]." In addition, after listening to the testimony of Watson and
representatives of The Bankers' Bank, he found "that the deletion of those phone records
was intentional." Finally, Judge Walters found that the recordings were "not lost due to
routine and/or good faith operation of [The Bankers' Bank] electronic storage [system]."

Accordingly, Judge Walters concluded that sanctions were appropriate under
K.S.A. 60-237. Specifically, he found that it would be appropriate to give the jury an
adverse inference instruction or spoliation instruction at trial. Judge Walters also
determined that LendingTools was entitled to an award of reasonable attorney fees and
costs in an amount to be agreed upon by the parties or determined by the court at a later
date. The district court ultimately journalized the ruling in an order filed on March 4,
2015. The order incorporated the ruling from the bench—a transcript of which was
attached—by reference.

On June 15, 2015, LendingTools filed a motion for additional sanctions against
The Bankers' Bank. In this motion, LendingTools asserted that it had discovered that The
Bankers' Bank intentionally failed to preserve documents from its Secure File Transfer
Site and Google Docs Site. Moreover, on June 24, 2015, The Bankers' Bank filed a
motion for reconsideration of the district court's initial imposition of sanctions. And on
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June 29, 2015, it filed a response to LendingTools' request for additional sanctions, in
which it argued that most of the documents in question were not responsive to
LendingTools' discovery requests, that its actions were reasonable in light of the large
amount of documents that were produced, and that LendingTools was not prejudiced
because the documents in question were produced as early as July 2013.

On July 17, 2015, Judge Walters held a hearing and status conference in which he
considered The Bankers' Bank's motion to reconsider the previously imposed sanctions
and LendingTools' motion for additional sanctions. In denying the motion to reconsider
filed by The Bankers' Bank, Judge Walters simply indicated that he had previously heard
the matter and would stand on his initial decision. In denying the motion for additional
sanctions filed by LendingTools, Judge Walters did not state the reasons for his decision.
Although no formal journal entry or order was filed, Judge Walters noted his ruling on a
minute sheet that read: "Overruled for reasons stated on the record."

LendingTools subsequently requested that Judge Walters recuse himself from the
case. After making an informal request by letter, LendingTools filed a formal motion for
a change of judge on August 28, 2015, pursuant to K.S.A. 20-311d. Five days later, the
district court reassigned this case from Judge Walters to Judge James R. Fleetwood. The
reassignment rendered the motion for new judge moot.

At a hearing on January 5, 2016, Judge Fleetwood reconsidered the motion for
additional sanctions. After considering the written submissions of the parties, the oral
arguments of counsel, and reviewing the transcripts of earlier hearings, Judge Fleetwood
found:

"[I]t appears to me that the management of these storage sites and document sites was
poorly done. The existence of them and the apparent contact of them is something that
was discovered only through some laborious work done by attorneys and expert
7

witnesses in trying to do forensic efforts, and discovering the content of them. I will grant
a sanction as to attorney fees and costs related in that forensic effort."

The district court subsequently journalized this ruling in a written order filed on
May 23, 2016. In the order, Judge Fleetwood incorporated his bench ruling—a transcript
of which was attached to the order—and concluded that "spoliation occurred with regard
to The Bankers' Banks' Secure File Transfer Site and Google Docs Site. The Court finds
no justification for that spoliation." The order also directed LendingTools to submit an
application for the attorney fees and costs claimed related to the spoliation.

Nearly five years after the petition in this case was initially filed, a six-week jury
trial commenced on February 16, 2016. After hearing the evidence, the jury returned a
defense verdict on all counts on March 28, 2016. Specifically, the jury found that The
Bankers' Bank did not misappropriate LendingTools' trade secret information nor did it
find that The Bankers' Bank and the BBOK had entered into a joint venture or partnership
that misappropriated LendingTools' trade secret information.

On June 2, 2016, The Bankers' Bank and the BBOK filed a joint motion for
attorney fees under K.S.A. 60-3323, alleging that LendingTools had brought and
maintained its trade secrets claim in bad faith. At a hearing held on July 14, 2016, Judge
Fleetwood considered The Banks' Bank's June 24, 2016 reply supporting its previously
filed motion to reverse sanctions award. After considering the arguments of counsel,
Judge Fleetwood determined that there was no reason to set aside the ruling made by
Judge Walters. In making this ruling, Judge Fleetwood stated:

"Counsel, one of the complications of this trial, obviously, is the fact that this has
gone over—covering several years, and I've only had the opportunity to be involved in
just really a few months of this case. I certainly would, if I had the opportunity, would
like to have been involved from the beginning.

