New York Court Dismisses $20 Million Case as Spoliation Sanction

In a recent decision out of the New York State Supreme Court in Manhattan, a spoliator’s worst fears were recognized when the Court dismissed its entire Complaint as a sanction for failing to preserve electronic evidence. The decision, 915 Broadway Associates, LLC, v. Paul, Hastings, Janofsky & Walker, LLP, 2012 NY Slip. Op. 50285U (N.Y. Sup. February 16, 2012), is instructive in its clear statement and analysis of New York’s spoliation law and its demonstration of the Court’s willingness to impose the ultimate spoliation sanction where warranted.

The case involved a bungled real estate transaction and resulting legal malpractice lawsuit. After a non-party pulled out of the transaction, Plaintiff failed to draw on a $20 million letter of credit before it expired. Although there was evidence that Plaintiff itself was responsible, at least to some degree, for the failure to draw on the $20 million, Plaintiff sued its attorneys claiming that they should have drawn on the letter of credit or, instead, advised Plaintiff that the letter of credit was due to expire.

Importantly, in late March 2008, the reneging nonparty in the failed real estate transaction filed an action in New Jersey seeking a declaration that it was not in breach of contract. Upon serving Plaintiff on or about April 1, 2008, the nonparty included a litigation hold letter to Plaintiff. Plaintiff, which chose not to attempt to recover the $20 million from the other party to the failed transaction, but rather to seek to recover the money from its counsel in a legal malpractice action, failed to preserve documents in compliance with the litigation hold.

Specifically, one of Plaintiff’s principals intentionally and routinely deleted emails for 2 ½ years after the litigation hold was issued, emails that may have supported its former counsel’s defense that Plaintiff itself was responsible for monitoring the letter of credit expiration. There were other failures as well. Plaintiff failed to investigate the ways in which emails were stored and retained by its principals, or to make any effort to ensure that custodians were complying with their preservation duties. Six of eleven principals, who also were primary custodians, completely failed to suspend automatic deletion functions associated with their files, even after receipt of the litigation hold. Plaintiff also failed to suspend deletion of back-up tapes or to create electronic images of their data. But most egregiously, in the Court’s view, was Plaintiff’s replacement of its email servers in 2011 – after the Defendant had raised concerns to the Court about spoliation – which rendered impossible any potential recovery of deleted emails.

Based on the identity and roles of the spoliating individuals in the failed real estate transaction, the Court found that the deleted emails were relevant to the critical issue of who was responsible for monitoring the expiration of the letter of credit. The Court pointed out that even if relevance of the deleted emails had not been established, it could be presumed because Plaintiff’s destruction of evidence was at least grossly negligent (and probably willful). The Court issued the ultimate sanction and dismissed Plaintiff’s Complaint in its entirety. The Court also awarded Defendant fees incurred in connection with the motion.

The Court’s finding of spoliation is in line with recent binding precedent out of New York State’s Appellate Division, First Department (covering Manhattan and Bronx Counties), which adopted the approach taken by the Southern District of New York in the well known Zubulake decisions. (A link to a prior blog post on the referenced Appellate Division case- Voom H.D. Holdings LLC v. EchoStar Satellite LLC, 2012 N.Y. Slip Op. 00658 (1st Dep’t 2012)- can be found here.) The 915 Broadway Associates decision affirms that blatant destruction of evidence after the duty to preserve has arisen will result in sanctions in New York State, and that New York courts are not afraid to issue the ultimate sanction- dismissal of an action- where warranted.