| Pegasus Aviation I, Inc. v Varig Logistica S.A. |
| 2014 NY Slip Op 04047 [118 AD3d 428] |
| June 5, 2014 |
| Appellate Division, First Department |
[*1] (June 5, 2014)
| Pegasus Aviation I, Inc. et al.,Respondents, v Varig Logistica S.A., Defendant, and MatlinPatterson GlobalAdvisers, LLC, et al., Appellants. |
Simpson Thacher & Bartlett LLP, New York (Roy L. Reardon of counsel), forappellants.
Coblentz Patch Duffy & Bass LLP, San Francisco, CA (Richard R. Patch of thebar of the State of California, admitted pro hac vice, of counsel), for respondents.
Order, Supreme Court, New York County (Barbara R. Kapnick, J.), enteredDecember 11, 2012, which, insofar as appealed from, granted plaintiffs' motion for a trialadverse inference instruction against defendants-appellants as a sanction for spoliation ofelectronic evidence, reversed, on the law and the facts, without costs, and the motiondenied.
Plaintiffs are entities that leased aircraft to non-appealing defendant Varig LogisticaS.A. (VarigLog), a Brazilian cargo airline. In this action, plaintiffs are suing (1)VarigLog, for breach of the aircraft lease agreements and for conversion of the aircraft,and (2) defendants-appellants (collectively, the MP defendants), as owners of VarigLog(a direct subsidiary of one of the MP defendants), on an alter ego theory and also on thetheory that the MP defendants' conduct constituted direct conversion of the aircraft.Plaintiffs originally sued VarigLog on these claims in a Florida action commenced inFebruary 2008. In October 2008, plaintiffs voluntarily discontinued the Florida action (towhich the MP defendants were not parties) and commenced this action against VarigLogand the MP defendants.
At issue on this appeal is whether the MP defendants exercised sufficient controlover VarigLog during the period from April 1, 2008, until VarigLog's bankruptcy filingon March 3, 2009,[FN1]to render the MPdefendants—who are not alleged to have failed to meet their obligations topreserve or produce their own documents relevant to this action—liable tosanctions for spoliation based on VarigLog's loss of its relevant electronically storedinformation (ESI) during that period.[FN2]Although VarigLog did not implementa litigation "hold" to preserve its ESI, it did install new information technology systemsin March 2008 (the month after plaintiffs commenced the Florida action) that providedfor daily, weekly and monthly backing up of its ESI. Plaintiffs adduce no evidence thatanyone took steps to defeat these backup systems or otherwise deliberately destroyed ESIrelevant to this litigation at any point after April 1, 2008. Unfortunately, however, as aresult of computer system crashes that occurred in February and March of 2009, all ofVarigLog's preexisting ESI was destroyed. As previously noted, plaintiffs do not claimthat the MP defendants were to blame for these crashes.
After learning of the loss of VarigLog's ESI, plaintiffs moved for sanctions againstboth VarigLog and the MP defendants. The motion court granted the motion, strikingVarigLog's answer and ruling that, at trial, the jury will be instructed that it may infer thatthe lost ESI would have supported the veil-piercing claim against the MP defendants. Insummary, the court's reasoning in imposing the sanction against the MP defendants wasas follows: (1) the MP defendants' control of VarigLog obligated them to see to it thatVarigLog preserved evidence relevant to this litigation and, in particular, that VarigLoginstitute a litigation hold on its ESI; (2) the MP defendants' failure to ensure thatVarigLog implemented a litigation hold constituted gross negligence per se, a ruling thatfollowed Pension Comm. of Univ. of Montreal Pension Plan v Banc of Am. Sec.(685 F Supp 2d 456, 465 [SD NY 2010, Scheindlin, J.] ["the failure to issue awritten litigation hold [*2]constitutes grossnegligence"]); and (3) because VarigLog's culpability rose to the level of grossnegligence, prejudice to plaintiffs could be presumed, consistent with VOOM HD Holdings LLC vEchoStar Satellite L.L.C. (93 AD3d 33, 45 [1st Dept 2012] ["The intentional orwillful destruction of evidence is sufficient to presume relevance, as is destruction that isthe result of gross negligence"]). Only the MP defendants have appealed.