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"That being said, I have not heard anything that would—that strongly encourages
me to set aside the rulings that have been previously made on this matter by Judge
Walters, nor have I heard anything that would change my initial impressions as quoted by
Mr. Fowler in his arguments. Therefore, the motion that's been made and argued today is
denied."

On August 3, 2016, Judge Fleetwood entered a sanction order relating to the
motion for additional sanctions in which he required The Bankers' Bank to pay
$109,222.25 in attorney fees and expenses. Although The Bankers' Bank agreed to the
amount, it reserved its objection to the district court's imposition of sanctions. On August
8, 2016, The Bankers' Bank filed a motion requesting that Judge Fleetwood enter findings
of fact and conclusions of law relating to his ruling to impose additional sanctions.

At a hearing held on September 21, 2016, Judge Fleetwood denied the motion for
attorney fees filed by The Bankers' Bank and the BBOK. He found that LendingTools
had come forward with sufficient evidence to proceed to trial on the issue of
misappropriation of trade secrets. The district court journalized this ruling on November
17, 2016. Specifically, Judge Fleetwood held:

"Defendant's motion and oral arguments rely heavily upon the continuing
assertion that the plaintiff has failed to appropriately identify the trade secret material
subject to the Kansas Uniform Trade Secrets Act, K.S.A. 60-332[o] et seq. As stated on
the record that matter has been fiercely and aggressively argued throughout the long
history of this trial. The defendants have asserted their legal challenge to this claim
multiple times and the court has overruled their challenge allowing the plaintiffs to
pursue their claim. At no time has the court considered the claim to have been made or
maintained in bad faith. The court refuses to do so now.

"The defendants' joint motion is denied."

Also on November 17, 2016, Judge Fleetwood issued findings in support of its
ruling on the motion for additional sanctions.
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ANALYSIS

Recovery of Attorney Fees under K.S.A. 60-3323

The Bankers' Bank contends that it is entitled to recover attorney fees from
LendingTools under the Kansas Uniform Trade Secrets Act, K.S.A. 60-3320 et seq. In
particular, The Bankers' Bank seeks to recover attorney fees under subsection (i) of
K.S.A. 60-3323. This statute provides: "If (i) a claim of misappropriation is made in bad
faith, (ii) a motion to terminate an injunction is made or resisted in bad faith, or (iii)
willful and malicious misappropriation exists, the court may award reasonable attorney's
fees to the prevailing party." K.S.A. 60-3323.

In Kansas, a court may not award attorney fees absent statutory authority or an
agreement by the parties. Snider v. American Family Mut. Ins. Co., 297 Kan. 157, 162,
298 P.3d 1120 (2013). Here, we find as a matter of law that the district court had the
statutory authority to grant attorney fees under K.S.A. 60-3323. As such, we review the
district court's decision under the abuse of discretion standard. Wiles v. American Family
Life Assurance Co., 302 Kan. 66, 81, 350 P.3d 1071 (2015); Rinehart v. Morton
Buildings, Inc., 297 Kan. 926, 942, 305 P.3d 622 (2013). A judicial action constitutes an
abuse of discretion if the action is arbitrary, fanciful, or unreasonable; based on an error
of law; or based on an error of fact. Northern Natural Gas Co. v. ONEOK Field Services
Co., 296 Kan. 906, 935, 296 P.3d 1106 (2013).

It is important to recognize that K.S.A. 60-3323 is identical to § 4 of the Uniform
Trade Secrets Act (UTSA), 14 U.L.A. § 4, p. 642. See ICE Corp. v. Hamilton Sundstrand
Corp., 432 F. Appx. 732, 741 (10th Cir. 2011) (unpublished opinion). The official
comment to § 4 of UTSA states that this provision "allows a court to award reasonable
attorney fees to a prevailing party in specified circumstances as a deterrent to specious
claims of misappropriation, to specious efforts by a misappropriator to terminate
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injunctive relief, and to willful and malicious misappropriation." (Emphasis added.) 14
U.L.A. Trade Secrets §4, Comment p. 642.

