Pegasus Aviation I, Inc. v. Varig Logistica S.A.

• Decision Date: 05 June 2014
• Citation: 118 A.D.3d 428,987 N.Y.S.2d 350,2014 N.Y. Slip Op. 04047
• Parties: PEGASUS AVIATION I, INC., et al., Plaintiffs–Respondents, v. VARIG LOGISTICA S.A., Defendant, MatlinPatterson Global Advisers, LLC, et al., Defendants–Appellants.
• Court: New York Supreme Court — Appellate Division

118 A.D.3d 428

987 N.Y.S.2d 350

2014 N.Y. Slip Op. 04047

PEGASUS AVIATION I, INC., et al., Plaintiffs–Respondents,

v.VARIG LOGISTICA S.A., Defendant,MatlinPatterson Global Advisers, LLC, et al., Defendants–Appellants.

Supreme Court, Appellate Division, First Department, New York.

June 5, 2014.

Simpson Thacher & Bartlett LLP, New York (Roy L. Reardon of counsel), for appellants.

Coblentz Patch Duffy & Bass LLP, San Francisco, CA (Richard R. Patch of the bar of the State of California, admitted pro hac vice, of counsel), for respondents.

FRIEDMAN, J.P., SWEENY, ANDRIAS, SAXE, RICHTER, JJ.

Order, Supreme Court, New York County (Barbara R. Kapnick, J.), entered December 11, 2012, which, insofar as appealed from, granted plaintiffs' motion for a trial adverse inference instruction against defendants-appellants as a sanction for spoliation of electronic evidence, reversed, on the law and the facts, without costs, and the motion denied.

Plaintiffs are entities that leased aircraft to non-appealing defendant Varig Logistica S.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 the theory that the MP defendants' conduct constituted direct conversion of the aircraft. Plaintiffs originally sued VarigLog on these claims in a Florida action commenced in February 2008. In October 2008, plaintiffs voluntarily discontinued the Florida action (to which the MP defendants were not parties) and commenced this action against VarigLog and the MP defendants.

At issue on this appeal is whether the MP defendants exercised sufficient control over VarigLog during the period from April 1, 2008, until VarigLog's bankruptcy filing on March 3, 2009,¹ to render the MP defendants—who are not alleged to have failed to meet their obligations to preserve or produce their own documents relevant to this action—liable to sanctions for spoliation based on VarigLog's loss of its relevant electronically stored information (ESI) during that period.² Although VarigLog did not implement a litigation “hold” to preserve its ESI, it did install new information technology systems in March 2008 (the month after plaintiffs commenced the Florida action) that provided for daily, weekly and monthly backing-up of its ESI. Plaintiffs adduce no evidence that anyone took steps to defeat these back-up systems or otherwise deliberately destroyed ESI relevant to this litigation at any point after April 1, 2008. Unfortunately, however, as a result of computer system crashes that occurred in February and March of 2009, all of VarigLog's preexisting ESI was destroyed. As previously noted, plaintiffs do not claim that the MP defendants were to blame for these crashes.

After learning of the loss of VarigLog's ESI, plaintiffs moved for sanctions against both VarigLog and the MP defendants. The motion court granted the motion, striking VarigLog's answer and ruling that, at trial, the jury will be instructed that it may infer that the lost ESI would have supported the veil-piercing claim against the MP defendants. In summary, the court's reasoning in imposing the sanction against the MP defendants was as follows: (1) the MP defendants' control of VarigLog obligated them to see to it that VarigLog preserved evidence relevant to this litigation and, in particular, that VarigLog institute a litigation hold on its ESI; (2) the MP defendants' failure to ensure that VarigLog implemented a litigation hold constituted gross negligence per se, a ruling that followed Pension Comm. of Univ. of Montreal Pension Plan v. Banc of Am. Sec., LLC, 685 F.Supp.2d 456, 465 (S.D.N.Y.2010) [Scheindlin, J.] [“the failure to issue a written litigation hold constitutesgross negligence”]; and (3) because VarigLog's culpability rose to the level of gross negligence, prejudice to plaintiffs could be presumed, consistent with VOOM HD Holdings LLC v. EchoStar Satellite L.L.C., 93 A.D.3d 33, 45, 939 N.Y.S.2d 321 [1st Dept.2012] [“The intentional or willful destruction of evidence is sufficient to presume relevance, as is destruction that is the result of gross negligence”] ). Only the MP defendants have appealed.