Under this Court's jurisprudence: "A party seeking sanctions based on the spoliationof evidence must demonstrate: (1) that the party with control over the evidence had anobligation to preserve it at the time it was destroyed; (2) that the records were destroyedwith a culpable state of mind; and finally, (3) that the destroyed evidence was relevant tothe [moving] party's claim or defense such that the trier of fact could find that theevidence would support that claim or defense" (VOOM, 93 AD3d at 45 [internalquotation marks omitted]). Further, "[w]hile discovery determinations rest within thesound discretion of the trial court, the Appellate Division is vested with a correspondingpower to substitute its own discretion for that of the trial court, even in the absence ofabuse" (Andon v 302-304 Mott St. Assoc., 94 NY2d 740, 745 [2000]; seealso Small v Lorillard Tobacco Co., 94 NY2d 43, 52-53 [1999] ["The AppellateDivision, as a branch of Supreme Court, is vested with the same discretionary power andmay exercise that power, even when there has been no abuse of discretion as a matter oflaw by the nisi prius court"]; 11 Carmody-Wait 2d § 72:142).
The first issue to be determined is whether, as of April 1, 2008, the MP defendantshad sufficient control over VarigLog to trigger a duty on their part to see to it thatVarigLog was preserving its ESI relevant to this litigation. We conclude that the recordsupports the motion court's determination that the MP defendants had a sufficient degreeof control over VarigLog to trigger such a duty. This does not equate to a finding thatVarigLog was an alter ego of the MP defendants (which will be the determinative issueon plaintiffs' claims against the MP defendants, since VarigLog itself has been heldliable).[FN3]Nonetheless, it cannot be ignored thatthe MP defendants, as the sole shareholders of VarigLog at this time, selected VarigLog'sdirectors, and the record establishes that, during the period in question, employees andconsultants of the MP defendants were closely monitoring VarigLog's operations andwere [*3]formulating its business strategy.[FN4]The MP defendants admitthat they could obtain documents from VarigLog upon request. In essence, even if it istrue that VarigLog was legally and organizationally distinct from the MP defendants, inview of the latter's status as sole shareholder, determination of the membership ofVarigLog's board and intimate involvement in directing VarigLog's business, "thereseems to be little doubt that [VarigLog] would have complied with a timely request by[the MP defendants] to preserve its [ESI]," from which we conclude that VarigLog's ESIwas sufficiently under the MP defendants' "practical control" to trigger "a duty[on their part] to ensure that those materials were adequately preserved" (GenOnMid-Atl., LLC v Stone & Webster, Inc., 282 FRD 346, 355 [SD NY 2012],affd 2012 WL 1849101, 2012 US Dist LEXIS 70750 [SD NY, May 21, 2012,No. 11 CV 1299 (HB)] [holding that the plaintiff was obligated to ensure that athird-party consultant, which had audited the defendant on the plaintiff's behalf,preserved information relating to the audit in the consultant's possession, where litigationrelating to the subject matter of the audit was foreseeable]).[FN5]
While the motion court properly determined that the MP defendants, once they tookcontrol of VarigLog, had a duty with regard to the preservation of VarigLog's ESI, onthis record it cannot be said that the MP defendants' failure to discharge this duty was soegregious as to rise to the level of gross negligence. The motion court's finding of grossnegligence apparently was based on a statement by a federal district court of the SouthernDistrict of New York that, when litigation is anticipated, "the failure to issue awritten litigation hold constitutes gross negligence because that failure is likely toresult in the destruction of relevant information" (Pension Comm., 685 F Supp 2dat 465). To the extent the district court meant by this that failure to institute a litigationhold, in all cases and under all circumstances, constitutes gross negligence per se, thestatement has been disapproved by the Second Circuit (see Chin v Port Auth. of N.Y.& N.J., 685 F3d 135, 162 [2d Cir 2012], cert denied 569 US &mdash,133 S Ct 1724 [2013] ["reject(ing) the notion that a failure to institute a 'litigation hold'constitutes gross negligence per se," and citing Pension Comm. ascontrary authority]). The per se rule apparently articulated in Pension Comm., andfollowed by the motion court, has never, to our knowledge, been adopted by a New Yorkstate appellate court.