Although the Kansas Uniform Trade Secrets Act does not define the term "bad
faith" and Kansas appellate courts have not interpreted K.S.A. 60-3323, we find guidance
from cases decided in other jurisdictions that have adopted the Uniform Trade Secrets
Act. In particular, we note that California appellate courts had found that the party
seeking attorney fees for a misappropriation of a trade secret claim made in bad faith
must show: (1) objective speciousness of the claim, and (2) subjective bad faith in
bringing or maintaining the action, i.e., for an improper purpose. Gemini Aluminum Corp.
v. California Custom Shapes, Inc., 95 Cal. App. 4th 1249, 1262, 116 Cal. Rptr. 2d 358
(2002). Other courts have also similarly endorsed this two-part test. See Krafft v.
Downey, 68 A. 3d 329, 333-34 (Pa. Super.) (2013); Hill v. Best Medical Intern., Inc., No.
07-1709, 2011 WL 6749036, at *3-4 (W.D. Pa. 2011) (unpublished opinion).

In Tank Connection, LLC v. Haight, No. 6:13-CV-01392-JTM, 2016 WL
1732433, at *1 (D. Kan. 2016) (unpublished opinion), the United States District Court for
the District of Kansas Judge J. Thomas Marten considered a motion for attorney fees
under K.S.A. 60-3323. In doing so, Judge Marten noted that "Kansas state courts have
not yet made clear what bad faith is in this context." 2016 WL 1732433, at *1. However,
he also noted that K.S.A. 60-3327 provides that the Kansas Uniform Trade Secrets Act is
to "be applied and construed to effectuate its general purpose to make the law with
respect to the subject of this act among states enacting it." 2016 WL 1732433, at *1.
Thus, Judge Marten concluded, "Kansas courts would likely adopt the prevailing two-part
test identified by these other jurisdictions." 2016 WL 1732433, at *1.

We agree that an application of the two-part test is appropriate. Accordingly, we
find that in order to recover attorney fees for bad faith under K.S.A. 60-3323, the movant
must establish that the misappropriation claim is objectively specious and was
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subjectively brought for an improper purpose. In other words, the movant must
objectively show that "'there is a complete lack of evidence supporting Plaintiff's
claims.'" Contract Materials Processing v. Kataleuna GmbH Catalysts, 222 F. Supp. 2d
733, 744 (D. Md. 2002) (quoting Computer Econ., Inc. v. Gartner Group, Inc., No. 98-
CV-0312, 1999 WL 33178020, at *6 [S.D. Cal. 1999] [unpublished opinion]).
Additionally, the movant must show that the plaintiff subjectively knew that the claim
was not valid and pursued it for an inappropriate purpose. See Gemini Aluminum Corp.,
95 Cal. App. 4th at 1263 (quoting Knight v. City of Capitola, 4 Cal. App. 4th 918, 932, 6
Cal. Rptr. 2d 874 [1992]).

Here, our review of the record confirms the district court's conclusion that there
was sufficient evidence presented at trial to support sending LendingTools' claim of
misappropriation of trade secrets to the jury. Although LendingTools' evidence in support
of its claims may have been weak and convoluted, we do not find it to be objectively
specious. Likewise, based on our review of the record, we do not find that The Bankers'
Bank has shown that LendingTools brought it for an improper purpose. Simply because
LendingTools may have wanted to deter customer departures and protect its business is
not—in and of itself—sufficient to rise to the level of bad faith. Accordingly, we do not
find that the district court abused its discretion or erred as a matter of law in denying the
motion for attorney fees filed by The Bankers' Bank pursuant to K.S.A. 60-3323.

Sanctions Relating to Deletion of Telephone Recordings

The Bankers' Bank contends that the district court erred in sanctioning it for
allegedly destroying telephone recordings kept on an electronic storage system. We
utilize an abuse of discretion standard to review whether sanctions should be imposed
under K.S.A. 60-237. Schoenholz v. Hinzman, 295 Kan. 786, 798, 289 P.3d 1155 (2012).
As indicated in the previous section of this opinion, a judicial action constitutes an abuse
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of discretion if the action is arbitrary, fanciful, or unreasonable; is based on an error of
law; or is based on an error of fact. Northern Natural Gas Co., 296 Kan. at 935.

Although the Legislature amended subsection (e) in 2017, at all times relevant to
these appeals, K.S.A. 2013 Supp. 60-237(e) provided:

"Absent exceptional circumstances, a court may not impose sanctions under this
article on a party for failing to provide electronically stored information lost as a result of
the routine, good-faith operation of an electronic information system."

