N.Y. High Court Weighs in on Failure to Issue Litigation Hold

In Pegasus Aviation I, Inc. v. Varig Logistica S.A., the New York Court of Appeals held that failure to preserve ESI was simple, not gross, negligence, and remanded to the trial court for a determination of whether the destroyed evidence was relevant to the plaintiff’s claims and what sanction, if any, is appropriate.

In this case, various defendants known as the “MP Defendants” were frozen out of defendant VarigLog’s affairs by certain shareholders. During that time, VarigLog breached aircraft lease agreements with plaintiffs. Before suit was commenced in New York, a Brazillian court granted one of the MP Defendants managerial authority over VarigLog. After suit was filed, the MP Defendant in control failed to issue a litigation hold to VarigLog and, after discovery requests were served, VarigLog suffered two computer crashes that caused it to lose ESI.

The trial court held that the failure to issue a litigation hold constituted gross negligence per se, such that the relevance of the lost ESI was presumed. As a sanction, the trial court struck VarigLog’s answer and imposed an adverse inference against the responsible MP Defendant. The First Appellate Department reversed, holding that the failure to issue a litigation hold does not constitute gross negligence per se and that the MP Defendant’s conduct was simple negligence. The First Department held that plaintiff failed to establish the relevance of the lost ESI so the sanction could not stand.

The Court of Appeals first reaffirmed 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. … Where the evidence is determined to have been intentionally or willfully destroyed, the relevancy of the destroyed documents is presumed.” (citations omitted).

The trial court, First Department, and Court of Appeals all agreed that the MP Defendant had a duty to preserve ESI for VarigLog at the time of the computer crashes and that it was negligent in discharging that duty. However, the high court sided with the First Department in holding that failure to issue a litigation hold, in this case, did not constitute gross negligence per se and, instead, held that it “is but one factor that a trial court can consider in making a determination as to the alleged spoliator’s culpable state of mind.” Here, the Court decided that the MP Defendant’s conduct amounted to simple negligence based on, inter alia, (1) no evidence that there were steps taken to defeat any computer back-up systems, (2) the MP Defendant did not cause the computer crashes, (3) VerigLog was represented by its own counsel at the time of the crash and the MP Defendant had no reason to believe that ESI preservation was not adequately being addressed by that counsel, (4) the MP Defendant adequately responded to discovery requests served upon it and (5) the MP Defendant and VarigLog were separate entities, with their own offices and computer systems. Accordingly, because this conduct constituted only simple negligence, and not gross negligence, the relevance of the missing ESI should not have been presumed and the case is being remanded to the trial court to determine that issue. The trial court may also determine the appropriate sanction, if any, and also reversed the First Department in noting that an adverse inference is not “tantamount to granting summary judgment” on plaintiff’s alter ego claim, leaving room for the trial court to impose the same sanction after considering the relevance of the spoliated evidence.

Paul A. Saso is a Director in the Gibbons Business & Commercial Litigation Department and a member of the Gibbons E-Discovery Task Force.
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