The facts of this case do not support a finding of gross negligence against the MPdefendants. First, the MP defendants did not take control of VarigLog until April 1,2008, after [*4]plaintiffs had commenced suit againstVarigLog in Florida the previous February. VarigLog was already represented by counselin the Florida action, and our attention has not been directed to any evidence tending toshow that the MP defendants had reason to believe that VarigLog's counsel was notgiving VarigLog adequate advice and direction concerning the preservation ofinformation relevant to the litigation. Neither are we directed to any evidence suggestingthat the MP defendants should have been aware of an inadequacy in this regard at anylater time (see GenOn, 282 FRD at 357 [noting, as a factor weighing against afinding that a party (GenOn) was grossly negligent based on the loss of information inthe possession of a third-party consultant (FTI), that "GenOn and its counsel mayreasonably have expected that FTI . . . would be aware of the rulesgoverning a party's discovery conduct"]). Moreover, the MP defendants are conceded tohave discharged their responsibility to preserve and produce their own documents in thismatter, which negates any inference that they deliberately sought to defeat plaintiffs' rightto disclosure or were reckless as to that possibility (see id. [noting, as anotherfactor weighing against a gross negligence finding against GenOn, that, "whateverGenOn's shortcomings with respect to FTI's information may have been, there is nosuggestion that GenOn failed to preserve and produce all of its own documents"]; seealso Hartford Ins. Co. v Holmes Protection Group, 250 AD2d 526, 527 [1st Dept1998] ["Gross negligence is conduct that evinces a reckless disregard for the rights ofothers or smacks of intentional wrongdoing" (internal quotation marks omitted)]).Finally, as previously discussed, although the MP defendants had "practical control" ofVarigLog during the relevant period, the record establishes that VarigLog was anorganization separate from the MP defendants, with its own offices, staff, operations, andcomputer systems. While employees of the MP defendants apparently were present atVarigLog's offices from time to time, these MP employees were present at VarigLog asrepresentatives of the MP defendants and did not become VarigLogemployees.[FN6]
Because the record supports, at most, a finding of simple negligence against the MPdefendants, plaintiffs must prove that the lost ESI would have supported their claims(see VOOM, 93 AD3d at 45). This they have failed to do.[FN7]The most importantevidence bearing on plaintiffs' alter ego claims against the MP defendants would becommunications between the MP defendants and VarigLog, but plaintiffs haveabandoned any contention that the loss of VarigLog's ESI has deprived them of thesecommunications—for the simple reason that the MP defendants have producedtheir own ESI embodying these communications. As to VarigLog's internal emails andemail exchanges with the judicial oversight committee, plaintiffs only [*5]speculate that these would have provided support for theirclaim that VarigLog was an alter ego of the MP defendants. Plaintiffs also complain thatthey have not received a full set of VarigLog's banking records, but they claim that thosethey have received "demonstrate[ ] that VarigLog was, indeed (at [the MP defendants']instruction), indirectly benefitting [the MP defendants] through payments to [their]affiliates." While proof of additional such payments would appear to be cumulative,information about payments to affiliates of the MP defendants presumably could beobtained through appropriate disclosure requests directed to the MP defendantsthemselves or, perhaps, VarigLog's banks. Finally, even if VarigLog had instituted alitigation hold, plaintiffs have presented no evidence that such a "hold" would havesaved the relevant ESI from destruction when VarigLog's entire computer system crashed(without any fault on the part of the MP defendants) in February and March of 2009.