Here, The Bankers' Bank argues that the district court abused its discretion
because it had no legal duty to preserve the telephone recordings. It also argues that the
deletion of the recordings from the electronic recording system was done in good faith as
part of a routine procedure to make space available as additional calls were received. It
further argues that the district court imposed sanctions based on the opinions of an expert
witness for LendingTools that were later proven incorrect.

A party seeking sanctions for destruction of potential evidence must establish that
"(1) the party with control over the evidence had an obligation to preserve it at the time it
was destroyed; (2) the evidence was destroyed with a culpable state of mind; and (3) the
destroyed evidence was 'relevant' to the party's claim or defense such that a reasonable
trier of fact could find that it would support that claim or defense." Rimkus Consulting
Group, Inc. v. Cammarata, 688 F. Supp. 2d 598, 615-16 (S.D. Tex. 2010) (citing
Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 220 [S.D.N.Y. 2003]).

In Superior Boiler Works, Inc. v. Kimball, 292 Kan. 885, 894-96, 259 P.3d 676
(2011), the Kansas Supreme Court found that "there is no common-law duty to preserve
evidence." See Koplin v. Rosel Well Perforators, Inc., 241 Kan. 206, 215, 734 P.2d 1177
(1987). Although neither Kimball nor Koplin deal directly with the issue presented in this
case, it is significant that there are currently no Kansas statutes, rules, or caselaw that
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require a party to a lawsuit to preserve potential evidence. See Ballai v. Kiewit Power
Constructors, Co., No. 110,166, 2015 WL 423795, at *5-6 (Kan. App. 2015)
(unpublished opinion), rev. denied 302 Kan. 1008 (2015). We pause to note that Ballai
did not create new law but was simply a recognition of the current status of the law in
Kansas based on prior cases from our Supreme Court as well as the lack of statutes or
rules establishing a legal duty to preserve evidence. Nevertheless, a legal duty to preserve
may still be established if it can be shown that a party knows or should know that the
potential evidence is relevant to pending or future litigation. Rimkus, 688 F. Supp. 2d at
612 (quoting John B. v. Goetz, 531 F.3d 448, 459 [6th Cir. 2008]).

Based on our review of the record on appeal, we conclude that the district court
made the appropriate findings in this case to establish a legal duty on the part of The
Bankers' Bank to preserve the telephone recordings. Specifically, after hearing the
evidence presented at the hearing on the motion for sanctions, the district court found that
representatives of The Bankers' Bank "knew or should have known that the litigation hold
should have commenced on the February 2012 date." We note that The Bankers' Bank
was joined as a party to this action on February 27, 2012. Thus, although The Bankers'
Bank may or may not have had a legal duty to preserve the telephone recordings prior to
being joined as a party, there is substantial evidence in the record to support the district
court's finding that it had a legal duty to do so once it was added as a defendant.

Likewise, we conclude that the district court made the necessary findings as
required by K.S.A. 2013 Supp. 60-237(e) that was in effect at the time. The district court
found that the recordings were "not lost due to routine and/or good faith operation of
[The Bankers' Bank] electronic storage [system]." In addition, the district court found
"that the deletion of those phone records was intentional" and resulted from conduct that
was "either negligent or reckless." As The Bankers' Bank recognizes in its brief, a
culpable state of mind may include negligence, gross negligence, recklessness, willful, or
intentional conduct. See Adkins v. Wolever, 554 F.3d 650, 652 (6th Cir. 2009) (a culpable
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state of mind for a spoliation sanction can range "through the degrees of negligence to
intentionality"). Thus, we do not find that the district court abused its discretion in
deciding—on May 6, 2014—to impose sanctions against The Bankers' Bank relating to
the destruction of telephone records.

The more difficult question is whether the district court erred in denying the
motions to reconsider the imposition of sanctions. Appellate courts review a challenge to
the district court's denial of a motion to reconsider for abuse of discretion. An abuse of
discretion occurs when the district court takes an action based on an error of law, an error
of fact, or an otherwise unreasonable decision. AkesoGenX Corp. v. Zavala, 55 Kan. App.
2d 22, 30-31, 407 P.3d 246 (2017), rev. denied 308 Kan. ___ (June 25, 2018).

