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Pegasus Aviation I, Inc. v. Varig Logistica S.A.
Citations: 118 A.D.3d 428; 987 N.Y.S.2d 350
Court: Appellate Division of the Supreme Court of the State of New York; June 5, 2014; New York; State Appellate Court
The Supreme Court of New York County reversed a prior order that granted plaintiffs a trial adverse inference instruction against the MP defendants for spoliation of electronic evidence, denying the motion without costs. Plaintiffs, who leased aircraft to Varig Logística S.A. (a Brazilian cargo airline), are suing VarigLog for breach of lease agreements and conversion of aircraft, and the MP defendants on an alter ego theory and for direct conversion. The plaintiffs had previously initiated a similar lawsuit in Florida but voluntarily discontinued it before starting this action. The critical issue on appeal was whether the MP defendants had sufficient control over VarigLog from April 1, 2008, until VarigLog’s bankruptcy on March 3, 2009, to be held liable for VarigLog's loss of electronically stored information (ESI). Despite VarigLog's failure to impose a litigation hold, it had installed backup systems in March 2008. No evidence indicated that anyone intentionally destroyed relevant ESI after April 1, 2008. However, VarigLog's ESI was lost due to computer crashes in early 2009, and plaintiffs did not hold the MP defendants responsible for these incidents. The motion court had initially sanctioned the MP defendants by striking VarigLog's answer and allowing adverse inference at trial regarding the lost ESI, reasoning that the MP defendants' control required them to ensure VarigLog preserved relevant evidence. This failure was classified as gross negligence per se, as established in precedent cases. The court presumed prejudice to the plaintiffs due to VarigLog's gross negligence, allowing for the inference that the lost ESI would have supported the plaintiffs' claims. The court outlined that for spoliation sanctions, a party must show: 1) control and obligation to preserve the evidence at the time of destruction, 2) a culpable state of mind regarding the destruction, and 3) the relevance of the destroyed evidence to the claims or defenses at issue. Discovery determinations are within the discretion of the trial court, but the Appellate Division holds the authority to substitute its discretion even without a finding of abuse. The key issue is whether, as of April 1, 2008, the MP defendants had sufficient control over VarigLog to impose a duty to preserve electronically stored information (ESI) relevant to the litigation. The record supports the conclusion that the MP defendants, as sole shareholders of VarigLog, had significant control, including the ability to select directors and closely monitor operations. Although VarigLog is distinct from the MP defendants legally, their practical control meant VarigLog was likely to comply with requests to preserve ESI. The motion court found that the MP defendants had a duty to preserve VarigLog's ESI, but their failure to do so was not gross negligence. The court's prior conclusion of gross negligence relied on a federal district court statement that failing to issue a written litigation hold constitutes gross negligence, which the Second Circuit has rejected as a per se rule. No New York state appellate court has adopted this notion. Consequently, the facts did not support a finding of gross negligence against the MP defendants. The MP defendants assumed control of VarigLog on April 1, 2008, after the plaintiffs had already filed a lawsuit against VarigLog in Florida the previous February. VarigLog had legal representation in that case, and there is no evidence indicating that the MP defendants lacked confidence in VarigLog’s counsel regarding the preservation of relevant information. Additionally, the MP defendants fulfilled their obligation to preserve and produce their own documents, which undermines any suggestion of deliberate misconduct or recklessness on their part. Gross negligence, defined as showing reckless disregard for others' rights or intentional wrongdoing, is not supported by the evidence, as the record shows that VarigLog operated independently with its own resources. Although the MP defendants had practical control over VarigLog, VarigLog remained a separate entity with its own operations. The plaintiffs must demonstrate that the lost electronically stored information (ESI) would have substantiated their claims; however, they failed to do so. The critical evidence for their alter ego claims would consist of communications between the MP defendants and VarigLog, but the plaintiffs conceded that they have received relevant ESI from the MP defendants themselves. The plaintiffs speculate that VarigLog's internal emails could support their claims, but there is no concrete evidence provided. They also assert that missing banking records show VarigLog indirectly benefited the MP defendants, but any further evidence could likely be obtained through disclosure requests. Additionally, the plaintiffs have not proven