We disagree with the full dissent's analysis in several respects. In concluding that theMP defendants were grossly negligent, the dissent disclaims reliance on any per se rule,instead asserting that the MP defendants "fail[ed] to take even the most rudimentarysteps" to preserve evidence at VarigLog. This ignores the fact thatVarigLog—which presumably could have anticipated being sued by plaintiffsbefore the Florida suit was commenced in February 2008, during the freeze-out of theMP defendants—had a duty to preserve evidence substantially before the MPdefendants acquired control in April 2008 or were sued themselves the followingOctober. Throughout the litigation against plaintiffs, VarigLog has been represented byits own U.S. counsel. The MP defendants evidently assumed that these attorneys, beforeand after the MP defendants took control, had been giving VarigLog employees adequateadvice and direction about evidence preservation, and that VarigLog employees had beenfollowing that advice. While it appears, on this record, that the MP defendants werenegligent to operate under these (in hindsight, too optimistic) assumptions, the failurewas not so egregiously irresponsible as to constitute gross negligence. Again, there is nodispute that the MP defendants preserved their own organization's ESI and otherdocuments relevant to this dispute, which, in our view, largely negates any inference thattheir culpability rose to the level of gross negligence. The dissent also ignores the factthat, even after the MP defendants acquired control of VarigLog in April 2008, VarigLogremained organizationally distinct from the MP defendants, with its own offices,employees and computer system; there is no evidence that the VarigLog "team"established by the MP defendants, which monitored VarigLog and set its overall businessstrategy, displaced VarigLog's own employees. As to prejudice, the dissent simplyspeculates, without apparent basis in the record, that (1) VarigLog's documents lost in thecrash (to the extent these were not available from other sources, such as the MPdefendants) were "directly relevant to the critical [alter ego] issue," and (2) theimposition of a litigation hold might have saved VarigLog's ESI from destruction in thecrashes.
The partially dissenting justice, although he agrees with us that the record disclosesonly ordinary negligence by the MP defendants, would remit the matter for a hearing todetermine the extent of the prejudice to plaintiffs from the loss of VarigLog's ESI. Whilewe agree with the partial dissent that ordinary negligence may provide a basis for theimposition of spoliation sanctions, we are mindful that, where "the destruction ofevidence is merely negligent, . . . relevance [of the lost material] must beproven by the party seeking spoliation sanctions" (VOOM, 93 AD3d at 45) tosatisfy the third prong of the showing required on a motion for such [*6]relief.[FN8]The partial dissent does not dispute thatthe existing record does not support a finding that VarigLog's lost ESI would havesupported plaintiff's claims against the MP defendants, which are the only claims thatremain at issue. The present record is extensive; plaintiffs moved for sanctions in March2012, more than two years after they learned in January 2010 that VarigLog's ESI hadbeen lost in computer crashes. Thus, plaintiffs, having had an ample opportunity toattempt to demonstrate the relevance of the lost material to their claims against the MPdefendants, instead chose to rely on a presumption (which we have found inapplicable)to satisfy the relevance prong of the showing required on their motion.[FN9]The partial dissent, whileagreeing with our rejection of plaintiffs' reliance on the presumption, would giveplaintiffs another chance to establish relevance through an evidentiary showing,notwithstanding the extensive litigation that has already taken place on the spoliationissue. We decline to give plaintiffs what would amount to a second bite at the apple.
In sum, given the very weak showing, on this record, that plaintiffs have suffered anyprejudice as a result of the MP defendants' merely negligent failure to see to it thatVarigLog instituted a litigation hold, the drastic sanction of an adverse inferenceinstruction telling the jury that the MP defendants were directly responsible forpreserving VarigLog's ESI—which, in a case based on an alter ego claim, istantamount to granting plaintiffs summary judgment—is not warranted in thiscase.[FN10]Concur—Friedman, J.P.,Sweeny and Saxe, JJ.
Andrias, J., concurs in part and dissents in part in a memorandum as follows: I agreewith the majority and the dissent that defendant MatlinPatterson Global Advisors, LLC (MP) exercised a sufficient degree of control over its subsidiary Varig LogisticaS.A. (VarigLog) to trigger a duty to preserve VarigLog's electronically storedinformation (ESI), and that MP's failure to impose a litigation hold was not, in and ofitself, gross negligence per se.