In its motions, The Bankers' Bank asserted that the district court should reconsider
imposing sanctions because Judge Walters based his initial decision on the opinion
testimony of an expert witness that was later shown to be incorrect. It argued that after a
"comprehensive investigation" of the electronic storage system, it was "discovered that
there were no manual deletions after [The Bankers' Bank] was sued." Moreover, The
Bankers' Bank argued that once it was named as a defendant, "the auto-purge function
was responsible for all deletions after that." Accordingly, The Bankers' Bank suggested
that the recordings were actually deleted in good faith as part of a routine business
practice.

The record clearly reflects that Judge Walters' findings on May 6, 2014, were
based—at least in part—on the opinion testimony offered by Watson. In announcing his
decision from the bench, Judge Walters stated, "I make a finding that after I listened to
Mr. Watson on the stand and reviewing his [declaration regarding the deletions] and the
testimony of the officers of [The Bankers' Bank], I find that the deletion of those phone
records was intentional." In turn, Judge Walters concluded that the records were "not lost
15

due to routine and/or good faith operation of [The Bankers' Bank] electronic storage
[system]."

Judge Walters denied the first motion to reconsider filed by The Bankers' Bank at
a status hearing held on July 17, 2015. In denying the motion, Judge Walters stated, "I
have listened to all your arguments. I know I cut them short this afternoon, but I will give
you my best—my best response to these." He then announced that the "motion to
reconsider sanctions is overruled." Instead, he decided to stand by his previous decision.

Nearly a year later, on July 14, 2016, Judge Fleetwood also considered The
Bankers' Bank's renewed motion to reconsider the sanctions imposed by Judge Walters
relating to the deletion of the telephone recordings, which it called a motion to reverse
sanctions award. After considering the arguments of counsel, he concluded that there was
no reason to set aside the ruling made by Judge Walters. Specifically, he found:

"Counsel, one of the complications of this trial, obviously, is the fact that this has
gone over—covering several years, and I've only had the opportunity to be involved in
just really a few months of this case. I certainly would, if I had the opportunity, would
like to have been involved from the beginning.

"That being said, I have not heard anything that would—that strongly encourages
me to set aside the rulings that have been previously made on this matter by Judge
Walters, nor have I heard anything that would change my initial impressions as quoted by
Mr. Fowler in his arguments.

"Therefore, the motion that's been made and argued today is denied."

Unfortunately, the basis for the denials of the motions to reconsider are unclear
from the record. We find the issue presented in the motions to reconsider to be
particularly significant in light of the requirements of the version of K.S.A. 60-237 that
was in effect at the time. If the district court were to conclude after considering the
16

evidence presented by the parties that the telephone recordings were actually deleted "as
a result of the routine, good-faith operation of an electronic information system," see
K.S.A. 2014 Supp. 60-237(e), the imposition of sanctions would be inappropriate. Thus,
we reverse the district court's denials of the motions to reconsider the imposition of
sanctions for destroying telephone recordings and remand this issue to the district court
for an evidentiary hearing.

Sanctions Relating to Secure File Transfer Site and Google Docs Site

The Bankers' Bank also contends that the district court erred in imposing sanctions
for failure to preserve documents from its Secure File Transfer Site and Google Docs
Site. Initially, Judge Walters denied LendingTools' motion for additional sanctions at a
status conference held in July 2015. In denying the motion, Judge Walters did not state
the reasons for his decision. Shortly thereafter, the district court reassigned this case to
Judge James R. Fleetwood.

At a hearing on January 5, 2016, Judge Fleetwood reconsidered the motion for
additional sanctions. After considering the written submissions of the parties, the oral
arguments of counsel, and reviewing the transcripts of earlier hearings, Judge Fleetwood
found:

"[I]t appears to me that the management of these storage sites and document sites was
poorly done. The existence of them and the apparent contact of them is something that
was discovered only through some laborious work done by attorneys and expert
witnesses in trying to do forensic efforts, and discovering the content of them. I will grant
a sanction as to attorney fees and costs related in that forensic effort."

The district court subsequently journalized this ruling in a written order filed on
May 23, 2016. In the order, Judge Fleetwood incorporated his bench ruling—a transcript
of which was attached—and concluded that "spoliation occurred with regard to The
17

Bankers' Banks' Secure File Transfer Site and Google Docs Site. The Court finds no
justification for that spoliation."