that a litigation hold by VarigLog would have prevented the loss of ESI during a computer system crash, which occurred without the MP defendants' involvement. The dissenting opinion disagrees with the majority, arguing that the MP defendants were grossly negligent for not taking basic steps to preserve evidence at VarigLog. VarigLog had a responsibility to preserve evidence prior to the MP defendants gaining control in April 2008 and before they were sued in October 2008. During the litigation, VarigLog was represented by its own U.S. counsel, and the MP defendants assumed these attorneys were adequately advising VarigLog employees on evidence preservation. While the MP defendants’ reliance on this assumption was negligent, it did not rise to the level of gross negligence. They preserved their own relevant documents, which mitigated claims of gross negligence against them. Even after the MP defendants took control of VarigLog, the latter remained a distinct entity with separate offices and employees. There was no evidence that the MP defendants displaced VarigLog’s staff. The dissent speculates about the relevance of VarigLog’s lost documents but fails to provide support from the record. Although the dissent acknowledges ordinary negligence, it suggests a hearing to assess the plaintiffs' prejudice from the loss of evidence. However, the majority asserts that the plaintiffs had sufficient opportunity to demonstrate the relevance of the lost evidence but did not do so, relying instead on an inapplicable presumption. The majority declines to allow the plaintiffs another opportunity to establish relevance and finds that the minimal showing of prejudice does not justify severe sanctions, such as an adverse inference instruction. This instruction would effectively grant summary judgment to the plaintiffs on their alter ego claim against the MP defendants, which is not warranted given the circumstances. VarigLog is currently subject to bankruptcy proceedings in Brazil, yet legal action against it is allowed to continue under Brazilian bankruptcy law. The MP defendants, a group of private equity firms and associated Brazilian individuals, have separate legal representation and are not alleged to have controlled VarigLog prior to April 1, 2008. This group purchased VarigLog in early 2006 during a prior bankruptcy. Brazilian law mandated that the co-investors from Brazil held 80% of the voting stock, granting them control over the board, which they used to appoint themselves to three out of four director positions. A dispute arose in 2007 regarding loan repayments, leading the Brazilian co-investors to exclude the MP defendants from VarigLog’s operations. Following this, shareholder litigation occurred, resulting in a February 2007 court ruling that found the co-investors guilty of mismanagement, resulting in their removal and the appointment of a judicial administrator. By April 1, 2008, the court appointed an MP defendant as the sole shareholder, with oversight from a judicial committee until December 9, 2008. Throughout the period from April 1, 2008, to March 3, 2009, corporate formalities appear to have been upheld, with an independent board and no MP defendant employees serving as officers. Despite the judicial oversight, the MP defendants argue they had no obligation to preserve VarigLog's electronically stored information (ESI), yet there is no evidence that the oversight committee would have objected to standard ESI preservation measures. The MP defendants acknowledged that, as of April 1, 2008, it was foreseeable that litigation could arise from disputes involving VarigLog. Notably, after the plaintiffs filed their action against the MP defendants in October 2008, VarigLog failed to implement a litigation hold, continuing to use the MP defendants' email system for correspondence instead of VarigLog's. The plaintiffs have engaged directly with VarigLog in discovery and have not sought documents from the MP defendants, relying instead on a presumption of gross negligence. The third element required for a motion for sanctions, as established in VOOM, is that the destroyed evidence must be relevant to the moving party’s claim or defense, such that it could support that claim or defense. The plaintiffs did not argue in their appellate brief that the lost electronically stored information (ESI) was relevant, even if a presumption of relevance against the MP defendants was deemed inappropriate. The motion court did not find the lost documents relevant based on the plaintiffs’ assertion; instead, it presumed relevance due to the MP defendants' gross negligence in failing to issue a litigation hold. The court indicated that such negligence implies relevance of the documents. While dissenting justices noted that an adverse inference instruction would be permissive, they did not consider the significant prejudice this could cause to the MP defendants, who are being sued under the theory that VarigLog is their alter ego, particularly if the jury were informed that the MP defendants were responsible for preserving VarigLog’s documents.