I also agree with the majority that upon a contextual assessment of all pertinent facts(see Chin v Port Auth. of N.Y. & N.J., 685 F3d 135, 162 [2d Cir 2012],cert denied 569 US &mdash, 133 S Ct 1724 [2013]), MP's failure to discharge itsduty did not rise to the level of gross negligence. However, because a court may, in itsdiscretion, impose a spoliation sanction for the negligent destruction of evidence, Idisagree with the majority's conclusion that no sanction is warranted, and would remandfor a determination as to the extent to which plaintiffs have been prejudiced by the lossof the evidence, and the sanction, if any, that should be imposed.
In Zubulake v UBS Warburg LLC (220 FRD 212, 218 [SD NY 2003]), thefederal district court held that "[o]nce a party reasonably anticipates litigation, it mustsuspend its routine document retention/destruction policy and put in place a 'litigationhold' to ensure the preservation of relevant documents." In VOOM HD Holdings LLC vEchoStar Satellite L.L.C. (93 AD3d 33, 45 [1st Dept 2012]), we adopted theZubulake standard for preservation and held that "[a] party seeking sanctionsbased on the spoliation of evidence must demonstrate: (1) that the party with control overthe evidence had an obligation to preserve it at the time it was destroyed; (2) that therecords were destroyed with a 'culpable state of mind'; and finally, (3) that the destroyedevidence was relevant to the party's claim or defense such that the trier of fact could findthat the evidence would support that claim or defense."
The requisite culpable state of mind can be demonstrated through intentional orwillful conduct, gross negligence, or ordinary negligence (id.), and the court has"broad discretion in determining what, if any, sanction should be imposed for spoliationof evidence . . . [,] even if the destruction occurred through negligencerather than wilfulness" (Samaroo v Bogopa Serv. Corp., 106 AD3d 713, 714 [2dDept 2013]).
In determining the appropriate sanction for spoliation, "the court must consider thedegree to which the contumacious conduct or destruction of evidence prejudiced theother party" (Melcher v ApolloMed. Fund Mgt. L.L.C., 105 AD3d 15, 23-24 [1st Dept 2013]). As the Court ofAppeals stated in Ortega v Cityof New York (9 NY3d 69, 76 [2007]): "New York courts therefore possessbroad discretion to provide proportionate relief to the party deprived of the lost evidence,such as precluding proof favorable to the spoliator to restore balance to the litigation,requiring the spoliator to pay costs to the injured party associated with the developmentof replacement evidence, or employing an adverse inference instruction at the trial of theaction. Where appropriate, a court can impose the ultimate sanction of dismissing theaction or striking responsive pleadings, thereby rendering a judgment by default [*7]against the offending party" (citations omitted).
The majority believes that no sanction is warranted. However, the motion courtstated that the lost documents, which included internal emails, communications with aBrazilian court, and bank records, "clearly would be very relevant and important for theplaintiff[s] to prove their case," i.e. that MP controlled and dominated VarigLog, that itused its domination to harm plaintiffs, and that MP's Brazilian court defense is notcredible. Even if the destruction of the records was the result of ordinary negligence, ahearing should be held to assess the extent of the prejudice suffered by plaintiffs thereby,and for a determination as to the sanction, if any, that would be appropriate. Thisincludes an adverse inference charge (PJI3d 1:77), which may be an appropriate sanctionfor the negligent spoliation of evidence (see Marotta v Hoy, 55 AD3d 1194 [3d Dept 2008]), even ifthe evidence destroyed did "not constitute the sole source of the information and the solemeans by which plaintiff c[ould] establish his case" (Alleva v United Parcel Serv., Inc., 112 AD3d 543, 544 [1stDept 2013]; Melendez v City ofNew York, 2 AD3d 170 [1st Dept 2003]).
In this regard, I disagree with the majority that an adverse instruction would betantamount to the grant of summary judgment in favor of plaintiff on its alter ego andconversion claims. An adverse inference charge is permissive, allowing, but notrequiring the jury to draw negative inferences from the missing evidence, and is notequivalent to a grant of summary judgment.
