Medical billing software provider negligent in failing to preserve contracted product in spoliation suit, COA affirms

A complaint brought by a now-defunct medical billing business against a company it hired to craft a software program was properly dismissed as a sanction for spoliation of evidence, the Court of Appeals of Indiana has ruled.

Synergy Healthcare Resources LLC, a medical billing software provider, hired Telamon Corporation in 2012 to convert its software to a web-based application to comply with government regulations.

After about a year of work, Telamon realized it wouldn’t be able to complete the software conversion by the deadline. After getting into a dispute with Synergy about a temporary solution, Telamon canceled the parties’ contract.

Synergy then hired a company called Itransition Inc. to finish the conversion and later ordered that Telamon send the source code for the software to Itransition, not to Synergy. An agreement was made between Synergy and Telamon that the latter would relinquish any and all copies of the retained source code and materials to Synergy or its designee.

In August 2014, Synergy’s attorney wrote to Telamon informing it that the software it had provided was “not functioning and was negligently installed or not converted properly.” As a result, Synergy claimed it lost numerous clients.

Meanwhile, Telamon sent the source code to Itransition and did not keep a copy of the code. By January 2015, Synergy was unable to continue paying Itransition to finish the software and ultimately went out of business.

Synergy sued Telamon for breach of contract while Telamon countersued by alleging breach of contract and unjust enrichment. During discovery, Synergy revealed that it did not keep a copy of the original, unmodified software source code. Instead, it only had the version completed by Itransition.

Telamon responded by filing a motion for sanctions due to spoliation of evidence, which the Lake Superior Court granted. It dismissed Synergy’s complaint, concluding Synergy “had a duty to preserve the subject evidence, the subject evidence was negligently destroyed and is no longer available to the parties, [and] the resulting prejudice to [Telamon] is severe[.]”

The trial court issued a final judgment pursuant to Indiana Trial Rule 54(B), prompting Synergy to claim abuse of discretion in Synergy Healthcare Resources, LLC v. Telamon Corporation, 22A-PL-121.

In affirming the trial court, the COA noted that contrary to Synergy’s contention that it cannot be charged with preserving what it never had in its possession, a party with a duty to preserve evidence in the possession of a third party may bear responsibility for spoliation of evidence.

The appellate panel pointed to N. Ind. Pub. Serv. Co. v. Aqua Env’t Container Corp., 102 N.E.3d 290 (Ind. Ct. App. 2018), noting that where Synergy directed Telamon to deliver the source code to Itransition, Synergy could not avoid its duty to preserve the evidence.

“In other words, here, where Synergy directed Telamon to deliver the source code to Synergy’s designee Itransition and Telamon was contractually bound to relinquish all copies of the source code in its possession, Synergy’s possession was exclusive vis-à-vis Telamon,” Judge Mathias wrote in a footnote.

The COA also pointed to the August 2014 letter from Synergy’s attorney to Telamon seeking compensation for the “negligently installed” software that was “not functioning.” The appellate panel concluded that at the time, Synergy knew or should have known that litigation was possible and that the as-delivered source code would be relevant evidence.

Additionally, the panel determined Synergy ignored the evidence that it was negligent by omission when it failed to direct Itransition to preserve the code when litigation became likely. As such, it concluded Synergy was negligent in failing to preserve the code.

The COA concluded by noting Synergy’s negligence resulted in a severe prejudice to Telamon because without the as-delivered source code,Telamon could not prepare a meaningful defense to Synergy’s claims that the code was deficient.

“The trial court did not abuse its discretion when it dismissed Synergy’s complaint as a sanction for its spoliation of evidence,” Mathias concluded.

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