The Subrogation Strategist

In Terra Mgmt. Grp., LLC v. Keaten, 572 P.3d 126 (CO 2025), the Supreme Court of Colorado (Supreme Court) considered whether the trial court properly imposed sanctions on the defendants for failing to preserve evidence before the commencement of litigation. The trial court noted that the defendants, who owned and managed an apartment building, began removing the evidence from an apartment after the plaintiffs complained of toxins originating from the apartment building. As a sanction, the trial court imposed a negative inference that the defendants’ destruction of evidence would have established a link in the chain of evidence against them. The court also awarded over $2.5 million in exemplary damages. The Supreme Court held that there is a duty to preserve relevant evidence when a party knows or should know that litigation is pending or is reasonably foreseeable. The Supreme Court provided clarification on this standard but did not find it necessary to remand the case because the trial court relied on available evidence to reach its findings on causation.  

The Keaten case involved personal injury claims by tenants of the defendants’ Section-8 housing complex related to toxic fume inhalation from unauthorized meth production inside an apartment unit below where they resided. In March 2018, the plaintiffs reported chemical smells to the property manager. The plaintiffs also told the property manager that they thought the fumes were coming from a meth lab in an apartment below their unit. About a week later, the property manager conducted a walk-through inspection of the apartment and did not find any signs of odor or foul play. In April 2018, the plaintiffs sent a letter to the defendants’ vice president detailing the various symptoms that they were experiencing due to exposure to the meth fumes from the apartment below. These symptoms included nose bleeds, burning sensations, heart palpitations, and difficulty in breathing. The Littleton Housing Authority inspected the plaintiffs’ apartment in April 2018 and confirmed a slight chemical smell.

In August 2018, the defendants evicted the tenant of the unit from which the smell allegedly originated. The defendants did not photograph the contents of the apartment before removing them outside. The defendants, moreover, did not instruct the property manager to preserve any items so they could be tested for meth. The defendants had the carpet replaced, walls painted, and the unit cleaned. The defendants did not conduct any testing of the unit before allowing new tenants to move in September 2018.

In October 2019, the plaintiffs filed suit against the defendants, seeking damages for the injuries sustained from exposure to toxic fumes. In November 2019, the defendants had an expert take samples from the plaintiffs’ unit, which contained toxins above regulatory limits. Subsequent testing of the apartment below showed the presence of toxins in excess of regulatory limits. During a bench trial, the trial court found that the plaintiffs’ injuries were caused by the toxic fumes from the meth lab, as evidenced by the testing results. The court also held that the defendants destroyed evidence when they cleaned out the apartment of origin, despite having notice of the plaintiffs’ potential injuries. As a sanction, the trial court imposed a negative inference regarding the defendants’ conduct, but did not specify what the inference established or whether it relied upon that inference for its findings on causation. The court awarded the plaintiffs $10.5 million in damages, including over $2.5 million in exemplary damages. The Court of Appeals affirmed, finding that a party may be sanctioned for destroying evidence after receiving notice that it is relevant to litigation regardless of whether a complaint has been filed, so long as the party knew of or should have known that the evidence was “relevant to pending, imminent, or reasonably foreseeable litigation.”  

The Supreme Court granted the defendants’ petition for certiorari review and affirmed the Court of Appeals ruling but provided additional clarification on Colorado’s rule regarding the pre-litigation duty to preserve. The Supreme Court held that a court may sanction a party for the destruction of relevant evidence if the party knew or should have known that: 1) litigation was pending or reasonably foreseeable, and 2) the destroyed evidence was relevant to that litigation. Whether litigation is “reasonably foreseeable” is both fact-specific and sufficiently flexible to afford a trial court the discretion to address the wide range of factual circumstances. The court explained that the mere existence of a potential claim or the distant possibility of litigation does not create a pre-litigation duty to preserve evidence. Determining whether there is a pre-litigation duty to preserve, or the appropriate sanction for breach of said duty, requires consideration of the totality of the circumstances, including the culpability of the party responsible for the loss or destruction of evidence and the resulting prejudice to the claimant. The Supreme Court chose not to remand the case because they found that the trial court’s conclusions were based on the available evidence, independent of the spoliation sanction.

The Keaten case establishes that, in Colorado, a party has a pre-litigation duty to preserve evidence if litigation is pending or reasonably foreseeable. The facts in Keaten suggest that notice to a party of potential damages may establish a pre-litigation duty to preserve relevant evidence. Subrogation professionals should be mindful of the Keaten holding when confronted with a potential spoliation claim against a responsible party.