Opinion
403124/08
02-16-2012
915 Broadway Associates LLC, Plaintiff, v. Paul, Hastings, Janofsky & Walker, LLP, Defendant.
For Plaintiffs: Stillman, Friedman & Schechtman, P.C. (Julian W. Friedman) For Defendants: Davis Polk & Wardwell, LLP (Brett McMahon)
APPEARANCES:
For Plaintiffs: Stillman, Friedman & Schechtman, P.C. (Julian W. Friedman)
For Defendants: Davis Polk & Wardwell, LLP (Brett McMahon)
Bernard J. Fried, J.
This is an action for professional malpractice brought by plaintiff 915 Broadway Associates LLC (915 Broadway) against defendant and third-party plaintiff Paul, Hastings, Janofsky & Walker LLP (Paul Hastings). In its complaint against Paul Hastings, 915 Broadway alleges that non-party Normandy Acquisitions LLC breached its agreement to purchase commercial real estate from 915 Broadway, and that 915 Broadway could not recover $20 million in liquidated damages from Normandy because a letter of credit posted on behalf of Normandy had expired, and because Normandy was otherwise insolvent. 915 Broadway alleges that Paul Hastings committed malpractice by failing to draw on the letter of credit, or by failing to advise 915 Broadway to draw on the letter of credit prior to its expiration on December 31, 2007.
Paul Hastings now moves for an order granting it sanctions based on 915 Broadway's spoliation of evidence in connection with the above-captioned matter, particularly the intentional destruction of documents by 915 Broadway representative Joel Poretsky after the duty to preserve such documents arose, dismissing the amended complaint with prejudice, and awarding Paul Hastings its attorneys' fees and costs incurred in the making of this motion.
For the reasons set forth below, Paul Hastings' motion for spoliation sanctions is granted, and the complaint is dismissed.
In August 2007, 915 Broadway entered into a transaction with Normandy involving the sale of a controlling interest in the commercial real estate located at 915 Broadway in Manhattan (the Property). Paul Hastings represented 915 Broadway in connection with the transaction, and Eric Landau was the principal Paul Hastings lawyer working on behalf of 915 Broadway. 915 Broadway and its principals, including Peter Burack, had previously retained Paul Hastings and Landau to represent them in other transactions.
As part of that transaction, Normandy posted, as a deposit, a $20 million letter of credit with an expiration date of December 31, 2007 (the Letter of Credit). 915 Broadway had the right to draw upon the Letter of Credit during the ten-day period prior to its expiration. Paul Hastings asserts that it informed 915 Broadway of the expiration date, and provided it with a copy of the Letter of Credit. In October 2007, 915 Broadway and Normandy terminated their original agreement, and entered into a new agreement for the fee interest in the Property (the October Agreement). By agreement of the parties, the Letter of Credit continued to be held by the Escrow Agent in temporary satisfaction of Normandy's obligation to post a deposit under the October Agreement.
The transaction did not close by December 31, 2007, and 915 Broadway did not instruct the escrow agent to draw on the Letter of Credit prior to December 31, 2007. Thus, the Letter of Credit expired without being drawn. Although Normandy refused to post a new letter of credit, the parties made an effort between January and March 2008 to close the transaction at a reduced price. However, Normandy ultimately walked away from the deal, refusing to attend a closing scheduled for March 26, 2008. The next day, Normandy filed a civil action in New Jersey state court (the New Jersey Action), seeking a declaratory judgment that it had not breached the October Agreement, and that it was entitled to return the Letter of Credit. The complaint did not seek any damages from 915 Broadway.
As part of the papers served on 915 Broadway by Normandy in connection with its filing of the New Jersey Action, Normandy included a letter to each of 915 Broadway's members which instructed them to preserve all documents related to the transaction (see 4/1/08 Letter from Richard Plotkin Esq. to TRAK Associates [Aff. of Brett M. McMahon, Exh A]). This letter specifically instructed 915 Broadway's members to:
preserve all papers, documents, other physical materials, and any electronic data that may(id.).
be reasonably relevant to these matters;
take immediate steps to preserve any and all electronic data contained on any desk top computer, notebook computer, personal computer or portable storage media [to protect] the information from loss or modification;
take steps to discontinue any automatic deletion processes that otherwise would cause the destruction of electronically stored information on a routine basis;
follow these instructions and undertake all measures necessary to secure and preserve data on its computers and storage media from loss or modification [because the] failure to comply with the terms of this notice could have adverse legal effects, including a charge of spoliation of evidence; and
not delete, modify, alter or make addition to any and all electronic data relating to the [transaction] [because] due to its format, electronic information is easily deleted, modified or corrupted
After the New Jersey Action was filed, and 915 Broadway received the preservation notice, it effectively discharged Paul Hastings. While in the middle of terminating Paul Hastings, Daniel Burack of ABS Partners Real Estate, Inc., a member of 915 Broadway, inquired of Eric Landau of Paul Hastings whether he had to distribute the preservation notice to his partners, as he preferred not to do so (see 4/1/08 Note from A. Movsesian to E. Landau with attachments [McMahon Aff., Exh B]; 4/3/08 Email from Loren List to David Fleischer ["Please advise as to whether Dan needs to forward on said letters to the members. He would prefer not to pass on the letter"] [McMahon Aff., Exh C]).
