(No 'Litigation Hold') + Spoliation = Sanctions

"Litigation hold" is a notice requiring the preservation of all data that may relate to a claim or lawsuit. "Spoliation" is the loss or destruction of evidence relative to a legal proceeding.

The failure to send or implement a "litigation hold" may result in loss of evidence resulting in a claim of "spoliation" - the sanctions for which run the gamut from an adverse inference charge that the lost evidence was damaging in nature or, in the extreme, to the striking of a pleading.

Pegasus Aviation I, Inc. v. Varig Logistica S.A., 26 N.Y.3d 543 (Court of Appeals) [decided on December 15, 2015]

Supreme Court imposed a spoliation sanction on the defendants. The Appellate Division reversed. The Court of Appeals remanded "for a determination as to whether the evidence, which the Appellate Division found to be negligently destroyed, was relevant to the claims asserted against defendants and for the imposition of an appropriate sanction[.]".

The Court outlined the facts:

In 2005 and 2006, plaintiffs Pegasus Aviation I, Inc., Pegasus Aviation IV, Inc. and Pegasus Aviation V, Inc. (collectively, Pegasus) leased cargo planes to defendant Varig Logistica S.A. (VarigLog), a Brazilian air cargo company. Shortly thereafter, the MP defendants purchased VarigLog out of a Brazilian bankruptcy. In early 2007, a dispute arose between one of the MP defendants (MP Volo) and its Brazilian shareholders concerning the distribution of proceeds from the sale of one of VarigLog's wholly-owned subsidiaries. In July 2007, the Brazilian shareholders denied the MP defendants access to VarigLog's offices, and shareholder litigation ensued. The end result was that the MP defendants were, in effect, "frozen out" of VarigLog's affairs from July 2007 until April 1, 2008, when a Brazilian court removed the three Brazilian shareholders and appointed MP Volo to "take over the administration and management" of VarigLog under the supervision of a judicial oversight committee.

The prior proceedings in Supreme Court:

During the shareholder litigation, and while the MP defendants were "frozen out" of VarigLog, VarigLog defaulted on its leases with Pegasus. In February 2008, Pegasus commenced litigation against only VarigLog in Florida state court for, among other things, breach of the lease agreements. Later, Pegasus voluntarily discontinued the Florida action and filed suit against both VarigLog and the MP defendants in New York County Supreme Court in October 2008. As relevant here, Pegasus sued VarigLog for breach of contract and conversion, and sought to hold the MP defendants liable for VarigLog's conduct on an alter ego theory. In March 2009, VarigLog filed for bankruptcy. At all relevant times, VarigLog and the MP defendants were represented by separate counsel.

Pegasus served a notice to produce documents pursuant to CPLR 3120 that, as relevant here, sought electronically stored information (ESI) concerning Pegasus's claims and VarigLog's relationship with the MP defendants. VarigLog produced some documents in response, but that production was unsatisfactory to Pegasus, particularly with regard to the ESI.

Supreme Court appointed a discovery referee to assist Pegasus and VarigLog in resolving the dispute. During the first conference, which occurred in January 2010, counsel for VarigLog reported that VarigLog had experienced one or more computer "crashes" that impaired its ability to provide the requested ESI. VarigLog's counsel later explained that between 2000 and 2008, VarigLog did not have a system of preserving emails, that emails were routinely stored on the computers of individual employees and that employee computers were returned empty when an employee left the company. Counsel also explained that beginning in March 2008, VarigLog had established a system whereby VarigLog's ESI was backed up on a daily, weekly and monthly basis, but that computer crashes that occurred in February and March 2009 resulted in the loss of much of the ESI, and that data recovery efforts had proven unsuccessful.

The motion for the imposition of sanctions:

Pegasus then moved for the imposition of sanctions against VarigLog and the MP defendants. It sought an order holding VarigLog in contempt for failing to comply with court orders, striking VarigLog's answer, and imposing a trial adverse inference against the MP defendants for their failure to properly preserve electronic and paper records relevant to the action and within their control, albeit in the possession of their subsidiary, VarigLog. Pegasus argued that the MP defendants controlled VarigLog and therefore had a duty to impose a "litigation hold" to preserve certain VarigLog paper documents but failed to do so.

