New York’s highest court recently issued a decision (after remaining silent for years) concerning sanctions for spoliation of destroyed ESI. See Pegasus Aviation I, Inc. v. Varig Logistica S.A., 2015 WL 8676955, 2015 N.Y. Slip Op. 09187 (Dec. 15, 2015). The trial court originally found that a company’s corporate parent had sufficient control over a subsidiary’s operations to be liable for spoliation of evidence when the subsidiary company failed to issue a litigation hold notice. That failure to institute a litigation hold notice, combined with several computer crashes resulting in the loss of much of the ESI, rose to the level of gross negligence, according to the Supreme Court. Where the destruction of evidence is merely negligence, the relevance of the lost material must be proven by the party seeking spoliation sanctions – otherwise, relevance is presumed. Thus, based on the Supreme Court’s finding of gross negligence in the Pegasus case, the relevance of the missing ESI was presumed. Based on this finding, the trial court struck the answer of the subsidiary and imposed a trial adverse inference sanction against the parent company with regard to that ESI.
The First Department reversed the sanctions imposed against the parent company, rejecting the lower court’s holding that the failure to institute a litigation hold amounted to gross negligence per se. The Appellate Division reasoned that this failure supported, at most, a finding of simple negligence. Because there was only a showing of simple negligence, the plaintiff had failed to prove that the missing ESI was relevant per se and the adverse inference was therefore improper.
Because the trial court and the Appellate Division reached different conclusions concerning the level of negligence, the Court of Appeals’ scope of review on appeal was limited to determining whether the record evidence supported the trial court’s findings or those of the Appellate Division. The Court of Appeals agreed with the Appellate Division on the issue of negligence, but disagreed with the appellate court’s determination that the plaintiff failed to show relevance. As to negligence, the Court of Appeals agreed that the parent company conduct in failing to preserve the ESI was not grossly negligent, noting that “a party’s failure to institute a litigation hold is but one factor that a trial court can consider in making a determination as to the alleged spoliator’s culpable state of mind.” The opinion also noted that the Court found the following facts pertinent to its determination:
- the parent company had no reason to believe that the subsidiary’s counsel was not providing the subsidiary with adequate advice concerning ESI preservation,
- the parent company had adequately responded to all of the plaintiff’s discovery demands, thus negating any inference that they were acting recklessly, and
- although the parent company exercised control over the subsidiary, they were nevertheless separate entities with separate offices, staff, operations, and computer systems.
The Court of Appeals held, however, that the appellate court “all but ignored [the plaintiff’s] arguments concerning the relevance of the documents” and therefore remanded the case to the trial court to determine whether the negligently destroyed ESI was relevant to the plaintiff’s claims and what, if any, sanction was warranted.
Judge Stein dissented, primarily disagreeing with the majority’s analysis as to the extent of parent company’s negligence, stating that the proper standard for gross negligence is “the failure to exercise even slight care. The dissent noted that the majority neglected to mention the VOOM HD Holdings LLC v. EchoStar Satellite L.L.C., 93 A.D.3d 33, 939 N.Y.S.2d 321 (1st Dept. 2012), decision which held that “destruction that is the result of gross negligence” also “is sufficient to presume relevance.” VOOM, 93 A.D.3d at 45. Based on Judge Stein’s review of the evidence, he recommended reversing the Appellate Division’s finding of ordinary negligence and reinstating the trial court’s finding of gross negligence. Given that the parent company’s gross negligence as to ESI preservation gave rise to a rebuttable presumption that the spoliated evidence was relevant, Judge Stein emphasized that the case should have been remitted the case to the Appellate Division (not the trial court) for a determination of what sanction, if any, was warranted.