Landau, who is not a litigation attorney, informed Peter Burack, Daniel Burack's son, that 915 Broadway was obligated to circulate and implement the preservation notice, stating that "it would be an uncomfortable answer at a deposition if certain correspondence had been destroyed, allowing Normandy to claim that it contained bad facts' for [915 Broadway]" (see 4/3/08 Email from Landau to P. Burack] [see McMahon Aff., Exh D]). Subsequently, the Buracks circulated to each of 915 Broadway's members a memorandum referencing and attaching a copy of the preservation notice (the Litigation Hold) (see 4/4/08 Memo from D. Burack to 915 Broadway Realty, attaching Preservation Notice] [McMahon Aff., Exh E]).
After discharging Paul Hastings, 915 Broadway retained the law firm of Stillman, Friedman & Schechtman, P.C. (Stillman Friedman), and Paul Hastings had no further involvement with 915 Broadway, including its preservation efforts. 915 Broadway then began strategizing how they could settle the New Jersey Action, and bring a malpractice suit against Paul Hastings, even though some of 915 Broadway's principals believed that the individuals managing the transaction on behalf of 915 Broadway were at least partially responsible for monitoring the Letter of Credit. For instance, Steven Hornstock, 915 Broadway's broker, testified that it was his "view" and his "experience" that the expiration date of a letter of credit posted as a deposit "would be monitored by the attorneys and the seller," a view that he held at the time 915 Broadway's principals were discussing responsibility for monitoring the Letter of Credit after it expired (Hornstock Dep., at 135-136 [McMahon Aff., Exh F]).
In early February 2008, a meeting took place between the 915 Broadway principals in charge of running the deal, and the principal Australian representative of TRAK Associates, LLC (TRAK), an entity that owns more than 31% of 915 Broadway (see 915 Broadway Organizational Chart [McMahon Aff., Exh Y]), to discuss the transaction and the potential courses of action going forward. During the meeting, Graham Smorgen, the principal Australian representative, criticized the 915 Broadway principals for allowing the letter of credit to expire (see 2/7/08 Fax from P. Burack to D. Burack [McMahon Aff., Exh G]). Peter Burack stated that 915 Broadway "could terminate the contract ... and take [its] chances in recovering the money from Paul Hastings" (see id.). The other principals, including the Australians, agreed with that approach, deciding "not to let Paul Hastings off the hook [if the transaction did] not close" (see 2/6/07 Post-it Note [McMahon Aff., Exh H]); see also Smorgen Dep., at 63-64 [agreed at meeting that Paul Hastings "should be sued for as much as possible"] [McMahon Aff., Exh I]).
915 Broadway then decided that it should settle with Normandy and go after Paul Hastings. They asked successor counsel, Stillman Friedman, to write a memorandum addressing the effect that a settlement with Normandy would have on a malpractice claim against Paul Hastings. In that memo, Stillman Friedman advised 915 Broadway that settling with Normandy "should not negatively impact a claim against [Paul Hastings]," but rather, would bolster its contemplated malpractice claim:
[A] settlement with Normandy would have two other benefits. First, if Normandy prevails in its present declaratory judgment action ... 915 would be left with no action against PH .... Second, so long as Normandy continues to litigate, PH can muddy the waters. For example, PH may assert that the real wrongdoer was Normandy in that Normandy failed to provide a fresh letter of credit as required under the Agreement(4/16/08 Mem. from J. Friedman to D. Burack [McMahon Aff., Exh K]).
Based on that advice, 915 Broadway made a "business decision" to settle with Normandy, rather than pursue any claims against Normandy or any of its affiliates (see Dep. of Barrie Damson, at 106, 113 [McMahon Aff., Exh L]), and to instead procure Normandy's cooperation in a suit against Paul Hastings (see 5/8/08 Mem. from J. Friedman to File [McMahon Aff., Exh M]). As Daniel Burack explained in an email to some of his 915 Broadway partners:
our strategy as outlined in earlier memos to all partners was to offer normandy a settlement and then move to sue paul hastings for malpractice. we have been advised th[at] by settling with normandy and getting their cooperation and avoiding losing their case for a declaratory judgment we are in a good position re PH. if we begin a lawsuit against normandy, the advice is that this might muddy the waters re PH.(4/21/08 Email from D. Burack to E. Altman, et al. [McMahon Aff., Exh N] [formatting in original]).