The decision by the Supreme Court:

Supreme Court granted Pegasus's motion, holding that VarigLog's failure to issue a "litigation hold" amounted to gross negligence as a matter of law, such that the relevance of the missing ESI was presumed. Supreme Court also found that the MP defendants, having been charged by the Brazilian court with the duty to "manage" and "administer" VarigLog, were in "control" of VarigLog for purposes of putting a "litigation hold" into place to preserve the ESI, and their failure to do so amounted to gross negligence. The court therefore struck the answer of VarigLog and imposed a trial adverse inference sanction against the MP defendants with regard to ESI and paper records relevant to the action and within the MP defendants' control[.]

The decision by the Appellate Division:

A divided Appellate Division reversed insofar as appealed from on the law and the facts and denied Pegasus's motion for a trial adverse inference instruction...The majority held that the record supported Supreme Court's finding that the MP defendants had sufficient control over VarigLog so as to trigger a duty on their part to preserve the ESI, but that it could not be said that their "failure to discharge this duty was so egregious as to rise to the level of gross negligence"...It rejected Supreme Court's holding that the MP defendants' failure to institute a litigation hold amounted to gross negligence per se, and held that the facts of the case supported, at most, a finding of simple negligence...Further, according to the majority, because Pegasus failed to prove that the lost ESI would have supported Pegasus's claims, a trial adverse inference sanction could not stand[.]

The options for relief with respect to spoliation:

Our state trial courts possess broad discretion to provide proportionate relief to a party deprived of lost or destroyed evidence, including the preclusion of proof favorable to the spoliator to restore balance to the litigation, requiring the spoliator to pay costs to the injured party associated with the development of replacement evidence, or employing an adverse inference instruction at the trial of the action[.]

Analyzed the decision of Supreme Court:

The trial court found that it was the lack of a litigation hold, and not the computer crashes themselves, that resulted in the destruction of the requested documents. However, the trial court incorrectly stated that the MP defendants were part of the Florida litigation, and that once they were, they were required to ensure that a litigation hold was in place, pointing to the fact that because the MP defendants were ordered by the Brazilian court to "manage and administer" VarigLog, the MP defendants were running VarigLog and therefore had the means of implementing a litigation hold. However, in this instance, the failure to institute a litigation hold did not amount to gross negligence per se, as the trial court held. Rather, a party's failure to institute a litigation hold is but one factor that a trial court can consider in making a determination as to the alleged spoliator's culpable state of mind.

And the Appellate Division:

In contrast to the trial court's reasoning, the Appellate Division majority noted that Pegasus did not adduce evidence that any steps were taken to defeat the computer backup system in the months leading up to the crashes, nor did Pegasus claim that the MP defendants themselves caused the crashes. The Appellate Division majority considered a number of factors in reaching its ultimate holding that the MP defendants' conduct in failing to preserve the ESI was not grossly negligent. Pertinent to that finding was the fact that VarigLog was represented by its own counsel when the MP defendants were brought into the litigation in April 2008, and there was no evidence that the MP defendants had reason to believe that VarigLog's counsel was not providing VarigLog adequate advice concerning ESI preservation. Another factor relied on by the majority was that the MP defendants adequately responded to all of Pegasus's discovery demands directed at them, thus negating any inference that the MP defendants were reckless concerning Pegasus's demands made on them. Finally, the majority found that notwithstanding the fact that the MP defendants had exercised practical control over VarigLog, the record evidence indicated that VarigLog and the MP defendants were separate entities, with each possessing their own offices, staff, operations and computer systems.

Concluding that:

On this record, we see no reason to disturb the unanimous finding of the lower courts that the MP defendants had sufficient control over VarigLog to trigger a duty on its part to preserve the ESI. Nor is there any basis to disturb the findings of fact by the Appellate Division that the MP defendants were negligent in failing to discharge that duty. The Appellate Division majority erred, however, to the extent that it determined that Pegasus had not attempted to make a showing of relevance...and chose to conduct its own analysis of the relevance issue without taking into account Pegasus's arguments in that regard, which were contained in its appellate brief. Thus, although the Appellate Division possesses the authority to make findings...