| Arbor Realty Funding, LLC v Herrick, Feinstein LLP |
| 2016 NY Slip Op 05065 [140 AD3d 607] |
| June 28, 2016 |
| Appellate Division, First Department |
[*1](June 28, 2016)
| Arbor Realty Funding, LLC,Appellant, v Herrick, Feinstein LLP, Respondent. |
Tannenbaum Helpern Syracuse & Hirschtritt LLP, New York (Vincent J.Syracuse of counsel), for appellant.
Davis Polk & Wardwell LLP, New York (Paul Spagnoletti of counsel), forrespondent.
Order, Supreme Court, New York County (Carol R. Edmead, J.), entered April 17,2015, which, to the extent appealed from as limited by the briefs, granted defendant'smotion for leave to renew its motion for spoliation sanctions, and upon renewal,dismissed the complaint, and denied plaintiff's cross motion for attorneys' fees and costs,unanimously modified, on the law, the facts, and in the exercise of discretion, to theextent of, upon renewal, adhering to the court's original determination awardingdefendant an adverse inference charge at trial as to the spoliated evidence, awardingmonetary discovery sanctions in the amount of $10,000, and otherwise affirmed, withoutcosts.
In this action, plaintiff Arbor Realty Funding, LLC (Arbor) seeks damages for legalmalpractice from defendant Herrick, Feinstein LLP (Herrick) in connection withHerrick's representation of Arbor in negotiating a high rise construction loan with adeveloper. The loan closed on May 8, 2007 and the developer defaulted on the loan in orabout July 2008. Arbor contends, inter alia, that Herrick gave it faulty advice in 2007 inconnection with zoning issues, the existence of which led to the revocation of buildingpermits following a crane collapse at the site, and the borrower's default. Herrick argues,inter alia, that Arbor would have issued the loans regardless of any potential zoningissues and that Arbor later assigned the loans and/or failed to mitigate its damages.
The instant motion concerns Arbor's alleged spoliation of evidence. It is undisputedthat Arbor's obligation to preserve evidence arose at least as early as June 2008, whenArbor retained counsel in connection with its claims against Herrick. However, Arbordid not issue a formal litigation hold until May 2010. As a consequence, Arbor's internalelectronic record destruction policies, including recycling of backup tapes, deletion ofemployees' emails stored in their inboxes or sent items folders for 189 days, and erasureof employee hard drives and email accounts upon the employee's departure from the firm,were not suspended until May 2010. In addition, Arbor's CEO deleted his emails on aregular basis between June 2007 and June 2010, with the result that only one of hisemails from the relevant period was produced. Arbor produced no emails from therelevant period from its Executive Vice President of Structured Finance, who wasinvolved in the transaction.
Arbor commenced this action in 2011. In or about June 2014, Herrick filed a motionseeking dismissal of the complaint as a sanction for Arbor's failure to preserve evidence,including the electronic records of six key witnesses. The court found that Arbor's failureto preserve evidence constituted ordinary negligence, and granted Herrick's motion onlyto the extent of directing that Herrick be entitled to an adverse inference at trial, citingPJI 1:77. Arbor did not appeal that order. Approximately six weeks later, Arbor producedto Herrick the minutes from a May 10, 2007 structured loan committee meeting, whichidentified eight additional Arbor employees who were involved in the loan transaction.Arbor claims that its failure to produce the minutes earlier was inadvertent. In or aboutJanuary 2015, Herrick moved to renew its spoliation [*2]motion, based on the new information in the minutes,including the identification of additional witnesses, much of whose electronic recordshad been destroyed by Arbor, either due to its failure to timely institute a litigation hold,or deliberately, and Arbor cross moved for sanctions.
Although the motion court properly granted renewal based on the new factspresented in defendant's renewal motion (see Eshaghian v Roshanzamir, 127 AD3d 448 [1st Dept2015]), the court improvidently exercised its discretion in, upon renewal, dismissing thecomplaint as a spoliation sanction. As this court has previously stated, "Failures whichsupport a finding of gross negligence, when the duty to preserve electronic data has beentriggered, include: (1) the failure to issue a written litigation hold . . . ; (2)the failure to identify all of the key players and to ensure that their electronic and otherrecords are preserved; and (3) the failure to cease the deletion of e-mail" (VOOM HD Holdings LLC vEchoStar Satellite L.L.C., 93 AD3d 33, 45 [1st Dept 2012]). Here, the motioncourt correctly determined that Arbor's destruction of evidence was, at a minimum, grossnegligence, since Arbor failed to institute a formal litigation hold until approximatelytwo years after even Arbor admits it had an obligation to do so. The minutes furtherreveal the extent to which Arbor failed to identify all of the key players in the loantransaction, and failed to preserve their electronic records. Where, as here, the spoliationis the result of the plaintiff's intentional destruction or gross negligence, the relevance ofthe evidence lost or destroyed is presumed (Pegasus Aviation I, Inc. v Varig Logistica S.A., 26 NY3d543, 547 [2015]; VOOM HD Holdings LLC, 93 AD3d at 45). Plaintifffailed to rebut this presumption. Accordingly, the motion court properly determined anappropriate sanction should be imposed on plaintiff. However, the sanction must reflect"an appropriate balancing under the circumstances," (VOOM HD Holdings LLC,93 AD3d at 47). Generally, dismissal of the complaint is warranted only where thespoliated evidence constitutes "the sole means" by which the defendant can establish itsdefense (Alleva v United ParcelServ., Inc., 112 AD3d 543, 544 [1st Dept 2013]), or where the defense wasotherwise "fatally compromised" (Jackson v Whitson's Food Corp., 130 AD3d 461, 463 [1stDept 2015]) or defendant is rendered "prejudicially bereft" of its ability to defend as aresult of the spoliation (Suazo vLinden Plaza Assoc., L.P., 102 AD3d 570, 571 [1st Dept 2013] [internalquotation marks omitted]). The record upon renewal does not support such a finding,given the massive document production and the key witnesses that are available totestify, including the eight additional persons identified in the minutes, on whom Herrickhad not yet served interrogatories or deposition notices at the time it filed its renewalmotion. Accordingly, an adverse inference charge is an appropriate sanction under thecircumstances (see id.; see also VOOM, 93 AD3d at 46-47; Ahroner v Israel Discount Bank ofN.Y., 79 AD3d 481 [2010]), since it will permit the jury to: (1) find that themissing emails and other electronic records would not have supported Arbor's position,and would not have contradicted evidence offered by Herrick, and (2) draw the strongestinference against Arbor on the issues of whether Arbor would have made the loansregardless of any potential zoning issues, and the measure of Arbor's damages taking intoaccount its assignment of the loans and/or failure to mitigate its damages (PJI 1:77). Inaddition, plaintiff shall be required to pay discovery sanctions of $10,000 to defendantHerrick, Feinstein, LLP for its failure to produce the loan committee meeting minutesuntil after the motion court had decided the initial spoliation motion (CPLR 3126). Thiscourt's modification of the motion court's order is without prejudice to Herrick seekingdismissal of the complaint or other spoliation sanctions in the future, should there befurther revelations making such a motion appropriate.
[*3] Defendant's motion to renew was not frivolous andthus plaintiff is not entitled to attorneys' fees and costs incurred in opposing the motion(see 22 NYCRR 130-1.1). Concur—Mazzarelli, J.P., Moskowitz,Manzanet-Daniels and Gesmer, JJ.