Subsequently, 915 Broadway's principals agreed to settle with Normandy, even though they believed that Normandy owed them $20 million (D. Burack Dep., at 169 [McMahon Aff., Exh O; Damson Dep., at 89]). In its settlement with Normandy, 915 Broadway agreed to:
release any and all of its claims against Normandy and all of Normandy's parents and affiliates in exchange for $0 (see e.g. 6/30/08 General Releases [McMahon Aff., Exh P]);
pay Normandy's future legal fees in the event that Normandy was required to participate as a witness or a party in any lawsuit related to the transaction, including this action (6/27/08 Letter Agreements [McMahon Aff., Exh Q]); and
collaborate with Normandy's counsel to draft an affidavit (reflecting comments from 915 Broadway principals themselves) to be sworn by a Normandy principal, David Welsh, which was designed to bolster 915 Broadway's contemplated malpractice action (see e.g. 6/28/08 Welsh Aff. [McMahon Aff., Exh T]; Friedman Dep., at 19, 49).
Paul Hastings alleges that, in addition to the settlement's extremely favorable terms, under which Normandy was required to pay nothing for a complete release and 915 Broadway was obligated to pay Normandy's future legal fees, the affidavit jointly crafted by 915 Broadway and Normandy was intentionally misleading about the extent of Normandy's assets, in order to cover up, for purposes of mitigation, 915 Broadway's own failure to pursue or investigate its $20 million claim against Normandy. Paul Hastings asserts that the affidavit was specifically drafted to suggest that Normandy had no assets at the time of the settlement by limiting Mr. Welsh's sworn statement about Normandy's assets to a period ending three months before the settlement (see Welsh Aff., ¶ 12 [McMahon Aff., Exh S]).Indeed, during those three months, which were before the Welsh affidavit was executed, Normandy's CFO opened a bank account for Normandy, and then caused Normandy's parent company, Normandy Real Estate Fund, Inc., to transfer $750,000 into the account to pay Normandy's expenses and liabilities related to the real estate transaction (see Bank Statements [McMahon Aff., Exh U]; Gately Dep., at 71-74 [McMahon Aff., Exh V]). Moreover, in late April 2008, approximately two months prior to the settlement, Stillman Friedman received a check for $29,000 cut from the bank account belonging to Normandy (see 4/30/09 Check [McMahon Aff., Exh W]). Thus, 915 Broadway knew that Normandy had assets after March 26, 2008 but, nevertheless, settled with and released Normandy, without even evaluating its potential claims to recovery from Normandy or its parent companies.
915 Broadway filed the instant action in August 2008, in which it alleges that its legal counsel, Paul Hastings, was responsible for monitoring dates related to the Letter of Credit, and that Paul Hastings' alleged failure to do so forced 915 Broadway to settle with Normandy for nothing, and to promise to pay Normandy's legal fees rather than attempt to recover from Normandy or its affiliates the $20 million in liquidated damages owed under the parties' real estate contract.
Paul Hastings asserts several defenses to 915 Broadway's claims, including that:
(1)915 Broadway cannot establish the required element of causation because (a) 915 Broadway caused its own damages by releasing Normandy without making any effort to mitigate its damages; and (a) 915 Broadway was not effectively compelled by anything that Paul Hastings did to settle with and release Normandy on the terms outlined above;
(2)it was the responsibility of 915 Broadway, and not of Paul Hastings, to monitor dates related to the financial aspects of the transaction (which required no legal knowledge or expertise), and 915 Broadway itself was negligent by not monitoring such dates and taking appropriate action; and
(3)915 Broadway's managing member, 915 Broadway Realty Associates (Broadway Realty) itself acted negligently in failing to monitor dates relevant to the transaction where it was responsible for managing the business and affairs of 915 Broadway, including in connection with any sale of the Property.
