Court Requires Full Disclosure in Business Divorce Action, Rejecting Defendants’ Attempt to Provide Less than All Required Information and Discovery

In a Decision and Order, dated January 30, 2023, in UniLoeb Holdings LLC v. Shamus, Index No. 651136/2022, Justice Andrew Borrok of the New York County Commercial Division denied defendants’ argument that the claims for breach of the Operating Agreement and for an equitable accounting were moot and that it was not required to comply with certain discovery orders because a stay of discovery from non-parties was in place. The Court explained:

The Ace Defendants move to dismiss the claims for breach of the Operating Agreement and for an equitable accounting, arguing that these claims are now moot. UniLoeb has made requests for information as authorized by the Operating Agreement and not all of the requested information has been provided. The attempt to dismiss this claim as moot is nothing more than an improper attempt by the Ace Defendants to control the flow of information to UniLoeb. UniLoeb is guaranteed certain information rights pursuant to the Operating Agreement, and the Ace Defendants can not [sic] extinguish that right by claiming that they have provided sufficient information. The claim for an equitable accounting is also not properly dismissed. The report provided by the Ace Defendants to UniLoeb is not a complete accounting that UniLoeb is entitled to and the attempt the information in this manner fails. Uniloeb is entitled participate in the selection of the independent accountant given its investment and the assumptions that the accountant has in performing its analysis. The motion is therefore denied.

On the record before the Court, it appears that the Defendants willfully failed to comply with certain discovery orders in this case and otherwise spoliated evidence. The Defendants have failed to produce text messages as they were required to do. Among other things, more than a year after a litigation hold was in place, the Defendants exchanged their cell phones and put their text messages beyond the reach of discovery. The Defendants must produce an affidavit describing what searches were conducted and how they sought to retrieve information. Upon receipt of such affidavit, leave is granted to the Plaintiff to bring a motion for spoliation sanctions. The universe of information to which UniLoeb is entitled includes emails in Gareb Shamus' icloud email account and messages in WhatsApp, and these sources must be searched and responsive communications must be produced. UniLoeb is also given leave to move for spoliation sanctions and UniLoeb is entitled to sanctions in the form of costs and expenses incurred in connection with having to bring this motion. A stay of discovery from non-parties was put in place to avoid potentially costly and duplicative discovery where documents could be obtained from the Defendants. The Defendants cannot use this stay and their own failure to produce to prevent UniLoeb from receiving the discovery to which it is entitled. The stay must therefore be lifted and UniLoeb can seek discovery from non-parties. For completeness, the request for additional time for the depositions of the Individual Defendants is premature at this stage and is denied without prejudice.

The attorneys at Schlam Stone & Dolan frequently litigate business divorce actions and discovery motions where the other party is delinquent in producing relevant information. Contact our attorneys at commercialdivisionblog@schlamstone.com if you or a client have questions regarding these issues.