Under this Court's jurisprudence:

“A party seeking sanctions based on the spoliation of evidence must demonstrate: (1) that the party with control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that the records were destroyed with a culpable state of mind; and finally, (3) that the destroyed evidence was relevant to the [moving] party's claim or defense such that the trier of fact could find that the evidence would support that claim or defense” ( VOOM, 93 A.D.3d at 45, 939 N.Y.S.2d 321 [internal quotation marks omitted] ).

Further, “[w]hile discovery determinations rest within the sound discretion of the trial court, the Appellate Division is vested with a corresponding power to substitute its own discretion for that of the trial court, even in the absence of abuse” ( Andon v. 302–304 Mott St. Assoc., 94 N.Y.2d 740, 745, 709 N.Y.S.2d 873, 731 N.E.2d 589 [2000];see also Small v. Lorillard Tobacco Co., 94 N.Y.2d 43, 52–53, 698 N.Y.S.2d 615, 720 N.E.2d 892 [1999] [“The Appellate Division, as a branch of Supreme Court, is vested with the same discretionary power and may exercise that power, even when there has been no abuse of discretion as a matter of law 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 defendants had sufficient control over VarigLog to trigger a duty on their part to see to it that VarigLog was preserving its ESI relevant to this litigation. We conclude that the record supports the motion court's determination that the MP defendants had a sufficient degree of control over VarigLog to trigger such a duty. This does not equate to a finding that VarigLog was an alter ego of the MP defendants (which will be the determinative issue on plaintiffs' claims against the MP defendants, since VarigLog itself has been held liable).³ Nonetheless, it cannot be ignored that the MP defendants, as the sole shareholders of VarigLog at this time, selected VarigLog's directors, and the record establishes that, during the period in question, employees and consultants of the MP defendants were closely monitoring VarigLog's operations and were formulating its business strategy. ⁴ The MP defendants admit that they could obtain documents from VarigLog upon request. In essence, even if it is true that VarigLog was legally and organizationally distinct from the MP defendants, in view of the latter's status as sole shareholder, determination of the membership of VarigLog's board and intimate involvement in directing VarigLog's business, “there seems 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 ESI was sufficiently under the MP defendants' “practical control” to trigger “a duty [on their part] to ensure that those materials were adequately preserved” ( GenOn Mid–Atlantic, LLC v. Stone & Webster, Inc., 282 F.R.D. 346, 355 [S.D.N.Y.2012],affd.2012 WL 1849101, 2012 U.S. Dist. LEXIS. 70750 [S.D.N.Y.2012] [holding that the plaintiff was obligated to ensure that a third-party consultant, which had audited the defendant on the plaintiff's behalf, preserved information relating to the audit in the consultant's possession, where litigation relating to the subject matter of the audit was foreseeable] ).⁵

While the motion court properly determined that the MP defendants, once they took control of VarigLog, had a duty with regard to the preservation of VarigLog's ESI, on this record it cannot be said that the MP defendants' failure to discharge this duty was so egregious as to rise to the level of gross negligence. The motion court's finding of gross negligence apparently was based on a statement by a federal district court of the Southern District of New York that, when litigation is anticipated, “the failure to issue a written litigation hold constitutes gross negligence because that failure is likely to result in the destruction of relevant information” ( Pension Comm., 685 F.Supp.2d at 465). To the extent the district court meant by this that failure to institute a litigation hold, in all cases and under all circumstances, constitutes gross negligence per se, the statement has been disapproved by the Second Circuit ( see Chin v. Port Auth. of N.Y. & N.J., 685 F.3d 135, 162 [2d Cir.2012], cert. denied––– U.S. ––––, 133 S.Ct. 1724, 185 L.Ed.2d 785 [2013] [“reject(ing) the notion that a failure to institute a ‘litigation hold’ constitutes gross negligence per se,” and citing Pension Comm. as contrary authority] ). The per se rule apparently articulated in Pension Comm., and followed by the motion court, has never, to our knowledge, been adopted by a New York state appellate court.

The facts of this case do not support a finding of gross negligence against the MP defendants. First, the MP defendants did not take control of VarigLog until April 1, 2008, after plaintiffs had commenced suit against VarigLog in Florida the previous February. VarigLog was already represented by counsel in the Florida action, and our attention has not been directed to any evidence tending to show that the MP defendants had reason to believe that VarigLog's counsel was not giving VarigLog adequate advice and direction concerning the preservation of information relevant to the litigation. Neither are we directed to any evidence suggesting that the MP defendants should have been aware of an inadequacy in this regard at any later time ( see GenOn, 282 F.R.D. at 357 [noting, as a factor weighing against a...