Paul Hastings asserts that 915 Broadway, in particular, 915 Broadway representative Joel Poretsky, intentionally destroyed numerous pertinent documents after the duty to preserve such documents arose on April 1, 2008, the day the Litigation Hold was circulated. After being apprised by Paul Hastings that 915 Broadway had destroyed documents pertaining to this litigation, on March 31, 2011, I ordered 915 Broadway to hire forensic IT experts to analyze the extent of 915 Broadway's document destruction problem. Those IT professionals confirmed that 915 Broadway had deleted relevant electronic documents well after a duty to preserve those documents arose. As more fully set forth below, the evidence adduced by 915 Broadway's own IT professionals reveals the 915 Broadway's destruction of relevant documents was extensive and systematic, and that, responsive documents continued to be destroyed by 915 Broadway, even after Paul Hastings raised its spoliation concerns before me.
Paul Hastings asserts that, any documents related to or touching upon the above claims, are crucial to its ability to present a complete defense in this action, and that 915 Broadway's failure to safeguard its own documents related to these topics has permanently and irrevocably tainted the documentary record in this matter, and has made it impossible for Paul Hastings to adequately defend itself against 915 Broadway's claims. Paul Hastings argues that the most severe sanction — the dismissal of 915 Broadway's amended complaint — is thus appropriate and necessary to redress the prejudice that Paul Hastings has suffered as a result of the spoliation.
Under New York law , a party is required to preserve evidence that may be relevant to pending or reasonably foreseeable litigation. Thus, " [o]nce a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a litigation hold' to ensure the preservation of relevant documents'" (Voom VD Holdings LLC v EchoStar Satellite L.L.C., ___ AD3d ___, 2010 NY Slip Op. 00658 [1st Dept 2012], quoting (Zubulake v UBS Warburg LLC, 220 FRD 212, 218 [SD NY 2003]). Over the past decade, this duty to preserve has been extended to electronically stored information, including email and other electronic documents (see e.g. McCarthy v Phillips Elec. N.A., Index No. 112522/03, at 3 [Sup Ct, NY County June 9, 2005] ["duty to preserve relevant evidence ... encompasses electronic data"]). Indeed, "[c]ourts have held that the contents of a computer are analogous to the contents of a filing cabinet" (Etzion v Etzion, 7 Misc 3d 940, 943 [Sup Ct, Nassau County 2005]). Thus, like the contents of a filing cabinet, which must be retained by a party to a pending or reasonably foreseeable litigation, electronic information saved on computers and email servers must also be diligently preserved.
Under the traditional law of spoliation of evidence, "[w]hen a party alters, loses or destroys key evidence before it can be examined by the other party's expert, the court should dismiss the pleadings of the party responsible for the spoliation" (Squitieri v City of New York, 248 AD2d 201, 202 [1st Dept 1998]). Until recently, New York state courts have grappled with the difficult issue of how to apply the traditional law of spoliation — e.g., the prohibition against destroying easily identifiable physical evidence related to, for example, some kind of accident — to the destruction of email and other electronic documents, as "[e]lectronic discovery raises a series of issues that were never envisioned by the drafters of the CPLR," and "are not faced in traditional paper discovery" (Lipco Elec. Corp. v ASG Consulting Corp., 4 Misc 3d 1019(A), 2004 NY Slip Op 50967[U], * 6, * 8 [Sup Ct, Nassau County 2004]). However, in Ahroner v Israel Discount Bank of New York (79 AD3d 481 [1st Dept 2010]), the First Department has recently clarified the standard for imposing sanctions for the destruction of electronic evidence:
On a motion for spoliation sanctions involving the destruction of electronic evidence, the party seeking sanctions must establish that (1) the party with control over the evidence had an obligation to preserve it at the time it was destroyed; (2) the records were destroyed with a "culpable state of mind"; and (3) the destroyed evidence was "relevant" to the moving party's claim or defense(id. at 482).
Establishing that the electronic data was destroyed with a "culpable state of mind" does not require proof that the destruction was imminent or even reckless. " Spoliation sanctions ... are not limited to cases where the evidence was destroyed willfully or in bad faith, since a party's negligent loss of evidence can be just as fatal to the other party's ability to present a defense'" (Standard Fire Ins. Co. v Fed. Pac. Elec. Co., 14 AD3d 213, 218 [1st Dept 2004] [citation omitted]). Thus, "[a] culpable state of mind' ... includes ordinary negligence" (Ahroner v Israel Discount Bank of New York , 79 AD3d at 482; see e.g. Mudge, Rose, Guthrie, Alexander & Ferdon v Penguin Air Conditioning Corp., 221 AD2d 243, 243 [1st Dept 1995] [dismissing plaintiff's claims due to its "negligent loss of a key piece of evidence which defendants never had the opportunity to examine"]).