Richter, J., dissents in a memorandum as follows: I agree with the majority's findingthat plaintiffs have demonstrated that defendant MatlinPatterson Global Advisers LLCand its affiliates (MP Global) exercised enough control over Varig Logistica S.A.(VarigLog) to trigger MP Global's obligation to see that VarigLog took reasonable stepsto preserve potentially relevant documents. I part company with the majority's holding asto the extent of MP Global's negligence. I conclude that MP Global's failure to take anymeaningful steps to preserve evidence constitutes gross negligence and therefore that theorder imposing the sanction of an adverse inference should be affirmed.
The imposition of spoliation sanctions is within the discretion of the motion courtand should not be disturbed on appeal absent evidence of an abuse of discretion (see Fish & Richardson, P.C. vSchindler, 75 AD3d 219, 220 [1st Dept 2010]; Talansky v Schulman, 2 AD3d355, 361-362 [1st Dept 2003]). Courts "possess broad discretion to provideproportionate relief to the party deprived of the lost evidence" (Ortega v City of New York, 9NY3d 69, 76 [2007]).[FN1]As observed by the majority, whendetermining if a sanction is proper, the court must determine if the party seeking thesanction established: "(1) that the party with control over the evidence had an obligationto preserve it at the time it was destroyed; (2) that the records were destroyed with aculpable state of mind; and finally, (3) that the destroyed evidence was relevant to the[*8]party's claim" (VOOM HD Holdings LLC v EchoStar Satellite L.L.C., 93AD3d 33, 45 [1st Dept 2012] [internal quotation marks omitted]). However, theparty seeking the sanction need not establish relevance when the destruction of evidencearises from conduct above mere negligence (see id. at 45-46; Ahroner v Israel Discount Bank ofN.Y., 79 AD3d 481, 482 [1st Dept 2010]). When the destruction is the result ofgross negligence, relevance is presumed (VOOM, 93 AD3d at 45-46;Ahroner, 79 AD3d at 482).
Here, the motion court acted within its discretion in determining that MP Global'sconduct constituted gross negligence. MP Global was in control of VarigLog when thisaction commenced in October 2008, triggering its obligation to preserve evidence(see VOOM, 93 AD3d at 45). Despite the fact that it had control, MP Global tookno action to ensure that VarigLog preserved potentially relevant evidence. I do notcontend, as the majority suggests, that MP Global's failure to institute a litigation hold atVarigLog constitutes gross negligence per se. Rather, my conclusion is based on MPGlobal's failure to take even the most rudimentary steps to ensure that potentially relevantevidence was preserved, including, but not limited to, instructing that a litigation hold beput in place.
Although VarigLog experienced two separate computer crashes that affected itshardware and software in 2009, at the time the crashes occurred VarigLog had no policyin place for email retention. Furthermore, there is no evidence that any efforts were madeto create copies of the information that now is at issue in case the primary backup datawas destroyed. Indeed, the first crash caused the backup tape to become corrupted, andthe tape could not be recovered. The second crash, which occurred about a month later,caused damage to VarigLog's backup server, which also could not be restored. Further,the disks and applications involved in the crashes were not retained. Perhaps mostnotable is the fact that after the first crash occurred, MP Global took no additional actionto ensure the preservation of data going forward.
Testimony by employees of VarigLog and MP Global provides further evidence thatMP Global did not take the necessary steps to preserve evidence. During her deposition,VarigLog's CEO, Chan Lup Wai Ohira, stated that as far as she knew or could remember,MP Global never made copies of any of VarigLog's computer hard drives. When she wasasked if anyone told her at the time she became CEO in November 2008, a month afterthis action commenced, that she "needed to take special precautions to preserve or retainrecords," Ohira said no. Additionally, when Santiago Juan Born, a former employee ofMP Global and manager of VarigLog, was asked if he ever saw an "instruction fromanyone to [VarigLog] telling them to retain their records for the purposes of litigation,"his answer also was no.
