Party’s Sale of Server During Lawsuit Leads to Adverse Inference As Sanction for Spoliation

On August 23, 2016, Justice Bransten of the New York County Commercial Division issued a decision in Oorah, Inc. v. Covista Communications, Inc., 2016 NY Slip Op 31618(U), imposing an adverse inference as a sanction for spolitation of electronic documents. In Oorah, the defendant, Covista, after making an apparently incomplete document production, transferred its server to another entity that purchased its assets. Covista did nothing to preserve documents on the server, and the purchaser erased them. Claiming that it had been "irreparably harmed by Covista's sale of its computer servers . . . during the pendency of the litigation," Oorah sought the dismissal of Covista's complaint as a sanction under CPLR 3216. Justice Bransten agreed that sanctions were warranted, but imposed an adverse inference rather than dismissal, explaining:

A party seeking sanctions based on spolitation of evidence must demonstrate that (1) [] the party with control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that the records were destroyed with a “culpable state of mind”; and finally (3) that the destroyed evidence was relevant to the party’s claim or defense such that the trier of fact could find that the evidence would support that claim or defense.

The elements of the spoliation analysis are not at issue here, since Covista makes no argument in its briefing that it lacked an obligation to preserve its ESI or a “culpable state of mind.” Indeed, Covista could make no such argument in light of the undisputed record. Over eighteen months after the commencement of this litigation – and over a year after receipt of document requests seeking production of its ESI – Covista not only failed to institute a litigation hold but sold its servers to a third-party whose “standard protocol” was to erase the servers’ content. . . . The transfer of the servers without a litigation hold in this context clearly was done with a “culpable state of mind,” since this element is satisfied by a showing of mere “ordinary negligence” – a threshold that Covista’s actions clears easily. . . .

Accordingly, the relevance of the evidence is presumed and need not be demonstrated by Oorah.

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As a general matter, dismissal of the complaint is warranted only where the spoliated evidence constitutes the sole means by which the aggrieved party can establish its case, or where the case was otherwise fatally compromised, or the aggrieved party is rendered prejudicially bereft of its ability to prosecute its claims as a result of the spoliation. The record does not support such a finding here. Oorah received some documents from Covista and has its own documents regarding the work it performed. Therefore, Oorah has not been left ''prejudicially bereft'' or without the "sole means" necessary to establish its breach of contract damages and breach of fiduciary duty claim. Accordingly, the imposition of an adverse inference is the appropriate sanction under the circumstances.

(Citations omitted).