In addition, the party deprived of evidence as a result of its adversary's spoliation need not, in most cases, prove the relevance of the destroyed evidence. The relevance of the evidence will be inferred where it is "destroyed either intentionally or as the result of gross negligence" (Ahroner v Israel Discount Bank of New York , 79 AD3d at 482, citing Sage Realty Corp. v Proskauer Rose, 275 AD2d 11 [1st Dept 2000], lv dismissed 96 NY2d 937 [2001]). Indeed, "it is the peculiarity of many spoliation cases that the very destruction of the evidence diminishes the ability of the deprived party to prove relevance directly" (Sage Realty Corp. v Proskauer Rose, 275 AD2d at 17 [affirming dismissal of legal malpractice claims based on plaintiffs' spoliation of evidence]). Given the inherent unfairness of asking a party to prove that the destroyed evidence is relevant even though it no longer exists and cannot be specifically identified as a result of the spoliator's own misconduct, courts will usually reject an argument that the deprived party cannot establish the relevance of the evidence (see e.g. id. at 16 [acknowledging that the burden of proving relevance can be "rendered impossible to satisfy as a result of plaintiffs' own misconduct"]).
Defendants contend that the intentional deletion of electronic documents by Joel Poretsky, the U.S. based representative of TRAK, well after he was under a duty to preserve evidence, is a "quintessential example of spoliation," requiring dismissal of this action. Although 915 Broadway contends that Poretsky was merely an "outside advisor" to one of its members who played a "negligible role" in the matters underlying this litigation (Pl Opp., at 1, 10-13), the documents produced by 915 Broadway in May 2011 reveal that he was actively involved in the transaction from its inception through 915 Broadway's decision to sue Paul Hastings (see McMahon Aff., Exhs Z, AA-JJ]). Poretsky appears to be the only principal, other than Peter Burack, who had a copy of the Letter of Credit before it expired (see Poretsky Dep., at 33-35 [Aff. of Paul Spagnoletti, Exh R]). Moreover, Poretsky was actively involved in the transaction after the Letter of Credit expired, including the planned lawsuit against Paul Hastings (see McMahon Aff., Exhs FF-GG; Spagnoletti Aff., Exhs J-Q]). Given his level of involvement, it is evident that he was in a position to send and receive crucial electronic documents that would be directly relevant to the instant action. Indeed, Poretsky admitted that the vast majority of his communications with TRAK's Australian representatives (including Graham Smorgon and Jeffrey Mahemoff) about 915 Broadway occurred via email (Poretsky Dep., at 19, 50 [McMahon Aff., Exh KK]).
It is undisputed that Poretsky received the Litigation Hold circulated to 915 Broadway's principals on April 9, 2008 (see 4/9/08 email from J. Poretsky to H. Rothman, attaching Litigation Hold [McMahon Aff., Exh A]), and that, once he received this document, he was required thereafter to preserve documents relating to the litigation. It is also undisputed that Poretsky failed to comply with the instructions contained therein, and continued to destroy electronic files relevant to this action after he had a legal duty to preserve such evidence. His own testimony, and the admissions of 915 Broadway's counsel, establish that:
Although Poretsky received the Litigation Hold in April 2008 and subsequently forwarded it to other TRAK representatives, he does not recall being instructed to preserve documents until more than two years after this litigation was initiated (Poretsky Dep., at 14-15);
Prior to December 2010, he made no effort to preserve documents (including electronic documents) relevant to this litigation (id. at 15);
Indeed, he actively deleted all of his emails related to the transaction underlying this action and to the New Jersey Action — including during the period after the Litigation Hold was circulated and even after 915 Broadway filed this case in August 2008 — pursuant to his routine practice of deleting, on a monthly basis, any email that had been transferred to his Deleted Items folder and was more than 90 days old (id. at 17-19); and
He did not recall locating any emails related to the transaction or the New Jersey Action when he finally collected documents in December 2010 (id. at 18), and he did not produce a single email to Paul Hastings.
At the same time, he also failed to implement any of the other most basic instructions in the Litigation Hold. An analysis of Poretsky's computer reveals that:
Emails that Poretsky deleted were backed up for 14 days after their deletion; thereafter the backups were destroyed and the deleted emails are therefore "no longer available" (see Poretsky IT Report, at 1, 2 [McMahon Aff., Exh NN]);
This routine destruction can be suspended for employees who are subject to a litigation hold, but neither Poretsky nor counsel ever informed the IT department to suspend the process with respect to his electronic data (see id. at 1); and
Because of the routine destruction policy applicable to Poretsky's electronic mail, which was never suspended, any email that Poretsky sent or received and subsequently deleted (without archiving) cannot now be recovered and is lost forever (see id. at 2).
