Answer Dismissed For Failure To Comply With CPLR § 3126 Conditional Order

On June 3, 2015, Justice Bransten of the New York County Commercial Division issued a decision in CPS 227 LLC v. Martin Brody, No. 654378/2013, striking the defendant's answer and directing entry of a default judgment in the amount of $6.25 million with interest.

The facts of CPS 227 LLC are not complicated: the plaintiff CPS agreed to purchase the defendant Martin Brody's minority interest in an LLC and advanced him $6.25 million towards the purchase price. The parties subsequently terminated the agreement by mutual consent, and Brody promised to pay back the advances. But Brody never paid the money back, and CPS brought an action against him.

The underlying facts not being in any real dispute, the opinion focused on procedural history. Brody failed to comply with the discovery rules, and CPS moved for sanctions. Based upon Brody's "willful failure to provide discovery as directed in the Court's amended PC order dated October 14, 2014," on February 9, 2015, the court entered a conditional order providing that:

Plaintiff's motion for sanctions is granted and the answer of defendant, Martin Brody, is stricken unless by March 6, 2015, Defendant Brody shall: (1) produce all documents responsive to plaintiff's discovery requests that are in his custody and control; and (2) execute an authorization allowing AOL to provide the entire contents of his [redacted]@aol.com to defendant's counsel . . .

By the deadline, Brody had only produced a set of documents in his former attorney's possession, as well as an affirmation stating that he did not have any financial records or emails in his possession because he deleted them or destroyed them as soon as he read them. Finding this response unsatisfactory, on March 17, 2015, the court issued a second order, directing Brody to produce all documents in a number of discrete categories encompassing communications with his business partners, accountants, and tax advisors, and his own tax returns and bank statements and those of any entities he controls. Brody was also directed to provide "corrected and accurate responses to all interrogatories."

But by April 16, 2015, nothing more had been produced. Brody had not even turned over the documents--bank statements from two of his entities, his own tax returns, and the emails from AOL--that were in his attorney's possession. The court ordered the attorney to go to New Jersey, get the documents from his home, and produce them in court that day. Once that was done, Brody himself testified about his retention practices under penalty of perjury. As the court summarized his testimony:

Next, Brody took the stand and was questioned under oath by plaintiff’s counsel. He affirmed; and after he took the affirmation under the penalties of perjury, he began his testimony by answering the very first question by perjuring himself.

After the April 16 hearing, CPS brought its application to enforce the conditional orders, which the court granted.

The court held that, under Gibbs v. St. Barnabas Hospital, 16 N.Y.3d 74 (2010), Brody's answer had to be stricken. The court found that Brody had not fully complied with the February conditional order, or with any of the more specific provisions of the March order. The court also found that Brody had lied while testifying under penalty of perjury—the AOL production contained many responsive documents, and in correspondence an AOL counsel explained that AOL did not retain deleted emails for more than 48 hours, meaning that as of March or April 2015, none of those responsive emails had been deleted and were still in Brody's possession. Brody also lied on the stand when he testified that he had never been involved in litigation or been asked to provide discovery prior to the present case.

In response to CPS's motion, Brody had argued that he had shown "substantial compliance," but the court rejected this argument on the grounds that Brody had not, in fact, shown substantial compliance. The court also held that, under Gibbs, substantial compliance would not be sufficient, and that a litigant failing to satisfy a conditional order is treated like any other defaulter and must show "both a reasonable excuse for not producing the documents and a meritorious defense to the claims in the complaint" to be excused. Because Brody did not satisfy either part of the test, the conditional order was enforced and his answer was stricken.

Finally, the court ruled that an inquest on damages was unnecessary because CPS's claim was for the specific amount of $6.25 million, and the clerk was directed to enter judgment in that amount, along with statutory interest. (The court also denied various motions made by Brody, and severed CPS's application for sanctions and directed an inquest.)

This ruling is of note for several reasons. First, it illustrates the harsh consequences of failing to satisfy a conditional order—absent full compliance, the litigant is treated as a defaulter, and substantial compliance is insufficient. And second, it provides an example of a useful but seldom-used discovery technique: although the Stored Communications Act, 18 U.S.C. 2701 et seq., forbids an email provider such as AOL from turning over emails to a third party without authorization from the account holder—even a court order directed to the provider is insufficient—a court can order a litigant, as part of its power to supervise discovery, to sign an authorization permitting turnover of records.

[NOTE: Schlam Stone & Dolan LLP is counsel for CPS in this action.]