Failure to Issue Litigation Hold Not Per Se Gross Negligence

On June 5, 2014, a divided panel of the First Department issued a decision in Pegasus Aviation I, Inc. v. Varig Logistica S.A., 2014 NY Slip Op. 04047, reversing a decision sanctioning defendants for spoliation of evidence.

In Pegasus Aviation, a group of defendants (collectively, the "MP defendants") who were the sole shareholders of the primary defendant, Varig Logistica ("VarigLog") appealed the trial court's sanction order. VarigLog, although also subject to the order, had filed for bankruptcy and did not appeal.

The sanctions order involved the loss of VarigLog's electronically stored information ("ESI"). VarigLog did not implement a formal litigation hold of its ESI, but did install backup systems a month after the litigation commenced. However, due to crashes of the backup system, all of VariLog's ESI was lost. Plaintiffs did not allege that the MP defendants were to blame for the crashes or that anyone intentionally destroyed ESI. The MP defendants properly preserved all of their own ESI.

The motion court nonetheless found the MP defendants (and VarigLog itself) culpable and ordered a series of adverse inferences against them. The motion court's ruling stated that (1) the MP defendants acquired sufficient control over VarigLog to oblige them to ensure that VarigLog's ESI was preserved and that VarigLog issued a litigation hold, (2) following a ruling by Judge Scheindlin in the S.D.N.Y., failure to issue a written litigation hold is gross negligence per se, and (3) gross negligence that results in the destruction of evidence creates a presumption that relevant evidence was destroyed.

A three-judge majority opinion reversed, with one judge concurring in part and dissenting in part, and one judge dissenting.

The majority first considered the issue of control, and found based upon the particular facts that "VarigLog’s ESI was sufficiently under the MP defendants' 'practical control' to trigger a duty on their part to ensure that those materials were adequately preserved." This standard does not require "a finding that VarigLog was the alter ego of the MP defendants."

Next, the majority rejected the motion court's per se rule, finding that the facts—including the lack of evidence that any litigation hold would have protected the ESI from the subsequent crashes—"negate[d] any inference that [the MP defendants] deliberately sought to defeat plaintiffs' right to disclosure or were reckless as to that possibility," and accordingly their conduct amounted at most to simple negligence.

And because plaintiffs failed to show gross negligence, they retained the burden of proving that "the lost ESI would have supported their claims." Plaintiffs failed to meet this burden, because the missing evidence they alleged was either available elsewhere or relied merely upon speculation.

Justice Andrias concurred that no per se rule should be imposed but would have held that the question of whether plaintiffs had been prejudiced by the MP defendants’ negligence should be addressed by the motion court. The majority rejected this argument on the grounds that a full record already existed.

Justice Richter also agreed that a per se rule was inappropriate but would have found gross negligence based upon "MP Global's failure to take even the most rudimentary steps to ensure that potentially relevant evidence was preserved, including, but not limited to, instructing that a litigation hold be put in place." The majority also rejected this argument, saying that the VarigLog was in litigation before the MP defendants acquired control, and that the MP defendants' assumption that VarigLog had already put adequate retention policies in place was negligent but not grossly negligent or reckless.

This opinion shows that the Appellate Division appears to be retreating from the S.D.N.Y.'s more draconian spoliation rules. Finding gross negligence for spoliation caused in large part by an entirely inadvertent computer crash would be a very harsh outcome. And all five justices rejected the per se rule, meaning that any finding of gross negligence must be based on the particular facts of the case. Finally, though, it must also be noted that all five justices also ruled that under certain circumstances a parent can be held responsible for spoliation by a subsidiary.