Poretsky's conduct warrants sanctions. First, by his own admission, Poretsky actively deleted electronic documents related to the transaction at a time when he had an obligation to preserve those documents. Poretsky's admitted deletion of emails after April 4, 2008, the day the Litigation Hold was circulated, and thus, the date that the duty to preserve arose, caused the destruction of innumerable emails dated during a key period in this litigation.
Second, the documents were destroyed with a "culpable state of mind" because they were deleted intentionally and then permanently destroyed beyond any possible recovery either intentionally, or as the result of gross negligence. Even though Poretsky received the Litigation Hold, which instructed him to preserve potentially relevant documents, he made no effort to abide by its instructions. Instead, he continued his routine deletion practices and completely failed to instruct his firm's IT department to suspend the routine destruction policy that resulted in the permanent destruction of every email that he intentionally deleted. This blatant disregard for his preservation duties constitutes, at the least, gross negligence (see Voom VD Holdings LLC v EchoStar Satellite L.L.C., ___ AD3d ___, 2010 NY Slip Op. 00658, supra [destruction is the product of gross negligence where, for example, a party fails to preserve "electronic and other records" or "fail[s] to cease the deletion of e-mail"]).
Finally, the electronic evidence that Poretsky destroyed was likely relevant to Paul Hastings' claims that (1) 915 Broadway and its managing members bore some, if not all, of the responsibility for monitoring the Letter of Credit's expiration date, given the criticism by TRAK's representatives of the individuals running the deal on behalf of 915 Broadway; and (2) 915 Broadway failed to mitigate its damages and voluntarily broke the chain of causation by settling with Normandy for nothing without any investigation, given TRAK's participation in debating and advocating for a lawsuit against Paul Hastings. Moreimportantly, even if it were not clear that the destroyed documents were relevant to Paul Hastings' claims and defenses, because the evidence was destroyed, at the least, as the result of gross negligence, relevance can be inferred (see Voom VD Holdings LLC v EchoStar Satellite L.L.C., ___ AD3d ___, 2010 NY Slip Op. 00658, supra; Ahroner v Israel Discount Bank of New York, 79 AD3d 481, supra).
In addition, five of 915 Broadway witnesses, in addition to Porestky, as listed below, have also allowed critical documents to be destroyed by failing to abide by the standard preservation instructions sent to them.
A party's mere circulation of a litigation hold is insufficient to meet its discovery obligations under New York law; rather, a party must take affirmative steps to ensure that potentially relevant evidence is diligently identified and preserved:
A party's discovery obligations do not end with the implementation of a "litigation hold" — to the contrary, that's only the beginning. Counsel must oversee compliance with the litigation hold, monitoring the party's efforts to retain and produce relevant documents. Proper communication between a party and her lawyer will ensure (1) that all relevant information (or at least sources of relevant information) is discovered; (2) that relevant information is retained on a continuing basis; and (3) that relevant non-privileged material is produced to the opposing party(Ahroner v Israel Discount Bank of New York, 2009 WL 2135164, 2009 NY Slip Op 31526[U] [Sup Ct, NY County July 9, 2009]). Thus, "a party must suspend its automatic deletion function or otherwise preserve e-mails as part of a litigation hold" (Voom VD Holdings LLC v EchoStar Satellite L.L.C., ___ AD3d ___, 2010 NY Slip Op. 00658, supra [" the preservation obligation is not limited simply to avoiding affirmative acts of destruction. Since computer systems generally have automatic deletion features that periodically purge electronic documents such as e-mail, it is necessary for a party facing litigation to active steps to halt that process'"] [citation omitted]).
Clearly, 915 Broadway did not make any effort to ensure that all sources of potentially relevant electronic data were identified and preserved. The record is devoid of any evidence that the individuals managing 915 Broadway's affairs made any effort to oversee or ensure compliance with the Litigation Hold, for example, communicating with IT personnel regarding the principals' data-retention policies or otherwise taking affirmative steps to confirm that relevant electronic documents were being retained in accordance with the Hold. As a result, the custodians almost uniformly failed to safeguard electronic evidence from destruction.
The IT reports (see McMahon Aff., Exhs NN-SS), and the May 16, 2011 letter from plaintiff's counsel to me confirm that six of 915 Broadway's 11 primary custodians — including Joel Poretsky as well as all three of the custodians affiliated with TRAK — failed to suspend the automatic-deletion processes applicable to the email programs they used to send and receive emails related to the transaction and the litigation underlying this action. These individuals were key principals — Barrie Damson, Steven Hornstock, Earle Altman, Graham Smorgon, Jeffrey Mahemoff and Joel Poretsky — who were engaged in dialogues related to such crucial topics as whether the individuals managing 915 Broadway had responsibility for monitoring the expiration date of the Letter of Credit, and whether 915 Broadway should attempt to mitigate its damages or instead release Normandy for nothing. It is now impossible to recover any of the deleted files because 915 Broadway did not make any effort to ensure that any electronic documents destroyed through automatic deletion were recoverable.
