Pegasus Aviation I, Inc. v. Varig Logistica S.A.
| Decision Date | 15 December 2015 |
| Citation | 26 N.Y.3d 543,26 N.Y.S.3d 218,46 N.E.3d 601 |
| Parties | PEGASUS AVIATION I, INC., et al., Appellants, v. VARIG LOGISTICA S.A., Defendant, and MatlinPatterson Global Advisers, LLC, et al., Respondents. |
| Court | New York Court of Appeals Court of Appeals |
Coblentz Patch Duffy & Bass LLP, San Francisco, California (Richard R. Patch, of the California bar, admitted pro hac vice, of counsel), and Skarzynski Black LLC, New York City (James T. Sandnes and Aron M. Zimmerman of counsel), for appellants.
Simpson Thacher & Bartlett LLP, New York City (Thomas C. Rice, Roy L. Reardon and Isaac M. Rethy of counsel), and Bracewell & Giuliani LLP, New York City (Michael C. Hefter, Kelly Koscuiszka and David A. Shargel of counsel), for respondents.
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" (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], quoting Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 220 [S.D.N.Y.2003] ). Where the evidence is determined to have been intentionally or wilfully destroyed, the relevancy of the destroyed documents is presumed (see Zubulake, 220 F.R.D. at 220 ). 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 (see id. ).
On this appeal, we are asked to decide whether the Appellate Division erred in reversing an order of Supreme Court that imposed a spoliation sanction on the defendants. We hold that it did, and remand the matter to the trial court 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, should the trial court deem, in its discretion, that a sanction is warranted.
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 defendants1 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.
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.
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.
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.2 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 MP defendants appealed the order of Supreme Court to the Appellate Division insofar as it granted Pegasus's motion for a trial adverse inference instruction.
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 (118 A.D.3d 428, 428, 987 N.Y.S.2d 350 [1st Dept.2014] ). 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" (id. at 432, 987 N.Y.S.2d 350 ). 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 (see id. at 432–434, 987 N.Y.S.2d 350 ). 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 (see id. at 435, 987 N.Y.S.2d 350 ).
Justice Andrias concurred with the majority on the issue of the MP defendants' control over VarigLog and their duty to preserve the ESI, and also agreed "that upon a contextual assessment of all pertinent facts" the MP defendants' "failure to discharge [their] duty did not rise to the level of gross negligence" (id. at 436, 987 N.Y.S.2d 350 ). However, in his view, because Supreme Court possessed the discretion to impose a spoliation sanction for negligent destruction of evidence, the matter should have been remanded to Supreme Court "for a determination as to the extent to which [Pegasus has] been prejudiced by the loss of the evidence, and the sanction, if any, that should be imposed" (id. at 436–437, 987 N.Y.S.2d 350 [Andrias, J., concurring in part and dissenting in part] ).
Justice Richter dissented in full, arguing that the MP defendants' "failure to take any meaningful steps to preserve evidence constitute[d] gross negligence" and that the adverse inference sanction should be affirmed (id. at 438, 987 N.Y.S.2d 350 [Richter, J., dissenting] ). She based her determination not only on the fact that the MP defendants failed to initiate a litigation hold, but also "on a close review of the specific facts of th[e] case" (id. at 440, 987 N.Y.S.2d 350 ).
The Appellate Division granted Pegasus's motion for leave to appeal, and, in its certified question, asks this Court to determine whether the Appellate Division's order, which reversed Supreme Court, was properly made (2014 N.Y. Slip Op. 90118[U] [1st Dept.2014] ).3 We answer that question in the negative.
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 (see Ortega v. City of New York, 9 N.Y.3d 69, 76, 845 N.Y.S.2d 773, 876 N.E.2d 1189 [2007] [citations omitted]; CPLR 3126 [...
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