Although The Bankers' Bank faults Judge Fleetwood for reconsidering Judge
Walters' denial of the motion for additional sanctions, it recognizes that a district court
retains the authority to alter or amend its orders at any time before they become final
judgments. See McTaggert v. Liberty Mut. Ins., 267 Kan. 641, 645, 983 P.2d 852 (1999)
("a trial court retains control over its proceedings and has the power to correct errors or
injustice until a final judgment is entered"); Burrowwood Assocs., Inc. v. Safelite Glass
Corp., 18 Kan. App. 2d 396, 398, 853 P.2d 1175 (1993) ("a trial judge may reverse
himself or herself during the course of an action if he or she believes an incorrect ruling
has been made"). Accordingly, we find that Judge Fleetwood acted within the scope of
his authority to revisit the denial of the motion for additional sanctions.

As indicated above, we review the district court's decision on a motion for
sanctions for abuse of discretion. Schoenholz, 295 Kan. at 798. Moreover, a party
claiming spoliation of evidence must establish that "(1) the party with control over the
evidence had an obligation to preserve it at the time it was destroyed; (2) the evidence
was destroyed with a culpable state of mind; and (3) the destroyed evidence was 'relevant'
to the party's claim or defense such that a reasonable trier of fact could find that it would
support that claim or defense." Rimkus Consulting Group, Inc., 688 F. Supp. 2d at 615-
16, (citing Zubulake, 220 F.R.D. at 220). A culpable state of mind for a spoliation
sanction can range "through the degrees of negligence to intentionality." Adkins, 554 F.3d
at 652.

Here, the district court concluded that "spoliation occurred with regard to The
Bankers' Banks' Secure File Transfer Site and Google Docs Site" and found "no
justification for that spoliation." However, the district court did not make the findings
necessary to reach this conclusion. Simply because the management of these sites may
18

have been "poorly done" does not necessarily rise to the level of culpable conduct.
Likewise, as The Bankers' Bank points out in its brief, it is questionable how much of the
information is relevant or material to the claims asserted in this case.

Accordingly, we vacate the order imposing additional sanctions and remand to the
district court for further proceedings on the motion for additional sanctions. Because this
issue also deals with the alleged failure to preserve or produce electronically stored
information, the district court should not only look to the elements required to establish
spoliation but should also look to the requirements set forth in K.S.A. 2014 Supp. 60-
237(e) that was in effect at the time the motion for additional sanctions was filed. Finally,
it is important for the parties to remember that a district court should use sanctions in
order to accomplish the objects of discovery rather than to punish. City of Neodesha v.
BP Corporation, 50 Kan. App. 2d 731, 777, 334 P.3d 830 (2014), rev. denied 302 Kan.
1008 (2015).

Motion for Attorney Fees on Appeal

On June 22, 2018, LendingTools filed a motion for attorney fees incurred in
defending The Banker's Bank's appeal. LendingTools claims it is entitled to attorney fees
incurred in any appeal in a case where the trial court had the authority to award attorney
fees. See Supreme Court Rule 7.07(b) (2018 Kan. S. Ct. R. 50). The Banker's Bank
responded to the motion for attorney fees, arguing that LendingTools is not entitled to
appellate attorney fees because there is no statute authorizing an award and no agreement
between the parties allowing it. The Banker's Bank also argues that it is impossible to
ascertain from the time entries submitted by LendingTools what portion of the fees
LendingTools actually expended in relation to the sanctions issue.

A Kansas court may not award attorney fees unless there is an agreement between
the parties or the court is authorized to do so by statute or court rule. Whether the court
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has authority to award appellate attorney fees is a question of law. Snider, 297 Kan. at
162. LendingTools fails to cite any applicable statute under which the district court had
the authority to award it attorney fees. The district court imposed an attorney fees award
as a sanction for discovery violations. LendingTools has not asserted that it is entitled to
attorney fees on appeal due to discovery violations. Moreover, the issue in this appeal
was not concerning the amount of attorney fees but whether they should have been
imposed.

Moreover, even if we could impose attorney fees, in the exercise of this court's
discretion under Supreme Court Rule 7.07(b), we would deny LendingTools' request for
attorney fees on appeal. As indicated above, there is no clear winner or loser in these
appeals and the ultimate outcome of this case remains to be determined. Accordingly, we
find that each party should be responsible for its own attorney fees and, as such,
LendingTools' motion for attorney fees is hereby denied.

Affirmed in part, reversed in part, vacated in part, and remanded with directions.