Most importantly, it is clear that 915 Broadway continued to allow evidence to be destroyed even after Paul Hastings raised its spoliation concerns before me. Specifically, the IT reports indicate that in January 2011, the email server associated with the electronic data sent and received by Steven Hornstock and Earle Altman was decommissioned, and a new email server was deployed (see May 16, 2011 Letter, at 4). Thus, even though it may have been possible to recover unknown numbers of relevant electronic files automatically deleted during the relevant period, "[r]ecovery of [those] deleted items from 2007-2008 cannot now be made" (see id., Exhs PP and QQ, at 2), because an integral server was discarded and replaced months after 915 Broadway knew that there were serious questions about potential spoliation and the completeness of the evidentiary record in this case.
I find that 915 Broadway's failure to implement an effective litigation hold and to suspend the routine destruction of documents warrants spoliation sanctions. It is indisputable that electronic files were destroyed by 915 Broadway at a time when it had an obligation to preserve all evidenced potentially relevant to this action. Indeed, the majority of 915 Broadway's principals never suspended their routine destruction practices after a duty to preserve arose.
Moreover, it is clear that these electronic documents were destroyed with a "culpable state of mind." 915 Broadway failed to suspend the automatic deletion or even investigate the basic ways in which its custodians stored their electronic data despite being put on notice that the evidence may be relevant to litigation. At a minimum, that conduct was grossly negligent (see e.g. Einstein v 357 LLC, Index No. 604199/07, at 26 [Sup Ct, NY County 2009] ["The failure to suspend the deletion policy or to investigate the basic ways in which emails were stored and deleted constitutes a serious discovery default on the part of the [defendants] and their counsel rising to the level of gross negligence or willfulness"]; County of Erie v Abbott Labs., Inc., 30 Misc 3d 837, 841 [Sup Ct, Erie County 2010] granting sanctions where plaintiff was "grossly negligent" by failing to place effective " litigation hold' on the routine destruction of documents"]). The additional and recent destruction of evidence caused by the change of email servers six months after Paul Hastings conveyed its concerns to me about 915 Broadway's discovery efforts also plainly occurred with a "culpable state of mind."
I reject 915 Broadway's contention that it did not have a "culpable state of mind" because there is no evidence that its custodians acted willfully or in bad faith. There is no requirement under New York law that a party must have acted willfully or in bad faith to have acted with a "culpable state of mind." To the contrary, it is clear that mere negligence is sufficient to warrant sanctions for the destruction of electronic evidence (see Ahroner v Israel Discount Bank of New York, 79 AD3d 481, supra).
I also reject 915 Broadway's argument that Paul Hastings has failed to provide me with evidence establishing that the destroyed documents are relevant to the claims and defenses in this action (Pl Opp., at 2, 3, 14, 15, 18). To the contrary, Paul Hastings has established the likelihood that documents deleted by 915 Broadway were relevant to crucial issues in this case, including who was responsible for monitoring the Letter of Credit and various issues related to mitigation and causation. For instance, Paul Hastings has presented evidence that a large amount of data associated with Steven Hornstock was destroyed. Given the fact that Hornstock believed that Paul Hastings and 915 Broadway shared responsibility for monitoring the Letter of Credit, and testified that he discussed that issue with other 915 Broadway custodians (see Hornstock Dep., at 135-136), the destruction of Hornstock's emails likely could have resulted in the loss of evidence supporting Paul Hastings' defense that 915 Broadway was responsible for monitoring the Letter of Credit.
Likewise, Paul Hastings has submitted evidence that data associated with Graham Smorgen was automatically deleted. Given the fact that Smorgen was "very critical" of Daniel and Peter Burack for allowing the Letter of Credit to expire (see McMahon Aff., Exh G]), any emails setting forth his views on that subject would be relevant to Paul Hastings' defense.
In any event, even if Paul Hastings had not provided evidence as to the relevancy of the spoliated documents, Paul Hastings is not required to come forward with dispositive evidence that the destroyed documents were relevant (see Ahroner v Israel Discount Bank of New York, 79 AD3d 481, supra [relevance of the spoliated documents will be inferred if it is destroyed as the result of, at a minium, gross negligence]; see also Sage Realty Corp. v Proskauer Rose, 275 AD2d at 17 ["it is the peculiarity of many spoliation cases that the very destruction of the evidence diminishes the ability of the deprived party to prove relevance directly"]).