The majority's focus on the computer crashes does not take any of this intoconsideration. The crashes would have been irrelevant had MP Global taken any steps toensure that the evidence was being preserved, such as printing hard copies of the materialor taking images of the hard drive. However, MP Global took no such precautions. MPGlobal does not contend it was unaware of the role electronic evidence would play inlitigation. Indeed, MP Global took action to ensure the preservation of its owndocuments, yet did absolutely nothing to ensure that the VarigLog documents werepreserved despite its control of the company. This further supports the conclusion thatMP Global's failure to impose a litigation hold at VarigLog was not the result of merenegligence, but arose from a gross disregard of its obligations. Therefore, my finding ofgross negligence is based, not only on MP Global's failure to initiate a litigation hold, buton a close review of the specific facts of this case (see Chin v Port Auth. of N.Y.& N.J., 685 F3d 135, 162 [2d Cir 2012] [stating that "a case-by-case approachto the failure to produce [*9]relevant evidence, at thediscretion of the district court, is appropriate" (internal quotation marks omitted)]).
My determination finds support in this Court's decision in VOOM. In thatcase, we found that several factors can "support a finding of gross negligence," such as"(1) the failure to issue a written litigation hold, when appropriate; (2) the failure toidentify all of the key players and to ensure that their electronic and other records arepreserved; and (3) the failure to cease the deletion of e-mail" (93 AD3d at 45). Therecord here indicates a pattern of inaction on the part of MP Global that supports afinding of gross negligence (see id.; see also 915 Broadway Assoc. LLC v Paul, Hastings, Janofsky& Walker, LLP, 34 Misc 3d 1229[A], 2012 NY Slip Op 50285[U], *9 [SupCt, NY County 2012]).
Contrary to MP Global's argument, this Court's affirmance of the motion court'sdecision will not result in parent corporations routinely being held responsible for thediscovery lapses of related companies. My conclusion is based on the unique facts of thiscase and the significant control MP Global had over VarigLog at the time this action wascommenced. Finally, other than disputing the degree of control, MP Global offers noexcuse for its failure to ensure that the documents were preserved.
The fact that the companies may have had different computer systems does notundermine the conclusion that MP Global had an obligation to act. In April 2008, aBrazilian court placed MP Global in control of VarigLog's administration andmanagement, and the record shows that MP Global put together the "team" that ranVarigLog, that the team included MP Global's own employees and consultants and, inone instance, a partner's sister, Ohira, who ultimately became VarigLog's CEO. MPGlobal could have, at a minimum, inquired about the existence of a litigation hold atVarigLog and directed preservation of the data.
As the loss of potential evidence was the result of MP Global's gross negligence, therelevance of the material is presumed and need not be proven by plaintiffs(VOOM, 93 AD3d at 45-46; Ahroner, 79 AD3d at 482). I note that,although the majority finds that plaintiffs can only speculate as to the relevance ofVarigLog's internal emails, "it is the peculiarity of many spoliation cases that the verydestruction of the evidence diminishes the ability of the deprived party to proverelevance directly" (Sage Realty Corp. v Proskauer Rose, 275 AD2d 11, 17 [1stDept 2000], lv dismissed 96 NY2d 937 [2001]).[FN2]
Footnote 1:NotwithstandingVarigLog's bankruptcy filing in Brazil, this action has been permitted to proceed againstit under Brazilian bankruptcy law. VarigLog and the MP defendants have beenrepresented by separate counsel in this action.
Footnote 2:Plaintiffs do not claimthat the MP defendants were in control of VarigLog before April 1, 2008. By way ofbackground, the MP defendants (a group of commonly controlled private equity firms,based in New York, and entities under their control), together with a group of threeBrazilian individuals, purchased VarigLog out of a previous Brazilian bankruptcyproceeding in early 2006. As required by Brazilian law, the MP defendants' Brazilianco-investors owned 80% of the voting stock of the entity that directly owned VarigLog;the remaining 20% was owned by the MP defendants. The Brazilian co-investorsexercised their voting control to appoint themselves to three of the four seats onVarigLog's board of directors. In 2007, a dispute developed between the MP defendantsand their Brazilian co-investors over VarigLog's obligation to repay loans from the MPdefendants. Beginning in July 2007, the Brazilian co-investors completely froze the MPdefendants out of VarigLog's offices, facilities and business. Shareholder litigationensued in Brazil between the Brazilian co-investors and the MP defendants. On February15, 2007, the Brazilian court issued an order finding the Brazilian co-investors guilty ofmismanagement, removing them from VarigLog's management, and appointing a judicialadministrator, who was subsequently replaced by a judicial oversight committee. OnApril 1, 2008, the Brazilian court removed the Brazilian co-investors as shareholders andappointed one of the MP defendants, as sole remaining shareholder, to manage VarigLogunder the supervision of the judicial oversight committee. The judicial oversightcommittee remained in place until December 9, 2008.
