After sitting on the sidelines for years, the New York Court of Appeals (the highest appellate court in New York) has finally ruled on the standard to be applied to claims alleging spoliation of ESI. The decision, however, which was late in coming, places New York at odds with the new Federal Rules of Civil Procedure. This post will address Pegasus Aviation I, Inc. v Varig Logistica, S.A. Next week’s post will address how Pegasus is at odds with the new Federal Rules of Civil Procedure.
Pegasus Aviation I, Inc. v Varig Logistica, S.A. involved litigation spanning multiple continents, and attendant discovery failures. The underlying dispute arose from the leasing of cargo airplanes in Brazil, a Brazilian bankruptcy and a shareholder dispute. The plaintiffs not only sued the company to whom they loaned money (the “VariLog Defendants”), but also a number of third parties who purchased the assets out of bankruptcy – the “MP Defendants.”
During discovery the VariLog Defendants advised that one or more computer “crashes” impaired their ability to produce ESI. The VariLog Defendants further explained that during the operative period the company did not have an email preservation system in place, emails were stored on local machines and employee computers were routinely returned “empty.” These practices were later halted, but subsequent computer “crashes” resulted in the loss of much of the requested ESI.
The Trial Court found that the VariLog Defendants’ failure to issue a litigation hold amounted to gross negligence, and as such relevance of the missing ESI was presumed. The Trial Court further found that because the MP Defendants had been charged by a Brazilian Court with managing and administering VariLog, they were in control of VariLog for purposes of instituting the litigation hold. The Trial Court sanctioned the defendants by striking Varilog’s answer and imposing an adverse inference sanction against the MP Defendants.
The Appellate Division reversed the sanction. While the Appellate Division agreed on the “control” issue, it differed with the Trial Court finding that there wasn’t a showing of gross negligence, because the issuance of a litigation hold cannot be considered gross negligence per se. The Appellate Division further placed the burden on the movant to establish that the lost ESI would have supported its claims, and failing to have done so, an adverse inference sanction was not required. Notably, the Appellate Division decision included a concurring and a dissenting opinion.
The Court of Appeals agreed with the Trial Court and Appellate Division’s findings that the MP Defendants were sufficiently in control of VariLog to trigger an ESI litigation hold. The Court of Appeals also agreed with the Appellate Division that the failure to issue a litigation hold does not amount to gross negligence per se, but was merely one factor to be considered when determining the spoliator’s culpable state of mind. The Court of Appeals differed, however, with the Appellate Division’s determination that the movant did not show relevance.
Specifically, the Court of Appeals found that:
A party that seeks sanctions for spoliation of evidence must show that the party having control over the evidence possessed an obligation to preserve it at the time of its destruction, that the evidence was destroyed with a “culpable state of mind,” and “that the destroyed evidence was relevant to the party’s claim or defense such that the trier of fact could find that the evidence would support that claim or defense.” On the other hand, if the evidence is determined to have been negligently destroyed, the party seeking spoliation sanctions must establish that the destroyed documents were relevant to the party’s claim or defense.
The Court of Appeals remanded the litigation to the Trial Court for a determination as to whether the negligently destroyed evidence was relevant to the claims against the defendants, and if so, the appropriate sanction (if the Trial Court deems one warranted).
In reaching its decision the Court of Appeals relied on the Appellate Division, First Department’s decision in VOOM HD Holdings LLC v EchoStar Satellite L.L.C. (93 AD3d 33, 45 [1st Dept 2012]), and the Southern District’s Zubulake v UBS Warburg LLC (220 FRD 212, 220 [SD NY 2004]). The Zubulake burden shifting rubric has been placed into doubt by recent amendments to the Federal Rules of Civil Procedure. More on that next week