Under CPLR 3126 and New York case law, where a litigant destroys evidence, courts "possess broad discretion to provide proportionate relief to the party deprived of the lost evidence" (Ortega v City of New York, 9 NY3d 69, 76 [2007]). Remedies for the spoliation of evidence include (1) dismissing the action or any part thereof; (2) deeming resolved for the purposes of the action any issues as to which the destroyed evidence is relevant; (3) precluding proof favorable to the spoliator on the issues, claims, or defenses to which the destroyed evidence is relevant; or (4) employing an adverse-inference instruction (see id.).
Paul Hastings seeks dismissal of the amended complaint, in light of 915 Broadway's complete failure to preserve key evidence relevant to Paul Hastings' claims and defenses in this action. I agree that dismissal is the only remedy capable of addressing the prejudice imposed upon on Paul Hastings as a result of 915 Broadway's conduct, as no other remedy can rectify the gaps in the evidentiary record resulting from 915 Broadway's own misconduct. If the amended complaint is not dismissed, Paul Hastings will have to defend itself against 915 Broadway's claims without the benefit of a full and complete record. Dismissal is warranted not only because 915 Broadway's intentional and reckless destruction of electronic evidence has been so widespread that it precludes Paul Hastings from fairly litigating its claims and defenses, but also because the destruction persisted months after Paul Hastings raised its concerns about 915 Broadway's preservation efforts, and the incompleteness of the evidentiary record in this case.
Generally, dismissal of a cause of action is warranted where the destroyed evidence is key to the innocent party's claims or defenses: (see e.g. Brown v Parfums Jacques Bogar S.A., 12 Misc 3d 1187(A) [Sup Ct, NY County 2006]). However,
[i]t is fundamentally unfair to require [a party] to come forward with evidence that the destroyed [documents] are key evidence ..., where [the party] has no way of knowing what(id. at * 5 [dismissing cause of action for failure to preserve relevant documents]).
records were destroyed. That is exactly why there are sanctions for spoliation. [The party] will never know what was in the records ... which is why [the spoliating party] should have preserved the records
Likewise, here, Paul Hastings cannot know exactly what documents were destroyed because of 915 Broadway's misconduct. However, it is clear that the following intentional, willful and/or grossly negligent destruction of evidence by 915 Broadway has tainted the record in this case: (1) Poretsky's intentional deletion of relevant electronic files after the duty to preserve arose, and until December 2010; (2) the failure of 915 Broadway to investigate the ways in which emails were stored and retained by its principals, or to make any effort to ensure that the custodians were complying with their preservation duties; (3) the complete failure of six of 915 Broadway's custodians to suspend the automatic-deletion functions associated with their electronic files, even after receipt of the Litigation Hold; (4) the complete failure of all of 915 Broadway's custodians to suspend the regular destruction of backup tapes or create electronic images of their data; and (5) the replacement of email servers in January 2011 associated with two key witnesses, which rendered impossible any potential recovery of destroyed emails, even though Paul Hastings had raised its concerns to me about 915 Broadway's preservation and production efforts months earlier.
These failures resulted in the destruction of relevant electronic documents, which has prevented Paul Hastings from defending the causes of action asserted against it. It is fundamentally unfair to require Paul Hastings to defend itself in a vacuum. Dismissal is therefore warranted.
Paul Hastings also seeks payment of its attorney's fees and costs incurred in making this motion. This branch of the motion is also granted, as there is ample authority for granting this relief (see e.g. see Ahroner v Israel Discount Bank of New York, 2009 WL 2135164, supra [granting request for attorneys' fees incurred in connection with motion for spoliation sanctions]; County of Erie v Abbott Labs., Inc., 30 Misc 3d at 842 [awarding moving party "the reasonable fees and costs of making this motion" for spoliation sanctions]; Bon Jour Group, LLC v Wathne, 2006 WL 5111085 [Sup Ct, NY County 2006] [ordering spoliating party to "pay the costs incurred by [moving party] for the making of this motion" for spoliation sanctions]).
Accordingly, it is
ORDERED that the motion of defendant Paul, Hastings, Janofsky & Walker LLP to dismiss the complaint herein is granted, and the complaint is dismissed, with prejudice, in its entirety as against said defendant, with costs and disbursements to said defendant as taxed by the Clerk of the Court, and the Clerk is directed to enter judgment accordingly in favor of said defendant; and it is further
ORDERED that defendant's motion for an order awarding it the attorneys' fees and costs incurred in the making of this motion is granted, and defendant is directed to submit an affidavit detailing such attorneys' fees and costs within 10 days from service of a copy of this order.
Dated: February __, 2012
ENTER:
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J.S.C.