Footnote 3:There is no indication inthe record that corporate formalities were not observed from April 1, 2008 throughMarch 3, 2009. Moreover, the record establishes that, during that period: (1) the majorityof VarigLog's five-member board was at all times independent of the MP defendants,with only one director having been an employee of the MP defendants and one havingbeen a sister of a partner in one of the MP entities; (2) no employee of the MP defendantsserved as a VarigLog officer, although the aforementioned sister of a partner in one ofthe MP entities was chief executive officer for part of the relevant time; (3) VarigLoghad its own staff, offices, operations, and computer systems; and (4) the law firms thathave represented VarigLog in the litigation against plaintiffs, both in New York andFlorida, have never represented the MP defendants in this matter.
Footnote 4:In arguing that they hadno duty with respect to the preservation of VarigLog's ESI, the MP defendants stress thattheir control of VarigLog was subject to the supervision of the judicial oversightcommittee for most of the period in question. However, our attention has not been drawnto any evidence supporting an inference that the judicial oversight committee would haveobjected to VarigLog's implementation of standard ESI preservation measures.
Footnote 5:We note that the MPdefendants have not denied that it was reasonably foreseeable as of April 1, 2008, thatplaintiffs would ultimately sue them in connection with plaintiffs' disputes withVarigLog. In any event, even after plaintiffs commenced this action against the MPdefendants in October 2008, no litigation hold was implemented at VarigLog.
Footnote 6:For example, membersof the MP defendants' VarigLog "team," to which the dissent refers, continued to useaccounts on the MP defendants' email system rather than switching to accounts onVarigLog's email system. Significantly, as the MP defendants note, in this litigation,plaintiffs have always dealt with VarigLog and its counsel directly in discovery matters,and have not directed demands for production of documents in VarigLog's possession tothe MP defendants.
Footnote 7:Indeed, plaintiffs do noteven claim to have made such a showing, and instead rely on the presumption arisingfrom the gross negligence finding.
Footnote 8:See VOOM, 93AD3d at 45 (the third element of the showing required on a motion for sanctions is "thatthe destroyed evidence was relevant to the [moving] party's claim or defense such thatthe trier of fact could find that the evidence would support that claim or defense").
Footnote 9:Again, plaintiffs'appellate brief does not argue, even in the alternative, that the record demonstrates therelevance of the lost ESI, should we determine that a presumption of relevance shouldnot have been applied against the MP defendants. Contrary to plaintiffs' conclusoryassertion that the motion court "found that the evidence established that the lostdocuments . . . were relevant," the motion court's decision makes clear thatit was presuming relevance based on gross negligence. For example, in rejecting the MPdefendants' argument that relevance had not been shown, the court stated: "But as I'vesaid, the failure to issue [a] litigation hold constitutes gross negligence. And once therehas been an inference of—a presumption of gross negligence, then there is aninference of relevance of the documents."
Footnote 10:While the dissentingand partially dissenting justices are correct that the adverse inference instruction wouldbe permissive, they overlook the severe prejudice that would accrue to the MPdefendants, which are being sued on a theory that VarigLog was their alter ego, if thecourt were to tell the jury that the MP defendants were responsible for preservingdocuments in VarigLog's possession.
Footnote 1:Even if this Courtwere to use its own discretion, a standard relied on by the majority, I believe an adverseinference would be the correct sanction. I also note, as does the concurring judge, that anadverse inference is permissive and does not require that the jury draw a negativeinference from the absence of evidence.
Footnote 2:Although the majorityengages in an extended discussion of the absence of prejudice, we do not know what themissing documents would show. However, it is important to note that the categories ofdestroyed materials are directly relevant to the critical issue in this litigation, which iswhether MP Global was an alter ego of VarigLog.